ITAT allows transfer pricing appeal: TNMM method preferred over CUP, royalty payments and cost reimbursements upheld

ITAT Mumbai allowed assessee's appeal regarding transfer pricing adjustments on brokerage commission from associated enterprises. Court held TNMM method appropriate over CUP method for benchmarking transactions, as TPO failed to specify comparables or justify CUP selection. Royalty payments to Netherlands entity for brand usage were upheld at 1% domestic and 2% export sales using TNMM method, following previous years' decisions. Indirect cost reimbursements for group expenses were allowed as TPO made adhoc additions without applying prescribed methods. Outstanding securities transaction tax addition was deleted. TDS disallowances under sections 40(a)(ia) and 195 were also deleted, with court ruling no TDS required for exchange transaction charges.

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Issues Involved:

1. Transfer Pricing Adjustments on Brokerage Commission
2. Payment of Royalty/Branding Fees
3. Payment of Indirect Costs
4. Addition of Outstanding Securities Transaction Tax (STT)
5. Disallowance of Transaction Charges under Section 40(a)(ia)
6. Disallowance of OASYS Global STP Charges under Section 40(a)(ia)
7. Levy of Interest under Sections 234B and 234D
8. Additional Ground related to Tax Computation under Section 115-O

Detailed Analysis:

1. Transfer Pricing Adjustments on Brokerage Commission:

The assessee challenged the rejection of the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) of brokerage commissions received from associated enterprises (AEs). The Transfer Pricing Officer (TPO) and Assessing Officer (AO) applied the Comparable Uncontrolled Price (CUP) method instead. The Tribunal noted that the issue had been previously decided in favor of the assessee for earlier assessment years (AYs 2006-07, 2008-09, and 2011-12) where TNMM was held to be the most appropriate method. The Tribunal found no significant change in circumstances or the nature of transactions for the current year and allowed the grounds in favor of the assessee, holding TNMM as the most appropriate method.

2. Payment of Royalty/Branding Fees:

The assessee paid royalty to Credit Lyonnais Securities Asia B.V. (CLSA BV) for the use of the brand name. The TPO/AO applied the CUP method to determine the ALP, rejecting the TNMM method used by the assessee. The Tribunal noted that in previous years (AYs 2002-03, 2003-04, and 2004-05), the Tribunal had upheld TNMM as the most appropriate method for determining the ALP for the payment of royalty. The Tribunal found no change in facts and circumstances for the current year and allowed the grounds in favor of the assessee, upholding TNMM as the most appropriate method.

3. Payment of Indirect Costs:

The assessee reimbursed indirect expenses incurred by CLSA Hong Kong for remuneration and travel costs of sales teams stationed in London and New York. The TPO/AO determined the ALP of these expenses to be Nil, rejecting the TNMM method used by the assessee. The Tribunal noted that in previous years (AYs 2003-04 and 2004-05), the Tribunal had decided in favor of the assessee, holding that the TPO/AO had made an ad hoc addition without applying any prescribed methods. The Tribunal directed the deletion of the impugned addition, allowing the grounds in favor of the assessee.

4. Addition of Outstanding Securities Transaction Tax (STT):

The AO added outstanding STT to the total income of the assessee, treating it as a trading receipt. The Tribunal noted that in AY 2006-07, the Tribunal had decided in favor of the assessee, holding that the liability to pay STT is on the stock exchanges, and the assessee acts merely as an agent. The Tribunal directed the deletion of the disallowance made under section 43B(a) of the Act, allowing the ground in favor of the assessee.

5. Disallowance of Transaction Charges under Section 40(a)(ia):

The AO disallowed transaction charges paid to Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) under section 40(a)(ia) for non-deduction of TDS. The Tribunal relied on the Supreme Court decision in CIT vs. Kotak Securities Ltd. [2016] 383 ITR 001 (SC), which held that no TDS is deductible under section 194J for transaction charges paid to stock exchanges. The Tribunal deleted the disallowance, allowing the grounds in favor of the assessee.

6. Disallowance of OASYS Global STP Charges under Section 40(a)(ia):

The AO disallowed STP charges paid to NSDL and a Singapore entity under section 40(a)(ia) for non-deduction of TDS. The Tribunal followed the Supreme Court decision in Kotak Securities Ltd. and deleted the disallowance for NSDL charges. For the Singapore entity, the Tribunal noted that the AO had allowed the amount in a rectification order and directed the deletion of the disallowance, allowing the grounds in favor of the assessee.

7. Levy of Interest under Sections 234B and 234D:

The assessee challenged the levy of interest under sections 234B and 234D. The Tribunal noted that this ground is consequential in nature and dismissed it as infructuous.

8. Additional Ground related to Tax Computation under Section 115-O:

The assessee raised an additional ground for computing tax payable under section 115-O in accordance with the DTAA between India and Netherlands. The Tribunal noted that the issue had been decided against the assessee by the Special Bench decision in Dy. CIT vs. Total Oil India (P.) Ltd. and the Supreme Court decision in Nestle SA. The Tribunal dismissed the additional ground.

Conclusion:

The appeal filed by the assessee was partly allowed, with significant relief granted on transfer pricing adjustments, payment of royalty/branding fees, payment of indirect costs, and disallowance of transaction charges and STP charges. The additional ground related to tax computation under section 115-O was dismissed.

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