TaxTMI 
TaxTMI 
2013 (11) TMI 927
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.... shortage in stock. The assessee explained that it was a practice of the assessee to review position of stock periodically and write-off useless and unsaleable stock. It was also submitted that such stock was not written off immediately at case to case basis. In accordance with such practice, assessee had written off a sum of Rs.4,84,976/-. The AO however did not accept the explanation given. It was observed by him that the assessee did not produce any evidence to prove that the entire loss had crystallized during the year. There was thus no evidence to substantiate the loss which was claimed as incidental to business. The AO also observed that similar claim of loss had been disallowed and confirmed by CIT(A) in 2001-02. The AO, therefore, disallowed the claim. 2.1 The assessee disputed the decision of AO and submitted before CIT(A) that the assessee in terms of the practice followed was making provisions for unexpected loss in respect of its stock against income @ .01% of the turnover. The provision so made is disallowed in the computation of income and actual claim of loss is made after due verification and analysis. CIT(A) was satisfied by the explanation given and following ....
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.... at arms length price. Further section 92C prescribes various methods for determination of arm's length price such comparables uncontrolled price (CUP) method, transactional net margin method (TNMM) etc. The assessee i.e. CLSA (India) is a subsidiary of Credit Lyonnais Securities Asia BV, (CLSA BV), a company incorporated in the Netherlands which in turn is a group company of CLSA Hong Kong. During the relevant year, the assessee had paid royalty of Rs.711,466/- to CLSA BV which is an associated enterprise @ 1% of net receipts. The royalty had been paid for the period from 19.2.2002 to 31.3.2002. Since the assessee company had entered into interactive transactions with the associated enterprises, The AO referred the matter of determination of arms length price to the TPO. 5.1 The TPO, asked the assessee to explain the basis of payment @ 1% and whether CLSA, BV was receiving such royalty from any other associate enterprise and the reason for payment from 19.2.2002. The assessee explained that it was using the brand name of the holding company from the date of its incorporation i.e. 21.11.94 but it was not able to make any payment towards use of brand name as such payment was ....
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....Assessee furnished copy of trade mark/brand name registration certificate to substantiate that CLSA brand was owned by CLSA BV and the same was protected/registered in India. The assessee also made a detailed submission as to how CLSA brand existed and how the same benefited the assessee in the course of business which has been reproduced by CIT(A) in para 8.7 of the order of CIT(A). 5.4 The assessee further argued that the internal CUP was erroneously applied by comparing with another CLSA entity which is related party. The CUP method could not be applied using transactions with a related party. Moreover, in this case, there had not been no transactions of royalty payment in relation to CLSA entities and, therefore, lack of transaction could not be considered as actual transactions. There being no comparable independent transaction of payment of royalty, CUP method could not be applied. The assessee also submitted that other CLSA entities were using CLSA name for which they were making direct marketing contributions and therefore did not make any royalty payment. The other CLSA were thus are not comparable. Elaborating further, the assessee argued that there were different mech....
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.... of brand fees paid by the assessee. The assessee gave the position regarding the margin of 29 other broking entities, as per table placed below: Sr.No. Name of the Company OP/OI 1. Aditya Birla Money Ltd. NA 2. Anagram Stock broking Ltd. -110.64% 3. Anand Rathi Securities Ltd. NA 4. Anand Rathi Share & Stock Brokers Ltd. NA 5. Asit C Mehta Invst. Intermediates Ltd. NA 6. B N Rathi Securities Ltd. 0.00% 7. Brics Securities Ltd. -74.23% 8. Cholamandalam Securities Ltd. 28.47% 9. Citigroup Global Markets India Pvt. Ltd. 20.00% 10. D S P Merrill Lynch Ltd. 27.26% 11. Emkay Global Financial Services Ltd. 17.71% 12. Geojit B N P Paribas Financial Services Ltd. 6.42% 13. H D F C Securities Ltd. -95.11% 14. ICICI Securities Ltd. 12.50% 15. ICICI Web Trade Ltd. [Merged] NA 16. India Infoline Securities Pvt. Ltd [Merged] NA 17. Indiabulls Securities Ltd. NA 18. Integrated Enterprises (India) Ltd. 22.00% 19. Joindre Capital Services Ltd. -25.27% 20. Khandwala Securities Ltd. 2.73% 21. Kotak Securitie....
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....ceedings showed that other entities were making direct marketing contribution in place of brand fees or royalty paid by the assessee. The assessee had also demonstrated that it was paying much lower business development expenditure including the royalty at 1.28% compared to average payment of 6.4% by the broking industries on brokerage turnover. The net margin of the assessee was also much higher at 57.58% compared to average margin of 28.29% of the comparable entities. CIT(A) held that TNMM method was appropriate method on the facts of the case that net margin declared by the assessee being much higher compared to such other entities, royalty paid by the assessee @ 1% had to be considered at arm's length. The CIT(A) accordingly deleting the addition made by the AO aggrieved by which the assessee is in appeal before the Tribunal. 6. Before us, the Ld. CIT-DR appearing for the revenue assailed the order of the Ld. CIT(A). It was submitted that payment of no royalty by other CISA entities did mean that there was an Internal CUP, which had been rightly applied by the AO. It was also submitted that merely because royalty had been approved by the Government, did not mean that the....
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....mitted that it was not open to TPO to question the wisdom of the assessee as to how it should conduct the business and decide the reasonableness of a particular expenditure. He referred to judgment of Hon'ble High Court of Delhi in case of EKL Appliances Ltd. in Income-tax Appeal No. 1068 of 2011 in which case also the TPO had held that royalty payment was not justified on the ground that the assessee was incurring huge losses. The Hon'ble High Court of Delhi after referring to the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. (289 ITR 26) held that it was not for the AO/TPO to decide as to how much expenditure was reasonable. It was accordingly held that the TPO had no jurisdiction to hold that royalty expenditure was not allowable in view of continuing losses. It was pointed out that the assessee had declared margin which was much more than the average margin of the broking industry. The business development expenditure of the assessee was much below the level of expenditure shown by other entities. It was, therefore, urged that the order of CIT(A) deleting the addition must be upheld. 8. We have perused the records and considered the rival co....
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....We, therefore agree with the finding of CIT(A) that CUP method on the facts of the case could not be applied. We are unable to accede to the request of the ld. CIT-DR, the matter may be restored to AO/TPO to find out a comparable transaction for application of CUP method. No such comparable transaction has been brought on record even by AO or by DRP, though the assessee had clearly stated that no such information was available. No such comparable case has been placed by the ld. CIT-DR even before us. The issue, therefore, cannot be restored for making roving inquiries. 8.2 The ld. CIT-DR has placed reliance on the decision of the Tribunal in the case of Knorr Bremse India (P.) Ltd. (supra), has argued that in case the assessee does not show that transaction by transaction approach was not possible and there has been no real or tangible benefit for carrying on international transactions with the AEs. CUP method can be adopted with preference to TNMM. It has been pointed out that in that case it was also held that TPO was justified in taking ALP at nil. We have perused the said judgment. There cannot be any dispute about applicability of CUP method when transaction by transaction ....