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2017 (3) TMI 1040
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....ated enterprise(AE)namely M/s. ABN Amro Asia(Mauritius)Ltd. The Assessing Officer(AO)completed the assessment u/s.143(3) of the Act, on 22/ 02/2006, determining its income at Rs. 7,39,40,340/-. Before us, the Authorised Representative (AR) stated that the assessee was not interested in pressing Grounds 2.1 and 3.1. and Ground no 9(considering the smallness of tax effect). Hence, these grounds stand dismissed as not pressed. 2. During the assessment proceedings, the AO found that the assessee had entered into Inter - national Transactions (IT.s) with its AE.s. To determine the Arm's Length Price(ALP) of such transactions, he made a reference to the Transfer Pricing Officer (TPO). After receiving the order of the TPO, the AO made an adjustment of Rs. 2.13 crores to the total income of the assessee. 3. First Effective Ground is about Transfer Pricing(TP)adjustments. During the TP proceedings, the assessee furnished the details of marketing functions performed by it along with the expenses incurred by it and the details read as under: Total volume of trades (CH and DVP trades) Clearing House (Rs.) DVP Trade (Rs.) Total (Rs.) Trades with controlled parties: AE.s ....
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....arketing cost per rupee of volume of trade (B/A) C 0.00048 Total Marketing Cost In percentage terms .048% The TPO held that company had spent an amount at the rate of .048% per rupee volume of trade for AE as well as non-AE businesses. He considered an adjustment of 0.048% reasonable as per the provisions of Rule10B(1)(a)(ii) of the Income Tax Rules,1962(Rules)and accordingly reduced from the arithmetic mean of the brokerages charged by the assessee from its top ten FII customers. The arm's length brokerages rate that the company should have charged from its AE, according to TPO,was as under: Arithmetic mean of the brokerage earned by the assessee from its top ten FII customers 0.408% Less: % of marketing costs incurred for Non-Ae.s as discussed above 0.048% Arms length Brokerage rate 0.36% Taking the basis of brokerages rate of 0.36% the TPO made the following adjustment: Particulars Amounts(Rs.) Clearing House Trades for AE A 17,669,433,449/- Arms length brokerage rate percentage B 0.36% Arms length brokerage, the company should have earned (A+B) C 6,36,09,960/- Actual ....
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....also be considered, that during the year under appeal it had earned 35% brokerages income from its AE, that the turnover from AE constituted 42.7% of the total turnover, that the volume of business procured from AE was not comparable to the volume procured from the third parties, that the second-best brokerage income from the thirdparty was approximately 9%. It referred to the provisions of Rule 10B(3)of the Rules and argued that brokerages rate in equity broking business was volume driven. It referred to brokerages rate charged by third-party broking entities and stated that the TPO had not allowed volume adjustment in absence of documentary evidences, that mere absence of evidences did not automatically suggest that no adjustment should be made on account of volume of business procured from AE, that the TPO had heard in considering only simple averages of the brokerages rates charged to FII clients, that he should have considered the weighted average of brokerages rates charged while determining the arm's length brokerages rate, that he had erred in considering only the FII clients, that the functions performed /undertaken in case of broking services to overseas clients and domes....
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....tion that it was meant to shift the profits from India to Mauritius, that by charging lower book is rate from its AE it was in all likelihood shifting its business profits liable for tax in India to an offshore jurisdictions. He held that CUP method was the most direct and reliable way to apply the ALP, that it was preferable to either of the other methods, that the assessee had dealt with FII, that the TPO had collected details of top ten clients and arrived at an average brokerage rate of 0.40%, that the TPO applied internal CUP, as the taxpayer entered into transaction with unrelated parties where the services provided were that of CH trades and all of them being FII.s were similarly placed, that the AE was also an FII and should not have been reluctant for adoption of the most direct and reliable method for determining the ALP, that the very fact that the assessee was trying to take refuse in the general/rigidity TNM and method betrays its lake of confidence in its ALP with the AE, that under the CUP method the price of goods/services was directly compared with the price in uncontrolled transaction under similar conditions, that the quality of products or services was also comp....
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....he quantum of investments, that volume adjustment / discounts were also used as a competitive strategic to secure the customer loyalty or could be given under duress to last powerful buyers, that the relationship between the assessee and its AE was such that loyalty was assured and there was no question of duress, that there was no need for any adjustment, that volume adjustments/discounts meant a deduction from the published list price of the goods/services, that in the case under consideration there was no such thing as list price and from the brokerages rate charged from the top-10 FII.s indicated that it varied from 0.17% to 0.50%, that the assessee had charged 0.17% brokers from the client with whom it had the minimum turnover, that is the turnover was smaller than the rate of charging brokerage would be higher, that if the market was booming the volume would automatically go up, the AE would definitely increase its volume without seeking any adjustment as it was already a use amount of tax-free capital gains, that it would be improper to hold that the AE would negotiate a volume discussed/adjustment when it was making tax-free profits Mauritius from the Indian stock markets, ....
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.... of the assessee that research and advisory costs incurred by the assessee was purely for non-AE business had to be rejected, that the assessee could not have risked its AE's profit without undertaking any in-depth research about the sector along with historical prices and volumes, that if such ad hoc adjustments were to be allowed the whole exercise of comparability and determination of ALP would be rendered nugatory, that the submissions of the assessee in that regard were only conjunctions and estimates, that it had not furnished any data in that regard, that the other areas i. e. coordinating management meetings order exhibitions and settlement were routine matters, that these activities did not contribute much economically, that they were not value-added activities which required higher charging price, that no evidence in form of contractual agreement of any marketing research coordinating management meeting for third parties were filed either at assessment stays or at the appellate stage. He further held,with regard to the brokerages rate to Indian FI.s, that the TPO had based the adjustments on the concept of comparability, that he had identified ten FII.s with whom the a....
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....arketing adjustments, he argued that the dispute was about the denominator, that marketing expenditure was incurred for non-AE.s only, that the TPO decided that it should be considered for non AE.s as well as for the AE.s, that the approach adopted by TPO was incorrect, that the assessee was not giving any research services to the AE, that the TPO had not allowed adjustment for volume. The Departmental Representative argued that the TPO had rightly preferred CUP over TNMM as appropriate method, that the TPO had not accepted the fact that the assessee was in the field of execution only, that big groups would have to maintain centralised and research analysis establishment, that the assessee was artificially differentiating between FSB and 'execution only services, that it was rendering all the services to all its clients, it had not furnished the evidence as to what services were rendered to AÉ.s and non AE.s, that there was no need for allowing adjustment on account of volume, that there was no prior agreement with the AE about minimum volume, that the TPO had rightly selected internal third party comparables, that he was justified in rejecting the FI as comparables, that In....
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....ation and the taxpayer. It is method and formula-based and, therefore, is rational and scientific. However, it is not a perfect or infallible exercise and therefore the Act and the Rules have provided that while finding out the fair and true market value of the transaction certain adjustment, if required, should be made. For that purpose we have to consider Rule 10B(2)and (3)of the Rules. The crucial expression giving insight into what was intended by the provision of the Rule can be seen by the use of the expression 'none of the differences if any between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in such transactions in the open market'. The other exercise which the TPO has to necessarily perform is that if there are some differences, an attempt to 'adjust' them to 'eliminate the material effects'should be made. Rule 10B(2) gives six methods outlined in clauses (a) to (f) of rule10B(1),while judging the comparability. Rule 10B(3), on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. The TPO, first, has to be sati....
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....ble in the TP study report of the assessee, that he selected ten FII.s who had entered in to CH transactions with it, that there was high degree of comparability between the functions performed by the comparables and assessee. He took in to consideration factors like year of the business transactions, geographical location of the country where both of them had carried out business-they all were based in Mauritius and had availed services of the assessee in India. The assessee had not pointed out the factors would justify for not relying upon the data of the FII.s. If the terms and conditions of CH trade for the assessee and the FII.s were same then there was no justification for adopting any other method. It is not the case of the assessee that the AE was provided certain exclusive services that required use of intangible assets and thus the comparison got vitiated. Foreign exchange risk are similar for the AE and the other FII.s. In short, there was a high level of comparability in the exercise done by the TPO to adopt CUP as MAM. In the case before us, the TPO had allowed the assessee adjustment towards sales and marketing expenses while applying CUP method, though the assesse....
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....itated the issue of not allowing the volume adjustment. We find that the assessee stated that it was entitled to an adjustment of 0.67% marketing and sales efforts as against the 0.48% allowed by the TPO, that the marketing cost of Rs. 2.83 crores comprised of salary and related costs of two employees, that the role of those employees was restricted to Non-AE.s only. But it is found that the assessee had not produced the qualification, employment-contract details of those employees and the terms of engagement to establish the claim made by it about rendering of services by them to Non-AE client only. The TPO had reduced the adjustment by a small margin only. In absence of full details reduction made by him is held to be justifiable. It is not a case of non granting deduction at all. So,we uphold the order of the FAA. 6.5.1. However,we agree with the assessee that in the denominator only non-AE trades should be considered, as considered in the order of the TPO for the AY.2006-07. TPO/AO is directed to rework the denominator for the year under appeal. 6.6. With regard to volume adjustment,we want to mention that the assessee had generated a volume of 42.7% of the total turnover....
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....fore the FAA. The assessee has claimed, before him, that it was offering EOSB services to its AE and to the Non-AE it was rendering FBS and the FAA had rejected the claim made by it. We are of the opinion that as per the provisions of section 92 of the Act, the onus is on the assessee to prove the claim made by it about the ALP of the IT.s. It is duty of the claimant to prove,with some cogent evidence, that statement made by it about a particular fact is correct and not merely an assertion. Evidences speak for themselves. Same could be in form of confirmations/letteres/ agreements/e-mails etc. But, they should primarily prove the existence of certain facts. It is true that in the proceedings under the Act strict rules of the Evidence Act are not applicable. But, it does not mean that a claim made by the assessee/AO should be accepted without verifying the veracity of such a claim. In short,claims made by a person(Assessee/AO)have to be corroborated by some kind of evidences/(s). Nothing has been brought on record that during the year under consideration the assessee had provided EOSB to its AE. For the first time before the FAA, the assessee had raised the issue of providing EOSB t....
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....dered by the assessee to its AE.s and non-AE.s. We are not commenting upon the papers submitted by it for the subsequent AY.s. We would consider them while deciding the appeals for those years. Therefore,we confirm the order of the FAA in that regard and hold that there is no evidence to prove that the AE was provided execution only services for the year under appeal. Considering the peculiar facts and circumstance of the case,we decide the effective ground of appeal(Gs. OA-2 to 8-except Grounds ), raised by the assessee with regard to determination of ALP, in it favour, in part. 7. Next ground (Ground of appeal No.10) is about disallowing of write-off of irrecoverable loan of Rs. 2.58 lakhs advanced to the employee of the assessee. The AO had disallowed the claim on the ground that same was not trade debt and hence was not allowable u/s.36 (1) read with section 37 of the Act, that the loan was given to the employee towards housing loan. 7.1. After considering the submission of the assessee and the assessment order, during the appellate proceedings, the FAA held that a that a bad debt or an advance which could be written off under the Act should be included in the income of t....