TaxTMI 
TaxTMI 
2019 (1) TMI 1351
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct. Since, the case was selected for scrutiny, notice u/s 143 (2) and 142 (1) were issued and served upon the assessee. In response to the said notices, the authorized representative of the assessee appeared before the AO and submitted the details called for and discussed the case. 3. Since the assessee company had entered into international transactions with its associated enterprises (AEs), the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining arm's length price of these transactions. The Ld. TPO vide order dated 27.01.2016 determined the arm's length price making upward adjustment of Rs. 143,67,42,784/-. Accordingly, the AO computed the total income of the assessee inter alia making addition of the arm's length price determined by the TPO u/s 92CA (3) of the Act as per the provisions of section 92CA (4) of the Act and passed draft assessment order u/s 143 (3) read with section 144C of the Act on 07.03.2016. The assessee filed objections against the said draft assessment order before the Ld. Dispute Resolution Penal (DRP) and the Ld. DRP after hearing the assessee dismissed the objections and passed directions u/s 144C (5) of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Ld DRP has wrongly upheld the transfer pricing adjustments made by the Ld TPO. The assessee has further alleged that the Ld. TPO has determined the ALP, without applying any of the prescribed methods under section 92C(1) of the Act and rejecting the transfer pricing analysis of the assessee based on the TNMM, without appreciating the documentary evidence including details of cost incurred by the AEs , details of allocation keys used by the AEs etc., filed by the assessee and without considering the benefits derived by the assessee and without taking into consideration the commercial expediency of the assessee. 7. Before us, the Ld. counsel for the assessee submitted that the TP analysis submitted by the assessee is at arm's length based on TNMM by considering the assessee as the tested party. The Ld. counsel invited our attention to the profit and loss account of the assessee in which two major costs have been mentioned as employee cost and management fees recharge (intra group services). The intra group services are closely linked to the business of the assessee and the assessee's benchmarking approach based on TNMM by considering the assessee as the tested party may be up....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Limited [2017] 78 taxmann.com 88 (Bombay) 3. CIT v. Johnson & Johnson Ltd. [2017] 80 taxmann.com 337 (Bombay) 4. CIT v. Kodak India (P) Ltd. [2017] 79 taxmann.362 (Bombay). 5. Kodak India (P) Ltd. v. ACIT [2013] 37 taxmann.com 233 (Mumbai-Trib). 6. Watson Pharma (P) Ltd. v. DCIT [2015] 54 taxmann.com 88 (Mumbai-Trib). 7. ITO v. Intertoll ICS India (P) Ltd. v. DCIT [2015] 71 taxmann.com 353(Mumbai-Trib). 8. ACIT v. Koch Chemical Technology Group (India) Ltd. [2015] 64 taxmann.com 464 (Mumbai-Trib). 9. CIT v. Diebold Software Services (P) Ltd. [2014], 48 taxmann.com 26 (Mumbai-Trib). 9. On the other hand, the Ld. departmental representative (DR) relying on the directions issued by the Ld DRP, submitted that the TNMM method adopted by the assessee is not an appropriate method as the intra-group services received by the assessee is a separate class of transaction which could not be aggregated with other international transactions of receipt of brokerage services, sub-advisory services, research support services etc. The Ld. DR placed reliance on the judgment of the Hon'ble Punjab and Haryana High Court in Knorr Bremse ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the companies Act 1956, is primarily engaged in the business of equity broking and has membership of Bombay stock exchange and the National stock exchange. The assessee's customers comprise of foreign institutional investors (FIIs) and domestic institutional investors (DIIs). As contended by the Ld. counsel for the assessee, since the assessee had no international sales presence or capability to maintain client relationship with FIIs on global basis or internal resources to undertake various activities like regional research or perform various back-office functions, it entered into agreements with CLSA Ltd. Hong Kong and CLSA Singapore private Ltd., which had the capacity to maintain the client relationship on global basis for providing services in the nature of international equity sales and sales trading support, dealing sport and regional research as well as a range of back-office support services. In the year relevant to the assessment year under consideration, the assessee made payment of Rs. 146,67,42,784/-for availing these intra group services. The assessee benchmarked the said international transaction using TNMM as the most appropriate method considering itself as the tes....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... evidence to prove services rendered by the intra group under the heads administration, broking management, client management, communications, compliance, credit risk management, developed squad, events marketing, finance, Human Resources, Information Technology, internal audit, internal sales and sales trading support, legal, Management, Operational Risk Management and Regional Research. The assessee also submitted description of the various services, head-wise breakup of the payments and cost allocation as per keys provided in agreement. 14. As pointed out by the Ld. counsel, the assessee has benchmarked the transaction with entry-level TNMM. It has benchmarked the transaction separately by adopting AE as tested party and using foreign data base. We notice that the arithmetic mean of the comparable companies was 10.14% and the assessee had earned net profit margin of 26.09%. As pointed out by the Ld. counsel, the margin earned by the assessee company at an entry level is in accordance with the provisions of section 92C(2) of the Act. But the Ld. TPO did not accept the entry level benchmarking of the cost contribution holding that the cost contribution constitutes a small part ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....16. On the other hand the Ld. DRP has upheld the findings of the Ld. TPO rejecting the objections filed by the appellant/assessee. The operative part of the findings of the Ld. DRP read as under: "3.3.1 We have considered the facts of the case and submissions made by the assessee. We find that the issues at hand are squarely covered against the assessee in its own case for A.Y. 2011-12, by the decision of DRP-I (WZ), Mumbai holding as under:- "We have considered the facts of the case and the submissions made. As per the provisions of section 92C of the Act, the arm's length price in relation to an international transaction shall be determined by adopting any of the prescribed five methods, being the most appropriate method '(MAM) having regard to the nature of transaction or class of transactions or class of associated persons or functions performed by such persons or such other relevant factors as may be prescribed. Each transaction is to be examined separately and independently. Different transactions cannot be bundled up together. Only those transactions which are closely interlinked, interrelated, interlaced, inter-wined, inter-connected, inter-dependent and c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er-connected and inter-dependent and also they cannot be evaluated and adequately compared on aggregate basis. All these transactions are different and independent of each other. They are also provided to different entities. Therefore, they cannot be bunched together for benchmarking by applying TNMM at entity level. Therefore the benchmarking of the assessee is neither scientific nor permitted as per law. Hence, the TPO has rightly rejected the entity level TNMM. The same is hereby upheld. 1.2. All these transactions can be independently examined and benchmarked applying CUP. Hence, the TPO has rightly applied CUP in respect of these transactions. ITAT Mumbai in the case of Goldman Sachs (India_) Securities Private Limited v ACIT (ITA No. 7724/Mum/2011) has upheld the application of CUP in the case of brokerage transactions similar to those of the assessee. Further, ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited in IT (TP) A No. 148/Bang/2014 for AY 2009-10 in their order dated 10.04.2015 has upheld application of CUP as MAM for benchmarking of payment for technical and management services. 1.3. ITAT Bangalore in Fosroc Chemicals India c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the above findings of the Ld. DRP the following question arise: (a) whether the Ld. TPO has determined the ALP in this case by following comparable uncontrolled price (CUP) method as the most appropriate method and (b) whether the Ld. DRP has rightly upheld the transfer pricing adjustment made by the Ld. TPO? 18. In order to determine the said questions, it is important to see as to whether the Ld. TPO has determined the arm's length price of the international transactions by following one of the prescribed methods which is the most appropriate in the light of the facts and the circumstances of the case? We notice that the Ld. TPO has estimated the man hours of services rendered by the AE to the assessee at 10000 hours and applying the rate of 3000 per hours determined the arms length compensation of the services rendered by the AE to the assessee at Rs. 3,00,00,000/-. The relevant part of the order passed u/s 92CA(3) of the Act is reproduced as under: "5.8.2 Though no concrete evidence of receipt of service has been provided by the assessee as detailed above, on a without prejudice basis it is estimated that, at the very best, the AE could have devoted a m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndersigned, regarding the services being rendered by the AE to the assessee. However after considering the evidence filed by the assessee, as a matter of abundant precaution, the undersigned proceeds to make a reasonable estimate, of whatever little services that can be said to have been rendered in the facts and circumstances of this case. Having regard to the nature of services which are claimed to have been rendered in the instant case, the undersigned estimates the salary for such an employer at Rs. 3000 per hour. To the best of my judgment, the number of man hours rendered by the employees towards rendering of these services to the assessee, is estimated earlier at 10,000 Hours at para 5.8.2" 20. From the observations of the Ld. TPO, it is clear that TPO has made the transfer pricing adjustment purely on estimation basis without any supporting material. Though the Ld. TPO has mentioned that arms length price has determined by applying CUP method but in fact the Ld. TPO has not come up with any comparables to justify the application of cup method. The Ld. TPO has not brought on record any material to substantiate that the AE provided the similar services to an independent en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....18. As regards to the application of method for determining the Arm's Length Price, we are of the view that the method to be used to determine arm's length price for intra-group services should be in accordance with the guidelines in Chapter- I, II & III ÖECD Transfer Pricing Guidelines" which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterprises in the recipient's market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee's case the CUP method was not the most appropriate method. On the contrary, the assessee rightly applied the TNMM method as most appropriate method because it was difficult to apply the CUP method or the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the issue to the Ld. TPO? On the said issue the Ld. counsel for the assessee heavily relied on the judgment of the Hon'ble Jurisdictional High Court, delivered in CIT vs. Kodak India Pvt. Ltd.,(supra) in which the coordinate Bench had declined to restore the issue similar to the present case to the file of TPO holding that the methods as prescribed by the legislature are mandatory and not directory and when the mandatory provision is either superseded or ignored it affects the jurisdiction. Since, the TPO did not adhered to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed. The Hon'ble High court held that the Tribunal has rightly declined to restore the similar issue to Assessing Officer for re-determining ALP by adopting one of the methods as listed out in section 92C of the Act. The relevant paras of the order of the Hon'ble Court reads as under:- "10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was....