AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 1133
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....e Appellant from its Associated Enterprises ('AEs'). In doing so, the learned TPO / learned AO / Hon'ble DRP has erred in law and in facts by: 4.1.rejecting Transactional Net Margin Method (TNMM') as the Most Appropriate Method ('MAM') for the determination of the ALP. 4.2.not appropriately applying any of the prescribed methods as per Section 92C(1) of the Act. 4.3.not appreciating the voluminous documentary evidence, details of cost incurred by the AEs, details of allocation keys used by the AEs etc filed by the Appellant. 4.4.not considering the benefits derived by the Appellant and also disregarding the commercial expediency of the Appellant. 4.5.determining the ALP as 'Nil'. 4. The facts in brief are that the assessee company was incorporated on 21.11.1994 under the Companies Act, 1956. It is a part of the CLSA group, which is an Asia brokerage house, having its regional headquarters in Hong Kong. The assessee is engaged in the business of institutional equity broking and has membership of the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange Limited (NSE). The assessee's customer....
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....vision of sub-advisory services 99,06,632/- Total Adjustments 151,68,82,394/- Ultimately, the assessment was framed by the Assessing Officer vide order, dated 28.01.2016, passed u/s. 143(3) r.w.s. 144C(13) of the Act, inter alia, making an addition of Rs. 151,68,82,394/- 5. As stated above, assessee entered into separate agreements with CLSA Limited, Honk Kong (CLSA Hong Kong) and CLSA Singapore Pte Limited (CSLA Singapore), in order to provided services in the nature of international equity sales, sales trading support, dealing support and regional research as well as a range of back office support services to international clients. The consideration paid by the assessee to CLSA Hong Kong and CLSA Singapore for the services rendered under the respective agreements with the said AE was on the basis of cost plus a mark-up. In terms of the said agreements, the assessee availed the following services which were integral to serve its clients: • Broking Management • Information Technology • Client Management • Internal Audit • Communications • International Sales and Sales Trading S....
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....fer pricing adjustment made by the TPO on estimation basis without following any prescribed method is bad in law. In the light of the said decision, the learned AR submitted that ground no. 4 may therefore be allowed in favour of the assessee by deleting the adjustment made of Rs. 127,38,27,995/- 7. The learned DR, on the other hand, submitted that the issue is not covered by the decision of the co-ordinate Bench for A.Y. 2012-13 as the assessee has not carried out any benchmarking based on foreign AEs as tested party in A.Y. 2011-12. The learned DR submitted that in A.Y. 2012-13 the assessee has considered foreign AE as tested party and, accordingly carried out Benchmarking whereas in A.Y. 2011- 12, the assessee has aggregated all its transactions and chosen itself as the tested party and carried out benchmarking. The ld DR further submitted that since assessee has benchmarked its transactions separately, the Tribunal in A.Y. 2012-13 upheld the MAM method adopted by the assessee. The learned AR rebutting the arguments of the learned DR submitted that they were factually incorrect in stating that for A.Y. 2011-12 the assessee has not benchmarked its transactions considering f....
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....heard the rival submissions and also perused the material on record including the cases relied upon the parties. The first issue pertains to the assessee's objection raised before the Ld. DRP on the ground that the Ld. TPO has wrongly rejected the TNMM followed by the assessee in its transfer pricing analysis. Brief facts and material which need necessary mention for the purpose of deciding the issues involved are that the assessee company incorporated under 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 b....
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.... Market Risk Management, Operational Risk Management, Regional Algorithm Business Support, Regional Research, Tax Planning and Management. 13. To substantiate its claim, the assessee inter alia submitted transfer pricing study report, copy of audited financials, copies of service level agreement entered into with CLSA, Hong Kong and CLSA, Singapore, description of services and summary of benefits, supplementary analysis KPMG benchmarks, documentary evidence to prove services rendered by the intragroup 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....
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.... for services availed. So, there is merit in the contention of the Ld. counsel that the assessee has complied with all requirements as prescribed under the Act and the Rules and the TP analysis has been carried out as per the provisions of law. We are therefore of the considered view that the assessee has discharged its onus by demonstrating that the transaction is at the arms length in accordance with the provisions of section 92C of the Act and has maintained the prescribed documentation in support of such compliance. 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 determi....
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....ernational transaction pursuant to an understanding between the various members of the group. This would be an issue of fact for the determination of the authorities under the Act." 1.1. The various international transactions of the assessee are: (i) Brokerage (ii) IT support services, (iii) Fees for sub-advisory services,(iv) Payment for intra-groups services (v) Interest (vi) Reimbursement of expenses and (vii) Bank charges. These transactions cannot be said to be closely inter-linked, interrelated, interlaced, inter-wind, inter-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 trans....
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....to be seen is whether the transaction entered into is bona fide or the same has been entered into for the purpose of diverting the profits. The Ld. DRP has further relied on the decision of the ITAT Mumbai in the case of Goldman Sachs (India) Securities Private Limited v ACIT (ITA No. 7724/Mum/2011) and 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 which the Tribunal has upheld the application of CUP as MAM for benchmarking of payment for technical and management services. In the light 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? ....
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....these employees, the educational qualification of these employees, the number of hours dedicated by these employees towards the services rendered to the assessee, the undersigned is constrained to go by estimation to the best judgment, to quantify the value of the services if at all any being rendered by the AE to the assessee. Without prejudice to the contention of the undersigned, 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....
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....d to the business of the assessee and the assessee's benchmarking approach is based on TNMM. Further as pointed out by the Ld. counsel, the Delhi Bench of the Tribunal in the case of Knorr Bremse India P. Ltd. vs. AICT 77 taxmann.com 101 (Delhi Tri), has held that payment of intra group services may be benchmarked using TNMM. The observations of the Tribunal are as under:- "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 intragroup 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....
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..... DRP ought to allowed the objection filed by the assessee. Hence, we decide both the questions mentioned in para No 17 (supra) in negative and further hold that the assessment order passed by the AO pursuant to the directions passed by the Ld DRP u/s 144(5) of the Act, is not sustainable in law. 24. Now the issue arises as to whether the legal infirmity in the impugned order can be cured by restoring 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 redetermining ALP by adopting one of the ....
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....ing the TP adjustment so made by the Ld. TPO is bad in law. So far as the cases relied upon by the Ld. DR is concerned, we are of the considered view that the facts of the said cases are different from the facts of the present case. Since, the Ld. TPO has not determined the arm's length price in accordance with the provisions of law, there is no reason to hold that the TNMM method applied by the assessee is not the most appropriate method within the meaning of section 92C of the Act. 27. We therefore, decide Ground No. 3 to 3.4 of the appeal in favour of the assessee and allow the appeal of the assessee and direct the AO to delete the upward adjustment of Rs. 143,67,42,784/- confirmed by the Ld. DRP." 9. We have considered the facts for A.Y. 2011-12 viz-a-viz A.Y. 2012-13. Only difference in these two years is that in A.Y. 2012-13, the TPO has given allowance on the basis of adhoc rate per hour and in A.Y. 2011-12, the TPO has made it nil on adhoc basis. The assessee has provided evidences in both the years of services received and benefits. Also assessee has provided AEs margin and Bench marking including PWC-AUP report for both the years and used TNMM to justify ELP. ....
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....ssessee from overseas non-AE is more than the rate of commission charged from AE while rendering equity broking services. Accordingly, a show cause notice was issued to the assessee as to why the ALP of the brokerage commission received from AEs should not be benchmarked under CUP method of 0.25% in line with the brokerage commission received from the overseas non-AEs. The assessee replied to the show cause notice is reproduced as under: "(A) The assessee has submitted that TNMM is the most appropriate method for benchmarking the above transaction. The assessee submitted that it has given due consideration to all the facts and circumstances related to the transactions that it executed for AE and has earned a margin on operating income of 15.44% as compared to the average margin on operating income of 16.27% earned by independent comparable India brokerage houses. (B) A number of functions namely, client origination activities, dedicated sales and sales trading staff in the New York, London and Hong Kong sales offices of CLSA that cover the India market, centralized client support functions, research teams based outside India, corporate access and investor forums a....
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....accurate adjustments should be made to enhance the comparability/ eliminate the material differences, as between the transactions that the assessee executes for its AE and non AE FU clients. In other words, the commission rate received by the assessee from its non AE FU clients remunerates it for functions that are performed by its AEs for such clients. In other words, the assessee also receives commission income from its non AE FU clients for functions that it does not perform and hence the internal CUP so identified, needs to be adjusted to reflect the fact that the remuneration received by the assessee from its non AE clients compensates it for functions that are performed offshore for those clients by the AEs. Based on the above argument, the assessee submitted the adjustment working to the comparable CUP. (I) The Assessee further submitted adjustments based on volume, submitting that the average rate of only Top 10 clients in each category should be considered as a CUP or by only considering clients who have had a turnover of higher than 2000 crores." 12. The TPO after considering the reply of the assessee came to the conclusion that the assessee is providing broki....
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....is well known that the CLSA Group is involved in raising private equity for private equity investment as well as its own investment in various entities. It is also involved in cross border investment banking and M&A deals. Therefore it has to maintain managers for client management as well as sale and is any benefit has accrued to the assessee company, the same is only incidental. (iv) The assessee has filed various research reports generated by its AEs to prove that the research is provided by the AE. This is not correct as the assessee company has its own research sitting in India. Therefore, it is more likely to prepare research report on Indian market and in fact it must be feeding it AE who may be compiling the research generated by the Indian entity. Even if it is assumed that the research is done by AE even then it is for all the public at large which are used by both Non-AEs and AEs. It is also seen that in all the reports submitted by the assessee company, the research relating to India, has been providing by the assessee company. Therefore there is no direct nexus between the research done by the AE and the benefit accruing to the assessee company. (v) T....
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....considered as the most appropriate method. The learned AR further submitted that if the Bench is of the view that CUP method should be adopted as the most appropriate method based on a non-binding precedent in the case of J P Morgan India (P) Ltd. (supra), similar adjustments to the cost structure should be allowed to iron out the differences between the AE and Non-AE transactions. The learned AR vehemently pointed out that the decision of co-ordinate Bench in the case of J P Morgan India (P) Ltd. (supra), has no binding precedence despite order of Hon'ble Bombay High Court, as the High Court has refused to admit the appeals and merely affirmed the orders of lower authorities including the CIT(A) and the Tribunal. The learned AR prayed that the TNMM may be adopted as the most appropriate method and, without prejudice, if CUP method is to be adopted as the most appropriate method the adjustments to the cost structure be allowed to iron out the differences between the AE and Non-AE transactions. 15. The learned DR, on the other hand, submitted that the assessee has bench marked the transaction by using TNMM and since the assessee is rendering similar services to overseas AEs, t....
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....the assessee significant revenue is from third party FII clients. We also noted that assessee could not have generated business from FII clients without the support of CLSA group resources, for which it is paying intra group service charges. Hence, in such a case, TNMM could be used as the most appropriate method. In view of these facts and circumstances, we are of the view that assessee has rightly followed the TNMM as the most appropriate method and the decision of the co-ordinate Bench in the case of J P Morgan India Pvt Ltd. (supra) is not applicable to the present set of facts of the assessee. Accordingly, we are inclined to set aside the order of the DRP and direct the TPO/AO to delete the adjustment of brokerage income of Rs. 21,73,90,712/-.Ground no.5 is allowed. 17. Ground no.6 reads as under: "Provision of sub-advisory services and information technology ('IT') support services 6. On the facts and circumstances of the case and in law, the learned TPO / learned AO / Hon'ble DRP has erred in proposing/ upholding an adjustment to the ALP determined by the Appellant in respect of provision of sub-advisory services and IT support services by th....
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....he directed the TPO to compute the margins of the comparable companies after considering the foreign exchange fluctuation as operating in nature. Thus, based on the DRP's directions the TPO computed the addition of Rs. 1,49,08,248/- 19. The TPO rejected GC Vak Software and Exports Limited as comparable on the ground that the said company incurred losses in the software segment. The TPO also observed that it had 85% of the business from North America and due to economic slow down in the said region CG VAK faced difficulty and suffered losses in the subsequent year also. The DRP upheld the rejection of the comparable by the TPO on the ground that there was persistent losses in the comparable software segment and other income included foreign currency income of Rs. 46 lacs, which is unallowable. 20. The learned AR submitted before the Bench that the said comparable is not a persistent loss maker. He referred to page nos. 442 & 781 of the paper-book, which shows the profit margin of 7.46%, 8.80% and 6.42% for the year ending March 2009, 2010 and 2011 respectively. The learned AR further submitted that TPO himself admitted that the margin of this year is 6.42 % by referring to pag....
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....comparable to the business model of the assessee, which is into software services. The learned counsel relied on following decisions of the co-ordinate Benches of the Tribunal, wherein the said companies have been excluded from the list of valid comparables. • Ness Technologies India Private Limited vs. DCIT [2016] 76 taxmann.com 209 • Orange Business Services India Solutions Private Limited. Vs. DCIT [2016] 71 taxmann.com 206 • Clear 2 Pay India (P.) Ltd vs. ITO [2018] 95 taxmann.com 284 • Alcatel Lucent India Limited vs. DCIT [2016] 74 taxmann.com 105 Similarly, the learned AR relied on the following judgments of Hon'ble Jurisdictional High Court wherein it has been held that a company involved in software product cannot be compare to a company providing software development services : • CIT vs. PTC Ltd. [2017] 395 ITR 176 • CIT vs. Principal Global Services P Ltd. [2018] 95 taxmann.com 315 On these facts and ratio laid down by the Tribunal and the Hon'ble Jurisdictional High Court, we are of the view that Infosys Ltd. and Zylog System Ltd. are to be excluded from the list of comparables. 23. W....
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.... of comparables. As regards CG-VAK Softwares and Exports Ltd, we are in agreement with the learned counsel for the assessee that the same should be included in the list of comparables. The learned counsel demonstrated that on including CG-VAK Softwares and Exports Ltd and excluding Infosys, Zylog and Wipro, the assessee's margin is higher than the remaining comparables. 25. The other issue challenged by the assessee before us is against the addition of Rs. 67,62,961/- with regard to sub-advisory services. The assessee is providing investment services to its AE and Non-AEs. The assessee has used TNMM to benchmark these transactions. The TPO has not disturbed the benchmarking method used by the assessee. However, he did not agree with the assessee's margin, which is 26% on the basis of the following comparables: • Crisil Ltd. • ICRA Management Consulting Services Ltd. • IDC (India) Ltd. • Mecklai Financial Services Ltd. The TPO rejected all the comparable companies and identified only two comparables viz. Motilal Investment Advisors Pvt. Ltd. and Ladderup Corporate Advisory Private Limited and computed an addition of Rs. 99,06....
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....T v. Blackstone Advisors India (P.) Ltd. [2019] 101 taxmann.com 116 • Temasek Holdings Advisors India (P.) Ltd. v. DCIT [2017] 87 taxmann.com 168 • Carlyle India Advisors Pvt. Ltd. v. ACIT [IT(TP)A No.2410/Mum/2017] The learned AR further relied on the following judgments of the Hon'ble Bombay High Court wherein it has held that companies involved in merchant banking business cannot be compared to non-binding investment advisory services • PCIT v. New Silk Route Advisors P. Ltd. [ITA No. 216 of 2016] • CIT v. General Atlantic Private Ltd. [ITA No. 1993 of 2013] • CITv. Goldman Sachs (India) Securities PvL Ltd. [ITA No. 2222 of 2013] 27. The learned DR, on the other hand, relied on the orders of lower authorities. 28. After hearing both the parties and going the material available on record as also the decisions cited, we observe that in the above cases, the co-ordinate Bench has held that Ladderup Corporate Advisors has to be excluded as the said company is into investment banking business and not rendering non-binding investment services. Similarly, Bombay High Court in the case of New Silk Route Advisors P.....
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....ted that the said company has been included as a comparable by the Tribunal in the case of AGM India Advisors Private Limited vs. DCIT [2016] 70 taxmann.com 219. It was further stated that a company cannot be excluded merely because it has incurred loss, unless it is a consistent loss making one. In support of this contention, reliance was placed on the decision of Hon'ble Bombay High Court in the case of CIT vs. Welspun Zucchi Textile Limited [2017] 391 TR 211. To defend the argument on the issue of product similarity does not matter if the method followed is TNMM, learned AR relied on the decision of Diageo India (P) Ltd. vs. DCIT [2013] 28 ITR(T) 242. 31. The learned DR relied on the order of the authorities below. 32. We have both the sides and perused material on record. We do not find force in the observation of the TPO that the said company is a persistent loss making company, which is clear from pages 561 and 577 of the paper-book. It has incurred loss only during the year. We also find merit in the argument of the learned AR that product similarity is not important when the method selected for benchmarking is TNMM. The case of the assessee is supported by the case la....
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....¢ Goldman Sachs India Private Limited v. ACIT [2017] 78 taxmann.com 142 • DCITv. General Atlantic (P.) Ltd. [2018] 91 taxmann.com 406 • ACIT v. Blackstone Advisors India (P.) Ltd. [2019] 101 taxmann.com 116 • Carlyle India Advisors Pvt. Ltd. v. ACIT [IT(TP)A No.2410/Mum/2017] We have perused all these case laws and find that the Tribunal has held these two companies as a valid company in case of non-binding investment advisory companies. Respectfully following the said decisions, we direct the TPO to include these two companies viz. ICRA Management Consulting Services Ltd. and IDC India Ltd. as valid comparables. The AO is directed accordingly.The ground no.6 is allowed. 36. Ground nos. 7 to 9 read as under: 7. On the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in disallowing the expenditure, in the nature of repair and maintenance, of INR 4,43,68,457 by treating the same as capital in nature. 8. Without prejudice to Ground 7, on the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in considering the entire repairs and maintenance ....