TaxTMI 
TaxTMI 
2020 (12) TMI 815
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...., and based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred on the following grounds, each of which are independent and without prejudice to each other: Common Grounds 1. On the facts and circumstances of the case and in law, the orders passed by learned Transfer Pricing Officer ('TPO'), the learned Assessing Officer ('AO') and the learned CIT(A) are bad in law and void ab initio; 2. On the facts and circumstances of the case and in law, the learned TPO / the learned AO / learned CIT(A) erred in assessing the total income of the Appellant at INR 35,84,28,360 as against returned income of INR 32,82,16,610 filed by the Appellant. Transfer Pricing Grounds- 3. On the facts and circumstances of the case and in law, the learned AO / learned TPO / learned CIT(A) erred in rejecting the Transfer Pricing ('TP') analysis undertaken by the Appellant; 4. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) failed to appreciate that under the provisions of Section 92CA(3) of the Act, the TPO is required to d....
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....ed TPO / learned AO learned CIT(A) failed to consider the evidence filed during the course of proceedings; Payment of referral fees - TNR 2,14,36,8 14 12. The learned TPO I learned AO I learned CIT(A) have erred on facts and in law in enhancing the income of the Appellant by INR 21,436,814 by holding that the international transaction of payment of referral fees to AE5 does not satisfy the arm's length principle envisaged under the Act 13. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appreciating that significant part of its brokerage business of the Appellant is through the transactions executed by the FIl's which are referred to the Appellant by AEs; 14. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appreciating the Functions, Assets and Risk ('FAR') profile of the Appellant vis-vis the AEs; 15. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appropriately applying any of the five prescribed methods as per Section 920(1)....
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....2,82,16,610/-. The return of income filed by the assessee company was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings the A.O observing that the assessee had entered into international transactions with its associated concerns (AEs) during the year under consideration, therein, made a reference to the DIT(Transfer Pricing), Mumbai (for short 'TPO') vide his letter dated 18.10.2005 for determining the Arm's Length Price (ALP) of the said transactions. The TPO after deliberating on the submissions of the assessee, vide his order under Sec. 92CA(3) of the Act, dated 07.03.2006 inter alia suggested the following adjustments as regards the ALP of the international transactions carried out by the assessee during the year under consideration : Sr. No. Particulars 1. The ALP of the international transactions relating to payment of brand fee by the assessee to its AE, viz. CLSA BV, Netherland was computed by the TPO at nil as against that shown by the assessee by applying TNMM as the most appropriate method at Rs. 49,38,6....
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....ards the disallowance of the assessee's claim for deduction of SEBI Merchant Banking License Fee of Rs. 1,66,666/- relatable to the year under consideration, the CIT(A) not being persuaded to subscribe to the claim of the assessee also upheld the same. Accordingly, the appeal filed by the assessee was dismissed by the CIT(A). 6. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short 'A.R') for the assessee took us through the relevant facts pertaining to the issues which had been assailed before us. Adverting to the determination of the ALP of the referral fees received by the assessee from its AE, viz. CLSA, Hong Kong by the AO/TPO at Rs. Nil, as against that determined by the assessee by adopting TNMM as the MAM at Rs. 2,14,36,814/-, it was submitted by the ld. A.R that the TPO had blatantly exceeded his jurisdiction as well as drawn inferences which were contrary to the material borne from the record. It was averred by the ld. A.R that though the assessee had filed voluminous details and evidence to prove rendition of the referral services by its AE viz. CLSA Ltd, Hong Kong, however....
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....m its AE, viz. CLSA, Hong Kong in compliance with the arm's length standard prescribed under the I.T Act and the rules, therefore, the TPO had clearly exceeded his jurisdiction in dislodging the same and adopting the ALP of the aforesaid international transactions at Rs.nil without adopting any one of the prescribed methods provided in Sec. 92C(1) of the Act, as against that shown by the assessee at an amount of Rs. 2,14,36,814/-. As regards the determination of ALP of the royalty paid by the assessee towards brand fee to its AE, viz. CLSA BV, Netherland by the TPO without following any prescribed method contemplated under Sec. 92C(1) at Rs.nil, as against that shown by the assessee by applying TNMM as the MAM at Rs. 49,38,615/-, the assessee assailed the validity of the jurisdiction exercised by the TPO on the basis of his contentions which were advanced by him in context of referral services received by the assessee from its AE. Further, it was submitted by the ld. A.R that the A.O/TPO had erred in not appreciating the fact that as the payment of brand fee by the assessee to its AE viz. CLSA BV, Netherland was allowed by the Reserve Bank of India (for short "RBI") and also permis....
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....on. In order to buttress his aforesaid claim the ld. A.R took us through the order of the CIT(A) for A.Y. 2001-02, Page 545 - 560 of the assessee's paper book (for short 'APB'). 7. Per contra, the ld. Departmental Representative (for short 'D.R') relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the assessee on the basis of supporting documentary evidence had failed to substantiate the rendition of referral services to the assessee by its AE, viz. CLSA, Hong Kong., therefore, the TPO had rightly taken the ALP of the same at Rs. nil. Also, a similar contention was advanced by the ld. D.R in support of the view taken by the lower authorities in determining the ALP of the royalty/brand fees paid by the assessee to its AE viz. CLSA BV, Netherland at Rs. nil. As regards the disallowance of the loss claimed by the assessee in respect of purchase and sale of shares, it was submitted by the ld. D.R that as the same was covered by the 'Explanation' to Sec. 73 of the Act, therefore, the lower authorities had rightly held the same as a speculative loss. In the backdrop of his aforesaid contention it was averred by the ld. D.R that as the appeal filed by....
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....05, dated 22.12.2004 had categorically directed that deduction of 1/3rd of the one time registration fees of Rs. 5,00,000/- paid by the assessee to SEBI towards merchant banking license be allowed in A.Y 2002- 03 & A.Y 2003-04. In the backdrop of the aforesaid clear and unequivocal direction given by the CIT(A) while disposing off the assessee's appeal for A.Y 2001-02, we are of the considered view that there was no justification on the part of the lower authorities in not allowing the assessee's claim for deduction of Rs. 1,66,666/- (i.e 1/3rd of Rs. 5,00,000/-). Accordingly, we direct the A.O to allow the assessee's claim for deduction of Rs. 1,66,666/- i.e 1/3rd of the registration fees of Rs. 5 lac that was paid by it towards merchant banking license fees to SEBI in the period relevant to A.Y. 2001-02. We thus in terms of our aforesaid observations 'set aside' the order of the CIT(A) in context of the aforesaid issue under consideration and vacate the disallowance of Rs. 1,66,666/- made by the A.O. The Grounds of appeal No. 19 & 20 are allowed in terms of our aforesaid observations. 9. We shall now advert to the claim of the assessee that the A.O/CIT(A) had erred in disallow....
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....g, that the assessee which was inter alia engaged in share trading business did not fall within the exclusions contemplated in Sec.73 of the Act, the A.O declined to accept the claim of the assessee that the loss on account of transactions in shares had arisen pursuant to its basic activities as that of a broker and treated the same as speculation loss within the meaning of 'Explanation' to Sec. 73 of the Act. Also, the A.O disallowed a proportionate expenses of Rs. 26,10,333/- on the basis of his working carried out at Para 6.8 of his order by attributing the same to the speculative transactions carried out by the assessee in shares. 10. We have given a thoughtful consideration to the aforesaid issue before us in the backdrop of the contentions advanced by the authorised representatives for both the parties. Admittedly, the assessee is engaged in the business of share and stock broking. On a perusal of the records, we find, that the purchase and subsequent sale of shares carried out by the assessee was incidental to its business of share broking. As such, our indulgence in the present case has been sought by the assessee for adjudicating as to whether or not the loss incurred o....
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....ness loss. On further appeal by the revenue, the Hon'ble High Court of Bombay in its order passed while disposing off the appeal of the revenue in CIT- 4 Vs. HSBC Securities & Capital Markets (India) Pvt. Ltd. (2015) 379 ITR 146 (Bom) after deliberating on the observations recorded by the Tribunal observed, that the Tribunal had held that in case the loss on the purchase and sale of shares was found to have occurred on account of error trade conducted by the assessee on behalf of its clients, then, the same had to be accepted as a business loss. In the backdrop of the aforesaid observations of the Tribunal, it was observed by the Hon'ble High Court that as the issue had been restored by the Tribunal to the file of the A.O for verifying as to whether the loss had occurred on account of error trade conducted by the assessee on account of its clients, therefore, no substantial question of law did arise therefrom. As such, the Hon'ble High Court had impliedly approved the view that was taken by the Tribunal while restoring the matter to the file of the A.O i.e in case if the loss had occurred on account of error trade conducted by the assessee on behalf of its clients, then, the assess....
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.... speculation loss, therefore, disallowance of the proportionate expenditure of Rs. 26,10,333/- that had been attributed by the lower authorities to the aforesaid speculative transactions also cannot be sustained and is consequentially deleted. Resultantly, the disallowance of the assessee's claim of share trading loss of Rs. 7,36,483/- and expenses of Rs. 26,10,333/- therein aggregating to Rs. 33,46,816/- [Rs. 7,36,483/-(+) Rs. 26,10,393/-] is hereby deleted. The Grounds of appeal No. 17 & 18 are allowed in terms of our aforesaid observations. 11. We shall now advert to the claim of the Ld. A.R that the A.O/TPO had erred in determining the ALP of the royalty/branding fees paid by the assessee to its AE viz. CLSA, Netherland at Rs.nil, as against that claimed by the assessee at Rs. 49,38,615/-. As is discernible from the orders of the lower authorities the assessee had paid a royalty of Rs. 49,38,615/- for the use of brand name to Credit Lyonnais Securities Asia BV, Netherlands (for short "CLSA BV, Netherland"). As per the TP study report the assessee had paid the branding fees as per the terms of the "branding agreement" that was entered into with its AE, viz. CLSA BV, Netherlan....
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....ch standalone basis would not justify the principles of arm's length. Further, observing that neither any of the uncontrolled entity with whom the CLSA group had a partnership or any other controlled entity of the group had paid any brand fee to CLSA BV, Netherlands, the TPO was of the view that on the basis of the said fact the ALP of the consideration paid for use of the brand name by the assessee company i.e CLSA India could safely be computed at nil. Observing, that the data regarding comparable transactions was available, the TPO was of the view that Comparable Uncontrolled Price method (CUP) was the most direct and reliable method for benchmarking the aforesaid transaction i.e payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherland. As regards adoption of TNMM by the assessee for benchmarking the aforesaid international transactions, the TPO was of the view that comparison of the net profit margin of the assessee at an entity level with that of the other broking entities without separately and independently benchmarking the transaction pertaining to payment of brand fee could not be accepted. Accordingly, the TPO determined the ALP of the aforesaid....
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....n, and therein, form a basis of selection of a comparable transaction. Further, the Tribunal while disposing off the aforesaid appeal in the assessee's own case for A.Y. 2002-03 had approved the adoption of TNMM by the assessee as the MAM for benchmarking the aforesaid international transaction. For the sake of clarity, the observations recorded by the Tribunal while disposing off the aforesaid appeal in the assessee's own case in context of the aforesaid issue under consideration is reproduced as under: "8. We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding transfer pricing adjustment made by AO in respect of royalty paid by the assessee to CLSA BV of which the assessee is a subsidiary. The royalty amounting to Rs. 7,11,466/- @ 1% of net receipt has been paid by the assessee during the year from 19.2.2002 to 31.2.2002. The assessee had not paid any royalty earlier as the same was not permitted by the erstwhile Foreign Exchange Regulation Act (FERA). However, later when FERA was replaced by FEMA, government allowed payment of royalty and therefore assessee started making payment of ro....
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.... 8.2 The ld. CIT-DR has placed reliance on the decision of the Tribunal in the case of M/s. Knorr Bremse (I) Pvt. 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 approach was possible but the method can be applied only when information is available for application of CUP method. In the cited case, the Tribunal had upheld the order of TPO determining ALP at nil on the basis of CUP method as in that case there was material to show that no real or tangible benefit had been derived by the assessee from the transaction with the AEs and benefit if any was only incidental. The present case is different. In this case, though the AO observed that the trade name/brand name CLSA was not protected in any country including In....
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....d by other comparable companies in India and has given a finding that these companies on average were incurring business development expenditure which was 6.4% of brokerage turnover whereas similar expenditure incurred by the assessee was only 1.28% including royalty of 1% paid by the assessee . Therefore expenditure incurred by the assessee on royalty and business development could not be considered as excessive compared to the comparable parties. CIT(A) has also applied the TNMM method for benchmarking international transactions. There are 29 comparables selected details of which have already been given earlier which gave an average margin of -5.5% and, in case, loss making companies were excluded, the average margin came to 16.06% whereas in case of the assessee the margin declared was 57.58%. CIT(A) has therefore held that no TP adjustment is required to be made in case of the assessee with which, on the facts of case, we fully agree. We, therefore, see no infirmity in the order of CIT(A) in deleting the addition made and the same is therefore, upheld." As the facts and the issue pertaining to determination of the ALP as regards the consideration paid towards royalty/brand f....
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.... According to the Assessing Officer and the Commissioner (Appeals), the Govt's approval had no weight as the person granting approval were not experts on income-tax. This was mere simplification of the matter. In the context of Section 40A(2)(b), the CBDT in Circular No. 6-P dated 6-7-1968 stated that when payments are approved by one wing of the Government, there is not question of such payment being treated as excessive or unreasonable having regard to the legitimate business needs. The principle behind this view is applicable with equal force to Section 37(1) also. Lightly brushing aside the Government approval in the manner done by the lower authorities would set a dangerous precedent and accordingly, could not be approved. In the above light, the above impugned addition having no justification was to be deleted." Accordingly, in the backdrop of our aforesaid deliberations we are of the considered view that the determining of the ALP of the royalty/brand fee paid by the assessee to its AE viz. CLSA BV, Netherland at Rs.nil by the TPO, as against that shown by the assessee at Rs. 49,38,615/- cannot be sustained and is liable to be vacated. Resultantly, the Ground....
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....e FIIs, therefore, it was very critical that such global institutional investors were convinced on a regular basis to execute their transactions through CLSA Ltd., Hong Kong and the assessee company. On the basis of the aforesaid factual position, the assessee tried to impress upon the lower authorities that in order to facilitate procuring of the business of the global institutional investors the role of its AE viz. CLSA Ltd., Hong Kong was very crucial and in fact indispensable. As regards the referral fees that was paid by the assessee @ 30% of the brokerage fees earned on each executed transaction, it was submitted by the assessee before the lower authorities that the same was well within the reasonable limits. In order to drive home its claim as regards the reasonabless of the referral fees that was paid by the assessee to its AE, viz. CLSA Ltd., Hong Kong, it was submitted by the assessee that the same could safely be gathered from the fact that as per the bye laws and regulations of the Stock Exchange the brokers were permitted to pay to the remisier (referral) a maximum share @ 50% of the brokerage charged to the clients introduced by them. The assessee had benchmarked the ....
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.... However, the reply filed by the assessee did not find favour with the TPO for the reasons discussed by him at length in the body of his order passed under Sec.92CA(3), dated 07.03.2006. In fact, it was observed by the TPO that as the assessee had neither furnished any specific answers to certain crucial questions nor furnished any evidence to substantiate the basis of the referral agreement itself or the circumstances leading to the same, therefore, he was constrained to infer viz. (i) that as no correspondence trail had been produced by the assessee which could substantiate its claim that referral services were infact rendered by its AE, viz. CLSA Ltd., Hong Kong, therefore, there was no certainty as regards the genuineness of its said claim; (ii) that as no details of the costs incurred for the services rendered by the AE, viz. CLSA Ltd., Hong Kong were furnished by the assessee despite having been specifically directed, therefore, it could not be proved that any costs had actually been incurred by the aforesaid AE for arranging such referrals, and thus, the cost pertaining to rendering of the aforesaid referral services was to be taken as zero; (iii) that as the assessee itself....
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....CLSA Ltd., Hong Kong; and (ii). that the TPO had gravely erred in law in determining the ALP of the referral services at Rs.nil without applying any one of the prescribed methods provided in Sec. 92C(1) of the Act. 16. We shall first deal with the claim of the assessee that it had placed on record substantial documentary evidence which proved to the hilt that it had received referral services from its AE, viz. CLSA Ltd., Hong Kong in lieu whereof a referral fees of Rs. 2,14,36,814/- was therein paid to the latter as per the terms of the referral agreement, dated 07.02.2003 (applicable w.e.f 01.01.2003). On a perusal of the records, we find, that the assessee in order to substantiate rendering of the referral services by its aforementioned AE, viz. CLSA, Hong Kong to the assessee compny had furnished the following documentary evidence as 'additional evidence' U/rule 46A in the course of the proceedings before the CIT(A): • Snapshot from CLSA Group website capturing research capabilities (refer PB 192 - 193) • List of different research activities undertaken by the CLSA HK (refer PB 194- 195) • Sample daily research publication titled as '....
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....an of CLSA HK (refer PB 343-345); • Affidavit of Mr. Donald Skinner, Director of Cash Equities Segment, CLSA HK dated May 11, 2011 (refer PB 346-351); 16. Still further, the assessee vide his submission dated 20.02.2012 had submitted certain more documents by way of 'additional evidence' U/rule 46A before the CIT(A), as under: • "Affidavit of Ms Sonal Jain, Country Head of CLSA India dated 16 February 2012 (refer PB Pg. 378 to 381) • List of Key Relationship Mangers (KRM) of top FII clients (refer PB Pg. 382 to 391) • List of roadshows conducted for FII clients (refer PB Pg. 392 to 395) • List of various communications with a FII client named 'Templeton Global Equity' (refer PB Pg. 392 to 400) • List of various communications with a FII client named 'Capital International Inc' (refer PB Pg. 401 to 404) • Details of support provided to a client named 'Templeton Global Equity' (refer PB Pg.405 to 417) • Details of meetings attended by FII clients with respect to India securities, sample clients named 'Fidelity investment International' and 'Templeton Global Equity' (refer PB Pg.....
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.... making the payments towards referral fees to its AE, viz. CLSA Ltd., Hong Kong, however, the fact that such payments were made from the month of January, 2003, therein revealed that the said referral fee was paid even prior to having been so advised by DHS. Further, It was stated by the assessee that as the assessee had not demonstrated as to which FII clients were referred by its AE, viz. CLSA Ltd., Hong Kong, therefore, it was not possible to know as to which clients were the 'referred clients' and which clients were 'direct clients'. As such, it was stated by the TPO that the assessee had adopted "hands-on approach" and had shared 30% of the commission received from all FIIs with its AE, viz. CLSA Ltd., Hong Kong. On the basis of his aforesaid claim, it was submitted by the TPO that de hors any material which would reveal that the foreign clients had actually been referred to the assessee by its AE, viz. CLSA Ltd., Hong Kong, its claim of having been paid the referral fees to the latter could not be accepted. Also, the TPO objected to the payments of the referral fees by the assessee to its AE, viz. CLSA Ltd., Hong Kong, in respect of certain CLSA group companies and its associ....
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....ble to place on record any such material which would dislodge the factum of rendition of referral services by the AE, viz. CLSA Ltd., Hong to the assessee during the year under consideration and therein prove to the contrary that no such referral services were therein factually rendered. Except for claiming that the documents filed by the assessee did not demonstrate that any actual referrals were made by the AE, viz. CLSA Ltd., Hong Kong, to the assessee, we find, that the said hollow claim of the TPO is not backed by any concrete material which would support the same. On the basis of the aforesaid observations, we are unable to concur with the view taken by the lower authorities that the assessee had failed to substantiate receipt of referral services from its the AE, viz. CLSA Ltd., Hong Kong during the year under consideration on the basis of any supporting documentary evidence. 19. Apart from the fact that the view taken by the lower authorities that the assessee had failed to substantiate on the basis of supporting documentary evidence its claim of having received referral services from its AE, viz. CLSA Ltd., Hong Kong had been vacated by us, we even otherwise are unable ....