TaxTMI 
TaxTMI 
2021 (3) TMI 680
X X X X Extracts X X X X
X X X X Extracts X X X X
....n law, the Ld. CIT(A) erred in overlooking the fact that the assessee has not provided any information regarding the level and type of manpower available at the disposal of the associated enterprises and associated enterprises (FIIs) at Mauritius was nothing but a letter box entity having no resources at its disposal to undertake the marketing and research function stated to be performed by it. 2.2 The revenue has further filed an additional ground of appeal, which is produced below:- 1. On the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in allowing the benefit of 5% on arm's length price (ALP) at the option of the assessee even though Section 92C(2A) clarifies that 5% is not a standard deduction. 2.2.1 Since the additional ground involves pure question of law and do not require any fresh examination of facts, we admit it by following the judgement of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. 2.3 The assessee has filed cross objections, which read as under:- 1. While upholding the application of the CUP Method to determine the ALP of the brokerage charged, the CIT(A) has erre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taken similar trades. It was however explained that such rates have not been compared for the only reason that the assessee undertakes marketing function in respect of its transactions with unrelated parties, whereas for the purpose of its transactions with related parties it does not undertake any marketing function. The TPO observed that while applying TNMM, the assessee has compared profits earned by it with the profits earned by other entities operating in India, providing similar broking services. On the basis of the analysis undertaken by the assessee, it has identified 10 comparable companies, who have earned a net operating margin on cost of 15.75%. The assessee further contends that it has earned the margin of 153.76% on its operating costs, which is much higher than the margin earned by the comparable cases. Thus, it was contended before the TPO that the international transactions entered into by it with its group FII are at Arm's Length Price (ALP). The TPO rejected the TNMM applied by the assessee for the following reasons:- (i) In the given case, the assessee clearly has not applied the most appropriate method. It is seen that there is a clear market rate ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o demonstrate that those personnels were involved in marketing function. Accordingly, the Ld. CIT(A) worked out the brokerage rate charged by the assessee to its AE at 0.28%. 4.1 Also the Ld. CIT(A) held that the assessee is entitled to 5% benefit for the impugned assessment year in respect of adjustment made on clearing house trades. The computation of the adjustment by him, after giving the benefit of 5% to the assessee is reproduced below: Computation of 5% range Particulars Amount in Rs. Total clearing house trades with related parties 29,477,212,989/- ALP - Arms Length brokerage (0.31% as computed above) 89,927,690/- 95% of Arm's length price (ALP) 85,431,306/- Actual brokerage (i.e. Transfer Price) charged by the appellant to the related party clearing house trades 83,743,226/- Adjustment 1,688,080/- Thus the Ld. CIT(A), considering the adjusted rate of brokerage of 0.31% and allowing the benefit of 5%, worked out the ALP of the related party clearing house trades segment at Rs. 85,431,306/- as against Rs. 10,31,70,245/- worked out by the TPO. Accordingly, the assessee got relief of Rs. 1,76,38,940/-. 5. Before us, the Ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat as the whole business of the assessee is driven by stock market and therefore, 'volume factors' are not applicable on the facts of the case. Thus he supports the order of the Ld. CIT(A) on the above. However, the Ld. DR explains that as the assessee failed to provide any particular of marketing function undertaken by the overseas AE and further failed to provide the details of employees of the AEs in this regard, the TPO has rightly come to a finding that the assessee undertakes the marketing function, if any, in respect of both the related party transactions as well as third party transactions. Therefore, it is pleaded by him that the order of the Ld. CIT(A) in respect of salary costs be set aside and the order passed by the TPO/AO be restored. The Ld. DR further explains that the Ld. CIT(A) is not correct in allowing the benefit of 5% on ALP at the option of the assessee even though section 92C(2A) clarifies that 5% is not a standard deduction. 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. As mentioned earlier, the assessee has relied on the order of the Tribunal in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....35,557 47,35,557 Transfer pricing Adjustment (C*D) 1,18,53,866 Nil 5,913 658 22. The Ld.AR explained that TPO granted an adjustment of marketing cost to the extent of 0.1076%, which is approximately 30% of weighted average rate charged to third party client. However, Ld. CIT(A) granted adjustment of 40% with respect to marketing cost adjustment for significant volume and research cost and granted relief to the assessee. The Ld.AR further submits that geographical location of market is of no consequence in judging comparability of an uncontrolled transaction for purpose of applying CUP method. The difference in geographical location cannot be reason enough to discard comparables. Geographical location of service recipient to be irrelevant consideration, because the consulting services provided by the assessee would remain the same whether the service receiver is located in X country or 'Y' country as long as service provider is in India. Reliance is placed on the following judicial precedents to support the said contention:- • SI Group-India Ltd. v. DCIT [2016] 68 taxmann.com 158 (Mumbai - Trib.) • Bharti Airtel Ltd. v. AC....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;s length price by applying CUP method. And suggested adjustment of RRs. 1,18,59,779/- in arm's length price. On receipt of report of the TPO, the AO made addition of Rs. 1,18,59,779/- in respect of arm's length price while passing the assessment order. The assessee filed appeal before CIT(A). Before CIT(A), the assessee besides other contentions, stated that CUP method cannot be used as it is for determination of ALP of assessee's transactions with its AE as it is difficult to make accurate adjustments for itself as compared to other trades/transactions and TNMM on the overall basis should have been considered, being more reliable and accurate method in assessee's case. The Ld. CIT(A), after considering the submissions of assessee concluded that CUP is the most appropriate method which should be applied to the proper adjustment instead of using TNMM which is an indirect method. 27. On the grounds of comparability of comparables, concluded that domestic independent client should be considered for comparability purpose. The assessee further stated that if CUP is to be applied, then appropriate adjustment need to be made for lesser function performed/asset u....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Further, the TPO has not considered any adjustment for the high volume of business given by MSDW Mauritius to the appellant. The total volume of trades (for purchases and sale) generated by MSDW Mauritius is Rs. 1316 crores. As noted by the TPO on page 8 of his order, the business provided by MSDW Mauritius is approximately 15% of the total business volume of total trades. The next highest client accounts for only 3.77% of the total business volume. It is well settled commercial principle that 'as volume increases, the price decreases'. The TPO has dealt with this issue on para 2 of page 8 in his order. The TPO has picked out certain instances where even though the volume has increased there is no decrease in the brokerage rate and accordingly has not considered any adjustment for volume differences. I am unable to agree with the TPO to the extent that one cannot disregard well-settled commercial principle based on certain stray instances. The fact that 'as volume increases, the price decreases' is a well-established commercial principle and accordingly due weightage/adjustment should be given for the huge volume of business given by MSDW Mauritius. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....381% 0.2403% Diff in ALP and rate charged to MSDW 0.0139% Addition 658 Considering the arm's length price determined on the above factors, the brokerage rate charged by the appellant to MSDW Mauritius for 'Clearing House' trades meets with the arm's length principle. However, the brokerage rate charged by the appellant to MSDW Mauritius for 'DVP' trades does not meet with the arm's length principle and consequently, the addition of Rs. 658 is therefore confirmed." 29 Before us, the Ld. DR for the revenue could not bring out any fact to enable us to take a different view. No contrary law is brought to our notice. Therefore, we do not find any reason to interfere with the finding of Ld. CIT(A). In the result, this ground of appeal also fails." 7.1 We begin with the contentions of the assessee regarding average of rates charged to third party FIIs and domestic clients. The TNMM applied by the assessee has been rightly rejected by the TPO/AO for the reasons that (i) in the given case the assessee clearly has not applied the most appropriate method as there is a clear market rate prevailing for broking s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asis of comparable uncontrolled transactions- internal or external- that are undertaken in different geographical markets as compared to the market in which the controlled transactions is undertaken. 7.5 For the purposes of sub-rule (1) of rule 10B, the comparability of an international transaction or the specified domestic transaction with an uncontrolled transaction shall be judged, as per sub-rule (2) with reference to the following namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transaction operate, including the geographical location and size of the markets, the laws and government orders in forc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ary costs can be considered as being incurred for marketing for third parties on the reasons that (i) though the assessee was specifically requested vide office letter dated 21-2-2006 to provide documentary evidence to show that the said sum of Rs. 6.53 crores was incurred on account of marketing activity relating to third party overseas FIIs for comparison, no documentary evidence in this regard could be provided by the assessee, (ii) the assessee itself contends that for its related party transaction no marketing activities were undertaken by it. Even than a salary cost of Rs. 2.60 crores has been attributed to its related party clearing house transactions which indicates that salary costs have to be incurred for non-marketing purposes only. The quantum of trade undertaken as clearing house third party transaction and clearing house related party transaction is almost the same. Hence, the entire salary costs of Rs. 1.94 crores considered for third party clearing house transaction is on account of non-marketing functions only, (iii) the assessee has failed to provide any particulars of marketing function undertaken by the overseas AE. The assessee has not even provided the details....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1,37,09,514/- Further marketing cost adjustment on account of equity research salary cost attributable towards unrelated party Clearing House trades E=D/C 0.05% 11. As mentioned earlier, the Ld. counsel has relied on the order of the Tribunal in the case of Morgan Stanley India Company Pvt. Ltd. (supra). A precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it. Judgments must be read as a whole and observations in judgments should be considered in the context in which they are made and in the light of the questions that were before the court as held in CIT v. Sun Engineering Works Pvt. Ltd. 198 ITR 297 (SC). In India, the burden of proof in transfer pricing litigation to establish the arm's length nature of international transaction is generally with the assessee. Once, the assessee discharges this burden, the burden shifts to the tax authorities to establish that the arm's length price has not been determined in accordance with the provisions of the law or that the information or data used in the computation is not reliable or correct. 12. Keeping i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal ground filed by the revenue is allowed. 14. Finally we turn to the 2nd and 3rd grounds of appeal filed by the revenue which read as under : 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in overlooking the fact that the explanatory notes to the Finance Act, 2005 clearly stated that transactions in derivatives shall cease to be speculative only from the day the Stock Exchanges fulfill the conditions to be prescribed by the Central Government and it was only w.e.f 25th January, 2006, that the notification to that effect was issued. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to consider that the proviso to 43(5) was mainly a safeguard to cover the losses that may arise by way of holding the stocks and not to cover cases of simultaneous purchase and sale of shares/derivatives with a view to earning profits out of price differentials in different segments. 15. The AO in his order has stated that the trading of shares by the assessee-company comes within the ambit of the Explanation to section 73 and accordingly disallowed the trading loss of Rs. 40,82,623/-. In appeal, the L....