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2024 (5) TMI 947
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....116,09,53,278 2015-16 144,65,87,463 2016-17 152,83,36,372 3. Besides this, there are other small grounds that we shall discuss in respective assessment years. 4. The brief facts qua the transfer pricing adjustment on account of intra-group services are that, assessee, i.e., CLSA India Pvt. Ltd. is a part of CLSA group, an Asia brokerage house having its regional headquarters in Hong Kong. The assessee in India is primarily engaged in the business of institutional equity broking and is a member of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Its customers are mainly comprise of Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII). 5. We will take up the appeal for A.Y. 2013-14 and our finding given therein will apply in the impugned appeals for A.Y. 2014-15 to 2016-17, pertaining to the issue of arm's length price of intragroup services. During the year assessee had shown payment of intra-group services of Rs. 160,26,18,641/- paid to following three parties: CLSA SGP 15,65,14,851 CLSA HK 130,39,76,089 CLSA UK 14,21,27,701 TOTAL 160,26,18,641 6. It has been stated that to serve its clients e....
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....of services, i.e., rendition of services by these entities. In order to demonstrate the evidences filed before the authorities below for entire transaction of intra group services which are contained in voluminous paper books filed before us, the assessee was directed to file a chart giving details of evidences and nature of services in all the heads of intra-group services for all the years. Broadly, assessee's benchmarking approach was as under:- * The Assessee had identified the services received from its AEs and provided the relevant agreements to justify its need and benefits from it; * It has also tried to demonstrate receipt and rendition of services by filing all the relevant documentation with the TPO. * The Assessee had explained the way costs incurred by AEs were identified (direct and indirect costs) and the how the allocation keys were used for allocation of indirect costs. * The Assessee had provided Agreed upon Procedures (AUP) report from PwC inter-alia to establish factual veracity of the costs incurred, allocation mechanism and mark-ups charged by the AEs and to demonstrate that shareholder costs and duplicative costs were not a....
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....t 9% CLSA U Communications Compliance Credit Risk Management Event Marketing Development Squad Finance and accounting Futures & Options Management Support Human Resources Internal Audit Legal Management Market Risk Management Operational Risk Management Regional Algorithm Business support Tax Planning and Management 11. Further, to justify the arm's length nature of mark-up charged by the AEs, KPMG, as an independent auditor had assisted CLSA Hong Kong, CLSA Singapore and CLSA UK to conduct a benchmarking analysis pertaining to all the four services discussed above. The findings of the KPMG for all the years impugned before us were as under:- AY 2013- 14 to AY 2016- 17 AY 2013-14 AY 2014-15 AY 2015-16 AY 2016-17 Benchmarking Category Cost plus markup earned by AEs Arithmetic Mean (AM) of the margin of comparable companies AM of the Margin of comparable companies Arm's length range using 35th & 65th percentile of comparable companies Arm's length range using 35th & 65th percentile of comparable companies Broking services 10% 13.4% 12.2% 3.7% to 14.1% 0.1% to 14.....
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....10,000 *4,000} 156,26,18,641 A.Y. 2014-15 121,09,51,979 5,00,00,000 (10,000 * 5,000) 116,09,53,278 A.Y. 2015-16 149,65,87,465 5,00,00,000 (10,000 * 5,000) 144,65,87,463 A.Y. 2016-17 157,14,21,372 5,00,00,000 {10,000 * 5,000) 152,14,21,372 16. In so far as various evidences and analysis are concerned, the observations of the ld. TPO, for the sake of ready reference are reproduced as under:- In this regard it is important to note that the AE is providing its services to its Group Entities including the assessee only. The AE is not providing these services to unrelated third parties meaning thereby it is only a captive service provider. Secondly, the search provided by the assessee doesn't specify whether the search has been made for captive service provider. As the AE is providing risk free services whereas the comparables are doing for profit making. Hence, the comparables selected in the search is not correct. Therefore, the same is rejected. Hence, the benchmarking used by the assessee is rejected. Further, the assessee has to also discharge its onus that the cost incurred is for the benefit of India. It is pertinent to note t....
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....ls and evidences submitted it is clear that the assessee has not been able to prove that it has actually received services of some value that call for such a huge payment. (more than 100% of the profits earned by the company Also it is not established that these were duplicative and not shareholder activities and also whether any independent third party would be willing to pay such a high consideration for such sketchy services. a) The following are the crucial issues to be seen in such related party transactions: * The taxpayer's agreement with the associated enterprises related to intra group services is to be examined to see as to what kind of services were to be provided by the AE to the taxpayer As normally such agreements refer to a large number of services which could be rendered by the AE, the taxpayer has to specify the service(s) which is actually received by it for which the payment is made * Whether the taxpayer really needed such services or not. If so, what direct or tangible benefit it has derived. * Contemporaneous information on the basis of which rate or payment for the service is determined This includes the cost benefit an....
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.... in rendering services to CLSA India; * Screenshots from the online system, evidencing communication between the centralized teams and overseas clients of CLSA India, * Sample emails exchanged between the central team and CLSA India, * System reports showing the number of orders obtained by the overseas trader for CLSA India; * Sample research publications issued by the regional team / global team; * List of roadshows/meetings of India research team; * Samples of client queries / calendar invites for conference calls on the Indian market related issues, * Sample emails exchanged between the central team and CLSA India, * Training and user material circulated, * Copies of notes, agenda, brochure, presentations and other written material circulated among the local team in respect of the trainings conducted, * Policies created and implemented. 5.8 TPO's comments on evidences: The services said to be provided by the Authorised Representative along with the evidences were thoroughly verified and following are the comments with reference to it: (1) International Sales ....
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.... conveying the procedures by a shareholder to the group company may not be termed as "service" under Arm's length condition. It is very clear from the procedure documents that benefit only the AE not the assessee (6) Compliance The compliance documents are very general and not commensurate with the payments made to the AE. The learned AR failed to establish that valuable or comparable services are provided to the assessee company (7) Legal: All the e-mails are routine, day to day correspondences between the assessee company and the AE. No legal specific services/agreements are submitted by the AR to prove the genuine nature. These correspondences make it clear every work on legal is prepared by the assessee company and just send it for a review to the AE. All the mails request the comments from the AE. Under Arm's length principle such are essentially shareholder's services and the volume and quality is not commensurate with the payment. Communications: The media documents prepared are related the group activities and it is not clear how the same can be considered as "receipt of services" The presentation made by the....
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....er actually any 'Comparable (or) Valuable' services are received by the assessee company (18) TPO here has not questioned the commercial wisdom or benefits received by the assessee. The examination was carried out at a preliminary stage ie whether the documentary evidences submitted by the assessee would tantamount to service or mere a communication or whether the communication had arisen only due to the passive association of the AEs. In other words, whether any third party would pay separately for such services? This is a very basic examination to be conducted by the TPO during the course of assessment proceedings, It cannot be assumed that simple submissions of the mail correspondences before the TPO is sufficient to prove that the services are at arm's length. The AR had not satisfactorily explained about the actual services received from the AEs in most of the circumstances. 19) The volume and the quality of the services received by the assessee company is not commensurate with the huge suns paid by the assessee company. The TPO had gone through the submissions it was found that these services are routine day to day communication and most....
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....departments constitutes 11% of allocation, 1100 man hours are estimated 12 Credit Risk Management 1,01,46,427 0.63 13 Human Resources 97,42,707 0.60 14 Client Management 95,96,538 0.59 15 Tax Planning & Management 71,65,574 0.44 16 Communication 69,42,107 0.43 17 Internal Audit 57,03,128 0.35 18 Administration 41,93,310 0.25 19 Operation Risk Management 35,40,519 0.21 20 CLSAU 24,84,926 0.14 21 Group Security Function 1,22,186 0.007 22 Market Risk Management 50,073 0.003 23 Development Squad (64,982) This is negative, so man hours not allocated Total 160,26,18,641 100 10000 17. Thereafter, TPO rejected the cost allocation as per the allocation keys which have been verified by independent auditors holding that it is not reliable, because the same is based on an agreement and assessee has failed to show that services have been availed. He further held that the principle of allocation of cost is....
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....ecipient entity do not need it and would not be willing to pay for it had it been from independent enterprises. It is performed because of its ownership interest in the capacity of shareholder. This type of activity cannot be reckoned as intra group services. 20. In respect of these tests, we have analysed various documents and evidences which were filed by the assessee before the TPO and also before us. In so far as „rendition test‟ is concerned, voluminous documents have been filed evidencing the receipt of intra-group services for each year which has also been highlighted in the evidence chart titled as „detailed chart of intra-group services therein‟. A summary of the documents substantiating the receipt of each of the services from the AE has been filed. From the perusal of these documents, it seems that these documents have been classified for various heads of services. From the perusal of the records it is seen that services and activities have actually carried out and same has been established through the details and description and invoices raised. This fact has not been denied by the TPO also. 21. In so far as need and benefit test is concern....
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....e important clauses with reference to the entities, viz.:- * CLSA Hong Kong 2.1 In consideration of the payment of Service Fees, Service Provider shall provide the Services to CLSAI throughout the term of this Agreement upon the terms and conditions set out herein and in accordance with all the requirements, procedures and guidelines agreed by the parties from time to time. For avoidance or doubt, all services provided under this Agreement shall exclude any stewardship, custodian or duplicative services that may be provided by the Service Provider. * CLSA Singapore "2.1 In consideration of the payment of Service Fees, Service Provider shall provide the Services to CLSAI throughout the term of this Agreement upon the terms and conditions set out herein and in accordance with all the requirements, procedures and guidelines agreed by the parties from time to time. For avoidance of doubt, all Services provided under this Agreement shall exclude any stewardship, custodian or duplicative services that may be provided by the Service Provider." * CLSA UK 2.1 In consideration of the payment of Service Fees, Service Provider shall provide....
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....by section 92 C of the Act. Therefore, we are inclined to hold that adjustment made by the TPO is bad in law and, accordingly, deleted. Further the TPO has not determined the ALP of the international transactions in accordance with the provisions of section 92C of the Act. There is no reason to disapprove the Transactional Net Margin Method applied by the assessee as the most appropriate method." 26. Now from the perusal of the evidences filed for intra-group services and the nature of services rendered have been highlighted in the following manner:- International Sales and Trading Support [70,74,57,499] * Dedicated India specialists in New York and London * Facilitation activities in relation to introduction of new clients to CLSAI * General promotion of CLSAI, India equities and the India market * India equities sales to CLSAI introduced clients in US, Europe and elsewhere in Asia * Facilitating order execution by CLSAI Need: Sales effort is a cohesive effort of the sales teams based in New York, London, Singapore and Hong Kong. Given that a significant portion of the Assessee's client base comprises of inte....
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....ll log to relate sales to these employees. Further, it is also not verifiable that these persons were working exclusively for India or not. Also, FII are client of CLSA group and if some revenue is generated in CLSA India, it is merely because of being a member of group, the intra group payments are supposed to be made for services availed not for membership of group. 28. Before us it has been elaborated further: Regional Research * Preparation of reports and in-sights on global equity markets, economics and industry research, quantitative and technical research and thematic Insights for CLSAI clients * Editing, designing, publication and distribution of CLSAI written research reports Need: CLSA provides regional research services to the Assessee, which Includes the preparation of reports and in-sights on global equity markets, economics and industry research, quantitative and technical research and thematic insights for the preparation of the Assessee's research products. The local team prepares research reports every month which covers issues relevant to India, Indian Industries and Indian companies. The local team leverages guidance from t....
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.... CLSA has a central IT team (Group IT team) that supports the various local CLSA entities. There is approximately 200 experienced staff in the Group IT team. The Group IT team is responsible for developing and maintaining the key IT applications and software processes that are essential for smooth functioning of the broking business undertaken by the CLSA group. The major IT activities undertaken by the CLSA Service Providers/CLSA Affiliates Include * Application software design, development, maintenance and support, * IT engineering. * Global systems hosting, support, and data retention * Remote support of selected in-country applications and technology infrastructure; * IT Help Desk and fault resolution services; * E-mail system hosting and support, * Website hosting and support, * Remote Access systems; * Video Conferencing services; * Project Management The local IT team provides the Global IT team with relevant details of a proposed project such as purpose, requirement and vendor details. This enables the Global IT team to assist local entities in a time bound and cost effective man....
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....A it has been explained in the following manner Need CLSA provides management and other support services which include senior management oversight and input as well as other related support as required by the Assessee. The CLSA top management personnel consists of the chief executive officer ('CEO') and chief operating officer (COO) of the group. Benefit: The CEO of the CLSA group has an oversight and management responsibility over all CLSA entities. In this capacity, the CEO contributes to the revenue growth and cost efficiency of the group by frequently interacting with the entities to co-ordinate business development and strategic initiatives as well as to meet with larger clients of the CLSA group. In addition the COO is responsible for the overall operational setup of the CLSA group and ensures each of the CLSA entities follow consistent operating procedures and processes, thus facilitating operational efficiency. The activities performed by these senior personnel provide the group with high level of operational efficiency, thereby resulting in cost optimisation and increased profits. Further, by co-ordinating business development and s....
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....des compliance services including establishing, maintaining and enforcing compliance with various policies and local regulations that are applicable to the operations of the Assessee. CLSA also provides training / ongoing education of staff in relation to their obligations and responsibilities to clients and the company. CLSA is responsible for establishing, communicating, monitoring and enforcing effective policies and procedures to address compliance requirements and risks. In addition, CLSA also has a specialized team to provide advice on anti-money laundering, regional documentation, and account opening and related support services to the Assessee. As a regulatory requirement, the Assessee also has small team of 2 employees which is responsible for the provision of local input to CLSA, like for example to obtain any approval required from the local regulators. Benefit: CLSA establishes relevant internal policies that the Assessee can apply to facilitate its day-to-day operations. The centralised provision of this function enables the Assessee to comply with various regulations applicable to its operations, ensure high quality internal control and risk manageme....
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.... brokerage clients in the region including India from time to time. Benefit: The centralised management of the events/forums ensures consistent approaches are being used across the CLSA group and is more efficient than having multiple local event management teams. However TPO observed that, certainly, the documents show that it is a mere routine communication regarding approvals etc. At no stretch of imagination this can never be said that the volume and quality is commensurate with the business. The above communication was sent by the Assessee company to the AE and for that AE charges as "Intra group services". 35. On Finance and accounting:- * Maintenance of accounting system that is made available for CLSAI's use * Advice on regulatory reporting policy * Management accounting support services * Advise on CLSA accounting policy * Budgeting support services * Advice on liquidity management and funding * Support for capital budgeting and expenditure Need: CLSA provides finance and accounting services including training on accounting software, ensuring financial records compl....
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....ofile of candidates they need and management of their human resources. On the other hand TPO observed that the Assessee had not submitted any specific instance that they have received same benefit out of the HR documents. 37. Internal audit:- * Provide Independent assurance over the Internal control environment supporting the CLSAI businesses and operations as a whole, including effective procedures for risk monitoring and administration and compliance with regulatory rules, CLSAI internal policy and corporate governance. * Report the outcome of internal audit reviews to CLSAI management and board of directors Need: CLSA has a global audit team based in Hong Kong and Singapore, which provides internal audit services to the Assessee. These services include providing independent assurance over the control environment supporting the businesses and operations as a whole, providing effective procedures for monitoring risk and complying with regulatory rules, and providing guidance on group internal policy and corporate governance. These services also include reporting the outcome of internal audit reviews to the Assessee's management and the....
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....ndences make it clear every work on legal is prepared by the Assessee company and Just send it for a review to the AE. All the mails request the comments from the AE. Under Arm's length principle such reviews are essentially shareholder's services and the volume and quality is not commensurate the payment. 39. Operational risk management:- * Manage all aspects of operational risks exposures * Provide operational risks supervision including without limitation established risk guidelines Need: CLSA provides operational risk management services to the Assessee including managing all aspects of operational risk exposures and providing operational risk supervision including, without limitation, establishing risk guidelines for the Assessee. CLSA also evaluates and provides a review of the Assessee's annual self- assessment reports which may involve CLSA physically observing the operations at the Assessee to assess the level of operational risk. Benefit: This allows the Assessee to ensure best practices are being adopted for their operations. The centralised provision is also more cost effective than if the Ass....
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.... the Internal Account cannot procedures as evidence. After going through it was found that is being a general document conveying their group procedures and policies. Merely conveying the procedures by a shareholder to the group company may not be termed as "service" under Arm's length condition. It is very clear from the procedure documents that benefit only the AE not the Assessee. 42. Client Management:- * Make available to CLSAI the client management system known as 'CIS" * Maintenance of CIS and related systems / information * Management of group client relationships Need: The CLSA Service Providers / CLSA Affiliates make available to the Assessee the client management system known as CIS. The CIS enables management of group client relationships, gathering client feedback and surveys. Benefit: This enables the Assessee to improve their client relationship management and service quality. The Assessee can also use the client feedback and surveys gathered by the CIS system at a lower cost than if they were gathered independently TPO held that the specific clients pertaining to the Assessee Company and the....
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....luding the assessee only and it is not providing the services to any unrelated third parties, therefore, it is only captive service provider and the search provided by the assessee does not satisfy whether search has been made for service provider, because AE is providing risk free services whereas the purpose is profit making. Though prima facie reasoning given by the ld. TPO may appear to be correct, however, in all the cases of captive service business based in India, for example, Software Development Company, TPO here in India use profit making companies for benchmarking. If one captive entity is providing services to other captive entity then its comparison of controlled transaction with another controlled transaction cannot be done. Even for the captive service provider, the cost plus mark up has to be seen from the independent entities, whether the profit margin for providing such services are at arm's length vis-à-vis the assessee. Further, as noted above, the Tribunal has rejected TPOs contention in the earlier years that foreign AE cannot be treated as tested party. The assessee has taken benchmarking analysis, firstly at entity level TNMM as well as TNMM analysis ....
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....estimating the hours devoted by the AE in respect of various services claimed to be availed by the assessee holding as under:- "5.11.2 In the absence of all these details regarding the number of employees working with the AE, the salaries paid to 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 ....