TaxTMI 
TaxTMI 
2024 (7) TMI 274
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.... ALP, however, same has been stated to be general ground and has not been pressed for the reason that the issue has been raised in other substantive grounds, therefore, the same is not pressed. 4. In ground No. 2, the assessee has challenged that ld. CIT(A) has failed to appreciate that assessee is a joint venture between Kothari family (58%) and Merrill Lynch having minority stake of 40% and the pricing of further transactions is dependent on the approval also of the unrelated JV, therefore, there is in built mechanism to meet the arm's length price and therefore, no TP adjustment should have been made. This ground too is not adjudicated as same has not been argued in view of the fact that grounds on merits were argued and is bein discussed herein this order as agreed by the parties. Accordingly, ground No.1 & 2 are dismissed as infructuous. 5. In so far as issue relating to ground No. 3 & 4 relates to TP adjustment on account of equity broking services (Non-DVP segment / CH settlement). Under these grounds assessee had raised following issues:- (a) The TPO/ CIT(A) erred in rejecting the application of the TNMM method for benchmarking these transactions. (b....
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.... by independent enterprises but whether they are working in comparable circumstances or not was not established. The assessee company had not worked out the net margin earned by it in the controlled transaction but the net margin earned in the whole equity broking business which has been used in analysis. Thereafter, he has pointed out many defects in the working of the TNMM by the assessee which has been highlighted in detailed at page 8 & 9 of the TPO's order. He required the assessee to furnish the details of volume of transactions, commission earned, average rate of broking and DVP rates and clearing house rates for the associated as well as independent enterprises and after getting the details and information, he asked assessee as to why the average broking rates charged to non-AE foreign clients may not be considered at arm's length price while computing the arm's length price of international transaction relating to brokerage for both DVP and clearing house rates. Based on the information he has worked out analysis of client-wise information in the following manner:- "10 In case of FIIs Clients (Non-AEs), the average rate of commission earned for DVP Trades and Non-....
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....no funding costs. The Arm's Length Price of the brokerage earned in respect of various associated entities are computed as below: (a) DVP Trades Associated Enterprises: The average rate of commission earned is 0.52%, on a total volume of Rs. 1,883,332,792/- for 12 AEs. The volume of Rs. 62,738,219,349/- in case of Non-AEs, is in respect of 315 clients. The average per client volume for Non-AEs comes to Rs. 199,168,950/-. For the corresponding 12 AEs, the volume would be Rs. 2,390,027,403/-, which is more than the volume of Rs. 1,833,332,792/-. Therefore, the volume in case of AEs, is less than the per client volume of Non-AEs. Therefore, no adjustment, on account of volume difference, is required to be made. By considering the Arm's Length Rate of 0.55%, the Arm's Length Price of commission would be Rs. 10,083,330/-. 95% of this price, by considering the provisions of section 92C(2) would be Rs. 9,579,163/- which is less than the commission of Rs. 9,589,679/- earned by the company from the AEs, therefore, for this transaction, no adjustment is required to be made. (b) Deemed AEs (Program Trades): In this transaction, for 30 deemed AEs....
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....received/receivable is worked out at Rs. 111,433,682/-, as against the commission received/receivable of Rs. 71,122,376/-. Due to this, an adjustment of Rs. 40,311,306/- to the income of the assessee. L In respect of the remaining International transactions of ABN AMRO funds, the volume of trade being very low of Rs. 27,215,582/-, considering the smallness of amount, no adjustment is made. The adjustments in the equity broking business are summarised as below: (1) For DVP Trades : Rs. 10,531,208/- (ii) Non-DVP Trades : Rs.40,311,306/- Total : Rs. 50,842,514/- ============== The Arm's Length Price of each international transaction, AE wise, is not computed separately, as the same is not available in Form No.3CEB for DVP and Non-DVP Trades. Otherwise also, it is not required to be computed separately, as all the similar transactions, are aggregated, by the company for the analysis. 11. Ld. CIT(A) has upheld the approach of benchmarking adopted by the ld. TPO, but thereafter he allowed a sales/marketing adjustment of 0.06% for the difference in the sales/ marketing function performed by Assessee for its ....
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....ere 19.15% and 17. 78% and therefore, it was stated that the same should be considered at arm's length. The reasons for not applying CUP as highlighted before us were as under:- • Brokerage commission rates are negotiated by the broker with its clients such negotiation could vary from client to client. • Equity Broking business operates in a competitive environment with an ongoing pressure on competitive brokerage rates to be charged to the clients. • Because of new international players as well as local brokers, clients always demand fine/competitive pricing, and the rates are negotiated and agreed with each client on an individual basis. • Volume of business also plays a major role in influencing the brokerage rates (AEs comprise of -37.5% of the total institutional volume of business). • Therefore, several factors are considered in negotiation, e.g. volumes, rate charged by competitors, market perception to determine the price to be offered to a client, it is not possible to translate such intangible factors to mechanical adjustments to arrive at an internal CUP. 15. However, at the time of hearing, we asked....
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....o. Name of the Client Turnover Commission excl. Service Tax Average Rate 1 Government Of Singapore Investment Corpn. Pvt. Ltd. A/C. Government of Singapore 5,78,30,87,646 2,74,66,587 0.47% 2 HSBC Global Investment Funds A/C HSBC Global Investment Funds - Mauritius Ltd 5,02,05,51,160 1,90,58,932 0.38% 3 B T Funds Management Ltd. As Trustee of B T Pacific Basin Fund 2,10,02,52,268 99,89,524 0.48% 4 Government Of Singapore Investment Corporation A/C Monetary Authority of Singapore - J 1,79,26,21,096 69,54,919 0.39% 5 Government Of Singapore Investment Corporation Pvt. Ltd. A/C. Monetary Authority of Singapore - H 1,37,67,95,841 49,79,078 0.36% 6 Unit Trust of India 1,10,28,54,106 16,06,287 0.15% 7 Abu Dhabi Investment Authority 1,05,34,66,573 45,30,363 0.43% 8 Advantage Advisers Inc. A/C The India Fund Inc. 92,87,77,571 44,28,967 0.48% 9 Franklin India Bluechip Fund 89,87,27,703 21,16,461 0.24% 10 UTI Bank Ltd. 60,04,01,453 16,62,544 0.28% Arithmetic Mean 0.40% 17. Thereafter we i....
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....ant differences in the volume trades done with the AE and third party clients in Non-DVP/ CH segment, the AE volume is Rs.6,015 crores as against a volume of Rs.2,774 crores with non- AEs FIIs i.e. AE volume is more than 2 times the volume with all Non-AE/ FIIs. It has been submitted that certain adjustments should be made on this account also. Further, Ld. Sr. Counsel stated that in case of the Non DVP/ CH segment, the TPO has made similar comparison of the average brokerage commission earned from MLI with the weighted average brokerage commission earned from third party FIIs clients and made an adjustment for the difference. However, in assessee's own case in AY 2002-03, under the DVP segment, the brokerage commission received from all AEs (on an aggregated basis) was compared with the brokerage commission received from third party FII clients. Basis such comparison, since the weighted average brokerage commission rate earned from AEs was higher than the weighted average brokerage commission earned from third party FIIs, the transaction was considered to be at arm's length by the ld. TPO. The aforesaid approach of benchmarking on an aggregate basis has also been followed ....
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....hird party FIIs : - 43 Bps (0.43%) (ii) Less Marketing adjustment as allowed By the ld. CIT(A) : - 6 Bps (0.06%) (iii) Adjusted weighted average brokerage for all third party FIIs : - 37 Bps (0.37%) (iv) Weighted average rate of brokerage Charged to MLI & MLCME : - 36 Bps (0.36%) (v) ALP determination : - 1 Bps (0.01%) 21. Thus, at the most adjustment would be of 0.01% if at all which is too miniscule to apply to make adjustment and therefore, we hold that no adjustment is required to be made. 22. The next ground relates to Port Fee charges paid by assessee which is the issue also raised in Revenue's appeal ground No.2. Both the grounds of the assessee as well as Revenue reads as under:- Ground 5-Port Fee Charges paid by BofASIL (a) The learned CIT(A) erred in applying the markup to cost at 15% as against 25% applied by the AE for determining the ALP in respect of the port fee charges paid by the appellant and thereby confirming addition to the extent of a sum of Rs. 3,20,794/- made by the Assessing officer under 92CA(3) of the Act. Department Appeal Ground - 2 On the facts and in the circumstances of the....
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....fit upheld in respect of services and determined 15% as appropriate mark-up basis in respect of the administrative support services transaction of assessee. Such mark-up was applied merely on the basis of a theory applying a lower mark-up on costs involving direct and indirect costs as compared to a mark-up only on direct costs. Assessee TPO CIT(A) Total Cost +25% Nil Total Cost +15% Rs.40,14,825/- Nil Rs. 36,94,031/- 27. Thus, the mark-up of 15% applied by the ld. CIT (A) is purely on adhoc basis. After considering the facts finding given in the impugned order, we find that assessee had paid Port Fee Charges amounting to Rs.46,28,008/- to its AE, however, in the transfer pricing study report ALP was worked out at Rs.40,14,825/- and the said amount was claimed. The ld. TPO worked out ALP at 'Nil' on the ground that Merrill Lynch Holding (Mauritius) was itself is not a service provider and further since assessee had not furnished the details of allocation received by Merrill Lynch Holding (Mauritius) from the ML entity which is providing services, whereas the case of the assessee is that these parties represent recovery towards on-going cost incurred ac....
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....dors office and did not utilize any office space and infrastructure of Assessee. For the provision of such services, Assessee charged its AE on the basis of the direct costs incurred plus a mark-Up of 10%. While determining the ALP of the transaction, Assessee considered the mark up at 25% on direct cost and offered the shortfall in its return of income. Based on the computation of the Assessee, the margin earned by the assessee works out to be 17.2 percent which was higher than the arm's length margin of comparable companies of 13.67% and accordingly, the transaction was concluded to be at arm's length. The learned TPO in para 4.3 of his order, considered direct and indirect cost using employee cost as an allocation key for allocating the indirect cost and applied it to the total administrative, other expenses and depreciation cost for the year and made an adjustment of Rs 1,04,06,386/- Further, the learned TPO imputed interest on delayed receivables at an interest rate of 12% for an average period of 6 months. The ld CIT(A) reduced the costs that were attributable to other business activities from the cost base used by the TPO as no rationale was provided for the same and....
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....s not in dispute that ML entity had engaged software companies to develop security market related software systems for use and rendering its security related services as a measure of quality and standard control it had engaged the assessee to provide coordination and administrative support services to manpower development of security related system including software from time to time. The provision of such services was by two member team with administrative support which functioning only with the administrative support from one or two persons. One of the employee working from Chennai office of the assessee while other party from division office. The assessee charged direct cost plus 10% for these services and this was arranged to reduce direct cost plus 25% effective from 01/04/2002. Assessee had made adjustment in its computation of income for assessment year under consideration on the basis of direct cost plus 25% and use TNMM for comparison purpose. The net margin of comparable companies in the TP study was 13.67% whereas assessee made interest margin of 17.20%. The ld. CIT (A) has considered the cost computation considering the cost related activity and using employee headcoun....
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....with Merrill Lynch (ML). A program trade typically involves no sales effort/research advice. It involves mainly execution services. Normally the client would approach a single broker or multiple brokers with a basket of trades it would like them to execute across regions/markets and request for a rate /bid. Depending on various parameters such as the client, total trade value etc. ML would bid for the order at a competitive rate If ML and client agree on the terms such as rate, execution timing, etc., the business would be awarded to ML who would in turn execute the trades across countries/regions. The trades relating to India, part of the basket, will be executed by Assessee upon intimation by ML. Assessee issues contracts directly to the clients and settles the same also directly with clients Such transactions are executed through program desks, in order to reap the volume benefit for pricing. Some of the clients (mainly index funds) deal only through program desks. 34. It has been stated that despite low rate of brokerage in respect of program trades, brokers find it compelling to execute such trades for retaining their clients as well as the market share. Further, some of th....
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....disputed that these are third party Independent transactions where the appellant gets its negotiated brokerage from these parties directly and no other benefit is passed on to ML entities from the business transacted by the appellant with these third parties. Further, it is not a case that different rates are negotiated for different countries or that ML charges a higher rate and gives a lower rate to the appellant. The contract note is raised direct on the client by DSML and amount received directly by DSPML from the third party client. The TPO has conjectured and surmised that indirect benefits may have been obtained off shore which is not based on any material evidence. Considering the aforesaid, I hold that the AO was not justified in making any adjustment in respect of brokerage charged for such program trades by the appellant. Accordingly, the addition made by the AO amounting to Rs. 1,05,31,208/- in respect of brokerage for program trades is deleted. 37. After hearing both the parties and on perusal of the order as noted above programme trades are third party trades entered into by the assessee where rates are negotiated by AE. Since the contract note and brokerage income....
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....arned AO considered that the interest expenditure incurred on the borrowings is attributable to the investments made by the Appellant. * 5% of the dividend income of INR 9,52,47,305 ie., INR 47,62,365 (~INR 0.48 Cr) being administrative expenses such as staff salary, rent, Demat charges, etc. by placing reliance on the decision of the Hon'ble Bombay High Court in the case of M/s. Sind National Sugar Mills P. Ltd. Vs CIT (121 ITR 742) 41. Before the ld. CIT(A) assessee was required to furnish the disallowance as per Rule 8D. In response to which assessee filed working wherein the disallowance worked out to Rs. 37,24,591/-. The ld. CIT(A) based on the working of Rule 8D has disallowed further amount of Rs. 24,591/- over and above the suomoto disallowance of Rs. 37,00,000/-. 42. We have considered the aforesaid finding of the ld. AO and ld. CIT (A). The ld. AO has made disallowance by taking proportionate interest expenses to the extent of Rs.4.5 Crores which was computed by applying the average rate of interest to the total investment and multiplying with the same with the total borrowing to the total fund of the assessee 5% of the dividend income towards administrati....
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....ates charged by Assessee to all third party Foreign Institutional Investor (Fill clients in the CH/ Non-DVP Segment. This resulted into an adjustment amounting to INR 12,956,231/- 47. Since the average brokerage rate charged to other AE, i.e., Merrill Lynch Capital Market Espana (MLCME) was higher than the weighted brokerage commission rates charged by Assessee to all third party FII clients in the CH/ Non-DVP Segment, no adjustment was made in respect of the same. A summary of the adjustment made by the learned TPO is as follows: Particulars for Non-DVP/ CH segment Volume (INR) Commission amount (INR) Commission Rate Weighted average commission rate for third Party Flls (ALP as per TPO) 19,161,782,723 817,55,961 43 bps Average commission rate for MLI 14,685,966,094 497,03,141 34bps Average commission rate for MLCME 46,438,199,826 229,895,141 50 bps SA 48. The ld. CIT (A) has upheld the approach of benchmarking adopted by the ld. TPO but, thereafter, allowed a sales/marketing adjustment of 0.08% for the difference in the sales/ marketing function performed by assessee for its AEs vis- a-vis third party clients bas....
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....nbsp;Turnover Commission excl. Service Tax Average Rate 1 SCHRODER INVESTMENT MANAGEMENT NORTH AMERICA INC. A/C SCMCT INDIA (MAURITIUS) LTD. 2,25,69,38,841 1,07,18,780 0.47% 2 GOLDMAN SACHS INVESTMENT MAURITIUS 1 LTD. - LONGTERM 1,67,23,25,932 99,93,098 0.60% 3 STICHTING SHELL PENSIOENFONDS 1,39,11,66,609 69,88,730 0.50% 4 EMERGING MARKETS MANAGEMENT LLC A/C EMSAF - MAURITIUS 1,30,98,56,847 62,36,445 0.48% 5 ABU DHABI INVESTMENT AUTHORITY 1,23,38,39,544 58,56,687 0.47% 6 SCHRODER INVESTMENT MANAGEMENT (GUERNSEY) LTD. A/C SCHRODER INDIA MAURITIUS LTD. 1,15,74,23,423 54,75,620 0.47% 7 DB INVESTMENT MANAGEMENT S.A. A/C TOP 50 ASIEN 1,13,76,30,602 54,09,037 0.48% 8 DB MANDARIN FONDS 99,40,48,768 47,30,438 0.48% 9 SCHRODER INVESTMENT MANAGEMENT NORTH AMERICA LTD A/C SCHRODER EMERGING MARKETS FUND 99,38,47,785 47,27,654 0.48% 10 M & G INVESTMENT MANAGEMENT LIMITED A/C. THE PRUDENTIAL ASSURANCE COMPANY LTD. 80,58,77,753 34,02,019 0.42% Total Arithmetic mean 0.49% 51. Thus, the average rate c....
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....round No.5 with regard to disallowance of interest expenses, same ground reads as under:- "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing relief of INR 76,86,000 as against the disallowance made by the AO on account of interest expenses." 58. The brief facts are that during the year under consideration the assessee had earned dividend income of INR 56,50,510 (INR 0.57 Cr) which was offered to tax as income from other sources. As on 31 March 2003, the assessee had net own funds of INR 3,17,84,12,000 (-INR 317.84 Cr) comprising of share capital of INR 22,50,00,000 (INR 22.50 Cr) and Reserves & surplus of INR 2,95,34,12,000 (INR 295.34 Cr). The borrowed funds/owed funds as on 31 March 2003 were INR 6,85,23,25,000 (INR 685.24 Cr). Further, the total investments of the assessee as on 31 March 2003 were INR 171,14,74,000 (INR 171,15 Cr), out of which the long term investments as on 31 March 2003 were INR 20,75,77,000 (INR 20.76 Cr). Further, the assessee had claimed deduction of INR 5,27,311 (INR 0.05 Cr) under section 80M of the Act for the year under consideration. Given that no exemption was claimed under section 10(33) of th....