2023 (4) TMI 1322 - AT - Income Tax

TP Adjustment - ALP of royalty and branding fees - TPO has determined ALP at 'Nil' holding that for any such transactions, no brand fee is paid by any independent enterprise and assessee has used TNMM method for computing the arm's length price by comparing the net profit margin of the company at entity level with that of the other permanent entities - HELD THAT - We find that this issue has been dealt by the Tribunal in A.Y.2002-03 in 2013 (11) TMI 927 - ITAT MUMBAI as held in the broking business, brand does promote the business and as rightly observed by CIT(A) it is one of the profit drivers within the industry. Thus it cannot be said that the assessee had not derived any benefit from use of brand. We also find that the AO without any detailed examination as to why other CLSA entities were not making any payment of royalty, rushed to apply the CUP method which as we have held could not be applied for the lack of proper information. CIT(A) has examined the matter in detail as to why other CLSS entities were not paying royalty which was because of the fact that CLSA had different arrangement in different jurisdictions. CLSA was present in 13 markets out of which India, Korea and Taiwan had capital market regulation which required FIIs to contract directly with a domestic CLSA entity. In other jurisdictions, a single contract model was followed CIT(A) on examination of the arrangement/system followed by CLSA BV has also given a finding that in other jurisdictions, CLSA entities were making market contributions. Therefore only on the ground that other CLSA units did not pay any royalty, it could not be held that payment of royalty by the assessee was not justified. 8.4 CIT(A) has also examined the business development system followed 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. Thus apart from that, similar observation and finding has been given in A.Y.2003-04 2020 (12) TMI 815 - ITAT MUMBAI Thus, consistent with view taken in the earlier years, the royalty payment of 1% is accepted and adjustment made by the ld. TPO is deleted. Benchmarking referral fees and reimbursement of indirect overhead expenses - Assessee has benchmarked both payment of referral fees and reimbursement of indirect overhead expenses by using TNMM as the Most Appropriate Method and concluded that they are at ALP. The assessee has justified that sale efforts, research activities and IT infrastructure are the main functions responsible for earning of brokerage income from clients. Accordingly, payment of referral fees and indirect overhead expenses reimbursement is closely inter linked to the assessee's business and therefore, was benchmarked using TNMM by considering assessee as a tested party. TPO cannot benchmark the 'referral fee' at Nil and accordingly, adjustment made by the ld. TPO is deleted on similar reasoning. Accordingly, grounds are allowed. Indirect overhead expenditure - again this issue is covered by the assessee's own case for A.Y.2003-04, 2020 (12) TMI 815 - ITAT MUMBAI wherein it has been held that ad-hoc TP addition without following any one of the prescribed method is not sustainable which has been discussed in detail in para 19 of the ITAT order cited supra. Apart from that, we find that the assessee has benchmarked the transaction using TNMM, which is one of the prescribed methods as per Section 92C. Further, the assessee has also provided a supplementary and detailed analysis by way of the AUP report which certifies that only costs attributable to the assessee have been reimbursed to the AE. Against the scientific approach adopted by the assessee, the ld. TPO has merely resorted to ad-hoc approach and without following any one of the prescribed methods determined ALP of reimbursement of indirect expense overheads as Nil. Thus, the addition of this adjustment made on account of reimbursement of indirect overhead expense is also directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Payment of royalty/branding fees.
2. Payment of referral fees.
3. Reimbursement of indirect overhead expenses.

Summary:

Issue 1: Payment of Royalty/Branding Fees
The assessee challenged the addition of Rs.1,30,22,846/- paid as royalty and branding fees calculated at 1% of gross receipts for using the brand 'CLSA'. The TPO determined the ALP at 'Nil', stating that no independent enterprise pays such fees, and the TNMM method used by the assessee did not separately benchmark the brand fee. The Tribunal, referencing its earlier decisions for A.Y.2002-03 and 2003-04, found that the CUP method used by the TPO was inappropriate due to lack of comparable transactions and upheld the CIT(A)'s application of TNMM. Consequently, the Tribunal deleted the adjustment made by the TPO.

Issue 2: Payment of Referral Fees
The assessee paid Rs.7,73,58,162/- as referral fees to its AE, CLSA Ltd Hongkong, under a referral agreement. The TPO determined the ALP at 'Nil' and adjusted the entire payment, arguing that the assessee failed to prove the necessity of the referral fees. The Tribunal, relying on its decision for A.Y.2003-04, found that the assessee substantiated the receipt of referral services and the tangible benefits derived therefrom with voluminous documentary evidence. The Tribunal deleted the adjustment made by the TPO, holding that the referral fees could not be benchmarked at 'Nil'.

Issue 3: Reimbursement of Indirect Overhead Expenses
The assessee reimbursed Rs.42,223,050/- towards indirect overhead expenses incurred by CLSA group for specified functions attributable to Indian operations. The TPO determined the ALP at 'Nil', making an ad-hoc adjustment without following any prescribed method. The Tribunal, referencing its decision for A.Y.2003-04, found that the assessee had used TNMM to benchmark the transaction and provided a detailed AUP report certifying the costs attributable to the assessee. The Tribunal directed the deletion of the adjustment made by the TPO.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal deleting the adjustments made by the TPO for royalty/branding fees, referral fees, and reimbursement of indirect overhead expenses. The order was pronounced on 21st April, 2023.