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2017 (3) TMI 1040 - AT - Income TaxTPA - MAM to be adopted for benchmarking - Held that - In the case before us, the TPO had allowed the assessee adjustment towards sales and marketing expenses while applying CUP method, though the assessee is not satisfied with the percentage of adjustment and not considering the claim for volume adjustment. But, these are procedural aspects-basic fact is selection of MAM. In our opinion,considering the facts of the case,CUP was more suitable method to determine the ALP of the IT.s., for the year under consideration. So, confirming the order of the FAA,we hold that preference given by the TPO to CUP over TNMM was based on valid reasons and it does not require any interference from our side. Selection of top ten FII s for benchmarking - Held that - We find merit in the argument of the assessee that only arithmetic mean and not the arithmetic mean of weighted average should be considered to benchmark and determine the ALP. Proviso to section 92C(2)of the Act also approves the use of arithmetic mean for the purposes of benchmarking and determining the ALP an IT. Therefore,we direct the TPO/AO and rework the adjustment considering the arithmetic mean of the brokerage paid by TOP ten FII.s for the year under appeal. Adjustments to be made to eliminate the material effects in TP exercise - Held that - We find that the assessee stated that it was entitled to an adjustment of 0.67% marketing and sales efforts as against the 0.48% allowed by the TPO, that the marketing cost of ₹ 2.83 crores comprised of salary and related costs of two employees, that the role of those employees was restricted to Non-AE.s only. But it is found that the assessee had not produced the qualification, employment-contract details of those employees and the terms of engagement to establish the claim made by it about rendering of services by them to Non-AE client only. The TPO had reduced the adjustment by a small margin only. In absence of full details reduction made by him is held to be justifiable. It is not a case of non granting deduction at all. So,we uphold the order of the FAA.However,we agree with the assessee that in the denominator only non-AE trades should be considered, as considered in the order of the TPO for the AY.2006-07. TPO/AO is directed to rework the denominator for the year under appeal. Volume adjustment - Held that - A perusal of the records reveal that brokerages rate charged from the top ten FII.s varied from 0.17% to 0.50%, that the assessee had charged 0.17% brokers from the client with whom it had the minimum turnover. As per the established business norms, rate of brokerage rate would be higher for smaller turnover. But, the assessee has not followed the said general rule. Thus, there is no evidence to prove that it was following any fixed pattern about allowing volume discount with its clients. We agree with the FAA that it goes against the normal human behavior that an Mauritian-AE would negotiate a volume discount/adjustment when it earning making tax-free income in Mauritius from the Indian stock markets. Definitely, it had would have been allowed had it been documented by the parties. So,we affirm the decision of the FAA that the assessee should not be allowed any volume discount. Offering EOSB services to its AE and to the Non-AE it was rendering FBS and the FAA - Held that - For establishing itself in the competitive market of equities all the players would concentrate on market research and data analysis. Though the details of transactions entered in to by the AE with the parties, other than the assessee, for purchasing/selling equities for the year under consideration are not available. Otherwise, it would have given a fare idea about the services availed by it from the India based investor advisors. No correspondence has been produced before us that could prove that there was difference between the services rendered by the assessee to its AE.s and non-AE.s. We are not commenting upon the papers submitted by it for the subsequent AY.s. We would consider them while deciding the appeals for those years. Therefore,we confirm the order of the FAA in that regard and hold that there is no evidence to prove that the AE was provided execution only services for the year under appeal. Considering the peculiar facts and circumstance of the case,we decide the effective ground of appeal(Gs. OA-2 to 8-except Grounds ), raised by the assessee with regard to determination of ALP, in it favour, in part. Disallowing of write-off of irrecoverable loan advanced to the employee of the assessee - Held that - We find that there is no doubt about the genuineness of the transaction i. e. advancing of loan. Even if it cannot be allowed as bad loan, it has to be allowed as a business loss. The loan was advanced to the employee and it could not be recovered. So, in our opinion, same has to be allowed u/s. 28 of the Act. Reversing the order of the FAA, we decide ground in favour of the assessee.
Issues Involved:
1. Transfer Pricing Adjustments 2. Selection of the Most Appropriate Method (MAM) for determining Arm's Length Price (ALP) 3. Adjustments for Sales and Marketing Expenses 4. Volume Adjustments 5. Determination of Brokerage Rates 6. Write-off of Irrecoverable Loan 7. Levy of Interest and Initiation of Penalty Proceedings Detailed Analysis: 1. Transfer Pricing Adjustments: The primary issue was the adjustment of ?2.13 crores made by the Transfer Pricing Officer (TPO) to the total income of the assessee based on the Arm's Length Price (ALP) of international transactions with its associated enterprises (AEs). The TPO determined the ALP using the Comparable Uncontrolled Price (CUP) method, which was contested by the assessee. 2. Selection of the Most Appropriate Method (MAM): The assessee argued that the Transactional Net Margin Method (TNMM) was the most appropriate method (MAM) for determining the ALP, as it had applied weighted average Net Profit Margin (NPM) based on three years' data. However, the TPO preferred the CUP method, considering it more direct and reliable. The Tribunal upheld the TPO's preference for the CUP method, noting a high degree of comparability between the functions performed by the comparables and the assessee. 3. Adjustments for Sales and Marketing Expenses: The assessee claimed adjustments for sales and marketing expenses, arguing that the TPO had erred in adjusting only 0.048% instead of 0.07%. The Tribunal found that the assessee had not provided sufficient evidence to support its claim that the marketing costs were exclusively for non-AE transactions. Therefore, the adjustment made by the TPO was upheld. 4. Volume Adjustments: The assessee sought a volume adjustment of 0.42% on account of higher business volume from its AE. The Tribunal rejected this claim, noting that no evidence was produced to prove any agreement or understanding regarding committed volumes between the AE and the assessee. The Tribunal agreed with the First Appellate Authority (FAA) that volume adjustments were not warranted without documentation. 5. Determination of Brokerage Rates: The TPO used the arithmetic mean of brokerage rates from the top ten Foreign Institutional Investors (FIIs) for benchmarking, which the assessee contested. The Tribunal directed the TPO/AO to rework the adjustment considering the arithmetic mean of brokerage rates, as per the proviso to section 92C(2) of the Income Tax Act. 6. Write-off of Irrecoverable Loan: The assessee's claim for the write-off of an irrecoverable loan of ?2.58 lakhs advanced to an employee was disallowed by the AO and upheld by the FAA. The Tribunal, however, allowed the write-off as a business loss under section 28 of the Income Tax Act, reversing the FAA's order. 7. Levy of Interest and Initiation of Penalty Proceedings: The issues of levy of interest under section 234 and initiation of penalty proceedings under section 271(1)(c) were not adjudicated, as the former was consequential and the latter premature. Conclusion: The appeal filed by the assessee was partly allowed. The Tribunal upheld the TPO's use of the CUP method for determining the ALP but directed reworking of adjustments considering the arithmetic mean of brokerage rates. The write-off of the irrecoverable loan was allowed as a business loss.
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