2023 (3) TMI 1219 - AT - Income Tax

TP adjustment - international transaction pertaining to fees received for marketing of fixed income products - difference in the price achieved by the marketer and the price quoted by the trader - As per DR benchmarking analysis undertaken by the assessee is not based on Profit Split Method as provided under the Rules - HELD THAT - Lower authorities failed to appreciate that in the entire transaction, the sales/marketing function and its activities (such as trading) cannot be separated from the other functions, all of which together are necessary elements for the assessee to realise income on these transactions. Therefore, it is necessary to take into consideration the functions performed, assets employed and risks assumed by the trader-associated enterprises, while allocating the commission. The entire local spread , i.e. the markup earned by the marketer either over the price offered by the trader to sell or lower than the price quoted by the trader to buy the product, is entirely allocated to the marketer. Accordingly, find no merits in upholding the transfer pricing adjustment on this issue. Hence, the TPO/AO is directed to delete the transfer pricing adjustment in respect of international transaction of fees receipt for marketing of fixed income products. As a result, grounds No. 1 3 raised by the assessee are allowed. Income from securities as capital gain - exemption under Article 13(6) of the India Switzerland Tax Treaty - PE in India - attraction principle enshrinest in Article 7(1) of the DTAA with Switzerland, the income of assessee form trading in security as FII being similar to the investment activities carried by the branch of assessee in India, was also liable to be taxed as income - HELD THAT - As in assessee s own case in the immediately preceding assessment year 2018 (8) TMI 2111 - ITAT MUMBAI by following the judicial precedents in assessee s own case decided a similar issue in favour of the assessee as held that income of a FIl from sale and purchase of securities is liable to be taxed as 'Capital Gains'. The second facet of the dispute is the taxability of such income, which has been held to be non- taxable in India under Article 13(6) of the India-Switzerland Tax Treaty by the Tribunal in the aforestated precedents. The Tribunal, in Assessment Year 2009-10 2016 (6) TMI 1462 - ITAT MUMBAI held that banking branch of the assessee in India would not constitute a PE qua the aforesaid income. Thus, the aforesaid decisions of the Tribunal in assessee's own case, and which continue to hold the field as they have not been altered by any higher authority, fully cover the aforestated Grounds raised by the Revenue before us. It is evident from the record that the issue is recurring in nature and has been decided in favour of the assessee in preceding assessment years. Also evident from the assessment orders passed in the subsequent assessment years that decisions of the coordinate bench have been accepted by the Revenue and no further appeal has been filed.As a result, grounds raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Transfer pricing adjustment regarding fees received for marketing fixed income products.
2. Characterization of gains from the transfer of debt securities as either capital gains or business income.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue in the assessee's appeal was the transfer pricing adjustment concerning fees received for marketing fixed income products. The assessee, a Foreign Institutional Investor (FII) registered with SEBI, had a branch in India constituting its Permanent Establishment (PE). The assessee's return of income was scrutinized, and the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transaction reported by the assessee.

The TPO, in the absence of evidence for functions performed, assets used, and risks taken by the associated enterprises, proposed a transfer pricing adjustment of Rs. 3,34,38,510, allocating the entire 'market spread' to the assessee. The assessee contended that the allocation of 'market spread' was based on its global transfer pricing policy, which allocated 33% of the market spread for fixed income products and 50% for interest rate derivatives to the marketing locations, including the Indian Branch.

The Dispute Resolution Panel (DRP) upheld the TPO's adjustment, leading the assessee to appeal. The Tribunal found that the lower authorities failed to consider the functions, assets, and risks of the trader-associated enterprises. The Tribunal concluded that the sales/marketing functions and trading activities are interdependent and must be considered together. Consequently, the Tribunal directed the deletion of the transfer pricing adjustment, allowing the assessee's grounds 1-3.

2. Characterization of Gains from Debt Securities:
The Revenue's appeal focused on whether the gains from the transfer of debt securities should be characterized as capital gains or business income. The assessee had declared these gains as capital gains, claiming exemption under Article 13(6) of the India-Switzerland Tax Treaty. However, the AO treated these gains as business income attributable to the assessee's PE in India.

The DRP, following the Tribunal's decisions in the assessee's own case for previous assessment years, accepted the assessee's objections and treated the gains as capital gains. The Tribunal, upon review, noted that the issue was recurring and had been consistently decided in favor of the assessee in preceding years. The Tribunal affirmed the DRP's directions, dismissing the Revenue's grounds.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the deletion of the transfer pricing adjustment related to fees for marketing fixed income products. It also dismissed the Revenue's appeal, affirming the characterization of gains from debt securities as capital gains, consistent with prior judicial precedents in the assessee's own case. The order was pronounced in open court on 09/12/2022.