2020 (3) TMI 1133 - AT - Income Tax

TP Adjustment - adjustment of brokerage income - selection of MAM - AR prayed that the TNMM may be adopted as the most appropriate method and without prejudice if CUP method is to be adopted as the most appropriate method the adjustments to the cost structure be allowed to iron out the differences between the AE and Non-AE transactions - HELD THAT - Assessee being an institutional brokerage house has earned significant brokerage commission from FII clients which included AE and Non AE enterprises. The transactions from Non-AE FII clients the assessee is required to provide broader range of services viz-a-viz services to AE FII clients did not include marketing and international sales support. We find that the assessee is dependent on the overall CLSA group resources without which the brokerage from FII clients could not have materialized. The assessee also filed submission dated 27.10.2014 before the TPO providing detailed explanation with regard to the differences in services provided to the AE and Non-AEs and explanation in support that TNMM was the most appropriate method to determine the ALP of brokerage earned from AEs. We find merit in the submission that TNMM is the correct method and internal CUP would entail adhoc adjustment to price in so far as broking commission from AE and Non AEs are concerned. Operating model of J P Morgan India Pvt. Ltd. 2014 (2) TMI 1215 - ITAT MUMBAI is not comparable to that of the assessee as majority of the income in the case of J P Morgan India Pvt. Ltd was from related parties whereas in the case of the assessee significant revenue is from third party FII clients Assessee could not have generated business from FII clients without the support of CLSA group resources for which it is paying intra group service charges. Hence in such a case TNMM could be used as the most appropriate method. In view of these facts and circumstances we are of the view that assessee has rightly followed the TNMM as the most appropriate method and the decision of the co-ordinate Bench in the case of J P Morgan India Pvt Ltd. 2014 (2) TMI 1215 - ITAT MUMBAI is not applicable to the present set of facts of the assessee. Accordingly we are inclined to set aside the order of the DRP and direct the TPO/AO to delete the adjustment of brokerage income Provision of sub-advisory services and information technology ( IT ) support services - Companies functionally dissimilar with assessee s services need to be deselected from final list. Addition with regard to sub-advisory services - comparability - Ladderup Corporate Advisors has to be excluded as the said company is into investment banking business and not rendering non-binding investment services. Similarly Bombay High Court in the case of New Silk Route Advisors P. Ltd General Atlantic Private Ltd. and Goldman Sachhs (India) Securities Pvt Ltd. 2018 (8) TMI 384 - BOMBAY HIGH COURT has held that merchant banking business cannot be company to nonbinding investment advisory services Mecklai Financial Services company is a persistent loss making company. It has incurred loss only during the year. We also find merit in the argument of the learned AR that product similarity is not important when the method selected for benchmarking is TNMM. Accordingly we direct the TPO to hold Mecklai Financial Services as a valid comparable. ICRA Management Consulting Services Ltd. is accepted to be a comparable to non-binding investment advisory activity See AGM INDIA ADVISORS PRIVATE LIMITED VERSUS DCIT 10- (1) AAYAKAR BHAVAN MUMBAI AND VICE-VERSA 2016 (5) TMI 1335 - ITAT MUMBAI - ICRA Management Consulting Services Ltd. and IDC India Ltd. as valid comparables. Allowability of repairs and maintenance charges of computers - allowable revenue expense - HELD THAT - We find that additional evidences have been filed which have bearing on the issue involved and accordingly we remit the issue back to the file of the AO to decide the same in the light of these fresh evidences as per facts and law. Needless to mention that in case the AO finds these expenses to be in capital in nature then the assessee may be allowed depreciation on that part of the capital expenditure @60% in terms of provisions of the Income tax Rules.

Summary

Issues Involved:
1. Availing of intra-group services.
2. Receipt of brokerage commission.
3. Provision of sub-advisory services and IT support services.
4. Disallowance of expenditure on repairs and maintenance by treating it as capital in nature.

Issue-wise Detailed Analysis:

1. Availing of Intra-group Services:
The appellant challenged the adjustment to the Arm's Length Price (ALP) determined for intra-group services availed from Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) rejected the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and determined the ALP as 'Nil'. The appellant argued that the TPO did not follow any prescribed method under Section 92C of the Income Tax Act, 1961, and ignored substantial evidence of services rendered and costs incurred. The Tribunal found that the TPO's adjustment was made on an ad-hoc basis without following any prescribed method, which is against the provisions of the Act. The Tribunal referred to its decision in the appellant's case for A.Y. 2012-13, where a similar adjustment was deleted. Consequently, the Tribunal allowed the appeal and directed the deletion of the adjustment of ?127,38,27,995/-.

2. Receipt of Brokerage Commission:
The appellant contested the adjustment to the ALP for brokerage commission received from its AEs. The TPO applied the Comparable Uncontrolled Price (CUP) method instead of TNMM. The appellant argued that the CUP method was inappropriate due to differences in the functions, assets, and risks (FAR) profile of transactions with AEs and non-AEs. The Tribunal observed that the appellant provided detailed explanations of the differences in services provided to AEs and non-AEs, and that the TNMM was the most appropriate method. The Tribunal found that the TPO did not adequately consider the differences or make necessary adjustments under the CUP method. Therefore, the Tribunal set aside the DRP's order and directed the deletion of the adjustment of ?21,73,90,712/-.

3. Provision of Sub-advisory Services and IT Support Services:
The appellant challenged the adjustment to the ALP for sub-advisory services and IT support services provided to its AEs. The TPO rejected certain comparables identified by the appellant and included others that were not functionally comparable. The Tribunal found that some of the comparables included by the TPO, such as Infosys Ltd., Zylog System Ltd., and Wipro Technologies Ltd., were functionally different from the appellant's services. The Tribunal directed the exclusion of these comparables and the inclusion of others, such as CG-VAK Software and Exports Ltd., ICRA Management Consulting Services Ltd., and IDC India Ltd., which were functionally similar. The Tribunal held that the appellant's transactions were within the ALP when the correct comparables were considered and directed the deletion of the adjustment of ?67,62,961/-.

4. Disallowance of Expenditure on Repairs and Maintenance:
The appellant contested the disallowance of ?4,43,68,457/- on repairs and maintenance, which was treated as capital expenditure by the AO. The appellant argued that the expenses were revenue in nature and provided additional evidence to support the claim. The Tribunal admitted the additional evidence and remitted the issue back to the AO for fresh adjudication. The Tribunal directed that if the expenses were found to be capital in nature, depreciation at the rate of 60% should be allowed for computer-related expenses as per the Income Tax Rules. The Tribunal allowed the ground for statistical purposes.

Conclusion:
The Tribunal allowed the appellant's appeal on all grounds, directing the deletion of adjustments made by the TPO and remitting the issue of repairs and maintenance expenses back to the AO for fresh adjudication with specific directions on the allowance of depreciation.