2022 (12) TMI 549 - AT - Income Tax

TP Adjustment - MAM selection - brokerage service income - CUP v/s TNMM - rejection of transactional net margin method adopted by the assessee and adoption of cup method as the most appropriate method by the learned transfer-pricing officer - HELD THAT - As relying on assessee own case 2020 (3) TMI 1133 - ITAT MUMBAI no hesitation in holding that the transactional net margin method is the most appropriate method for determination of the arm s-length price of the brokerage service income earned by the assessee. Accordingly the adjustment made by the learned transfer pricing officer and confirmed by the learned CIT A is not sustainable. Hence deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of Transfer Pricing (TP) analysis.
2. Appropriateness of Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP).
3. Rejection of TNMM as the Most Appropriate Method (MAM) for brokerage commission transactions.
4. Application of Comparable Uncontrolled Price (CUP) method for benchmarking brokerage commission.
5. Use of non-AE Foreign Institutional Investors (FIIs) brokerage rate as an internal CUP.
6. Comparability of broking services provided to non-AE Domestic Institutional Investors (DIIs) versus AEs.
7. Adjustment for additional functions performed for non-AE FIIs.
8. Separate charges for additional services provided to non-AEs.
9. Requirement for documentary evidence for differential services provided to clients.
10. Timing of affidavit submissions as additional evidence.
11. Application of appropriate turnover filter and granting volume discount.

Detailed Analysis:

1. Rejection of Transfer Pricing (TP) Analysis:
The appellant (CLSA India Ltd) contested the rejection of its TP analysis by the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Commissioner of Income Tax (Appeals) [CIT(A)]. The appellant argued that the TNMM was the most appropriate method for determining the ALP of brokerage services provided to associated enterprises (AEs).

2. Appropriateness of Transactional Net Margin Method (TNMM):
The appellant maintained that TNMM was suitable for benchmarking the international transaction of brokerage commission. The TPO, however, favored the CUP method, stating that the brokerage rates charged to non-AEs were higher than those charged to AEs, suggesting a discrepancy. The TPO proposed an adjustment based on this difference.

3. Rejection of TNMM as the Most Appropriate Method (MAM):
The TPO and CIT(A) rejected TNMM, arguing that CUP was more appropriate due to the availability of direct comparables. The CIT(A) emphasized that the arm's length principle is about comparability, and traditional transaction methods like CUP are preferred over profit-based methods like TNMM.

4. Application of Comparable Uncontrolled Price (CUP) Method:
The TPO applied the CUP method, comparing the brokerage rates charged to AEs with those charged to non-AEs. The TPO found that the rates charged to non-AEs were higher, leading to a proposed adjustment. The CIT(A) upheld this approach, citing the preference for CUP in cases where direct comparables are available.

5. Use of Non-AE Foreign Institutional Investors (FIIs) Brokerage Rate as an Internal CUP:
The appellant argued that the brokerage rates for non-AE FIIs should not be used as an internal CUP due to differences in services provided. The TPO rejected this, stating that the services provided to AEs and non-AEs were comparable.

6. Comparability of Broking Services Provided to Non-AE Domestic Institutional Investors (DIIs) Versus AEs:
The appellant contended that services provided to non-AE DIIs were more comparable to those provided to AEs than services provided to non-AE FIIs. The TPO disagreed, maintaining that the services were similar across AEs and non-AEs.

7. Adjustment for Additional Functions Performed for Non-AE FIIs:
The appellant argued for adjustments to account for additional functions performed for non-AE FIIs. The TPO rejected this, stating that the appellant did not provide sufficient evidence to support the claim of additional functions.

8. Separate Charges for Additional Services Provided to Non-AEs:
The appellant contended that higher brokerage rates charged to non-AEs included charges for additional services. The TPO rejected this, stating that the appellant did not provide separate billing for these additional services.

9. Requirement for Documentary Evidence for Differential Services Provided to Clients:
The TPO and CIT(A) required documentary evidence to support the appellant's claim that different services were provided to different clients. The appellant's failure to provide such evidence led to the rejection of this argument.

10. Timing of Affidavit Submissions as Additional Evidence:
The CIT(A) noted that affidavits submitted by the appellant were presented during the appellate proceedings as additional evidence, contrary to the appellant's claim that they were submitted during the TP proceedings.

11. Application of Appropriate Turnover Filter and Granting Volume Discount:
The appellant argued for the application of an appropriate turnover filter and volume discount in the CUP method. The TPO rejected this, stating that the rate of brokerage and volumes did not show a perfect correlation.

Conclusion:
The appellate tribunal, following judicial discipline and previous decisions in similar cases, held that TNMM was the most appropriate method for determining the ALP of brokerage services. The tribunal directed the deletion of the adjustment made by the TPO and CIT(A), thereby allowing the appeal in favor of the appellant. Other grounds of appeal were deemed academic and not adjudicated. The order was pronounced on 28.06.2022.