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2024 (7) TMI 274 - AT - Income TaxTP adjustment on account of equity broking services (Non-DVP segment / CH settlement) - selection of MAM most appropriate method - TPO rejecting the application of the TNMM method for benchmarking these transactions - HELD THAT - Since at the time of hearing we made it clear that we are not going to the controversy of whether TNMM is most appropriate method or CUP and both the parties agreed that CUP should be applied after taking into consideration, proper comparability analysis because the functions performed by the assessee for the AEs are non-AEs were the same. We find that the ld. TPO also under the DVP segment has taken the brokerage commission received from all AEs on an aggregate basis which was compared with the brokerage commission received from third party FIIs. Since the weighted average brokerage commission rate earned from AEs was higher than the weighted average brokerage commission earned from third party FIIs, the ld. TPO has treated it to be at ALP. Therefore, if the same yardstick is adopted and the same benchmarking of aggregate basis as been upheld by the ld. TPO in assessee s own case in the subsequent years right from A.Y.2004-05 to 2011-12 is taken into consideration, then weighted average brokerage rate earned by assessee from AEs if compared with rate earned by third party FIIs, the difference is 0.07%. Further, we find that ld. CIT(A) has given adjustment of sales cost of 0.6%, which we find is most reasonable basis for benchmarking the sale cost adjustment, because assessee has to incur extra sales cost in the case of third party FIIS which may not be the case with the AEs - Thus, at the most adjustment would be of 0.01% if at all which is too miniscule to apply to make adjustment and therefore, we hold that no adjustment is required to be made. Port Fee charges paid - CIT(A) applying the markup to cost at 15% as against 25% applied by the AE for determining the ALP in respect of the port fee charges paid by the appellant and thereby confirming addition - HELD THAT - As per the agreement it was agreed that the charges were be at cost 25% which were applied to previous relevant assessment year under question before us. The assessee had submitted the break-up of the cost per user ID per month certified and provided by ML and the relevant agreements. These charges were allocated to AEs on the basis of total no. of mailboxes used over a period of 12 months. Thus, the proper allocation and proper work has been given for allocation and cost plus mark-up. Based on this details, we do not find any reason for adhoc mark-up of 15% applied by the ld. CIT (A) and moreover ld. TPO has not given any basis for taking it Nil . Accordingly, we accept the cost plus mark-up of 25%. Accordingly, ground of the assessee is allowed. Addition u/s 92CA(3) in respect of administrative support services provided by the appellant to the AE - HELD THAT - Once in the TP study report the arm s length mark-up under the comparison with comparable uncontrolled transaction worked out at 13.67% which has not been rejected by the ld. TPO and assessee had shown the margin of 17.2% in the TP study report and it is also that even the 15% mark-up adopted by the ld. CIT(A) is greater than the arm s length price determined by the assessee in TPSR. Therefore, assessee s margin has to be reckoned at arm s length and therefore, no adjustment is required. Addition of brokerage for program trades - TPO had made adjustment in respect of brokerage commission earned by assessee from programme trades by comparing the rate charged to the client for programme trades for brokerage commission rate charged by assessee with third party FIIS for the DVP rates - HELD THAT - After hearing both the parties and on perusal of the order as noted above programme trades are third party trades entered into by the assessee where rates are negotiated by AE. Since the contract note and brokerage income is settled directly between third party and assessee which has been reported as a deemed international transaction in terms of 92B (2). Nonetheless these are third party independent transactions where assessee got its negotiated brokerage from these parties directly and no benefit is cost on to ML entities from the business transacted by the assessee in these third parties. The certificate from Merill Lynch to the effect that brokerage in respect of premium rate is received directly by the clients of DSPML has been placed in the paper book also before us. Further, in subsequent years, i.e., from A.Y.2006-07 onwards, the ld. TPO himself has accepted the transaction to its arm s length in assessee s own case. Thus, we do not find any reason to tinker with the order of the ld. CIT(A) and same is confirmed and consequently the Revenue s grounds are dismissed. Disallowance u/s 14A - assessee had earned dividend income which was claimed exempt u/s 10(33) - suo-moto additiona made by assessee - HELD THAT - As it is a well established law that Rule 8D is not applicable in the A.Y.2002-03 and the basis of which AO has made the disallowance cannot be sustained, firstly, that no interest expenses can be attributed as noted above assessee had more surplus interest free funds by sixth investment made by the assessee. Thus, in such a case no disallowance can be made. Secondly, in so far as Revenue expenses are concerned, AO has taken 5% of dividend income. CIT (A) has reduced the addition after applying Rule 8D(2), the disallowance upheld by CIT(A), which is almost to the extent of suomoto disallowance offered by the assessee which under the facts and circumstances and looking to the fact that Rule 8D is not applicable is far more sufficient. Thus, suomoto disallowance offered by the assessee is accepted. Consequently, assessee s appeal is allowed and Revenue s appeal is dismissed. TP adjustment of equity broking services (non-DVP / CH segment) - TPO has made the adjustment by applying CUP method and comparing weighted average commission rate charged by assessee to all AEs and brokerage commission rates charged by the assessee to all third party FII clients in the CH/ Non-DVP Segment - HELD THAT - Average rate comes to 0.49% if the adjustment is given by the ld. CIT (A) on account of sales of marketing function performed by the assessee from its AE vis- -vis third party client is given which we have upheld in the earlier year. Thus, out of average rate of 0.49%, adjustment of 0.08% towards sales and marketing function is to be released. Thus, ALP brokerage rate comes to 0.41%. Accordingly, adjustment shall be made under the DVP segment by taking the ALP of 0.41% and accordingly, ld TPO is directed to make suitable adjustment. Accordingly, ground No.3 4 of assessee s appeal is partly allowed and ground No.1 of Revenue s appeal is dismissed. Disallowance of interest expenses - HELD THAT - As assessee s own surplus funds were far more than investment made and therefore, no disallowance of interest can be made in view of the decision of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT wherein it has been held that in case there are mixed funds available with the assessee i.e. owned funds as well as owed funds, the investments made by the assessee ought to be considered to be made out of the interest-free funds and the assessee has the right of appropriation of the funds, where 'sufficient interest-free funds are available. Thus, the grounds raised by the Revenue are dismissed.
Issues Involved:
1. Validity of Reference to TPO for Computation of ALP 2. TP Adjustment on Equity Broking Services (Non-DVP Segment / CH Settlement) 3. Port Fee Charges 4. Administrative Support Services 5. Brokerage for Program Trades 6. Disallowance under Section 14A Analysis: 1. Validity of Reference to TPO for Computation of ALP: - Ground No.1: The assessee did not press this ground as it was covered under other substantive grounds. Therefore, it was dismissed as infructuous. 2. TP Adjustment on Equity Broking Services (Non-DVP Segment / CH Settlement): - Ground No. 3 & 4: The TPO rejected the TNMM method and applied the CUP method. The TPO compared the brokerage rates charged to AEs with those charged to third-party FIIs. - Findings: The TPO's analysis showed discrepancies in brokerage rates between AEs and non-AEs. The CIT(A) upheld the TPO's approach but allowed a sales/marketing adjustment of 0.06%, bringing the adjusted brokerage rate within the +/-5% range, thus concluding the transaction to be at arm's length. - Conclusion: The Tribunal found that the TPO's approach was reasonable and upheld the CIT(A)'s adjustments, thereby dismissing the Revenue's appeal and allowing the assessee's appeal. 3. Port Fee Charges: - Ground 5: The CIT(A) applied a 15% markup instead of the 25% applied by the AE, resulting in a partial disallowance. - Findings: The CIT(A) accepted the benefit of services but adjusted the markup to 15%. The Tribunal found this adjustment to be arbitrary and accepted the 25% markup as reasonable. - Conclusion: The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, accepting the cost-plus markup of 25%. 4. Administrative Support Services: - Ground No. 6: The CIT(A) reduced the markup from 25% to 15% on administrative support services provided by the assessee to its AE. - Findings: The CIT(A) accepted the revised working based on headcount and deemed a 15% markup as reasonable. - Conclusion: The Tribunal found the CIT(A)'s approach reasonable and upheld the 15% markup, dismissing the Revenue's appeal and allowing the assessee's appeal. 5. Brokerage for Program Trades: - Ground No. 1 (Revenue): The TPO made an adjustment by comparing the rate charged to the client for program trades with the brokerage commission rate charged to third-party FIIs. - Findings: The CIT(A) found that program trades are distinct from regular broking transactions and are negotiated directly with third parties. The CIT(A) deleted the adjustment made by the TPO. - Conclusion: The Tribunal upheld the CIT(A)'s findings and dismissed the Revenue's appeal. 6. Disallowance under Section 14A: - Ground No. 4 (Revenue) & Ground No. 7 (Assessee): The AO made a disallowance of INR 4.98 Cr, which the CIT(A) reduced based on Rule 8D. - Findings: The Tribunal noted that Rule 8D is not applicable for A.Y. 2002-03 and found that the assessee had sufficient interest-free funds to cover the investments. - Conclusion: The Tribunal accepted the assessee's suo moto disallowance and dismissed the Revenue's appeal. Summary for A.Y. 2003-04: - Ground No. 1 & 2: Dismissed as infructuous. - Ground No. 3 & 4: The TPO applied the CUP method, leading to an adjustment of INR 5,04,21,817/-. The CIT(A) allowed a sales/marketing adjustment, bringing the transaction within the arm's length range. - Port Fee Charges: Similar to A.Y. 2002-03, the Tribunal upheld the 25% markup. - Administrative Support Services: The Tribunal upheld the 15% markup. - Brokerage for Program Trades: The Tribunal upheld the CIT(A)'s deletion of the adjustment. - Disallowance of Interest Expenses: The Tribunal noted that the assessee had sufficient interest-free funds and dismissed the Revenue's appeal. Conclusion: - The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals for both A.Y. 2002-03 and A.Y. 2003-04.
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