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TMI Blog2013 (1) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer pricing adjustment. 4. The assessee in the present case is a company which is engaged in the business of broking and trading in shares as a corporate member of Bombay Stock Exchange and National Stock Exchange. The return of income for the year under consideration was filed by it on 28-10-2003 declaring total income of Rs.5,23,56,068/-. In the said year, the company had provided the stock broking services in respect of clearing house trades to its Associated Enterprise (AE) M/s ABN Ambro Asia (Mauritius) Ltd. and had earned brokerage for the said services amounting to Rs.4,22,84,486/- at the rate of 0.24%. The income so earned from the PE constituted more than 35% of the total income of the assessee from clearing house trades. To determine the arm's length price of the transactions entered into by the assessee company with its AE, the matter was referred by the AO to the TPO. The TPO after receiving reference u/s 92CA(1) of the Act, proceeded to compute the Arm's Length Price in respect of this international transaction and directed the assessee to furnish the brokerage rates of top ten clients in terms of volume, which was done on 12-12-2005. A perusal of the list showed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (f) It canvassed its case for application of TNMM as this method has relaxed standard of comparability. In view of the above submissions and based on its TNMM using Net Profit Margin (NPM), the assessee argued that the weighted average NPM earned by 14 broadly independent companies based on three years data ranges from 1.3% to 25.22% with an arithmetical mean of 11.60% while it has earned the NPM of 24.87% during the financial year which is at arm's length. 6. The TPO considered/examined the contentions / objections raised by the assessee at length and held as under : (a) Volume difference : That the volume does have affect on the brokerage rate, but in this trade, as in any other trade, these volumes have to be "committed volumes" and the appellant has not been able to substantiate that its AE had committed any volume of transaction with it. No agreement has been signed between the assessee and its AE and no documentary evidence has been produced. The TPO collected the data of the earlier year and found that the company had in the immediately preceding year had 23.77% of its transactions with its AE and there is nothing to suggest that it would commit large volum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average broking rate in case of foreign clients (FIIs) in respect of CH trades and thereafter, provided adjustments. (e) Marketing & Sales Function : The TPO has examined the issue in detail in pages 10, 11 and 12 of her order. She has made an adjustment of 0.408% as per the provisions of Section 10B(1)(a)(ii) and came to an arm's length brokerage rate of 0.36%. Since the appellant had shown .240% as the brokerage rate., therefore, the addition to income proposed by TPO was .120% which in monetary terms came to Rs.2,13,25,474/-/-. 7. The addition as proposed by the TPO above was incorporated by the AO after providing an opportunity of being heard to the appellant. The AO, after taking into account the submissions made, was of the view that no additional facts or figures were brought before it and it was merely a repetition of the submissions made before the TPO, which were duly considered. As such he carried out upward adjustment of Rs.2,13,25,474/- on this issue and made addition to the total income of the assessee to that extent in the assessment completed u/s 143(3) vide an order dated 22-02-2006. 8. Against the order passed by the AO u/s 143(3), an appeal was preferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished. 9. The above submissions made on behalf of the assessee before him while challenging the TP adjustments were not found acceptable by the learned CIT(Appeals). According to him, CUP method being the traditional method was most direct and reliable for the transfer pricing analysis. He held that even the facts and circumstances of the assessee's case fully justified adoption of CUP method for TP analysis. As regards the adjustment sought by the assessee on account of volume, the learned CIT(Appeals) held that the volume factor was of no importance keeping in view the nature of assessee's business and, therefore, the TPO was fully justified in not allowing any volume adjustment in the facts of the assessee's case. As regards the claim of the assessee for adoption of weighted average arithmetical mean instead of simple average arithmetical mean, the learned CIT(Appeals) held that what is contemplated in the statute is adoption of arithmetic mean only and the concept of weighted average is not recognized by the statute. As regards the contention of the assessee that the brokerage rate charged to Indian FIs should have been taken into account by the TPO for comparability anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee company to its AE was 0.24%, TP adjustment was made at 0.12% being the difference between arm's length brokerage rate determined by the TPO and brokerage rate actually charged by the assessee to its AE. He contended that if the weighted average brokerage rate as worked out by the assessee at 0.392% is taken and adjustment for marketing function, research function and difference in volumes as claimed by the assessee are made, the arm's length brokerage rate would come to 0.102% and the same being lower than the brokerage rate of 0.24% charged by the assessee to its AE, no TP adjustment is actually required to be made. 11. The learned DR, on the other hand, strongly supported the action of the authorities below in adopting CUP method for the purpose of comparability analysis. He submitted that CUP is the most appropriate method to determine the ALP in the facts and circumstances of the assessee's case especially when internal CUP was available. As regards the various adjustments claimed by the assessee, he submitted that volume of 10 FIIs taken by the TPO for comparability analysis was close to the volume of transactions of assessee company with its AE and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment for difference in volumes. As rightly contended by the learned counsel for the assessee comparable uncontrolled price is required to be adjusted as per Rule 10B(1)(a)(ii) to account for difference, if any, between the international transaction and the comparable uncontrolled transaction which could materially affect the price in the open market. However, as contended by the learned DR, a case has to be made by the assessee for allowing such adjustment duly supported by relevant facts and figures as well as documentary evidence. He has contended that such details and documents, however, need to be verified by the AO/TPO and if the matter is sent back to the AO or the TPO for such verification, he has no objection. Since the learned counsel for the assessee has also agreed with this proposition, we restore this issue to the file of the AO with a direction to consider the claim of the assessee for adjustment for marketing function, research function and differences in volumes afresh on merits after verifying the details and documentary evidence to be furnished by the assessee in support. The claim of the assessee on this issue is accordingly treated as partly allowed for statist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-06-2003 whereby it is clarified that the provisions of section 234D shall also apply to an assessment year commencing before the first day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date. Since the said Explanation is clearly applicable in the case of the assessee, we uphold the levy of interest u/s 234D and dismiss ground No. 11 of the assessee's appeal. 19. Now we shall take up the appeal of the assessee for assessment year 2005-06 being ITA No. 1236/Mum/2010 which is directed against the order of learned CIT(Appeals)-15, Mumbai dated 01-12-2009. 20. The common issue involved in ground No. 1 to 8 of this appeal relates to the addition of Rs.5,88,62,098/- made by the AO and confirmed by the learned CIT(Appeals) by way of TP adjustment. 21. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, this issue involved in assessment year 2005-06 is similar to the one involved in the appeal of the assessee for assessment year 2003-04 which has been decided by us in the foregoing portion of this order. As all the material facts rel ..... 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