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TMI Blog2013 (11) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... tment - Determination of arm's length price - Expenditure on royalty and business development - Held that:- CIT(A) has examined the business development system followed by other comparable companies in India and has given a finding that these companies on average were incurring business development expenditure which was 6.4% of brokerage turnover whereas similar expenditure incurred by the assessee was only 1.28% including royalty of 1% paid by the assessee . Therefore expenditure incurred by the assessee on royalty and business development could not be considered as excessive compared to the comparable parties. CIT(A) has also applied the TNMM method for benchmarking international transactions. There are 29 comparables selected details of which have already been given earlier which gave an average margin of -5.5% and, in case, loss making companies were excluded, the average margin came to 16.06% whereas in case of the assessee the margin declared was 57.58%. Therefore it is held that no TP adjustment is required to be made in case of the assessee - Decided against Revenue. - ITA No. 2362/Mum/2011 - - - Dated:- 22-2-2013 - RAJENDRA SINGH AND VIJAY PAL RAO , JJ. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee by the decision of the Tribunal in assessment year 1999-2000 in ITA No. 2930/M/2008 in which year also similar disallowance had been made by AO but the same had been allowed by the Tribunal. The ld. DR placed reliance on the order of AO. 4. We have perused the records and considered the matter carefully. The dispute is regarding the allowability of claim of deduction on account of write-off of bad stock. The assessee is in share broking business and many a times, the clients or stock exchange return stocks to the assessee due to reasons such as difference in signature of transferor, forged/ fake share certificate etc. and therefore to take care of such unforeseen circumstances, the assessee has been making provision for such loss @ .01% of turnover. The provision so made is added in the computation of income and actual claim of loss is made after due verification. This year assessee claimed loss of Rs.4,84,796/- which was disallowed by the AO. We find that similar disallowance had been made by AO in the assessment year 1999-2000 which had been deleted by CIT(A). In further appeal, the Tribunal after necessary examination concluded that the assessee had been regularly mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er automatic route on use of trade mark of the foreign collaborator without technology transfer. Accordingly, the assessee company started paying royalty from 19.2.2002 after getting RBI's approval on 26.3.2002. The payment was thus approved by the govt. The assessee further submitted that it was not aware of payment of similar type of brand fees by other broking companies as such details were publicly not available. 5.2 The TPO however did not accept the explanation given by the assessee. It was observed by him that the trade name/brand name was not protected in any country including India and assessee could not give any document to prove the ownership of the brand by CLSA BV. It was also observed by him that the assessee was the only associate enterprise (AE) of CLSA group that had entered into a brand agreement. The RBI approval for royalty payment only indicated that such payment was not prevented/blocked by govt. considering the exchange control policy. However, approval itself did not mean that the payment had been made at arm's length. The TPO observed that the issue whether the payment had been made at arm's length was required to be examined under the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade and local only. In any other market, there was a single contracting model, as per which, in case a client located in a particular country wanted to buy equity in some other country, he had to place a buy order with CLSA entity of the home country, who would then contact the CLSA entity in the country in which equities is to be bought. The client has to pay commission directly to the CLSA entity of the home country, which then pays the 'execution Commission' to the CLSA entity of the other country. It was further submitted that, in India, the client can contact directly the CLSA entity of the country in which the equity has to be bought. The position was different in Korea and Taiwan. In Korea, there was commission sharing arrangement, whereas, CLSA Taiwan operates as a branch. While CLSA Taiwan between books the commission revenue earned, it is charged an allocation of certain head office expense. In India, there was no commission sharing arrangement. However, after the payment of royalty was permitted by the Government, the assessee started payment of royalty @ 1% for use of brand. 5.5 The assessee also submitted before the CIT(A) that the details of similar paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICICI Securities Ltd. 12.50% 15. ICICI Web Trade Ltd. [Merged] NA 16. India Infoline Securities Pvt. Ltd [Merged] NA 17. Indiabulls Securities Ltd. NA 18. Integrated Enterprises (India) Ltd. 22.00% 19. Joindre Capital Services Ltd. -25.27% 20. Khandwala Securities Ltd. 2.73% 21. Kotak Securities Ltd. NA 22. K J M C Capital Market Services Ltd. -0.38% 23. L K P Securities Ltd. 16.29% 24. Peerless Securities Ltd. 40.28% 25. R B S Equities (India) Ltd. 22.74% 26. Religare Securities Ltd. -17.47% 27. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd fees or royalty paid by the assessee. The assessee had also demonstrated that it was paying much lower business development expenditure including the royalty at 1.28% compared to average payment of 6.4% by the broking industries on brokerage turnover. The net margin of the assessee was also much higher at 57.58% compared to average margin of 28.29% of the comparable entities. CIT(A) held that TNMM method was appropriate method on the facts of the case that net margin declared by the assessee being much higher compared to such other entities, royalty paid by the assessee @ 1% had to be considered at arm's length. The CIT(A) accordingly deleting the addition made by the AO aggrieved by which the assessee is in appeal before the Tribunal. 6. Before us, the Ld. CIT-DR appearing for the revenue assailed the order of the Ld. CIT(A). It was submitted that payment of no royalty by other CISA entities did mean that there was an Internal CUP, which had been rightly applied by the AO. It was also submitted that merely because royalty had been approved by the Government, did not mean that the payment of royalty was at arm's length. It was further submitted that application of TNM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct the business and decide the reasonableness of a particular expenditure. He referred to judgment of Hon'ble High Court of Delhi in case of EKL Appliances Ltd. in Income-tax Appeal No. 1068 of 2011 in which case also the TPO had held that royalty payment was not justified on the ground that the assessee was incurring huge losses. The Hon'ble High Court of Delhi after referring to the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. (289 ITR 26) held that it was not for the AO/TPO to decide as to how much expenditure was reasonable. It was accordingly held that the TPO had no jurisdiction to hold that royalty expenditure was not allowable in view of continuing losses. It was pointed out that the assessee had declared margin which was much more than the average margin of the broking industry. The business development expenditure of the assessee was much below the level of expenditure shown by other entities. It was, therefore, urged that the order of CIT(A) deleting the addition must be upheld. 8. We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding transfer pricing adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be applied. We are unable to accede to the request of the ld. CIT-DR, the matter may be restored to AO/TPO to find out a comparable transaction for application of CUP method. No such comparable transaction has been brought on record even by AO or by DRP, though the assessee had clearly stated that no such information was available. No such comparable case has been placed by the ld. CIT-DR even before us. The issue, therefore, cannot be restored for making roving inquiries. 8.2 The ld. CIT-DR has placed reliance on the decision of the Tribunal in the case of Knorr Bremse India (P.) Ltd. (supra), has argued that in case the assessee does not show that transaction by transaction approach was not possible and there has been no real or tangible benefit for carrying on international transactions with the AEs. CUP method can be adopted with preference to TNMM. It has been pointed out that in that case it was also held that TPO was justified in taking ALP at nil. We have perused the said judgment. There cannot be any dispute about applicability of CUP method when transaction by transaction approach was possible but the method can be applied only when information is available for ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and payment of royalty was therefore permitted. CIT(A) on examination of the arrangement/system followed by CLSA BV has also given a finding that in other jurisdictions, CLSA entities were making market contributions. Therefore only on the ground that other CLSA units did not pay any royalty, it could not be held that payment of royalty by the assessee was not justified. 8.4 CIT(A) has also examined the business development system followed by other comparable companies in India and has given a finding that these companies on average were incurring business development expenditure which was 6.4% of brokerage turnover whereas similar expenditure incurred by the assessee was only 1.28% including royalty of 1% paid by the assessee . Therefore expenditure incurred by the assessee on royalty and business development could not be considered as excessive compared to the comparable parties. CIT(A) has also applied the TNMM method for benchmarking international transactions. There are 29 comparables selected details of which have already been given earlier which gave an average margin of -5.5% and, in case, loss making companies were excluded, the average margin came to 16.06% whereas in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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