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TMI Blog2020 (12) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... g the said amount on an ad hoc basis to carrying on of speculation business by the assessee - HELD THAT:- As the assessee had carried out the transactions of purchase and sale of shares on account of a business exigency and not with an intention to earn profit, therefore, the same would not come within the purview of Explanation to Sec.73 - We thus not being able to persuade ourselves to subscribe to the view taken to the contrary by the lower authorities that the loss on account of transactions in shares incurred by the assessee was to be held as speculation loss within the meaning of Explanation to Sec. 73 therein, set aside the same and direct the A.O to allow the assessee s claim for deduction of business loss on account of transactions in shares. As concluded that the loss on account of transaction in shares cannot be held to be speculation loss, therefore, disallowance of the proportionate expenditure that had been attributed by the lower authorities to the aforesaid speculative transactions also cannot be sustained and is consequentially deleted. TP adjustment - Royalty/branding fees paid by the assessee to its AE - AO/TPO determining the ALP of the royalty/brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents filed by the assessee did not demonstrate that any actual referrals were made by the AE, viz. CLSA Ltd., Hong Kong, to the assessee, we find, that the said hollow claim of the TPO is not backed by any concrete material which would support the same. On the basis of the aforesaid observations, we are unable to concur with the view taken by the lower authorities that the assessee had failed to substantiate receipt of referral services from its the AE, viz. CLSA Ltd., Hong Kong during the year under consideration on the basis of any supporting documentary evidence. We have given a thoughtful consideration to the contentions of the ld. A.R as regards the invalid assumption of jurisdiction by the TPO for determining the ALP of the referral services rendered by the AE, viz. CLSA Ltd., Hong Kong at RS. Nil i.e without adopting any one of the prescribed method contemplated in Sec. 92C(1) of the Act, and are persuaded to subscribe to the same. We are unable to concur with the aforesaid manner in which the TPO had determined the ALP of the referral services rendered by the AE, viz. CLSA, Hong Kong to the assessee at Rs.nil. In our considered view, on a reference made under Sec. 92C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the Appellant at INR 35,84,28,360 as against returned income of INR 32,82,16,610 filed by the Appellant. Transfer Pricing Grounds - 3. On the facts and circumstances of the case and in law, the learned AO / learned TPO / learned CIT(A) erred in rejecting the Transfer Pricing ('TP') analysis undertaken by the Appellant; 4. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) failed to appreciate that under the provisions of Section 92CA(3) of the Act, the TPO is required to determine the arm's length price in relation to the international transactions in accordance with Section 92C(3) of the Act; 5. On the facts and circumstances of the case and in law, the learned TPO/learned A.O/ learned CIT(A) erred by the failing to discharge the burden of proof while concluding that Transactional Net Margin Method ('TNMM') is not the Most Appropriate Method ('MAM') for the determination of the arm's length price ('ALP') in respect of the international transaction pertaining to payment of royalty / branding fees and payment of referral fees; Payment of royalty I branding fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the transactions executed by the FIl's which are referred to the Appellant by AEs; 14. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appreciating the Functions, Assets and Risk ('FAR') profile of the Appellant vis-vis the AEs; 15. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appropriately applying any of the five prescribed methods as per Section 920(1) of the Act for determining the arm's length price of the international transaction pertaining to payment of referral fees; 16. On the facts and circumstances of the case and in law, the learned TPO I learned AO learned CIT(A) failed to consider the evidence filed during the course of proceedings: Loss incurred from error trades - INR 33,46,816 17. On the facts and circumstances of the case and in law, the learned AO I learned CIT(A) erred in disallowing the loss of INR 7,36,483 from error trades of equity shares on account of dealing in securities in the ordinary course of the stock broking business of the Appellant Additionally, learned AO has errone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, dated 07.03.2006 inter alia suggested the following adjustments as regards the ALP of the international transactions carried out by the assessee during the year under consideration : Sr. No. Particulars 1. The ALP of the international transactions relating to payment of brand fee by the assessee to its AE, viz. CLSA BV, Netherland was computed by the TPO at nil as against that shown by the assessee by applying TNMM as the most appropriate method at ₹ 49,38,615/-. 2. The ALP of the referral services received by the assessee from its AE viz. CLSA, Hong Kong was determined by the TPO at Rs.nil as against that shown by the assessee by applying TNMM as the most appropriate method at ₹ 2,14,36,814/-. Accordingly, the TPO suggested an upward revision of the ALP of the aforesaid international transactions of the assessee. 4. After receiving the order passed by the TPO under Sec. 92CA(3), dated 07.03.2006, the A.O passed an order under Sec.143(3), dated 20.03.2006, therein making an addition towards ALP of the aforementioned international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which had been assailed before us. Adverting to the determination of the ALP of the referral fees received by the assessee from its AE, viz. CLSA, Hong Kong by the AO/TPO at Rs. Nil, as against that determined by the assessee by adopting TNMM as the MAM at ₹ 2,14,36,814/-, it was submitted by the ld. A.R that the TPO had blatantly exceeded his jurisdiction as well as drawn inferences which were contrary to the material borne from the record. It was averred by the ld. A.R that though the assessee had filed voluminous details and evidence to prove rendition of the referral services by its AE viz. CLSA Ltd, Hong Kong, however, the lower authorities had simply brushed aside the same and drawn adverse inference in the hands of the assessee on the ground that no supporting material in context of receipt of the aforesaid services by the assesseee from its AE was available on record. In order to drive home his aforesaid claim the ld. A.R took us through the details of the documentary evidence that was filed by the assessee as additional evidence before the CIT(A) to demonstrate the functions which were carried out by its AE, viz. CLSA, Hong Kong, in lieu whereof the referral fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erland by the TPO without following any prescribed method contemplated under Sec. 92C(1) at Rs.nil, as against that shown by the assessee by applying TNMM as the MAM at ₹ 49,38,615/-, the assessee assailed the validity of the jurisdiction exercised by the TPO on the basis of his contentions which were advanced by him in context of referral services received by the assessee from its AE. Further, it was submitted by the ld. A.R that the A.O/TPO had erred in not appreciating the fact that as the payment of brand fee by the assessee to its AE viz. CLSA BV, Netherland was allowed by the Reserve Bank of India (for short RBI ) and also permissible under the Exchange Control Regulations, thus, there was no basis for making any adjustment in the backdrop of the CBDT Circular No.6-P, dated 06.07.1968. It was averred by the ld. A.R that as the payment of brand fees was duly approved by the RBI under the Exchange Control Regulation and was in accordance with the laws and the Government orders then in force, therefore, the payment therein made by the assessee duly complied with the arm s length principle as mentioned under Rule 10B(2)(d) of the Income Tax Rules, 1962. Apart from that, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken the ALP of the same at Rs. nil. Also, a similar contention was advanced by the ld. D.R in support of the view taken by the lower authorities in determining the ALP of the royalty/brand fees paid by the assessee to its AE viz. CLSA BV, Netherland at Rs. nil. As regards the disallowance of the loss claimed by the assessee in respect of purchase and sale of shares, it was submitted by the ld. D.R that as the same was covered by the Explanation to Sec. 73 of the Act, therefore, the lower authorities had rightly held the same as a speculative loss. In the backdrop of his aforesaid contention it was averred by the ld. D.R that as the appeal filed by the assessee was devoid and bereft of any force, therefore, the same did not merit acceptance. 8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. We shall first deal with the disallowance of the assessee s claim for deduction of SEBI Merchant License fee of ₹ 1,66,666/-. Briefly stated, the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim for deduction of ₹ 1,66,666/- (i.e 1/3rd of ₹ 5,00,000/-). Accordingly, we direct the A.O to allow the assessee s claim for deduction of ₹ 1,66,666/- i.e 1/3rd of the registration fees of ₹ 5 lac that was paid by it towards merchant banking license fees to SEBI in the period relevant to A.Y. 2001-02. We thus in terms of our aforesaid observations set aside the order of the CIT(A) in context of the aforesaid issue under consideration and vacate the disallowance of ₹ 1,66,666/- made by the A.O. The Grounds of appeal No. 19 20 are allowed in terms of our aforesaid observations. 9. We shall now advert to the claim of the assessee that the A.O/CIT(A) had erred in disallowing the assessee s claim for deduction of loss from error trades of equity shares on account of dealing in securities in the ordinary course of its share and stock broking business. Also, we shall deal with the inextricably interlinked disallowance of the proportionate expenditure of ₹ 26,10,333/- made by the A.O by attributing the said amount on an ad hoc basis to carrying on of speculation business by the assessee. As observed by us hereinabove, the assessee is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 26,10,333/- on the basis of his working carried out at Para 6.8 of his order by attributing the same to the speculative transactions carried out by the assessee in shares. 10. We have given a thoughtful consideration to the aforesaid issue before us in the backdrop of the contentions advanced by the authorised representatives for both the parties. Admittedly, the assessee is engaged in the business of share and stock broking. On a perusal of the records, we find, that the purchase and subsequent sale of shares carried out by the assessee was incidental to its business of share broking. As such, our indulgence in the present case has been sought by the assessee for adjudicating as to whether or not the loss incurred on account of error trade conducted by it in its status as that of a broker on behalf of its clients is to be held as a business loss. Issue in hand had earlier came up before a coordinate bench of the Tribunal i.e ITAT, Ahmedabad bench B in the case of Parkar Securities Ltd. Vs. DCIT, Circle 2 (5) (2006) 102 TTJ 235 (Ahd) . In the aforesaid case, it was observed by the Tribunal that in order to invoke the Explanation to Sec. 73 the purchase and sale of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee on behalf of its clients, then, the same had to be accepted as a business loss. In the backdrop of the aforesaid observations of the Tribunal, it was observed by the Hon ble High Court that as the issue had been restored by the Tribunal to the file of the A.O for verifying as to whether the loss had occurred on account of error trade conducted by the assessee on account of its clients, therefore, no substantial question of law did arise therefrom. As such, the Hon ble High Court had impliedly approved the view that was taken by the Tribunal while restoring the matter to the file of the A.O i.e in case if the loss had occurred on account of error trade conducted by the assessee on behalf of its clients, then, the assessee s claim of having suffered a business loss had to be accepted. Also, we find that the ITAT, Delhi F in the case of ACIT Vs. Subhash Chandra Shorewala (2004) 91 TTJ 57 (Del) , had observed, that in case where the assessee being a share broker is faced with a situation wherein some of his clients anticipating certain losses had not owned up the transactions, then, the consequential loss incurred by the assessee to honour the commitments is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (+) ₹ 26,10,393/-] is hereby deleted. The Grounds of appeal No. 17 18 are allowed in terms of our aforesaid observations. 11. We shall now advert to the claim of the Ld. A.R that the A.O/TPO had erred in determining the ALP of the royalty/branding fees paid by the assessee to its AE viz. CLSA, Netherland at Rs.nil, as against that claimed by the assessee at ₹ 49,38,615/-. As is discernible from the orders of the lower authorities the assessee had paid a royalty of ₹ 49,38,615/- for the use of brand name to Credit Lyonnais Securities Asia BV, Netherlands (for short CLSA BV, Netherland ). As per the TP study report the assessee had paid the branding fees as per the terms of the branding agreement that was entered into with its AE, viz. CLSA BV, Netherland w.e.f 19.02.2002. It has been the claim of the assessee before the lower authorities that as the brand CLSA was a well respected brand name in the brokerage and securities market worldwide, therefore, the use of the same had given the assessee company an identity readily recognisable in the brokerage and securities market, and thus, was immensely beneficial to its business. As per the branding agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company i.e CLSA India could safely be computed at nil. Observing, that the data regarding comparable transactions was available, the TPO was of the view that Comparable Uncontrolled Price method (CUP) was the most direct and reliable method for benchmarking the aforesaid transaction i.e payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherland. As regards adoption of TNMM by the assessee for benchmarking the aforesaid international transactions, the TPO was of the view that comparison of the net profit margin of the assessee at an entity level with that of the other broking entities without separately and independently benchmarking the transaction pertaining to payment of brand fee could not be accepted. Accordingly, the TPO determined the ALP of the aforesaid international transaction relating to payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherlands at Rs. Nil, as against that computed by the assessee at ₹ 49,38,615/-. 12. We have deliberated at length on the issue under consideration, and as pointed out by the ld. A.R, find, that the issue pertaining to the determination of the ALP of the royalty/ brand fee paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the assessee s own case in context of the aforesaid issue under consideration is reproduced as under: 8. We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding transfer pricing adjustment made by AO in respect of royalty paid by the assessee to CLSA BV of which the assessee is a subsidiary. The royalty amounting to ₹ 7,11,466/- @ 1% of net receipt has been paid by the assessee during the year from 19.2.2002 to 31.2.2002. The assessee had not paid any royalty earlier as the same was not permitted by the erstwhile Foreign Exchange Regulation Act (FERA). However, later when FERA was replaced by FEMA, government allowed payment of royalty and therefore assessee started making payment of royalty to the parent company which is incorporated in Netherlands, after taking approval from RBI. Since the assessee had entered into an international transaction with an associate enterprise, the matter was referred to TPO who has made transfer pricing adjustment using CUP method. The TPO noted that no other subsidiary of CLSA BV anywhere in the world had paid any royalty. Therefore, he had treated this as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 application of CUP method. In the cited case, the Tribunal had upheld the order of TPO determining ALP at nil on the basis of CUP method as in that case there was material to show that no real or tangible benefit had been derived by the assessee from the transaction with the AEs and benefit if any was only incidental. The present case is different. In this case, though the AO observed that the trade name/brand name CLSA was not protected in any country including India and the assessee could not give any document to prove ownership of the brand by CLSA BV, CIT(A) on detailed examination of the matter has given a finding that the CLSA brand was owned by CLSA BV and the same was also registered in India. CIT(A) has also given a finding that CLSA strongly strived to maintain as well as enhance its brand value which had earned recognition in India and Asian markets. There is no material produced before us t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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%. CIT(A) has therefore held that no TP adjustment is required to be made in case of the assessee with which, on the facts of case, we fully agree. We, therefore, see no infirmity in the order of CIT(A) in deleting the addition made and the same is therefore, upheld. As the facts and the issue pertaining to determination of the ALP as regards the consideration paid towards royalty/brand fee by the assessee to its AE viz. CLSA BV, Netherland remains the same as was there before the Tribunal in the aforementioned case of the assessee for A.Y. 2002-03, we, therefore, finding no reason to take a different view therein respectfully follow the same. Independent of our aforesaid observations, we may herein further observe, that as the assessee has received the specific approval from the RBI for making payments @ 1% of gross receipts towards royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legitimate business needs. The principle behind this view is applicable with equal force to Section 37(1) also. Lightly brushing aside the Government approval in the manner done by the lower authorities would set a dangerous precedent and accordingly, could not be approved. In the above light, the above impugned addition having no justification was to be deleted. Accordingly, in the backdrop of our aforesaid deliberations we are of the considered view that the determining of the ALP of the royalty/brand fee paid by the assessee to its AE viz. CLSA BV, Netherland at Rs.nil by the TPO, as against that shown by the assessee at ₹ 49,38,615/- cannot be sustained and is liable to be vacated. Resultantly, the Grounds of appeal Nos. 6 to 11 are allowed in terms of our aforesaid observations. 13. We shall now deal with the claim of the assessee that the A.O/TPO had erred in law and the facts of the case in determining the ALP of the referral services received by the assessee from its AE, viz. CLSA Ltd., Hong Kong at Rs. nil, as against that claimed by the assessee as being at arm s length at an amount of ₹ 2,14,36,814/-. Briefly stated, the assessee which is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact indispensable. As regards the referral fees that was paid by the assessee @ 30% of the brokerage fees earned on each executed transaction, it was submitted by the assessee before the lower authorities that the same was well within the reasonable limits. In order to drive home its claim as regards the reasonabless of the referral fees that was paid by the assessee to its AE, viz. CLSA Ltd., Hong Kong, it was submitted by the assessee that the same could safely be gathered from the fact that as per the bye laws and regulations of the Stock Exchange the brokers were permitted to pay to the remisier (referral) a maximum share @ 50% of the brokerage charged to the clients introduced by them. The assessee had benchmarked the referral fees transactions by using entity-wide analysis with TNMM as the most appropriate method. As the average margin of the selected companies was arrived at 15.97% as against the net margin of 54.81% of the assessee, therefore, it was claimed by the assessee that the aforesaid transaction with its AE was consistent with the arm s length principle. 14. In the course of the proceedings it was observed by the TPO that the referral agreement, dated 07.02.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondence trail had been produced by the assessee which could substantiate its claim that referral services were infact rendered by its AE, viz. CLSA Ltd., Hong Kong, therefore, there was no certainty as regards the genuineness of its said claim; (ii) that as no details of the costs incurred for the services rendered by the AE, viz. CLSA Ltd., Hong Kong were furnished by the assessee despite having been specifically directed, therefore, it could not be proved that any costs had actually been incurred by the aforesaid AE for arranging such referrals, and thus, the cost pertaining to rendering of the aforesaid referral services was to be taken as zero; (iii) that as the assessee itself was treating the referral fees as compensation on an ongoing basis for such referral function calculated on a certain cost base, therefore, the Cost Plus Method (CPM) would be the most appropriate method to benchmark the aforesaid international transaction of receipt of referral services by the assessee from its AE, viz. CLSA Ltd., Hong Kong; (iv) that as no cost had been proved to have been incurred by the AE on the rendition of the aforesaid referral services, therefore, there was no other option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein paid to the latter as per the terms of the referral agreement, dated 07.02.2003 (applicable w.e.f 01.01.2003). On a perusal of the records, we find, that the assessee in order to substantiate rendering of the referral services by its aforementioned AE, viz. CLSA, Hong Kong to the assessee compny had furnished the following documentary evidence as additional evidence U/rule 46A in the course of the proceedings before the CIT(A): Snapshot from CLSA Group website capturing research capabilities (refer PB 192 193) List of different research activities undertaken by the CLSA HK (refer PB 194- 195) Sample daily research publication titled as 'Asia Morning Line - Today's best ideas in Asian equities' dated May 5, 2011 (refer PB 196-209); Sample referral fee invoice raised by CLSA HK in respect of which there has been a payment of referral fees (refer PB 210-233) (also submitted before the learned TPO); A copy of the referral agreement between the Appellant and CLSA HK dated February 7, 2003 (refer PB 234-236) (also submitted before the learned TPO); Research publication prepared by the CL.SA Chief Strategist titled 'Asia Maxima -Quarterly Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of various communications with a FII client named Capital International Inc (refer PB Pg. 401 to 404) Details of support provided to a client named Templeton Global Equity (refer PB Pg.405 to 417) Details of meetings attended by FII clients with respect to India securities, sample clients named Fidelity investment International and Templeton Global Equity (refer PB Pg. 418 to 420) List of India specific roadshows conducted and attended by clients (refer PB Pg. 418 to 443) A report by PWC identifying the costs incurred by CLSA HK towards referring clients to CLSA India (refer PB Pg. 444 to 451) On receipt of the aforesaid additional evidence the CIT(A) had remanded the same under Rule 46A to the TPO and had called for his comments. In reply, the TPO filed three remand reports wherein he without appreciating the aforesaid documentary evidence and also the directions of the CIT(A) summarily rejected the aforesaid documentary evidence, for the reasons, viz. (i). that as the assessee had an opportunity to submit the aforesaid documents in the course of the TP proceedings/assessment proceedings, therefore, the same may not be entertained by admitting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veal that the foreign clients had actually been referred to the assessee by its AE, viz. CLSA Ltd., Hong Kong, its claim of having been paid the referral fees to the latter could not be accepted. Also, the TPO objected to the payments of the referral fees by the assessee to its AE, viz. CLSA Ltd., Hong Kong, in respect of certain CLSA group companies and its associate enterprises. As such, the TPO submitted before the CIT(A) that the additional evidence filed by the assessee U/rule 46A with respect to referral fees may be rejected. Lastly, the TPO in respect of the second set of additional evidence furnished by the assessee with the CIT(A) therein filed a remand report , dated 20.12.2013. In his said report the TPO objected to the filing of the second set of additional evidence by the assessee vide its letter dated 20.02.2012. Referring to the documents filed by the assessee by way of an additional evidence , vide its letter dated 20.02.2012 it was stated by the TPO that as the assessee had failed to demonstrate that it was prevented by a sufficient cause from producing the aforesaid evidence in the course of the original proceedings before the A.O/TPO, therefore, the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration on the basis of any supporting documentary evidence. 19. Apart from the fact that the view taken by the lower authorities that the assessee had failed to substantiate on the basis of supporting documentary evidence its claim of having received referral services from its AE, viz. CLSA Ltd., Hong Kong had been vacated by us, we even otherwise are unable to concur with the manner in which the TPO had without following any one of the prescribed methods provided in Sec.92C(1) of the Act, therein determined the ALP of the referral services at Rs.nil as against that shown by the assessee by applying TNMM as the MAM at ₹ 2,14,36,814/-. We have given a thoughtful consideration to the contentions of the ld. A.R as regards the invalid assumption of jurisdiction by the TPO for determining the ALP of the referral services rendered by the AE, viz. CLSA Ltd., Hong Kong at RS. Nil i.e without adopting any one of the prescribed method contemplated in Sec. 92C(1) of the Act, and are persuaded to subscribe to the same. As observed by us hereinabove, the assessee had duly conducted a transfer pricing study and by applying TNMM as the MAM had therein demonstrated that the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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