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TMI Blog2021 (3) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee has not provided any information regarding the level and type of manpower available at the disposal of the associated enterprises and associated enterprises (FIIs) at Mauritius was nothing but a letter box entity having no resources at its disposal to undertake the marketing and research function stated to be performed by it. 2.2 The revenue has further filed an additional ground of appeal, which is produced below:- 1. On the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in allowing the benefit of 5% on arm's length price (ALP) at the option of the assessee even though Section 92C(2A) clarifies that 5% is not a standard deduction. 2.2.1 Since the additional ground involves pure question of law and do not require any fresh examination of facts, we admit it by following the judgement of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. 2.3 The assessee has filed cross objections, which read as under:- 1. While upholding the application of the CUP Method to determine the ALP of the brokerage charged, the CIT(A) has erred in law and facts by: a. Excluding third party domestic comparables th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee undertakes marketing function in respect of its transactions with unrelated parties, whereas for the purpose of its transactions with related parties it does not undertake any marketing function. The TPO observed that while applying TNMM, the assessee has compared profits earned by it with the profits earned by other entities operating in India, providing similar broking services. On the basis of the analysis undertaken by the assessee, it has identified 10 comparable companies, who have earned a net operating margin on cost of 15.75%. The assessee further contends that it has earned the margin of 153.76% on its operating costs, which is much higher than the margin earned by the comparable cases. Thus, it was contended before the TPO that the international transactions entered into by it with its group FII are at Arm's Length Price (ALP). The TPO rejected the TNMM applied by the assessee for the following reasons:- (i) In the given case, the assessee clearly has not applied the most appropriate method. It is seen that there is a clear market rate prevailing for broking services, which is expressed in terms of a percentage of the trade undertaken. In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate charged by the assessee to its AE at 0.28%. 4.1 Also the Ld. CIT(A) held that the assessee is entitled to 5% benefit for the impugned assessment year in respect of adjustment made on clearing house trades. The computation of the adjustment by him, after giving the benefit of 5% to the assessee is reproduced below: Computation of 5% range Particulars Amount in Rs. Total clearing house trades with related parties 29,477,212,989/- ALP - Arms Length brokerage (0.31% as computed above) 89,927,690/- 95% of Arm's length price (ALP) 85,431,306/- Actual brokerage (i.e. Transfer Price) charged by the appellant to the related party clearing house trades 83,743,226/- Adjustment 1,688,080/- Thus the Ld. CIT(A), considering the adjusted rate of brokerage of 0.31% and allowing the benefit of 5%, worked out the ALP of the related party clearing house trades segment at Rs. 85,431,306/- as against Rs. 10,31,70,245/- worked out by the TPO. Accordingly, the assessee got relief of Rs. 1,76,38,940/-. 5. Before us, the Ld. counsel for the assessee relies on the decision of the order of the Tribunal in the case of Morgan Stanley India Company Pvt. Ltd. (ITA No. 266/Mum/2006) and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of employees of the AEs in this regard, the TPO has rightly come to a finding that the assessee undertakes the marketing function, if any, in respect of both the related party transactions as well as third party transactions. Therefore, it is pleaded by him that the order of the Ld. CIT(A) in respect of salary costs be set aside and the order passed by the TPO/AO be restored. The Ld. DR further explains that the Ld. CIT(A) is not correct in allowing the benefit of 5% on ALP at the option of the assessee even though section 92C(2A) clarifies that 5% is not a standard deduction. 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. As mentioned earlier, the assessee has relied on the order of the Tribunal in the case of Morgan Stanley India Company Pvt. Ltd. (supra). In that case, the Tribunal vide order dated 25-2-2020 held as under: "21. Ground 6 relates to reducing the arm's length price in respect of brokerage rate charge for Morgan Stanley Dean Witter Mauritius Limited. The Ld.AR of the assessee submits that assessee is a broker/dealer of Bombay Stock Exchange and National Stock Exchange. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... location of market is of no consequence in judging comparability of an uncontrolled transaction for purpose of applying CUP method. The difference in geographical location cannot be reason enough to discard comparables. Geographical location of service recipient to be irrelevant consideration, because the consulting services provided by the assessee would remain the same whether the service receiver is located in X country or 'Y' country as long as service provider is in India. Reliance is placed on the following judicial precedents to support the said contention:- * SI Group-India Ltd. v. DCIT [2016] 68 taxmann.com 158 (Mumbai - Trib.) * Bharti Airtel Ltd. v. ACIT [2014] 43 taxmann.com 50 (Delhi - Trib.) * Tower Watson India Pvt. Ltd. v. DCIT [TS-260-ITAT-2019 (DEL)-TP] * Inslico Ltd. v. DCIT Ts-623-ITAT-2015(DEL)-TP * Clear Plus India Pvt. Ltd. v. DCIT 30 CCH 0652 Del Trib. * BMW India Pvt. Ltd. v. ACIT (TS-401-ITAT-2018 (Del Trib.) * M/s Garware Polyester v. Dy. CIT-8(1), Mumbai ITA No. 6169/Mum/2011 * ADIT. Circle 1(1), International Taxation, New Delhi v. ABB Lummus Heat Transfer BV [2015] 64 taxmann.com 210 (Delhi - Trib.) 23. The Ld.AR accordingly s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being more reliable and accurate method in assessee's case. The Ld. CIT(A), after considering the submissions of assessee concluded that CUP is the most appropriate method which should be applied to the proper adjustment instead of using TNMM which is an indirect method. 27. On the grounds of comparability of comparables, concluded that domestic independent client should be considered for comparability purpose. The assessee further stated that if CUP is to be applied, then appropriate adjustment need to be made for lesser function performed/asset utilised and risk assumed. It was further stated that assessee did not perform any marketing and sales activities while executing trade for AE in Mauritius. Even the levels of other activities like research, trade relationship, etc. are lower as compared to independent client. In addition, Mauritius AE is the trusted client of assessee and provided substantial volume of business. Mauritius AE is dedicated client of the assessee. While fixing the brokerage rate of Mauritius AE, the assessee has to consider all the above factors. Accordingly, the assessee urged that if CUP has to be applied, then discounting factor of 50% should be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instances where even though the volume has increased there is no decrease in the brokerage rate and accordingly has not considered any adjustment for volume differences. I am unable to agree with the TPO to the extent that one cannot disregard well-settled commercial principle based on certain stray instances. The fact that 'as volume increases, the price decreases' is a well-established commercial principle and accordingly due weightage/adjustment should be given for the huge volume of business given by MSDW Mauritius. As per the appellant, MSDW Mauritius is a dedicated client i.e. it bought and sold securities only through the appellant for the entire previous year. Accordingly, while fixing the brokerage rate for MSDW Mauritius, the appellant has to consider the fact that MSDW Mauritius has no transactions through any of its competitors. The TPO has not considered any adjustments for the same. I am unable to agree with the TPO as certain amount of adjustment is required to loyalty factor of MSDW Mauritius. The appellant carries out 'Clearing House' and 'DVP' trades for MSDW Clearing House' trades. As stated above, the average brokerage charged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of appeal also fails." 7.1 We begin with the contentions of the assessee regarding average of rates charged to third party FIIs and domestic clients. The TNMM applied by the assessee has been rightly rejected by the TPO/AO for the reasons that (i) in the given case the assessee clearly has not applied the most appropriate method as there is a clear market rate prevailing for broking services which is expressed in terms of a percentage of the trade undertaken, (ii) in the presence of a reliable comparable uncontrolled price, the CUP method should have been chosen by the assessee as the most appropriate method, as it is most direct method and hence is preferable to all other methods which determine the ALP in an indirect manner, (iii) the comparable cases considered by the assessee under the TNMM are not engaged in functions that are similar to the assessee. 7.2 Rule 10B(1)(a) of the Income-tax Rules, 1962 (the Rules) delineates Comparable Uncontrolled Price method (CUP), by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transaction operate, including the geographical location and size of the markets, the laws and government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 7.6 It is crystal clear that the assessee's transactions are with overseas FIIs and hence comparison with other overseas FIIs would alone be appropriate. The fact remains that domestic third party transactions are not comparable with the overseas FIIs on account of geographic differences. Thus the 1(a) of cross-objection is rejected. 8. Then we come to the issue regarding volume adjustments. We observe that though the assessee was specifically requested by the TPO vide office letter dated 17-1-2006 to explain how the brokerage rate was determined for its AE, no specific response was given; nor any evidence furnished to show that the AE was bound to give the assessee a minimum volume of business. A perusal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same. Hence, the entire salary costs of Rs. 1.94 crores considered for third party clearing house transaction is on account of non-marketing functions only, (iii) the assessee has failed to provide any particulars of marketing function undertaken by the overseas AE. The assessee has not even provided the details of the employees on role of the AE in this regard. All this clearly indicates that the assessee undertakes the marketing functions, if any, in respect of both related party transactions as well as third party transactions, (iv) costs that have been incurred exclusively for third party transactions have in any case been considered. With the above observations, the TPO concluded that no portion of the salary costs can be considered as being incurred for marketing for third parties. 10. It was the contentions of the assessee before the Ld. CIT(A) that cost centre-wise-month-wise details of equity sales and research salary cost were filed with the TPO; however, corresponding travel expenses of equity sales and research employees have already been allowed by the TPO as a marketing cost; hence it would be appropriate to align the treatment of equity sales and research salary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shifts to the tax authorities to establish that the arm's length price has not been determined in accordance with the provisions of the law or that the information or data used in the computation is not reliable or correct. 12. Keeping in mind the above aspects, we are of the considered view that the salary cost of research personnel need to be re-examined. Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO/TPO for making a fresh order after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO/TPO. Thus the ground of cross objections raised by the assessee in respect of salary cost of research personnel i.e 1(c) is allowed for statistical purposes. Similarly, the 1st ground of appeal filed by the revenue is allowed for statistical purposes, on the reasons that the tax authorities have proceeded to examine the actual rate charged by the assessee to its AE in Mauritius and compare the same with the rates charged by it to third parties. 13. The Ld. CIT(A) has held that the applicant will be entitled to 5% benefit for the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order has stated that the trading of shares by the assessee-company comes within the ambit of the Explanation to section 73 and accordingly disallowed the trading loss of Rs. 40,82,623/-. In appeal, the Ld. CIT(A), allowed the grounds of appeal filed by the assessee on the above disallowance with following reasons : "I have examined the issue and the facts on record. The Appellant is a share broker and has purchased and sold the shares on behalf of its clients. From the evidence gathered during the course of the hearing, the loss has occurred on account of dealing errors or some mistake in carrying out the instructions of the client such as specific limit instructions of the client are overlooked, orders cancelled by client are not entered into the system or overlooked by dealer etc. The Appellant itself is not engaged in the business of share trading. The loss suffered by the appellant on account of errors in the scripts traded by the appellant on behalf of the clients, which comes to approx 0.79% of the turnover of the appellant cannot be termed as excessive. Thus, the loss is incidental to the share broking business and the provisions of Explanation to section 73 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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