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TMI Blog2022 (12) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the Commissioner of income tax (appeals) 15, Mumbai (the learned CIT A) dated 7/1/2014 for assessment year 2008 09. 02. Assessee has raised following Grounds of appeal:- 1. On the facts and circumstances of the case and in law, the learned AO/TPO/CIT(A) erred in rejecting the Transfer Pricing (TP) analysis undertaken by the Appellant. 2. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) failed to discharge the burden of proof to establish 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 transaction pertaining to provision of braking services to associated enterprises ( AES'). 3. On the facts and circumstances of the case and in law, the learned AO/TPO/CIT(A) erred in rejecting TNMM as the MAM for the determination of the ALP of the international transaction of brokerage commission received by the Appellant from its AEs. 4. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) has erred in applying the Comparable Uncontrolled Price (CUP) method as the MAM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in concluding that the Appellant was required to provide documentary evidence to establish that while raising invoices, certain services were not provided to a set of its clients while certain services were provided to another set of clients, thereby failing to appreciate the general industry practice. 10. On the facts and circumstances of the case and in law, the learned CIT(A) erred by stating that the affidavits were being submitted during the course of the appellate proceedings as additional evidence, whereas the affidavits were in fact submitted before the learned TPO during the course of the TP proceedings. 11. On the facts and circumstances of the case and in law, the learned AO/TPO/CIT(A) erred in not applying an appropriate turnover filter and granting volume discount for the purposes of applying the internal CUP for benchmarking the international transaction elating to brokerage commission received by the Appellant from its AEs in respect of non DMA transactions. 03. Facts show that appellant is a member of Bombay stock exchange and National stock exchange and engaged in the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The assessee is of course, free to follow any model for his business. But when a particular method is considered most appropriate, which in this case is CUP , then the method has to be applied in terms of its key ingredients. In the case of cup method, it is the price of the product of the comparable uncontrolled transactions, which is to be compared with the price of 10 able in the case of control transactions. In the equity broking services, the price charged with the brokerage/commission. The overall commission earned by our transacting entity has no bearing while comparing the transactions of a controlled entity to those of an uncontrolled entity. Hence, the contention of the assessee is rejected. (ii) The assessee has submitted that different services are offered to different clients in view of which the services rendered to one client cannot be compared to services rendered to another client. The basic flaw in the argument of the assessee cannot be overlooked. If different services are offered to different clients then the price (brokerage) charged for that can be different. But what services are rendered over and above the services rendered to the AE s have to be ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison of control transactions with an uncontrolled transaction is made on the basis of price itself. (iii) The use of TNMM to benchmark this transaction is not desirable because, whereas, it is manageable to identify the difference in products and services rendered to the unrelated parties on the basis of documentation being available with the assessee, the same cannot be the case when comparable selected from an external database because the specific characteristics of the services and the terms thereof will remain unobtainable in those cases. 07. Based on the above finding the learned transfer pricing officer held that assessee has charged a book rate income of ₹ 556,041,039/ in rate charged by the assessee is 0.13% whereas the arm s-length price of the rate of brokerage is 0.23% and therefore there reason adjustment proposed of ₹ 427,723,876/ . Accordingly an order u/s 92CA (3) of the act was passed on 14/10/2011. 08. Consequent to that the draft assessment order u/s 144C read with Section 143 (3) of the act was passed on 23/12/2011 wherein certain other corporate additions/disallowances were made and total income was computed at ₹ 3,978,250,390/ . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions and the outcomes thereof. Viewed in this context, the traditional transaction methods being direct in nature score over the profit-based methods despite the fact that there is no specified hierarchy of methods. As such, the TPO s adoption of valid cup in the present case will get precedence over the TNMM adopted by the appellant. It is relevant to mention that in a couple of interesting Australian decisions, the court that expressed a preference for traditional methods over the TNMM that was proposed by Australian tax office. (Roche products Pty Ltd versus the Commissioner of taxation (2008), AATA 639, SNF (Australia Pty Ltd versus Commissioner of taxation (2010) FCA 635. In these cases, the court favoured the use of cup over TNMM. In fact, in other jurisdiction also where transfer-pricing regulations apply, the preference for cup is evident. Accordingly, contention of the appellant is not acceptable. c. The appellant also contended that TNMM should have been accepted, since its TP study was undertaken by an independent external consultant. In this regard, it is mentioned that the argument of the appellant has no force since the consultant is always an external person, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate method. Further, he also referred to the direction of the learned dispute resolution panel in assessee s own case for assessment year 2006 07 where the action of the AO in applying CUP method was confirmed. 012. Therefore, aggrieved by the order of the learned CIT A assessee is in appeal before us. 013. The learned it authorised representative after referring to the various paragraphs of the order of the learned transfer pricing officer as well as the learned CIT A state that in case of assessee for assessment year 2006 07 in ITA number 8431/M/2010 identical issue arose. The coordinate bench wide order dated 14/12/2020 wide paragraph number 14 onwards relying on the order of the coordinate bench in assessee s own case in ITA number 920/M/2016 for assessment year 2011 12 dated 3 February 2020 has upheld the transactional net margin method as the most appropriate method and deleted the addition. Therefore, this appeal is squarely covered in favour of the assessee as far as the most appropriate method is concerned. 014. The learned departmental representative also supported the order of the learned transfer pricing officer, learned CIT A and learned DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed commission/brokerage @ 0.250%. The rate of commission charged by the assessee from overseas non-AE is more than the rate of commission charged from AE while rendering equity broking services. Accordingly, a show cause notice was issued to the assessee as to why the ALP of the brokerage commission received from AEs should not be benchmarked under CUP method of 0.25% in line with the brokerage commission received from the overseas non-AEs. The assessee replied to the show cause notice is reproduced as under: (A) The assessee has submitted that TNMM is the most appropriate method for benchmarking the above transaction. The assessee submitted that it has given due consideration to all the facts and circumstances related to the transactions that it executed for AE and has earned a margin on operating income of 15.44% as compared to the average margin on operating income of 16.27% earned by independent comparable India brokerage houses. (B) A number of functions namely, client origination activities, dedicated sales and sales trading staff in the New York, London and Hong Kong sales offices of CLSA that cover the India market, centralized client support functions, researc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a without prejudice basis, that reasonable and accurate adjustments should be made to enhance the comparability/ eliminate the material differences, as between the transactions that the assessee executes for its AE and non AE FU clients. In other words, the commission rate received by the assessee from its non AE FU clients remunerates it for functions that are performed by its AEs for such clients. In other words, the assessee also receives commission income from its non AE FU clients for functions that it does not perform and hence the internal CUP so identified, needs to be adjusted to reflect the fact that the remuneration received by the assessee from its non AE clients compensates it for functions that are performed offshore for those clients by the AEs. Based on the above argument, the assessee submitted the adjustment working to the comparable CUP. (I) The Assessee further submitted adjustments based on volume, submitting that the average rate of only Top 10 clients in each category should be considered as a CUP or by only considering clients who have had a turnover of higher than 2000 crores. 12. The TPO after considering the reply of the assessee came to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company. It is well known that the CLSA Group is involved in raising private equity for private equity investment as well as its own investment in various entities. It is also involved in cross border investment banking and M A deals. Therefore it has to maintain managers for client management as well as sale and is any benefit has accrued to the assessee company, the same is only incidental. (iv) The assessee has filed various research reports generated by its AEs to prove that the research is provided by the AE. This is not correct as the assessee company has its own research sitting in India. Therefore, it is more likely to prepare research report on Indian market and in fact it must be feeding it AE who may be compiling the research generated by the Indian entity. Even if it is assumed that the research is done by AE even then it is for all the public at large which are used by both Non-AEs and AEs. It is also seen that in all the reports submitted by the assessee company, the research relating to India, has been providing by the assessee company. Therefore there is no direct nexus between the research done by the AE and the benefit accruing to the assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod cannot be considered as the most appropriate method. The learned AR further submitted that if the Bench is of the view that CUP method should be adopted as the most appropriate method based on a non-binding precedent in the case of J P Morgan India (P) Ltd. (supra), similar adjustments to the cost structure should be allowed to iron out the differences between the AE and Non-AE transactions. The learned AR vehemently pointed out that the decision of co-ordinate Bench in the case of J P Morgan India (P) Ltd. (supra), has no binding precedence despite order of Hon ble Bombay High Court, as the High Court has refused to admit the appeals and merely affirmed the orders of lower authorities including the CIT(A) and the Tribunal. The learned AR prayed that the TNMM may be adopted as the most appropriate method and, without prejudice, if CUP method is to be adopted as the most appropriate method the adjustments to the cost structure be allowed to iron out the differences between the AE and Non-AE transactions. 15. The learned DR, on the other hand, submitted that the assessee has bench marked the transaction by using TNMM and since the assessee is rendering similar servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties, whereas in the case of the assessee significant revenue is from third party FII clients. We also noted that assessee could not have generated business from FII clients without the support of CLSA group resources, for which it is paying intra group service charges. Hence, in such a case, TNMM could be used as the most appropriate method. In view of these facts and circumstances, we are of the view that assessee has rightly followed the TNMM as the most appropriate method and the decision of the co-ordinate Bench in the case of J P Morgan India Pvt Ltd. (supra) is not applicable to the present set of facts of the assessee. Accordingly, we are inclined to set aside the order of the DRP and direct the TPO/AO to delete the adjustment of brokerage income of ₹ 21,73,90,712/-.Ground no.5 is allowed. 016. By the above order of the coordinate bench has deleted the adjustment of arm s-length price of the brokerage income on identical facts and circumstances. The learned departmental representative could not show us any reason to deviate from the same. The judicial discipline also binds us in following the decision of the coordinate bench in assessee s own case on similar se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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