9911796707
TMI Blog2024 (5) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... chmarking analysis has been done for each of the AEs for various services rendered by them. The approach of the TPO after discovering all those evidences to adopt that adhoc estimation of man hours is highly unjustifiable was it is neither based on any method nor analysis for the documents simply rejecting the documents without any proper basis or reasoning cannot be sustained so as to justify some adhoc estimation. Benchmarking approach conducted by the assessee for intra-group services, from the perusal of the reports specially by the benchmarking performed by the independent auditor, KPMG, it is seen that direct and indirect costs have been clearly identified which has been incurred and allocated by the AEs and which has been charged alongwith mark-up. The cost plus mark-up charged by the AEs have been compared with similar cost plus mark-up charged by the independent comparable companies. TPO had sought to reject the assessee s benchmarking using AE as a tested party, holding that AE is providing services to its group entities including the assessee only and it is not providing the services to any unrelated third parties, therefore, it is only captive service provider and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee duly supported by independent report of PWC AUP and KPMG. Accordingly, based on aforesaid analysis and details of various intra-group services duly substantiated by the evidence and the benchmarking analysis, we do not find any reason to justify the TP adjustments made by the TPO based on adhoc estimation. Disallowance of MAT credit entitlement - HELD THAT:- This issue is directed to be verified by the AO to examine the MAT credit entitlement and allow in accordance with law. Disallowance u/s. 14A r.w.r. 8D - assessee had earned dividend income and the entire dividend has been estimated earlier as assessee filed computation of income and income tax return for the year under consideration - HELD THAT:- Once, the assessee itself has not claimed dividend income as exempt then there is no question of making any disallowance u/s. 14A r.w.r.8D, accordingly, the same is deleted. X X X X Extracts X X X X X X X X Extracts X X X X ..... a number of middle and back office support services. Before us, assessee has provided service level agreements with all the parties for all the assessment years. 7. As per the scope of SLAs, following services which were integral to serve the clients were availed by CLSA India for the years under consideration: • Broking Management • Client Management • CLSA U • Communications • Compliance • Credit Risk Management • Development Squad • Event Marketing • Finance and Accounting • Futures & Options Management Support S • Human Resources • Information Technology • Internal Audit • International Sales and Sales Trading Support • Legal • Management • Market Risk Management • Operational Risk Management • Regional Algorithm Business Support • Regional Research • Tax Planning and Management • Administration • Group Security function. 8. In response to show-cause notice by the ld. TPO, assessee had submitted description of the various services; head-wise breakup of the payments; cost allocation as per the keys provided in agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said exercise were as under: a. Obtain the agreements, identify the services, allocation keys and mark-up. b. Obtain the details of costs incurred for provision of services. c. Check whether the costs mentioned in the allocation sheets are the same in the AE's books of accounts. d. Check whether costs are allocated on the basis mentioned in the agreement and that the working of the allocation is correct. e Sign off from the auditor if the auditor's exercise and the working prepared by the AE are the same. f. The report also analyzed, as to whether services are received by CLSA India, as whether the services are share-holder or duplicative in nature and that benefits are received by CLSA India. In support, the aforesaid reports for all the four AEs have been given in the paper book before us for all the years. 10 It has been further explained and submitted that for benchmarking purposes and in order to identify comparable companies whose functions, assets and risks assumed (FAR) are broadly comparable to those of the CLSA Service Providers (AES), the intra-group services provided were segregated into the following four broad buckets: Benchmarking Category Intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der:- Nature of services AY 2016-17 Cost Plus mark-up earned by AE Arm's length range using 35th & 65th percentile of comparable companies Marketing, promotion Sales Support and Trading Cost plus 10% 8.65% to 17.93% 14. Accordingly, it was submitted before the authorities below as well as before us that the above benchmarking, i.e., the cost allocation and mark-up benchmarking conjointly establishes that international transaction pertaining the intra-group services were at arm's length. 15. The TPO has however rejected the entire benchmarking analysis done by the assessee and then proceeded to conclude ALP on some adhoc estimation. He adopted the benchmarking of the transaction using CUP as Most Appropriate Method. He has estimated total man hours of the services rendered by AE to the assessee at 10,000 hours on adhoc for A.Y. 2013-14, 2014-15, 2015-16 and 2016-17 each. In addition, he has estimated the salaries of the employees at an adhoc of Rs. 4000/- per hour for A.Y. 2013-14 and Rs. 5000/- per hour for A.Y. 2014-15, 2015-16 and 2016-17. Accordingly, the ld. TPO has proposed the following additions in these years:- Particulars Total payment of intra-group services A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red a loss of Rs 42.28 crores. The total intra group charge was Rs 160.26 crores. The profits from the operations before the intragroup charge were a profit of Rs 152.86 crores. It is difficult to comprehend under an arm's length scenario, whether a third party entity would be willing to pay a charge of more than 100% of its profit as a service charge. Further, calculating the said charge as a percentage of sales amounts to 63% of its operating revenue (160.26 crores/254.45 crores). The assessee has clearly failed to demonstrate such a high percentage of intra group charge calculated as a percentage of sales. In the independent arms length scenario it has to be established that the huge charges paid commensurate with the benefits (with detailed benefit test documentation). Also in an arm's length scenario an independent would evaluate the total charge club under the various baskets. However in the current situation the assessee was unable to give the total charge incurred by the AE towards various services and also the allocation keys/methodology. Under the OECD guidelines for transfer pricing an indirect charge method use allocation keys has been prescribed for such charges. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been made by it to the ABs. c) in arm's length situation before availing any service an independent person would consider the nature of services required by it and would make the payment which are commensurate with the nature of the service and the expected benefit derived there from. d) No analysis was done as to the payment which would have been made to an independent person for such services. e) Facts of the case clearly show that whether or not the taxpayer needed these services or whether or not such services were mainly for its direct benefit or whether or not such services were actually availed by it, the assessee had to share the costs on the basis of some allocation keys. No independent person in similar circumstances would pay such amount. 5.7 Evidences filed & comment for Intra Group Services: The Assessee submitted voluminous paperbook to evidence benefit. The nature of documents maintained by CLSA India and submitted is as follows: • Various events/forums/roadshows organized for overseas clients in order to promote India business; • Call logs/meeting logs of employees engaged in rendering services to CLSA India; • Screenshots fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess scenario announcements or communication would never be treated as services. The AR's submission that it requires separate fees for making announcements is not an acceptable proposition. (4) Information Technology The specific IT services availed by the assessee company has not been submitted. The centralized IT facility developed by the AE per se may not be good reason to charge the cost the same to the assessee company unless they prove with the cost, the services received by the assessee company and naturally benefit desired by the Indian company No specific instances were submitted where the assessee requires such IT technology and received the benefits from the assessee. When the closely related parties transact, such evidences needs to be given along with the cost incurred. (5) Broker Management. The assessee company had submitted the Internal Account cannot procedures as evidence. After going through it was found that is being a general document conveying their group procedures and policies. Merely conveying the procedures by a shareholder to the group company may not be termed as "service" under Arm's length condition. It is very clear from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (14) CRM The learned AR has not submitted any credential evidence to show that the assessee company has received specific credit risk management services from the AE. The said documents simply communicates the limit approval, limit per client, limit per user and limit changes and it is not clear how these services require separate payment. (15) Tax: It is not prudent on the part of the assessee to show that the TP document drafts, communicating to AE regarding advance tax etc, requires a separate payment. (16) Finance: For such training specific cost and other were not submitted. Budgeting is clearly a shareholder activity, benefits only the AE and not a service to the assessee company. (17) The AR was requested to submit the documentary evidences for the services received. Most of the judicial decisions with respect to the management fees payment emphasize that TPO invariably needs to verify whether actually any 'Comparable (or) Valuable' services are received by the assessee company (18) TPO here has not questioned the commercial wisdom or benefits received by the assessee. The examination was carried out at a preliminary stage ie whether the documentary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices claimed to be availed by the assessee: SI No. Department Total share in % Remark of the TPO 1 International Sales and Sale Trading Support 70,74,57,499 44.14 These four departments constitutes 89% of allocation, 8900 man hours are estimated. 2 Information Technology 32,66,77,692 20.37 3 Regional research 21,08,28,472 13.15 4 Management 18,39,44,024 11. 47 5 Regional Algorithm Business Support 2,21,42,977 1.37 6 Broking Management 2,08,44,580 1.29 7 Futures & Options Management Support 1,74,03,343 1.08 8 Events Marketing 1,46,93,438 0.91 9 Legal 1,44,90,443 0.89 10 Finance 1,42,84,910 0.88 11 Compliance 1,02,28,748 0.63 These departments constitutes 11% of allocation, 1100 man hours are estimated 12 Credit Risk Management 1,01,46,427 0.63 13 Human Resources 97,42,707 0.60 14 Client Management 95,96,538 0.59 15 Tax Planning & Management 71,65,574 0.44 16 Communication 69,42,107 0.43 17 Internal Audit 57,03,128 0.35 18 Administration 41,93,310 0.25 19 Operation Risk Management 35,40,519 0.21 20 CLSAU 24,84,926 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit test, that is, whether there was some prima facie benefit from such services and whether any independent enterprise in comparable circumstances would be willing to pay for it and would have preferred to perform the activity through in-house; fourthly, duplicate services, that is, whether same services is being availed from in-house and again from AE service provider leading to duplication of same services; and lastly, whether, it is part of its shareholder activity, that is an intra group activity may be performed even though the recipient entity do not need it and would not be willing to pay for it had it been from independent enterprises. It is performed because of its ownership interest in the capacity of shareholder. This type of activity cannot be reckoned as intra group services. 20. In respect of these tests, we have analysed various documents and evidences which were filed by the assessee before the TPO and also before us. In so far as „rendition test‟ is concerned, voluminous documents have been filed evidencing the receipt of intra-group services for each year which has also been highlighted in the evidence chart titled as „detailed chart of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been demonstrated with actual benefits qua every activity carried out with evidences and explanation. 22. Further, assessee has also filed PWC AUP report wherein the cost for only those services have been allocated which benefitted the assessee and attention was drawn to the said report which is a detailed analysis to substantiate that the need and benefit test has been satisfied in the present case. 23. Lastly, in so far as duplicative shareholder test are concerned, it has been submitted that in the agreement itself there were important clauses with reference to the entities, viz.:- • CLSA Hong Kong 2.1 In consideration of the payment of Service Fees, Service Provider shall provide the Services to CLSAI throughout the term of this Agreement upon the terms and conditions set out herein and in accordance with all the requirements, procedures and guidelines agreed by the parties from time to time. For avoidance or doubt, all services provided under this Agreement shall exclude any stewardship, custodian or duplicative services that may be provided by the Service Provider. • CLSA Singapore "2.1 In consideration of the payment of Service Fees, Service Provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 viz-a-viz A.Y. 2012-13. Only difference in these two years is that in A.Y. 201213, the TPO has given allowance on the basis of adhoc rate per hour and in A.Y. 2011-12, the TPO has made it nil on adhoc basis. The assessee has provided evidences in both the years of services received and benefits. Also assessee has provided AEs margin and Bench marking including PWC-AUP report for both the years and used TNMM to justify ELP. However, on the other hand, TPO has followed no prescribed method as envisaged by section 92 C of the Act. Therefore, we are inclined to hold that adjustment made by the TPO is bad in law and, accordingly, deleted. Further the TPO has not determined the ALP of the international transactions in accordance with the provisions of section 92C of the Act. There is no reason to disapprove the Transactional Net Margin Method applied by the assessee as the most appropriate method." 26. Now from the perusal of the evidences filed for intra-group services and the nature of services rendered have been highlighted in the following manner:- International Sales and Trading Support [70,74,57,499] • Dedicated India specialists in New York and London &bul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible for the CLSA Affiliates to have access to the USA clients. 27. The TPO has alleged that the services rendered specifically to the Assessee Company were not submitted. The services described are very general, not substantive to prove that valuable services have been received by the AE. The Assessee claimed that 2 key relationship persons were dedicated to India Desk and they were instrumental in generating revenue. The Assessee furnished sample call log to relate sales to these employees. Further, it is also not verifiable that these persons were working exclusively for India or not. Also, FII are client of CLSA group and if some revenue is generated in CLSA India, it is merely because of being a member of group, the intra group payments are supposed to be made for services availed not for membership of group. 28. Before us it has been elaborated further: Regional Research • Preparation of reports and in-sights on global equity markets, economics and industry research, quantitative and technical research and thematic Insights for CLSAI clients • Editing, designing, publication and distribution of CLSAI written research reports Need: CLSA provides regiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so in the business of equity brokerage globally. The awards and recognition earned by the AE may not be sufficient cause to pay certain sum under Arm's Length condition. Such a scenario cannot be visualized where a taxpayer would pay for the other persons rewards (valuable service not provided to the AE.) 29. On the Information Technology, it has been staed in the following manner:- Need: CLSA has a central IT team (Group IT team) that supports the various local CLSA entities. There is approximately 200 experienced staff in the Group IT team. The Group IT team is responsible for developing and maintaining the key IT applications and software processes that are essential for smooth functioning of the broking business undertaken by the CLSA group. The major IT activities undertaken by the CLSA Service Providers/CLSA Affiliates Include • Application software design, development, maintenance and support, • IT engineering. • Global systems hosting, support, and data retention • Remote support of selected in-country applications and technology infrastructure; • IT Help Desk and fault resolution services; • E-mail system hosting and suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desired by the Indian company. No specific instances were submitted where the Assessee requires such IT technology and received the benefits from the Assessee. When the closely related parties transact, such evidences needs to be given along with the cost incurred. 30. Regarding Management and related support as required by CLSA it has been explained in the following manner Need CLSA provides management and other support services which include senior management oversight and input as well as other related support as required by the Assessee. The CLSA top management personnel consists of the chief executive officer ('CEO') and chief operating officer (COO) of the group. Benefit: The CEO of the CLSA group has an oversight and management responsibility over all CLSA entities. In this capacity, the CEO contributes to the revenue growth and cost efficiency of the group by frequently interacting with the entities to co-ordinate business development and strategic initiatives as well as to meet with larger clients of the CLSA group. In addition the COO is responsible for the overall operational setup of the CLSA group and ensures each of the CLSA entities follow consistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cedures to address compliance requirements and risks applicable to CLSAI • Training CLSAI compliance officers • Account opening advice and support services Need: CLSA has a central or regional compliance team which provides compliance services including establishing, maintaining and enforcing compliance with various policies and local regulations that are applicable to the operations of the Assessee. CLSA also provides training / ongoing education of staff in relation to their obligations and responsibilities to clients and the company. CLSA is responsible for establishing, communicating, monitoring and enforcing effective policies and procedures to address compliance requirements and risks. In addition, CLSA also has a specialized team to provide advice on anti-money laundering, regional documentation, and account opening and related support services to the Assessee. As a regulatory requirement, the Assessee also has small team of 2 employees which is responsible for the provision of local input to CLSA, like for example to obtain any approval required from the local regulators. Benefit: CLSA establishes relevant internal policies that the Assessee can apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd arranging the participation of the Assessee's clients in such events. A designated team is responsible for providing assistance in organising the forums for brokerage clients in the region including India from time to time. Benefit: The centralised management of the events/forums ensures consistent approaches are being used across the CLSA group and is more efficient than having multiple local event management teams. However TPO observed that, certainly, the documents show that it is a mere routine communication regarding approvals etc. At no stretch of imagination this can never be said that the volume and quality is commensurate with the business. The above communication was sent by the Assessee company to the AE and for that AE charges as "Intra group services". 35. On Finance and accounting:- • Maintenance of accounting system that is made available for CLSAI's use • Advice on regulatory reporting policy • Management accounting support services • Advise on CLSA accounting policy • Budgeting support services • Advice on liquidity management and funding • Support for capital budgeting and expenditure Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xperience of other CLSA entities with respect to the profile of candidates they need and management of their human resources. On the other hand TPO observed that the Assessee had not submitted any specific instance that they have received same benefit out of the HR documents. 37. Internal audit:- • Provide Independent assurance over the Internal control environment supporting the CLSAI businesses and operations as a whole, including effective procedures for risk monitoring and administration and compliance with regulatory rules, CLSAI internal policy and corporate governance. • Report the outcome of internal audit reviews to CLSAI management and board of directors Need: CLSA has a global audit team based in Hong Kong and Singapore, which provides internal audit services to the Assessee. These services include providing independent assurance over the control environment supporting the businesses and operations as a whole, providing effective procedures for monitoring risk and complying with regulatory rules, and providing guidance on group internal policy and corporate governance. These services also include reporting the outcome of internal audit reviews to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery work on legal is prepared by the Assessee company and Just send it for a review to the AE. All the mails request the comments from the AE. Under Arm's length principle such reviews are essentially shareholder's services and the volume and quality is not commensurate the payment. 39. Operational risk management:- • Manage all aspects of operational risks exposures • Provide operational risks supervision including without limitation established risk guidelines Need: CLSA provides operational risk management services to the Assessee including managing all aspects of operational risk exposures and providing operational risk supervision including, without limitation, establishing risk guidelines for the Assessee. CLSA also evaluates and provides a review of the Assessee's annual self- assessment reports which may involve CLSA physically observing the operations at the Assessee to assess the level of operational risk. Benefit: This allows the Assessee to ensure best practices are being adopted for their operations. The centralised provision is also more cost effective than if the Assessee managed this risk independently on a day-to-day basis. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up procedures and policies. Merely conveying the procedures by a shareholder to the group company may not be termed as "service" under Arm's length condition. It is very clear from the procedure documents that benefit only the AE not the Assessee. 42. Client Management:- • Make available to CLSAI the client management system known as 'CIS" • Maintenance of CIS and related systems / information • Management of group client relationships Need: The CLSA Service Providers / CLSA Affiliates make available to the Assessee the client management system known as CIS. The CIS enables management of group client relationships, gathering client feedback and surveys. Benefit: This enables the Assessee to improve their client relationship management and service quality. The Assessee can also use the client feedback and surveys gathered by the CIS system at a lower cost than if they were gathered independently TPO held that the specific clients pertaining to the Assessee Company and the specific services are not submitted. 43. On all the above services discussed above, reference has been made to voluminous documents to show the rendition of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by the assessee does not satisfy whether search has been made for service provider, because AE is providing risk free services whereas the purpose is profit making. Though prima facie reasoning given by the ld. TPO may appear to be correct, however, in all the cases of captive service business based in India, for example, Software Development Company, TPO here in India use profit making companies for benchmarking. If one captive entity is providing services to other captive entity then its comparison of controlled transaction with another controlled transaction cannot be done. Even for the captive service provider, the cost plus mark up has to be seen from the independent entities, whether the profit margin for providing such services are at arm's length vis-à-vis the assessee. Further, as noted above, the Tribunal has rejected TPOs contention in the earlier years that foreign AE cannot be treated as tested party. The assessee has taken benchmarking analysis, firstly at entity level TNMM as well as TNMM analysis by taking foreign AE as tested party to substantiate the arm's length price. By taking foreign AE as tested party transaction by transaction benchmarking app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyees working with the AE, the salaries paid to these employees, the educational qualification of these employees, the number of hours dedicated by these employees towards the services rendered to the assessee, the undersigned is constrained to go by estimation to the best Judgment, to quantify the value of the services if at all any being rendered by the AE to the assessee. Without prejudice to the contention of the undersigned, regarding the services being rendered by the AE to the assessee. However after considering the evidence filed by the assessee, as a matter of abundant precaution, the undersigned proceeds to make a reasonable estimate, of whatever little services that can be said to have been rendered in the facts and circumstances of this case. Having regard to the nature of services which are claimed to have been rendered in the instant case, the undersigned estimates the salary for such an employer at Rs. 3000 per hour. To the best of my judgment, the number of man hours rendered by the employees towards rendering of these services to the assessee, is estimated earlier at 10,000 Hours at para 5.8.2" 20. From the observations of the Ld. TPO, it is clear that TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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