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TMI Blog2024 (7) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... ge brokerage commission rate earned from AEs was higher than the weighted average brokerage commission earned from third party FIIs, the ld. TPO has treated it to be at ALP. Therefore, if the same yardstick is adopted and the same benchmarking of aggregate basis as been upheld by the ld. TPO in assessee s own case in the subsequent years right from A.Y.2004-05 to 2011-12 is taken into consideration, then weighted average brokerage rate earned by assessee from AEs if compared with rate earned by third party FIIs, the difference is 0.07%. Further, we find that ld. CIT(A) has given adjustment of sales cost of 0.6%, which we find is most reasonable basis for benchmarking the sale cost adjustment, because assessee has to incur extra sales cost in the case of third party FIIS which may not be the case with the AEs - Thus, at the most adjustment would be of 0.01% if at all which is too miniscule to apply to make adjustment and therefore, we hold that no adjustment is required to be made. Port Fee charges paid - CIT(A) applying the markup to cost at 15% as against 25% applied by the AE for determining the ALP in respect of the port fee charges paid by the appellant and thereby confirming a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved directly by the clients of DSPML has been placed in the paper book also before us. Further, in subsequent years, i.e., from A.Y.2006-07 onwards, the ld. TPO himself has accepted the transaction to its arm s length in assessee s own case. Thus, we do not find any reason to tinker with the order of the ld. CIT(A) and same is confirmed and consequently the Revenue s grounds are dismissed. Disallowance u/s 14A - assessee had earned dividend income which was claimed exempt u/s 10(33) - suo-moto additiona made by assessee - HELD THAT:- As it is a well established law that Rule 8D is not applicable in the A.Y.2002-03 and the basis of which AO has made the disallowance cannot be sustained, firstly, that no interest expenses can be attributed as noted above assessee had more surplus interest free funds by sixth investment made by the assessee. Thus, in such a case no disallowance can be made. Secondly, in so far as Revenue expenses are concerned, AO has taken 5% of dividend income. CIT (A) has reduced the addition after applying Rule 8D(2), the disallowance upheld by CIT(A), which is almost to the extent of suomoto disallowance offered by the assessee which under the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entical set of facts, therefore, same were heard together and have been disposed of by way of its consolidated order. 3. Ground No.1 relates to validity of reference made by the ld. AO to the ld. TPO for computation of ALP, however, same has been stated to be general ground and has not been pressed for the reason that the issue has been raised in other substantive grounds, therefore, the same is not pressed. 4. In ground No. 2, the assessee has challenged that ld. CIT(A) has failed to appreciate that assessee is a joint venture between Kothari family (58%) and Merrill Lynch having minority stake of 40% and the pricing of further transactions is dependent on the approval also of the unrelated JV, therefore, there is in built mechanism to meet the arm s length price and therefore, no TP adjustment should have been made. This ground too is not adjudicated as same has not been argued in view of the fact that grounds on merits were argued and is bein discussed herein this order as agreed by the parties. Accordingly, ground No.1 2 are dismissed as infructuous. 5. In so far as issue relating to ground No. 3 4 relates to TP adjustment on account of equity broking services (Non-DVP segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MM as MAM adopted in TP study report on the ground that assessee company has used net margin earned by independent enterprises but whether they are working in comparable circumstances or not was not established. The assessee company had not worked out the net margin earned by it in the controlled transaction but the net margin earned in the whole equity broking business which has been used in analysis. Thereafter, he has pointed out many defects in the working of the TNMM by the assessee which has been highlighted in detailed at page 8 9 of the TPO s order. He required the assessee to furnish the details of volume of transactions, commission earned, average rate of broking and DVP rates and clearing house rates for the associated as well as independent enterprises and after getting the details and information, he asked assessee as to why the average broking rates charged to non-AE foreign clients may not be considered at arm s length price while computing the arm s length price of international transaction relating to brokerage for both DVP and clearing house rates. Based on the information he has worked out analysis of client-wise information in the following manner:- 10 In case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are less because of no funding costs. The Arm's Length Price of the brokerage earned in respect of various associated entities are computed as below: (a) DVP Trades Associated Enterprises: The average rate of commission earned is 0.52%, on a total volume of Rs. 1,883,332,792/- for 12 AEs. The volume of Rs. 62,738,219,349/- in case of Non-AEs, is in respect of 315 clients. The average per client volume for Non-AEs comes to Rs. 199,168,950/-. For the corresponding 12 AEs, the volume would be Rs. 2,390,027,403/-, which is more than the volume of Rs. 1,833,332,792/-. Therefore, the volume in case of AEs, is less than the per client volume of Non-AEs. Therefore, no adjustment, on account of volume difference, is required to be made. By considering the Arm's Length Rate of 0.55%, the Arm's Length Price of commission would be Rs. 10,083,330/-. 95% of this price, by considering the provisions of section 92C(2) would be Rs. 9,579,163/- which is less than the commission of Rs. 9,589,679/- earned by the company from the AEs, therefore, for this transaction, no adjustment is required to be made. (b) Deemed AEs (Program Trades): In this transaction, for 30 deemed AEs, the volume is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71,122,376/-. Due to this, an adjustment of Rs. 40,311,306/- to the income of the assessee. L In respect of the remaining International transactions of ABN AMRO funds, the volume of trade being very low of Rs. 27,215,582/-, considering the smallness of amount, no adjustment is made. The adjustments in the equity broking business are summarised as below: (1) For DVP Trades : Rs. 10,531,208/- (ii) Non-DVP Trades : Rs.40,311,306/- Total : Rs. 50,842,514/- ============== The Arm's Length Price of each international transaction, AE wise, is not computed separately, as the same is not available in Form No.3CEB for DVP and Non-DVP Trades. Otherwise also, it is not required to be computed separately, as all the similar transactions, are aggregated, by the company for the analysis. 11. Ld. CIT(A) has upheld the approach of benchmarking adopted by the ld. TPO, but thereafter he allowed a sales/marketing adjustment of 0.06% for the difference in the sales/ marketing function performed by Assessee for its AEs vis- -vis third party clients based on the salary cost of the identified employees of Assessee engaged in providing the sales/ marketing services. Names of the sales/ marketing team e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch negotiation could vary from client to client. Equity Broking business operates in a competitive environment with an ongoing pressure on competitive brokerage rates to be charged to the clients. Because of new international players as well as local brokers, clients always demand fine/competitive pricing, and the rates are negotiated and agreed with each client on an individual basis. Volume of business also plays a major role in influencing the brokerage rates (AEs comprise of -37.5% of the total institutional volume of business). Therefore, several factors are considered in negotiation, e.g. volumes, rate charged by competitors, market perception to determine the price to be offered to a client, it is not possible to translate such intangible factors to mechanical adjustments to arrive at an internal CUP. 15. However, at the time of hearing, we asked the Ld. Sr. Counsel, Mr. Pardiwala for the assessee that, if CUP is to be considered as MAM looking to the nature of broking business where comparable price can be benchmarked with similar transaction with third parties both FIIs and domestic institutions, which will be best way to benchmark the ALP, because functions performed by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of B T Pacific Basin Fund 2,10,02,52,268 99,89,524 0.48% 4 Government Of Singapore Investment Corporation A/C Monetary Authority of Singapore - J 1,79,26,21,096 69,54,919 0.39% 5 Government Of Singapore Investment Corporation Pvt. Ltd. A/C. Monetary Authority of Singapore - H 1,37,67,95,841 49,79,078 0.36% 6 Unit Trust of India 1,10,28,54,106 16,06,287 0.15% 7 Abu Dhabi Investment Authority 1,05,34,66,573 45,30,363 0.43% 8 Advantage Advisers Inc. A/C The India Fund Inc. 92,87,77,571 44,28,967 0.48% 9 Franklin India Bluechip Fund 89,87,27,703 21,16,461 0.24% 10 UTI Bank Ltd. 60,04,01,453 16,62,544 0.28% Arithmetic Mean 0.40% 17. Thereafter we insisted the ld. Counsel to submit that if only third party FIIs is taken as comparable, the rates charged to the Top 10 third party FIIs and companies thereof. The assessee has filed the details of rates charged to the top 10 third party FIIs which are as under:- No. Name of the Client Turnover Commission excl. Service Tax Average Rate 1 Government Of Singapore Investment Corpn. Pvt. Ltd.A/C. Government of Singapore. 5,78,30,87,646 2,74,66,587 0.47% 2 HSBC Global Investment Funds A/C HSBC Global Investment Funds- Mauritius Ltd. 5,02,05,51,160 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. Basis such comparison, since the weighted average brokerage commission rate earned from AEs was higher than the weighted average brokerage commission earned from third party FIIs, the transaction was considered to be at arm's length by the ld. TPO. The aforesaid approach of benchmarking on an aggregate basis has also been followed by the ld. TPO in the assessee's own case in the subsequent years, viz.,(AY 2004-05 to AY 2011-12). Thus, he submitted that comparison should be done on aggregate basis where the weighted average brokerage rate earned by assessee from AEs (i.e. MLI and MLCME) is compared with the weighted average brokerage rates earned from third party FIIs, post factoring sales cost adjustment as granted by the CIT (A), the transaction shall be at arm's length and the entire adjustment would stand deleted. 20. Since at the time of hearing we made it clear that we are not going to the controversy of whether TNMM is most appropriate method or CUP and both the parties agreed that CUP should be applied after taking into consideration, proper comparability analysis because the functions performed by the assessee for the AEs are non-AEs were the same. If we com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the port fee charges paid by the appellant and thereby confirming addition to the extent of a sum of Rs. 3,20,794/- made by the Assessing officer under 92CA(3) of the Act. Department Appeal Ground - 2 On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow deduction of Rs. 36,94,031/- holding that a mark-up of 15% is reasonable as against the amount of Rs. 40,14,825/- of ALP worked out by the TPO in respect of Port Fee Charges paid by the assessee to its AE. 23. The brief facts stated before us are that during the year under consideration Assessee paid port fees charges to its AE for running and maintaining the centralized infrastructure required for operating the MS Exchange E-mail system which was essential for Assessee, as a broker. This system would result in communication in a secure environment for Assessee, which is also more efficient in terms of transmission speed and vital to Assessee's business keeping in mind the business sensitivities and volume of email flow. The costs incurred along with an appropriated mark-up were allocated to each mailbox on the basis of the total number of mailboxes over a period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by Merrill Lynch Holding (Mauritius) from the ML entity which is providing services, whereas the case of the assessee is that these parties represent recovery towards on-going cost incurred across the global to run, maintain and provide MS Exchange E-mail System services with an appropriate mark-up. As per the agreement it was agreed that the charges were be at cost +25% which were applied to previous relevant assessment year under question before us. The assessee had submitted the break-up of the cost per user ID per month certified and provided by ML and the relevant agreements. These charges were allocated to AEs on the basis of total no. of mailboxes used over a period of 12 months. Thus, the proper allocation and proper work has been given for allocation and cost plus mark-up. Based on this details, we do not find any reason for adhoc mark-up of 15% applied by the ld. CIT (A) and moreover ld. TPO has not given any basis for taking it Nil . Accordingly, we accept the cost plus mark-up of 25%. Accordingly, ground No.5 of the assessee is allowed and ground No.2 raised by the Revenue is dismissed. 28. Lastly, the issue of administrative support services as raised in groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld CIT(A) reduced the costs that were attributable to other business activities from the cost base used by the TPO as no rationale was provided for the same and changed the allocation key from employee cost to employee count. Further, the learned CIT(A) reduced the mark-up from 25% to 15% Accordingly, the learned CIT(A) granted relief of Rs. 75,97,875/-. The observation and finding of the ld. CIT (A) reads as under:- 8.7. I have considered the order of the TPO as well as the submissions of the appellant. In my view, the TPO has not given a rationale reason for rejecting the Direct and Indirect costs worked out by appellant other than stating at page 20 of his order that the entitlement for assets and facilities in any office depends upon the grade/ level of the employee in organization . I agree with the appellant that TPO while working out the total Costs which included direct and indirect costs should not to have noted the mark of 25%, which per the arrangement was only Direct Costs. 8.8. Having regard to the facts, I accept the revised (without prejudice) working of the appellant which is based on headcount. The average mark-up per the transfer pricing study was worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation considering the cost related activity and using employee headcount as allocation key and after considering the cost pertaining to the activity. The computation of ALP as per assessee, TPO and CIT (A) is summarized as under:- Particulars Assessee TPO CIT (A) Cost Base Direct cost consisting of employee cost, travel and telephone and other costs Direct cost Indirect cost - Total admin, other expense Depreciation Direct cost Indirect cost - Total admin, other expense and depreciation as reduced by costs not attributable to these services. Method of allocation of Administrative Other expenses Depreciation N.A Based on employee cost Based on employee count Mark-up 25% 25% 15% 31. Once in the TP study report the arm s length mark-up under the comparison with comparable uncontrolled transaction worked out at 13.67% which has not been rejected by the ld. TPO and assessee had shown the margin of 17.2% in the TP study report and it is also that even the 15% mark-up adopted by the ld. CIT(A) is greater than the arm s length price determined by the assessee in TPSR. Therefore, assessee s margin has to be reckoned at arm s length and therefore, no adjustment is required. Accordingly, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso give business other than program trades which are executed at normal brokerage rates resulting in substantial brokerage revenue. Refusal to execute program trades could result into potential loss of normal brokerage income or the client. However, at times, if it is not an important client relationship or the order value is not large enough for the trade to qualify as a program trade and consequential volume discounts, ML would not be keen to execute the trades at low brokerage rates. Accordingly, it may either bid at non-competitive rates for program trades or may refer the client to come through the normal mechanism. 35. The TPO had made adjustment in respect of brokerage commission earned by assessee from programme trades by comparing the rate charged to the client for programme trades for brokerage commission rate charged by assessee with third party FIIS for the DVP rates. The manner in which the relevant observation of the ld. TPO reads as under:- In this transaction, for 30 deemed AEs, the volume is Rs. 4,419,333,913/-. The average volume per client works out to Rs. 147,311,130/-, which is less than Rs. 199,168,950/- per client in case of Non-AEs, as computed in (a) above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd assessee which has been reported as a deemed international transaction in terms of 92B (2). Nonetheless these are third party independent transactions where assessee got its negotiated brokerage from these parties directly and no benefit is cost on to ML entities from the business transacted by the assessee in these third parties. The certificate from Merill Lynch to the effect that brokerage in respect of premium rate is received directly by the clients of DSPML has been placed in the paper book also before us. Further, in subsequent years, i.e., from A.Y.2006-07 onwards, the ld. TPO himself has accepted the transaction to its arm s length in assessee s own case. Thus, we do not find any reason to tinker with the order of the ld. CIT(A) and same is confirmed and consequently the Revenue s grounds are dismissed. 38. Now coming the corporate tax grounds, the Revenue s appeal being ground No.4 and assessee s appeal being ground No.7 relates to disallowance u/s.14A. The Revenue s appeal on the ground that ld. CIT(A) has erred in giving relief of Rs. 4,60,37,774/- whereas assessee is in appeal in upholding the disallowance of Rs. 24,591/- over and above the suomoto disallowance made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable in the A.Y.2002-03 and the basis of which ld. AO has made the disallowance cannot be sustained, firstly, that no interest expenses can be attributed as noted above assessee had more surplus interest free funds by sixth investment made by the assessee. Thus, in such a case no disallowance can be made. Secondly, in so far as Revenue expenses are concerned, the ld. AO has taken 5% of dividend income. The ld. CIT (A) has reduced the addition after applying Rule 8D(2), the disallowance upheld by the ld. CIT(A), which is almost to the extent of suomoto disallowance offered by the assessee which under the facts and circumstances and looking to the fact that Rule 8D is not applicable is far more sufficient. Thus, suomoto disallowance offered by the assessee is accepted. Consequently, assessee s appeal is allowed and Revenue s appeal is dismissed. 43. Accordingly, assessee s appeal is allowed and Revenue s appeal is dismissed. A.Y. 2003-04 44. Now coming to the appeal for A.Y.2003-04 ground No. 1 2 are general in nature as held above in the appeal for A.Y.2002-03. The same is dismissed as infructous. 45. Ground No.3 4 relates to TP adjustment of equity broking services (non-DVP / C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was concluded to be at arm's length and the adjustment was deleted. The ld. CIT(A) noted that the average brokerage rate for non-AE FIIs was 0.43% and after sales and marketing adjustment of 0.08% which he has worked out by taking the employee cost involved in sales and marketing, the ALP of non-DVP rates was worked out to 0.35%. Since average brokerage rate charged to AE on non-DVP rates was 0.34%, he held that same falls within the tolerance range of +/-5% and accordingly, in respect of non-DVP segment, adjustment made by the ld. AO was deleted. 49. In DVP segment in the appeal for A.Y.2002-03, ld. AO had asked the assessee to furnish the details of average rates charged for Top 10 third party institutional clients can use as comparable in the DVP segment. These details are as under:- No. Name of the Client Turnover Commission excl. Service Tax Average Rate 1 SCHRODER INVESTMENT MANAGEMENT NORTH AMERICA INC. A/C SCMCT INDIA (MAURITIUS) LTD. 2,256,938,841 1,07,18,780 0.47% 2 GOLDMAN SACHS INVESTMENT MAURITIUS 1 LTD. - LONGTERM. 1,672,325,932 99,93,098 0.60% 3 STICHTING SHELL PENSIOENFONDS 1,39,116,6609 69,88,730 0.50% 4 EMERGING MARKETS MANAGEMENT LLC A/C EMSAF - MAURITIUS 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.5 of the assessee and ground No.3 of Revenue s appeal relates to Port Fee Charges. This issue is similar to the ground No.2 in A.Y.2002-03. In view of the finding given therein, the adjustment is deleted and consequently, the Revenue s appeal is dismissed and assessee s appeal is allowed. 53. In ground No.4 of Revenue s appeal relates to administrative support services. The Revenue has raised following grounds:- On the facts and the circumstances of the case and in law, the CIT(A) has erred in considering the ALP mark up at 15% as against 25% worked out by TPO, and deleting the addition made on account of Administrative Support Services amounting to Rs. 79,79,893/- provided by the assessee to its AE stating that the TPO has not given a rationale reason for rejecting the Direct and Indirect costs worked out by the assessee while determining the markup at 25%. 54. This issue is similar to the issue raised in A.Y.2002-03, therefore, in view of the finding given hereinabove, the Revenue s appeal is dismissed. 55. Ground No.2 in department s appeal, reads as under:- On the facts and in the circumstances of the case and in law, the C1T(A) has erred in deleting the addition of Rs. 30,16 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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