CLSA INDIA LTD, MUMBAI V. DCIT CIR 4(1), MUMBAI

ITA 2385/MUM/2014

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2265 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2008-2009
• Appeal Filed On: 08-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Transactions in derivatives
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 144C; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI RAHUL CHAUDHARY, JM ITA No. 2385/Mum/2014 (Assessment Year 2008–09) CLSA India Ltd. 8/F Dalamal House, Nariman Point, Mumbai–400 021 Vs. The Dy. Commissioner of Income Tax, Circle 4(1), Room no.640, Aayakar Bhavan, M.K. road, Mumbai–400020 (Appellant) (Respondent) PAN No. AAACC2262K Assessee by : S/Shri Mukesh Butani, Ms. Karishma R. Phatarphekar, Mr. Harsh R Shah, Shreyash Shah Revenue by : Shri Dr. Yogesh Kamat, CIT DR Date of hearing: 29.03.2022 Date of pronouncement : 28.06.2022 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by CLSA India Ltd (the appellant) against the 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. Page | 2 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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 for benchmarking the international transaction of brokerage commission received by the Appellant from its AES, failing to appreciate the following: a. There are key differences between the Functions Performed, Assets Employed and Risk Assumed ('FAR') in respect of transactions executed by the Appellant with AEs vis-à-vis non-AEs. a. Brokerage rates differ inter alia based on clients, volume of transactions, geographical differences, nature of services offered to each client and client relationships, Page | 3 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 b. The brokerage rate charged to non-AEs includes remuneration for services performed by AEs which could not be shared by the Appellant with the AEs given the Indian regulatory restrictions applicable to sharing of commission by brokers. 5. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in adopting the non-AE Foreign Institutional Investors (FIIs) brokerage rate as an internal CUP for benchmarking the international transaction of brokerage commission received by the Appellant from its AEs. 6. On the facts and circumstances of the case and in law, the learned AO / TPO / CIT(A) erred in not appreciating that the broking services provided by the Appellant to non-AE Domestic Institutional Investors ("DIls') has a higher degree of comparability with the broking services provided AES as compared to the broking services provided to non-AE FIIs for the purpose of application of an internal CUP. 7. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in not appreciating the evidence filed by the Appellant, which demonstrates the difference in the functions undertaken for servicing non-AE FIls and non-AE Dils, and thereby in not granting an adjustment in respect of the costs incurred towards such additional functions for the purposes of applying the internal CUP for benchmarking the international transaction Page | 4 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 relating to brokerage commission received by the Appellant from its AEs. 8. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in concluding that there should have been a separate charge for the additional services provided by the Appellant to the non-AEs, thereby failing to appreciate that higher rate of brokerage charged to such non-AEs includes a charge for such additional services. 9. On the facts and 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 Page | 5 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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 of stock broking. Assessee company has filed its return of income on 29/9/2008 declaring a total income of ₹ 3,550,372,407/–. As assessee has entered into certain international transactions with its associated concern, the deputy Commissioner of income tax, range 4 (1), Mumbai (the learned AO) referred the matter to the additional Commissioner of income tax, transfer pricing –I (2) Mumbai (the learned TPO) for determination of arm’s- length price of such international transactions. 04. Facts shows that assessee has entered into an international transactions of brokerage commission of ₹ 570,842,965 with its associated enterprises, assessee benchmark the about transaction using the transactional net margin method (TNMM) as the most appropriate method. These transactions are related to rendering of equity broking services to its associated enterprises. Assessee has rendered services on two segments where the broking activities are undertaken i.e. Cash and future and options. The assessee has charged a brokerage income of ₹ 566,041,039/– in the cash segment and Rs. 1, 26,31,468/– in the future and options segment. The rate Page | 6 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 of commission is 0.13% in cash segment and 0.026% in F & O segment. 05. The learned transfer-pricing officer questioned the assessee regarding the brokerage commission charged by the assessee for rendering similar services to overseas non-associated enterprises. He found that assessee has charged 0.23% in cash segment, 0.029% in future, and options segment from its non-associated enterprises. Therefore he found that rate of commission charged by the assessee from overseas non associated enterprise is more than the rate of commission charged from the associated enterprise while rendering equity broking services. Accordingly assessee was show caused to propose an adjustment of ₹ 427,723,876/–. 06. Assessee objected to the same by various replies. However the learned transfer pricing officer rejected the contentions of the assessee for following reasons:- (i) The assessee has submitted that while carrying out the business of equity broking, it is concerned with the brokerage income earned as a whole rather than the rate thereof. However, while applying cup method, it is the price of the product or services, which is to be considered rather than the value resulting as a result of transacting products and services. 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 Page | 7 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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 evidenced. It just cannot be a matter of argument. If the assessee has provided research services are trading coverage et cetera, then a separate charge for that should have been made from the concerned client. Rendering services over and above equity broking can be charged separately wherever applicable but if the invoices Page | 8 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 raised are only by way of brokerage and there is no basis of the assessee for taking the centre of the argument as above. The chargeability of any service is dependent upon factors like the cost of providing them, the competitive environment, the bargaining position of the buyers etc. The assessee is contending that services rendered to the non-AE is over and above those rendered to the AE’s and hence higher rate of brokerage is obtainable in those cases. What was the cost of those services and why the same were not charged separately is also not established. What is coming on record is the fact that the lower rate of broking commission is charged by the assessee from the AE’s while rendering the equity broking services as compared to the rate of broking commission charged from the overseas non-AE is for rendering the same service. It may also be pointed out that the broking services rendered by the assessee are not as unique as they are made out to be. A large number of players, both buyers and suppliers are there in the market, who are operating in a fairly competitive setup. Hence, an internal CUP is very much available. Accordingly, the contentions of the assessee is rejected. The assessee also cannot ask for adjustment like volume discount et cetera as the rate of brokerage and volumes do not show hundred percent correlations. Also, the assessee has a capacity to Page | 9 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 provide certain services. The same have been provided to the non-AE as per assessee’s claim. By those services were not provided to the AE and what documentary evidence the assessee has to show that while raising invoices for brokerage commission some services were provided to one set of clients and not to other set of clients has not been documentarily demonstrated by the assessee. The assessee has benchmark the broking transactions on the basis of TNMM. In this regard it should be pointed out that wherever possible cup method is always preferable over TNMM. The OECD guidelines clearly hold that a cup method is always preferable to any other method because the comparison 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. Page | 10 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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/–. 09. As assessee did not file any objection, consequently assessment order u/s 143 (3) of the act was passed on 3/2/2012. 010. Aggrieved, assessee preferred an appeal before the Commissioner of income tax (appeals) – 15, Mumbai challenging the rejection of transactional net margin method adopted by the assessee and adoption of cup method as the most appropriate method by the learned transfer-pricing officer. The learned CIT (A) decided the issue as Under:- a. In grounds of appeal, 2, 3, and 4 the appellant has contended that the AO was not justified in rejecting the TNMM. The appellant submitted the FAR analysis to strengthen its argument that the cup method could not have been the most appropriate Page | 11 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 method as there are differences in functions performed, assets employed, and risks assumed. However, on perusal of the details filed it is noted that admittedly, there is no difference in the assets acquired with reference to the AE and non-AE trade. Even with reference to functions performed, the differences pointed out by the appellant are general in nature, which is also in the case of risk as you. The contention of appellant that dedicated sales and trading staff was deployed in New York, London, Hong Kong and Singapore sales office of CLSA that cover the Indian market, is not supported by any documentary evidences and hence not verifiable. b. The appellant contended that Indian transfer pricing regulations do not provide for any priority of methods and hence TNMM applied by it was the best method. However, as discussed by the TPO in his order on Page 6, the TNMM was not found suitable. Further even as per the OECD guidelines where the cup method is readily available same has to be preferred over other method of benchmarking. It is true that Under the Indian transfer pricing regulations, there is no hierarchy of methods to be adopted while determining the ALP. The OECD two in its revised/updated guidelines released in July, 2010 has removed the here are key of methods and thereby Ltd the status of profit-based methods like TNMM which were hitherto methods of last resort. However, the key thing which has to be borne in Page | 12 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 mind is that the arm’s-length principle is all about comparability. Arm’s-length and comparability are inextricably linked concepts, loosening with regard to comparability means losing sight of the arm’s-length character of transactions 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 Page | 13 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 external person, which is not specific to the case of the appellant only. d. The appellant further argued that no circumstances as enumerated under clause (a) to (d) of Section 92C (3) have been pointed out by the TPO to reject the TP study report. In this regard it is mentioned that in para 5.1.3 of his order on Page 5 and 6, the AO has discussed in detail the basis for rejection of TNMM and applying cup method. Hence, this contention of the appellant is factually incorrect. e. The appellant contended that the adjustment was required to be made relating to economic circumstances since the appellant is remunerated by non-AES for the significant additional functions performed to service non-AE clients vis-à-vis is the limited services performed to service AEs. In this regard, it is mentioned that the appellant has not brought on record any evidence that it has charged any specific price for such services performed to the non-AE. No separate billing for the same has been made. Thus, the contention of the appellant being not supported by any documentary evidences is not acceptable. f. The appellant further contended that overall margin earned by it is higher in this year since due to regulatory reasons it does not bear all the costs of the functions performed to the non-AE. In this regard, it is mentioned that the appellant has not Page | 14 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 filed any comparative figures for the periods of functioning under regulatory and non-regulatory control. Further, it is also not brought on record that in earlier years when regulations were not brought, the margins were less as compared to current year. Hence, this contention of the appellant is not acceptable. g. The appellant has referred to the various factors in negotiating the price to be charged to each client to state that there are no standard brokerage rates charged by appellant to each individual client. However as submitted in the submission itself, these factors are based on discussions with the business team of the appellant which negotiates contracts with AE’s and non-AE clients. Obviously, there is no document supporting the contention of the appellant and hence same being not verifiable is not acceptable. h. Accordingly, in view of the discussion as above, ground number 2, 3 and 4 of appeal raised by the appellant are dismissed. 011. Accordingly, the learned CIT – A upheld the adoption of CUP as the most 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. Page | 15 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 012. 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 DRP for assessment year 2006 – 07 and submitted that the cup method is the most appropriate method in the transactions entered into by the assessee of brokerage. 015. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully gone through the orders of the coordinate bench in assessee’s own case for assessment year 2006 – 07 and 2011 – 12. We find that the coordinate bench in ITA number 902/M/2016 in assessee’s own case for Page | 16 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 assessment year 2011 – 12 per order dated 3/2/2020 has dealt with this issue in paragraph number 11 onwards as Under:- “10. Ground no.5 reads as under: Receipt of brokerage commission 5. On the facts and circumstances of the case and in law, the learned TPO / learned AO / Hon'ble DRP has erred in proposing / upholding an adjustment to the ALP determined by the Appellant in respect of the international transaction in connection with receipt of brokerage commission by the Appellant from its AEs. In doing so, the learned TPO / learned AO / Hon'ble DRP has erred in law and in facts by: 5.1.rejecting the TNMM as the MAM for the determination of the ALP of the international transaction of brokerage commission received by the Appellant from its AEs in respect of non-Direct Market Access ('DMA') transactions. 5.2.inappropriately applying the Comparable Uncontrolled Price ('CUP') method while computing the ALP. 5.3.not granting appropriate economic adjustments in order to eliminate the differences in the Functions, Assets and Risk ('FAR') profile of the transactions undertaken with the AEs vis-a-vis non-AEs.” 11. Facts in brief, as stated earlier, the assessee is in the business of equity broking both in the Bombay Stock Exchange and the National Stock Exchange. It also rendered services to AEs and also to non-AEs. The non-AEs are based in India and also overseas. There are principally two segments where the broking activities are undertaken i.e. cash and F&O. The assessee has shown to have charged a total brokerage of ₹ 22,77,50,526/- from the AEs in cash segment. The rate of commission works out to be 0.138% of the turnover and the assessee has benchmarked this transaction by using TNMM. The TPO observed that assessee has also rendered similar services to the overseas non-AEs, from whom the assessee charged commission/brokerage @ 0.250%. The rate of commission charged by the assessee from overseas non-AE is more than the rate of commission Page | 17 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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, research teams based outside India, corporate access and investor forums and applications software development and IT support are performed by the AEs for non-AE Fll clients of the assessee. (C) The detailed FAR analysis submitted by the assessee highlights the key differences between transactions executed for its AE and non-AE clients and establishes that AEs and non-AE transactions are different and not directly comparable for the purposes of CUP. As per the assessee, the non-AE transactions are also not comparable within each other which are evidenced by the variations in the brokerage rates charged to non AEs as per the samples brokerage rates provided by the assessee. (D) The nature of services rendered to clients varies in terms of corporate access, analyst access, research, regularity of business, sales and trading coverage, client's creditworthiness etc. and hence the service rendered and the rate charged for that cannot be compared from one client to another. Thus, the application of the CUP method is not supported under the given facts and circumstances of the case and hence cannot be selected as the most appropriate method. Page | 18 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 (E) The brokerage rate received by the assessee from its non-AE clients remunerates the assessee for functions that are performed by the AEs for such clients on account of the Indian regulatory environment applicable to sharing of commission by brokers. (F) As per the assessee, the degree of comparability is to be judged taking into account the FAR of the parties, the economic, business and regulatory environment, among others. Further, reasonable accurate adjustments are to be made to take into account the differences and where such adjustments are not reliably quantifiable; CUP method should not be used. (G) The assessee submitted that it has discharged its onus by demonstrating compliance with the arm's length price in accordance with Sections 92C(1) & (2) of the Act and has maintained the prescribed documentation in support of its compliance. The onus is on the TPO to establish why cash equity transactions executed by the assessee for unrelated Flls should be considered a suitable benchmark to establish an arm's length brokerage rate for cash equity transactions executed by the assessee for its AEs. H) In case CUP is considered as the most appropriate method, the assessee submitted on 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 Page | 19 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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 the conclusion that the assessee is providing broking services to AEs and Non-AEs. The services provided by the brokers mainly include trade execution. There is a direct internal comparable available in the form of brokerages charged from the third parties. The assessee has argued that the choice of most appropriate method lies with the assessee. The opinion expressed by the assessee is correct to an extent if there is proper application of the principals laid down in the provisions of the I.T Act. As per the assessee, the CUP method could not have been applied because of the reasons mentioned in the TP documentation report, which are reproduced below: a) Marketing/ origination activity in relation to non-AE Flls b) Significant research function centralized at Hong Kong and used by non-AE FIIIS c) Centralized business support provided d) As per circular issued by NSE, the assessee is not allowed to pass any commission to its AEs for services provided. 13. However, the learned TPO rejected the reply of the assessee by citing the following reasons: a) The assessee is easily relying on marketing and origination activities provided by the overseas AEs. No direct evidence has been produced to establish that the clients are serviced by the global office, In support of its claim it has submitted a list of sales corporate, road shows in foreign countries and visit of one of its analysts /to India. It has also submitted an affidavit by former employees. b) After going through the evidences, the following finding is given:- (i) Not a single evidence has been filed to prove that the client management was done for the benefit of the assessee company. It is well known that the CLSA Group is involved in cross border investment banking and M&A deals. Page | 20 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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. (ii) The assessee has filed some printouts of the so- called meetings conducted but not a single evidence is filed to prove the purpose of the meeting or what has transpired during the meeting pertaining to the assessee company. (iii) The list of road shows and meeting with clients are enclosed. Again these evidences do not prove that the purpose of these road shows and meetings were for the benefit of the 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 company. (v) The assessee in TP report, rejected the CUP method citing functional differences. However, as discussed above the functions performed by the assessee company is almost similar for both Non-AEs and AE clients. (vi) In a CUP method, reasonable and accurate adjustments are allowed for better comparability. Instead of working out adjustments at the time of the Page | 21 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 TP report, it has altogether rejected the CUP method which makes the TP report non-reliable as the choice of most appropriate method has not been done in the manner prescribed u/s 92C(1) & (2) of the IT Act. (vii) The assessee has submitted on without prejudice basis that the rate charged from the Non-AE DIls may be taken as comparable. This is not correct as the customers are not located in India. The AEs are more comparable to Non-AE FIIs. Therefore the rate charged from the Non-AE FIls is taken as comparable. (viii) There is not much difference in credit risk as well because the assessee takes margin money both from AE and non-AE. Finally, the TPO took the ALP at 0.250% as against the brokerage of 0.138% charged by the assessee from the AEs and thus the adjustment of ₹ 21,73,90,771/- was made to the income of the assessee as proposed by the TPO. 14. The learned AR submitted before the Bench that the TPO has thrust the CUP method upon the assessee without analysing whether any reasonable and accurate adjustment would be worked out to iron out difference between the AE and Non-AE transactions. The learned AR submitted that the TPO itself has held that there are no differences between the Non-AE and AE transactions and thereby brushing aside the detailed submissions dated 27.10.2014 filed before the TPO, explaining the facts. It was also submitted that if it is not possible to eliminate the differences between the transactions, the method has to be rejected and a method has to be analysed as documented in the transfer pricing analysis. The learned AR further argued that in this case the TPO ought to have rejected the CUP method. The learned AR further submitted that in the case of JP P Morgan India (P) Ltd. v. ACIT [2014] 44 taxmann.com 466 (Mum), the CUP method was held to be the most appropriate method by ironing out the difference between the AE and Non-AE transactions. This exercise has not been done in the case of the assessee and, therefore, the CUP method 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 Page | 22 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 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 services to overseas AEs, the TPO has rightly proposed the CUP method in place of TNMM. The argument of the assessee that same brokerage services are to be provided to the AEs and Non-AEs though the functions are different, was rejected by the DRP as it failed to demonstrate as to how the functions as brokerage activities are different between AEs and Non-AEs. The learned DR further submitted that in the case of J P Morgan India Pvt. Ltd., (supra), there was difference in the activities in the services rendered by the assessee to the AEs and Non-AEs and the same was demonstrated before the appellate authorities. However, no such difference in activities has been established by the assessee before the TPO/DRP in the present case. Considering all the above, the learned DR contended that the orders of the TPO and DRP be upheld. 16. We have heard the parties and perused material on record. We observed that the assessee being an institutional brokerage house has earned significant brokerage commission from FII clients, which included AE and Non AE enterprises. The transactions from Non-AE FII clients, the assessee is required to provide broader range of services viz-a-viz services to AE FII clients did not include marketing and international sales support. We find that the assessee is dependent on the overall CLSA group resources without which the brokerage Page | 23 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 from FII clients could not have materialized. The assessee also filed submission dated 27.10.2014 before the TPO providing detailed explanation with regard to the differences in services provided to the AE and Non-AEs and explanation in support that TNMM was the most appropriate method to determine the ALP of brokerage earned from AEs. We find merit in the submission that TNMM is the correct method and internal CUP would entail adhoc adjustment to price in so far as broking commission from AE and Non AEs are concerned. We also find merit in the contention of the AR that if the decision in the case of J P Morgan India Pvt. Ltd. (supra), is to be followed, then adjustments to the cost structure should be allowed to iron out the differences between the AE and Non-AE transactions. Under these circumstances, we are of the view that operating model of J P Morgan India Pvt. Ltd. is not comparable to that of the assessee as majority of the income in the case of J P Morgan India Pvt. Ltd was from related parties, 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 Page | 24 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 binds us in following the decision of the coordinate bench in assessee’s own case on similar set of facts and circumstances. In view of this, we do not have any hesitation in holding that the transactional net margin method is the most appropriate method for determination of the arm’s-length price of the brokerage service income earned by the assessee. Accordingly the adjustment made by the learned transfer pricing officer of ₹ 427,723,876/– and confirmed by the learned CIT – A is not sustainable. Hence deleted. 017. In view of our above decision, other grounds of appeal becomes merely academic and do not require any adjudication. 018. Accordingly, the appeal of the assessee is allowed. Order pronounced in the open court on 28.06.2022. Sd/Sd/- SdSd/- (RAHUL CHAUDHARY) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 28.06.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Page | 25 2385/Mum/2014 ITA no. CLSA India Ltd; A.Y. 2008–09 Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai