Income Tax Appellate Tribunal - Mumbai
Clsa India Ltd, Mumbai vs Department Of Income Tax on 22 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "K",
MUMBAI
BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND
SHRI VIJAY PAL RAO, JUDICIAL MEMBER
ITA No. 2362/Mum/2011
Assessment Year : 2002-03
Dy. Commissioner of CLSA India Ltd.
Income tax -LTU 8/F, Dalamal House
28th Floor, Centre-1, Nariman Point
Vs.
World Trade Centre Mumbai-400 021
Cuffe Parade PAN No.AAACC 2262 K
Mumbai-400 005.
(Appellant) (Respondent)
Appellant by Shri Ajeet Kumar Jain and
:
Shri Praveen Kumar
Respondent by : Shri Porus Kaka
Date of hearing : 22.01.2013
Date of Pronouncement : 22.02.2013
ORDER
PER RAJENDRA SINGH, AM:
This appeal by the revenue is directed against the order dated 4.1.2011 of CIT(A) for the assessment year 2002-03. The revenue in this appeal has raised disputes on two different grounds which relate to addition on account of write-off of stock and addition on account of transfer pricing adjustment.
2 ITA No.2362/M/11
AY .02-03
2. We first take up the dispute relating to addition made by AO on account of write off of bad stock. The facts in brief are that the AO during the assessment proceedings noted that the assessee in the P/L Account has claimed deduction of Rs.11,98,000/- on account of provisions for shortage in stock-in-trade. However, the said provision was added in the computation of total income and claim on this account was made only to the tune of Rs.4,84,796/- with regard to actual write off of shortage in stock. The assessee explained that it was a practice of the assessee to review position of stock periodically and write-off useless and unsaleable stock. It was also submitted that such stock was not written off immediately at case to case basis. In accordance with such practice, assessee had written off a sum of Rs.4,84,976/-. The AO however did not accept the explanation given. It was observed by him that the assessee did not produce any evidence to prove that the entire loss had crystallized during the year. There was thus no evidence to substantiate the loss which was claimed as incidental to business. The AO also observed that similar claim of loss had been disallowed and confirmed by CIT(A) in 2001-02. The AO, therefore, disallowed the claim.
2.1 The assessee disputed the decision of AO and submitted before CIT(A) that the assessee in terms of the practice followed was making provisions for unexpected loss in respect of its stock against income @ .01% of the turnover. The provision so made is disallowed in the 3 ITA No.2362/M/11 AY .02-03 computation of income and actual claim of loss is made after due verification and analysis. CIT(A) was satisfied by the explanation given and following the decision taken in assessment years 1999-2000 and 2000-01 allowed the claim of the assessee aggrieved by which the revenue is in appeal before the Tribunal.
3. Before us the Ld. Sr. Counsel appearing for the assessee submitted by the issue was covered in favour of the assessee by the decision of the Tribunal in assessment year 1999-2000 in ITA No. 2930/M/2008 in which year also similar disallowance had been made by AO but the same had been allowed by the Tribunal. The ld. DR placed reliance on the order of AO.
4. We have perused the records and considered the matter carefully. The dispute is regarding the allowability of claim of deduction on account of write-off of bad stock. The assessee is in share broking business and many a times, the clients or stock exchange return stocks to the assessee due to reasons such as difference in signature of transferor, forged/ fake share certificate etc. and therefore to take care of such unforeseen circumstances, the assessee has been making provision for such loss @ .01% of turnover. The provision so made is added in the computation of income and actual claim of loss is made after due verification. This year assessee claimed loss of Rs.4,84,796/- which was disallowed by the AO. 4 ITA No.2362/M/11
AY .02-03 We find that similar disallowance had been made by AO in the assessment year 1999-2000 which had been deleted by CIT(A). In further appeal, the Tribunal after necessary examination concluded that the assessee had been regularly making analysis of the bad stock and only after arriving at the conclusion that the stock had become worthless/ unsaleable, the business decision was taken to write-off the stock. The Tribunal also observed that there was no dispute that the assessee was consistently following this accounting practice of write-off of stock. The Tribunal, therefore, confirmed the order of CIT(A) allowing the claim of assessee. In this year, the CIT(A) has given relief following the decision in assessment year 1999-2000 which has been confirmed by the Tribunal, The facts this year are identical. We therefore respectfully following the decision of the Tribunal in assessment year 1999-2000 (supra) confirm the order of CIT(A).
5. The second dispute is regarding transfer pricing adjustment. Under the provisions of section 92, any income arising from an International transaction with an associated enterprise is required to be computed at arms length price. Further section 92C prescribes various methods for determination of arm's length price such comparables uncontrolled price (CUP) method, transactional net margin method (TNMM) etc. The assessee i.e. CLSA (India) is a subsidiary of Credit Lyonnais Securities Asia BV, (CLSA BV), a company incorporated in the Netherlands which in turn 5 ITA No.2362/M/11 AY .02-03 is a group company of CLSA Hong Kong. During the relevant year, the assessee had paid royalty of Rs.711,466/- to CLSA BV which is an associated enterprise @ 1% of net receipts. The royalty had been paid for the period from 19.2.2002 to 31.3.2002. Since the assessee company had entered into interactive transactions with the associated enterprises, The AO referred the matter of determination of arms length price to the TPO. 5.1 The TPO, asked the assessee to explain the basis of payment @ 1% and whether CLSA, BV was receiving such royalty from any other associate enterprise and the reason for payment from 19.2.2002. The assessee explained that it was using the brand name of the holding company from the date of its incorporation i.e. 21.11.94 but it was not able to make any payment towards use of brand name as such payment was prohibited by erstwhile Foreign Exchange Regulation Act (FERA). It was also submitted that only after FERA was replaced by Foreign Exchange Management Act, (FEMA) from 1.6.2000, the govt. decided to allow the payment of royalty up to 2% of exports and 1% of domestic sales under automatic route on use of trade mark of the foreign collaborator without technology transfer. Accordingly, the assessee company started paying royalty from 19.2.2002 after getting RBI's approval on 26.3.2002. The payment was thus approved by the govt. The assessee further submitted that it was not aware of payment of similar 6 ITA No.2362/M/11 AY .02-03 type of brand fees by other broking companies as such details were publicly not available.
5.2 The TPO however did not accept the explanation given by the assessee. It was observed by him that the trade name/brand name was not protected in any country including India and assessee could not give any document to prove the ownership of the brand by CLSA BV. It was also observed by him that the assessee was the only associate enterprise (AE) of CLSA group that had entered into a brand agreement. The RBI approval for royalty payment only indicated that such payment was not prevented/blocked by govt. considering the exchange control policy. However, approval itself did not mean that the payment had been made at arm's length. The TPO observed that the issue whether the payment had been made at arm's length was required to be examined under the provisions of the Act. He noted that since no other associate enterprise of CLSA group had any agreement for use of brand, there existed an internal comparable uncontrolled price (CUP) being the use of CLSA brand for no payment. The TPO further observed that the assessee could not submit any details of payment of band fees by any broking entity engaged in similar business in India. Therefore, there was also an external CUP of no payment of brand fee. Since, similar payment for comparable transactions both internal and external was nil, the TPO computed arm's length price of transaction at nil against payment of Rs.711,466/- by the assessee. The 7 ITA No.2362/M/11 AY .02-03 AO following the order of TPO made an adjustment of Rs.711,466/- to the total income on account of transfer pricing.
5.3 The assessee disputed the decision of AO and submitted before CIT(A) that it was not correct to state that the CLSA name was not protected in India. Assessee furnished copy of trade mark/brand name registration certificate to substantiate that CLSA brand was owned by CLSA BV and the same was protected /registered in India. The assessee also made a detailed submission as to how CLSA brand existed and how the same benefited the assessee in the course of business which has been reproduced by CIT(A) in para 8.7 of the order of CIT(A). 5.4 The assessee further argued that the internal CUP was erroneously applied by comparing with another CLSA entity which is related party. The CUP method could not be applied using transactions with a related party. Moreover, in this case, there had not been no transactions of royalty payment in relation to CLSA entities and, therefore, lack of transaction could not be considered as actual transactions. There being no comparable independent transaction of payment of royalty, CUP method could not be applied. The assessee also submitted that other CLSA entities were using CLSA name for which they were making direct marketing contributions and therefore did not make any royalty payment. The other CLSA were thus are not comparable. Elaborating further, the assessee 8 ITA No.2362/M/11 AY .02-03 argued that there were different mechanisms under which CLSA recovered its marketing cost from other entities. It was pointed out that out of the 13 markets in which CLSA was present. India, Korea and Taiwan had capital market regulations, which require FIIs to contact directly with the domestic CLSA units for trade and local only. In any other market, there was a single contracting model, as per which, in case a client located in a particular country wanted to buy equity in some other country, he had to place a buy order with CLSA entity of the home country, who would then contact the CLSA entity in the country in which equities is to be bought. The client has to pay commission directly to the CLSA entity of the home country, which then pays the 'execution Commission' to the CLSA entity of the other country. It was further submitted that, in India, the client can contact directly the CLSA entity of the country in which the equity has to be bought. The position was different in Korea and Taiwan. In Korea, there was commission sharing arrangement, whereas, CLSA Taiwan operates as a branch. While CLSA Taiwan between books the commission revenue earned, it is charged an allocation of certain head office expense. In India, there was no commission sharing arrangement. However, after the payment of royalty was permitted by the Government, the assessee started payment of royalty @ 1% for use of brand.
5.5 The assessee also submitted before the CIT(A) that the details of similar payment of royalty made by competitors and other players to their 9 ITA No.2362/M/11 AY .02-03 affiliates was not publicly available either on Prowess Data base or on royaltystat. The assessee had, however made efforts to collect data that would indicate the cost that was incurred by comparable companies on business development activities. The assessee submitted chart for the period from March, 2000 to March, 2009 showing the broking industry's average business development expenditure, which was 6.4% of brokerage turnover as compared to the expenditure incurred by the assessee, which was 1.28% inclusive of branding fees. It was thus argued that payment of 1% brand fees by the assessee was substantially lower than the business development expenditure incurred by any other business entity. The assessee also submitted that, on the facts of the case, TNMM method had to be considered as most appropriate method to determine arm's length nature of brand fees paid by the assessee. The assessee gave the position regarding the margin of 29 other broking entities, as per table placed below:
Name of the Company OP/ OI
Sr.No.
Aditya Birla Money Ltd. NA
1.
Anagram Stock broking Ltd. -110.64%
2.
Anand Rathi Securities Ltd. NA
3.
Anand Rathi Share & Stock Brokers Ltd. NA
4.
Asit C Mehta Invst. Intermediates Ltd. NA
5.
B N Rathi Securities Ltd. 0.00%
6.
Brics Securities Ltd. -74.23%
7.
10 ITA No.2362/M/11
AY .02-03
Cholamandalam Securities Ltd. 28.47%
8.
Citigroup Global Markets India Pvt. Ltd. 20.00%
9.
D S P Merrill Lynch Ltd. 27.26%
10.
Emkay Global Financial Services Ltd. 17.71%
11.
Geojit B N P Paribas Financial Services Ltd. 6.42%
12.
H D F C Securities Ltd. -95.11%
13.
I C I C I Securities Ltd. 12.50%
14.
I C I C I Web Trade Ltd. [Merged] NA
15.
India Infoline Securities Pvt. Ltd [Merged] NA
16.
Indiabulls Securities Ltd. NA
17.
Integrated Enterprises (India) Ltd. 22.00%
18.
Joindre Capital Services Ltd. -25.27%
19.
Khandwala Securities Ltd. 2.73%
20.
Kotak Securities Ltd. NA
21.
K J M C Capital Market Services Ltd. -0.38%
22.
L K P Securities Ltd. 16.29%
23.
Peerless Securities Ltd. 40.28%
24.
R B S Equities (India) Ltd. 22.74%
25.
Religare Securities Ltd. -17.47%
26.
R R Financial Consultants Ltd. 2.31%
27.
Shriyam Broking Intermediary Ltd. 6.13%
28.
Twentyfirst Century Shares & Securities ltd. -18.34%
29.
Average -5.55%
CLSA India Limited 57.58%
11 ITA No.2362/M/11
AY .02-03
5.6 Thus, it was pointed out that average margin of the above listed 29 broking entities was -5.5% and in case the loss making entities were removed, the average margin was 16.06% compared to 57.58% margin declared by the assessee. Therefore, there was no adjustment required on account of transfer pricing. The assessee also submitted that it had been using the brand name since its incorporation of 21.11.1994 and CLSABV could have recovered the royalty for such use of brand but it could not do so as payment for use of use of brand name was prohibited under the erstwhile Foreign Exchange Regulation Act. It was thus argued on the facts and circumstances of the case, no adjustment could be made on account of royalty.
5.7 The CIT(A) after considering the submissions of the assessee, agreed that the assessee had effectively rebutted the reasoning adopted by the TPO for disallowing the payment of royalty. It was observed by him that CLSA brand was owned by CLSA BV and the same was registered in India. It was also observed by him that CLSA, constantly strived to maintain as well as enhance its brand value in India by undertaking number of activities. The CLSA brand had earned recognition in India and in Asian Markets over a number of years and had bagged number one position. Further, CLSA brand enjoyed high status in equity broking and branding was one of the profit drivers within the industries. The payment of royalty thus promoted the business of the assessee. CIT(A) also held 12 ITA No.2362/M/11 AY .02-03 that AO and TPO were not correct in applying CUP method which could be applied to comparable independent transactions. Lack of transaction could not be considered as transaction. TPO instead of investigating the matter, as to why other CLSA entities were not paying royalty, jumped to the conclusion and no royalty was payable the by Indian entity. The detailed examination made during appellate proceedings showed that other entities were making direct marketing contribution in place of brand fees or royalty paid by the assessee. The assessee had also demonstrated that it was paying much lower business development expenditure including the royalty at 1.28% compared to average payment of 6.4% by the broking industries on brokerage turnover. The net margin of the assessee was also much higher at 57.58% compared to average margin of 28.29% of the comparable entities. CIT(A) held that TNMM method was appropriate method on the facts of the case that net margin declared by the assessee being much higher compared to such other entities, royalty paid by the assessee @ 1% had to be considered at arm's length. The CIT(A) accordingly deleting the addition made by the AO aggrieved by which the assessee is in appeal before the Tribunal.
6. Before us, the Ld. CIT-DR appearing for the revenue assailed the order of the Ld. CIT(A). It was submitted that payment of no royalty by other CISA entities did mean that there was an Internal CUP, which had been rightly applied by the AO. It was also submitted that merely because 13 ITA No.2362/M/11 AY .02-03 royalty had been approved by the Government, did not mean that the payment of royalty was at arm's length. It was further submitted that application of TNMM method was not justified as broking entities had also other income. It was argued that the assessee had not maintained records of uncontrolled transactions which it was required to do. The internal CUP applied by TPO was therefore, justified. He placed reliance on the decision of Tribunal in the case of Knorr Bremse India Pvt. Ltd. vs. ACIT (ITA no. 5017/Del/2011) in support of the CUP method applied by the TPO. It was further, submitted that, in case, an external CUP was considered proper, the matter may be restored to the TPO for fresh examination.
7. The Ld. Sr. Counsel appearing for the assessee, on the other hand, strongly supported the order of CIT(A). It was submitted that Internal CUP, in this case, had been applied by the TPO in relation to transactions with related parties, which could not be accepted. Even in case of Internal CUP the comparable transaction has to be with an independent party. Moreover, in this case, there was no actual transaction and lack of transaction could not be considered as a transaction. He placed reliance on the decision of Pune Bench of the Tribunal in the case of Skoda Auto (I) Pvt. Ltd. for the said proposition. He also referred to the decision of Mumbai Bench of the Tribunal in the case of Cabot India vs. DCIT (46 SOT 14) in which it has been held that when no data is available in respect of uncontrolled transactions as was the position in case of the 14 ITA No.2362/M/11 AY .02-03 assessee, CUP method could not be considered as most appropriate method. It was pointed out that the assessee had clearly submitted before the TPO that no information was available in respect of similar royalty payment by other broking entities. The TPO had also not brought on record any such uncontrolled transaction of payment of royalty and, therefore, it was not proper on part of CIT-DR to argue at this stage that the matter may be returned to TPO for fresh determination of arms length price based on external CUP. The Ld. Sr. Counsel further argued that the decision of Tribunal in case of M/s. Knorr Bremse (I) Pvt. Ltd. relied upon by the Ld. CIT-DR was not applicable to the facts of the present case as in the present case, the assessee had properly demonstrated that brand licensing agreement had benefited the assessee. It was submitted that it was not open to TPO to question the wisdom of the assessee as to how it should conduct the business and decide the reasonableness of a particular expenditure. He referred to judgment of Hon'ble High Court of Delhi in case of EKL Appliances Ltd. in Income-tax Appeal No. 1068 of 2011 in which case also the TPO had held that royalty payment was not justified on the ground that the assessee was incurring huge losses. The Hon'ble High Court of Delhi after referring to the judgment of Hon'ble Supreme Court in the case of SA Builders (289 ITR 26) held that it was not for the AO /TPO to decide as to how much expenditure was reasonable. It was accordingly held that the TPO had no jurisdiction to hold that royalty 15 ITA No.2362/M/11 AY .02-03 expenditure was not allowable in view of continuing losses. It was pointed out that the assessee had declared margin which was much more than the average margin of the broking industry. The business development expenditure of the assessee was much below the level of expenditure shown by other entities. It was, therefore, urged that the order of CIT(A) deleting the addition must be upheld.
8. We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding transfer pricing adjustment made by AO in respect of royalty paid by the assessee to CLSA BV of which the assessee is a subsidiary. The royalty amounting to Rs.7,11,466/- @ 1% of net receipt has been paid by the assessee during the year from 19.2.2002 to 31.2.2002. The assessee had not paid any royalty earlier as the same was not permitted by the erstwhile Foreign Exchange Regulation Act (FERA). However, later when FERA was replaced by FEMA, government allowed payment of royalty and therefore assessee started making payment of royalty to the parent company which is incorporated in Netherlands, after taking approval from RBI. Since the assessee had entered into an international transaction with an associate enterprise, the matter was referred to TPO who has made transfer pricing adjustment using CUP method. The TPO noted that no other subsidiary of CLSA BV anywhere in the world had paid any royalty. Therefore, he had treated this as internal CUP of royalty payment. Further, since the 16 ITA No.2362/M/11 AY .02-03 assessee could not give any information regarding similar payment of royalty by any broking company, the TPO treated the same as external CUP of no payment of royalty. Accordingly, he has considered the entire payment as excessive and made adjustment on this account which was followed by the AO.
8.1 In our view the approach adopted by TPO/AO is not correct. International transaction in case of the assessee has to be compared with uncontrolled transactions. There can be an internal CUP provided, the transaction is with an unrelated party. But comparing the transaction in case of the assessee with transactions of CLSA BV with another associate enterprise cannot be considered as internal CUP. Moreover, lack of transaction cannot be considered as a transaction. Regarding external CUP also, TPO has not placed any material on record to show that no payment of royalty has been made by any independent party for using brand name/trade name. Non availability of a comparable transaction can not be considered as transaction and cannot be the basis of selection of comparable transaction. Further, CUP method can not be applied if the relevant information is not available. This view is also supported by the decision of Mumbai Bench of the Tribunal in Cabot India Ltd. vs. DCIT on which the ld. Sr. Counsel has placed reliance. We, therefore agree with the finding of CIT(A) that CUP method on the facts of the case could not be applied. We are unable to accede to the request of the ld. CIT-DR, the 17 ITA No.2362/M/11 AY .02-03 matter may be restored to AO/TPO to find out a comparable transaction for application of CUP method. No such comparable transaction has been brought on record even by AO or by DRP, though the assessee had clearly stated that no such information was available. No such comparable case has been placed by the ld. CIT-DR even before us. The issue, therefore, cannot be restored for making roving inquiries.
8.2 The ld. CIT-DR has placed reliance on the decision of the Tribunal in the case of M/s. Knorr Bremse (I) Pvt. Ltd. (supra), has argued that in case the assessee does not show that transaction by transaction approach was not possible and there has been no real or tangible benefit for carrying on international transactions with the AEs. CUP method can be adopted with preference to TNMM. It has been pointed out that in that case it was also held that TPO was justified in taking ALP at nil. We have perused the said judgment. There cannot be any dispute about applicability of CUP method when transaction by transaction approach was possible but the method can be applied only when information is available for application of CUP method. In the cited case, the Tribunal had upheld the order of TPO determining ALP at nil on the basis of CUP method as in that case there was material to show that no real or tangible benefit had been derived by the assessee from the transaction with the AEs and benefit if any was only incidental. The present case is different. In this case, though the AO observed that the trade name/brand name CLSA was 18 ITA No.2362/M/11 AY .02-03 not protected in any country including India and the assessee could not give any document to prove ownership of the brand by CLSA BV, CIT(A) on detailed examination of the matter has given a finding that the CLSA brand was owned by CLSA BV and the same was also registered in India. CIT(A) has also given a finding that CLSA strongly strived to maintain as well as enhance its brand value which had earned recognition in India and Asian markets. There is no material produced before us to controvert the said finding. In the broking business, brand does promote the business and as rightly observed by CIT(A) it is one of the profit drivers within the industry. Thus it cannot be said that the assessee had not derived any benefit from use of brand. The decision of the Tribunal relied upon by the ld. CIT-DR, therefore, cannot be applied to the facts of the present case. 8.3 We also find that the AO without any detailed examination as to why other CLSA entities were not making any payment of royalty, rushed to apply the CUP method which as we have held could not be applied for the lack of proper information. CIT(A) has examined the matter in detail as to why other CLSS entities were not paying royalty which was because of the fact that CLSA had different arrangement in different jurisdictions. CLSA was present in 13 markets out of which India, Korea and Taiwan had capital market regulation which required FIIs to contract directly with a domestic CLSA entity. In other jurisdictions, a single contract model was followed as per which client in particular country willing to buy 19 ITA No.2362/M/11 AY .02-03 securities in other countries has to place order in CLSA entity in the home country which shares commission with CLSA unit of the other country. In Korea, there was commission sharing arrangement whereas CLSA Taiwan operated as a branch which books the commission and it is charged an allocation of certain head office expenses. In India there was no commission sharing arrangement and payment of royalty was therefore permitted. CIT(A) on examination of the arrangement/system followed by CLSA BV has also given a finding that in other jurisdictions, CLSA entities were making market contributions. Therefore only on the ground that other CLSA units did not pay any royalty, it could not be held that payment of royalty by the assessee was not justified. 8.4 CIT(A) has also examined the business development system followed by other comparable companies in India and has given a finding that these companies on average were incurring business development expenditure which was 6.4% of brokerage turnover whereas similar expenditure incurred by the assessee was only 1.28% including royalty of 1% paid by the assessee . Therefore expenditure incurred by the assessee on royalty and business development could not be considered as excessive compared to the comparable parties. CIT(A) has also applied the TNMM method for benchmarking international transactions. There are 29 comparables selected details of which have already been given earlier which gave an average margin of -5.5% and, in case, loss making 20 ITA No.2362/M/11 AY .02-03 companies were excluded, the average margin came to 16.06% whereas in case of the assessee the margin declared was 57.58%. CIT(A) has therefore held that no TP adjustment is required to be made in case of the assessee with which, on the facts of case, we fully agree. We, therefore, see no infirmity in the order of CIT(A) in deleting the addition made and the same is therefore, upheld.
9. In the result appeal of the revenue is dismissed.
Order pronounced in the open court on 22/02/2013.
Sd/- Sd/-
( VIJAY PAL RAO ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 22/02/2013.
Jv.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.