Income Tax Appellate Tribunal - Mumbai
Clsa India Pvt Ltd., Mumbai vs Asst Cit 4 (1)(1), Mumbai on 14 December, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL, 'K' BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No.6748/Mum/2017 (Assessment Year :2013-14) ITA No.7257/Mum/2018 (Assessment Year :2014-15) ITA No.7246/Mum/2019 (Assessment Year:2015-16) & ITA No.599/Mum/2021 (Assessment Year :2016-17) M/s. CLSA India Vs. Deputy Commissioner Private Limited of Income Tax, Circle (formerly CLSA India 4(1)(1) Limited) Mumbai 8/F, Dalamal House Nariman Point Mumbai-400 021 PAN/GIR No.AAACC2262K (Appellant) .. (Respondent) Assessee by Shri Mukesh Butani / Ms. Karishma Phatarphekar / Shri Harsh Shah & Shri Pratik Poddar Revenue by Shri Akhtar Hussain Ansari Date of Hearing 09/11/2023 Date of Pronouncement 14/12/2023 2 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited आदे श / O R D E R PER AMIT SHUKLA (J.M):
The aforesaid appeals have been filed by the assessee against separate final assessment orders dated 12/10/2017, 05/12/2017, 24/10/2019 & 28/03/2021, passed in pursuance of directions given by the DRP for the A.Ys. 2013-14, 2014-15, 2015-16 and 2016-17, respectively.
2. In all the appeals one common issue which is involved is transfer pricing adjustment on international transaction of intra- group services. The adjustments made on this account for various assessment years are as under:-
A.Y. Amount (Rs.)
2013-14 156,66,14,610
2014-15 116,09,53,278
2015-16 144,65,87,463
2016-17 152,83,36,372
3. Besides this, there are other small grounds that we shall discuss in respective assessment years.
4. The brief facts qua the transfer pricing adjustment on account of intra-group services are that, assessee, i.e., CLSA India Pvt. Ltd. is a part of CLSA group, an Asia brokerage house having its regional headquarters in Hong Kong. The assessee in India is primarily engaged in the business of institutional equity 3 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited broking and is a member of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Its customers are mainly comprise of Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII).
5. We will take up the appeal for A.Y.2013-14 and our finding given therein will apply in the impugned appeals for A.Y.2014-15 to 2016-17, pertaining to the issue of arm‟s length price of intra- group services. During the year assessee had shown payment of intra-group services of Rs.160,26,18,641/- paid to following three parties:
CLSA SGP 15,65,14,851
CLSA HK 130,39,76,089
CLSA UK 14,21,27,701
TOTAL 160,26,18,641
6. It has been stated that to serve its clients effectively, expertise at global / regional level is required as well as at local level. The resources available with the assessee for sales, research, back office are purely for localized work and are not capable to carry out the specialized global /regional activities. Since assessee does not have international sales presence or capability to maintain client relationships, therefore, it has entered into separate Service Level Agreements (SLA) with CLSA service providers (AEs) which are three entities mentioned above in this year and also CLSA USA in other years, which operate as centralized hub of CLSA group and provide regional or operational support to CLSA affiliates including broking related 4 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited services as well as a number of middle and back office support services. Before us, assessee has provided service level agreements with all the parties for all the assessment years.
7. As per the scope of SLAs, following services which were integral to serve the clients were availed by CLSA India for the years under consideration:
Broking Management
Client Management
CLSA U
Communications
Compliance
Credit Risk Management
Development Squad
Event Marketing
Finance and Accounting
Futures & Options Management Support S
Human Resources
Information Technology
Internal Audit
International Sales and Sales Trading Support
Legal
Management
Market Risk Management
Operational Risk Management
Regional Algorithm Business Support
Regional Research
Tax Planning and Management
Administration
Group Security function.
8. In response to show-cause notice by the ld. TPO, assessee had submitted description of the various services; head-wise breakup of the payments; cost allocation as per the keys provided in agreement, survey report by separate and 5 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited independent auditor, who have certified and verified allocated cost and keys. In the TP study report, assessee had benchmarked the transaction by taking entity level TNMM and has benchmarked the transaction separately by adopting AE as a tested party using foreign data base. During the course of TP proceedings, assessee has filed voluminous documents to show the receipts and availability of services, i.e., rendition of services by these entities. In order to demonstrate the evidences filed before the authorities below for entire transaction of intra group services which are contained in voluminous paper books filed before us, the assessee was directed to file a chart giving details of evidences and nature of services in all the heads of intra-group services for all the years. Broadly, assessee‟s benchmarking approach was as under:-
The Assessee had identified the services received from its AEs and provided the relevant agreements to justify its need and benefits from it;
It has also tried to demonstrate receipt and rendition of services by filing all the relevant documentation with the TPO.
The Assessee had explained the way costs incurred by AEs were identified (direct and indirect costs) and the how the allocation keys were used for allocation of indirect costs.
The Assessee had provided Agreed upon Procedures (AUP) report from PwC inter-alia to establish factual veracity of the costs incurred, allocation mechanism and mark-ups charged 6 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited by the AEs and to demonstrate that shareholder costs and duplicative costs were not allocated.
The Assessee had also tried to justify the appropriateness of the arm's length mark-up charged by the AEs by providing benchmarking analysis undertaking by KPMG.
One very important piece of evidence which was filed before the ld. TPO was -
a. PWC AUP reports, which was a detailed investigation in the costs incurred and mark-up charged by the AES b. KPMG benchmarking reports, identifying companies which perform similar functions as the CLSA Service Providers and are comparable in terms of risks assumed and assets.
9. It was further explained before us that, the PwC AUP report is a detailed analysis of the costs incurred and allocated by assessee‟s foreign AE‟s, CLSA Hong Kong, CLSA Singapore, CLSA UK and CLSA America. The steps carried out in the said exercise were as under:
a. Obtain the agreements, identify the services, allocation keys and mark-up.
b. Obtain the details of costs incurred for provision of services.
c. Check whether the costs mentioned in the allocation sheets are the same in the AE's books of accounts.
d. Check whether costs are allocated on the basis mentioned in the agreement and that the working of the allocation is correct.7 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited e Sign off from the auditor if the auditor's exercise and the working prepared by the AE are the same.
f. The report also analyzed, as to whether services are received by CLSA India, as whether the services are share-holder or duplicative in nature and that benefits are received by CLSA India.
In support, the aforesaid reports for all the four AEs have been given in the paper book before us for all the years.
10 It has been further explained and submitted that for benchmarking purposes and in order to identify comparable companies whose functions, assets and risks assumed (FAR) are broadly comparable to those of the CLSA Service Providers (AES), the intra-group services provided were segregated into the following four broad buckets:
Benchmarking Intra-group service department Margin earned Category by CLSA service providers Brokerage, International Sales and Trading 10% Sales, Trading Support and Dealing Support Broking Management Regional Regional Research Services 10% Research Services IT Services Information Technology 7% 8 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited Business Client Management 9% Support Services CLSA U Communications Compliance Credit Risk Management Event Marketing Development Squad Finance and accounting Futures & Options Management Support Human Resources Internal Audit Legal Management Market Risk Management Operational Risk Management Regional Algorithm Business support Tax Planning and Management
11. Further, to justify the arm‟s length nature of mark-up charged by the AEs, KPMG, as an independent auditor had assisted CLSA Hong Kong, CLSA Singapore and CLSA UK to conduct a benchmarking analysis pertaining to all the four 9 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited services discussed above. The findings of the KPMG for all the years impugned before us were as under:-
AY 2013- AY 2013-14 AY AY AY
14 to 2014-15 2015-16 2016-17
AY 2016-
17
Cost plus Arithmetic AM of the Arm's Arm's
markup Mean (AM) Margin of length length
earned by of the comparable range using range using
Benchmarking AEs margin of companies 35th & 65th 35th & 65th
Category comparable percentile percentile
companies of of
comparable comparable
companies companies
Broking 10% 13.4% 12.2% 3.7% to 0.1% to
services 14.1% 14.2%
Regional p 10% 13.5% 12.4% (PB- 6.7% to 5.2% to
Research Pg. 97-98) 10.8% 22.8%
and services
IT Support 7% 6.9% 5.9% 4.9% to 4.6% to
Services 8.6% 13.5%
Business 5% 5.9% 3.9% 4.4% to 3.8% to
Support 5.4% 10.7%
Services
12. Further in respect of services provided by CLSA, UK, the benchmarking analysis done by KPMG was as under:-
10 ITA No.6748/Mum/2017 and other appealsM/s. CLSA India Private Limited AY 2013-14 AY AY AY 2015-16 AY Benchmarking to 2013-14 2014-15 2016-17 Category AY 2016-17 Cost plus Arithmetic AM of the Arm's length Arm's length markup Mean (AM) of Margin of range using range using earned by the margin of comparable 35th & 65th 35th & 65th AEs comparable companies percentile of percentile of companies comparable comparable companies companies Marketing, 10% 10.84% 10.84% 4% to 6.6% 6.6% to promotion and 12.5% Sales Trading Support
13. In respect of services provided by CLSA America, Deloitte has done their benchmarking analysis the results were as under:-
Nature of services AY 2016-17
Cost Plus mark-up Arm‟s length range
earned by AE using 35th & 65th
percentile of
comparable
companies
Marketing, Cost plus 10% 8.65% to 17.93%
promotion and
Sales Trading
Support
14. Accordingly, it was submitted before the authorities below as well as before us that the above benchmarking, i.e., the cost 11 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited allocation and mark-up benchmarking conjointly establishes that international transaction pertaining the intra-group services were at arm‟s length.
15. The TPO has however rejected the entire benchmarking analysis done by the assessee and then proceeded to conclude ALP on some adhoc estimation. He adopted the benchmarking of the transaction using CUP as Most Appropriate Method. He has estimated total man hours of the services rendered by AE to the assessee at 10,000 hours on adhoc for A.Y.2013-14, 2014-15, 2015-16 and 2016-17 each. In addition, he has estimated the salaries of the employees at an adhoc of Rs.4000/- per hour for A.Y.2013-14 and Rs.5000/- per hour for A.Y.2014-15, 2015-16 and 2016-17. Accordingly, the ld. TPO has proposed the following additions in these years:-
Particulars Total payment ALP determined by Addition made of intra-group TPO (10,000 hours * by Id, TPO services rate per hour) A.Y.2013-14 160,26,18,641 4,00,00,000 {10,000 * 156,26,18,641 4,000} A.Y.2014-15 121,09,51,979 5,00,00,000 (10,000 * 116,09,53,278 5,000) A.Y.2015-16 149,65,87,465 5,00,00,000 (10,000 * 144,65,87,463 5,000) A.Y.2016-17 157,14,21,372 5,00,00,000 {10,000 * 152,14,21,372 5,000) 12 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited
16. In so far as various evidences and analysis are concerned, the observations of the ld. TPO, for the sake of ready reference are reproduced as under:-
In this regard it is important to note that the AE is providing its services to its Group Entities including the assessee only. The AE is not providing these services to unrelated third parties meaning thereby it is only a captive service provider. Secondly, the search provided by the assessee doesn't specify whether the search has been made for captive service provider. As the AE is providing risk free services whereas the comparables are doing for profit making. Hence, the comparables selected in the search is not correct. Therefore, the same is rejected. Hence, the benchmarking used by the assessee is rejected. Further, the assessee has to also discharge its onus that the cost incurred is for the benefit of India. It is pertinent to note that the assessee has changed the benchmarking methodology by taking overseas AEs as tested party as compared to last year, where by entity level TNMM of the assessee was selected to benchmark the transaction. It is clearly coming out the change in methodology is warranted on account of operating losses of the assessee i.e. without other income.
Further with regard to the detailed cost benefit analysis and also of the fact that the assessee has incurred losses as discussed in detailed below, the benchmarking approach adopted by the assessee is propose to be rejected.
5.5 Analysis of the TPO From the P & L account of the assessee it is observed as under:
TOTAL OP REVENUE 252,45,10,000 TOTAL EXPENSES 294,74,08,000 (including intra-group payment of Rs 160,26 crores) OP LOSS (-) 42,28,98,000 13 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited OTHER INCOME 49,73,58,000 PROFIT BEFORE TAX 7,44,60,000
The total operating turnover of the company during the year was Rs 252.45 crores and other income constituted 49.73 crores. The profit before tax was of Rs 7.4 crores. However, by excluding the other income the assessee has actually incurred a loss of Rs 42.28 crores. The total intra group charge was Rs 160.26 crores. The profits from the operations before the intra-
group charge were a profit of Rs 152.86 crores. It is difficult to comprehend under an arm's length scenario, whether a third party entity would be willing to pay a charge of more than 100% of its profit as a service charge. Further, calculating the said charge as a percentage of sales amounts to 63% of its operating revenue (160.26 crores/254.45 crores). The assessee has clearly failed to demonstrate such a high percentage of intra group charge calculated as a percentage of sales. In the independent arms length scenario it has to be established that the huge charges paid commensurate with the benefits (with detailed benefit test documentation). Also in an arm's length scenario an independent would evaluate the total charge club under the various baskets. However in the current situation the assessee was unable to give the total charge incurred by the AE towards various services and also the allocation keys/methodology. Under the OECD guidelines for transfer pricing an indirect charge method use allocation keys has been prescribed for such charges.
From the details and evidences submitted it is clear that the assessee has not been able to prove that it has actually received services of some value that call for such a huge payment. (more than 100% of the profits earned by the company Also it is not established that these were duplicative and not shareholder activities and also whether any independent third party would be willing to pay such a high consideration for such sketchy services.
14 ITA No.6748/Mum/2017 and other appealsM/s. CLSA India Private Limited
a) The following are the crucial issues to be seen in such related party transactions:
The taxpayer's agreement with the associated enterprises related to intra group services is to be examined to see as to what kind of services were to be provided by the AE to the taxpayer As normally such agreements refer to a large number of services which could be rendered by the AE, the taxpayer has to specify the service(s) which is actually received by it for which the payment is made Whether the taxpayer really needed such services or not. If so, what direct or tangible benefit it has derived.
Contemporaneous information on the basis of which rate or payment for the service is determined This includes the cost benefit analysis done by the taxpayer at the time of entering into agreement. Whether any benchmarking analysis was done by the taxpayer so as to compare the amount which he would have paid to an independent person under similar circumstances.
Whether an independent person would have paid such amount in comparable circumstances Whether the expected benefit is commensurate with the payment Whether the taxpayer has separately incurred any expenditure on similar services and if so the necessity of making further payment to the AE for the same activity or it is a duplicate payment.
Whether the payment is in the nature of shareholder's activity or largely for the benefit of the AE.
Whether the AE is rendering such services to other AEs or dependent parties and it so the rate / amount charged from such persons.15 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited The cost incurred by the AE for providing such services and the basis of allocation key
b) in the present case the taxpayer has not been able to show as to when and how the various services were requisitions from the ABS, whether the services were actually needed by it, what cost benefit analysis was done particularly when a huge payment has been made by it to the ABs.
c) in arm's length situation before availing any service an independent person would consider the nature of services required by it and would make the payment which are commensurate with the nature of the service and the expected benefit derived there from.
d) No analysis was done as to the payment which would have been made to an independent person for such services.
e) Facts of the case clearly show that whether or not the taxpayer needed these services or whether or not such services were mainly for its direct benefit or whether or not such services were actually availed by it, the assessee had to share the costs on the basis of some allocation keys. No independent person in similar circumstances would pay such amount.
5.7 Evidences filed & comment for Intra Group Services:
The Assessee submitted voluminous paperbook to evidence benefit. The nature of documents maintained by CLSA India and submitted is as follows:
Various events/forums/roadshows organized for overseas clients in order to promote India business;
Call logs/meeting logs of employees engaged in rendering services to CLSA India;
Screenshots from the online system, evidencing communication between the centralized teams and overseas clients of CLSA India, 16 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited Sample emails exchanged between the central team and CLSA India, System reports showing the number of orders obtained by the overseas trader for CLSA India;
Sample research publications issued by the regional team / global team;
List of roadshows/meetings of India research team;
Samples of client queries / calendar invites for conference calls on the Indian market related issues, Sample emails exchanged between the central team and CLSA India, Training and user material circulated, Copies of notes, agenda, brochure, presentations and other written material circulated among the local team in respect of the trainings conducted, Policies created and implemented.
5.8 TPO's comments on evidences:
The services said to be provided by the Authorised Representative along with the evidences were thoroughly verified and following are the comments with reference to it:
(1) International Sales and Sales trading support:
Comment: The services rendered specifically to the assessee company were not submitted. The services described are very general, not substantive to prove that valuable services has been received by the AE. The assessee claimed that 2 key relationship persons were dedicated to India Desk and they were instrumental in generating revenue. The assessee furnished sample call log to relate sales to these employees. Further, it is also not verifiable that these person were working exclusively for India or not. Also, 17 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited FII are client of CLSA group and if some revenue is generated in CLSA India, it is merely because of being a member of group the intra group payments are supposed to be made for services availed not for membership of group.
(2) Regional Research The AE is also in the business of equity brokerage globally. The awards and recognition earned by the AE may not be sufficient cause to pay a certain sum under Arm's Length condition. Such a scenario cannot be visualized where a taxpayer would pay for the other Person's rewards and awards(valuable service not provided to the AE).
(3) Management:
As a shareholder, the AE needs to make any communication for an effective management in their day to day usage. It is peculiar to note that in business scenario announcements or communication would never be treated as services. The AR's submission that it requires separate fees for making announcements is not an acceptable proposition.
(4) Information Technology The specific IT services availed by the assessee company has not been submitted. The centralized IT facility developed by the AE per se may not be good reason to charge the cost the same to the assessee company unless they prove with the cost, the services received by the assessee company and naturally benefit desired by the Indian company No specific instances were submitted where the assessee requires such IT technology and received the benefits from the assessee. When the closely related parties transact, such evidences needs to be given along with the cost incurred.
(5) Broker Management.
The assessee company had submitted the Internal Account cannot procedures as evidence. After going through it was found that is being a general document conveying their group procedures and 18 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited policies. Merely conveying the procedures by a shareholder to the group company may not be termed as "service" under Arm's length condition. It is very clear from the procedure documents that benefit only the AE not the assessee (6) Compliance The compliance documents are very general and not commensurate with the payments made to the AE. The learned AR failed to establish that valuable or comparable services are provided to the assessee company (7) Legal:
All the e-mails are routine, day to day correspondences between the assessee company and the AE. No legal specific services/agreements are submitted by the AR to prove the genuine nature. These correspondences make it clear every work on legal is prepared by the assessee company and just send it for a review to the AE. All the mails request the comments from the AE. Under Arm's length principle such are essentially shareholder's services and the volume and quality is not commensurate with the payment.
Communications:
The media documents prepared are related the group activities and it is not clear how the same can be considered as "receipt of services" The presentation made by the group was annexed as evidence which is not at all commensurate with the huge payment received by the AE.
(9) Client Management:
The specific clients pertaining to the assessee company and the specific services are not submitted.
(10) Events marketing:
Certainly the documents show that it is a mere routine communication regarding approvals etc. At no stretch of 19 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited imagination this can never be said that the volume and quality is commensurate with the business. The above communication was sent by the assessee company to the AE and for that AE charges as "Intra group services"
(11) Operations Risk Management:
It is imperative that the shareholder has to ensure that CLSA India operates as per the laid down policies. Clearly a "shareholder activity" and does not require separate payment as per the OECD regulations.
(12) Human Resources:
The assessee had not submitted any specific instance that they have received same benefit out of the HR documents.
(13) Internal Audit:
It is clearly a shareholder activity to protect their own interest. Where the assessee company has a separate audit control mechanisms as per the Indian accounting standards/regulations, the "internal audit" is a duplicate procedure and benefits only the AE. This cannot be a service received by the assessee company clearly a beneficial document to the AE.
(14) CRM The learned AR has not submitted any credential evidence to show that the assessee company has received specific credit risk management services from the AE. The said documents simply communicates the limit approval, limit per client, limit per user and limit changes and it is not clear how these services require separate payment.
(15) Tax:
It is not prudent on the part of the assessee to show that the TP document drafts, communicating to AE regarding advance tax etc, requires a separate payment.20 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited (16) Finance:
For such training specific cost and other were not submitted. Budgeting is clearly a shareholder activity, benefits only the AE and not a service to the assessee company.
(17) The AR was requested to submit the documentary evidences for the services received. Most of the judicial decisions with respect to the management fees payment emphasize that TPO invariably needs to verify whether actually any 'Comparable (or) Valuable' services are received by the assessee company (18) TPO here has not questioned the commercial wisdom or benefits received by the assessee. The examination was carried out at a preliminary stage ie whether the documentary evidences submitted by the assessee would tantamount to service or mere a communication or whether the communication had arisen only due to the passive association of the AEs. In other words, whether any third party would pay separately for such services? This is a very basic examination to be conducted by the TPO during the course of assessment proceedings, It cannot be assumed that simple submissions of the mail correspondences before the TPO is sufficient to prove that the services are at arm's length. The AR had not satisfactorily explained about the actual services received from the AEs in most of the circumstances.
19) The volume and the quality of the services received by the assessee company is not commensurate with the huge suns paid by the assessee company. The TPO had gone through the submissions it was found that these services are routine day to day communication and most of them are shareholder's responsibilities, which needs to be rendered by them normally 5.9 Summary:
5.9.1 The detailed analysis given above, represents the entire evidences submitted by the assessee in support of receipt of service and an objective evaluation of the same. The conclusions can be summarized to state that while the assessee has given description of the various services for which the payment is stated to have been made, actual evidence for receipt of service has not 21 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited been furnished to justify the huge cost allocation or enable the ALP determination. Some Auditor's certificate has been furnished but, the evidences that were provided to the Auditor based on which the Auditor arrived at the conclusions, such evidences were not produced. Also, the assessee/AE has neither maintained any log book of the time devoted by the employees of the AE to provide the services to the assessee, nor did the assessee furnish details of actual cost incurred by the AE in respect of services availed by the assessee. In this connection, the assessee has not submitted the details of number of hours devoted by each employee in respect of the services provided to India and the per hour cost of these employees.
5.9.2 Though no concrete evidence of receipt of service has been provided by the assessee as detailed above, on a without prejudice basis it is estimated that, at the very best, the AE could have devoted a maximum of the following man hours in respect of various services claimed to be availed by the assessee:
SI No. Department Total share in Remark of % the TPO 1 International 70,74,57,499 44.14 These four Sales and Sale departments Trading constitutes Support 89% of allocation, 8900 man hours are estimated.
2 Information 32,66,77,692 20.37 Technology 3 Regional 21,08,28,472 13.15 research 4 Management 18,39,44,024 11. 47 5 Regional 2,21,42,977 1.37 Algorithm Business Support 22 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited 6 Broking 2,08,44,580 1.29 Management 7 Futures & 1,74,03,343 1.08 Options Management Support 8 Events 1,46,93,438 0.91 Marketing 9 Legal 1,44,90,443 0.89 10 Finance 1,42,84,910 0.88 11 Compliance 1,02,28,748 0.63 These departments constitutes 11% of allocation, 1100 man hours are estimated 12 Credit Risk 1,01,46,427 0.63 Management 13 Human 97,42,707 0.60 Resources 14 Client 95,96,538 0.59 Management 15 Tax Planning & 71,65,574 0.44 Management 16 Communication 69,42,107 0.43 17 Internal Audit 57,03,128 0.35 18 Administration 41,93,310 0.25 19 Operation Risk 0.21 Management 35,40,519 23 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited 20 CLSAU 24,84,926 0.14 21 Group Security 1,22,186 0.007 Function 22 Market Risk 50,073 0.003 Management 23 Development (64,982) This is Squad negative, so man hours not allocated Total 160,26,18,641 100 10000
17. Thereafter, TPO rejected the cost allocation as per the allocation keys which have been verified by independent auditors holding that it is not reliable, because the same is based on an agreement and assessee has failed to show that services have been availed. He further held that the principle of allocation of cost is not as per the Indian transfer pricing law and accordingly, he rejected the same. Thereafter, he proceeded to apply CUP and made the aforesaid TP adjustment and adhoc estimation as noted above.
18. The ld. DRP has upheld the adjustments / additions proposed by the ld. TPO relying on the earlier order for A.Y.2011- 12 for all the assessment years. For A.Y.2016-17, ld. DRP took cognizance of the order of the Tribunal from A.Y.2011-12, 2012- 13 wherein transfer pricing adjustment made by the TPO from this scope was utilized. Thereafter, the ld. DRP called for the remand report from the ld.TPO, however, in the remand report 24 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited the ld. TPO gave certain reasons to justify the ALP determined based on the adhoc cost per hour. The ld. DRP confirmed the TPO‟s stand by stating that ALP determined based on adhoc hours can be termed as use of "other method", without explaining how it can be reckoned as "other method". Thus, only to this extent, the finding of the ld. DRP is different in A.Y. 2016-
17, otherwise A.Y.2013-14 to 2015-16 was based on earlier order of the ld. DRP for A.Y.2011-12 which has been reversed by the Tribunal.
DECISION
19. We have heard both the parties at length, perused the relevant finding given in the impugned orders as well as voluminous details referred at the time of hearing as discussed above. The entire dispute involves around the transfer pricing adjustment made on account of intra-group services rendered by CLSA Hong Kong, CLSA UK, CLSA Singapore and CLSA USA. What needs to be examined for benchmarking the intra-group services is, whether prima facie following tests have been satisfied or not: Firstly, rendition test, that is, whether services has actually been rendered qua each of the heads of services during the year; secondly, need test, that is, whether there was need of such services; thirdly, benefit test, that is, whether there was some prima facie benefit from such services and whether any independent enterprise in comparable circumstances would be willing to pay for it and would have preferred to perform the activity through in-house; fourthly, duplicate services, that is, whether same services is being availed from in-house and again 25 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited from AE service provider leading to duplication of same services; and lastly, whether, it is part of its shareholder activity, that is an intra group activity may be performed even though the recipient entity do not need it and would not be willing to pay for it had it been from independent enterprises. It is performed because of its ownership interest in the capacity of shareholder. This type of activity cannot be reckoned as intra group services.
20. In respect of these tests, we have analysed various documents and evidences which were filed by the assessee before the TPO and also before us. In so far as „rendition test‟ is concerned, voluminous documents have been filed evidencing the receipt of intra-group services for each year which has also been highlighted in the evidence chart titled as „detailed chart of intra-group services therein‟. A summary of the documents substantiating the receipt of each of the services from the AE has been filed. From the perusal of these documents, it seems that these documents have been classified for various heads of services. From the perusal of the records it is seen that services and activities have actually carried out and same has been established through the details and description and invoices raised. This fact has not been denied by the TPO also.
21. In so far as need and benefit test is concerned, it was explained with reference to the business model and functions of the assessee and its foreign AEs, it has been stated that the CLSA group is a leading Independent brokerage house in Asia. It provides institutional equity broking, capital markets, merger 26 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited and acquisition, and asset management services to global corporate and institutional clients, having substantial operations in the Asia-Pacific region with offices and staff located in 15 Asian countries including in China, Hong Kong, Singapore Malaysia, Korea, India, Thailand, Philippines, Taiwan, Indonesia and Australia. It has more than 1,500 professionals spread across 20 cities across Asia Pacific, as well as UK and the US. It has Stock Exchange memberships in Hong Kong India Indonesia, Korea, Philippines, Shanghai, Shenzhen, Singapore, Taiwan, Malaysia and Thailand. Further it has been stated that, in its business to serve clients effectively, expertise is required at global/regional level as well as local level. The resources available with the assessee for sales, research, back-office are purely for localised work and are not capable to carry out the specialised global/regional activities. Further, the assessee does not have any international sales presence or capability to maintain client relationships with its global clients or conduct road shows outside India for its domestic mutual fund clients. Also, it did not have the internal resources to undertake regional research or perform back-office functions. Therefore, there was not only a need for the assessee to enter separate SLAs with the AEs, but also the assessee had benefitted from these services. The AEs operate as centralized hubs and provide regional and operational support services to the CLSA group companies; including broking relate services as well as a number of back office support services. It has been demonstrated with actual 27 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited benefits qua every activity carried out with evidences and explanation.
22. Further, assessee has also filed PWC AUP report wherein the cost for only those services have been allocated which benefitted the assessee and attention was drawn to the said report which is a detailed analysis to substantiate that the need and benefit test has been satisfied in the present case.
23. Lastly, in so far as duplicative shareholder test are concerned, it has been submitted that in the agreement itself there were important clauses with reference to the entities, viz.:-
CLSA Hong Kong 2.1 In consideration of the payment of Service Fees, Service Provider shall provide the Services to CLSAI throughout the term of this Agreement upon the terms and conditions set out herein and in accordance with all the requirements, procedures and guidelines agreed by the parties from time to time. For avoidance or doubt, all services provided under this Agreement shall exclude any stewardship, custodian or duplicative services that may be provided by the Service Provider.
CLSA Singapore "2.1 In consideration of the payment of Service Fees, Service Provider shall provide the Services to CLSAI throughout the term of this Agreement upon the terms and conditions set out herein and in accordance with all the requirements, procedures and guidelines agreed by the parties from time to time. For avoidance of doubt, all Services provided under this Agreement shall exclude any stewardship, custodian or duplicative services that may be provided by the Service Provider."
CLSA UK 28 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited 2.1 In consideration of the payment of Service Fees, Service Provider shall provide the Services to CLSAI throughout the term of this Agreement upon the terms and conditions set out herein and in accordance with all other requirements, procedures and guidelines agreed by the parties from time to time. For avoidance of doubt, all Services provided under this Agreement shall exclude any stewardship, custodian or duplicative services that may be provided by the Service Provider."
24. Thus, the cost for any services that were duplicative or shareholder in nature has specifically not been allocated and the PWC AUP report contains various disclosures. Thus, on perusal of the documents which will be discussed in detail in the following paragraphs, it can be seen that all the requisite tests as stated above will be satisfied in the case of the assessee.
25. Further, we had enquired upon identifying the direct and indirect cost incurred and allocated by the AEs and charged alongwith a mark-up. In support, reference was given to separate benchmarking performed by KPMG wherein the cost plus mark- up charged by the AE was compared with similar cost plus mark up charge with independent comparable companies. Though the profit level indicator which was tested was cost-plus, since the costs involved both direct and indirect costs, the method used was TNMM and not cost plus. The reason given was that cost plus method was used when direct costs are charged, when both direct and indirect costs are charged, margins are required to be tested at net level, hence, TNMM was adopted. Before us, our attention was also drawn to the decision of the Tribunal in 29 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited assessee‟s own case for A.Y.2011-12 wherein the Tribunal has followed the decision in A.Y.2012-13 and upheld assessee‟s benchmarking based on overseas AE as tested parties. Now our attention was drawn on para 9 of the said order which reads as under:-
9. We have considered the facts for A.Y. 2011-12 viz-a-viz A.Y. 2012-13. Only difference in these two years is that in A.Y. 2012-
13, the TPO has given allowance on the basis of adhoc rate per hour and in A.Y. 2011-12, the TPO has made it nil on adhoc basis. The assessee has provided evidences in both the years of services received and benefits. Also assessee has provided AEs margin and Bench marking including PWC-AUP report for both the years and used TNMM to justify ELP. However, on the other hand, TPO has followed no prescribed method as envisaged by section 92 C of the Act. Therefore, we are inclined to hold that adjustment made by the TPO is bad in law and, accordingly, deleted. Further the TPO has not determined the ALP of the international transactions in accordance with the provisions of section 92C of the Act. There is no reason to disapprove the Transactional Net Margin Method applied by the assessee as the most appropriate method."
26. Now from the perusal of the evidences filed for intra-group services and the nature of services rendered have been highlighted in the following manner:-
International Sales and Trading Support [70,74,57,499] Dedicated India specialists in New York and London Facilitation activities in relation to introduction of new clients to CLSAI General promotion of CLSAI, India equities and the India market India equities sales to CLSAI introduced clients in US, Europe and elsewhere in Asia 30 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited Facilitating order execution by CLSAI Need:
Sales effort is a cohesive effort of the sales teams based in New York, London, Singapore and Hong Kong. Given that a significant portion of the Assessee's client base comprises of international clients, the sales teams must be close to the clients they wish to serve. The services provided by the centralized sales team includes, Client Acquisition, Client Servicing, Trade Execution.
Client acquisition - The centralized sales team undertakes significant efforts to attract international clients to the Indian markets.
Client servicing - Involves providing a desired level of service to the clients in accordance with the assigned service bracket. The sales people sell the general/market specific research ideas to the investors. A Key Relationship Manager ('KRM') is appointed at the client location, whose responsibility is to ensure a client is assigned a suitable service bracket (in proportion to their potential revenue generating capability).
Trade execution - Apart from client origination and client servicing activities, the Assessee is assisted by dedicated CLSA sales trading professionals in New York, London, Singapore and Hong Kong who act as intermediaries to take client orders for subsequent execution by the Assessee dealers. The dealing support team are also responsible for the order taking and entry into the Order Management System ('OMS') for subsequent execution by the Assessee. This is a crucial function in relation to foreign clients that wish to trade Asian equities with the Assessee.
Benefit:
These services improve the efficiency of the local teams by performing order taking and entry into the order management system centrally. This creates significant 31 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited economies of scale which are shared amongst the service recipients including the Assessee.
The Assessee also benefits from the sales and marketing activities undertaken in the various offshore locations. These services provide a reach that no one local broker could itself achieve and represents a key benefit.
Due to regulatory constraints, it is only possible for the CLSA Affiliates to have access to the USA clients.
27. The TPO has alleged that the services rendered specifically to the Assessee Company were not submitted. The services described are very general, not substantive to prove that valuable services have been received by the AE. The Assessee claimed that 2 key relationship persons were dedicated to India Desk and they were instrumental in generating revenue. The Assessee furnished sample call log to relate sales to these employees. Further, it is also not verifiable that these persons were working exclusively for India or not. Also, FII are client of CLSA group and if some revenue is generated in CLSA India, it is merely because of being a member of group, the intra group payments are supposed to be made for services availed not for membership of group.
28. Before us it has been elaborated further:
Regional Research Preparation of reports and in-sights on global equity markets, economics and industry research, quantitative and technical research and thematic Insights for CLSAI clients Editing, designing, publication and distribution of CLSAI written research reports 32 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited Need:
CLSA provides regional research services to the Assessee, which Includes the preparation of reports and in-sights on global equity markets, economics and industry research, quantitative and technical research and thematic insights for the preparation of the Assessee's research products. The local team prepares research reports every month which covers issues relevant to India, Indian Industries and Indian companies. The local team leverages guidance from the global and regional research teams to develop its research publications and ideas and the global and regional research teams are involved at all stages of identification, conceptualization and review of the final research reports.
Further, they provide timely review and guidance on the various research outputs produced by the local team.
CLSA also provides research production support functions. The Assessee sends its research output to the centralised team based in CLSA HK for review, editing and publishing. The centralized team incorporate inputs received from overseas CLSA HK teams into the draft research product prepared by the Assessee. The draft is then edited and formatted to ensure the final version is consistent with group standards before presenting to clients.
Benefit:
The regional research services provided by CLSA enhances the quality and efficiency of research output by providing a dedicated team of research staff to perform the research at a regional level and review any research output produced by the Assessee. The Assessee therefore benefits from a large and well-recognised research team that it could not finance independently. This is important as investors require an overall research product and not simply a country/company perspective.
The Assessee also benefits from CLSA Evaluator, a powerful proprietary research database owned / managed by CLSA. This system contains data from CLSA's research team covering approximately 1,000 Asian companies as well as data from other 33 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited vendors such as Reuters and Bloomberg. It enables the Assessee to leverage the expertise for detailed quantitative and technical analysis.
Furthermore, the Service Provider's centralized research publishing, production and dissemination process enhances the Assessee's reputation and facilitates higher revenue generation by ensuring consistent high quality research is produced.
TPO‟s allegation is that the AE is also in the business of equity brokerage globally. The awards and recognition earned by the AE may not be sufficient cause to pay certain sum under Arm's Length condition. Such a scenario cannot be visualized where a taxpayer would pay for the other persons rewards (valuable service not provided to the AE.)
29. On the Information Technology, it has been staed in the following manner:-
Need:
CLSA has a central IT team (Group IT team) that supports the various local CLSA entities. There is approximately 200 experienced staff in the Group IT team. The Group IT team is responsible for developing and maintaining the key IT applications and software processes that are essential for smooth functioning of the broking business undertaken by the CLSA group. The major IT activities undertaken by the CLSA Service Providers/CLSA Affiliates Include Application software design, development, maintenance and support, IT engineering.
Global systems hosting, support, and data retention Remote support of selected in-country applications and technology infrastructure;
IT Help Desk and fault resolution services;34 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited E-mail system hosting and support, Website hosting and support, Remote Access systems;
Video Conferencing services;
Project Management The local IT team provides the Global IT team with relevant details of a proposed project such as purpose, requirement and vendor details. This enables the Global IT team to assist local entities in a time bound and cost effective manner and prepare a Project Initiation Document;
IT-related Procurement and Vendor Management; IT management information reporting tools, Information Security consulting and monitoring, and IT training Benefit:
These services benefit the Assessee by improving the efficiency of the local IT team by providing technical support for the global systems. The services also benefit the Assessee by providing support with development and implementation of appropriate IT systems and lower prices for their IT purchases via globally negotiated contracts.
The equity broking business is highly dependent on state-of-the- art IT facilities. This is primarily due to the time and price sensitive nature of the business, difference in the time zones of the overseas client and India.
For eg, an order for a certain stock may be booked by an overseas client at a time when the stock markets in India are not trading. In such a scenario, the decision to buy / purchase a certain stock for the overseas client needs to be communicated to the Indian dealer (with appropriate instructions). This communication is done via centralized global electronic order management system (managed and maintained by the Global IT team), to assure that the stock is purchased at the appropriate price / quantity.
An effective IT infrastructure facilitates smooth operation of the CLSA Group's broking business, which thereby results in minimal errors while buying / purchasing Indian equities. A robust IT 35 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited infrastructure leads to better client servicing, client management and client relationships, which further facilitates generation of brokerage commission for the Assessee.
TPO‟s allegation is the specific IT services availed by the Assessee company has not been submitted. The centralized IT facility developed by the AE per se may not be good reason to charge the cost the same to the Assessee company unless they prove with the cost, the services received by the Assessee company, and naturally benefit desired by the Indian company. No specific instances were submitted where the Assessee requires such IT technology and received the benefits from the Assessee. When the closely related parties transact, such evidences needs to be given along with the cost incurred.
30. Regarding Management and related support as required by CLSA it has been explained in the following manner Need CLSA provides management and other support services which include senior management oversight and input as well as other related support as required by the Assessee. The CLSA top management personnel consists of the chief executive officer ('CEO') and chief operating officer (COO) of the group.
Benefit:
The CEO of the CLSA group has an oversight and management responsibility over all CLSA entities. In this capacity, the CEO contributes to the revenue growth and cost efficiency of the group by frequently interacting with the entities to co-ordinate business development and strategic initiatives as well as to meet with larger clients of the CLSA group. In addition the COO is responsible for the overall operational setup of the CLSA group and ensures each of the CLSA entities follow consistent operating procedures and processes, thus facilitating operational efficiency.36 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited The activities performed by these senior personnel provide the group with high level of operational efficiency, thereby resulting in cost optimisation and increased profits. Further, by co-ordinating business development and strategic initiatives, these senior personnel contribute to revenue generation.
Additional evidences The benefit to CLSA India is that with a strong parent, there will be new opportunities of starting different lines of business activities. Introduction of objective setting, which helps employee to set targets for the upcoming year and with management playing a key role in implementing it across locations including India.
TPO‟s Allegation on this point is that as a shareholder, the AE needs to make any communication for an effective management in their day to day usage. It is peculiar to note that in business scenario announcements or communication would never be treated as services. The AR's submission that it requires separate fees for making announcements is not an acceptable proposition.
31. Regarding Communications and Website it has been stated:
Media relations for CLSAI Brand Management Need:
CLSA is responsible for maintaining media relations for the Assessee, providing brand management, and creating and administering the Assessee's website.
Benefit:
These services benefit the Assessee by providing the overall branding of the CLSA group and coordinating the quality of the organisation, promotion and delivery of any external marketing events or courses for the Assessee's clients 37 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited TPO on this aspect has observed that the media documents prepared are related the group activities and it is not clear how the same can be considered as "receipt of services". The presentation made by the group was annexed as evidence which is not at all commensurate with the huge payment received by the AE.
32. On Compliance it has been stated:-
Establish, maintain and in conjunction with CLSAI enforce CLSAI compliance policies Education of staff on their obligations and responsibilities to clients and the company including the preparation of training courses and the management of CLSAI staff compliance declaration Establish, communicate, monitor and enforce effective compliance policies and procedures to address compliance requirements and risks applicable to CLSAI Training CLSAI compliance officers Account opening advice and support services Need:
CLSA has a central or regional compliance team which provides compliance services including establishing, maintaining and enforcing compliance with various policies and local regulations that are applicable to the operations of the Assessee. CLSA also provides training / ongoing education of staff in relation to their obligations and responsibilities to clients and the company. CLSA is responsible for establishing, communicating, monitoring and enforcing effective policies and procedures to address compliance requirements and risks. In addition, CLSA also has a specialized team to provide advice on anti-money laundering, regional documentation, and account opening and related support services to the Assessee. As a regulatory requirement, the Assessee also has small team of 2 employees which is responsible for the 38 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited provision of local input to CLSA, like for example to obtain any approval required from the local regulators.
Benefit:
CLSA establishes relevant internal policies that the Assessee can apply to facilitate its day-to-day operations. The centralised provision of this function enables the Assessee to comply with various regulations applicable to its operations, ensure high quality internal control and risk management of its local business and reduce costs related to the compliance management and any potential non-compliance.
As per TPO, the compliance documents are very general and not commensurate with the payments made to the AE. The learned AR failed to establish that valuable or comparable services are provided to the Assessee company.
33. On Credit Risk Management it has been explained:-
Ensure that credit risk exposures of all new counterparties have an appropriate review of their credit worthiness and that the risk arising from the acceptance of orders from customers are recognised, measured and monitored.
Need:
CLSA provides credit risk management services aligned with the CLSA group's global risk management. The services provided include ensuring all new counterparties have an appropriate review of their creditworthiness and that the risks arising from the acceptance of orders from customers are recognized, measured and monitored.
Benefit:
These services benefit the Assessee by managing the credit risk exposures at a regional level and ensuring this is consistent with the global group policy and any local regulatory requirements in India. In addition, the centralised management by CLSA provide 39 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited information on the solvency and general creditworthiness of the Assessee's clients.
As per the TPO, the learned AR has not submitted any credential evidence to show that the Assessee company has received specific credit risk management services from the AE. The said documents simply communicates the limit approval, limit per client, limit per user and limit changes and it is not clear how these services require separate payment.
34. As regards Events marketing, following has been stated:
Organising the India advisor forum for CLSAI Organising overseas roadshows and forums and the participation of CLSAI clients in such events.
Need:
CLSA is responsible for organising events in relation to the regional CLSA brokerage business. This includes organising the Annual Investor Forum in Hong Kong for CLSA group clients, organising the ASEAN investor forum for the Assessee, organising overseas road shows and forums and arranging the participation of the Assessee's clients in such events. A designated team is responsible for providing assistance in organising the forums for brokerage clients in the region including India from time to time.
Benefit:
The centralised management of the events/forums ensures consistent approaches are being used across the CLSA group and is more efficient than having multiple local event management teams.
However TPO observed that, certainly, the documents show that it is a mere routine communication regarding approvals etc. At 40 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited no stretch of imagination this can never be said that the volume and quality is commensurate with the business. The above communication was sent by the Assessee company to the AE and for that AE charges as "Intra group services".
35. On Finance and accounting:-
Maintenance of accounting system that is made available for CLSAI's use Advice on regulatory reporting policy Management accounting support services Advise on CLSA accounting policy Budgeting support services Advice on liquidity management and funding Support for capital budgeting and expenditure Need:
CLSA provides finance and accounting services including training on accounting software, ensuring financial records comply with prevailing internal as well as external policies and regulations, and other general finance and accounting support where required.
CLSA is responsible for generating a monthly summary worksheet to ensure the Assessee properly books the profit and loss statement.
CLSA is also responsible for providing budget and accounting support services, supporting capital budgeting and expenditure, preparing a monthly report, managing credit risk and providing advice on treasury management (example advising the Assessee to transfer funds between its accounts to manage its credit risk).
Benefit:
Centralised provision of these services benefit the Assessee by ensuring its performance is tracked and capital budgeting and the 41 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited credit risk exposures are managed in line with the CLSA group standards.
TPO held that for such training specific cost and other were not submitted. Budgeting is clearly a shareholder activity, benefits only the AE and not a service to the Assessee company
36. On Human resource:-
Establish CLSAI policy on recruitments Review staff contracts Advice on CLSAI training requirements Establish and advice on CLSAI appraisal requirements Advice on payroll and other benefits Design and co-ordinate all succession planning Need:
CLSA provides HR services to the Assessee. CLSA provides strategic and routine support to CLSA entities, including the Assessee. CLSA is mainly responsible for providing guidance to the CLSA entities and granting relevant approvals such as recruitment of personnel. The Assessee is responsible for executing the guidance provided by the Service Providers. CLSA's key activities include payroll and taxation function, HR information system, compensation & benefits, project control, policies and procedures, relationship management, annual review, interviews, centralized evaluation, negotiation and procurement for employee related benefits and organizing and managing several training programs.
Benefit:
Centralised provision of these services benefits the Assessee through the application of consistent policies on recruitment. The services also benefit. the Assessee by providing high quality employee practices and the ability to leverage the experience of other CLSA entities with respect to the profile of candidates they need and management of their human resources.42 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited On the other hand TPO observed that the Assessee had not submitted any specific instance that they have received same benefit out of the HR documents.
37. Internal audit:-
Provide Independent assurance over the Internal control environment supporting the CLSAI businesses and operations as a whole, including effective procedures for risk monitoring and administration and compliance with regulatory rules, CLSAI internal policy and corporate governance.
Report the outcome of internal audit reviews to CLSAI management and board of directors Need:
CLSA has a global audit team based in Hong Kong and Singapore, which provides internal audit services to the Assessee. These services include providing independent assurance over the control environment supporting the businesses and operations as a whole, providing effective procedures for monitoring risk and complying with regulatory rules, and providing guidance on group internal policy and corporate governance. These services also include reporting the outcome of internal audit reviews to the Assessee's management and the Board of Directors. The internal audit team visits the Assessee once every year for a period of three to four weeks to conduct an internal audit of the Assessee.
Benefit:
These services benefit the Assessee by providing independent assurance as required by local regulations in India. By improving compliance transparency and risk management, these services enable the Assessee to mitigate issues that could potentially lead to a significant level of financial, reputation and / or regulatory impact.43 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited TPO on the other hand has held that, it is clearly a shareholder activity to protect their own interest. Where the Assessee company has a separate audit control mechanisms as per the Indian accounting standards/regulations, the "internal audit" is a duplicate procedure and benefits only the AE. This cannot be a service received by the Assessee company clearly a beneficial document to the AE.
38. Legal:
Preparation of independence review of all documents that may create rights or obligations on the part of CLSAI Review of all corporate documents pertaining to CLSAI Review of all corporate filing to government agencies Instruction of external counsel In conjunction with compliance, the clearance for communication with any stock exchange or regulator Management of any legal cases, potential or in progress Need:
CLSA provides legal services including the preparation or independent review of all documents which may create rights or obligations, and all corporate documents pertaining to the Assessee.
CLSA also assists in preparing or reviewing any corporate filings to government authorities, provide instruction and use of external lawyers, assist in the clearance of communication with any stock exchange or regulator, as well as manage any potential or in progress legal cases.
Benefit:
This ensures the Assessee is in compliance with the relevant regulations across various countries including the stock exchange and other regulators. Professional legal advice may also be provided as requested by the Assessee.44 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited TPO Allegation has alleged that all the e-mails are routine, day to day correspondences between the Assessee company and the AE. No legal specific services/agreements are submitted by the AR to prove the genuine nature. These correspondences make it clear every work on legal is prepared by the Assessee company and Just send it for a review to the AE. All the mails request the comments from the AE. Under Arm's length principle such reviews are essentially shareholder's services and the volume and quality is not commensurate the payment.
39. Operational risk management:-
Manage all aspects of operational risks exposures Provide operational risks supervision including without limitation established risk guidelines Need:
CLSA provides operational risk management services to the Assessee including managing all aspects of operational risk exposures and providing operational risk supervision including, without limitation, establishing risk guidelines for the Assessee.
CLSA also evaluates and provides a review of the Assessee's annual self- assessment reports which may involve CLSA physically observing the operations at the Assessee to assess the level of operational risk.
Benefit:
This allows the Assessee to ensure best practices are being adopted for their operations. The centralised provision is also more cost effective than if the Assessee managed this risk independently on a day-to-day basis.
TPO on this has held that it is imperative that the shareholder has to ensure that CLSA India operates as per the laid down 45 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited policies. Clearly a "shareholder activity" and does not require separate payment as per the OECD regulations.
40. Tax Planning & Management:-
Ensuring all CLSA entities are compliant with all tax laws and tax reporting requirements, Providing tax advisory and planning activities; Assisting CLSA entities address and manage tax audits and controversies, and Developing and managing effective relationships with external advisors.
Need:
The central tax team who overview and drive the tax functions at the local CLSA entities, have expertise and global insight, in depth knowledge about the operations of the CLSA group which assists in undertaking tax functions at the local CLSA entities.
Benefit:
These services benefit the Assessee by providing expert tax advisory and support services that assist in handling tax compliance issues and enable the Assessee to manage tax risks and establish best tax practices.
As per TPO, it is not prudent on the part of the Assessee to show that the TP document drafts, communicating to AE regarding advance tax etc, requires a separate payment.
41. Broking Management:-
Support of international institutional clients of CLSAI Need:
CLSA provides operational support and services for international institutional clients of the Assessee.46 ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited CLSA also manages new product setup and launches within the CLSA group, oversee broking, derivatives and sales trading from an operational perspective, manage IT projects from a business perspective, review procedures and re-engineer business processes as and when required and assist/drive strategic initiatives relating to the broking and derivatives business.
Benefit:
CLSA provides management oversight and business development for the broking business on a regional basis. The broking management team contributes to the business of the Assessee by visiting and meeting large clients, formulating and co-ordinating the research strategy as well as managing the overall operational framework of the CLSA group broking business.
TPO‟s allegation is that he Assessee company had submitted the Internal Account cannot procedures as evidence. After going through it was found that is being a general document conveying their group procedures and policies. Merely conveying the procedures by a shareholder to the group company may not be termed as "service" under Arm's length condition. It is very clear from the procedure documents that benefit only the AE not the Assessee.
42. Client Management:-
Make available to CLSAI the client management system known as 'CIS"
Maintenance of CIS and related systems / information Management of group client relationships Need:
The CLSA Service Providers / CLSA Affiliates make available to the Assessee the client management system known as CIS. The 47 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited CIS enables management of group client relationships, gathering client feedback and surveys.
Benefit:
This enables the Assessee to improve their client relationship management and service quality. The Assessee can also use the client feedback and surveys gathered by the CIS system at a lower cost than if they were gathered independently TPO held that the specific clients pertaining to the Assessee Company and the specific services are not submitted.
43. On all the above services discussed above, reference has been made to voluminous documents to show the rendition of services, need and benefit test under heads of „services‟ stand satisfied. Exactly similar analysis has been done vis-à-vis corresponding evidences for A.Y.2014-15, 2015-16 and 2016-17. As far as TPO‟s observations and allegations are concerned same are either bald statement de hors any analysis of the activity or evidences or without appreciating the business model and all the satisfaction of tall the tests qua all the services as discussed n detail above.
44. Further, on careful perusal of these evidences, we find that assessee before the authorities below has given all the details and evidences in support of not only on the rendition of services but also need and benefit test which we find that, all stands fully satisfied in this case. In so far as duplicative services also, it has been submitted that not a single activity done which are into duplicative in nature and neither there is any services which are in the nature of stewardship of shareholders activity. From the 48 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited perusal of PWC AUP reports, we find that detailed analysis has been done about the cost for only those services which had benefitted the assessee and separate benchmarking analysis has been done for each of the AEs for various services rendered by them. The approach of the ld. TPO after discovering all those evidences to adopt that adhoc estimation of man hours is highly unjustifiable was it is neither based on any method nor analysis for the documents simply rejecting the documents without any proper basis or reasoning cannot be sustained so as to justify some adhoc estimation.
45. In so far as benchmarking approach conducted by the assessee for intra-group services, from the perusal of the reports specially by the benchmarking performed by the independent auditor, KPMG, it is seen that direct and indirect costs have been clearly identified which has been incurred and allocated by the AEs and which has been charged alongwith mark-up. The cost plus mark-up charged by the AEs have been compared with similar cost plus mark-up charged by the independent comparable companies. The TPO had sought to reject the assessee‟s benchmarking using AE as a tested party, holding that AE is providing services to its group entities including the assessee only and it is not providing the services to any unrelated third parties, therefore, it is only captive service provider and the search provided by the assessee does not satisfy whether search has been made for service provider, because AE is providing risk free services whereas the purpose is profit making. Though prima facie reasoning given by the ld. TPO may 49 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited appear to be correct, however, in all the cases of captive service business based in India, for example, Software Development Company, TPO here in India use profit making companies for benchmarking. If one captive entity is providing services to other captive entity then its comparison of controlled transaction with another controlled transaction cannot be done. Even for the captive service provider, the cost plus mark up has to be seen from the independent entities, whether the profit margin for providing such services are at arm‟s length vis-à-vis the assessee. Further, as noted above, the Tribunal has rejected TPOs contention in the earlier years that foreign AE cannot be treated as tested party. The assessee has taken benchmarking analysis, firstly at entity level TNMM as well as TNMM analysis by taking foreign AE as tested party to substantiate the arm‟s length price. By taking foreign AE as tested party transaction by transaction benchmarking approach has been adopted for each international transaction which is justified method and accordingly, in line with the earlier years we upheld the benchmarking analysis of the assessee using foreign AE as tested party.
46. Now, coming to the other method which has been applied in A.Y.2016-17 by the DRP, first of all, Rule 10AB provides as under:-
"For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled 50 ITA No.6748/Mum/2017 and other appeals M/s. CLSA India Private Limited transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts."
Ergo, there are critical aspects of Rule 10AB. This method requires determination of ALP based on the following parameters:-
i. the price which has been charged or paid, or would have been charged or paid.
ii. for the same or similar uncontrolled transaction. iii. under similar circumstances, considering all the relevant facts.
47. Thus, the sixth method does not permit TPO to determine the ALP of best judgment basis or estimation basis but he has to arrive at ALP based on above parameters. Further, by adopting adhoc basis also, TPO has not even followed the CUP method at this stage. At this stage, it is relevant to quote the following paragraphs of the Tribunal in A.Y.2012-13 in the case of the assessee.
18. In order to determine the said questions, it is important to see as to whether the Ld. TPO has determined the arm's length price of the International transactions by following one of the prescribed methods which is the most appropriate in the light of the facts and the circumstances of the case? We notice that the Ld. TPO has estimated the man hours of services rendered by the AE to the assessee at 10000 hours and applying the rate of 3000 per hours determined the arms length compensation of the services rendered by the AE to the assessee at Rs. 3,00,00,000/-
19. The Ld. TPO has justified the method of estimating the hours devoted by the AE in respect of various services claimed to be availed by the assessee holding as under:-
51 ITA No.6748/Mum/2017 and other appealsM/s. CLSA India Private Limited "5.11.2 In the absence of all these details regarding the number of employees working with the AE, the salaries paid to these employees, the educational qualification of these employees, the number of hours dedicated by these employees towards the services rendered to the assessee, the undersigned is constrained to go by estimation to the best Judgment, to quantify the value of the services if at all any being rendered by the AE to the assessee. Without prejudice to the contention of the undersigned, regarding the services being rendered by the AE to the assessee. However after considering the evidence filed by the assessee, as a matter of abundant precaution, the undersigned proceeds to make a reasonable estimate, of whatever little services that can be said to have been rendered in the facts and circumstances of this case. Having regard to the nature of services which are claimed to have been rendered in the instant case, the undersigned estimates the salary for such an employer at Rs. 3000 per hour. To the best of my judgment, the number of man hours rendered by the employees towards rendering of these services to the assessee, is estimated earlier at 10,000 Hours at para 5.8.2"
20. From the observations of the Ld. TPO, it is clear that TPO has made the transfer pricing adjustment purely on estimation basis without any supporting material. Though the Ld. TPO has mentioned that arms length price has determined by applying CUP method but in fact the Ld. TPO has not come up with any comparables to justify the application of cup method. The Ld. TPO has not brought on record any material to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. The Ld. TPO has also not brought on record any instance where comparable services were provided to an independent enterprise in the recipient market. So in view of the fact that the Ld. TPO has, in fact, not applied the CUP method to determine the arm's length price of the transaction, there is no reason to reject the TNMM method applied by the assessee."
52 ITA No.6748/Mum/2017 and other appealsM/s. CLSA India Private Limited
48. Thus, this Tribunal has already rejected adhoc determination of TP adjustment in assessee‟s own case. Though the approach of the ld. TPO has been rejected in the earlier years, however, for these years, independently also we have examined all the evidences on the nature of services rendered but also tested need and benefit test, duplicative test with the evidences. We have found all the requirements to satisfy these tests have been elaborately demonstrated including allocation of the cost as well as detailed analysis for benchmarking of the margins for each and every cost which has been applied by the independent auditors. We do not find any shortcoming or defect in such allocations and therefore, we have no reason to reject the benchmarking analysis done by the assessee duly supported by independent report of PWC AUP and KPMG. Accordingly, based on aforesaid analysis and details of various intra-group services duly substantiated by the evidence and the benchmarking analysis, we do not find any reason to justify the TP adjustments made by the ld. TPO based on adhoc estimation. Accordingly, the same are deleted.
49. Thus, TP adjustments for A.Y. 2013-14, 2014-15 and 2015- 16 are deleted.
50. In A.Y.2014-15, another ground which has been raised in disallowing MAT credit entitlement of Rs.1,53,51,465/- ,same is directed to be verified by the ld. AO to examine the MAT credit entitlement and allow in accordance with law.
53 ITA No.6748/Mum/2017 and other appealsM/s. CLSA India Private Limited
51. In A.Y.2016-17, another one corporate ground which has been raised is disallowance of Rs.69,55,000/- made u/s.14A r.w.r.8D.
52. The brief facts are that assessee had earned dividend income of Rs.11,05,000/- and the entire dividend has been estimated earlier as assessee filed computation of income and income tax return for the year under consideration. However, the authorities below had blindly applied 14A r.w.r. 8D for making the disallowance of Rs.69,55,000/-. Once, the assessee itself has not claimed dividend income as exempt then there is no question of making any disallowance u/s.14A r.w.r.8D, accordingly, the same is deleted.
53. In the result, all the appeals filed by the assessee are allowed.
Order pronounced on 14th Dec, 2023.
Sd/- Sd/-
(S.RIFAUR RAHMAN) (AMIT SHUKLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai; Dated 14/12/2023
KARUNA, sr.ps
54
ITA No.6748/Mum/2017 and other appeals
M/s. CLSA India Private Limited
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. CIT BY ORDER,
4. DR, ITAT, Mumbai
5. Guard file.
//True Copy// (Asstt.
Registrar)
ITAT, Mumbai