2. Presented by Alpana Saksena CIT (A) International Tax Mumbai

3. engaged in the equity broking business Its customers comprise. Business of the Company FF oreign Institutional Investors MM utual Funds, DD omestic Financial Institutions BB anks,

4. PROVIDES Stock Broking services to its AE in Mauritius. Value of transaction :Rs 1766.94 Crores Brokerage Earned :Rs 4.22 Crores Rate of Brokerage : 0.24 % Nature of International Transaction

5. TNMM Method used by taxpayer for computing ALP Taxpayer short listed 14 independent comparables Operating Profit Margins of taxpayer 24.87% Operating Profit Margins of 14 Comparable companies 8.65% So, So, taxpayer concludes that transactions are at arms length

6.  CUP method rejected because taxpayer stated that Method used by taxpayer for computing ALP  Volume of business given by the customer  Desire to capture market share  Negotiation power of the customer  Credibility of customer  Marketing efforts involved  Expected future business from the customer IIt was stated that reasonable and accurate adjustment cannot be made for aforesaid factors. the brokerage rates charged to customers vary on account of various factors such as

7. the turnover from AE constitutes 42.7% of the total turnover What triggered investigation? Main Income was from Clearing House Trades Rate of brokerage earned from third parties ranged between 0.10 % to 0. 50 %. Rate of brokerage earned from AE0.24 %.

8. 1. Details of brokerage rate charged for :  C H (Clearing House) trades 3. Average of brokerage rates charged to top 10 clients (in terms of volume) by the taxpayer What was examined

9. Client GroupTurnover Crores Brokerage Crores Brokerage rate AE (FII)1766. 944.220.24% Brokerage paid by AE to Taxpayer

10. Sl No. Client GroupTurnover In crores Brokerage In Lacs Brokerage rate 1 J Co (FII) 3361170.35 2 K Co 302 740.25 3 B Co 143 300.21 4 G Co (FII) 141 700.50 5 H Co (FII) 139 390.28 6 U Co 133 200.15 7 M Co (FII) 124 500.41 8 A Co 117 340.29 9 X Co (FII)86430.50 Average Brokerage Charged0.27%

11. SO this list showed that taxpayer had transacted with BOTH Foreign Institutional Investors (FIIs and Domestic Financial Institutions (FIs) The taxpayer was asked to furnish details of the top ten Foreign (FII) clients.

12. Sl No FII Turnover Crores Brokerage In lacs Brokerage % 1 J Co 3361170.35 2 G Co 141 700.50 3 H Co 139 390.28 4 M Co 124 500.41 5 B Co86430.50 6 A Co77380.50 7 A C Co74230.31 8 F Co31150.50 9 S Co28140.50 10 D Co25430.17 Brokerage charged from TOP TEN FIIs AVERAGE was…………………….0.40%

13. Thus it was seen that there was a wide difference between average brokerage rates of  0.40% charged from (FIIs)  0.24% charged from AE who was also an FII ClientRange of brokerage charged Foreign Institutional Investors (FIIs) 0.40% AE0.24% Pattern of Brokerage was……… Thus much lower rates charged from AE……and

14. There was an Internal CUP available

15.  Reason for variation in brokerage rate charged to third party FII customers RR eason for not using CUP to benchmark the brokerage income  If the AE had committed giving volume to the taxpayer …..then  To produce the Agreement entered with AE, if any for volume of business The questions asked

16. CUP can not be used Brokerage rate charged to different customers vary on account of various factors. Taxpayer’s defence Since, reasonable and accurate adjustments cannot be made for several factors brokerage rate charged to third party customers can not be used as CUP

17. Even if CUP is to be used 1. Volume adjustment should be done 2. no marketing and selling expenses incurred for procuring business from its AE Hence, Marketing and selling cost should be adjusted in the brokerage rate of third parties Taxpayer’s Defence whereas taxpayer to incur these expenses for procuring business from third parties To arrive at ALP

18. CUP is the appropriate method to benchmark the brokerage rate charged to AE Brokerage rate charged by the assessee to third parties can be considered as CUP In this case the average brokerage rates, in case of foreign clients (FIIs) was considered as Arm’s Length Rates and the same are 0.40% Department’s contention

19. Department’s contention  Volume adjustment can be made  No history of volumes seen  No agreement of any sort with the AE  existed  that the AE had committed to give volume business to the assessee  if the taxpayer can prove

20.  Marketing and selling efforts are involved in respect of business obtained from Non AEs Thus, adjustments for marketing functions had to be worked out. But the Department accepted  The taxpayer’s contention …..that

21. For Marketing Function: Considering the proviso of Rule 10B(1)(a)(ii) of the Act Taxpayer was asked to furnish details of marketing functions performed along with the expense incurred for it Adjustments made to Arms length Brokerage Which requires adjustments to be made while calculating ALP

22. The company had spent an amount of Re 0.0004 on marketing, per rupee volume of trade for all transactions with Non AEs Expressed in percentage terms it is 0.04% of marketing expenses per rupee volume of trade. An adjustment of 0.04% was considered as reasonable according to the provisions of Rule 10B(1)(a)(ii) of the Act and was reduced from the arithmetic mean of.40% brokerage earned by taxpayer from its top ten FII customers. Adjustments made to Arms length Brokerage

23. Brokerage rate of 0.40% charged by the assessee to third party FII customers is considered as CUP, Adjustments were made for marketing and selling expenses. Arms length brokerage was arrived at Calculation of Arms length Brokerage

24. Arithmetic mean of the brokerage earned by taxpayer from its top ten FII customers. 0.40% Less % of marketing costs incurred for Non AEs as discussed above 0.04 % Arms length Brokerage rate 0.36% Calculation of Arms length Brokerage

25.  Was applied to the taxpayer’s Clearing House transactions of Rs 1766.94 crores /- with its AE  Thus the Arms length Brokerage rate of 0.36% Addition of Rs 2.13 Crores was made Calculation of Arms length Brokerage

26. THANK YOU