TMI Blog2013 (12) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... internal transaction has actually been undertaken does not exceeds 5%, than only the benefit of tolerance range of +/-5% is to be given – The CIT(A) was incorrect on this view – Partly allowed in favour of Revenue - Decided in favour of assessee. Leased line charges, V-sat charges – Held that:- Following Kotak Securities Ltd. v/s ADIT, [2009] 25 SOT 440 [2008 (8) TMI 592 - ITAT MUMBAI] - V-SAT charges and transaction charges cannot be held to be rendering of technical services and, accordingly, cannot be considered to be covered under section 194J - The TDS is not required on the payment of V-SAT charges and lease line charges – Decided against Revenue. Interest paid to SEBI – Held that:- Following ACIT v/s Bulls and Bears Portfolios Ltd. [2011 (1) TMI 1056 - ITAT DELHI] 48 SOT 0527 - The interest paid to the SEBI for registration fees is a fee which is allowable as deduction in terms of the provisions of section 43B and would be allowable when such an interest is paid as per the SEBI (Interest Liability Scheme) 2004 – Decided against Revenue. Penalty to stock exchange – Held that:- Following assessee's own case for the assessment year 2000-01 - The payments are in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng disposed off by way of this consolidated order. 2. We first proceed to dispose off the cross appeals for the assessment year 2005-06. In the appeal in ITA no.6572/Mum./2011, preferred by the assessee, vide which, two grounds have been raised and the first ground relates to addition on account of transfer pricing adjustment of Rs. 89,15,190, and the second ground relates to disallowance on account of security transaction tax payable of Rs. 6,26,417. Whereas the Revenue in its appeal in ITA no.6451/Mum./2011, has raised the following grounds of appeal:- "1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition to the extent of Rs. 53,22,397/- on account of transfer pricing adjustment. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 1,86,67,243/- u/s. 40(a)(ia)." 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 1,55,0591- paid to SEBI as interest pertaining to earlier years. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities provides support to the Associated Enterprises (AE) in relation to investment banking mandates executed by AEs outside India. The support provided include the following: Providing information to the AE as per specific requests made by the AE; Conducting rudimentary research and providing the findings of to the AE based on specific requests made by the A.E; and Assisting the AE in preparing marketing material such as presentations, pitch-packs, etc. 4.6.5 UBS Securities never interacts directly with the clients of the AE nor assist in securing orders on behalf of the AE. Further, UBS Securities does not engage in any negotiations or discussions on pricing, term, etc., with the clients on behalf of the AE and it does not execute any documents or give any assurance of any nature to any person on behalf of the A.E." 5. The value of international transaction in respect of investment banking and support service to UBS AG, Hong Kong, amounted to Rs. 6,12,24,967. For rendering of such services, the assessee is being compensated by its Associated Enterprise (A.E) at cost plus 10%. The margin earned under this segment was shown as under:- Particulars Amount in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer (TPO) observed that in the second search, the assessee has dropped the three comparables and no reasons have been given for rejecting these comparables as they were also involved in similar activities. Rejecting the assessee's search of comparables, the TPO also conducted a fresh search to identify fresh set of comparables with the following margin. Sr.no Name of Company / Segment OP/TC as per TP 1. Ajcon Global Services Ltd. 40..70% 2. Epic Energy Ltd. 78.94% 3. Sumedha Fiscal Services Ltd. 41.46% (Segment - Consultancy) 4. IDC (India) Ltd. 11.56% 5. India Securities Ltd. 11.74% 6. Kinetic Trust Ltd. 12.50% 7. Crisil Ltd. (Segment - 9.20% Research and Info. services) 8. Wall Street Finance Ltd. (Seg. 12.79% - Finance and Allied activities) 9. ICDS Securities Ltd. (Segment 75.00% - Financial Advisory Services) 10. Maruti Insurance Brokers Ltd. 38.74% Arithmetic Mean 33.26% 10. These comparables were confronted to the assessee and, accordingly, a show cause notice was is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40.70% 2. Epic Energy Ltd. 78.94% 3. Sumedha Fiscal Services Ltd. 41.46% (Segment - Consultancy) 4. IDC (India) Ltd. 11.56% 5. India Securities Ltd. 11.74% 6. Kinetic Trust Ltd. 12.50% 7. Wall Street Finance Ltd. (Seg. 12.79% - Finance and Allied activities) 8. ICDS Securities Ltd. (Segment 75.00% - Financial Advisory Services) Arithmetic Mean 35.59% Accordingly, upward adjustment of Rs. 1,42,37,587 was made. 11. Before the learned Commissioner (Appeals), very detail objections were made with regard to some of the comparables included by the TPO namely, Ajcon Global Services Ltd. Epic Energy Ltd., Sumedha Fiscal Services Ltd. (segmental), IDCS Securities Ltd. (segmental) and also the exclusion of Crisil Ltd. (segmental). The assessee's objections / submissions have been discussed in detail by the learned Commissioner (Appeals) and such contentions have been rejected except for the exclusion of Crisil Ltd. by the TPO was rejected and the assessee's contention for including the same in the set of comparables was accepted. Thus, after the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -to-year. This is evident from the fact that in the F.Y. 2001-02, its margin was 18.50%, in F.Y. 2003-04, the margin was 9.36% and in the F.Y. 2004-05, its margin has shoot up at as huge as 75% as per the data given by the TPO. The main reason for such a fluctuation has not been brought on record. Further, as per its annual report, it has been disclosed that the revenue recognition from service transactions such as financial advisory services have been accounted on the completion of the assignment. In such a situation, there is always a problem of matching of revenue expenditure. This, at times, results into volatility of the margin for different years since the income of any year would not match with the expenditure incurred in that year. Thus, such a fluctuating margin and method of revenue recognition cannot be compared with the assessee's margin which is, by and large, constant due to mark-up given by the A.E. Another most important fact is that the income of the financial advisory segment mostly includes service charges received from Standard Chartered Bank which are shown at net of reimbursement of salary, rent and conveyance expenses. Such a netting of expenses results into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee submitted that this company was earlier into project consultancy and from the financial year 2004-05, it has ventured into new activities like portfolio management service, merchant banking service, marketing of IPO and other financial products. Another important aspect with regard to this company is that the operating income is majorly from stock market operation. Also there are no segmental details. Lastly, he submitted that the TPO has applied filter of the turnover of less than Rs. 1 crore and whereas the turnover of this company is Rs. 80.89 lakhs which is below Rs. 1 crore and this also includes sale of investment of Rs. 15.75 lakhs. Therefore, in all perspective, this company cannot be taken as comparable. iv) Epic Energy Ltd:- The learned Counsel for the assessee submitted that this company has increased its focus on energy sector and is mainly into project finance and consultancy. It has sold / discarded most of its assets from its balance sheet and no depreciation has been claimed in the financial year 2004-05. In the earlier years, there was huge expenditure on account of bad debt which in this year has been reduced substantially which has an impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search process of the comparables, he submitted that by adopting such criteria, the TPO has brought only three comparables, out of which one comparable has been excluded and two comparables were already a part of the original transfer pricing study report by the assessee. The assessee itself has selected these comparables for comparability analysis in its transfer pricing study report and, therefore, such a plea cannot be raised that these comparables should be excluded on the basis of filter criteria adopted by the TPO. i) ICDC Securities Ltd:- Coming to the comparables also the learned Departmental Representative made his elaborate submissions. He submitted that there is nothing on record that income is mismatched with the expenditure. If such a company was involved in merchant banking and stock broking, then the assessee is also doing the same function as it itself is involved in stock broking. Thus, the reasons given by the TPO as well as the learned Commissioner (Appeals) with regard to the inclusion of such a comparable is wholly justified. ii) Regarding inclusion of Sumedha Fiscal Services Ltd., the learned Departmental Representative submitted that this company was ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee's advisory business. Therefore, this company has rightly been excluded by the TPO. 16. On the other hand, the learned Counsel for the assessee submitted that while excluding the Crisil Ltd., the TPO has wrongly chosen the segment of gas and infrastructure advisory services whereas the correct segment which is to be taken is research and information services. He also pointed out the relevant segmental working of this company. This issue has been properly appreciated by the learned Commissioner (Appeals) and have been rightly included by the learned Commissioner (Appeals) in the final set of comparables, therefore, this objection of the Revenue cannot be sustained. 17. The learned Counsel for the assessee, by way of rejoinder to the earlier submissions of the learned Departmental Representative, submitted that even though the assessee is carrying out host of activities but one has to see what is the subject matter of bench marking. In this case, it is the international transaction with the A.E. which is purely investment banking support service. The assessee's transaction with the A.E. is only Rs. 6,12,24,967, whereas the assessee's other business transactions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of margin of comparables were worked out at 14.98% and it was submitted that since this margin is within +/ - 5% range, therefore, the assessee's operating margin is at arm's length. The assessee has taken the financial data for the financial years 2002 -03 and 2003-04 as at the time of preparing the transfer pricing study report, financial data for the financial year 2004-05 was not available. At the time of transfer pricing proceedings, after the objection of the TPO, the assessee submitted a fresh search and identified five comparables out of which there were four new comparables. The arithmetic mean of the margins of these five comparables was determined at 11.56% which was claimed to be within +/-5% range and thus assessee's margin were at arm's length. The TPO rejected the entire assessee's search of comparables and carried out his own search afresh to identify the fresh set of comparables after taking the following filters for eliminating the comparables. i) the company having zero fee based income; ii) the company having fund based income more than 25% of the total income; iii) the company having fee based income less than 25% of the total revenue; and lastly; iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of the assessee, firstly, because once it has been brought on record that in the earlier TP study report current financial data were not available and once the current financial data were available in the fresh search at the time of T.P. proceedings, then the same should be taken into consideration for the comparability analysis as it is in conformity with the provisions of rule 10B(4) which envisages that the data to be used in analyzing the comparability of uncontrolled transactions with an international transaction shall be the data relating to the financial year for which the international transactions have been entered into and, therefore, the earlier comparables which were based on earlier financial data should not be given preference to; and secondly, once the TPO himself has carried out fresh search and shortlisted the comparables based on current financial data, the same should be analysed rather than supporting the inclusion of such comparables on the ground that the assessee itself has chosen at the time of original T.P. report. There should not be cherry picking of the comparables but should be based on certain criteria and functional analysis. The comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree with the learned Counsel for the assessee that such a comparable has to be excluded from the final set of comparables. ii) Sumedha Fiscal Services Ltd. (segmental):- On a perusal of the annual financial account for the year ending 31st March 2005 in respect of Sumedha Fiscal Services Ltd. (segmental), which is the subject matter of analysis, it is seen that its main function is of loan syndication and project consultancy services. It also has income from capital market operation. The loan syndication is nothing but a merchant banking activity which is different from the functions carried out by the assessee with its A.E. The assessee is rendering investment banking advisory services and related support service to its A.E. The Tribunal in Carlyle India Advisors Pvt. Ltd. (supra) has held that Sumedha Fiscal Services Ltd. (segmental), which is engaged in merchant banking cannot be compared with the companies which are rendering investment advisory and related support services. The said company cannot be held to be compared with all the functions and activities carried out by the assessee. It is further noticed that under the product description in which the service are being ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal margin cannot be considered for comparability analysis specifically in case of the assessee, which is a kind of a captive service provider with limited risk. Thus, on these factors, this company also cannot be included in the set of comparables. 22. In view of the above, all the four comparables which have been included by the TPO are hereby rejected and they have to be excluded from the set of final comparables for determining the arm's length margin. 23. Now coming to Crisil Ltd., which has been excluded by the TPO and included by the learned Commissioner (Appeals), which is the subject matter of ground raised by the Revenue, it is seen that the TPO has rejected the said comparables on the ground that this company is mainly into gas and infrastructure advisory services which is entirely different from field as compared to the assessee's business function with its A.E. 24. Before the learned Commissioner (Appeals), it has been brought on the record that the TPO has taken wrong segment and in fact the correct segment should have been "research and information services". Before us also, the learned Counsel for the assessee had submitted the annual report of Crisil Ltd. f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urities through stock exchange. The Assessing Officer noted that the assessee has not deducted TDS while making the payment ot the stock exchange and, accordingly, held that such payments are to be disallowed under section 40(a)(ia). 30. The learned Commissioner (Appeals), relying upon the decision of the Tribunal in Kotak Securities Ltd. v/s ADIT, [2009] 25 SOT 440 (Mum.) and DCIT v/s Angle Broking Ltd., [2010] 35 SOT 457 (Mum.), held that V-SAT charges and transaction charges cannot be held to be rendering of technical services and, accordingly, cannot be considered to be covered under section 194J. Therefore, no disallowance under section 40(a)(ia) can be made. 31. Before us, it has been admitted by both the parties that the decision of the Hon'ble Jurisdictional High Court in Angle Capital and Debit Market Ltd. (supra) it has been held that fees paid for V-SAT and lease line charges are not "fees for technical services" as the same do not fall within the purview of section 194J. Regarding transaction charges, it has been pointed out by the learned Counsel for the assessee that in the earlier years, no disallowance has been made by the Revenue and, therefore, in this year al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability of interest payment got crystallized in the year under consideration when the SEBI came out with such an interest liability regulation scheme. He further observed that if the assessee was providing the interest on yearly accrual basis then such interest waiver by the SEBI to the extent of 80% would have become taxable under section 41(1) of the Act and not 20% which is paid by the assessee during the year. Accordingly, he disallowed the interest paid to the SEBI. 35. Before the learned Commissioner (Appeals), the assessee submitted that it has paid a sum of Rs. 1,55,059 to SEBI during the earlier year which pertains to the payment made under SEBI (Interest Liability Regulation Scheme) 2004. Detail submissions of the assessee have been dealt by the learned Commissioner (Appeals) from Para-6.2.1 to Para-6.2.9. After following various decisions of the Tribunal, the learned Commissioner (Appeals) decided the issue in favour of the assessee as per the findings given in Para-6.3. 36. Before us, both the parties agreed that this issue stands covered by series of decisions given by the Tribunal in various cases, some of which are as under:- 1. Wallfort Financial Services L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations of the AO in his order. Chapter VI A of the SEBI Act in respect of the levy of penalties. It is the observation of 'the AO in para 6.4 of the order that if the assessee has not collected sufficient margins, not maintained KYC forms or delayed in remitting securities, it would amount to the infraction of the law and therefore would be covered under the explanation of section 37(1) -of the Act Further as per the submission of the appellant the penalty as per chapter VI-A leviable in relation to stockbroker for failure to issue contract note, failure to deliver securities or make payments and for charging excess brokerage. It is further submission of the appellant that it has not been charged penalty in accordance with SEBI (Procedure for holding Inquiry and imposing penalty by Adjudicating Officer) Rules, 1995. It. is seen from the sample copies of statements issued by NSCCL submitted by the appellant that such payments are in the nature of processing fees for bad/short delivery, wrong claim for the corporate benefit, late reporting delayed settlement of IT trades, margin shortage charges etc. As these charges are computed based on the penalty points calculated based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per its own calculation. The said sum was also not returned to FFI from whom the said deduction was made. Accordingly, the Assessing Officer added the sum of Rs. 6,26,417 as the remaining sum of Rs. 32,55,044 pertaining to STT on trade executed on last two days. 46. It was submitted by the assessee before the learned Commissioner (Appeals) that such an amount payable has been reflected under the head "Current Liability" and this represents amount due to NSE on account of trade executed during the last two days of the financial year 2004 -05. The learned Commissioner (Appeals), however, upheld the action of the Assessing Officer but observed that the assessee has added the amount in the subsequent years which has been paid by the assessee as demand by the NSE and corresponding deduction can be claimed in the return of income on the payment basis in the year of payment. The relevant observations of the learned Commissioner (Appeals) are as under:- "I have considered the facts of the case, together with. the submission of the appellant as against the finding of the AO in his assessment order. It is the fact of the case that the appellant has deducted higher amount of STT than i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for tax for the subsequent years and, therefore, there should not be double taxation on this amount. 48. The learned Departmental Representative, on the other hand, submitted that the matter can be restored to the file of the Assessing Officer to examine this issue afresh to ascertain whether the amount was offered for tax and agreed that there should not be any double addition. 49. We have heard the rival contentions, perused the relevant findings of the Assessing Officer and the learned Commissioner (Appeals) as well as the relevant details of amount offered for tax which, for the sake of ready reference, is reproduced herein below:- Particulars A.Y. 2005-06 A.Y. 2006-07 Amount under dispute 6,26,417 9,52,738 Less: amount offered for tax in A.Y. 2008-09 1,50,171 4,90,647 Less: Amount paid in September 2009 4,61,217 3,60,766 Balance amount payable 15,029 1,01,325 In view of the above, we direct the Assessing Officer to verify this contention of the assessee and, accordingly, decide this issue afresh after calling for the necessary details from the assessee. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54. Owing to this bonafide belief, the assessee's case is squarely covered by the decision of the Hon'ble Jurisdictional High Court in Kotak Securities Ltd. (supra). 55. After carefully considering the rival submissions, we find that this issue is similar to ground no.2 of Revenue's appeal for the assessment year 2005 - 06, wherein this issue has been decided in favour of the assessee. In this year also, the assessee's contention appears to be correct insofar as entertaining the bonafide belief that it was not liable for deduction of TDS on transaction charges in view of the events given as above. The facts of the assessee's case are covered by the decision of the Hon'ble Jurisdictional High Court in Kotak Securities Ltd. (supra) and the findings given in the assessment year 2005-06 will also apply mutatis mutandis to the present case and also on V-SAT and lease line charges. Thus, the ground raised by the assessee is treated as allowed. 56. Insofar as the additional ground is concerned that the disallowance under section 40(a)(ia) should be restricted to amount payable in view of the Special Bench decision of the Tribunal in Merilyn Shipping and Transport v/s ACIT, has becom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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