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2015 (7) TMI 1054 - ITAT MUMBAI

2015 (7) TMI 1054 - ITAT MUMBAI - TMI - TDS u/s 194J - Non deduction of TDS - disallowance of transaction charges and lease line charges paid to National Stock Exchange/Bombay Stock Exchange - Held that:- In the past assessment years i.e upto assessment year 2004-05, neither assessee deducted tax at source on transaction charges paid to stock exchange and nor Revenue had raised any objection u/s 40(a)(ia) of the Act; and, the action taken u/s 40(a)(ia) of the Act in assessment year 2005-06 by th .....

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the stock exchange from July 2006 onwards. Considering the aforesaid peculiar facts, and following the parity of reasoning laid down by the Honíble Bombay High Court in the case of Kotak Securities Ltd. (2011 (10) TMI 24 - Bombay High Court ), the disallowance made by invoking section 40(a)(ia) of the Act is hereby deleted.- Decided in favour of assessee.

Insofar as the payment of lease line charges to stock exchanges is concerned, following the Judgment of the Honíble Bombay High Co .....

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. - Decided in favour of assessee.

Disallowance representing loss on account of error trades - Held that:- The impugned loss suffered by the assessee on account of client errors, dealing errors or sale errors is incurred in the ordinary course of its business and being incidental to its business activity, deserves to be allowed as a business loss - Decided in favour of assessee.

Denial of depreciation on Motor Car - the Motor vehicle was not registered in the name of assess .....

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depreciation on written down value (WDV) of Motor vehicle and the same, in our view, cannot be denied following the Judgment of Honíble Bombay High Court in the case of Dilip Singh Saradarsingh Bagga (1992 (9) TMI 74 - BOMBAY High Court). Thus we direct the Assessing Officer to allow depreciation to the assessee on the WDV of the Motor Vehicle in question - Decided in favour of assessee.

Disallowance of club entry fees and subscription charges - Held that:- In the assesseeís own case .....

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ing a very generalized observation, the Assessing Officer has not pointed out any particular instance which could demonstrate that the expenditure was incurred for any non business purpose. It is also not the case of Revenue that the explanation furnished by the assessee in the course of assessment proceedings was lacking in any manner. Therefore, we direct the Assessing Officer to delete the addition - Decided in favour of assessee.

Transfer pricing adjustment - Held that:- d, it is .....

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e internal CUP data for the purposes of bench-marking the international transaction of provision of broking services for Futures & Options trades. Needless to say, the Assessing Officer shall allow the assessee an appropriate opportunity of being heard before re-working the armís length price of the international transaction of provision of broking services of Futures & Options trades for the aforesaid limited extent

Determination of armís length price of international transactions pe .....

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- SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For the Appellant : Shri P. Pardiwala For the Respondent : Shri. N. K. Chand ORDER Per G.S. Pannu, AM This appeal by the assessee is directed against the order of Additional Commissioner of Income Tax, Range-4(3) Mumbai, Passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short the Act ) dated 23.09.2010 pertaining to the assessment year 2006-07, which is in conformity with the directions given by the Disp .....

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harges paid to National Stock Exchange (NSE)/ Bombay Stock Exchange (BSE) amounting to ₹ 28,669,998 and lease line charges amounting to ₹ 433,130. 3. In disallowing loss on account of error trades amounting to ₹ 7,774,691. 4. In disallowing depreciation on motor car amounting to ₹ 144,702. 5. In disallowing club entrance fees and subscription charges of ₹ 313,753. 6. In disallowing an amount of ₹ 742,851 out of client entertainment expenses. 7. In rejecting th .....

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quity transaction. 10. In making an upward adjustment of ₹ 1,275,000 with respect to the provision of broking services for cash equity transaction. 11. In computing the ALP for the transaction pertaining to merchant banking services by making an upward adjustment of ₹ 31,061,627, in addition to the book-tax adjustment amounting to ₹ 96,270,525 already offered to tax by the Appellant. Without prejudice to ground 11 above, in selectively using the data only for Financial Year 200 .....

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aining to merchant banking services. 15. In computing the arm's length price for the transaction pertaining to marketing and sales support services in relation to American Depository Receipts (ADRs) at ₹ 6,576,856 and consequently making an upward adjustment of ₹ 866,768. 16. Without prejudice to ground 15 above, in selectively using the data only for Financial Year 2005-06 for the transaction pertaining to marketing and sales support services in relation to ADRs and rejecting th .....

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The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is inter alia engaged in the business of Merchant Banking, stock broking and in providing related financial and advisory services. For the assessment year under consideration, it filed return of income declaring a total income of ₹ 1,612,557,283/- under the normal provisions of the Act and the Book Profit in terms of section 115JB of the Act was determined at ₹ 1,41,01,13,145/-. The return of .....

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manifested by the above stated Grounds of appeal with which we shall deal in seriatim. 4. Insofar as the Ground of appeal no. 1 is concerned, the same is general in nature and does not require any specific adjudication and is accordingly dismissed. 5. In Ground of appeal no. 2, the issue relates to disallowance of transaction charges and lease line charges paid to National Stock Exchange/Bombay Stock Exchange amounting to ₹ 28,669,998/- and ₹ 4,33,130/- respectively. The Assessing Of .....

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the case of CIT Vs. Kotak Securities Ltd. in Income Tax Appeal No. 3111 of 2009 dated 21.10.2011. So however, the Ld. Representative for the assessee pointed out that section 194J of the Act was inserted w.e.f 1.7.1995 and upto assessment year 2004-05 assessee as well as the Revenue proceeded on the footing that section 194J was not applicable to the payment of transaction charges inasmuch as no action was taken u/s 40(a)(ia) of the Act to disallow the impugned expenditure till assessment year .....

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e payment of transaction charges and under these circumstances the Hon ble High Court did not find it fit to uphold the action taken u/s 40(a)(ia) of the Act in relation to the assessment year 2005-06. As per the Hon ble High Court, if both the parties for nearly a decade proceeded on the footing that section 194J is not attracted, then in the assessment year before it i.e. assessment year 2006-06, no fault can be found with the assessee in not deducting tax at source u/s 194J of the Act and con .....

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d, disallowance was made but the issue was decided in favour of the assessee by the CIT(A). 5.3 We have considered the aforesaid point raised by the appellant and the following discussion in the order of the Hon ble High Court, which is relevant:- 32) Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute 'fees for technical services' covered under Section 194J of the Act and, therefore, the assessee was liable to deduct tax at source whil .....

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sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the revenue and the assessee right from the insertion of Section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax a source and in fact immediately after the assessment year in question i.e. from AY 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock .....

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f the Hon ble Bombay High Court was not available so as to require the assessee to deduct tax at source. Moreover, in the past assessment years i.e upto assessment year 2004-05, neither assessee deducted tax at source on transaction charges paid to stock exchange and nor Revenue had raised any objection u/s 40(a)(ia) of the Act; and, the action taken u/s 40(a)(ia) of the Act in assessment year 2005-06 by the Assessing Officer was also set aside by the CIT(A). In the background of aforesaid pecul .....

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following the parity of reasoning laid down by the Hon ble Bombay High Court in the case of Kotak Securities Ltd. (supra), the disallowance made by invoking section 40(a)(ia) of the Act is hereby deleted. 5.5 Insofar as the payment of lease line charges to stock exchanges is concerned, following the Judgment of the Hon ble Bombay High Court in the case of ITO Vs. Angel Capital & Debit Market Ltd in Income Tax Appeal no. 475/2011 dated 28.07.2011, it has to be held that such payments were mer .....

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f ₹ 77,74,691/- representing loss on account of error trades . 6.1 In this context, assessee had claimed before the lower authorities that the aforesaid amount represented losses incurred on account of equity error trades and derivative error trades. It was explained that in the normal course of business, assessee executed trades as per the orders placed by its clients but sometimes errors crept into the execution, whereby the executed trade is not as per the client s requirements. For ins .....

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the course of carrying out activity on behalf of the clients on the Stock Exchanges, losses suffered because of errors are borne by the assessee and such losses amounting to ₹ 77,74,691/- had been claimed as deduction. 6.2 We find that the Assessing Officer has disallowed the claim primarily on the ground that assessee has not furnished evidence to show any nexus between business transactions in normal course and the impugned loss claimed on account of errors. 6.3 Before us the Ld. Repres .....

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e responsible for committing such error. Apart from the aforesaid, the Ld. Representative pointed out that the ratio of the Judgment of Hon ble Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 is clearly applicable inasmuch as the impugned loss has taken place in the course of carrying on of the business. Reliance has also of M/s HSBC Securities and Capital Markets (India) Pvt. Ltd Vs Addl. CIT in ITA No. 6979/Mum/2008 dated 29.06.2012, wherein, loss suffered on account of erro .....

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r. 6.5 We have carefully considered the rival submissions. Factually speaking there is no assertion by the Assessing Officer that the impugned loss claimed by the assessee is incurred in the course of an activity not connected to business. In fact, the Assessing Officer acknowledges the furnishing of requisite details by the assessee wherein details of date of error, scrip, nature, person responsible, counter party, etc has been furnished. Therefore, insofar as the nature of loss and incurrence .....

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roking and, therefore, such losses suffered in the course of carrying on such business cannot be denied. Coming to the specific objection of the Assessing Officer to the effect that assessee has not shown direct nexus between business transaction and the loss claimed, the same in our view is unsustainable having regard to the material which was available to the Assessing Officer for verification. The relevant details have been placed in the Paper Book at pages 37 to 77; and, having perused the s .....

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the assessee on account of client errors, dealing errors or sale errors is incurred in the ordinary course of its business and being incidental to its business activity, , deserves to be allowed as a business loss. Thus insofar as Ground of appeal no. 3 is concerned, assessee succeeds. 7. By way of Ground of appeal no. 4, the grievance of assessee is against the denial of depreciation on Motor Car amounting to ₹ 1,44,702/- on the ground that the Motor vehicle was not registered in the name .....

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on the same in the hands of assessee. In the absence of the registration of the vehicle in the name of assessee company, the depreciation claimed of ₹ 1,44,702/- was disallowed by the Assessing Officer. 7.1 Before us, the Ld. Representative pointed out that not only the possession of vehicle was with the assessee but it was also being used for its business purposes; and the full price was also paid by the assessee itself. At the time of hearing, reliance was placed on the Judgment of Hon .....

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the said Motor Car was acquired by the assessee in the immediately preceding year though it has been registered in the name of another group concern under the Motor Vehicles Act, 1988. There is no denying the fact that the assessee has paid full price for acquiring the Motor vehicle and it has been using the same for its business. In the year under consideration, assessee has claimed depreciation on written down value (WDV) of Motor vehicle and the same, in our view, cannot be denied following .....

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noticed that assessee has claimed entrance fee and subscription charges of ₹ 3,92,191/- as expenditure in Profit & Loss Account. In respect of aforesaid club expenses, the explanation of assessee was that such facility was provided to its employees to find suitable avenues to further the business of assessee company. The Assessing Officer following the directions of DRP considered 20% of the said expenditure as related to business and balance of ₹ 3,13,753/- has been disallowed. .....

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charges. Thus on this aspect assessee succeeds. 8.2 By way of Ground of appeal no. 6, the assessee has assailed the action of Assessing Officer in disallowing 7,42,851/- out of client entertainment expenses. The assessee was found to have incurred an expenditure of ₹ 14,85,703/- as client entertainment expenses and the Assessing Officer disallowed 50% of the same i.e. 7,42,851/- on the ground that there was no concrete material to establish the authenticity and commercial expediency of suc .....

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the Department in the appeal before the Tribunal and, therefore, there was no justification for the Assessing Officer to have made such ad hoc disallowance. 8.3 We have considered the objections put forth by the assessee and find that the disallowance made by the Assessing Officer is based on pure conjectures and surmises. Apart from making a very generalized observation, the Assessing Officer has not pointed out any particular instance which could demonstrate that the expenditure was incurred .....

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red into certain international transactions within the meaning of section 92B of the Act with its associated enterprises; and, income arising therefrom was required to be computed having regard to their arm s length price as mandated by section 92(1) of the Act. 10. Insofar as it is relevant for the present controversy it would suffice to note that assessee had, inter-alia, carried out international transaction with its associated enterprises in the field of investment banking services, marketin .....

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y with the order passed by the Transfer Pricing Officer (in short the TPO ) on a reference u/s 92CA(3) of the Act dated 30.10.2009 read with the directions of DRP u/s 144C(5) of the Act dated 17.09.2010. In respect of the international transaction of provision of broking services for Futures & options trade is concerned, an addition of ₹ 4,30,88,000/- has been made which is contested by the assessee by way of Ground of appeal nos. 7 and 8. The addition made in respect of international .....

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- has been made which is contested by the assessee by way of Ground of appeal nos. 15 to 17. 11. First, we may take up the segment of international transactions entered by the assessee on account of provision of broking services for Futures & Options trades and for cash equity transactions. Notably, assessee company is engaged in the business of merchant banking, stock broking and in providing financial and advisory related services to its associated enterprise as well as non related parties .....

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rding to the TPO the internal Comparable Uncontrolled Price (CUP) method was the most appropriate method in the present case. The TPO justified the adoption of internal CUP method by noticing that assessee had carried out transactions with related as well as non related parties and, therefore, the commission charged by the assessee from unrelated parties for the broking services provided to them could be functionally compared with similar services provided to the associated enterprises; in other .....

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al related to brokerage transactions rendered by the assessee in respect of delivery payment trades and clearing house trade undertaken by it for related parties as well as unrelated parties. In view of the aforesaid precedent, in our considered opinion the selection of the internal CUP method as the most appropriate method even in the current assessment year of 2006-07 deserves to be upheld. Therefore, in principle insofar as the application of CUP method for the purposes of benchmarking assess .....

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e manner in which the TPO has allowed the adjustment to the internal CUP data of commission charged from unrelated parties on account of additional interest earned on the volumes of business with the related parties. In order to appreciate the grievance of assessee brief background can be understood as follows. As per the appellant, once the commission charged by assessee from unrelated parties is compared with the percentage of commission charged from the associated enterprise, suitable adjustm .....

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age rate i.e. internal CUP data. One of the elements identified by the TPO in this regard was the interest earned on account of high volume trades of related parties. In terms of calculation placed in para 25.7 of the order of the TPO, it was noted that interest earned vis-a-vis volumes of trade in related parties and unrelated parties as a percentage of respective turnovers was 0.0348% and 0.0212%; and, as a consequence additional interest earned in the volume of related party trade was compute .....

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for the assessee has placed the following working of the interest earned on margin monies placed by the associated enterprises as compared to the unrelated parties:- Particulars Total Interest earned by assessee based on Margin Monies placed by associated enterprises 1,86,323 Interest earned by assessee based on Margin Monies placed by nonrelated parties 64,081 Additional interest earned by assessee based on margin monies placed by associated enterprises as compared to Non- related parties 1,22, .....

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after, the commission earned from unrelated parties was compared with the commission earned from the associated enterprises. By referring to the decision of the Tribunal for assessment year 2002-03 vide order dated 12.02.2014, (supra) the Ld. DR submitted that assessee did not oppose the calculation of said adjustment for differences. Therefore, according to him, the plea of assessee for re-working the adjustment on account of interest earned by a methodology different than that used by the Asse .....

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hich is based on margin monies placed by the associated enterprises vis-à-vis the margin monies placed by the unrelated parties in the Futures & Options trade segment. 11.4 We have carefully considered the rival submissions. Factually speaking we are in agreement with the stand of assessee that so far as the segment relating to the provision of broking services for Futures & Options trade is concerned, the same was absent in assessment year 2002-03, though assessee had rendered br .....

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djustment. Therefore, the issue raised by the assessee is not governed by the earlier precedent. 11.5 Insofar as, the merits of the claim is concerned, it is abundantly clear that the methodology proposed by the assessee is more appropriate than the manner in which the adjustment for the difference on account of interest earned in the respective segments of related and unrelated parties has been allowed by the TPO. Therefore, we deem it fit and proper to direct the Assessing Officer to verify th .....

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n of broking services of Futures & Options trades for the aforesaid limited extent. In the result insofar as the Ground of appeal no. 7 is concerned, the assessee fails therein and insofar as Ground of appeal no. 8 is concerned, the same is allowed for statistical purposes. 11.6 Similarly with regard to international transactions on account of broking services for cash equity transactions is concerned, the Ground of appeal no. 9 is dismissed in view of the precedent in assessee s own case da .....

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od, wherein, the profit level indicator used was Operating Profits over Operating Costs. In the Transfer Pricing study, assessee computed the arithmetic mean of the margins earned by comparable companies at 18.91% and after comparing it with assessee s margin of (-)39%, assessee made a book tax-adjustment of ₹ 9,62,70,525/-. The TPO considered the same set of comparables selected by the assessee, but he considered the financial data of such comparable concerns for the financial year under .....

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scal Services Limited 22.03% 8. SREI Capital Market Limited 18.94% Arithmetic Mean 48.06% 12.1 Based on the aforesaid the TPO worked-out the adjustment of ₹ 8,05,54,275/- that was required to be made to arrive at the arm s length price. Before the DRP, assessee objected to inclusion of Keynote Corporate Services Limited and Brescon Corporate Advisors Limited in the final set of comparables. The DRP has accepted the plea of the assessee for excluding Brescon Corporate Advisors Limited from .....

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ynote Corporate Services Limited 45.37% 3. Khandwala Securities Limited 38.17% 4. Sumedha Fiscal Services Limited 22.03% 5. SREI Capital Market Limited 18.94% Arithmetic Mean 30.15% 12.2 On the aforesaid basis the adjustment to the stated values of the international transaction of investment banking services has been finally determined at ₹ 3,10,61,627/-, against which assessee is in appeal before us. 12.3 On this aspect, the Ld. Representative for the assessee has only articulated exclusi .....

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sets Management, Concept Holding Limited and Concept Capital Management Limited amalgamated with the assessee whereby the assets and liabilities of the companies vested in the assessee company with retrospective effect from 01.04.2003. By referring to the Annual Report of M/s Keynote Corporate Services Limited for the financial year under consideration, it was pointed out that the accounts of the said concern for the financial year under consideration have been drawn up after giving effect to th .....

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it has been further noticed that for the subsequent financial year of 2006-07 also, there has been a process of amalgamation between the said concern and six other companies whereby the assets and liabilities of the amalgamated companies were vested in the said concern with retrospective effect from 01.04.2005. It was, therefore, contended that on account of extraordinary events, the said concern should be excluded from the list of comparables. 12.4 On the other hand, the Ld. DR appearing for th .....

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omain in the term of its Annual Report, which brings out that the said concern is undergoing a process of business restructuring. The Director s report of the said concern pertaining to the financial year under consideration speaks of business re-structuring whereby the scheme of merger of three subsidiaries was effected in the instant year pursuant to the scheme approved by the Hon ble Bombay High Court vide order dated 02.12.2005. Thus, the exceptional /non-recurring events on account of busin .....

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mergers during the relevant year, a concern cannot be included in the final set of comparables. In fact, as per the Tribunal once it is found that there has been an exceptional event on account of mergers/demergers there was no need to further look into comparability or otherwise of the factual aspects of such a concern with that of the tested party. According to the Tribunal, in such circumstances such a concern should be excluded from the final set of comparables. In our considered opinion, th .....

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id concern was inadvertently included by the assessee in the list of comparables but on the given facts which are on record the said concern deserves to be excluded. 12.7 Having considered the aforesaid objection of the Ld. DR, in our view, the case set-up by the assessee for exclusion of the said concern from the list of comparables cannot be merely decided on the basis of the position that the assessee had taken at a given point of time. Quite clearly, the purpose of income tax assessment is t .....

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the decision of the Special Bench of the Tribunal in the case of DCIT Vs. Quark Systems (P) Ltd 132 TTJ CHD(SB) 1, wherein assessee was allowed to claim exclusion of certain concerns from the final set of comparables which were otherwise inadvertently included by it in its Transfer Pricing Study. In the present case, assessee included Keynote Corporate Services Limited as a comparable in its Transfer Pricing Study based on functional similarities, so however, the case being set-up now is not ba .....

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the assessee. Ostensibly, the said inclusion was an inadvertent mistake. Therefore, in view of the aforesaid discussion, we direct the Assessing Officer to exclude Keynote Corporate Services Pvt. Ltd from the final set of comparables. 13. The next plea of the assessee is for exclusion of Khandwala Securities Ltd from the final set of comparables. On this aspect, the Ld. Representative submitted that in Grounds of appeal enumerated in the Memo of appeal, the plea relating to exclusion of Khandwa .....

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omparables while evaluating the international transaction of merchant banking services on the ground that the said concern has earned more than 75% of the fee based operations segmental income from rendering broking services. In this context, the case set-up by the assessee is that in the Investment banking services segment, the activities performed by Khandwala Securities Ltd. are qualitatively different as the said concern is acting as securities and stock brokers. It has been pointed out that .....

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286 of 2012 dated 22.02.2013. 15. On this aspect also, the only plea set up by the Ld. DR is that the said concern was initially included by the assessee itself as a comparable and thus it should not be excluded. So however, the functional dissimilarity sought to be set up by the assessee has not been assailed by the Ld. DR . 16. At the threshold, we may say that the functions performed by the assessee in its segment of merchant banking activities does not involve broking services which is a sep .....

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sofar as the plea of Revenue that assessee has included the said concern as a comparable in its Transfer Pricing Study is concerned, the same has already been addressed by us in the earlier paras while dealing with assessee s plea for exclusion of Keynote Corporate Services Limited. In our view, the reasons assigned by us to uphold the exclusion of Keynote Corporate Services Limited qua the aforesaid objection of the Ld. DR applies herein also and the same is accordingly rejected. In the result, .....

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sue relating to determination of arm s length price of the international transaction of rendering of marketing and sales support services in respect of American Depository Receipts (ADRs) programs of the associated enterprises for the Indian clients. 19. In respect of the international transaction relating to provision of marketing and sales support services rendered to associated enterprises in relation to ADR services, assessee used the TNM method for benchmarking the same. The PLI used was Op .....

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er consideration and accordingly adopted a final set of eight comparables whose arithmetic mean of operating margin was determined at 39.85%. Accordingly an adjustment of ₹ 19,35,370/- was worked out. The DRP considered the objections raised by the assessee and finally directed the Assessing Officer to adopt the following five comparables, whose arithmetic mean of the margins was determined at 20.2%. Name of the Company Operating margin on operation costs (%) Allianz Securities Limited 22. .....

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plea set up by the Ld. Representative for the assessee is that the said concern has no salary costs, which show that it has outsourced its activities. It is, therefore, contended that the business model under which the said concern operates is quite different from that of the assessed, and, hence the said concern is excludible from the list of comparables. In support of such proposition, reliance has been placed on the following decisions of the Tribunal:- (1) M/s Stream International Services .....

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ssessee does involve employee/personnel activities and, therefore, such facet of business operations is critical insofar as the comparability analysis is concerned. The Ld. Representative has adverted to page 231 of the Paper Book wherein it placed the relevant extracts of its Transfer Pricing Study to say that the functional analysis of the impugned segment brings out that the services rendered, which include identifying financial contracts and opportunities in Indian market; preparation of mar .....

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