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2015 (7) TMI 1054

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..... parity of reasoning laid down by the Hon ble 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 Hon ble Bombay High Court in the case of ITO Vs. Angel Capital Debit Market Ltd [2014 (5) TMI 584 - BOMBAY HIGH COURT ] it has to be held that such payments were merely reimbursement of the charges paid/payable to the stock exchange to the Department of Telecommunication (DOT) and, therefore, it does not have any element of income which would require deduction of tax at source. In view of the aforesaid, the action taken by the Assessing Officer u/s 40(a)(ia) of the Act, is impermissible and is accordingly set aside. - 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, d .....

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..... the TPO. Therefore, we deem it fit and proper to direct the Assessing Officer to verify the working of additional interest earned on account of high volume of trades for related party trades and, thereafter, he shall factor-in such difference in the 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 arm s length price of the international transaction of provision of broking services of Futures Options trades for the aforesaid limited extent Determination of arm s length price of international transactions pertaining to merchant banking services rendered by the assessee to its associated enterprises - Held that:- We direct the Assessing Officer to exclude Sundaram Finance Distribution Limited from the final set of comparables and, thereafter, re-work the arm s length price of the international transaction relating to the provision of marketing and support services to associated enterprises in relation to ADR services. Thus, on this aspect assessee succeeds. .....

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..... 1,061,627, 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 2005-2006 for the transaction pertaining to merchant banking and rejecting the data for Financial Year 2003-04 and 2004-05. 13. In rejecting the use of contemporaneous data for computing the ALP for merchant banking services as on the date of filing of return of income in accordance with Rule 1 OD( 4). 14. Without prejudice to ground 11 to 13 above, in not treating Keynote Corporate Services as non comparable company for the Financial Year 2006-07, while arriving at the ALP for the transaction pertaining 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 .....

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..... e nature of fees for technical services which is subject to the withholding tax u/s 194J of the Act following the Judgment of Hon ble Bombay High Court in 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 2004-05. It is further pointed out that the assessee has started deducting the requisite tax at source u/s 194J of the Act on the transaction charges paid to the stock exchanges from July 2006 onwards. The Ld. Representative pointed out that in the case of Kotak Securities Ltd. (supra), the Hon ble High Court has observed that section 194J was inserted w.e.f 1.7.1995 and till assessment year 2005-06 both Revenue and assessee had proceeded on the footing that section 194J was not applicable to the payment of transaction charges and under t .....

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..... hile crediting the transaction charges to the account of the stock exchange. 5.4 In the background of aforesaid pronouncement by the Hon ble High Court in the present case too, peculiar circumstances exist which require mitigation of the rigors of the application of section 40(a)(ia) of the Act. The return of income for the year under consideration was filed by the assessee on 29.11.2006 and the Judgment of Hon ble Bombay High Court in the case of Kotak Securities Ltd. (supra) was rendered on 21.10.2011. Therefore, at the relevant point of time, the Judgment of 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 peculiar circumstances, we are inclined to uphold the plea of assessee that no fault can be found with the action of assessee in not de .....

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..... ut 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. Representative for the assessee has vehemently pointed out that complete details of the losses were furnished and in this context he has referred to the details of such loss placed at pages 37 to 77 of the Paper Book. On the basis of such details, it is sought to be explained that the type of error, the scrip involved, quantity of scrips involved and the loss suffered thereof have been itemized. Further, it has been pointed out that assessee has also detailed the respective clients as also the employee 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 clear .....

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..... rcise that he may have deemed fit. So however, instead of carrying out any verification exercise, the details sought to be furnished by the assessee have been merely disbelieved and brushed-aside. The said approach in our view is quite untenable, and cannot be sustained. 6.6 Therefore, considering the entirety of facts and circumstances, in our view, 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. 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 of assessee company. Before the Assessing officer it was explained that the Motor vehicle was purchased and was provided for use of one of its employee and, thus, the same was used for its business purposes. The Motor vehicle was not registered in the name of the assessee but in the name of J.P. Morgan West B .....

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..... see 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. 8.1 In this context it was a common ground between the parties that in the assessee s own case for assessment year 2002-03, the Tribunal vide its order in ITA No. 618/Mum/2008 dated 12.02.2014 has allowed the claim of assessee following the Judgment of Hon ble Supreme Court in the case of CIT Vs. United Glass Manufacturing Co. Ltd. dated 12.09.2012. Following the precedent, the Assessing Officer is directed to delete the impugned addition of ₹ 3,13,753/- out of club fees and subscription 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 gr .....

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..... have been adjusted by the Revenue so as to bring it to the level of their arm s length price. Notably, the adjustments to the stated value of transactions were determined by the Assessing Officer in conformity 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 transaction of provision of broking for cash equity transactions amount to ₹ 12,75,000/-, which is contested by the assessee by way of Ground of appeal nos. 9 10. In relation to the international transaction of investment banking services, an adjustment of ₹ 3,10,61,627/- has been made which is contested by the assessee by way of Ground of appeal nos. 11 to 14. In relation to the international transactions of marketing and sale support services, an addition of ₹ 8,66,768 .....

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..... e, in principle insofar as the application of CUP method for the purposes of benchmarking assessee s international transaction entered with its associated enterprises on account of provision of broking services for Futures Options trade as well as cash equity transaction trade is concerned, the same is upheld. 11.1 Before us, in the context of adjustment of ₹ 4,30,88,000/- with respect to international transaction of provision of broking services for Futures Options trade is concerned, the Ld. Representative for the assessee has raised a solitary point which related to the 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 adjustments be allowed for the difference between the functions performed and risk assumed in respect of broking ser .....

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..... llowed. The additional cost that was found to have been incurred in relation to services rendered to the unrelated parties was adjusted and, thereafter, 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 Assessing Officer should not be allowed. 11.3 In reply, the Ld. Representative pointed out that in the assessment year 2002-03, assessee had not rendered any broking services in relation to the segment of Futures Options trade to associated enterprises and therefore, there was no occasion for the assessee to raise the aforesaid issue. In the present year, the adjustment that is sought by the assessee is on account of the interest earned on high volume trades in associated enterprises segment which is based on margin monies placed by the associated .....

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..... edent in assessee s own case dated 12.02.2014 (supra). In Ground of appeal no. 10, no specific argument has been made and, therefore, the same is also dismissed. 12. Now we may take up Grounds of appeal nos. 11 to 14 which relate to determination of arm s length price of international transactions pertaining to merchant banking services rendered by the assessee to its associated enterprises. Assessee renders the investment banking services to its associated enterprises and such transactions were bench-marked by using TNM method, 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 consideration alone as against the multiple years financial data considered by the assessee. Accordingly, the TPO considered the following six comparables as the fina .....

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..... 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 exclusion of two comparables, namely, Keynote Corporate Services Limited and Khandwala Securities Limited from the final set of comparables. In the context of Keynote Corporate Services Limited, the plea set up by the assessee is that the said concern is excludible because of exceptional financial results due to amalgamations. It was pointed out that in the year under consideration in terms of scheme of amalgamation approved by the Hon ble High Court on 02.12.2005, three other concerns - M/s Concept Assets 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 Service .....

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..... ern could not be considered as a good comparable on account of exceptional final results due to mergers/demergers. The Mumbai Bench of the Tribunal in the case of Petro Araldite Pvt. Ltd. (ITA No. 6217/Mum/2012 dated 18.01.2013) for assessment year 2008-09 also held that on account of acquisition and demergers 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, the aforesaid decision of the Tribunal clearly support the plea of assessee for exclusion of Keynote Corporate Services Limited from the final set of comparables. 12.6 So however, the Ld. DR has pointed out that the assessee itself included the said concern as a comparable in its Transfer Pricing Study and, therefore, assessee is not justified in seeking its exclusion. On this aspect of the m .....

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..... 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 Khandwala Securities Limited was not specifically raised, though it can be considered as subsumed in Ground of appeal no. 11, wherein, the enhanced adjustment to the stated value of the international transaction has been assailed. Be that as it may, it has been pointed out that assessee has raised an Additional Ground of appeal whereby exclusion of Khandwala Securities Ltd has been specifically canvassed. 14. The assessee company has sought exclusion of Khandwala Securities Ltd. from the final set of comparables 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 bee .....

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..... length price of the international transactions entered with the associated enterprises. 18. Now, we may take up the last issue 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 Operating Profits to Operating costs and assessee s margin was computed at 4.48%. The assessee determined a set of comparables wherein the arithmetic mean of the operating margins was computed at 1.55% and accordingly the stated value of the transaction was claimed to be at arm s length price. The TPO disagreed with the assessee on the use of financial data of multiple years of the comparables. Instead, the TPO used the financial data of the comparable concerns pertaining to the financial year under consideration and accordingly adopted a final set of eight comparab .....

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..... 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 marketing material; arrangement of meetings; marketing presentations; providing information and market intelligence to associated enterprises; coordination and support services in relationship clients; and, other miscellaneous support services. It has been emphasized that all the said activities involve employee/personnel as a critical component of functioning. 24. We have carefully considered the rival submissions. As per the Director s report of Sundaram Finance Distribution Limited, a copy of which is placed on page 274 of the Paper Book, the said concern has no employees on its pay roll. It is for this reason that the administrative and other expenses debited in its Profit Loss Account (copy at page 276 of the Paper Book) reflects a debit of ₹ 1,45,37,206/- under the head sourcing fee. The factual position in the case of the assessee is quit .....

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