TMI Blog2021 (10) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... mployee is within the limits prescribed by Companies Act and satisfies the test of reasonableness. We have noted that the AO, while making the disallowance disregarded the approval granted by central government under the statutory provisions of Companies Act. The AO made addition / disallowance without considering the qualification, experience and reasonableness with regard to his past and position in the field of capital market. Disallowance of notional interest on deposits u/s 40A(2) - HELD THAT:- As in assessee s own case for the assessment year 2002 03, in assessee s own case for the assessment year wherein the issue has been decided against the Revenue held held that where assessee paid lease rent to a group company in respect of wind farm taken on lease, since lease rent was fixed in accordance with formula provided by Indian Renewable Energy Development, a Government of India Company, impugned disallowance made by Assessing Officer under section 40A(2)(b) was to be set aside. Disallowance pertaining to adjustment under the head payment of overseas support fees - HELD THAT:- Issue decided in favour of assessee as relying on own case. - ITA no.1164/Mum./2011, ITA n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's length price by applying CUP method. And suggested adjustment of ₹ 18,59,779 in arm's length price. On receipt of report of TPO, the A.O. made addition of ₹ 1,18,59,779/ in respect of arm's length price while passing the assessment order. The assessee filed appeal before the CIT(A). Before the CIT(A), the assessee besides other contentions, stated that CUP method cannot be used as it is for determination of ALP of assessee s transaction with its A.E. as it is difficult to make accurate adjustments for itself as compared to other trades / transactions and TNMM on the overall basis should have been considered being more reliable and accurate method in assessee s case. The Ld.CIT(A), after considering the submissions of assessee concluded that CUP is the most appropriate method which should be applied to the proper adjustment instead of using TNMM which is an indirect method. 27. On the grounds of comparability of comparables, concluded that domestic independent client should be considered for comparability purpose. The assessee further stated that if CUP is to be applied, then appropriate adjustment needs to be made for lesser function performed / asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the TPO has not considered any adjustment for the high volume of business given by MSDW Mauritius to the appellant. The total volume of trades (for purchases and sale) generated by MSDW Mauritius is Rs.1316 crores. As noted by the TPO on page 8 of his order, the business provided by MSDW Mauritius is approximately 15% of the total business volume of total trades. The next highest client accounts for only 3.77% of the total business volume. It is well settled commercial principle that as volume increases, the price decreases . The TPO has dealt with this issue on para 2 of page 8 in his order. The TPO has picked out certain instances where even though the volume has increased there is no decrease in the brokerage rate and accordingly has not considered any adjustment for volume differences. I am unable to agree with the TPO to the extent that one cannot disregard well- settled commercial principle based on certain stray instances. The tact that 'as volume increases, the price decreases' is a well-established commercial principle and accordingly due weightage /adjustment should he given for the huge volume of business given by MSDW Mauritius. As per the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price (i.e., adjusted average rate for uncontrolled trades) 0.2107% 0.2542% Trades for MSDW Mauritius 131,622,693 4,735,557 Commission Amount 31,343,868 11.379 Rate charged To MSDW Mauritius 0.2381% 0.2403% Diff in ALP and rate charged to MSDW 0.0139% Addition 658 Considering the arm's length price determined on the above factors, the brokerage rate charged by the appellant to MSDW Mauritius for Clearing House trades meets with the arm s length principle. However, the brokerage rate charged by the appellant to MSDW Mauritius for DVP trades does not meet with the arm's length principle and consequently, the addition of ₹ 658 is, therefore, confirmed. The appellant gets a relief of ₹ 1,18,59,121, for the sub ground. 6. Since the issue before us is covered by the aforesaid decision of the Tribunal rendered in assessee s own case cited sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi vs ABB Lummus Heat Transfer BV [2015] 64 taxrnanitcom 210 (Delhi-Trib) 23. The Ld.AR accordingly submits that the Ld.CIT(A) was justified in taking the average brokerage rate charged by assessee to its overseas and Indian clients irrespective of geographical location of service recipients. The Ld. AR further submits that volume discount / adjustment should be allowed in computing arm's length price. It was explained that volume traded / executed by assessee on behalf of Mauritius entity was ₹ 1.316 crores for CH trade, which constitute approximately 34% of total CH trade executed by assessee of its clients. And on the other the highest third party client had executed volume of CH trade of ₹ 396.84 Crore which constitute 10% of the total CH trades executed by assessee to all its clients. In support of his submissions the ld AR for the assessee relied on the following case laws; Clariant Chemical (I) Ltd. v/s JCIT [2014] taxmann. com 421 (Mum. Trib.); Dresser Rand India (P) Ltd v/s ACIT [2011] 13 taxmann.com 82 (Mumbai Trib); Livingstones v/s DCIT [2014] 41 taxmann.com 499 (Mumbai Trib.) 26. We have considered the submissions of both the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lients. 28. The contention of assessee was accepted by Ld. CIT(A) by taking view that if CUP method has to be applied, then appropriate adjustment need to be made for all differences. The Ld. CIT(A) further noted that TPO has carried out adjustment for marketing function by making adjustment considering part of marketing cost and has not made any adjustment to research activities on the premise that Mauritius AE would he getting research related services from assessee. Thus, the Ld. CIT(A) not agreed with the view of TPO that no adjustments are required to he made for research activities based on assumption and possibility and not on actual facts. The Ld.CIT(A), after considering the high volume of business profit of Mauritius A.E. to assessee which is 15% of the total business volume of assessee and the other highest client account is only 3.7% of total business volume the Ld. CIT(A) took his view that it is settled commercial principle that volume increase the price decrees . The Ld.CIT(A), after considering the facts, passed the following order: I agree with the appellant that if CUP method has to he applied then appropriate adjustments need to be made for all difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy considered an adjustment of 0.1076% on account of marketing cost. Thus, adjustment granted by the TPO amounts to approx. 30% of average brokerage charged to all independent clients. As stated above, the appellant has contended that the discounting factor of atleast 50% should he applied as an adjustment to the brokerage rate charged to all independent clients. Keeping the entire factual matrix in mind, I feel that the ends of justice would be met to both sides by considering a discounting factor of 40%. This discounting factor of 40% would cover the marketing cost adjustment already considered by the TPO. Conclusion Based on the above, this sub-ground is partly allowed. For comparability purposes, all the independent entities i.e. domestic as well as overseas should he considered, and a discounting factor of 40% as adjustment should be applied. The calculation of the arm's length price is enclosed as Annexure 1. Particulars Clearing House Trades DVP Trades Overseas Trades 13,513,701,695 62,321,033,641 Domestic Trades 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o separate adjudication is needed. 14. In the result, assessee s appeal is allowed. ITA no.1582/Mum./2011 Revenue s Appeal A.Y. 2004 05 15. Ground no.1, relates to disallowance of remuneration under section 40A(2) of the Act. 16. After hearing both the learned Counsel appearing for the parties and on a perusal of the material on record, we find that this issue has been decided by the Co ordinate Bench of the Tribunal in assessee s own case for the assessment year 2002 03, in assessee s own case for the assessment year 2002 03, vide order dated 25th February 2020, ACIT v/s Morgan Stanley India Company Pvt. Ltd., ITA no.266/Mum./ 2006, etc., wherein the issue has been decided against the Revenue and in favour of the assessee. The relevant portion of the findings of the Tribunal is reproduced below for reference: 14. We have considered the submissions of the parties and perused the order of the lower authorities. We noted that during the assessment before A.O. the assessee stated that they have paid remuneration of ₹ 48,88,261/ to Shri Ashish Kampani for the year under consideration. The remuneration consists of basic salary of ₹ 10 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue of disallowance of notional interest on deposits claimed under section 40A(2) of the Act has been decided by the Co ordinate Bench of the Tribunal in assessee s own case for the assessment year 2002 03, in assessee s own case for the assessment year 2002 03, vide order dated 25th February 2020, ACIT v/s Morgan Stanley India Company Pvt. Ltd., ITA no.266/Mum./ 2006, etc., wherein the issue has been decided against the Revenue and in favour of the assessee. The relevant portion of the findings of the Tribunal is reproduced below for reference: 7. We have considered the submissions of parties and perused the order of lower authorities. During the assessment, the AU noted that assessee has paid rent of Rs.1.41 crores to its sister concern for occupying of 12.030 sq.ft. of office premises in Forbes building. The assessing officer further noted that assessee has paid deposit of Rs.3.00 crore with its sister concern. The A.O. noted that no explanation was given for such deposit with sister concern. The AO calculated interest @10% amounting to Rs.30 lakhs and made addition on account of interest free deposit. The AO concluded that even the rent paid is reasonable, the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reproduced below for reference: 6. We have considered the submission of both the parties and perused the record. We have seen that the assessee claimed an amount of Rs.10,94,87,945/- as a business expenditure on account of overseas support fees paid to Morgan Stanley India Securities Private Limited. The AO held that overseas support services are not in the business interest of the assessee. These expenses were neither necessitated nor justified by commercial expediency. The AO further held that no businessman will part its income by way of overseas support fees. The AO held that these are the transactions between sister concerns and covered by provisions of section 40A(2) being not incurred wholly and exclusively. The AO also held that no businessman will part its income by way of overseas Support fees. The AO held that no businessman will part its income by way of overseas support fees. The AO held that these are the transactions between sister concerns and covered by provisions of Section 40A(2) being not incurred wholly and exclusively. On appeal, the Ld. C1T(A) deleted the addition by following the decision of his predecessor far AYs 2000-01 and 2001-02. 7. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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