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TMI Blog2024 (1) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... the Honourable DRP, erred in making an upward adjustment of Rs. 19,77,31,456 in determining the ALP of the international transaction pertaining to provision of equity broking services in the clearing house (CH) and delivery versus payment (DVP) segment, to the Associated Enterprises (AEs) by the Appellant. 2. On the facts and circumstances of the case, the learned AO, based on the directions of the Honourable DRP, erred on the following grounds 2.1 In not accepting the Appellant's contention that the Transactional Net Margin Method is the most appropriate method for determining the ALP for the broking commission earned on trades executed on behalf of the AES 2.2 In using Comparable Uncontrolled Price (CUP) method and while applying the CUP method, by not appreciating that during the previous year ended on 31 March 2014, the AEs had also entered into similar trades with third party brokers, who had charged brokerage to the AEs at rates lower than the brokerage rates charged by the Appellant in the said previous year, which establishes adherence to the arm's length principle of the trades entered into between the Appellant and the AEs 2.3 Applying CUP method incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken by the 2.2 In not appreciating the fact that the loss arising on account of error trades is purely incidental to rendering broking services business and thereby, deductible as business loss under section 28 of the Act 2.3 in stating that the assessee failed to produce relevant documents like contract notes in respect of error trades. Ground 3: Disallowance under section 14A of the Act 1. On the facts and circumstances of the case, the learned AO, based on the directions of Honourable DRP, erred in disallowing Rs. 2,09,70,578 under section 14A of the Act 2. On the facts and circumstances of the case, the learned AO, based on the directions of the Hon'ble DRP erred on the following grounds. 2.1 In not appreciating the fact that no expenditure having direct and proximate connection with earning of exempt income has been incurred by the Assessee and thus, no disallowance (in addition to the suo-motu disallowance of Rs. 3,51,604 by the Assessee) as expenditure incurred in relation to earning exempt income is warranted under the provisions of section 14A of the Act 2.2 Without prejudice to the above, in applying Rule BD of the Income-tax Rules, 1962 (Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's length price (ALP of brokerage received on clearing house trades and Delivery Versus Payment trades executed for the associated enterprises in respect of the international transactions. The assessing officer has passed draft assessment order u/s 143(3) r.w.s 144C of the Act on 29.12.2017 and proposed adjustment of Arm's Length price as suggested by the Transfer Pricing Officer. 5. Against the draft assessment order the assessee filed objection before the ld. DRP. The DRP vide order dated 27.09.2018 rejected the objection filed by the assessee and upheld the adjustment as decided by the assessing officer/TPO. Thereafter the assessing officer has passed assessment order u/s 143(3) r.w.s 144C(13) of the Act on 29.12.2018 and added the adjustment suggested by the TPO to the amount of Rs. 19,77,31,456/- to the total income of the assesse. 6. The assessing officer has also disallowed an amount of Rs. 31,65,904/- being gross loss on account of error trade transactions. The AO has also made disallowance of Rs. 209,70,578/- u/s 14A of the Act as expenditure incurred in relation to the earning of exempt income. The further facts of the case are discussed while adjudicating the ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10B(2)(d) and in the various judicial orders as cited by the TPO. 16. During the course of appellate proceedings before us at the outset the ld. Counsel submitted that ITAT Mumbai in the case of the assessee itself has accepted the stand of the assessee to consider the brokerage rate of all Non-AEs for comparability purpose in the assessment year 2002-03 to 2005-06 and A.Y. 2007-08. The ld. Counsel further submitted that during the assessment year 2006-07, the TPO has accepted the aforesaid proposition for assessment year 2006-07 and during the assessment year 2008-09 to 2011-12 the ld. CIT(A) and DRP have also agreed with the decision of ITAT for considering the brokerage rate for all Non-AEs for comparability purpose. 17. Heard both the sides and perused the material on record. With the assistance of the ld. Representative we have perused the decision of ITAT for assessment year 2003-04 vide ITA No. 1235/Mum/2014 dated 30.06.2023 wherein the ITAT in the case of the assessee itself after following the decision of ITAT, Mumbai for assessment year 2005-06 held that to consider both overseas and domestic independent clients while applying CUP method in the case the assessee. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the objections filed by the assessee. Being aggrieved, the assessee is in appeal before us. 8. During the hearing, the learned Authorised Representative ("learned AR") submitted that for benchmarking the transactions by application of CUP, an adjustment of 40% has been granted by the coordinate bench of the Tribunal in assessee's own case for the preceding year be also allowed in the year under consideration. 9. On the contrary, the learned Departmental Representative ("learned DR") vehemently relied upon the orders passed by the lower parties. 10. We have considered the submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee's own case in Morgan Stanley India Company Pvt. Ltd. vs Addl. CIT, in ITA No. 2206 and 2320/Mum/2011, vide order dated 22/07/2022, for the assessment year 2005-06, following the judicial precedents in assessee's own case, observed as under: "020. We have carefully considered the rival contentions and perused the orders of the lower authorities. Since, the issue has already been decided by the co-ordinate Bench in assessee's own case for A.Y. 2002-03, which has been followed by c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we also direct the learned assessing officer/transfer pricing officer to adjust and grant benefit of 40% discount to the assessee. 11. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the order passed by the coordinate bench of the Tribunal in the assessee's own case cited supra, we direct the AO/TPO to grant adjustment to the extent of 40% to the assessee while determining the arm's length price of international transaction of brokerage and commission. As a result, ground No. 1.3 raised in assessee's appeal is partly allowed. 12. This has also been followed by the Tribunal in A.Y.2005-06 also. Accordingly, on similar line we direct the TPO to give adjustment of 40% to the assessee while determining the arm's length price of international transaction of brokerage and commission, as against 25% given by the ld. TPO while considering both overseas and domestic independent clients while applying CUP method. Accordingly, the ground Nos. 2.1.1 and 2.1.2 are partly allowed." Since, ground no. 2.3 & 2.4 are similar to the ground raised in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2003-04 vide ITA No. 1235/Mum/2014 dated 30.06.2023 wherein the ITAT in the case of the assessee itself after following the decision of ITAT, Mumbai for assessment year 2005-06 wherein held that adjustment of 40% will be allowed on marketing cost adjustments and research cost. The relevant extract of the decision of the order of the ITAT is reproduced as under: 11. In so far as the issue, whether comparability analysis should be undertaken by considering both overseas and domestic independent clients, i.e., all non-AE transactions for determining the ALP while applying CUP and how much adjustment should be allowed on account of various factors as claimed by the assessee. The Tribunal has by and large accepted the stand of the assessee to give suitable adjustments on the price determined after CUP. The Tribunal in A.Y.2004-05 vide order dated 05/10/2021 also followed in A.Y. 2005-06, held that adjustment of 40% will be allowed on marketing cost adjustments and research cost. The relevant observation of the Tribunal in this regard reads as under:- 7. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in assessee's own case, observed as under: "020. We have carefully considered the rival contentions and perused the orders of the lower authorities. Since, the issue has already been decided by the co-ordinate Bench in assessee's own case for A.Y. 2002-03, which has been followed by co-ordinate Bench in assessee's own case for A.Y. 2004-05, we find no reason to sent the matter back to the file of the learned Transfer Pricing Officer. The co-ordinate Bench has decided the issue as under for A.Y. 2002- 03. For that assessment year the TPO granted an adjustment of marketing cost to the extent of 0.1076% and which is approximately 30% of the weighted average rate charged to 3rd party clients. The learned CIT (A) granted adjustment of 40% with respect to marketing cost adjustment for significant volume and research cost and granted relief to the assessee. This action of the learned CIT - A was challenged by the revenue in its appeal as per ground number (vi). Coordinate bench as per paragraph number 29 upheld the order of the learned CIT - A. Thus the adjustment granted by the learned CITA as per paragraph number 22 of that order of 40% was upheld. In appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee while determining the arm's length price of international transaction of brokerage and commission, as against 25% given by the ld. TPO while considering both overseas and domestic independent clients while applying CUP method. Accordingly, the ground Nos. 2.1.1 and 2.1.2 are partly allowed." Following the decision of ITAT on similar grounds as referred above we direct TPO to give adjustment of 40% to the assessee while determining the arm's length of international transactions of brokerage and commission as directed in the finding of the ITAT referred supra, therefore these ground of appeal the assessee are partly allowed. Ground No. 1.3: (Computing upward adjustment by considering addition as Rs. 19,7,31,456 instead of rectified amount of Rs. 197,58,118/-.) 21. The assessee submitted that TPO had suo moto rectified the addition vide Rectification order dated 21.02.2018 therefore, we restore this issue to the file of the assessing officer for giving effect to the claim of the assessee after verification as per the Rectification order passed by the TPO. This ground of appeal of the assessee is allowed for statistical purposes. Ground No. 2: Disallowance of net los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security, system error and error in punching the type of order etc. During the course of appellate proceedings before us the assessee has also placed reliance on the decision of ITAT, Mumbai in the case of CLSA India Pvt. Ltd. vs. ACIT (Range-4(1) vide ITA No. 4824/Mum/2015 A.Y. 2003-04 dated 14.12.2020. In the aforesaid decision the ITAT observed that certain client for whom the assessee was working as a broker had not owned up certain share transactions then the assessee had no other alternative but to accept those transactions as its own transactions because of its relation with the clients from whom it was accepting good earnings. After considering the volume of transactions undertaken by the assessee company as broker for various clients we observe that such marginal error in share trading is incidental to the business of the assessee, therefore, we don't find any reason to that assessee has wrongly claimed such loss, therefore, AO is directed to allow the claim of the assessee. Ground No. 3: Disallowance u/s 14A: 25. During the course of assessment AO is noticed that assessee has received dividend of Rs. 505,20,000/- and also had made investment of Rs. 439,99,95,000/- whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-moto disallowance which it rescinded from. Accordingly, the submissions made by the ld. Counsel cannot be accepted. However, interest disallowance is concerned, nothing has been brought on record as to whether the interest free funds exceeds the investments made in which had yielded exempt income. Accordingly, this issue is remanded back to the file of the ld. AO to examine the disallowance u/s.14A and assessee is directed to substantiate its claim as to why no disallowance should be made. With this direction, this ground is treated as allowed for statistical purposes." Following the decision of ITAT as referred above we restored this issue to the file of the AO for deciding afresh as directed in the decision of ITAT, therefore, this ground of appeal of the assessee is allowed for statistical purposes. ITA No. 7550/Mum/2019 (AY: 2015-16) Ground No. 1: Upward adjustment of Rs. 21,72,11,500/- in determining the ALP of the international transaction pertaining to provision of equity broking services in CH and DVP segment to AEs: 20. This generic ground was not pressed therefore, the same stand dismissed as not pressed Ground No. 1-2.1: Regarding applicability of transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociate enterprises: 30. The assessee has not pressed this ground of appeal therefore, the same stand dismissed. Ground No. 1-2.2: (Assessee's Transactions with its AEs are at ALP) 31. The assesse has not pressed this ground therefore, the same stand dismissed. 32. Ground No. 2.3 & 2.4: (Considering brokerage rate of all Non-AEs for the comparability purposes). 33. Since the facts and the issue involved in this ground of appeal is similar to the facts and issue involved in ground no. 2.3 & 24 of the appeal vide ITA No. 340/Mum/2019 as adjudicated supra in this order, therefore, applying the finding of ITA No. 340/Mum/2019 as mutatis mutandis this ground of appeal of the assessee is also allowed for statistical purposes. 34. Ground No. 2.5 & 2.6: No adjustment of marketing cost while applying CUP method & not granting adjustment of research cost and 50% of volume while applying CUP method: 35. Since the facts and the issue involved in this ground of appeal is similar to the facts and issue involved in ground no.2.5 & 2.6 of the appeal vide ITA No. 340/Mum/2019 as adjudicated supra in this order, therefore, applying the finding of ITA No. 340/Mum/2019 as mutatis mutandis thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also allowed for statistical purposes. ITA No. 2435/Mum/2022 (AY: 2018-19) Ground No. 1: Upward adjustment of Rs. 3,73,04,429/- in determining the ALP of the international transaction pertaining to provision of equity broking services in CH and DVP segment to AEs: 37. This generic ground was not pressed therefore, the same stand dismissed as not pressed Ground No. 1-2.1: Regarding applicability of transactions net margin method as the most appropriate method for determining the arm's length price for the broking commission earned on trades executed on behalf of the associate enterprises: 38. The assessee has not pressed this ground of appeal therefore, the same stand dismissed. Ground No. 1-2.2: (Assessee's Transactions with its AEs are at ALP) 39. The assesse has not pressed this ground therefore, the same stand dismissed. 40. Ground No. 2.3 & 2.4: (Considering brokerage rate of all Non- AEs for the comparability purposes). 41. Since the facts and the issue involved in this ground of appeal is similar to the facts and issue involved in ground no.2.3 & 24 of the appeal vide ITA No. 340/Mum/2019 as adjudicated supra in this order, therefore, applying the finding of I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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