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2023 (6) TMI 1357

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..... s 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 [ 2021 (10) TMI 1349 - ITAT MUMBAI] also followed in A.Y. 2005-06 [ 2022 (7) TMI 1210 - ITAT MUMBAI] , held that adjustment of 40% will be allowed on marketing cost adjustments and research cost. 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. All the adjustments which has been claimed by the assessee has been restricted to 40% by the Tribunal and accordingly, in line with the past precedent, we direct the ld. TPO to make the adjustment of 40% while determining the arm s length price of international transaction of brokerage and commission. In so far as the contention of assessee that AE has charged higher brokerage rates than average brokerage rates charged by A .....

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..... on to the income of assessee which has not been earned and. therefore, deleted the addition. Before us, neither the Ld. DR brought any contrary law nor any comparable rate of rent in similarly situated property. Moreover, the AO has not made a case of disallowance on the basis of any comparable and simply made addition for notional return of interest free deposit - as decided in Karma Energy [ 2015 (6) TMI 216 - BOMBAY HIGH COURT] 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 Thus, when no contrary fact or law is brought to our notice, we affirm the finding of Id CIT(A). Disallowance of interest on loss on IT T shares - HELD THAT:- Tribunal in A.Y.2002-03 had deleted the addition as held that since the loss of transaction of IT T of AY 2001-02 has been allowed as business loss by his predecessor and accordingly, the interest component is married to such loss also assumes the character of business .....

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..... ase of South India Bank Ltd [ 2021 (9) TMI 566 - SUPREME COURT] Accordingly, ground No.2 is partly allowed. TDS u/s 194C/194J - disallowance of lease line charges, VSAT charges paid to stock exchange and transaction charges paid to local depository u/s.40a (ia) - HELD THAT:- It has been brought on record before us that the Tribunal in A.Y.2005-06 and 2006-07 has deleted the disallowance made u/s.40a(ia) and in respect of transaction charges, VSAT and lease line charges to stock exchange in view of the judgment of the Hon‟ble Supreme Court in the case of CIT vs. Kotak Securities Ltd. [ 2016 (3) TMI 1026 - SUPREME COURT] held that these charges are merely the recovery of the cost of infrastructure support and therefore, neither it falls under section 194J or section 194C of the Act. Disallowance on account of lease rentals paid for use of vehicles - HELD THAT:- We find that the Tribunal in A.Y.2016-17 [ 2022 (7) TMI 589 - ITAT MUMBAI] following the order of the Tribunal in A.Y.2005-06 has deleted the said disallowance on the ground that nowhere it has been proved that assessee was the owner of the leased assets. Accordingly, following the earlier year precedents, t .....

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..... THY S, ACCOUNTANT MEMBER For the Appellant : Shri Sunil M. Lala For the Respondent : Shri Alok Singh ORDER PER BENCH: The aforesaid cross appeals have been filed by the assessee as well as by the Revenue against separate impugned orders passed by Ld. CIT(A) for the assessment years 2003-04, 2007-08 and 2008-09 and for A.Y.2009-10, the appeal has been filed against final assessment order passed in pursuance of directions given by the DRP dated 31/10/2013. In all the years the issues involved are identical arising out of identical set of facts and the reasoning given by the authorities below are also by and large similar. 2. We will first take up the cross appeal for A.Y.2003-04. In various grounds of appeal the assessee has challenged the following issues:- GROUND NO. GROUND/ISSUE 1. Upward adjustment of INR 1,50,72,130 in determining the ALP of the international transaction pertaining to provision of equity broking services in CH segment to AEs 2.1.1 CUP method applied by incorrectly considering the simple average of the brokerage rates char .....

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..... te the disallowance of INR 8,03,67,075 made by the AO as per the TPO's order with respect to transaction payment of overseas support services 4. At the outset, it has been submitted that all the issues which has been raised are covered by the decision of the Tribunal in assessee s own case, right from A.Y.2000-01 to A.Y 2006-07 and in subsequent years, for which separate compilation of all the orders have been filed separately before us. 5. The brief facts are that the assessee company Morgan Stanley India Co. Pvt. Ltd is a joint venture enterprise between Morgan Stanley Securities Pvt. Ltd holding 51% of its equity shares and JM Share Brokers Ltd holding the balance 49% equity. The joint venture agreement was entered for the purpose of establishing investment banking, institutional sales and trading organisations in India. For the purpose, their institutional equity shares and trading business was transferred to the assessee company w.e.f. 01/04/1999. In the relevant A.Y. 2003-04, the assessee company is engaged in financial services dealing in Indian stock broking business and also a broker at Bombay Stock Exchange and National Stock Exchange with institut .....

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..... ble as an adjustment to the marketing cost, because he was a sales trader given the responsibility of ensuring the execution of the relevant transactions and this cost would be common to both the trading transactions carried out on behalf of the AEs as well as the unrelated overseas FIIs. 7. In so far as additional research cost incurred for unrelated parties and not for AEs, the same was also rejected on the ground that research infrastructure of the assessee company is common and it cannot be stated that such research are meant only for the unrelated clients and that the same are not shared with its AES. In so far as claim for an adjustment for the larger volume of transactions carried out for its AEs as compared to the unrelated FIIs which were proposed to be used by the ld. TPO, he rejected the claim of the assessee. After detailed analysis the ld. TPO making adjustment on account of lower commission charged from associated entities namely M/s. MSDW, Mauritius and M/s. MSIL, UK of Rs.1,55,63,806. While doing so, the ld. TPO had adjusted rate of commission charged from uncontrolled overseas state which worked out at 0.2898% and 0.3473% as against 0.2335% and 0.2380% charged t .....

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..... 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 consideration, the assessee provided broking services to institutional investors in the Indian equity market. It, interalia, also provided broking services to its associated enterprises namely Morgan Stanley Dean Witter, Mauritius and Morgan Stanley Co International Ltd, UK. The assessee benchmarked the aforesaid international transaction entered into with its associated enterprises by considering Transactional Net Margin Method as the most appropriate method with PLI of operating profit to total cost. Further, considering itself as the tested party, the assessee selected 9 companies as comparables and .....

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..... 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 as well as the revenue for assessment year 2004 - 05 this issue is dealt with in paragraph number five of that order wherein also at page number 5 of that decision in the last para the learned and CIT - A allowed the discounting factor of 40%. The coordinate bench upheld the order of the learned CIT - A. Therefore, the assessee cannot be allowed 50% discount on the price of the comparables (third parties) but only 40% as per the order of the coordinate benches in earlier years. 021. We also find that rule 10 B (1) (a) (ii) of the income tax rules 1962 also allowed adjustment t .....

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..... e for 50%, same also has been restricted to 40%. 14. Thus, all the adjustments which has been claimed by the assessee has been restricted to 40% by the Tribunal and accordingly, in line with the past precedent, we direct the ld. TPO to make the adjustment of 40% while determining the arm s length price of international transaction of brokerage and commission. In so far as the contention of assessee that AE has charged higher brokerage rates than average brokerage rates charged by AE with the third parties, it has been admitted that same has been dismissed by the Tribunal. Accordingly, this ground is dismissed. 15. Ground No.2.2 relates to applicability of TNMM, which has not been pressed and accordingly, the same is dismissed as not pressed. 16. In so far as ground No.2.3 relating to grant of benefit of +/-5% u/s. 92C (2), the same has been submitted that direction may be given to allow in accordance with law. Accordingly, the ld. TPO is directed to grant benefit in accordance with Section 92C (2) as in the statute at that point of time. 17. Ground No. 3 4 has not been pressed; therefore, same is dismissed as not pressed. ITA No.2637/Mum/2014 (A.Y.2003-04) .....

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..... , is pertaining to addition on account of disallowance under section 40A(2) of the Act in respect of payment made to Mr Ashith Kampani. 28. The brief facts of the case pertaining to this issue are: During the year under consideration, the assessee made a payment of Rs 1,07,39,276 to Mr Ashith Kampani. The Ministry of Company Affairs vide letter dated 04/09/2004 being the approval of Central Government under section 314(1)(B) of the Companies Act restricted the salary, perquisites, allowances, etc. payable to Mr Ashith Kampani with effect from 01/12/2004. On perusal of details, during the assessment proceedings, it was noticed that the payment made to Mr Ashith Kampani as salary, perquisites, and allowances were within the limits approved by the Central Government. However, the payment of bonus of Rs 90,55,400 was not in accordance with the approval granted. Accordingly, the AO disallowed the sum of Rs 90,55,400 under section 40A(2) of the Act being excess payment made to Mr Ashith Kampani. The learned DRP vide directions issued under section 144C(5) of the Act rejected the objections filed by the assessee against the aforesaid addition. Being aggrieved, the assessee is in app .....

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..... rn The LA AR of the assessee submits that the assessee has not debited an amount of Rs 300 lakhs to the P L Account and accordingly There cannot be disallowance of notional interest as computed by AO in respect of interest free security deposit provided by assessee to its sister concern. Notional interest does not fall within the ambit of exception u/s 50A(2)(b) of the Act. The Ld AR submits that onus is on the AO to prove that the rent paid by the assessee should be considered as excess within the meaning of section 40A(2) The AO has not brought any material to substantiate the disallowance The Ld. AR submits that vide submission dated 22-12-2004, the assessee explained the complete fact before the AO. The Ld. AR subunits that the Ld. CIT(A) rightly appreciated the fact that no case for disallowance of notional interest on interest free deposit was made out by the AO. In support of his submissions the Id AR for the assessee relied on the decision of Bombay High Court in Karma Energy [2015] 57 taxmann.com 235(Bom), Gujarat High Court in Ashok J Patil [2014] 43 taxmann.com 227 (Guj) 16. On the other hand, the Ld. DR for the revenue supported the order of AO. 17. We have c .....

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..... appointed as one of the joint lead merchant banker and the under writer for the IPO of IT IT. Due to under subscription, the loss attributed to the undersubscribed shares were to be home by the assessee and JP Morgan Stanley Pvt. Ltd in 50: 50 shares each. JP Morgan Stanley Pvt. Ltd paid full consideration for development, which was on account of assessee and thus the assessee paid interest @12% amounting to Rs.49.56,360 The AO disallowed interest of Rs.49.56,360/-, by taking view that underwriting transaction of IT T share was disallowed in the earlier assessment year being not related to the business. On appeal the Ld CIT(A) held that since the loss of transaction of IT T of AY 2001-02 has been allowed as business loss by his predecessor and accordingly, the interest component is married to such loss also assumes the character of business expense and is accordingly allowable and resultantly allowed relief to the assessee. We have further noted that the co-ordinate bench of Tribunal while considering the disallowance in AY 2001-02 in its order dated 25.01.2008 in ITA No.7060 held that loss suffered by assessee out of its business of earning commission income and on the prin .....

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..... (a) The IT team in India is assisted by the IT team in Hong Kong which is the hub office for the Asia Pacific region; (b) India IT team endeavors to ensure that global standards are maintained; (c) Hong Kong IT teams support us for both ongoing maintenance as well special projects. (d) The IT team in India undergoes technical training in Hong Kong. (e) There is constant communication between the India IT team and Hong Kong IT team members regarding various issues, projects etc. through telephone a to emails and other electronic means well as Video Conference Calls, in addition to emails and other electronic means. (iii) Legal and Compliance : (a) Legal : Provision of advice with respect to implementation of policies and procedures to manage legal risk with counterparties advice on management of relationships with outside legal counsel: (b) Compliance: This includes provision of advice relating to compliance with applicable local legal and statutory requirements and internal standards of conduct, ethics and business practices: review of research reports with respect to compliance with applicable local legal and statutory re .....

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..... for different subjects like: Code of Conduct - adapted to Indian set up: 1. Dress Code: 2. Dignity at Work; (c) Admin help for New Hires Terminations such as: a) Generates employee Ids for all new employees; b) Generates e-mail Ids for all new employees; c) Termination of employee ids in case of resignations; d) Termination of e-mail Ids in case of resignations; 26. The ld. TPO noted that the working for arriving of such overseas support services have been provided by way of debit note which mentions the services and the amount charged. However, the ld. TPO noted that assessee has various list of employees, the details of the qualifications and designation have been given in his order and he came to the conclusion that since the assessee itself has employed so many employees for carrying out its business requirements, the ld. TPO held that assessee has not received any extraordinary benefit in necessitating the payment of such a huge amount and accordingly, he treated the arm s length price of the transaction at Nil . 27. The ld. CIT(A) following the earlier orders of the ld. CIT(A) for A.Y.2000-01 to 2007-08 held that no TP .....

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..... e measured. Another important factor is to examine whether the services have not been resulted into duplicative services. Further, assessee is also required to show it was for the business purpose and is not carried out by the shareholder as its own activity. 30. Not only that, the charging method, i.e., direct or indirect charge should also be based on proper allocation key which should be commensurate in the nature of services and the impurity of such services and utilization thereof by the assessee. Here in this case from the record, it is not discernable whether any such documentation was prepared by the assessee or was ever asked by the ld. TPO. 31. Before us, ld. Counsel for the assessee submitted that in the subsequent year, the assessee had filed voluminous details before the ld. CIT (A) when asked by him. It has also been submitted that in the A.Y.2007-08, based on perusal of those documentation, the ld. CIT (A) has held that the payment for intra-group services is justified. 32. From the perusal of the ld. TPO's order as noted above, it is seen that, he has merely noted that assessee had various employees and therefore, there was no requirement or need for su .....

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..... under section 40(a)(ia) 34. In so far as issue raised in ground No.1.1.1 to 1.1.5, as admitted by both the parties, this issue is common in A.Y.2003-04, wherein all these issues are covered by the decision of the Tribunal for earlier years wherein the Tribunal has held that while applying CUP, various adjustments is to be given while determining the arm s length price, which should be allowed to the extent of 40%. Accordingly, in line with the earlier years, we direct the ld. TPO that while applying the CUP, various adjustments as claimed by the assessee should be given to the extent of 40%. Accordingly, these grounds are treated as partly allowed. 35. Ground No.1.2 with regard to applicability of TNMM has not been pressed, therefore, the same is dismissed as not pressed. 36. Ground No. 1.3 is with regard to grant benefit under proviso to Section 92C(2) of +/- 5%, like in the earlier year, we have directed the ld. AO to divide the issue in accordance with law and grant consequential relief. 37. In so far as disallowance u/s.14A is concerned, the ld. AO noted that assessee received dividend income of Rs.1,49,18,622/-. The assessee has claimed that he has n .....

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..... rities Ltd. 67 Taxmann.com 356 (SC). The relevant observation of the Tribunal in A.Y.2006-07 reads as under:- 38. Having heard both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee s own case for the assessment year 2005 06 cited supra, following the decision of Hon ble Supreme Court in CIT vs Kotak Securities Ltd, [2016] 383 ITR 1 (SC), held that these charges are merely the recovery of the cost of infrastructure support and therefore, neither it falls under section 194J or section 194C of the Act. The relevant findings of the coordinate bench of the Tribunal in the aforesaid decision are as under: 039. Ground no.5 is with respect to the disallowance of transaction charges lease line charges and VSAT charges paid by assessee to the Stock exchanges. The assessee paid a sum of Rs.1,72,51,564/-, however, did not deduct any tax at source. The learned Assessing Officer held the same to be fees for technical services under Section 194J of the Act or under Section 194C of the Act. Therefore, he disallowed the sum applying the provisions of Section 40a(ia) of the Act. The learned CIT(A) held that these charges are .....

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..... held that CUP should be applied with certain adjustments and accordingly, in view of the finding given in assessee s appeal, the ground raised by the Revenue is dismissed. 43. In so far as the transfer pricing adjustment with respect to availment of overseas support services, we have already dealt this issue in A.Y.2003-04 in Revenue s appeal and finding given in the impugned order and following earlier order of the Tribunal, such adjustment made by the ld. TPO is directed to be deleted. 44. In so far as disallowance of remuneration to Mr. Ashith Kampani u/s. 40A(2) is again similar to ground No.3 in A.Y.2003-04 in Revenue appeal, wherein following the earlier Tribunal order, this disallowance can be deleted. Accordingly, ground No.3 is dismissed. 45. Lastly, in so far as disallowance on account of lease rentals paid for use of vehicles, the brief facts are that in the computation of income assessee had added back to the profits of business an amount of Rs.97,334/- as Finance Charges for assets taken on lease which was debited in profit loss account and reduced the amount of Rs.5,49,612/- claimed as Lease Rentals paid . The assessee stated that vehicles were acquired un .....

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..... 3. The Ld. AO erred in making reference to the Ld. TPO for computing the ALP in respect of international transaction pertaining to provision of equity broking services, since it was not in accordance with the provisions of section 92CA(1) of the Act 4. Disallowance under section 14A 49. Ground Nos.2.1.1 to 2.3 are similar to the grounds raised in A.Y.2003-04 and 2007-08 wherein following the decisions of the Tribunal in earlier years. These grounds are treated as partly allowed. Firstly, the CUP should be applied and secondly, adjustment while returning the ALP should be to the extent of 40%. 50. Likewise in the earlier year, ground No.2.2 regarding applicability of TNMM has not been pressed, therefore, the same is dismissed as not pressed. 51. Ground No.2.3 is similar to ground raised in earlier years, accordingly, ld. AO is directed to grant benefit in accordance with the proviso to Section 92C(2). 52. Ground No.3 has not been pressed, therefore, the same is dismissed as not pressed. 53. In so far as disallowance u/s.14A is concerned, the brief facts are that the assessee had .....

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..... ernative he submitted that later in the earlier year disallowance should be restricted to Rs.1,00,000/-. 56. After considering the entire gamut of facts and the contentions raised by the assessee, we find that first of all assessee had itself made suomoto disallowance under Rule 8D and later on assessee claimed that no disallowance should be made. The ld. AO has rejected the explanation and has made the disallowance on the basis of working given by the assessee. Thus, when assessee itself has given the working for the disallowance, there was no reason for ld. AO to record his satisfaction. The assessee had to give reasons as to why disallowance is uncalled having regards to the books of accounts and then only ld. AO can record his satisfaction, whether to accept or reject the explanation given by the assessee. Here in this case, assessee at the very threshold has offered suo-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. Accordingl .....

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..... n incorrect amount of total income. 60. The ground Nos.2.1.1 to 2.1.2 are exactly same which has been discussed in the earlier years. Now, these issues are covered by the earlier decision of the Tribunal, accordingly, these grounds are partly allowed. 61. Ground No.2.2 is dismissed as not pressed and ground No.2.3, we have already given direction to the ld. AO to give benefit in accordance with law. 62. Ground Nos. 3 4 relate to disallowance u/s.14A. The assessee had earned dividend income of Rs.86,88,529/- out of which assessee had made suomoto disallowance of Rs.2,51,534/-, whereas ld. AO has made disallowance in Rule 8D at Rs.41,25,431/-. The ld. AO had disregarded the working of the disallowance given by the assessee for which, following reasons have been given for rebutting the ld. AO's contention: Sr. No. AO s Basis Appellant s submission 1 Appellant has failed to adduce (1) direct nexus between own funds and investments made and (ii) no loan funds were utilized in procuring investments It is submitted that, Appellant has suffici .....

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..... lso allowed for statistical purposes. 64. In so far as ground No.5 is concerned regarding short grant of TDS, it has been informed that assessee has already filed rectification application. However, the same has not been disposed of. Accordingly, this matter is remanded back to the ld. AO to examine this issue and grant consequential relief for grant of TDS. 65. In ground No.6 assessment of incorrect amount of income under the head profits and gains from business. It has been noted that rectification application has been filed. Accordingly, we direct the ld. AO to examine this issue and decide the correct amount assessable under the head profits and gains. ITA No.1235/Mum/2014 (A.Y.2009-10) 66. The Revenue has raised the following ground of appeal:- GROUND NO. GROUND/ISSUE 1. DRP erred in adopting weighted average methodology in computing the arithmetic mean of Non-AE 2002-03 transactions for arriving at ALP of brokerage charged for CH and DVP trades. 67. Since, this issue is covered by the decision of the Tribunal in earlier years where Tribunal has accepted the stand of .....

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