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2015 (7) TMI 1054 - AT - Income TaxTDS 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 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 deducting tax at source u/s 194J of the Act in the instant assessment year and thus the invoking of section 40(a)(ia) of the Act is liable to be set aside. It is also undisputed that assessee has started deducting tax at source u/s 194J of the Act on the transaction charges paid to the stock exchange from July 2006 onwards. Considering the aforesaid peculiar facts, and following the 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, 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 assessee company - Held that - Quite clearly, the facts emerging from the order of the Assessing Officer establish that 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 the Judgment of Hon ble 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 assessee s own case for assessment year 2002-03, the Tribunal 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 2012 (9) TMI 914 - SUPREME COURT - Decided in favour of assessee. Disallowance of client entertainment expenses - Held that - 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 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 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 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.
Issues Involved:
1. Disallowance of transaction charges and lease line charges. 2. Disallowance of loss on account of error trades. 3. Disallowance of depreciation on motor car. 4. Disallowance of club entrance fees and subscription charges. 5. Disallowance of client entertainment expenses. 6. Transfer pricing adjustments for broking services for futures and options trades. 7. Transfer pricing adjustments for broking services for cash equity transactions. 8. Transfer pricing adjustments for merchant banking services. 9. Transfer pricing adjustments for marketing and sales support services in relation to ADRs. Detailed Analysis: 1. Disallowance of Transaction Charges and Lease Line Charges: The issue pertains to the disallowance of transaction charges paid to NSE/BSE amounting to Rs. 28,669,998 and lease line charges amounting to Rs. 433,130. The Assessing Officer disallowed these charges under section 40(a)(ia) of the Income Tax Act, 1961, citing non-deduction of tax at source. The Tribunal referred to the Bombay High Court's judgment in CIT Vs. Kotak Securities Ltd., which held that no fault could be found with the assessee for not deducting tax at source on transaction charges under section 194J for the relevant assessment year. Consequently, the Tribunal deleted the disallowance of transaction charges and lease line charges. 2. Disallowance of Loss on Account of Error Trades: The assessee claimed a loss of Rs. 7,774,691 due to error trades. The Assessing Officer disallowed the claim, stating that the assessee did not provide evidence of a nexus between business transactions and the loss. The Tribunal observed that the losses were incurred in the normal course of business and were incidental to the business activity. It referred to the Supreme Court's decision in Badridas Daga v. CIT, which allows deduction for losses incurred in the course of business. The Tribunal allowed the claim for deduction of the loss on error trades. 3. Disallowance of Depreciation on Motor Car: The issue involved the disallowance of depreciation amounting to Rs. 144,702 on a motor car not registered in the name of the assessee company but used for its business. The Tribunal referred to the Bombay High Court's judgment in CIT Vs. Dilip Singh Saradarsingh Bagga, which allows depreciation on assets used for business purposes even if not registered in the assessee's name. The Tribunal directed the Assessing Officer to allow the depreciation claim. 4. Disallowance of Club Entrance Fees and Subscription Charges: The assessee claimed club entrance fees and subscription charges amounting to Rs. 313,753. The Assessing Officer disallowed 80% of the expenditure. The Tribunal referred to its own decision in the assessee's case for the assessment year 2002-03, which allowed such expenses following the Supreme Court's judgment in CIT Vs. United Glass Manufacturing Co. Ltd. The Tribunal directed the deletion of the disallowance. 5. Disallowance of Client Entertainment Expenses: The assessee incurred client entertainment expenses amounting to Rs. 14,85,703, of which 50% (Rs. 7,42,851) was disallowed by the Assessing Officer. The Tribunal found that the disallowance was based on conjectures and surmises without any specific instance of non-business expenditure. The Tribunal directed the deletion of the disallowance. 6. Transfer Pricing Adjustments for Broking Services for Futures and Options Trades: The assessee used the Transactional Net Margin Method (TNMM) for benchmarking, but the TPO adopted the Comparable Uncontrolled Price (CUP) method. The Tribunal upheld the use of the internal CUP method due to the availability of internal comparable data. However, it directed the Assessing Officer to rework the adjustment considering additional interest earned on high-volume trades based on margin monies placed by associated enterprises. 7. Transfer Pricing Adjustments for Broking Services for Cash Equity Transactions: The Tribunal upheld the use of the internal CUP method for benchmarking the broking services for cash equity transactions, following the precedent set in the assessee's case for the assessment year 2002-03. 8. Transfer Pricing Adjustments for Merchant Banking Services: The TPO used financial data of comparable companies for the financial year under consideration, leading to an adjustment of Rs. 3,10,61,627. The Tribunal directed the exclusion of Keynote Corporate Services Limited and Khandwala Securities Limited from the final set of comparables due to exceptional financial results and functional dissimilarities, respectively. The Assessing Officer was directed to recompute the arm's length price. 9. Transfer Pricing Adjustments for Marketing and Sales Support Services in Relation to ADRs: The TPO used financial data for the financial year under consideration, leading to an adjustment of Rs. 8,66,768. The Tribunal directed the exclusion of Sundaram Finance Distribution Limited from the final set of comparables due to its business model of outsourcing activities, which was different from the assessee's model of employing its own employees. The Assessing Officer was directed to rework the arm's length price accordingly. Conclusion: The Tribunal partly allowed the appeal, providing relief on several issues by deleting disallowances and directing the recomputation of transfer pricing adjustments based on revised sets of comparables and appropriate methodologies. The judgment emphasizes the importance of functional comparability and the use of appropriate benchmarking methods in transfer pricing cases.
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