2020 (1) TMI 1233 - AT - Income Tax

TP Adjustment - MAM selection - CUP or TNMM - TPO rejecting assessee s CUP method adopted, by substituting the same with TNMM method - Whether CIT(A) erred in rejecting the TNMM method adopted by the AO? - HELD THAT - The assessee s claim is that nature of services provided to the AEs and third party into stock broking is the same as is comparable and in such circumstances the assessee s claim that CUP method for determination of ALP is the most appropriate method. These pleas of the assessee are duly supported by the OECD TP guidelines and UN TP manual for the proposition that internal AO has rejected the CUP method adopted by the assessee without bringing any cogent material on record as to why the same is not appropriate. AO has made general observation that the assessee has not been able to prove that uncontrolled transaction was comparable to the assessee with regard to address like date of transactions, volume of transactions, type of account, country of transactions and terms and conditions. AO has referred to above in a general manner and this remains only theoretical observation without any specific details on cogent finding. CIT(A) is correct in holding that the AO has rejected CUP method used by the assessee without bringing any cogent material on record as to why the same method is not appropriate and should be replaced with TNMM as the most appropriate method chosen by the Assessing Officer. CUP method selected by the assessee is appropriate - No interference in the order of learned CIT(A) required - Decided against revenue. Loss in derivative segment - Whether not speculation loss? - whether assessee being a share broker and not a share trader, case of the assessee does not fall under any of exceptions enlisted in Section 73(1) ? - HELD THAT - We find that CIT(A) is correct in holding that the transactions do not fall under the realm of speculative transaction. Any loss which may arise in the course of such business, shall not be deemed to be a speculative transaction. If the nature of the transaction by the assessee is not a speculative transaction at all, then, the Explanation to section 73 has no application. The loss sustained by the assessee is a business loss which can be set off against income from other sources. Therefore, the prohibition under section 73 is attracted only to set off the loss in a speculative business against the profit from other business, because loss from speculation business should be set off only from a profit of speculation business.See M/S. FIRST SECURITIES PVT. LTD. 2015 (2) TMI 361 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of TNMM method by CIT(A) and acceptance of CUP method for determining ALP.
2. Classification of loss in derivative segment as speculation loss.
3. Attribution of trading expenses to speculative business.

Issue-wise Detailed Analysis:

1. Rejection of TNMM Method and Acceptance of CUP Method:

The Revenue appealed against the CIT(A)'s rejection of the Transactional Net Margin Method (TNMM) adopted by the Assessing Officer (AO) and the acceptance of the Comparable Uncontrolled Price (CUP) method used by the assessee for determining the Arm's Length Price (ALP) of international transactions. The AO had justified the applicability of TNMM, arguing that the assessee's internal CUP method lacked comparability due to differences in transaction dates, volumes, account types, countries, and terms. The AO selected comparables and calculated an ALP adjustment based on TNMM, leading to a significant adjustment.

The CIT(A) noted that the CUP method is preferred when internal comparables exist, as supported by OECD TP guidelines and UN TP Manual. The CIT(A) found the AO's rejection of the CUP method to be without proper basis and upheld the assessee's use of CUP, deleting the ALP adjustment. The Tribunal agreed with the CIT(A), emphasizing that the AO failed to provide cogent material to justify rejecting the CUP method and replacing it with TNMM.

2. Classification of Loss in Derivative Segment as Speculation Loss:

For A.Y. 2011-12, the AO classified a loss of ?39,631 in the derivative segment as a speculation loss, arguing that the assessee, being a share broker, did not fall under exceptions listed in Section 73(1) of the Act. The CIT(A) disagreed, noting that the loss was not from speculative activity but from normal business operations. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT's previous ruling in the assessee's favor for A.Y. 2010-11, which held that operational defaults by employees causing losses do not constitute speculative activities.

3. Attribution of Trading Expenses to Speculative Business:

For A.Y. 2012-13, the AO attributed trading expenses of ?24,05,350 to speculative business, invoking the Explanation to Section 73. The CIT(A) rejected this attribution, again referencing the ITAT's previous ruling that operational defaults causing losses are part of normal business exigencies and not speculative activities. The Tribunal upheld the CIT(A)'s decision, agreeing that the transactions did not fall under speculative transactions and citing the Karnataka High Court's decision in CIT Vs. First Securities (P) Ltd., which clarified that losses from normal business operations of stock exchange members are not speculative.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues. The CUP method was deemed appropriate for determining ALP, losses in the derivative segment were not classified as speculative, and trading expenses were not attributed to speculative business. The Tribunal emphasized the need for cogent material and proper basis when rejecting established methods and classifications used by the assessee.