2023 (6) TMI 1357 - AT - Income Tax

TP Adjustment - MAM selection - whether MAM will be CUP or TNMM - how the transfer pricing adjustment should be made, whether the margins of the comparables have to be taken on simple arithmetic mean of uncontrolled transactions or weighted average - HELD THAT - As following the decision of the Tribunal in A.Y.2011-12 2023 (2) TMI 502 - ITAT MUMBAI we hold that, firstly CUP method is to be applied and secondly, simple average mean brokerage rate should be taken for the comparability purpose. 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 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 AE with the third parties, it has been admitted that same has been dismissed by the Tribunal. Accordingly, this ground is dismissed. 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. Depreciation of NSE membership card u/s. 32(1) - HELD THAT - Issue is covered by the decision of the Tribunal as series of decisions of the Tribunal in A.Y.2000-01, 2001-02 and 2006-07 wherein the Tribunal has allowed the depreciation @25% of BSE and NSE membership. Disallowance of club membership fees paid by the assessee, the same has been held to allowable by the Tribunal relying upon the judgment of Hon ble Bombay High Court in the case of Otis Elevator Co. Ltd. vs. CIT 1991 (4) TMI 53 - BOMBAY HIGH COURT and other decisions of the Jurisdictional High Court. Hence, this ground raised by the Revenue is dismissed. Disallowance of remuneration paid u/s. 40A(2) - HELD THAT - As respectfully following the judicial precedents in assessee s own case, we direct the AO to delete the disallowance made under section 40A(2) of the Act in respect of payment made to Mr Ashith Kampani, who has 18 years of experience in the field of capital market. Identical issue arose in case of assessee for A.Y. 2004-05 where learned CIT(A) deleted the addition which was confirmed by ITAT. In view of this, we find no infirmity in the order of the learned CIT(A) in deleting the disallowance which has been confirmed by ITAT in assessee's own case for earlier years. We also find that the learned Assessing Officer has not given any reason that why the above remuneration is excessive and unreasonable looking to the legitimate needs of the business. Disallowance of interest u/s. 40A (2)(b) - HELD THAT - The relevant observation of the Tribunal for A.Y.2002-03 held that here 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 40A(2)(b) of the Act. AO has not made a case for disallowance of any expenditure and made addition for notional return of interest from deposit. It was further held that the AO made addition 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 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 held that loss suffered by assessee out of its business of earning commission income and on the principle of matching concept of income and expenditure, the entire loss was allowed in AY 2001-02. We are further in agreement that allowance of interest is merely consequential in the year under consideration. Therefore, we do not find any merit in the ground of appeal. Disallowance on account of overseas support services have been broadly classified under the head finance (controllers, treasury and tax, information technology, legal and compliance and HR) - HELD THAT - Nowhere the nature of intra-group services and how the services has been rendered and utilised have been analysed by the Tribunal nor any of the tests for examining the arm s length price for such services has been discussed nor any of the tests for examining the arm s length principle have been looked into 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 such services. Nowhere he is questioned or asked about the rendition of the services or to demonstrate whether there was any duplicative service. Once assessee has given the details, then ld. TPO should have at least asked for the documentation of proving the aforesaid tests and cannot simply determine arm s length price at Nil'. Since ld. TPO has not brought anything on record, therefore, we have no option but to follow the earlier year orders even though none of the orders of the Tribunal have considered this aspect. Accordingly, the Revenue cannot substantiate the disallowance of ALP at Nil and accordingly, the Revenue s appeal is dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - We hold that disallowance u/s.14A is to be restricted to Rs.1,00,000/- in absence of applicability of Rule 8D in A.Y.2007-08. One of the reasons is that in case of the assessee, disallowance of interest is unjustified because admittedly assessee had more interest free funds exceeding the investments yielding any tax free income and now this issue stands covered by the judgement of the Hon ble Supreme Court in the case 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, the claim of the assessee is allowed and the ground raised by the Revenue is dismissed. Disallowance u/s 14A - assessee had itself made suomoto disallowance under Rule 8D - AO has rejected the explanation and has made the disallowance on the basis of working given by the assessee - HELD THAT - 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. 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. Incorrect amount of income under the head profits and gains from business - HELD THAT - 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‟. TP Adjustment - DRP 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 - HELD THAT - Since, this issue is covered by the decision of the Tribunal in earlier years where Tribunal has accepted the stand of the Revenue to consider simple average brokerage rate for comparability purpose and that Tribunal has already accepted and directed the AO to consider the brokerage of non-AE for comparability purpose. Thus, in line with the earlier year s decisions, we hold that weighted average methodology in computing the arithmetic mean is not tenable. Accordingly, this ground is dismissed.

Summary

Issues Involved:
1. Upward adjustment in determining the ALP of international transactions.
2. Application of CUP method and adjustments.
3. Applicability of TNMM.
4. Depreciation on NSE membership card.
5. Disallowance of club membership fees.
6. Disallowance of remuneration paid under Section 40A(2).
7. Disallowance of interest under Section 40A(2)(b).
8. Disallowance of interest on loss on IT&T shares.
9. Transfer pricing adjustment for overseas support services.
10. Disallowance under Section 14A.
11. Disallowance of lease line charges, VSAT charges under Section 40(a)(ia).
12. Short grant of TDS.
13. Assessment of incorrect amount of income under the head profits and gains from business.

Summary:

1. Upward Adjustment in Determining the ALP of International Transactions:
The assessee challenged the upward adjustment of INR 1,50,72,130 for equity broking services to AEs. The Tribunal upheld the application of the CUP method over TNMM for determining the ALP. The Tribunal directed that adjustments should be made for marketing, research costs, and volume discounts, restricting the adjustment to 40%.

2. Application of CUP Method and Adjustments:
The Tribunal affirmed the use of the CUP method and directed that the simple average of brokerage rates should be used instead of the weighted average. Adjustments for marketing costs, research costs, and volume discounts were restricted to 40%.

3. Applicability of TNMM:
The Tribunal dismissed the applicability of TNMM as not pressed by the assessee.

4. Depreciation on NSE Membership Card:
The Tribunal allowed depreciation on NSE membership cards under Section 32(1), following the Supreme Court's decision in Techno Shares and Stocks Ltd.

5. Disallowance of Club Membership Fees:
The Tribunal dismissed the Revenue's challenge, allowing the club membership fees as deductible, relying on the Bombay High Court's judgment in Otis Elevator Co. Ltd. vs. CIT.

6. Disallowance of Remuneration Paid Under Section 40A(2):
The Tribunal deleted the disallowance of remuneration paid to Mr. Ashith Kampani, following its earlier decisions in the assessee's own case for previous years.

7. Disallowance of Interest Under Section 40A(2)(b):
The Tribunal deleted the disallowance of notional interest on interest-free security deposits, following the Bombay High Court's decision in Karma Energy.

8. Disallowance of Interest on Loss on IT&T Shares:
The Tribunal upheld the deletion of disallowance of interest on loss on IT&T shares, considering it a business expense.

9. Transfer Pricing Adjustment for Overseas Support Services:
The Tribunal directed the deletion of the transfer pricing adjustment for overseas support services, noting that the assessee had justified the need, rendition, and benefit of the services received.

10. Disallowance Under Section 14A:
The Tribunal remanded the issue back to the AO to examine the disallowance under Section 14A, directing the assessee to substantiate its claim.

11. Disallowance of Lease Line Charges, VSAT Charges Under Section 40(a)(ia):
The Tribunal deleted the disallowance of lease line charges, VSAT charges, and transaction charges, following the Supreme Court's decision in CIT vs. Kotak Securities Ltd.

12. Short Grant of TDS:
The Tribunal remanded the issue of short grant of TDS back to the AO for examination and consequential relief.

13. Assessment of Incorrect Amount of Income Under the Head Profits and Gains from Business:
The Tribunal directed the AO to examine and rectify the assessment of the incorrect amount of income under the head profits and gains from business.

Conclusion:
The appeals and cross objections of the assessee were partly allowed, and the appeals of the Revenue were dismissed. The Tribunal provided detailed directions for each issue, ensuring consistency with previous decisions and judicial precedents.