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2020 (12) TMI 815 - AT - Income TaxDisallowance of deduction of SEBI Merchant License fee - HELD THAT - Clear and unequivocal direction given by the CIT(A) while disposing off the assessee s appeal for A.Y 2001-02, we are of the considered view that there was no justification on the part of the lower authorities in not allowing the assessee s claim for deduction of ₹ 1,66,666/- (i.e 1/3rd of ₹ 5,00,000/-). Accordingly, we direct the A.O to allow the assessee s claim for deduction of ₹ 1,66,666/- i.e 1/3rd of the registration fees of ₹ 5 lac that was paid by it towards merchant banking license fees to SEBI in the period relevant to A.Y. 2001-02. We thus in terms of our aforesaid observations set aside the order of the CIT(A) in context of the aforesaid issue under consideration and vacate the disallowance. Disallowing claim for deduction of loss from error trades of equity shares on account of dealing in securities in the ordinary course of its share and stock broking business - disallowance of the proportionate expenditure made by the A.O by attributing the said amount on an ad hoc basis to carrying on of speculation business by the assessee - HELD THAT - As the assessee had carried out the transactions of purchase and sale of shares on account of a business exigency and not with an intention to earn profit, therefore, the same would not come within the purview of Explanation to Sec.73 - We thus not being able to persuade ourselves to subscribe to the view taken to the contrary by the lower authorities that the loss on account of transactions in shares incurred by the assessee was to be held as speculation loss within the meaning of Explanation to Sec. 73 therein, set aside the same and direct the A.O to allow the assessee s claim for deduction of business loss on account of transactions in shares. As concluded that the loss on account of transaction in shares cannot be held to be speculation loss, therefore, disallowance of the proportionate expenditure that had been attributed by the lower authorities to the aforesaid speculative transactions also cannot be sustained and is consequentially deleted. TP adjustment - Royalty/branding fees paid by the assessee to its AE - AO/TPO determining the ALP of the royalty/branding fees paid by the assessee to its AE viz. CLSA, Netherland at Rs.nil, as against that claimed by the assesseeat ₹ 49,38,615/- - HELD THAT - International transactions of payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherland was to be held as being at arm s length. Our aforesaid view is fortified by the CBDT Circular No. 6-P, dated 06.07.1968, wherein, in context of the provisions of Sec. 40A(2)(b) it was therein clarified that where the scale of remuneration of a director of a company had been approved by the Company Law Administration, there would be no question of disallowance of any part thereof in the income tax assessment of the company, on the ground, that the remuneration was unreasonable or excessive. Now when the payment of the royalty/brand fees by the assessee to its AE viz. CLSA BV, Netherlands had been approved by the RBI, the same, thus, on the said ground also could safely be held to be at arm s length. In fact, the aforesaid CBDT Circular had been pressed into service in the case of Kinetic Honda Motor Limited Vs. JCIT, 2000 (3) TMI 201 - ITAT PUNE . In the aforesaid case, the Tribunal while dislodging the view taken by the A.O and the CIT(A), had observed, that when the payments made by an assessee are approved by one wing of the government, then, there would be no question of treating such payment as excessive or unreasonable having regard to the legitimate business needs. Thus determining of the ALP of the royalty/brand fee paid by the assessee to its AE viz. CLSA BV, Netherland at Rs.nil by the TPO, as against that shown by the assessee at ₹ 49,38,615/- cannot be sustained and is liable to be vacated. Non substantiate receipt of referral services from its the AE, viz. CLSA Ltd., Hong Kong - documents filed by the assessee as additional evidence in two parts before the CIT(A) - HELD THAT - As is discernible from the records, we find, that the TPO on being confronted with the aforesaid additional evidence , had however, in neither of his three remand reports been able to place on record any such material which would dislodge the factum of rendition of referral services by the AE, viz. CLSA Ltd., Hong to the assessee during the year under consideration and therein prove to the contrary that no such referral services were therein factually rendered. Except for claiming that the documents filed by the assessee did not demonstrate that any actual referrals were made by the AE, viz. CLSA Ltd., Hong Kong, to the assessee, we find, that the said hollow claim of the TPO is not backed by any concrete material which would support the same. On the basis of the aforesaid observations, we are unable to concur with the view taken by the lower authorities that the assessee had failed to substantiate receipt of referral services from its the AE, viz. CLSA Ltd., Hong Kong during the year under consideration on the basis of any supporting documentary evidence. We have given a thoughtful consideration to the contentions of the ld. A.R as regards the invalid assumption of jurisdiction by the TPO for determining the ALP of the referral services rendered by the AE, viz. CLSA Ltd., Hong Kong at RS. Nil i.e without adopting any one of the prescribed method contemplated in Sec. 92C(1) of the Act, and are persuaded to subscribe to the same. We are unable to concur with the aforesaid manner in which the TPO had determined the ALP of the referral services rendered by the AE, viz. CLSA, Hong Kong to the assessee at Rs.nil. In our considered view, on a reference made under Sec. 92CA(1) of the Act to the TPO, the latter therein is obligated to benchmark the international transactions of the assessee only after applying any one of the prescribed methods provided in Sec. 92C(1) of the Act. Under no circumstances the TPO can benchmark the transactions at nil or in an ad hoc manner by dispensing with the statutory obligation cast upon him to take recourse to and therein determine the ALP by applying any one of the methods prescribed under Sec. 92C(1) of the Act. We are unable to sustain the determination of the ALP of the aforesaid international transaction of rendering of referral fees by the AE, viz. CLSA Ltd., Hong Kong to the assessee at Rs.nil, i.e without following any one of the prescribed methods provided in Sec.92C(1) - Decided in favour of assessee.
Issues Involved:
1. Validity of orders passed by TPO, AO, and CIT(A). 2. Assessment of total income discrepancy. 3. Rejection of Transfer Pricing (TP) analysis. 4. Determination of Arm's Length Price (ALP) under Section 92CA(3). 5. Appropriateness of Transactional Net Margin Method (TNMM) for determining ALP. 6. Payment of royalty/branding fees. 7. Application of Comparable Uncontrolled Price (CUP) method. 8. Use of controlled transactions for benchmarking. 9. RBI approval and Exchange Control Regulations. 10. Consideration of evidence during proceedings. 11. Payment of referral fees. 12. Loss from error trades. 13. SEBI merchant banking license fees. Issue-wise Detailed Analysis: 1. Validity of Orders Passed by TPO, AO, and CIT(A): The appellant contended that the orders passed by the Transfer Pricing Officer (TPO), Assessing Officer (AO), and Commissioner of Income Tax (Appeals) [CIT(A)] were "bad in law and void ab initio." The tribunal did not find merit in this ground and dismissed it as not pressed. 2. Assessment of Total Income Discrepancy: The AO assessed the total income of the appellant at INR 35,84,28,360 as against the returned income of INR 32,82,16,610. The tribunal did not find any specific argument or evidence from the appellant to contest this discrepancy. 3. Rejection of Transfer Pricing (TP) Analysis: The TPO rejected the TP analysis undertaken by the appellant, which used the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The tribunal found that the TPO had not provided sufficient justification for rejecting the TNMM analysis. 4. Determination of Arm's Length Price (ALP) Under Section 92CA(3): The TPO determined the ALP of the international transactions relating to payment of brand fee and referral services at nil. The tribunal found that the TPO had not applied any of the prescribed methods under Section 92C(1) of the Act, which was a requirement for determining the ALP. 5. Appropriateness of Transactional Net Margin Method (TNMM) for Determining ALP: The appellant argued that the TNMM was the most appropriate method for determining the ALP for the payment of royalty/branding fees and referral fees. The tribunal agreed with the appellant, citing previous judicial pronouncements that supported the use of TNMM. 6. Payment of Royalty/Branding Fees: The TPO had enhanced the income of the appellant by INR 49,38,615, holding that the payment of royalty/branding fees did not satisfy the arm's length principle. The tribunal found that the TPO had erred in applying the CUP method and not considering the RBI approval and Exchange Control Regulations, which allowed the payment. 7. Application of Comparable Uncontrolled Price (CUP) Method: The TPO applied the CUP method for benchmarking the international transaction of payment of royalty/branding fees. The tribunal found this application incorrect as the TPO had used data from controlled transactions, which was not appropriate for benchmarking. 8. Use of Controlled Transactions for Benchmarking: The TPO used controlled transactions as the internal CUP, which the tribunal found inappropriate. The tribunal emphasized that comparable data should pertain to uncontrolled transactions or companies. 9. RBI Approval and Exchange Control Regulations: The appellant argued that the payment of royalty was allowed by the RBI and permissible under Exchange Control Regulations. The tribunal agreed, stating that this approval indicated compliance with the arm's length principle. 10. Consideration of Evidence During Proceedings: The appellant contended that the TPO, AO, and CIT(A) failed to consider the evidence filed during the proceedings. The tribunal found merit in this argument, noting that substantial documentary evidence was provided to substantiate the appellant's claims. 11. Payment of Referral Fees: The TPO enhanced the income of the appellant by INR 21,436,814, holding that the payment of referral fees did not satisfy the arm's length principle. The tribunal found that the TPO had erred in determining the ALP of the referral services at nil without applying any of the prescribed methods under Section 92C(1) of the Act. 12. Loss from Error Trades: The AO disallowed the loss of INR 7,36,483 from error trades, treating it as speculative. The tribunal found that the loss was incurred in the ordinary course of the appellant's stock broking business and should be allowed as a business loss. Consequently, the disallowance of proportionate expenditure of INR 26,10,333 attributed to speculative transactions was also deleted. 13. SEBI Merchant Banking License Fees: The AO did not allow the deduction of INR 1,66,666 being SEBI merchant banking license fees. The tribunal found that the CIT(A) had previously directed the AO to allow this deduction, and there was no justification for not following these directions. Conclusion: The tribunal allowed the appeal filed by the appellant, directing the AO to make the necessary adjustments and deletions as per the tribunal's observations. The tribunal emphasized the importance of following prescribed methods for determining ALP and considering all relevant evidence during the proceedings.
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