2023 (10) TMI 1196 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Inclusion of cyber media research Ltd (formerly IDC (India) Ltd. with respect to the related party transaction filter, CIT- A that it does not cross 25% of the revenue of the comparable company. To establish the functional comparability, we have also compared the employee cost of assessee and this comparable and we found that the total employee cost of the assessee out of the operating cost was 34.9% whereas in case of the comparable company it is 34.5%. However, in the original except reject matrix of the assessee this company appeared as a comparable. Inadvertently it was excluded. When the assessee pointed out the same before the TPO asking for its inclusion, the learned TPO held it to be functionally not comparable stating that the annual account of the assessee company are not reliable because of incorrect disclosure of related party transactions. Before us it was not shown that how the disclosure in the annual accounts of that company could be said to be erroneous without making any enquiry under section 133 (6) of the act. As no new facts, additional evidences were submitted by the assessee for its inclusion before the learned CIT- A, we do not find any infirmity in the order of the learned CIT A in directing the learned TPO to include the above comparable. Accordingly ground number 1 of the appeal of learned AO is dismissed. CIT-A held that has excluded the IDFC investment advisors Ltd on the basis that it is engaged in the business of providing portfolio management services as a registered portfolio manager with the securities and board of India which is having 90% of its revenue coming from that stream and only 10% revenue stream is from advisory services. CIT- A has also directed for exclusion of Ledger up corporate advisory private limited, which is found to be engaged primarily in the business of providing investment banking services like that syndication, private equity deals and other corporate advisory mandates. It is also registered with the securities and exchange board of India and therefore the CIT - A held that it is engaged in merchant banking activities and therefore not comparable to the assessee. Exclusion of Motilal Oswal investment advisors private limited, it was held that it is engaged in the business of providing investment banking, merchant banking services based on the extracts of the annual reports. It was also found that it is an investment banking company engaged in providing comprehensive investment banking solution. All these findings of the CIT- A remain unchallenged by the learned departmental representative before us. We find that there is a reasonable basis for the learned CIT-A to hold so that all these entities are selected as comparable by the learned transfer pricing officer are having different functions. Disallowance on account of error trade loss - Speculative Loss or not - CIT- A deleted the disallowance following the decision of HSBC securities and capital markets India private limited 2015 (5) TMI 122 - BOMBAY HIGH COURT - We also found that assessee does not have any share trading income and does not hold any stock in trade of equity except the shares of Bombay stock exchange. It is not also in dispute that losses have arising on account of error trades only. Therefore, provisions of section 73 of the income tax act with respect to the speculation loss does not apply in case of the assessee. Accordingly we do not find any infirmity in the order of the learned CIT A in deleting the above disallowance. Ground of the appeal of the learned assessing officer is dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - AO has categorically stated that there is a composite use of funds and there is a common pool of human and financial resources which are being utilized by the assessee for earning income in various forms and therefore the claim of the assessee that it did not incur any expenditure towards earning of exempt income is not correct. We find that the satisfaction is recorded by the learned assessing officer. We also find that the law does not require a specific manner in which such satisfaction is to be recorded. We do not find any relevance of dominant purpose of holding investments while making disallowance u/s 14 A of the act. Thus, the claim of the assessee that the shares were acquired on demutualization of Bombay stock exchange membership card where assessee is a stockbroker does not help the case of assessee. In this case the total dividend income is received and according to rule 8D, the learned that AO has disallowed. We do not find any infirmity in the order of the learned lower authorities in confirming the above disallowance. Accordingly, ground number 3 of the appeal of the assessee is dismissed. Ad hoc disallowance of 10% of entertainment and conference expenses, repair maintenance expenses and books and periodical expenses - HELD THAT - If the assessing officer is not satisfied by any amount of expenditure, the expenditure to that extent should have been disallowed irrespective of its percentage. Merely applying an ad hoc percentage to the total expenditure for holding that such expenditure are not bifurcated into business and non business expenditure is not correct. It is not the case of the revenue that any bogus expenditure has been debited in the books of accounts. Merely because certain vouchers are held to be prepared by self showing cash expenditure, does not result into any illegality as there are certain types of expenditure which are prepared on self made vouchers and reimbursed or paid in cash, i.e. Petty cash expenditure, conveyance etc. As such, the assessee has submitted all the Ledgers of such expenditure, which had proper narration of the nature, and the amount spent along with the name of the person who spent it. AO after obtaining the explanation of the assessee did not further point out to the assessee about specific instances of such expenditure with respect to disallowance. As the disallowance is ad hoc without pointing out any instances of nature of expenditure which are not supported by voucher, we reverse the orders of the lower authorities and direct the learned assessing officer to delete the disallowance of 10% of such expenditure confirmed by the learned CIT A - Accordingly ground number 4 of the appeal of the assessee is allowed. TPA - Kshitij investment advisory Co Ltd is required to be excluded from the comparability analysis - should be excluded from comparability analysis. In CIT versus Tata Power solar systems limited 2016 (12) TMI 1600 - BOMBAY HIGH COURT wherein held that party is not barred in law from withdrawing from its list of comparables, if the same is found to have been included on account of mistake as on facts, it is not comparable, was upheld. In that case, the issue of exclusion of a comparable, which was included by the assessee, was argued before the TPO, it is not permitted by the TPO. In this case also, though it was not argued before the TPO, but first time argued before us, for exclusion of Kshitij investment advisory Ltd. We are also duty bound to compute the ALP of international Transaction. Therefore, there is not much difference whether it is challenged before TPO or before us for the first time. We find that comparable company with effect from 1 January 2010 has hived of its investment advisory services to Everstone investment advisors private limited. Therefore, there is an extraordinary event in the comparable company, which has affected the profitability/PLI of the comparable, as investment advisory services business revenue/expenses is not to be included in the financial of comparable company from 1/1/2010. Therefore, we direct the learned AO/ TPO to exclude Kshitij investment advisory Co Ltd from comparability analysis. The additional ground raised by the assessee is thus allowed.

Summary

Issues Involved:

1. Inclusion and exclusion of comparable companies in Transfer Pricing analysis.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Application of Section 73 of the Income Tax Act regarding speculation loss.
4. Disallowance under Section 14A of the Income Tax Act.
5. Ad hoc disallowance of business expenses.

Summary:

Issue 1: Inclusion and Exclusion of Comparable Companies in Transfer Pricing Analysis

The learned Assessing Officer (AO) challenged the inclusion of IDC (India) Ltd. by the CIT(A), arguing that the functional comparability and application of Related Party Transactions (RPT) were not ascertainable from financials. The CIT(A) justified the inclusion based on functional similarity and RPT compliance. The Tribunal upheld the CIT(A)'s decision, noting that IDC (India) Ltd. was functionally comparable and the RPT did not impact the profit and loss account.

Conversely, the AO contested the exclusion of IDFC Investment Advisories Ltd., Ladderup Corporate Advisory Pvt. Ltd., and Motilal Oswal Investment Advisory P. Ltd. by the CIT(A) on grounds of functional dissimilarity. The Tribunal supported the CIT(A)'s findings, confirming that these companies were engaged in different services, thus not comparable.

Issue 2: Determination of Arm's Length Price (ALP) for International Transactions

The assessee disputed the upward adjustment of Rs. 2,080,796 in brokerage services, which was not pressed during the hearing. The CIT(A) agreed with the Transfer Pricing Officer (TPO) on the adjustment, and the Tribunal dismissed the related grounds of appeal.

Issue 3: Application of Section 73 of the Income Tax Act Regarding Speculation Loss

The AO applied Section 73, treating the loss on error trades as speculative. The CIT(A) deleted this disallowance, citing the Bombay High Court's decision in CIT vs. HSBC Securities and Capital Markets India Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, confirming that the losses were incidental to the broking business and not speculative.

Issue 4: Disallowance under Section 14A of the Income Tax Act

The AO disallowed Rs. 48,325 under Section 14A, applying Rule 8D, arguing that a common pool of resources was used for earning income. The CIT(A) confirmed the disallowance. The Tribunal found the AO had recorded satisfaction about the correctness of the claim and upheld the disallowance.

Issue 5: Ad Hoc Disallowance of Business Expenses

The AO made an ad hoc disallowance of 20% of entertainment, conference, repairs, maintenance, and books and periodicals expenses, later reduced to 10% by the CIT(A). The Tribunal found the disallowance unjustified as the expenses were not fully supported by vouchers, reversing the CIT(A)'s decision and deleting the disallowance.

Additional Ground: Exclusion of Kshitij Investment Advisory Co. Ltd.

The assessee raised an additional ground to exclude Kshitij Investment Advisory Co. Ltd. from comparability analysis due to a business realignment during the assessment year. The Tribunal admitted this ground and directed the AO/TPO to exclude the company from the analysis, citing an extraordinary event affecting its profitability.

Conclusion:

The appeal of the AO was dismissed, and the appeal of the assessee was partly allowed. The Tribunal upheld the CIT(A)'s decisions on the inclusion and exclusion of comparable companies, confirmed the disallowance under Section 14A, deleted the ad hoc disallowance of business expenses, and directed the exclusion of Kshitij Investment Advisory Co. Ltd. from the comparability analysis.