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2024 (7) TMI 879 - AT - Income TaxTP Adjustment - ALP of the broking commission earned - Selection of MAM - Considering brokerage rate of all Non- AEs for the comparability purposes - TPO has rejected the TNMM method since the assesse has provided broking services to non- associate enterprise along with its associate enterprises, therefore, CUP method was selected - HELD THAT - As following the decision of ITAT of earlier years 2023 (6) TMI 1357 - ITAT MUMBAI it is held to consider both overseas independent clients while applying CUP method. Accordingly we direct the TPO to consider both overseas and domestic clients while applying CUP method as directed. No adjustment of marketing cost while applying CUP method not granting adjustment of research cost and 50% of volume while applying CUP method - assessee submitted that there were functional difference in the services provided by the assessee to AEs and non-AEs therefore the same was not comparable and requested for adjustments for marketing cost, Research support and volume - HELD THAT - With the assistance of ld. Representative we have perused the decision of ITAT in the case of the assessee itself for assessment year 2003-04 2023 (6) TMI 1357 - ITAT MUMBAI wherein the ITAT in the case of the assessee itself after following the decision of ITAT, Mumbai for assessment year 2005-06 wherein held that adjustment of 40% will be allowed on marketing cost adjustments and research cost. Thus, we direct TPO to give adjustment of 40% to the assessee while determining the arm s length of international transactions of brokerage and commission as directed. Computing upward adjustment by considering addition instead of rectified amount - As assessee submitted that TPO had suo moto rectified the addition vide Rectification order therefore, we restore this issue to the file of the assessing officer for giving effect to the claim of the assessee after verification as per the Rectification order passed by the TPO. This ground of appeal of the assessee is allowed for statistical purposes. Disallowance of net loss incurred on error trading transactions - HELD THAT - The assessee explained that error trades are the clerical other errors of the assessee in execution of the transactions for the clients. The error trades are basically trades generated by the clients, however, due to error inter alia in punching of the trade, etc. these trades are not executed as per the trading order of the clients. The error could be in the name of wrong punching of quantity, rate, security, system error and error in punching the type of order etc. As decided in in the case of CLSA India Pvt. Ltd. 2020 (12) TMI 815 - ITAT MUMBAI that certain client for whom the assessee was working as a broker had not owned up certain share transactions then the assessee had no other alternative but to accept those transactions as its own transactions because of its relation with the clients from whom it was accepting good earnings. After considering the volume of transactions undertaken by the assessee company as broker for various clients we observe that such marginal error in share trading is incidental to the business of the assessee, therefore, we don t find any reason to that assessee has wrongly claimed such loss, therefore, AO is directed to allow the claim of the assessee. Disallowance u/s 14A - assessee has received dividend and also had made investment which yielded exempt income - AO noticed that assessee has not computed disallowance as per provisions of Sec. 14A r.w.Rule 8D - HELD THAT - As perused the decision of ITAT, Mumbai in the case of the assessee itself for assessment year 2008-09 2023 (6) TMI 1357 - ITAT MUMBAI wherein on identical issue and similar facts the issue was remanded back to the file of the assessing officer to examine the disallowance u/s 14A and assessee was also direct to substantiate its claim as to why no disallowance should be made.
Issues Involved:
1. Adjustment to the Arm's Length Price (ALP) of the broking commission. 2. Disallowance of net loss on error trade transactions. 3. Disallowance under section 14A of the Act. 4. Initiation of penalty proceedings under section 271(1)(c) of the Act. Issue-wise Detailed Analysis: 1. Adjustment to the Arm's Length Price (ALP) of the broking commission: - Generic Ground: The generic ground regarding the upward adjustment of Rs. 19,77,31,456/- was not pressed and hence dismissed. - Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) Method: The assessee's contention that TNMM is the most appropriate method for determining the ALP was not pressed and thus dismissed. The TPO used the CUP method, considering it the most direct method for determining the arm's length price by comparing controlled transactions with comparable uncontrolled transactions. The TPO and DRP rejected the assessee's submission to use the arithmetic mean of commission earned from all clients combined, emphasizing the importance of geographical differences. - Comparability Analysis: The ITAT Mumbai in the assessee's own case for previous assessment years accepted the stand of considering both overseas and domestic independent clients while applying the CUP method. The Tribunal directed the TPO to grant an adjustment of 40% on marketing cost adjustments and research costs, following the precedent set in earlier years. - Rectification of Adjustment Amount: The issue regarding the rectified amount of Rs. 19,75,81,188/- instead of Rs. 19,77,31,456/- was restored to the assessing officer for verification and giving effect as per the rectification order. 2. Disallowance of net loss on error trade transactions: - The assessee claimed a loss of Rs. 28,09,603/- due to error trades, which the AO disallowed, citing a lack of documentary evidence. The ITAT observed that error trades are incidental to the broking business and directed the AO to allow the claim, following the precedent set in the case of CLSA India Pvt. Ltd. 3. Disallowance under section 14A of the Act: - The AO disallowed Rs. 2,09,70,578/- under section 14A, applying Rule 8D for computing disallowance without recording sufficient reasons. The ITAT restored the issue to the AO for fresh examination, directing the assessee to substantiate its claim and following the precedent set in earlier assessment years. 4. Initiation of penalty proceedings under section 271(1)(c) of the Act: - The ground regarding the initiation of penalty proceedings under section 271(1)(c) for transfer pricing adjustments and disallowance of losses on error trades was not specifically adjudicated in the provided text. Separate Judgments for Other Assessment Years: - For subsequent assessment years (AY 2015-16, AY 2016-17, AY 2017-18, and AY 2018-19), the issues and facts were similar to those adjudicated in ITA No. 340/Mum/2019. The Tribunal applied the findings of ITA No. 340/Mum/2019 mutatis mutandis, allowing the grounds of appeal for statistical purposes and directing the TPO/AO to follow the established precedents. Conclusion: - The appeals were partly allowed, with specific directions for the AO/TPO to follow the established precedents and provide appropriate adjustments as directed by the ITAT in the assessee's own case for previous assessment years. The Tribunal emphasized the importance of consistency in applying the CUP method and granting adjustments for marketing and research costs.
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