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2013 (1) TMI 310 - AT - Income TaxTransfer pricing adjustment - assessee is in the business of broking and trading in shares as a corporate member of BSE and NSE - the AE, M/s ABN Amro Asia (Mauritius) Ltd. was charged brokerage at a much lower rate of .24% than the average rate of .40% charged from all the other FIIs - CUP v/s TNMM method - Held that - As regards the method to be adopted for comparability analysis, agreeing with the contention of the DR that CUP is the most appropriate method in the facts and circumstances of the case including especially the fact that internal CUPs are available for the comparability analysis. Therefore, find no infirmity in the action of the AO/TPO in adopting CUP method for comparability analysis instead of TNMM applied by the assessee. Weighted average arithmetic mean of brokerage rate of 10FIIs v/s simple average arithmetic mean of such rates taken by the TPO - Held that - The first proviso to section 92C speaks about taking arithmetic mean of more than one ALPs determined by the most appropriate method. There is, however, nothing to suggest that volume of the relevant transactions also has to be taken into consideration for the purpose of computing such arithmetic mean. Therefore, it will be difficult to accept the stand of the assessee that weighted average arithmetic mean should be taken and not the simple average arithmetic mean. Thus CIT(A) has rightly rejected the stand of the assessee on this issue holding that there is no provision in the statute which allows taking weighted average arithmetic mean for determination of arm s length price. Adjustments claimed for marketing function, research functions and for differences in volumes - Held that - As rightly contended by the assessee comparable uncontrolled price is required to be adjusted as per Rule 10B(1)(a)(ii) to account for difference, if any, between the international transaction and the comparable uncontrolled transaction which could materially affect the price in the open market. However, as contended by the DR, a case has to be made by the assessee for allowing such adjustment duly supported by relevant facts and figures as well as documentary evidence. He has contended that such details and documents, however, need to be verified by the AO/TPO and if the matter is sent back to the AO or the TPO for such verification, he has no objection. Since the assessee has also agreed with this proposition, this issue is to be restored back to the file of the AO with a direction to consider the claim of the assessee for adjustment. Disallowance for write off of irrecoverable loan - Held that - There was nothing brought on record by the assessee to show any efforts made to recover the loan from the concerned employee or from the security, which was taken while giving the said loan - as the assessee has agreed that the amount in question cannot be allowed as bad debts as the condition stipulated in section 36(1)(vii) read with section 37(2) is not satisfied - nothing has been brought on record by the assessee to show that the loss as a result of the loan given to the employee becoming irrecoverable was actually incurred in the year under consideration and this being so, the amount in question cannot be allowed even as business loss in the year under consideration. Charging of interest u/s 234D - Held that - Explanation 2 to section 234D inserted by the Finance Act, 2012 with retrospective effect from 01-06-2003 whereby it is clarified that the provisions of section 234D shall also apply to an assessment year commencing before the first day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date. Since the said Explanation is clearly applicable in the case of the assessee, we uphold the levy of interest u/s 234D. Addition of Rs.5,88,62,098/- by way of TP adjustment - Held that - Following the decision rendered in assessment year 2003-04 and the issue relating to TP adjustment of this year 2005-06 is also to be restyored to the file of the AO with a direction to consider the claim of the assessee for adjustment for marketing function, research function and differences in volumes on merit afresh after verifying the details and documentary evidence to be furnished by the assessee. Disallowance u/s 14A R.W.R. 8D - Held that - As decided in Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT Rule 8D is applicable prospectively from assessment year 2008-09 and for the years prior to 2008-09, the disallowance u/s 14A is required to be made on some reasonable basis. Therefore, restore this issue to the file of the AO with a direction to recompute the disallowance to be made u/s 14A on some reasonable basis & also to consider the stand of the assessee that no expenditure was actually incurred for the purpose of making investment in shares so as to warrant any disallowance u/s14A.
Issues Involved:
1. Transfer Pricing Adjustment for Assessment Year 2003-04 2. Disallowance of Irrecoverable Loan for Assessment Year 2003-04 3. Charging of Interest under Section 234D for Assessment Year 2003-04 4. Transfer Pricing Adjustment for Assessment Year 2005-06 5. Disallowance under Section 14A for Assessment Year 2005-06 6. Charging of Interest under Section 234D for Assessment Year 2005-06 Issue-Wise Detailed Analysis: 1. Transfer Pricing Adjustment for Assessment Year 2003-04: The assessee, engaged in broking and trading in shares, provided stock broking services to its Associated Enterprise (AE) and earned brokerage at 0.24%. The AO referred the matter to the TPO to determine the arm's length price (ALP). The TPO observed that the average brokerage rate from top 10 FIIs was 0.408%, while the rate from the AE was only 0.24%. The TPO rejected the assessee's arguments for lower rates based on volume, client relationship, and marketing efforts, and applied the CUP method, determining an ALP of 0.36%. The AO made an upward adjustment of Rs.2,13,25,474/- to the assessee's income. The CIT(A) upheld the AO's decision, rejecting the assessee's claims for adjustments on account of volume, marketing, and research functions. The Tribunal found CUP to be the most appropriate method but remanded the matter back to the AO for verification of adjustments for marketing, research functions, and volume differences. 2. Disallowance of Irrecoverable Loan for Assessment Year 2003-04: The AO disallowed Rs.2,58,801/- claimed by the assessee as irrecoverable loan, as there was no evidence of efforts made to recover the loan. The CIT(A) upheld the AO's decision. The Tribunal agreed with the authorities below, noting that the assessee failed to demonstrate that the loss was incurred in the relevant year, and thus upheld the disallowance. 3. Charging of Interest under Section 234D for Assessment Year 2003-04: The AO charged interest under Section 234D, which was upheld by the CIT(A). The Tribunal noted that Explanation 2 to Section 234D, inserted retrospectively, applied to the case, and thus upheld the levy of interest. 4. Transfer Pricing Adjustment for Assessment Year 2005-06: Similar to the issue in Assessment Year 2003-04, the AO made an upward adjustment of Rs.5,88,62,098/- based on the CUP method. The Tribunal remanded the matter back to the AO for verification of adjustments for marketing, research functions, and volume differences, following its decision for Assessment Year 2003-04. 5. Disallowance under Section 14A for Assessment Year 2005-06: The AO disallowed Rs.72,116/- under Section 14A, applying Rule 8D. The CIT(A) upheld the disallowance. The Tribunal noted that Rule 8D applies prospectively from Assessment Year 2008-09 and directed the AO to recompute the disallowance on a reasonable basis, considering the assessee's claim that no expenditure was incurred for making the investment. 6. Charging of Interest under Section 234D for Assessment Year 2005-06: The AO charged interest under Section 234D, which was upheld by the CIT(A). The Tribunal noted that the provisions of Section 234D were applicable for the relevant year and upheld the levy of interest. Conclusion: Both appeals were partly allowed for statistical purposes, with key issues remanded back to the AO for further verification and consideration.
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