2022 (7) TMI 1361 - AT - Income Tax

TP adjustment - origination and marketing support services in respect of investment banking mandates - Comparable selection - AR submitted that the assessee does not provide full fledged investment/merchant banking, consultancy/research and advisory services, as presumed by the tax authorities - HELD THAT - No reason for rejecting M/s SREI Capital Markets Limited, M/s Edelweiss Capital Limited and M/s Keynote Corporate Services Limited. Accordingly, we direct the TPO/AO to include these three companies as comparable companies. We noticed earlier that the activities carried on by the assessee falls mainly under the category of marketing support services. It is also a fact that both the parties could not identify any other company, which carries on exactly same nature of activities as that of the assessee. There is no other option but to select companies whose functions are broadly comparable. There is no dispute that M/s Karvy Stock broking Limited and M/s Birla sunlife Distribution Company Limited are engaged in marketing of financial products of various companies. Accordingly we are of the view that these two companies can be taken as comparable companies. We direct the AO/TPO to take these two companies also as comparable companies. Accordingly, we restore this issue to the file of AO/TPO for determining ALP of the transaction afresh. TP Adjustment - international transaction pertaining to marketing and sales support services in relation to American Depository Receipt (ADR) - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. We restore this issue to the file of AO/TPO for determining ALP of the transaction afresh by excluding all the above said three companies Sumedha Financial Services Limited, Sundaram Finance Distribution Limited AND L T Capital Company Limited - It is pertinent to note that the assessee had voluntarily made transfer pricing adjustment under this segment. AO/TPO may deal with the same in accordance with law. Companies functionally dissimilar with that of assessee investment advisory activities also be deselected. Deduction towards adjustment for Additional cost incurred for unrelated party trades and Additional interest earned for related party trades - HELD THAT - We direct the AO/TPO to allow adjustment towards additional cost incurred in providing services to unrelated parties. Interest income adjustment on account of high volume of trades for related parties - HELD THAT - We direct the AO/TPO to allow adjustment towards additional interest income earned in respect of related party transactions. Disallowance of claim of loss arising from error trades - AO disallowed the claim apparently holding that the error losses are not related to the business carried on by the assessee - HELD THAT - We noticed earlier that the AO has followed the earlier year s orders. We further notice that the DRP had directed the AO to verify the details of loss again. AO has observed that the details have been verified, yet he comes to the conclusion that the same is not acceptable, i.e., the AO has not given the basis on which he had to come to such a conclusion. Again the AO is confirming the disallowance, following the order passed by him in AY 2006- 07. We noticed that the Tribunal has allowed identical claim made in the assessment year 2006-07. Accordingly, following the order of the Tribunal, we direct the AO to allow this claim in this year. Disallowance u/s 14A - main contention of the assessee was that the investments are mainly strategic investments - HELD THAT - We notice from the written submission furnished by the assessee that the assessee has raised an alternative ground contending that the disallowance should not exceed the amount of dividend and in this regard, it has placed reliance on the decision rendered by Hon ble Delhi High Court in the case of Joint Investments P Ltd 2015 (3) TMI 155 - DELHI HIGH COURT Accordingly, we direct the AO to restrict the disallowance to the amount of dividend income. Disallowance made out of entertainment expenses - HELD THAT - As decided in own case in A.Y. 2006-07 2015 (7) TMI 1054 - ITAT MUMBAI Apart from making a very generalized observation, the AO has not pointed out any particular instance which could demonstrate that the expenditure was incurred for any non business purpose. It is also not the case of Revenue that the explanation furnished by the assessee in the course of assessment proceedings was lacking in any manner. We direct the AO to delete the addition.

Summary

Issues Involved:
1. Transfer pricing adjustment for origination and marketing support services in investment banking mandates.
2. Transfer pricing adjustment for marketing and sales support services related to American Depository Receipt (ADR).
3. Transfer pricing adjustment for sub-advisory, research, and investment advisory services.
4. Transfer pricing adjustment for research support services.
5. Transfer pricing adjustment for broking services in futures and options trades.
6. Disallowance of loss claim due to error trades.
7. Disallowance under Section 14A of the Income Tax Act.
8. Disallowance of entertainment expenses.

Detailed Analysis:

1. Transfer Pricing Adjustment for Origination and Marketing Support Services in Investment Banking Mandates:
The assessee argued that it only provided origination and marketing support services, not full-fledged investment banking services. The assessee used the TNM method with a margin of 19.13%, comparing it to companies engaged in investment banking and consultancy services, with an average margin of 23.15%. The TPO selected different comparables, leading to an adjustment of Rs. 8,69,81,396/-. The Tribunal directed the inclusion of five additional comparable companies, as their functions were broadly similar to the assessee's activities, and ordered a fresh determination of the ALP.

2. Transfer Pricing Adjustment for Marketing and Sales Support Services Related to ADR:
The TPO selected five companies for comparison. The assessee sought the exclusion of three companies (L & T Capital Company Limited, Sundaram Finance Distribution Ltd., and Sumedha Fiscal Services Limited) on grounds of functional dissimilarity. The Tribunal agreed with the assessee, noting that these companies' business models and income sources were not comparable to the assessee's activities. The Tribunal directed the AO/TPO to exclude these companies and reassess the ALP.

3. Transfer Pricing Adjustment for Sub-Advisory, Research, and Investment Advisory Services:
The TPO selected six companies for comparison, while the assessee sought inclusion of five different companies and exclusion of five selected by the TPO. The Tribunal directed the inclusion of ICRA Management Consulting Services Limited, IDC (India) Limited, Informed Technologies Limited, Kinetic Trust Limited, and Access India Advisors Limited, as their functions were comparable to the assessee's. The Tribunal also directed the exclusion of Khandwala Securities Ltd, KJMC Corporate Advisors (India) Limited, Sumedha Fiscal Services Ltd, L & T Capital Company Ltd, and Motilal Oswal Investment Advisors P Ltd due to functional differences.

4. Transfer Pricing Adjustment for Research Support Services:
The assessee did not press this ground due to the small amount in dispute. The Tribunal dismissed this issue as not pressed.

5. Transfer Pricing Adjustment for Broking Services in Futures and Options Trades:
The TPO used the CUP method, resulting in an adjustment of Rs. 39.09 crores. The assessee argued for adjustments for additional costs incurred and additional interest earned. The Tribunal agreed, directing the AO/TPO to allow these adjustments after verification, based on principles established in previous years.

6. Disallowance of Loss Claim Due to Error Trades:
The AO disallowed the claim, but the Tribunal noted that such losses were incidental to the business of broking and had been allowed in previous years. The Tribunal directed the AO to allow the claim.

7. Disallowance under Section 14A of the Income Tax Act:
The AO computed disallowance under Rule 8D, resulting in an additional disallowance of Rs. 5,10,325/-. The Tribunal directed the AO to restrict the disallowance to the amount of dividend income, i.e., Rs. 3,00,000/-.

8. Disallowance of Entertainment Expenses:
The AO disallowed 50% of the expenses due to a lack of concrete evidence. The Tribunal noted that similar disallowances had been deleted in previous years due to the lack of specific instances of non-business purposes. The Tribunal directed the AO to delete the disallowance.

Conclusion:
The Tribunal allowed the appeal, directing the AO/TPO to reassess the transfer pricing adjustments and disallowances based on the guidelines provided. The Tribunal emphasized the need for functional comparability and consistency with previous decisions. The order was pronounced on 13.07.2022.