2023 (2) TMI 502 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - As respectfully following the decision of ITAT in assessee s own case for A.Y. 2010-11 2018 (2) TMI 428 - ITAT MUMBAI we direct the learned Assessing Officer to restrict the disallowance under Section 14A of the Act to the extent of exempt income only. Accordingly, the ground no.1 of the appeal is partly allowed. Credit for TDS - HELD THAT - Though, nothing is argued before us but we direct the learned Assessing Officer to verify the claim of the assessee, if substantiated before him and decide in accordance with the law. TP Adjustment - claim of the assessee is that at least 50% of deduction should be granted to the assessee on account of research cost and volume cost if CUP method is applied - HELD THAT - Respectfully following the decision of the co-ordinate benches in assessee s own case, where assessee is granted 40% deduction on account of research cost volume adjustment, we direct the learned Transfer Pricing Officer/ Assessing Officer to grant the deduction on this count at the rate of 40% instead of 29.50% allowed by him. The contention of the assessee with respect to ground is rejected in view of the decision of the co-ordinate Bench in assessee s own case for earlier years. DRP direction to adopt a weighted average methodology in computing the arithmetic mean of non-Associated Enterprises transaction for arriving at Arm s Length Price of brokerage charged for clearing house and DVP trades - HELD THAT - Only arithmetic mean of the prices of brokerage should be taken and not weighted average of such prices todetermine Arm s length price of the International Transaction. Directions of the LD DRP are unsustainable in law.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act.
2. Short grant of credit for Taxes Deducted at Source (TDS).
3. Non-grant of deduction under Section 80G of the Act.
4. Adjustment to the Arm's Length Price (ALP) of the brokerage received by the assessee.
5. Methodology for computing the arithmetic mean of non-Associated Enterprises (AE) transactions for determining ALP.

Detailed Analysis:

1. Disallowance under Section 14A of the Act:
The assessee, M/s Morgan Stanley India Company Private Limited, had earned exempt income of Rs. 5,20,000 and made a Suo moto disallowance of Rs. 4,29,944 under Section 14A of the Act. The Assessing Officer (AO) examined the correctness of this disallowance and computed a disallowance under Rule 8D of Rs. 2,30,15,500, resulting in an additional disallowance of Rs. 2,25,85,556. The ITAT, following its decision in the assessee's own case for A.Y. 2010-11, directed the AO to restrict the disallowance under Section 14A to the extent of the exempt income only, thus partly allowing the ground.

2. Short Grant of Credit for TDS:
The assessee claimed TDS credit of Rs. 17,24,18,686, but the AO granted only Rs. 17,09,87,733. The ITAT directed the AO to verify the claim of the assessee and allow the correct amount of TDS credit as per law, thus addressing the grievance of the assessee.

3. Non-Grant of Deduction under Section 80G of the Act:
The assessee did not press the ground regarding the deduction under Section 80G of the Act, and thus, the ITAT dismissed this ground.

4. Adjustment to the Arm's Length Price (ALP) of the Brokerage Received by the Assessee:
The Transfer Pricing Officer (TPO) used the Comparable Uncontrolled Price (CUP) method to determine the ALP of brokerage received by the assessee. The assessee argued that it charged higher brokerage rates than third-party brokers and sought adjustments for research costs and volume costs. The ITAT, following its decisions in the assessee's own case for earlier years, directed the TPO/AO to grant a 40% deduction on account of research cost and volume adjustment instead of the 29.50% allowed by the TPO. The contention of the assessee regarding higher brokerage rates was rejected based on earlier decisions.

5. Methodology for Computing the Arithmetic Mean of Non-AE Transactions for Determining ALP:
The Dispute Resolution Panel (DRP) directed the TPO to compute the weighted average brokerage rate for non-AE transactions and apply it to AE transactions to determine the ALP. The Revenue challenged this direction, arguing that the law mandates the use of the arithmetic mean, not the weighted average. The ITAT agreed with the Revenue, stating that the plain language of Section 92C(2) of the Act requires the arithmetic mean of prices, not the weighted average. The ITAT held that the DRP's direction to use the weighted average was contrary to the provisions of the law and allowed the Revenue's appeal on this ground.

Conclusion:
The ITAT partly allowed the assessee's appeal regarding the disallowance under Section 14A and the short grant of TDS credit, dismissed the ground on Section 80G deduction, and directed adjustments to the ALP of brokerage received. The ITAT allowed the Revenue's appeal, holding that the arithmetic mean, not the weighted average, should be used to determine the ALP of brokerage transactions.