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TMI Blog2013 (12) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... andard deduction which is to be given on the arithmetic mean - When the variation between the arm's length price so determined and the price at which internal transaction has actually been undertaken does not exceeds 5%, than only the benefit of tolerance range of +/-5% is to be given – The CIT(A) was incorrect on this view – Partly allowed in favour of Revenue - Decided in favour of assessee. Leased line charges, V-sat charges – Held that:- Following Kotak Securities Ltd. v/s ADIT, [2009] 25 SOT 440 [2008 (8) TMI 592 - ITAT MUMBAI] - V-SAT charges and transaction charges cannot be held to be rendering of technical services and, accordingly, cannot be considered to be covered under section 194J - The TDS is not required on the payment of V-SAT charges and lease line charges – Decided against Revenue. Interest paid to SEBI – Held that:- Following ACIT v/s Bulls and Bears Portfolios Ltd. [2011 (1) TMI 1056 - ITAT DELHI] 48 SOT 0527 - The interest paid to the SEBI for registration fees is a fee which is allowable as deduction in terms of the provisions of section 43B and would be allowable when such an interest is paid as per the SEBI (Interest Liability Scheme) 2004 – Decided against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard together and are being disposed off by way of this consolidated order. 2. We first proceed to dispose off the cross appeals for the assessment year 2005-06. In the appeal in ITA no.6572/Mum./2011, preferred by the assessee, vide which, two grounds have been raised and the first ground relates to addition on account of transfer pricing adjustment of Rs. 89,15,190, and the second ground relates to disallowance on account of security transaction tax payable of Rs. 6,26,417. Whereas the Revenue in its appeal in ITA no.6451/Mum./2011, has raised the following grounds of appeal:- "1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition to the extent of Rs. 53,22,397/- on account of transfer pricing adjustment. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 1,86,67,243/- u/s. 40(a)(ia)." 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 1,55,0591- paid to SEBI as interest pertaining to earlier years. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. UBS Securities provides support to the Associated Enterprises (AE) in relation to investment banking mandates executed by AEs outside India. The support provided include the following: Providing information to the AE as per specific requests made by the AE; Conducting rudimentary research and providing the findings of to the AE based on specific requests made by the A.E; and Assisting the AE in preparing marketing material such as presentations, pitch-packs, etc. 4.6.5 UBS Securities never interacts directly with the clients of the AE nor assist in securing orders on behalf of the AE. Further, UBS Securities does not engage in any negotiations or discussions on pricing, term, etc., with the clients on behalf of the AE and it does not execute any documents or give any assurance of any nature to any person on behalf of the A.E." 5. The value of international transaction in respect of investment banking and support service to UBS AG, Hong Kong, amounted to Rs. 6,12,24,967. For rendering of such services, the assessee is being compensated by its Associated Enterprise (A.E) at cost plus 10%. The margin earned under this segment was shown as under:- Particulars Amount in Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables with the following margin. Sr.no Name of Company / Segment OP/TC as per TP 1. Ajcon Global Services Ltd. 40..70% 2. Epic Energy Ltd. 78.94% 3. Sumedha Fiscal Services Ltd. 41.46% (Segment - Consultancy) 4. IDC (India) Ltd. 11.56% 5. India Securities Ltd. 11.74% 6. Kinetic Trust Ltd. 12.50% 7. Crisil Ltd. (Segment - 9.20% Research and Info. services) 8. Wall Street Finance Ltd. (Seg. 12.79% - Finance and Allied activities) 9. ICDS Securities Ltd. (Segment 75.00% - Financial & Advisory Services) 10. Maruti Insurance Brokers Ltd. 38.74% Arithmetic Mean 33.26% 10. These comparables were confronted to the assessee and, accordingly, a show cause notice was issued as to why the mean margin of 33.26% may not be considered as arm's length margin and necessary adjustment be made to the value of international transaction with the A.E. In response, the assessee submitted that at the time of preparing transfer pricing study report, data for financial year 2004-05 were not available and, therefore, the assessee had relied upon previous two years' data to identify potential comparables to support functional analysis. Further, the assessee is a captive service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the comparables included by the TPO namely, Ajcon Global Services Ltd. Epic Energy Ltd., Sumedha Fiscal Services Ltd. (segmental), IDCS Securities Ltd. (segmental) and also the exclusion of Crisil Ltd. (segmental). The assessee's objections / submissions have been discussed in detail by the learned Commissioner (Appeals) and such contentions have been rejected except for the exclusion of Crisil Ltd. by the TPO was rejected and the assessee's contention for including the same in the set of comparables was accepted. Thus, after the findings of the learned Commissioner (Appeals), following nine comparables were chosen. Sr.no Name of Company / Segment OP/TC as per TP 1. Ajcon Global Services Ltd. 40.70% 2. Epic Energy Ltd. 78.94% 3. Sumedha Fiscal Services Ltd. 41.46% (Segment - Consultancy) 4. IDC (India) Ltd. 11.56% 5. India Securities Ltd. 11.74% 6. Kinetic Trust Ltd. 12.50% 7. Crisil Ltd. (Seg. - Research 9.20% and Information services) 8. Wall Street Finance Ltd. (Seg. 12.79% - Finance and Allied activities) 9. ICDS Securities Ltd. (Segment 75.00% - Financial & Advisory Services) Arithmetic Mean 32.65% 12. Further, the learned Commissioner (Appeals) al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be compared with the assessee's margin which is, by and large, constant due to mark-up given by the A.E. Another most important fact is that the income of the financial advisory segment mostly includes service charges received from Standard Chartered Bank which are shown at net of reimbursement of salary, rent and conveyance expenses. Such a netting of expenses results into increase in the margin of segment since its costs would reduce due to netting off. Such a netting of expenses has a huge impact on the profit margin. To support his contention, he has given the working of the operating income of the assessee on the gross basis as well as on the net basis and tried to demonstrate that if the operating income is taken on net basis in case of the assessee then margin would substantially increase. Further, he submitted that ICDS Securities Ltd. is into merchant banking and broking activities whereas, the assessee's services to A.E. is investment banking activities and, hence, the same cannot be considered to be comparable. Lastly, he submitted that the TPO has applied the search filter criteria of the turnover of less than Rs. 1 crore, whereas the turnover of the said company for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has increased its focus on energy sector and is mainly into project finance and consultancy. It has sold / discarded most of its assets from its balance sheet and no depreciation has been claimed in the financial year 2004-05. In the earlier years, there was huge expenditure on account of bad debt which in this year has been reduced substantially which has an impact on the profit margins. Lastly, he submitted that the turnover of this company is merely Rs. 34.03 lakhs and once the TPO himself has applied the turnover filter of less than Rs. 1 crore, then how such a company can be included in the comparability analysis. Thus, this company should also to be excluded from the final set of comparables. 14. Per contra, the learned Departmental Representative, Mr. Ajit Jain, submitted that the assessee has not furnished any kind of agreement with regard to functions performed with the A.E. In the absence of such documents or correspondence, it is very difficult to gauge the proper functions and conduct FAR analysis. Drawing our attention to the financials of the company, he submitted that the assessee's main income is from gross commission and management fees. There are also trade wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is also doing the same function as it itself is involved in stock broking. Thus, the reasons given by the TPO as well as the learned Commissioner (Appeals) with regard to the inclusion of such a comparable is wholly justified. ii) Regarding inclusion of Sumedha Fiscal Services Ltd., the learned Departmental Representative submitted that this company was earlier included by the assessee itself in its transfer pricing study report because of its functional profile. Now the same company is being contested by the assessee on the ground that its functions have changed mostly to merchant banking. The kind of service which have been rendered by this company is quite similar to the service rendered by the assessee. Further, in this case, the TPO has only considered the consulting segment, which is exactly done by the assessee also. Thus, this company has rightly been included by the TPO and the learned Commissioner (Appeals). iii) Regarding Ajcon Global Services Ltd., the learned Departmental Representative submitted that this comparable was also selected by the assessee in its TP study report, as it is engaged in the equity broking and financial advisory services. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that even though the assessee is carrying out host of activities but one has to see what is the subject matter of bench marking. In this case, it is the international transaction with the A.E. which is purely investment banking support service. The assessee's transaction with the A.E. is only Rs. 6,12,24,967, whereas the assessee's other business transactions are far more. The issue before us is only the bench marking of the OP/TC of 10% with the A.E. and not the other activities. Regarding submissions of the learned Departmental Representative that the nature of activities and functions cannot be gathered due to lack of agreement and documents, he submitted that in the transfer pricing study report the entire functions carried out with the A.E. has been duly elaborated and also noted by the TPO. Thus, there is no quarrel with regard to the function performed with the A.E. Regarding the inclusion of the comparables in the transfer pricing study report, he reiterated that these comparables were taken on the basis of earlier financial data which the TPO himself has agreed that the earlier year's data cannot be used for bench marking. Further, once the TPO has carried out his fresh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out his own search afresh to identify the fresh set of comparables after taking the following filters for eliminating the comparables. i) the company having zero fee based income; ii) the company having fund based income more than 25% of the total income; iii) the company having fee based income less than 25% of the total revenue; and lastly; iv) the company having total revenue less than Rs. 1 crore. Based on the aforesaid criteria, companies were to be excluded from the comparability analysis. After carrying out his fresh search, he identified 10 comparables which have already been stated in the forgoing paragraphs. After inviting assessee's objections, finally eight comparables were shortlisted, the arithmetic mean margin of these companies worked out at 35.59% and accordingly, this resulted into upward transfer pricing adjustment of Rs. 1,42,37,587. From the stage of the learned Commissioner (Appeals), one more comparable which was initially selected by the assessee as well as by the TPO was also included and, accordingly, nine comparables were shortlisted, the arithmetic mean margin of which was worked out at 32.65%. 19. The issue before us is mainly, whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the comparables based on current financial data, the same should be analysed rather than supporting the inclusion of such comparables on the ground that the assessee itself has chosen at the time of original T.P. report. There should not be cherry picking of the comparables but should be based on certain criteria and functional analysis. The comparables as chosen by the TPO has to be considered for the comparability analysis based on his filtration search criteria because that is the subject matter of acceptance and non-acceptance of comparables before us. 21. Now, we proceed to take up the comparables which have been included by the TPO and objected by the assessee so as to examine, whether they can be included in the set of comparables for the purpose of comparability analysis or not:- i) ICDS Securities Ltd:- The TPO has taken the segmental details of service charges. On a perusal of the financials, as given in the annual report for the financial year 2004-05, it is seen that service charges has been received mainly from Standard Chartered Bank which is after the netting off reimbursement of salary, rent and conveyance expenses. In such a situation, it is very difficult to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal), which is engaged in merchant banking cannot be compared with the companies which are rendering investment advisory and related support services. The said company cannot be held to be compared with all the functions and activities carried out by the assessee. It is further noticed that under the product description in which the service are being carried out by Sumedha Fiscal Services Ltd. (segmental), also includes broking services and merchant banking and underwriting. These activities are not carried out by the assessee with its A.E. Thus, Sumedha Fiscal Services Ltd. (segmental) cannot be functionally compared with that of the assessee as per the data given for the financial year 2004-05 and, therefore, this company cannot be included in the final set of comparables; iii) Ajcon Global Services Ltd:- As per the financial statement and annual report of the said company, it is seen that its main income is from stock market operation and its main profit is from share trading. The TPO has taken the entire operation of this company as comparable which mainly include income from share trading and is entirely different from the services rendered by the assessee to its A.E. which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's business function with its A.E. 24. Before the learned Commissioner (Appeals), it has been brought on the record that the TPO has taken wrong segment and in fact the correct segment should have been "research and information services". Before us also, the learned Counsel for the assessee had submitted the annual report of Crisil Ltd. for the financial year 2004-05, which shows that it has prepared segmental accounts with regard to "research and information services" separately and even the TPO in his show cause notice has also taken this particular segment information which disclosed the operating margin at 9.20%. The learned Commissioner (Appeals) has duly appreciated the information and has held that the TPO has taken a wrong segment for the purpose of comparing the margins and if the correct segment is taken into consideration, then its operating margin can be considered as comparable. On these facts, we do not find any reason to deviate from such a finding of fact which is also apparent from the records placed before us. Thus, we hold that the segmental information of Crisil Ltd. has rightly been included in the set of comparables for the purpose of comparability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that fees paid for V-SAT and lease line charges are not "fees for technical services" as the same do not fall within the purview of section 194J. Regarding transaction charges, it has been pointed out by the learned Counsel for the assessee that in the earlier years, no disallowance has been made by the Revenue and, therefore, in this year also, the assessee can be held to entertain bonafide belief that no TDS is required to be made. In view of the decision in CIT v/s Kotak Securities Ltd., [2012] 340 ITR 333 (Bom.) such a disallowance should not be made. 32. After hearing both the parties, we are of the considered opinion that in view of the facts and the decision of the Hon'ble Jurisdictional High Court in Angel Capital and Debit Market Ltd. (supra), the TDS is not required on the payment of V-SAT charges and lease line charges. Insofar as transactions charges are concerned, it is seen that Revenue has accepted the non- deduction of TDS in earlier years and at the time of filing of return of income, there were favourable decisions, therefore, the assessee had a bondafide belief for not deducting TDS. Thus, in view of the decision in Kotak Securities Ltd. (supra), no disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Tribunal, the learned Commissioner (Appeals) decided the issue in favour of the assessee as per the findings given in Para-6.3. 36. Before us, both the parties agreed that this issue stands covered by series of decisions given by the Tribunal in various cases, some of which are as under:- 1. Wallfort Financial Services Ltd. v/s ITO-4(2)(2) ITA no.5984/Mum./2008 2. Wallfort Financial Services Ltd. v/s ACIT (2010) 41 SOT 200 (Mum.) 3. Vfc Securities Ltd. ITA no.4200/Mum./2009 4. ACIT v/s BLB Ltd. ITA no.2290(Del.)/2008 5. ACIT v/s Bulls and Bears Portfolios Ltd. (2011) 48 SOT 0527 (Del.) 37. In these cases, the Tribunal has held that the turnover charges were in the nature of tax, duty, cess or fees payable under the law and any payment made thereon has to be allowed under section 43B in the year of payment. 38. After hearing both the parties, we, respectfully following the judicial precedence of the co-ordinate bench of the Tribunal in various cases, hold that the interest paid to the SEBI for registration fees is a fee which is allowable as deduction in terms of the provisions of section 43B and would be allowable when such an interest is paid as per the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statements issued by NSCCL submitted by the appellant that such payments are in the nature of processing fees for bad/short delivery, wrong claim for the corporate benefit, late reporting delayed settlement of IT trades, margin shortage charges etc. As these charges are computed based on the penalty points calculated based on aforesaid default and .find their mention in the statement issued by NSCCL as processing charges, the charges so levied as penalty is found to be compensatory in nature. The AO has no where brought out that these penalties are not compensatory in nature. Further in the case the appellant for A.Y. 2000-01, such penalty payment has been held to be compensatory in nature by the Ld. CIT(A) in the office and further the same was confirmed by the Hon'ble ITAT. In view of the facts of the case as aforesaid and following the rule of judicial consistency and judicial discipline, the amount so disallowed by the AO as per explanation of section 37(1) is held to be allowable and thus the addition so made is directed to be deleted and the ground of appeal so raised by the appellant is allowed. Accordingly, the appellant gets relief of Rs. 26,70,310." 42. After hearing bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment. The relevant observations of the learned Commissioner (Appeals) are as under:- "I have considered the facts of the case, together with. the submission of the appellant as against the finding of the AO in his assessment order. It is the fact of the case that the appellant has deducted higher amount of STT than it was required to deduct from its FII client. Further after the amount paid to NSE, the balance amount which was in effect not regarded as SIT by the NSE software has not been refunded to the FIL Further it is fact of the case that such, instances have occurred on subsequently and the appellant himself has written back these amounts as income. These facts clearly prove the point that the excess amount so retained by the appellant has been treated by the appellant as his income in the subsequent i.e. A.Y. 08-09. Such treatment of excess deduction in the A.Y. 08-09, clearly gives the nature of such deductions as income and only substantiates the AO stand in the year under consideration. Such excess deduction done by the appellant cannot be considered to be as per the prescribed charging of SIT and as such if the amount is not refunded back to the clients from whom suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,029 1,01,325 In view of the above, we direct the Assessing Officer to verify this contention of the assessee and, accordingly, decide this issue afresh after calling for the necessary details from the assessee. Ground no.2, is thus treated as allowed for statistical purposes. 50. In the result, assessee's appeal for the assessment year 2005-06 is treated as partly allowed for statistical purposes and Revenue's appeal is treated as partly allowed. We now take up assessee's appeal in ITA no.7728/Mum./2011, for the assessment year 2006-07, which has been preferred against the final assessment order passed in pursuance of the DRP direction date 27th July 2010. 51. Ground no.1 raised by the assessee relates to disallowance of Rs. 18,00,021 under section 40(a)(ia) on account of non-deduction of tax on transaction charges, V-SAT charges and lease line charges. 52. The assessee has debited lease line charges of Rs. 3,36,823, V-SAT charges and Rs. 1,73,86,740 which were payable to stock exchange on account of services provided by it with regard to transactions in securities through exchange. The Assessing Officer disallowed the said payment under section 40(a)(ia) after a detail disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned that the disallowance under section 40(a)(ia) should be restricted to amount payable in view of the Special Bench decision of the Tribunal in Merilyn Shipping and Transport v/s ACIT, has become purely academic. 57. In ground no.2, the assessee has challenged the addition of Rs. 15,93,547 on account of penalty charges paid to National Securities Clearing Corporation of India after invoking the provisions of Explanation to section 37(1). 58. After hearing both the parties, we find that this issue is similar to the grounds raised in the assessment year 2005-06, wherein this issue has been decided in favour of the assessee. Moreover, the learned Counsel for the assessee has also submitted a compilation of various case laws wherein the Tribunal held that such penalties are not in violation of any law or infringement of any rules but were imposed for violation of certain norms and procedure and do not fall within the purview of Explanation to section 37. A list of such case laws are as under:- Accordingly, we hold that such a disallowance for the penalty charges paid to National Securities Clearing Corporation of India cannot be held to be on account of any infraction of law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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