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TMI Blog2015 (7) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... stock exchange from July 2006 onwards. Considering the aforesaid peculiar facts, and following the parity of reasoning laid down by the Hon ble Bombay High Court in the case of Kotak Securities Ltd. (2011 (10) TMI 24 - Bombay High Court ), the disallowance made by invoking section 40(a)(ia) of the Act is hereby deleted.- Decided in favour of assessee. Insofar as the payment of lease line charges to stock exchanges is concerned, following the Judgment of the Hon ble Bombay High Court in the case of ITO Vs. Angel Capital Debit Market Ltd [2014 (5) TMI 584 - BOMBAY HIGH COURT ] it has to be held that such payments were merely reimbursement of the charges paid/payable to the stock exchange to the Department of Telecommunication (DOT) and, therefore, it does not have any element of income which would require deduction of tax at source. In view of the aforesaid, the action taken by the Assessing Officer u/s 40(a)(ia) of the Act, is impermissible and is accordingly set aside. - Decided in favour of assessee. Disallowance representing loss on account of error trades - Held that:- The impugned loss suffered by the assessee on account of client errors, dealing errors or sale errors is incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the respective segments of related and unrelated parties has been allowed by the TPO. Therefore, we deem it fit and proper to direct the Assessing Officer to verify the working of additional interest earned on account of high volume of trades for related party trades and, thereafter, he shall factor-in such difference in the internal CUP data for the purposes of bench-marking the international transaction of provision of broking services for Futures Options trades. Needless to say, the Assessing Officer shall allow the assessee an appropriate opportunity of being heard before re-working the arm s length price of the international transaction of provision of broking services of Futures Options trades for the aforesaid limited extent Determination of arm s length price of international transactions pertaining to merchant banking services rendered by the assessee to its associated enterprises - Held that:- We direct the Assessing Officer to exclude Sundaram Finance Distribution Limited from the final set of comparables and, thereafter, re-work the arm s length price of the international transaction relating to the provision of marketing and support services to associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n addition to the book-tax adjustment amounting to ₹ 96,270,525 already offered to tax by the Appellant. Without prejudice to ground 11 above, in selectively using the data only for Financial Year 2005-2006 for the transaction pertaining to merchant banking and rejecting the data for Financial Year 2003-04 and 2004-05. 13. In rejecting the use of contemporaneous data for computing the ALP for merchant banking services as on the date of filing of return of income in accordance with Rule 1 OD( 4). 14. Without prejudice to ground 11 to 13 above, in not treating Keynote Corporate Services as non comparable company for the Financial Year 2006-07, while arriving at the ALP for the transaction pertaining to merchant banking services. 15. In computing the arm's length price for the transaction pertaining to marketing and sales support services in relation to American Depository Receipts (ADRs) at ₹ 6,576,856 and consequently making an upward adjustment of ₹ 866,768. 16. Without prejudice to ground 15 above, in selectively using the data only for Financial Year 2005-06 for the transaction pertaining to marketing and sales support services in relation to ADRs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical services' which is subject to the withholding tax u/s 194J of the Act following the Judgment of Hon'ble Bombay High Court in the case of CIT Vs. Kotak Securities Ltd. in Income Tax Appeal No. 3111 of 2009 dated 21.10.2011. So however, the Ld. Representative for the assessee pointed out that section 194J of the Act was inserted w.e.f 1.7.1995 and upto assessment year 2004-05 assessee as well as the Revenue proceeded on the footing that section 194J was not applicable to the payment of transaction charges inasmuch as no action was taken u/s 40(a)(ia) of the Act to disallow the impugned expenditure till assessment year 2004-05. It is further pointed out that the assessee has started deducting the requisite tax at source u/s 194J of the Act on the transaction charges paid to the stock exchanges from July 2006 onwards. The Ld. Representative pointed out that in the case of Kotak Securities Ltd. (supra), the Hon'ble High Court has observed that section 194J was inserted w.e.f 1.7.1995 and till assessment year 2005-06 both Revenue and assessee had proceeded on the footing that section 194J was not applicable to the payment of transaction charges and under these circumstances the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges to the account of the stock exchange." 5.4 In the background of aforesaid pronouncement by the Hon'ble High Court in the present case too, peculiar circumstances exist which require mitigation of the rigors of the application of section 40(a)(ia) of the Act. The return of income for the year under consideration was filed by the assessee on 29.11.2006 and the Judgment of Hon'ble Bombay High Court in the case of Kotak Securities Ltd. (supra) was rendered on 21.10.2011. Therefore, at the relevant point of time, the Judgment of the Hon'ble Bombay High Court was not available so as to require the assessee to deduct tax at source. Moreover, in the past assessment years i.e upto assessment year 2004-05, neither assessee deducted tax at source on transaction charges paid to stock exchange and nor Revenue had raised any objection u/s 40(a)(ia) of the Act; and, the action taken u/s 40(a)(ia) of the Act in assessment year 2005-06 by the Assessing Officer was also set aside by the CIT(A). In the background of aforesaid peculiar circumstances, we are inclined to uphold the plea of assessee that no fault can be found with the action of assessee in not deducting tax at source u/s 194J of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Stock Exchanges, losses suffered because of errors are borne by the assessee and such losses amounting to ₹ 77,74,691/- had been claimed as deduction. 6.2 We find that the Assessing Officer has disallowed the claim primarily on the ground that assessee has not furnished evidence to show any nexus between business transactions in normal course and the impugned loss claimed on account of errors. 6.3 Before us the Ld. Representative for the assessee has vehemently pointed out that complete details of the losses were furnished and in this context he has referred to the details of such loss placed at pages 37 to 77 of the Paper Book. On the basis of such details, it is sought to be explained that the type of error, the scrip involved, quantity of scrips involved and the loss suffered thereof have been itemized. Further, it has been pointed out that assessee has also detailed the respective clients as also the employee responsible for committing such error. Apart from the aforesaid, the Ld. Representative pointed out that the ratio of the Judgment of Hon'ble Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 is clearly applicable inasmuch as the impugned loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstead of carrying out any verification exercise, the details sought to be furnished by the assessee have been merely disbelieved and brushed-aside. The said approach in our view is quite untenable, and cannot be sustained. 6.6 Therefore, considering the entirety of facts and circumstances, in our view, the impugned loss suffered by the assessee on account of client errors, dealing errors or sale errors is incurred in the ordinary course of its business and being incidental to its business activity, , deserves to be allowed as a business loss. Thus insofar as Ground of appeal no. 3 is concerned, assessee succeeds. 7. By way of Ground of appeal no. 4, the grievance of assessee is against the denial of depreciation on Motor Car amounting to ₹ 1,44,702/- on the ground that the Motor vehicle was not registered in the name of assessee company. Before the Assessing officer it was explained that the Motor vehicle was purchased and was provided for use of one of its employee and, thus, the same was used for its business purposes. The Motor vehicle was not registered in the name of the assessee but in the name of J.P. Morgan West Bank, a group concern. Assessee contended that since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find suitable avenues to further the business of assessee company. The Assessing Officer following the directions of DRP considered 20% of the said expenditure as related to business and balance of ₹ 3,13,753/- has been disallowed. 8.1 In this context it was a common ground between the parties that in the assessee's own case for assessment year 2002-03, the Tribunal vide its order in ITA No. 618/Mum/2008 dated 12.02.2014 has allowed the claim of assessee following the Judgment of Hon'ble Supreme Court in the case of CIT Vs. United Glass Manufacturing Co. Ltd. dated 12.09.2012. Following the precedent, the Assessing Officer is directed to delete the impugned addition of ₹ 3,13,753/- out of club fees and subscription charges. Thus on this aspect assessee succeeds. 8.2 By way of Ground of appeal no. 6, the assessee has assailed the action of Assessing Officer in disallowing 7,42,851/- out of client entertainment expenses. The assessee was found to have incurred an expenditure of ₹ 14,85,703/- as client entertainment expenses and the Assessing Officer disallowed 50% of the same i.e. 7,42,851/- on the ground that there was no concrete material to establish the authen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir arm's length price. Notably, the adjustments to the stated value of transactions were determined by the Assessing Officer in conformity with the order passed by the Transfer Pricing Officer (in short 'the TPO') on a reference u/s 92CA(3) of the Act dated 30.10.2009 read with the directions of DRP u/s 144C(5) of the Act dated 17.09.2010. In respect of the international transaction of provision of broking services for Futures & options trade is concerned, an addition of ₹ 4,30,88,000/- has been made which is contested by the assessee by way of Ground of appeal nos. 7 and 8. The addition made in respect of international transaction of provision of broking for cash equity transactions amount to ₹ 12,75,000/-, which is contested by the assessee by way of Ground of appeal nos. 9 & 10. In relation to the international transaction of investment banking services, an adjustment of ₹ 3,10,61,627/- has been made which is contested by the assessee by way of Ground of appeal nos. 11 to 14. In relation to the international transactions of marketing and sale support services, an addition of ₹ 8,66,768/- has been made which is contested by the assessee by way of Ground o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of benchmarking assessee's international transaction entered with its associated enterprises on account of provision of broking services for Futures & Options trade as well as cash equity transaction trade is concerned, the same is upheld. 11.1 Before us, in the context of adjustment of ₹ 4,30,88,000/- with respect to international transaction of provision of broking services for Futures & Options trade is concerned, the Ld. Representative for the assessee has raised a solitary point which related to the manner in which the TPO has allowed the adjustment to the internal CUP data of commission charged from unrelated parties on account of additional interest earned on the volumes of business with the related parties. In order to appreciate the grievance of assessee brief background can be understood as follows. As per the appellant, once the commission charged by assessee from unrelated parties is compared with the percentage of commission charged from the associated enterprise, suitable adjustments be allowed for the difference between the functions performed and risk assumed in respect of broking services related parties vis-à-vis unrelated parties. The TPO accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission earned from the associated enterprises. By referring to the decision of the Tribunal for assessment year 2002-03 vide order dated 12.02.2014, (supra) the Ld. DR submitted that assessee did not oppose the calculation of said adjustment for differences. Therefore, according to him, the plea of assessee for re-working the adjustment on account of interest earned by a methodology different than that used by the Assessing Officer should not be allowed. 11.3 In reply, the Ld. Representative pointed out that in the assessment year 2002-03, assessee had not rendered any broking services in relation to the segment of Futures & Options trade to associated enterprises and therefore, there was no occasion for the assessee to raise the aforesaid issue. In the present year, the adjustment that is sought by the assessee is on account of the interest earned on high volume trades in associated enterprises segment which is based on margin monies placed by the associated enterprises vis-à-vis the margin monies placed by the unrelated parties in the Futures & Options trade segment. 11.4 We have carefully considered the rival submissions. Factually speaking we are in agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch relate to determination of arm's length price of international transactions pertaining to merchant banking services rendered by the assessee to its associated enterprises. Assessee renders the investment banking services to its associated enterprises and such transactions were bench-marked by using TNM method, wherein, the profit level indicator used was Operating Profits over Operating Costs. In the Transfer Pricing study, assessee computed the arithmetic mean of the margins earned by comparable companies at 18.91% and after comparing it with assessee's margin of (-)39%, assessee made a book tax-adjustment of ₹ 9,62,70,525/-. The TPO considered the same set of comparables selected by the assessee, but he considered the financial data of such comparable concerns for the financial year under consideration alone as against the multiple years financial data considered by the assessee. Accordingly, the TPO considered the following six comparables as the final set of comparables and computed the arithmetic mean of the operating margin of 48.06%:- Sl. No. Name of Company Operating Margin on operating cost (%) 2006 1. Brescon Corporate Advisors Limited 117.72% 2. Cetrum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring to the Annual Report of M/s Keynote Corporate Services Limited for the financial year under consideration, it was pointed out that the accounts of the said concern for the financial year under consideration have been drawn up after giving effect to the scheme of amalgamation. The Ld. Representative has referred to Schedule - O of the Annual Report whereby the matters relating to the scheme of amalgamation and the accounting for such amalgamation has been brought out. It was, therefore, pointed out that this was an extraordinary situation and accordingly the financial results of the said concern in the year under consideration should not be considered. On this aspect reference has also been made to the discussion in the order of DRP in which it has been further noticed that for the subsequent financial year of 2006-07 also, there has been a process of amalgamation between the said concern and six other companies whereby the assets and liabilities of the amalgamated companies were vested in the said concern with retrospective effect from 01.04.2005. It was, therefore, contended that on account of extraordinary events, the said concern should be excluded from the list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in seeking its exclusion. On this aspect of the matter, the Ld. Representative for the assessee contended that at the stage of Transfer Pricing Study the said concern was inadvertently included by the assessee in the list of comparables but on the given facts which are on record the said concern deserves to be excluded. 12.7 Having considered the aforesaid objection of the Ld. DR, in our view, the case set-up by the assessee for exclusion of the said concern from the list of comparables cannot be merely decided on the basis of the position that the assessee had taken at a given point of time. Quite clearly, the purpose of income tax assessment is to arrive at the correct tax liability of the assessee and it is not dependent on what position the assessee had taken, but the same is to be determined having regard to the applicable legal position. It is well understood that in the appellate proceedings, an assessee is entitled to set-up a case against a wrong claim that might have been made in the return of income subject of course after demonstrating that the fresh claim is made on bonafide considerations. At this stage, we may also refer to the decision of the Special Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting as securities and stock brokers. It has been pointed out that even in the case of M/s Carlyle India Advisors (P) Ltd. Vs. ACIT [2012] 146 TTJ (Mum) 521, the said concern was excluded on the ground that it was acting as a securities and stock broker and it was not comparable to a concern which was rendering investment advisory services. It was also pointed out that the decision of the Mumbai Bench of the Tribunal in the case of Carlyle India Advisors (P) Ltd. (supra) has also been approved by the Hon'ble Bombay High Court in the Income Tax Appeal (b) No. 1286 of 2012 dated 22.02.2013. 15. On this aspect also, the only plea set up by the Ld. DR is that the said concern was initially included by the assessee itself as a comparable and thus it should not be excluded. So however, the functional dissimilarity sought to be set up by the assessee has not been assailed by the Ld. DR . 16. At the threshold, we may say that the functions performed by the assessee in its segment of merchant banking activities does not involve broking services which is a separate segment and has been separately bench-marked. Therefore, qualitatively speaking, the activities undertaken by Khandwala Securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly adopted a final set of eight comparables whose arithmetic mean of operating margin was determined at 39.85%. Accordingly an adjustment of ₹ 19,35,370/- was worked out. The DRP considered the objections raised by the assessee and finally directed the Assessing Officer to adopt the following five comparables, whose arithmetic mean of the margins was determined at 20.2%. Name of the Company Operating margin on operation costs (%) Allianz Securities Limited 22.20% IDC (India) Limited 10.58% SREI Money Mall 0.51% Sundaram Finance Distribution Limited 49.76% SREI Capital Markets 14.53% Arithmetic Mean 20.2% 20. On this basis, the adjustment for the purpose of computing the arm's length price of international transaction was determined at ₹ 8,66,768/- which is the subject matter of dispute before us. 21. On this aspect, the only plea of the assessee is for exclusion of M/s Sundaram Finance Distribution Limited from the final set of comparables. The plea set up by the Ld. Representative for the assessee is that the said concern has no salary costs, which show that it has outsourced its activities. It is, therefore, contended that the business model under whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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