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TMI Blog2020 (1) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... country of transactions and terms and conditions. AO has referred to above in a general manner and this remains only theoretical observation without any specific details on cogent finding. CIT(A) is correct in holding that the AO has rejected CUP method used by the assessee without bringing any cogent material on record as to why the same method is not appropriate and should be replaced with TNMM as the most appropriate method chosen by the Assessing Officer. CUP method selected by the assessee is appropriate - No interference in the order of learned CIT(A) required - Decided against revenue. Loss in derivative segment - Whether not speculation loss? - whether assessee being a share broker and not a share trader, case of the assessee does not fall under any of exceptions enlisted in Section 73(1) ? - HELD THAT:- We find that CIT(A) is correct in holding that the transactions do not fall under the realm of speculative transaction. Any loss which may arise in the course of such business, shall not be deemed to be a speculative transaction. If the nature of the transaction by the assessee is not a speculative transaction at all, then, the Explanation to section 73 has no application. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ationale laid down by the decision of the Hon'ble Delhi High Court in the case of CIT v. DLF Commercial Developers Limited . 3. Grounds of appeal for A.Y. 2012-13 read as under :- 1. On the facts in the circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the TNMM method adopted by the Assessing Officer without appreciating the fact that the Assessing Officer has justified the applicability of TNMM method in the assessment order. 2. On the facts in the circumstances of the case and in law, the Ld. CIT(A) erred in accepting the CUP method adopted by the assessee without giving any reason as to why the TNMM is not a suitable method in the case of the assessee. 3. On the facts in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the trading expenses of ₹ 2405350/- are not attributable to speculative business of the assessee of trading in derivative segment, without appreciating the rationale laid down by the decision of the Hon'ble Delhi High Court in the case of CIT v. DLF Commercial Developers Limited 4. On the facts in the circumstances of the case and in law, the Ld. CIT(A) erred the holding that the trading expenses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar transactions with unrelated parties. The transactions with third parties have been documented in transfer pricing analysis The comparable companies are into Investment advisor/portfolio management and the assessee is into stock broking business The assessee relied on the ruling in case of DCIT Vs. M/s. SGIobal Service Private Limited The assessee provides financial advisory services in line with primary business of stock broking but the international transaction falls under its business of stock broking. 7. However, the Assessing Officer was not satisfied. The Assessing Officer rejected the CUP method adopted by the assessee by observing as under :- The reliance of the assessee on the case law is in different industry i.e. IT/ITES and not related to industry in which the assessee-operates. The income earned by the assessee is brokerage income from stock broking activities and considering the comparable companies earning brokerage/advisory fees from rendering stock broking/advisory services applying the TNMM method can be evaluated as under: - The assessee submitted the chart for internal CUP transactions. However, under the CUP as per Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the following comparables on arithmetic means. Accordingly computed arm s length price adjustment as under :- Sr. No. Company Name NCP% FY 201 0-11 1 IDFC Investment Advisors Ltd 6.51 2 Kshitij Investment Advisors Ltd 27.77 3 Ladderup Corporate Advisory Pvt. Ltd. 54.92 4 Motilal Oswal Private Equity advisors Pvt. Ltd. 33.78 Arithmetic Mean 30.74 The arm's length price of the international transaction is calculated as under:- Particulars Amount (Rs.) Operating Revenue (A) 6,70,24,877 Operating Cost (B) 12,41,84,391 ALP(C=Bx 1.3074) 16,23,58,673 Difference between ALP and Transfer Price (C-A) 9,53,33,796 9. The difference between ALP and Transfer Price of ₹ 9,53,33,7967- is more than the 5% of the transfer price i.e. ₹ 33,52,244/-, therefore, the adjustment proposed is ₹ 9,53,33,796/-. 10. Against the above order the assessee is in appeal before learned CIT(A). Learned CIT(A) reproduced the submission of the assessee in his appellate order. Learned CIT(A) on the basis of the assessee s submission noted the merits and demerits of CUP TNMM and thereafter held that TNMM followed by the Assessing Officer is without proper basis and deleted the adjustment by conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant during the course of assessment proceedings were not properly considered for the purpose of rejection of CUP method. Therefore the addition of ₹ 9,53,33,796/- with regards to the ALP of the transaction with the AE is deleted. 11. For A.Y. 2012-13 also the Assessing Officer rejected the CUP method by observing as under :- The above submission has been duly considered and the same cannot be accepted for the following reasons: - The reliance of the assessee on the case law is in different industry i.e. IT/ITES and not related to industry in which the assessee operates. The income earned by the assessee is brokerage income from stock broking activities and considering the comparable companies earning brokerage/advisory fees from rendering stock broking/advisory services applying the TNMM method can be evaluated as under. The assessee submitted the chart for internal CUP transactions. However, under the CUP as per Rule 10B the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions are identified. In the instant case the assessee has not been able to prove the fact that the uncontrolled tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- with regards to the ALP of the transaction with the AE is deleted . 13. Against the above order, the Revenue is in appeal before us. 14. We have heard both the counsel and perused the records. Learned Departmental Representative relied upon the order of the Assessing Officer. Learned Counsel of the assessee submitted that the assessee is providing stock broking services to the AEs and third parties. Brokerage charges are dependent on type of market and type of investor account. Assessee agreed to provide services under the same service commitments and default service charges to the AEs and third parties. Increase and decrease in the default brokerage rates may vary considering the business dynamics, customer penetration strategy etc., which are equally applicable for AEs as well as third parties. The nature of services provided to AEs and third parties under stock broking is the same and is comparable. Hence, learned Counsel of the assessee submitted that it is appropriate to compare the broking rate charged from AEs as well as third parties while applying the CUP method for determination of arm s length price. Thereafter, learned counsel referred to OECD TP guidelines and UN TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case in our considered opinion CUP method selected by the assessee is appropriate and the Assessing Officer has rejected the same without any cogent basis. Accordingly, we do not find any interference in the order of learned CIT(A). Accordingly, we uphold the same. 16. Another common issue raised relates to disallowance of ₹ 17,07,026/- for A.Y. 2012-13 and a sum of ₹ 24,05,350/- as attributable to a speculation business. The A.O. has disallowed these expenses by invoking provision of Explanation to section 73. 17. Upon the assessee's appeal, the Id. CIT(A) noted that there is no case of assessee engaging into any speculative activity. He also relied upon the ITAT order on the same issue in the assessee's own case for A.Y. 2010-11 vide order dated 31.01.2017 as under: 5. I have heard both the parties and have perused the material available on record. Looking at the turnover and assessee's commission income, operational default by assessee's huge staff cannot be held as unreasonable. The assessee's total income is a loss and not a positive figure. The accounts are duly audited and follow the established rules and norms. The lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss against profits and gains arising from any other business. However, an explanation was added by Taxation Laws (Amendment) Act, 1975, which came into effect from 01.04.1977 providing for a deeming clause. As per the said explanation, where any part of the business of a company other than a company whose gross total income consists of mainly purchase and sale of shares of other companies, then such company shall for the purpose of the section 73 that is, for setting off the losses be deemed to be carried on as a speculation business to the extent to which the business consists of purchase and sale of such shares. Therefore, it has no application to a contract entered into by a member of the NSE or Bangalore Stock Exchange, whose business is in trading of shares on behalf of his clients, which is known as jobbing or arbitrage. Any loss which may arise in the course of such business, shall not be deemed to be a speculative transaction. If the nature of the transaction by the assessee is not a speculative transaction at all, then, the Explanation to section 73 has no application. The loss sustained by the assessee is a business loss which can be set off against income from other sou ..... 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