2022 (7) TMI 1210 - AT - Income Tax

Tribunal grants 40% discount on transfer pricing adjustment, upholds CIT(A)'s decisions.

Morgan Stanley India company P. Ltd. Versus Addl. CIT, Range 4 (3), Mumbai And (Vice-Versa)

The Tribunal partly allowed the assessee's appeal by granting a 40% discount on the transfer pricing adjustment for brokerage services provided to ... TP Adjustment - ALP determination - assessee claimed that if CUP method is applied for determining the arms length price of international transaction of brokerage and commission earned, downward adjustment to the extent of 50% is required to be granted to the assessee - HELD THAT:- Rule 10 B (1) (a) (ii) of the income tax rules 1962 also allowed adjustment to the prices which could materially affect the price in the open market. Further guidelines (2022) at paragraph number 2.17 also suggest that in considering whether controlled and uncontrolled transaction is comparable, regard should be held to the effect on price of broader business functions other than just product comparability. Where the differences exist between the controlled and uncontrolled transaction is on between the enterprises undertaking those transactions, it may be difficult to determine reasonably accurate adjustment to eliminate the effect on price. However such difficulties should in all fairness be adjusted reasonably but that should not preclude the application of cup method. In the present case for earlier years the learned and CIT – A has granted adjustment to the extent of 40%, which is been upheld by the coordinate benches in case of the assessee for earlier years, we also direct the learned assessing officer/transfer pricing officer to adjust and grant benefit of 40% discount to the assessee. Comparability analysis - AO/TPO/ CIT(A) should have considered both overseas and domestic independent clients -As now assessee has submitted the details, wherein the third party rates are charged by the assessee for clearing house trading is 0.25% and adjustment on account of volume marketing etc. at the rate of 50% makes the arms length price of the brokerage at 0.13%. The assessee has charged the brokerage of 0.14% from Mauritius entity and 0.21 % from UK entity. Therefore, final amount of adjustment is in case of clearing house trades. With respect to the delivery versus Payment towards third party rates charged by assessee is 0.38% and after deduction of 50% it comes to 0.19%. Assessee has charged from Mauritius Associated Enterprises 0.14 % and from UK Associated Enterprises of 0.22%, looking to the volume of trade, the adjustment with the UK entity is Rs. Nil and with Mauritius entity is Rs. 9,59,202/-. AO is directed to verify the same and computation of arms length price has directed the above. Accordingly, ground no. 1.4 of the appeal is allowed with above direction. Transaction of charging of brokerage commission income from its associate enterprise is at arm’s length price for the reason that third party brokerages namely Motilal Oswal Securities Limited and ICICI Brokerage Services Limited have charged higher brokerage rates to these associate enterprises - We find that in case of 19 transactions, the ICICI brokerage Securities Limited on clearing house transaction has charged 0.1% as commission rate and also 0.05%. There is a difference of almost 3 times between the lowest rates charged and the highest rate charged by the ICICI brokerage Securities Limited. Coming to the Motilal Oswal Securities rate, the identical situation is depicted. In two of the transactions there is a nil rate of commission and in three of the transactions it is at 0.16%. There is no justification for such wide variants in the rates. With respect to the DVP rates, the assessee has only given a single instance where the commission expenditure is merely Rs.15,542/-. No justification is coming from the side of the assessee with respect to such a wide variance in the rates. Further, 40% deduction granted by the ITAT also covers such issue. The reliance on the decision First Credit ITES (P.) Ltd. (2022 (5) TMI 1423 - ITAT MUMBAI] also do not apply to the facts of the case as the issue in that case related to the adoption of other method where the authentic quotes were accepted. In the present case, the huge rate variants do not inspire any confidence in the data submitted by the assessee. Further assessee cannot change the benchmarking and comparability analysis at his own whims and fancies. Accordingly, ground no. 1.1 is dismissed. Addition of overseas support services received from its associate enterprises - Issue decided in favour of assessee as per assessee own case for assessment year 2000 – 01 and 2001 – 02. Disallowance of remuneration paid to Mr. Ashith Kampani under Section 40A(2) - HELD THAT:- As we find no infirmity in the order of the learned CIT(A) in deleting the disallowance which has been confirmed by ITAT in assessee’s own case for earlier years. We also find that the learned Assessing Officer has not given any reason that why the above remuneration is excessive and unreasonable looking to the legitimate needs of the business. Further, the approval granted under the companies Act cannot use for making disallowance under the income tax Act, for the reason that both the enactments have different objects and reasons. Accordingly, ground no. 3 is dismissed. Disallowance u/s 14A - CIT(A) held that Rule 8D applies only with A.Y. 2008-09. He therefore, upheld the disallowance of only ₹1 lacs - HELD THAT:- There is no change in the facts and circumstances of the case and further Rule 8D of the Rules does not apply for this year also. Respectfully following the order of the co-ordinate Bench in assessee’s own case, we upheld the order of the learned Commissioner of incometax (Appeal). Accordingly, ground no. 4 is dismissed. Addition u/s 40(a)(ia) - Disallowance of transaction charges lease line charges and VSAT charges paid by assessee to the Stock exchanges - HELD THAT:- We find that now this issue is squarely covered by the decision of Hon'ble Supreme Court in case of CIT vs. Kotak Securities Limited [2016 (3) TMI 1026 - SUPREME COURT] wherein it has been held that these are the standard facilities and no tax is required to be deducted for the reason that these are the services not specifically sought by the user but are standard services. In view of this, we do not find any infirmity in the order of the learned CIT(A) in deleting the above disallowance. Issues Involved:1. Transfer Pricing Adjustment on Brokerage Commission2. Disallowance of Overseas Support Service Fees3. Disallowance of Remuneration under Section 40A(2)4. Disallowance under Section 14A5. Disallowance of Transaction Charges, Lease Line Charges, and VSAT Charges under Section 40(a)(ia)Detailed Analysis:1. Transfer Pricing Adjustment on Brokerage Commission:The primary issue was the adjustment made by the Assessing Officer (AO) on brokerage commission earned from associated enterprises (AEs) in Mauritius and the UK. The AO adopted the Comparable Uncontrolled Price (CUP) method, while the assessee preferred the Transactional Net Margin Method (TNMM). The CIT(A) upheld the use of the CUP method, citing it as more direct. The Tribunal agreed with the CIT(A) and dismissed the assessee's contention for TNMM. However, it granted a 40% discounting adjustment for brokerage services provided to AEs, following precedents from earlier years. The Tribunal directed the AO to verify and adjust the arms-length price (ALP) accordingly.2. Disallowance of Overseas Support Service Fees:The AO disallowed the payment of Rs. 6,24,08,002/- made to Morgan Stanley International Inc. for overseas support services, determining the ALP at nil. The CIT(A) deleted this adjustment, referencing his decision from the previous year, which was upheld by the Tribunal. The Tribunal confirmed this decision, noting that the cost was reimbursed without any markup and that similar issues in earlier years had been resolved in favor of the assessee.3. Disallowance of Remuneration under Section 40A(2):The AO disallowed remuneration paid to Mr. Ashith Kampani, exceeding the limit prescribed by the Ministry of Law and Justice. The CIT(A) deleted the disallowance, recognizing Mr. Kampani's extensive experience and finding no evidence that the remuneration was excessive or unreasonable. The Tribunal upheld this decision, emphasizing that the approval under the Companies Act does not dictate disallowance under the Income Tax Act.4. Disallowance under Section 14A:The AO disallowed Rs. 78,93,438/- under Section 14A, applying Rule 8D. The CIT(A) limited the disallowance to Rs. 1 lakh, stating that Rule 8D applies only from AY 2008-09. The Tribunal upheld this decision, referencing similar rulings in the assessee's favor from previous years.5. Disallowance of Transaction Charges, Lease Line Charges, and VSAT Charges under Section 40(a)(ia):The AO disallowed Rs. 1,72,51,564/- paid to stock exchanges for transaction, lease line, and VSAT charges, citing non-deduction of tax at source under Sections 194J and 194C. The CIT(A) ruled these charges as mere infrastructure support costs, not requiring TDS. The Tribunal confirmed this view, relying on the Supreme Court's decision in CIT vs. Kotak Securities Limited, which classified these as standard services not necessitating TDS.Conclusion:The Tribunal partly allowed the assessee's appeal, granting relief on the transfer pricing adjustment by applying a 40% discount. It dismissed the AO's appeal, upholding the CIT(A)'s decisions on overseas support service fees, remuneration under Section 40A(2), disallowance under Section 14A, and transaction charges under Section 40(a)(ia). The judgment emphasized adherence to precedents and detailed verification of facts.