TaxTMI 
TaxTMI 
2015 (7) TMI 1054
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.... the above, the Appellant objects on the following grounds: 2. In disallowing transaction charges paid to National Stock Exchange (NSE)/ Bombay Stock Exchange (BSE) amounting to Rs. 28,669,998 and lease line charges amounting to Rs. 433,130. 3. In disallowing loss on account of error trades amounting to Rs. 7,774,691. 4. In disallowing depreciation on motor car amounting to Rs. 144,702. 5. In disallowing club entrance fees and subscription charges of Rs. 313,753. 6. In disallowing an amount of Rs. 742,851 out of client entertainment expenses. 7. In rejecting the internal Transactional Net Margin Method (TNMM) and adopting the Comparable Uncontrolled Price (CUP) method for determining the arm's length price (ALP) for provision of broking services for futures and options trades. 8. In making an upward adjustment of Rs. 43,088,000 with respect to the provision of broking services for futures and options trades. 9. In rejecting the internal TNMM method and adopting the CUP method for determining the ALP for provision of broking services for cash equity transaction. 10. In making an upward adjustment of....
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....' in terms of section 115JB of the Act was determined at Rs. 1,41,01,13,145/-. The return of income filed by the assessee was subject to scrutiny assessment in terms of section 143(3) r.w.s 144C(13) of the Act, whereby the total income has been determined at Rs. 1,72,69,27,800/- as per the normal provisions of the Act. The said assessment has been finalized by the Assessing Officer in conformity with the directions of Dispute Resolution Panel [hereinafter referred to as 'the DRP'] issued u/s 144C(5) dated 13.08.2010. The various grievances of the assessee against such assessment are manifested by the above stated Grounds of appeal with which we shall deal in seriatim. 4. Insofar as the Ground of appeal no. 1 is concerned, the same is general in nature and does not require any specific adjudication and is accordingly dismissed. 5. In Ground of appeal no. 2, the issue relates to disallowance of transaction charges and lease line charges paid to National Stock Exchange/Bombay Stock Exchange amounting to Rs. 28,669,998/- and Rs. 4,33,130/- respectively. The Assessing Officer has disallowed the said expenditure by invoking section 40(a)(ia) of the Act on the ground that the requis....
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....isallowance was made but the issue was decided in favour of the assessee by the CIT(A). 5.3 We have considered the aforesaid point raised by the appellant and the following discussion in the order of the Hon'ble High Court, which is relevant:- "32) Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute 'fees for technical services' covered under Section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. However, since both the revenue and the assessee were under the bonafide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the assessing officer under Section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the revenue and the assessee right from the insertion of Section....
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.... 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. Thus on this aspect assessee succeeds. 6. By way of Ground of appeal no. 3, the grievance of the assessed is with respect to the disallowance of Rs. 77,74,691/- representing loss on account of error trades . 6.1 In this context, assessee had claimed before the lower authorities that the aforesaid amount represented losses incurred on account of equity error trades and derivative error trades. It was explained that in the normal course of business, assessee executed trades as per the orders placed by its clients but sometimes errors crept into the execution, whereby the executed trade is not as per the client's requirements. For instance, it has been explained that if the sales person places an order for a wrong stock/wrong quantity or mis-communication of details of the client, such loss is absorbed by the assessee. Thirdly, it was pointed that the personnel employed to carry out actual trading on the terminal o....
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....d in the course of an activity not connected to business. In fact, the Assessing Officer acknowledges the furnishing of requisite details by the assessee wherein details of date of error, scrip, nature, person responsible, counter party, etc has been furnished. Therefore, insofar as the nature of loss and incurrence of the same in the normal course of the carrying on business activity of the assessee is concerned, the same is not disputed. The Hon'ble Supreme Court in the case of Badridas Daga (supra) has laid down that once it is established that the loss for which the deduction is claimed springs directly from carrying on of the business and is incidental to it, then the deduction for the same ought to be allowed. In the present case, it is evident that assessee is, inter-alia engaged in the business of broking and, therefore, such losses suffered in the course of carrying on such business cannot be denied. Coming to the specific objection of the Assessing Officer to the effect that assessee has not shown direct nexus between business transaction and the loss claimed, the same in our view is unsustainable having regard to the material which was available to the Assessing Officer ....
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....tablished in the absence of its registration in the name of assessee company. 7.3 We have carefully considered the rival submissions. Quite clearly, the facts emerging from the order of the Assessing Officer establish that the said Motor Car was acquired by the assessee in the immediately preceding year though it has been registered in the name of another group concern under the Motor Vehicles Act, 1988. There is no denying the fact that the assessee has paid full price for acquiring the Motor vehicle and it has been using the same for its business. In the year under consideration, assessee has claimed depreciation on written down value (WDV) of Motor vehicle and the same, in our view, cannot be denied following the Judgment of Hon'ble Bombay High Court in the case of Dilip Singh Saradarsingh Bagga (supra). In view of the Judgment of Hon'ble Bombay High Court, we direct the Assessing Officer to allow depreciation to the assessee on the WDV of the Motor Vehicle in question. Thus on this aspect assessee succeeds. 8. By way of Ground of appeal no. 5, the grievance of assessee is with regard to a disallowance of Rs. 3,13,753/- representing club entry fees and subscription charges....
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....ng Officer has not pointed out any particular instance which could demonstrate that the expenditure was incurred for any non business purpose. It is also not the case of Revenue that the explanation furnished by the assessee in the course of assessment proceedings was lacking in any manner. Therefore, we direct the Assessing Officer to delete the addition of Rs. 7,42,851/-. Thus, assessee succeeds on this aspect also. 9. In respect of Ground of appeal Nos. 7 to 18, the issues relate to the additions made by the Assessing Officer on account of transfer pricing adjustments. Notably, the assessee had entered into certain international transactions within the meaning of section 92B of the Act with its associated enterprises; and, income arising therefrom was required to be computed having regard to their arm's length price as mandated by section 92(1) of the Act. 10. Insofar as it is relevant for the present controversy it would suffice to note that assessee had, inter-alia, carried out international transaction with its associated enterprises in the field of investment banking services, marketing and sales support services, brokerage services for Futures & Options; and, broking ....
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....the internal Comparable Uncontrolled Price (CUP) method was the most appropriate method in the present case. The TPO justified the adoption of internal CUP method by noticing that assessee had carried out transactions with related as well as non related parties and, therefore, the commission charged by the assessee from unrelated parties for the broking services provided to them could be functionally compared with similar services provided to the associated enterprises; in other words as per the TPO there existed a valid internal CUP data and thus he adopted the CUP method. At the time of hearing, it was pointed out that in the assessment year 2002-03 (supra), similar aspect was considered by the Tribunal and because of availability of the internal CUP data , the action of the TPO in rejecting the TNM method and adopting the CUP method has been affirmed. We have perused the said decision of the Tribunal dated 12.02.2014 (supra) and find that the issue before the Tribunal related to brokerage transactions rendered by the assessee in respect of delivery payment trades and clearing house trade undertaken by it for related parties as well as unrelated parties. In view of the aforesaid ....
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....arned on account of high volume trades of related parties cannot be computed as a percentage of turnover since interest earned has no connection with the turnover. As per the appellant, the interest earned in the related and unrelated trades is based on the level of margin monies placed by the related parties and unrelated parties. In this context, the Ld. Representative for the assessee has placed the following working of the interest earned on margin monies placed by the associated enterprises as compared to the unrelated parties:- Particulars Total Interest earned by assessee based on Margin Monies placed by associated enterprises 1,86,323 Interest earned by assessee based on Margin Monies placed by nonrelated parties 64,081 Additional interest earned by assessee based on margin monies placed by associated enterprises as compared to Non- related parties 1,22,242 11.2 On this point, the Ld. DR has opposed the plea of assessee by pointing out that in the assessment year 2002-03 also, the Assessing Officer had recognized the difference in activities in the services rendered by the assessee to its associated enterprises vis-à-vis....
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....e methodology proposed by the assessee is more appropriate than the manner in which the adjustment for the difference on account of interest earned 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. In the result insofar as the Ground of appeal no. 7 is concerned, the assessee fails therein and insofar as Ground of appeal no. 8 is concerned, the same is allowed for statistical purposes. 11.6 Similarly with regard to international transactions on account of broking services for cash equity tran....
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....ating margin of Keynote Corporate Services Limited at 45.37% as against 65.25% taken by the TPO. As a consequence the DRP directed the Assessing Officer to re-work the arithmetic mean of the final set of comparables as under:- Sl. No. Name of Company Operating Margin on operating cost (%) 2006 1. Cetrum Capital Limited 26.26% 2. Keynote Corporate Services Limited 45.37% 3. Khandwala Securities Limited 38.17% 4. Sumedha Fiscal Services Limited 22.03% 5. SREI Capital Market Limited 18.94% Arithmetic Mean 30.15% 12.2 On the aforesaid basis the adjustment to the stated values of the international transaction of investment banking services has been finally determined at Rs. 3,10,61,627/-, against which assessee is in appeal before us. 12.3 On this aspect, the Ld. Representative for the assessee has only articulated exclusion of two comparables, namely, Keynote Corporate Services Limited and Khandwala Securities Limited from the final set of comparables. In the context of Keynote Corporate Services Limited, the plea set up by the assessee is that the said concern is excl....
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....eport of the said concern pertaining to the financial year under consideration speaks of business re-structuring whereby the scheme of merger of three subsidiaries was effected in the instant year pursuant to the scheme approved by the Hon'ble Bombay High Court vide order dated 02.12.2005. Thus, the exceptional /non-recurring events on account of business restructuring and amalgamations cannot be claimed. The Hyderabad Bench of the Tribunal in the case of Capital I-Q investment Ltd Vs. DCIT, ITA No. 6961/Hyd/11 dated 23.11.2012 held that a concern could not be considered as a good comparable on account of exceptional final results due to mergers/demergers. The Mumbai Bench of the Tribunal in the case of Petro Araldite Pvt. Ltd. (ITA No. 6217/Mum/2012 dated 18.01.2013) for assessment year 2008-09 also held that on account of acquisition and demergers during the relevant year, a concern cannot be included in the final set of comparables. In fact, as per the Tribunal once it is found that there has been an exceptional event on account of mergers/demergers there was no need to further look into comparability or otherwise of the factual aspects of such a concern with that of the tested ....
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....rging from the material on record, which is available in public domain. Thus, the said concern deserves to be excluded and such a plea of the asssesee cannot be thwarted merely because at a given point of time the said concern was considered as a comparable by the assessee. Ostensibly, the said inclusion was an inadvertent mistake. Therefore, in view of the aforesaid discussion, we direct the Assessing Officer to exclude Keynote Corporate Services Pvt. Ltd from the final set of comparables. 13. The next plea of the assessee is for exclusion of Khandwala Securities Ltd from the final set of comparables. On this aspect, the Ld. Representative submitted that in Grounds of appeal enumerated in the Memo of appeal, the plea relating to exclusion of Khandwala Securities Limited was not specifically raised, though it can be considered as subsumed in Ground of appeal no. 11, wherein, the enhanced adjustment to the stated value of the international transaction has been assailed. Be that as it may, it has been pointed out that assessee has raised an Additional Ground of appeal whereby exclusion of Khandwala Securities Ltd has been specifically canvassed. 14. The assessee company has sou....
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.... uphold the exclusion of Keynote Corporate Services Limited qua the aforesaid objection of the Ld. DR applies herein also and the same is accordingly rejected. In the result, we direct the Assessing Officer to exclude Khandwala Securities Ltd from the final set of comparables. Thus, insofar as the determination of arm's length price in relation to international transaction pertaining to Merchant banking Services segment is concerned, the Assessing Officer is directed to give effect to the aforesaid directions and, therefore, recompute the arm's length price of the international transactions entered with the associated enterprises. 18. Now, we may take up the last issue relating to determination of arm's length price of the international transaction of rendering of marketing and sales support services in respect of American Depository Receipts (ADRs) programs of the associated enterprises for the Indian clients. 19. In respect of the international transaction relating to provision of marketing and sales support services rendered to associated enterprises in relation to ADR services, assessee used the TNM method for benchmarking the same. The PLI used was Operating Profits to O....
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....arked. 23. In reply the Ld. Representative for the assessee vehemently pointed out that marketing and sales support services in relation to ADR rendered by the assessee does involve employee/personnel activities and, therefore, such facet of business operations is critical insofar as the comparability analysis is concerned. The Ld. Representative has adverted to page 231 of the Paper Book wherein it placed the relevant extracts of its Transfer Pricing Study to say that the functional analysis of the impugned segment brings out that the services rendered, which include identifying financial contracts and opportunities in Indian market; preparation of marketing material; arrangement of meetings; marketing presentations; providing information and market intelligence to associated enterprises; coordination and support services in relationship clients; and, other miscellaneous support services. It has been emphasized that all the said activities involve employee/personnel as a critical component of functioning. 24. We have carefully considered the rival submissions. As per the Director's report of Sundaram Finance Distribution Limited, a copy of which is placed on page 274 of the ....