AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (7) TMI 1361
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....ervices and investment advisory services (both original ground and additional ground) (d) Transfer pricing adjustment in respect of international transactions pertaining to research support services. (e) Transfer pricing adjustment in respect of provision of broking services for futures and options trades. (f) Disallowance of claim of loss arising on account of error trades. (g) Disallowance u/s 14A of the Act (h) Disallowance of entertainment expenses. 2. The assessee is a wholly owned subsidiary of M/s J P Morgan India Securities Holdings Ltd, which is engaged in the business of merchant banking, stock broking and also providing related financial and advisor services. The assessee has entered into international transactions with its Associated Enterprises (AEs) and the TPO has made adjustments. After receiving directions from Ld DRP, the AO has made addition of transfer pricing adjustments that were confirmed by Ld DRP. 3. The first issue relates to the transfer pricing adjustment relating to origination and marketing support services in respect of investment banking mandates. The Ld A.R submitted that the assessee does not provide full fledged investment/merchant ban....
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....ng 102.76% Arithmetic mean 22.45% The Ld A.R submitted that the Ld D.R has obtained remand report from the assessing officer on the above said fresh set of comparable companies. He submitted that the TPO has accepted three companies viz., M/s Almondz Global Securities Ltd, M/s Sumedha Fiscal Services Ltd and M/s KJMC Global markets (India) Ltd. The TPO has not accepted the remaining five comparable companies. 3.2 The Ld A.R submitted that the tax authorities have proceeded to analyse the comparable companies under the impression that the assessee is involved in end to end activities like deal origination, client relationship management, structuring and execution functions in respect of investment banking mandates. He submitted that this presumption is highly incorrect. He submitted that the assessee's services to its AEs are limited to origination of customer transactions, maintenance of client relationship, i.e., they are in the nature of marketing support services only. Thus the above said services are provided by the assessee on case to case basis and is limited to assisting in organizing road shows & complying with local regulations and provi....
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....ing five comparable companies should not have been rejected. 3.5 We heard the parties with respect to the five comparable companies. The main contention of the Ld DR was that these companies are not functionally comparable with the activities carried on by the assessee. On the contrary, it is the submission of Ld A.R that the activities carried on by the assessee are limited to Deal origination and marketing, client relationship management. 3.6 We notice that the TPO has furnished a letter dated 29-09-2016 to the learned CIT(DR), wherein the Transfer pricing officer has also described the activities carried on by the assessee. Apart from the two activities mentioned above, the TPO has also stated that the assessee is assisting its AEs in complying with local regulatory requirements and in structuring and execution of the mandates. Hence, it is the submission of Ld A.R that no company in India is doing such kind of a portion merchant banking/investment banking activities described above. Hence, there was no option for the assessee, but to select companies which are mainly involved in the basic operations and marketing operations. 3.7 The Ld A.R. submitted that the TPO has accepte....
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....keting the investment banking offerings of its AEs in India. Accordingly, he submitted that these two companies are broadly comparable with the assessee company. He reiterated that no other company in India is carrying on activities as that of the assessee. Hence, both the assessee and TPO are constrained to select companies whose activities are broadly comparable. He further submitted that the segmental results of M/s Karvy stock broking Limited is available at page 26 of the annual report. Accordingly, he submitted that these two companies should also be regarded as comparable companies. 3.10 We find merit in the submissions made by Ld A.R. We noticed earlier that the activities carried on by the assessee falls mainly under the category of marketing support services. It is also a fact that both the parties could not identify any other company, which carries on exactly same nature of activities as that of the assessee. Under these set of facts, there is no other option but to select companies whose functions are broadly comparable. There is no dispute that M/s Karvy Stock broking Limited and M/s Birla sunlife Distribution Company Limited are engaged in marketing of financial pro....
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....e primarily in the nature of investment banking as it helps clients in raising funds. Accordingly, he submitted that this company can be considered as comparable. (iii) We noticed earlier that the AE of the assessee is providing Depository services for ADR program. Acting as depository does not involve services in relation to raising of funds overseas. Thus the services rendered by the assessee cannot be considered to be in the nature of investment/merchant banking. In the case of Carlyle India Advisors P Ltd vs. ACIT (ITA No.7901/Mum/2011), the Tribunal has given a specific finding that M/s L & T Capital Company Limited is primarily engaged into Portfolio Management, Mutual fund distribution and merchant banking. The Ld A.R has submitted that this company has earned more than95% of its income from syndication services. Further, this company has been rejected by the TPO in the succeeding year, i.e., A Y 2010-11. Accordingly, we hold that this company cannot be considered to be a comparable company. (B) Sundaram Finance Distribution Limited:- (i) The Ld A.R submitted that this company gets its work done through outsourcing, which is evidenced by the fact that 96% of its total ....
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....es and marketing services provided by the assessee under this segment is related to canvassing for "Depository services" provided by its AE in respect of ADR program, wherein the AEs act as depositories only. It does not help in raising funds and hence it is not an investment banking activity. Hence we do not find any merit in the submissions made by Ld D.R. It was submitted by Ld A.R that the TPO himself has excluded this company in AY 2010-11 after analysing the functional comparability of this company with that of the assessee. It was submitted that this company was not considered as a comparable company in AY 2011-12 and 2012-13. Accordingly, we direct exclusion of this company. 4.3 Accordingly, we restore this issue to the file of AO/TPO for determining ALP of the transaction afresh by excluding all the above said three companies. It is pertinent to note that the assessee had voluntarily made transfer pricing adjustment of Rs.8,88,315/- under this segment. The AO/TPO may deal with the same in accordance with law. 5.0 The next issue relates to Transfer pricing adjustment made in respect of international transactions pertaining to sub-advisory, research and other support servi....
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....ket Research and Management consultancy services. It provides, inter alia, user research, verticals research and consulting services. Since the assessee is also engaged in analysing financial data of potential clients, analysing market conditions etc, it was contended that the market research functions of this company should be considered as comparable to the functions performed by the assessee. It was also submitted that this company was considered as comparable by TPO in AY 2008-09. It is submitted that this company is held to be comparable to an investment advisory company in the case of Temasek Holdings Advisors India P Ltd vs. DCIT (ITA No.776/Mum/2015) by the Tribunal. Accordingly, we direct inclusion of this company. (c) Informed Technologies India Limited:- This company is engaged in the activities of collecting and analysing data on financial fundamentals, corporate governance, director/executive compensation and capital market for research and advisory reports. The assessee also carry on the activities of analysing financial data of potential clients, analysing market conditions etc. It was submitted that this company has been held to be a comparable company to an inve....
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.... SEBI. It is further submitted that this company earns income from professional fees, brokerage and other operations and dividend, of which 67% of total income is earned from professional fees. It has reported merchant banking a single segment. Accordingly, it was submitted that this company cannot be considered to be comparable with the assessee's segment of investment advisory. It was further submitted that this company has been excluded by the Tribunal in the case of Carlyle India Advisors P Ltd (ITA 2200/Mum/2014). In view of the above facts, we direct exclusion of this company. (iii) Sumedha Fiscal Services Limited:- This company has got three segments viz., Capital market operations, consultancy and other services. The consultancy segment comprises of Loan Syndication, Merchant Banking, Restructuring & other related advisory services. Accordingly, it was submitted that this company cannot be compared with the assessee's segment of investment advisory. It was further submitted that this company was not included by the TPO in AY 2010-11 after analysing the functions of this company. It is also submitted that this company was rejected by the Tribunal in the case of Carlyle In....
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.... under this segment. The Ld DRP upheld the same. 7.2 The plea of the assessee is that the TPO should have given deduction towards adjustment for (a) Additional cost incurred for unrelated party trades and (b) Additional interest earned for related party trades The Ld A.R submitted that the additional cost adjustment was allowed to the assessee in respect of broking services under "cash segment" by the Tribunal in the assessee's own case in AY 2002-03 by the Tribunal in ITA No.670/Mum/2006 dated 12-02-2014. He submitted that though the order was passed by the Tribunal for "Broking services in Cash segment", the underlying principle shall equally apply to the present transactions of "Broking services in F & O Segment". With regard to the adjustment towards interest income adjustment, the Ld A.R submitted that the Tribunal has allowed the same in the assessee's own case in AY 2006-07 in ITA No.8193/Mum/2010 and the decision of the Tribunal has since been upheld by Hon'ble Bombay High Court, vide its order dated 14th January, 2019 passed in ITA No. 912 of 2016. 7.3 We heard Ld D.R on this issue and perused the record. We notice that the Tribunal has upheld the view of Ld CIT....
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....notice that the Tribunal has observed in AY 2006-07 as under:- "6.5 ........... 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..... The relevant details have been placed in the Paper book at pages 37to 77 and, having perused the same, we find that the requisite information was available for the Assessing Officer to carry out any verification exercise that he may have deemed fit. So however, instead 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..." We noticed earlier that the AO has followed the earlier year's orders. We further notice that the L....