JOINT COMMISSIONER OF INCOME TAX (OSD)-4(1)(1), MUMBAI vs. CITIGROUP GLOBAL MARKETS (INDIA) PRIVATE LIMITED, MUMBAI

In The learned Assessing Officer is aggrieved by raising following grounds of appeal:-

“1. Each ground is without prejudice to the others. 1.1 "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in including comparable namely M/s IDC (India) Ltd., overlooking the fact that functional comparability and application of RPT is not ascertainable from the financials?" 1.2 "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in 1.3 "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in including comparable namely M/s IDC (India) Ltd., overlooking the fact that M/s IDC Ltd. is owning a brand and in the case of M/s Rolls Royce Marine India Pvt. Ltd. reported in [2014], 49 taxmann.com 365 (Mum. Trib.) Hon'ble ITAT has held that brand Owners Company can't be taken as comparable."

In assessee is also aggrieved raising following grounds of appeal:-

The learned CIT(A) erred in re-computing the arm's length price (ALP) of the international transaction, pertaining to provision of broking services to Citigroup Global Markets Limited, UK (CGM UK), as Rs 6,242,387 as against Rs 4,161,591, resulting in an upward adjustment of Rs 2,080,796.

The brief facts of the case shows that assessee is a company engaged in the business of stock broking, investment banking and rendering various other

The learned Transfer Pricing Officer asked for further details on accepts / reject matrix. The learned Assessing Officer found that assessee has used the data for three years of the comparable company and has taken the weighted average in the accept/ reject matrix. Assessee originally selected 6 companies but rejected two companies having significant related party transactions and one company on functional dissimilarity, thereafter, assessee based on the transfer pricing study report of subsequent year selected one more comparable as IDC India Limited because same was found comparable on the basis of annual report for financial year 2009-10. Therefore, the learned Transfer Pricing Officer was of the view that assessee has done cherry picking. Further, the assessee is also using same set off comparables for investment banking as well as for research support services. Accordingly, a show cause notice was issued. The learned Transfer Pricing Officer accepted the three comparables selected by the assessee but rejected IDC India Limited having a margin of 14.72%. Further, the learned Transfer Pricing Officer looked up at comparables rejected by the assessee in it’s accept/ reject matrix. He found that three comparables which qualified all the filters but rejected by assessee. The learned Transfer Pricing Officer collected certain information under Section

With respect to brokerage services, assessee has received brokerage fees of ₹181,49,41,232/-. Assessee adopted the Comparable Uncontrolled price Method [CUP method] as MAM . Assessee submitted that the average broking charges of the assessee to the Associated Enterprises in respect of cash equity trade is 0.25% and assessee has also earned commission in respect of trade executed with unrelated parties, average brokerage commission charged to top of 10 unrelated foreign institutional investors in cash equity trade is 0.15%. Therefore, the assessee claimed that transaction is at Arm’s Length. b. The AO found that assessee has shown ₹ 3,241,723 under the head leasehold improvements and assessee was asked to justify the claim. Assessee submitted that it has incurred the expenditure in the least office premises from which it operates to meet the Citigroup standards. The assessee submitted that it is done electrical work for third floor of ₹ 1,811,469, interior work of ₹ 1,044,205 and paid project management fees of ₹ 386,050/– totaling to ₹ 3,241,725/– which is in the nature of repairs and renovation and is purely a of revenue nature. The learned AO rejected the contention of the assessee and held that the capital expenditure debited under the head repairs and maintenance’s for the reason that the benefit of the above repairs to the assessee clearly extends to the assessee beyond the year and they are not of the nature of current repairs. Accordingly he held it to be a capital expenditure and granted depreciation at the rate of 10% amounting to ₹ 324,172/– and disallowed the balance sum of ₹ 2,917,552/–. c. The AO during the course of assessment proceedings also found that assessee has incurred loss on trading d. Assessee has paid a sum of ₹ 1,981,158 levied on the assessee by the stock exchange as penalty relating to non-maintenance of complete records, delay in payout of funds and securities and incomplete forms short collection of margins et cetera. The assessee has argued that such penalties e. The AO noted that assessee has debited the business development and entertainment expenditure of ₹ 59,764,000, repairs and maintenance of ₹ 13,468,000 and books and periodicals of ₹ 125, 71,000/– wherein the assessee was asked to substantiate these expenses with supporting bills and vouchers. Assessee merely explain the nature of such sum submitted that these are not capital expenditure and are allowable as expenditure bully and exclusively incurred for the purposes of the business. The learned assessing officer held that the explanation of the assessee is general and casual in nature and these expenses are not fully supported by proper bills and vouchers. The learned AO held that there is an element of personal expenditure in these heads of expenditure, which cannot be ruled out for want of itineraries and logbooks and final details. Accordingly he disallowed 20% of the said expenses amounting to ₹ 9,301,653/–.

Accordingly, the draft assessment order was forwarded to the assessee on 18/2/2014 in response to which the assessee on 20/3/2014 submitted that they have opted not to file objection before the

Assessee preferred the appeal before the learned CIT (A), who passed an appellate order on 12th October, 2017, partly allowing the appeal. The learned CIT (A) while adjudicating the transfer pricing adjustment directed the learned Transfer Pricing Officer to a. include the IDC India Limited in comparability analysis as he found that comparable is engaged in research and analysis services based on the analysis report and website extract provided by the appellant. According to the learned CIT (A), this comparable is functionally similar. He further stated that there is no reason for the learned Transfer Pricing Officer to go beyond the RPT schedule and check the reliability of the financial statement. Even otherwise, he held that IDC India Limited is a good comparable. b. With respect to IDFC Investment Advisories Ltd. included by the learned Transfer Pricing Officer in the final set of comparable but objected by the assessee, he held that same is primarily engaged in providing portfolio services, whereas the assessee is engaged in rendering research c. With respect to the Ladderup Corporate Advisory Pvt. Ltd. which is included by the learned Transfer Pricing Officer objected to by the assessee, he held that it is primarily engaged in providing investment banking services, where the assessee is engaged in rendering research report services and therefore, the same is to be excluded. d. on the issue of M/s Motilal Oswal Investment Advisory P. Ltd. included by the learned Transfer Pricing Officer and objected by the assessee, he found that it performs the investment banking activities and therefore, functionally dissimilar. e. Accordingly, after the order of the learned CIT (A), four comparable companies remain in the comparability analysis whose operating margin was 19.57% and therefore, the TP adjustment with respect to the research report services was deleted. f. With respect to the adjustment on account of the provision for broking services, the learned CIT (A) agreed with the learned Transfer Pricing Officer and confirmed the addition on account of broking services. h. The learned Assessing Officer during the course of assessment proceedings, disallowed 20% of entertainment and conference, repairs and maintenance and books and periodical expenditure holding that this expenditure were not incurred wholly and exclusively for the

Therefore, both the parties are aggrieved with the order of the learned Commissioner of Income tax (Appeals). The learned Assessing Officer is aggrieved with the order of the learned CIT (A), wherein he deleted the addition on account of Arm’s Length Price of the international transaction by directing inclusion of IDC Limited and exclusion of IDFC Investment Advisories Ltd., Ladderup Corporate Advisory Pvt. Ltd. and M/s Motilal Oswal Investment Advisory P. Ltd.

The learned Departmental representative submitted that i. IDC India Limited that assessee did not have the above comparable company in it’s accept/ reject matrix. However, assessee included the same, as it was part of its comparability ii. With respect to the inclusion of IDFC investment advisory limited by the learned Transfer Pricing Officer but excluded by the learned CIT (A), he submitted that the learned Transfer Pricing Officer has categorically stated that IDFC investment advisories limited qualify all the filters adopted by the assessee and the learned Transfer Pricing Officer rejected it merely because of RPT filter. According to the assessee, it has related party transaction more iii. With respect to the Ladder up corporate advisory Pvt. Ltd., the assessee has excluded the same on account of business review and iv. Similarly, Motilal Oswal Investment Advisories Pvt. Ltd. was also objected on that basis. Both the objections were rejected by the learned Transfer Pricing Officer by obtaining 133(6) of the Act, information from those parties and were considered as functional comparable. v. It was stated that the learned CIT (A) has without making any enquiry not even looking at the 133(6) of the Act information has directed the learned Transfer Pricing Officer to exclude these comparables. vi. He submitted that the learned CIT (A) has not even referred to various observations of the learned Transfer Pricing Officer with respect to vii. Therefore, according to him the learned CIT (A) in a stereotype manner without considering the finding of the learned Assessing Officer has decided on inclusion or exclusion of the comparables. Thus, the order of the learned CIT (A) was stated to be unsustainable.

On the issue of applicability of Section 73 as per ground no.5 of the appeal, the learned Departmental Representative vehemently submitted that assessee has traded into securities and has incurred losses on transaction of shares and therefore, it is hit by provisions of Section 73 of the Act.

The learned Authorized Representative supported the order of the learned CIT (A) on the issue of various grounds in the appeal of the learned Assessing Officer. He submitted that i. each of the comparable company was analyzed by the learned CIT (A) and has correctly dealt with its inclusion or exclusion. He submitted that IDC India was appearing in the accept reject matrix of the assessee however the same was inadvertently rejected it was submitted before the learned transfer pricing Officer as per letter dated 10 January 2014 and before the learned CIT – A as per letter dated ninth ii. With respect to the exclusion of IDFC investment advisors Ltd, Motilal Oswal investment advisors private limited and ladder up corporate advisory private limited, he submitted that the learned CIT – A has given his detailed finding that why the above comparable is to be excluded. The learned departmental representative did not challenge the reasons given by the learned CIT – A. iii. With respect to ground no.5 of the appeal, he submitted that the learned CIT (A) has followed the decision of the Hon'ble Bombay High Court on identical facts and circumstances and

On assessee’s appeal, the learned authorized representative did not press ground number 1 and 2 of the appeal regarding T P adjustment confirmed by the learned CIT – A of ₹20,80,796/-.

On the issue of disallowance under Section 14A of the Act, he submitted that though assessee has earned tax-free dividend income of ₹5,20,000/- assessee has stated it has not incurred any expenditure towards earning exempt income for the reason that it is holding only the shares of stock exchange for which it is broking. The learned Assessing Officer without saying anything has invoked the provisions of Section 14A read with Rule 8D of the Rules and worked out the disallowances of ₹48,325/-. He submits that there is no satisfaction recorded by the learned Assessing Officer on the disallowance not offered by the assessee. He otherwise submitted that when the assessee hold shares of the stock exchange, where it is member, there is no expenditure as such incurred by the assessee. Therefore, disallowance under Section 14A of the Act should not have been made. He submitted that the learned CIT (A) did not consider any of the explanation, but has confirmed the disallowance. He referred to Para no.6.2 of the order. Even otherwise

During the course of hearing, an additional ground of appeal was raised by the assessee stating that in the research report service income segment comparability analysis Kshitij Investment company advisories limited has wrongly been considered as comparable. It was submitted that since it has undergone a realignment of business during the assessment year 2010-11, therefore, assessee submits that above ground should be admitted for the purpose of determination of Arm's Length Price. It was further stated that the above ground should be admitted relying on the decisions of the Hon'ble Supreme Court. 020. The learned Departmental Representative vehemently objected to the same stating that

The learned Authorized Representative relied upon the decision of the Hon'ble Bombay High Court in case of CIT vs. Tata Power Solar Systems Ltd. 77 taxmann.com 326, stating that if a comparable has been included mistakenly, assessee has not been barred in law from withdrawing the comparable.

During the course of hearing, the assessee was also directed to explain and submit search process for research support services, which was submitted along with accept/ reject matrix for the same. It was submitted. The assessee was also asked about the comparability of the employee cost ratio between the assessee and IDC Ltd, it was submitted that the assessee employee cost was 34.9% whereas the employee cost of IDC India Ltd is 34.50%. 023. We have carefully considered the rival contention and perused the orders of the lower authorities along with the transfer pricing study report submitted by the assessee as well as further details called for by us. In the appeal of the revenue, the learned AO is aggrieved by the direction of the learned CIT – A to include IDC (India) Ltd, and to exclude IDSA investment advisors Ltd, Ledger up corporate

The learned assessing officer has challenged the order of the learned CIT – A as per ground number 2 – 4 with respect the order of the learned CIT – A that has excluded the IDFC investment advisors Ltd on the basis that it is engaged in the business of providing portfolio management services as a

With respect to ground number 5 wherein the learned CIT – A has deleted the addition/disallowance of ₹ 23,106,114 on account of error trade loss,, the learned CIT – A deleted the disallowance following the decision of the honourable Bombay High Court in case of CIT versus HSBC securities and capital markets India private limited 379 ITR 147. We also found that assessee does not have any share trading income and does not hold any stock in trade of equity except the shares of Bombay stock exchange. It is not also in dispute that losses have arising on account of error trades only. Therefore, provisions of section 73 of the income tax act with respect to the speculation loss does not apply in case of the assessee. Accordingly we do not find any infirmity in the order of the learned CIT – A in deleting the above disallowance. Ground number 5 of the appeal of the learned assessing officer is dismissed.

Accordingly, ITA number 45/M/2018 filed by the learned assessing officer for assessment year 2010 – 11 is dismissed.

Coming to ITA number 72/M/2018 filed by the assessee, ground number 1 and 2 of the appeal with respect to the transfer pricing adjustment of ₹

Ground number 3 of the appeal is against the disallowance confirmed by the learned CIT – A of ₹ 48,325/– under section 14 A of the act read with rule 8D. The assessee has also without prejudice raised an issue that no expenditure having direct and proximate connection with the earning of exempt income has been incurred by the appellant and thus no disallowances of expenditure incurred in relation to earning exempt income is warranted. The claim of the assessee is that assessee has earned tax-free income from shares of Bombay stock exchange Ltd as dividend. Assessee is stockbroker and was holding shares of Bombay stock exchange. On conversion of the Bombay stock exchange membership card of the assessee into the shares under the scheme of 2005 assessee got equity shares. From these equity shares, assessee received the above dividend. Assessee claims that it has not incurred any expenditure for earning the dividend income. On the issue of not incurring any expenditure for earning dividend income , ld AO rejected stating that there is common pool of expenses for earning taxable and exempt income. The learned AO, disallowed ₹ 48,325/– applying rule 8D. On appeal before the learned CIT – A, he upheld the validity of rule 8D following his own order in assessee’s case for earlier year and confirmed the disallowance. Assessee has

As the assessee has raised an additional ground with respect to the transfer pricing adjustment that Kshitij investment advisory Co Ltd is required to be excluded from the comparability analysis. On perusal of the transfer pricing study report, we found that while computing the arm’s-length PLI of the assessee, assessee selected this comparable namely Kshitij investment advisory Co Ltd by prowess database having a margin of 23.46%. Thus, it is assessee’s own comparable. The learned assessing officer/transfer pricing officer also did not dispute the above comparable as assessee selected the same and it was also functionally comparable as found by the lower authorities also. However before us assessee has stated that note number 14 (17) of notes to the accounts of Kshitij investment advisors Co Ltd has realigned its investment advisory activities by the alignment agreement effective from 1 January 2010 wherein Everstone investment advisors private limited would be carrying on all investment advisory services. Thus with effect from

In the result, appeal filed by the assessee is partly allowed.

Thus, for assessment year 2010 – 11, appeal of the AO is dismissed and appeal of the assessee is partly allowed.