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

In ITA No.45/Mum/2018 The learned Assessing Officer is aggrieved by raising following grounds of appeal:-

"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in

"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in excluding comparable namely M/s Ladderup Corporate Advisory Pvt. Ltd. on the basis of functional dissimilarity?"

"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in excluding comparable namely M/s Motilal Oswal Investment Advisory P. Ltd. on the basis of functional dissimilarity?"

"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding the loss on error trade as business loss without appreciating the fact that the provisions of Explanation to Section 73 of the Income Tax Act, 1961 are applicable to the assessee-company which states that "where any part of the business of a company consists of purchase and sale of shares of other companies, such company shall, for the purpose of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”

In ITA No. 72/Mum/2018 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.

In determining the ALP of the International transaction of provision of broking services to CGM UK, the learned CIT(A) has inter alia erred on the following grounds:

The learned CIT(A) erred in disallowing a sum of Rs 48,325 under section 14A of the Act read Rules.

The learned CIT(A) erred in disallowing Rs 46,50,827 being 10 percent of the following expenditure incurred by the Appellant on the ground that the expenses were not entirely incurred for the purpose of the business and were not adequately supported by bills etc:

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.

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

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

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

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.