ASST CIT CIR 4(3)(2), MUMBAI vs. MORGAN STANLEY INDIA CO.P.LTD, MUMBAI

These are two appeals and one cross objection in case of the assessee M/s Morgan Stanley India Company Private Limited [ the Assessee/ Appellant] for the same assessment year. is filed by the Asst. Commissioner of Income Tax, Circle 4(3)(2), Mumbai (the learned Assessing Officer), ITA No. 1715/Mum/2016 is filed by Morgan Stanley India Company Private Limited(the assessee/ Appellant) and CO No. 145/Mum/2016 in A.Y. 2011-12 against the assessment order passed by the Asst. Commissioner of Income Tax, Circle 4(3)(2), Mumbai for A.Y. 2011-12 under Section 144C read with section 143(3) of the Income-tax Act, 1961 (the Act) dated 28th January, 2016, where the return of income filed by the assessee on 15th January, 2011 at a total income of ₹328,69,20,549/- was assessed at ₹ 330,57,25,170/-.

The respective grounds of appeal in is under: -

The grounds of appeal in Appeal of ld. AO in is as under:-

The grounds in the Cross Objection No.145/Mum/2016 is as under:-

The learned Assessing Officer noted that the assessee has received dividend income of ₹5,20,000/- and assessee has made a Suo moto disallowance under Section 14A of the Act of ₹4,29,944/-. The learned Assessing Officer examined the correctness of the same and worked out disallowance under rule 8D under Section 14A of the Act of ₹2,30,15,500/- and made the balance disallowance of ₹2,25,85,556/-.

Against the above order, assessee preferred the objection before the learned Dispute Resolution Panel-3, Mumbai who passed direction under Section 144C(5) of the Act on 28th December, 2015. The learned Dispute Resolution Panel on the issue of transfer pricing adjustment held that objection of the assessee with respect to the most appropriate method as Transactional Net Margin Method is not acceptable and upheld the CUP as the most appropriate method as accepted in earlier years. The objection of the assessee with respect to the deduction of marketing cost research support and volume adjustment the learned Dispute Resolution Panel held that the learned Transfer Pricing Officer has already allowed deduction of 29.5% and therefore, no further adjustment is required. The learned Dispute Resolution Panel further held that as in earlier years it has taken a view that weighted mean to take care of all these adjustments and consequently no further adjustment is required. With respect to the approach of the learned Transfer Pricing Officer it did not agree but agreed with the assessee’s contention that the rate of brokerage charged is dependent on volume of the transaction

On the basis of the above direction, the learned Transfer Pricing Officer vide letter dated 19th January, 2016, furnished revised transfer pricing adjustment amounting to ₹17,34,651/-. Based on this, assessment order under Section 144C read with section 143(3) of the Act was passed on 28th January, 2016, wherein transfer pricing adjustment of ₹17,34,561/- and disallowance under Section 14A

Both the parties are aggrieved with the above order and therefore, are in the appeal and cross objection before us.

The learned Authorized Representative submitted the chart on both the appeals and its CO, a paper book containing 503 pages and 5 orders of the co-ordinate Bench in assessee’s own case from A.Y. 2002-03, 04-05, 05-06, 06-07 and 10-11 contained in a 97 page paper book.

The learned Authorized Representative first came to the appeal no. 1715/Mum/2016. The ground no. 1 of the appeal is with respect to the disallowance under Section 14A of the Act at ₹1,70,70,056/-. It was submitted that assessee has earned exempt income of ₹5,20,000/-, Suo moto made disallowance of ₹4,29,944/-. In A.Y. 2010-11 in assessee’s own case the co-ordinate Bench has held that disallowance under Section 14A of the Act cannot exceed the dividend income[ exempt income] . Therefore, according to him if the disallowance is restricted to the exempt income no further arguments were pressed.

The learned Departmental Representative could not show us any reason against the above decision in assessee’s own case.

Assessee did not press ground no.4 of the appeal regarding deduction under Section 80G of the Act and therefore same is dismissed.

With respect to ground no.2, the grievance is that credit for TDS amounting to ₹17,24,18,686/- was claimed but was allowed only to the extent of ₹17,09,87,738/-. Though, nothing is argued before us but we direct the learned Assessing Officer to verify the claim of the assessee, if substantiated before him and decide in accordance with the law.

Accordingly, for A.Y. 2011- 12 filed by assessee is partly allowed.

Coming to the CO of the assessee in CO no.145/Mum/2016, ground no.1 relates to the adjustment of Arm’s Length Price of the brokerage received by the assessee. Assessee has challenged the adjustment of Arm’s Length Price on four counts.

As per ground no. 1.1.1, the assessee challenges that its international transaction are at Arm’s Length

As per ground no. 1.1.2, the claim of the assessee is that at least 50% of deduction should be granted to the assessee on account of research cost and volume cost if CUP method is applied. The learned Authorized Representative submitted that ITAT in A.Y. 2002-03, 2004-05, 2005-06 and 2006-07 has agreed with the contention of the assessee and granted allowance to the extent of 40% of the CUP price.

No other grounds on transfer pricing were pressed.

The learned Departmental Representative agreed that ITAT has granted 40% of the CUP rate on account of research cost and volume adjustment to the assessee.

On careful consideration of the rival contentions, respectfully following the decision of the co-ordinate benches in assessee’s own case, where assessee is granted 40% deduction on account of research cost volume adjustment, we direct the learned Transfer Pricing Officer/ Assessing Officer to grant the

In the result, Cross Objection filed by the assessee is partly allowed.

Now, we come to the appeal of the Revenue in .

The learned Departmental Representative submitted that as per ground no. 1, the learned Assessing Officer has challenged the direction of the learned Dispute Resolution Panel to adopt a weighted average methodology in computing the arithmetic mean of non-Associated Enterprises transaction for arriving at Arm’s Length Price of brokerage charged for clearing house and DVP trades. He submitted that this direction of the learned Dispute Resolution Panel is contrary to the provision of Income Tax Act. He submitted that in paragraph no.5.11, the learned Dispute Resolution Panel following its earlier years direction has directed the learned Transfer Pricing Officer to compute the weighted average brokerage rate which is not in accordance with the law. He referred to Section 92C of the Act and submitted that where more than one price is determined by the most appropriate method, the Arm’s Length Price

The learned Departmental Representative vehemently submitted that the decision of RBS Equity Limited rendered on 14thDecember 2016 is not correct as it has not considered the judicial precedents referred to in order of the ITAT in assessee’s own case for A.Y. 2002-03 at para no.23. According to him, if such decision would have been brought to the notice of the ITAT, the decision of the RBS Securities would not have been the same. Therefore, the decision of RBS securities should not be applied. He further submitted that decision of the RBS securities cannot be applied in case of the assessee where Tribunal has decided the issue in assessee’s own case in several years. He submitted that law of consistency, law of binding precedents clearly suggests that basically the assessee’s own case should be followed.

Countering the argument of the learned Authorized Representative, the learned Departmental Representative vehemently submitted that any decision which is contrary to the law i.e. the express provision of the law laying down the rule in

We have carefully considered the rival contentions and perused the orders of lower authorities.

According to section 92 C (2) provides as under: -

‘Arithmetic mean’ means add up all the values and divide the sum by the number of values. It does not have any scope for any weight to any value. To interpret it in any other manner is violence to plain meaning of the section. It has no reason to include weighted average. The plain meaning rule dictates those statutes are to be interpreted using the ordinary meaning of the language of the statute.

In A.N. Roy Commissioner of Police v. Suresh Sham Singh reported in AIR 2006 SC 2677, the Hon'ble Apex Court held that, "It is now well settled principle of law that, the Court cannot change the scope of legislation or intention, when the language of the statute is plain and unambiguous. Narrow and pedantic construction may not always be given effect to. Courts should avoid a construction, which would reduce the legislation to futility. It is also well settled that every statute is to be interpreted without any violence to its language. It is also trite that when an expression is capable of more than one meaning, the Court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the great consequences of the alternative constructions.

In Adamji Lookmanji & Co. v. State of Maharashtra reported in AIR 2007 Bom. 56, the Bombay High Court held that, when the words of status are clear, plain or unambiguous, and reasonably susceptible to only meaning, Courts are bound to give effect to that meaning irrespective of the consequences. The intention of the legislature is primarily to

In State of Haryana v. Suresh reported in 2007 (3) KLT 213, the Hon'ble Supreme Court held that, "One of the basic principles of Interpretation of Statutes is to construe them according to plain, literal and grammatical meaning of the words. If that is contrary, to or inconsistent with any express intention or declared purpose of the Statute, or if it would involve any absurdity, repugnancy or inconsistency, the grammatical sense must then be modified, extended or abridged, so far as to avoid such an inconvenience, but no further. The onus of showing that the words do not mean what they say lies heavily on the party who alleges it must advance something which clearly shows that the grammatical construction would be repugnant to the intention of the Act or lead to some manifest absurdity."

In Visitor Amu v. K.S.Misra reported in (2007) 8 SCC 594, the Hon'ble Supreme Court held that, "It is well settled principle of interpretation of the statute that it is incumbent upon the Court to avoid a construction, if reasonably permissible on the language, which will render a part of the statute devoid of any meaning or application. The Courts always presume that the legislature inserted every part thereof for a purpose and the legislative intent is that every of the statute should have effect. The legislature is deemed not to waste its words or to say anything in vain and a construction which attributes redundancy to the legislature will not be accepted except for compelling reasons. It is not

In Phool Patti v. Ram Singh reported in (2009) 13 SCC 22, the Hon'ble Supreme Court held that, "9. It is a well-settled principle of interpretation that the court cannot add words to the statute or change its language, particularly when on a plain reading the meaning seems to be clear."

It is also to be noted that in none of the decisions cited by the LD AR, [including the decisions in case of the assessee itself] the provision of proviso of section 92 C (2) were noted at all. Therefore all these decision losses or weaken the binding force of those decisions. This is also mentioned in the commentary kanga & Palkhivala in “The Law and Practice of Income Tax (Eleventh edition) Page 50 at Para no 46 (vii).

On the issues that there are decision of ITAT in case of the assessee in AY 2002-03, allowing weighted average , Ld. DRP allowing the weighted average of the prices and Ld. TPO himself taking it as weighted average in subsequent years are not in accordance with law. To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. Justice Bronson in Pierces v. Delameter (AMY at p.18) said that a judge ought to be wise enough to know that he is fallible and,

Accordingly, we hold that only arithmetic mean of the prices of brokerage should be taken and not weighted average of such prices todetermine Arm’s length price of the International Transaction. Directions of the LD DRP are unsustainable in law.

The Appeal of the LD AO is allowed.

Accordingly both the appeal and CO for AY 2011-12 are disposed of accordingly.