ADDL CIT RG 4(3), MUMBAI vs. MORGAN STANLEY INDIA COMPANY P. LTD ( FORMERLY KNOWN AS J M MORGAN STANLEY SECURITIES P. LTD), MUMBAI

These are the cross appeals filed by the assessee M/s Morgan Stanley India company P. Ltd (formerly known as JP Morgan Securities Pvt. Ltd) (assessee/ appellant) in

The learned Assessing Officer has raised the following grounds of appeal:-

Assessee has raised the following grounds of appeal:-

The brief fact of the case shows that assessee is a company engaged in the business of stock trading and member of Bombay Stock Exchange and National Stock Exchange. The assessee on 25th October, 2005 filed its return of income at Rs. 82,63,550/-, assessed by the learned Assessing Officer at a total income of Rs. 106,23,02,970/- by the order [ Assessment order] dated 29th December, 2008 passed under Section 143(3) of the of the Income-tax Act, 1961 (the Act).

Assessee has entered into a certain international transaction; the matter was referred to Addl. CIT, Transfer Pricing, 1(4), Mumbai, (the learned Transfer Pricing Officer) for computation of arms length price.

Assessee has earned brokerage commission from associate enterprises in Mauritius amounting to Rs. 21,90,69,377/- and UK amounting to Rs. 35,54,824/-. The assessee aggregated all the transactions and adopted Transactional Net Margin Method (TNMM), as the most appropriate method, benchmarked along with other

Assessee has also made a payment to Morgan Stanley International Inc of overseas support services fees amounting to ₹ 62,408,002/–. This was also benchmarked adopting transactional net margin method as the most appropriate method clubbing it along with other international transactions. Hence, according to assessee it is also at arm’s-length.

These transactions were tested by the learned Transfer Pricing Officer and found that the commission rate earned from the associate enterprises is less than the commission rate earned from independent parties. The learned Transfer Pricing Officer found that in the immediately preceding year adjustments were made on account of these transactions. Therefore, based on the last year, the learned Transfer Pricing Officer made an adjustment to the total income of the assessee with respect to the lower commission income earned by the assessee in case of clearing house transaction as well as DVP[ Delivery versus payment ] trades amounting to Rs. 14,82,08,736/-. The ld TPO passed order on 27/10/2008 u/s 92 CA (3) of the Act proposing upward adjustment of Rs. 148208736/- .

With respect to various support services, the learned transfer pricing officer held that there is no justification and genuineness of the payment Under the said to the associated enterprises and therefore as assessee has not

The same was adjusted by increasing the total income of the assessee along with certain other adjustments and corporate additions. The assessment order was passed on 29th December, 2008.

This assessment order was challenged before the learned Commissioner of income-tax (Appeal). With respect to the addition of Rs. 14,82,08,736/-, on account of brokerage commission earned from Mauritius and UK entity, he rejected the contention of the assessee as under:-

Accordingly, he computed the adjusted brokerage rate of 0.3252% in case of DVP trades and 0.4437% in the clearing house trades for determination of arms length price. For DVP trade ALP was determined at Rs. 1,05,85,329/- compared to the transaction of Rs. 56,68,096/- and in case of clearing house trades, the arms length price is worked out at Rs. 33,15,32,868/- against the brokerage charged of Rs. 21,69,55,132/-. Accordingly, assessee was granted marginal relief. Therefore, assessee is aggrieved with the order of the learned CIT(A) by rejection of the contention of the assessee, rejection of TNMM method, adoption of CUP method, not considering adjustment of 50% brokerage and not accepting that if CUP method is applied than overseas and domestic clients both must be considered.

With respect to the adjustment on account of overseas support services fees, the learned CIT – A that during the assessment year 2004 – 05 the similar issue of disallowance of expenditure pertaining to overseas support services has been examined by him in detail in the adjustment made by the AO was deleted for the reasons discussed in that order dated 2/12/2010. Accordingly he deleted the adjustment on account of the arm’s-length

The learned Assessing Officer is aggrieved as the learned CIT(A) has granted substantial relief to assessee on transfer pricing issues. The learned Assessing Officer is also aggrieved by deletion of adjustment on account of arm’s-length price of the overseas support services.

We first deal with appeal of assessee. The learned Authorized Representative submitted that ground no. 1 is general in nature, therefore, same may be considered in light of other specific grounds. We find that ground no. 1 is general in nature and therefore, no specific arguments were advanced, hence, dismissed.

The learned Authorized Representative submitted that ground no. 1.2 is not pressed, where the TNMM method adopted by the assessee as the most appropriate method was rejected by the learned Transfer Pricing Officer and learned CIT(A) and CUP method was considered as the most appropriate method. In view of this, the arms length price of the international transaction entered into by the assessee are required to be derived only on the basis of CUP method. Hence, ground no. 1.2 is dismissed.

Ground no. 1.3 and 1.4 were claimed by the learned Authorized Representative covered in favour of assessee by the decision of co-ordinate Bench in assessee’s own case.

The learned Departmental Representative referred to his written submission dated 6th December, 2021 and stated that assessee has first adopted the Transactional Net Margin Method as MAM but now, has accepted the CUP as the most appropriate method as the earlier years Tribunal’s decision are on this issue. With respect to granting of deduction to the extent of 50%, he submitted that as greater details are required, for this, it should be restored to the file of the learned Assessing Officer.

We have carefully considered the rival contentions and perused the orders of the lower authorities. Since, the issue has already been decided by the co-ordinate Bench in assessee’s own case for A.Y. 2002-03, which has been

We also find that rule 10 B (1) (a) (ii) of the income tax rules 1962 also allowed adjustment to the prices which could materially affect the price in the open market.

In view of this, ground no. 1.3 of the appeal is partly allowed.

Ground no. 1.4 is with respect to the claim of the assessee that for the comparability analysis, the learned Assessing Officer / Transfer Pricing Officer/ CIT(A) should have considered both overseas and domestic independent clients. This is identical to ground no. 1.4 of the appeal in assessee’s own case for A.Y. 2004-05, which has been dealt with by the co-ordinate Bench at Para 7.2 to 10 of

The learned Departmental Representative submitted that this issue needs verification.

We have carefully considered the rival contentions and find that now assessee has submitted the details, wherein the third party rates are charged by the assessee for clearing house trading is 0.25% and adjustment on account of volume marketing etc. at the rate of 50% makes the arms length price of the brokerage at 0.13%. The assessee has charged the brokerage of 0.14% from Mauritius entity and 0.21 % from UK entity. Therefore, final amount of adjustment is in case of clearing house trades.

With respect to the delivery versus Payment towards third party rates charged by assessee is 0.38% and after deduction of 50% it comes to 0.19%. Assessee has

Ground no. 1.5, ground no. 2 and ground no. 3 were not pressed and hence, dismissed.

This leaves us to ground no. 1.1. The claim of the assessee is that the transaction of charging of brokerage commission income from its associate enterprise is at arm’s length price for the reason that third party brokerages namely Motilal Oswal Securities Limited and ICICI Brokerage Services Limited have charged higher brokerage rates to these associate enterprises. Therefore, there cannot be any adjustment. For this proposition, he referred to page no. 215 to 213 of the Paper Book, wherein Mauritius Associated Enterprises has entered into clearing house transactions with ICICI Brokerage Services Limited at an average commission rate of 0.7% and with Motilal Iswal Securities Limited at an average of 0.08%. He submitted that the rates charged by the assessee from the associated enterprises compared to rates charged by these two entities from associate enterprises are much higher. He submitted that for the clearing house rate the rate of the assessee are 0.14% and 0.21% from Mauritius

The learned Departmental Representative vehemently opposed above submission. He referred to the rates of commission mentioned at page no. 215 which varies from 0.05% to 0.15%. With respect to DVP brokerage rates, he submitted that solitary transaction of very small amount cannot also be relied upon.

We have carefully considered the rival contentions. Here the claim is that when the foreign Associated Enterprises has been charged by other brokerage house rates less than what assessee has charged than the rates charged by the assessee should be considered as arm’s length price. We have verified the data place at page no. 215, 217 of the Paper Book. We find that in case of 19 transactions, the ICICI brokerage Securities Limited on clearing house transaction has charged 0.1% as commission rate and also 0.05%. There is a difference of almost 3 times between

Accordingly, appeal of the assessee is partly allowed.

Now, we come to the appeal of the learned Assessing Officer.

Ground no. 1 and 2 are relating to the Transfer Pricing adjustment.

Ground no. 2, is with respect to the disallowance of Rs. 6,24,08,002/- deleted by the learned CIT(A) on account of overseas support services received from its associate enterprises. Assessee has availed support services from its associate enterprise as per the agreement, where assessee was to reimburse the actual cost incurred by Associated Enterprises. The cost so derived did not include any markup. The learned Assessing Officer disallowed the same stating that assessee has not received any benefit. The learned CIT(A) following his own order for A.Y. 2004- 05 deleted the addition. The order of the learned CIT – A has been upheld by the coordinate bench has been upheld by ITAT. Coordinate bench followed the decision of the ITAT in assessee’s own case for assessment year 2002 – 03 dated 25 February 2020 in ITA number 266/M/2006 wherein as per paragraph number 6 – 7 the addition was deleted. The coordinate bench has also held that the identical issue arose in the case of the assessee’s own case for assessment year 2000 – 01 and 2001 – 02 where the issue is decided in favour of the assessee. In view of

Ground no. 3 is with respect to the disallowance of remuneration paid to Mr. Ashith Kampani under Section 40A(2) of the Act. The disallowance has been made by the learned Assessing Officer holding remuneration is paid in excess of limits permitted by Ministry of law and justice vide letter dated 24th April, 2001. The learned CIT(A) found that remuneration was paid of Rs.89,17,000/- against the approval limit of 53,72,360/-. He further held that Mr. Ashith Kampani has 18 years of experience in the field of capital market. Identical issue arose in case of assessee for A.Y. 2004-05 where learned CIT(A) deleted the addition which was confirmed by ITAT. In view of this, we find no infirmity in the order of the learned CIT(A) in deleting the disallowance which has been confirmed by ITAT in assessee’s own case for earlier years. We also find that the learned Assessing Officer has not given any reason that why the above remuneration is excessive and unreasonable looking to the legitimate needs of the business. Further, the approval granted under the companies Act cannot use for making disallowance under the income tax Act, for the reason that both the enactments have different objects and reasons. Accordingly, ground no. 3 is dismissed.

Ground no. 4 is with respect to the deletion of disallowance of Rs. 78,93,438/- under Section 14A of the Act. The learned Assessing Officer disallowed the above

Ground no.5 is with respect to the disallowance of transaction charges lease line charges and VSAT charges paid by assessee to the Stock exchanges. The assessee paid a sum of Rs.1,72,51,564/-, however, did not deduct any tax at source. The learned Assessing Officer held the same to be fees for technical services under Section 194J of the Act or under Section 194C of the Act. Therefore, he disallowed the sum applying the provisions of Section 40a(ia) of the Act. The learned CIT(A) held that these charges are merely recovery of the cost of infrastructure support and therefore, neither it falls under section 194J of the Act nor under Section 194C of the Act. Therefore, no tax is required to be deducted; hence, he deleted the disallowance. We find that now this issue is squarely covered by the decision of Hon'ble Supreme Court in case of CIT vs. Kotak Securities Limited 67 taxmann.com 356, wherein it has been held that these are the standard

Ground no. 6 and 7 are general in nature, hence, dismissed.

Accordingly, appeal filed by the learned Assessing Officer is dismissed.

In the result, appeal of the learned Assessing Officer is dismissed and appeal of the assessee is partly allowed.