RBS EQUITIES (INDIA) LTD ( FORMERLY KNOWN ABN AMRO ASIA EQUITIES (INDIA) LTD), MUMBAI V. ADDL CIT RG 4(1), MUMBAI

ITA 1236/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9005 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 10-12-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 15-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A V SONDE
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts
• Section: 92C; 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI P.M.JAGTAP, ACCOUNTANT MEMBER. I.T.A. NO. 3077/MUM/2009 ASSESS MENT YEAR : 2003-04. I.T.A. NO. 1236/MUM/2010 ASSESSME NT YEAR : 2005-06. M/S RBS EQUITIES (INDIA) LIMITED, ADDL./ASSTT. COMMISSIONER (FORMERLY KNOWN AS ABN AMRO ASIA VS. OF INCOME-TAX, EQUITIES (INDIA LIMITED), RANGE-4(1), MUMBAI. 83/84, SAKHAR BHAVAN, BEHIND OBEROI TOWERS, NARIMAN POINT, MUMBAI 400 021. PAN AAACH1596D APPELLANT RESPONDENT . APPELLANT BY : SHRI A.V. SONDE. RESPONDENT BY : SHRI AJIT KUMAR JAIN. DATE OF HEARING : 18-07-2012. DATE OF PRONOUNCEMENT : 14-09-2012. O R D E R PER P.M. JAGTAP, A.M. THESE TWO APPEALS FILED BY THE ASSESSEE AGAINST T WO SEPARATE ORDERS OF LEARNED CIT(APPEALS)-19, MUMBAI AND LEARNED CIT(APP EALS)-15, MUMBAI DATED 19-02-2009 AND 01-12-2009 FOR ASSESSMENT YEARS 2003 -04 AND 2005-06 2 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 RESPECTIVELY, INVOLVE SOME COMMON ISSUES AND THE S AME, THEREFORE, HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS SI NGLE CONSOLIDATED ORDER. 2. FIRST WE SHALL TAKE UP THE APPEAL OF THE ASSESSE E FOR ASSESSMENT YEAR 2003-04 BEING ITA NO. 3077/MUM/2009 WHICH IS DIRECTED AGAIN ST THE ORDER OF LEARNED CIT(APPEALS)-19, MUMBAI DATED 19-02-2009. 3. THE COMMON ISSUE INVOLVED IN GROUND NOS. 1 TO 9 OF THIS APPEAL RELATES TO THE ADDITION OF RS.2,13,25,474/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF TRANSFER PRICING ADJUSTMENT. 4. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF BROKING AND TRADING IN SHARES AS A CORP ORATE MEMBER OF BOMBAY STOCK EXCHANGE AND NATIONAL STOCK EXCHANGE. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 28-10-2003 DECLARI NG TOTAL INCOME OF RS.5,23,56,068/-. IN THE SAID YEAR, THE COMPANY HAD PROVIDED THE STOCK BROKING SERVICES IN RESPECT OF CLEARING HOUSE TRADES TO ITS ASSOCIATED ENTERPRISE (AE) M/S ABN AMBRO ASIA (MAURITIUS) LTD. AND HAD EARNED BROK ERAGE FOR THE SAID SERVICES AMOUNTING TO RS.4,22,84,486/- AT THE RATE OF 0.24%. THE INCOME SO EARNED FROM THE PE CONSTITUTED MORE THAN 35% OF THE TOTAL INCOME OF THE ASSESSEE FROM CLEARING HOUSE TRADES. TO DETERMINE THE ARMS LENGTH PRICE O F THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS AE, THE MATTER WAS REFERRED BY THE AO TO THE TPO. THE TPO AFTER RECEIVING REFERENCE U/S 92CA(1) OF THE ACT, PROCEEDED TO COMPUTE THE ARMS LENGTH PRICE IN RESPECT OF THIS I NTERNATIONAL TRANSACTION AND DIRECTED THE ASSESSEE TO FURNISH THE BROKERAGE RATE S OF TOP TEN CLIENTS IN TERMS OF VOLUME, WHICH WAS DONE ON 12-12-2005. A PERUSAL OF THE LIST SHOWED THAT THE 3 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 ASSESSEE HAD TRANSACTED WITH BOTH FIIS AND FIS AND SO IT WAS FURTHER REQUIRED BY THE TPO TO FURNISH DETAILS OF THE TOP 10 FIIS CLIEN TS. THE SAME WAS FURNISHED BY THE ASSESSEE AS REFLECTED AT PARA 3 OF THE TPOS ORDER. BASED ON THE DETAILS FURNISHED BY THE ASSESSEE, IT WAS OBSERVED BY THE TPO THAT TH E AVERAGE BROKERAGE CHARGED FROM TOP 10 FIIS IS 0.408% WHILE THE AVERAGE BROKER AGE CHARGED FROM FIS IS 0.22%. SINCE THERE WAS A WIDE DIFFERENCE BETWEEN TH E BROKERAGE RATE OF .40% CHARGED FROM FIIS AND .22% FROM FIS AND MORE IMPOR TANTLY, THE AE OF THE ASSESSEE BEING A FII, A MUCH LOWER RATE OF BROKERAG E OF .24% WAS CHARGED BY THE ASSESSEE. THE TPO REQUIRED THE ASSESSEE TO EXPLA IN WHY : (A) THE AE, M/S ABN AMRO ASIA (MAURITIUS) LTD. WAS CHAR GED BROKERAGE AT A MUCH LOWER RATE OF .24% THAN THE AVERAGE RATE OF .40% CHARGED FROM ALL THE OTHER FIIS AND (B) WHY THE AVERAGE BROKERAGE RATES OF .40% CHARGED TO THE TOP FIIS SHOULD NOT BE APPLIED TO THE ASSESSEES TRANSACTION S AMOUNTING TO RS.1,766,94,33,449/- (MORE THAN RS.1,766 CRORES) WI TH ITS AE AND APPROPRIATE ADDITION MADE TO THE ASSESSEES INCOME ON ACCOUNT OF SHORT CHARGE OF BROKERAGE. 5. THE ASSESSEE SUBMITTED ITS REPLY DATED 20-1-200 5 WHEREIN THE FOLLOWING POINTS WERE MAINLY RAISED : (A) THE RATE DOES NOT DIFFER ON ACCOUNT OF CLASSIFI CATION OF THE CUSTOMERS, THE RATE DIFFERS ON VARIOUS OTHER FACTORS SUCH AS VOLUM E OF BUSINESS, EXPECTED FUTURE BUSINESS, MARKETING EFFORTS, CREDIBILITY OF CUSTOMER, NEGOTIATION POWER OF THE CUSTOMER, TO CAPTURE MARKET SHARE. ACCORDING LY, THE COMPANY WOULD COMMERCIALLY BE KEEN TO CHARGE A LOWER RATE TO A CU STOMER HAVING LOW VOLUME OF BUSINESS IN ANTICIPATION OF FUTURE BUSINE SS, BUILD CLIENT RELATIONSHIP. (B) THE TURNOVER FROM THE AE CONSTITUTED 42.7% OF T HE TOTAL TURNOVER AND ITS TOTAL TURNOVER AND THE VOLUME OF BUSINESS PROCURED IS NOT COMPARABLE WITH THAT FROM THIRD PARTIES. (C) THE AE OF THE COMPANY HAS SNOT USED THE SERVIC ES OF ANY OTHER BROKER IN INDIA AND GIVEN THEIR ENTIRE BUSINESS TO COMPANY ON AN EXCLUSIVE BASIS. 4 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 (D) EVEN THE COMPARISON WITH THIRD PARTY BROKERAGE RATES THEN DUE CONSIDERATION SHOULD BE GIVEN TO THE VOLUME OF BUSI NESS TRANSACTED AND THE FACT THAT COMPANY ACTS AS AN EXCLUSIVE BROKERAGE, (E) IT ALSO CITED OECD GUIDELINES TO HIGHLIGHT TH AT CUP WAS NOT APPLICABLE BECAUSE OF DIFFERENCES BETWEEN AE AND THIRD PARTY. (F) IT CANVASSED ITS CASE FOR APPLICATION OF TNMM AS THIS METHOD HAS RELAXED STANDARD OF COMPARABILITY. IN VIEW OF THE ABOVE SUBMISSIONS AND BASED ON ITS TNMM USING NET PROFIT MARGIN (NPM), THE ASSESSEE ARGUED THAT THE WEIGHTE D AVERAGE NPM EARNED BY 14 BROADLY INDEPENDENT COMPANIES BASED ON THREE YEARS DATA RANGES FROM 1.3% TO 25.22% WITH AN ARITHMETICAL MEAN OF 11.60% WHILE I T HAS EARNED THE NPM OF 24.87% DURING THE FINANCIAL YEAR WHICH IS AT ARMS LENGTH. 6. THE TPO CONSIDERED/EXAMINED THE CONTENTIONS / OB JECTIONS RAISED BY THE ASSESSEE AT LENGTH AND HELD AS UNDER : (A) VOLUME DIFFERENCE : THAT THE VOLUME DOES HAVE AFFECT ON THE BROKERAG E RATE, BUT IN THIS TRADE, AS IN ANY OTHER TRADE, THE SE VOLUMES HAVE TO BE COMMITTED VOLUMES AND THE APPELLANT HAS NOT BEEN ABLE TO SUBSTANTIATE THAT ITS AE HAD COMMITTED ANY VOLUME OF TRANSACTION WITH IT. NO AGREEMENT HAS BEEN SIGNED BETWEEN THE ASSESSEE AND ITS AE AND NO DOCUMENTARY EVIDENCE HAS BEEN PRODUCED. THE TPO COL LECTED THE DATA OF THE EARLIER YEAR AND FOUND THAT THE COMPANY HAD IN THE IMMEDIATELY PRECEDING YEAR HAD 23.77% OF ITS TRANSACTIONS WITH ITS AE AND THERE IS NOTHING TO SUGGEST THAT IT WOULD COMMIT LARGE VOLUM ES TO THE ASSESSEE. ACCORDING TO THE TPO, IT REMAINS ACT OF SHEER CHAN CE THAT THE AE HAD A LARGE VOLUME OF BUSINESS WITH THE ASSESSEE IN THE Y EAR UNDER CONSIDERATION. THE TPO FURTHER HELD THAT GIVEN THE FACT THAT THE ASSESSEE HAD NO KNOWLEDGE THAT ITS AE WOULD GIVE ITS SUBSTAN TIAL VOLUME OF BUSINESS TO IT, THE LOWER RATE OF BROKERAGE OF 24 B ASIS POINTS CHARGED FROM THE VERY BEGINNING OF THE FINANCIAL YEAR, FROM ITS AE, IRRESPECTIVE OF THE VOLUMES, WAS A DELIBERATE ACT ON ACCOUNT OF THE SP ECIAL RELATIONSHIP. AS SUCH, THE TPO HELD THAT PROVIDING VOLUME ADJUSTMENT / DISCOUNT ON THE FACTS OF THE CASE WITHOUT ANY COMMITTED VOLUMES C ANNOT BE ALLOWED. 5 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 (B) TYPES OF TRADES : THE TPO HELD THAT TYPES OF TRADES WERE FVP AND N ON- DVP, THE COMPANY HAD TRANSACTIONS WITH AE AND INDEP ENDENT FOREIGN ENTITIES IN BOTH THE SEGMENTS, THEREFORE, THE BROKE RAGE EARNED FOR BOTH THE TRADES CAN BE COMPARED SEPARATELY AND THESE TWO TYP ES OF TRADES, IN NO CASE REDUCES THE EFFECTIVENESS OF THE APPLICATION O F THE CUP. (C) CLIENT RELATIONSHIP / CLIENT TYPE : THE TPO HELD THAT THIS GENERALIZED ASSERTION IS NOT EXPLAINED IN THE REPORT AS TO HOW THE SAME AFFECTS THE PRICING OF THE SERVICES. (D) MARKETING FORCES AND COMPETITION : THE TPO HELD THAT ADJUSTMENTS WOULD BE MADE AS THE FIIS WERE TRADING THROUGH THE COMPAN Y AND OTHER BROKERS ARE READY TO PAY THE HIGHER BROKERAGE THAN PAID BY THE AES. THE PAYMENT OF SUCH BROKERAGE OF FIIS TAKES INTO CONSIDERATION, THE COMPETITIVE RATES OFFERED BY THE OTHER BROKERS AND THE RATES PAID BY THEM ARE DETERMINED BY THE MARKET FORCES. THE COMPANY IS UNDERTAKING TR ADES FOR AES AND FOREIGN FIIS, WHO ARE OPERATING FROM THE SIMILAR GE OGRAPHICAL REGIONS, WITHOUT BEING PRESENT IN INDIA, THEIR PERCEPTION OF THE INDIAN MARKET IN TERMS OF RISKS AND REWARDS WOULD BE THE SAME. CONSI DERING ALL THESE ABOVE FACTORS, THE TPO WAS OF THE VIEW THAT THERE W AS NO MATERIAL DIFFERENCE AND SO REJECTED THE CONTENTION OF THE AP PELLANT THAT CIP METHOD WAS NOT THE MOST APPROPRIATE. THE TPO FURTHER WAS O F THE VIEW THAT, IN THIS CASE, THE INTERNAL COMPARABLES AREA AVAILABLE AND SINCE THE DATE MAINTAINED BY THE APPELLANT COMPANY FOR SUCH UNCONT ROLLED TRANSACTION WOULD BE MORE COMPLETE AND RELIABLE THAN THE DATA O F INDEPENDENT ENTERPRISES SELECTED AS COMPARABLES BY THE APPELLAN T OF TNMM IS ADOPTED. THE TPO IN ITS ORDER HAS TAKEN .408% AS TH E ARMS LENGTH RATE BEING AVERAGE BROKING RATE IN CASE OF FOREIGN CLIEN TS (FIIS) IN RESPECT OF CH TRADES AND THEREAFTER, PROVIDED ADJUSTMENTS. (E) MARKETING & SALES FUNCTION : THE TPO HAS EXAMINED THE ISSUE IN DETAIL IN PAGES 10, 11 AND 12 OF HER ORDER. SHE HAS MADE A N ADJUSTMENT OF 0.408% AS PER THE PROVISIONS OF SECTION 10B(1)(A)(I I) AND CAME TO AN ARMS LENGTH BROKERAGE RATE OF 0.36%. SINCE THE APP ELLANT HAD SHOWN .240% AS THE BROKERAGE RATE., THEREFORE, THE ADDITI ON TO INCOME PROPOSED BY TPO WAS .120% WHICH IN MONETARY TERMS CAME TO RS .2,13,25,474/-/-. 6 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 7. THE ADDITION AS PROPOSED BY THE TPO ABOVE WAS INCORPORATED BY THE AO AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO TH E APPELLANT. THE AO, AFTER TAKING INTO ACCOUNT THE SUBMISSIONS MADE, WAS OF THE VIEW THAT NO ADDITIONAL FACTS OR FIGURES WERE BROUGHT BEFORE IT AND IT WAS MERELY A REPETITION OF THE SUBMISSIONS MADE BEFORE THE TPO, WHICH WERE DULY CONSIDERED. AS SUCH HE CARRIED OUT UPWARD ADJUSTMENT OF RS.2,13,25,474/- ON THIS ISSUE AND MA DE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE TO THAT EXTENT IN THE ASSESSMENT CO MPLETED U/S 143(3) VIDE AN ORDER DATED 22-02-2006. 8. AGAINST THE ORDER PASSED BY THE AO U/S 143(3), A N APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) DISPUT ING, INTER ALIA, THE ADDITION MADE BY THE AO BY WAY OF TP ADJUSTMENT. IT WAS SUBM ITTED ON BEHALF OF THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) THAT TNMM METHOD AS APPLIED BY IT FOR TRANSFER PRICING STUDY WAS MOST APPROPRIATE METHOD AND THE TPO WAS NOT JUSTIFIED IN ADOPTING CUP METHOD FOR DETERMINING THE ARMS LE NGTH BROKERAGE RATE OF CH RATES. WITHOUT PREJUDICE TO THIS MAIN ARGUMENT, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT EVEN IF CUP METHOD WAS TO BE CONSIDER ED AS THE MOST APPROPRIATE METHOD, VOLUME ADJUSTMENTS SHOULD HAVE BEEN PROVIDE D BY THE TPO. IT WAS SUBMITTED THAT THE ASSESSEE COMPANY PROVIDED EXECU TION ONLY SERVICES TO ITS AE WHILE THE SERVICES RENDERED TO THE FIIS WERE FULL BROKERAGE SERVICES. IT WAS SUBMITTED THAT THE FULL BROKERAGE SERVICES ENTAILED MARKETING, RESEARCH COORDINATING, MANAGEMENT MEETING, ORDER EXECUTION E TC. AND THAT IS WHY THE RATE CHARGED TO THE AE WAS LESS. IT WAS FURTHER SUBMITTE D THAT THERE WAS AN ERROR IN THE WORKING OF THE TPO INASMUCH AS SIMPLE AVERAGE OF BR OKERAGE RATES WAS TAKEN INTO CONSIDERATION BY HIM FOR DETERMINING THE ARMS LENG TH BROKERAGE RATE INSTEAD OF WEIGHTED AVERAGE. IT WAS ALSO SUBMITTED THAT THE BR OKERAGE RATES CHARGED TO INDIAN FINANCIAL INSTITUTIONS SHOULD HAVE TAKEN INTO ACCOU NT BY THE TPO AS THE FUNCTIONS 7 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 AND RISK WERE SIMILAR. IT WAS POINTED OUT THAT IF T HIS HAD BEEN DONE, THE AVERAGE BROKERAGE RATE WOULD HAVE BEEN 0.316% INSTEAD OF 0. 40% AS WORKED OUT BY THE TPO. IT WAS CONTENDED THAT THE TPO COMMITTED A MIST AKE IN ASSUMING THAT MARKET AND SALES EFFORTS WERE REQUIRED ALSO IN RESPECT OF TRANSACTIONS EXECUTED FOR AES AND THEREBY GRANTING A LESSER ADJUSTMENT ON ACCOUNT OF MARKETING AND SALES EFFORT AT 0.048% AS AGAINST 0.07% AS CLAIMED BY THE ASSESSEE. IT WAS POINTED OUT THAT THE TOTAL MARKETING COST OF RS.2,80,37,910/- CONSIDERED BY THE TPO WHILE COMPUTING THE MARKETING COST ADJUSTMENT COMPRISED OF THE SALA RY AND RELATED COST OF TWO EMPLOYEES WHOSE ROLE WAS RESTRICTED ONLY TO INTERAC TING AND MAINTAINING RELATIONSHIP WITH THE THIRD PARTY CLIENTS. ACCORDIN G TO THE ASSESSEE, THE TPO ALSO COMMITTED A MISTAKE IN NOT ALLOWING ADJUSTMENTS ON ACCOUNT OF RESEARCH FUNCTION UNDERTAKEN BY THE ASSESSEE IN PROVIDING SERVICES TO THIRD PARTY CLIENTS FOR ITS CH TRADES. IT CLAIMED THAT SUCH ADJUSTMENT SHOULD HAVE BEEN ALLOWED AT 0.175% AS PER THE WORKING FURNISHED. 9. THE ABOVE SUBMISSIONS MADE ON BEHALF OF THE ASSE SSEE BEFORE HIM WHILE CHALLENGING THE TP ADJUSTMENTS WERE NOT FOUND ACCEP TABLE BY THE LEARNED CIT(APPEALS). ACCORDING TO HIM, CUP METHOD BEING TH E TRADITIONAL METHOD WAS MOST DIRECT AND RELIABLE FOR THE TRANSFER PRICING A NALYSIS. HE HELD THAT EVEN THE FACTS AND CIRCUMSTANCES OF THE ASSESSEES CASE FULLY JUST IFIED ADOPTION OF CUP METHOD FOR TP ANALYSIS. AS REGARDS THE ADJUSTMENT SOUGHT B Y THE ASSESSEE ON ACCOUNT OF VOLUME, THE LEARNED CIT(APPEALS) HELD THAT THE VOL UME FACTOR WAS OF NO IMPORTANCE KEEPING IN VIEW THE NATURE OF ASSESSEES BUSINESS AND, THEREFORE, THE TPO WAS FULLY JUSTIFIED IN NOT ALLOWING ANY VOLUME ADJUSTMENT IN THE FACTS OF THE ASSESSEES CASE. AS REGARDS THE CLAIM OF THE ASSESS EE FOR ADOPTION OF WEIGHTED AVERAGE ARITHMETICAL MEAN INSTEAD OF SIMPLE AVERAGE ARITHMETICAL MEAN, THE LEARNED CIT(APPEALS) HELD THAT WHAT IS CONTEMPLATED IN THE STATUTE IS ADOPTION OF 8 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 ARITHMETIC MEAN ONLY AND THE CONCEPT OF WEIGHTED AV ERAGE IS NOT RECOGNIZED BY THE STATUTE. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT THE BROKERAGE RATE CHARGED TO INDIAN FIS SHOULD HAVE BEEN TAKEN INTO ACCOUNT BY T HE TPO FOR COMPARABILITY ANALYSIS, THE LEARNED CIT(APPEALS) HELD THAT THE TP O HAD MAINTAINED HIGH STANDARD OF COMPARABILITY BY TAKING INTO CONSIDERATION THE T OP 10 FIS WHICH WERE SIMILARLY PLACED. AS REGARDS THE ADJUSTMENT OF 0.67% CLAIMED BY THE ASSESSEE ON ACCOUNT OF MARKETING AND SALES EFFORTS AS AGAINST 0.48% ALLOWE D BY THE TPO, THE LEARNED CIT(APPEALS) HELD THAT THIS CLAIM OF THE ASSESSEE WAS NOT SUPPORTED BY ANY EVIDENCE OR MATERIAL. HE HELD THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TPO WAS VERY FAIR AND REASONABLE IN ALLOWING SUCH A DJUSTMENT AT 0.48%. REGARDING THE CLAIM OF THE ASSESSEE FOR ADJUSTMENT ON ACCOUNT OF RESEARCH FUNCTION UNDERTAKEN FOR PROVIDING SERVICES TO THIRD PARTY CL IENTS, THE LEARNED CIT(APPEALS) HELD THAT IT WAS BASED MERELY ON ASSUMPTION AND EST IMATE AND THERE WAS NO BASIS TO JUSTIFY THE SAME. HE, THEREFORE, OVERRULED ALL THE OBJECTIONS RAISED BY THE ASSESSEE WHILE CHALLENGING THE TP ADJUSTMENT MADE BY THE AO/ TPO AND CONFIRMED THE ADDITION MADE TO THE TOTAL INCOME OF THE ASSESSEE B Y WAY OF SUCH ADJUSTMENT. 10. THE LEARNED COUNSEL FOR THE ASSESSEE, AT THE OU TSET, STRONGLY OBJECTED TO THE CUP METHOD ADOPTED BY THE TPO FOR COMPARABILITY AN ALYSIS. HE CONTENDED THAT TNMM APPLIED BY THE ASSESSEE FOR COMPARABILITY ANAL YSIS WAS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES O F THE CASE AND THE AO/TPO WAS NOT JUSTIFIED IN CHANGING THE SAME. WITHOUT PREJUDI CE TO THIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT EVEN IF CUP METHOD IS TO BE ADOPTED AS MOST APPROPRIATE METHOD FOR COMPARABILITY ANALYSIS, CERTAIN ADJUSTMENTS HAVE TO BE MADE AS PER RULE 10B(1)(A)(II). HE SUBMITTED THAT T HE AO WORKED OUT THE ARITHMETICAL MEAN OF BROKERAGE RATE EARNED BY THE A SSESSEE FROM TOP TEN FIIS BY TAKING SIMPLE AVERAGE WHICH IS NOT CORRECT. HE CONT ENDED THAT ARITHMETIC MEAN 9 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 SHOULD HAVE BEEN WORKED OUT BY THE AO ON THE BASIS OF WEIGHTED AVERAGE TO MAKE A FAIR COMPARISON. HE SUBMITTED THAT SIMILARLY ADJU STMENT FOR MARKETING FUNCTION AT 0.073%, FOR RESEARCH FUNCTION 0.175% AND FOR VOLU ME AT 0.042% AS CLAIMED BY THE ASSESSEE SHOULD HAVE BEEN ALLOWED BY THE AO/T PO. HE SUBMITTED THAT THE AO, HOWEVER, ALLOWED ADJUSTMENT FOR MARKETING FUNCT ION ONLY TO THE EXTENT OF 0.048% AND AFTER MAKING THE SAID ADJUSTMENT TO SIMP LE AVERAGE ARITHMETIC MEAN OF 0.408% WORKED OUT THE ARMS LENGTH BROKERAGE RATE A T 0.36%. HE SUBMITTED THAT SINCE THE BROKERAGE RATE CHARGED BY THE ASSESSEE C OMPANY TO ITS AE WAS 0.24%, TP ADJUSTMENT WAS MADE AT 0.12% BEING THE DIFFERENC E BETWEEN ARMS LENGTH BROKERAGE RATE DETERMINED BY THE TPO AND BROKERAGE RATE ACTUALLY CHARGED BY THE ASSESSEE TO ITS AE. HE CONTENDED THAT IF THE WEIGHT ED AVERAGE BROKERAGE RATE AS WORKED OUT BY THE ASSESSEE AT 0.392% IS TAKEN AND A DJUSTMENT FOR MARKETING FUNCTION, RESEARCH FUNCTION AND DIFFERENCE IN VOLUM ES AS CLAIMED BY THE ASSESSEE ARE MADE, THE ARMS LENGTH BROKERAGE RATE WOULD COM E TO 0.102% AND THE SAME BEING LOWER THAN THE BROKERAGE RATE OF 0.24% CHARGE D BY THE ASSESSEE TO ITS AE, NO TP ADJUSTMENT IS ACTUALLY REQUIRED TO BE MADE. 11. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUP PORTED THE ACTION OF THE AUTHORITIES BELOW IN ADOPTING CUP METHOD FOR THE PU RPOSE OF COMPARABILITY ANALYSIS. HE SUBMITTED THAT CUP IS THE MOST APPROPR IATE METHOD TO DETERMINE THE ALP IN THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE S CASE ESPECIALLY WHEN INTERNAL CUP WAS AVAILABLE. AS REGARDS THE VARIOUS ADJUSTMEN TS CLAIMED BY THE ASSESSEE, HE SUBMITTED THAT VOLUME OF 10 FIIS TAKEN BY THE TPO F OR COMPARABILITY ANALYSIS WAS CLOSE TO THE VOLUME OF TRANSACTIONS OF ASSESSEE COM PANY WITH ITS AE AND, THEREFORE, NO ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN VOLUME NEED TO BE ALLOWED. AS REGARDS THE ADJUSTMENT CLAIMED BY THE ASSESSEE F OR MARKETING AND RESEARCH FUNCTION, HE SUBMITTED THAT SUCH ADJUSTMENTS CAN BE MADE AS PER /RULE 10B(1)(A)(II) 10 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 ONLY IF THE ASSESSEE CAN SUPPORT AND SUBSTANTIATE I TS CLAIM FOR SUCH ADJUSTMENTS BY PRODUCING RELEVANT EVIDENCE AND SUBJECT TO VERIFICA TION BY THE AO OF THE SAID EVIDENCE AS WELL AS OF THE WORKING MADE BY THE ASS ESSEE ON THE BASIS THEREOF. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. AS REGARDS THE METHOD TO BE ADO PTED FOR COMPARABILITY ANALYSIS, WE AGREE WITH THE CONTENTION OF THE LEARN ED DR THAT CUP IS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES O F THE CASE INCLUDING ESPECIALLY THE FACT THAT INTERNAL CUPS ARE AVAILABLE FOR THE C OMPARABILITY ANALYSIS. WE, THEREFORE, FIND NO INFIRMITY IN THE ACTION OF THE A O/TPO IN ADOPTING CUP METHOD FOR COMPARABILITY ANALYSIS INSTEAD OF TNMM APPLIED BY THE ASSESSEE. 13. AS REGARDS THE CLAIM OF THE ASSESSEE FOR ADOPTI NG WEIGHTED AVERAGE ARITHMETIC MEAN OF BROKERAGE RATE OF 10FIIS AS AGAI NST SIMPLE AVERAGE ARITHMETIC MEAN OF SUCH RATES TAKEN BY THE TPO, WE FIND THAT T HE FIRST PROVISO TO SECTION 92C SPEAKS ABOUT TAKING ARITHMETIC MEAN OF MORE THAN ON E ALPS DETERMINED BY THE MOST APPROPRIATE METHOD. THERE IS, HOWEVER, NOTHING TO SUGGEST THAT VOLUME OF THE RELEVANT TRANSACTIONS ALSO HAS TO BE TAKEN INTO CON SIDERATION FOR THE PURPOSE OF COMPUTING SUCH ARITHMETIC MEAN. WE, THEREFORE, FIN D IT DIFFICULT TO ACCEPT THE STAND OF THE ASSESSEE THAT WEIGHTED AVERAGE ARITHMETIC ME AN SHOULD BE TAKEN AND NOT THE SIMPLE AVERAGE ARITHMETIC MEAN. IN OUR OPINION, THE LEARNED CIT(APPEALS), THEREFORE, HAS RIGHTLY REJECTED THE STAND OF THE AS SESSEE ON THIS ISSUE HOLDING THAT THERE IS NO PROVISION IN THE STATUTE WHICH ALLOWS T AKING WEIGHTED AVERAGE ARITHMETIC MEAN FOR DETERMINATION OF ARMS LENGTH P RICE. 14. AS REGARDS THE ADJUSTMENTS CLAIMED BY THE ASSES SEE FOR MARKETING FUNCTION, FOR RESEARCH FUNCTIONS AND FOR DIFFERENCES IN VOLUM ES, IT IS OBSERVED THAT THE 11 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 RELEVANT DETAILS AND WORKING HAVE BEEN FURNISHED BY THE ASSESSEE AT PAGE NO. 161 OF THE PAPER BOOK IN SUPPORT OF ADJUSTMENT FOR MARK ETING FUNCTION, PAGE NO.200 AND 211 OF THE PAPER BOOK IN SUPPORT OF ADJUSTMENT FOR RESEARCH FUNCTION AND PAPER BOOK PAGE NO. 135, 139, 144 AND 158 IN SUPPORT OF A DJUSTMENT FOR DIFFERENCE IN VOLUMES. AS RIGHTLY CONTENDED BY THE LEARNED COUNSE L FOR THE ASSESSEE COMPARABLE UNCONTROLLED PRICE IS REQUIRED TO BE ADJUSTED AS PE R RULE 10B(1)(A)(II) TO ACCOUNT FOR DIFFERENCE, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION WHICH COULD MATERIALLY AFF ECT THE PRICE IN THE OPEN MARKET. HOWEVER, AS CONTENDED BY THE LEARNED DR, A CASE HAS TO BE MADE BY THE ASSESSEE FOR ALLOWING SUCH ADJUSTMENT DULY SUPPORTED BY RELE VANT FACTS AND FIGURES AS WELL AS DOCUMENTARY EVIDENCE. HE HAS CONTENDED THAT SUCH DETAILS AND DOCUMENTS, HOWEVER, NEED TO BE VERIFIED BY THE AO/TPO AND IF T HE MATTER IS SENT BACK TO THE AO OR THE TPO FOR SUCH VERIFICATION, HE HAS NO OBJE CTION. SINCE THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO AGREED WITH THIS PROPOSITION, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO CONSIDER THE CLAIM OF THE ASSESSEE FOR ADJUSTMENT FOR MARKETING FUNCTION, RESEARCH FUNCTIO N AND DIFFERENCES IN VOLUMES AFRESH ON MERITS AFTER VERIFYING THE DETAILS AND DO CUMENTARY EVIDENCE TO BE FURNISHED BY THE ASSESSEE IN SUPPORT. THE CLAIM OF THE ASSESSEE ON THIS ISSUE IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTIC AL PURPOSES. 15. THE ISSUE RAISED IN GROUND NO.10 RELATES TO THE DISALLOWANCE OF RS.2,58,801/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APP EALS) ON ACCOUNT OF ASSESSEES CLAIM FOR WRITE OFF OF IRRECOVERABLE LOAN. 16. FROM THE DETAILS OF OTHER OPERATING EXPENSES DE BITED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT, IT WAS NOTICED BY THE AO THA T THE ASSESSEE HAS CLAIMED ADVANCES WRITTEN OFF AMOUNTING TO RS.2,58,801/-. WH ILE JUSTIFYING THE SAID CLAIM, 12 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 THE ASSESSEE SUBMITTED THAT HOUSING LOAN WAS GIVEN TO ONE OF ITS EMPLOYEES AND SINCE THE SAID EMPLOYEE HAD BECOME UNTRACEABLE, THE LOAN GIVEN TO HIM WAS WRITTEN OFF AS IRRECOVERABLE. IT IS, HOWEVER, OBSERVED BY THE AO THAT THERE WAS NOTHING BROUGHT ON RECORD BY THE ASSESSEE TO SHOW ANY EFFOR TS MADE TO RECOVER THE LOAN FROM THE CONCERNED EMPLOYEE OR FROM THE SECURITY, I F ANY, WHICH WAS TAKEN WHILE GIVING THE SAID LOAN. HE, THEREFORE, HELD THAT THE LOSS ON ACCOUNT OF THE SAID LOAN BECOMING IRRECOVERABLE HAD NOT BEEN INCURRED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION AND THE SAME WAS DISALLOWED BY HIM. O N APPEAL, THE LEARNED CIT(APPEALS), CONFIRMED THE ACTION OF THE AO ON THI S ISSUE FOR THE SAME REASONS AS GIVEN BY THE AO. 17. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNE D COUNSEL FOR THE ASSESSEE HAS AGREED THAT THE AMOUNT IN QUESTION CANNOT BE ALLOWE D AS BAD DEBTS AS THE CONDITION STIPULATED IN SECTION 36(1)(VII) READ WITH SECTION 37(2) IS NOT SATISFIED. HE, HOWEVER, HAS CONTENDED THAT THE SAME IS ALLOWABLE A S BUSINESS LOSS. HOWEVER, AS RIGHTLY HELD BY THE AUTHORITIES BELOW IN THIS REGAR D, NOTHING HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE TO SHOW THAT THE LOSS AS A R ESULT OF THE LOAN GIVEN TO THE EMPLOYEE BECOMING IRRECOVERABLE WAS ACTUALLY INCURR ED IN THE YEAR UNDER CONSIDERATION AND THIS BEING SO, WE ARE OF THE VIEW THAT THE AMOUNT IN QUESTION CANNOT BE ALLOWED EVEN AS BUSINESS LOSS IN THE YEAR UNDER CONSIDERATION. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) CONFIRMING THE DISALLOWANCE MADE BY THE AO ON THIS ISSUE AND DISMI SS GROUND NO. 10 OF THE ASSESSEES APPEAL. 18. AS REGARDS GROUND NO. 11, IT IS OBSERVED THAT T HE ISSUE RAISED THEREIN RELATING TO CHARGING OF INTEREST U/S 234D IS SQUARELY COVERE D BY EXPLANATION 2 TO SECTION 13 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 234D INSERTED BY THE FINANCE ACT, 2012 WITH RETROSP ECTIVE EFFECT FROM 01-06-2003 WHEREBY IT IS CLARIFIED THAT THE PROVISIONS OF SECT ION 234D SHALL ALSO APPLY TO AN ASSESSMENT YEAR COMMENCING BEFORE THE FIRST DAY OF JUNE, 2003 IF THE PROCEEDINGS IN RESPECT OF SUCH ASSESSMENT YEAR IS COMPLETED AFT ER THE SAID DATE. SINCE THE SAID EXPLANATION IS CLEARLY APPLICABLE IN THE CASE OF TH E ASSESSEE, WE UPHOLD THE LEVY OF INTEREST U/S 234D AND DISMISS GROUND NO. 11 OF THE ASSESSEES APPEAL. 19. NOW WE SHALL TAKE UP THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2005-06 BEING ITA NO. 1236/MUM/2010 WHICH IS DIRECTED AGAIN ST THE ORDER OF LEARNED CIT(APPEALS)-15, MUMBAI DATED 01-12-2009. 20. THE COMMON ISSUE INVOLVED IN GROUND NO. 1 TO 8 OF THIS APPEAL RELATES TO THE ADDITION OF RS.5,88,62,098/- MADE BY THE AO AND CON FIRMED BY THE LEARNED CIT(APPEALS) BY WAY OF TP ADJUSTMENT. 21. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS AGREED BY THE LEARNED REPRES ENTATIVES OF BOTH THE SIDES, THIS ISSUE INVOLVED IN ASSESSMENT YEAR 2005-06 IS SIMILA R TO THE ONE INVOLVED IN THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2003-04 WHICH HAS BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDER. AS ALL THE MATERIAL FACTS RELEVANT TO THIS ISSUE AS INVOLVED IN THE YEAR UNDER CONSIDERATION AS WELL AS THE ARGUMENTS OF BOTH THE SIDES ARE SIMILAR TO THAT OF ASSESSMENT YEAR 2003-0 4, WE FOLLOW OUR DECISION RENDERED IN ASSESSMENT YEAR 2003-04 AND RESTORE THE ISSUE RELATING TO TP ADJUSTMENT TO THE FILE OF THE AO WITH A DIRECTION T O CONSIDER THE CLAIM OF THE ASSESSEE FOR ADJUSTMENT FOR MARKETING FUNCTION, RES EARCH FUNCTION AND DIFFERENCES IN VOLUMES ON MERIT AFRESH AFTER VERIFYING THE DET AILS AND DOCUMENTARY EVIDENCE TO BE FURNISHED BY THE ASSESSE. THE CLAIM OF THE ASSES SEE ON THIS ISSUE IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 14 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 22. THE ISSUE RAISED IN GROUND NO.9 RELATES TO THE DISALLOWANCE OF RS.72,116/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APP EALS) U/S 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962. 21. ACCORDING TO THE AO, THE ASSESSEE HAD MADE INVE STMENT IN SHARES, THE DIVIDEND INCOME ON WHICH WAS EXEMPT FROM TAX. HE, T HEREFORE, HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE SAID INVESTMENT WAS LIABLE TO BE DISALLOWED U/S 14A. ACCORDINGLY, SUCH EXPENDITU RE INCURRED BY THE ASSESSEE WAS WORKED OUT BY HIM AT RS.72,116/- BY APPLYING RU LE 8D AND DISALLOWANCE TO THAT EXTENT WAS MADE BY HIM U/S 14A. ON APPEAL, THE LEARNED CIT(APPEALS) CONFIRMED THE SAID DISALLOWANCE. 24. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS HELD BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. 234 CTR (BOM) 1 , RULE 8D IS APPLICABLE PROSPECTIVELY FROM ASSESSMENT YEAR 2008-09 AND FOR THE YEARS PRIOR TO 2008-09, THE DISALLOWANCE U/S 14A IS REQUIRED TO BE MADE ON SOME REASONABLE BASIS. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO RECOMPUTE THE DISALLOWANCE TO BE MADE U/S 14A ON SOME REASONABLE BASIS. WE ALSO DIRECT THE AO TO CONSIDER THE STAND OF THE ASSESSEE THAT NO EXPEN DITURE WAS ACTUALLY INCURRED FOR THE PURPOSE OF MAKING INVESTMENT IN SHARES SO AS TO WARRANT ANY DISALLOWANCE U/S14A. GROUND NO. 9 OF THE ASSESSEES APPEAL IS AC CORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 25. AS REGARDS GROUND NO. 10, THE LEARNED COUNSEL F OR THE ASSESSEE HAS AGREED THAT THE ISSUE RAISED THEREIN RELATING TO LEVY OF I NTEREST U/S 234D IS TO BE DECIDED AGAINST THE ASSESSEE AS THE PROVISIONS OF SECTION 2 34D ARE CLEARLY APPLICABLE IN 15 ITA NO.3077/MUM/2009 ITA NO. 1236/MUM/2010 ASSESSMENT YEAR 2005-06. ACCORDINGLY, WE DECIDE THI S ISSUE AGAINST THE ASSESSEE AND DISMISS GROUND NO. 10 OF THE ASSESSEES APPEAL. 26. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 14 TH DAY OF SEPT., 2012. SD/- (D.K. AGARWAL) JUDICIAL MEMBER SD/- (P.M. JAGTAP) ACCOUNTANT MEMBER DATED : 14 TH SEPT., 2012 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI WAKODE