J.P. MORGAN INDIA P.LTD, MUMBAI V. ASST CIT RG 4(3), MUMBAI

ITA 1502/MUM/2014

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7722 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 03-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Futures and options; Rule 8D
• Section: 143(3); 14A; 22

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL “K” Bench, Mumbai Shri B.R. Baskaran (AM) & Shri Kuldip Singh (JM) I.T.A. No. 1502/Mum/2014 (A.Y. 2009-10) J.P.Morgan India Pvt.Ltd. J.P. Morga n Tower Off CST Road, Ka lina Santacruz Ea st Mumb ai-400 098. PAN : AAACJ1022G Vs. ACIT, Range-4 (3) Room No. 649 Aayakar Bhava n M.K. Road Mumbai-400 020. (Appellant) (Respondent) Assessee by Shri Percy J. Pardiwalla & Shri Fenil Bhatt Department by Dr. Yogesh Kamat Date of Hear ing 18.05.2022 Date of Pr onouncem en t 13.07.2022 O R D E R Per B.R.Baskaran (AM) :- The assessee has filed this appeal challenging the assessment order passed by the assessing officer for assessment year 2009-10 u/s 143(3) r.w.s. 144C of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP). The grounds of appeal urged by the assessee give rise to the following issues:- (a) Transfer pricing adjustment made in respect of international transaction pertaining to origination and marketing support services in respect of investment banking mandates. (b) Transfer pricing adjustment in respect of international transaction pertaining to marketing and sales support services in relation to American Depository Receipt (ADR). (c) Transfer pricing adjustment in respect of international transactions pertaining to sub-advisory, research and other support services and J.P.Morgan India Pvt.Ltd. 2 investment advisory services (both original ground and additional ground) (d) Transfer pricing adjustment in respect of international transactions pertaining to research support services. (e) Transfer pricing adjustment in respect of provision of broking services for futures and options trades. (f) Disallowance of claim of loss arising on account of error trades. (g) Disallowance u/s 14A of the Act (h) Disallowance of entertainment expenses. 2. The assessee is a wholly owned subsidiary of M/s J P Morgan India Securities Holdings Ltd, which is engaged in the business of merchant banking, stock broking and also providing related financial and advisor services. The assessee has entered into international transactions with its Associated Enterprises (AEs) and the TPO has made adjustments. After receiving directions from Ld DRP, the AO has made addition of transfer pricing adjustments that were confirmed by Ld DRP. 3. The first issue relates to the transfer pricing adjustment relating to origination and marketing support services in respect of investment banking mandates. The Ld A.R submitted that the assessee does not provide full fledged investment/merchant banking, consultancy/research and advisory services, as presumed by the tax authorities. Under this segment, the assessee’s activities are restricted to rendering of origination and marketing support services in respect of investment banking mandates executed by the AEs of the assessee. The assessee adopted TNM method as most appropriate method and Operating Profit/Operating cost (OP/OC) as the profit level indicator. The assessee’s margin was 19.13%. The Ld A.R submitted that the assessee had selected comparable companies using a blend of companies engaged in investment/merchant banking and companies engaged in providing consultancy/research and advisory services. The average mean margin of comparable companies was 23.15%. Accordingly, the assessee claimed its J.P.Morgan India Pvt.Ltd. 3 transactions to be at arms length. The TPO, however, rejected the transfer pricing report and he selected certain comparable companies and accordingly made transfer pricing adjustment. After the DRP order, the Transfer pricing adjustment of Rs.8,69,81,396/- for this segment. 3.1 The Ld A.R submitted that, in an earlier hearing, the erstwhile bench was of the view that the primary functions performed by the assessee under this segment were more akin to “marketing support services”. Accordingly, the bench suggested the assessee to furnish a revised set of companies, which should include companies engaged in the marketing of financial products, as well as companies involved in investment/merchant banking activities. Accordingly, a fresh set of following eight comparable companies were submitted by the assessee to the bench as well as to the D.R:- Sr. No. Comparable selected by Name of the companies Nature of activity Operating Margin for the A.Y. 2009-10 1 Common Almondz Global Securities Ltd Investment Banking 0.75% 2 Common Sumedha Fiscal Services Ltd Investment Banking 65.28% 3 Common KJMC Global Markets (India) Ltd Investment Banking 43.38% 4 Assesses SREI Capital Markets Ltd Investment Banking -17.44% 5 Assessee - New Edelweiss Capital Limited (Segment) Investment Banking 12.06% 6 Assessee - New Karvy Stock Broking Limited (Segment) Marketing of financial products 1.96% 7 Assessee - New Birla Sun Life Distribution Company Limited Marketing of financial products -29.11% J.P.Morgan India Pvt.Ltd. 4 8 Assessee - New Keynote Corporate Services Limited (Segment) Investment Banking 102.76% Arithmetic mean 22.45% The Ld A.R submitted that the Ld D.R has obtained remand report from the assessing officer on the above said fresh set of comparable companies. He submitted that the TPO has accepted three companies viz., M/s Almondz Global Securities Ltd, M/s Sumedha Fiscal Services Ltd and M/s KJMC Global markets (India) Ltd. The TPO has not accepted the remaining five comparable companies. 3.2 The Ld A.R submitted that the tax authorities have proceeded to analyse the comparable companies under the impression that the assessee is involved in end to end activities like deal origination, client relationship management, structuring and execution functions in respect of investment banking mandates. He submitted that this presumption is highly incorrect. He submitted that the assessee’s services to its AEs are limited to origination of customer transactions, maintenance of client relationship, i.e., they are in the nature of marketing support services only. Thus the above said services are provided by the assessee on case to case basis and is limited to assisting in organizing road shows & complying with local regulations and providing inputs on market conditions & products. Hence the assessee is not providing full fledged investment banking activity, which is also evidenced by the fact that the assessee is not taking risks and not enjoying rewards. 3.3 The Ld D.R, however, submitted that the assessee itself is undertaking merchant banking activities and has got its own set up. He submitted that entire work relating to investment banking/merchant banking activities have been divided between the assessee and its AEs and they carry out them in their respective countries. He submitted that the activity of Investment banking/merchant banking involves technical and intense knowledge oriented work, requiring immense experience in the field of finance, economics and J.P.Morgan India Pvt.Ltd. 5 legal environment. Hence the functions performed by the assessee are complex requiring very high level of knowledge and expertise. Accordingly, the Ld D.R submitted that the comparable companies have to be selected taking into consideration all these aspects. He further submitted that blending approach adopted by the assessee is fraught with risks. He submitted that the selection of companies involved in mere distribution of financial products like LIC policies, Mutual fund schemes would not be appropriate. Hence companies like M/s Karvy stock broking (involved in distribution of mutual fund products) and M/s Birla Sunlife distribution company Ltd (involved in distribution of insurance products) are not appropriate comparable companies. The Ld D.R also placed his reliance on the report dated 29-09-2016 furnished by the TPO in respect of revised set of comparable companies selected by the assessee. 3.4 The Ld A.R, however, submitted that the fact that the assessee is having own set for undertaking merchant banking activities is irrelevant here, since the assessee is operating as merchant banker only in respect of domestic mandates, i.e., it undertakes the risks and enjoy rewards only in respect of domestic mandates. It does not act as full fledged merchant banker for foreign mandates of AEs. He submitted that the assessee is performing a portion of merchant banking/investment banking activity limited to origination of customer transactions and maintenance of client relationship. Thus, the assessee does not take any risk as in the case of financial products distribution companies. Accordingly, the Ld A.R submitted that the remaining five comparable companies should not have been rejected. 3.5 We heard the parties with respect to the five comparable companies. The main contention of the Ld DR was that these companies are not functionally comparable with the activities carried on by the assessee. On the contrary, it is the submission of Ld A.R that the activities carried on by the assessee are limited to Deal origination and marketing, client relationship management. J.P.Morgan India Pvt.Ltd. 6 3.6 We notice that the TPO has furnished a letter dated 29-09-2016 to the learned CIT(DR), wherein the Transfer pricing officer has also described the activities carried on by the assessee. Apart from the two activities mentioned above, the TPO has also stated that the assessee is assisting its AEs in complying with local regulatory requirements and in structuring and execution of the mandates. Hence, it is the submission of Ld A.R that no company in India is doing such kind of a portion merchant banking/investment banking activities described above. Hence, there was no option for the assessee, but to select companies which are mainly involved in the basic operations and marketing operations. 3.7 The Ld A.R. submitted that the TPO has accepted M/s Almondz Global Securities Ltd, M/s Sumedha Fiscal Services Ltd and M/s KJMC Global markets (India) Ltd as comparable companies. He submitted that the activities carried on by the above said three companies are identical with the activities carried on by M/s SREI Capital Markets Limited, M/s Edelweiss Capital Limited and M/s Keynote Corporate Services Ltd. The assessee has tabulated the services rendered by all the above said six companies as under:- Table I Name of the company selected by the Appellant Functional profile SREI Capital Markets Limited • Merchant banking; • Debt syndication; • Underwriting services Edelweiss Capital Limited • Investment banking; • Mergers and acquisition advisory services; • Private placement of equity • Portfolio management Keynote Corporate Services Limited • Corporate advisory services • Mergers and acquisitions • Underwriting • Portfolio management • Private placement of securities • Corporate advisory services J.P.Morgan India Pvt.Ltd. 7 Table II Name of the company considered comparable by the learned TPO and Hon'ble DRP Functional profile Almondz Global Securities Limited • Merchant banking; • Acting as arranger of debts/bonds, loan syndication; • Corporate and infrastructure advisory; • Mergers and acquisition Advisory; • Underwriting; • Portfolio management KJMC Global Markets (India) Limited • Merchant banking; • Term loan/debt syndication; • Advisory services; • Private placements of bonds and equities; • Project finance Sumedha Fiscal Services Limited • Merchant banking services; • Debt syndication; 3.8 We find merit in the submissions made by Ld A.R. A perusal of the above said details would show that all these six companies are performing broadly identical functions. Accordingly, we do not find any reason for rejecting M/s SREI Capital Markets Limited, M/s Edelweiss Capital Limited and M/s Keynote Corporate Services Limited. Accordingly, we direct the TPO/AO to include these three companies as comparable companies. 3.9 With regard to M/s Karvy Stock broking Limited and M/s Birla Sunlife Distribution Company Limited, the Ld A.R submitted that these two companies are engaged in marketing of financial products. He submitted that the activities carried on by the assessee also falls under the category of marketing the investment banking offerings of its AEs in India. Accordingly, he submitted that these two companies are broadly comparable with the assessee company. He reiterated that no other company in India is carrying on activities as that of the assessee. Hence, both the assessee and TPO are constrained to select companies whose activities are broadly comparable. He further submitted that the segmental results of M/s Karvy stock broking Limited is available at page J.P.Morgan India Pvt.Ltd. 8 26 of the annual report. Accordingly, he submitted that these two companies should also be regarded as comparable companies. 3.10 We find merit in the submissions made by Ld A.R. We noticed earlier that the activities carried on by the assessee falls mainly under the category of marketing support services. It is also a fact that both the parties could not identify any other company, which carries on exactly same nature of activities as that of the assessee. Under these set of facts, there is no other option but to select companies whose functions are broadly comparable. There is no dispute that M/s Karvy Stock broking Limited and M/s Birla sunlife Distribution Company Limited are engaged in marketing of financial products of various companies. Accordingly, in the facts and circumstances of the case, we are of the view that these two companies can be taken as comparable companies. Accordingly, we direct the AO/TPO to take these two companies also as comparable companies. 3.11 Accordingly, we restore this issue to the file of AO/TPO for determining ALP of the transaction afresh by including all the above said five companies. 4.0 The next issue relates to the transfer pricing adjustment made in respect of international transaction pertaining to marketing and sales support services in relation to American Depository Receipt (ADR). The Ld A.R submitted that the AEs of the assessee are rendering depository services for ADR program, wherein the AE basically acts as depositories for the clients who have their ADRs listed. Under this segment, the assessee is providing marketing and sales support services for canvassing for its AE’s depository services. He submitted that the TPO has selected following five companies for this segment:- (a) Almondz Global Securities Ltd (Distribution operations segment) (b) Birla Sun Life Distribution Company Limited (c) L & T Capital Company Limited (d) Sundaram Finance Distribution Ltd. (e) Sumedha Fiscal Services Limited (Consultancy segment) J.P.Morgan India Pvt.Ltd. 9 4.1 The Ld A.R submitted that the assessee seeks exclusion of L & T Capital Company Limited, M/s Sundaram Finance Distribution Ltd and M/s Sumedha Finance Distribution Limited. 4.2 We heard the rival contentions on the above said three companies. We shall examine each of these three comparable companies:- (A) L & T Capital Company Limited:- (i) The Ld A.R submitted that this company operates in a single segment of portfolio management services, mutual fund distribution services and merchant banking services. However, more than 95%of the income from operations has been earned from syndication fees, which is not comparable to the services rendered by the assessee. He further submitted that the TPO accepted that this company cannot be considered as comparable company in AY 2010-11, as more than 92% of income was derived from syndication fees in that year. He further submitted that this company has not been included as comparable company in AY 2011-12 and 2012-13 also. (ii) The Ld D.R, on the contrary, submitted that the marketing and sales support services are in relation to ADR services are primarily in the nature of investment banking as it helps clients in raising funds. Accordingly, he submitted that this company can be considered as comparable. (iii) We noticed earlier that the AE of the assessee is providing Depository services for ADR program. Acting as depository does not involve services in relation to raising of funds overseas. Thus the services rendered by the assessee cannot be considered to be in the nature of investment/merchant banking. In the case of Carlyle India Advisors P Ltd vs. ACIT (ITA No.7901/Mum/2011), the Tribunal has given a specific finding that M/s L & T Capital Company Limited is primarily engaged into Portfolio Management, Mutual fund distribution and merchant banking. The Ld A.R has submitted that this company has earned more than95% of its income from syndication services. Further, this company has been rejected by the TPO in the J.P.Morgan India Pvt.Ltd. 10 succeeding year, i.e., A Y 2010-11. Accordingly, we hold that this company cannot be considered to be a comparable company. (B) Sundaram Finance Distribution Limited:- (i) The Ld A.R submitted that this company gets its work done through outsourcing, which is evidenced by the fact that 96% of its total expenses comprise of “Outsourced servicing fee” and it has got no employees in its payrolls. Hence the business model of this company is totally different and hence it cannot be compared with that of the assessee. The Ld A.R further submitted that this company has been rejected in the assessee’s own case in AY 2006-07 by the Tribunal in ITA No.8193/Mum/2010. (ii) The Ld D.R submitted that the assessee itself has selected this company as a comparable in its transfer pricing study. Further, the assessee has not sought for exclusion of this company before the lower authorities. (iii) In the rejoinder, the Ld A.R submitted that the assessee had included a company as comparable in its TP study in AY 2006-07 also and sought for exclusion of the same before ITAT. He submitted that the ITAT has accepted the plea of the assessee in that year, following the decision rendered by the Special bench of Tribunal in the case of DCIT vs. Quark Systems (P) Ltd (132 TTJ CHD (SB) 1). The Tribunal has observed that the purpose of income tax assessment is to arrive at the correct tax liability of the assessee and it is not dependent on what position the assessee had taken, but the same is determined having regard to the applicable legal position. (iv) We notice that this company is following different business model, i.e., it does not have work force and it gets its work done on outsourcing basis. On similar set of facts, the co-ordinate bench has rejected this company in the assessee’s own case in AY 2006-07. Since there is no change in facts in respect of this company, following the decision rendered by the co-ordinate bench in AY 2006-07, we direct exclusion of this company. J.P.Morgan India Pvt.Ltd. 11 (C) Sumedha Financial Services Limited:- (i) The Ld A.R submitted that this company is a registered merchant banker and it provides merchant banking services. The activities in “consultancy segment” comprises of Loan Syndication, Merchant Banking, Restructuring & other related advisory services. He further submitted that the TPO has excluded this company in AY 2010-11. (ii) The Ld D.R, on the contrary, submitted that the marketing service provided by the assessee is primarily in the nature of investment banking and it helps its clients to raise funds. Accordingly, the Ld D.R submitted that this company should be considered as good comparable company. (iii) We have noticed earlier that the sales and marketing services provided by the assessee under this segment is related to canvassing for “Depository services” provided by its AE in respect of ADR program, wherein the AEs act as depositories only. It does not help in raising funds and hence it is not an investment banking activity. Hence we do not find any merit in the submissions made by Ld D.R. It was submitted by Ld A.R that the TPO himself has excluded this company in AY 2010-11 after analysing the functional comparability of this company with that of the assessee. It was submitted that this company was not considered as a comparable company in AY 2011-12 and 2012-13. Accordingly, we direct exclusion of this company. 4.3 Accordingly, we restore this issue to the file of AO/TPO for determining ALP of the transaction afresh by excluding all the above said three companies. It is pertinent to note that the assessee had voluntarily made transfer pricing adjustment of Rs.8,88,315/- under this segment. The AO/TPO may deal with the same in accordance with law. 5.0 The next issue relates to Transfer pricing adjustment made in respect of international transactions pertaining to sub-advisory, research and other support services and investment advisory services (both original ground and additional ground). J.P.Morgan India Pvt.Ltd. 12 5.1 Under this segment, the assessee is rendering sub-advisory, research and other support services. The assessee had selected 10 comparable companies initially. Based on single year data, the assessee revised its set of comparable companies to seven. Rejecting the transfer pricing study of the assessee, the TPO selected following six companies:- (a) Integrated Capital Services Limited (b) Khandwala Securities Limited (c) KJMC Corporate Advisors (India) Limited (Formerly known as KJMC Global Market (India) Limited) (d) L & T Capital Company Limited (e) Sumedha Fiscal Services Limited (Consultancy segment) (f) Motilal Oswal Investment Advisors P Ltd The Ld DRP upheld selection of above said comparable companies. 5.2 Before us, the assessee seeks inclusion of five companies and exclusion of 5 companies selected by TPO. The assessee seeks inclusion of following five companies:- (a) ICRA Management Consulting Services Limited (b) IDC (India) Limited (c) Informed Technologies Limited (d) Kinetic Trust Limited (e) Access India Advisors Limited. The assessee seeks exclusion of following five companies:- (i) Khandwala Securities Ltd (ii) KJMC Corporate Advisors (India) Limited (iii) Sumedha Fiscal Services Ltd (iv) L & T Capital Company Ltd (v) Motilal Oswal Investment Advisors P Ltd 5.3 We shall now examine the companies sought to be included by the assessee:- (a) ICRA Management Consulting Services Limited:- The main source of income of this company is consultancy fees. The business activities of this company is described as management consultancy services, which involves the analysis of business and operations of a company, its profitability, operational efficiency, future outlook etc. Accordingly, it was J.P.Morgan India Pvt.Ltd. 13 submitted that the basic and underlying functions/activities undertaken by the assessee for investment advisory services are identical with the functions/activities of this company. It is submitted that the TPO has considered this company as comparable company. In the case of M/s Blackstone Advisors India P Ltd (ITA No.1581/Mum/2014), this company has been held to be a comparable one to an investment advisor. In view of the above, we direct inclusion of this company. (b) IDC (India) Limited:- This company is engaged in the business of Market Research and Management consultancy services. It provides, inter alia, user research, verticals research and consulting services. Since the assessee is also engaged in analysing financial data of potential clients, analysing market conditions etc, it was contended that the market research functions of this company should be considered as comparable to the functions performed by the assessee. It was also submitted that this company was considered as comparable by TPO in AY 2008-09. It is submitted that this company is held to be comparable to an investment advisory company in the case of Temasek Holdings Advisors India P Ltd vs. DCIT (ITA No.776/Mum/2015) by the Tribunal. Accordingly, we direct inclusion of this company. (c) Informed Technologies India Limited:- This company is engaged in the activities of collecting and analysing data on financial fundamentals, corporate governance, director/executive compensation and capital market for research and advisory reports. The assessee also carry on the activities of analysing financial data of potential clients, analysing market conditions etc. It was submitted that this company has been held to be a comparable company to an investment advisor I the case of Temasek Holdings Advisors (India) P Ltd (ITA No.968/Mum/2014) by the Tribunal. In view of the above, we direct inclusion of this company. J.P.Morgan India Pvt.Ltd. 14 (d) Kinetic Trust Limited:- This company is providing consultancy, advisory and financial services. Hence the services rendered by the assessee are comparable with the services rendered by this company. It was submitted that this company has been held to be comparable one to an investment advisor by the Tribunal in the case of Temasek Holdings Advisors (India) P Ltd (AY 2007-08 (ITA 4203/Mum/2012), AY 2008-09 (ITA 6504/Mum/2012) and AY 2010-11 (ITA No.776/Mum/2015). We notice that the Tribunal is consistently holding this company as comparable one. Accordingly, we direct inclusion of this company. (e) Access India Advisors Limited:- This company is engaged in providing management consultancy and business advisory services. This company has been accepted as comparable by TPO in AY 2008-09. It is submitted that this company is held to be comparable to an investment advisory company in the case of Temasek Holdings Advisors India P Ltd vs. DCIT (ITA No.776/Mum/2015) by the Tribunal. Accordingly, we direct inclusion of this company. 5.4 We shall now examine the companies sought to be excluded by the assessee:- (i) Khandwala Securities Limited:- It is submitted that the company has got two reportable segments, viz., Investment stock operations and Fee based operations. Fee based services relate to merger and acquisitions, equity and debt issue management, portfolio management and broking. It is submitted that the income from broking services comprises approximately 35% of revenue of fee based operations. Hence income from other fee based services is less than 75% of segmental revenue and it mainly consists of fee from investment/merchant banking activities. Accordingly it was submitted that this company cannot be considered as comparable. It is also submitted that this company was excluded in the case of Goldman Sachs (India) Securities P Ltd (ITA No. J.P.Morgan India Pvt.Ltd. 15 222/Mum/2014). In view of the above facts, we hold that this company is not comparable with this segment of the assessee. Accordingly, we direct exclusion of this company. (ii) KJMC Corporate Advisors (India) Limited:- It is submitted that this company is rendering merchant banking services and is registered as Category-I Merchant Bank with SEBI. It is further submitted that this company earns income from professional fees, brokerage and other operations and dividend, of which 67% of total income is earned from professional fees. It has reported merchant banking a single segment. Accordingly, it was submitted that this company cannot be considered to be comparable with the assessee’s segment of investment advisory. It was further submitted that this company has been excluded by the Tribunal in the case of Carlyle India Advisors P Ltd (ITA 2200/Mum/2014). In view of the above facts, we direct exclusion of this company. (iii) Sumedha Fiscal Services Limited:- This company has got three segments viz., Capital market operations, consultancy and other services. The consultancy segment comprises of Loan Syndication, Merchant Banking, Restructuring & other related advisory services. Accordingly, it was submitted that this company cannot be compared with the assessee’s segment of investment advisory. It was further submitted that this company was not included by the TPO in AY 2010-11 after analysing the functions of this company. It is also submitted that this company was rejected by the Tribunal in the case of Carlyle India Advisors P Ltd (ITA No. 7901/Mum/2011 relating to AY 2007-08) and there is no change in facts. In view of the above, we direct exclusion of this company. (iv) L & T Capital Company Limited:- It is submitted that this company operates in a single segment of portfolio management services, mutual fund distribution services and merchant banking services. It has generated more than 95% of its income J.P.Morgan India Pvt.Ltd. 16 from syndication fees, which is not comparable with investment advisory. In AY 2010-11, the TPO himself has rejected this company. It is also submitted that this company was rejected by the Tribunal in the case of Carlyle India Advisors P Ltd (ITA No. 7901/Mum/2011 relating to AY 2007-08) and there is no change in facts. In view of the above, we direct exclusion of this company. (v) Motilal Oswal Investment Advisors P Ltd:- It is submitted that this company has reported single segment and the activities consist of comprehensive investment banking solutions, transaction expertise covering private placement of equity, debt and convertible instruments, mergers & acquisitions advisory and restructuring advisory and implementations. It is submitted that the Tribunal has held in the case of DCIT vs. Arisaig Partners India P Ltd (ITA No.1083/Mum/2014) that this company is not comparable to investment advisory activities. In view of the above, we direct exclusion of this company. 6.0 The next issue relates to the transfer pricing adjustment made in respect of international transactions pertaining to research support services. 6.1 The Ld A.R did not press this ground on account of smallness of the amount in dispute. Accordingly, we dismiss grounds relating to this issue as not pressed. 7.0 The next issue relates to the transfer pricing adjustment in respect of provision of broking services for futures and options trades. The TPO has adopted CUP method for determining Arms Length Price of transactions. Though the assessee has raised a ground challenging the adoption of CUP method, the assessee did not press the same at the time of hearing. Accordingly, adoption of CUP method is being upheld. 7.1 The assessee had provided broking services in F & O segment to both related and unrelated parties. The assessee had earned commission @ 0.0471% from unrelated parties and 0.0344% from related parties. J.P.Morgan India Pvt.Ltd. 17 Accordingly, the TPO made transfer pricing adjustment of Rs.39.09 crores under this segment. The Ld DRP upheld the same. 7.2 The plea of the assessee is that the TPO should have given deduction towards adjustment for (a) Additional cost incurred for unrelated party trades and (b) Additional interest earned for related party trades The Ld A.R submitted that the additional cost adjustment was allowed to the assessee in respect of broking services under “cash segment” by the Tribunal in the assessee’s own case in AY 2002-03 by the Tribunal in ITA No.670/Mum/2006 dated 12-02-2014. He submitted that though the order was passed by the Tribunal for “Broking services in Cash segment”, the underlying principle shall equally apply to the present transactions of “Broking services in F & O Segment”. With regard to the adjustment towards interest income adjustment, the Ld A.R submitted that the Tribunal has allowed the same in the assessee's own case in AY 2006-07 in ITA No.8193/Mum/2010 and the decision of the Tribunal has since been upheld by Hon’ble Bombay High Court, vide its order dated 14 th January, 2019 passed in ITA No. 912 of 2016. 7.3 We heard Ld D.R on this issue and perused the record. We notice that the Tribunal has upheld the view of Ld CIT(A) in granting relief towards cost adjustment in view of additional cost incurred in providing broking service to the unrelated parties (Para 3 and page 8 of the order passed by the Tribunal in AY 2002-03). Though the above said decision was rendered by the Tribunal for “Broking services in Cash segment”, we agree with the submission of Ld A.R that the underlying principle shall equally apply to the present transactions of “Broking services in F & O Segment”. Accordingly we direct the AO/TPO to allow adjustment towards additional cost incurred in providing services to unrelated parties. J.P.Morgan India Pvt.Ltd. 18 7.4 We notice that the Tribunal has allowed interest income adjustment on account of high volume of trades for related parties in AY 2006-07 (Paragraph 11.5 at page 22 of the order of the Tribunal) and the said decision of Tribunal has since been upheld by the Hon’ble Bombay High Court. Accordingly, we direct the AO/TPO to allow adjustment towards additional interest income earned in respect of related party transactions. 7.5 Since the workings given by the assessee in respect of both these adjustments require verification at the end of AO/TPO, we restore this issue to their file for allowing both adjustments after verification of the workings given by the assessee. 8. The next issue relates to the disallowance of claim of loss arising from error trades amounting to Rs.20,82,737/-. The AO noticed that the assessee had claimed identical losses in AY 2006-07 to 2008-09 and it was disallowed in those years also. Accordingly, the AO disallowed the claim apparently holding that the error losses are not related to the business carried on by the assessee. 8.1 The Ld A.R submitted that the error losses occur mainly due to punching errors while executing the orders placed by its clients. When the clients reject the transactions entered on account of punching error, the assessee closes those deal and, in that process, it may incur loss. The said loss cannot be claimed from any of the clients and hence the assessee is required to bear the same. Accordingly, he submitted that this kind of error loss is very much related to the business of broking carried on by the assessee and hence it is allowable. He submitted that identical disallowance made by the AO in AY 2006-07 has since been allowed by the Tribunal in AY 2006-07. 8.2 We heard Ld D.R on this issue and perused the record. We notice that the Tribunal has observed in AY 2006-07 as under:- J.P.Morgan India Pvt.Ltd. 19 “6.5 ........... In the present case, it is evident that assessee is, inter alia, engaged in the business of broking and, therefore, such losses suffered in the course of carrying on such business cannot be denied..... The relevant details have been placed in the Paper book at pages 37to 77 and, having perused the same, we find that the requisite information was available for the Assessing Officer to carry out any verification exercise that he may have deemed fit. So however, instead of carrying out any verification exercise, the details sought to be furnished by the assessee have been merely disbelieved and brushed-aside. The said approach in our view is quite untenable, and cannot be sustained. 6.6 Therefore, considering the entirety of facts and circumstances, in our view, the impugned loss suffered by the assessee on account of client errors, dealing errors or sale errors is incurred in the ordinary course of its business and being incidental to its business activity, deserves to be allowed as a business loss...” We noticed earlier that the AO has followed the earlier year’s orders. We further notice that the Ld DRP had directed the AO to verify the details of loss again. Though the AO has observed that the details have been verified, yet he comes to the conclusion that the same is not acceptable, i.e., the AO has not given the basis on which he had to come to such a conclusion. Again the AO is confirming the disallowance, following the order passed by him in AY 2006- 07. We noticed that the Tribunal has allowed identical claim made in the assessment year 2006-07. Accordingly, following the order of the Tribunal, we direct the AO to allow this claim in this year. 9. Ground no.8 relates to the disallowance made u/s 14A of the Act. During the year under consideration, the assessee had earned dividend income of Rs.3,00,000/- and it disallowed a sum of Rs.30,000/- u/s 14A. The AO took the view that the disallowance should be computed in accordance with Rule 8D of IT Rules. Accordingly, he computed disallowance under Rule 8D(2)(iii) of I T Rules, being 0.50% of the average value of investments, which worked out to Rs.5,40,325/-. Accordingly, the AO disallowed the difference amount of Rs.5,10,325/-. The Ld DRP confirmed the same. J.P.Morgan India Pvt.Ltd. 20 9.1 We heard the parties on this issue. The main contention of the assessee was that the investments are mainly strategic investments. The Ld A.R, accordingly, submitted that there is no ground for applying Rule 8D in the facts of present case. Accordingly, he submitted that the disallowance may be sustained at a reasonable level. 9.2 We heard Ld D.R and perused the record. We notice from the written submission furnished by the assessee that the assessee has raised an alternative ground contending that the disallowance should not exceed the amount of dividend and in this regard, it has placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of Joint Investments P Ltd (TS-92-HC-2015). Accordingly, we direct the AO to restrict the disallowance to the amount of dividend income of Rs.3,00,000/-. 10. The last issue relates to the disallowance made out of entertainment expenses. The AO noticed that the assessee has incurred a sum of Rs.25,50,821/- as clients entertainment expenses. The AO noticed that identical claim made in AY 2006-07 to 2008-09 had been rejected and the entertainment expense was disallowed to the extent of 50%. The reasoning given by the AO in those years was that the assessee did not furnish any concrete evidence to establish authenticity and commercial expediency. Accordingly, the AO disallowed 50% of the claim following the earlier years’ order. The Ld DRP also confirmed the same. 10.1 We noticed that the identical disallowance was made in A.Y. 2006-07 has been deleted by the Coordinate Bench with following observations :- “We have considered the objections put forth by the assessee and find that the disallowance made by the Assessing Officer is based on pure conjectures and surmises. Apart from making a very generalized observation, the Assessing Officer has not pointed out any particular instance which could demonstrate that the expenditure was incurred for any non business purpose. It is also not the case of Revenue that the explanation furnished by the assessee in the course of assessment proceedings was lacking in any J.P.Morgan India Pvt.Ltd. 21 manner. Therefore, we direct the Assessing Officer to delete the addition of Rs. 7,42,851/-. Thus, assessee succeeds on this aspect also.” Following the above said decision of the Tribunal, we direct the Assessing Officer to delete the impugned disallowance. 11. In the result, appeal filed by the assessee is treated as allowed. Order pronounced in the open court on 13.07.2022. Sd/- Sd/- (KULDIP SINGH) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 13/07/2022 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai