DCIT 4(1), MUMBAI V. HSBC SECURITIES AND CAPITAL MARKETS (INDIA) P.LTD, MUMBAI

ITA 1661/MUM/2014

AI Insights

The case involves multiple appeals by both the assessee, M/s. HSBC Securities and Capital Markets (India) Pvt. Ltd., and the revenue against the orders passed by the Deputy Commissioner of Income Tax under sections 143(3) r.w.s. 144C of the Income Tax Act, 1961. The appeals pertain to the assessment years 2006-07 and 2009-10. The primary issues revolved around transfer pricing adjustments related to the provision of brokerage and back office support services to associated enterprises, disallowance of VSAT and lease line charges, and disallowance under Section 14A concerning expenses incurred in earning exempt income. The Tribunal examined the methods used for determining the arm's length price of international transactions, the appropriateness of selected comparables, and the application of various filters in the selection process.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123775 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 11-12-2022
• Assessment Year: 2009-2010
• Appeal Filed On: 09-03-2014
• Other Referred Cases: Vodafone India Services Pvt. Ltd. vs. Union of India, Principal Commissioner of Income Tax vs. IHG IT Services (India) (P.) Ltd., ACIT vs. Maersk Global Services Centre (India) P Ltd., Stream International Services (P.) Ltd. vs. ADIT, Goldman Sachs Services (P.) Ltd. vs. DCIT, TNS India Pvt. Ltd. vs. ACIT, Travelex India (P.) Ltd vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PROFITS BY
• Assessee Lawyers: PORUS KAKA TEJAS MHATRE
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency; Bonafide belief; Earning of tax free income; Fair market value; Speculation loss; Valuation report; Capital receipt; TDS; Rule 8D; Set aside; Liquidation; Capital Gains
• Section: 68; 56; 92C; 143(3); 92; 92D; 92B; 92F; 56(2); 234B; 14A; 40(a)(ia); 43(5); 194C; 10B; 250; 144C; 43; 48; 9(1); 9(1); 9(1); 194J; 73; 13; 153; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 4459/Mum/2014 (A.Y. 2006-07) ITA No. 702/Mum/2014 (A.Y. 2009-10) M/s. HSBC Securities and Capital Markets (India) Pvt. Ltd. 52/60, Mahatma Gandhi Road, Fort, Mumbai- 400001. PAN: AAACJ1395E ..... Appellant Vs. DCIT-4(1), Room No. 640, 6 th Floor, Aayakar Bhavan, M.K. Road, Mumbai- 400020. ...... Respondent ITA No. 1661/Mum/2014 (A.Y. 2009-10) DCIT-4(1), Room No. 640, 6 th Floor, Aayakar Bhavan, M.K. Road, Mumbai- 400020. ...... Appellant Vs. M/s. HSBC Securities and Capital Markets (India) Pvt. Ltd. 52/60, mahatma Gandhi Road, Fort, Mumbai- 400001. PAN: AAACJ1395E ..... Respondent Appellant by : Ms. Samruddhi Dhananjay Hande, Sr. DR Respondent by : Sh. Porus Kaka / Tejas Mhatre 2 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. Date of hearing : 12/12/2022 Date of pronouncement : 10/03/2023 ORDER PER GAGAN GOYAL, A.M: These appeals by assessee and revenue are directed against the order of Deputy Commissioner of Income Tax, Mumbai [for short ‘AO’] passed under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 [for short ‘the Act’] vide order dated 30.04.2014 for Assessment Year (AY) 2006-07. For A.Y. 2009-10 assessee and revenue both are in appeal vide ITA No. 702/Mum/2014 & ITA No. 1661/Mum/2014 respectively. The assessee has raised the following grounds of appeal for A.Y. 2006-07 as under: “The followings Grounds of Appeal are independent of and without prejudice to one another: A. Grounds relating to Transfer Pricing adjustments On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) under directions issued by the Hon'ble Dispute Resolution Panel (DRP) erred in making transfer pricing adjustments to the Appellant's total income. I. Addition to total income on account of Provision of Brokerage Services 1.1 On the facts and in the circumstances of the case and in law, the learned TPO erred in proposing, the AO erred in making and the Hon'ble DRP erred in upholding / confirming an upward adjustment of Rs. 2, 25, 95,505 to the income of the appellant earned on account of provision of Brokerage Services to its Associated Enterprises. 1.2 on the facts and in the circumstances of the case and in law, the learned TPO AD erred and the Hon'ble DRP erred in upholding the order of AO/TPO, in disregarding the Appellant's transfer pricing study. 1.3 On the facts and in the circumstances of the case and in law, the learned TPO AO/ DRP erred in not adopting the Transactional Net Margin Method (TNMM) as 3 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. the most appropriate method and instead adopting the Comparable Uncontrolled Price (CUP) Method. 1.4 On the facts and in the circumstances of the case and in law, the learned TPO AO erred in considering as comparables and the Hon'ble DRP erred in upholding Top 10 Foreign Institutional Investors for the purpose of arriving at the arm's length price under the CUP Method adopted by the AO and TPO. 1.5 On the facts and in the circumstances of the case and in law, the learned TPO AQ erred and the Hon'ble DRP erred in upholding the order of AO/TPO in not allowing volume adjustments as warranted under Rule 10B(1)(a) of the Income Tax Rules, 1962 ("the Rules'). 1.6 Without prejudice to any of the above grounds, the learned DRP/AO failed to appreciate and rectify the inadvertent mistake made by the Appellant before the TPO in submitting the Top 10 Foreign Institutional Investors by erroneously including data pertaining to AE. II. Addition to total income on account of Provision of Back Office Support Services 2.1 On the facts and in the circumstances of the case and in law, the learned TPO AO erred and the Hon'ble DRP erred in providing only partial relief in relation to the Transfer Pricing additions of Rs. 12, 89,837 to the income of the appellant by erroneously enhancing the receipts on account of provision of Back Office Support Services to its Associated Enterprise: 2.2 On the facts and in the circumstances of the case and in law, the learned TPO/AO erred and the Hon'ble DRP erred in upholding the order of AO/TPO by wrongfully rejecting the detailed and methodical benchmarking analysis undertaken by the Appellant and incorrectly invoking the provisions of Section 92C (3e) of the Income-tax Act, 1961 (the Act). 2.3 On the facts and in the circumstances of the case, the learned TPO and the learned AO have erred in making and the learned DRP has erred in confirming the approach adopted by the learned AO TPO, who have disregarded the benchmarking analysis conducted, search filters applied and the comparable companies selected by the Appellant without appreciating the fact that such selection was based on the contemporaneous data and the transfer pricing study report prepared and maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules"). 2.4 On the facts and in the circumstances of the case and in law, the learned TPO/AO erred in making and the Hon'ble DRP erred in upholding the order of AO/TPO, of resorting to cherry-picking of comparables based on conjectures and surmises with complete disregard to the differences in functions performed, assets 4 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. employed and risks undertaken by the Appellant. Thus, the Appellant prays that the benchmarking analysis conducted by the learned TPO be quashed. 2.5 On the facts and in the circumstances of the case and in law, the learned TPO/AO erred in making and the Hon'ble DRP erred in upholding the order of the AO/TPO despite the fact that the TPO had not provided any basis for arriving at the margins of the comparable companies selected by him to arrive at the arm's length price of the international transaction undertaken by the Appellant, thereby amounting to denial of principles of natural justice 2.6 On the facts and in the circumstances of the case and in law, the learned TPO/AO/ DRP erred in rejecting the use of multiple year data as permitted under the provisions of Rule 10B(4) of the Rules. 2.7 On the facts and in the circumstances of the case and in law, the learned TPO/AO erred and the Hon'ble DRP erred in upholding the order of AO/TPO by determining the arm's length price based on data which was not available as on the specified date (as defined in Section 92F (iv) of the Act read with Rule 10B (4) of the Rules]. 2.8 On the facts and in the circumstances of the case and in law, the learned TPO/AO erred and the Hon'ble DRP erred in not allowing risk adjustments as warranted under Rule 10B(1Xe)(ii) of the Rules. 2.9 on the facts and in the circumstances of the case and in law, the learned TPO/AO/ DRP erred in rejecting the following comparable companies selected by the Appellant in its transfer pricing study: •Ask Me Info Ltd. •MCS Ltd. •CMC Ltd. •C.S. Software Enterprise Ltd •Mphasis BFL, Ltd. •Tata Share Registry Ltd. •HCL Technologies Ltd. •Datamatics Technologies Ltd. 2.10 on the facts and in the circumstances of the case and in law, the learned TPO/AO/DRP erred in wrongfully including the following comparable companies in the final set of comparables: •Apes Knowledge Solutions Ltd. •Goldstone Infratech Ltd. (Erstwhile Goldstone Teleservices Ltd.) 5 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. •R Systems International Ltd. (Seg.) •Flextronics Software System Ltd. (Seg.) •Asit C Mehta Financial Services Ltd (Erstwhile Nuclear Netsoft & GIS India Ltd.) •Cosmic Global Ltd. •Datamatics Financial Services Ltd. • Maple eSolutions Ltd. •Transworks Information Services Ltd. •Vishal Information Technologies Ltd. 2. 11 or the facts and in the circumstances of the case and in law, the TPO/AO/DRP erred in rejecting the following filters applied by the Appellant. • Companies for which there was insufficient financial data were excluded • Companies whose manufacturing sales were equal to or greater than 25 percent of total sales in the latest year in which financial das was available were rejected • Companies whose trading sales were equal to or greater than 25 percent of total sales in the latest year in which financial data was available were rejected 2.12 On the facts and in the circumstances of the case and in law, the learned TPO/ DRP wrongfully applying the following filters: • Use of relevant financial year end data only • Use of single year data only • Companies with service income less than 75 percent of revenues rejected • Companies with export revues less than 25 percent of the revenues rejected The Appellant prays that the additions to the appellant's income made in relation pricing matters by the AO TPO be deleted. B. Corporate Tax Grounds III. Disallowance of VSAT and Lease line charges amounting in RS. 2, 58,839/- under Section 40(a) (ia) of the Act: 3. On the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel(DRP) and the Ld. AO (following the directions of the DRP) erred in disallowing Rs. 2,59,839/- made by the Ld. AO under section 40(a)(ia) of the Act, being VSAT and lease line charges paid by the Appellant to the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and MTNL on the alleged ground 6 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. that these charges qualify as “Fees for technical services (FTS) u/s 9(1) (vii) of the Act. 3.2 The Ld. AO further erred in observing that the said VSAT and lease line charges are covered by section 194J / 194C of the Act. 3.3 The Appellant prays that the Ld. AO he directed to delete the said disallowance of Rs 2,58,839 made under section 40 (a) (ia) of the Act as the VSAT and leased line charges do not qualify to be FTS 3.4 The Appellant further prays that it be held that the said VSAT and lease line charges do not fall within the purview of section 194J/ 194C of the Act and, hence, ought not to be disallowed us 40(a)(ia) for purported non-deduction of tax at source u/s 194J/194C of the Act. IV. Disallowance of Rs. 10, 00,000/- under Section 14A of the Act: 4.1 On the facts and in the circumstances of the case and in law, the Ld. DRP and the Ld. AO (following the directions of the DRP) erred in making disallowance under section 14A of the Act amounting to Rs 10,00,000 towards the indirect expenses incurred, purportedly incurred towards earning of exempt income. 4.2 The Appellant prays that the Ld. AO be directed to delete the said disallowance of Rs. 10, 00,000/- under section 14A of the Act 4.3 without prejudice, the Appellant prays that the disallowance of Rs. 10, 00,000/- made u/s. 14A be appropriately reduced. V. Levy of Interest under section 234B and 234C of the Act: On the facts and in the circumstances of the case and in law, the Ld. DRP and the Ld. AO (following the directions of the DRP) erred in not deleting the interest charged by the AO under section 234B and 234C of the Act 5.2 The Appellant prays that the Ld. AO be directed to delete the said interest under section 234B and 234C of the Act." 2. In ITA No. 702/Mum/2014 for A.Y. 2009-10, the Assessee has raised grounds similar to A.Y. 2006-07 except these two grounds taken first time and different from A.Y. 2006-07, which are as follows: “III. Addition to total income on account of undervaluation of equity shares considered as deemed loan and interest computed thereof 3.1 Issue of equity shares 7 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 3.1.1 On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding the Transfer Pricing (TP) adjustment of Rs. 932.34 Crores, on account of alleged shortfall in the value of equity shares, since transfer pricing provisions provided under Chapter X of the Act do not apply to issuance of equity shares. 3.1.2 On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in making an addition on account of the alleged shortfall in the price of equity shares issued without giving any cogent reasons for not accepting the submissions made by the Appellant that such deemed receipts are not 'income' taxable under the Act. 3.1.3 On the facts and in the circumstances of the case and in law, the learned TPO grossly erred and the Hon'ble DRP further erred in failing to appreciate that the transaction relating to issue of equity shares is a capital receipt in the hands of the Appellant and does not result into an income taxable under provision of the Act. 3.1.4 on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred by failing to appreciate that in the absence of any income, transfer pricing provisions do not apply to issuance of equity shares. Consequently, the DRP ought to have held that reference of the transaction to the TPO under Section 92CA (1) of the Act for determination of Arm's Length Price (ALP) is untenable and bad in law. 3.1.5 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in concluding that the variation in the ALP of an international transaction as determined by the AO/ TPO under Chapter X of the Act would be a part of "notional income" and hence would fall within the definition of the term "Income" as defined under section 2(24) of the Act, irrespective of whether or not it is otherwise taxable under normal provisions of the Act. 3.1.6 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in concluding that (i) the Appellant has extinguished relinquished the right to receive the fair market value of shares and (ii) Extinguishment/Relinquishment of a right to receive the fair market value of shares is a "Transfer" as defined under section 2(47) of the Act for the purposes of determination of Capital Gains. 3.1.7. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in making wrong references to section 47(iv), (v) and (vid) without 8 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. appreciating that these sections have no application whatsoever to the facts of the present case and further that these sections nowhere suggest that issue of shares is taxable 3.1.8 on the facts and in the circumstances of the case and in law, the Hon'ble DRP further erred in relying on section 56(2) (x) (via) and 58(2) (xvii) (b) of the Act. 3.1.9 on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in concluding that Chapter X of the Act is a separate code in itself and Section 92 of the Act is a separate charging provision. 3.1.10 on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in concluding that share premium is liable to be assessed to tax as income by wrongfully drawing reference from proviso to Section 68 of the Act. 3.1.11 On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in assuming the transaction relating to issue of equity shares as an international transaction within the explanation (i) (c) to Section 92B of the Act inserted vide Finance Act 2012 with retrospective effect from 1 April 2002. 1.1.12 On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in not appreciating the fact that the Appellant has received the said amount from its 100 percent parent as capital contribution based on the business and commercial expediency wherein the number of shares and issue price are not determinative factors. The TPO/ AO/ DRP ought to have held that since 100 percent shares are held by the parent of the Appellant both before and after the issuance of shares, there was no question of over or under valuation of shares and therefore, the adjustment was wholly misconceived. 3.1.13 on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in ignoring the fact that since the Appellant is the 100 percent subsidiary of the Associated Enterprise (AE), the number of equity shares held by AE is of no significance. 3.2 Valuation of equity shares 9 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 3.2.1 on the facts and in the circumstances o the case and in law, the learned TPO erred and the Hon’ble DRP further erred in disregarding the value of Rs. 156/- per share determined by Independent valuer. 3. 2.2 on the bets and in the circumstances of the case and in law, the leased TPO erred and the Hon’ble DRP further erred in not accepting the valuation done as per CCI guidelines for computing the fair value of the unquoted shares. 3.2.3 On the facts and in the circumstances of these and in law, the learned TPO red and the Hon’ble DRP further erred in disregarding the valuation of shares done in accordance with CC guidelines even though such valuation was accepted by other the Government i.e. RBI 3.2.4 on the facts and in the circumstances of the case and in law, the ld. TPO erred and the Hon’ble DRP further erred in not referring the valuation of shares / options to an expert in line with the CBDT Instruction No. 5/2011 dated 30 March 2011. 3.2.5 on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in disregarding the following valuation reports furnished during the course of the assessment proceedings without providing any cogent reasons: - 2012 Valuation Report dated 5 November 2012 determining the value per share at Rs. 233/- applying Discounted Cash Flow (DCF) Method. - 2008 Valuation Report dated 28 January 2013 determining the value per share at Rs. 243/- applying DCF Method. - Alternative PECV method side submission dated 25 January 2013 determining the value per share at Rs. 90.89/- 3.2.6 The TPO /AO /DRP erred in not applying PECV Method correctly in order to work out the value per share. 3.3 Deemed Loan 3.3.1 On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in considering the alleged shortfall of Rs. 932.34 Crores, arising on account of the alleged value of equity share capital, as an amount receivable by the Appellant from its AE or a loan extended by the Appellant to its AE and thereby erred in creating a notional transaction. 10 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 3.3.2 On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in making a secondary adjustment by holding that the so-called shortfall was a receivable in the absence of specific provisions in the Act which permits such secondary adjustment. 3.3.3 on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in re-characterizing the legitimate business transaction of issue of shares into a transaction of loan in the absence of any statutory provisions authorizing such re-characterization. 3.3.4 On the facts and in the circumstances of the case and in law, the learned TPO//AO/ DRP erred in not appreciating the fact that without the prior approval of the Reserve Bank of India, the characterization of the shortfall in issuance of equity into a debt would be contrary to the provisions of the Foreign Exchange Management Act, 1999. The TPO AO/ DRP erred in making an assumption which imputes illegality to the transaction, which is not permissible. 3.3.5 on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred by failing to appreciate the fact that under the prevailing laws and regulations, Indian subsidiary company is not permitted to give loan to foreign holding company. 3.3.6 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in wrongly concluding that in the course of determining the ALP of the share issue transaction, the TPO came across another transaction (i.e., the amount due as fair market value was left with the AE) which tantamount as an arrangement as defined under section 92F (v) of the Act thereby failing to appreciate that the TPO/AO exceeded jurisdiction by splitting a single transaction into two. 3.4 Interest on Deemed Loan 3.4.1 On the facts and in the circumstances of the case and in law, the learned TPO grossly erred and the Hon'ble DRP further erred in enhancing the adjustment as regards interest on the so-called deemed loan by adopting an adhoc and arbitrary approach to determine the rate of interest to be imputed on the so- called deemed loan. 3.4.2 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in holding that interest rate needs to be adjusted for the credit risk 11 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. borne in case of transactions with AE and further erred in arbitrarily determining a 3 percent addition on account of credit risk. 3.4.3 Without prejudice, on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in not considering interest in borrower's (parent company's) country i.e. the Netherlands. 3.4.4 Without prejudice, on the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in not adopting LIBOR rates for imputing interest on the deemed loan to AE. The Appellant prays that the additions to the appellant's income made in relation to transfer pricing matters by the AO/ TPO be deleted. VI. Disallowance of loss on account of error trades amounting to Rs. 21, 24,000/- 6.1 On the facts and in the circumstances of the case and in law, the AO erred in treating the loss of Rs. 21,24,000 incurred on account of error trades as speculation loss by invoking the Explanation to section 73 of the Act. The Appellant prays that the AO be directed to allow the loss on error trades as it is a loss incidental to its broking business under section 28 of the Act. The Appellant craves leave to add or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.” 3. In ITA No. 1661/Mum/2014 for A.Y. 2009-10, the Revenue has raised the following grounds of appeal: “1. On the facts and in the circumstances of the case, the DRP erred in directing the AO to include M's ICRA Techno Analytics Ltd, M/s Informed Technologies Ltd. & M/s Nittany Outsourcing Services Ltd. as comparables for determining the arm's length price of the back office support in spite of the fact that these comparables have already been discussed and rejected by the TPO." 2. on the facts and in the circumstances of the case and in law, the impugned order of the DRP-1 is contrary to law and consequently merits to be set aside that of the Assessing Officer be restored." 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 12 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 4. Brief facts of the case are that assessee filed its return of income on 28.11.2006 declaring total income at Rs. 51,11,44,760/-. The case was selected for scrutiny. Assessee is engaged in share broking and is a member of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Assessee is primarily catering to FIIs as well as local financial institutions the assessee renders its services for dealing in shares / debentures, Government Securities and PSU Bonds as Category-1, Merchant Banker in Corporate Finance and Advisory Transaction. 5. It was seen during the assessment proceedings that assessee had entered into international transactions with its AEs. During the relevant Financial Year (FY) these transactions were listed in the Auditor’s Report also in Form No. 3CEB submitted along with the return. To determine the ALP of these transactions, the matter was referred to the TPO under section 92CA (1). TPO in his order under section 92CA (3) has determined an adjustment of Rs. 2, 38, 85,342/- under the following heads: SL. No. Particulars Amount A Lower brokerage of CH trades 2,07,72,140/- B Lower brokerage on DVP trades 18,23,365/- C Lower mark up on back office services 12,89,837/- Total adjustment 2,38,85,342/- 6. These adjustments determined by the TPO under section 92CA (3) were added back to the income of the assessee. In addition to this, AO disallowed VSAT charges and lease line charges payable to Stock Exchange on account of services provided by with regard to transactions in securities through the Exchange 13 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. amounting to Rs. 2,58,839/- on account of non-deduction of TDS under section 40a(ia) of the Act. AO further disallowed Rs. 27, 16, 560/- under section 14A. Against this draft order of AO, assessee objected the same before the DRP through Form No. 35A. 7. DRP vide its order under section 144C (13) sustained the draft order of AO as far as addition on account of TP Adjustment and disallowance under section 40a (ia) is concerned. As far as disallowance under section 14A is concerned, DRP reduced the amount from Rs. 27,16,560/- to Rs. 10,00,000/-. Being aggrieved with this order of AO, passed to comply with the directions of DRP, the assessee preferred appeal before ITAT. 8. We have gone through the draft assessment order, order of TPO under section 92CA (3), directions of DRP under section 144C (13) and final assessment order under section 143(3) r.w.s. 144C of the Act. We found that in A.Y. 2005-06, the method of determining the Arm’s Length Price (ALP) as adopted by the assessee was accepted by the Department. Not only were these, for A.Y. 2003-04 & 2004-05 the TNMM Method as selected by assessee for benchmarking the International Transactions accepted by the Revenue. In Income Tax proceedings the principle of res-judicata is not applicable but the concept of the principle of consistency has to be maintained by the both the sides unless there is a difference in the facts or the law applicable for the year under consideration. It can be reasonably presumed that assessee must have carried out a judicious and methodical economic analysis based on the guidelines laid down in the legislation for A.Y. 2003-04 to A.Y. 2005-06 based on which a clean report was given by the TPO for those years. 14 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 9. It is observed that during the F.Y. ended 31.03.2006, the Assessee was engaged in Clearing House (CH) and Delivery vs. Payment ('DVP) trade transactions with its AEs. To briefly explain the nature of activity, stock broking transactions may be executed either on Delivery vs. Payment basis (DVP) or on Clearing House (CH) basis. (a) CH trades: CH trades are where the settlement obligation is transferred from the stock broker to the client's custodian. Hence, the stock broker does not take the onus of either funding or settling the trade. In case of deals with AEs, the trades are generally intended to be settled through the clearing house mechanism; (b) DVP trade: In a DVP trade, a broker uses his own funds to settle the trade for a client. In case of a sale deal, the client delivers the securities only after receiving payment from the broker. Similarly, in case of a purchase deal, the client pays only after receiving delivery of securities from the broker. A.2.2 Functions performed by the Assessee The typical functions performed in respect of equity broking trades are discussed below: a) Sales and marketing Meeting the client, explaining them the services offered by the broking house, negotiating the price with the customer are the key functions of sales and marketing activity. The following functions are performed for selling and marketing the broking services to the clients: 15 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. • Obtaining orders from the prospective customers. • Getting in touch with the client and providing information about the Indian market. • Maintaining day to day relationship with the client • Arranging business development meetings • Meeting prospective investors • Arranging meetings of the potential investor with the management of the target company b) Execution of Order and Settlement The process of executing orders start, once the client laces buy/sell order. The following functions are performed for execution of the trade: • The broker enters the transaction (either buy or sell based on the client instruction) on the Bombay Stock Exchange ('BSE') or National Stock Exchange ("NSE"). • Successful execution of the transaction is communicated to the client by the broker. • Thereafter, the broker prepares a contract note which is sent to the custodian of the client (in case where the client is an FII). • The custodian settles the trade after matching the instructions received from the FII client and the contract note received from the broker. 16 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 10. Section 92C (3) specifies for preconditions, at least one of which has to be satisfied before taking any adverse action against the assessee. Apparently it appears that assessee has conducted a proper benchmarking analysis and the AO cannot make a fresh analysis unless he is able to establish that the assessee falls under the purview of section 92C (3). During the year the has earned an NPM of 49.41% from the provisions of broking services to its AEs whereas as TP Study of companies broadly comparable to the assessee after applying the quantitative and qualitative filters, NPM comes in a range of 19.58% to 37.71% with an arithmetical mean of 20.63%. We found that necessary working along with audit report and TP Study were duly submitted by the assessee and TPO was not in a position to disregard TNMM i.e. assessee’s choice of most appropriate method. The TPO simply mentioned in his order “The CUP is the most desirable and preferred method for determining the Arms Length. TNMM is a residual method which is a very crude method for benchmarking. This view is also endorsed by the OECD commentary on the subject. Therefore CUP method will get preference over the TNMM method for benchmarking the ALP.” 11. Further, the Assessee had also provided details in the transfer pricing documents on why the CUP could not be applied in its case, which has been reproduced below: "To compare similarity of transactions, one would need to establish the closeness of all material factors affecting the pricing of the transactions HSBC Securities provides similar broking services to unrelated parties as well as its AEs. There are various factors that affect the brokerage rates, viz. volumes traded, expected future business, marketing efforts, types of trade, client relationship, client type, credibility of customer, negotiation power of the customer, market forces at the point when the transaction is entered into, brokerage offered by competitors, other business referrals by clients etc. Some of these differences may not be 17 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. quantifiable and therefore, cannot be adjusted for to arrive at reliably and closely comparable transaction. Further, the risk profile in respect of trades executed for AEs and for non-AEs also differs. The Company does not bear any credit risk in respect of trades executed for AEs. However, the Company bears credit risk in respect of trades executed for non-AEs. Since there are differences in the functions performed, risks assumed, other commercial and economic factors in respect of trades executed for AEs and for non-AEs, the rate charged by the Company to non-AEs is not the appropriate brokerage rate to benchmark the transaction of brokerage rate charged to AEs." 12. Further the Board’s Circular / Instruction No. 14/2001 and 3 respectively also provide as under: “...Where such onus is discharged by the Assessee and the data used for determining the arms length price is reliable and correct, there can be no intervention by the Assessing Officer. This is made clear by sub-section (3) of Section 92C which provides that the Assessing Officer may intervene only if he is, on the basis of material or information or document in his possession, of the opinion that the price charged in the international transaction has not been determined in accordance with sub-sections (1) and (2), or information and documents relating to the international transaction have not been kept and maintained by the Assessee in accordance with the provisions contained in sub- section (1) of Section 92D and the rules made there under; or the information or data used in computation of the arm's length price is not reliable or correct.....” "(ii) Role of Transfer Pricing Officer ......................... The transfer price has to be determined by the TPO in terms of Section 92C. The price has to be determined by any one of the methods stipulated in sub-section (1) of Section 92C and by applying the most appropriate method referred to in sub-section (2) thereof.” As can be seen from the above, the CBDT has held that where: • the onus is discharged by the Assessee; and • The data used by the Assessee is reliable and correct; there can be no intervention by the AO, 18 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. In the instant case, the Assessee discharged its liability, inter alia, of: a) Preparing a transfer pricing documentation; b) Conducting a comparability analysis; and c) Furnishing the same, to the TPO.” we are of the considered view that TPO, erred in disturbing the benchmarking adopted by assessee and in turn additions made by AO was also erroneous. We allow Ground No.1 on these facts and law. 13. For Ground No. 2 also, we observed on the facts and in the circumstances of the case, the TPO and the AO have erred in disregarding the benchmarking analysis conducted, search filters applied and the comparable companies selected by the Appellant without appreciating the fact that such selection was based on the contemporaneous data and the transfer pricing study report prepared and maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules"). On the facts and in the circumstances of the case and in law, the TPO/AO erred in resorting to cherry-picking of comparables based on conjectures and surmises with complete disregard to the differences in functions performed, assets employed and risks undertaken by the Appellant. On the facts and in the circumstances of the case and in law, TPO/AO erred in making different decision, despite the fact that the TPO had not provided any basis for arriving at the margins of the comparable companies selected by him to arrive at the arm's length price of the international transaction undertaken by the Appellant, thereby amounting to denial of principles of natural justice. The TPO/AO/ DRP erred in rejecting the use of multiple year data as permitted under the provisions of Rule 10B (4) of the Rules. The TPO/AO was legally not entitled to determine the arm's length price based on data which was not available as on the specified date (as defined in Section 92F (IV) of the Act read with Rule 10B (4) of the Rules]. Moreover, TPO/AO erred in not allowing risk adjustments as warranted under Rule 10B (1) (xe) (ii) of the Rules. 19 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. 14. In the grounds of appeal assessee vide ground no. 2.9 challenged the rejection of certain bench mark companies as provided in ground itself and vide ground no. 2.10 assessee challenged inclusion of certain bench mark companies and wants the same to be excluded but during argument assessee argued in favour of following four companies for exclusion only. So, our analysis and adjudication is limited to these four companies only for the purposes of exclusion as under for A.Y. 2006-07 (Exclusions only) and A.Y. 2009-10 (Exclusions and Inclusions both): AY. 2006-07 Vishal Information Technologies Limited The company is Functionally not comparable 1) The relevant factor in choosing comparable cases is to find out similarity he in the nature of services rendered. In that view a case in which services are Se outsourced and then provided to its customers cannot be compared with the rendering of in- house services. There is a vast difference in the cases where the services are outsourced or provided in-house and there cannot be any comparison between such types of cases. (il) The company cannot be accepted as it outsources a considerable portion of its business. In AY 06-07, Data entry charges & Vendor Payments Rs. 11.49 Crores formed 66% of the total Cost of Rs. 17.42 Crores or 44.81% of the total revenue of 25.64 Crores reported in the Profit and Loss account (Refer page 654 and 658 of the paper book): (ii) The company has very low employee cost ratio of 1.83% of total cost or 1.25% of total revenue. (iv) In contrast the Appellant has 46.83% employee cost ratio of total cost or 20.22% of total revenue. (Refer page 340 of the paper book.) Accordingly the company has a different business model and outsources majority of services and hence cannot be accepted as comparable. Principal Commissioner of Income Tax. Vs. IHG IT Services (India) (P.) Ltd., (2017) 88 taxmann.com 642 (Punjab and Haryana HC) The High Court has upheld Tribunal's finding that company has outsourced 44.81 % of its business. It was also observed that company has a low employee cost of 1.25% of operating revenue. The Tribunal has also found that the TPO himself has referred NASSCOM survey wherein the average wages and salaries to sales ratio of IT/ITES industry in India was 46.61%. The company was hence sought to be excluded. 20 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. ACIT v. Maersk Global Services Centre (India) P Ltd. [2012) 14 ITR (Tribunal) 541 Mumbai) The company cannot be accepted as it outsources a considerable portion of its business Stream International Services (P.) Ltd. v. ADIT [2013] 31 taxmann.com 227 (Mumbai) The company cannot be accepted as it outsources a considerable portion of its business. HSBC Electronic Data Processing India Ltd. v. ACIT [2013] 38 taxmann.com 141 (Hyderabad ) The company cannot be accepted as it outsources a considerable portion of its business. Goldman Sachs Services (P.) Ltd. vs. DCIT [2015] 63 taxmann. com 9 (Bangalore) The company cannot be accepted as it outsources a considerable portion of its business and functionally different Google India (P.) Ltd V. DCIT [2013] 29 Taxmann.com 412 (Bangalore) The company cannot be accepted as it outsources a considerable portion of its business and functionally different M/s TNS India Pvt. Ltd. v. ACIT [2014] 48 taxmann.com 80 (Hyderabad) The company cannot be accepted as it outsources a considerable portion of its business and functionally different Travelex India (P.) Ltd V. DCIT [2019] 106 Taxmann.com 351 (Mumbai ) The company cannot be accepted as it outsources a considerable portion of its business and functionally different Asit C Mehta Financial Services (Nucleus Netsoft and Gis (India) Limited) The company has undergone amalgamation during the year which has changed the business model of the company. a) The relevant extracts of Directors Report is reproduced I) "The scheme of amalgamation of erstwhile Nucleus Netsoft and GIS (India) Ltd. The transferor company with your company was sanctioned by Hon’ble High Court of Mumbai on 22 nd February. 2006. On complying with the requisite formalities, the scheme became effective and operative retrospectively from the appointed date of 1 April 2005, as per the scheme. In the accompanying financial statements, results of the transferor company have been incorporated and the figures herein and elsewhere in this annual report are not strictly comparable with those of previous year." (Refer page 507 of the paper book) (ii) " The financial year under review of 2005-06 was a year of growth and HSBC Electronic Data Processing India Ltd. v. ACIT [2013] 38 taxmann.com 141 (Hyderabad-Tribunal) Rejected by ITAT on the basis of the company undergoing amalgamation during the year which has changed the business model of the company and also the company outsource significant portion of its work 21 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. consolidation for your company. The company posted a strong top line performance (post amalgamation) with the total sales and services revenues of Rs. 56.77 million. The company also earned a healthy profit after tax of Rs 25.17 million and earnings per share of Rs. 5.08 per equity share iii) " We focused more on exports as a key driver for future growth. We also improved resource utilization in terms of capacity on all fronts. We have added clients and had increased business from existing clients." (Refer page 507 of the paper book) iv) "On amalgamation we have transformed ourselves into a sustainable growth centric company. Our strategy for growth is to remain export driven and strengthen the presence in the international marketed...” (Refer page 508 of the paper book) ) For detailed note on amalgamation refer pages 535 and 536 of the paper book. 1)The company is Functionally not comparable The company earns revenue from IT enabled services and software development services and no segmental information is available. (1) The Management discussion and Analysis states the company is into ITES and Software Services (Refer page 510 of the paper book) li) The company has earned revenue from Services and Software services (Refer page 511 and 531 of the paper book) i) The company's segmental disclosure note mentions primary reporting segments as Information Technology Enabled Services and Software development, PMS and Investment activities. (Refer page 539 of the paper book) liv) The balance sheet abstract mentions principal activity as IT Enables & Software Service and Portfolio Management Services. (Refer page 542 of the paper book) LI)The company has outsourced signification portion of its business The company has data processing charges of 1.05 Crores of total expenses of 4.24 Crores which 22 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. accounts for 24.76% of total expenses. According on account of above stated reasons the company cannot be accepted as comparable. M/s TNS India Pvt. Ltd. v. ACIT [2014] 48 taxmann.com 80 (Hyderabad-Tribunal) Rejected by ITAT on the basis of the company undergoing amalgamation during the year which has changed the business model of the company Franklin Templeton International Services (India) (P.) Ltd. v. DCIT [2018] 89 taxmann.com 439 (Mumbai- Tribunal) Rejected by ITAT on the basis that extraordinary financial event of amalgamation has taken place during the year. Goldman Sachs Services (P.) Ltd. v. DCIT [2015] 63 taxmann.com 9 (Bangalore- Tribunal) Rejected by ITAT on the basis of the company undergoing amalgamation during the year which has changed the business model of the company and also the company outsource significant portion of its work. Datamatics Financial Services Limited (Seg) (I) The he company fails related party filter a) The company cannot be accepted as it fails the Related party filter. Related party transactions are greater than 25% of total revenue of the •company. %) The company had related party expenses pertaining to reimbursement of expenses of Rs. 99.14 lakhs and other related party expenses of 14.31 lakhs totalling to 113.45 Lakhs during the year. The gross income of the company stood at 231 Lakhs hence it is evident that the related party Transactions were around 49% of the revenue. (I) No financials were available a) The annual report of the company was not available in the public domain and hence the company was not able to analyse the functions undertaken by the company. (Refer page 438 of the paper book) [b) The Appellant relies on the judicial decision of M/s Star India Private Garter India Research & Advisory Services (P) Ltd. v. ACIT [2019] 111 taxmann.com 245 (Mumbai- Tribunal) Rejected by ITAT on the basis that the company is functionally not comparable and engaged in services in relation to software development and no segmental information is available 23 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. Limited (ITA No. 6332/ Mum/ 2008) wherein it was held that the non- supply of basic data vitiates the whole TP exercise. As a quasi judicial authority TO is required to follow the principles of natural justice. It is clearly evident that the company fails the RPT filter of 25 % and hence the company cannot be accepted as a comparable. Principal Commissioner of Income-tax, Gurgaon v. IHUF IT Services (India) (P.) Ltd. [2017] 88 taxmann.com 642 (Punjab & Haryana HC) HC uphold ITAT's decision on the basis that the company has outsourced significant portion of its business. Stream International Services (P.) Ltd. v. ADIT [2013] 31 taxmann.com 227 (Mumbai- Tribunal) Rejected by ITAT on the basis of the company having related party transactions greater than 25% HSBC Electronic Data Processing India Ltd. v. ACIT [2013] 38 taxmann.com 141 (Hyderabad-Tribunal) Rejected by ITAT on the basis of the company having related party transactions greater than 25% (relied on Stream International Services (P.) Ltd ruling cited above) Goldman Sachs Services (P.) Ltd. v. DCIT [2015] 63 taxmann.com 9 (Bangalore- Tribunal) Rejected by ITAT on the basis of the company having related party transactions greater than 25% TNS India (P.) Ltd. v. ACIT [2014] 48 taxmann.com 80 (Hyderabad-Tribunal) 1Rejected by ITAT on the basis of the company having related party transactions greater than 25% Franklin Templeton International Services (India) (P.) Ltd. v. DCIT [2018] 89 taxmann.com 439 (Mumbai- Tribunal) Rejected by ITAT on the basis of that financials were not available on public domain and it had related party transactions greater than 25% Maple eSolutions Ltd. (1) The company's owner / director are involved in fraud In the company cannot be accepted as owner/ director have been involved in fraud and the financial statements are unreliable. CIT v. Cummins Turbo Technologies Ltd (2018] 91 taxmann.com 307 (Bombay HC) The HC uphold Tribunal's order that the company cannot be accepted as its 24 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. (I) No financials were available a) The annual report the company was not available in the public domain and hence the company was not able to analyse the functions undertaken by the company. (Refer page 437 of the paper book) b) The Appellant relies on the judicial decision of M/s Star India Private Limited (ITA No. 6332/ Mum/ 2008) wherein it was held that the non- supply of basic data vitiates the whole TP exercise. As a quasi judicial authority TPC is required to follow the principles of natural justice. Accordingly the company has unreliable financial statements and hence cannot be accepted as comparable. owner/director has been involved in fraud. ITO v. CRM Services India (P.) Ltd. [2011) 14 taxmann.com 96 (Delhi Tribunal) The company cannot be accepted as its owner/director have been involved in fraud. Stream International Services (P.) [Ltd. v. ADIT (2013] 31 taxmann.com 227 (Mumbai - Tribunal) The company cannot be accepted as its owner/director has been involved in fraud. [HSBC Electronic Data Processing India Ltd. v. ACIT (2013] 38 taxmann.com 141 (Hyderabad - (Tribunal) The company cannot be accepted as its owner/director has been involved in fraud. Goldman Sachs Services (P.) Ltd. v. DCIT (2015] 63 taxmann.com 9 (Bangalore - Tribunal) The company cannot be accepted as its owner/director have been involved in fraud Franklin Templeton International Services (India) (P.) Ltd. v. DCIT [2018] 89 taxmann.com 439 (Mumbai - Tribunal) The company cannot be accepted as its owner/director has been involved in fraud. M/s TNS India Pvt. Ltd. v. ACIT [2014] 48 taxmann.com 80 (Hyderabad - Tribunal) The company cannot be accepted as its owner/director has been involved in fraud. Travelex India (P.) Ltd V. DCIT [2019] 106 Taxmann.com 351 (Mumbai - Tribunal) The company cannot be accepted as its owner/director has been involved in fraud. 25 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. AY. 2009-10 Infosys BPO Ltd. The company is Functionally not comparable (i) High Turnover The turnover of the company (i.e. 1.016 Crore is significantly higher than that of the appellant company ( INR 2.22 Crore which is about 450 times the appellant (ii) Brand Value a) The company is a giant in its area and has a brand value of Infosys Technologies Limited. The company has huge asset base and is functionally comparable to appellant. B) Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India (iii)Large scale reorganization There has been large scale reorganisation as under a) Transfer of shams from P-Financial Services Holding BV to Infosys BPO Limited b) Liquidation of P.Financial Services Holding BV (direct subsidiary of Infosys BPO holding 100% shareholding in each of Poland. Thailand and Chennai subsidiaries) c) Merger of PAN Financial Shared Services India Private Limited with Infosys BPO Limited, This event has definitely impacted the PLI of the company, source, UT Starcom Inc. v. Deputy Director of Income-tax, Circle 2(2). International Taxation New Delhi (2018) 89 taxmann.com 90 (De -Tribunal Accordingly owing to above reasons the company cannot be Commissioner of Income Tax -2, Pune V. Principal Global Services (P.) Ltd. (2018 95 taxmann.com 315 (Bombay High Court.) CIT Vs. Pentair Water India (P) Ltd. (2016) 69 taxmann.com 180 (Bombay High Court) UT stardom Inc. v. DCIT, Circle 2(2), International Taxation, New Delhi (2018) 89 taxmann.com 90 (Delhi)- Tribunal Capital IQ Information Systems (India) Pvt. Ltd. Vs. ACIT (2014) 49 taxmann.com 313 (Hyderabad –Tribunal) M/s. Excellence Data Research Pvt. Ltd. V/s ITO ward 2(1) (2014) 49 taxmann.com 409 (Hyderabad- Tribunal) Hyundai Motors India Engineering Pvt. Ltd. Vs. DCIT (2014) 49 taxmann.com 290 (Hyderabad-Tribunal) M/s. Eaton Technology Pvt. Ltd. Vs. DCIT ITA. No. 400/Pn/2014 (Pune Tribunal) The High Court has upheld the order of the Tribunal in rejecting Infosys BPO Ltd. from the list of comparable companies on account of significant difference in turnover of the company and the appellant. The company has been rejected by the ITAT due to significantly high turnover Functionally not comparable. The company engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputable is a huge brand and definitely, result of that brand goes to this comparable, Also there has been large scale reorganisation of subsidiaries. Hence the company was rejected by ITAT The company has big brand value, hence excluded by the ITAT on the basis of functional dissimilarity. The company has big brand value huge asset base and hence excluded on the basis of functional dissimilarity by the ITAT. 26 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. accepted as comparable Eclerx Services Ltd. The company is Functionally not comparable (i) Knowledge Process Outsourcing ("KPO") Services The company is a KPO which is functionally different from routine BPO services. The relevant annual report extracts are reproduced below a) "Eclerx services Limited is a KPD company the paper book) proving data analytics process solutions to global enterprise clients (refer page 741 b) "Eclerx accessed the capital markets in December 2007 and became India first public listed Knowledge Process Outsourcing company refer page 741 of the paper book) c) What is really interesting about Eclerx though, is the way we have made an inherently niche, high end, KPO data analytics business scalable by combining people, process re- engineering and automation in a potent n nt mix to build propriety, platform based services" (refer page 744 of the paper book) d) The industry overview states "KPO represents the next step in the evolutionary cycle of the outsourcing market. Unlike BPOs, which focus on processes that are rules based and transactional, a KPO requires specialized knowledge and the ability to handle more complex activities... (refer page 755 of the paper book) e) The company's income from operations consists of revenue from data analytics services and process solutions. (Refer page 759 and 787 of the paper book) f) The balance sheet abstract mentions the principal product/service of the company as Knowledge Processing Outsourcing (Refer page 799 of the paper book) Maersh Global Centres (India) Pvt. Ltd. Vs. ACIT (2014) 31 ITR (T) 1 (Mumbai- Tribunal Special Bench) Research Pvt. Ltd. V/s ITO ward 2(1) (2014) 49 taxmann.com 409 (Hyderabad- Tribunal) Capital IQ Information Systems (India) Pvt. Ltd. Vs. ACIT (2014) 49 taxmann.com 313 (Hyderabad –Tribunal) Hyundai Motors India Engineering Pvt. Ltd. Vs. DCIT (2014) 49 taxmann.com 290 (Hyderabad-Tribunal) The company has been rejected by the ITAT due to significantly high turnover and presence of brand value. Functionally not comparable- mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field. Functionally not comparable- mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field. Functionally not comparable- mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field. H The company has experienced high growth which is in contrast to It is apparent from the nature of the activity of this 27 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. declining revenues experienced by the IT and ITAT The relevant extracts of Chairman's message are reproduced below: Whilst maintaining margins. Without what, a year it’s been for ecterx. in the midst of slowdown and recession, we have Grown revenue by 51% and profits by 39% " (Refer page 743 of the paper book) » " We added 446 employees in the year and our 73000 sq ft state of art Pune SFZ facility became operational a critical milestone for growth. The softer talent market has been a boon for us? We have been able to hire and retain excellent talent at all level or the firm. Whilst companies have retrenched we have invested. We have doubled our senior management strength and selectively added strong talent throughout the team..." (Refer page 743 of the paper book) (it) Business Restructuring / Environment peculiar to the company The company had acquired IT in year 2007, however the business restructuring was completed during the financial 2008-09, contracts o the subsidiaries which were wound up during the year were transferred to Eclerx. (Refer Page 756 of the paper book). Accordingly owing to above reasons the company cannot be accepted as comparable company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Thus, it is to be held that this company is not a comparable with BPO company which are engaged only in low end services of data processing Cosmic Global Limited The company is Functionally not comparable (1) The relevant factor in choosing comparable cases is to find out similarity in the nature of services rendered. In that view a case in which services are outsourced and then provided to its customers cannot be compared with the rendering of in- house services. There is a vast difference in the cases where the services are outsourced or provided in-house and there cannot be any comparison between such types of cases. (ii) The company is primarily engaged in translation services and the BPO segment contributes to less than 5 percent of the total turnover. Further, majority of the business is outsourced to a third party. While rendering the CIT-2, Pune vs. Principal Global Service (P) Ltd. (2018) 95 taxmann.com 315 (Bombay High Court) Mercer Consulting (India) (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-2, Gurgaon - [2014] 47 taxmann.com 84 (Delhi - Trib.) Capital 1Q Information Systems (India) Pvt. Ltd. Vs ACIT (2014] 49 taxmann.com 313 (Hyderabad - Tribunal.) M/s. Hyundai Motors India Engineering P. Ltd vis. DCIT (2014] 49 taxmann.com 290 The business model of the comparable being of out sourcing its servicing is different from the in-house business model of providing services adopted by the Respondent. This finding of fact by the Tribunal based on difference in business model, resulting in Cosmic Global Ltd., not being a comparable, is a possible view on facts. The Punjab & Haryana High Court held that the outsourcing charges of the company constitute 57.31 per cent of its total operating costs whereas the annual account of Cosmic Global Limited indicates a total revenue from operations of 28 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. services as against that of the Appellant wherein services are rendered in-house. (iii) The outsourcing charges of the assessee constitute 57.31% of its total operating costs. The annual account of Cosmic Global Limited indicates total revenue from operations of Rs.7.37 Crores of which Rs. 9.90 lacs were in respect of medical transcription and consulting services, Rs. 6.99 Crores were towards translation charges and only Rs. 27.76 lacs were on account of the BPO services. Thus the assessee's outsourcing activities constitute 57% of its total expenses whereas the similar activity of Cosmic Global Ltd. viz. the BPO segment was only Rs. 27.76 lacs which are but a small fraction of its total revenue from all its operations. (Source: Commissioner of Income-tax, Faridabad v. Mercer Consulting (India) (P.) Ltd - HIGH COURT (2016) 76 taxmann.com 153 (Punjab & Haryana High Court) Accordingly owing to above reasons the company cannot be accepted as comparable (Hyderabad - Tribunal.) M/s. Excellence Data Research Pvt. Ltd. v/s. Income Tax Officer ward 2(1) [2014] 49 taxmann.com 409 (Hyderabad - Tribunal.) Integreon (India) (P.) Ltd. v. Income Tax Officer, Ward- 11(4), New Delhi [2018] 99 taxmann.com 263 (Delhi - Tribunal.) Deputy Commissioner of Income-tax, Circle-11(4), Bangalore v. Informatics Business (P.) Ltd. [2019] 106 taxmann.com 354 (Bangalore - Tribunal.) Rs.7.37 Crores of which Rs. 9.90 lacs were in respect of medical transcription and consultancy services, Rs. 6.99 Crores were towards translation charges and only Rs. 27.76 lacs were on account of the BPO services. Thus the company's outsourcing activities constitute 57 per cent of its total expenses whereas the similar activity of Cosmic Global Ltd. viz. the BPO segment was only Rs. 27.76 lacs which are but a small fraction of its total revenue from al its operations. Accordingly, Cosmic Global was rejected. The company cannot be accepted as it has very low turnover from BPO business (Rs. 27.76 lacs out of total turnover of Rs. 7.37 Crores). The company cannot be accepted as it has very low turnover from BPO business (Rs. 27.76 lacs out of total turnover of Rs. 7.37 Crores). The company cannot be accepted as it has very low turnover from BPO business (Rs. 27.76 lacs out of total turnover of Rs. 7.37 Crores). This company is substantially outsourcing its services to outsiders, which gets reflected from the ratio of 'Translation charges' to 'Sales', which is at 40% and odd. It, therefore, becomes graphically clear that Cosmic Global Ltd., though functionally similar, is carrying out its work by relying more on outsourcing than through its own personnel as against. This illustrates that there is a difference in the business model adopted by the assessee vis-a-viz Cosmic Global Limited 21 10 The segmental revenue from the operations are given in 29 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. schedule 8 to the profit and loss account which reveals that major revenue of Rs. 7 Crore out of total revenue of Rs. 7.37 Crores has been earned by this company from the activity of translation services. It is to be noted further that the company has debited an expenditure of more than Rs. 3 crore on account of translations charges paid. Thus, it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Genesys International Corporation Ltd. The company is Functionally not comparable © The company’s website depicts the services offered are Geospatial, engineering an application development services Corporation Ltd. a) The services under Geospatial are: Photogrammely: data conversion, data migration, data maintenance, application development and outsourcing services Pore services under Engineering services are: Land Development Concept lans, Sie Curating Design, Storm & Sanitary Sewer Design, ) The services under Engineering services are: Land Development Conceptual Plans, Subdivision Plans, Platting and Design. Site and Survey Plans Site utility plans. Storm water management plan, wetland plans, Google earth overlay c) The services Jinder Application Development are: Application Development, Maintenance and Support Services and Testing Services (Refer p. e 678 of the paper book) (ii) The chairman and managing director's statement's relevant extracts are reproduced below (a) " Our performance has been the result of growth in our core capability in all kinds of land base mapping and in Geographical Information Systems. The use and applicability of GIS is ubiquitous and large in almost all are Mercer Consulting (India) (P) Ltd. Vs. DCIT, Circle-2, Gurgaon- (2014) 47 taxmann.com 84 (Delhi) Capital IQ Information Systems (India) Pvt. Ltd. Vs. ACIT (2014) 49 taxmann.com 313 (Hyderabad –Tribunal) M/s. Hyundai Motors India Engineering P. Ltd v/s. DCIT [2014] 49 taxmann.com 290 (Hyderabad - Trib.) (AY 2009- 10) M/s. Parexel International (India) Pvt. Ltd. Vs. ACIT ITA No. 144/Hyd/2014) (AY. 2009-10) Rejected by ITAT as it functionally not comparable as the company is engaged in providing full range of geospatial services, which deal with relative position of things on earth's surface which is not comparable to the business of the Appellant. Internal Page No Rejected by ITAT as it functionally not comparable as the company is engaged in providing full range of geospatial services, which deal with relative position of things on earth's surface which is not comparable to the business of the Appellant. Rejected by ITAT as it functionally not comparable as the company is engaged in providing full range of geospatial services, which deal with relative position of things on earth's surface which is not comparable to the business of the Appellant. Rejected by ITAT as it functionally not comparable as the company is engaged in providing full range of geospatial services, which deal with relative position of things on earth's surface 30 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. of business and society." (Refer page 837 of the paper book) b) " We are progressing well towards our goal to be an innovation and IP-led geospatial solutions provider touching all core areas of the economy. (Refer page 838 of the paper book) c) The company competes with Microsoft. Nokia, Digital Globe, Google Earth, etc. (Refer page 838 of the paper book) d) The company is exclusive reseller for NAVTEQ data foot the enterprise space in India. NAVTEQ is the world leader in navigable Maps and Street Data. (Refer page 839 of the paper book) ) The companies capabilities is GIS Consulting, 3D Mapping, Navigation maps. Lidar, photogrammetric Remote sensing services, utility services, image processing, surveying, business geographic & logistics, cadastral mapping, city scale and telecommunication refer page 849 and 850 or the paper book) 1) The industry overview, challenges & opportunism are in relation to Geographical Information System ('GIS) Industry (Refer page 876 of the paper book) (il) The company during the year was engaged in providing Geographical Information Services comprising of photogrammetric, Remote Sensing, Cartography, Data Conversion and other computer based related services. However it operated in single primary segment i.e. GIS based services (refer page 890 and 901 of the paper book) (iv) The company's balance sheet abstract mentions the principal activity of the company as Computer Software. (refer page 905 of the paper book) (U)The company has earned abnormal profits during the year The company has earned abnormal profits during the year. The Chairman's report and managing directors extract is reproduced "It gives me great pleasure to report to you the financial performance for the last year. Our sales grew by 77% and our net profits by 107%" (Refer page 838 of the paper book) which is not comparable to the business of the Appellant. 31 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. Accordingly owing to above reasons the company cannot be accepted as comparable Allsec Technologies Ltd. (for the purposes of inclusion) Mercer Consulting (India) (P) Ltd. Vs. DCIT, Circle-2, Gurgaon- (2014) 47 taxmann.com 84 (Delhi) American express (India) (P) Ltd. Vs. ACIT, Circle-1(1) New Delhi (2018) 97 taxmann.com 180 (Delhi-Tribunal)) PO rejected as the company failed export filter - 74.45% against TO filter of 75%. ITAT observed that the difference is miniscule and hence the company should be accepted International. The reasons assigned by TPO of putting such a ceiling for exclusion of this company cannot be upheld looking to the fact that the difference of the ceiling put by the TPO is only 0.5% by relying on the judgment of Mercer Consulting (India) (P.) Ltd. on the same very grounds. R. Systems International Ltd. (for the purposes of inclusion) The Company is functionally comparable but has a different Financial Year end. (1)The company's data for a financial year can be extra-plated with credible accuracy and there is no reason why the said comparable should be rejected. Moreover, the data for nine months is common for both the comparable and the Appellant. working Accordingly in the view of above, the comparable has to be accepted. Mercer Consulting (India) (P) Ltd. Vs. DCIT, Circle-2, Gurgaon- (2014) 47 taxmann.com 84 (Delhi) CIT Vs. Mckinsey Knowledge centre India Pvt. Ltd. TS-672 HC-2015 (Del HC) American express (India) (P) Ltd. Vs. ACIT, Circle-1(1) New Delhi (2018) 97 taxmann.com 180 (Delhi-Tribunal)) The Punjab & Haryana High Court held that the rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. The rule requires that the data used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it does not matter if the financial year followed is different. In the instant case the data relating to the relevant financial year of R. Systems International Limited is available and hence considered as comparable. The HC uphold the tribunal's decision that if the data for a financial year can be extra- polated with credible accuracy on the basis of data available on record then there is no reason why the 32 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. said comparable should be rejected. The company was held as comparable by relying on the decision of ITAT Delhi Bench in the case of Mercer Consulting (India) and Cadence Design Systems (India) Pvt. Ltd., wherein they have followed the judgment of Hon'ble Delhi High Court in the case of McKinsey Knowledge Centre India (P.) Ltd. v. Pr. CIT [2018] 96 taxmann.com 237. 15. We have gone through the table compiled and submitted by assessee as reproduced above in para 14. We have deliberated on the facts of the comparables as mentioned above and found the submissions of the assessee are to be in order. For example, in the case of M/s. Vishal Information Technologies Ltd., model of business is altogether different. M/s. Asit C Mehta Financial Services (Nucleus Netsoft and Gis (India) Limited, certain extra ordinary events occurred in this company, this company is a software company and involved in ITES further no segmental data provided for this comparable. M/s. Datamatics Financial Services limited. In this comparable related party transactions are crossing the bench mark limit of 25%. M/s. Maple eSolutions Ltd. for A.Y. 2006-07 and in same for A.Y. 2009-10 for the comparable names mentioned in table above (Both exclusions and inclusions). 16. In view of above observations and the specific facts of the case relying on the principle of consistency and Board’s Circular mentioned (supra), 33 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. Ground No. 2 raised by assessee on the premises that TPO/AO erred in making cherry picking of comparables based on conjectures and surmises with complete disregard to the differences in functions performed, assets employed and risks under taken by the assessee. We allow ground no. 2 raised by the assessee to the extent argued before us. 17. The 3 rd Ground raised by the assessee pertains to Disallowance of VSAT and Lease Charges paid to NSE and BSE without deduction of T.D.S. u/s. 194C/194J hence disallowable u/s. 40a(ia). This issue is squarely covered by assessee’s own case for A.Y. 2005-06 before coordinate bench of ITAT vide ITA No. 133/M/2009 and Hon’ble Jurisdictional High Court vides Income Tax Appeal No. 1230 of 2013. Relevant extract of ITATs order on similar issue in the case of assessee is as under: “5.1.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of VSAT, lease line charges and transaction charges paid by the assessee to the stock exchange as brokerage. The AO had disallowed the claim holding that the payment made by the assessee were not for use of standard ITA No.6979/M/08 & 133/M/09 A.Y.05-06 equipments but also involved technical services. He therefore, held that these payments were fees for technical service covered by Section 40(a) (ia) and since the assessee had not deducted tax at source the claim had been disallowed. The CIT(A) has deleted the addition holding that VSAT, and lease line charges, were reimbursement of expenses to the stock exchanges for use of standard facilities and transaction charges were not disallowable in view of the decision of the Tribunal in case of Kotak Securities Ltd. 5.1.4 We find that the issue of transaction charges is covered by the judgment of Hon'ble High Court of Bombay in case of CIT(A) vs. Kotak securities Ltd.( 15 Taxmann.com77). The Hon'ble High Court in that case held that the transaction charges paid by the assessee were of the nature of fees for technical services. However, the Hon'ble High Court noted that both parties were under bonafide belief for nearly a decade that no tax was required to be deducted and, therefore, this being the first year the disallowance could not be made as the assessee was under the bonafide belief that the claim was allowable. The case of the assessee is identical as in this year also disallowance has been made for the first time in assessment year 2005-06. No distinguishing features have been brought to our notice by the ld. DR. We therefore, delete the disallowance made by AO on account of transaction charges and confirmed the order of CIT (A). As regards ITA No.6979/M/08 & 133/M/09 A.Y.05-06 VSAT and lease line charges it has to be allowed 34 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. in view of the decision of the Tribunal in the case of Angel Stock Broking Ltd. (35 SOT 457) in which the Tribunal noted that stock exchanges were not owners of technology to provide it for a fees to the prospective users. They were consumers of technology for which they had to get permission from DOT. Therefore, the payment could not be considered as fees for technical services. Respectfully following the decision of the Tribunal (supra), we allow the claim of the assessee.” 18. In view of the above decision of coordinate bench of ITAT and Hon’ble Jurisdictional High Court in assessee’s own case, nothing adduce afresh by the Revenue, which can prompt us to take any deviation from the earlier position. This view of ITAT and Hon’ble Bombay High Court further confirmed by the Hon’ble Apex Court (in the case of Kotak Securities Ltd. [2016] 383 ITR 1 (SC.)) once for all and declared that such type of payments are not liable to TDS at all. In the light of above ground no. 3 raised by the assessee is allowed. 19. The 4 th Ground of appeal pertains to disallowance u/s. 14A of the Act. This issue also dealt with by the coordinate bench of ITAT in assessee’s own case for A.Y.s 2002-03, 2004-05 and 2005-06 vide ITA No. 6762, 3186 and 6979/Mum/2005, 2008 and 2008 respectively. Again the facts of the year under consideration are same and revenue is failed to adduce any fresh argument of variation in facts which can prompt us to take any deviation from earlier position. In A.Y. 2002-03, 2004-05 and 2005-06 as mentioned (supra) amount of disallowance under section 14A was limited maximum up to Rs. 2,20,000/-. Quantum of investments for the year under consideration is also similar to that of A.Y. 2005-06, in view of this amount of disallowance under section 14A for this year also is restricted up to Rs. 2, 20,000/- only against the disallowance of Rs. 10, 00,000/- made by AO and confirmed by DRP. Although position w.e.f. A.Y. 2008- 09 has been changed as Rule 8D came into force from A.Y. 2008-09. So, for A.Y. 2009-10 it is observed that all the investments made by the assessee are out of 35 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. his own funds so there cannot be any disallowance on front of interest. Secondly, there is no change in investments in subsidiaries and investment made in the scheme of HSBC Mutual Fund (group concern) does not require much deliberation on the administrative or accounting side. Although assessee suo-moto offered disallowance under section 14A amounting to Rs. 12.85 Lakhs on account of Employee Cost & Proportionate overheads amounting to Rs. 10.35 Lakhs and Rs. 2.5 Lakhs respectively. It is a settled position of law where amount of investments are lesser than or equal to assessee’s own funds, no disallowance in Rule 8D (2)(ii) can be made on account of interest element and as far as disallowance for the purposes of Rule 8D(2)(i) is concerned assessee suo-moto offered 18.25 Lakhs as disallowance which is not under challenge by the Revenue. As far as disallowance under Rule 8D (2)(iii) Is concerned, no disallowance can be made where investments are of strategic nature. With this background, we allow the ground of assessee and hold that disallowance under section 14A for the A.Y. 2006-07 is restricted up to Rs. 2.2 Lakhs and Rs. 18.25 Lakhs for A.Y. 2009-10. 20. Ground No.5 pertaining to levy of interest under section 234B and 234C raised for A.Y. 2006-07. On this issue, we hold that interest under section 234C is limited up to the returned income of the assessee and has no connection with any further addition or disallowance made by the Revenue. Hence, if any variation is there in charging of interest under section 234C above the figure of returned income, same directed to be deleted and interest under section 234B is consequential in nature, hence, no specific adjudication is required. 21. In the result appeal filed by the assessee is allowed. 36 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. ITA No. 702/Mum/2014 (A.Y. 2009-10) 22. Ground No. 1, 2, 4 & 5 already discussed and adjudicated in ITA No. 4459/Mum/2014 for A.Y. 2006-07 (supra). As the facts and law applicable is similar, hence, our findings mutatis mutandis applicable to this appeal also. 23. Ground No. 3 pertains to issue of equity shares on undervalued figures and consequent treatment of the same as deemed loan and interest thereon. During the year under consideration, the assessee had issued 3, 78, 61, 200 equity shares of Rs. 100/- each to its AE viz. HSBC Investment Bank Holding B.V. at Rs. 250 per share from the assessee’s prospective the transaction was at Arm’s Length as the valuation of share as per certificate issued in accordance with the guidelines laid down by the Controller of Capital Issues Act, 1947. Assessee submitted valuation report during the TP Proceedings on the basis of Discounted Cash Flow Method (DCM) at Rs. 244 per share, which the TPO rejected and substituted the same with his own working on the basis of PECV Method thus arriving at value of Rs. 496 per share; this led to an adjustment of Rs. 932.34 Cr. The TPO held the excess amount paid as the interest free loan to the AE and charged ALP interest @ 15.55% this led to the interest adjustment of Rs. 59.97 Cr. 24. The transaction of purchase of equity shares, whether it is in the nature of inbound investment or outbound investment is a capital account transaction which does not give rise to any income chargeable to tax in India under the provision of the Act. Cases of outbound investment have also been specifically adjudicated upon by Hon'ble Bombay High Court and Hon'ble Tribunals wherein it has been held that purchase of shares of an AE is not an international transaction 37 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. as there is no income arising on account of such transactions: Pr Comm. Income tax-7 vs. PMP Auto Components Pvt. Ltd (Bombay HC 1685 of 2016): "In our view, therefore, the issue arising here stands concluded by the decision of this Court in Vodafone (supra). The distinction which is sought to be made by the revenue on the basis of this being an inbound investment and not an outbound investment as in the case of Vodafone (supra) is a distinction of no significance. On principle, if this court has held that Chapter X of the Act is machinery provision and can only be invoked to bring to tax any income arising from an international transaction, then, it is necessary for the revenue to show that income as defined in the Act does arise from the international transaction. The distinction between inbound and outbound investment is a distinction which does not take the case of revenue any further, as the Legislature has made no such distinction while providing for determination of any income on adjustments to arrive at ALP arising from an international transaction." 25. Pr. Comm. of Income Tax-13 vs. Tops Group Electronics Systems Ltd (Bombay HC 1721 of 2016) has upheld order of the Hon'ble ITAT in M/s. Tops group Electronic Systems Ltd vs. Income Tax Officer-8(3)(3) (ITA 2115/Mum 2015). M/s. TCG Life sciences Pvt. Ltd. vs. DCIT, Circle-11(2) (ITA No. 121/Kol/2016 & 647/Kol/2017). Vijay Electricals Ltd vs. Addl. Commissioner of Income-tax (ITA 842 / Hyd/2012). 26. In the event the alleged excessive consideration is re-characterized as a 'deemed loan’, the Assessee could not have lent this amount to its AE outside India in view of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000 ('Regulations. Considering the alleged excess consideration as a 'deemed loan is itself not permissible as per the FEMA, in the absence of a transaction, the resultant proceedings should be dropped. 27. Reference to TPO on this issue is un-warranted hence, bad in law. As transaction of purchase of equity shares is a capital transaction and the same is 38 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. not falling in the category of International Transaction as defined in section 92 of the Act, as there is no income arising on account of such transactions. In the light of these observations, we set aside the action of authorities below and allow Ground No. 3 raised by the assessee. 28. Further on similar facts and law applicable, the Hon’ble Jurisdictional High Court came across the situation in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India [2014] 50 taxmann.com 300 (Bom.) wherein Hon’ble Jurisdictional High Court allowed the petition of the assessee as under: “Chapter X in the present form replaced the erstwhile section 92 by sections 92 to 92F with effect from assessment year 2002-03. Erstwhile section 92 of Chapter X did deal with cross border transactions permitting adjustments of profits made by a resident in case of transactions with non-resident (two entities having close connection) if the profits of the resident were understated. This and section 40A(2) which governed all assessee, did give some power to the Assessing Officer to ensure the correct profits are brought to tax in case of cross border transactions. However, in the light of Indian Economy opening up and becoming part of the global economy, leading to a spate of foreign companies (Multinational Enterprises) establishing business in India either by itself or through its subsidiaries or joint ventures. Similarly, Indian Companies ventured abroad, operating either by itself or through its subsidiaries or joint venture companies. These multinational enterprises had transaction between themselves and these transactions not being subject to market forces, the consideration were fixed within the group to ensure transfer of income from one tax jurisdiction to another as appeared profitable to them. Thus, the new sections 92 to 92F were introduced with effect for assessment year 2002-03 as a part of Chapter X. The aim being to have well defined rules to tax transactions between AEs and not left to the discretion of the Assessing Officer and brings out 39 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. uniformity in treatment to tax of International Transaction between AEs. The Explanatory Notes to the Finance Act, 2001 brings out the objectives as indicated in the circular No. 14 of 2001 [Para 22]. Thus to get over transfer mispricing/manipulation/abuse that the market based transfer pricing was introduced, known as ALP. Therefore, it is clear that Chapter X now existing was to ensure that qua International Transaction between AEs, the profits are not understated nor losses overstated by abuse of either showing lesser consideration or higher expenses between AEs than would be the consideration between two independent entities, uninfluenced by relationship. It did not replace the concept of income or expenditure as normally understood in the Act for the purposes of Chapter X. The objective of Chapter X is certainly not to punish Multinational Enterprises and/or AEs from doing business inter se. However, one is conscious of the fact that in fiscal statutes, whatever may be the intent of the Parliament, the courts have to construe the statute strictly on the basis of what is stated in the Act [Para 23]. A plain reading of section 92(1) very clearly brings out that income arising from an International Transaction is a condition precedent for application of Chapter X [Para 24]. The word income for the purpose has a well understood meaning as defined in section 2(24). This even when the definition in section 2(24) is an inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in section 2(24)(vi). In such a case, capital gains chargeable to tax under section 45 are, defined to be income. The amounts received on issue of share capital including the premium are undoubtedly on capital account. Share premium have been made taxable by a legal fiction under section 56(2) (viib) and the same is enumerated as income in section 2(24) (xvi). However, what is brought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed in capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express 40 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as income. In view of the above, there is substance in the assessee's case that neither the capital receipts received by the assessee on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act [Para 25]. The issue of shares at a premium does not exhaust the universe of applicability of Chapter X. There are transactions which would otherwise qualify to be covered by the definition of International Transaction. The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. it is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order [Para 31]. The other basis in the impugned order is that as a consequence of under valuation of shares, there is an impact on potential income. The reasoning is that if the ALP were received, the assessee would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium. Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/consideration between AEs. The entire consideration received would not be subject-matter of taxation [Para 32]. Section 92(2) deals with a situation where two or more AE's enter into an arrangement whereby they are to receive any benefit, service or facility then the allocation, apportionment or contribution towards the cost or expenditure is to be determined in respect of each AE having 41 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. regard to ALP [Para 36] It is contended by the revenue that in view of Chapter X, the notional income is to be brought to tax and real income will have no place. The entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. It is undisputed that that there is absence of any charge in the Act to subject issue of shares at a premium to tax [Para 40]. There is also merit in the submission of the assessee that with effect from 1-4-2013, the definition of income under section 2(24) (xvi) includes within its scope the provisions of section 56(2) (viib). This indicates the intent of the Parliament to tax issue of shares to a resident, when the issue price is above its fair market value. In the instant case, the revenue's case is that the issue price of equity share is below the fair market value of the shares issued to a non-resident. Thus Parliament has consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad. The revenue has not been able to meet the above submission but have in their written submission only submitted that the above provisions would have no application to the present facts [Para 41]. It was contended by the revenue that in any event the charge would be found in section 56(1). Section 56 does provide that income of every kind which is not excluded from the total income is chargeable under the head income from other sources. However, before section 56 can be applied, there must be income which arises. As pointed out above, the issue of shares at a premium is on capital account and gives rise to no income. The submission of the revenue that the shortfall in the ALP as computed for the purposes of Chapter X gives rise to income is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant re-computation of a consideration 42 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. received/given on capital account. It permits re-computation of income arising out of a Capital Account Transaction, such as interest paid/received on loans taken/given, depreciation taken on machinery etc. All the above would be cases of income being affected due to a transaction on capital account. This is not the revenue's case here. Therefore, although section 56(1) would permit including within its head, all income not otherwise excluded, it does not provide for a charge to tax on Capital Account Transaction of issue of shares as is specifically provided for in section 45 or section 56(2)(viib) and included within the definition of income in section 2(24) [Para 42]. It was contended by the revenue that income becomes taxable no sooner it accrues or arises or when it is deemed to accrue or arise and not only when it was received. It is submitted that even though the petitioner did not receive the ALP value/consideration for the issue of its shares to its holding company, the difference between the ALP and the contract price is an income, as it arises even if not received and the same must be subjected to tax. There can be no dispute with the proposition that income under the Act is taxable when it accrues or arises or is received or when it is deemed to accrue, arise or received. The chargeability to tax is when right to receive an income becomes vested in the assessee. However, the issue under consideration is different viz. whether the amount said to accrue, arise or receive is at all income. The issue of shares to the holding company is a capital account transaction, therefore, has nothing to do with income [Para 43]. It was also contended that Chapter X is a complete code by itself and not merely a machinery provision to compute the ALP. It is a hidden benefit of the transaction which is being charged to tax and the charging section is inherent in Chapter X. It is well settled position in law that a charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging section in Chapter X, it is not possible to read charging provision into Chapter X. In this case, there is no uncertainty that no charge, express or implied, in letter or in spirit to tax issue of shares at a premium as income [Para 44]. In view of the above, it is held that 43 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. an issue of shares at a premium by assessee to its non-resident holding company does not give rise to any income from an admitted International transaction and, thus, there is no occasion to apply chapter X in such a case [Para 49]. Accordingly, petition is allowed.” 29. Further, CBDT also dealt with the similar issue vide its instruction mentioned below: Instruction No 2/2015 F No.500/15/2014/APA-I Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Foreign Tax & Tax Research- I Division APA-I Section New Delhi, Dated the 29th January, 2015 To All Principal CCsIT/DsGIT and CCSIT/DSGIT Madam/Sir Subject: Acceptance of the Order of the Hon'ble High Court of Bombay in the case of Vodafone India Services Pvt. Ltd.-reg. In reference to the above cited subject. I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for AY 2009-10(WP No 871/2014). wherein the Court has held, inter-alia, that the premium on share issue was on account of o capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. 2. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs, and CsIT(Appeals), 3. This issues with the approval of Chairperson CBDT. (Anchal Khandelwal) 44 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. Under Secretary to the Govt of Indi 30. In the light of above the issue of shares at a premium is on capital account and gives rise to know income for the purposes of Chapter-X of the Act. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measures of ALP to transactional value itself does not arise. In the result, keeping in view the decision of Hon’ble Jurisdictional High Court and CBDT Circular, order of TPO and AO is set-aside on this issue as raised in Ground No.3 of the appeal. 31. Ground No.6 pertains to disallowance of loss on account of error trades amounting to Rs. 21.24 Lakhs. Loss on account of error trades and client facilitation and not on account of purchases and sales of own stock of the assessee. In the course of executing the contracts on behalf of the clients there could be "errors" committed by the staff of the assessee. Some of the common types of errors are: punching wrong codes, executing purchase contract instead of sale contract, wrong quantity, etc. In such cases, the assessee has to "square off" the transactions by taking over the wrong trades on its own account. Such transactions are reflected under the head "Share Trading" Account and represent loss incurred in the course of our broking business. Since this loss has not resulted from assessee’s own Share Trading operations, it cannot be deemed to be speculation loss under the Explanation to section 73 of the Act. Assessee Company is a member of the Bombay Stock Exchange and the National Stock Exchange. The main business activity of the assessee company is research-based stock broking. Apart from this, it had also carried out share trading from out of its owned funds in the relevant previous year. The share trading activity of the 45 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. assessee is incidental to its main business activity of stock-broking and carried out alongside stock-broking activity. Common funds and managerial staffs of the assessee carry out these activities. There is unity of control and management between the businesses of the assessee –company. Hence, they constitute single business. The transactions entered by the assessee are not speculative because Section 43(5) defines "speculative transactions" as those which are settled otherwise than on delivery. In the assessee's case the transactions were settled by delivery. Therefore, the case of the assessee is not covered by the said definition. 32. Similar issue in assessee’s own case for A.Y. 2005-06 has been allowed by the co-ordinate bench vide ITA No. 6979/Mum/2008 as under: “3.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding the allowability of loss incurred by the assessee on account of certain share transactions. The assessee is only a share broker who buys/sells shares on behalf of the clients. It has been argued that loss had occurred on those transactions undertaken on behalf of the clients in which there were errors and transactions were not as per orders booked by the clients. These purchases/sales executed on behalf of the clients are therefore, owned up by the assessee and these are squared up which has resulted into loss. CIT (A) has observed that the assessee had not made any claim of error trades before the AO. The perusal of record shows that the finding of the CIT (A) is not correct. The assessee vide letter dated 28.09.2007, copy of which is placed at page -42 of the paper book had given details of error trade before the AO as per annexure-VI placed at page 45 of the paper book. The assessee had also enclosed details of error trades before CIT (A). The claim of the assessee has not been controverted by the Ld. D.R by producing any material. Therefore, claim of the assessee that it had made claim of error trades before the AO as well as CIT(A) has to be accepted. However, it is also a fact that the claim of error trade has not been examined either by AO or CIT (A). The Ld. A.R had no objection if the matter is restored to the file of AO for necessary verification. In our view the matter requires fresh examination and in case loss is found to have occurred on account 46 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. of error trades conducted by assessee on behalf of clients, the claim has to be accepted as business loss in view of the decision of the Tribunal in the case of Parker Securities Ltd. (8 SOT 257) relied upon by the Ld. AR in which it has been held that in case of brokers loss arising on account of purchase and sale of shares under forced circumstances and under compulsion will not be covered by Explanation to Section 73. We, therefore, set aside the order of CIT (A) and restore the issue to the file of AO for fresh order after necessary examination and after allowing opportunity of being heard to the assessee.” 33. In view of above, we found that this loss claimed by assessee does not hit by Explanation to section 73 and it is a part of regular business transactions of the assessee and very much allowable against the business income of the assessee. We direct the AO to delete the disallowance and allow the same to the assessee against its business income. Resultantly, Ground No. 6 raised by assessee is allowed. 34. In the result, appeal filed by the assessee is allowed. ITA No. 1661/Mum/2014 (A.Y. 2009-10) 35. In this appeal, Revenue raised one substantial ground and rest two are general in nature. On ground No. 1 which is substantial in nature raised by the Revenue has already been discussed in detail in DRP order. We have carefully gone through and deliberated on the reasoning given in DRPs order and found the same to be reasonable looking at the facts of the case. In the light of this we don’t 47 ITA Nos. 4459, 702 & 1661/Mum/2014 M/s HSBC Securities and Capital Markets (India) Pvt. Ltd. find any reason to disturb the same. Hence, ground no. 1 of appeal raised by Revenue is dismissed. 36. In the result appeal filed by the revenue is dismissed. Order pronounced in the open court on 10 th day of March, 2023. Sd/- Sd/- (VIKAS AWASTHY) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 10/03/2023 SK, Sr.PS Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकर आयुक्त(अ)/The CIT(A)- 4. आयकर आयुक्त CIT 5. दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 6. ग र्ड फ इल/Guard file. BY ORDER, //True Copy// (Dy. /Asstt. Registrar) ITAT, Mumbai