ACIT - 4(3), MUMBAI V. M/s. J.P. MORGAN INDIA PVT. LTD., MUMBAI

ITA 618/MUM/2006

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75548 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 12-02-2014
• Assessment Year: 2002-2003
• Appeal Filed On: 27-01-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: P J PARDIWALA
• Keywords: Related party transaction; Transfer pricing; Revenue expenditure
• Section: 14A; 37(1); 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / , ! ' # BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 670/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 J.P.MORGAN INDIA PRIVATE LIMITED, 9 TH FLOOR, MAFATLAL CENTRE, NARIMAN POINT, MUMBAI 21 / VS. THE ACIT, RANGE 4(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. & ! ./ '( ./ PAN/GIR NO. : AAACJ 1022G ( &) / APPELLANT ) .. ( *+&) / RESPONDENT ) . / ITA NO. 618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 THE ACIT, RANGE 4(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. / VS. J.P.MORGAN INDIA PRIVATE LIMITED, 9 TH FLOOR, MAFATLAL CENTRE, NARIMAN POINT, MUMBAI 21 & ! ./ '( ./ PAN/GIR NO. : AAACJ 1022G ( &) / APPELLANT ) .. ( *+&) / RESPONDENT ) ASSESSEE BY : SHRI P.J.PARDIWALA REVENUE BY : S/SHRI ABHINAY KUMBHAR & AJEET KUMAR JAIN , -.! / DATE OF HEARING : 12/02/2014 /0% , -.! / DATE OF PRONOUNCEMENT : 12/02/2014 . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 2 1 / O R D E R PER BENCH: THESE CROSS APPEALS ARE DIRECTED AGAINST ORDER DATED 31/10/2005 PASSED BY LD. CIT(A)-XIV, MUMBAI FOR ASSESSMENT Y EAR 2002-03. GROUNDS OF APPEAL READ AS UNDER: GROUNDS OF ASSESSEES APPEAL: AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER O F INCOME-TAX (APPEALS)-XIV, MUMBAI [HEREINAFTER REFERRED TO AS THE LEARNED CIT (A)], UNDER SECTION 250 OF THE INCOME-TAX ACT, 1961 (ACT) AND BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, J.P. MORGAN INDIA PRIVATE LIMITED [HEREINAFTE R REFERRED TO AS THE APPELLANT] RESPECTFULLY SUBMITS THAT THE LEARNED CIT(A) ERRED IN PARTLY UPHOLDING THE ORDER OF THE ADDITIONAL COMMISSIONER OF INCOME-TAX RANGE 4 (3), MUMBAI, BY: NOT ACCEPTING THAT THE TRANSACTIONAL NET MARGIN MET HOD AS THE MOST APPROPRIATE METHOD AND CONCLUDING THAT THE COMPARAB LE UNCONTROLLABLE PRICE METHOD MAY BE APPLIED TO DETERMINE THE ARMS LENGTH PRICE IN RESPECT OF THE BROKING SERVICES PROVIDED BY THE APPELLANT, IF THE APPROPRIATE ADJUSTMENTS ARE MADE TO THE RATES CHARGED BY JPMIPL TO RELATED AND UNRELATED PARTIES. . GROUNDS OF REVENUES APPEAL: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 13,76,355/- U/S . 14A AS EXPENDITURE INCURRED FOR EARNING DIVIDEND ON PREFERENCE SHARES, ON THE G ROUNDS. IRRELEVANT TO THE DISALLOWANCE. 2) ON THE FACTS AND IN HE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 6,54,000/- IN R ESPECT OF CLUB MEMBERSHIP FEES. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) ERRED IN DELETING THE ADDITION OF RS. 33,61,974/- CONSID ERED AS CAPITAL IN NATURE IN RESPECT OF SOFTWARE, SUPPORT SERVICES, REPAIRS AND MAINTENANCE. 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) ERRED IN DELETING THE TRANSFER PRICING ADJUSTMENT OF RS . 74,79,266/-. . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 3 5) FURTHER, PLACED IN THE ABOVE FACTUAL AND LEGAL SCENARIO, THE IMPUGNED ORDER OF THE LI. CIT(A) IS, THE APPELLANT PRAYS, PATENTLY PE RVERSE AND CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6) THE APPELLANT CRAVES E TO AMEND OR ALT ER ANY GROUND OR ADD A NEW GROUND WHICH MA L NECESSARY. 2. GROUND RELATING TO T.P. ADJUSTMENT OF RS.74,79,2 66/- IS COMMON IN BOTH THE APPEALS. IT IS THE SOLE GROUND IN THE ASSESSEES APPEAL AND THE GRIEVANCE OF THE REVENUE REGARDING THIS ADJUSTMENT IS STATED IN GROU ND NO.4. 2.1 THE BASIC FACTS RELATING TO THIS ADJUSTMENT ARE AS UNDER: 2.2 THE ASSESSEE HAS PROVIDED BROKING OF SERVICES T O RELATED PARTIES AS WELL AS UNRELATED PARTIES. THERE IS TWO TYPES OF BRAKING A CTIVITIES. ONE ACTIVITY IS DESCRIBED AS DELIVERY VERSES PAYMENT (DVP) AND OTHER TYPE OF AC TIVITY IS DIRECT CUSTODIAN SETTLEMENT(DCS). THE AVERAGE RATE CHARGED BY THE ASSESSEE ON SUCH TYPE OF ACTIVITIES IN RELATION TO RELATED AND UNRELATED PARTIES IS DES CRIBED IN FOLLOWING TABLE: BROKERAGE RATES PARTICULARS RELATED PARTIES UNRELATED PARTIES DVP TRADES 0.35% 0.56% DCS TRADES 0.36% 0.40% TRANSACTION WITH RELATED PARTIES WERE INTERNATIONA L TRANSACTIONS REQUIRING DETERMINATION OF ALP. ACCORDING TO TRANSFER PRICIN G STUDY FILED BY THE ASSESSEE SUCH TRANSACTIONS WERE STATED TO BE AT ARMS LENNG TH ON THE APPLICATION OF TRANSACTION NET MARGIN METHOD (TNMM). HOWEVER, TPO DID NOT ACCEPT SUCH CLAIM OF THE ASSESSEE. ACCORDING TO TPO INTERNAL C OMPARABLES WERE AVAILABLE, THEREFORE, THE METHOD ADOPTED BY THE ASSESSEE WAS N OT ACCEPTABLE OR PROPER. IT WAS THE CASE OF THE ASSESSEE THAT ACCORDING TO TH E FACTS OF THE CASE THE TRANSACTIONS CANNOT BE EVALUATED ON THE BASIS OF CUP METHOD WHICH REQUIRE A HIGH DEGREE OF COMPARABILITY BETWEEN CONTROLLED A ND UNCONTROLLED TRANSACTIONS. THE FOLLOWING FACTORS WERE BROUGHT T O THE NOTICE OF TPO TO CONTEND THAT INTERNAL CUP COULD NOT BE APPLIED: . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 4 IN THE PRESENT CIRCUMSTANCES, THERE ARE SUBSTANTIA L DIFFERENCES IN THE FUNCTIONS UNDERTAKEN AND RISKS ASSUMED BY THE ASSES SEE WITH RESPECT TO BROKING SERVICES PROVIDED TO RELATED PARTIES VIS-- VIS UNRELATED PARTIES; MOST OF THE RELATED PARTIES ARE CAPTIVE CLIENTS OF THE ASSESSEE. HENCE, IT DOES NOT NEED TO INCUR SIGNIFICANT COSTS ON MARKETI NG ITS SERVICES. FOR EG, CMIL THE LARGEST CLIENT OF THE ASSESSEE DOES NOT TR ANSACT WITH OTHER INDIAN BROKERS. HENCE, THE ASSESSEE WOULD NOT NEED TO INCU R MARKETING COSTS WITH RESPECT TO CMIL; COUNTER PARTY CREDIT RISK IS SIGNIFICANT RISK WHICH ARISES TO A BROKER AND NEEDS TO BE FACTORED IN WHILE DETERMINING THE BROKE RAGE RATE. THE ASSESSEE DOES NOT BEAR ANY CREDIT RISK WITH RESPECT TO ITS R ELATED PARTIES; AND THE FUNCTIONS PERFORMED BY THE ASSESSEE WITH RESPEC T TO ITS RESEARCH ACTIVITIES IS SIGNIFICANTLY LOWER FOR RELATED PARTY COMPARED TO THOSE INCURRED FOR UNRELATED PARTY. 2.3 HOWEVER, TPO DID NOT ACCEPT AFOREMENTIONED SUBM ISSIONS OF THE ASSESSEE. IT WAS THE CASE OF THE ASSESSEE THAT IF INTERNAL CUP METHOD IS APPLIED THEN ADJUSTMENT FOR DIFFERENCE ON ACCOUNT OF FUNCTIONS PERFORMED, ASSET EMPLOYED AND RISK ASSUMED SHOULD BE GIVEN TO THE ASSESSEE. FOLLOWING TABLE WAS DESCRIBED TO SAY THAT THERE IS A BASIC DI FFERENCE IN THE TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS RELATED PARTI ES AND UNRELATED PARTIES. PARTICULARS RELATED PARTIES UNRELATED PARTIES FUNCTIONS BUILDING CLIENT RELATIONSHIP 6 3 MARKETING AND ORDER ORIGINATION 3 * 3 PREPARATION AND CIRCULATION OF RESEARCH REPORTS 3 3 ORDER EXECUTION 3 3 RISKS FUNDING RISK 3 3 RISK OF NON DELIVERY 6 # 3 OPERATIONAL RISK 3 3 *EFFORT INCURRED IS SIGNIFICANTLY LOWER FOR RELATED PARTIES VIS--VIS UNRELATED PARTY. # NO ORIGINATION AND MARKETING EFFORTS ARE UNDERTA KEN FOR COPTHALL MAURITIUS INVESTMENT LIMITED (CMIL)- CMIL IS A KEY CLIENT OF THE ASSES SEE TO WHOM IT RENDERS BROKING SERVICES. CMIL PROVIDES A LARGE VOLUME OF BUSINESS TO THE ASSESSEE. ALSO, CMIL CARRIES OUT ITS TRADES ONLY THROUGH THE ASSESSEE. 2.4 IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS TO INCUR LOWER COST IN PROVIDING BROKING SERVICES TO RELATED PARTIES WHI CH WAS CONSIDERED BY PRICING . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 5 THE RESPECTIVE TRANSACTIONS. THESE DIFFERENCES WE RE ON ACCOUNT OF VARIOUS FACTORS. FOR EXAMPLE EFFORTS OF RESEARCH PERSONNEL IN THE CASE OF RELATED PARTIES BASED ON TIME SPENT WAS APPROXIMATELY 20% LOWER THA N THAT FOR UNRELATED PARTIES. SIMILARLY, THE SALES TRADING EFFORTS FOR RELATED PARTIES WAS 20% OF THE EFFORTS REQUIRED FOR UNRELATED PARTIES SINCE NO SAL ES PERSONS WERE DEDICATED TOWARDS BUILDING AND FOSTERING CLIENTS RELATIONSHI P. IT WAS FURTHER SUBMITTED THAT TO ACCOUNT FOR DIFFERENCES, THE ADDITIONAL CO ST INCURRED IN TRANSACTION WITH UNRELATED PARTIES VIS--VIS RELATED PARTIES WOULD NEED TO BE REDUCED FROM THE BROKERAGE RATE CHARGED TO UNRELATED PARTIES TO ARR IVE AT THE ADJUSTED COMPARABLE BROKERAGE RATE. THESE SUBMISSIONS WERE MADE TO THE TPO ACCORDING TO LETTER DATED 29/11/2004, COPY OF WHICH IS PLACED AT PAGES 71 TO 75 OF THE PAPER BOOK. FOLLOWING TABLE WAS SUBMITTE D TO SHOW THAT ASSESSEE WAS REQUIRED TO INCUR ADDITIONAL COST IN RELATION T O BROKING SERVICES RENDERED TO UNRELATED PARTIES. AVERAGE BROKERAGE RATE FOR UNRELATED PARTY -DVP TRADES (A) 0.56 ADDITIONAL COST INCURRED FOR UNRELATED PARTY-DVP TRADES (B) 0.29 COMPARABLE ADJUSTED BROKERAGE RATE FOR DVP TRADE (A - B) 0.26 2.5 FOLLOWING ANNEXURES WERE ENCLOSED WITH THE AFOR EMENTIONED LETTER. DETAILS OF BROKERAGE: DCS TRADES: CLIENT TYPE TURNOVER BROKERAGE EARNED BROKERAGE AS A % OF TURNOVER RELATED PARTY 35,246,323,824.09 128,601,217.24 0.36% FOREIGN INSTITUTIONAL INVESTORS UNRELATED PARTY 10,181,335,689.56 40,679,447.75 0.40% LOCAL MUTUAL FUNDS UNRELATED PARTY 4,972,108,556. 71 13,942,880.70 0.28% OVERSEAS CORPORATE BODIES UNRELATED 387,625,536.82 1,543,713.51 0.40% GRAND TOTAL 50,787,393,607.18 184,767,259.20 DVP TYPE . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 6 CLIENT TYPE TURNOVER BROKERAGE EARNED BROKERAGE AS A % OF TURNOVER CORPORATES UNRELATED PARTY 845,908,450.00 2,959, 427.25 035% FOREIGN INSTITUTIONAL INVESTORS 2,999,190,384.43 10,249,561.47 0.34% RELATED PARTY UNRELATED PARTY 39,159,283,008.14 222,132,207.28 0.57% LOCAL MUTUAL FUNDS UNRELATED PARTY 613,337,538. 12 1,962,493.13 0.32% RELATED PARTY 1,866,731,718.36 6,939,937.55 0.3 7% OVERSEAS CORPORATE BODIES UNRELATED PARTY 1,005,095,230.62 4,138,025.36 0.41% STAFF UNRELATED PARTY 8,636,958.25 2 7,073.80 0.31% HOUSE A/C. BAD DELIVERY /AUCTIONS 338,728.00 - GRAND TOTAL 46,498,522,015.92 248,408,725.84 WORKING OF COST INCURRED FOR PROVISION OF BROKING S ERVICES TO UNRELATED AND RELATED PARTIES FOR DVP TRADES FIGURE S IN 000S DETAILS UNRELATED PARTY TRADES RELATED PARTY TRADES DIRECT COST 103,506 4,667 INDIRECT COST 95,559 4,309 FUNDING COST 1,831 214 TOTAL COST 200,896 9,190 TURNOVER 41,632,600 4,865,922 COST AS % OF TURNOVER 0.48% 0.19% ADDITIONAL COST INCURRED FOR UNRELATED PARTY TRADES : 0.48%-0.19%+0.29% THUS IT WAS SUBMITTED THAT THE TRANSACTION OF THE A SSESSEE, EVEN UNDER CUP METHOD, AFTER GRANTING THE AFOREMENTIONED ADJUSTMEN T SHOULD BE CONSIDERED TO BE AT ARMS LENGTH. 2.6 HOWEVER, TPO DID NOT ACCEPT SUCH SUBMISSIONS OF THE ASSESSEE. TPO OBSERVED THAT THE ADJUSTMENT ON ACCOUNT OF DIFFEREN CE, IF ANY, WAS TO BE CONSIDERED AS THE DIFFERENCE IN THE DCS TRANSACTION S. TAKING BASE THEREON TPO ADOPTED THE FOLLOWING FORMULA TO ARRIVE AT THE CONCLUSION THAT ASSESSEE SHOULD HAVE CHARGED BROKERAGE OF 0.50697% ON SERVIC ES RENDERED BY THE ASSESSEE TO ITS RELATED PARTIES ON DVP TRADES. . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 7 0.5633% * 0.36/0.40% = 0.50697% FINDING THAT ASSESSEE HAD EARNED BROKERAGE FROM RE LATED PARTIES ON DVP TRADES AT A SUM OF RS.1,71,89,499/-, THE TPO COMPUT ED THE SAID BROKERAGE ON THE BASIS OF AFOREMENTIONED FORMULA AT A SUM OF RS. 2,46,68,765/- AND COMPUTED THE DIFFERENCE AT A SUM OF RS.74,79,266/-, WHICH WAS ADDED TO THE INCOME OF THE ASSESSEE AS OF T.P ADJUSTMENT. 2.7 AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE LD. CIT(A). THE SUBMISSIONS MADE BEFORE TPO WERE REITERATED. LD. C IT(A) AFTER EXAMINING THE CONTENTIONS OF THE ASSESSEE HAS COME TO A CONCLUSIO N THAT TNMM WAS NOT A PROPER METHOD IN VIEW OF THE AVAILABILITY OF INTERN AL CUP METHOD. LD. CIT(A) ALSO OBSERVED THAT THE ADJUSTMENT SOUGHT FOR BY THE ASSESSEE ON ACCOUNT OF FUNCTIONS PERFORMED, ASSET EMPLOYED AND RISK ASSUME D SHOULD HAVE BEEN GRANTED TO THE ASSESSEE. ACCEPTING THE AFOREMENTIO NED SUBMISSIONS OF THE ASSESSEE WITH REGARD TO DIFFERENCE ON ACCOUNT OF SE RVICES RENDERED TO RELATED PARTIES AND UNRELATED PARTIES, LD. CIT(A) HAS DELE TED THE ADDITION. THE ASSESSEE IN ITS APPEAL IS OBJECTING TO THE FINDING S OF LD. CIT(A) VIDE WHICH IT HAS BEEN HELD THAT TNMM ADOPTED BY THE ASSESSEE IS NOT AN APPROPRIATE METHOD. THE DEPARTMENT IN ITS APPEAL IS AGGRIEVED BY THE RELIEF GRANTED BY LD. CIT(A). 2.8 ARGUING THE APPEAL FOR REVENUE IT WAS SUBMITTED BY LD. DR THAT TPO WAS RIGHT IN MAKING THE ADJUSTMENT AND LD. CIT(A) HAS W RONGLY DELETED THE SAME. 2.9 AGAINST SUCH ARGUMENTS OF LD. DR IT WAS SUBMITT ED BY LD. AR THAT ASSESSEES FIRST CONTENTION IS THAT THE METHOD ADOP TED BY IT HAS WRONGLY BEEN REJECTED BY LD. CIT(A) AND TPO. IN THE ALTERNATIVE IT IS THE CONTENTION OF THE ASSESSEE THAT LD. CIT(A) HAS RIGHTLY HELD THAT ASSE SSEE WAS ENTITLED TO GET RELIEF ON ACCOUNT OF DIFFERENCE IN THE ACTIVITIES PERFORM ED BY THE ASSESSEE IN RELATION TO SERVICES RENDERED BY IT TO RELATED AND UNRELATED PARTIES. LD. AR SUBMITTED . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 8 THAT ALL THE SUBMISSIONS RELYING UPON WHICH LD. CI T(A) HAS GRANTED RELIEF TO THE ASSESSEE WERE SUBMITTED TO TPO ALSO WHO HAS FA ILED TO APPRECIATE THE FACTS OF THE CASE AND LD. CIT(A) HAS RIGHTLY APPRECIATED THE FACTS OF THE CASE AND HAS GRANTED APPROPRIATE RELIEF TO THE ASSESSEE ON ACCOU NT OF DIFFERENCE IN ACTIVITIES. 3. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY CONSIDERED. THE FACTS OF THE CASE HAVE ALREADY BE EN DISCUSSED IN DETAIL IN THE ABOVE PART OF THIS ORDER. WE ARE IN AGREEMENT WITH THE OBSERVATIONS OF LD. CIT(A) THAT IN CASE OF AVAILABILITY OF INTERNAL CU P METHOD, TNMM COULD NOT BE APPLIED. WHAT WAS NECESSARY WAS THAT ASSESSEE SHOU LD HAVE BEEN ALLOWED THE RELIEF AS PER DIFFERENCE IN THE ACTIVITIES IN THE SERVICES RENDERED BY IT TO RELATED AND UNRELATED PARTIES. THE SAID DIFFERENCE HAS BEEN DESCRIBED IN THE AFOREMENTIONED TABLES SUBMITTED BY THE ASSESSEE TO THE TPO VIDE LETTER DATED 29/11/2004. HOWEVER, TPO DID NOT DISCUSS THOSE FIG URES IN HIS ORDER BUT THESE FIGURES ARE DISCUSSED IN THE ORDER OF LD. CIT (A). THE TPO DID NOT POINT OUT ANY DEFECT IN SUCH CALCULATION OF THE ASSESSEE. IT HAS BEEN DESCRIBED IN THE ABOVE SUBMISSION THAT ASSESSEE HAD TO INCUR ADDITIO NAL COST TO THE TUNE OF 0.29% IN RELATION TO SERVICES RENDERED BY IT TO UNR ELATED PARTIES WHEN THE SAME IS COMPARED TO THE SIMILAR SERVICES RENDERED TO THE RELATED PARTIES. IN VIEW OF THESE FACTS, WE ARE OF THE OPINION THAT LD. CIT(A) WAS RIGHT IN GRANTING RELIEF TO THE ASSESSEE AND WE DECLINE TO INTERFERE IN HIS FIN DINGS ON THIS ISSUE. ACCORDINGLY, SOLE GROUND OF APPEAL FILED BY THE ASS ESSEE AND GROUND NO.4 OF THE REVENUES APPEAL, BOTH ARE DISMISSED. 4. APROPOS FIRST GROUND RAISED BY THE REVENUE, IT W AS NOTICED BY THE AO THAT ASSESSEE HAS EARNED TAX FREE DIVIDEND INCOME O F RS.13,99,784/-. THE AO CALCULATED DISALLOWANCE UNDER SECTION 14A OF THE AC T AT RS.13,76,355/-. IT WAS PLEADED BEFORE LD. CIT(A) THAT SUCH DISALLOWANCE W AS NOT CALLED FOR AS ASSESSEE DID NOT UTILIZE INTEREST BEARING BORRO WED FUNDS AND NO EFFORT WAS REQUIRED TO EARN THIS INCOME, THEREFORE, NO OTHER E XPENSES WAS ALSO MADE. LD. . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 9 CIT(A) HAS ACCEPTED SUCH SUBMISSIONS OF THE ASSESSE E AND HAS DELETED THE ENTIRE ADDITION. WHILE DELETING THE ADDITION LD. CI T(A) HAS ALSO NOTICED THAT FOR ASSESSMENT YEAR 2001-02 SIMILAR ADDITION WAS DELETE D BY THE CIT(A). 4.1 DURING THE COURSE OF HEARING IT WAS BROUGHT TO OUR NOTICE THAT REVENUE HAD PREFERRED AN APPEAL AGAINST AFOREMENTIONED DELE TION AND TRIBUNAL VIDE ITS ORDER DATED 20/04/2011 IN RESPECT OF A.Y 2001-02 HA S SUSTAINED THE DISALLOWANCE TO THE EXTENT OF RS.10,000/- WITH THE FOLLOWING OBSERVATIONS: 6.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF EXPENDITURE I N RELATION TO DIVIDEND INCOME RECEIVED BY THE ASSESSEE. THE SHARES OF KCL FROM WH ICH DIVIDEND HAD BEEN RECEIVED WERE ACQUIRED DURING THE F.Y.1996-97 OUT O F OWN FUNDS. THIS CLAIM IS NOT CONTRAVETED BEFORE US. EVEN THE AO HAS NOT GIV EN ANY FINDING THAT THE SHARES WERE ACQUIRED OUT OF BORROWED FUNDS. THEREFORE, THE RE IS NO INTEREST EXPENDITURE INVOLVED. HOWEVER, AS HELD BY HONBLE HIGH COURT O F MUMBAI IN CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) BOTH DIRECT AN D INDIRECT EXPENSES HAVE TO BE CONSIDERED FOR DISALLOWANCE ON A REASONABLE BASIS. THOUGH THE ASSESSEE IN THIS CASE HAS RECEIVED DIVIDEND ONLY FROM ONE COMPANY SO ME INDIRECT EXPENSES ON COLLECTION OF DIVIDEND AND ACCOUNTING OF INCOME ETC . HAVE TO BE INCURRED EVEN THOUGH THIS MAY BE ONLY NOMINAL. IN OUR VIEW ON FA CTS OF THE CASE IT WILL BE REASONABLE TO ESTIMATE SUCH EXPENSES AT RS.10,000/ -. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) ON THIS POINT AND CONFIRM THE A DDITION TO THE ABOVE EXTENT. 4.2 IN THIS VIEW OF THE SITUATION, AFTER HEARING BO TH THE PARTIES, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y 2001-02, WE HOLD THAT RS.10,000/- SHOULD BE DISALLOWED UNDER SE CTION 14A OF THE ACT. ACCORDINGLY THIS GROUND OF THE REVENUE IS PARTLY AL LOWED. 5. APROPOS GROUND NO.2, WE FOUND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF CIT VS. UNITED GLASS MANUFACTURING CO. LTD. DATED 12/9/2012 IN CIVIL APPEAL NO.6447 OF 2012 ARISING OUT OF SLP(C) NO.3016 OF 2008, COP Y OF THIS ORDER IS PLACED ON OUR RECORD. THE OBSERVATIONS OF THEIR LORDSHIP IN THIS REGARD ARE AS UNDER: CIVIL APPEAL NO.6449/2012 ( S.L.P. (C) NO.29629/20 09: . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 10 HEARD LEARNED COUNSEL ON BOTH SIDES. LEAVE GRANTED. IN THIS CIVIL APPEAL, FOLLOWING TWO QUESTIONS ARISE FOR DETERMINATION: (I) WHETHER ADVANCE CUSTOM DUTY PAID BY THE ASSESS EE CAN BE DEDUCTED UNDER SECTION 43-B OF THE INCOME TAX ACT, 1961? (II) WHETHER CLUB MEMBERSHIP FEE FOR EMPLOYEES INCU RRED BY THE ASSESSEE IS A BUSINESS EXPENSE AND LIABLE TO BE DEDUCTED UNDER SE CTION 37(1) OF THE INCOME TAX ACT, 1961? AS FAR AS QUESTION NO.1 IS CONCERNED, THE ISSUE IS ANSWERED IN FAVOUR OF THE ASSESSEE IN THE ORDER PASSED TODAY IN CIVIL APPEAL ARISING OUT S.L.P. (C) NO.20791 OF 2009. AS FAR AS QUESTION NO.2 IS CONCERNED, WE F IND THAT A SERIES OF JUDGEMENTS HAVE BEEN PASSED BY HIGH COURTS HOLDING THAT CLUB MEMBERSHIP FEES FOR EMPLOYEES INCURRED BY THE ASSESSEE IS BUSINESS EXPENSE UNDER SECTION 37 OF THE INCOME TAX ACT, 1961. WE ALSO FIND THAT NONE OF THE DECISIONS HAVE BEEN CHALLENGED IN THIS COURT. EVEN OTHERWISE, WE ARE O F THE VIEW THA3T IT IS A PURE BUSINESS EXPENSE. IN THE CIRCUMSTANCES, THIS CIVIL APPEAL FILED BY T HE DEPARTMENT STANDS DISMISSED WITH NO ORDER AS TO COSTS. ACCORDINGLY, THIS GROUND OF THE REVENUE IS REJECTE D. 6. APROPOS GROUND NO.3; IT WAS BROUGHT TO OUR NOTIC E THAT SIMILAR DISALLOWANCE WAS ALLOWED IN RESPECT OF ASSESSMENT YEAR 2001-02. THE TRIBUNAL VIDE ITS AFOREMENTIONED ORDER DATED 20/4/2 011 IN RESPECT OF A.Y 2001-02 HAD RESTORED THIS ISSUE TO THE FILE OF AO. IT WAS ALSO BROUGHT TO OUR NOTICE THAT IN PURSUANCE TO THE AFOREMENTIONED ORDE R OF THE TRIBUNAL AO HAS PASSED FRESH ASSESSMENT ORDER DATED 28/03/2013, WHE RE AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IT HAS BEEN HELD BY TH E AO THAT SUCH EXPENDITURE WAS REVENUE EXPENDITURE. COPY OF THE ASSESSMENT OR DER WAS PRODUCED BEFORE US. THE AO HAS ACCEPTED THE CLAIM OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: ON PERUSAL OF CASE LAW RELIED UPON BY HONBLE ITAT AND ASSESSEES SUBMISSION. IT HAS BEEN OBSERVED THAT THE EXPENDITURE BY THE AS SESSEE ON SOFTWARE DID NOT RESULT BRING INTO EXISTENCE OF AN ASSET OR ADVANTAG E FOR THE ENDURING BENEFIT. AS ASSESSEE HAS GOT THE LICENSING AGREEMENT WHICH HAS TO BE RENEWED AFTER PARTICULAR TIME. AND IS MERE FACILITATING THE CONDU CT OF BUSINESS OF THE ASSESSEE. . / ITA NO. 670&618/MUM/2006 % % % % / ASSESSMENT YEAR 2002-03 11 ACCORDINGLY, IN LINE WITH THE CASE LAW RELIED UPON BY HONBLE ITAT THE SOFTWARE EXPENSES INCURRED IS HELD AS REVENUE IN NATURE AND ACCORDINGLY ALLOWED. 6.1 ACCORDINGLY, AFTER HEARING BOTH THE PARTIES, AS REVENUE ITSELF HAS ACCEPTED SUCH CLAIM OF THE ASSESSEE IN IMMEDIATE PR ECEDING YEAR, WE DECLINE TO INTERFERE IN THE RELIEF GRANTED BY LD. CIT(A) AND T HIS GROUND OF THE REVENUE IS REJECTED. 7. GROUND NO.6 & 7 OF THE REVENUES APPEAL ARE GENE RAL IN NATURE AND NO ARGUMENTS WHATSOEVER WAS SUBMITTED WITH REGARD TO THESE GROUNDS. ACCORDINGLY, GROUND NO.5 & 6 ARE DISMISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED AND APPEAL FIELD BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12/02/2014 1 , /0% ! 2 34 12/02/2014 0 , 5 # SD/- SD/- ( / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) ! / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 3 DATED 12/02/2014 1 1 1 1 , ,, , *- *- *- *- 6%- 6%- 6%- 6%- / COPY OF THE ORDER FORWARDED TO : 1. &) / THE APPELLANT 2. *+&) / THE RESPONDENT. 3. 7 ( ) / THE CIT(A)- 4. 7 / CIT 5. 85 *- , , / DR, ITAT, MUMBAI 6. 59 : / GUARD FILE. 1 1 1 1 / BY ORDER, +- *- //TRUE COPY// ; ;; ; / < < < < ' ' ' ' (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI