ACIT CIR 4(2), MUMBAI V. UBS SECURITIES INDIA P.LTD, MUMBAI

ITA 6451/MUM/2011

• Counselvise Citation: 645119914 RSA 2011
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 05-09-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 21-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Bonafide belief; Retrospective amendment; Initiation of penalty proceedings; Wrong claim; Procedural lapse; Revenue expenditure
• Section: 43B; 143(3); 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , , , BEFORE SHRI P.M. JAGTAP , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEM BER . / ITA NO. 6451 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 05 06 ) ADDL. COMMISSIONER OF INCOME TAX CIRCLE 4(2), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. / APPELLANT V/S M/S. UBS SECURITIES INDIA PVT . LTD. LEVEL 2, 2 NORTH AVENUE MAKER MAXITY, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACU1304N . / ITA NO. 6572 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 05 06 ) M/S. UBS SECURITIES INDIA PVT. LTD. LEVEL 2, 2 NORTH AVENUE MAKER MAXITY, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .. / APPELLANT V/S ADDL. COMMISSIONER OF INCOME TAX CIRCLE 4(2), AAYAKAR BHA VAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACU1304N M/S. UBS SECURITIES INDIA PVT. LTD. 2 . / ITA NO. 7728 / MUM./ 2011 ( / ASSESSMENT YEAR : 20 06 07 ) M/S. UBS SECURITIES INDIA PVT. LTD. LEVEL 2, 2 NORTH AVENUE MAKER MAXITY, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 .. / APPELLANT V/S ADDL. COMMISSIONER OF INCOME TAX CIRCLE 4(2), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACU1304N / REVENUE BY : MR. AJIT KUMAR JAIN A/W MR. JITENDRA YADAV / ASSESSEE BY : MR. KANCHAN KAUSHAL A/W MR. SUNIL LALA, MR. VARUN SANKHESARA & MR. ALIASGER RAMPURWALA / DATE OF HEARING 05.09.2013 / DATE OF ORDER 22.11.2013 / ORDER , / PER AMIT SHUKLA , J.M. THE CROSS APPEALS FOR THE ASSESSMENT YEAR 2005 06 HAVE BEEN PREFERRED BY EITHER PARTY CHALLENGING THE IMPUGNED ORDER DATED 4 TH JULY 2011, PASSED BY THE LEARNED COMMISSIONER (APPEALS) XV, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ) AND APPEAL FOR THE ASSESSMENT YEAR 2006 07, HAS BEEN PREFERRED BY THE ASSESSEE AGAINST THE IMPUGNED FINAL ASSESSMENT ORDER DATED 31 ST AUGUST 2010, PASSED IN PURSUANCE OF THE DIRE CTIONS GIVEN BY THE DRP II UNDER SECTION 144C(5) OF THE ACT. SINCE THESE APPEALS ARE INTER CONNECTED, THEREFORE, AS A MATTER OF CONVENIENCE, WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER. M/S. UBS SECURITIES INDIA PVT. LTD. 3 2 . WE FIRST PROCEED TO DISPOSE OFF THE CROSS APPEALS FOR THE ASSESSMENT YEAR 2005 06. IN THE APPEAL IN ITA NO.6572/MUM./ 2011 , PREFERRED BY THE ASSESSEE, VIDE WHICH, TWO GROUNDS HAVE BEEN RAISED AND THE FIRST GROUND RELATES TO ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF ` 89,15,190 , AND THE SECOND GROUND RELATES TO DISALLOWANCE ON ACCOUNT OF SECURITY TRANSACTION TAX PAYABLE OF ` 6,26,417 . W HEREAS THE REVENUE IN ITS APPEAL IN ITA NO.6451/MUM./ 2011 , HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: ' 1. ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION TO THE EXTENT OF ` 53,22,397/ - ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLO WANCE OF ` 1,86,67,243/ U/S. 40(A)(IA).' 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF ` 1 ,55,0591 - PAID TO SEBI AS INTEREST PERTAINING TO EARLIER YEARS. 4. ON THE FACTS AND IN THE CIRC UMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF ` 26,70,310 / ON ACCOUNT OF PENALTY PAID TO STOCK EXCHANGE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE IMPUGNED ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED ' . 3 . WE WILL FIRST ADJUDICATE THE ISSUE OF TRANSFER PRICING ADJUSTMENT, WHICH HAS BEEN RAISED BY THE ASSESSEE AS WELL AS BY THE DEPARTMENT IN THEIR RESPECTIVE CROSS APPEALS . THE RELEVANT FACTS A PROPOS THIS ISSUE ARE AS UNDER: 4 . FACTS IN BRIEF : THE ASSESSEE , U.B.S. SECURITIES INDIA PVT. LTD., IS A PART OF UBS GROUP, WHICH IS A LEADING FINANCIAL SERVICE FIRM AND WORLDS LEADING GLOBAL ASSET MANAGER BASED AT SWITZERLAND. THE ASSESSEE COMPANY WAS IN CORPORATED IN INDIA IN THE YEAR 1996 AND IS A LEADING BROKING HOUSE IN INDIA, SERVICING THE NEEDS OF FOREIGN INSTITUTIONAL INVESTORS AND DOMESTIC M/S. UBS SECURITIES INDIA PVT. LTD. 4 MUTUAL FUNDS. THE ASSESSEE IS PROVIDING MARKETING AND SUPPORT SERVICE TO UBS A/G HONG KONG IN RESPECT OF INVES TMENT BANKING SERVICES. IN THE TRANSFER PRICING STUDY REPORT, THE FOLLOWING FUNCTIONS IN RESPECT OF MARKETING AND SUPPORT SERVICE FOR INVESTMENT BANKING ACTIVITIES TO UBS A/G, HONG KONG HAVE BEEN ILLUSTRATED. 4.6.1 UBS SECURITIES IS INVOLVED IN PROVIDING MARKETING AND SUPPORT SERVICES TO UBS AG, HONG KONG IN RESPECT OF INVESTMENT BANKING SERVICES PROPOSED TO BE PROVIDED BY UBS AG, HONG KONG. 4.6.2 BASED ON INSTRUCTIONS PROVIDED BY UBS AG, HONG KONG, UBS SECURITIES UNDERSTANDS A PROSPECTIVE CLIENTS BUSI NESS MODEL, FINANCIAL STATUS, REQUIREMENTS, ETC. THEREAFTER, IT CO ORDINATES WITH THE PROSPECTIVE CLIENT AND ARRANGES FOR MAKING A PROPOSAL / PRESENTATION SHOWCASING THE CAPABILITIES AND DEMONSTRATING CREDENTIALS OF UBS GROUP. PERSONNEL FROM UBS AG, HONG K ONG ARE ALSO INVOLVED IN THE MARKETING EFFORTS. IN THE EVENT OF A MANDATE BEING OBTAINED, UBS AG, HONG KONG (OR ANY OTHER UBS GROUP ENTITY BASED OFFSHORE) WOULD BE RESPONSIBLE FOR THE PROVISION OF THE CORE INVESTMENT BANKING SERVICES (E.G. ADVISORY SERVICE S, MARKETING OF ADRS / GDRS ETC.). 4.6.3. UBS SECURITIES UNDERTOOK CLIENT RELATIONSHIP MANAGEMENT ON A CONTINUOUS BASIS IN CLOSE CONJUNCTION WITH UBS AG, HONG KONG. UBS SECURITIES ACTED AS A INTERMEDIARY BETWEEN THE POTENTIAL CLIENT AND UBS AG, HON G KONG AND FACILITATED EXCHANGE OF INFORMATION BETWEEN THEM. FURTHER, IT ALSO PROVIDED INDIA SPECIFIC INDUSTRY AND ECONOMIC INFORMATION TO UBS AG, HONG KONG. UBS SECURITIES PROVIDES SUPPORT TO THE ASSOCIATED ENTERPRISES (AE) IN RELATION TO INVESTMENT BANKING MAND ATES EXECUTED BY AES OUTSIDE INDIA. THE SUPPORT PROVIDED INCLUDE THE FOLLOWING: PROVIDING INFORMATION TO THE AE AS PER SPECIFIC REQUESTS MADE BY THE AE; CONDUCTING RUDIMENTARY RESEARCH AND PROVIDING THE FINDINGS OF TO THE AE BASED ON SPECIFIC REQUESTS MAD E BY THE A.E; AND ASSISTING THE AE IN PREPARING MARKETING MATERIAL SUCH AS PRESENTATIONS, PITCH PACKS, ETC. 4.6.5 UBS SECURITIES NEVER INTERACTS DIRECTLY WITH THE CLIENTS OF THE AE NOR ASSIST IN SECURING ORDERS ON BEHALF OF THE AE. FURTHER, UBS SECURITIES DOES NOT ENGAGE IN ANY NEGOTIATIONS OR DISCUSSIONS ON PRICING, TERM, ETC., WITH THE CLIENTS ON BEHALF OF THE AE AND IT DOES NOT EXECUTE ANY DOCUMENTS OR GIVE ANY ASSURANCE OF ANY NATURE TO ANY PERSON ON BEHALF OF THE A.E . M/S. UBS SECURITIES INDIA PVT. LTD. 5 5 . THE VALUE OF INTERNATIONAL TRANS ACTION IN RESPECT OF INVESTMENT BANKING AND SUPPORT SERVICE TO UBS AG, HONG KONG, AMOUNTED TO ` 6,12,24,967. FOR RENDERING OF SUCH SERVICES, THE ASSESSEE IS BEING COMPENSATED BY ITS ASSOCIATED ENTERPRISE (A.E) AT COST PLUS 10% . T HE MARGIN EARNED UNDER THIS SEGMENT WAS SHOWN AS UNDER: PARTICULARS AMOUNT IN ` SALES / OPERATING INCOME 61,224,967 LESS: EMPLOYEE COSTS 46,209,205 ADMINISTRATIVE & OTHER EXP . 9,449,856 OPERATING EXPENSES 55,659,061 OPERATING PROFIT 5,565,906 OP/TC 10.00% 6 . FOR BENCH MARKING THIS TRANSACTION AND THE OPERATING MARGIN, THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE OPERATI NG PROFIT DIVIDED BY TOTAL COST AS THE PROFIT LEVEL INDICATOR (PLI). FOR THE PURPOSE OF COMPARABILITY ANALYSIS UNDER TNMM, THE ASSESSEE HAD INITIALLY IDENTIFIED FIVE COMPARABLE COMPANIES WHICH WERE BASED ON EARLIER YEARS FINANCIAL DATA AND WERE ENGAGED IN ADVISORY, CONSULTANCY AND RESEARCH SERVICES IN ITS T.P. STUDY REPORT . THE OPERATING MARGIN OF THESE FIVE COMPARABLES WERE AS UNDER: SR.NO. NAME OF COMPANY / SEGMENT OP/TC AS PER TP STUDY USING TWO YEAR AVERAGE 1. KINETIC TRUST LTD. 8.11% 2. AJCON GLO BAL SERVICES LTD. 27.27% 3. EPIC ENERGY LTD. 14.29% 4. MAHANIVESH (I) LTD. 0.97% 5. SUMEDHA FISCAL SERVICES LTD. (SEGMENT CONSULTANCY) 40.49% ARITHMETIC MEAN 14.98% M/S. UBS SECURITIES INDIA PVT. LTD. 6 7 . SINCE THE AFORESAID MARGIN WAS WITHIN THE TOLERANCE RANGE OF +/ 5%, IT WAS REPORTE D THAT IT IS OPERATING MARGIN UNDER INVESTMENT BANKING SERVICES TO THE A.E. WAS AT ARMS LENGTH. 8 . DURING THE COURSE OF TRANSFER PROCEEDING PR ICING PROCEEDINGS , THE ASSESSEE FILED FRESH COMPARABLES WHICH WERE BASED ON CURRENT DATA PERTAINING TO THE F.Y. 20 04 05 AS THE EARLIER COMPARABLES WERE BASED ON EARLIER FINANCIAL YEAR S 2002 03 AND 2003 04 , FIVE COMPARABLES WERE SELECTED WITH THE FOLLOWING MARGINS: SR. NO NAME OF COMPANY / SEGMENT OP/TC AS PER TP STUDY USING TWO YEAR AVERAGE 1. IDC (INDIA) LTD. 11.56 % 2. INDIA SECURITIES LTD. 11.74% 3. KINETIC TRUST LTD. 12.50% 4. WALL STREET FINANCE LTD. (SEG. FINANCE AND ALLIED ACTIVITIES) 12.79% 5. CRISIL LTD. (SEGMENT RESEARCH AND INFORMATION SERVICES) 9.20% ARITHMETIC MEAN 11.56% THUS, IT WAS SUBMITT ED THAT THE ASSESSEES MARGIN OF 10% WAS WITHIN THE TOLERANCE RANGE OF 5% AND, THEREFORE, ITS MARGIN SHOULD BE ACCEPTED A T ARMS LENGTH PRICE. 9 . THE TRANSFER PRICING OFFICER (TPO) OBSERVED THAT IN THE SECOND SEARCH, THE ASSESSEE HAS DROPPED THE THREE COMPAR ABLES AND NO REASONS HAVE BEEN GIVEN FOR REJECTING THESE COMPARABLES AS THEY WERE ALSO INVOLVED IN SIMILAR ACTIVITIES. REJECTING THE ASSESSEES SEARCH OF COMPARABLES, T HE TPO ALSO CONDUCTED A FRESH SEARCH TO IDENTIFY FRESH SET OF COMPARABLES WITH THE FOLLO WING MARGIN. M/S. UBS SECURITIES INDIA PVT. LTD. 7 SR.NO NAME OF COMPANY / SEGMENT OP/TC AS PER TP 1. AJCON GLOBAL SERVICES LTD. 40..70% 2. EPIC ENERGY LTD. 78.94% 3. SUMEDHA FISCAL SERVICES LTD. (SEGMENT CONSULTANCY) 41.46% 4. IDC (INDIA) LTD. 11.56% 5. INDIA SECURITIES LTD. 11.74% 6. KINETIC TRUST LTD. 12.50% 7. CRISIL LTD. (SEGMENT RESEARCH AND INFO . SERVICES) 9.20% 8. WALL STREET FINANCE LTD. (SEG. FINANCE AND ALLIED ACTIVITIES) 12.79% 9. ICDS SECURITIES LTD. (SEGMENT FINANCIAL & ADVISORY SERVICES) 75.00% 10. MARUTI INSU RANCE BROKERS LTD. 38.74% ARITHMETIC MEAN 33.26% 10 . THESE COMPARABLES WERE CONFRONTED TO THE ASSESSEE AND, ACCORDINGLY, A SHOW CAUSE NOTICE WAS ISSUED AS TO WHY THE MEAN MARGIN OF 33.26% MAY NOT BE CONSIDERED AS ARMS LENGTH MARGIN AND NECESSARY ADJUSTMEN T BE MADE TO THE VALUE OF INTERNATIONAL TRANSACTION WITH THE A.E. IN RESPONSE, THE ASSESSEE SUBMITTED THAT AT THE TIME OF PREPARING TRANSFER PRICING STUDY REPORT, DATA FOR FINANCIAL YEAR 2004 05 WERE NOT AVAILABLE AND, THEREFORE, THE ASSESSEE HAD RELIED UP ON PREVIOUS TWO YEARS DATA TO IDENTIFY POTENTIAL COMPARABLES TO SUPPORT FUNCTION AL ANALYSIS . FURTHER, THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER, WHICH IS BEING REMUNERATED ON A COST PLUS BASIS FOR PERFORMING SUPPORT SERVICE FOR ITS A.E., AND IT DOES NOT ASSUME ANY KIND OF R ISKS LIKE MARKET RISKS , PRICE RISKS , CREDIT RISKS , ETC. , WHICH ANY OTHER ENTREPRENEUR IN A THIRD PARTY SITUATION WOULD ASSUME. MOREOVER, THE FRESH COMPARABLES ARE BASED ON STRUCTURAL METHODOLOGY OF SEARCH PRO W E S S AND PROPER FAR ANALYSIS OF THE BUSINESS ACTIVITIES. REGARDING THE COMPARABLES WHICH WERE CHOSEN AT THE TIME OF TRANSFER PRICING STUDY BUT NOT INCLUDED IN M/S. UBS SECURITIES INDIA PVT. LTD. 8 THE FRESH SEARCH, IT WAS SUBMITTED THAT IN CASE OF AJCON GLOBAL SERVICES LTD., THERE HAS BEEN DIVERSIFICATION OF BUSINESS OPE RATIONS IN THE CURRENT F.Y. 2004 05 , AS THEY HAVE STARTED OFFERING VARIOUS SERVICES LIKE PORTFOLIO MANAGEMENT SERVICES, MERCHANT BANKING SERVICE, MARKETING OF IPO AND OTHER FINANCIAL PRODUCTS WHICH WERE DIFFERENT FROM FUNCTIONS CARRIED OUT BY THE ASSESSEE WITH ITS A.E. REGARDING SUMEDHA FISCAL SERVICES LTD. (SEGMENTAL) , AS IN THE F.Y. 2004 05, THIS COMPANY HAS ENTERED INTO CORE INVESTMENT BANKING SERVICES WHEREAS THE ASSESSEE IS PROVIDING SUPPORT SERVICE. THE RISK PROFILE WAS ALSO DIFFERENT. REGARDING EPIC ENERGY LTD., IT WAS SUBMITTED THAT THIS COMPANY HAS ESTABLISHED ITSELF IN THE ENERGY SECTOR AND ITS FOCUS FROM FISCAL SERVICES HAS BEEN CHANGED. THUS, THESE THREE COMPARABLES WHICH WERE EARLIER CHOSEN CANNOT BE KEPT IN THE BASKET OF THE COMPARABLES. AS REG ARDS THE COMPARABLES SELECTED BY THE TPO, DETAILED OBJECTIONS WERE MADE BY THE ASSESSEE, H OWEVER, HE REJECTED ALL THE CONTENTIONS OF THE ASSESSEE WITH REGARD TO THE COMPARABLES CHOSEN BY HIM EXCEPT FOR MARUTI INSURANCE BROKERS LTD., WHICH HE REMOVED FROM T HE FINAL SET OF COMPARABLES. FINALLY, FOLLOWING EIGHT COMPARABLES WERE CHOSEN FOR COMPARABILITY ANALYSIS WITH THE FOLLOWING MARGINS : SR.NO NAME OF COMPANY / SEGMENT OP/TC AS PER TP 1. AJCON GLOBAL SERVICES LTD. 40.70% 2. EPIC ENERGY LTD. 78.94% 3. SU MEDHA FISCAL SERVICES LTD. (SEGMENT CONSULTANCY) 41.46% 4. IDC (INDIA) LTD. 11.56% 5. INDIA SECURITIES LTD. 11.74% 6. KINETIC TRUST LTD. 12.50% 7. WALL STREET FINANCE LTD. (SEG. FINANCE AND ALLIED ACTIVITIES) 12.79% 8. ICDS SECURITIES LTD. (SEGMEN T FINANCIAL & ADVISORY SERVICES) 75.00% ARITHMETIC MEAN 35.59% M/S. UBS SECURITIES INDIA PVT. LTD. 9 ACCORDINGLY, UPWARD ADJUSTMENT OF ` 1,42,37,587 WAS MADE. 11 . BEFORE THE LEARNED COMMISSIONER (APPEALS), VERY DETAIL OBJECTIONS WERE MADE WITH REGARD TO SOME OF THE COMPARABLES INCLUDED BY T HE TPO NAMELY , AJCON GLOBAL SERVICES LTD. EPIC ENERGY LTD., SUMEDHA FISCAL SERVICES LTD. (SEGMENTAL), IDCS SECURITIES LTD. (SEGMENTAL) AND ALSO THE EXCLUSION OF CRISIL LTD. (SEGMENTAL). THE ASSESSEES OBJECTIONS / SUBMISSIONS HAVE BEEN DISCUSSED IN DETAIL BY THE LEARNED COMMISSIONER (APPEALS) AND SUCH CONTENTIONS HAVE BEEN REJECTED EXCEPT FOR THE EXCLUSION OF CRISIL LTD. BY THE TPO WAS REJECTED AND THE ASSESSEES CONTENTION FOR INCLUDING THE SAME IN THE SET OF COMPARABLES WAS ACCEPTED. THUS, AFTER THE FINDI NGS OF THE LEARNED COMMISSIONER (APPEALS), FOLLOWING NINE COMPARABLES WERE CHOSEN. SR.NO NAME OF COMPANY / SEGMENT OP/TC AS PER TP 1. AJCON GLOBAL SERVICES LTD. 40.70% 2. EPIC ENERGY LTD. 78.94% 3. SUMEDHA FISCAL SERVICES LTD. (SEGMENT CONSULTANCY) 41.46% 4. IDC (INDIA) LTD. 11.56% 5. INDIA SECURITIES LTD. 11.74% 6. KINETIC TRUST LTD. 12.50% 7. CRISIL LTD. (SEG. RESEARCH AND INFORMATION SERVICES) 9.20% 8. WALL STREET FINANCE LTD. (SEG. FINANCE AND ALLIED ACTIVITIES) 12.79% 9. ICDS SECURITIE S LTD. (SEGMENT FINANCIAL & ADVISORY SERVICES) 75.00% ARITHMETIC MEAN 32.65% 12 . FURTHER, THE LEARNED COMMISSIONER (APPEALS) ALSO ACCEPTED THE ASSESSEES SUBMISSION WITH REGARD TO PROVIDING BENEFIT OF +/ 5% ON THE M/S. UBS SECURITIES INDIA PVT. LTD. 10 ARITHMETIC MEAN OF 32.65%. THIS RESULT ED INTO OVER ALL RELIEF OF ` 53,22,397 AND THE BALANCE AMOUNT OF ` 89,15,190 STOOD CONFIRMED. AGAINST THIS, BOTH, THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 13 . THE LEARNED COUNSEL, MR. KANCHAN KAUSHAL, ON BEHALF OF THE ASSESSEE, EXPLAINING THE ENTIRE FACTS WHICH HAVE BEEN INCORPORATED ABOVE, SUBMITTED THAT THE ONLY DISPUTE IN ASSESSEES APPEAL ON THE T.P. ISSUE IS THE INCLUSION OF FOUR COMPARABLES BY THE TPO AND ALSO CONFIRMED BY THE LEARNED COMMISSIONER (APPEALS). THESE FOUR COMPARABLES ARE ICDS SECURITIES LTD. (SEGMENT), SUMEDHA FISCAL SERVICES LTD., AJCON GLOBAL SERVICES LTD. AND EPIC ENERGY LTD. REGARDING THREE COMPARABLES OUT OF THESE FOUR, HE SUBMITTED THAT AT THE TIME OF TRANSFER PRICING STUDY REPORT, THESE WERE INCLUDED BY THE ASSESSE E ON THE BASIS OF BUSINESS PROFILE AND FINANCIAL DATA OF PREVIOUS TWO YEARS AND NOT THE CURRENT FINANCIAL YEAR. AFTER GATHERING THE DATA FOR THE FINANCIAL YEAR 2004 05, IT WAS FOUND THAT IN MOST OF THE CASES NOT ONLY THE FUNCTIONS AND THE BUSINESS PROFILE HAVE CHANGED BUT ALSO THE PATTERN OF INCOME AND, THEREFORE, IN THE FRESH COMPARABLES GIVEN AT THE TIME OF TRANSFER PRICING ASSESSMENT PROCEEDINGS BY THE ASSESSEE THEY WERE EXCLUDED AND NEW COMPARABLES WERE TAKEN INTO CONSIDERATION. HIS MAIN SUBMISSION FOR THE EXCLUSION OF THESE FOUR COMPARABLES WERE AS UNDER: I) ICDC SECURITIES LTD. (SEGMENTAL) : THIS COMPANY WAS SHOWING ABNORMAL PROFITS WHICH A RE VARYING FROM YEAR TO YEAR. THIS IS EVIDENT FROM THE FACT THAT IN THE F.Y. 2001 02, ITS MARGIN WAS 18.50%, IN F.Y. 2003 04, THE MARGIN WAS 9.36% AND IN THE F.Y. 2004 05, ITS MARGIN HAS SHOOT UP AT AS HUGE AS 75% AS PER THE DATA GIVEN BY THE TPO. THE MAIN REASON FOR SUCH A FLUCTUATION HAS NOT BEEN BROUGHT ON RECORD. FURTHER, AS PER ITS ANNUAL REPORT, IT HAS BEEN DI SCLOSED THAT THE REVENUE RECOGNITION FROM SERVICE TRANSACTIONS SUCH AS FINANCIAL ADVISORY SERVICES HAVE BEEN ACCOUNTED ON THE COMPLETION OF THE ASSIGNMENT. IN SUCH A SITUATION, THERE IS ALWAYS A PROBLEM OF MATCHING OF REVENUE EXPENDITURE. THIS, AT TIMES, R ESULTS INTO VOLATILITY OF THE MARGIN FOR DIFFERENT YEARS SINCE THE INCOME OF ANY YEAR WOULD NOT MATCH M/S. UBS SECURITIES INDIA PVT. LTD. 11 WITH THE EXPENDITURE INCURRED IN THAT YEAR. THUS, SUCH A FLUCTUATING MARGIN AND METHOD OF REVENUE RECOGNITION CANNOT BE COMPARED WITH THE ASSESSEES MARGI N WHICH IS, BY AND LARGE, CONSTANT DUE TO MARK UP GIVEN BY THE A.E. ANOTHER MOST IMPORTANT FACT IS THAT THE INCOME OF THE FINANCIAL ADVISORY SEGMENT MOSTLY INCLUDES SERVICE CHARGES RECEIVED FROM STANDARD CHARTERED BANK WHICH ARE SHOWN AT NET OF REIMBURSEME NT OF SALARY, RENT AND CONVEYANCE EXPENSES. SUCH A NETTING OF EXPENSES RESULTS INTO INCREASE IN THE MARGIN OF SEGMENT SINCE ITS COSTS WOULD REDUCE DUE TO NETTING OFF. SUCH A NETTING OF EXPENSES HAS A HUGE IMPACT ON THE PROFIT MARGIN. TO SUPPORT HIS CONTENT ION, HE HAS GIVEN THE WORKING OF THE OPERATING INCOME OF THE ASSESSEE ON THE GROSS BASIS AS WELL AS ON THE NET BASIS AND TRIED TO DEMONSTRATE THAT IF THE OPERATING INCOME IS TAKEN ON NET BASIS IN CASE OF THE ASSESSEE THEN MARGIN WOULD SUBSTANTIALLY INCREAS E. FURTHER, HE SUBMITTED THAT ICDS SECURITIES LTD. IS INTO MERCHANT BANKING AND BROKING ACTIVITIES WHEREAS , THE ASSESSEE S SERVICES TO A.E. IS INVESTMENT BANKING ACTIVITIES AND, HENCE, THE SAME CANNOT BE CONSIDERED TO BE COMPARABLE. LASTLY, HE SUBMITTED TH AT THE TPO HAS APPLIED THE SEARCH FILTER CRITERIA OF THE TURNOVER OF LESS THAN ` 1 CRORE , WHEREAS THE TURNOVER OF THE SAID COMPANY FOR THE FINANCIAL AND ADVISORY SEGMENT IS ` 56.03 LAKHS AND, THEREFORE, ON THIS BASIS ALONE, ICDC SECURITIES LTD. (SEGMENTAL) SHOULD BE REMOVED FROM THE FINAL SET OF COMPARABLES. II ) SUMEDHA SUMEDHA FISCAL SERVICES LTD : FOR THE FINANCIAL YEAR 2004 05, THIS COMPANY WAS MAINLY INTO LOAN SYNDICATION WHICH IS A MERCHANT BANKING ACTIVITY, CAPITAL MARKET OPERATION AND PROJECT CONSULTANC Y SERVICES. FROM THE ANNUAL ACCOUNTS, HE POINTED OUT THAT UNDER THE PRODUCTS AND SERVICE DESCRIPTION IN THE FINANCIAL STATEMENTS, IT HAS BEEN STATED THAT THIS COMPANY IS MAINLY ENGAGED INTO BROKING CONSULTANCY SERVICES, MERCHANT BANKING AND UNDERWRITING. T HESE FUNCTIONS ARE ENTIRELY DIFFERENT FROM THE ACTIVITIES BEING CARRIED OUT BY THE ASSESSEE WITH ITS A .E. IN SUPPORT OF HIS CONTENTION THAT MERCHANT BANKING CANNOT BE INCLUDED IN SUCH COMPARABLE SITUATIONS, HE RELIED UPON THE DECISION OF CARLYLE INDIA ADVI SORS PVT. LTD. V/S ACIT, [2012] 146 TTJ (MUM.) 521, WHEREIN THE TRIBUNAL HAS EXCLUDED SUMEDHA M/S. UBS SECURITIES INDIA PVT. LTD. 12 SUMEDHA FISCAL SERVICES LTD . ON THE GROUND THAT IT IS CARRYING OUT MERCHANT BANKING WHICH IS DIFFERENT FROM INVESTMENT ADVISORY AND RELATED SUPPORT SERVICES TO TH E A.E. HE ALSO POINTED OUT THAT IN THE EARLIER FINANCIAL YEARS, AS PER THE DATA AVAILABLE, THE MERCHANT BANKING ACTIVITY OF SUMEDHA SUMEDHA FISCAL SERVICES LTD . WAS QUITE NEGLIGIBLE AND THAT IS WHY IT WAS INCLUDED IN THE TRANSFER PRICING STUDY REPORT. HOWE VER, IN THE WAKE OF THE CURRENT FINANCIAL DATA , SUCH A COMPANY CANNOT BE INCLUDED IN THE FINAL SET OF COMPARABLES. III ) AJCON GLOBAL SERVICES LTD : THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY WAS EARLIER INTO PROJECT CONSULTANCY AND FROM T HE FINANCIAL YEAR 2004 05, IT HAS VENTURED INTO NEW ACTIVITIES LIKE PORTFOLIO MANAGEMENT SERVICE, MERCHANT BANKING SERVICE, MARKETING OF IPO AND OTHER FINANCIAL PRODUC TS . ANOTHER IMPORTANT ASPECT WITH REGARD TO THIS COMPANY IS THAT THE OPERATING INCOME IS MAJORLY FROM STOCK MARKET OPERATION. ALSO THERE ARE NO SEGMENTAL DETAILS. LASTLY, HE SUBMITTED THAT THE TPO HAS APPLIED FILTER OF THE TURNOVER OF LESS THAN ` 1 CRORE AND WHEREAS THE TURNOVER OF THIS COMPANY IS ` 80.89 LAKHS WHICH IS BELOW ` 1 CRORE AND THI S ALSO INCLUDES SALE OF INVESTMENT OF ` 15.75 LAKHS. THEREFORE, IN ALL PERSPECTIVE, THIS COMPANY CANNOT BE TAKEN AS COMPARABLE. IV ) EPIC ENERGY LTD : THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY HAS INCREASED ITS FOCUS ON ENERGY SECTOR AND IS MAINLY INTO PROJECT FINANCE AND CONSULTANCY. IT HAS SOLD / DISCARDED MOST OF ITS ASSETS FROM ITS BALANCE SHEET AND NO DEPRECIATION HAS BEEN CLAIMED IN THE FINANCIAL YEAR 2004 05. IN THE EARLIER YEARS, THERE WAS HUGE EXPENDITURE ON ACCOUNT OF BAD DEBT W HICH IN THIS YEAR HAS BEEN REDUCED SUBSTANTIALLY WHICH HAS AN IMPACT O N THE PROFIT MARGINS. LASTLY, HE SUBMITTED THAT THE TURNOVER OF THIS COMPANY IS MERELY ` 34.03 LAKHS AND ONCE THE TPO HIMSELF HAS APPLIED THE TURNOVER FILTER OF LESS THAN ` 1 CRORE, THEN HOW SUCH A COMPANY CAN BE INCLUDED IN THE COMPARABILITY ANALYSIS. THUS, THIS COMPANY SHOULD ALSO TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. M/S. UBS SECURITIES INDIA PVT. LTD. 13 14 . PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE, MR. AJIT JAIN, SUBMITTED THAT THE ASSESSEE HAS NOT FU RNISHED ANY KIND OF AGREEMENT WITH REGARD TO FUNCTIONS PERFORMED WITH THE A.E. IN THE ABSENCE OF SUCH DOCUMENTS OR CORRESPONDENCE, IT IS VERY DIFFICULT TO GAUGE THE PROPER FUNCTIONS AND CONDUCT FAR ANALYSIS. DRAWING OUR ATTENTION TO THE FINANCIALS OF THE C OMPANY, HE SUBMITTED THAT THE ASSESSEES MAIN INCOME IS FROM GROSS COMMISSION AND MANAGEMENT FEES. THERE ARE ALSO TRADE WHICH HAVE BEEN EXECUTED BUT NOT SETTLED , WHICH AGGREGATES TO MORE THAN ` 40 CRORES. FURTHER, THE ASSESSEE HAS BEEN IN BROKING BUSINESS AND PURCHASE AND SALE OF SECURITIES. THUS, THE ASSESSEE HAS BEEN CARRYING OUT VARIOUS FUNCTIONS AND ALL THE COMPARABLES SHORTLISTED BY THE TPO SOMEHOW MATCHES WITH MOST OF THE FUNCTIONS DONE BY THE ASSESSEE COMPANY. HE ALSO DREW OUR ATTENTION TO THE NOTES FORMING PART OF THE ACCOUNTS FOR THE YEAR ENDING 31 ST MARCH 2005 WHERE IN IT HAS BEEN MENTIONED THAT ALL THE OPERATIONS OF THE ASSESSEE COMPANY FALLS UNDER THE SINGLE BUSINESS SEGMENT OF INVESTMENT BANKING AND AS AN INVESTMENT BANK ER , IT IS ALSO ENGAGED IN THE BUSINESS OF SECURITIES BROKING AND CORPORATE FINANCE ACTIVITIES. THUS, IT CANNOT BE SAID THAT THE ASSESSEE IS MERELY DOING INVESTMENT BANKING SUPPORT SERVICE. IN FACT, THE ASSESSEE IS CARRYING OUT ENTIRE BOUQUET OF SERVICE UNDER THE HEAD INVESTMENT BAN KING. ON THIS PROFILE, ALL THE COMPARABLES HAVE RIGHTLY BEING INCLUDED IN THE SAID COMPARABLES BY THE TPO AND ALSO RIGHTLY CONFIRMED BY THE LEARNED COMMISSIONER (APPEALS). THE ASSESSEE COMPANY HAS ALSO DEBITED EMPLOYEES COST AT ` 70.77 CRORES OUT OF WHICH ALLOCATION FOR SUPPORT SERVICES HAD BEEN MADE AT ` 4.62 CRORES. NO PROPER ALLOCATION OR SEGREGATION HAS BEEN MADE FOR THE SUPPORT SERVICE. THUS, THE ASSESSEES MARGIN ON SUPPORT SERVICE TO ITS A.E. CANNOT BE HELD TO BE PROPER AND, THEREFORE, THE BENCH MARK ING HAS TO BE DONE WITH LIKE COMPARABLES IN THE UNCONTROLLED CONDITIONS. REGARDING THE TPOS CRITERIA FOR TURNOVER FILTER OF LESS THAN ` 1 CRORE IN THE SEARCH PROCESS OF THE COMPARABLES, HE SUBMITTED THAT BY ADOPTING SUCH CRITERIA, THE TPO HAS BROUGHT ONLY THREE COMPARABLES, OUT OF WHICH ONE COMPARABLE HAS BEEN EXCLUDED AND TWO COMPARABLES WERE ALREADY A PART OF THE ORIGINAL TRANSFER M/S. UBS SECURITIES INDIA PVT. LTD. 14 PRICING STUDY REPORT BY THE ASSESSEE. THE ASSESSEE ITSELF HAS SELECTED THESE COMPARABLES FOR COMPARABILITY ANALYSIS IN ITS TR ANSFER PRICING STUDY REPORT AND, THEREFORE, SUCH A PLEA CANNOT BE RAISED THAT THESE COMPARABLES SHOULD BE EXCLUDED ON THE BASIS OF FILTER CRITERIA ADOPTED BY THE TPO. I ) ICDC SECURITIES LTD : COMING TO THE COMPARABLES ALSO THE LEARNED DEPARTMENTAL REPRESENT ATIVE MADE HIS ELABORATE SUBMISSIONS. HE SUBMITTED THAT THERE IS NOTHING ON RECORD THAT INCOME IS MISMATCHED WITH THE EXPENDITURE. IF SUCH A COMPANY WAS INVOLVED IN MERCHANT BANKING AND STOCK BROKING, THEN THE ASSESSEE IS ALSO DOING THE SAME FUNCTION AS IT ITSELF IS INVOLVED IN STOCK BROKING. THUS, THE REASONS GIVEN BY THE TPO AS WELL AS THE LEARNED COMMISSIONER (APPEALS) WITH REGARD TO THE INCLUSION OF SUCH A COMPARABLE IS WHOLLY JUSTIFIED. II ) REGARDING INCLUSION OF SUMEDHA FISCAL SERVICES LTD ., THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THIS COMPANY WAS EARLIER INCLUDED BY THE ASSESSEE ITSELF IN ITS TRANSFER PRICING STUDY REPORT BECAUSE OF ITS FUNCTIONAL PROFILE. NOW THE SAME COMPANY IS BEING CONTESTED BY THE ASSESSEE ON THE GROUND THAT ITS FUNCT IONS HAVE CHANGED MOSTLY TO MERCHANT BANKING. T HE KIND OF SERVICE WHICH HAVE BEEN RENDERED BY THIS COMPANY IS QUITE SIMILAR TO THE SERVICE RENDERED BY THE ASSESSEE. FURTHER, IN THIS CASE, THE TPO HAS ONLY CONSIDERED THE CONSULTING SEGMENT , WHICH IS EXACTLY DONE BY THE ASSESSEE ALSO . THUS, THIS COMPANY HAS RIGHTLY BEEN INCLUDED BY THE TPO AND THE LEARNED COMMISSIONER (APPEALS). III ) REGARDING AJCON GLOBAL SERVICES LTD., THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THIS COMPARABLE WAS ALSO SELECTED BY T HE ASSESSEE IN ITS TP STUDY REPORT , AS IT IS ENGAGED IN THE EQUITY BROKING AND FINANCIAL ADVISORY SERVICES. THEREFORE, THIS COMPANY CAN BE SAID TO BE BROADLY FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. HE STRONGLY RELIED UPON THE REASONING GIVEN BY THE LEARNED COMMISSIONER (APPEALS) FOR INCLUSION OF THIS COMPANY. M/S. UBS SECURITIES INDIA PVT. LTD. 15 IV ) REGARDING EPIC ENERGY LTD., THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THIS COMPANY WAS ALSO ONE OF THE COMPARABLES SELECTED BY THE ASSESSEE IN THE TP STUDY REPORT AND, THEREFOR E, THE ASSESSEE WITHOUT ANY JUSTIFIABLE REASON , CAN BACK OFF FROM SUCH INCLUSION AT THE ASSESSMENT STAGE WITHOUT ANY DIFFERENCE IN THE FINANCIAL PROFILE. WITH REGARD TO THE TPOS APPLICATION OF TURNOVER FILTER OF LESS THAN ` 1 CRORE , HE SUBMITTED THAT WHEN THE ASSESSEE HAS INCLUDED IT AS COMPARABLE THEN SUCH A CRITERIA OF THE TPO SHOULD NOT BE TAKEN INTO COGNIZANCE. THUS, HE SUBMITTED THAT ALL THESE COMPANIES HAVE RIGHTLY BEEN INCLUDED IN THE FINAL SET OF COMPARABLES. 15 . IN THE REVENUES APPEAL WITH REGARD TO THE EXCLUSION OF CRISIL LTD., WHICH WAS EXCLUDED BY THE TPO AND INCLUDED BY THE LEARNED COMMISSIONER (APPEALS), THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE TPO HAS GIVEN A VERY DETAIL REASONING AS TO WHY THIS COMPARABLE SHOULD BE EXCLUDED. THIS COMPANY IS MAINLY IN CREDIT RATING BUSINESS WHEREAS HE ASSESSEES BUSINESS IS OF ADVISORY SERVICES. IN THE SEGMENT OF ADVISORY SERVICES, THE COMPANY CRISIL LTD. IS INTO GAS AND INFRASTRUCTURE ADVISORY SERVICES, POWER SECTOR AND ADVISORY SERVICES FOR T HE FISCAL REFORM INITIATIVE UNDERTAKEN BY THE STATE GOVERNMENT. THUS, THE ADVISORY SERVICES OF CRISIL LTD. IS ENTIRELY DIFFERENT AS COMPARED TO THE ASSESSEES ADVISORY BUSINESS. THEREFORE, THIS COMPANY HAS RIGHTLY BEEN EXCLUDED BY THE TPO. 16 . ON THE OTHER HA ND, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHILE EXCLUDING THE CRISIL LTD., THE TPO HAS WRONGLY CHOSEN THE SEGMENT OF GAS AND INFRASTRUCTURE ADVISORY SERVICES WHEREAS THE CORRECT SEGMENT WHICH IS TO BE TAKEN IS RESEARCH AND INFORMATION SE RVICE S. HE ALSO POINTED OUT THE RELEVANT SEGMENTAL WORKING OF THIS COMPANY. THIS ISSUE HAS BEEN PROPERLY APPRECIATED BY THE LEARNED COMMISSIONER (APPEALS) AND HAVE BEEN RIGHTLY INCLUDED BY THE LEARNED COMMISSIONER (APPEALS) IN THE FINAL SET OF COMPARABLES, THER EFORE, THIS OBJECTION OF THE REVENUE CANNOT BE SUSTAINED. M/S. UBS SECURITIES INDIA PVT. LTD. 16 17 . THE LEARNED COUNSEL FOR THE ASSESSEE, BY WAY OF REJOINDER TO THE EARLIER SUBMISSIONS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT EVEN THOUGH THE ASSESSEE IS CARRYING OUT HOST OF ACTI VITIES BUT ONE HAS TO SEE WHAT IS THE SUBJECT MATTER OF BENCH MARKING. IN THIS CASE, IT IS THE INTERNATIONAL TRANSACTION WITH THE A.E. WHICH IS PURELY INVESTMENT BANKING SUPPORT SERVICE. THE ASSESSEES TRANSACTION WITH THE A.E. IS ONLY ` 6,12,24,967, WHERE AS THE ASSESSEES OTHER BUSINESS TRANSACTIONS ARE FAR MORE. THE ISSUE BEFORE US IS ONLY THE BENCH MARKING OF THE OP/TC OF 10% WITH THE A.E. AND NOT THE OTHER ACTIVITIES. REGARDING SUBMISSIONS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE NATURE OF AC TIVITIES AND FUNCTIONS CANNOT BE GATHERED DUE TO LACK OF AGREEMENT AND DOCUMENTS, HE SUBMITTED THAT IN THE TRANSFER PRICING STUDY REPORT THE ENTIRE FUNCTIONS CARRIED OUT WITH THE A.E. HAS BEEN DULY ELABORATED AND ALSO NOTED BY THE TPO. THUS, THERE IS NO QU ARREL WITH REGARD TO THE FUNCTION PERFORMED WITH THE A.E. REGARDING THE INCLUSION OF THE COMPARABLES IN THE TRANSFER PRICING STUDY REPORT, HE REITERATED THAT THESE COMPARABLES WERE TAKEN ON THE BASIS OF EARLIER FINANCIAL DATA WHICH THE TPO HIMSELF HAS AGRE ED THAT THE EARLIER YEARS DATA CANNOT BE USED FOR BENCH MARKING. FURTHER, ONCE THE TPO HAS CARRIED OUT HIS FRESH SEARCH OF COMPARABLES, THEN SUCH COMPARABLES HAS TO BE SEEN AND EXAMINED FOR THE PURPOSE OF BENCH MARKING THE ASSESSEES MARGIN FROM THESE COM PARABLES AND NOT WHETHER THE SAME COMPARABLES WERE EARLIER INCLUDED OR EXCLUDED BY THE ASSESSEE. THE FILTRATION CRITERIA ADOPTED BY THE TPO HAS TO BE SEEN FOR SELECTING THE COMPARABLES AND THERE CANNOT BE ANY CHERRY PICKING OF THE COMPARABLES. 18 . WE HAVE HEA RD THE RIVAL CONTENTIONS, PERUSED THE RELEVANT FINDINGS OF THE TPO AND THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE COMPANY IS MAINLY CARRYING OUT ITS BUSINESS OPERATION IN EQUITY BROKING AND INVESTMENT BANKI NG. IT IS ALSO PROVID ING MARKETING AND SUPPORT SERVICE TO UBS AG, HON G KONG (A.E) IN RESPECT OF ITS INVESTMENT BANKING ACTIVITIES. THE SERVICE CHARGES RECEIVED FOR INVESTMENT BANKING SUPPORT AGGREGATED TO ` 6,12,24,967, ON WHICH, THE M/S. UBS SECURITIES INDIA PVT. LTD. 17 ASSESSEE HAD SUBMITTED THAT IT HAS RECEIVED COST PLUS 10% MARGIN. THE OPERATING PROFIT / TOTAL COST HAS ALREADY BEEN GIVEN IN THE FORGOING PARAGRAPHS. IT IS THIS SEGMENT OF THE TRANSACTION WHICH IS THE SUBJECT MATTER OF BENCH MARKING UNDER THE ARMS LENGTH CONDITION. THE ASSESS EE HAS SUBMITTED THAT BASED ON FAR ANALYSIS AND THAT THE ASSESSEE IS A CAPT IVE SERVICE PROVIDER S ASSUMING LIMITED RISK , THE ASSESSEE HAS CARRIED OUT ITS BENCH MARKING BY ADOPTING TNNM A S THE MOST APPROPRIATE METHOD FOR ESTABLISHING ARMS LENGTH NATURE OF I NVESTMENT BANKING SUPPORT SERVICE . INITIALLY, I T HAD IDENTIFIED FIVE COMPARABLES IN ITS TRANSFER PRICING STUDY REPORT, THE ARITHMETIC MEAN OF MARGIN OF COMPARABLES WERE WORKED OUT AT 14.98% AND IT WAS SUBMITTED THAT SINCE THIS MARGIN IS WITHIN +/ 5% RANGE , THEREFORE, THE ASSESSEES OPERATING MARGIN IS AT ARMS LENGTH. THE ASSESSEE HAS TAKEN THE FINANCIAL DATA FOR THE FINANCIAL YEARS 2002 03 AND 2003 04 AS AT THE TIME OF PREPARING THE TRANSFER PRICING STUDY REPORT , FINANCIAL DATA FOR THE FINANCIAL YEAR 2004 05 WAS NOT AVAILABLE. AT THE TIME OF TRANSFER PRICING PROCEEDINGS, AFTER THE OBJECTION OF THE TPO, THE ASSESSEE SUBMITTED A FRESH SEARCH AND IDENTIFIED FIVE COMPARABLES OUT OF WHICH THERE WERE FOUR NEW COMPARABLES. THE ARITHMETIC MEAN OF THE MARGIN S OF TH ESE FIVE COMPARABLES WAS DETERMINED AT 11.56% WHICH WAS CLAIMED TO BE WITHIN +/ 5% RANGE AND THUS ASSESSEES MARGIN WERE AT ARMS LENGTH. THE TPO REJECTED THE ENTIRE ASSESSEES SEARCH OF COMPARABLES AND CARRIED OUT HIS OWN SEARCH AFRESH TO IDENTIFY THE FRE SH SET OF COMPARABLES AFTER TAKING THE FOLLOWING FILTERS FOR ELIMINATING THE COMPARABLES. I ) T HE COMPANY HAVING ZERO FEE BASED INCOME; II ) T HE COMPANY HAVING FUND BASED INCOME MORE THAN 25% OF THE TOTAL INCOME; III ) T HE COMPANY HAVING FEE BASED INCOME LESS THAN 25% O F THE TOTAL REVENUE; AND LASTLY; IV ) T HE COMPANY HAVING TOTAL REVENUE LESS THAN ` 1 CRORE. M/S. UBS SECURITIES INDIA PVT. LTD. 18 BASED ON THE AFORESAID CRITERIA, COMPANIES WERE TO BE EXCLUDED FROM THE COMPARABILITY ANALYSIS. AFTER CARRYING OUT HIS FRESH SEARCH, HE IDENTIFIED 10 COMPARABLES WHICH HAVE ALREADY BEEN STATED IN THE FORGOING PARAGRAPHS. AFTER INVITING ASSESSEES OBJECTION S , FINALLY EIGHT COMPARABLES WERE SHORTLISTED, THE ARITHMETIC MEAN MARGIN OF THESE COMPANIES WORKED OUT AT 35.59% AND ACCORDINGLY, THIS RESULTED INTO UPWARD TRANSFER PR ICING ADJUSTMENT OF ` 1,42,37,587. FROM THE STAGE OF THE LEARNED COMMISSIONER (APPEALS), ONE MORE COMPARABLE WHICH WAS INITIALLY SELECTED BY THE ASSESSEE AS WELL AS BY THE TPO WAS ALSO INCLUDED AND, ACCORDINGLY, NINE COMPARABLES WERE SHORTLISTED, THE ARITH METIC MEAN MARGIN OF WHICH WAS WORKED OUT AT 32.65%. 19 . THE ISSUE BEFORE US IS MAINLY , WHETHER THE FOUR COMPANIES SHORTLISTED BY THE TPO CAN BE INCLUDED IN THE FINAL SET OF COMPARABLES FOR THE PURPOSE OF COMPARABILITY ANALYSIS OR NOT . THESE COMPANIES ARE ; ( I) IDCS SECURITIES L T D. (SEGMENTAL); (II) SUMEDHA FISCAL SERVICES LTD. (SEGMENTAL) ; (III) AJCON GLOBAL SERVICES LTD; AND (IV) EPIC ENERGY LTD. THE REVENUE IS IN APPEAL AGAINST THE INCLUSION OF CRISIL LTD. BY THE LEARNED COMMISSIONER (APPEALS). IN ALL, WE H AVE TO SEE WHETHER THESE FIVE COMPANIES CAN BE INCLUDED AS COMPARABLES FOR THE PURPOSE OF BENCH MARKING THE ALP IN THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS A.E. 20 . ONE OF THE MAIN ARGUMENTS PUTFORTH BY THE PARTIES BEFORE US IS WHETHER THE FILTRA TION CRITERIA ADOPTED BY THE TPO (AS ENUMERATED ABOVE) FOR THE PURPOSE OF SELECTION OF THE COMPARABLES SHOULD BE TAKEN INTO CONSIDERATION OR NOT. THE REVENUES ALLEGATION IS THAT ONCE THE ASSESSEE ITSELF HAS SHORTLISTED CERTAIN COMPARABLES IN THE TRANSFER PRICING STUDY REPORT, THEN THE ASSESSEE IS PRECLUDED FROM RAISING OBJECTION ON THESE COMPARABLES, WHEREAS THE ASSESSEES CONTENTION IS THAT ON CE THE TPO HAS CARRIED OUT HIS FRESH SEARCH AND SHORTLISTED CERTAIN COMPARABLES BASED ON CERTAIN FILTRATION CRITER IA, THEN THE SAME SHOULD BE THE SUBJECT MATTER OF ANALYSIS AND T HE TPO CANNOT RESORT TO CHERRY PICKING OF THE COMPARABLES, SOME FROM HIS OWN M/S. UBS SECURITIES INDIA PVT. LTD. 19 SEARCH AND SOME FROM THE ASSESSEES ORIGINAL T . P . STUDY REPORT , WHEN IT HAS BEEN BROUGHT ON RECORD THAT EARLIER COM PARABLES WERE NOT BASED ON CURRENT FINANCIAL DATA BUT OF THE EARLIER TWO YEARS. WE ARE INCLINED TO AGREE WITH THE CONTENTION OF THE ASSESSEE , FIRSTLY , BECAUSE ONCE IT HAS BEEN BROUGHT ON RECORD THAT IN THE EARLIER TP STUDY REPORT CURRENT FINANCIAL DATA W ER E NOT AVAILABLE AND ONCE THE CURRENT FINANCIAL DATA WERE AVAILABLE IN THE FRESH SEARCH AT THE TIME OF T.P. PROCEEDINGS, THEN THE SAME SHOULD BE TAKEN INTO CONSIDERATION FOR THE COMPARABILITY ANALYSIS AS IT IS IN CONFORMITY WITH THE PROVISIONS OF RULE 10B(4 ) WHICH ENVISAGES THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF UNCONTROLLED TRANSACTIONS WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR FOR WHICH THE INTERNATIONAL TRANSACTIONS HAVE BEEN ENTERED INTO AND, T HEREFORE, THE EARLIER COMPARABLES WHICH WERE BASED ON EARLIER FINANCIAL DATA S HOULD NOT BE GIVEN PREFERENCE TO; AND S ECONDLY, ONCE THE TPO HIMSELF HAS CARRIED OUT FRESH SEARCH AND SHORTLISTED THE COMPARABLES BASED ON CURRENT FINANCIAL DATA, THE SAME SHOULD BE ANALYSED RATHER THAN SUPPORTING THE INCLUSION OF SUCH COMPARABLES ON THE GROUND THAT THE ASSESSEE ITSELF HAS CHOSEN AT THE TIME OF ORIGINAL T . P . REPORT. THERE SHOULD NOT BE CHERRY PICKING OF THE COMPARABLES BUT SHOULD BE BASED ON CERTAIN CRITERIA AND F UNCTIONAL ANALYSIS. THE COMPARABLES AS CHOSEN BY THE TPO HAS TO BE CONSIDERED FOR THE COMPARABILITY ANALYSIS BASED ON HIS FILTRATION SEARCH CRITERIA BECAUSE THAT IS THE SUBJECT MATTER OF ACCEPTANCE AND NON ACCEPTANCE OF COMPARABLES BEFORE US. 21 . NOW, WE PROC EED TO TAKE UP THE COMPARABLES WHICH HA VE BEEN INCLUDED BY THE TPO AND OBJECTED BY THE ASSESSEE SO AS TO EXAMINE , WHETHER THEY CAN BE INCLUDED IN THE SET OF COMPARABLES FOR THE PU RPOSE OF COMPARABILITY ANALYSIS OR NOT: I ) IC DS SECURITIES LTD : THE TPO HAS T AKEN THE SEGMENTAL DETAILS OF SERVICE CHARGES. ON A PERUSAL OF THE FINANCIALS, AS GIVEN IN THE ANNUAL REPORT FOR THE FINANCIAL YEAR 2004 05, IT IS SEEN THAT SERVICE CHARGES HAS BEEN M/S. UBS SECURITIES INDIA PVT. LTD. 20 RECEIVED MAINLY FROM STANDARD CHARTERED BANK WHICH IS AFTER THE NETTING OF F REIMBURSEMENT OF SALARY, RENT AND CONVEYANCE EXPENSES. IN SUCH A SITUATION, IT IS VERY DIFFICULT TO ANALYSE THE OPERATING EXPENDITURE A S IT WOULD RESULT INCREASE IN THE PROFIT MARGIN OF THE SEGMENT SINCE ITS COST BASE WOULD SUBSTANTIALLY REDUCE DUE TO NE TTING OFF THE EXPENDITURE. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO DEMONSTRATED BEFORE US THE IMPACT OF SUCH A NETTING OFF ON THE OPERATING INCOME WHICH GOES TO SHOW THAT IF THE SALARY, RENT AND CONVEYANCE EXPENSES ARE REMOVED, THE ASSESSEES PROFIT MARGIN WOULD INCREASE UPTO TO 28.57%. IT IS ALSO SEEN FROM THE NOTES ON ACCOUNT THAT THE REVENUE RECOGNITION FROM SERVICE TRANSACTION HAS BEEN ACCOUNTED ON THE BASIS OF COMPLETION OF ASSIGNMENTS. UNDER THI S SYSTEM OF ACCOUNTING, THERE COULD BE A CHANCE THA T IN THE YEAR OF REVENUE RECOGNITION, THE PROFIT MARGIN IS MORE AND THERE IS ALWAYS A PROBLEM OF MATCHING CONCEPT I.E., THE INCOME WILL NOT CORRESPOND WITH THE EXPENDITURE. BECAUSE OF THESE FACTORS, THERE HAS BEEN HUGE VARIATION OF THE MARGIN WHICH CAN BE SEEN FROM THE FACT THAT IN THE FINANCIAL YEAR 2002 03, IT WAS 18.50% IN THE FINANCIAL YEAR 2003 04, ITS OPERATING MARGIN WAS 9.36% AND IN THE FINANCIAL YEAR 2004 05, IT HAS SHOOT UP TO 75%. UNDER SUCH A SITUATION, WHERE THERE IS AN ABNORMAL / SUPERNORMAL F LUCTUATION OF MARGIN IN THE IMMEDIATELY TWO FINANCIAL YEARS, THEN SUCH AN OPERATING MARGIN CANNOT BE CONSIDERED FOR BENCH MARKING THE ASSESSEES MARGIN. THUS, THE COMPARABILITY ANALYSIS ON TH ESE FACTORS FAILS IN THIS CASE AND, THEREFORE, SUCH A COMPARABLE CANNOT BE INCLUDED FOR THE PURPOSE OF BENCH MARKING THE ARMS LENGTH MARGIN WITH THAT OF THE ASSESSEE. ACCORDINGLY, WE AGREE WITH THE LEARNED COUNSEL FOR THE ASSESSEE THAT SUCH A COMPARABLE HAS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. II ) SUMEDHA FIS CAL SERVICES LTD. (SEGMENTAL) : ON A PERUSAL OF THE ANNUAL FINANCIAL ACCOUNT FOR THE YEAR ENDING 31 ST MARCH 2005 IN RESPECT OF SUMEDHA FISCAL SERVICES LTD. (SEGMENTAL) , WHICH IS THE SUBJECT MATTER OF ANALYSIS, IT IS SEEN THAT ITS MAIN FUNCTION IS OF LOAN S YNDICATION AND PROJECT CONSULTANCY SERVICES. IT ALSO HAS INCOME FROM CAPITAL MARKET OPERATION. THE LOAN SYNDICATION IS NOTHING BUT A MERCHANT BANKING ACTIVITY WHICH IS DIFFERENT FROM M/S. UBS SECURITIES INDIA PVT. LTD. 21 THE FUNCTIONS CARRIED OUT BY THE ASSESSEE WITH ITS A.E. THE ASSESSEE IS R ENDERING INVESTMENT BANKING ADVISORY SERVICES AND RELATED SUPPORT SERVICE TO ITS A.E. THE TRIBUNAL I N CARLYLE INDIA ADVISORS PVT. LTD. (SUPRA) HAS HELD THAT SUMEDHA FISCAL SERVICES LTD. (SEGMENTAL), WHICH IS ENGAGED IN MERCHANT BANKING CANNOT BE COMPARED W ITH THE COMPANIES WHICH ARE RENDERING INVESTMENT ADVISORY AND RELATED SUPPORT SERVICES. THE SAID COMPANY CANNOT BE HELD TO BE COMPARED WITH ALL THE FUNCTIONS AND ACTIVITIES CARRIED OUT BY THE ASSESSEE. IT IS FURTHER NOTICED THAT UNDER THE PRO DUCT DESCRIPTI ON IN WHICH THE SERVICE ARE BEING CARRIED OUT BY SUMEDHA FISCAL SERVICES LTD. (SEGMENTAL) , ALSO INCLUDES BROKING SERVICES AND MERCHANT BANKING AND UNDERWRITING. THESE ACTIVITIES ARE NOT CARRIED OUT BY THE ASSESSEE WITH ITS A.E. THUS, SUMEDHA FISCAL SERVICE S LTD. (SEGMENTAL) CANNOT BE FUNCTIONALLY COMPARED WITH THAT OF THE ASSESSEE AS PER THE DATA GIVEN FOR THE FINANCIAL YEAR 2004 05 AND, THEREFORE, THIS COMPANY CANNOT BE INCLUDED IN THE FINAL SET OF COMPARABLES; III ) AJCON GLOBAL SERVICES LTD : AS PER THE FINAN CIAL STATEMENT AND ANNUAL REPORT OF THE SAID COMPANY, IT IS SEEN THAT ITS MAIN INCOME IS FROM STOCK MARKET OPERATION AND ITS MAIN PROFIT IS FROM SHARE TRADING. THE TPO HAS TAKEN THE ENTIRE OPERATION OF THIS COMPANY AS COMPARABLE WHICH MAINLY INCLUDE INCOM E FROM SHARE TRADING AND IS ENTIRELY DIFFERENT FROM THE SERVICES RENDERED BY THE ASSESSEE TO ITS A.E. WHICH IS MAINLY INVESTMENT BANKING ADVISORY SERVICE. FURTHER, IT IS SEEN THAT ITS PROFIT MARGIN IN CLUDES SALE OF INVESTMENTS OF ` 15.75 LAKHS WHICH HAS RE SULTED INTO INCREASE OF PROFIT MARGIN IN THIS YEAR. THUS, ITS PROFIT MARGIN CANNOT BE TAKEN FOR COMPARABILITY ANALYSIS WITH THAT OF THE ASSESSEE ESPECIALLY WHEN ITS TURNOVER ITSELF IS LITTLE OVER THAN ` 80 LAKHS . IT IS ALSO SEEN THAT ITS ENTIRE TURNOVER IS ` 80 TO ` 90 LAKHS, WHICH IS LESS THAN ` 1 CRORE AND, THEREFORE, WITHIN THE FILTRATION CRITERIA ADOPTED BY THE TPO THAT THE TURNOVER BEING LESS THAN ` 1 CRORE ALSO DOES NOT SATISFY. ONCE THE TPO HAS EXCLUDED THE COMPARABLES HAVING LESS THAN ` 1 CRORE, THE N SUCH A COMPARABLE CANNOT BE INCLUDED FOR THE COMPARABILITY ANALYSIS AND, M/S. UBS SECURITIES INDIA PVT. LTD. 22 THEREFORE, ON THESE FACTS, AJCON GLOBAL SERVICES LTD. CANNOT BE INCLUDED IN THE FINAL SET OF COMPARABLES. IV ) EPICS ENERGY LTD : THE FIRST AND FOREMOST OBJECTION OF THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT ITS TURNOVER IS NEARLY ` 34,03,200 ONLY . ONCE THE TPO HIMSELF HAS EXCLUDED THE COMPARABLES WHICH ARE LESS THAN ` 1 CRORE THEN SUCH A COMPANY CANNOT BE SAID TO BE INCLUDIBLE IN THE COMPARABILITY ANALYSIS. ANOTHER IMPORTANT FACT WHI CH IS NOTICEABLE IN THE CASE OF THIS COMPANY IS THAT IN THE FINANCIAL YEAR 2003 04, ITS OPERATING MARGIN WAS 12.50% WHEREAS IN THE FINANCIAL YEAR 2004 05, ITS OPERATING MARGIN HAS SHOOT UP TO 78.94%. NO REASON HAS BEEN GIVEN FOR SUCH A HUGE JUMP IN THIS YE AR. ONCE THERE IS SUCH A HUGE VARIATION OF PROFIT MARGIN IN SUCCESSIVE FINANCIAL YEARS, THEN SUCH AN ABNORMAL MARGIN CANNOT BE CONSIDERED FOR COMPARABILITY ANALYSIS SPECIFICALLY IN CASE OF THE ASSESSEE , WHICH IS A KIND OF A CAPT IVE SERVICE PROVIDER WITH LI MITED RISK. THUS, ON THESE FACTORS, THIS COMPANY ALSO CANNOT BE INCLUDED IN THE SET OF COMPARABLES. 22 . IN VIEW OF THE ABOVE, ALL THE FOUR COMPARABLES WHICH HAVE BEEN INCLUDED BY THE TPO ARE HEREBY REJECTED AND THEY HAVE TO BE EXCLUDED FROM THE SET OF FINAL COMPARABLES FOR DETERMINING THE ARMS LENGTH MARGIN. 23 . NOW COMING TO CRISIL LTD., WHICH HAS BEEN EXCLUDED BY THE TPO AND INCLUDED BY THE LEARNED COMMISSIONER (APPEALS), WHICH IS THE SUBJECT MATTER OF GROUND RAISED BY THE REVENUE, IT IS SEEN THAT THE TPO HA S REJECTED THE SAID COMPARABLES ON THE GROUND THAT THIS COMPANY IS MAINLY INTO GAS AND INFRASTRUCTURE ADVISORY SERVICES WHICH IS ENTIRELY DIFFERENT FROM FIELD AS COMPARED TO THE ASSESSEES BUSINESS FUNCTION WITH ITS A.E. 24 . BEFORE THE LEARNED COMMISSIONER (A PPEALS), IT HAS BEEN BROUGHT ON THE RECORD THAT THE TPO HAS TAKEN WRONG SEGMENT AND IN FACT THE C O RRE C T SEGMENT SHOULD HAVE BEEN RESEARCH AND INFORMATION SERVICES . BEFORE US ALSO, THE LEARNED COUNSEL FOR THE ASSESSEE HAD SUBMITTED THE ANNUAL REPORT OF CR ISIL LTD. FOR THE FINANCIAL YEAR 2004 05, WHICH SHOWS THAT IT HAS PREPARED M/S. UBS SECURITIES INDIA PVT. LTD. 23 SEGMENTAL ACCOUNTS WITH REGARD TO RESEARCH AND INFORMATION SERVICES SEPARATELY AND EVEN THE TPO IN HIS SHOW CAUSE NOTICE HAS ALSO TAKEN THIS PARTICULAR SEGMENT INFORMATION WHICH D ISCLOSED THE OPERATING MARGIN AT 9.20%. THE LEARNED COMMISSIONER (APPEALS) HAS DULY APPRECIATED THE INFORMATION AND HAS HELD THAT THE TPO HAS TAKEN A WRONG SEGMENT FOR THE PURPOSE OF COMPARING THE MARGINS AND IF THE CORRECT SEGMENT IS TAKEN INTO CONSIDERAT ION, THEN ITS OPERATING MARGIN CAN BE CONSIDERED AS COMPARABLE. ON THESE FACTS, WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A FINDING OF FACT WHICH IS ALSO APPARENT FROM THE RECORDS PLACED BEFORE US. THUS, WE HOLD THAT THE SEGMENTAL INFORMATION OF CRISI L LTD. HAS RIGHTLY BEEN INCLUDED IN THE SET OF COMPARABLES FOR THE PU RPOSE OF COMPARABILITY ANALYSIS BY THE LEARNED COMMISSIONER (APPEALS). 25 . LASTLY, FROM THE ORDER OF THE LEARNED COMMISSIONER (APPEALS), IT IS SEEN THAT THE LEARNED COMMISSIONER (APPEALS) HA S GIVEN BENEFIT OF +/ 5% AS PER THE PROVISO TO SECTION 92C(2) ON THE MARGIN OF 32.65%. 26 . AS ADMITTED BY BOTH THE PARTIES, SUCH A BENEFIT CANNOT BE GIVEN IN VIEW OF THE RETROSPECTIVE AMENDMENT BY INSERTION OF SUB SECTION 2A IN SECTION 92C. IN ANY CASE, + / 5 % IS NOT A STANDARD DEDUCTION WHICH IS TO BE GIVEN ON THE ARITHMETIC MEAN , BUT CAN ONLY BE CONSIDERED WHEN THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND THE PRICE AT WHICH INTERNAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEEDS 5% , THAN ONLY THE BENEFIT OF TOLERANCE RANGE OF +/ 5% IS TO BE GIVEN. THUS, THIS FINDING OF THE LEARNED COMMISSIONER (APPEALS) IS LEGALLY INCORRECT AND IS ACCORDINGLY REVERSED. 27 . CONSEQUENTLY, THE GROUNDS RAISED BY THE REVENUE ARE TREATED AS PARTLY ALLOWED TO THE EXTENT OF BENEFIT OF +/ 5%, AS GIVEN BY THE LEARNED COMMISSIONER (APPEALS) IS INCORRECT IN THE EYES OF LAW, AND THE ASSESSEES GROUND ON THIS SCORE IS ALLOWED. M/S. UBS SECURITIES INDIA PVT. LTD. 24 28 . GROUND NO.2 RAISED BY THE REVENUE IN ITS APPEAL IN ITA NO.6451/MUM./ 2011, IS THE DELET ION OF DISALLOWANCE OF ` 1,86,67,243, MADE UNDER SECTION 40(A)(IA) OF THE ACT. 29 . THE ASSESSEE HAS DEBITED LEASE LINE CHARGES OF ` 5,91,434, V SAT CHARGES OF ` 1,58,994 AND TRANSACTION CHARGES OF ` 1,79,16,816. THESE CHARGES WERE PAYABLE TO STOCK EXCHANGE ON ACCOUNT OF SERVICES PROVIDED BY THE ASSESSEE REGARDING TRANSACTION IN SECURITIES THROUGH STOCK EXCHANGE. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS NOT DEDUCTED TDS WHILE MAKING THE PAYMENT OT THE STOCK EXCHANGE AND, ACCORDINGLY, HELD THAT SUCH PAY MENTS ARE TO BE DISALLOWED UNDER SECTION 40(A)(IA). 30 . THE LEARNED COMMISSIONER (APPEALS), RELYING UPON THE DECISION OF THE TR IBUNAL IN KOTAK SECURITIES LTD. V/S ADIT, [2009] 25 SOT 440 (MUM.) AND DCIT V/S ANGLE BROKING LTD., [2010] 35 SOT 457 (MUM.), HELD T HAT V SAT CHARGES AND TRANSACTION CHARGES CANNOT BE HELD TO BE RENDERING OF TECHNICAL SERVICES AND, ACCORDINGLY, CANNOT BE CONSIDERED TO BE COVERED UNDER SECTION 194J. THEREFORE, NO DISALLOWANCE UNDER SECTION 40(A)(IA) CAN BE MADE. 31 . BEFORE US, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN ANGLE CAPITAL AND DEBIT MARKET LTD. (SUPRA) IT HAS BEEN HELD THAT FEES PAID FOR V SAT AND LEASE LINE CHARGES ARE NOT FEES FOR TECHNICAL SERVICES A S THE SAME DO NOT FALL WITHIN THE PURVIEW OF SECTION 194J. REGARDING TRANSACTION CHARGES, I T HAS BEEN POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE EARLIER YEARS, NO DISALLOWANCE HAS BEEN MADE BY THE REVENUE AND, THEREFORE, IN THIS YEAR ALSO, THE ASSESSEE CAN BE HELD TO ENTERTAIN BONAFIDE BELIEF THAT NO TDS IS REQUIRED TO BE MADE. IN VIEW OF THE DECISION IN CIT V/S KOTAK SECURITIES LTD. , [ 2012 ] 340 ITR 333 (BOM.) SUCH A DISALLOWANCE SHOULD NOT BE MADE. 32 . AFTER HEARING BOTH THE PARTIES, WE ARE OF THE CONSIDE RED OPINION THAT IN VIEW OF THE FACTS AND THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN ANGEL CAPITAL AND DEBIT MARKET LTD. (SUPRA), THE TDS IS NOT REQUIRED ON THE M/S. UBS SECURITIES INDIA PVT. LTD. 25 PAYMENT OF V SAT CHARGES AND LEASE LINE CHARGES. INSOFAR AS TRANSACTIONS CHARGES ARE CON CERNED, IT IS SEEN THAT REVENUE HAS ACCEPTED THE NON DEDUCTION OF TDS IN EARLIER YEARS AND AT THE TIME OF FILING OF RETURN OF INCOME, THERE WERE FAVOURABLE DECISIONS, THEREFORE, THE ASSESSEE HAD A BONDAFIDE BELIEF FOR NOT DEDUCTING TDS . THUS, IN VIE W OF THE DECISION IN KOTAK SECURITIES LTD. (SUPRA), NO DISALLOWANCE SHOULD BE MADE. THUS, THE ADDITION DELETED BY THE LEARNED COMMISSIONER (APPEALS) ON THE DISALLOWANCE UNDER SECTION 40(A)(IA) ON SUCH PAYMENTS ARE UPHELD. GROUND NO.2 IS THUS TREATED AS DIS MISSED. 33 . IN GROUND NO.3, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF ` 1,55,059 PAID TO SEBI AS INTEREST PERTAINING TO EARLIER YEARS. 34 . THE RELEVANT FACTS, AS NOTED BY THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS), ARE THAT AS PER THE SEBI (STOCK BROKERS AND SUB - BROKERS) REGULATIONS , 1992 THE BROKERS WERE REQUIRED TO PAY TURNOVER TAX BASED ON THEIR ANNUAL TURNOVER AS REGISTER ATION FEE. THE SAME WERE DISPUTED BY THE BROKER S. ON 16 TH DECEMBER 1998, THE SEBI (STOCK BROKERS AND SUB BROKERS) REGULATIONS, 1992 WAS AMENDED AND INTEREST @ OF 15% PER ANNUM WAS LEVIED IN RESPECT OF ANY DELAY / FAILURE OF PAYMENT OF REGISTRATION FEE / TURNOVER FEE WHICH WAS ACCRUING ON THE UNPAID AND DISPUTED TURNOVER TAX. IN THE YEAR 2004, SEBI CAME OUT WITH INTEREST LIABILITY REGULATION SCHEME WHEREBY ONE TIME WAIVER WAS GIVEN TO THE BROKER TO PAY ANNUAL 20% OF THE INTEREST ACCRUED SO FAR , IN FULL AND FINAL SETTLEMENT OF DUES. THE SEBI FEES ARE GOVE RNED BY THE PROVISIONS OF SECTION 43B AND ARE ALLOWED IN THE YEAR OF THE PAYMENT. THE ASSESSING OFFICER OBSERVED THAT THE LIABILITY OF REGISTRATION FEE AROSE EARLIER AND CRYSTALLIZED FINALLY WHEN THE HON'BLE SUPREME COURT BY ITS JUDGMENT DATED 1 ST FEBRUARY 2001, UPHELD THE LEVY OF TURNOVER FEE. THE INTEREST, THUS, PERTAINED TO UNPAID LIABILITY AND IT IS NOT THE CASE THAT THE LIABILITY OF INTEREST PAYMENT GOT CRYSTALLIZED IN THE YEAR UNDER CONSIDERATION WHEN THE SEBI CAME OUT WITH SUCH AN INTEREST LIABILITY REGULATION SCHEME. HE FURTHER OBSERVED THAT IF THE ASSESSEE WAS PROVIDING THE INTEREST ON YEARLY M/S. UBS SECURITIES INDIA PVT. LTD. 26 ACCRUAL BASIS THEN SUCH INTEREST WAIVER BY THE SEBI TO THE EXTENT OF 80% WOULD HAVE BECOME TAXABLE UNDER SECTION 41(1) OF THE ACT AND NOT 20% WHICH IS PAID BY THE ASSESSEE DURING THE YEAR. ACCORDINGLY, HE DISALLOWED THE INTEREST PAID TO THE SE B I. 35 . BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE SUBMITTED THAT IT HAS PAID A SUM OF ` 1,55,059 TO SEBI DURING THE EARLIER YEAR WHICH PERTAINS TO THE PAYMENT MA DE UNDER SEBI (INTEREST LIABILITY REGULATION SCHEME) 2004. DETAIL SUBMISSIONS OF THE ASSESSEE HAVE BEEN DEALT BY THE LEARNED COMMISSIONER (APPEALS) FROM PARA 6.2.1 TO PARA 6.2.9. A FTER FOLLOWING VARIOUS DECISIONS OF THE TRIBUNAL , THE LEARNED COMMISSIONER ( APPEALS) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AS PER THE FINDINGS GIVEN IN PARA 6.3. 36 . BEFORE US, BOTH THE PARTIES AGREED THAT THIS ISSUE STANDS COVERED BY SERIES OF DECISIONS GIVEN BY THE TRIBUNAL IN VARIOUS CASES, SOME OF WHICH ARE AS UNDER: 1. W ALLFORT FINANCIAL SERVICES LTD. V/S ITO 4(2)(2) ITA NO.5984/MUM./2008 2. WALLFORT FINANCIAL SERVICES LTD. V/S ACIT (2010) 41 SOT 200 (MUM.) 3. VFC SECURITIES LTD. ITA NO.4200/MUM./2009 4. ACIT V/S BLB LTD. ITA NO.2290(DEL.)/2008 5. ACIT V/S BULLS AND B EARS PORTFOLIOS LTD. (2011) 48 SOT 0527 (DEL.) 37 . IN THESE CASES, THE TRIBUNAL HAS HELD THAT THE TURNOVER CHARGES WERE IN THE NATURE OF TAX, DUTY, CESS OR FEES PAYABLE UNDER THE LAW AND ANY PAYMENT MADE THEREON HAS T O BE ALLOWED UNDER SECTION 43B IN THE YEA R OF PAYMENT. 38 . AFTER HEARING BOTH THE PARTIES, WE, RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENCE OF THE CO ORDINATE BENCH OF THE TRIBUNAL IN VARIOUS CASES , HOLD M/S. UBS SECURITIES INDIA PVT. LTD. 27 THAT THE INTEREST PAID TO THE SEBI FOR REGISTRATION FEES IS A FEE WHICH IS ALLOWABLE AS DEDUCT ION IN TERMS OF THE PROVISIONS OF SECTION 43B AND WOULD BE ALLOWABLE WHEN SUCH AN INTEREST IS PAID AS PER THE SEBI ( INTEREST LIABILITY SCHEME) 2004, WHICH IN THIS CASE IS THE PRESENT YEAR. CONSEQUENTLY, WE UP HOL D THE DECISION OF THE LEARNED COMMISSIONER (A PPEALS) IN DELETING THE DISALLOWANCE. 39 . IN GROUND NO.4, THE REVENUE HAS CHALLENGED DISALLOWANCE OF ` 26,70,310 ON ACCOUNT OF PENALTY PAID TO STOCK EXCHANGE. 40 . THE ASSESSEE HAS DEBITED ` 26,70,310 AS EXCHANGE EXPENSES WHICH WERE ON ACCOUNT OF SHORT DELIVERY C HARGES, FAILURE TO RAISE REQUISITE MARGIN MONEY, PENALTY IMPOSED UNDER CONSUMER CODES, VIOLATION OF NON CONFIRMATION OF OTR TRADES OF INSTITUTION, ETC. THE SEBI IMPOSED PENALTY ON THE MEMBERS UNDER ITS RULE. ACCORDINGLY, THE ASSESSING OFFICER HELD THAT SUC H A PAYMENT IS ON ACCOUNT OF INFRACTION OF LAW AND, THEREFORE, COVERED UNDER EXPLANATION TO SECTION 37(1). 41 . THE ASSESSEE, BEFORE THE LEARNED COMMISSIONER (APPEALS), SUBMITTED THAT THE PENALTY CHARGES ARE ON ACCOUNT OF CERTAIN PROCEDURAL LAPSE S IN THE ORDIN ARY COURSE OF BUSINESS AND NOT FOR ANY INFRINGEMENT OF ANY LAW. FURTHER, THE PENALTY CHARGES HAVE BEEN ALLOWED BY THE LEARNED COMMISSIONER (APPEALS) AND THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2000 01. DETAIL SUBMISSIONS WERE MADE BY TH E ASSESSEE ON THIS SCORE WHICH HAS BEEN INCORPORATED BY T H E LEARNED COMMISSIONER (APPEALS) FROM PAGE 31 TO 35 OF THE APPELLATE ORDER. THE LEARNED COMMISSIONER (APPEALS) DELETED THE SAID DISALLOWANCE AFTER OBSERVING AND HOLDING AS UNDER: 7.3 I HAVE CONSI DERED THE FACTS OF THE CASE, TOGETHER WITH THE SUBMISSION OF THE APPELLANT AS AGAINST THE OBSERVATIONS OF THE AO IN HIS ORDER. CHAPTER VI A OF THE SEBI ACT IN RESPECT OF THE LEVY OF PENALTIES. IT IS THE OBSERVATION OF 'THE AO IN PARA 6.4 OF THE ORDER THAT IF THE ASSESSEE HAS NOT COLLECTED SUFFICIENT MARGINS, NOT MAINTAINED KYC FORMS OR DELAYED IN REMITTING SECURITIES, IT WOULD AMOUNT TO THE INFRACTION OF THE LAW AND THEREFORE WOULD BE COVERED UNDER THE EXPLANATION OF SECTION 37(1) - OF THE ACT FURTHER AS PER M/S. UBS SECURITIES INDIA PVT. LTD. 28 THE SUBMISSION OF THE APPELLANT THE PENALTY AS PER CHAPTER VI - A LEVIABLE IN RELATION TO STOCKBROKER FOR FAILURE TO ISSUE CONTRACT NOTE, FAILURE TO DELIVER SECURITIES OR MAKE PAYMENTS AND FOR CHARGING EXCESS BROKERAGE. IT IS FURTHER SUBMISSION OF THE APPEL LANT THAT IT HAS NOT BEEN CHARGED PENALTY IN ACCORDAN CE WITH SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTY BY ADJUDICATING OFFICER) RULES, 1995. IT. IS SEEN FROM THE SAMPLE COPIES OF STATEMENTS ISSUED BY NSCCL SUBMITTED BY THE APPELLANT THAT SUC H PAYMENTS ARE IN THE NATURE OF PROCESSING FEES FOR BAD/SHORT DELIVERY, WRONG CLAIM FOR THE CORPORATE BENEFIT, LATE REPORTING DELAYED SETTLEMENT OF IT TRADES, MARGIN SHORTAGE CHARGES ETC. AS THESE CHARGES ARE COMPUTED BASED ON THE PENALTY POINTS CALCULATED BASED ON AFORESAID DEFAULT AND .FIND THEIR MENTION IN THE STATEMENT ISSUED BY NSCCL AS PROCESSING CHARGES, THE CHARGES SO LEVIED AS PENALTY IS FOUND TO BE COMPENSATORY IN NATURE. THE AO HAS NO WHERE BROUGHT OUT THAT THESE PENALTIES ARE NOT COMPENSATORY IN NATURE. FURTHER IN THE CASE THE APPELLANT FOR A.Y. 2000 - 01, SUCH PENALTY PAYMENT HAS BEEN HELD TO BE COMPENSATORY IN NATURE BY THE LD. CIT(A) IN THE OFFICE AND FURTHER THE SAME WAS CONFIRMED BY THE HONBLE ITAT. IN VIEW OF THE FACTS OF THE CASE AS AFORESA ID AND FOLLOWING THE RULE OF JUDICIAL CONSISTENCY AND JUDICIAL DISCIPLINE, THE AMOUNT SO DISALLOWED BY THE AO AS PER EXPLANATION OF SECTION 3 7(1) IS HELD TO BE ALLOWABLE AND THUS THE ADDITION SO MADE IS DIRECTED TO BE DELETED AND THE GROUND OF APPEAL SO RA ISED BY THE APPELLANT IS ALLOWED. ACCORDINGLY, THE APPELLANT GETS RELIEF OF ` 26,70,310. 42 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT ONCE IT IS AN ADMITTED FACT THAT IN THE EARLIER YEARS, THIS ISSUE STANDS DECIDED BY THE LEARNED COMMISSIONER (APPEALS) W HICH HAS BEEN AFFIRMED BY THE TRIBUNAL ALSO, THEN WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A FINDING OF THE FACTS RECORDED BY THE LEARNED COMMISSIONER (APPEALS). THUS, THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) ON THIS SCORE ARE AFFIRMED AND THE GROUND RAISED BY THE REVENUE IS TREATED AS DISMISSED. 43 . THE ASSESSEE, IN ITS CROSS APPEAL IN ITA NO.6572/MUM./2011, BY WAY OF GROUND NO.2, HAS CHALLENGED THE ADDITION OF ` 6,26,417, ON ACCOUNT OF S ECURITY T RANSACTION T AX (STT) COLLECTED BY THE ASSESSEE ON BEHALF OF ITS CLIENT. 44 . THE ASSESSEE HAS DEBITED AN AMOUNT OF ` 38,81,461, PAYABLE AS DUE TO STOCK EXCHANGE TOWARDS CLIENT SECURITY TRANSACTION TAX. 45 . BEFORE THE ASSESSING OFFICER, IT WAS SUBMITTED THAT THIS AMOUNT IS DUE TO SALE AND PURCHASE TRANSACTION IN TWO DELIVERY BASED TRANSACTION IN THE M/S. UBS SECURITIES INDIA PVT. LTD. 29 SAME SCRIP ON THE SAME DAY. THE ASSESSING OFFICER OBSERVED THAT THE SAME REPRESENT EXCESS DEDUCTION OF STT BY THE ASSESSEE FROM ITS FOREIGN INSTITUTIONAL CLIENT S TRADING DONE W H ERE SALE AND PURCHASE S OF SECURITY WE RE TRANSACTED ON THE SAME DAY IN SUCH A SITUATION, THE NSE SOFTWARE TREATS IT AS DAY TRADING AND DEDUCTS STT ONLY ON SALE AND NOT ON PURCHASE. AS THE FIIS ARE NOT ALLOWED TO INDULGE IN DAY TRADING THE ASSESSEE HAD DEDUCTED STT ON BOTH SALE AND PURCHASE. H OWEVER, THE BSE REFUSED TO ACCEPT THE EXCESS STT AND ACCEPTED ONLY WHAT WAS DUE AS PER ITS OWN CALCULATION. THE SAID SUM WAS ALSO NOT RETURNED TO FFI FROM WHOM THE SAID DEDUCTION WAS MADE. ACCORDINGLY, THE ASSESSING OFFICER ADDED THE SUM OF ` 6,26,417 AS T HE REMAINING SUM OF ` 32,55,044 PERTAINING TO STT ON TRADE EXECUTED ON LAST TWO DAYS. 46 . IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE LEARNED COMMISSIONER (APPEALS) THAT SUCH AN AMOUNT PAYABLE HAS BEEN REFLECTED UNDER THE HEAD CURRENT LIABILITY AND THIS REP RESE NTS AMOUNT DUE TO NSE O N ACCOUNT OF TRADE EXECUTED DURING THE LAST TWO DAYS OF THE FINANCIAL YEAR 2004 05. T HE LEARNED COMMISSIONER (APPEALS), HOWEVER, UPHELD THE ACTION OF THE ASSESSING OFFICER BUT OBSERVED THAT THE ASSESSEE HAS ADDED THE AMOUNT IN TH E SUBSEQUENT YEARS WHICH HAS BEEN PAID BY THE ASSESSEE AS DEMAND BY THE NSE AND CORRESPONDING DEDUCTION CAN BE CLAIMED IN THE RETURN OF INCOME ON THE PAYMENT BASIS IN THE YEAR OF PAYMENT. THE RELEVANT OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS) ARE AS UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE, TOGETHER WITH. THE SUBMISSION OF THE APPELLANT AS AGAINST THE FINDING OF THE AO IN HIS ASSESSMENT ORDER. IT IS THE FACT OF THE CASE THAT THE APPELLANT HAS DEDUCTED HIGHER AMOUNT OF STT THAN IT WAS REQUI RED TO DEDUCT FROM ITS FII CLIENT. FURTHER AFTER THE AMOUNT PAID TO NSE, THE BALANCE AMOUNT WHICH WAS IN EFFECT NOT REGARDED AS SIT BY THE NSE SOFTWARE HAS NOT BEEN REFUNDED TO THE FIL FURTHER IT IS FACT OF THE CASE THAT SUCH, INSTANCES HAVE OCCURRED ON S UBSEQUENTLY AND THE APPELLANT HIMSELF HAS WRITTEN BACK THESE AMOUNTS AS INCOME. THESE FACTS CLEARLY PROVE THE POINT THAT THE EXCESS AMOUNT SO RETAINED BY THE APPELLANT HAS BEEN TREATED BY THE APPELLANT AS HIS INCOME IN THE SUBSEQUENT I.E. A.Y. 08 - 09. SUCH TREATMENT OF EXCESS DEDUCTION IN THE A.Y. 08 - 09, CLEARLY GIVES THE NATURE OF SUCH DEDUCTIONS AS INCOME AND ONLY SUBSTANTIATES M/S. UBS SECURITIES INDIA PVT. LTD. 30 THE AO STAND IN THE YEAR UNDER CONSIDERATION. SUCH EXCESS DEDUCTION DONE BY THE APPELLANT CANNOT BE CONSIDERED TO BE AS PER THE P RESCRIBED CHARGING OF SIT AND AS SUCH IF THE AMOUNT IS NOT REFUNDED BACK TO THE CLIENTS FROM WHOM SUCH DEDUCTION IS MADE, THEN THE SAME SHOULD BE OFFERED TO TAX IN THE YEAR WHEN SUCH EXCESS DEDUCTION HAS TAKEN PLACE. THE CASE LAWS RELIED UPON BY THE APPEL LANT ARE DISTINGUISHABLE TO THE EXTERN THAT THEY DO NOT DEAL WITH COLLECTION OF EXCESS TAXES THAN WHAT IS MANDATED BY THE LAW. ACCORDINGLY THE ACTION OF THE AO IS UPHELD IN ADDING THE AMOUNT TO THE INCOME OF THE APPELLANT. HOWEVER IT IS SEEN FROM THE FACTS OF THE CASE AND SUBMISSION OF THE APPELLANT THAT OUT OF THE AMOUNT SO ADDED AN AMOUNT 0F RS. 461,217 ON 11 SEPTEMBER, 2009, HAS BEEN PAID BY THE APPELLANT AS DEMANDED BY THE NSE. THE APPELLANT ON WITHOUT PREJUDICE BASIS HAS ASKED FOR DEDUCTION OF SUCH AM OUNT ON PAYMENT .BASIS. IN THE FACTS OF THE CASE WHEN SUCH AN AMOUNT HAS BEEN ADDED IN THE YEAR UNDER CONSIDERATION. THE APPELLANT COULD CLAIM THE CORRESPONDING DEDUCTION IN ITS RETURN OF INCOME FILED, ON THE PAYMENT BASIS, IN THE YEAR OF PAYMENT I.E. IN A .Y. 10 - 11, WHICH COULD THEN ACCORDINGLY BE TREATED BY THE AO AS PER LAW. IN VIEW OF THE FACTS AND DISCUSSION AS ABOVE THE ACTION OF THE AO IS UPHELD AND TO THE EXTENT OF ADDITION MADE AND GROUND OF APPEAL RAISED IN RESPECT OF THE SAME IS ACCORD INGLY DISMIS SED. FOR THE APPELLANT'S GROUND ON THE WITHOUT PREJUDICE BASIS, IT IS MENTIONED THAT THE APPELLANT MAY MAKE SUCH CLAIM IN ITS RETURN OF INCOME FOR A.Y. 2010 - 11. 47 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED A CHART OF STT PAYABLE FOR THE ASSE SSMENT YEARS 2005 06 AND 2006 07 AND SUBMITTED THAT THESE AMOUNTS HAVE BEEN OFFERED FOR TAX FOR THE SUBSEQUENT YEARS AND, THEREFORE, THERE SHOULD NOT BE DOUBLE TAXATION ON THIS AMOUNT. 48 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THE MATTER CAN BE RESTORED TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THIS ISSUE AFRESH TO ASCERTAIN WHETHER THE AMOUNT WAS OFFERED FOR TAX AND AGREED THAT THERE SHOULD NOT BE ANY DOUBLE ADDITION. 49 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE RELEVANT DETAILS OF AMOUNT OFFERED FOR TAX WHICH, FOR THE SAKE OF READY REFERENCE, IS REPRODUCED HEREIN BELOW: M/S. UBS SECURITIES INDIA PVT. LTD. 31 PARTICULARS A.Y. 2005 06 A.Y. 2006 07 AMOU NT UNDER DISPUTE 6,26,417 9,52,738 LESS: AMOUNT OFFERED FOR TAX IN A.Y. 2008 09 1,50,171 4,90,647 LESS: AMOUNT PAID IN SEPTEMBER 2009 4,61,217 3,60,766 BALANCE AMOUNT PAYABLE 15,029 1,01,325 IN VIEW OF THE ABOVE, WE DIRECT THE ASSESSING OFFICER TO VE RIFY THIS CONTENTION OF THE ASSESSEE AND, ACCORDINGLY, DECIDE THIS ISSUE AFRESH AFTER CALLING FOR THE NECESSARY DETAILS FROM THE ASSESSEE. GROUND NO.2, IS THUS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 50 . 2005 06 5 0 . IN THE RESULT, ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2005 06 IS TREATED AS PARTLY ALLOWED FO R STATISTICAL PURPOSES AND REVENUES APPEAL IS TREATED AS PARTLY ALLOWED. WE NOW TAKE UP ASSESSEES APPEAL IN ITA NO. 7728/MUM./2011 , FOR THE ASSESSMENT YEAR 2006 07, WHICH HAS BEEN PREFERRED AGAINST THE FINAL ASSESSMENT ORDER PASSED IN PURSUANCE OF THE DR P DIRECTION DATE 27 TH JULY 2010. 51 . GROUND NO.1 RAISED BY THE ASSESSEE RELATES TO DISALLOWANCE OF ` 18,00,021 UNDER SECTION 40(A)(IA) ON ACCOUNT OF NON DEDUCTION OF TAX ON TRANSACTION CHARGES, V SAT CHARGES AND LEASE LINE CHARGES. 52 . THE ASSESSEE HAS DEBITED L EASE LINE CHARGES OF ` 3,36,823, V SAT CHARGES AND ` 1,73,86,740 WHICH WERE PAYABLE TO STOCK EXCHANGE ON ACCOUNT OF SERVICES PROVIDED BY IT WITH REGARD TO TRANSACTIONS IN SECURITIES THROUGH EXCHANGE. THE ASSESSING OFFICER DISALLOWED THE SAID PAYMENT UNDER SECTION 40(A)(IA) AFTER A DETAIL DISCUSSION. THE DRP HAS ALSO CONFIRMED THE FINDINGS OF THE ASSESSING OFFICER AND REJECTED THE ASSESSEES RELIANCE ON THE M/S. UBS SECURITIES INDIA PVT. LTD. 32 DECISION OF THE TRIBUNAL IN KOTAK SECURITES LTD. (SUPRA) ON THE GROUND THAT THE ORDER OF THE TRIBUNAL HAS BEEN CHALLENGED BEFORE THE HIGH COURT. 53 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT INSOFAR AS THE LEASE LINE AND V SAT CHARGES ARE CONCERNED, THE SAME IS COVERED BY THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN KOTAK SECU RITIES LTD. (SUPRA) AND ANG E L CAPITAL AND DEBIT MARKET LTD. (SUPRA). REGARDING NON DEDUCTION OF TAX ON TRANSACTION CHARGES AND ALSO THE OTHER CHARGES, HE SUBMITTED THAT THE ASSESSEE WAS UNDER THE BONAFIDE BELIEF IN THE ASSESSMENT YEAR 2006 07 THAT ON SUCH A PAYMENT OF TDS NOT DEDUCTIBLE AS IN THE EARLIER YEARS ALSO NO TDS HAS BEEN DEDUCTED BY THE ASSESSEE AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT. HE HAS GIVEN A CHRONOLOGY OF THE DATES IN SUPPORT OF THE CONTENTION OF BONAFIDE BELIEF OF THE ASSESSEE F OR NON DEDUCTING THE TAX ON SUCH CHARGES WHICH IS REPRODUCED HEREIN BELOW: 30.11.2006 RETURN OF INCOME FOR A.Y. 2006 07 FILED 18.12.2008 ASSESSMENT ORDER FOR A.Y. 2005 06 27.07.2010 ORDER PASSED BY DISPUTE RESOLUTION PANEL FOR A.Y. 2006 07 26.08.2008 KOTAK SECURITIES LTD. TRIBUNAL DECISION 04.07.2011 ORDER PASSED BY THE CIT(A) FOR A.Y. 2005 06 21.10.2011 KOTAK SECURITIES LTD. HIGH COURT DECISION 54 . OWING TO THIS BONAFIDE BELIEF, THE ASSESSEES CASE IS SQUARELY COVERED BY THE DECISION OF THE HON'BL E JURISDICTIONAL HIGH COURT IN KOTAK SECURITIES LTD. (SUPRA). 55 . AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THIS ISSUE IS SIMILAR TO GROUND NO.2 OF REVENUES APPEAL FOR THE ASSESSMENT YEAR 2005 06, WHEREIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. IN THIS YEAR ALSO, THE ASSESSEES CONTENTION APPEARS TO BE CORRECT INSOFAR AS ENTERTAINING THE BONAFIDE BELIEF THAT IT WAS NOT LIABLE FOR DEDUCTION OF TDS ON TRANSACTION CHARGES IN VIEW OF THE EVENTS GIVEN AS ABOVE. THE FACTS OF THE M/S. UBS SECURITIES INDIA PVT. LTD. 33 ASSESSEES CASE ARE COVERED BY THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN KOTAK SECURITIES LTD. (SUPRA) AND THE FINDINGS GIVEN IN THE ASSESSMENT YEAR 2005 06 WILL ALSO APPLY MUTATIS MUTANDIS TO THE PRESENT CASE AND ALSO ON V SAT AND LEASE LI NE CHARGES . THUS, THE GROUND RAISED BY THE ASSESSEE IS TREATED AS ALLOWED. 56 . INSOFAR AS THE ADDITIONAL GROUND IS CONCERNED THAT THE DISALLOWANCE UNDER SECTION 40(A)(IA) SHOULD BE RESTRICTED TO AMOUNT PAYABLE IN VIEW OF THE SPECIAL BENCH DECISION OF THE TRIB UNAL IN MERILYN SHIPPING AND TRANSPORT V/S ACIT, HAS BECOME PURELY ACADEMIC. 57 . IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE ADDITION OF ` 15,93,547 ON ACCOUNT OF PENALTY CHARGES PAID TO NATIONAL SECURITIES CLEARING C ORPORATION OF INDIA AFTER INVOKING THE PROVISIONS OF EXPLANATION TO SECTION 37(1). 58 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS ISSUE IS SIMILAR TO THE GROUNDS RAISED IN THE ASSESSMENT YEAR 2005 06, WHEREIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. MOREOVER, THE LEARNED COU NSEL FOR THE ASSESSEE HAS ALSO SUBMITTED A COMPILATION OF VARIOUS CASE LAWS WHEREIN THE TRIBUNAL HELD THAT SUCH PENALTIES ARE NOT IN VIOLATION OF ANY LAW OR INFRINGEMENT OF ANY RULES BUT WERE IMPOSED FOR VIOLATION OF CERTAIN NORMS AND PROCEDURE AND DO NOT FALL WITHIN THE PURVIEW OF EXPLANATION TO SECTION 37. A LIST OF SUCH CASE LAWS ARE AS UNDER: SR. PARTICULARS CITATION NO. 1 CIT VS. A NGE L CAPITA L & D E B IT MARKET LTD. ITA (L) NO . 475 0[2011 (BORN HC) 2 CIT VS. T H E STOCK AN D B O N D TRA D ING COMPA NY ITA NO. 4117 OF2010 (BORN HC) 3 CIT VS. PRASAD & CO (2012) 20 TAXMANN.COM 654 (DEL HC) 4 ACIT VS. U B S SECURITIES IN D IA PVT. LTD. ITA NO. 43271M107 (MUM - TRI) 5 DCIT VS. EMKAY SHARES & STOCK BROKERS P VT . LTD. ITA NO . 6562/M/20 0 6 (M U RN - TRI) 6 DCIT VS. ANTI Q UE STOCK BROKIN G L TD . ITA NO. 5272/ M /201 0 (MUM - TRI) 7 GOLDCREST CAPITAL MARKETS VS. ITA (2010) 130 TTJ 446 (MUM - TRI) 8 ITA VS . VRM SHARE BROKING (P) LTD . (2009) 27 SOT 569 (MUM - TRI) 9 ACIT VS . MANGAL KESHAVSECURITIES ITA NO. 1 21/M/2010 (MUM - TRI) M/S. UBS SECURITIES INDIA PVT. LTD. 34 10 HSBC SECURITIES & CAPITAL MARKETS (INDIA) PVT . LTD VS. ACIT. IT A NO . 6979/M/2008 AND IT A NO . 133 / M/2009 (MUM - TRI) 11 MASTER CAPITAL SERVICES LTD. VS. DC IT (2007) 108 ITJ 389 (CHD - TRI) 12 ITA VS. GDB SHARES & STOCK BROKIN G (2004) 80 ITJ 352 (CAL - TRI) 13 ADDNL CIT VS. TWIN EARTH SECURITIES PVT . LTD. IT A NO. 6464/MURNL20 I 0 14 ACIT VS. INTIME SPECTRUM SECURITIES LTD. ITA NOS . 4500 & 2766IMURNL2011 15 SPAN SECURITIES LTD. VS. ITA ITA NO. 3240IDEV2010 ACCOR DINGLY, WE HOLD THAT SUCH A DISALLOWANCE FOR THE PENALTY CHARGES PAID TO NATIONAL SECURITIES CLEARING CORPORATION OF INDIA CANNOT BE HELD TO BE ON ACCOUNT OF ANY INFRACTION OF LAW AND, THEREFORE, IT IS NOT COVERED UNDER EXPLANATION TO SECTION 37(1). GROUND NO.2 IS THUS TREATED AS ALLOWED. 59 . GROUND NO.3, RELATES TO ADDITION OF ` 9,52,738, ON ACCOUNT OF SECURITIES TRANSACTION TAX COLLECTED BY THE ASSESSEE ON BEHALF OF ITS CLIENTS . 60 . AS ADMITTED BY BOTH THE PARTIES, THIS ISSUE IS SIMILAR TO GROUND RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2005 06 WHEREIN THIS ISSUE HAS BEEN SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR NECESSARY VERIFICATION OF THE STT PAID BY THE ASSESSEE IN THE SUBSEQUENT YEARS. IN VIEW OF THE DIRECTIONS GIVEN IN THE SAID APPEAL, THIS ISSU E IS ALSO RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATING THE SAME AFRESH. THUS, GROUND NO.3 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 61 . GROUND NO.4, RELATES TO INITIATION OF PENALTY PROCEEDINGS U /S 271(1)(C). 62 . AFTER HEARING BOTH THE PA RTIES, WE ARE OF THE VIEW THAT THIS GROUND IS PREMATURE AND, THEREFORE, THE SAME IS TREATED AS DISMISSED. 6 3 . 6 3 . IN THE RESULT, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. M/S. UBS SECURITIES INDIA PVT. LTD. 35 64. 2005 06 2006 07 64. TO SUM UP, FOR THE ASSESSMENT YEAR 2005 06 REVENUES APPEAL IS TREATED AS PARTLY AL LOWED AND ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. FOR THE ASSESSMENT YEAR 2006 07, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 22 ND N OVEMBER 2013 ORDER PR ONOUNCED IN THE OPEN COURT ON 22 ND N OVEMBER 2013 SD / - . . P.M. JAGTAP ACCOUNTANT MEMBER SD / - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 22 ND N OVEMBER 2013 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI