JM FINANCIAL INSITUTIONAL SECURITIES P. LTD ( FORMELRY KNOWN AS JM FINANCIAL CONSULTANTS P.LTD), MUMBAI V. DCIT CIR 3(2), MUMBAI

ITA 7339/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3710 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 05-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 11-12-2012
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: VISPI PATEL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary
• Section: 14A

Judgement Text

, , K, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.7339/MUM/2012 ASSESSMENT YEAR: 2008-09 JM , FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD. (FORMERLY KNOWN AS JM FINANCIAL CONSULTANTS PVT. LTD. ) MUMBAI-400021 / VS. D CIT 3(2) , MUMBAI- (ASSESSEE ) (REVENUE) P.A. NO. AAACM7079C / ASSESSEE BY SHRI VISPI PATEL (AR) / REVENUE BY SHRI N.K. CHAND (DR) / DATE OF HEARING : 15/03/2016 / DATE OF ORDER: 27/04/2016 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ASSESSMENT ORDER DATED 8 TH OCTOBER, 2012, PASSED IN PURSUANCE TO THE DIRECTIONS GIVEN BY THE DISPUTE RE SOLUTION PANEL (IN SHORT REFERRED TO AS DRP) VIDE ITS ORDE R DATED 30TH AUGUST 2012, ON THE FOLLOWING GROUNDS: J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 2 GROUNDS OF APPEAL 1. THE TRANSFER PRICING PROCEEDINGS INITIATED BY THE A O UNDER SECTION 92CA(1) OF THE ACT ARE WITHOUT ANY JURISDICTION AND OUGHT TO BE QUASHED. 2. THE LEARNED DRP ERRED IN NOT DIRECTING THE TRANSFER PRICING OFFICER (TPO) THAT THE TRANSFER PRICING REGULATIONS DO NOT APPLY IN RESPECT OF THE TRANSACT IONS ENTERED INTO BETWEEN THE APPELLANT AND ITS JOINT VE NTURE (JV) PARTNER. 3. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED DRP ERR ED IN NOT CONSIDERING THE FACT THAT THE JV PARTNERS MUTUA LLY AGREED TO SPLIT THE JV ON 22 FEBRUARY 2007 AND THEREFORE, THE APPELLANT AND THE JV PARTNERS (INCLU DING ITS ASSOCIATED ENTITIES) WERE NOT ASSOCIATED ENTERP RISES AS PER SECTION 92A(1) OF THE ACT. 4. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED DRP ERR ED IN CONFIRMING THE ACTION OF THE TPO IN REJECTING THE SEGMENTAL ACCOUNTS PREPARED BY THE APPELLANT AS NOT RELIABLE. 5. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED DRP ERR ED IN NOT APPRECIATING THAT THE APPELLANT HAS NOT PERFORM ED WELL AFTER THE SEPARATION OF JV (LOSS INCURRED ON S TAND- ALONE BASIS POST SEPARATION). THEREFORE, IT CANNOT BE SAID THAT THERE WAS A SHIFTING OF PROFIT TO AES BEF ORE THE SEPARATION OF JV; ACCORDINGLY, NO TRANSFER PRICING ADJUSTMENT SHOULD BE MADE. 6. THE LEARNED DRP ERRED IN NOT DIRECTING THE TPO TO COMPUTE TRANSFER PRICING ADJUSTMENT USING THE FINAN CIAL INFORMATION OF THE COMPARABLE COMPANIES, WHICH WAS AVAILABLE AT THE TIME OF ASSESSMENT; ALTHOUGH SUCH INFORMATION WAS NOT AVAILABLE AT THE TIME WHEN THE APPELLANT COMPLIED WITH THE TP REGULATIONS, AS PER THE ACT. 7. THE LEARNED DRP ERRED IN CONFIRMING THE ACTION OF T HE TPO IN CONSIDERING THE OPERATING MARGINS EARNED BY COMPARABLE COMPANIES BASED ON THE FINANCIAL DATA PERTAINING TO THE YEAR ENDED 31 MARCH 2008 ONLY AND REJECTING THE FINANCIAL DATA OF COMPARABLE COMPANIE S FOR PRIOR TWO YEARS OR USE OF MULTIPLE YEAR DATA. J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 3 8. THE LEARNED DRP ERRED IN CONFIRMING THE ACTION OF T HE TPO IN REJECTING SOME OF THE APPELLANT'S COMPARABLE S WITHOUT SATISFYING THE PROVISIONS OF SECTION 92C(3) OF THE ACT. 9. THE LEARNED DRP ERRED IN NOT DIRECTING THE TPO TO R EJECT TWO COMPARABLES (VIZ, L & T CAPITAL CO. LTD. AND CENTRUM CAPITAL LTD.) AS POINTED OUT BY THE APPELLA NT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 10. THE LEARNED DRP ERRED IN CONFIRMING THE SELECTION O F THREE COMPANIES BY THE TPO AS COMPARABLES, WHICH WERE SELECTED BY THE TPO IN EARLIER ASSESSMENT YEAR I.E. A Y 2007- 08, WITHOUT SOUND AND LOGICAL REASONS. 11. THE LEARNED DRP ERRED IN NOT DIRECTING THE TPO TO COMPUTE THE OPERATING MARGINS EARNED BY THE COMPARABLE COMPANIES AFTER CONSIDERING THE NEXUS OF INCOME TO THE RELEVANT OPERATING ACTIVITY AND APPLY ING THE CORRECT SEARCH FILTER (EMPLOYEE COST FILTER). 12. THE LEARNED DRP ERRED IN NOT DIRECTING THE TPO TO APPLY THE PROVISO TO SECTION 92C(2) OF THE ACT. 13. THE DRP ERRED IN CONFIRMING THE DISALLOWANCE OF INR 1,05,20,834 MADE BY THE AO UNDER SECTION 14A OF THE ACT AS AGAINST THE AMOUNT OF INR 3,00,000 WORKED OU T BY THE APPELLANT IN ITS RETURN OF INCOME. THE LEARN ED DRP ALSO ERRED IN NOT APPRECIATING THAT THE APPELLA NT HAD NOT INCURRED ANY DIRECT OR INDIRECT EXPENDITURE FOR EARNING TAX FREE DIVIDEND EXCEPT THE AMOUNT DETERMI NED BY THE APPELLANT IN ITS RETURN OF INCOME. 14. THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER OR AMEND TO THE ABOVE GROUNDS OF APPEAL. 2. DURING THE COURSE OF HEARING, ARGUMENTS WERE MADE B Y SHRI VISPI PATEL, AUTHORISED REPRESENTATIVE (AR) ON BEHALF OF J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 4 THE ASSESSEE AND BY SHRI N.K. CHAND, DEPARTMENTAL REPRESENTATIVE (CIT-DR) ON BEHALF OF THE REVENUE. 3. GROUND NOS. 1 TO 12: IN THESE GROUNDS, THE ASSESSEE HAS CHALLENGED THE ACTION OF LOWER AUTHORITIES IN MAKIN G ADDITION UNDER TRANSFER PRICING REGULATIONS. 3.1. THE BRIEF FACTS AS SUMMARISED BY THE DRP IN ITS OR DER ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED AS A JOI NT VENTURE BETWEEN THE MORGAN STANLEY GROUP (MSG) AND JM FINANCIAL GROUP (JMFG) TO CARRY ON THE BUSINESS OF INVESTMENT BANKING SERVICES. MSG AND JMFG RESPECTIV ELY HELD SHARE CAPITAL IN THE RATIO OF 49:51. IN FEBRUARY, 2 007, THE JOINT VENTURE WAS DECIDED TO BE DISCONTINUED. MSG A GREED TO SELL ITS 49% SHARE HOLDING TO JMFG. HOWEVER, CLOSIN G OF THE TRANSACTION TOOK TIME AND THE ACTUAL TRANSFER OF SH ARES HAPPENED ONLY ON 5-10-2007 WHEN THE ASSESSEE BECAME A WHOLLY OWNED SUBSIDIARY OF JMFG. 3.2. IT WAS FURTHER NOTED BY THE DRP THAT DURING THE REL EVANT FINANCIAL YEAR 2007-08, THE ASSESSEE CONTINUED TO F UNCTION AS A JOINT VENTURE UPTO THE END OF SEPTEMBER, 2007 AND ENTERED INTO INTERNATIONAL TRANSACTIONS OF PROVISION OF ADV ISORY SERVICES IN THE CAPITAL MARKET SEGMENT AS WELL AS IN RELATIO N TO MERGERS AND ACQUISITIONS. THE TOTAL VALUE OF TRANSACTIONS E NTERED INTO DURING THE 6 MONTHS PERIOD WAS RS.34,25,06,275/-, T HE DETAILS OF WHICH ARE AS UNDER:- J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 5 SR.NO. INTERNATIONAL TRANSACTION AES NATURE OF TRANSACTION AMOUNT 1 UNITECH AIM MS & CO. INTERNATIONAL LTD. CAPITAL MARKET 1,14,15,044 2 STERLITE US IPO MS & CO. INTERNATIONAL LTD. CAPITAL MARKET 22,30,75,148 3 GENPACT US IPO MS & CO. INTERNATIONAL LTD. CAPITAL MARKET 3,17,02,495 4 HDFC ADR MS & CO. INTERNATIONAL LTD. CAPITAL MARKET 1,75,04,662 5 PROJECT MAHARANI MS JAPAN SECURITIES CO. LTD M&A 5,88,08,926 TOTAL 34,25,06,275 3.3. DURING THE COURSE OF PROCEEDINGS BEFORE THE TRANSF ER PRICING OFFICER, IT WAS NOTED THAT THE ASSESSEE HAD BENCHMARKED ITS INTERNATIONAL TRANSACTIONS USING TN MM METHOD WITH OPERATING MARGIN AS THE PLI. THE TPO RE JECTED SOME OF THE COMPARABLES AND FINALLY ARRIVED AT A LI ST OF 14 COMPARABLES AND TAKING OP TO TC AS PLI, WORKED OUT THEIR ARITHMETIC MEAN AT 114.06%, AND THEREBY MADE AN ADJUSTMENT OF RS. 17.88 CRORES. 3.4. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP AND SUBMITTED THAT SINCE THE TWO JOINT VENTURE PARTNERS OF THE ASSESSEE WERE UNRELATED ENTITIES AND THE INTERNATIO NAL TRANSACTIONS WERE ENTERED INTO WITH ENTITIES RELATE D TO ONE OF THE JOINT VENTURE PARTNERS, THE TRANSACTION MUST IN TRINSICALLY BE ACCEPTED AS BEING AT ARM'S LENGTH. NEITHER OF TH E JOINT VENTURE PARTNERS WOULD AGREE TO TRANSFER OF PROFITS AS THIS J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 6 WOULD AFFECT THE JOINT VENTURE ITSELF. IT IS ALSO S TATED THAT THE JOINT VENTURE HAD IN FACT BEEN DISCONTINUED IN FEBR UARY, 2007 AND HENCE DURING THE RELEVANT YEAR THE MSG GROUP SH OULD NOT BE CONSIDERED AS HAVING ANY STAKE IN THE ASSESSEE C OMPANY. 3.5. BUT THE DRP DID NOT ACCEPT THIS OBJECTION OF THE AS SESSEE AND HELD THAT THESE ARGUMENTS OF THE ASSESSEE ARE W ITHOUT MERITS. IT IS A FACT THAT THE ASSESSEE COMPANY HAD ENTERED INTO TRANSACTIONS WITH COMPANIES OF THE MSG GROUP WHICH WERE RELATED TO THE COMPANIES OWNING 49% OF THE SHARE CA PITAL IN THE ASSESSEE COMPANY. THESE TRANSACTIONS WERE THUS COVERED IN THE DEFINITION OF INTERNATIONAL TRANSACTION AS D EFINED IN SECTION 92B. THEREFORE, THE INCOME ARISING FROM THE TRANSACTIONS HAS TO BE COMPUTED HAVING REGARD TO TH E ARMS LENGTH PRICE IN ACCORDANCE WITH SECTION 92C. THE EX ISTENCE OR OTHERWISE OF ANY INTENTION OF SHIFTING PROFITS WAS IMMATERIAL. 3.6. THE NEXT CONTENTION TAKEN BY THE ASSESSEE BEFORE THE DRP WAS THAT I T HAD FURNISHED SEGMENT WISE ACCOUNTS TO THE TPO WHICH HAVE NOT BEEN CONSIDERED. IT WAS S TATED THAT ONLY 5 DEALS WERE ENTERED INTO DURING THE IMPUGNED PERIOD WITH THE AES WHILE 78 DEALS WERE ENTERED INTO WITH NON-RELATED PARTIES. THE DIRECT EXPENSES INCURRED WERE ALLOCATE D TO THE AE SEGMENT AS ALL SUCH EXPENSES RELATED TO THE MERCHAN T BANKING ACTIVITIES CARRIED OUT FOR NON-RELATED PARTIES. IND IRECT COSTS WERE ALLOCATED ON THE BASIS OF SALES. IT WAS SUBMIT TED THAT DURING THE TP PROCEEDINGS SEGMENTAL ACCOUNTS CERTIF IED BY AN AUDITOR WERE ALSO FURNISHED TO THE TPO. HOWEVER, TH ESE HAVE J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 7 NOT BEEN ACCEPTED ON THE GROUND THAT SALES HAD BEEN USED AS THE ALLOCATION KEY EVEN THOUGH IT IS THE SALES TRAN SACTIONS WHICH WERE BEING BENCH MARKED. THE TPO ALSO OBSERVE D THAT NO DIRECT COSTS WERE DEBITED TO THE AE ACCOUNTS AND THAT DIFFERENT SETS OF SEGMENTAL ACCOUNTS HAD BEEN FILED AT DIFFERENT TIMES. HE ALSO HELD THAT THE AE AND NON-AE TRANSACT IONS WERE INTERLINKED AND COULD NOT HAVE BEEN SEPARATED. IT W AS ALSO SUBMITTED THAT DIRECT COSTS WERE ACTUALLY INCURRED IN THE NON- AE SEGMENT AND THAT THE DIFFERENT SETS OF SEGMENTAL ACCOUNTS WERE FURNISHED ONLY BECAUSE THE AUDITORS IN THE SEC OND SET HAD ALLOCATED THE ENTIRE EXPENSES OF THE YEAR ON TH E BASIS OF SALES. IT WAS ALSO SUBMITTED THAT EVEN IF THE ACCOU NTS SUBMITTED EARLIER WERE NOT ACCEPTED, SUCH SEGMENT A CCOUNTS COULD BE ADOPTED BY ALLOCATING THE ENTIRE EXPENSES ON THE BASIS OF THE RATIO OF OPERATING PROFIT TO SALES AND OPERATING PROFIT TO COSTS. A REVISED WORKING WAS SUBMITTED CO MPUTING THE OPERATING COST RELATING TO THE AE SEGMENT AT RS.18. 57 CRORES, APPLYING THE MEAN OPERATING COST MARGIN COMPUTED BY THE TPO TO SUCH OPERATING COST. IT WAS SUBMITTED THAT T HE TOTAL REVENUES SHOULD BE COMPUTED AT RS.39.75 CRORES AS A GAINST, RS.34.25 CRORES SHOWN IN THE AE SEGMENT. THE ADJUST MENT SHOULD THEREFORE BE LIMITED TO RS.5.50 CRORES. 3.7. THE DRP CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND PARTLY ACCEPTED THE SAME. AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEE, THE DRP MADE A RE- WORKING OF THE ADJ USTMENT TO BE MADE IN THE CASE OF ASSESSEE. THE DRP HELD AS UN DER:- J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 8 .. HOWEVER, THE ASSESSEE'S SUBMISSIONS REGARDIN G THE AE AND NON AE SEGMENTS ARE FOUND TO HAVE SOME MERIT. IT IS NOTED THAT THE GROSS INCOME FROM OPERA TIONS DURING THE RELEVANT PERIOD WAS RS.11.27 CRORES WHIL E THE GROSS INCOME FROM THE AE SEGMENT WAS ONLY RS.35.24 CRORES. BY APPLYING THE MEAN MARGIN ON THE ENTIRE OPERATING COST OF RS.60.34 CRORES, THE TPO HAS DETE RMINED AN ADJUSTMENT OF RS.17.88 CRORES WHICH IS APPARENTL Y EXCESSIVE WHEN VIEWED IN THE LIGHT OF THE GROSS REV ENUE OF ONLY RS.34.25 CRORES IN THE AE SEGMENT. IT IS ALSO A FACT THAT ONLY 5 DEALS WERE ENTERED INTO WITH AES AS AGA INST 78 TRANSACTIONS WITH NON AES DURING THE PERIOD. WE ARE IN AGREEMENT WITH THE TPO THAT THE SEGMENTAL ACCOUNTS SUBMITTED ARE NOT RELIABLE FOR THE REASONS MENTIONE D BY HIM. HOWEVER, IN THE INTEREST OF JUSTICE, WE DIRECT THAT SUCH SEGMENT ACCOUNTS MAY NOW BE PREPARED AND THE ALLOCA TION OF EXPENSES MAY BE MADE IN THE SAME RATIO AS THE RA TIO OF TOTAL OPERATING COST TO TOTAL OPERATING INCOME AND THE OPERATING COST RELATED TO THE AE SEGMENT MAY BE DETERMINED ACCORDINGLY. THE CALCULATIONS OF ADJUSTM ENT WOULD THEN BE AS UNDER:- PARTICULARS TOTAL NON AE SEGMENT AE SEGMENT INCOME FROM OPERATIONS 1,112,720,443 770,214,168 342,506,275 OPERATING COST 603,363,588 417,642,353 185, 721,235 OPERATING PROFIT 509,356,855 352,571,815 OPERATING PROFIT TO SALES OPERATING PROFIT TO COST OPERATING COST RELATED TO AE SEGMENT (A)COMPARABLE COMPANIES MARGINS DERIVED BY TPO 45.78% 84.42% 45.78% 84.42% 45.78% 84.42% 185,721,235 114.06% 21,18,33,641 ALP DETERMINED BY CONSIDERING THE COMPARABLE'S MARGIN GIVEN BY TPO (C) [(A) + (B)) ACTUAL REVENUE FROM AE (D) 39,75,54,876 34,25,06,27 5 TOTAL ADJUSTMENT DIFFERENCE 5,50,48,601 J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 9 BETWEEN ALP AND ACTUAL REVENUE (C) - (D) THUS, ON THE BASIS OF ABOVE SAID ANALYSIS, THE DRP CONFIRMED THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENT TO THE EXTENT OF RS 5,50,48,601/-. 3.8. DURING THE COURSE OF HEARING BEFORE US, LEARNED C OUNSEL SUBMITTED THAT THE DRP MADE AN ERROR IN NOT ACCEPTI NG THE CONTENTION OF THE ASSESSEE IN A COMPLETE MANNER AND THEREFORE RESULT OF THE DECISION GIVEN BY THE DRP WAS ILLOGIC AL AND NOT IN ACCORDANCE WITH LAW AND FACTS. IT WAS SUBMITTED THA T THOUGH DRP ACCEPTED THE STAND OF THE ASSESSEE IN PRINCIPLE THAT THE LAW DOES NOT PERMIT TO APPLY TNMM METHOD ON ENTITY LEVEL IN THE GIVEN FACTS OF THE CASE, ESPECIALLY WHEN COMPLE TE SEGMENTAL DATA WAS AVAILABLE GIVING PROPER BREAK-UP OF THE AE AND NON- AE TRANSACTIONS, BUT WHILE WORKING OUT THE AMOUNT O F OPERATING PROFITS AND OPERATING COSTS OF AE AND NON -AE SEGMENT FACTUAL FIGURES WERE NOT TAKEN. HE DREW OUR ATTENTION ON VARIOUS PAGES OF THE PAPER BOOK SHOWING THAT COM PLETE ACCOUNTS WERE MAINTAINED GIVING DETAILS OF SEPARATE TRANSACTIONS FOR AE AND NON-AE SEGMENTS. HE REQUEST ED FOR CORRECTION OF MISTAKE DONE BY THE DRP. 3.9. ON THE OTHER HAND, LD. CIT-DR SUBMITTED THAT COMPL ETE SEGMENTAL ACCOUNTS WERE NOT SHOWN TO THE LOWER AUTH ORITIES. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT BEE N ABLE TO SHOW WHAT EXPENSES WERE INCURRED FOR EARNING INCOME FROM FOREIGN AE, AS ALL THE EXPENSES HAD BEEN ALLOCATED TOWARDS THE J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 10 DOMESTIC INCOME ONLY. IT CANNOT BE ACCEPTED THAT NO EXPENSES WERE INCURRED FOR EARNING THE INCOME FROM FOREIGN A E. 3.10. IN REJOINDER, IT WAS SUBMITTED BY THE LD COUNSEL T HAT WHATEVER EXPENSES WERE INCURRED FOR EARNING OF INCO ME FROM FOREIGN AE, THESE WERE REIMBURSED BY THE FOREIGN AE AND THAT IS WHY THESE WERE NOT DEBITED IN THE PROFIT AND LOS S ACCOUNT. HE DREW OUR ATTENTION ON VARIOUS PAGES OF THE PAPER BOOK SHOWING THAT SOME OF THE EXPENSES WERE REIMBURSED B Y THE FOREIGN AE TO THE ASSESSEE. 3.11. WE HAVE GONE THROUGH THE SUBMISSIONS MADE BY BOTH THE SIDES. IT IS NOTED BY US THAT IT IS A FIT CASE WHERE CIRCUMSTANCES SUGGEST THAT THE TNMM METHOD SHOULD N OT BE APPLIED ON ENTITY LEVEL. IT IS NOTED THAT THE ASSES SEE IS MAINTAINING SEPARATE ACCOUNTS FOR AE AND NON-AE SEG MENTS. THE OBJECTION OF THE LEARNED CIT-DR WAS THAT THE AS SESSEE COULD NOT SHOW PROPER CORRELATION BETWEEN THE FOREI GN INCOME EARNED AND EXPENSES INCURRED BY THE ASSESSEE IN REL ATION TO THAT. IT HAS BEEN VEHEMENTLY CONTENDED BY THE ASSES SEE THAT IT CAN SHOW THAT THE TRANSACTIONS WERE RECORDED IN THE BOOKS OF ACCOUNTS METICULOUSLY IN THE RESPECTIVE SEGMENT AND COMPLETE EVIDENCES ARE AVAILABLE IN SUPPORT OF THE TRANSACTI ONS DONE BY THE ASSESSEE. IT IS FURTHER SUBMITTED THAT THE EXPE NSES HAVE BEEN CORRECTLY DEBITED IN THE NON-AE SEGMENT AND TH AT THERE IS NO EXPENSE WHICH WAS INCURRED BY THE ASSESSEE RELAT ING TO THE AE SEGMENT BUT WHICH HAS NOT BEEN PROVIDED IN THE B OOKS OF ACCOUNTS OR WHICH HAS BEEN WRONGLY DEBITED IN THE N ON-AE SEGMENT. THUS, KEEPING IN VIEW FACTS AND CIRCUMSTAN CES OF THE J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 11 CASE AND SUBMISSIONS MADE BEFORE US BY BOTH THE PAR TIES, WE FIND IT APPROPRIATE TO SEND THIS ISSUE BACK FOR VER IFICATION OF REQUISITE FACTS TO THE FILE OF THE TRANSFER PRICING OFFICERS WHO SHALL KEEP IN MIND THE PRINCIPLE THAT THE METHOD OF TNMM HAS TO BE APPLIED SEGMENT WISE, AS STATED ABOVE. THE AS SESSEE SHALL FURNISH COMPLETE FACTS AND DOCUMENTS TO SHOW THAT SEPARATE SEGMENTAL RECORDS ARE MAINTAINED. THE TPO IS FREE TO EXAMINE THE NATURE OF EXPENSES INCURRED UNDER BOTH THE SEGMENTS TO VERIFY THAT EXPENSES HAVE BEEN CORRECTL Y DEBITED IN THE RESPECTIVE SEGMENTS. THE ASSESSEE CAN ALSO RAIS E ISSUES OF INCLUSION OR EXCLUSION OF COMPARABLES, IF DESIRED N ECESSARY. THE TPO IS PERMITTED TO CARRY OUT FRESH SEARCH OF C OMPARABLES, IF NEEDED. THE ASSESSEE IS PERMITTED TO RAISE ALL L EGAL AND FACTUAL ISSUES AS MAY BE CONSIDERED APPROPRIATE AS PER LAW AND FACTS. THE ASSESSEE SHALL EXTEND REQUISITE COOP ERATION TO THE TPO IN TERMS OF PROVIDING DESIRED DETAILS AND D OCUMENTS. THE TPO SHALL GIVE ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE BEFORE PASSING THE FRESH ORDER. THUS, WE R EMIT ALL THESE GROUNDS BACK TO THE FILE OF THE TPO ALONG WIT H THE DIRECTIONS AS GIVEN ABOVE. THESE GROUNDS MAY BE TRE ATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 4. GROUND NO. 13: IN THIS GROUND, THE ASSESSEE HAS CHALLENGED THE ACTION OF THE DRP IN CONFIRMING THE DISALLOWANCE OF RS 1,05,20,834/-MADE BY THE ASSESSI NG OFFICER UNDER SECTION 14A OF THE ACT AS AGAINST THE AMOUNT OF RS 300000/-ADDED BY THE ASSESSEE VOLUNTARILY IN ITS RE TURN OF INCOME. J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 12 4.1. DURING THE COURSE OF HEARING, IT WAS SUBMITTED BY T HE LEARNED COUNSEL AT THE OUTSET THAT THIS ISSUE IS CO VERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AS SESSMENT YEAR 2009-10 IN ITA NUMBER 1863/M/2013 VIDE ORDER D ATED 7/10/2015. 4.2. BEFORE PROCEEDING FURTHER, WE HAVE GONE THROUGH THE AFORESAID ORDER OF THE TRIBUNAL. RELEVANT PARA OF T HE SAID ORDER IS REPRODUCED BELOW: 6.2. HONBLE MUMBAI BENCH HAS HELD THAT ONCE ALL THE DETAILS WERE MADE AVAILABLE ALONG WITH ENTIRE ACCOU NTS OF THE ASSESSEE, THE AO WAS REQUIRED TO SATISFY HIMSEL F THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, CLAI M OF THE ASSESSEE IN RESPECT OF EXPENDITURE DEBITED IS NOT C ORRECT, AND THAT THERE COULD HAVE BEEN CERTAIN OTHER EXPEND ITURES WHICH CAN BE SAID TO HAVE BEEN INCURRED IN RELATION TO THE EARNING OF EXEMPT INCOME. AS PER MANDATE OF THE LAW , THE AO IS OBLIGED TO RECORD SUCH SATISFACTION, WITH REA SONING. 6.3. IN THE PRESENT CASE, IT IS SEEN THAT CONDITIONS OF SUB- SECTION 2 OF SECTION 14A ARE NOT SATISFIED. THE AO HAS NOT CARED TO EXAMINE THE ACCOUNTS OF THE ASSESSEE AND CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE. LD. AO IN THE PRESENT CASE HAS STRAIGHT AWAY PROCEEDED TO APP LY RULE 8D FOR THE PURPOSE OF DISALLOWANCE U/S 14A, WI THOUT SATISFYING OR APPLYING WITH THE MANDATORY REQUIREME NT OF SECTION 14A(2) R.W. RULE 8D. IT IS SEEN THAT THE AS SESSEE HAS GIVEN ITEM WISE JUSTIFICATION FOR DETERMINATION OF THE PROPORTIONATE EXPENSE INCURRED ON MAKING INVESTMENT S J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 13 EARNING TAX-FREE INCOME. NO DISCREPANCIES HAVE BEEN POINTED OUT BY THE AO BEFORE REJECTING THE CLAIM OF THE ASSESSEE. SINCE THE AO HAS FAILED TO COMPLY WITH TH E STATUTORY REQUIREMENT, HE COULD NOT HAVE PROCEEDED TO MAKE DISALLOWANCE U/S 14A. IT IS FURTHER NOTED THA T OUT OF TOTAL DIVIDEND INCOME OF RS 3,70,61,654/- RECEIVED BY THE ASSESSEE COMPANY DURING THE YEAR, AN AMOUNT OF RS 3,00,71,654/- WAS ON THE INVESTMENTS IN MUTUAL FUND S OF GROUP COMPANIES FOR STRATEGIC REASONS AND RS. 50,00,000/- ON THE PREFERENCE SHARES OF SUBSIDIARY COMPANY. BOTH OF THESE AMOUNTS HAVE BEEN RECEIVED O N THE INVESTMENTS MADE OSTENSIBLY FOR STRATEGIC REASO NS. IN OUR CONSIDERED VIEW, STRATEGIC INVESTMENTS ARE NOT MADE FOR THE PURPOSE OF EARNING TAX-FREE INCOME. THESE S HOULD NOT BE CONSIDERED FOR MAKING DISALLOWANCE U/S 14A/. RECENTLY, HONBLE DELHI HIGH COURT HAS TAKEN SAME V IEW IN THE CASE OF CHEMINVEST LTD VS CIT , ITA NO.749/2014, ORDER DT 9-9-2015. THE RELEVANT OBSERVATIONS ARE REPRODUCED HEREUNDER: 18. IN THE PRESENT CASE, THE FACTUAL POSITION THAT HAS NOT BEEN DISPUTED IS THAT THE INVESTMENT BY THE ASSESSE E IN THE SHARES OF MAX INDIA LTD. IS IN THE FORM OF A ST RATEGIC INVESTMENT. SINCE THE BUSINESS OF THE ASSESSEE IS O F HOLDING INVESTMENTS, THE INTEREST EXPENDITURE MUST BE HELD TO HAVE BEEN INCURRED FOR HOLDING AND MAINTAINING S UCH INVESTMENT. THE INTEREST EXPENDITURE INCURRED BY TH E J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 14 ASSESSEE IS IN RELATION TO SUCH INVESTMENTS WHICH G IVES RISE TO INCOME WHICH DOES NOT FORM PART OF TOTAL IN COME. 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOLCIM INDIA (P) LTD. (SUPRA) AND IN VIEW OF THE ADMITTED FACTUAL POSITION IN THIS CASE THAT THE ASSESSEE HAS MADE ST RATEGIC INVESTMENT IN SHARES OF MAX INDIA LTD.; THAT NO EXE MPTED INCOME WAS EARNED BY THE ASSESSEE IN THE RELEVANT A Y AND SINCE THE GENUINENESS OF THE EXPENDITURE INCURR ED BY THE ASSESSEE IS NOT IN DOUBT, THE QUESTION FRAMED I S REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE A ND AGAINST THE REVENUE. 6.4 THE REMAINING AMOUNT OF DIVIDEND WAS RECEIVED ON THE INVESTMENT IN EQUITY SHARES, ONLY FOR AN AMOUNT OF RS19,90,000/-. THUS, VIEWED FROM THIS ANGLE ALSO, T HE DISALLOWANCE MADE BY THE AO IS NOT JUSTIFIED. IN VI EW OF THE AFORESAID DISCUSSION AND KEEPING IN MIND THE FA CTS AND CIRCUMSTANCES OF THE CASE, DISALLOWANCE MADE BY THE AO IS REDUCED TO THE AMOUNT OF RS.7,64,949/-, AS WA S VOLUNTARILY OFFERED BY THE ASSESSEE. 4.3. WE HAVE CAREFULLY GONE THROUGH THE AFORESAID ORDER OF THE TRIBUNAL. WE HAVE ALSO HEARD BOTH THE PARTIES AT LE NGTH ON THIS ISSUE. WITH THE ASSISTANCE OF THE LEARNED COUNSEL, WE EXAMINED VARIOUS PAGES OF THE PAPER BOOK. IT IS NOT ED THAT DURING THE COURSE OF PROCEEDINGS BEFORE THE ASSESSI NG OFFICER, THE ASSESSING FILED A REVISED COMPUTATION SHEET OF INCOME WHEREIN IT OFFERED A VOLUNTARY DISALLOWANCE OF RS 1 7,93,351/-. WITH THE ASSISTANCE OF THE PARTIES, IT WAS NOTED BY US THAT THE J.M. FINANCIAL INSTITUTIONAL S.P. LTD. 15 FACTS OF THIS YEAR ARE IDENTICAL TO THE FACTS OF TH E ASSESSMENT YEAR 2009 10. IN OUR CONSIDERED OPINION, THE SAID DECISION OF THE TRIBUNAL IS SQUARELY APPLICABLE ON THE FACTS OF THE CASE OF THIS YEAR. THEREFORE, RESPECTFULLY FOLLOWING THE SA ME, WE HOLD THAT THE DISALLOWANCE COULD NOT HAVE BEEN MADE OF A N AMOUNT MORE THAN THE AMOUNT VOLUNTARILY MADE BY THE ASSESS EE, WHICH WAS PROPERLY JUSTIFIED WITH FACTS AND FIGURES . THUS, THE DISALLOWANCES IS REDUCED TO RS 17,93,351/-, AND THE BALANCE AMOUNT OF DISALLOWANCE IS DELETED. AS A RESULT, THI S GROUND IS PARTLY ALLOWED. 5. IN THE RESULT, THIS APPEAL MAY BE TREATED AS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH APRIL, 2016. SD/- (SAKTIJIT DEY) SD/- (ASHWANI TANEJA) ! / JUDICIAL MEMBER '! / ACCOUNTANT MEMBER MUMBAI; DATED 27/04 /2016 CTX? P.S/. .. # $%&'&($ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !'# / THE RESPONDENT. 3. $# $# % ( ) / THE CIT, MUMBAI. 4. $# $# % / CIT(A)- , MUMBAI 5. ()* # !+ , $# # +- , / DR, ITAT, MUMBAI 6. *. / / GUARD FILE. / BY ORDER, '#( ! //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI