JM FINANCIAL CONSULTATIONS PVT. LTD., MUMBAI V. D.C.I.T.-3(2), MUMBAI

ITA 7455/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5057 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 25-04-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 04-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VISPI PATEL
• Keywords: Transfer pricing; International transaction
• Section: 43B; 14A

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . .. . . .. . , ,, , ! ! ! ! , ' ' ' ' # $% # $% # $% # $% , ,, , & ! & ! & ! & ! ' ' ' ' BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 7455/MUM./2011 ( &( ) '*) / ASSESSMENT YEAR : 200708 ) JM FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD., (FORMERLY KNOWN AS JM FINANCIAL CONSULTANTS PVT. LTD.), 141, MAKER CHAMBERIII, NARIMAN POINT MUMBAI 400 021 .. +, / APPELLANT ( V/S DY. COMMISSIONER OF INCOME TAX CIRCLE3(2), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... -.+, / RESPONDENT !+ . / PERMANENT ACCOUNT NUMBER AAACM7079C &( )0 1 2 / ASSESSEE BY : MR. VISPI PATEL !' 1 2 / REVENUE BY : MR. AJIT KUMAR JAIN (' 1 / DATE OF HEARING 26.08.2013 $ 34* 1 / DATE OF ORDER 13.09.2013 $ $ $ $ / ORDER # $% # $% # $% # $% , ,, , & ! & ! & ! & ! 5 5 5 5 / PER AMIT SHUKLA, J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE AGAINST THE FINAL ASSESSMENT ORDER DATED 12 TH SEPTEMBER 2011, PASSED IN PURSUANCE OF DIRECTIONS GIVEN BY THE DRP UNDER SECTION 144C(5). THE MAIN ISSUE INVOLVED IN THE PRESENT CASE IS WITH REGARD TO THE TRANSFER PRICING ADJUSTMENT OF ` 9,75,71,680 ON ACCOUNT OF INTERNATIONAL TRANSACTION S OF PROVIDING ADVISORY SERVICES AND CAPITAL MARKET TRANSACTIONS WITH A.E. OF THE ASSESSEE. BESIDES JM FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD. 2 THIS, THE DISALLOWANCE UNDER SECTION 14A OF ` 9,64,573, AND ADDITION ON ACCOUNT OF DISALLOWANCE UNDER SECTION 43B IN RESPEC T OF SERVICE TAX OF ` 69,29,376 HAS BEEN RAISED. FOLLOWING GROUNDS HAVE B EEN RAISED IN THE GROUNDS OF APPEAL: 1. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES OF THE CASE, THE DISPUTE RESOLUTION PANEL (LD. PANEL) AND CONSEQUENTLY, TH E DY. COMMISSIONER OF INCOME TAX 3(2) (AC) ERRED IN MAKING AN UPWARD AD JUSTMENT OF RS.9,75,71,680/- TO THE INTERNATIONAL TRANSACTION O F PROVI LING ADVISORY SERVICE AND CAPITAL/MARKET TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE 2. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN DISREGARDING THE AUDITED SEGMENTAL DATA SUBMITTED BY THE APPELLANT, WITHOUT TAKING INTO CON SIDERATION THE SUBMISSIONS MADE BY THE APPELLANT DURING THE COURSE OF THE PROC EEDINGS BEFORE THE LD. PANEL. 3. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN UPHOLDING THE ACT ION OF THE TRANSFER PRICING OFFICER (TPO) OF ARBITRARILY SELECTING CERTAIN COMP ANIES AS COMPARABLES, WITHOUT UNDERTAKING A METHODICAL SEARCH AND WITHOUT QUALITATIVELY ANALYSING THE FUNCTIONAL PROFILE OF SUCH COMPANIES TO DETERMI NE THEIR COMPARABILITY TO THE FUNCTIONAL PROFILE OF THE APPELLANTS INTERNATI ONAL TRANSACTIONS WITH ITS AE. 4. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, IN REFERENCE TO THE COMPUT ATION OF THE OPERATING PROFIT TO SALES (OP/SALES) OF COMPARABLE COMPANIE S, ERRED IN: A) DISREGARDING THE COMPUTATION OF OP/SALES OF COMP ARABLE COMPANIES FROM THE ANNUAL REPORTS AS SUBMITTED BY THE APPELLANT DU RING THE PROCEEDINGS BEFORE THE LD. PANEL; B) CONFIRMING THE COMPUTATION OF OP/SALES PROVIDED BY THE TPO DURING THE PROCEEDINGS BEFORE THE LD. PANEL VIDE HIS REPORT TO THE LD. PANEL DATED APRIL 15, 2011 WHEREIN CERTAIN NON OPERATING ITEMS LIKE D IVIDEND, INTEREST INCOME, ETC. WERE TAKEN INTO CONSIDERATION WHILE COMPUTING THE OP/SALES OF COMPARABLE COMPANIES. 5. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN ACCEPTING THE DET ERMINATION OF THE ARMS LENGTH OP/SALES BASED ON THE DATA FOR FINANCIAL YEA R 2006-2007, TO THE EXCLUSION OF PRIOR YEAR DATA AS CONTEMPLATED UNDER RULE 10B(4) OF THE INCOME-TAX RULES, 1962. 6. WITHOUT PREJUDICE TO GROUNDS 1 TO 5 ABOVE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED, ON THE FACTS, IN LAW AND IN THE CIRC UMSTANCES OF THE CASE, IN UPHOLDING THE ADJUSTMENT MADE ON THE BASIS OF THE E NTIRE DIFFERENCE BETWEEN ARMS LENGTH MARGIN (COMPUTED USING FY 2006-07 DATA ) AND THE MARGINS OF THE APPELLANT AT A COMPANY LEVEL, INSTEAD OF MAKING A PROPORTIONATE ADJUSTMENT ONLY TO THE EXTENT OF THE PROPORTION OF THE INTERNATIONAL TRANSACTIONS WITH AE TO THE TOTAL TURNOVER OF THE A PPELLANT. 7. WITHOUT PREJUDICE TO GROUNDS I TO 6 ABOVE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN NOT GRANTING THE BENEFIT OF THE 5% RANGE AS ENVISAGED UNDER JM FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD. 3 THE PROVISO TO SECTION 92C(2) OF THE ACT PRIOR TO T HE AMENDMENT BY THE FINANCE ACT, 2009. 8. ON THE FACTS, IN LAW AND IN HE CIRCUMSTANCES OF THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN NOT TAKING INTO CONSI DERATION THE BASIS OF PRICING AGREED BETWEEN THE APPELLANT AND THE ASSOCI ATED ENTERPRISES WHILE DETERMINING THE ARMS LENGTH NATURE OF THE INTERNAT IONAL TRANSACTIONS, WHICH WAS AGREED ON THE BASIS OF THE FUNCTIONS PE FORMED BY THE APPELLANT VIS--VIS THE ASSOCIATED ENTERPRISES. 9. ON THE FACTS, IN LAW AND IN TIE CIRCUMSTANCES O F THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN MAKING DISALLOWANCE O F RS.9,64,5731- BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT WITHO UT APPRECIATING THE FACT THAT THERE IS NO NEXUS BETWEEN EARNING OF THE DIVID END INCOME AND EXPENSES INCURRED. 10. WITHOUT PREJUDICE TO GROUND 9 ABOVE, THE LD. P ANEL AND THE AC, ERRED IN COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT, AT RS.9,64,5731- INSTEAD OF RS.2,19,358/- DISREGARDING THE BASIS ADO PTED BY THE APPELLANT. 11. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. PANEL AND CONSEQUENTLY THE AC, ERRED IN INVOKING THE PROV ISIONS OF SECTION 43B OF THE ACT IN RESPECT OF SERVICE TAX OF RS.69,25,376/- , NOT REALISED BY THE APPELLANT. 2. APART FROM THE ABOVE GROUNDS, THE ASSESSEE HAS ALSO RAISED FOLLOWING ADDITIONAL GROUNDS WHICH HAS BEEN SUBMITTED BEFORE US THAT IT GOES TO THE VERY ROOT OF THE TRANSFER PRICING ADJUSTMENT: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DISPUTE RESOLUTION PANEL (LD. PANEL) AND CONSEQUENTLY THE DY. COMMISSIONER OF INCOME-TAX 3(2) (AO) FAILED TO APPRECIATE THAT TH E REVENUE SHARING ARRANGEMENT BETWEEN THE APPELLANT (JOINT VENTURE CO MPANY) AND THE ASSOCIATED ENTERPRISES (JOINT VENTURE GROUP - MORGA N STANLEY GROUP) WERE ENTERED INTO WHEN THEY (JM GROUP AND MORGAN STANLEY GROUP JOINT VENTURERS) WERE TWO INDEPENDENT PARTIES. FURTHER, T HE LD. PANEL AND CONSEQUENTLY THE AO, FAILED TO APPRECIATE THAT THER E CANNOT BE SHIFTING OF INCOME BY THE APPELLANT TO THE ASSOCIATED ENTERPRIS ES, AS THE ASSOCIATED ENTERPRISES ARE INDEPENDENT OF THE OTHER JOINT VENT URER, AND THEREFORE, THE TRANSACTIONS IN SUCH CASES SHOULD BE REGARDED AS CA RRIED OUT UNDER UNCONTROLLED CONDITIONS AND HENCE AT ARMS LENGTH U NDER SECTION 92(1) OF THE INCOME-TAX ACT, 1961. 3. THE ASSESSEE, J.M. FINANCIAL CONSULTANTS PVT. LTD. (JMFCPL) IS A JOINT VENTURE COMPANY BETWEEN J.M. SECURITIES PVT. LTD., A GROUP COMPANY OF J.M. FINANCIAL GROUP AND MORGAN STANLEY GROUP. THE JOINT VENTURE WAS FORMED TO CARRY ON THE BUSINESS OF INVESTMENT BANKING SERVICE S, SERVING THE NEEDS OF INDIAN SECURITIES IN U.S.A. JMF GROUP AND MORGAN ST ANLEY GORUP RESPECTIVELY HELD THE SHARE CAPITAL OF THE ASSESSEE JMFCPL IN TH E RATIO OF 51:49%. IN THE JM FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD. 4 TRANSFER PRICING REPORT IN FORM NO.3CEB, THE ASSESS EE HAS REPORTED FOLLOWING INTERNATIONAL TRANSACTIONS IN TERMS OF SECTION 92B. S.NO. NAME OF A.ES DETAILS OF INTERNATIONAL TRANS. AMOUNT (INR) 1. MORGAN STANLEY & CO. LTD. ADVISORY SERVICES 4,29 9,441 2. MORGAN STANLEY & CO. INTERNATIONAL LTD. CAPITAL MARKET TRANSACTIONS 326,041,099 3. MORGAN STANLEY DEAN WITTER ASIA LTD. REIMBURSEMENT OF EXPENSES 8,782,179 4. MORGAN STANLEY & CO. INTERNATIONAL LTD REIMBURSEMENT OF EXPENSES 748,137 5. MORGAN STANLEY & CO. INC. REIMBURSEMENT OF EXPENSES 123,112 6. MORGAN STANLEY JAPAN LTD. REIMBURSEMENT OF EXPENSES 1,572,439 7. MORGAN STANLEY DEAN WITTER ASIA (SINGAPORE) PTE REIMBURSEMENT OF EXPENSES 36,039 8. MORGAN STANLEY SANFRANSICO FIXED INCOME SECURITIES REIMBURSEMENT OF EXPENSES 15,159 9. MORGAN STANLEY DEAN WITTER ASIA LTD. REIMBURSEMENT OF EXPENSES 10,528,789 TOTAL 352,146,394 4. THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN M ETHOD BY USING NET COST PLUS MARKUP AS THE PROFIT LEVEL INDICATOR (PLI). FOR BENCH MARKING THE ALP, THE ASSESSEE HAS TAKEN 11 COMPARABLES WITH ARITHMETIC MEAN OF 28.24%. (DETAILS OF THESE 11 COMPANIES HAVE BEEN GI VEN AT PAGE3 OF THE TPOS ORDER). SINCE THE ASSESSEES OPERATING MARGIN WAS 30.01%, HENCE IT WAS DECLARED THAT ITS MARGIN IS AT ALP. THE TRANSFE R PRICING OFFICER HAS REJECTED THE TWO COMPARABLES AND ADDED FIVE MORE CO MPARABLES. FINALLY, 14 COMPARABLES WERE SHORT-LISTED FOR BENCH MARKING THE ASSESSEES ALP AND THE AVERAGE OPERATING MARGIN OF THIS FINALLY SELECTED 1 4 COMPARABLES WAS AT 47.03%. ACCORDINGLY, UPWARD ADJUSTMENT IN THE ALP W AS MADE AT ` 4,50,24,820 AS PER THE WORKING GIVEN IN THE TPOS O RDER. 5. BEFORE THE DRP, THE ASSESSEE HAS MADE VERY DETAIL O BJECTIONS NOT ONLY ON VARIOUS LEGAL ISSUES BUT ALSO ON MERITS. HOWEVER , THE DRP REJECTED MOST JM FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD. 5 OF THE OBJECTIONS AND HELD THAT OPERATING MARGIN OF COMPARABLES SHOULD BE AT 51.88% AS PER THE DISCUSSION MADE IN THE SAID ORDER. AS A RESULT OF DRP DIRECTIONS, THERE WAS AN ENHANCEMENT AND UPWARD ADJ USTMENT IN THE ALP WAS MADE BY THE ASSESSING OFFICER AT 9,75,71,680. T HIS UPWARD ADJUSTMENT HAS BEEN CHALLENGED BEFORE US BY THE ASSESSEE ON VA RIOUS COUNTS. 6. BEFORE US, THE LEARNED COUNSEL, MR. VISPI PATEL, HA S MADE A VERY ELABORATE SUBMISSION ON THE ISSUE THAT IN CASE OF A JOINT VENTURE ARRANGEMENT, THERE COULD NOT BE ANY UNDERCHARGING O F PRICE OR MARGIN. LOOKING TO THE VERY NATURE OF JOINT VENTURE ARRANGE MENT, THE INTERNAL TRANSACTIONS ARE AT ALP. HE SUBMITTED THAT THE ISSU E RAISED IN THE ADDITIONAL GROUND GOES TO THE VERY ROOT OF THE TRANSFER PRICIN G ADJUSTMENT AND SUCH A PLEA WAS DULY RAISED BEFORE THE DRP BY THE ASSESSEE IN OBJECTION NO.3. THESE PRELIMINARY OBJECTIONS HAVE NOT BEEN DEALT BY THE D RP AT ALL. ONCE THESE ISSUES ARE DECIDED IN FAVOUR OF THE ASSESSEE, THEN THE ENTIRE MATTER WILL BECOME PURELY ACADEMIC. HE FURTHER PROCEEDED TO MAK E HIS SUBMISSIONS ON THE ISSUE RAISED IN THE ADDITIONAL GROUND. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE, MR. AJIT J AIN, SUBMITTED THAT ONCE THESE BASIC ISSUES HAVE NOT BEEN DECIDED BY TH E DRP, THEN THE RIGHT COURSE SHOULD BE THAT THE MATTER SHOULD GO BACK TO THE DRP FOR ITS ADJUDICATION OR IT SHOULD BE REJECTED BECAUSE THIS PLEA WAS NOT TAKEN BEFORE THE TPO OR THE ASSESSING OFFICER SPECIFICALLY. 8. WE HAVE HEARD THE RIVAL CONTENTION ON THE ISSUE RAI SED IN THE ADDITIONAL GROUND WHICH HAS BEEN REPRODUCED ABOVE. ON PERUSAL OF THE ADDITIONAL GROUNDS WHICH HAS BEEN RAISED BEFORE US, VIDE PETIT ION DATED 17 TH JULY 2013, WE FIND THAT THE ISSUE RAISED THEREIN, GOES TO THE VERY ROOT OF THE ISSUE AS TO WHETHER UNDER THESE FACTS ANY ADJUSTMENT ON ACCOUNT OF ALP IS AT ALL CALLED FOR OR NOT. THIS ISSUE HAS ALSO BEEN RAISED BY THE ASSESSEE BEFORE THE DRP IN ITS OBJECTION WHICH HAS NOT BEEN DEALT BY THE DRP. THEREFORE, WE ADMIT THE ADDITIONAL GROUND RAISED BEFORE US AND IN THE INTER EST OF JUSTICE WE RESTORE THE ISSUE BACK TO THE FILE OF THE DRP TO ADJUDICATE THIS ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE AND EFFECTIVE OPPORTUNITY OF HEARING TO JM FINANCIAL INSTITUTIONAL SECURITIES PVT. LTD. 6 THE ASSESSEE. THE ASSESSEE MAY RAISE ANY OBJECTION OR PLEA IN RELATION TO THE ISSUE RAISED IN THE ADDITIONAL GROUND. THUS, THE EN TIRE MATTER IS RESTORED BACK TO THE FILE OF THE DRP FOR FRESH ADJUDICATION OF ADDITIONAL GROUND AND THE DRP MAY DEAL AND DECIDE THIS ISSUE WITHIN SIX MONTH S FROM THE DATE OF RECEIPT OF THIS ORDER. 9. 0 6 &( )0 1 71 89: # !' ; ( <= > 9. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS A LLOWED FOR STATISTICAL PURPOSES. $ 1 4* ? @ (6 13 TH SEPTEMBER 2013 1 > ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH SEPTEMBER 2013 SD/- . .. . . .. . ! ! ! ! P.M. JAGTAP ACCOUNTANT MEMBER SD/- # # # # $% $% $% $% & ! & ! & ! & ! AMIT SHUKLA JUDICIAL MEMBER MUMBAI, @ ( @ ( @ ( @ ( DATED: 13 TH SEPTEMBER 2013 $ 1 -&#A BA* / COPY OF THE ORDER FORWARDED TO : (1) &( )0 / THE ASSESSEE; (2) !' / THE REVENUE; (3) C () / THE CIT(A); (4) C / THE CIT, MUMBAI CITY CONCERNED; (5) A'F -&&( , , / THE DR, ITAT, MUMBAI; (6) G) H / GUARD FILE. .A -& / TRUE COPY $( / BY ORDER - . IJ / PRADEEP J. CHOWDHURY '0K &( I' / SR. PRIVATE SECRETARY 8 / < / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI