Income Tax Appellate Tribunal - Mumbai
Jm Financial Consultations Pvt. Ltd., ... vs Assessee on 12 September, 2011
आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'क
के' मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI
ी पी.
पी.एम.
एम. जगताप,
जगताप, लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं. / ITA no. 7455/Mum./2011
( नधारण वष / Assessment Year : 2007-08)
JM Financial Institutional Securities Pvt. ....................... अपीलाथ /
Ltd., (Formerly known as JM Financial
Appellant
Consultants Pvt. Ltd.), 141, Maker
Chamber-III, Nariman Point
Mumbai 400 021
बनाम v/s
Dy. Commissioner of Income Tax ................... यथ /
Circle-3(2), Aayakar Bhavan
Respondent
101, M.K. Road, Mumbai 400 020
थायी लेखा सं./ Permanent Account Number - AAACM7079C
नधा रती क ओर से / Assessee by : Mr. Vispi Patel
राज व क ओर से / Revenue by : Mr. Ajit Kumar Jain
सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 26.08.2013 Date of Order - 13.09.2013
आदे श / ORDER
अ मत शु ला, या यक सद य के ारा /
PER AMIT SHUKLA, J.M.
The present appeal has been preferred by the assessee against the final assessment order dated 12th 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 transactions of providing advisory services and capital market transactions with A.E. of the assessee. Besides JM Financial Institutional Securities Pvt. Ltd.
2this, the disallowance under section 14A of ` 9,64,573, and addition on account of disallowance under section 43B in respect of service tax of ` 69,29,376 has been raised. Following grounds have been 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, the Dy. Commissioner of Income Tax 3(2) ('AC') erred in making an upward adjustment of Rs.9,75,71,680/- to the international transaction of provi ling advisory service and capital/market transactions with its associated enterprise
2. On the facts, in law and in the circumstances of the case, the Ld. Panel and consequently the AC, erred in disregarding the audited segmental data submitted by the Appellant, without taking into consideration the submissions made by the Appellant during the course of the proceedings before the Ld. Panel.
3. On the facts, in law and in the circumstances of the case, the Ld. Panel and consequently the AC, erred in upholding the action of the Transfer Pricing Officer (TPO) of arbitrarily selecting certain companies as comparables, without undertaking a methodical search and without qualitatively analysing the functional profile of such companies to determine their comparability to the functional profile of the Appellant's international transactions with its AE.
4. On the facts, in law and in the circumstances of the case, the Ld. Panel and consequently the AC, in reference to the computation of the Operating Profit to Sales ("OP/Sales") of comparable companies, erred in:
a) Disregarding the computation of OP/Sales of comparable companies from the Annual Reports as submitted by the Appellant during 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 dividend, 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 of the case, the Ld. Panel and consequently the AC, erred in accepting the determination of the arm's length OP/Sales based on the data for financial year 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 circumstances of the case, in upholding the adjustment made on the basis of the entire difference between arm's 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 Appellant.
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.
3the proviso to Section 92C(2) of the Act prior to the 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 consideration the basis of pricing agreed between the Appellant and the associated enterprises while determining the arm's length nature of the international transactions, which was agreed on the basis of the functions pe formed by the Appellant vis-à-vis the associated enterprises.
9. On the facts, in law and in tie circumstances of the case, the Ld. Panel and consequently the AC, erred in making disallowance of Rs.9,64,5731- by invoking provisions of Section 14A of the Act without appreciating the fact that there is no nexus between earning of the dividend income and expenses incurred.
10. Without prejudice to ground 9 above, the Ld. Panel 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 adopted 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 provisions 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 the revenue sharing arrangement between the appellant (joint venture company) and the associated enterprises (joint venture group - Morgan Stanley Group) were entered into when they (JM Group and Morgan Stanley Group -- joint venturers) were two independent parties. Further, the Ld. Panel and consequently the AO, failed to appreciate that there cannot be shifting of income by the appellant to the associated enterprises, as the associated enterprises are independent of the other joint venturer, and therefore, the transactions in such cases should be regarded as carried out under uncontrolled conditions and hence at arm's length under 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 services, serving the needs of Indian securities in U.S.A. JMF Group and Morgan Stanley Gorup respectively held the share capital of the assessee JMFCPL in the ratio of 51:49%. In the JM Financial Institutional Securities Pvt. Ltd.
4transfer pricing report in Form no.3CEB, the assessee has reported following international transactions in terms of section 92B.
Name of A.Es Details of Amount
S.no. International Trans. (INR)
1. Morgan Stanley & Co. Ltd. Advisory Services 4,299,441
2. Morgan Stanley & Co. Capital market 326,041,099
International Ltd. transactions
3. Morgan Stanley Dean Witter Reimbursement of 8,782,179
Asia Ltd. expenses
4. Morgan Stanley & Co. Reimbursement of 748,137
International Ltd expenses
5. Morgan Stanley & Co. Inc. Reimbursement of 123,112
expenses
6. Morgan Stanley Japan Ltd. Reimbursement of 1,572,439
expenses
7. Morgan Stanley Dean Witter Reimbursement of 36,039
Asia (Singapore) PTE expenses
8. Morgan Stanley Sanfransico Reimbursement of 15,159
Fixed Income Securities expenses
9. Morgan Stanley Dean Witter Reimbursement of 10,528,789
Asia Ltd. expenses
Total 352,146,394
4. The assessee has adopted transactional net margin method by using net cost plus mark-up 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 given at Page-3 of the TPO's order). Since the assessee's operating margin was 30.01%, hence it was declared that its margin is at ALP. The Transfer Pricing Officer has rejected the two comparables and added five more comparables. Finally, 14 comparables were short-listed for bench marking the assessee's ALP and the average operating margin of this finally selected 14 comparables was at 47.03%. Accordingly, upward adjustment in the ALP was made at ` 4,50,24,820 as per the working given in the TPO's order.
5. Before the DRP, the assessee has made very detail objections not only on various legal issues but also on merits. However, the DRP rejected most JM Financial Institutional Securities Pvt. Ltd.
5of 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 adjustment in the ALP was made by the Assessing Officer at 9,75,71,680. This upward adjustment has been challenged before us by the assessee on various counts.
6. Before us, the learned Counsel, Mr. Vispi Patel, has made a very elaborate submission on the issue that in case of a joint venture arrangement, there could not be any undercharging of price or margin. Looking to the very nature of joint venture arrangement, the internal transactions are at ALP. He submitted that the issue raised in the additional ground goes to the very root of the transfer pricing 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 DRP at all. Once these issues are decided in favour of the assessee, then the entire matter will become purely academic. He further proceeded to make his submissions on the issue raised in the additional ground.
7. The learned Departmental Representative, Mr. Ajit Jain, submitted that once these basic issues have not been decided by the 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 raised in the additional ground which has been reproduced above. On perusal of the additional grounds which has been raised before us, vide petition dated 17th 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 interest 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.
6the assessee. The assessee may raise any objection or plea in relation to the issue raised in the additional ground. Thus, the entire 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 months from the date of receipt of this order.
9. प रणामतः नधा रती क अपील सां यक य उ े य के लए वीकत ृ मानी जाती है ।
9. In the result, assessee's appeal is treated as allowed for statistical purposes.
आदे श क धोषणा खले
ु यायालय म दनांकः 13th September 2013 क गई ।
Order pronounced in the open Court on 13th September 2013 Sd/- Sd/-
पी.
पी.एम.
एम. जगताप अ मत शु ला
लेखा सद य या यक सद य
P.M. JAGTAP AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
मंुबई MUMBAI, दनांक DATED: 13th September 2013
आदे श क त ल प अ े षत / Copy of the order forwarded to:
(1) नधा रती / The Assessee;
(2) राज व / The Revenue;
(3) आयकर आयु (अपील) / The CIT(A);
(4) आयकर आयु / The CIT, Mumbai City concerned;
(5) वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6) गाड फाईल / Guard file.
स या पत त / True Copy
आदे शानुसार / By Order
द प जे. चौधर / Pradeep J. Chowdhury
वर नजी स चव / Sr. Private Secretary
उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai