Life membership fees of club is an  expenditure of capital  nature & not eligible for deduction.

 

 

Short Overview  Payment of club membership fees was for life membership, benefit of which was spread over the life of member and, therefore, expenditure was capital in nature.

Assessee-company claimed deduction of club membership expenditure. AO held that expenditure was capital/personal expenditure and did not fall under the ambit of revenue expenditure.

It is held that Payment of club membership fees was for life membership, benefit of which was spread over the life of member and, therefore, expenditure was capital in nature. Further, personal expenses for membership did not fall within the ambit of revenue expenditure.

Decision: Against the assessee.

Followed: Otis Elevator Co. Ltd. v. CIT (1992) 195 ITR 682 (Bom) : 1992 TaxPub(DT) 486 (Bom-HC) and CIT v. Johnson & Johnson Ltd. (2012) 80 Taxmann.com 337 (Bom) : 2017 TaxPub(DT) 1277 (Bom-HC).

Income Tax Act, 1961, Section 40A(2)

Business disallowance under section 40A(2)(b)—Excessive or unreasonable payment–Remuneration paid by stock broker to related person–Payee commanding very high price and payment being within limit prescribed by Companies Act

Conclusion: Payment of remuneration made by assessee stock broker to one A covered under section 40A(2)(b) was reasonable on account of payee in the field of capital market was commanding a very high price and further payment was within limits prescribed by Companies Act and, therefore, no disallowance under section 40A(2)(b) was called for.

Decision: In assessee s favour.

Income Tax Act, 1961, Section 40A(2)(b)

Short Overview  Notional interest which had not been earned, could not be subjected to addition under section 40A(2)(b), especially when no case for disallowance of notional interest on interest free deposit was made out by AO.

Assessee extended interest-free deposit to sister concern. AO made addition under section 40A(2)(b) on account of notional interest in respect of interest free security deposit provided by assessee to its sister concern. Assessee’s case was that notional interest did not fall within the ambit of exception under section 40A(2)(b).

It is held that  Notional interest which had not been earned, could not be subjected to addition especially when no case for disallowance of notional interest on interest free deposit was made out by AO.

Decision: In assessee’s favour.

Relied: Karma Energy (2015) 57 Taxmann.com 235 (Bom).

IN THE ITAT, MUMBAI “J” BENCH

R.C. SHARMA, A.M. & PAWAN SINGH, J.M.

ACIT v. Morgan Stanley India Co. (P) Ltd.

ITA No. 266/Mum/2006

C.O. No. 215/Mum/2008

ITA No. 7057/Mum/2008

A.Y. 2002-03

25 February, 2020

Revenue by: A. Mohan (CIT-DR)

Assessee by: Sunil M. Lala (AR)

ORDER

Pawan Singh, J.M.

These two Appeal out of which one appeal by revenue against the order of learned Commissioner (Appeals)-XIV, Mumbai dated 28-10-2005 and appeal by assessee against the order of learned Commissioner (Appeals)-XIV dated 11-11-2008 for the assessment year 2002-03. The assessee has also filed cross objection in revenue’s appeal. As both the appeals and C.O of the assessee relates to same assessment year, therefore, both the appeal and C.O. were clubbed, heard and are decided by common order for the sake of convenience and to avoid the conflicting decision.

2. First, we are taking the revenue appeal and assessee’s C.O. for the assessment year 2002-03, wherein following grounds have been taken :–

Grounds of Revenue’s appeals:

“(i) On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in deleting the disallowance of Rs. 10,94,87,945 on account of overseas support fees.

(ii) On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in deleting the disallowance of Rs. 3,06,988 on account of Club Membership.

(iii) On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in deleting the disallowance under section 40A(2)(b) in respect of salary payment to Asitkumar Kampani on the strength of evidence not produced before the assessing officer.

(vi) On the facts and in the circumstances of the case and in law, Commissioner (Appeals) erred in deleting the disallowance of Rs. 30,00000 relating to interest free deposit given to sister concern for office premises.

(v) On the facts and in the circumstances of the case and in law, Commissioner (Appeals) erred in deleting the disallowance of Rs. 49,56,360 relating to I.T. & T interest without appreciating the fact that the department has not accepted the decision relating to transaction loss on these shares.

(vi) On the facts and in the circumstances of the case and in law, Commissioner (Appeals) erred in reducing the Arm’s length price in respect of brokerage rate charged for DVP trades to MSDW Mauritius from Rs. 1,18,59,779 to Rs. 658.

(vii) Further placed in the above factual and legal scenario, the impugned order of the learned Commissioner (Appeals) is the appellant prays, penalty perverse and contrary to law and consequently merits to be set aside and that of the Assessing officer be restored.

(viii) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

Grounds of assessee’s C.O.

1. On the facts and in the circumstances of the case, the assessing officer has legally erred in not allowing depreciation of Rs. 87,46,875 on computer software capatalized in the assessment order for assessment year 2000-01.

It is prayed that the learned assessing officer be directed to allow the depreciation on computer software capatalized in assessment year 2000-01.

The respondent craves leave to add, alter, amend or withdraw the above ground of cross objection and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.

3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the stock broking business and is a member of the stock exchange, Mumbai as well as the National Stock Exchange of India. The assessee filed its return of income for the year under consideration on 21-10-2002 declaring total income of Rs. 17,89,79,871. The assessing officer passed assessment order and assessed total income at Rs. 32,06,27,094 after making various disallowances/additions. By the impugned order, the learned Commissioner (Appeals) has given part relief, against which, both the assessee and the revenue are in appeal and the assessee has also filed C.O. before us.
4. First, we are taking revenue’s appeal beingITA No. 266/mum/2006. Ground I relates to deletion of disallowance of overseas support fees. At the outset of hearing, the learned AR of the assessee submits that ground i raised by the revenue is covered in favour of the assessee by the decision of Tribunal for assessment years 2001-02 and 2001-02, wherein the Tribunal decided similar issue on the appeal of revenue for assessment years 2000-01 and 2001-02. The learned AR furnished the copy of decision of Tribunal.
5. On the other hand, the learned DR for the revenue supported the order of assessing officer.

6. We have considered the submission of both the parties and perused the record. We have seen that the assessee claimed an amount of Rs. 10,94,87,945 as a business expenditure on account of overseas support fees paid to Morgan Stanley India Securities Private Limited. The assessing officer held that overseas support services are not in the business interest of the assessee. These expenses were neither necessitated nor justified by commercial expendiency. The assessing officer further held that no businessman will part its income by way of overseas support fees. The assessing officer held that these are the transactions between sister concerns and covered by provisions of section 40A(2) being not incurred wholly and exclusively. The assessing officer also held that no businessman will part its income by way of overseas support fees. The assessing officer held that these are the transactions between sister concerns and covered by provisions of section 40A(2) being not incurred wholly and exclusively. On appeal, the learned Commissioner (Appeals) deleted the addition by following the decision of his predecessor for assessment years 2000-01 and 2001-02.
7. We have noted that in assessee’s own case for assessment years 2000-01 and 2001-02 the Tribunal on similar ground of appeal(ITA No. 7070/Mum/2004 – assessment year 2001-02 Order, dated 25-1-2008) while following the decision in assessee’s own in assessee’s own case for assessment year 2000-01 in ITA No. 3053/Mum/2014 deleted similar disallowance. We have note that facts for the year under consideration are not at variance. Otherwise, no contrary facts or material has been brought before us to take a different view. Therefore, respectfully following the earlier decision of the Tribunal. We do not find any infirmity in the order passed by the learned Commissioner (Appeals). Which we hereby affirm. In the result this ground of appeal is dismissed.
8. Ground No. 2 relates to deletion of disallowance of club membership fees. While making addition, the assessing officer in the assessment order held that the club membership expenditure amounting to Rs. 3,06,988 is a payment for life membership the benefit of which spreads over the life of the membership and, therefore, the expenditure is capital/personal expenditure and do not fall under the ambit of revenue expenditure. On appeal, the learned Commissioner (Appeals) found that these are the annual club membership fees and not life membership fees and deserved to be allowed as business expenditure.
9. The learned AR of the assessee submits that the club expenditure fees is allowable as revenue/business expenditure as has been held by Hon’ble Jurisdictional High Court inOtis Elevator Co. Ltd. v. CIT (1992) 195 ITR 682 (Bom) : 1992 TaxPub(DT) 0486 (Bom-HC) and CIT v. Johnson & Johnson Ltd. (2012) 80 Taxmann.com 337 (Bom) : 2017 TaxPub(DT) 1277 (Bom-HC).
10. On the other hand, the learned DR further submits that expenses incurred on account of membership fee for club or maintenance fees was not incurred wholly and exclusively for the purpose of business.
11. We have considered the submission of both the parties, perused the record. We have noted that during the assessment, the assessing officer held that payment of club membership fees is for life membership, the benefit of which is spread over the life of member and, therefore, the expenditure is capital in nature. The personal expenses for membership did not fall within the ambit of revenue expenditure. The learned Commissioner (Appeals) allowed relief to the assessee by following the decision of Jurisdictional High Court in case ofOtis Elevator Co. Ltd. (Supra). Before us, the learned DR failed to bring any contrary material or law to take over view. Therefore, respectfully following the decision of Hon’ble jurisdictional High Court in CIT v. Johnson & Johnson Ltd. (Supra) and Otis Elevator Co Ltd. (supra), we affirm the order of learned Commissioner (Appeals). In the result ground of appeal is dismissed.
12. Ground 3 relates to deletion of disallowance of payment made to Ashish Kampani under section 40(A)(2)(b). The learned AR of the assessee submits that the assessee obtained the approval of Central Government for payment of salary, allowances, bonus and perquisites and accordingly made payment in accordance with the approval accorded by Central Government under section 314(1B) of Companies Act. The assessing officer disregarded the approval obtained by the assessee from Central Government and the fact that payment made to Ashish Kampani (employee) is not in excess having regard to his qualification, experience, nature of services rendered by him. Further, the housing loan was not interest free. The assessee charged interest 10% which is evidenced by the document furnished at page 446 of the paper book.
13. On the other hand, the learned DR for the revenue supported the order of assessing officer. The learned DR submits that the assessing officer passed the detailed order substantiating the disallowances.
14. 14. We have considered the submissions of the parties and perused the order of the lower authorities. We noted that during the assessment before assessing officer. The assessee stated that they have paid remuneration of Rs. 48,88,261 to Shri Ashish Kampani for the year under consideration. The remuneration consists of basic salary of Rs. 10 Lakhs P.A. bonus of Rs. 32,41,261. The assessee also furnished the interest bearing housing loan of Rs. 66.50 Lakhs. The assessee also contended before the assessing officer that they have obtained the approval of Central Government under section 314(1B) for payment of salaries of Rs. 10 Lakhs P.A., bonus and perquisites was subject to a maximum value of Rs. 7.67% and allowance of Rs. 5 lakhs and bonus of 15.7%. The assessing officer disallowed only Rs. 10,49,299 under section 40A(2)(b) by taking view that remuneration paid is in excess of limit prescribed by Ministry Of Law in itsletter, dated 24-2-2001 and 5-9-2005, having regard to his qualification, experience and the nature of service rendered being more than reasonable. The assessing officer treated the 10% of housing loan as interest. Accordingly, the assessing officer disallowed Rs.10,49,299 and interest on housing loan of Rs. 64,500 totalling Rs. 16, 94,299. The learned Commissioner (Appeals) deleted the addition by taking view that the person is in the field of capital markets, command a very high price. Further, the payment made to employee is within the limits prescribed by companies Act and satisfies the test of reasonablesness. We have noted that the assessing officer, while making the disallowance disregarded the approval granted by Central Government under the statutory provisions of companies Act. The assessing officer made addition/disallowance without considering the qualification, experience and reasonableness with regard to his past and position in the field of capital market. So far as interest disallowance of Rs. 645,000 is concerned, we have noted that the housing loan was not interest free the assessee charged interest on such loan as evident from page No. 446 of the paper book. Which has not been disputed by learned DR while making his submissions before us. Therefore, we do not find any justifiable reason to interfere with the finding of learned Commissioner (Appeals), which we affirm. In the result this ground of appeal is also dismissed.
15. 15. Ground 4 relate to deletion of disallowance of interest free deposit to sister concern. The learned AR of the assessee submits that the assessee has not debited an amount of Rs.300 Lakhs to the P&L Account and accordingly there cannot be disallowance of notional interest as computed by assessing officer in respect of interest free security deposit provided by assessee to its sister concern. Notional Interest does not fall within the ambit of exception under section 40A(2)(b) of the Act. The learned AR submits that onus is on the assessing officer to prove that the rent paid by the assessee should be considered as excess within the meaning of section 40A(2). The assessing officer has not brought any material to substantiate the disallowance. The learned AR submits that vide submission dated 22-12-2004, the assessee explained the complete facts before the assessing officer. The learned AR submits that the learned Commissioner (Appeals) rightly appreciated the fact that no case for disallowance of notional interest on interest free deposit was made out by the assessing officer. In support of his submission the learned AR for the assessee relied on the decision of Bombay High Court inKarma Energy (2015) 57 taxmann.com 235(bom),Gujarat High Court in Ashok J Patil (2014) 43 Taxmann.com 227 (Guj).
16. On the other hand, the learned DR for the revenue supported the order of assessing officer.
17. We have considered the submissions of parties and perused the order of lower authorities. During the assessment, the assessing officer noted that assessee has paid rent of Rs. 1,41 crores to its sister concern for occupying of 12,030 sq.ft. of office premises in forbes building. The assessing officer further noted that assessee has paid deposit of Rs. 3,00 crore with its sister concern. The assessing officer noted that no explanation was given for such deposit with sister concern. The assessing officer calculated interest @10% amounting to Rs.30 Lakhs and made addition on account of interest free deposit. The assessing officer concluded that even the rent paid is reasonable, the interest on deposits has to be considered as an excess within the meaning of section 40A(2) of the Act. On the before learned Commissioner (Appeals), learned Commissioner (Appeals) took his view that the assessing officer has not made a case for disallowance of any expenditure and made addition for notional return of interest from deposit. It was further held that the assessing officer made addition to the income of assessee which has not been earned and, therefore, deleted the addition. Before us, neither the learned DR brought any contrary law nor any comparable rate of rent in similarly situated property. Moreover, the assessing officer has not made a case of disallowance on the basis of any comparable and simply made addition for notional return of interest free deposit. The Hon’ble Bombay High Court inKarma Energy (2015) 57 taxmann.com 235(bom) held that where assessee paid lease rent to a group company in respect o wind farm taken on lease, since lease rent was fixed in accordance with formula provided by Indian Renewable Energy Development, a government of Indian company, impugned disallowance made by Assessing officer under section 40A(2)(b) was to be set aside. Thus, keeping in view the decision of Bombay High Court (Supra) and when no contrary fact or law is brought to our notice, we affirm the finding of learned Commissioner (Appeals). In the result the Ground No.4 is dismissed.
18. Ground 5 relates to deletion of disallowance of interest relating to loss on underwriting transaction. The learned AR of the assessee submits that loss on transaction pertaining to assessment year 2001-02 which was disallowed in the assessment order for assessment year 2001-02 and on appeal was allowed by Tribunal inITA No. 7060/Mum/2011. Therefore, disallowance of interest does not survive.
19. On the other hand, the learned DR for the revenue supported the order of assessing officer.
20. We have considered the submissions of the parties and seen the orders of the lower authorities. For the year ended 31-3-1001, the assessee and JP Morgan Stanley Pvt Ltd were appointed as one of the joint lead merchant banker and the under writer for the IPO of IT & IT. Due to under subscription , the loss attributed to the undersubscribed shares were to be borne by the assessee and JP Morgan Stanley Pvt. Ltd. in 50:50 shares each. JP Morgan Stanley Pvt. Ltd. paid full consideration for development. Which was on account of assessee and thus the assessee paid interest @12% amounting to Rs. 49,56,360. The assessing officer disallowed interest of 49,56,360, by taking view that underwriting transaction of IT&T share was disallowed in the earlier assessment year being not related to the business. On the appeal the learned Commissioner (Appeals) held that since the loss of transaction of IT & T of assessment year 2001-02 has been allowed as business loss by his precessor and accordingly, the interest component is married to such loss also assumes the character of business expense ans is accordingly allowable and resultantly allowed relief to the assessee. We have further noted that the co-ordinate bench of Tribunal while considering the disallowance in assessment year 2001-02 in itsOrder dated 25-1-2008 in ITA No. 7060 held that loss suffered by assessee out of its business of earning commission income and on the principle of matching concept of income and expenditure, the entire loss was allowed in assessment year 2001-02. We are further in agreement that allowance of interest of Rs. 49,56,360 is merely consequential in the year under consideration. Therefore, we do not find any merit in the ground of appeal. The same is dismissed.
21. Ground 6 relates to reducing the arm’s length price in respect of brokerage rate charge for Morgan Stanley Dean Witter Maurities Limited. The learned AR of the assessee submits that assessee is a broker/dealer of Bombay Stock Exchange and National Stock Exchange. Assessee is having institutional clients, locally and globally. During the relevant assessment year, the assessee rendered broking services to its AE and to third party clients both, in india and overseas. The assessee benchmarked this transaction by using transaction net margin method (TNMM) in its transfer pricing study report, whereby net margin earned by assessee at entity level was compared with the profit margin earned by comparable companies engaged in similar broking business. The net margin earned by assessee is 35.38 which is higher than the net profit margin earned by comparable companies i.e. 21.63%. Accordingly, the transaction of assessee is within arm’s length price (ALP). During the transfer pricing assessment proceedings, the TPO rejected the appropriate method adopted by assessee and computed the Arm’s Length Price by using Comparable Uncontrolled Price (CUP) method thereby made an adjustment of Rs. 1,18,59,779 with regard to the international transaction. The TPO rejected the contention of assessee while computing Arm’s Length Price under CUP. Further, on appeal before Commissioner (Appeals), the contention of assessee was accepted and adjustment was reduced to Rs. 658 only. The learned AR of the assessee furnished the working of calculation adopted by TPO and the learned Commissioner (Appeals) in the following manner :–

Particulars	Clearing House (CH) Trades		Delivery versus payment (DVP) Trades
	By TPO	By CIT(A)	By TPO	By CIT(A)
Arms length brokerage rate	0.4358%	0.3511%	0.4728%	0.4622%
Less: Adjustment made to the aforesaid rate-30 percent/40 percent	0.1076%	0.1405%	0.1076%	0.2080%
Adjusted arm’s length brokerage rate (A)	0.3282 %	0.2107%	0.3652%	0.2542%
Rate charged by MSCPL	0.2381%	0.2381	0.2403%	0.2403%
Difference in brokerage rate (C=A-B)	0.0901%	Nil	0.1249%	0.0139%
Volume executed by MSDW Mauritius(D)	13,16,22,69,259	13,16,22,69,259	47,35,557	47,35,557
Transfer Pricing Adjustment	1,18,53,866	Nil	5,913	658

22. The learned AR explained that TPO granted an adjustment of marketing cost to the extent of 0.1076%, which is approximately 30% of weighted average rate charged to third party client. However, learned Commissioner (Appeals) granted adjustment of 40% with respect to marketing cost adjustment for significant volume and research cost and granted relief to the assessee. The learned AR further submits that geographical location of market is of no consequence in judging comparability of an uncontrolled transaction for purpose for applying CUP Method. The difference in geographical location cannot be reason enough to discard comparables. Geographical location of service recipient to be irrelevant consideration, because the consulting services provided by the assessee would remain the same whether the service receiver is located in ‘X’ country or ‘Y’ country as long as service provider is in India. Reliance is placed on the following judicial precedents to support the said contention :-

SI Group India Ltd. v. DCIT (2016) 68 taxmann.com 158 (Mumbai-Trib) : 2016 TaxPub(DT) 2058 (Mum-Trib)

Bharti Airtel Ltd. v. ACIT (2014) 43 taxmann.com 50 (Del-Trib) : 2014 TaxPub(DT) 1899 (Del-Trib)

Tower Watson India Pvt. Ltd. v. DCIT [TS-260-ITAT-2019(Del)-TP]

Inslico Ltd. v. DCIT TS-623-ITAT-2015(Del)-TP

Clear Plus India Pvt. Ltd. v. DCIT 30 CCH 0652 (Del-Trib)

BMW India Pvt Ltd v. ACIT (TS-401-ITAT-2018 (DEL-TRIB)

M/s Garware Polyester v. Dy.CIT-8(1), Mumbai ITA No. 6169/Mum/2011 : 2017 TaxPub(DT) 0598 (Mum-Trib)

ADIT, Circle 1(1), International Taxation, New Delhi v. ABB Lummus Heat Transfer BV (2015) 64 Taxmann.com 210 (Del-Trib) : 2015 TaxPub(DT) 5386 (Del-Trib)

23. The learned AR accordingly submits that the learned Commissioner (Appeals) was justified in taking the average brokerage rate charged by assessee to its overseas and Indian clients irrespective of geographical location of service recipients. The learned AR further submits that volume discount/adjustment should be allowed in computing arm’s length price. It was explained that volume traded/executed by assessee on behalf of Mauritius entity was Rs. 1,316 crores for CH trade, which constitute approximately 34% of total CH trade executed by assessee of its clients. And on the other the highest third party client had executed volume of CH trades Rs. 396,84 Crores which constitute 10% of total CH trades executed by assessee to all its clients. In support of his submissions the learned AR for the assessee relied on the following case laws :–

Clarient Chemical (India) Ltd. v. JCIT (2014) 44 taxmann.com 421 (Mumbai-Trib)

Dresser-Rand India (P) Ltd v. ACIT (2011) 13 taxmann.com 82 (Mumbai Trib) : 2012 TaxPub(DT) 0317 (Mum-Trib),

Livingstones v. DCIT (2014) 41 taxmann.com 499 (Mumbai-Trib) : 2014 TaxPub(DT) 0776 (Mum-Trib)

24. It was further explained that adjustment of research cost should be allowed for computing the arm’s length price.
25. On the other hand, the learned DR for the revenue supported the order of TPO/assessing officer.
26. We have considered the submissions of both the parties, perused the record. While filling the return of income, the assessee reported transactions with its AE as reported in form 3CEB. Consequent to that, the assessing officer made reference to the TPO vide reference dated 24-9-2003 for computation of arm’s length price. The TPO vide hisOrder, dated 22-02-2005 suggested the adjustment of Rs. 1,18,559,779. The TPO rejected the TNMM method applied by assessee for bench marking with its AE. The TPO computed the arm’s length price by applying CUP Method. And suggested adjustment of Rs.18,59,779 in arms length price. On receipt of report of TPO, the assessing officer made addition of Rs. 1,18,59,779 in respect of arm’s length price while passing the assessment order. The assessee filed appeal before Commissioner (Appeals). Before Commissioner (Appeals), the assessee besides other contentions, stated that CUP method cannot be used as it is for determination of ALP of assessee’s transactions with its AE as it is difficult to make accurate adjustments for itself as compared to other trades/transactions and TNMM on the overall basis should have been considered, being more reliable and accurate method in assessee’s case. The LD.CIT(A), after considering the submissions of assessee concluded the CUP is the most appropriate method which should be applied to the proper adjustment instead of using TNMM which is an indirect method.
27. On the grounds of comparability of comparables, concluded that domestic independent client should be considered for comparability purpose. The assessee further stated that if CUP is to be applied, then appropriate adjustment need to be made for lesser function performed/asset utilised and risk assumed. It was further stated that assessee did not perform any marketing and sales activities while executing trade for AE in mauritius. Even the levels of other activities like research, trade relationship, etc. are lower as compared to independent client. In addition, Mauritius AE is the trusted client of assessee and provided substantial volume of business. Mauritius AE is dedicated client of the assessee. While fixing the brokerage rate of mauritius AE, the assessee has to consider all the above factors. Accordingly, the assessee urged that if CUP has to be applied. Then discounting factor of 50% should be applied as an adjustment to the brokerage rate charged to all indian clients.
28. The contention of assessee was accepted by learned Commissioner (Appeals) by taking view that if CUP method has to be applied, then appropriate adjustment need to be made for all differences. The learned Commissioner (Appeals) further noted that TPO has carried out adjustment for marketing function by making adjustment considering part of marketing cost and has not made any adjustment to research activities on the premise that maurities AE would be getting research related services from assessee. Thus, the learned Commissioner (Appeals) not agreed with the view of TPO that no adjustments are required to be made for research activities based on assumption and possibility and not on actual facts. The learned Commissioner (Appeals), after considering the high volume of business profit of mauritius AE to assessee which is 15% of the total business volume of the assessee and the other highest client account is only 3.7% of total business volume, the learned Commissioner (Appeals) took his view that it is settled commercial principle that volume increases, the price decrease”. The learned Commissioner (Appeals), after considering the facts, passed the following order :–

I agree with the appellant that if CUP method has to be applied then appropriate adjustments need to be made for all differences. The TPO has carried out adjustments for marketing functions by making an adjustment considering part of the marketing cost. The TPO has not made any adjustments for research activities on the premise that MSDW Mauritius would be getting research related services from the appellant. I an unable to agree with the TPO who has formed a view that no adjustments are required to be made for research activities based on certain assumptions and possibilities and not on actual facts.

Further, the TPO has not considered any adjustment for the high volume of business given by MSDW Mauritius to the appellant. The total volume of trades (for purchases and sale) generated by MSDW Mauritius is Rs. 1316 crores. As noted by the TPO on page 8 of his order, the business provided by MSDW Mauritius is approximately 15% of the total business volume of total trades. The next highest client accounts for only 3.77% of the total business volume. It is well settled commercial principle that ‘as volume increases, the price decreases’. The TPO has dealt with this issue on para 2 of page 8 in his order. The TPO has picked out certain instances where even though the volume has increased there is no decrease in the brokerage rate and accordingly has not considered any adjustment for volume differences. I am unable to agree with the TPO to the extent that one cannot disregard well-settled commercial principle based on certain stray instances. The fact that ‘as volume increases the price decreases’ is a well-established commercial principle and accordingly due weightage/adjustment should be given for the huge volume of business given by MSDW Mauritius.

As per the appellant, MSDW Mauritius is a dedicated client i.e. it brought and sold securities only through the appellant for the entire previous year. Accordingly, while fixing the brokerage rate of MSDW Mauritius the appellant has to consider the fact that MSDW Mauritius has no transaction through any of its competitors. The TPO has not considered any adjustments for the same. I am unable to agree with the TPO as certain amount of adjustment is required to loyalty factor of MSDW Mauritius.

The appellant carries out ‘Clearing House’ and ‘DVP’ trades for MSDW ‘Clearing House’ trades. As stated above, the average brokerage charged to all independent clients for ‘Clearing House’ trades is 0.3511%. The TPO, in his order, has already considered an adjustment of 0.1076% on account of marketing cost. Thus, adjustment granted by the TPO amounts to approx 30% of average brokerage charged to all independent clients.

As stated above, the appellant has contended that the discounting factor of atleast 50% should be applied as an adjustment to the brokerage rate charged to all independent clients.

Keeping the entire factual matrix in mind, I feel that the ends of justice would be met to both sides by considering a discounting factor of 40%. This discounting factor of 40% would cover the marketing cost adjustment already considered by the TPO.

Conclusion

Based on the above, this sub-ground is partly allowed. For comparability purposes, all the independent entities i.e. domestic as well as overseas should be considered, and a discounting factor of 40% as adjustment should be applied. The calculation of the arm’s length price is enclosed as annexure 1.

Annexure-1

Table

Particulars	Clearing House Trades	DVP Trades
Overseas Trades Domestic Trades	13,513,701,695 9,741,948,998	62,321,033,641 2,248,476,175
Total Uncontrolled Trades	23,255,650,692	64,569,509,816
Total Commission for uncontrolled trades weighted Average Rate Discount @40%	81,660,811 0.3511% 0.1405%	298410339 0.4622% 0.2080%
Arm’s Length Price (i.e. adjusted average rate for uncontrolled trades)	0.2104%	0.2542%
Trades for MSDW Mauritius Commission Amount	131,622,693 31,343,868	4,735,557 11,379
Rate charged to MSDW Mauritius	0.2381%	0.2403%
Diff in ALP and rate charged to MSDW Addition		0.0139%   658

Considering the arm’s length price determined on the above factors, the brokerage rate charged by the appellant to MSDW Mauritius for ‘Clearing House’ trades meets with the arm’s length principle. However, the brokerage rate charged by the appellant to MSDW Mauritius for ‘DVP’ trades does not meet with the arm’s length principle and consequently, the addition of Rs. 658 is therefore confirmed. The appellant gets a relief of Rs. 1,18,59,121 for this sub-ground.”

29. Before us, the learned DR for the revenue could not bring out any fact to enable us to take a different view. No contrary law is brought to our notice. Therefore, we do not find any reason to interfere with the finding of learned Commissioner (Appeals). In the result, this ground of appeal also fails.
30. In the result, appeal of the revenue is dismissed.

CO & Appeal of the assessee

31. Brief facts of the case are that in assessment year 2000-01, the assessee claimed revenue expenditure of Rs. 6.22 crores on computer software. The assessment for assessment year 2000-01 was completed on 28-03-2005 and the assessing officer considered the said expenses as capital against the revenue expenses claimed by assessee and allowed depreciation @25%. The assessee accepted the treatment. Accordingly, subsquent to the assessment year 2000-01, the assessee filed aletter, dated 08-07-2003 requesting the assessing officer to allow the depreciation on computer software in assessment year 2001-02. Accordingly, vide order passed under section 154 for assessment year 2001-02, the assessee was allowed depreciation on computer software. While passing the assessment for assessment year 2002-03 i.e. assessment year under consideration under section 143(3), due depreciation on computer software of Rs. 87,46,875 was not allowed. After receipt of the order, the assessee filed application for rectification dated 28-03-2005 before assessing officer for allowing consequential depreciation on computer software. The assessing officer in his rectification order on 29-06-2005 allowed the claim of depreciation to the assessee. However, subsequently, a notice under section 154 dated 07-04-2006 was issued to the assessee seeking to withdraw the depreciation already allowed. The assessee filed detailed submission dated 28-4-2006 in response to Notice, dated 7-4-2006. However, vide Order, dated 26-6-2006 passed under section 154 withdrew the claim of depreciation on the ground that assessee’s income assessed was lower than the returned income. The assessee filed its submission before assessing officer dated 6-6-2006 and contended that there was neither any omission nor wrong statement in the return of income originally filed and as such revised return of income can be filed. Aggrieved by the action of assessing officer, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) vide Order dated 11-11-2008 upheld the action of assessing officer. Thus, aggrieved by the action of Commissioner (Appeals), assessee has filed appeal before the Tribunal as well as cross objection in the revenue’s appeal by raising the common grounds of appeal in appeal as well as in cross objections.
32. We have heard the submission of learned AR of the assessee and learned DR for the revenue and perused the material available on record. The learned AR of the assessee submits that theCircular No. 549 dated 31-10-1989 relied upon by the assessing officer ultra virus. The assessing officer/Commissioner (Appeals) or Tribunal is not bound by the said circular. The learned AR of the assessee submits that the Hon’ble Gujarat High Court in Gujarat Gas Co Ltd. v. JCIT (2000) 111 taxman144 (Guj) : 2000 TaxPub(DT) 1344 (Guj-HC) held that assessing officer exercised quasi judicial function and has a duty cast upon him to act in a quasi judicial and independent manner and authorities cannot be controlled or affected his judgment in the matter of assessment. The High Court concluded that the order of assessing officer to his extent stated that total income should be returned income was to be set aside. The High Court directed the assessing officer to ignore even the circular of CBDT which directs the assessing officer not to let the assessed income below the returned income. The learned AR also relied upon the following decisions :–

Kalindi Rail Nirman (Engineers) Ltd. v. CIT (2017) 88 Taxmann.com 533 (Raj) : 2017 TaxPub(DT) 0385 (Raj-HC)

Sajjan India Ltd v. ACIT (2018) 89 taxmann.com 21 (Mumbai-Trib) : 2018 TaxPub(DT) 0084 (Mum-Trib)

Tata Industries Ltd. v. ITO (2016) 70 Taxmann.com 227 (Mumbai-Trib)

Dhampur Sugar Mills Limited v. CIT (1973) 90 ITR 236 (All) : 1973 TaxPub(DT) 0200 (All-HC),

33. On the other hand, the learned DR for the revenue supported the orders of authorities below.
34. We have considered the submission of parties and perused the orders of authorities below. We have noted that initially in assessment year 2000-01. The assessee claimed revenue expenditure on computer software. However, the assessing officer treated the expenditure as capital expenditure and allowed the depreciation. Initially the assessing officer rectified the assessment order for the assessment year under consideration on 29-6-2005. The assessing officer thereafter, while giving affect to the order of learned Commissioner (Appeals) passed on 8-12-2005 took his view that the order passed under section 154 dated 29-6-2005 resulted in assessing income at below the return income. The assessing officer sought the approval for issue of refund from the office of CIT-4, Mumbai. The CIT-4, Mumbai vide hisletter, dated 17-3-2006 conveyed to the assessing officer that assessed income has become less than the returned income and assessing officer accordingly directed to verify how the assessed income is less than the returned income. Accordingly, the assessing officer issued show-cause notice to the assessee and by making reference of Circular No. 549 dated 31-10-1989, withdrew the depreciation on computer software allowed to the assessee. The learned Commissioner (Appeals) affirmed the action of assessing officer by taking view that no depreciation on computer software was claimed by assessee in the return of income, nor the same was claimed by filing revised return. The assessee claimed depreciation vide letter dated 08.07.2003 on which cognizance was taken by assessing officer. Subsequently, the assessee filed rectification application before the assessing officer, who rectified the assessment order under section 143(3) on 18-3-2005 by allowing claim of depreciation. However, on receipt of Commissioner (Appeals) order, order giving effect was passed on 8-12-2005 which resulted in assessing the income at Rs. 17,24,79,590. The assessing officer sought the approval of CIT. The office of CIT directed to take remedial action with reference to Circular No. 549 of CBDT dated 31-10-1989. The learned Commissioner (Appeals) also held that in view of the decision of Hon’ble Supreme Court in Goetz India Ltd., the assessing officer is not entitled to allow claim unless revised return is filed. There was mistake by assessing officer while passing the order under section 154 dated 26-9-2005 which was rectified vide Order, dated 26-6-2006.
35. We have noted that there was no dispute that in assessment year 2000-01, the assessee claimed revenue expenditure on computer software, the assessing officer treated the same as capital expenditure and allowed the depreciation. The similar treatment was followed in assessment year 2001-02 allowing depreciation @25% again in assessment year 2002-03, the assessee was allowed depreciation @25% though allowed on fillingapplication/letter dated 8-7-2003. Subsquently, the depreciation was allowed on the pretext that assessed income was below the returned income. The assessing officer also relied upon the Circular No. 549 dated 31-10-1989. The Hon’ble Gujarat High Court in Gujarat Gas Co. Ltd. v. JCIT (supra) held that assessing officer exercised quasi judicial function and a duty cast upon him to act in a judicial and independent manner and other authorities cannot control or affect this judgment in the matter of assessment. The Hon’ble High Court further held and directed the assessing officer to ignore even the circular of CBDT, which directed the assessing officer not to let the assessed income below the returned income. Further, the Hon’ble Gujarat High Court in CIT v. Milton Laminates Ltd. (2013) 37 taxmann.com 249 (Guj.) held that while giving effect to the order of learned Commissioner (Appeals), the assessing officer can compute income lower than the returned income. The Hon’ble Rajasthan High Court in Kalindee Rail Nirman (Engineers) Ltd. v. CIT held that after proceeding if it is found that the assessee is entitled to refund, the same should be refunded as State cannot recover tax more than what is due. Considering the aforesaid legal discussion, we are of the view that the assessing officer cannot withdrew the depreciation already allowed by taking plea that assessed income became less than the returned income. So far as objection of learned Commissioner (Appeals) that assessing officer is not entitled to entertain fresh claim in absence of revised return of income as held by Hon’ble Apex Court in Goetz India Ltd. (Supra).
36. The Hon’ble Bombay High Court in a landmark decision inPruthvi Brokers & Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom.) : 2012 TaxPub(DT) 2671 (Bom-HC) held that an assessee is entitled to raise a fresh claim before the Appellate Authoritius, even if the same was not raised before the assessing officer at the time of filing return of income or by filling a revised return of income. Thus, in view of the decision of Pruthvi Brokers & Shareholders Pvt. Ltd. (supra), the assessing officer may not have entertain the revised claim of depreciation, though it was allowed, and subsequently withdrawn, however, the learned Commissioner (Appeals) having co-terminus power was fully competent to allow the depreciation as it was the revenue, which treated the expenditure incurred on computer software as capital expenditure in place of revenue expenditure in earlier assessment year. In our view once the particular treatment is accepted consistently by revenue, it cannot be treated indifferently in subsequent assessment year unless the facts are totally different. Therefore, in view of the aforesaid factual and legal discussion, the rectification Order dated 26-6-2006 in withdrawing the depreciation is unjustified, which we set-aside.
37. In the result, appeal of the assessee is allowed.

38. Considering the fact that we have allowed the appeal of assessee in setting-aside theOrder dated 26-6-2006passed under section 154 by assessing officer. Therefore, the cross-bjections filed by assessee have become infructuous and dismissed.