C.N. PRASAD, JUDICIAL MEMBER 
AND RAJESH KUMAR, ACCOUNTANT MEMBER

F.V. Irani and Z. Mehta for the Appellant. 
Manjunatha Swamy and R.A. Dhyani for the Respondent.

ORDER

C.N. Prasad, Judicial Member - ITA Nos. 1777/M/2015 & 1669/M/2015 are the appeals by the assessee and the Revenue preferred against the very same orders passed by the Ld. CIT (A)-9, Mumbai dated 28.01.2015 for assessment year 2011-12 arising out of the assessment order passed u/s. 143(3) of the Act. ITA No. 1669/M/2015 is the appeal filed by the assessee against the order passed by the Ld. CIT (A)-9, Mumbai dt. 28.01.2015 pertaining to assessment year 2011-12 against the penalty order u/s. 271(1)(c) of the Act. Since issues are common in all these appeals, they were heard together and disposed of by this common order for the sake of convenience and brevity.

ITA No. 1777/M/2015 - Assessee's appeal

2. The first issue in the appeal of the assessee is that the Ld. CIT (A) erred in restricting the allowance of sub-brokerage to 50% of the expenditure incurred and claimed by the assessee holding it as excessive and unreasonable within the meaning of Sec. 40A(2)(b) of the Act.

3. Brief facts are that the assessee is a 100% subsidiary of Stock Holding Corporation of India Ltd., and engaged in the business of share broking and providing Portfolio Management Services. The assessee filed its return of income on 29.9.2011 declaring total income of Rs. 5,0,73,621/-. The assessment was completed on 21.2.2014 u/s. 143(3) of the Act determining the income at Rs. 26,93,95,020/-. While completing the assessment, the Assessing Officer disallowed sub-brokerage of Rs. 21,80,51,674/- paid by the assessee to Stock Holding Corporation of India Ltd., for the reason that assessee has not deducted TDS u/s. 194J of the Act. According to the AO, the payments made by the assessee to Stock Holding Corporation of India Ltd., being the sub-brokerage is nothing but fees for professional and technical services, therefore the provisions of Sec. 194J of the Act are attracted.

3.1 The assessee contended that the provisions of Sec. 194J have no application as the sub-brokerage paid by the assessee to Stock Holding Corporation of India Ltd., do not fall under professional or fees for technical services so as to attract the provisions of Sec. 194J of the Act. It was further contended that the provisions of Sec. 194H would apply to the sub-brokerage paid by the assessee but the sub-brokerage was paid is exempt from the provisions of Sec. 194H in view of Explanation-I to Sec. 194H of the Act. However, the AO disallowed the sub-brokerage paid holding that the provisions of Sec. 194J would attract to the said payments and since the assessee has not deducted any tax at source from such payments, he disallowed the sub-brokerage paid by the assessee.

4. On appeal, the Ld. CIT (A) accepted the contention of the assessee that the payments made by the assessee do not fall under fees for technical services u/s. 194J of the Act but the same would fall u/s. 194H of the Act which is a specific provision dealing with commission/brokerage with securities by following his own decision for the immediately preceding assessment year. However, the Ld. CIT (A) by invoking the provisions of Sec. 40A(2)(b) held that since the assessee and Stock Holding Corporation of India Ltd are related entities covered u/s. 40A(2)(b), he restricted the allowance of sub-brokerage to 50% of the brokerage incurred.

5. The Ld. Counsel for the assessee submits that the Ld. CIT (A) invoked the provisions of Sec. 40A(2)(b) of the Act stating that there is excessive payment of sub-brokerage to the Stock Holding Corporation of India Ltd which is a holding company of the assessee. He submits that no exercise has been done by the lower authorities to say that the sub-brokerage paid by the assessee is excessive. Referring to page-47 of the Paper Book, it is the submission of the Ld. Counsel that several entities have paid sub-brokerage higher than 50% and in fact copy of documents stating that broker named M/s. Kaonain Securities Pvt. Ltd had paid almost 70% of brokerage by way of sub-brokerage was also submitted to the lower authorities. Ld. Counsel submits that assessee also enclosed copy downloaded from Internet of Economic Times stating that the trend of sub-brokerage payment is approximately 70% of the brokerage received. It was also submitted that during the year under consideration, the percentage of sub-brokerage paid by the assessee was reduced from 75% to 60% w.e.f 1.10.2010 as per the agreement dated 3.11.2010. Therefore the Counsel for the assessee submits that it is not unusual that the sub-brokerage payments range from 50 to 80% depending upon the market conditions. Referring to page-43 of the Paper Book, the Ld. Counsel for the assessee submits that a list of brokers sharing brokerage in the ratio between 60:40 to 80:20 was submitted before the lower authorities. Referring to page-47 of the Paper Book, it is the submission of the Ld. Counsel that no evidence has been lead by the lower authorities to justify the stand that the commission paid by the assessee is excessive. Further, there is no rebuttal by the lower authorities on the submission of the assessee that it is not an unusual practice in paying sub-brokerage more than 50-60%.

5.1 It is further contended by the Ld. Counsel that both the assessee and the Stock Holding Corporation of India Ltd, are taxed at maximum marginal rate therefore the Stock Holding Corporation of India Ltd has admitted the commission income and paid taxes hence it is Revenue neutral. Referring to the decision of Edwise Consultants (P.) Ltd. v. Dy. CIT [IT Appeal No. 5376 (M) of 2011, dated 14-10-2015] the Ld. Counsel for the assessee submits that following the Jurisdictional High Court decision in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306 (Bom.), The Hon'ble Bench held that no disallowance is to be made u/s. 40A(2) in respect of the payments made to related parties when there is no attempt to evade tax. It is further submitted by the Ld. Counsel that the AO alleged that since there is no dividend declared by the assessee, there is no payment of dividend distribution tax. Referring to page-3 of the Paper Book which is a Director's Report, the Ld. Counsel submits that in the Director's report, it is clearly indicated that with a view to conserving resources for business/expansion dividend was not recommended for the financial year 2010-11. However, the Stock Holding Corporation of India Ltd declared dividend and paid dividend distribution tax.

5.2 The Ld. Counsel for the assessee placing reliance on the decision of the Mumbai 'E 'Bench in the case of Dy. CIT v. S.J. investment Agencies (P.) Ltd. [2014] 146 ITD 691/32 taxmann.com 97 (Mum. - Trib.) submits that it has been held by the Mumbai Tribunal that the provisions of Sec. 194H have no application for the sub-brokerage paid in connection with the services rendered in the course of buying and selling of units of Mutual Funds or in relation to transactions relating to Mutual funds. For this proposition, he also places reliance on the decision of the Kolkata Bench in the case of Dy. CIT v. Noble Enclave & Towers (P.) Ltd. [2012] 50 SOT 5/18 taxmann.com 288.
5.3 The Ld. Counsel for the assessee placing reliance on the decision of the Mumbai Bench in the case ofOrchard Advertising (P.) Ltd. v. Asstt. CIT [2010] 8 taxmann.com 162 submits that in order to invoke the provisions of Sec. 40A(2) one has to see for the expenditure incurred in respect of which payment is made to the specified persons, is excessive or unreasonable having regard to the market value of goods services or facilities for which the payment is made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him. The Ld. Counsel for the assessee submits that it is not brought on record by the lower authorities how the sub-brokerage paid by the assessee is excessive or unreasonable having regard to the market value of services or facilities for which the payment is made. Referring to the decision in the case of Orchard Advertising (P.) Ltd. (supra), the Ld. Counsel submits that without giving any cogent findings about the conditions of applicability of Sec. 40A(2) and unless there is a clear findings that the market value of the services taken from the sister concern is less than the price at which the services are obtained there cannot be an occasion to apply the disabling provisions of Sec. 40A(2). The Ld. Counsel submits that no exercises have been conducted by the lower authorities in such direction, therefore, the provisions of Sec 40A(2) are not justifiably invoked in assessee's case.

6. The Ld. Departmental Representative vehemently supports the orders of the lower authorities.

7. We have heard both parties and perused the orders of lower authorities, case laws relied on and the material evidence placed before us. The assessee is a stock broker and a member of Stock Exchange carrying on the business of sale and purchase of share and securities in the name and style of SHCIL Services Ltd. The assessee entered into agreement with Stock Holding Corporation of India Ltd. for conducting business as sub-broker in shares and securities on behalf of its clients with the stock broker. The assessee during this assessment year has paid sub-brokerage to Stock Holding Corporation of India Ltd., a holding company. The AO was of the view that such commission is attracted the provisions of Sec. 194J of the Act as the assessee paid amounts to holding company and these amounts would fall under fees for technical services within the meaning of Sec. 194J of the Act. .

7.1 It was the contention of the assessee that the sub-brokerage paid to the sub-broker will fall u/s. 194H which is a specific provision for commission and brokerage but not under the provisions of Sec. 194J of the Act. Further it was submitted that the provisions of Section 194H are not attracted for the sub-brokerage paid on dealing with securities in view of the proviso which exempts such brokerage. However, the AO rejecting the contentions and on securities treated the said amount of sub-brokerage paid by the assessee as fees for technical services within the provisions of Sec. 194J of the Act. The Ld. CIT (A) accepted the contention of the assessee that the payment made by the assessee would fall under the provisions of Sec. 194H and since the securities are exempt, provisions of Sec. 194H have no application. However, he invoked the provisions of Sec. 40A(2) of the Act and restricted the disallowance to 50% of brokerage. According to him there is excess payment of sub-brokerage by the assessee. He held that it is for the assessee to prove beyond all doubt that the payment made constituted the fair market value of the services received. As far as the findings of the Ld. CIT (A) that the payments are attracted the provisions of Sec. 194H is concerned, we completely agree with the Ld. CIT (A) that since there is a specific provision dealing with commission and brokerage, the same would attract to the payments made by the assessee and not the provisions of Section 194J of the Act. We also find that Sec. 194H carves out an exception in respect of transactions in securities and therefore no tax is deductible in respect of sub-brokerage paid. The decisions of the Mumbai Bench and Kolkata Bench in the case of S.J. Investment Agencies (P.) Ltd. (supra) andNoble Enclave & Towers (P.) Ltd. (supra) are to this effect.

7.2 However, in respect of the finding that the provisions of Sec. 40A(2)(b) are attracted and the sub-brokerage paid is in excess, we do not agree with the findings of the conclusions of the Ld. CIT (A).

7.3 In the course of the assessment proceedings as well as the appellate proceedings, the assessee very much contested that the payment of sub-brokerage is not unusual that it ranges more than 50%. The assessee also furnished list of sub-broking companies who paid sub-brokerage in the ratio of 60:40 and 80:20. The assessee also given an instance in the case of a broker name Kaonain Securities Pvt. Ltd. where 70% of its brokerage was paid by way of sub-brokerage. It is also submitted by the assessee as under:—

7.4 None of these submissions of the assessee have been rebutted by the lower authorities. Thus, the observation of the Ld. CIT (A) that "it is for the appellant to prove beyond all doubt that the payment made constituted the fair market value of the services received" is not justified since assessee has given instances where the sub-brokerage was paid at 70% of the commission received. Further a list of parties were submitted to show that the sub-brokerage paid was in the ratio of 60:40 and 80:20 depending on the market conditions. The lower authorities have not made any enquiries to disprove the submissions of the assessee.

8. In the case of Orchard Advertising (P.) Ltd. (supra), the Mumbai Bench of the Tribunal held as under:—

"We see merits in the plea of the assessee. The impugned disallowance under section 40A(2)(b) viz provides that where the assessee incurs any expenditure in respect of which payment has been made to specified person, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the services for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The scheme requires the Assessing Officer to establish the fair market value of the services for which payment is made and any amount that he finds to have been paid by the assessee in excess of such fair market value of the services alone can be disallowed under the said section. It is, therefore, condition precedent without resorting to the disallowance under section 40A(2)(b). So far as the expenditure being excessive or unreasonable having regard to the fair market services is concerned, that the fair market value of such services is to be determined first. Unless this benchmark is set, there cannot be any question of resorting to disallowance under section 40A(2)(b) for excessive payment vis-à-vis fair market value of services. In the case of Batlivala & Karanai Vs ACIT ( 2 SOT 379), a coordinate bench of this Tribunal has observed as follows

Section 40A(2) provides that where the Assessing Officer is of the view that expenditure incurred by the assessee, in respect of which payment is made to the specified persons, is excessive or unreasonable having regard to the market value of goods, services or facilities for which the payment is made, or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is considered to be excessive or unreasonable shall not be allowed as deduction. The emphasis is on the market value of the goods or services . . . . . . . . . . . . . . . . . . . . . The CIT (A) has also dealt with the matter at an equally superficial level by only modifying the quantum and without giving any cogent finding about the conditions of applicability of section 40A(2) being satisfied. Unless there is a clear finding that the market value of the services taken from the sister concern is less than the price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of section 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. For this reason alone, the disallowance under section 40A(2) is inherently unsustainable in law on the facts of this case."

9. In the case of Aradhana Beverages & Foods Co. (P.) Ltd. v. Dy. CIT [2012] 51 SOT 426/21 taxmann.com 135the Delhi Bench held as under:—

'The opening words of Section 40A(1) indicate that the provisions of this Section shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act relating to the computation of income under the head "profits and gains of business or profession". In other words, Section 40A is an overriding provision which operates inspite of anything to the contrary contained in any other provisions of the Act relating to the computation of income under the had profits and gains of business or profession. Sub-Section 2(a) of Section 40A provides that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to the persons specified in that Section and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the market value of the goods, services or facilities for which the payment is made or the legitimate needs of business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. In other words, if the expenditure incurred by the assessee is considered by the AO to be of excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the assessee for business or profession or the benefit derived by the assessee or accruing to the assessee for payment, then so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as a deduction. If the above conditions are fulfilled, the AO can disallow the expenditure to the extent he considers it excessive or unreasonable by the above objective standards or otherwise. The object, scope and effect of the introduction of Section 40A(2)(a) was explained by the Board in its Circular No.6P of 1968 dated 6.7.1968 and in that Circular at para 74, the Board has stated that where payment for any expenditure is found to have been made to a relative or associate concern falling within the specified categories, it will be necessary for the AO to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the Section. It was further stated that the AO is expected to exercise his judgment in a reasonable and fair manner, and it should be borne in mind that this provisions is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner, which will cause hardship in bonafide cases.'

10. In the case of Edwise Consultants (P.) Ltd. (supra), the Co-ordinate Bench of this Tribunal held as under:—

'We have earlier noticed that all the directors are in charge of the entire operations of the assessee company and the financial/operational results of the company are growing every year. Hence, on that count alone, the salary and incentive paid to the directors could be justified and could not be found fault with, without bringing the fair market value of services. In our view, the financial and operational results, justify the payments made to the directors. At this juncture, it is pertinent to refer to the binding decision rendered by the Hon'ble jurisdictional Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd.(2009)(310 ITR 306), wherein the Hon'ble Bombay High Court referred to the Circular issued by CBDT with regard to sec. 40A(2)(a) as under:-

"Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of payments made to relatives and sister concerns where there is no attempt to evade tax."

In the case before the Bombay High Court, the revenue was not in a position to show as to how the assessee therein evaded payment of tax by alleged payment made to its sister concern, since the sister concern was also paying tax at higher rate and hence the disallowance made u/s 40A(2)(a) was deleted. We further notice that the Hon'ble Bombay High Court has expressed identical view in the case of V.S. Dempo & Co. (P.) Ltd. (336 ITR 209) also. The Hon'ble Punjab & Haryana High Court has also expressed similar view in the case of CIT v. Siya Ram Garg (HUF)(2011) (237 CTR 321).'

11. In view of our discussion above and the case laws referred to above, we are not in agreement with the Ld. CIT (A) in holding that the brokerage paid should be restricted by invoking the provisions of Section 40A(2) of the Act. Thus we set aside the order of the Ld. CIT (A) on this issue.

ITA No. 1669/M/2015 - Revenue's appeal
12. The Revenue has raised following grounds of appeal.

13. As we have upheld the order of the Ld. CIT (A) in holding that the sub-brokerage paid would fall under the provisions of Sec. 194H and not under the provisions of Section 194J, the provisions of Sec. 40A(2) have no application in the facts and circumstances of the case, we dismiss the Revenue's appeal.

ITA No. 5004/M/2015 - Assessee's appeal

13.1 Since the disallowance of sub-brokerage in quantum appeal is deleted, question of levying penalty u/s. 271(1)(c) of the Act would not arise. Hence this appeal is allowed.

14. In the result, both the appeals filed by the assessee are allowed and the appeal filed by the Revenue is dismissed.