Court excludes Axis Integrated Systems as comparable; disallows long-term capital loss claim. Revenue appeal dismissed.

The court upheld the exclusion of Axis Integrated Systems Limited as a comparable in the case. It was determined that the company provided high-end services different from the low-end services offered by the assessee. Additionally, the claim of long-term capital loss on the sale of shares was disallowed as the assessee did not hold the entire share capital as required by law. The assessee's claim was allowed, while the Revenue's appeal was dismissed.

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Issues Involved:

1. Exclusion of Axis Integrated Systems Limited as a comparable.
2. Claim of long-term capital loss on the sale of shares.

Issue 1: Exclusion of Axis Integrated Systems Limited as a Comparable

The primary issue in ITA No. 136/Mum/2017 was the inclusion of Axis Integrated Systems Limited as a comparable. The Revenue argued that the CIT(A) erred in excluding Axis Integrated Systems Limited, asserting that Business Support Services (BSS) and Management Services (MSS) are highly skill-based and cannot be considered low-end services. Both parties acknowledged that this comparable was previously excluded by the co-ordinate Bench in earlier years (ITA No.1547/Mum/2016, ITA No.2733/Mum/2017, and ITA No.5842/Mum/2017). The Bench noted that Axis Integrated Systems Ltd provides high-end regulatory and licensing services, whereas the assessee offers low-end back-office support services. Therefore, following the earlier decision, the Bench upheld the CIT(A)'s order excluding Axis Integrated Systems Limited from the comparability analysis. Consequently, ground no.36 of the Revenue's appeal was dismissed.

Issue 2: Claim of Long-Term Capital Loss on the Sale of Shares

The additional ground no.6 raised by the assessee in ITA No. 7299/Mum/2017 involved the claim of long-term capital loss on the sale of equity and preference shares of M/s. Reliance Exploration and Production DMCC to its subsidiary M/s. Reliance Industrial Investments and Holdings Ltd (RIIHL). The assessee argued that the loss was not claimed in the Return of Income due to an erroneous understanding that the transaction was not a 'transfer' under section 47(iv) of the Income Tax Act, 1961. The assessee contended that the sale was not exempt under section 47(iv) as it did not hold the whole share capital of the subsidiary, only the equity share capital.

The Tribunal examined the details and found that the assessee did not hold any of the preference shares of RIIHL, which were held by other entities. Thus, the assessee did not hold the "whole of the share capital" as required by section 47(iv). Consequently, the transaction did not qualify for exemption, and the capital loss was chargeable to tax under section 45. The Tribunal directed the Assessing Officer to verify the computation of the capital gain/loss.

In conclusion, the additional ground no.6 raised by the assessee was adjudicated and allowed, while the Revenue's appeal regarding the exclusion of Axis Integrated Systems Limited was dismissed. The order was pronounced in the open court on 20.04.2023.

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