2018 (4) TMI 2023 - AT - Income Tax

DRP to redecide slump-sale and transfer-pricing adjustments; secondary adjustment under Chapter X deleted; Revenue appeal dismissed

ITAT MUMBAI remitted the disputed slump-sale characterization and related TP issues to the DRP for fresh adjudication, directing the DRP to complete its ... TP Adjustment - sale of business division - assessee is a captive back office support service provider providing call centre and other back office services to its group companies in the UK region - services rendered by the assessee are in the nature of ITES - international transaction relating to sale of business was not referred by the AO to the Transfer Pricing Officer - HELD THAT:-MWe find that there is no adjudication by the Dispute Resolution Panel on this limb of the objection though the Assessing Officer in the draft assessment order has also made this addition. In our considered opinion, adjudication on this aspect of the assessee’s ground is necessary. The Dispute Resolution Panel has erred in not adjudicating this issue raised before it. This issue raised by the assessee is without prejudice and, hence, it will be appropriate if on the issue of the sale of business, the Dispute Resolution Panel completes its order by also deciding upon the assessee’s ground regarding the addition made by the Assessing Officer as slump sale. We are not adjudicating the merits of the Transfer Pricing Officer addition in this regard. As first, the order of the lower authority has to be completed before proper adjudication can be done. As a decision on the addition made by the Transfer Pricing Officer on the same issue without adjudicating the addition by the Assessing Officer on the same issue as slump sale, would lead to multiplicity of the proceedings at different forums. As the party aggrieved by the adjudication on one part will have to go to higher forum, while the other limb of the same issue will be open to adjudication before the other forum upon remitting that issue. Such practice is not appropriate and desirable. For this proposition, we place reliance upon the decision of Ramdas Pharmacy [1969 (12) TMI 19 - MADRAS HIGH COURT] Accordingly, ground no. 1 relating to sale of business division which has resulted in adjustment is remitted to the file of the Dispute Resolution Panel as directed to complete its order by adjudicating upon the ground relating to the addition made by the Assessing Officer, by treating the transaction as slump sale. Adjustment in the provision of information technology enabled services - assessee is a captive back office support services provider providing call centre and other back office services to its group companies in UK region. Hence the services rendered by the assessee is in the nature of ITES - HELD THAT:- We note that with regard to the issues raised relating to the provision for information technology enabled services, the assessee has also raised an alternate ground. By way of this, it has been submitted that “Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in failing to appreciate the rectification application filed by the Appellant, requesting either to consider pro-rata cost or total revenue (including revenue from domestic associated enterprise) for computation of the adjustment.” We find that here also the assessee has raised the alternate ground by way of which it is emanating that one limb of this issue relating to the addition is pending adjudication at the Dispute Resolution Panel level. On the same reasoning and the case law as referred hereinabove in ground no. 1 above, we deem it appropriate to remit this issue also to the file of the Dispute Resolution Panel. Dispute Resolution Panel shall complete its direction by giving direction on the alternate (without prejudice) ground raised by the assessee. Disallowance u/s. 14A read with Rule 8D - assessee stated that the assessee’s investment portfolio included those investments the dividend from which is not exempt and the assessee has been duly taxed/assessee has offered to tax the dividend on the same, assessee submitted that the same should not be taken into account while computing the disallowance - HELD THAT:- We find that these submissions were made before the Dispute Resolution Panel but the Dispute Resolution Panel has passed a laconic order without considering the legal and factual aspect of the situation. As in the case of M/s Sahara India (Farms) [2008 (4) TMI 4 - SUPREME COURT] has expounded that even administrative order have to consistent with the rules of natural justice. Accordingly, we deem it appropriate to remit this issue to the file of the Dispute Resolution Panel. The Dispute Resolution Panel shall examine the factual aspect and pass a speaking order keeping in mind the assessee’s submissions regarding the proposition of the law and the facts involved. Addition of interest chargeable on the international transaction pertaining to sale computed by him - dispute resolution panel has directed for the deletion of the addition - HELD THAT:- We find that the Dispute Resolution Panel has noted that the concept of secondary expenditure is not expressly provided in the Chapter X of the Act. It has been observed that the mandate in this chapter is to determine arm's length price of the international transaction undertaken by the tax payer, which is what has been done by TPO. We agree with DR that once this aspect is addressed, as per the requirement of law, there is nothing further provided to impute any secondary adjustment. Hence, we do not find any infirmity in the direction of the DRP that the action of the TPO in charging interest on such amount of adjustment arrived at towards the ALP of the issue of equity share, over and above the amount of adjustment, is not found to be in accordance with the provisions of law. Hence, we find ourselves in agreement withteh direction of the Dispute Resolution Panel and hence we uphold the same. Accordingly, the Revenue’s appeal stands dismissed. 1. ISSUES PRESENTED AND CONSIDERED - Whether the transaction of sale of a domestic business division is a 'deemed international transaction' within the meaning of section 92B(2) by virtue of a prior/global outsourcing agreement between associated enterprises and, if so, whether the transfer pricing provisions apply. - Whether the valuation of the sold business division (Vikhroli division) adopted by the taxpayer (mix of Discounted Cash Flow (DCF) and Replacement Cost Method (RCM) with specific assumptions) is the arm's length price; and if not, whether DCF (with revised inputs) and corroborative PE multiple testing justify the TPO/DRP valuation. - Whether an alternative uplift to income under section 50B (slump sale) may be made by the Assessing Officer in the event the TP addition is reversed, and whether the DRP erred in not adjudicating that alternative contention. - Whether a 'secondary adjustment' in the form of imputing interest on the difference between ALP and consideration actually received is permissible under Chapter X (and if so, at what rate), or whether charging interest is beyond Chapter X mandate. - Whether the arm's length price for provision of ITeS to associated enterprises is correctly determined by the TPO using a revised set of comparables (arithmetic mean OP/TC), and whether alternate rectification grounds (pro-rata cost or total revenue basis) required DRP adjudication. - Whether disallowance under section 14A computed under Rule 8D (adopting investments as per balance sheet) is correct or requires reconsideration where some investments yield taxable receipts (e.g. capital gains) and dividend-exempt element is contested. 2. ISSUE-WISE DETAILED ANALYSIS Issue A - Deemed international transaction under section 92B(2) - Legal framework: Section 92B defines 'international transaction'; subsection (2) contains a deeming fiction where a transaction with a third party is treated as between associated enterprises if there exists a prior agreement between the AE and that third party or the terms are determined in substance by the AE. - Precedent Treatment: CBDT Circular No.14/2001 is applied as interpretative guidance illustrating the scope of s.92B(2) (referred to by the DRP and Tribunal). Prior ITAT decisions on DCF/valuation methods were cited for valuation issues but not to displace s.92B(2) analysis. - Interpretation and reasoning: The Tribunal and DRP found (on record and public-domain material) that a global outsourcing agreement between two non-resident AEs pre-determined the transfer of the Indian division; the Indian sale agreements were instruments to give effect to that global bargain. The facts - timing of global agreement, contemporaneous sale agreements, bifurcation of total consideration into UK/IPR and India components, failure to produce global agreement - supported the conclusion that either a prior agreement existed or substance of terms was determined by the AE and the third party. - Ratio vs. Obiter: Ratio - where documentary and circumstantial evidence demonstrate that a third-party sale is effected to give effect to a global agreement between associated enterprises, s.92B(2) can render the domestic sale a deemed international transaction subject to transfer pricing. - Conclusion: The Tribunal/DRP upheld that the sale was a deemed international transaction under s.92B(2); the objection that the transaction was purely domestic was rejected. (This reasoning is integral to the ALP determination and is ratio of the decision.) Issue B - Appropriateness of valuation methodology (RCM vs DCF) and inputs - Legal framework: Section 92C(1) prescribes selection of most appropriate method; comparability analysis required; DCF is an accepted method (noting ITAT precedents referenced by authorities). - Precedent Treatment: ITAT Chennai (Ascendas) and other cited authorities endorse DCF as appropriate for enterprise/concern valuation; RBI guidance and decisions were invoked to support DCF preference over RCM for service-sector entities. - Interpretation and reasoning: The TPO rejected RCM as inappropriate for service-sector valuation (human-resource-driven revenues not captured by fixed-asset replacement). The TPO identified unreliable/unsupported assumptions in the taxpayer's valuer projections (negative growth rates, short projection term relative to contract period, low operating margin used for projections, unexplained weighting between DCF and RCM). The TPO adjusted inputs: positive growth rate (2.2% from 2011; 1% perpetuity), PLI (OP/TC) raised to actual historic 25.5% (and 20% for perpetuity), and used DCF for valuation period (10 years + perpetuity, consistent with taxpayer's own approach). PE multiple (PECV) testing corroborated DCF result. The two methods produced proximate values (~Rs.186-189 crore), and the transaction value (~Rs.82.24 crore) fell outside +/-5% band, triggering an upward adjustment. - Ratio vs. Obiter: Ratio - DCF (with reasonable, market-supported inputs) is the most appropriate method for valuing a going-concern service-division sold in the context of a long-term global outsourcing contract; RCM is inappropriate for such service undertakings. Obiter - discussion of specific numerical weighting or exclusion/inclusion of particular comparables may be contextual. - Conclusion: The Tribunal accepted DRP/TPO reasoning that DCF (with modified inputs) yields ALP of ~Rs.186.279 crore and upheld the upward adjustment of Rs.104.035 crore (subject to remittal on procedural completeness per Issue C). The valuation conclusion is a binding ratio on methodology and inputs to the extent supported by facts and public-domain corroboration. Issue C - Alternative addition under section 50B (slump sale) and remittal - Legal framework: Section 50B governs capital gains on slump sale; Assessing Officer proposed alternative/additional addition under s.50B treating the discrepancy as capital gain per slump-sale valuation if TP addition is reversed. - Precedent Treatment: Administrative/functioning principle invoked to avoid multiplicity of proceedings; reliance on Madras High Court (Ramdas Pharmacy) regarding finality/completeness of orders and avoidance of fragmented adjudication. - Interpretation and reasoning: The DRP did not adjudicate the alternative s.50B contention. The Tribunal found omission to be material: DRP should complete consideration on the alternative slump-sale addition to avoid multiplicity and incomplete orders. Tribunal therefore remitted the sale-of-business ground to DRP to adjudicate the s.50B issue; Tribunal declined to pre-judge merits of TPO addition. - Ratio vs. Obiter: Ratio - failure by DRP to adjudicate alternative/additional claims requires remittal for complete disposal; consideration of alternative s.50B addition is necessary before final adjudication of TP addition. This procedural-direction is part of operative decision. - Conclusion: Ground relating to sale-of-business adjustment (Rs.104.035 crore) remitted to DRP for completion including adjudication of the Assessing Officer's slump-sale addition under s.50B. Issue D - Secondary adjustment (imputation of interest) - permissibility and rate - Legal framework: Chapter X (sections 92-92F etc.) prescribes ALP determination; no express provision in Chapter X for 'secondary adjustment' in the form of interest imputation on ALP excess. TPO imputed interest (benchmarked at 15%) on difference between ALP and consideration; DRP deleted the interest addition. - Precedent Treatment: DRP relied on absence of express secondary adjustment mechanism in Chapter X; Tribunal agreed with the view that once ALP is determined, law under Chapter X does not provide for additional imputation of interest as a secondary consequence. - Interpretation and reasoning: The Tribunal agreed with DRP that charging interest as a secondary adjustment is not authorised by Chapter X and therefore the addition of interest (Rs.7.80 crore approx.) was not in accordance with provisions of law; consequential alternative arguments (LIBOR basis, rate selection) rendered inconsequential. - Ratio vs. Obiter: Ratio - imputation of interest as a 'secondary adjustment' over and above an arm's length adjustment is not permissible under Chapter X where no statutory provision mandates such an adjustment; deletion of interest is therefore warranted. Obiter - the question of appropriate rate (10% v. 15%) became moot on deletion. - Conclusion: The Tribunal upheld DRP deletion of interest addition; Revenue appeal on this point dismissed; cross-objection on interest rate rendered infructuous. Issue E - Benchmarking of ITeS transaction (comparables and rectification ground) - Legal framework: Section 92C methods and comparability analysis govern benchmarking of provision of services to AEs; TP study must use appropriate comparables and single-year/multi-year considerations per rule/practice. - Precedent Treatment: DRP and TPO applied standard comparability tests, replaced taxpayer's comparables and obtained an arithmetic mean OP/TC of 26.02% from a final set, leading to adjustment of ~Rs.14.37 crore. - Interpretation and reasoning: The Tribunal found that the TPO/DRP selection and rejection of comparables were supported by reasons (functional comparability, consistency). However, the taxpayer raised an alternate rectification ground (pro-rata cost or total revenue including domestic AE revenue) which DRP had not adjudicated. Following same procedural concern as Issue C, Tribunal remitted this alternate ground to DRP for adjudication. - Ratio vs. Obiter: Ratio - selection/rejection of comparables by TPO/DRP sustained where reasoned; procedural requirement to have DRP decide taxpayer's alternate rectification plea is obligatory (remittal). The benchmarking outcome is sustained subject to DRP completion. - Conclusion: Main benchmarking addition upheld but remitted to DRP for decision on alternate rectification ground advanced by taxpayer. Issue F - Disallowance under section 14A and application of Rule 8D - Legal framework: Section 14A disallows expenditure in relation to exempt income; Rule 8D provides formula for computation; investments relevant for Rule 8D should reflect investments that give rise to exempt income. - Precedent Treatment: Authorities below applied Rule 8D using balance-sheet investment figures leading to disallowance Rs.29,01,303; taxpayer contended some investments (debt MF growth/capital gains) do not yield exempt dividend and thus should not be included. - Interpretation and reasoning: The Tribunal found that DRP's order was laconic and did not consider taxpayer's factual/legal submissions fully; the question of whether certain investments should be excluded from Rule 8D computation is fact-sensitive and requires speaking adjudication. - Ratio vs. Obiter: Ratio - factual and legal aspects material to s.14A/Rule 8D require detailed consideration by DRP; remittal for speaking order is necessary to satisfy principles of natural justice. This is a procedural-ratio direction. - Conclusion: Issue remitted to DRP to examine factual submissions and pass a reasoned order on applicability of Rule 8D figures and consequent disallowance.