TaxTMI 
TaxTMI 
2014 (12) TMI 563
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....(3GSPL). It was a wholly owned subsidiary of Hutchison Tele-services (India) Holdings Limited, a company incorporated in Mauritius which, in turn, was a wholly owned subsidiary of CGP Investments (Holdings) Limited, a company incorporated in the Caymen Islands (hereinafter referred to as CGP). The shares of CGP were held by HTI (BVI) Holdings Limited, a company incorporated in British Virgin Islands which, in turn, was ultimately controlled by Hutchison Telecommunications International Limited (hereinafter referred to as "HTIL"), a company incorporated in Caymen Islands. It would be convenient here to reproduce the ownership structure chart set out in the judgment of the Supreme Court in (Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 341 ITR 1 as under: 3. Since April, 2003, the assessee, inter-alia, provided call centre services captive to entities within the Hutchison Group viz. Hutchison 3G Australia Pty. Ltd. and Hutchison 3G UK Ltd. in terms of a Managed Services Agreement for contact centre services between Hutchison Call Centre Holdings Limited, British Virgin Islands (HCCH) and the assessee dated 1st January, 2006. 5. A Framework agreement date....
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....ions during the assessment year 2008-09. The AO, with the approval of the Commissioner of Income-tax, by a letter dated 25th January, 2010, referred the same to the TPO under section 92CA(1) for the determination of the arm's length price thereof. In the course of proceedings, the TPO sought various documents and particulars and contended that the assessee had not disclosed two international transactions viz. the BTA - the transaction relating to the sale of the call centre business by the assessee to HWP (India) and the assignment of the call options under the new Framework agreements dated 5th July, 2007. The TPO stated that both the transactions were international transactions. He also disputed the valuation reports submitted by the assessee. The assessee, after some initial hesitation, furnished the documents, including the SPA, the BTA and the Framework agreements at different stages. The assessee contended that the same did not constitute international transactions. 9. The TPO issued notices calling upon the assessee to show cause why it had not disclosed the said unreported international transactions. 10. The assessee submitted a detailed reply to the show ca....
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....irections u/s 144C by the DRP was due to expire on 30.09.2012. It was also observed by the Hon'ble High Court that the assessee would be at liberty to appear before the DRP without prejudice to its rights and contentions including those in the writ petition. The DRP subsequently passed the directions u/s 144C(5) of the Act on 30.09.2012 inter alia upholding the findings of TPO. Consequently, the Assessing Officer has passed the final assessment order u/s 143(3) r.w.s 144C(13) of the Act in pursuant to the directions of DRP. 14. The writ petition filed by the assessee was disposed off by the Hon'ble High Court vide judgment dated 6.09.2013 reported in 359 ITR 133. The Hon'ble Jurisdictional High Court has rejected the contention of the assessee that the TPO had no jurisdiction to consider the transaction relating to the sale of call centre/business transfer agreement. The Hon'ble High Court has observed that there are several issues of fact and of law on every material aspect which must be considered by the authorities under the Act. Thus it was held that this is not a fit case for invoking extra ordinary jurisdiction Article 226 of Constitution of India. On merits th....
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....action' for the purpose of Chapter X of the Act, which has been specifically confirmed by the Hon'ble Supreme Court vide Judgment dated 20th January 2012 in the matter of Vodafone International Holdings BV Vs. UOI (2012) 341 ITR 1 (the "Judgment") 4. That in the facts and circumstances of the case, the Lower Authorities failed to appreciate that no transaction per se has been undertaken as the rights under the 2006 and the 2007 Framework Agreements have not been altered, as they remain where they were i.e. with the Assessee, and, therefore, the provisions of the Act or the transfer pricing Provisions contained in Chapter X of the Act do not apply for the want of any transaction. 5. That the Lower Authorities knowing that the finding of the Hon'ble Supreme Court of India is binding, has erroneously tried to shift its stand by treating all subsidiaries of Vodafone Group Plc as the transferee of the alleged assignment of call options, which is perverse, vague, ambiguous and untenable as it has failed to identify the specific transferee of the alleged Assignment of Call Options. 6. That in the facts and circumstances of the case, the DRP failed to appreciate the findings i....
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.... the present case, the Lower Authorities grossly erred in applying the doctrine of lifting of the Corporate Veil and the doctrine of Substance over Form to force its erroneous conclusion' that the sale of Call Centre Business transaction was a deemed "international transaction" and/or an "international transaction" within the meaning of Section 92B. 9.4 That the Lower Authorities have erred in holding that Hutchison Whampoa Properties (India) Private Ltd ["HWP (India)"] to be a dummy entity in complete disregard of the material placed on record. 9.5 While doing so, the Lower Authorities further erred in holding that HWP (India) was "interposed only to evade tax by avoiding transfer pricing compliance" without appreciating that HWP India was used to acquire the Call Centre business for legal, commercial and practical reasons and not to evade tax. 10. That in the facts and circumstance of the present case, the Lower Authorities grossly erred in not correctly applying section 50B of the Act by substituting the actual sale consideration of Rs. 64 crores with the alleged ALP, since the sale of Call Centre business is a domestic transaction and therefore not subject to trans....
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....the material placed on record. 14.1 That furthermore if the aforementioned sale to the third party is considered as a benchmark in terms of "evidence of fair value" of the Call Centre business and the sale price to third party is appropriately adjusted taking into account differences between valuation date and subsequent sale date, an independent third party would have paid a substantially lower amount of Rs. 85 crores (approx) had such sale taken place in March 2007 as against September 2012. Provision of ITeS Services - Addition of Rs. 28,74,34,828/- 15. That in the facts and circumstances of the case, the Lower Authorities erred in law in making an addition of Rs. 28,74,34,828/- to the income of the Assessee on account of provision of ITeS services to Hutchison Call Centre Holdings Limited ("HCCH") [hereinafter referred to "Provision ofITeS Services"]. 15.1 That in the facts and circumstances of the case, Lower Authorities erred in law and in facts in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 15.2 That in holding as aforesaid, the DRP erred in confirming the action of the TPO in arbitrarily....
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....ourt in the case of the assessee. d) Shareholders Agreements and Supplement to the Framework Agreements. e) List of dates filed by VIH BV before the Hon'ble Supreme Court. f) Written submissions filed by VIH BV before the Hon'ble Supreme Court. g) Financial account of the VIH BV group of companies 16. Additional evidence filed by the assessee with the application dated 3.3.2014/4.3.2014 contains the following documents:- a) Letters from Analjit Singh and Asim Ghosh to the Assessee for exercise of put options. b) Letters from Assessee to its affiliate, viz, CGP India Investments ltd ("CGP" nominating CGP to discharge the obligation arising from exercise of put options by Analjit Singh and Asim Ghosh. c) Letters from the Assessee to Analjit Singh and Asim Ghosh indicating the nomination of CGP d) Written Submissions filed by the Revenue bfore the Hon'ble Supreme Court. e) Order dated 22.10.2010 passed by the revenue in the case of VIH BV. f) Interim Application No. 6 of 2010 filed by VIH BV before the Hon'ble Supreme Court and order passed by the Hon'ble Court allowing the said interim application g) Disclosure letter dated 11.2.2007 al....
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....out. These documents were admittedly not filed by the assessee in the assessment proceedings though some of them were produced before the Hon'ble Supreme Court. All the documents are pertaining to the process of execution of agreement relating to Call Options and Put Options as well as execution of Put Option. Therefore, it is necessary to examine all the documents before arriving at a conclusive finding on the issue. Accordingly in the facts and circumstances of the case, we admit the additional evidence filed by both the parties. Ground no. 1 is general in nature and does not required any specific finding. 20. Ground No. 2 to 6 is regarding assignment of call options: 21. Brief facts relevant to this issue emerged from record are as under:- 22. The Hutchison Group, Hong Kong (HK) first invested into the telecom business in India in 1992 when the said Group invested in an Indian joint venture vehicle by the name Hutchison Max Telecom Limited (HMTL) - later renamed as Hutchison Essar Ltd (HEL). On 12.01.1998, CGP stood incorporated in Cayman Islands, with limited liability, as an "exempted company", its sole shareholder being Hutchison Telecommunications Limited, Ho....
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....e assessee would have Call Option to buy entire equity shares of SMMS thereby its entire holding in HEL. Due to the transfer of entire share capital (single share) of CGP from HTIL group to VIH B.V., the Vodafone acquired the controlling interest in HEL via its subsidiary VIH B.V. through the subsidiary companies of HITL group with control of 67% interest in HEL including indirect 15% holding through framework agreements. New Frame Work Agreements (FWAs) were executed in the month of June and July 2007 between assessee and Indian Partners holding 15% indirect interest in HEL. These new FWAs were entered into because of change of holding group companies from HTIL to Vodafone. Certain changes in terms and conditions of 2007 FWAs were made which has led to the controversy in question as the Assessing Officer has treated these changes being transfer/assignment of Option rights held by the assessee in 2006 agreement in favour of its holding company VIH (BV) by virtue of 2007 framework agreements. Thus as per the revenue, the assessee has transferred the right to acquire 15% shares holding of HEL in the 2006 framework agreements in favour of its holding company (AE) by execution of 2007 ....
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.... heavy burden would rest upon the Revenue even regarding the assessee's assessment in view of the judgment in Vodafone's case. Every Court, Tribunal, authority or person is bound to give the observations of the Supreme Court, including in respect of the Framework Agreements, their full effect. The suggestion that they are casual observations is rejected. A view to the contrary would tantamount to judicial indiscipline. This is not just our prima facie view. Needless to say it would be necessary to consider the judgment even in the present proceedings. That, however, can and in the facts of this case ought to be done by the authorities under the Act. It could have been done even by the TPO and the AO. Their orders were, however, passed prior to the judgment of the Supreme Court and the occasion for them to consider this judgment does not arise at this stage. It will, however, be necessary for the ITAT to do so. We see no reason to short-circuit the proceedings in this regard as there are or are likely to be other aspects including facts which will also require consideration. 210. The matter regarding the assessee's assessment, however, does not end there. It does not ....
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....y transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation 1.-For the purposes of sub-clauses (v) and (vi), "immovable property" shall the same meaning as in clause (d) of section 269UA. Explanation 2.-For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India." Explanation 2 was introduced with retrospective effect from 1st April, 1962. 213. The amendm....
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....ct or indirect, absolute or conditional, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a non-obstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. It would be evident, therefore, that a lot more must now be seen and considered than before while arriving at a conclusion whether the terms and conditions of the Framework agreement constituted a transfer or assignment of the call options by one party to another. 26. Thus the issue of assignment of option rights has to be adjudicated by considering and examining the framework agreements along with any other document(s) or development subsequent or prior to the Framework Agreements in light of the judgment of Hon'ble Supreme Court, the observation of the Hon'ble High Court as well as subsequent amendment in section 2(47) along with transfer pricing provisions of the Act and further by considering the new facts and records brought before us. The Ld....
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....gh the phrase 'sole discretion' does not find mention in the 2006 version, it is clear that the absence of any fetter whatsoever on the rights of GSPL (Assessee), has, in result, the same effect. At best, the 2007 version makes explicit what is implicit in the 2006 version regarding discretion. It is vital to note that at no point of time prior to the present proceedings did the IT Department find the per se existence of clause 4.4 and 4.9 in the 2006 Framework Agreements objectionable or culpable regarding ipso facto assignment or divestiture and consequent application of TP regulations. It is thus clear, and the DRP order dated 30.09.2012 says so explicitly that it is the change of language in the 2007 Framework Agreement which constitutes assignment and, therefore, attracts the TP regulations. For the reasons elaborated above, this is ex facie fallacious and liable to be set-aside. Even otherwise, on first principle, assignment means the transfer or relinquishment or divestiture of rights held by a person in favour of others. Assuming without conceding that there is any relevant or material difference between the two, it is impossible to assert by any distortion of language or s....
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....terized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. Thus the Ld. ASG highlighted the widen definition of the term transfer in relation to a capital asset by introduction of Explanation 2 which includes disposal or parting with or creating any interest in any asset by direct or indirect, absolute or conditional or voluntarily or involuntarily by an agreement or otherwise. Therefore, it is not necessary under the amended provisions of section 2(47) that an asset itself has to be transferred but creation of any interest or right in the asset also falls in the ambit of term 'transfer'. Therefore, the judgment of Hon'ble Supreme Court in the case of Vodafone International Holdings BV vs. UOI (supra) cannot be considered as a decision on the issue of assignment/transfer of Call Option by the assessee to its affiliate. 29. In rebuttal, the Ld. Senior Counsel has submitted that the Hon'ble Supreme Court has decided the jurisdictional fact and even the amended provisions of section 2(47) would not obliterate the judgment of Hon'ble Supreme Court on the point of no assignment of Call O....
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....t of the holding of shares. Applying the above principles governing shares and the rights of the shareholders to the facts of this case, we find that this case concerns a straightforward share sale. VIH acquired Upstream shares with the intention that the congeries of rights, flowing from the CGP share, would give VIH an indirect control over the three genres of companies. If one looks at the chart indicating the Ownership Structure, one finds that the acquisition of the CGP share gave VIH an indirect control over the tier I Mauritius companies which owned shares in HEL totalling to 42.34%; CGP India (Ms), which in turn held shares in TII and Omega and which on a pro rata basis (the FDI principle), totalled up to 9.62% in HEL and an indirect control over Hutchison Tele-Services (India) Holdings Ltd. (Ms), which in turn owned shares in GSPL, which held call and put options. Although the High Court has analysed the transactional documents in detail, it has missed out this aspect of the case. It has failed to notice that till date options have remained un-encashed with GSPL. Therefore, even if it be assumed that the options under the Framework Agreements 2006 could be considered to be....
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....y the High Court. This problem has arisen also because of the reason that this case deals with share sale and not asset sale. This case does not involve sale of assets on itemized basis. The High Court ought to have applied the look at test in which the entire Hutchison structure, as it existed, ought to have been looked at holistically. This case concerns investment into India by a holding company (parent company), HTIL through a maze of subsidiaries. When one applies the "nature and character of the transaction test", confusion arises if a dissecting approach of examining each individual asset is adopted. As stated, CGP was treated in the Hutchison structure as an investment vehicle. As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. [See Charanjit Lal Chowdhuri v. Union of India AIR 1951 SC 41, Venkatesh v. CIT [2000] 243ITR 367 /109 Taxman 781 (Mad.) and....
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....28.01.2003 as also the judgment of this Court in the case of CIT v. Mugneeram Bangur & Co. [1965] 57ITR 299 . Thus, we need to "look at" the entire Ownership Structure set up by Hutchison as a single consolidated bargain and interpret the transactional documents, while examining the Offshore Transaction of the nature involved in this case, in that light. 31. It was held by the Hon'ble Supreme Court that the asset of a company belongs to the company and not to the share holders of the company, therefore, the asset vested with the company would remain vested albeit the ownership is transferred. Thus the Hon'ble Supreme Court examined the question in the context of transfer of asset of the assessee by its holding company HTIL to VIH BV by virtue of share transfer agreement(STA) along with FWAs and found that despite the transfer of share held by HTIL to VIH BV, the same would not result transfer of asset of the assessee to VIHBV. This question was dealt with only in context of transfer between HTIL and VIH BV by virtue of STA and not in context of transfer of Option rights by assessee to its affiliate. Therefore, at the first place the judgment of Hon'ble Supreme Court ....
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....sel appearing on behalf of the assessee has not denied that the Call Option are very valuable and that Vodafone indirectly obtained a degree of persuasive control over these call options consistent with a holding subsidiary relationship as recorded by Hon'ble Jurisdictional High Court in para 204 in Vodafone India Service (P.) Ltd. Vs. Union of India, (supra). Therefore, undisputedly and undoubtedly the option rights held by the assessee are valuable rights in relation to the indirect share holding to the extent of 15.03% in HEL/VIL. The issue before us, is regarding the option rights to acquire 12.25% shares of HEL/VIL through AG and AS Framework Agreements. 32. As we have already discussed the matter has been remanded by the Hon'ble High Court to this tribunal for finding of fact after considering all facts, additional evidence /documents to be filed by the parties as well the amended provisions of section 2(47) and transfer pricing provisions. First we will examine the FWAs of 2006 and 2007 by comparing the relevant clauses. In order to proper appreciation of agreements in question and facts, we reproduce the relevant clauses of Framework agreement 2006 as well as 2007 si....
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....cription Shares; or (e) Receipt of a notice of default under the Centrion Financing. GSPL hereby agrees to abide by the directions of Goldspot in connection with the Transfer of the put shares to GSPL or its nominee and undertakes to do or produce all necessary things and execute all necessary forms, documents and agreements to implement such directions and the Parties agree if the Put Option is exercised at any time after the Subscription Notice is issued, then GSPL shall, in its absolute discretion, have the option to withdraw the Subscription Notice or complete thereunder. (4.3) Put Option (a) AG shall have the right to require GSPL or its Nominated Person to purchase, at its sole discretion, any or all of the AG Mercantile Shares (the "Put Shares") held by AG ("Put Option"): (i) at any time, and from time to time, and to the extent GSPL or any of its Affiliates or any Person to which the Call Option is assigned pursuant to Clause 4.10(a) becomes eligible under all applicable Indian laws or Regulations to hold such Put Shares. For the avoidance of doubt, in the event that the Sectoral Cap is increased to permit an increased l....
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....n whose favour the Put Shares are pledged) and execute all necessary forms, documents and agreement to implement such directions. (d) Nadal irrevocably undertakes to GSPL.as trustee for itself and GSPl's Affiliates that it shall not exercise 'the TII Put Option unless the Put Option and/or the Can Option have been exercised in full in accordance with the terms of this Agreement (e) If the Put Option is exercised alter the demise (if any) of AG. GSPl shall have the right to purchase the Plus tech Shares held by AG Mercantile in lieu of the AG Mercantile Shares held by AG and in such event, all references to 'Put Shares' and 'AG Mercantile Shares' in this Agreement. to the extent relevant, shall be deemed to mean the Pluslech Shares and all references to 'AG' shall be deemed to be references to AG Mercantile to the extent relevant. 4.4 Call Option GSPL Shall, subject to the conditions set out below, have the right at any time to purchase all, but not part only, of the Plustech Shares (the "Call Shares") held by Goldspot (the "Call Option") in accordance with the procedure laid down in clause 4.5 be....
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....G. GSPL shall have the right to exercise the Call Option or the Default Option either with respect to AG Mercantile Shares or Plustech Shares on the terms of this. Agreement. If the Call Option or the Default Option is exercised with respect to Plustech Shares, all references to 'Call Shares', 'AG Mercantile Shares' and 'Default Shares' in this Agreement, to the extent relevant, shall be deemed to mean the Plustech Shares held by AG Mercantile, and all references to AG shall be deemed to be references to AG Mercantile to the extent relevant. (d) In consideration of the grant of the Call Option by AG to GSPL, GSPL or an Affiliate shall pay to AG an aggregate amount of US$6.3 million per annum accruing on a daily basis (the 'Option Payment'). GSPL's obligation to pay AG the Option Payment as aforesaid shall be deemed to be effective from 1 May 2007. The Option Payment for the period from 1 May 2007 to 30 April 2008 will be paid as soon as practicable and in any case by the 20'" Business Day after the date of this Agreement and the Option Payment for each twelve (12) month period from 1 May 2008 shall be pa....
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....notice, such date to be not shorter than 30 days or longer than 90 days from the date of the relevant Notice. (c) In the case of an issue of Subscription Shares, upon the failure of Centrino And/or Plustech, to comply with the provisions of this Clause 4 within the prescribed time frame (or any extension thereof necessary to obtain requisite approvals), Centrino and/or Plustech shall be deemed to have irrevocably appointed GSPL as its attorney to deal with the matter. (4.5) Transfer Procedure (a) An Option as specified in Clause 4.3 or 4.4 or a Default Option shall be exercised by a written notice ("Transfer Notice) from the Party exercising such Option or Default Option ("Offeror) to the applicable counterparty ("Offeree") and the effective date of its exercise shall be the date of such written notice. Any Transfer of Put Shares or Call Shares or Default Shares shall be subject to the approval of any competent regulatory agencies, if required, and shall be completed within the .periods stipulated by Clause 4.5(b) or such other extended time which may be Trequired to comply with applicable laws (including the obtaining of requisite approvals). GSPL Shall notify A....
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....tion or the Call Option, as the case may be, the price payable to AG pursuant to AG pursuant to Clause 4.6(a) shall be an amount which represents 100% of the Transfer Price; And (ii) . where AG transfers Put Shares or Can Shares, as the case maybe, which represent less than 100% of the issued equity share capital of AG Mercantile or Plustech as relevant pursuant to exercise of the Put Option or the Call Option, as the case maybe, the price payable to AG pursuant to Clause 4.6(a) on the exercise of each Put Option or each Call Option, as the case maybe, shall be calculated as follows: A = X multiplied by [Y/Z) Where: A = the price payable pursuant to Clause 4.6(a); X= the Transfer Price; Y = number of Put Shares or Call Shares, as the case maybe, transferred by AG pursuant to exercise of the Put Option or the Call Option, as the case maybe; Z = total number of. Put Shares or Call Shares, as the case maybe, representing 100% of the issued equity share capital of AG Mercantile or Plustech as relevant. 4.7 Default Option (a) Following any Event of Default on the part ....
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....ten consent of GSPL 4.10 Assignability or transfer of rights (a) The parties agree that the Call Option set out in Clause 4.4 may be freely assigned or transferred by GSPL without the consent of AG or any other party being required. (b) In the event that the Call Option is assigned or transferred to a person that is not an affiliate of GSPL; (i) Such assignment or transfer shall be subject to the condition that the Call Option can only be exercised in respect of all, and not part, of the Call shares; and (ii) GSPL shall continue to be bound by all obligations under this agreement associated with the exercise of the Call Option by such assignee or transferee. (c) The Parties agree that the Put Option set out in Clause 4.3 may not be assigned or transferred without the prior written consent of GSPL. 5.3 Change of Control In the event of a Change of Control, each party will promptly, and in no event later than 10 days after such Change of Control has occurred and provide appropriate details as to the nature of the Change of Control. 5.5 Change of Control In the event of a Change of Control (other than a ....
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....the probable assignees would create a right or interest in the property/asset being Option Rights in respect of the shares held under the Call Option. The revenue has relied upon the amended provisions of section 2(47) of the Income Tax Act and contended that inclusion of any of wholly owned subsidiary of Vodafone PLC as a nominee under clause 4.4 does create a right and interest in favour of the subsidiary of Vodafone PLC to acquire the shares held in the Call Option and, therefore, it is a transfer in terms of amended provisions of section 2(47) of the Income Tax Act. For ready reference we reproduce section 2(47) along with newly inserted Explanation 2 as under:- 2.(47) "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into; or is treated by him as, stock-in-trade of a business carried on by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon....
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....rk agreements of 2007, any of wholly owned subsidiary of Vodafone PLC is a prospective nominee but would get the right to acquire share only when a nomination is made by the assessee in favour of such subsidiary. Under clause 4.4 read with clause 4.10 of framework agreements, the right to acquire shares remains with the assessee till the assessee exercises its right to nominate a pre mentioned wholly owned subsidiary of Vodafone PLC failing which the right to acquire the shares remains with the assessee. It is clear from clause 4.4 (a)(i) that the assessee shall have the right to purchase or require that any wholly owned subsidiary of Vodafone Group PLC purchase the shares held under the Call Option. It is discern from the comparative study of the relevant clauses of two framework agreements that by change of prospective nominee it does not amount to transfer or creating any right in favour of the said prospective nominee until the actual nomination is made. 35. Now we will examine the Share Holder's Agreement dated 05/07/2007. Though the re-writing of the frame work agreement in the year 2007 stand alone does not constitute assignment, transfer or creating any right of Call ....
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....India Investment Ltd to confirm the understanding regarding the regulation of affairs of Telecon Investment India Ltd. (TII). As per clause 4.2 of the share holder's agreement, the right to exercise Put Options was conferred upon by ND Callus Info Services Pvt. Ltd. and Nadal Trading Company Pvt. Ltd to require CGP India Investments Ltd. who is a share holder of TII to purchase shares held by ND Callus Info Services Pvt. Ltd and Nadal Trading Company Pvt. Ltd in TII. Clause 4.3 authorizes CGP India Investments Ltd or its nominated person to Call Options to purchase the share held by ND Callus Info Services Pvt. Ltd. and Nadal Trading Company Pvt. Ltd.. Thus it has been submitted that these Options are completely different from Call Options and Put Options held by assessee, Analjit Singh and Asim Ghosh respectively, under the 2007 Framework Agreements. The Framework Agreements between Analji Singh and Asim Ghosh and assessee are completely distinct from the TII share holder's agreement as the former relate to Call Options and Put Options in respect of shares of Scorpio Beverages (P) Ltd. and AG mercantile Co. (P) Ltd., whereas the latter relates to shares of TII. A reference is also....
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....t clauses are as under:- "This Shareholder's Agreement (this "Agreement") is entered into on 5 July 2007, among: (1) Nadal Trading Company Private Limited (formerly known as Cerntino Trading Company Private' limited). a company incorporated under the Companies Ad , 956, and having its registered office at Meher Chambers, 4" and 5th Floors. RK Marg, Ballard Estate. Mumbai 400 038 (herein after referred to as "Nadal") of the FIRST PART; (2) ND Callus Info Services Private Limited, a company incorporated under the Companies Act 1956 and having its registered office at 15. Aurangzebe Road, New Delhi 110011 (hereinafter referred to as. "NDC'') of the SECOND PART; (3) CGP India Investments Limited. a company organized under the laws 01 Mauritius and having its registered office at 608. 51 James Court, 51 Denis Street. Port Louis. Mauritius (hereinafter referred 10 as TCGP') of the THIRD PART; (4) Telecom Investments India Private Limited, a company incorporated into the Companies Act 1956 and having its registered office at 240 Navsari Building, First Floor, DN Road, Mumbai 400001 (hereinafter referred to as the "Company") of the FOURTH PART; and (5) Voda1on....
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....greement; "NDC Framework Agreement" means the Framework Agreement dated the date hereof between Analjit Singh, Mrs. Neelu Analjit Singh, Scorpios Beverages Private Limited MV Healthcare Services Private Limited, GSPL, NDC and Vodafone; "NDC Put Option" has the meaning assigned to the term "Put Option" under the NDC Framework Agreement; "NDC Shares" means the equity shares of the Company held by NDC, consulting 38.78% of the total issued and paid up equity share capital of the Company at the date hereof, and shall include any further shares issued under the terms hereof; "Nominated Person" shall mean any Person(s) whom CGP may nominate to acquire the NDC Shares or the Nadal Shares including, for the avoidance of doubt Vodafone or any Indian third party; "Offeree" shall have the meaning set forth in Clause 4.4(a); "Offeror" shall have the meaning set forth in Clause 4.4(a); "Original Director" shall have the meaning set forth in Clause 6.6; "Option" shall mean any of the Subscription Option, Put Option or Call Option; "Person" shall mean any natural person limited or unlimited liability company, corporation, general partnership, limited partnership, p....
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....th the assessee under the Framework Agreements of 2006 as well as 2007. Though under FWAs the assessee was having the right to assign option rights to one of the probable persons/assignees, however, till the assignment took place the rights were remained vested with the assessee. These rights to Call Option to purchase the shares held by the Asim Ghosh and Analjit Singh including their 100% subsidiaries ND Callus Information Services Pvt. Ltd. and Nadal Trading Company in TII stand transferred and vested in CGP India Investments (Mauritius) by virtue of TII share holder's agreement as it is clear from the clause 4.2 and 4.3 of the share holders agreement in question. As per the definition clause, Call Option has the meaning assigned to the term Call Options under the Framework Agreements, therefore, all the terms have the same meaning as it was understood by the parties under the Framework Agreements. Even under the Framework Agreements of 2007 what was to be transferred under the option rights were 23.97% and 38.78% of shares in TII and thereby indirect 12.25% share holding in HEL. 40. The combined reading of Framework Agreements 2007 and share holder's agreement dated 5.7.2007....
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....I SHA including the TII company itself. Therefore, the SHA is binding to all the share holders and company as well. Even otherwise when the issue of assignment/transfer of Call Options right by the assessee was not before the Hon'ble Supreme Court then the said observation of the Hon'ble Supreme Court was not in the context of the issue before us. 41. Under the Framework Agreements, the parties agreed to transfer the entire share holding of Asim Ghosh and Analjit Singh Group Companies under the Option rights which means their holding to the extent of 23.97% and 38.78% in TII was to be transferred on exercise of option rights under FWAs as well as under SHA dated 05/07/2007. It is manifest from the SPA between HTIL and VIHBV, Framework Agreements and TII share holders agreement as well as surrounding facts and circumstances that the entire arrangement and exercise was targeted to acquire the 15% share holding in HEL as and when the restriction on FDI in telecom sector is relaxed by the Government. Therefore, both Framework Agreements and TII share holders agreement were signed with the sole object to acquire 12.25% share holding in HEL on a future date and till then Asim ....
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....her or not such arrangement and understanding is formal or in writing or whether or not , the same is intended to be enforceable by legal proceedings. The legislature has deliberately not defined the term 'transaction' itself and has provided an inclusive definition. It is a word of widest import. Thus the term transaction not only includes a sale, purchase, lease, mortgage, pledge, rent or hire but also any other dealing between parties which may have a financial impact or any other dealing or course of dealings undertaken in the normal course. In the specific context of T.P Provisions, it includes any arrangement, understanding, or action in concert. Further, there is no necessity that such arrangement or understanding should be in writing or legally enforceable. Thus, even an oral understanding or arrangement which may or may not be enforceable at law will constitute a transaction. The term 'international transaction' has been defined in sec.92B.Under sub section (1), international transaction has been defined as a transaction between two associated enterprises out of which at least one is a nonresident. This section further provides that the transaction should be in the nature ....
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....virtue of new Framework Agreement. 47. The use of the words 'at its sole discretion' in clause 4.4 of the 2007 FWA is very material. Since the appellant already had the discretion to purchase the option shares, these words can only be attributed in favour of Vodafone group Plc subsidiary. There would be no purpose to attribute these words to the appellant as the appellant already had the discretion to purchase the option shares. The effect of attributing the words 'at its sole discretion' to Vodafone Group Plc is that the appellant now bound by an obligation to call upon the Vodafone Group Plc subsidiary to purchase the shares. Hence the new Frame Work Agreement of 2007 has effectively transferred the appellant's right to purchase the shares in favour of a Vodafone group subsidiary company. In fact, the shares have subsequently been purchased by CGP Mauritius; a Mauritius based subsidiary company of Vodafone Group Plc at the instance of VIHBV. Thus the Frame Work Agreement has provided the basis for the subsequent nomination of CGP Mauritius in whom all the shares are now vested. 48. On 8th May, 2007, HTIL & VIHBV entered into a Retention Deed. According to clause 2 of retent....
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....t of existence of transaction including the international transaction section 92B of the Income Tax Act is not satisfied. Hence the provisions of transfer pricing cannot be invoked when there is no transaction by recasting the framework agreements in 2007. The decision of Hon'ble Supreme Court in respect of 2007 agreement were not a mere casual observation but is ratio descending and binding law declared as per Article 141 of Constitution of India. In support of his contention he has referred the judgment of Hon'ble High Court wherein it has been held that the finding of Hon'ble Supreme Court is binding. The Ld. Senior cl. further submitted as under: (i)Under Chapter X, the jurisdictional and threshold fact for invocation of transfer pricing provisions is the existence of a 'transaction' as defined under Section 92F(v) of the Income Tax Act, 1961 which will tantamount to an 'international transaction' as per section 92B of the Act if the said transaction is between two associated enterprises, either or both of whom are non-residents. As per 92(1), an arm's length price can be determined only in respect of an 'international transaction'. The Department's case is that ....
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.... before the Supreme Court in the case of VIH BV and the present case, the finding of the Supreme Court that there is no assignment of any call options under the July 2007 Framework Agreements is binding on this Hon'ble Tribunal and the IT Department. Accordingly, the jurisdictional and threshold requirement of existence of a transaction, which is also an international transaction under section 92B of the Act, is not satisfied. Therefore, the invocation of transfer pricing provisions is inherently without jurisdiction. 51. We have considered the rival submissions as well as various documents executed in connection with the divestment of telecom business in India by HTIL by transfer of stake in HEL through sale of shareholding of CGP. We have also analysed the relevant facts, clauses of the agreements and the provisions of the IT Act. The meaning of international transaction is provided u/s 92B which reads as under:- Meaning of international transaction. 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature....
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....nsultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation; (f) customer related intan....
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....owing money or any other transaction having a bearing on the profits, income, losses or asset of such enterprise. It also includes a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to any cost, expenses incurred or to be incurred in connection with benefit, service or facility provided or to be provided to anyone or more of such enterprises. 54. As per the definition of international transaction as contemplated u/s 92B r.w.s 92F(v), it does not necessarily require a transfer or assignment of a property or creating any right or interest in the property but even an arrangement, understanding and action in concert, whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings or not, if the said understanding shall have a bearing on the profits, income, losses or asset of the enterprises, the same would fall within the realm of international transaction. Even if it is accepted that VIH BV is only a confirming/consenting party to the framework agreements, the said agreement is a mutual agreement under which the Call Options were granted by Asim Ghosh an....
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....sts. (B) The Vendor has agreed to produce the sale of, and the Purchaser has agreed to purchase, the entire issued share capital of CGP on the terms and conditions set out in this agreement. The Vendor has further agreed to procure the assignment of, and the Purchaser has agreed to accept an assignment of, the Loans on the terms and conditions set out in this Agreement and the Loan Assignments. ND Callus Framework Agreement means the framework agreement dated 1 March 2006 between Analjit Singh, GSPL, ND Callus Holdco, ND Callus and ASCo; Transaction Documents means this Agreement, the Tax Deed, this Disclosure Letter, the Hutch Brand License, the Loan Assignments, the Confidentiality Agreement, the IDFC Framework Agreement and the GSPL Transfer Agreement; Wider Group means CGP, GSPL, the Holding Companies and the Group and Wider Group Company means any one of them. The Vendor's Obligations in relation to the Conduct of Business The Vendor undertakes to procure that, save insofar as otherwise agreed in writing the Purchaser (such agreement not to be unreasonably withheld or delayed) or to give effect to and comply with any of the Transaction Documents, during the Clos....
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....e and its AEs for securing the Option Rights against the consideration paid by VIH BV to HTIL and AG & AS certainly having a bearing on the profits, income, losses or asset of the associated enterprises. 57. Now the question arises whether the transaction is at arm's length or not. Undisputedly the consideration was paid by VIH BV to HTIL as well as to AG & AS but nothing was paid to the assessee for facilitating the arrangement and signing the Framework Agreements to protect the valuable interest of the Vodafone Group. Further the option rights held in the Framework Agreements stood assigned and vested in favour of CGP India Investments Ltd. vide TII share holders agreement dated 5.7.2007. A sum of US$351.8 million was retained by VIH BV from the purchase consideration as retention amount as per clause 8.10(b) of SPA for acquisition of 15.03% stake from AS & AG and IDFC under FWAs. Once the transaction is held to be a international transaction the same must be at Arms Length Price. The assessee being the holder of the valuable option rights under FWAs to give proper effect to the SPA was required to be compensated at ALP and on assignment of option rights in the form of CGP Ind....
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....t of Call Option is given at page 48 of the TPO as under:- 1) Analjit Singh & Ors. 7.57% 2) Asim Ghosh & Ors. 4.68% 12.25% Valuation of 0.1234% Rs. 62,24,27,849/- Valuation of 12.25% option 62,24,27,849X12.25% 0.1234% 0.1234% The ALP of assignment of Call Option Rs. 6178,88,26,177 Acutal price charged NIL Adjustment u/s. 92CA Rs. 6178,88,26,177/- 59. Since no price was charged by the assessee from AE against the alleged assignment of Call Option rights to the extent of 12.25% of HEL shares in the Framework Agreements, therefore, the TPO proposed the adjustment u/s 92CA at the entire amount of ALP of Rs. 6178.88 crores. While passing the draft order, the Assessing Officer determined the cost of acquisition of said Call Option at Rs. 73,44,15,000/- being the annual payment made to AG and AS from 01st March 2006 to July 2007. The DRP held that no cost has been borne by the assessee and accordingly recomputed the cost of acquisition at nil and thereby the capital gain was taken as full value consideration at Rs. 6178.8....
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....thcare Services (P) Ltd. (Analjit Singh Group Company) and not the main operating company i.e. 'F' in the ownership chart. ii. It is an option that has no strike price, iii. It is an option that requires the payment of cash equivalent to 'fair market value' ("FMV") of the Shares Underlying the Option. The price, i.e. US$ 266,250,000 (AS Option) and US$ 164,510,000 (AG Option) at which the underlying shares could be purchased under the Option was the FMV of the said shares. These prices were FMV of the said shares have been certified by two leading Chartered Accountants and Valuers namely, KPMG and S.R. Dinodia relying on the report of a renowned and esteemed Valuer namely Goldman Sachs. On the basis of Goldman Sachs's Report, the FIPB accepted the FMV of these shares and only after considering the said report, FIPB gave its approval to the entire transactions including the Option price. This fact has been considered by the Supreme Court in its judgment. ( para 120 and 121) (c) Based on the above, it is abundantly clear that there are glaring and apparent differences between the subject (present) call options and the IDFC option which makes the two options uncomparable. Set....
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....underlying HEL shares. The option holder will only exercise the option if the fair market value of HEL shares is higher than the strike price. If that is the case, then, the option holder does not have to pay anything for the purchase of the underlying shares. In fact, it will receive a net cash inflow upon the exercise of the option. (d) Based on the above, it is abundantly clear that the value of the IDFC Option is predominantly driven each of its salient characteristics, in particular, the following characteristics: i. the value of the benefit granted to the option holder through the mechanism of strike price, ii. no money has to be paid by the option holder for the exercise of the option and iii. the value of the shares of HEL. (e) The TPO failed to appreciate i. absence of all of the benefits implicit in the structure of the IDFC Option are completely absent in the structure of the present Call Option, namely, the benefit to the FMV as a result of strike price mechanism built into the structure of the IDFC option and the cashless feature of the IDFC option and ii. the value of the Share Underlying present Call Option is different than the value o....
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....parable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction. Cup is applied when a price is charged for a product or service. This is essentially comparison of prices charged for the property or services transferred in a controlled transaction to a price charged for property or services transferred in a comparable uncontrolled transaction. The bedrock of this method is the identification of an identical transaction, in a situation where a price is charged for products or services between unrelated parties. While applying CUP the comparability between controlled and uncontrolled transactions should not be only judged from the point of product comparability, but should also take into consideration the effect on price of other broader business functions. Even minor differences in contractual terms or economic conditions, geographical areas, risks assumed, functions assumed etc. could affec....
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....ed by fraud, bias or a patent mistake. In the facts of the present case, the DRP has failed to consider the expert opinions without assigning any reason, which is not permissible in law. (Refer G.L. Sultania Vs. SEBI AIR 2007 SC 2172). c. The cost of acquisition of the Call Options is indeterminable (i.) The reasons accorded by the DRP to distinguish the judgment of the Supreme court in the case of Srinivasa Setty (supra) that the cost of acquisition of the options was determinable but since the Assessee did not make any payment for such determinable cost, the COA in the hands of the Assessee is 'nil'. (ii)As admitted by the DRP, the call options came into existence by the Framework Agreements executed on 1 March 2006. It is also undisputed that credit support was arranged by the then AE of the Assessee through Rabobank wherein the AE stood as a guarantor to enable Analjit Singh and Asim Ghosh to acquire shares in the main operating company. As per the DRP in consideration of this facility, Analjit Singh and Asim Ghosh agreed to vest the call options with the Assessee. The DRP has rendered a finding that the cost of acquisition of these options was fully funded by the AE o....
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....used assignment of cashless option as described above as internal CUP for determining the ALP of assignment of call options to VIHBV. Schedule 1 to the 2006 IDFC FWA, provides the manner of determination of the FMV. Since, the consideration for cashless option is the difference between the FMV and the Strike Price, the Fair Market Value of 0.1234% of shares of HEL is Rs. 112,24,27,849/- (i.e.Rs.50.00,00,000 + Rs. 62,24,27,849). This shows that the difference between the FMV and the Strike Price is nothing but the value of the options in the hands of the option holder i.e. IDFC Investors. Since, the assessee has also assigned its call option rights in favour of VIH BV the assessee should have got compensation equivalent to the value of the options. As the option right which earlier vested in the assessee, now vest in VIHBV to the extent of 12.25.% of HEL shares, the TPO has correctly determined the ALP by pro rating the consideration paid by the assessee to IDFC Investors (which were also in respect of option to buy HEL shares). In this regard it should be noted that the TPO has valued the options and not the shares itself. This is evident from the fact that the TPO has considered o....
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....FC Investors would get the difference between the FMV of 0.1234% shares of HEL and the Strike Price ( Rs. 62.24 crores). Under the transaction agreement dated 5th June 2007, the assessee got the cashless option assigned to itself after making the said payment of Rs. 62.24 crores to the IDFC Investors. Pursuant to the FWA 2007 with AS/AG, the options were divested in favour of VIH BV for which the assessee received no consideration whatsoever. 63. The Ld. ASG further contended that the assessee's argument that no exchange of cash is involved on the assignment of the cashless option under the IDFC FWA, whereas a payment of USD 430.76 million will have to be made on exercise of the Call Option under the 2007, FWAs with AS and AG, is ex facie incorrect. In fact, cash is involved under the IDFC FWA because in addition to the Rs. 62.24 crores paid to the IDFC Investors by the assessee, an amount of Rs. 50 crores (the strike price) would have to be paid to Omega on exercise of the Option. The assessee has confused the outflow at the time of exercise of option by actual purchase of shares with the compensation payable on transfer of the option prior to its exercise. In the IDFC agree....
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....terest in 9.62% of the issued share capital of HEL. (para 25 of Hon 'ble Supreme Court order). It has been further clarified in para 33 of the Hon'ble Supreme Court order that VIHBV acquired 42% direct interest .in HEL through its acquisition of 100%CGP (CI). It also acquired further 10% stake through pro-rata route by holding shares in TII and Omega through acquisition of CGP (CI). While valuing these 10% shares, no holding company discount or liquidity discount was applied though these 10% shares were held in a similar fashion as shares of HEL held by AS/AG through ND Callus and Centrino. It is submitted that the holding company/liquidity discount comes into play only when a minority shareholder is trying to sell its stake in the market As far as majority shareholder is concerned, the acquisition of further shares only strengthens its bargaining power and from the perspective of the majority shareholder who is acquiring the shares, there is no concept of any discount. That is why while acquiring CGP shares there is no difference in the value of direct, indirect or pro-rata holding. In para 85 of the Judgment of Hon 'ble Supreme Court, the finding has been given that t....
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....n. d. Alternatively even if the methodology adopted by the assessee is followed and the enterprise value of HEL is considered at USD 18.80 Billion as per the SPA even then the value works out to Rs. 7262.58 crores. 68. The Assessee argued that the conclusions arrived at in the presentation made by Goldman Sachs before the FIPB cannot be challenged by the Department before the ITAT now. The Goldman Sachs had valued the equity in N. D. Callus and Centrino being the company through which the shares in HEL were indirectly held by them. According to the counsel, the valuation of these two companies was binding on the revenue as the revenue attended the meeting called for by the FIPB. This argument of the Assessee is unfounded as the purpose of the FIPB meeting was entirely different and had nothing to do with determination of the Assessee's taxability under the TP provisions in respect of the transactions entered into subsequently. In fact, at that time (9th April, 2007), nobody could have foreseen that the Assessee would transfer its valuable option rights to its non-resident AEs for no consideration through the Framework Agreement dated in July, 2007. The Assessee's cont....
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.... of acquisition of call options the amount paid to AG and AS being annual payment for keeping the options alive. The DRP held that no cost has been borne by the assessee and accordingly recomputed the Short term Capital Gain by taking the cost of acquisition at Nil. Consequently the DRP enhanced the assessment. We may clarify that it is nobody's case that there is no cost of acquisition of call options but the DRP proceeded on basis that the cost of acquisition was not paid by the assessee. 72. The assessee has disputed the comparability of the cashless option held by the IDFC Investors under Framework Agreements dated 7-8-2006 with the call options under FWAs with AG & AS. As per the clause 4.2 (c) to (f), the investors of the IDFC were holding a cash less option thereby requiring the other parties of the Framework Agreements to transfer the 0.1234% of HEL shares in favour of third party as nominated by the investors. For ready reference, we quote clause 4.2 (c) to (f)as under: (c) if at any time during the Option exercise period prior to any Investor Option Cashless exercise ("Cashless Option") they may do so by way of written notice ("Cashless Notice") to ITNL, GSPL and HT....
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....Framework Agreements with AS and AG as well as Framework Agreements with Investors of IDFC are for acquisition of HEL shares. The only difference in the rights of the assessee under IDFC Framework Agreements is that the investors were also having the cash less option to purchase the shares of HEL held by Omega Telecom Holding Pvt. Ltd. Therefore, there was a deficiency in the right of the assessee to purchase the shares under IDFC Framework Agreements to the extent of cash less option held by the investors of IDFC under which there was a possibility as per the terms and conditions of the Framework Agreements that the investors may exercise the cashless option in favour of a third party after giving a prior notice to the assessee. Thus to remove this deficiency in the rights of the assessee it entered into a transaction agreement dated 5.6.2007 with the IDFC investors, whereby, the said cashless option was assigned by the IDFC investors in favour of the assessee. In this way the IDFC Framework Agreements was brought to the parity with the Framework Agreements with AG and AS and dissimilarity in the option rights of assessee between the two sets of Framework Agreements was brought to....
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....suppression of material facts. Therefore, when the reports were not produced before the Assessing Officer then it cannot be said that the valuation were accepted by the assessing authority merely because these were presented before the FIPB. In view of the above discussion, we do not find any reason to interfere with the orders of authorities below except the re-computation of Short term Capital Gain by DRP on which, we restore the order of TPO. 74. The Ld. Senior Counsel has raised an another point that no Call Option was exercised but Put Option was exercised by the other parties in the year 2009 and, therefore, even at the time of acquiring the shares under the Put Option exercised by Asim Ghosh and Analjit Singh, there was no assignment of any right but it was an obligation on the part of the assessee to acquire the shares under Put Option exercised by other parties. The Ld. Senior Counsel has placed reliance on the judgment of Hon'ble Supreme Court and submitted that the Hon'ble Supreme Court had considered this issue in detail in para 158 of the judgment and noted the difference between the Call Option and Put Option. The Ld. Senior Counsel has submitted that it is....
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....ption holder (not the option writer who will be in the possession of the underlying stock as he has right to sell the stock on a specified dated. This position is clearly explained in the book "Financial Management, Theory & Practice, 4th edition written by Prassana Chandra on pages 639 to 642. He further submitted that the observation of Hon'ble Supreme Court in para 158 with regard to put option has to be understood in this context. The Hon'ble Supreme Court has observed that the put option represents the right, but not the requirement to sell a set number of shares of stock, which one do not yet own at a pre-determined strike price, before the option reaches the expiration date. This does not signify that the put option holder does not own the underlying shares. It means that it is the put writer, who does not own the shares yet and will own them after exercise of the put option. This intention is clear from the next line in the Supreme Court judgment wherein the Court has clearly clarified that a put option is purchased with the belief that the underlying stock price will drop well before the strike price, at which point one may choose to exercise the option. This clearly s....
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....k agreements in question. The term 'Option' has been defined to mean Put Option or Call Option. Thus, even as per the appellant's FWA, both options are included in the term 'Options'. 76. It is further submitted that as per clause 3.1 of the FWA 2007, AS / AG have to ensure that the entire issued and paid up capital of the Group companies are held by them respectively. Thus, it is ensured that AS and AG cannot bring new shareholders into their company. As per clause 4.1 of the same agreement, there is a complete embargo on AG and AS from issuing any further shares in their companies which would alter the issued share capital of those companies. The effect of clause of 3.1 and 4.1 of the FWA is that both AS and AG have been restrained from making any change in any downstream interest (or capital structure of their companies through which they hold 15% stake in VIL) leading to their shareholding in TII and consequently HEL/VIL. This aspect has in fact been noticed by the Supreme Court at Para 9 of the judgement of Justice K.S. Radhakrishnan. When the restrictions contained in para3.1 and 4.1 of the FWA on subscription and transfer of any interest in the AS and AG Group of companie....
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....isions for resolution of disputes between the shareholders. Many of the above mentioned provisions find a place in SHAs, FWAs, Term Sheet Agreement etc. in the present case, hence, we may refer to some of those provisions. (a) Right of First Refusal (ROFR): ROFR permits its holders to claim the transfer of the subject of the right with a unilateral declaration of intent which can either be contractual or legal. No statutory recognition has been given to that right either in the Indian Company Law or the Income Tax Laws. Some foreign jurisdictions have made provisions regulating those rights by statutes. Generally, ROFR is contractual and determined in an agreement. ROFR clauses have contractual restrictions that give the holders the option to enter into commercial transactions with the owner on the basis of some specific terms before the owner may enter into the transactions with a third party. Shareholders' right to transfer the shares is not totally prevented, yet a shareholder is obliged to offer the shares first to the existing shareholders. Consequently, the other shareholders will have the privilege over the third parties with regard to purchase of shares. (b) Tag A....
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....es." 77 . The Ld. Senior Counsel of the assessee also made a reference to the Explanation of Call Option and Put Option in the book "Financial Management Theory and Practice 4th Edition" by Prassana Chandra. There is no quarrel on the standard meaning of "Call Option" and "Put Option" whereby the Call Option gives the option holder a right to buy an asset (share) at a fixed price within a certain period. The opposite of Call Option is "Put Option" which gives the holder the right to sale a stock at a fixed price. Similarly, the Hon'ble Supreme Court has also discussed the Call Option and Put Option in the context of an arrangement in merger and acquisition project and Put Option represents the right to sell a set number of shares or stock, which one do not yet own, at a pre determined price before the option reaches the expiration date. Thus the Put Option as discussed by the Hon'ble Supreme Court is in the context of trading of stock without owning the securities. In the case of the assessee, the Call Option and Put Option are provided under the framework agreements with the intention to ensure 15% share holding of VIL to be acquired in future by the assessee or its nom....
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....ses and not giving any discretion or free hand to counter party namely Asim Ghosh and Analjit Singh to sell or transfer the shares held under Call Option to anybody other than the assessee . Hence, in any eventuality, the shares held under Option Rights shall have to be transferred in favour of the assessee or its nominee as the case may be at a pre determined price. The Put Option and Call Option under the framework agreements is an arrangement like tossing a even sided coin and, therefore, it makes no difference whosoever tosses the coin as the result will be same. Though this issue is not so relevant for the year under consideration because the Put Option has been exercised in the year 2009 and the issue before us is confined only with respect to the arrangements made for Call Option right as per clause 4.4 of framework agreements 2007. 78. During the course of hearing, the revenue has raised a serious contention that the assessee is guilty of concealment of relevant facts regarding exercise of Put Option by Analjit Singh and Asim Ghosh in the year 2009, therefore, the assessee obtained the decision of Hon'ble Supreme Court as well as Hon'ble High Court by misrepresen....
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....cluding the exercise of Put Option in the year 2009 before the Hon'ble Supreme Court. The Ld. Senior Counsel has pointed out that after the exercise of Put Option, the assessee sought amendment in the SLP filed before the Hon'ble Supreme Court. The amendment sought through the IA No. 6 to the SLP was permitted by the Hon'ble Supreme Court vide order dated 26.11.2010. Even otherwise, by interim order dated 27.9.2010 in SLP, the Hon'ble Supreme Court directed the tax office to quantify the tax liability of VIHBV u/s 201. Accordingly, in pursuant to the direction of Hon'ble Supreme Court, the tax office passed an order dated 22.10.2010 quantifying tax liability of VIHBV u/s 201. This order dated 22.10.2010 was challenged before the Hon'ble Supreme Court by way of an amendment. Consequent to amendment to the SLP converted into the civil appeal, the assessee added the ground no PPPPPP to the petition, wherein it has been explained that the relevant material placed before the respondent no. 2 in relation to exercise of Put Option by Asim Ghosh and Analjit Singh including FIPB permission granted in relation to such transaction has been completely ignored by the res....
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....he issue of re-writing of framework agreements 2007. Therefore, the word "till today" has been used in respect to the transaction that culminated in the Financial Year 2009 and have to be understood in the aforesaid factual matrix. The judgment of the Hon'ble Supreme Court has to be read as whole and sentences cannot be picked out de hors from the context in which it was rendered as held by the Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs Sun Engineering Works (P.) Ltd. (1989 ITR 297). The Ld. Senior Counsel has summarized his contention by referring the proceedings in the case of VIHBV tax quantification by tax authorities in the year, wherein, the fact of exercise of Put Option in the year 2009-10 was taken note of. The fact was brought on record of the Hon'ble Supreme Court by amendment in the grounds of SLP which were allowed by the Hon'ble Supreme Court. Again this fact was brought to the notice of the Assessing Officer during the assessment proceedings in the year 2011 as well as before the DRP in the year 2012. Even otherwise, this fact and documents relating to exercise of Put Option are irrelevant in determining the question whether re....
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....s 201 as per the directions of the Hon'ble Supreme Court has been brought to the notice of the Assessing Officer having jurisdiction over the assessee during the assessment proceedings. As regards the relevant documents and facts submitted before the FIPB for allowing the transfer of shares in pursuant to the exercise of Put Option, it cannot be said that the decision taken by the FIPB was in context of the tax implications of the transaction under the transfer pricing provisions of the Income Tax Act. Therefore, the permission granted by the FIPB to a transaction cannot be treated as acceptance of the claim of the assessee of no tax implication under the provisions of Income Tax Act. Even otherwise while taken the decision by the FIPB it is not supposed to have gone deep into the issue of tax liability under the transfer pricing provisions of Income Tax Act. 83. In the writ petition before the Hon'ble High Court against the TPO and draft assessment order this fact was not expressly disclosed by the assessee as it was not part of the contentions or pleadings but the documents and record as filed before the Hon'ble Supreme Court were also filed along with writ petitio....
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....hare capital of CGP Investments (Holdings) Ltd. ('CGP') which indirectly owned assessee, together with certain loans. It was agreed upon between HTIL and VIH BV at the time of entering into SPA that the call centre business of the assessee will not be acquired by VIH BV. Pursuant to the SPA between HTIL and VIH BV, the call centre business of the assessee was transferred to Hutchison Whampoa Properties (India) Pvt. Ltd., a subsidiary of HWL Group. The ownership structure of the HWL group companies is as under:- 2.1 The Assesse sets out below the genesis of the transaction reflected in the chart below: S. No. Date Particulars 1 11 February 2007 SPA was signed between HTIL and VIH BV 2. 8 May 2007 Business Transfer Agreement ('BTA') was signed between 3GSPL (at this stage because the SPA had not been completed, 3GSPL had not yet become part of the VIH BV Group) and Hutchison Whampoa Properties (India) Private Ltd ('HWP India') 3. 8 May 2007 Completion of SPA took place after BTA (as defined in para 2.4 below @ page 4 of this submission) was signed (as a consequence of having met the precompletion conditions of SPA) 4. 4 December 2007....
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....it was concluded that the transaction of sale of call centre business by the assessee to HWP (India) is deemed transaction u/s 92B of the Income Tax Act . The TPO proposed to determine the arm's length price of the sale of call centre business on the basis future cash flows using DCF method and rejected the valuation submitted by the assessee based on profit earning capacity value and net asset method. Since the relevant data was not available with the TPO regarding the future cash flows, therefore, the DCF method could be applied by the TPO for the purpose of computation of arm's length price/ sale price of the call centre. The TPO then applied the valuation of the price of share based on P/E multiple of listed comparable companies. Finally, the TPO selected three listed companies namely WNS Global Services, EXL Holdings and Firstsource Solutions Ltd., by applying the filter of 2000 employees. Accordingly, the TPO made an adjustment of Rs. 23,50,20,43,185/- of arithmetical mean of P/E at 34.96%. The assessee challenged the action of the TPO before DRP on the ground that provisions of section 92B(2) are not applicable as the transaction is between two related parties one of which i....
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.... assessee and HWP India (both associated enterprises of the HWL Group) thus, the BTA was not "pursuant to" or "part of" the SPA (as alleged by the lower authorities), but was in consequence of the SPA. In fact, the sale of Call Centre was not the driving force behind the execution of the SPA. The SPA was entered into with the aim of acquiring the equity share of CGP and assignment of certain loans, and not with the intent to sell the Call centre business of assessee. 89. Owing to the difficulties in obtaining regulatory approval to run a Call Centre business in India by an Indian branch of non-resident company, together with the legal and practical difficulties of doing so even if such approval could be obtained, it was decided that the Call Centre business would be acquired by an Indian subsidiary of the HWL Group. It should be noted that it is common practice for most multinational companies to do business in India through an Indian subsidiary rather than a branch of a foreign company. 90. Since VIH BV did not intend to, nor wish to, acquire the Call Centre business, it was necessary to transfer the business from assessee (part of the HWL Group) to another entity (part of t....
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.... therefore in accordance with stock exchange regulations, any transaction between them being connected transaction, was required to be on normal commercial terms i.e. at arm's length. 95. In order to determine Arm's length Price of the Call Centre business, assessee engaged Dalal & Shah, a registered Chartered Accountant firm and an independent expert valuer for valuing the Call Centre. Dalal & Shah issued a valuation report dated 16 March 2007 wherein the Call Centre business was valued at Rs. 67.57 crores. Dalal & Shah used weighted average of Net Asset Value ('NAV') method and Profit Earning Capacity Method ('PECV') or Earning Capitalization method. The method of valuation used is in line with the principles laid down by the Hon'ble Supreme Court in the case of Hindustan Lever Employees' Union vs. Hindustan Lever Limited and Ors [Special Leave Petition (civil) and an acceptable method of valuation. Dalal & Shah gave basis of valuation in paragraph 3.1, assumptions for NAV method. Based on the Dalal & Shah's valuation report, assessee agreed to sell the Call Centre business to HWP India for Rs. 64 crores. 96. In accordance with paragraph 6(b) of the MOU, HWP India paid ....
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....le the number of employees working in the call centre. It did not provide the correct number to the TPO and kept on changing the number of employees. The same is evident from its letter filed before the TPO on October 7, 2011 and October 10, 2011. According to these letters, the assessee first reported its number as 5483 which it later changed to 3640 as on 30th November 2007. The assessee did not provide any reason for changing its number. 98. He referred the provisions of Section 92B(1) of the I.T.Act, 1961 and submitted that the definition of transaction is given in Section 92F(v) according to which "transaction" includes an arrangement, understanding or action in concert whether or not it is formal or in writing or whether the same is intended to be enforceable by legal proceeding or not. The meaning of AE is given in Section 92A. Transaction is required to be between two or more associated enterprises in which one of the associated enterprise has to be a non-resident. The tarnaction is in the nature of Purchase, sale or lease or borrowing money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. 99. Section 92B(2) of th....
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....sferred by Vodafone group to Hutch Group with adequate safeguards built in. In view of the above clauses of SPA and BTA and in view of the admission of VIHBV before the Supreme Court, the Respondent submits that the BTA was signed after the execution of SPA on 08.05.2007. SPA is the prior agreement in relation to the transaction, as various clauses of the SPA clearly demonstrate that the BTA is in pursuance of SPA. It is an admitted fact that VIHBV did not want to keep the call centre within the Vodafone Group as it was exclusively providing services to the various group companies of the Hutchison Group. Therefore, VIHBV wanted to hive off the call centre to the Hutchison Group. That is why, clauses were inserted in the SPA to facilitate the sale of call centre owned by the assessee. The following clauses of the SPA clearly demonstrate that the SPA is the "prior agreement" in relation to the sale of the Assessee's call centre business. The SPA refers to a business transfer agreement to be entered into between the Assessee and an Affiliate of HWL relating to the disposal of the Assessee's call centre business. The business transfer agreement is to be substantially in the form attach....
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....n the SPA that accrued to and bound HWP India. 107. In the present case, it has been shown that HWP India is a party to the SPA and thereby fulfilling the condition of Prior Agreement being between the AE of Assessee i.e VIHBV and HWP India (Person other than enterprise). However, the Bombay High court at para 155 in WP No. 488 of 2012, have given the finding that, the prior agreement need not be in writing and it can be oral also. Since, HWP India have acted as per the conditions stipulated under SPA under an oral agreement with VIHBV, the condition required for SPA to be a prior agreement is satisfied Therefore, all the conditions specified in sec.92B(2) r.w.s.92B(1) are satisfied. 108.. Hence the transaction of sale of call centre business is deemed to be between two associated enterprises i.e. Assessee and VIHBV. Since, VIHBV is a non-resident, the condition of sec. 92 B(1) is also fulfilled. The transaction involves sale of call centre business in which the call centre business is a capital asset which is getting transferred which in turn affects the income or profit of the assessee. Therefore, the transaction of sale of call centre business satisfies the conditions spec....
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....nvestment in call options but has also included the income from call centre business in its hands till the date of transfer. This proves that the transfer took place on 4 December, 2007. 112. It is submitted that in view of the various clauses, on reading the Financial statement submitted by the Assessee to the Assessing officer at page 24 Volume 1 under the heading "Notes to the Financial Statements", which sets out the completion date, it becomes indisputably clear that the transfer of call centre business took place on 4th December 2007. Thus, it is submitted that the reading of the clauses set out above of the SPA will demonstrate that the SPA is the prior agreement entered into between VIH BV and HWP India in relation to sale of Assessees call centre business. The SPA itself contemplated the BTA, which in turn contemplated a completion date, which finally culminated into the transfer of call centre business on 4th December 2007. 113. The above submissions are supported by the decisions in the case of Harish Chandra & Ors. Vs. CIT, (1985) 154 ITR 478 (Del.)- para no.8, Smt. Raj Rani Devi Ramna Vs. CIT, (1993) 201 ITR 1032 (Pat.). 114. Alternatively it is submitted that....
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....reement, Transaction Documents, and Clauses 10.1, 10.2 and 13(c) are relevant to show that the parties have an understanding and / or an arrangement or have acted in concert. The BTA dt.8th May, 2007 was signed between the Assessee and HWP India substantially in the same form which was attached to the disclosure letter. 115. Without prejudice to above contentions the revenue advanced further arguments to show that there is an international transaction u/s.92B(1) by lifting the corporate veil. This has been done by the DRP additionally while upholding the case made by the TPO u/s.92B(2). The Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India [2012] 341 ITR 1 has laid down various parameters for piercing the corporate veil of a company. Though the Supreme Court held in that piercing of corporate veil is not applicable in that case, however, the parameters may be applicable in the facts and circumstances of the present case. 116. Reference was made to the paragraph 65 - 68 of judgment of Hon'ble Supreme Court and submitted that whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is....
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.... create a sham that the call centre business was being transferred by the Assessee to an Indian company when in fact the call centre business was being transferred to the Hutchison group. The Government of India, vide Press Note 5 (2005 Series) dated 3 November 2005 notified an enhancement of the Foreign Direct Investment limits in the telecommunications sector from 49% to 74%. Since apparently the Hutchison group wished to divest its telecom business shareholding in India but not its call centre business, HWP India was incorporated on 23 January 2006. After its incorporation, HWP India was a dormant company with no business activity until it acquired the call centre business from the Assessee. HWP India is a wholly owned subsidiary of Hutchison Wampoa Limited ("HWL"), Hong Kong. HWL is the holding company of HTIL. It is submitted that HWP India has no commercial or business substance as disclosed by its balance sheet for the year ended 31 March 2007 (Pg. No.2262 to 2267 of Volume VII). HWP India was interposed only to evade tax. 120. The assessee filed additional evidence to show that the HWP India was exploring the Realty Business. These documents were placed before DRP on 25.....
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....eated as an international transaction. The Ld. ASG on the other hand, contended that BTA was entered on 8.5.2007 but the call centres were transferred by the assessee to HWP (India) on 4.12.2007, therefore, the transfer of the call centre was subsequent to the SPA dated 8.05.2007 and, therefore, the assessee was part of VIH BV on the date of transfer/sale of call centre. Since there was a prior agreement between Hutchison Whampoa Group and VIH BV being SPA, therefore, the sale of call centre to HWP (India) will fall under the provisions of section 2 of section 92B being a transaction entered into by the assessee with a unrelated party but shall be deemed to be a transaction entered into between the assessee and its associated enterprises VIH BV due to the existence of a prior agreement. It is pertinent to note that up to 08/05/2007, the assessee was subsidiary of HTIL Group and after 08/05/2007 the assessee became subsidiary of VIHBV Group. The assessee was associated enterprises of both HTIL and VIH BV during the previous year relevant to the A.Y. under consideration in terms of sub-section 2 of section 92A of the Income Tax Act because prior to the SPA dated 08.05.2007, the asses....
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....e parties to the SPA that the call centre business was to be transferred back to HTIL post SPA but the agreement and arrangement between the parties suggest that the call centre business was to be retained by the HTIL at the time of transfer of share of CGP along with interest in all down stream subsidiaries except call centre business of the assessee. The question arises whether the transfer of call centre business is an international transaction as per the provisions of section 92B (1) and (2). Undisputedly, the sale of call centre business was not an independent decision of the assessee alone but it was a decision of the Hutchison Whampoa Group as per the terms and conditions of the SPA. Therefore, the BTA was entered into in pursuant to the SPA wherein it was agreed upon between the parties that VIH BV shall acquire the telecom business through the entire share of CGP but excluding the call centre business of the assessee. The assessee being a down stream subsidiary of HTIL and HWL was bound by the SPA being the part of wider group companies. It was in the compliance of SPA dated 11.02.2007 that the HTIL was required to retain the call centre business and, therefore, the HTIL w....
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.....e. HTIL on completion to deliver or procure the delivery to the purchaser i.e. VIH BV of the GSPL Transfer Agreement duly executed by the parties thereto. The parties to the "GSPL Transfer Agreement" are the seller i.e. the petitioner and the affiliate of HWL. HWP (India) was ultimately nominated to be the purchaser. Clause 8.13 of the SPA further provided that if clauses 8.2 to 8.11 including 8.8 (j) are not fully complied with by the vendor i.e. HTIL or the purchaser i.e. VIH BV by the completion date, the vendor or the purchaser, as the case may be, would be entitled inter-alia to terminate the agreement. 161. Clause 10.1 provided that following completion, the purchaser i.e. VIH BV would procure that the petitioner complies with its obligations under the GSPL Transfer Agreement. Thus the SPA expressly contemplated the possibility of VIH BV being required to ensure that the petitioner would comply with its obligations under the GSPL Transfer Agreement. It would follow that the SPA contemplated the formation of the GSPL agreement for without the formation of the agreement, there would be no question of compliance of the obligations therein. Clause 10.2 goes a step further ....
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....ia) and find that the payment of Rs. 64 crore was received by HWP (India) in its bank account on 30.04.2007 when the MOU was signed between the assessee and HWP (India). The payment was also made on the same date i.e. 30.04.2007. Thus it is clear that the payment was made by HWL Group Company and not by the HWP (India), though it was routed through the bank account of HWP (India). There is no record produced by the assessee to show that the HWP (India) procured finance from its Group Companies for the purpose of business. Further only after the beginning of process of divestment of investment in India by HTIL and decision of retaining the call centre business, the Memorandum Of Association (MOA) of HWP (India) was amended in January 2007, to incorporate the call centre business in its object. There was no business, commercial or economic substance or interest of HWP (India) involved in the transaction of purchase of call centre business except it was in pursuant to the SPA and to avoid chargeability of tax under the provisions of transfer pricing of Income Tax Act. The transaction in substance is between the assessee and HTIL/ HWL Group, the AEs of the assessee and HWP (India) is m....
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....a transaction must be between two or more associated enterprise either or both of whom are non resident. The condition of non resident of associated enterprises is only for bringing a transaction between two associated enterprises under the ambit of international transaction. Hence an associated enterprise can be a resident or non resident. HWP (India) is an associated enterprise of the assessee for the year under consideration, therefore, the provisions of sub-section 2 of section 92B are not attracted. Ground No. 11 to 14 is regarding valuation of call centre business for computation of Arm's Length Price 129. We have heard the Ld. AR as well as Ld. ASG at length and also considered the written submissions filed by both the parties. On careful perusal of the TPO's order we find that the transfer pricing officer was of the view that Discounted Cash Flow Method (DCFM) is the most appropriate method for computation of ALP in respect of the transaction of transfer of Call centre business. Accordingly, the TPO asked the assessee to submit the valuation on the basis of discounted cash flow analysis or profit earning multiple method. The report submitted by the assessee from Dalal....
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....ing considering the rival submissions, relevant record and having regard to the facts and circumstances of the case as well as in the interest of justice, we are of the considered view that the valuation of Call Centre business should be based on the most appropriate method as agreed by both the parties, being DCF Method. Accordingly, we set aside the issue of valuation of Call Centre business for the purpose of determination of ALP to the record of Assessing Officer/TPO for consideration of valuation filed by the assessee and then decide the issue after giving an appropriate opportunity of hearing to the assessee. 131. Ground No. 15 and 16 is regarding addition on account of adjustment made as a result of arm's length price of provision of ITES services. 132. During the relevant year , the assessee has provided IT enabled services to its AE M/s Hutchison Call Centre Holding Ltd. The assessee has charged cost + 7% mark up on operating cost including depreciation. To bench mark its international transaction of providing IT enabled services to AE, the assessee selected a set of 9 comparable companies engaged in providing voice based BPO services. The details of companies se....
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....an 25% related party transaction. The DRP directed the TPO to exclude 7 companies from the set of comparables being not functionally comparable with the assessee and the 8th company namely HCL Comnet System And Services Ltd can be considered as functionally comparable subject to the verification of related party transaction and then to re-compute the arm's length price. Accordingly, the adjustment got reduced to Rs. 28,74,34,828/- as a result of the DRP's direction whereby 7 out of 17 comparables companies selected by the TPO were treated as not suitable comparables. 134. Before us, Ld. A R of the assessee has submitted that the TPO has no jurisdiction to do fresh search of comparables. The TPO rejected the FAR and economic analysis adopted by the assessee in TP report without pointing out any cogent reason and insufficiency in the same. The TPO failed to appreciate that as per section 92C(3) of the Act. He has the jurisdiction to do fresh search of comparables only if the comparable selected by the assessee were either insufficient or had other deficiency. In support of his contention, he has relied upon the decision of Hon'ble Delhi High Court in the case of CIT Vs. Mentor Gra....
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....ed Transcription Services Inc which is engaged in medical transcription. * Further, Accentia has been held as not valid comparable in case of Capital IQ Information systems (India) Pvt. Ltd. in ITA no. 1961/Hyd/2011 (Pg 15-17 of the ruling) due to amalgamation in December 2006 and in Symphony Marketing Solutions India Pvt. Ltd. in ITA no. 1316/Bang/2012 (Pg 6 to 9 of the ruling) due to occurrence of extra ordinary events during the previous year. * The company fails the filter of 'rejection of companies having peculiar circumstances' applied by the Ld DRO (Serial no.1, para 12.5(v), page 52-54) for rejecting one of the comparables of the Applicant i.e. Allsec Technologies Limited ('Allsec'). The DRP rejected Allsec due to increase in cost on account of amalgamation. In case of Accentia also, there is significant acquisition (as cited above). In view of the above, Accentia needs to be rejected. Cosmic Global Ltd. * Medical transcription and translation services constitute the major portion of the revenue of Cosmic and are not functionally comparable with the voice based contact centre services rendered by the Appellant. * ....
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....t of marketing intangibles and intellectual property rights owned by it. WIPRO has a number of global development centers as on 31 March 2008, of which some are located outside India. WIPRO also filed over 17 patents in FY 2007-08, with current portfolio of 101 filed patents and 38 granted patents. These patents span across product engineering, enterprise business and quality. * The standalone segmental data of WIPRO is not available in the public domain. * Even otherwise, WIPRO must be rejected on account of extremely high turnover [The Hon'ble Hyderabad tribunal in case of Capital IQ Information systems (India) Pvt. Ltd. in ITA no. 1961/Hyd/2011 (Para 20, Page 188 of Paperbook, Volume B)] (para 8.40 to 8.42 below @ page 75-76 of this submission). * Alternatively, WIPRO must also be rejected given that its brand value has significant influence in price that it commands in market [The Hon'ble Bangalore tribunal in case of Symphony Marketing Solutions India Pvt. Ltd. in ITA no. 1316/Bang/2012 (Para 26, Page 203 of Paperbook, Volume B) HCL Comnet Systems and Services Ltd. (seg) * As per Segmental Information, HCL's business seg....
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....% margin) b) Godrej Upstream Ltd (-15.56% margin) c) Maple E-Solutions Ltd (20.09% margin) d) Optimus Global Services Ltd (0.58% margin) e) Sparsh BPO Services Ltd (8.61% margin) f) Microwave Communications Limited (1.81% margin) g) Survin Internet Services Ltd (3.21% margin) 136. If these companies are included in the list of comparables then the mean margin after giving the adjustment on account of working capital and risk profile would be within the range of +/- 5% and consequently no adjustment is called for. 137. On the other hand, the Ld. ASG has submitted that the TPO as well as the DRP has analyzed the details of the comparables selected by the assesseee and found that these companies were not functionally comparable as well as certain companies were having peculiar economic circumstances on account of amalgamation and expansion and therefore, cannot be considered as comparable for the purpose of determining the arm's length price. The Ld. ASG has referred the reasons assigned by the TPO and DRP for rejecting the comparables which are summarized in the table below :- S.No Name of the Comparable rejected Reasons by the TPO Reasons by....
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....ence the company fails the RPT filter applied by the assessee as well as TPO, hence rejected The Related Party transaction is more than 25% and hence the company fails the RPT filter applied by the assessee as well as Department. The comparable has been validly rejected. 7. Optimus Global services Ltd. The company fails the Export earning filter i.e. the foreign exchange earning of the company is less than 75% and hence it is rejected as a comparable. The export earnings constitute only 11.46% of the total revenue and hence the company fails the export earning filter. The company has been validly rejected by the TPO. 8. Sparsh BPO Services Ltd. The company fails the Export earning filter i.e. the foreign exchange earning of the company is less than 75% and hence it is rejected as a comparable. The company fails the Export earning filter. The company has been validly rejected by the TPO. 9. HTMT Global Solution Ltd. The Related Party transaction is more than 25% and hence the company fails the RPT filter applied by the assessee as well as TPO, hence rejected The Related Party transaction is more than....
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....ntal data. The assessee and TPO agreed upon the filter of 25% related party transaction, therefore, in the case of HCL Comnet System Ltd, the related party transaction were found less than 25% and accordingly, it was included in the comparables otherwise, this company is functionally comparable with the assessee as held by the DRP as the segmental margins have been adopted by the TPO. As regards the objection of the assessee on account of extreme high turnover, the Ld. ASG has submitted that the Tribunal has considered this issue extensively in the case of Willis Processing Services India Pvt. Ltd., in (57 SOT 339). As regards the comparability of e4e Healthcare Solutions, the said company was also found as comparable with the assessee as held by the Tribunal in the assessee's own case for A.Y. 2007-08 in para 20.1 of the decision. Thus the Ld. ASG has submitted that the companies selected by the assessee are not functionally comparables whereas the companies selected by the TPO and confirmed by the DRP are even otherwise, comparables in view of the decision of this Tribunal in assessee's own case. 139. We have considered the rival submissions and as well as the relevant materia....
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....n otherwise it will loose the character of uncontrolled un related party transaction. However, in the real word it is almost impossible to have a comparable without single related party transaction and, therefore, while selecting the comparables, related party transaction cannot be completely ruled out. Therefore, having regard to the fact and circumstances and availability of the comparables to bench mark the international transaction, the reasonable tolerance range has to be considered which may be 10% on the lower side to 25% as the highest limit which could be permitted in any exceptional circumstances where the availability of the comparables is very less. In the case in hand, the TPO adopted a very lenient and highest limit of related party transaction, therefore, we do not find any error in applying filter of not exceeding 25% of related party. The DRP while deciding the comparability of the companies selected by the assessee applied these filters as well as functional comparability which is summarized in the table below:- Sr. No. Name of the Company Remarks 1 Allsec Technologies Limited The annual report of the company refers to the following: &nb....
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....mpany it is also seen that the sales of the company has decreased compared to the earlier year by 44% on account of a conducting agreement entered by the company with its related party Upstream RPO Services Pvt. Ltd. As a result, the sales for the period 1.9.2007 to 29.2.2008, (ie. for six months) was booked as revenue as per arrangement in the books of the related party UBSPN, for which the company has received conducting fee of Rs. 1.5 crores. As this agreement did not materialize, the revenue for March 2008 was offered in the books of this company. Effectively revenue for 6 months of the year was not considered in its operating performance. Hence it not a reliable comparable. 4 Maple E-solutions Ltd As per schedule 13 the revenue from exports services Rs. 17.76 crores and domestic sales and services Rs. 15.88 crores. The export earnings constitute 53% of the total revenue. It fails the export earning filter set by the TPO. As we have already observed that this filter is valid, we are of the view that this company was validly rejected. 5 N I I T Smartserve Ltd The related party transaction is more than 25%. Fails the RPT filter set by the assessee and department....
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....s and turning around the operations in coming years. Accordingly the accounting standards have been prepared on a going concern basis. The company has given segmental profitability information from call centre business and paging business. The revenue from call centre is Rs. 11,83,05,511/-, the operating profit was Rs. 2,83,69,152/-.The OP/TC comes to 31.54%. However, it is seen it has not reported any export earnings. It fails the export earning filter. This company was validly rejected as comparable. 14. Survin Internet services Ltd The company has no export earnings. It fails the export earning filter. This company was validly rejected as comparable. The company's total revenue is only Rs. 1.91 crore of which 1.86 cro was from call centre and the balance from software division, but the segmental information has not been provided in the annual report. It is seen that the assessee has taken into account the call centre revenue but has considered all the expenses in the Profit & Loss The profit from call centre business cannot be reliably computes. For this reason also this company is considered incomparable. 15. Jindal Intellicom Pvt Ltd Fails the....
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....export earning filter as its export earning constitutes only 53% of the total revenue which is not disputed. Accordingly, we do not find any reason to interfere with the orders of authorities below for rejecting this company as a comparable. 145. NIIT Smartserve Ltd This company has been rejected on the ground that the related party transaction is more than 25%. This fact is not disputed by the assessee that this company has more than 25% related party transaction. We have alredy discussed the filters applied by the TPO and found to be proper and justified. Accordingly, this company cannot be considered as uncontrolled comparable for determining the arm's length price. 146. Nipuna Services Ltd (Now Satyam BPO) Undisputedly related party transaction in this case is also more than 25%, therefore, it cannot be included as comparable representing uncontrolled transaction. 147. Optimus Global Services Ltd. In this case, the DRP has noted that the export earning constitute only 11.46% of the total revenue and accordingly, it was rejected on account of failure to pass the export earning filter. The company having so meager earning from export cannot be compared with the ....
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....regarding the jurisdiction of the TPO to carry out fresh search for selecting the comparables for determination of arm's length price in relation to international transaction. It is pertinent to note that as per provisions of section 92C(A)(3) of the Income Tax Act, the TPO has the jurisdiction/power to gather and consider all relevant material and information apart from evidence, information and documents, produced by the assessee as required u/s 92D(3). Further secion 92C(A)(7) empowers the TPO to exercise any of the powers specified in clause (a) to (d) of sub-section 1 of section 132 or subsection 6 to section 133 or 133A of the Income Tax Act for the purpose of determining the arm's length price. There is no impediment on the power of the TPO to carry out a fresh search for the purpose of gathering more information and documents relevant to determine the arm's length price in relation to international transaction. Thus we do not find any merit or substance in the contention of the assessee in this respect. 157. Now we will analyze the functional comparability and other aspects of the comparables selected by the TPO and confirmed by DRP while computing the arm's length price....
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....07-08 (supra) in para 21.6 as under:- "21.6 The assessee has objected to the inclusion of this comparable on the ground that the company is not comparable as it is mainly engaged in translation business in addition to medical transcription, accounts BPO and consultancy. The learned DR has placed on record the annual report of the company which shows that the main revenue i.e. 4.05 crore is from translation business where as revenue from medical transcription is only 9.72 lakh and from BPO at Rs. 12.41 lakh. The translation business is not comparable to the case of the assessee. Therefore, in our view, this company has to be excluded from the list of comparables. We accordingly direct the Assessing Officer to exclude this comparable." 161. The Tribunal found that the major revenue of the company is from translation business which is not comparable to the case of the assessee, therefore, it was held that this company has to be excluded from the list of comparables. Following the earlier order of this Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables for determination of arm's length price. 162. e4e Healthcare Solutions Ltd ....
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.... without any involvement of application of mind. Hence this company is a good comparable for the purpose of determining the arm's length price. 166. Infosys BPO We have heard the Ld. AR as well as Ld. ASG and considered the relevant material on record. At the outset, we note that the comparability of this company was examined by the Tribunal in the assessee's own case for the A.Y. 2008-09 in para 24.3.2 and 24.3.3 as under:- "24.3.2 We have carefully considered the various aspects of the issue and the rival arguments advanced by both the parties. We have already held that high end services in ITES sector could not be the basis for exclusion of comparables. Similarly, we have also not found the arguments based on high margin convincing for the reason given earlier. The argument of the learned AR based on brand value and high marketing /selling expenses had been examined in detail by the Tribunal in case of Actis Advisors (P) Ltd. (Supra). The Tribunal noted that high marketing expenses did create marketing intangibles such as brand. But it was not necessary that it always resulted into high margin. The Tribunal in that case noted the finding of TPO that 95% of the revenue o....
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....of more skilled manpower, it will not result into higher margins. Therefore following the decisions of Tribunal (Supra), we reject the argument advanced for exclusion of Infosys BPO Ltd. and accordingly hold that this has to be accepted as a good comparable. 167. There is no change in the business profile of the said company during the year consider, therefore, following the earlier order of this Tribunal, we hold that the Infosys BPO is a good comparable to the assessee to determine the arm's length price. 168. Wipro Ltd. We have heard the Ld. AR as well as Ld. ASG and considered the relevant material on record. We find from record that the comparability of this company was also analyzed by this Tribunal in assessee's own case for A.Y. 2007-08 in para 24.4 as under:- "The case of Wipro Ltd. which has been excluded by CIT (A) is identical to the case of Infosys BPO Ltd. with only difference that turnover in case of Wipro Ltd. is 939.78 whereas in case of Infosys BPO Ltd. the turnover is 649.57. The argument advanced by the assessee for exclusion of this comparable is the same as advanced in the case of Infosys BPO Ltd. Therefore, for the same reasons given in case of In....
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....mparables. 172. Out of ten comparables, the assessee had raised objection before us only with respect to six companies as discussed above. In view of our above finding, the two comparables namely, Accentia Technologies Ltd,. and Cosmic Global Ltd., are directed to be excluded from the list of comparables and, accordingly, the Assessing Officer/TPO is directed to re-compute the arm's length price on the basis of the remaining 8 comparables. 173. Ground No. 17 is regarding set off of unabsorbed depreciation against income from other sources or alternative deduction u/s 10A of the Income Tax Act. 174. The assessee claimed set off unabsorbed depreciation of Rs. 2,70,64,399/- against the income from other sources. The Assessing Officer has disallowed the claim of the assessee on the ground that unabsorbed depreciation has already been adjusted in the A.Y. 2005-06 and, therefore, no further set off can be allowed in the year under consideration. The DRP confirmed the disallowance made by Assessing Officer on the ground that unabsorbed depreciation of Rs. 38520781/- pertains to the A.Y. 2004-05, was carried forward to A.Y. 2005-06 and the Assessing Officer while passing the asses....
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....s. 3,08,67,480/- resulting a short credit of withheld amounting to Rs. 21,59,286/-. This claim of the assessee is based on the revised return of income. Since the complete facts are not recorded by the authorities below as this ground was not raised before the authorities below particularly before the DRP, therefore, in the facts and circumstances of the case as well as in the interest of justice, we direct the Assessing Officer to verify the correct amount of tax withheld and accordingly consider the claim of credit of the same. 181. Ground no. 19 is regarding short credit of advance tax. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The grievance of the assessee is that in the revised return of income, the assessee claimed the credit of advance tax of Rs. 4,51,47,905/- whereas the Assessing Officer has given the credit of Rs. 2,68,97,905/- resulting short credit of Rs. 1,82,50,000/-. This plea has been raised by the assessee for the first time before us, therefore, it was not considered by the authorities below. Accordingly, in the facts and circumstances of the case, we direct the Assessing Officer to verify and consider the cla....
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....ldings Limited ORIGINAL TARGET 100% nigs Plustech Mercantile Co. (P) Ltd. OPTIONS AGREEMENT (COUNTERPARTY 100% 100% Centrino Trading Co. Private Ltd. I (later Nadal Trading Co. Pvt. Ltd.) MV Healthcare Services (P) Ltd. I OPTIONS AGREEMENT (COUNTERPARTY) 100% ND Callus Info Services Private Ltd. I 100% 100% @ Licensed Area UAS Licence Licences being applied for Document 3 Hutchison Tele- Services (India) Holdings Limited MS CGP India Investments Limited 100% 100% 100% 100% 100% 100% 3 Global services Private Limited Trans Crystal Limited AL-Amin International Euro Prime Limited Pacific Mobilvest MS MS Securities Metals Ltd. CCI Mauritius Inc Ms 100% 37.25% Telecom Investments India Pvt. Ltd. MS Ltd. MS (Now Vodafone India MS 100% Services Pvt. Ltd.) I OPTIONS AGREEMENTS CALL CENTRE BUSINESS (DEMERGEDT TO HWL) 23.97% 38.78% I Jaykay Finholding (India) Private Limited 100% UMT Investments Limited I 100% Asian Telecommunications Hutchison Telec....