TaxTMI 
TaxTMI 
2015 (7) TMI 1051
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....ued by the AE 59,90,19,794 3 Sale of shares by the applicant to its AE 1,51,41,11,996 4 Guarantee commission on intra-group Guarantees extended by the applicant 10,70,78,915 5 Interest on advances extended to AEs 16,70,226 Total 2,31,48,59,599 (ii) Grounds challenging the following additions/disallowances: S. No. Particulars Amount INR 1 Disallowance of carry forward and set-off Of unabsorbed depreciation allowance 8,52,64,475 2 Disallowance of stamp duty and customs Duty along with disallowance of claim of Depreciation on stamp duty 73,18,345 3 Addition on account of alleged mismatch between AIR and revenue reported by the applicant, in its Profit & Loss Account 1,55,232 4 Addition of notional interest expense Arising out of lease payments 89,716 5 Disallowance of interest expenses claimed 78,60,025 6 Addition of exchange gain on repayment of loan 8,71,00,937 Total 18,77,88,730 (iii) Levy of interest u/s 234B & 234C; (iv) Additional grounds of appeal filed vide petition dated 21st October, 2014, which are alternative grounds for T.P. adjustments on guarantee commissions raised vide ground Nos. 1, 2 &....
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.... Cost (OP/OC) as the Profit Level Indicator (PLI); and using data pertaining to financial year 2008-09 wherever it was available, otherwise for two preceding years i.e. financial year 2007-08, 2006-07. As a result of transfer pricing exercise, the assessee's margin and comparable margins were reported as under in the Transfer Pricing Study Report: Sr. No. Nature of international transaction Aegis India's Margin Comparables' margin No. of comparables 1 Provision of IT Enabled services (for third party contracts) 16.14 Percent 13.58 Percent 6 2 Provision of IT Enabled services (for In-house campaigns) 12.13 Percent 13.49 Percent 6 3 Provision of Receivable management services 15.83 Percent 14.15 percent 6 5. However, the Ld. Transfer Pricing Officer (TPO), to whom the matter was referred by the Assessing Officer for analyzing the ALP of the international transactions with the AEs, did not concur with the assessee's transfer pricing analysis and proceeded to modify the same. Firstly, he merged the three segments of provisions of ITEs into single IT enabled service segment which was separately benchmarked by the assessee; secondly, he introduced certain fil....
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....p; 10 Accentia Technologies Limited 52.24% 49.38% 11 Vishal Information Technologies Limited(Now known as Coral Hub Limited) 52.07% 37.14% 36.93% 12 Cosmic Global Limited 17.94% 40.68% 40.68% 13 Crossdomain Solutions Pvt Limited 29.40% 29.40% 14 Genesys International Limited 57.91% 57.91% Operating Margins 16.51% 3 0.46% 25.99% Total Number of comparables 6 8 8 2 3 6. Before us, Ld. Counsel, Shri Rajan Vohra submitted that, so far as first three comparables are concerned i.e. Allesec Technologies Ltd.; Aditya Birla Minacs Worldwide Ltd; and Cepha Imaging Private Ltd., the same were selected by the assessee in the TP study report and have also been accepted by the TPO/DRP. Hence these are not in dispute and are to be included in the final list of comparables. However, as regard five comparables listed at Serial No. 4 to 8 i.e. Accentia Technologies Ltd., Vishal Information Technology Ltd, now known as Coral Hub Limited; Cosmic Global Limited; Crossdomain Solutions Pvt Ltd; and Genesys Internatio....
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.... account of outsourcing charges. He also drew our attention to relevant extracts of annual reports of Coral Hub & Cosmic Global and submitted that in case of Coral Hub, the outsourcing charges were at 90.57% of the operating costs and in case of Cosmic Global Ltd. it is 57.31%. Thus, when these companies outsource their significant portion of their work, the same cannot be compared with the assessee, which performs the services all by itself. In support of their exclusion he relied upon four decisions of the Tribunal wherein, these companies have been excluded on account of outsourcing operations; which are as under: (a) ACIT v Hapag Lloyd Global Services Private Limited (ITA No. 8499/Mum/2010); (b) ACIT v Maersk Global Service Centre India Private Limited (ITA No. 3774/Mum/2011); (c) Symphony Marketing Systems India Private Limited (37 CCH 253); and (d) HSBC Electronic Data Processing India Limited v ACIT (1624/Hyd/2010) Lastly, he submitted that in case of Coral Hub and there are significant intangible assets like goodwill, intellectual property and technical know-how, whose value is approximately 48.5% of its net block. Hence, these two companies should be excluded ....
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....ssee based on functional similarity. TPO/DRP have rejected the said company on account of diminishing revenue filter; turnover less than 5 crores filter and services revenue less than 75%. The TPO has not cited any instances of functional dissimilarity vis-à-vis the assessee. Further, its revenues in subsequent years have increased and criteria adopted by the TPO as its sales are on decline cannot be held to be reason for its exclusion. Further, its income from ITES is 99.57% and, therefore, it is a fit case of being comparable company. Regarding turnover filter of less than 5 crores adopted by the TPO, he made his detailed submissions and submitted that the said company should be included in the final comparability. ii) R. Systems International Ltd. (Segmental) The Ld. TPO, has rejected the aforesaid comparable on the ground that this company is following January, 2008 to December, 2008 as accounting year instead of April 2008 to March, 2009. Mr Rajan Vohra submitted that otherwise the functional profile of the BPO segment of R Systems is similar to that of the assessee and it satisfies all the comparability criteria. Regarding different accounting year, he submitted that....
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....accordance with the requirements of AS-17, issued by ICAI which clearly states that the purpose of segmental reporting is to determine the profitability of group of services that are subject to different rates of profitability, opportunities of growth, future prospects and risks. The accounts of the company have been duly audited and therefore, TPO cannot question the authenticity of the audited financial year statement as he has not provided any evidence to support his contentions. 8. Finally, as an alternative, Mr. Rajan Vohra submitted that, out of all the disputed comparables, Accentia Technologies Limited, Coral Hub Ltd; Genesys International are removed and R Systems International Ltd is included, then assessee's margin will fall within the range of +/- 5%, of ALP vis-à-vis the comparable and accordingly no adjustment would be required to be made in this ITES segment. 9. On the other hand, the Ld. CIT DR, after referring to the various observations made by the TPO made his detailed submissions with regard to each and every comparables argued by the Ld. Counsel. In sum and substance, he mainly relied upon the order of the TPO & DRP. 10. We have heard the rival submis....
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....omes very difficult to make a comparison or carry out any comparability analysis for the purpose of benchmarking the margins with that of the assessee and therefore, such a comparable cannot be held to be includible in the list of comparables. Thus, we agree with the contention of the Ld. Counsel that this company should be excluded from the final list of comparables. Further, in the decisions relied upon by the Ld. Counsel, this company has been excluded from the comparing it with ITES companies on the ground of unavailability of the segmental information in the public domain. Accordingly, this comparable is directed to be excluded. (ii) & (iii) Coral Hub Ltd. (Vishal Information Technologies) & Cosmic Global Ltd :- As pointed out by the Ld. Counsel, these companies have significantly outsourced their activities, which is evident from the fact that out of the total operating costs, the outsourcing charges are more than 90% and 57% respectively. This factor alone makes a significant difference vis-à-vis the business model of the assessee, which is carrying out its IT enabled services on its own. Further, the Coral Hubs Ltd is having significant intangible assets like goodw....
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....d factors in these periods then proportionate operating margins on operating cost can be very well taken for benchmarking the margins. We find no fault for reworking the margin on the basis of adding the three months and excluding three months to work out the proportionate working margin if the financial data are duly audited and are available in the public domain, of course with a rider that during that period there are no other factors affecting the operating margin. Thus, we accept the contention of the Ld. Counsel that this company should be included in the list of final comparables for benchmarking the margins. 11. Before us, the Ld. Counsel had submitted that if the aforesaid four comparables are excluded from the list of comparables and one company, namely, R. Systems are included, then assessee's margin will fall within the range of +/- 5 of arms length price vis-à-vis the average operating margin of the comparable companies. Accordingly, we direct the Assessing Officer/TPO to analyze the operating margin of the assessee vis-àvis the final comparables after including and excluding the comparables as decided above and the comparables which are not in dispute a....
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....t Rs. 400 per share on the basis of Discounted Cash Flow Method (DCF) by using swap ratio of 1:3 to compute the value of each equity share of Aegis Gurgaon at Rs. 133 per share. Accordingly, adjustment of Rs. 227,99,28,047/- was made to the income of the assessee. The DRP, however, held that valuation done by the TPO was not correct and revise the valuation of equity share to Rs. 313 per share of the assessee and the value was determined at Rs. 104 per share of Aegis Gurgaon being 1/3rd and accordingly, adjustment was reduced to Rs. 151,41,11,996/-. 14. Before us, the Ld. Counsel Shri Rajan Vohra submitted that even if the DCF method is to be applied then the same comes to Rs. 84.63 per share and the actual working in accordance with DCF report has been given in paper book at page 386. He submitted that it is open for verification by the AO/TPO. The 1/3rd value of Rs. 84.63 will come down to approximately Rs. 29 per share and if at all any adjustment is to be made then the same has to be made strictly as per DCF method, if the TPO's version is to be accepted. However, the TPO has erroneously worked out the valuation as per the DCF method; Secondly, he submitted that the three tran....
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....alue in accordance with the CCI Guidelines was only Rs. 22.82 per share. He has also taken note of the fact that BPO division of Aegis Gurgaon was demerged with the ESSAR in subsequent year. Using swap ratio of 1:3, he has taken the value of each equity share of Aegis Gujarat at Rs. 133 i.e. 1/3rd. This has been reduced by the DRP as there was some erroneous calculation. This entire valuation has been done on the basis of DCF method. The assessee's case before us is that the transaction of sale of shares of Aegis Gurgaon, issue of shares by the assessee and demerger of BPO Division of Gurgaon are completely isolated and not linked to each other. Therefore, same should not be benchmarked on the basis of such a transaction, as one transaction pertains to transfer of shareholding in a subsidiary and second transaction relates to issue of its own equity shares. The valuation of the two transactions cannot be equated for the reason that they pertain to different financial years and therefore, same cannot be held to be inextricably linked. However, without going into merits of this aspect, whether they are two separate transactions or not, we are proceeding with the main arguments of the....
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....te Bank of India (Canada), Punjab National Bank (International Ltd, London) and J P Morgan Securities (Asia Pacific) Limited, Singapore 6,66,46,80,000 For financing the acquisition of People Support Inc. for USD 132 Million 19. The TPO held that guarantee fee should have been charged @ 5% from the AE for providing the corporate guarantee and accordingly, he made an adjustments of Rs. 17,84,64,859/-. The DRP on the other hand, held that the Indian Banks charge around 2% of commission for giving bank guarantee and over and above this, 1% for covering the risk taken by the assessee without any security should also be included. Thus, DRP directed the Assessing Officer to compute the guarantee fee commission at 3% per annum and accordingly, the amount of adjustment on account of guarantee fee was reduced to Rs. 10,70,78,915/-. 20. Before us, the Ld. Counsel Shri Rajan Vohra besides submitting that such guarantee fee arrangement cannot be held to be international transaction in view of the decision of ITAT Delhi Bench in the case of Bharti Airtel Ltd in ITA No. 5816/Del/2012, he further submitted that such a guarantee fee percentage as determined by the DRP is not correct on ....
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.... be benchmark by taking the rate of 1% of the outstanding guaranteed amount in line with the consistent views taken by the coordinate Benches, from its AE and adjustments should be made accordingly. Thus, grounds 12 & 13 as raised by the assessee are treated as partly allowed. 23. Next issue is with regard to adjustment on account of subscription and redemption of preference shares at Rs. 59,90,19,794/-, as raised vide ground no. 14. 24. Brief facts are that during the relevant assessment year, the assessee subscribed to redeemable preference shares of its AE, Essar Services Mauritius and also redeemed some of these shares at par. The assessee's case had been that subscription of preference shares does not impact profit & loss account or taxable income or any corresponding expense resulting into deduction in the hands of the assessee. Redemption of preference shares at par represents an uncontrolled price for shares, based on a comparison with such uncontrolled transaction price and, therefore, such redemption of preference share should be considered at arms length from Indian transfer pricing prospective. During the course of transfer pricing proceedings, the TPO observed that s....
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....idiaries. Thus, by any stretch of imagination it cannot be inferred to be loan but is purely on investment in shares. As an alternative, he submitted that interest should be on LIBOR basis and in support of this contention, he relied upon the following decisions: Sr. No. Name of case law 1 Cotton Naturals India Private Limited (22 ITR 438) 2 Cotton Naturals India Private Limited (ITA No. 3265/D/2011) 3 Everest Kanto Cylinder Limited (ITA No. 7073/Mum/2012) 4 Hinduja Global Solutions Limited v ACIT (145 ITD 361) 5 DCIT v Tech Mahindra Limited (ITA No. 1176/Mum/2010) 6 Tata Autocomp Systems Limited v ACIT (52 SOT 48) 7 Dania Oro Jewellery Private Limited (63 SOT 19) 8 Aurionpro Solutions Limited (36 CCH 6) 26. On the other hand, Ld. DR strongly relied upon the order of the TPO and DRP. 27. We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. The TPO has re-characterized the said transaction of subscrip....
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.... in the name of Aegis BPO (South Africa) Pty. Ltd., which was a Special Purpose Vehicle for investing in South Africa. This was a cost pertained to the assessee and when in the next year actual invoice were received the same was booked in the profit and loss account. In support, the copy of these invoices were also filed. However, the TPO held that it is an interest free loan and assessee should have earned interest on it and accordingly, he imputed the interest @ 15.41% and made adjustment of Rs. 16,70,226/-. Such an adjustment has also been confirmed by the DRP. 30. The Ld. Counsel submitted that, it was duly clarified before the TPO that the nature of advance was in fact, payment made for advisory services, which was wrongly classified as advance and therefore, it is an expense to the assessee and no interest can be charged. On the other hand, the Ld. DR relied upon the order of the DRP. 31. After considering the rival submissions, we find that the assessee has filed copies of invoices relating to payment of Advisory Services rendered by the South African based Consultants, for acquiring prospective companies for acquisition in South Africa. This was a cost incurred towards hi....
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.... in the case of GVPL were determined as under: AY Returned Loss of GVPL Assessed losses of GVPL post the Order of learned CIT(A), ITAT, Delhi High Court Revised Losses of GVPL available to Appellant, for carry Forward and set-off In AY 2009-10 2002-03 4,61,86,250 4,61,86,250 76,56,312 2003-04 11,80,25,770 10,96,37,145 8,39,79,624 (including unabsorbed depreciation of 2,87,66,909) That apart, during the financial year 2008-09, there was change in holding company of the assessee from Arya infrastructure holdings to Essar Services holdings Ltd. therefore, own business loss of the company were not available for carried forward as per section 79. The Ld. Assessing Officer without taking the note of the subsequent appellate orders for the AY 2003-04 wherein substantial relief was allowed to the GVPL has disallowed the entire losses of 2003-04 and thereafter after applying section 79 Assessing Officer disallowed the claim of carry forward and set off of previous years' business losses and unabsorbed depreciation of the GVPL to the assessee. 34. Before us, the Ld. Counsel submitted that section 72A(4) has an overriding effect on section 79 and hence, the year in which....
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....ings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be". Thus, by virtue of section 72A(4), in the case of the assessee, the accumulated loss and unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of the resulting company i.e. the assessee. The Assessing Officer has invoked section 79 which apparently is not applicable on the facts of the case; and secondly, it does not have an overriding effect on section 72A(4) which is a specific provision in case of carry forward and set off of accumulated loss and unabsorbed depreciation in case of amalgamation or demerger. Section 79 has only an overriding effect so far as Chapter VI is concerned, however, section 72A(4) has an overriding effect over any other provisions of the Income Tax Act including that of section 79 because it is a special provi....
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.... depreciation accordingly. As per section 43(1) "actual cost means" the actual cost of the assets to the assessee. Since the stamp duty is the actual cost incurred by the assessee in order to purchase the assets, it shall be considered as cost to the assessee. As per AS-10 stamp duty relates to the cost of acquisition and hence it should be capitalized. Thus, the principle of apportionment for determining the actual cost of a depreciable assets is embedded in the Act itself. Without prejudice, he submitted that stamp duty is otherwise allowable as revenue expenses and in support, various judicial precedents were cited before us. 40. On the other hand, Ld. DR submitted that the stamp duty in the present case has been paid on business transfer agreement and not for a specific depreciable assets. Even as per accounting standard the stamp duty relatable cost should be capitalized which is also the plea of the assessee. However, no depreciation can be allowed on such a expense. Further, stamp duty cannot be held to be revenue expenditure as explained by subsequent decision of Hon'ble Supreme Court. 41. We have heard the rival submissions and also perused the relevant material placed o....
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....er considering the rival submissions and on perusal of records, we find that all the amounts received by the assessee were through cheques or through banking channels which has been deposited in the bank account of the assessee. The gross income offered by the assessee also far exceeds the amount appearing in the AIR. That apart the assessee's books of account have been duly audited and no discrepancy as such have been found by the Assessing Officer, that any transaction has not been entered by the assessee. If the assessee had categorically denied any transaction with those two parties by showing it from its own records, then the onus heavily lies upon the Department to show that the assessee had actually transacted with the said parties. Thus, in absence of any such material or enquiry done by the Assessing Officer, no addition could be made in the hands of the assessee simply relying upon the uncorroborated AIR Information. Accordingly, addition made by the Assessing Officer is directed to be deleted and ground no. 19 is thus allowed. 45. In ground no. 20, the assessee has challenged the addition of Rs. 11,69,56,961/- which was on account of disallowance of current year's loss ....
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.... of lease payment, u/s 40(a)(ia) on the ground that TDS u/s 194A has not been deducted. 48. The assessee has made lease payment to IBM India Pvt Ltd and Oren Auto Infrastructure. The interest amount aggregating to Rs. 89,719/- was paid to these parties without any deduction of tax. 49. Before us, the assessee's contention has been that no disallowance u/s 40(a)(ia) can be made for the amount "paid" during the year and in support reliance was placed on the decision of ITAT SB in the case of Malinlyn Shipping and Transport vs Addl CIT, reported in 146 TTJ 1 and Addl CIT vs Victor Shipping Services P Ltd, reported in 357 ITR 642. 50. On the other hand, the Ld. DR relied upon a decision of ITAT Mumbai Bench in the case of ITO vs M/s Pratibhuti Viniyog Ltd, ITA No. 1689/Mum/2011, order dated 22.08.2014 wherein the Tribunal after considering the Vector Shipping and Gujarat and Calcutta High Courts have decided the issue in favour of the Department by holding that "provision of section 40(a)(ia) is applicable even on the paid amount". 51. After considering the rival submissions, we find that the Tribunal in the aforesaid decision has discussed the issue of "paid" and "payable" after d....
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....ar for cash i. On July 15, 2008 219,642 400 87,856,800 ii. November 4, 2008 2,884,200 400 1,153,680,000 iii March 17, 2009 1,251,336 400 500,534,400 Iv March 30, 2009 2,542,875 400 1,017,150,000 Total (INR) 62,21,125,200 54. The Assessing Officer's case was that these advances have been made out of the borrowed funds and since no commercial expediency is established, the proportionate disallowance of interest on borrowed funds has to be made and accordingly, he applied the interest rate at 15.41%. 55. Before us, the Ld. Counsel, Shri Rajan Vohra submitted that assessee had own funds of Rs. 346.19 crores, out of which only Rs. 4.81 crores was given as loan to the sister concern/subsidiaries. During the year, the assessee had raised 275.92 crores by way of issue of shares out of which Rs. 4.81 crores have been lent to sister concern/subsidiaries. The loan amount received by the assessee during the year under consideration was for specific purpose like, capital expenditure, import of IT equipment etc. In support of his contention, he relied upon the decision of Hon'ble Bombay High Court in the case of Reliance Utilities and Power....
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....er the head "income" credited under Schedule-14. The exchange gain on such redemption has subsequently been reduced from net profit, while computing the total income of the assessee as the same was capital in nature. The assessee had submitted the detailed working of such exchange gain in the following manner: Dt of sale of investment No. of Preference shares sold Amount Received (USD) Exchange Rate of time of remittance Amount Received (INR Exchange Gain/ (Loss) Sold out of investments made on 24.12.08 5820000 5820000 48.95 284889000 19613400 27.10.2004 (1st Tranche) 11296837 11296837 50.08 565797568 50887732 27.10.2004 (1st Tranche) 2660000 2660000 50.08 133225036 13099436 27.10.2004 (IInd Trache) 623163 623163 50.08 31210864 3500368 09.12.2004 (IIIrd Tranche) Total 20400000 20400000 1015122468 87100937 Since TPO has held that preference shares held by the assessee was akin to giving or interest free loan and, therefore, had arrived at interest rate based on assumed credit rating, the Assessing Officer following the TPO's order held that the resultant exchange gain of Rs.....