TaxTMI 
TaxTMI 
2015 (7) TMI 1051
X X X X Extracts X X X X
X X X X Extracts X X X X
....8 2 Compensation receivable on preference shares issued 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervices, the assessee has benchmarked the margins of these services separately after adopting Transactional Net Margin Method (TNMM) as the most appropriate method by taking Operating Profit/Operating 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 7.29% 6 Informed Technologies India Ltd. 19.46% 7 Microgenetic Systems Limited 1.13% 8 Microland Limited (Seg.) -19.13% 9 R Systems International Limited (Seg) 11.84% 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.; A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Hub : Regarding Coral Hub and Cosmic Global Hub, he submitted that the business model of these companies are significantly different from the assessee. These companies have incurred significant amount of expenditure on translation charges, which is indicative of the fact that it operate on different business model and are also engaged into significant outsourcing activities which is not the case of the assessee. This is he submitted are apparent from the review of their financials where the majority of expenses were on 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven in its annual report are GIS consulting; 3D Mapping; Navigation Maps; LIDAR; Photogrammetry Remote Sensing Services; Image processing and Surveying. Thus, this company is functionally entirely different from the assessee and hence it cannot be included in the final list of comparables for comparability analysis. 7. Regarding inclusion of various comparables selected by the assessee and rejected by the Ld. TPO, his arguments regarding all these comparables are as under: (i) Informed Technologies India Ltd:- The Ld. Counsel submitted that this company was included by the assessee 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany has shown decline in sales for FY 2008-09, yet it has reported increase in total profits before tax in the same year as compared to the earlier year. This company is not undergoing a phase of diminishing revenues. Thus, this company cannot be excluded on the grounds taken by the TPO. v) Microland Ltd. The said company has been rejected by the TPO on account of unreliable segment information. In this regard, Ld. Counsel submitted that the TPO has not cited any instances of functional dissimilarity of this company vis-a-vis the assessee. This company has separately reported ITES segment in 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, Acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....services. The software development service includes software products also. Further, the said company is earning substantial portion of its income from coding activity, which is primarily related to software development. Such functions are slightly different from IT enabled services. Another very significant fact is that segmental information of the said company is not available in the public domain to properly identify the reserves and costs attributable to various business areas and segments. Once it is difficult to identify the revenues and cost attributable in absence of segmental information, then it becomes 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (v) R Systems International Ltd (Segmental) : This company has been included by the assessee and rejected by the TPO/DRP on the ground that it is having different financial year ending on 31st December 2008, as accounting year followed by this company is January to December, whereas, the assessee is following March ending, i.e. 1st April, 2008 to 31st March, 2009. The assessee has taken the proportionate basis to rework the operating margins on operating costs by adding three months from January 2009 to March 2009 and excluding the three months from January 2008 to March 2008. If there are no extraordinary events and 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2010 w.e.f. 1st April, 2009 using a Swap ratio of one equity share of the assessee for three shares of Aegis (Gurgaon) as approved in the Scheme of amalgamation and demerger by the High Court. The assessee had furnished valuation reports and other details for transfer and issue of shares before the TPO. However, the TPO rejected the valuation undertaken by the assessee and concluded that transactions relating to sale of shares by the Aegis Gurgaon and demerger into the assessee were inextricably linked. Accordingly, he computed the value of equity shares of Aegis Gujarat by taking the value of the shares of the equity shares at 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. Bef....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. The main issue raised before us is, whether the sale of shares of Aegis BPO Gurgaon by the assessee to Essar Services Holding Ltd Mauritius at Rs. 12.72 per share is at arms length price or not. The assessee in support of benchmarking the ALP has relied upon the valuation report of the Chartered Accountant, which has been placed in the paper book at pages 466 to 467, which has been valued at "nil". On the other hand, the TPO has adopted the value of Rs. 400 per share on the basis that the assessee had also issued equity shares to ESSAR Services Holdings and Arya Infrastructure Holdings Ltd at Rs. 400 per share whose fair market value 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stitute international transactions. The details of various guarantee arrangement made and entered into by the assessee with third party banks on behalf of its AE were as under: S. No. Details of guarantee Guarantee Amount (INR) Purpose of guarantee 1 Corporate guarantee given by the Appellant to Axis bank for extending foreign currency loan of USD 15,000,000 to its 100% Subsidiary Essar Services Mauritius 75,73,50,000 For redemption of preference shares of Essar Services Mauritus held by the Appellant 2 Corporate guarantee given by the appellant on behalf of its 100% subsidiary, Aegis USA Inc. to Bank of India (Singapore), State 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w.e.f. financial year 2007-08 for a period of five years. The said guarantee commission recovered by the assessee has been recognized in the financial statement by the assessee for the assessment year 2012- 13 and has also been offered for tax in that year. In wake of these fact and without going into the other arguments of the assessee and also looking to the fact that the Tribunal in various cases has accepted guarantee commission chargeable between 0.5% to 1%, we hold that guarantee commission of 1% should be chargeable. Here in this case, assessee itself has agreed to charge guarantee commission @ 1% of the outstanding guaranteed amount, accordingly, we also hold that a guarantee commission should 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scuits Private Limited(ITA No. 9010/Mum/2010) 5 All Cargo Global Logistics Limited (ITA No. 4909 and 4910/Mum/2012 6 Tooltech Global Engineering Private Limited (ITA No. 273/PN/2014) Explaining the nature of transaction, Mr. Rajan Vohra submitted that the assessee had entered into arrangements for specific purpose and in the capacity of a shareholder furthering its own interest, it had borrowed money from EXIM bank and Axis Bank and these loans were being serviced at a high interest rates. To reduce its interest burden, the assessee decided to prepay its debts by redeeming its preference shares. Subsequently it subscribed for fresh preference shares in order to further its participation interest in downstream subsidiaries. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uted by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed. 28. Next issue relates to adjustment of Rs. 16,70,226/- on account of interest on advance given to the AE, as raise in Ground no. 15. 29. During the financial year 2008-09, the assessee has made advance to its AE which was disclosed in Form 3ECB. The assessee's case has been that for the purpose of identifying prospective companies for acquisition in South African region the assessee had given advance for engaging consultants and has in fact received advisory services from South African based consultants in this regard. The cost incurred towards hiring of these consultants was erroneously shown as advance 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 earn....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AY 2009-10 Losses carried Forward by Appellant to AY 2010-11 2002-03 Unabsorbed Depreciation 76,55,312 76,55,312 - 2003-04 Business Loss 6,36,01,340 6,36,01,340 - 2003-04 Unabsorbed Depreciation 2,87,66,909 1,40,07,823 1,47,59,086 Total (INR) 10,00,23,561 8,52,64,475 1,47,59,086 Further, adjustment of aforementioned losses of GVPL was carried out by the Assessing Officer during the course of assessment proceedings for the AY 2003-04. However, after the order of the CIT(A), which was subsequently upheld by the ITAT, Delhi, and also by Delhi High Court the losses of GVPL were finally assessed at Rs. 10,96,37,145/-. Further adjustments were made by the Assessing Officer for the AY 2002-03 also. As a result the revise business loss and unabsorbed depreciation loss 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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m of set off of unabsorbed business losses and unabsorbed depreciation pertaining to the GVPL can be allowed in the hands of the assessee or not. Section 72A deals with the provision relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in the cases of amalgamation and demerger. Sub-section (4) is non obstante clause, which provides that notwithstanding anything contain in any other provision of this Act in the case of a demerger, the accumulated loss/allowance for the unabsorbed depreciation of the demerger company shall be as under: "(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y has been capitalized in the ratio of value of assets acquired from AOL India P Ltd. under BTA. The Assessing Officer held that what was transferred by way of DTA is the business and the stamp duty paid on such agreement is with regard to the business and not any specific depreciable assets. As per AS-10 Stamp duty paid on transfer of business being not mentioned in the list of items to be included in the "cost of fixed assets" cannot be added to cost of such fixed assets. Such an addition has also been confirmed by the DRP. 39. Before us, the Ld. Counsel submitted the Act nowhere specifies modicum and how the cost is to be recognized by purchase of an undertaking acquired on a slump sale basis. As an established practice the purchaser allocates the purchase price and other related cost incurred by it (i.e. to acquire an undertaking on slum sale basis) over assets on rational basis and claim 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee has challenged the addition of Rs. 1,55,232/- on account of mismatch between Annual Information Report (AIR) and the revenue reported by the assessee. 43. The Assessing Officer on the basis of AIR Information observed that the assessee had entered into a transaction with "PA Poonacha" and "Supertending Engineer". The assessee's case before the Assessing Officer was that it had not entered into any such transaction with the said two parties and there must be some error in the AIR information. The assessee does not have any record of having received any sum of the money from any such parties in the relevant assessment year. Neither the assessee has claimed any TDS credit deducted by these parties nor has received any such money. The Assessing Officer held that since the assessee could not get any confirmation from these parties to substantiate its claim, therefore, the same was added. 44. After 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 exc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pacity of shareholder was furthering its own interest by subscribing the shares. It had borrowed money from EXIM and Axis Bank at high interest rate. To reduce the interest burden, the assessee decided to pay these debt by redeeming its preference shares. Subsequently, it subscribed again for fresh preference shares in order to further its participation interest in downstream subsidiaries. This transaction cannot be recharacterized or inferred as a "loan". The transaction of purchase and redemption cannot be held to be a loan transaction and accordingly such a loss cannot be disallowed which is purely on account of indexation. We thus, direct the Assessing Officer to work out gain/loss after treating it as a transaction of purchase and redemption of shares. Thus, Ground no. 20 is treated as allowed. 47. In ground no. 21, the assessee has challenged disallowance of interest expense of Rs. 89,716/- arising out 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 deductio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Services (South Africa) Ltd. Subsidiary - 10,313 Aegis BPO Services (Gurgaon) Limited Subsidiary - 18,408 BPO division demerged into Aegis Limited w.e.f. 01.04.2009 Total 13,206 61,319 The sums so advanced to these sister concerns, were utilized by these companies for payment of various expenses incurred by them like payment of service tax, sales tax, salary etc. The assessee's case had been that it has advanced the money from its own interest free funds and no borrowed funds have been utilized by the assessee for advancing the money. The detailed break up of own funds as available with the assessee were as under: Particulars No of shares Issue Price(INR) Value (INR) Opening balance of share Capital as on 01.04.2008 616,345,000 Opening balance of share premium as on 01.04.2008 2,845,559,000 Total (INR) 3,461,904,000 Shares issued during the year 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 1,2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in various other decisions, we hold that no disallowance of interest is called for. Accordingly, ground no. 22 is treated as allowed. 58. In ground no. 23, the assessee has challenged the addition on account of Foreign exchange gain on redemption of preference shares aggregating to Rs. 8,71,00,937/-. 59. The assessee has subscribed to certain preference shares of Essar Services Mauritius during the financial year 2004-05, the details of which are as under: Date of Investment No. of Preference shares subscribed Amount Remitted (USD) Exchange rate at the time of remittance Amount Remitted (INR) 27.10.2004 30,601,000 30,601,000 40.58 1,394,793,580 27.10.2004 2,660,000 2,660,000 45.16 120,125,600 09.12.2004 8,995,333 8,995,333 44.47 400,000,000 Total 42,256,333 42,256,333 1,914,919,180 60. A portion of these preference shares were sold during the financial year 2008-09 i.e. AY 2009-10 and accordingly, the assessee credited an amount of Rs. 8,71,00,937/- on account of exchange gain on redemption of those preference shares under the head "income" credited under Schedule-14.....