TaxTMI 
TaxTMI 
2017 (2) TMI 1204
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....144C of the Income-tax Act, 1961 ('the Act') after considering the adjustments made by learned Transfer Pricing Officer ('IPO') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the learned Dispute Resolution Panel ('DRP'). GROUNDS RELATING TO TRANSFER PRICING MATTERS: 2. The learned TPO / AO / DRP have erred in making an addition of INR 88,02,54,695 to the total income (as detailed below) of the appellant in respect of various international transactions entered into by the appellant with its associated enterprises ('AE'). S.No. Particulars Amount (INR) 1. Adjustment in respect of IT -enabled services 4,47,84,556 2. Adjustment in respect of subscription and redemption of preference share capital 63,64,02,739 3. Adjustment in respect of guarantee commission on intra-group guarantees extended by the applicant 19,90,67,400 Total 88,02,54,695 3. The learned TPO / AO / DRP have erred in not accepting the economic analysis undertaken by the appellant in respect of the impugned international transactions entered into by the appellant with its AEs in accordance with provisions of t....
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....cable as per law. Adjustment in respect of issue and redemption of preference shares: 12. The learned TPO / AO / DRP have erred in re-determining the arm's length compensation pertaining to subscription and redemption of preference share capital by re-characterizing the same as interest-free loan and thereby imputing interest thereon. 13. Without prejudice to the above, the learned TPO / AO / DRP have erred in considering Indian bond rates for the purpose of computing interest on the alleged loan instead of LIBOR based rate. Adjustment in respect of corporate guarantee: 14. The learned TPO / AO / DRP have erred in re-determining the arm's length compensation for corporate guarantees extended by appellant on behalf of its AEs and confirming an adjustment of INR 19,90,67,400 on this account. 15. Without prejudice to above, the learned TPO / AO / DRP have erred in making double addition on account of guarantee commission, since the appellant has cumulatively recovered guarantee commission from its AEs in AY 2012-13 at 1 percent including guarantee commission for AY 2010-11; 16. Without prejudice to above, if the addition of on account of guarantee commission is uphel....
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....e Act without appreciating the fact that the payee would have offered the payment to tax in its return of income. 21. The learned AO /DRP have erred on facts and in law in disallowing interest expense, amounting to INR 5,37,76,428, claimed by the appellant by holding that the appellant has not established the commercial expediency for advancing interest free loans to sister concerns I subsidiaries: a. the AO/DRP failed to consider the factual matrix and the circumstances of the case, evidencing the fact that appellant has extended loans from its own funds; b. follow the law laid down by the Hon'ble Supreme Court and the Jurisdictional High Court on allowability of interest on loans made to a sister concern, without interest, where commercial expediency is prima facie evidenced in the transaction. 22. The learned AO has erred on facts and in law in making an addition of exchange gain on redemption of preference shares aggregating to INR 43,310,670 to the business income: a. The learned AO has failed to give due regard to the express scheme of section 92C I Chapter X-B of the Act, whereby no power is vested in the learned AO to enhance or modify the findings of the lear....
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....s regretted and therefore it is humbly requested that the delay may kindly be condoned. 3. Before we proceed to address the respective Grounds of appeal, we may briefly refer to the background of the case. The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing Customer interaction (customer acquisition, customer services), Back-office (Receivables management and data management) recovery and collection services for its customers. For the assessment year under consideration, it filed a return of income on 14/10/2010 declaring an income of Rs. 66,34,88,210/-, which was subsequently revised to Rs. 53,53,12,560/-. In the ensuring scrutiny assessment finalized under section 143(3) r.w.s. 144C(13) of the Act dated 29/11/2014, the total income has been assessed at Rs. 197,44,90,852/-. The assessment so finalized by the Assessing Officer was, inter-alia, in conformity with the arm's length price of the international transactions entered by the assessee with associated enterprises, which was determined by the Transfer Pricing Officer in an order passed under section 192CA(3) of the Act dated 13/01....
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....ing Officer, however, merged the aforesaid two segments into a single ITE services segment and determined the assessee's margin at 20.11% on cost. Though the Transfer Pricing Officer did not disagree with the selection of TNM method as the most appropriate method but he has introduced some new filters, modified the threshold limit of various filters and/ or other comparability criteria applied by the assessee and arrived at the following final set of six comparables:- S.No. Name of comparable Operating Margin (OP/OC)% 1. Accentia Technologies Ltd. 43.07 2, Acropetal technologies Ltd. 22.22 3. Cosmic global Ltd. 14.97 4. E 4e Healthcare Business Services Pvt. Ltd. 19.52 5. Informed Technologies India Ltd. 26.15 6. Infosys BPO Ltd. 31.20 Total 157.13 Mean 26.18 The average margin of the said comparables arrived at 26.18% was computed as arm's length margin and after comparing it with assessee's margin, an amount of Rs. 4,47,84,566/- was determined as an adjustment that was required to be made to bring the stated value of the transactions to their arm's length price. The DRP has also affirmed the ultimate decision of the Transfer P....
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....he Ld. Departmental Representative pointed out that there was nothing on record to show that the said event had impacted the comparability of the said concern with the asessee's tested activities, which are in the field of a classical BPO. The Ld. Departmental Representative pointed out that the Transfer Pricing Officer had rejected the said plea by relying on the decision of the Mumbai Tribunal in the case of Willis Processing (India) Pvt. Ltd.,ITA No.2152/Mum/2014 on the ground that, where the merger of two functionally similar concerns took place, then the event of merger by itself cannot be taken as a factor for exclusion of the said concern from the list of comparables. In this context, observation of the Delhi Bench of the Tribunal in the case of Agilent Technologies International Private Limited, ITA No. 1837/Del/2014 have also been referred to show that in such situation, a concern can be excluded only if, because of merger or demerger, the said concern becomes functionally different. 4.4 We have carefully considered the rival submissions. Though the said concern has been excluded from the final set of comparable in assessment year 2009-10 also by the Tribunal vide order i....
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....y event in this year, which has had an effect on its financial result, thereby impacting its comparability with assessee's tested segment of IT enabled services. Thus, on this short point, we uphold the plea of the assessee for exclusion of Accentia Technologies Ltd. from the final set of comparables. 5. The next plea of the assessee is for exclusion of M/s.Cosmos Global Ltd. from the final set of comparables. The Ld. Representative for the assessee justified the plea for exclusion of Cosmos Global Limited on the ground that the business model of the said concern is significantly different from that of the assessee company. By referring to the relevant extracts of the Annual Report of the said concern, copy of which has been placed in the Paper Book at pages 420 to 434, it is sought to be pointed out that it has incurred significant expenditure on translation charges, which shows that it has outsourced a major portion of its activities, which is not so in the case of the assessee. Apart therefrom, it is pointed out that in assessment year 2009-10, the said concern has been excluded by the Tribunal also and in this context, a reference has been made to para 10(ii & iii) of the orde....
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....out the necessary verification. Without finding any fault on the merit or the bonafides of the exclusion, the action of the Transfer Pricing Officer in merely shutting out assessee's plea is not justified. Therefore, considering the entire conspectus of the facts and circumstances of the case we deem it fit and proper to uphold the plea of the assessee for exclusion of Cosmos Global Limited from the final set of comparables. 6. The next plea of the assessee is for exclusion of Infosys BPO Limited from the final set of comparables primarily on the ground that the array and scale of operations of the said concern is quite incomparable to assessee's activity of providing routine BPO services to the associated enterprise in the nature of data collection and analysis. The Transfer Pricing Officer has included said concern on the ground that it is engaged in similar functions and further, that the said concern was a part of set of comparables initially selected by the assessee itself. 6.1 Before us, the Ld. Representative for the assessee pointed out that the said concern is engaged in providing high end integrated services by assisting its clients in improving their competitive positi....
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....ion before the DRP does not preclude it from raising it before the Tribunal because it is not a plea which is alien to the Revenue, since it was very much before the Transfer Pricing Officer hitherto. In so far as the merits of the exclusion of Infosys BPO Limited is concerned, it is quite clear that whereas is engaged in providing routine BPO services to its associated enterprise, the Infosys BPO Limited is engaged in providing high end integrated services. Moreover, the said concern has a significantly large scale of operations and a high brand value, which makes it quite incomparable with the assessee on a qualitative basis. It has also been pointed out before us that in the case of Techbooks International Pvt. Ltd.(supra) for the very same assessment year, the said concern has been found to be incomparable on the ground of exceptional event reflected by the acquisition of Mc Carnish LLC. during the year under consideration . Even otherwise, in our considered opinion, the assessee concern is rendering routine services and is being remunerated on cost plus basis and it is incomparable to Infosys BPO Limited, which is ostensibly engaged in a variety of services and is admittedly a....
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....e used in analyzing the comparability of an uncontrolled transaction with an international transaction ought to be the data relating to the financial year in which the international transaction has been entered into. The aforesaid is the clear requirement of Rule 10(B)(4) of the Income Tax Rules, 1962('the Rules'). For the said reason, the data comprised in the financial year ending on 31/12/2009 of RSystems International Limited (BPO-Seg.) cannot be used for the purpose of comparability with assessee's tested segment. So however, the plea of the assessee is that the data for all the quarters is available in public domain and, therefore, on that basis it is possible to construct data corresponding to the instant financial year of the assessee company and, therefore, it would meet the test of even Rule 10(B)(4) of the Rules. The said approach of the assessee has been approved by the Tribunal in assessment year 2009-10(supra) and we find that it is also supported by the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT v. M/s. Mercer Consulting (India) Pvt. Ltd. Gurgaon, ITA No.101 of 2015(O&M) dated 24th August, 2016. The following discussion in the decision of ....
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....international transaction has been entered into". 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule (4) of Rule 10B." 7.3 In the above background, we are, therefore, inclined to uphold the plea of the assessee for inclusion of R-Systems International Limited....
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....es shall be within +/- 5% range of the assessee's margin reflecting that the transactions of the assessee of providing IT enabled services to the associated enterprise are at an arm's length price and does not require any further adjustment. Since assessee has succeeded on the aforesaid plea, we find no reason to adjudicate other pleas on this aspect, which are kept open. Accordingly, the Assessing Officer/Transfer Pricing Officer is directed to re-determine the arm's length price of the assessee in the above light. Thus, on this aspect assessee succeeds. 8. We may now take up Grounds of appeal No.12 & 13, which relate to transfer pricing adjustment of Rs. 63,64,02,739/- in respect of subscription and redemption of Preference Share capital. 8.1 Briefly put, the relevant facts are that during the year under consideration assessee had subscribed to 1,85,03,468 redeemable Preference shares of Essar Services Mauritius and also redeemed 1,81,00,000 of such shares at par. The Assessing Officer notes that Essar Services Mauritius was an associated enterprise and that the said shares were non-cumulative and redeemable on par without dividend. The Transfer Pricing Officer also observed th....
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....the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon'ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August, 2012 and by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed 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." 8.3 At the time of hearing the Ld. Representative for the assessee also placed reliance on the judgment of the Hon'ble Bombay High Court in the c....
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....t the guarantee fee be computed at 3% per annum and accordingly, in the final assessment order passed under section 143(3) r.w.s. 144C(13) of the Act dated 29/11/2014, the adjustment on account of guarantee fee has been reduced to Rs. 19,90,67,400/- from Rs. 29,39,56,194/-. Not being satisfied, assessee is in appeal before us by way of Grounds of appeal No.14 to 16, whereas Revenue has contested the decision of the DRP to reduce the arm's length rate of the guarantee fee in its cross appeal. Since the cross-grounds relates to the same issue, they have been taken up together. 9.2 At the time of hearing, the Ld. Representative for the assessee has raised varied arguments, inter-alia, contending that providing of guarantee is not an international transaction within the meaning of section 92B of the Act; that it was in the nature of shareholder activity and did not constitute any intra group services, so far as the instant assessment year is concerned. Apart therefrom, a pertinent point has been brought out to say that subsequent to the impugned assessment, on a suo-moto basis, assessee has recovered guarantee fee @1% of outstanding guaranteed amount from its associated enterprise....
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....ed 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." 9.5 Following the aforesaid precedent, we direct the Assessing Officer/Transfer Pricing Officer that the guarantee fee be benchmarked by adopting the rate at 1% of the outstanding guaranteed amount for maintaining consistency with the precedent in the assessee's own case. Thus, in so far as Grounds of appeal No.14 to 16 are concerned, they are partly allowed and the Grounds raised by the Revenue in its crossappeal are dismissed. 10. The next Ground of appeal No.17 is general in nature and does not require any specific adjudication, therefore, the same is dismissed. 11. In Ground of appeal No.18, the grievance of the assessee is against the action of the lower authorities in denying carry forward and set-off of unabsorbed depreciation of Rs. 40,22,26,882/- and business loss of Rs. 9,03,07,429/-. 11.1 In this context, the brief facts a....
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....esaid limited plea of the assessee. 11.4 Having considered the rival stands, we deem it fit and proper to restore the matter back to the file of Assessing Officer, who shall appropriately consider the claim of carry forward and set-off of unabsorbed depreciation and business loss in accordance with law, ofcourse after allowing the assessee a reasonable opportunity of being heard and putting forth its position on the subject. Thus, on this aspect, assessee succeeds for statistical purposes. 12. Now, we may take up Grounds of appeal No.19 and 22, which relate to a similar issue. 12.1 In brief, the relevant facts are that in earlier years, assessee had subscribed to the preference shares of Essar Services Mauritius and a part of such shares have been sold by the assessee during the previous year relevant to the assessment year under consideration. While computing the capital gains, assessee determined a loss of Rs. 22,48,78,471/- primarily on account of indexation cost, which was claimed to be carry forward. Similarly, the assessee had credited an amount of Rs. 4,33,10,670/- to the P&L account on account of exchange gain on redemption of the preference shares, which was reduced fro....
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..... 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." ......................................................................................................................... "60......... As admitted by both the parties, this issue is similar to Ground No. 14 and 20 and, therefore, in view of the finding given therein, we hold that the approach of the TPO as well as Assessing Officer is not correct. Such a foreign exchange gain, which has been separately accounted in the books, cannot be taxed as business income here in the case of the assessee, because same was on account of shares and therefore, same shall be considered while working out capital gain or loss as per section 48. Thus we hold that the gain arising to the assessee, shall be taxable under the head "capital gains" because the foreign exchange gain has been account of capital asset i.e. on account of shares and any such claim would also be of a capital in nature. The Assessing Officer has erred in law in making the said addition as normal business profits of the assessee. Accordingly, Ground ....
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....sessee, as according to him the advances to the subsidiaries/sister concerns were made out of borrowed funds and no commercial expediency was established. The Assessing Officer proceeded to disallow proportionate interest on the borrowed funds and accordingly a disallowance of Rs. 5,37,76,428/- was made, which has also been affirmed by the DRP. 14.1 Before us, the Ld. Representative for the assessee has made various submissions on this aspect. Firstly, it is pointed out that assessee had sufficient own funds and, therefore, following the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd., 313 ITR 340(Bom), it has to be presumed that the loans and advances to the subsidiaries/sister concerns have made out of non-interest bearing funds. It has also been pointed out before us that the advances made to the subsidiaries/sister concerns are for their business consideration, which amounts to commercial expediency qua the assessee and thus, interest expenditure is allowable under section 36(1)(iii) of the Act. It is pointed out that the sums advanced to the subsidiaries/sister concerns were utilized by them for payment of service tax,....