TaxTMI 
TaxTMI 
2017 (2) TMI 1204
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....e assessment order under section 143(3) r.w.s 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 transacti....
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...., while making adjustment to the value of international transactions of the appellant, applicable 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; ....
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....tion by imputing a notional interest expense (amounting to INR 11,380) arising out of lease payments which is not covered under section 194A of the 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....
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....i.e. DCIT 6(1)(1), Mumbai on 23.01.2015 and following three days were public holidays. The comments of TPO were obtained on 25.02.2015 by the AO. Thus the delay is 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....
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....n of ITE services and Receivable Management Services were favourable and thus, the stated value of the transactions was at an arm's length price. The Transfer Pricing 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 o....
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....sidered as a comparable by the assessee itself and, therefore, there is no justification for the assessee to again seek its exclusion. Secondly, with regard to the merger of Accent Infoserve Private Ltd., with the said concern, the 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 con....
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....ibunal in the case of M/s. Zavata India Pvt. Ltd.(supra)clearly dispels the stand of the Revenue in the context of the instant assessment year. Therefore, the said concern is excludable on the ground of existence of an extraordinary 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....
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....e, we find that the exclusion of Cosmos Global Limited has been sought by the assessee before the Transfer Pricing Officer itself, which clearly suggests that the assessing authority was in a position to adequately and appropriately carry 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 initial....
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.... Ld. Departmental Representative inasmuch as, assessee resisted the inclusion of the said concern in the list of comparables even in the course of proceedings before the Transfer Pricing Officer. The factum of assessee not having raised any objection 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 other....
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.... 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." 7.2 We have carefully considered the rival submissions. Undoubtedly, the data to be 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 ....
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.... year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the 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 f....
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....as stated by the Ld. Representative for the assessee that if Accentia Technologies Ltd., Cosmos Global Limited and Infosys BPO Ltd. are excluded and R Systems International Limited( BPO-Seg) is included in the final set of comparables, then the margin of the comparables 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 Mauritiu....
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....annot disregarded any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of 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 g....
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....t assessment order dated 14/02/2014. The DRP, in principle, agreed with the approach of Transfer Pricing Officer but differed with the arm's length rate of guarantee fee. The DRP following its directions in the assessee's own case for earlier assessment year of 2009-10, directed that 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,....
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....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." 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 ....
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....unabsorbed depreciation pertaining to the erstwhile units, which had merged with the assessee company. The only plea of the assessee before us is that similar directions be given to the Assessing Officer in the instant year also. 11.3 The Ld. Departmental Representative has no objection to the aforesaid 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 gain....
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....n 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." ......................................................................................................................... "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 taxab....
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....o the subsidiaries/sister concerns on the basis of commercial expediency, which was a normal and acceptable business practice. It was also canvassed by the assessee that the funds advanced to the subsidiaries/sister concerns were out of own non-interest bearing funds. The Assessing Officer however, disagreed with the assessee, 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 subsidi....