TaxTMI 
TaxTMI 
2022 (9) TMI 1413
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.... (AE). The assessee has also raised additional ground No.14 which is nothing but a facet of the argument of the assessee in connection with the determination of ALP viz., companies with high turnover cannot be taken as a comparable company for comparing profit margins of the assessee. The specific contention in this regard is that the lower authorities erred in not applying an upper limit of turnover upto INR 200 crores for selection of comparable companies for benchmarking. At the time of hearing, learned Counsel for the assessee submitted that if some of the comparable companies that remain after the order of the Dispute Resolution Panel (DRP) are excluded then he would not press for adjudication of other grounds with regard to determination of Arm's Length Price. Accordingly, we proceed to decide the issue with regard to determination of ALP. 3. The factual details with regard to the determination of ALP are that the assessee was incorporated on May 18, 2015, as a wholly owned subsidiary of Tyco Electronics Singapore Pte Ltd, Singapore, which is ultimately held by TE Connectivity Ltd., Switzerland. The assessee is a captive service provider and is engaged, inter-alia, in the ....
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....itae International Accounting Services Pvt Ltd 27.13 9. Manipal Digital Systems Pvt Ltd 27.41 10. CES Ltd 29.00 11. Ultramarine & Pigment Ltd 34.41 12. SPI Technologies India Pvt Ltd 36.95 13. Inteq BPO Services Pvt Ltd 39.51 35th Percentile 22.37% Median 24.37% 65th Percentile 27.41% * Not adjusted for working capital differences 7. Based on the aforesaid comparable companies and their median profit martin, the TPO computed the ALP of the international transaction as follows: "20.4.1 The median of the weighted average Profit Level Indicators is taken as the A Length margin. Please see Annexure-A for details of computation of PLI of the comparabl Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its A is computed as under: ITeS SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 64,45,04,000 Taxpayers operating cost OC 56,07.00,000 Taxpayers operating profit OP 8,37,04,000 Taxpayers PLI PLI=OP/OC 14.92% 35th Percentile Margin of comparable set Yes A....
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....ru Bench, in assessee's own case for Assessment Year 2016-17 in IT(TP)A No.300/Bang/2021, order dated 26.05.2022, wherein this Tribunal took the view that companies having a turnover of less than Rs.200 Crores cannot be compared with companies having a turnover of more than 200 Crores. He also highlighted the fact that the TPO applied a filter of excluding companies whose turnover was less than one Crore but by the same logic should have applied to the upper turnover filter also which he failed to do. Learned DR submitted that high turnover cannot be criteria to reject a company as a comparable company, if the said company is functionally comparable. 11. We have considered the rival submissions. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the ....
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....SSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are nonjurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable com....
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....d on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as p....
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.... loss by adopting Ind AS 109 notified under the Companies (Indian Accounting Standards) Rules, 2015. In holding so, learned AO has erroneously disregarded (a) the fact that an amount of INR 4,53,11,205 has actually been paid out as interest expenditure after duly deducting tax at source thereon; (b) real income theory and (c) the principle that accounting treatment is not decisive for tax treatment. • The Learned AO has erred in rejecting the interest expense claimed in the computation of income, considering it as an actual interest income in the hands of the Company. In holding so, the learned AO has ignored the fact that CCD is a liability for the Company and hence, there cannot be any interest income arising out of the same in the hands of the Company 16. The factual details in so far as the aforesaid ground of appeal is concerned are that during the Assessment Year 2016-17, the assesee issued 6,50,00,000 Compulsory Convertible Debentures (CCD) of Rs.10/- each to TE Connectivity, Singapore, by way of rights issue. The CCDs are subject to a simple interest of 3 months MIBOR+ 150 Basis points, capped to 9.75% per annum. For the year under consideration, the assesse....
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.... disclosed in the Balance sheet by reducing the outstanding amount. - The assessee worked out the two components as under: Interest expense(by applying PDIR on Debt component) Dr. 1,56,29.455/- Debt Component of the CCD instrument Dr. 4,53,11,205/- Interest Payable (actual interest incurred during the year) Cr 6,09,40,650/- 17. The assessee pointed out that as the amount charged to the P&L Account was a lower sum, the remaining amount of Rs 4,53,11,205/- was claimed as deduction by the assessee as a separate it item in its computation of income. The assessee submitted CCDs constitute debt instruments and the interest payable thereon is a deductible expenditure till the same is converted into equity. The assessee relied on the decisions rendered in M/s CAE Flight Training India Pvt Ltd by ITAT Bangalore and Zaheer Mauritius Vs DIT, 270 CTR 244, Delhi High Court. 18. However, the AO allowed a deduction of Rs 1,56,29,445/- only and the balance amount of Rs 4,53,11,205 was denied the deduction. The DRP upheld the order of the AO on the reasoning that under Section 36(1)(iii) of the Act, deduction is allowed only for amounts borrowed for business purp....
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....ns relating to debentures, indicates that the statute seeks to regulate CCDs as debentures. The DRP then made a reference to Section 129 of companies Act (Financial Statement) read with Schedule III (General Instructions for Preparation of Balance Sheet and Statement of Profit and Loss of a Company) which requires to inter alia provide appropriate disclosures with respect to debentures and the rate of interest and particulars of conversion thereof. The DRP also made a reference to investment by a non-resident in an Indian Company, in any form, which is regulated by the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident outside India) Regulations, 2017 (FEMA Regulations'). The regulations prescribe the manner, limit, period, etc. of such investments. In other words, investment by a non-resident in a manner not prescribed, or in excess of the limits, etc. cannot be made in an Indian Company. Regulation 2(xviii) defines 'Foreign Investment' to mean any investment made by a person resident outside India on a repatriable basis in 'capital instruments' of an Indian company or to the capital....
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.... prefers re-characterise CCDs as equity and the disallowance of the interest expenditure claimed thereof. The DRP observed that RBI has treated the CCDs as equity under FDI Policy. In the case of assessee, CCDs are equity and not debt. No independent/ un-related party would subscribe to the CCDs of the assessee. It is an investment in equity and not debt. The investment by the AE with the assessee by subscription of CCD is not payable back to the AE, as the amount invested gets compulsorily converted into equity in the due course. When the amount invested is not repaid/ repayable, it loses the character of a debt. In the debt instruments like short term/ long term loans there is an agreement, contractual understanding between the lender and receiver of the funds on a legal terms and conditions for the interest payments. The DRP gave examples like banking interest rates regulated by RBI, LIBOR (London Inter Bank Offer Rate) are bench mark interest rates for many adjustable-rate mortgages, business loans, and financial instruments traded on Global Financial Markets. In the case of assessee in the thirdparty scenario, no independent entity would lend any funds to the company, if the d....
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....erein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. For the proposition only real income is taxable, the learned counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of Shoorji Vallabhdas & Co. 46 ITR 144 (SC), wherein the Hon'ble Court held that if income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a hypothetical income, which does not materialise. It was submitted that the assessee is entitled to deduction of entire amount of interest expense being INR 6.11 Crores. The learned DR reiterated the stand of the DRP and the reasoning given by the DRP. 22. We have carefully considered the rival submissions. The first aspect which needs to be considered is as to whether the revenue authorities were justified in treating the CCDs as Equity and disallowing claim for deduction of interest paid on CCD's. We are of the view that CCDs till such time they are converted into equity are in the nature of loans and therefore any interest paid on borrowings for the p....
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....f AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009 - 10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether th....
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....rred for issue of shares because it was found that first part of the debentures was to be converted into shares on the date of allotment itself and the second part was to be converted after expiry of 15 months from the date of allotment of debenture and therefore it was held that expenses incurred were actually incurred for issue of shares and not issue of debentures. In the present case, the issue is not regarding expenses incurred on issue of shares. In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decision of special bench of the Tribunal is not applicable in the facts of present case because the issue in dispute is different. In that case the issue in dispute is regarding expenditure incurred on issue of convertibles whereas in the present case the issue is regarding allowability of interest ITA No.1549/Bang/2019 expenditure on convertible debentures for the pre-conversion period. Hence we hold that the revenue does not find any support from this decision of Special Bench of the Tribunal in that case. 25. Apart from relying on this decision of Special Bench of the Tribunal, the ld. DR o....
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.... of FDI policy to exercise control on future re-payment obligations in convertible foreign currency. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during preconversion period or regarding payment of dividend on such convertible debentures during preconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. The same principle will apply to the other corporate laws cited by the DRP in its directions. 24. On the question whether on the basis of book entries by which the interest was not debited in the profit and loss account but claimed in the computation of income, the disallowance can be sustained. On this aspect, the law is well settled and laid down by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC), wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. It is undisputed that the assessee has deducted TDS on the entire interest expen....
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....and ("TEL"), to the employees of assessee. The stock option plan granted to the employees during the current period is Restrictive Stock Options ("RSU"), which are assessed, managed and administered by the ultimate holding company. During the relevant FY 2016-17, assessee debited an amount of Rs.10,60,575 in the profit & loss account pertaining to costs relating to 236 shares vested during the year under consideration. The entire amount was cross charged to the assessee by the ultimate holding company, as the RSUs are allotted at free of cost to the employees of the assessee. In other words, the employees of the assessee were given option to invest in shares of the market value of the shares and the price at which the shares were issued to the employees was paid by the assessee to its holding company and such difference was claimed as employee cost of the assessee in the profit and loss account. 27. The AO rejected the claim of the Assessee on the ground that the Employee Stock Option Plan (ESOP) expenditure being a capital expenditure. The DRP also upheld the order of the AO on the ground that the similar issue on ESOP was pending before the Hon'ble Supreme Court and the additi....
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....laid out or expended any amount while choosing to receive no/ lesser securities premium. Accordingly, the Hon'ble ITAT took the view that the receipt of securities premium being a capital receipt is not chargeable to tax, and in same breath, it observed that any short collection of securities premium should also be considered as a capital outlay and not allowable as expenditure relying on Eimco K.C.P Ltd Vs CIT 159 CTR 137 (Supreme Court) and CIT Vs. Reinz Talbros Pvt Ltd 252 ITR 637 (Delhi HC). The above views of Hon'ble Delhi ITAT in the case of Ranbaxy (supra) were also followed subsequently by the Hon'ble Hyderabad ITAT in the case of Medha Servo Drivers Limited ITA No 1114n-1yd/2008, the Hon'ble Mumbai Tribunal in the cases of DCIT Vs Blow Plast Limited ITA No 512/Mum/2009; Mahindra & Mahindra Vs DCIT ITA No 8597/Mum/2010; M/s VIP Industries Vs DCIT ITA No 7242/Mum/2008. 30. We have carefully considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue....