TaxTMI 
TaxTMI 
2022 (12) TMI 1564
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....with Section 144C(13) of the Income-tax Act, 1961 ('Act') (Assessment order), in pursuance of the directions issued by Honourable Dispute Resolution Panel-2 (Hon'ble DRP), Mumbai, on the following grounds which are without prejudice to each other: General Ground 1. On the fact and in circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP has erred in determining the total taxable income of the Appellant for AY 2016-17 at Rs 5,73,07,23,232 instead of the income offered by the Appellant for the subject AY in its income-tax return of Rs. 4,85,66,82,220/-. Transfer Pricing Grounds Ground challenging the reference made to the transfer pricing officer and the transfer pricing adjustment 2. On the fact and in circumstances of the case and in law, the learned AO has erred in making a reference of the Appellant's case to the Deputy Commissioner of Income Tax, Transfer Pricing- 4(3)(2) (learned TPO) and then making a transfer pricing adjustment of Rs 17.87.70,865 to the income of the Appellant for AY 2016-17. Grounds challenging the partial disallowance of depreciation 3. On th....
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....n international transaction under Section 92B of the Act. 9. On the fact and in circumstances of the case and in law, the learned TPO/learned AO/Hon'ble DRP has erred in making transfer pricing adjustments by arbitrarily revising the value per share from USD 14.9 per share to USD 301.7 per share for the transaction of purchase of equity shares of an AE by a. erroneously not accepting the valuation report issued by a third-party valuation expert without giving cogent reasons for non-acceptance of the valuation undertaken by such expert and arbitrarily making certain changes to the valuation report issued by the expert by taking benefit of hindsight and incorrect application of valuation principles based on assumptions and speculations without allowing the Appellant an opportunity of being heard. b. erroneously not following any of the methods prescribed under Section 92C(1) of the Act for benchmarking the transaction of purchase of equity shares. c. erroneously not giving a specific show cause notice to the Appellant before arriving at the revised valuation of share in respect of the transaction of purchase of equity shares thereby denying the....
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....uity shares treated as a deemed loan. 16. On the fact and in circumstances of the case and in law, the learned AO has erred in not incorporating the directions of the Hon'ble DRP of adopting the interest rate of Libor + 100 basis points, as agreed under the advance pricing agreement signed by the Appellant, to impute interest on the alleged excessive payment for the transaction of purchase of equity shares treated as a deemed loan. 17. On the fact and in circumstances of the case and in law, the learned TPO / learned AO/Hon'ble DRP has erred in computing transfer pricing adjustment on account of arm's length interest by computing interest for the entire year i.e. 365 days, ignoring the actual period for which alleged loan is outstanding during the year i.e. 224 days i.e. period to be counted from 21 August 2015). Non Transfer Pricing Grounds Grounds challenging disallowance of depreciation claimed on intangible assets 18. On the fact and in circumstances of the case and in law, the learned AO has erred in disallowing depreciation of Rs 14.50,931 on intangible assets acquired by the Appellant from WNS Global Services (UK) Limi....
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.... Hon'ble DRP erred in making a disallowance of Rs. 3,47,89,378 under Section 14A of the Act read with Rule 8D of the Rules, erroneously. a) by invoking the provisions of Section 14A(2) of the Act read with Rule 8D of the Rules, without appreciating the fact that the Appellant has suo-moto disallowed Rs 9,29,819 under Section 14A of the Act. b) by imputing disallowance under Rule 8D(2)ii) of the Rules without appreciating the fact that the borrowed funds have been used for specific purposes for which they have been borrowed and not been utilised for investment in Mutual Funds. c) without appreciating the fact that the Appellant had surplus interest free funds available which was more than the amount of investment in Mutual Funds. d) without prejudice to the above by adding the amount of alleged disallowance under Section 14A of the Act read with Rule 8D of the Rules in the computation of Book Profits' under Section 115JB of the Act. Ground challenging initiation of penalty proceedings 24. The learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act. Each of the above ground of app....
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....hout any jurisdiction and cannot be sustained (para-20). The TPO/DRP has not found any fault in the report in which the projected revenue and projected operating from the unexpired period of the MSA was considered to determine the price payable by WNS India to WCIL and therefore, the TPO/DRP cannot resort to their own estimate in determining the arm's length price (para 21). The valuation of an intangible requires expertise and knowledge in the domain of valuation principles, markets and business and even if the TPO/DRP were not in agreement with the variables assumed valuation undertaken by the independent valuer, they ought to have desire from their own exercise of adhoc valuation without having pointed a valuation expert to determine the value (Para 22). WCIL had pad Aviva Singapore an incentive payment of GBP 80 million for securing MSA with Aviva Singapore for the entire contract period of 8 years and 4 months and the unamortized portion of the incentive payment as on the date of purchase of MSA by the assessee was USD 106.83mn which ought to be a valid CUP benchmarking to determine arm length price of the transaction (Para-24). On the of projections not to b....
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....come tax (36 ITD 107) Nagulakonda Venkata Subba Rao vs. Commissioner of Income tax (31 ITR 761 (AP) 8. This issue has already been settled in favour of assessee for A.Ys. 2011-12 and 2012-13 vide ITA No. 2257/Mum/2017 and ITA No. 1955/Mum/2016. In these two years ITAT, Mumbai observed that since price paid by assesses is determined to be at arm's length depreciation has to be allowed to the assessee. We further observed that this transaction originally took place in A.Y. 2011-12 and there is no international transaction in A.Y. 2016-17 in relation to the business and commercial rights purchased by assessee, hence, no addition on this ground also can be made merely consequential to the adjustments made by the TPO in A.Y. 2011-12. In the result, Ground No. 3 to 6 of the appeal raised by assessee is allowed and AO is directed to delete the disallowance made on account of depreciation of business rights. 9. Ground No. 7 to 17 pertains to adjustment in relation to the purchase of equity shares of an associate enterprise (AE) and treating the alleged excessive payment for purchase of equity shares as deemed loan and imputing notional interest on the same. We have considere....
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....0% weightage [ as per valuation report] 150.9 Concluded Business Enterprise Value 152.4 Less: Long term and Short term borrowings 6.9 Less: Derivate Financial Instruments- Non Current 0.1 Less: Non Current Liabilities 0.8 Less: Deferred Revenue 0.2 Add: Cash 6.2 Add: Derivative Financial Instruments - Non Current 1.8 Estimated Fair Value of Equity 152.4 Total number of shares outstanding 5,05,050 Estimated Fair Value of Equity on a per share basis (USD) 301.7 Based on the revised share price, the learned TPO computed of excess amount paid by WNS India on purchase of shares and alleged the excess as deemed loan to AE by learned TPO: Particulars Reference Amount Estimated Fair Value of Equity on a per share basis as per valuation report (USD) A 514.9 Estimated Fair Value of Equity on a per share basis (USD) B 301.7 Difference i.e. excess amount paid per share (USD) C=A-B 213.2 Total excess amount paid on purchase of shares (INR) D=C*49,495*62.5 65,95,20,875 On the excess consideration deemed as a loan, the learned TPO imputed arm/s length interest by adopting ....
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....ational transaction as defined under Section 92 of the Act as there is no income arising on account of such transactions: Pr Comm. Income tax- 7 vs. PMP Auto Components Pvt. Ltd (Bombay HC 1685 of 2016) Pr Comm. Income tax-13 vs. Tops Group Electronics Systems Ltd (Bombay HC 1721 of 2016) has upheld the order of the Hon'ble ITAT in M/s. Tops group Electronic Systems Ltd vs. Income Tax Officer-8(3)(3) (ITA 2115/Mum 2015) M/s. TCG Life sciences Pvt. Ltd. vs. DCIT, Circle-11(2) (ITA No. 121/Kol/2016 & 647/Kol/2017) Vijay Electricals Ltd vs. Addl. Commissioner of Income-tax (ITA 842/Hyd/2012) TPO's Contentions: The transaction of purchase of equity shares is an international transaction between the Assessee and its non- resident AE which has a bearing on profit/ loss/ assets of the Assessee Transfer pricing provisions also take into account potential income and therefore Chapter X is applicable to the transaction of purchase of shares In case, excess consideration is paid over and above the FMV/ ALP, to the related party/ AE, for purchase of such shares, the cost of acquisition in such a situation will be higher amo....
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....in future. This submission is in the realm of speculation. At this stage, it is hypothetical. The issue has to be examined on the basis of law and facts as existing before the authorities in the subject assessment year No provision of the Act has been shown to us, which would allow the Revenue to tax a potential income in the present facts" (emphasis supplied) The transaction of purchase of equity shares, whether it is in the nature of inbound investment or outbound investment is a capital account transaction which does not give rise to any income chargeable to tax in India under the provision of the Act Cases of outbound investment have also been specifically adjudicated upon by Hon'ble Bombay High Court and Hon'ble Tribunals wherein it has been held that purchase of shares of an AE is not an international transaction as there is no income arising on account of such transactions: Pr Comm. Income tax-7 vs. PMP Auto Components Pvt. Ltd (Bombay HC 1685 of 2016) "In our view, therefore, the issue arising here stands concluded by the decision of this Court in Vodafone (supra). The distinction which is sought to be made by the revenue....
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....e adjustments made by the learned TPO should be deleted as the learned TPO was unable to provide any cogent or sound reasoning for rejection of the analysis undertaken by the Assessee TPO's Contentions: The AE got huge premium on sale of shares due to its special relation with the Assessee and the Assessee had failed to establish that the AE was capable of raising funds either by way of loan or share capital, on standalone basis. In absence of the premium paid on purchase of shares, the AE would have had to take loans Assessee or on open market which would entail it to pay huge interest costs. AE thus got the funds without being charged interest thereon and thus, the premium paid on shares was nothing but a loan given by the Assessee to its AE in the garb of share premium Assessee's Rebuttals: Treating the excess price paid for acquiring the shares as deemed loan is nothing but recharacterisation of the transaction of acquiring equity shares into a loan between the Assessee and its AE. None of the provisions of the law justify the recharacterisation of the acquisition of shares as deemed loan and hence, the same would be invalid and bad i....
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....'s Rebuttals: Valuation of shares requires expertise and knowledge in the domain of valuation principles, markets, and business which was possessed by the third party valuer appointed by the Assessee. The learned TPO has not pointed out any flaw in the valuation report submitted by the Assessee but has in fact relied on the same assumptions and variables as used in the valuation report. In absence of any fault being pointed, the learned TPO has grossly erred in assuming that the valuation report cannot be relied upon and has stepped into the shoes of an expert without possessing the requisite knowledge and skill to undertake valuation. Even if the learned TPO were not in agreement with the variables assumed/ valuation undertaken by independent third party valuers, they ought to have desisted from their own exercise of adhoc valuation without having appointed a valuation expert to determine the value of shares of WNS UK G. L. Sultania and Anr v. SEBI & Ors (AIR 2007 SC 2172) Tecumseh Products India (P) Ltd. v. ACIT (ITA 1686 (HYD) OF 2010) Global Payments Asia Pacific (India) (P) Ltd. v. Deputy Commissioner of Income Tax Social Media Indi....
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....the value of USD 93.30 million derived on sale of Assistance division by WNS UK which forms part of the cash (i.e. assets) of WNS UK be added to the enterprise value of WNS UK and arrived at the total enterprise value of WNS UK under DCF method at USD 247.20 million as against USD 263.00 million TPO's Contentions: The cash flow/ income from sale of Assistance division is an exceptional event and not a part of operational activities. Hence, the amount of USD 93.30 million from Assistance division sale is not considered in revised DCF analysis. Assessee's Rebuttals: The learned TPO has failed to adopt a consistent approach in determining the arm's length price for benchmarking this transaction of the Assessee in transfer pricing order since if the projections are replaced with actual under revised valuation, all events happening up to date of revision ought to have been considered. The valuation of equity shares should consider both operating as well as non-operating items to arrive at the enterprise value. As per the basic principle of DCF valuation method, cash flows from operating activities are projected and discounted to derive value o....
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....of shares (INR) D=C*49,495*62.5 4,57,65,682 Actual amount paid as per form 3CEB E 1,67,53,38,028 3% of the transaction value* F=3% of E 5,02,60,141 Adjusted to share price Since F >D NIL "Since benefit of tolerance range of +/-3% can be availed even in case of single price determined as ALP. Reliance is placed on Hon'ble Mumbai ITAT's rulings in the following cases: DDIT vs. Development Bank of Singapore [(2013) 144 ITD 265 (Mumbai)] and DDIT vs. Sonata Software Ltd. {ITA 594/Mum/2017 & ITA 721/Mum/2017] Action Plan 8-10 of OECD's Base Erosion and Profit Shifting Project where, in the context of hard to value intangibles. states that if the actual outcomes do not result in reducing/ increasing the compensation of such intangibles by more than 20% of the compensation determined at the time of transaction, the compensation determined at the time of transaction should be accepted as arm's length price (Refer para 10.9.13 on page 46 of the DRP Application) I. Adhoc adoption of interest rate (Refer para 10.1 on page 50 of the DRP Application) TPO's Actions: (Refer page 137 of the D....
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....as not undertaken any credit rating analysis to arrive at the credit rating of the AE and thus, without prejudice that no interest adjustment is warranted, even where SHR was referred to by the learned TPO, the rate of 6 months LIBOR + 400 bps is applicable Assessee's Contentions: Without prejudice, even if interest is to be charged, the rate of interest should not exceed 6 months USD LIBOR + 100 points as agreed under the APA signed by WNS India with the CBDT for other covered transactions which also covers AY 2016-17. The rate of interest applied by the learned TPO is exorbitantly high even in view of the judicial precedents where LIBOR 2% has been accepted. Infotech Enterprises Limited vs. Asst CIT (ITA No 2184/Hyd/2011 & ITA No 115/Hyd/2011] Dr. Reddy's Laboratories Ltd vs.. Addl. CIT [ITA No. 1605/Hyd/2010] Particulars Scenario 1- LIBOR + 100bps Scenario 1- LIBOR + 200 bps Alleged excess amount in INR 65,95,20,875 65,95,20,875 Date of remittance 21-Aug-15 21-Aug-15 Year end 31-Mar-16 31-Mar-16 Period for which alleged loan is outstanding during the year 224 224 Rate of interest 1.485% ....
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....We thoroughly analysed the judicial pronouncements relied up on by both the parties. In our considered opinion we found force in the contentions of the assessee that Projections can't be substituted by actual and hindsight ought not to effect a valuation report, without prejudice to this even if it is assumed otherwise for the time being in force, if projections are to be relied up on, all events that have occurred till that date should be considered. 13. Moreover, reference to TPO on this issue is un-warranted hence, bad in law. As transaction of purchase of equity shares is a capital transaction and the same is not falling in the category of International Transaction as defined in section 92 of the Act, as there is no income arising on account of such transactions. In the light of these observations, we set aside the action of authorities below and allow ground No. 7 to 17 raised by the assessee. 14. Ground No. 18-22 pertains to disallowances of depreciation claimed on intangible assets.We have considered the draft order of AO, order of TPO, directions of DRP and final order of AO passed u/s 143(3), r.w.s 144C(13) and 144B. Moreover identical issue in assessee own case has ....
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....7/Mum/2017) whereby the Tribunal has deleted the entire transfer pricing valuation adjustment of the contract acquired WCIL and allowed entire depreciation claimed on customer contract acquired by WNS India from WNS UK and WCIL There is no material change in facts & circumstances in the year under consideration. 16. On account of the acquisition of customer contracts, the Assessee acquired a commercial right i.e. right to receive all revenues; have all the obligations and liabilities with respect to the said contracts. Section 32(1)(ii) of the Act allows deduction of depreciation in case of intangible assets being know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature Applying the principle of interpretation of ejusdem generis, any commercial right which forms part of the tool of the trade of a taxpayer and facilitates the smooth carrying of the business would fall within the scope of the expression "business or commercial rights of a similar nature" under Section 32(1)(ii) of the Act. By virtue of the acquisition of the customer contracts, the Assessee acquired a commercial right i.e. right to receive all re....
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.... AY 2005-06 and AY 2008-09 (supra) 19. Without prejudice to the objection raised against disallowance of depreciation on intangible assets acquired by the Assessee, the learned AO erred in making a double disallowance of depreciation on intangible assets to the extent of INR 13,60,00,936, first by learned TPO in its order wherein depreciation of INR 13,60,00,936 has not been allowed as it pertains to alleged excess consideration paid in AY 2011-12 and second by learned AO in the draft order wherein the entire depreciation of INR 39,03,28,049 (including INR 13,60,00,936 supra) as entire depreciation is not eligible on customer contract under Section 32 of the Act. 20. Considering the chronology of events discussed (supra), The issue has been considered and decided by the ITAT in Assessee's own case vide orders dated 16 January 2018 for AY 2005-06 and AY 2008-09 read with MA order dated 17 July 2019 (MA No 261/Mum/2019) and 19 February 2020 for AY 2007-08 (ITA 1451/Mum/2012). We found the order of authorities below to be erroneous and liable to be set aside. In the result Ground No. 18 to 22 raised by the assessee are allowed. 21. Ground No. 23 with its sub grounds perta....
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....ncome and does not connote notional expenditure or expenditure computed on an estimated basis. It would be pertinent to note that though the learned AO has relied on the said judgment for the basic principle of disallowance of expenditure under Section 14A of the Act, however, he has not considered the aspect that there has to be proximate cause for disallowance in relation to the tax exempt income as enumerated in the above paragraph. During the year under consideration, the Assessee had invested the surplus funds accruing out of the receivable in various Mutual Fund units to the tune of Rs. 783.12 cr. Hence, the Assessee has earned dividend income of Rs. 32.99 cr. on account of investment made in Mutual Fund units and the same is exempt under the provisions of the Act. In this regard, Assessee has suo-moto identified the actual expenses incurred in connection with the earning of exempt income and made disallowance under Section 14A of the Act. However, the learned AO has failed to prove that the expenses incurred by the Assessee is not acceptable and it has incurred any additional expenses for the earning the exempt income during the course of the assessment proceedings ....
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....er the decision passed by Tribunal in aforesaid cases (viz. Daga Capital Management Private Limited, Citicorp) and accordingly, is binding on the learned AO. Reliance on Section 115-0 (5) of the Act by the learned AO is misplaced as the entire chapter refers to "Special provisions relating to tax on distributed profits if domestic companies'. Thus, the same is applicable where dividend is distributed by a company and does not apply to dividend income received by the taxpayer. Accordingly, the above mentioned provision is not applicable to the facts of the present case as Section 115-0(5) of the Act is about deduction of dividend and DDT thereon and not about deductibility of expenses in relation of earning exempt income. Incorrect computation under Rule 8D of the Rules (d) Incorrect computation under Rule 8D of the Rules Particulars Amount (INR) Amount (INR) (i) Disallowance of direct expenses 9,29,819 (ii) A Disallowance of interest expenses 17,76,232 B Average investments 6,86,18,33,915 C Average of total assets 25,38,10,50,000 &....
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....f funds comprising of both borrowed and own funds, it has been held by the Courts that it shall be assumed that investments have been made with the Assessee's own funds and not with the borrowed funds. Reliance in this regard is placed on the following decisions: Jurisdictional Bombay High Court in the case of Reliance Utilities & Power (313 ITR 340) CIT v HDFC Bank Ltd [Income Tax Appeal No. 330 of 2012] [Bom] CIT v Sharada Erectors (P.) Ltd (76 taxmann.com 107) The above view is also supported from the fact that the CBDT vide official gazette dated 2nd June 2016 has notified the amended Rule 8D. Per such Rule, aggregate of only direct expenses and 1 percent of annual average of the monthly averages of the opening and closing balances of the value of investment. Income from which does not form part of total income can be disallowed. The normative/presumptive disallowance of interest expense has been done away with. The provisions of the Section 14(2) of the Act requires the AO to disallow an expenditure as per satisfied with the correctness of the claim of the Assessee in respect of expenditure in relation to Acme which does not form part of....
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.... yielding exempt income of Own Funds Year ending 31 March 2016 Year ending 31 March 2015 Year ending 31 March 2014 Year ending 31 March 2013 Year ending 31 March 2012 48.87 46.70 13.63 34.07 25.20 1. As it can be observed from the above tables, the own funds of WNS India are greater than its investments yielding exempt income for each of the abovementioned years: 2. It is also re-iterated that the interest expense incurred on borrowed funds amounting to Rs 50.75 Crores was incurred for a specific purpose; Reliance in this regard is placed on the following judicial precedents: PCIT v Sintex Industries Ltd (2018) (93 taxmann.com 24) (SC) CIT v Reliance Industries Ltd (2019) (410 ITR 466)(SC) CIT v Reliance Utilities & Power Ltd (2009) (313 ITR 340) (Bom) HDFC Bank Ltd v DCIT (2016) (383 ITR 529)(Bom) CIT v HDFC Bank Ltd (2014)(366 ITR 105)(Bom) (f) Without prejudice to previous submission -Scientific apportionment of administrative expenses As mentioned, the Assessee has earned a dividend income of INR 32.99 crs. And the disallowance computed by the AO by invoking Rule 8D is....