TaxTMI 
TaxTMI 
2018 (4) TMI 2023
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....considering that the tangible benefit has clearly been passed on to the AE by charging consideration below the ALP and therefore the same is required to be treated as interest free recoverable." Grounds of appeal in Assessee's appeal: Sale of Business division - Adjustment of Rs. 1,04,03,50,000 1. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the action of the Assessing officer ('AO') / Transfer Pricing Officer ('TPO') of making an adjustment of Rs. 1,04,03,50,000 in respect of the transaction of sale of business division by the Appellant to an independent domestic company ('Capita India'). In doing so, the Hon'ble DRP has erred in agreeing with the AO / TPO's action of failing to appreciate that the transaction is not an international transaction. It is prayed that the said adjustment be deleted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the AO / TPO in determining the value of the transaction of sale ....
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....o delete the adjustment of Rs. 14,37,35,552. Disallowance under section 14A of the Act - Adjustment of Rs. 29,01,303 6. On the facts and in the circumstance of the case and in law, the Hon'ble DRP has erred in upholding the action of the AO / TPO in computing the disallowance U/s 14A of the Act at Rs. 29,01,303. The assessee prays that the proposed addition made by the AO be deleted. The Grounds stated above are independent of, and without prejudice to one another. Grounds of appeal in cross objection: i. Without prejudice to the relief granted by the Hon'ble Dispute Resolution Panel ("DRP") in relation to the levy of interest on the difference between the amount received on sale of business division and the arm's length consideration determined by the TPO, ('secondary adjustment'), on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in not adjudicating on whether the interest to be taxed at the rate of fifteen percent or ten percent as proposed by the appellant. It is therefore prayed that in the event, the secondary adjustment is confirmed by the Hon'ble ITAT, the ....
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....ficer, as per the information in the public domain, the assessee nowhere figured either in the negotiation or in the decision making process. The assessee's role in this deal was to give effect to the global deal between Prudential Process, UK and Capita, UK. The Transfer Pricing Officer noted that in spite of these facts, the assessee failed to acknowledge these transactions in its 3CEB report. 5. After the detailed scrutiny and analysis of information available in the public domain, the Transfer Pricing Officer was of the opinion that to give effect to the global deal, the two Indian entities have entered into a contract for sale and purchase of the Vikhroli division but for the global outsourcing agreement, this transaction would not have happened and in view of this, the Transfer Pricing Officer had given a specific opportunity on several occasions (from 07.02.2012 to 07.01.2013, 10 opportunities were given) directing the assessee to file the copy of the global agreement between Prudential, UK and Capita. UK. 6. When the Transfer Pricing Officer has directed the assessee to file the copy of the valuation report and due diligence report in support of consideration of G....
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....me date i.e. on 20.12.2007. The bifurcation of GBP25 million which is the total consideration agreed for transfer of Vikhroli division is as under:- (i) Consideration to transfer Vikhroli division GBP10.35 million (ii) Balance towards transfer of IPRs GBP14.65 million That it is interesting to note that consideration of GBP10.35 million was directly paid by Capita India to the assessee and the balance GBP14.65 million related to IPRs was paid by Capita UK to Prudential UK. The way the agreed total consideration GBP25 million was split i.e transfer of a portion in India and a portion in UK is not possible in the absence of a global agreement. 8. The assessee's description of the transaction as noted by the transfer pricing officer was as under: 2.2.3 It is to be pointed out here that the transaction was neither reported in Form No. 3CEB nor it was benchmarked by the assessee in its TP study report./The TPO had browsed the website of Capita, UK and extracted certain crucial information about the business deal between Capita, UK and Prudential, UK. He had noticed that Capita, UK was selected by Prudential, UK as strategic outsourcing partner and ac....
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.... the assessee's AE, Prudential Plc UK (PPU) gave a contract of GBP 722 million (Approximately Rs. 5800 crores) to Capita UK (CU)for business process outsourcing of its various pension products for a period of 15 years. The AE of the assessee already had a captive service provider in India in the form of the assessee which was consistently rendering BPO services. Therefore, the AE entered into an arrangement with CUK whereby the assessee's Vikhroli Division was to be sold to CUK's Indian arm, Capita India Pvt Ltd (CIPL) on a going concern basis. Further, as already mentioned earlier, the decision to sell the Indian arm, VDPPMS of the assessee was taken by assessee's AE and came in public domain on 28.11.2007. Thereafter, to give effect to global agreement between PAC and CIL, the above mentioned 2 agreements were entered into on same date i.e. 20.12.2007. The first agreement talks of the lump sum consideration of GBP 25 million for the deal between PAC and CIL. The second agreement talks of the valuation of VDPPMS being GBP 10.35 million and the modality of the transfer of funds from CIPL to PPMS as part of the overall consideration of GBP 25 million. During the cour....
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....BP 25 million whereby Vikhroli division and the IPRs of the AE were transferred and the value attributable to these ideas was the difference between the total consideration of GBP 25 million and the valuation of Vikhroli division. Therefore, as per the assessee's submissions, it may be inferred that the value of IPRs could be as low as negligible. viii) The assessee did not furnish the details of the outsourcing work likely to be assigned to Indian operations out of the total contract value of GBP 722 million. As per the write up available on Capita's website, this deal was to lead to a saving of GBP 60 million per annum by the end of year 2010. Thus, it is expected that PPU would have saved approximately Rs. 500 Cr per annum by the end of year 2010. With such quantum of savings within 2 years of transferring the unit, the corresponding allocation of revenues in the DCF method for a period of 10 years is just Rs. 992 crores. This is inconsistent with the data available on the website of Capita. 11. Thereafter, the transfer pricing officer analyzed the assessee's submission as under: As per Section 92F, transaction includes arrangement, understanding or acti....
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....tion: or -Terms of the relevant transaction are determined in substance between 3rd party and the AE. It is only due to the Global Outsourcing Agreement between Prudential UK and capita UK that the Indian arm of the outsourcing business was sold to the AE of capita UK in India. The 2 Indian entities entered into a contract of sale and purchase of the Vikhroli division just to give effect to the global arrangement. But for the global outsourcing agreement, this transaction would not have happened. Thus, it is clearly a deemed international transaction in which the Indian parties are merely giving effect to the global agreement. Further, as mentioned earlier from the chronology of the events it is seen that the decision to sell VDPPMS was taken by assessee's AE, PAC and CIL as early as on 28.11.2007. Thereafter, PPMS engaged M/s. Ernst & Young on 12.12.2007 to value VDPPMS. The consultant gave its valuation report on 19.12.2007 and on 20.12.2007 PAC signed an agreement with CIL for providing an opportunity to the latter for a consideration of GBP 25 million and on the same date PPMS signed an agreement with CIPL to transfer VDPPMS for a consideration of GBP 10.3....
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....mptions made while carrying out the values. In recent decision in the case of Ascendas (India) Pvt Ltd vs DCIT (ITAT Chennai), the hon'ble ITAT has held that DCF is the correct method of valuation of concern/shares. In view of the above discussion, the assessee's reliance on RCM is incorrect and thus RCM is rejected. iii. The DCF and its application have been explained in the decision of hon'ble ITAT in the case of Ascendas (India) Pvt Ltd (supra). As per the said decision "The value of equity can be obtained in two methods under the Discounted Cash Flow method. The first method is to discount the cash flow expected from the equity investment and the second method is to ascertain the value of the enterprise by applying DCF on its future earnings and then dividing it with the number of shares. The most important aspect in the application of DCF is the discounting factor used for working out the net present value (NPV). The factor generally used is the Weighted Average Cost of capital. The difficult parts are (i) determining the future cash flows, (ii) determining the cost of equity, (iii) determining the cost of debt and (iv) determini....
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....e age segments. We believe that and health insurance in combination with assisted services such as home rare will be the key segments which will benefit from these demographic trends. Accenture estimates that life and pension insurance business in mature markets will grow by $200 billion to $350 billion over the next five years, of which about $160 billion will be generated by the old-age provisioning segment. The expected rise in demand for health insurance globally represents some $120 billion of premiums. At the same time, the demand for new assistance services will grow in significance: worldwide coverage for automotive, travel, health and life care or other assistance services to insurance customers is estimated to increase by about $12 billion over the course of the next five years. This section would not be complete without mentioning the fact that certain emerging markets also show a strong aging trend, especially China. However, we do not believe this to be as strong a source of growth as in mature markets owing to the fact that consumers in these sectors in emerging markets do not have the same buying power. " From the above discussion, it is clear that while the....
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....till perpetuity has been taken as 2.2% per annum instead of the negative growth rate taken by the assessee - the PLI (OP/TC) has been taken as 25.5% for March 2008 onwards and 20% for perpetuity as against 13% adopted by the assessee for the corresponding period On the basis of the above, the revised valuation of the undertaking comes to 186.279 Cr. The AR was shown the calculation sheet and he did not find any mistake as far as the mathematical accuracy was concerned. As already mentioned above, the DCF valuation has been upheld by the hon'ble ITAT in the case of Ascendas (supra). Therefore, the arm's length value of the transaction is taken as Rs. 186.279 Cr. 12. Thereafter, the transfer pricing officer tested the accuracy of this valuation and applied BEC, i.e, PE multiple method. Thereafter asking for further information and receiving the response of the assessee the transfer pricing officer held as under: a) The assessee sold Vikhroli division on going concern basis. It is not the case where the division was sold because it was incurring losses. It was sold to give effect to the global outsourcing agreement between Prudential UK a....
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....sing PE multiple method, PE multiples of ICRA and Mold Tek may be excluded from the working as these companies have high PE multiples as on 31.3.2008. In this regard it may be mentioned that on analysing the past data of these companies it is observed that they have consistently maintained high PE multiples. This is indicative of strong growth performance maintained by these companies. As these companies are functionally similar to the assessee, therefore, there is no reason to exclude them. In view of this, the assessee's argument is rejected. However, it is seen that the correct PE multiple of Mod Tek after considering PAT is 77.07 instead of 88.78. So, the same has been considered for calculation and the assessee's calculation submitted on without prejudice basis have been modified to this extent and the final valuation of Rs. 188.88 Cr. has been determined. As can be seen from the above, that as per PE multiple method, the valuation of the division comes to Rs. 188.88 Cr which is nearly the same i.e. Rs. 186.279 Cr as calculated using DCF method. However, the discounted cash flow method is considered most appropriate valuation technique as it gives the closest approxima....
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....3 As per the definition of Section 92F, the transaction includes an arrangement, understanding or action in concert. As discussed above, there exists a global outsourcing agreement between Prudential UK and Capita UK to give the outsourcing business to the tune of GBP722 million covering a period of 15 years to Capita UK. As a part of this arrangement, Prudential UK was to transfer the Vikhroli division to Capita's Indian AE (COS). Thus, there is not only an arrangement /understanding between the AE of the assessee and AE of Capita India, but they have also acted in concert, respectively influencing and causing the sale of VDPPMS by I India and purchase of the same by Capita India. 16. Thereafter, the dispute resolution panel referred to the provisions of section 92B. The dispute resolution panel observed that from Explanation 9(i) a of section 92B of the Act, the purchases and sale transfer of intangible property, plant etc is an international transaction. Thereafter, the dispute resolution panel held as under: 2.2.15 It is stated that once the appellant has undertaken an international transaction which falls within the meaning of section 92B of the Act, it is impe....
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....he purpose of Indian taxation, but the presence of a global agreement makes the appellant's AE part of the entire transaction and hence the conditions laid down in section 92B(1) is fully satisfied. 2.2.17 The transactions between the-assessee and its AE is deemed to be international transaction, as per section 92B(2). The scope of section 92B(2) is explained in CBDT circular No. 14 of 2001, dated 22.11.2001 with an illustration as under: "55.8 Sub-section (2) of section 92B extends the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined by the associated enterprise. An illustration of such a transaction could be where the assessee, being an enterprise resident in India, exports goods to an unrelated person abroad, and there is a separate arrangement or agreement between the unrelated person and an associated enterprise which influences the price at which the....
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.... 2.2.23 As discussed in detail above, the two Indian entities have entered into a contract for sale and purchase of Vikhroli division only to give effect to the global outsourcing agreement otherwise the transactions between the two Indian entities would not have materialised. Hence, we feel it is an international transaction in which the Indian entity i.e. assessee is merely giving effect to the global agreement entered into by its AE and therefore it clearly falls within the provisions of Section 92B. It is further the fact gathered by TPO from public domain and as such not disputed by the assessee that the resultant saving of GBP60 million per year by 2010 to Prudential UK and no portion of such benefit is there to assessee. 2.2.24 In view of detailed discussion above, we are satisfied that the above transaction is an international transaction and the objection raised by the assessee has no merits. 17. Thereafter, the dispute resolution panel adjudicated the valuation arrived at by the assessee towards valuing the Vikhroli division. The distribution panel observed as under: 2.2.28 We have carefully gone through the submissions. As far as the objecti....
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....ut the matter being referred by the Assessing Officer. Hence, the ld. Counsel of the assessee submitted that the assessee has no grievance in this regard. 21. We further note that apart from the Transfer Pricing Officer, making adjustment in this regard amounting to Rs. 1,04,03,50,000/- on the same issue, the Assessing Officer has also passed an alternate order as under: Addition u/s.50B on account of slump sale 5.1 Perusal of the details filed revealed that the assessee company has sold its business division to Capita India Pvt. Ltd. thereby, offering an amount of Rs. 58,86,42,145/- as Capital Gains as per the provisions of section 50B of the Act. In this case, the TPO vide its order dated 24.01.2013 has made an upward adjustment to the arm's length price by Rs. 104,03,50,000/-. In this case, the total sale consideration received by the assessee company stood at Rs. 82.244 crores on which capital gain of Rs. 58,86 crores have been shown. 5.2 In the instant case, the TPO has recomputed the Arm's Length Price based on the fact that the sale of said property / business was purely a repercussion agreement entered between the assessee's holding....
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....y the industry it can be comfortably construed that the business would have grown at a cumulative rate of at least 2% which by applying DCF (Discounted Cash Flow) method would have fetched good dividends; to the assessee company. As already discussed and established that the assessee company was posting good profits on the said business there was no need for it to undervalue the company and transfer the same to Capita India Pvt. Ltd. at a price much below the market rate. Therefore, there is a definite and certain Connection between the transaction carried out by the holding companies and the- assessee company and M/s. Capita India Pvt. Ltd. Although the global outsourcing: agreement between the holding companies does not have any tax implication in India the transaction entered between the assessee company and M/s. Capital India Pvt. Ltd. does have a taxation angle attached to it as the receipts on sale of such business transfer is taxable in the hands of the assessee company and by .undervaluing its business the assessee company has inflected, a loss to the exchequer Without prejudice to the above, even if it is construed and' -believed' that the local business transactio....
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....Dispute Resolution Panel completes its order by also deciding upon the assessee's ground regarding the addition made by the Assessing Officer as slump sale. We are not adjudicating the merits of the Transfer Pricing Officer addition in this regard. As first, the order of the lower authority has to be completed before proper adjudication can be done. As a decision on the addition made by the Transfer Pricing Officer on the same issue without adjudicating the addition by the Assessing Officer on the same issue as slump sale, would lead to multiplicity of the proceedings at different forums. As the party aggrieved by the adjudication on one part will have to go to higher forum, while the other limb of the same issue will be open to adjudication before the other forum upon remitting that issue. Such practice is not appropriate and desirable. For this proposition, we place reliance upon the decision of the Hon'ble Madras High Court in the case of CIT vs. Ramdas Pharmacy [1970] 77 ITR 276 (Mad). Accordingly, ground no. 1 relating to sale of business division which has resulted in adjustment of Rs. 1,04,03,50,000/- is remitted to the file of the Dispute Resolution Panel. The Dispute Resol....
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....rning an operating profit margin of 15.21% as against the comparables' operating margin of 26.02%. Therefore, the operating margin on total cost @ 26.02% is applied to the total cost of the assessee. The ALP is as under: Total Cost A 102,72,07,907/- The Arm's length Price (A x 1 .2602) B 129,44,87,404/- Transaction value C 115,07,51,882/- 105% of Transaction value 120,82,89,476/- 95% of Transaction value 109,32,14,288/- Difference 14,37,35,552/- As the ALP falls outside the limit of +7- 5%, the amount of Rs. 14,37,35,5527- is adjusted to the international transaction. 26. Against the above order, the assessee filed objections before the dispute resolution panel. The dispute resolution panel found itself in the agreement with the order of the transfer pricing officer. It concluded as under: 4.2.10 The TPO has given valid reasons in respect of the addition of comparables such as Acropetal Technologies Ltd, (Segmental), Cross Domain Solutions Ltd., Eclerks Services Ltd. and Informed Technologies (I) Ltd. Similarly in respect of Galaxy Commercials Ltd. and Sparsh BPO Ltd., a detailed....
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.... assessing officer was not satisfied, he made the addition in this regard by observing as under: 6.2 The assessee has not disputed the applicability of Section 14A and Rule 8D in its case. However, while computing the disallowance: as per Rule 8D, the assessee has taken investments as on 31.03.2008 at Rs. 290243353 whereas the investments on the said date as per the Balance Sheet amount to Rs. 443342560. Similarly, the assessee has taken investments as on 31.03.2009 at Rs. 270277801 whereas, the investments on the said date as per the Balance Sheet amount to Rs. 87598740. It is not explained as to why the figure as per the Balance Sheet is not adopted and why some of the investments have been excluded for the purpose of computing disallowance u/s 14A. Therefore, the said disallowance is computed as per the formula given in Rule 8D adopting the figures of investments appearing in the Balance Sheet as on 31.03.2008 and 31.03.2009, which is as under: i. Disallowance of directly related expenditure Nil ii. Disallowance of interest expenses Nil iii. Disallowance of other expenses a. Average amount of Investme....
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....isallowance. 37. Per contra, the ld. Departmental Representative could not controvert the submissions of the ld. Counsel of the assessee. We find that these submissions were made before the Dispute Resolution Panel but the Dispute Resolution Panel has passed a laconic order without considering the legal and factual aspect of the situation. The Hon'ble Apex Court in the case of M/s Sahara India (Farms) Vs. CIT & Anr. 300 ITR 403 (SC) has expounded that even administrative order have to consistent with the rules of natural justice. Accordingly, in light of the above factual submissions, we deem it appropriate to remit this issue to the file of the Dispute Resolution Panel. The Dispute Resolution Panel shall examine the factual aspect and pass a speaking order keeping in mind the assessee's submissions regarding the proposition of the law and the facts involved. Revenues appeal: 38. The Revenue is aggrieved that the dispute resolution panel has erred in deleting the interest chargeable. The transfer pricing officer has made the addition in this regard by observing as under: The assessee was to receive Rs. 186.16 crores as Arm's Length consideration towards the sa....
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.... rate charged to be LIBOR based etc become inconsequential and hence not discussed and no separate directions are considered necessary in regard to them. 40. Against the above order revenue is in appeal before us. 41. We have heard both the counsel and perused the records. On this issue, we note that the Transfer Pricing Officer has made an addition on account of interest on the international transaction pertaining to sale computed by him. In this regard, we find that the Dispute Resolution Panel has noted that the concept of secondary expenditure is not expressly provided in the Chapter X of the Act. It has been observed that the mandate in this chapter is to determine arm's length price of the international transaction undertaken by the tax payer, which is what has been done by the Transfer Pricing Officer. We agree with the ld. Departmental Representative that once this aspect is addressed, as per the requirement of law, there is nothing further provided to impute any secondary adjustment. Hence, we do not find any infirmity in the direction of the Dispute Resolution Panel that the action of the Transfer Pricing Officer in charging interest on such amount of adjustment....