2015 (7) TMI 1051 - AT - Income Tax

Transfer pricing adjustment - Held that - Accentia Technologies Ltd. (included by the TPO) be excluded from the list of comparables on account of its strategy to acquire companies for inorganic growth and also on account of absence of segmental information for ascertaining the comparability. Coral Hub and Cosmic Global Hub,should be excluded from the list of final list and have benchmarking its financial transactions having significant intangible assets like goodwill, intellectual property and technical know-how, whose value is approximately 48.5% of its net block Cross Domain Solutions Pvt Ltd.website of the said company, suggests that Crossdomain is mainly engaged in providing niche and high-end services in the nature of re-engineered payroll services, which ranges from high-end KPO Services, development of products, IT consulting services etc. Further in following cases, this company has held to be not comparable with ITeS companies. Genesys International Corporation Ltd ( Genesys ) is functionally entirely different from the assessee and hence it cannot be included in the final list of comparables for comparability analysis. Informed Technologies India Ltd revenues in subsequent years have increased and criteria adopted by the TPO as its sales are on decline cannot be held to be reason for its exclusion. Further, its income from ITES is 99.57% and, therefore, it is a fit case of being comparable company. Regarding turnover filter of less than 5 crores adopted by the TPO, he made his detailed submissions and submitted that the said company should be included in the final comparability. R. Systems International Ltd. (Segmental) - the BPO segment of R Segment should be included in the sales of all financial comparables. Micro Genetic System Ltd. company is engaged in the provision of IT enabled services, which is functionally similar, therefore, this company should be included in the list of final comparables. Fortune InfoTech Ltd. is not undergoing a phase of diminishing revenues. Thus, this company cannot be excluded on the grounds taken by the TPO. Microland Ltd. company has separately reported ITES segment in accordance with the requirements of AS-17, issued by ICAI which clearly states that the purpose of segmental reporting is to determine the profitability of group of services that are subject to different rates of profitability, opportunities of growth, future prospects and risks. The accounts of the company have been duly audited and therefore, TPO cannot question the authenticity of the audited financial year statement as he has not provided any evidence to support his contentions. Transfer pricing adjustment on account of transfer of equity shares - Held that - the valuation of the shares has to be done correctly so as to determine the actual arms length price and for this purpose both the party agree before us that DCF method can be applied. Since it has been pointed out before us that there are several flaws and defects in the TPO s methodology and certain factual corrections need to be done, therefore we are of the opinion that this aspect needs to be examined again. The assessee had valued the shares as per DCF method at ₹ 84.63 the working of each has been given in pages 386 of the paper book and 1/3rd of value of assessee s share comes to ₹ 28 to ₹ 29, if swap ratio of 1 3 is taken into account. Accordingly, we direct the Assessing Officer to verify the working given by the assessee as per DCF Method and determine the correct value of shares and thereafter make suitable adjustments if required. Thus, this issue is restored back to the file of the Assessing Officer for the purpose of verification and examination of the valuation as per the DCF method. The assessee should be given an opportunity to explain the correct figures and valuation. - Decided in favour of assessee for statistical purpose. Adjustment on account of corporate guarantee fee - Held 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. - Decided partly in favour of assessee. Adjustment on account of subscription and redemption of preference shares - Held that - The TPO /Assessing Officer cannot 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. Thus subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer.- Decided in favour of assessee. Adjustment on account of interest on advance given to the AE - Held that - The assessee has filed copies of invoices relating to payment of Advisory Services rendered by the South African based Consultants, for acquiring prospective companies for acquisition in South Africa. This was a cost incurred towards hiring of the consultants and was in the nature of expenditure. Such an expenditure has been booked in the profit and loss account also in the subsequent year, therefore, such an advance given in this year cannot be treated as a loan so as to impute interest thereon. It is purely for business and commercial consideration and hence no interest can be charged on such advance/expenses. Accordingly, the adjustment of interest made by the AO is directed to be deleted - Decided in favour of assessee. Disallowance of assessee s claim for carry forward and set off unabsorbed depreciation allowance and business loss - Held that - Section 79 has only an overriding effect so far as Chapter VI is concerned, however, section 72A(4) has an overriding effect over any other provisions of the Income Tax Act including that of section 79 because it is a special provision applicable only for amalgamation and demerger. Thus, the assessee would be entitled for claim of set off of carried forward un-accumulated business loss and unabsorbed depreciation of GVPL. So far as the fact that the Assessing Officer has disallowed the carry forward of business loss for the AY 2003-04 in the case of GVPL, now claimed by the assessee after demerger, it appears that he has not taken into effect the subsequent appellate orders which has been affirmed from the stage of Delhi High Court. As a result of such orders substantial relief has been allowed to the GVPL, which will result into revise claim of business losses and unabsorbed depreciation. Accordingly, the Assessing Officer is directed to verify the said effect of appellate orders and to give consequential relief to the assessee and allow the business losses and unabsorbed depreciation allowance of GVPL in the hands of the assessee company in accordance with section 72A(4) - Decided in favour of assessee. Disallowance claim of depreciation on account of stamp duty capitalized by the assessee - Held that - Since the stamp duty is the actual cost incurred by the assessee in order to purchase the asset, therefore, it acquires the character of a cost of the capital asset and hence becomes the part of the value of the capital asset acquired. The Hon ble Supreme Court in the case of Challapalli Sugars Ltd vs CIT, reported in 1974 (10) TMI 3 - SUPREME Court had held that the accepted Accountancy Rules for determining the cost of fixed assets is to include all the expenditure necessary to bring such asset into existence and put to them in working condition. Thus, the payment of stamp duty is a cost which is directly attributable to the acquisition of an asset and as per Accounting Standard-10 the same should be included in the cost of fixed assets and, therefore, being part of the capital asset, the assessee is entitled for depreciation. - Decided in favour of assessee. Addition on account of mismatch between Annual Information Report (AIR) and the revenue reported by the assessee - Held that - The gross income offered by the assessee also far exceeds the amount appearing in the AIR. That apart the assessee s books of account have been duly audited and no discrepancy as such have been found by the Assessing Officer, that any transaction has not been entered by the assessee. If the assessee had categorically denied any transaction with those two parties by showing it from its own records, then the onus heavily lies upon the Department to show that the assessee had actually transacted with the said parties. Thus, in absence of any such material or enquiry done by the Assessing Officer, no addition could be made in the hands of the assessee simply relying upon the uncorroborated AIR Information. Accordingly, addition made by the Assessing Officer is directed to be deleted - Decided in favour of assessee. Addition on account of disallowance of current year s loss on account of redemption of preference shares and loss on sale of shares - Held that - The assessee had entered into these arrangement for specific purpose and in a capacity of shareholder was furthering its own interest by subscribing the shares. It had borrowed money from EXIM and Axis Bank at high interest rate. To reduce the interest burden, the assessee decided to pay these debt by redeeming its preference shares. Subsequently, it subscribed again for fresh preference shares in 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. - Decided in favour of assessee. Disallowance of interest expense arising out of lease payment u/s 40(a)(ia) on the ground that TDS u/s 194A has not been deducted - Held that - In the case of ITO vs M/s Pratibhuti Viniyog Ltd, 2014 (11) TMI 8 - ITAT MUMBAI wherein decided the issue in favour of the Department by holding that provision of section 40(a)(ia) is applicable even on the paid amount . - Decided against assessee. Disallowance of interest expense u/s 36(1)(iii) holding that money has been advanced on interest free loans to the sister concern/subsidiaries - Held that - the advance given to the subsidiary was 1.32 crores as on 01.04.2008 and as on 31.03.2009 it stood at ₹ 6,13,19,000/-. As against that, the assessee had own funds to the tune of ₹ 346.19 crores in the form of share capital and share premium and during the year it has raised shares of 279.93 crores out of which 4.81 crores had been lent to the sister concern. In such a situation, where the assessee has substantial own funds, then presumption is that assessee has given advance to its sister concern from its own funds. Thus, following the ratio laid down by the Hon ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT ) which have been followed in various other decisions, we hold that no disallowance of interest is called for. - Decided in favour of assessee. Addition on account of Foreign exchange gain on redemption of preference shares - Held that - we hold that the approach of the TPO as well as Assessing Officer is not correct. Such a foreign exchange gain, which has been separately accounted in the books, cannot be taxed as business income here in the case of the assessee, because same was on account of shares and therefore, same shall be considered while working out capital gain or loss as per section 48. Thus we hold that the gain arising to the assessee, shall be taxable under the head capital gains because the foreign exchange gain has been account of capital asset i.e. on account of shares and any such claim would also be of a capital in nature. The Assessing Officer has erred in law in making the said addition as normal business profits of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Disallowances and Additions
3. Levy of Interest under Sections 234B & 234C
4. Additional Grounds for Transfer Pricing Adjustments on Guarantee Commissions

Detailed Analysis:

1. Transfer Pricing Adjustments:

International Transactions:
The assessee challenged transfer pricing adjustments on international transactions with its AE, including IT-enabled services, compensation receivable on preference shares, sale of shares, guarantee commission, and interest on advances. The total adjustment was Rs. 2,31,48,59,599.

IT-enabled Services:
The assessee provided IT-enabled BPO services to its AEs, benchmarked using the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The TPO modified the assessee's analysis, merging segments and introducing new filters, leading to an upward adjustment of Rs. 13,88,67,536, later reduced to Rs. 9,29,78,668 by the DRP.

Comparable Companies:
The assessee contested the inclusion of certain comparables selected by the TPO, arguing functional dissimilarity and lack of segmental information. The Tribunal excluded Accentia Technologies Ltd., Coral Hub Ltd., Cosmic Global Ltd., and Genesys International Corporation Ltd. from the list of comparables and included R Systems International Ltd.

Sale of Shares:
The assessee sold shares of Aegis BPO Services (Gurgaon) Ltd. to Essar Services Holding Ltd. Mauritius. The TPO revalued the shares using the Discounted Cash Flow (DCF) method, resulting in an adjustment of Rs. 1,51,41,11,996, later reduced by the DRP. The Tribunal directed the AO to verify the DCF valuation provided by the assessee.

Corporate Guarantee Fee:
The assessee did not disclose guarantee arrangements in Form 3CEB, believing they were not international transactions. The TPO imputed a 5% guarantee fee, later reduced to 3% by the DRP. The Tribunal, considering the assessee's subsequent charging of 1% guarantee commission, directed the AO to benchmark the commission at 1%.

Subscription and Redemption of Preference Shares:
The TPO recharacterized the subscription of preference shares as an interest-free loan, imputing interest at 15.41%. The DRP reduced the rate to 13.78% with a 1.65% markup. The Tribunal held that recharacterizing the transaction as a loan was incorrect and deleted the adjustment.

Interest on Advances:
The TPO imputed interest on advances given to the AE, treating them as interest-free loans. The Tribunal deleted the adjustment, accepting the assessee's explanation that the advances were for advisory services.

2. Disallowances and Additions:

Carry Forward and Set-off of Unabsorbed Depreciation and Business Loss:
The AO disallowed the carry forward and set-off of unabsorbed depreciation and business loss from the demerged company GVPL. The Tribunal directed the AO to verify the appellate orders and allow the claim as per Section 72A(4).

Depreciation on Stamp Duty:
The AO disallowed depreciation on stamp duty paid for a business transfer agreement. The Tribunal allowed the claim, holding that stamp duty is part of the cost of acquiring the business and should be capitalized.

Mismatch Between AIR and Revenue:
The AO added income based on AIR information, which the assessee denied. The Tribunal deleted the addition, stating the onus was on the Department to prove the transaction.

Loss on Redemption of Preference Shares:
The AO disallowed the loss on redemption of preference shares, treating it as a loan transaction. The Tribunal directed the AO to treat it as a transaction of purchase and redemption of shares.

Disallowance of Interest Expense:
The AO disallowed interest expense on advances to sister concerns. The Tribunal allowed the claim, holding that the advances were from the assessee's own funds.

Foreign Exchange Gain on Redemption of Preference Shares:
The AO treated foreign exchange gain on redemption of preference shares as business income. The Tribunal held it should be taxed as capital gains.

3. Levy of Interest under Sections 234B & 234C:
The Tribunal noted that the levy of interest under Sections 234B & 234C is consequential.

4. Additional Grounds for Transfer Pricing Adjustments on Guarantee Commissions:
The Tribunal addressed the additional grounds related to guarantee commissions in the main grounds, treating them as allowed.

Conclusion:
The Tribunal's order resulted in partial relief to the assessee, with several adjustments and disallowances being deleted or modified. The appeal was treated as partly allowed.