2017 (2) TMI 1204 - AT - Income Tax

TPA - selection of comparable - Held that - Companies need to be excluded from the final set of comparables on the ground that there was a significant difference in business strategies like outsourcing of the entire service segment, etc. At the time of hearing, it was 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. Transfer pricing adjustment in respect of subscription and redemption of Preference Share capital - Held that - Tribunal in assessee s own case for assessment year 2009-10, wherein it has been held that the Transfer Pricing Officer cannot disregard the apparent transaction and substitute it with a transaction as per his own perception. Transfer pricing adjustment made in respect of the arm s length fee for the Corporate Guarantee extended by the assessee on behalf of its associated enterprises - Held that - 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. Denying carry forward and set-off of unabsorbed depreciation and business loss - Held that - 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. Disallowing the current year s loss and making addition on account of exchange gain on account of redemption of preference shares is directed to be deleted. Disallowance of interest expenditure invoking provisions of section 40(a)(ia) - Held that - Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT ), the presumption is that the advances to the subsidiaries/sister concerns are out of such owned non-interest bearing funds. On this count itself, we find that the disallowance of ₹ 5,37,76,428/- made by the Assessing Officer is liable to be deleted. Apart from the aforesaid plea, assessee had also pointed out at the time of hearing that the borrowings raised during the year from various banks and other financial institutions were acquired for specific utilization like acquisition of fixed assets, capital expenditure, etc. and, therefore, the same would not be presumed to have been lent to subsidiaries /sister concerns. Be that as it may, having regard to the fact-situation and the ratio of the judgment of the Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd.(supra), we uphold the plea of the assessee for deletion of interest expenditure

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Tax Matters
3. Carry Forward and Set-off of Unabsorbed Depreciation and Business Loss
4. Disallowance of Interest Expenditure
5. Charging of Interest under Sections 234B and 234C
6. Credit for TDS
7. Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustments:
- IT Enabled Services (ITeS):
- The assessee's margin was determined at 20.11% on cost by merging ITE services and Receivable Management Services segments.
- The Transfer Pricing Officer (TPO) introduced new filters and selected six comparables with an average margin of 26.18%.
- The Tribunal upheld the exclusion of Accentia Technologies Ltd., Cosmic Global Ltd., and Infosys BPO Ltd. from the final set of comparables due to functional dissimilarity, extraordinary events, and significant intangibles.
- Inclusion of R Systems International Limited (BPO-Seg.) was allowed as the data for each quarter was available, meeting the requirement of Rule 10(B)(4).

- Subscription and Redemption of Preference Shares:
- The TPO re-characterized the transaction as an interest-free loan and imputed interest thereon.
- The Tribunal held that the TPO cannot disregard the apparent transaction and substitute it, following the precedent set in the assessee's own case for assessment year 2009-10.

- Corporate Guarantee:
- The TPO determined a guarantee fee of 4.43% of the outstanding amount, which the DRP reduced to 3%.
- The Tribunal directed the guarantee fee to be benchmarked at 1% of the outstanding guaranteed amount, consistent with the precedent in the assessee's own case.

2. Corporate Tax Matters:
- Disallowance of Carry Forward and Set-off of Unabsorbed Depreciation and Business Loss:
- The Tribunal restored the matter to the Assessing Officer (AO) to verify and allow the claim in accordance with the law.

- Disallowance of Current Year Loss and Exchange Gain on Redemption of Preference Shares:
- The AO re-characterized the preference shares as loans and disallowed the capital loss and exchange gain.
- The Tribunal directed the AO to treat the transaction as a purchase and redemption of shares, following the precedent set in the assessee's own case for assessment year 2009-10.

3. Disallowance of Interest Expenditure:
- Interest Expenditure of ?5,37,76,428:
- The AO disallowed interest expenditure, claiming the advances to subsidiaries were made out of borrowed funds without commercial expediency.
- The Tribunal upheld the assessee's plea, noting sufficient own funds and commercial expediency, following the judgment of the Hon'ble Bombay High Court in Reliance Utilities & Power Ltd.

4. Charging of Interest under Sections 234B and 234C:
- The issue was deemed consequential and did not require specific adjudication.

5. Credit for TDS:
- The AO was directed to examine and grant credit for TDS as per the material on record and law.

6. Penalty Proceedings under Section 271(1)(c):
- The initiation of penalty proceedings was considered premature and dismissed.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided detailed directions on transfer pricing adjustments, corporate tax matters, disallowance of interest expenditure, and credit for TDS, ensuring compliance with legal precedents and proper verification by the AO.