2014 (12) TMI 563 - AT - Income Tax

Transfer pricing adjustments - Assignment of call options Whether recasting of framework agreement in 2007 tantamount assignment of option rights held by the assessee under framework agreements of 2006 - Scope of transfer u/s 2(47) - transfer by nomination - Held that - Under the framework agreements of 2007, any of wholly owned subsidiary of Vodafone PLC is a prospective nominee but would get the right to acquire share only when a nomination is made by the assessee in favour of such subsidiary. - the mutual intention of the parties of Framework Agreements and TII share holders agreement was to transfer the Option rights vested with the assessee in favour of CGP India Investment Ltd. Accordingly, we hold that the Option rights including the Call Option held by the assessee under Framework Agreements stand transferred/assigned in favour of CGP India Investments by virtue of TII share holders agreement. Decision of Supreme Court in the matter of Vodafone India Holdings BV Vs. UOI 2012 (1) TMI 52 - SUPREME COURT OF INDIA distinguished in view that subsequent to the judgment of the Hon ble Supreme Court, there is an amendment to section 2(47) which raises several important question of fact and law and accordingly, the effect of the amendment would have to be considered and it cannot be brushed aside. International transaction or not - Held that - The entire transaction under SPA and other supplementary/ancillary agreements is one package/composite transaction of transfer of share of CGP and rights attached to the share - during the year under consideration both HTIL and VIH BV are the associated enterprises of the assessee as per section 92A(2) - SPA and FWAs constitute an arrangement, understanding or action in concert among the assessee, HTIL and VIH BV for grant of Call Option by Asim Ghosh and Analjit Singh to assessee against the agreed consideration paid by the VIHBV - This mutual understanding and arrangement as well as action in concert between the assessee and its AEs for securing the Option Rights against the consideration paid by VIH BV to HTIL and AG & AS certainly having a bearing on the profits, income, losses or asset of the associated enterprises. Whether the transaction is at arm s length or not Held that - once the transaction is held to be an international transaction the same must be at Arm s Length Price - The assessee being the holder of the valuable option rights under FWAs to give proper effect to the SPA was required to be compensated at ALP and on assignment of option rights in the form of CGP India Investments Ltd vide TII shareholders agreement dated 5/7/2007, the assessee was not compensated. Valuation of Call Option - comparability of the cashless option - Valuation and benchmarking the transaction Application of CUP method - Computation of STCG by TPO made by considering the cost of acquisition of call options the amount paid to AG and AS being annual payment for keeping the options alive - The Assessee argued that the conclusions arrived at in the presentation made by Goldman Sachs before the FIPB cannot be challenged by the Department before the ITAT now. - Held that - when the reports were not produced before the Assessing Officer then it cannot be said that the valuation were accepted by the assessing authority merely because these were presented before the FIPB. In view of the above discussion, we do not find any reason to interfere with the orders of authorities below except the re-computation of Short term Capital Gain by DRP on which, we restore the order of TPO. The Ld. Senior Counsel has raised an another point that no Call Option was exercised but Put Option was exercised by the other parties in the year 2009 and, therefore, even at the time of acquiring the shares under the Put Option exercised by Asim Ghosh and Analjit Singh, there was no assignment of any right but it was an obligation on the part of the assessee to acquire the shares under Put Option exercised by other parties. - Held that - in any eventuality, the shares held under Option Rights shall have to be transferred in favour of the assessee or its nominee as the case may be at a pre determined price. The Put Option and Call Option under the framework agreements is an arrangement like tossing a even sided coin and, therefore, it makes no difference whosoever tosses the coin as the result will be same. - argument of the assessee rejected. Whether the assessee is guilty of concealment of relevant facts regarding exercise of Put Option by Analjit Singh and Asim Ghosh in the year 2009 - Held that - The factum of put option exercised by the counter party to the FWA and shareholder s agreement dated 05/07/2007 was not brought by the assessee either before the authorities below or before Hon ble High Court. Even before this tribunal the assessee did not disclose these facts and developments taken place subsequent to FWAs of 2007 and only on the query from the bench as well as from the additional evidence filed by the revenue it came to the notice of the Tribunal. Therefore, the assessee, in our view, is guilty of not disclosing before the assessing authorities the material fact relevant for adjudicating the issue of assignment of option rights. Sale of call centre business - Whether the transfer of call centre business is an international transaction as per the provisions of section 92B (1) and (2) - Held that - HTIL was under obligation to procure and deliver the call center business transfer agreement duly entered into between the assessee and an affiliate of HTIL at the time of completion of SPA on 8/5/2007 - the language of SPA and BTA manifest without any ambiguity that the BTA was signed between the assessee being downstream subsidiary of HTIL and, therefore, the BTA is preceded the SPA - Both SPA and BTA was signed on the same date, however, BTA is considered as preceded the SPA because of the conditions provided under SPA - the sale of call centre business was not an independent decision of the assessee alone but it was a decision of the Hutchison Whampoa Group as per the terms and conditions of the SPA - the BTA was entered into in pursuant to the SPA wherein it was agreed upon between the parties that VIH BV shall acquire the telecom business through the entire share of CGP but excluding the call centre business of the assessee - The assessee being a downstream subsidiary of HTIL and HWL was bound by the SPA being the part of wider group companies - It was in the compliance of SPA dated 11.02.2007 that the HTIL was required to retain the call centre business and the HTIL was under the obligation to retain the call centre business by procuring the transfer of call centre business from the assessee to an affiliate of HWL. Whether the transaction of sale of call centre business by the assessee to HWP (India) would fall under the expression international transaction as per the provisions of section 92B(1) deemed international transaction - The assessee has forcefully contended that it was transferred to an India related party, therefore, the provisions of section 92B(1) and 2 are not attracted - Held that - The surrounding facts and circumstances can lead to the conclusion that it was only an arrangement without any substantial business or commercial interest of HWP (India) but to avoid the tax liability in India, the call centre business was though apparently transferred to HWP (India) but the real transaction of sale and purchase is between the assessee and HTIL/HWL Group. Therefore, the transaction being between the assessee and its non resident AEs would constitute the international transaction in terms of section 92B(1). Applicability of section 92B(2) Held that - For invoking the provisions of sub-section 2 of section 92B, the transaction must be entered into by the enterprise with the person other than an associated enterprise - The definition of the associated enterprises is provided u/s 92A which does not contemplate that associated enterprises means an enterprise inter alia a nonresident - Therefore, an enterprise which fulfills the conditions as prescribed u/s 92A will fall under the expression associated enterprises irrespective of its residential status, domestic or nonresident- It is only for the purpose of international transaction, a transaction must be between two or more associated enterprise either or both of whom are nonresident - The condition of nonresident of associated enterprises is only for bringing a transaction between two associated enterprises under the ambit of international transaction - an associated enterprise can be a resident or nonresident- HWP (India) is an associated enterprise of the assessee for the year under consideration, therefore, the provisions of sub-section 2 of section 92B are not attracted. Valuation of call centre business - Computation of Arm s Length Price Held that - the valuation of Call Centre business should be based on the most appropriate method as agreed by both the parties, being DCF Method thus, the issue of valuation of Call Centre business for the purpose of determination of ALP is remitted back to the AO/TPO for consideration of valuation filed by the assessee. Addition of adjustment made as a result of arm s length price of provision of ITES services Held that - having regard to the fact and circumstances and availability of the comparables to bench mark the international transaction, the reasonable tolerance range has to be considered which may be 10% on the lower side to 25% as the highest limit which could be permitted in any exceptional circumstances where the availability of the comparables is very less there was no error in applying filter of not exceeding 25% of related party. Set off of unabsorbed depreciation against income from other sources Deduction u/s 10A Held that - Due to the finding of CIT(A) for the AY 2005-06 and, thereafter, the order of this Tribunal, the deduction u/s 10A was allowed to the assessee before setting off unabsorbed depreciation against the business income consequently the income available for setting off unabsorbed depreciation was to be recomputed thus, the matter is to be remitted back to the AO for re-consideration.

Summary

Issues Involved:
1. Assignment of Call Options.
2. Sale of Call Centre Business.
3. Provision of ITES Services.
4. Set off of Unabsorbed Depreciation.
5. Short Credit of Tax Withheld.
6. Short Credit of Advance Tax.
7. Levy of Interest under Sections 234B, 234C, and 234D.
8. Initiation of Penalty Proceedings under Sections 271(1)(c), 271AA, and 271G.

Detailed Analysis:

1. Assignment of Call Options:
The Tribunal examined whether the recasting of framework agreements in 2007 amounted to the assignment of option rights held by the assessee under the 2006 framework agreements. The Tribunal noted that the 2007 framework agreements included the assessee and any wholly owned subsidiary of Vodafone Group PLC as potential assignees of the Call Options. However, the Tribunal concluded that the inclusion of a potential assignee alone did not constitute an assignment or transfer of the Call Options. The Tribunal also considered the share holders' agreement dated 5.07.2007 and concluded that the option rights under the 2006 framework agreements were transferred/assigned to CGP India Investments Ltd. (Mauritius), an AE of the assessee, by virtue of the share holders' agreement. The Tribunal held that the transaction was an international transaction under section 92B of the Income Tax Act and required determination of the arm's length price.

2. Sale of Call Centre Business:
The Tribunal examined whether the sale of the call centre business to HWP (India) was an international transaction. The Tribunal noted that the sale was part of the SPA between HTIL and VIH BV, which required HTIL to retain the call centre business. The Tribunal concluded that the transaction was an international transaction under section 92B(1) as it was between the assessee and its non-resident AE, HTIL. The Tribunal also held that the transaction fell under section 92B(2) as there was a prior agreement (SPA) between HTIL and VIH BV. The Tribunal directed the TPO to determine the arm's length price using the DCF method.

3. Provision of ITES Services:
The Tribunal considered the comparability of various companies selected by the TPO and the assessee for benchmarking the international transaction of providing ITES services. The Tribunal excluded Accentia Technologies Ltd. and Cosmic Global Ltd. from the list of comparables as they were not functionally comparable. The Tribunal upheld the inclusion of Infosys BPO Ltd., Wipro Ltd., and HCL Comnet Systems & Services Ltd. as comparables. The Tribunal directed the TPO to re-compute the arm's length price based on the remaining comparables.

4. Set off of Unabsorbed Depreciation:
The Tribunal noted that the issue of unabsorbed depreciation required reconsideration in light of the order of CIT(A) and the Tribunal for the A.Y. 2005-06. The Tribunal restored the issue to the Assessing Officer for consideration.

5. Short Credit of Tax Withheld:
The Tribunal directed the Assessing Officer to verify the correct amount of tax withheld and consider the claim of credit accordingly.

6. Short Credit of Advance Tax:
The Tribunal directed the Assessing Officer to verify and consider the claim of the assessee regarding short credit of advance tax.

7. Levy of Interest under Sections 234B, 234C, and 234D:
The Tribunal held that the levy of interest under sections 234B and 234D is mandatory and consequential. The Tribunal directed the Assessing Officer to verify the claim of the assessee regarding the difference in levy of interest under section 234C.

8. Initiation of Penalty Proceedings under Sections 271(1)(c), 271AA, and 271G:
The Tribunal dismissed the ground regarding the initiation of penalty proceedings as premature, noting that the remedy is available only against the order of levy of penalty and not against the initiation of penalty proceedings.

Conclusion:
The Tribunal partly allowed the appeal of the assessee for statistical purposes, directing the Assessing Officer/TPO to re-compute the arm's length price and consider the claims of the assessee as per the Tribunal's directions.