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2015 (7) TMI 1051 - ITAT MUMBAI

2015 (7) TMI 1051 - ITAT MUMBAI - TMI - 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 intangib .....

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eS 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 com .....

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hould 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 profit .....

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gree 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 r .....

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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 .....

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r 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 .....

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ces 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 .....

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ause 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 affirme .....

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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 tha .....

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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 .....

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t 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 fo .....

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ssessee.

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 b .....

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s 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 pre .....

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use 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. - ITA No. : 1213/Mum/2014 - Dated:- 27-7-2015 - SHRI R C SHARMA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBERITA For the Petitioner : Shri Rajan Vora & Shri Hemen Chandariya For the Respondent : .....

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he issues challenged before us are summarized as under:- (i) Transfer pricing adjustments made on the following international transactions entered into by the assessee with its AE: S. No. Particulars Amount INR 1 Adjustment in respect of IT-enabled services 9,29,78,668 2 Compensation receivable on preference shares issued by the AE 59,90,19,794 3 Sale of shares by the applicant to its AE 1,51,41,11,996 4 Guarantee commission on intra-group Guarantees extended by the applicant 10,70,78,915 5 Inte .....

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,232 4 Addition of notional interest expense Arising out of lease payments 89,716 5 Disallowance of interest expenses claimed 78,60,025 6 Addition of exchange gain on repayment of loan 8,71,00,937 Total 18,77,88,730 (iii) Levy of interest u/s 234B & 234C; (iv) Additional grounds of appeal filed vide petition dated 21st October, 2014, which are alternative grounds for T.P. adjustments on guarantee commissions raised vide ground Nos. 1, 2 & 3, which are as under: 24. Without prejudice to a .....

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brief facts qua the issues raised vide ground Nos. 2 to 8 which are with regard to the transfer pricing adjustments of ₹ 9,29,78,668/- are that, the assessee company is engaged in providing IT enabled business processing outsourcing services (BPO) to its Associates Enterprises (AEs) for the third party contracts and in-house campagins and receivable management services. In short assessee is providing ITES BPO services to its AEs. The assessee provides customer interaction, back office, re .....

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00,000 preference shares of M/s Essar Services Mauritius 101,51,22,468 5. Purchase of 7,91,36,000 preference shares of M/s Essar Mauritius 389,78,41,026 6. Sale of 16528404 shares 21,09,14,000 7. Issue of equity shares to Arya Infrastructure Holdings Ltd Mauritius and Essar Services Holdings Ltd Mauritius 275,92,21,200 8. Advances against expenses to Aegis BPO Services, South Africa 1,03,12,805 9 . Advances against expenses to Essar Services Holdings Ltd. 5,25,785 4. So far as first three intern .....

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2007-08, 2006-07. As a result of transfer pricing exercise, the assessee s margin and comparable margins were reported as under in the Transfer Pricing Study Report: Sr. No. Nature of international transaction Aegis India s Margin Comparables margin No. of comparables 1 Provision of IT Enabled services (for third party contracts) 16.14 Percent 13.58 Percent 6 2 Provision of IT Enabled services (for In-house campaigns) 12.13 Percent 13.49 Percent 6 3 Provision of Receivable management services 1 .....

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fy the threshold limits of various filters and also the comparability criteria adopted by the assessee in its TP study report. He rejected most of the comparable companies selected by the assessee and also included some more comparables in his search process. He finally arrived at set of eight comparable companies and arrived at average arms length margin at 30.46% on operating cost to benchmark the said transactions of the assessee and made an upward adjustment of ₹ 13,88,67,536/- in resp .....

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₹ 9,29,78,668/-. Accordingly, the list of all the disputed comparables as included by the assessee, TPO and also the exclusion contested by the assessee as well as made by the TPO and the margins adopted were as under:- Sl. No. Company Name Unadjusted Operating margins as per Appellant s TP study (3 years weighted average margin) Single Year operating margins as per TP Order (considering Forex as non operating) Single Year operating margins after DRP directions Addition-Al comparables to p .....

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.13% 8 Microland Limited (Seg.) -19.13% 9 R Systems International Limited (Seg) 11.84% 10 Accentia Technologies Limited 52.24% 49.38% 11 Vishal Information Technologies Limited(Now known as Coral Hub Limited) 52.07% 37.14% 36.93% 12 Cosmic Global Limited 17.94% 40.68% 40.68% 13 Crossdomain Solutions Pvt Limited 29.40% 29.40% 14 Genesys International Limited 57.91% 57.91% Operating Margins 16.51% 3 0.46% 25.99% Total Number of comparables 6 8 8 2 3 6. Before us, Ld. Counsel, Shri Rajan Vohra subm .....

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ral Hub Limited; Cosmic Global Limited; Crossdomain Solutions Pvt Ltd; and Genesys International Ltd., which have been selected by the TPO are being contested by the assessee on various counts, including functionally dissimilarity and on various other factors. As regards comparables from Serial No. 9 to 14, these comparables were adopted by the assessee, but have been rejected by the TPO, which too are being disputed before us. His submissions on various inclusion and exclusion of comparables ar .....

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pers. Thus, it is functionally different from IT enabled services companies. Further, there is no segmental information available in the public domain to identify the revenues and costs attributable to various business areas and hence this company cannot be taken as comparable for benchmarking the margins of the assessee. He also referred and relied upon various decisions of the Tribunal, wherein Accentia Technologies Ltd has been excluded from the list of comparables on account of its strategy .....

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al Hub, he submitted that the business model of these companies are significantly different from the assessee. These companies have incurred significant amount of expenditure on translation charges, which is indicative of the fact that it operate on different business model and are also engaged into significant outsourcing activities which is not the case of the assessee. This is he submitted are apparent from the review of their financials where the majority of expenses were on account of outso .....

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Tribunal wherein, these companies have been excluded on account of outsourcing operations; which are as under: (a) ACIT v Hapag Lloyd Global Services Private Limited (ITA No. 8499/Mum/2010); (b) ACIT v Maersk Global Service Centre India Private Limited (ITA No. 3774/Mum/2011); (c) Symphony Marketing Systems India Private Limited (37 CCH 253); and (d) HSBC Electronic Data Processing India Limited v ACIT (1624/Hyd/2010) Lastly, he submitted that in case of Coral Hub and there are significant inta .....

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nt discussion and analysis and also detail of profit and loss account. The Annual report provided by the Ld. TPO was also incomplete. Thus, it is very difficult to carry out any comparability analysis and compute the margins. Further the 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. Furth .....

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report of the said company, it would be seen that this company is engaged in the business of Geographical Information Services comprising Photogrammetry, Remote sensing, Cartography, Data conversion, related computer base services and other related services. It mainly operates in niche area of land base mapping and Geographical information services. It is exclusive reseller for Navteq data for enterprise space in India. The major service provided by Genesys as given in its annual report are GIS .....

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submitted that this company was included by the assessee based on functional similarity. TPO/DRP have rejected the said company on account of diminishing revenue filter; turnover less than 5 crores filter and services revenue less than 75%. The TPO has not cited any instances of functional dissimilarity vis-à-vis the assessee. Further, its 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. .....

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to March, 2009. Mr Rajan Vohra submitted that otherwise the functional profile of the BPO segment of R Systems is similar to that of the assessee and it satisfies all the comparability criteria. Regarding different accounting year, he submitted that the results, of the profitability and margin can be easily worked out and if the financials of three months is worked out on proportionate basis as per March, 2009, the operating margin on operating cost for the year 2008-09 would be 5.8%. He furthe .....

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arables. iii) Micro Genetic System Ltd. This company too was excluded by the TPO on account of diminishing revenue filter and turnover of less than 5 crores. In this regard, the Ld. Counsel submitted that this company has reported increasing sales and higher profit before tax for three consecutive years and this is indicative of the fact that the company is not undergoing any recessionary phase and operating under normal business circumstance. Its income has been reported mainly from ITeS. As pe .....

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transcription services. Even though this company has shown decline in sales for FY 2008-09, yet it has reported increase in total profits before tax in the same year as compared to the earlier year. This company is not undergoing a phase of diminishing revenues. Thus, this company cannot be excluded on the grounds taken by the TPO. v) Microland Ltd. The said company has been rejected by the TPO on account of unreliable segment information. In this regard, Ld. Counsel submitted that the TPO has n .....

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t question the authenticity of the audited financial year statement as he has not provided any evidence to support his contentions. 8. Finally, as an alternative, Mr. Rajan Vohra submitted that, out of all the disputed comparables, Accentia Technologies Limited, Coral Hub Ltd; Genesys International are removed and R Systems International Ltd is included, then assessee s margin will fall within the range of ± 5%, of ALP vis-à-vis the comparable and accordingly no adjustment would be .....

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nts of transactions; viz., Provision for ITES for third party contracts; Provision for ITES for in house campaigns; and Provision for receivable and management services. It has also separately benchmark these services using TNMM as most appropriate method by taking operating profit/operating cost as PLI. The TPO as well as the DRP have treated all the three segments into a single IT enabled service segment. The average profit margin of the assessee from these ITES segments is 16.16%. Now as disc .....

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r ITES segment as a whole by treating them as single ITES segment rather than three different segments, as adopted by the assessee. The reason being, no cogent reasons have been canvassed before us, that these services have to separately benchmarked. We will discussed the disputed comparables in brief:- (i) Accentia Technologies Ltd :- This comparable has been disputed by the assessee for exclusion from the list of comparables as selected by the Ld. TPO. From the perusal of the relevant records .....

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is not available in the public domain to properly identify the reserves and costs attributable to various business areas and segments. Once it is difficult to identify the revenues and cost attributable in absence of segmental information, then it becomes very difficult to make a comparison or carry out any comparability analysis for the purpose of benchmarking the margins with that of the assessee and therefore, such a comparable cannot be held to be includible in the list of comparables. Thus .....

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t by the Ld. Counsel, these companies have significantly outsourced their activities, which is evident from the fact that out of the total operating costs, the outsourcing charges are more than 90% and 57% respectively. This factor alone makes a significant difference vis-à-vis the business model of the assessee, which is carrying out its IT enabled services on its own. Further, the Coral Hubs Ltd is having significant intangible assets like goodwill, intellectual property and technical k .....

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of final comparables. The reason being, different business strategies like outsourcing of entire service segment affects many factors which have bearing on the conduct of the business and also the profitability. Accordingly, these two comparables are directed to be excluded from the list of the final comparables. (iv) Genesys International Corporation Ltd: From the perusal of the annual report and information of this company, it is seen that this company is mainly engaged in geographical inform .....

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nies like assessee and hence this company is functionally not comparable so as to be included in the comparable list for the purpose of benchmarking the margin of the assessee. Accordingly, this company is directed to be excluded. (v) R Systems International Ltd (Segmental) : This company has been included by the assessee and rejected by the TPO/DRP on the ground that it is having different financial year ending on 31st December 2008, as accounting year followed by this company is January to Dec .....

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fault for reworking the margin on the basis of adding the three months and excluding three months to work out the proportionate working margin if the financial data are duly audited and are available in the public domain, of course with a rider that during that period there are no other factors affecting the operating margin. Thus, we accept the contention of the Ld. Counsel that this company should be included in the list of final comparables for benchmarking the margins. 11. Before us, the Ld. .....

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cided above and the comparables which are not in dispute and if the average margin of the final comparables falls within the arms length price of ± 5, then assessee s margin with regard the provision of IT enabled services as a whole should be accepted. With this direction, we dispose off the grounds No. 2 to 8 as raised by the assessee. In view of our finding given above, the dispute regarding other comparables remain purely academic and therefore, no findings is given on merits with reg .....

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alysis in respect of international transactions of sale of share to its AE, the assessee filed report of a Chartered Accountant for determining the fair value of each equity share of Aegis (Gurgaon) which was valued at nil . Since the transaction was carried out at a price of ₹ 12.72 per equity share, which was higher than the price determined by the Chartered Accountant, it was reported that the transaction undertaken by the assessee with its AE was at arms length. The Ld. TPO observed th .....

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mation and demerger by the High Court. The assessee had furnished valuation reports and other details for transfer and issue of shares before the TPO. However, the TPO rejected the valuation undertaken by the assessee and concluded that transactions relating to sale of shares by the Aegis Gurgaon and demerger into the assessee were inextricably linked. Accordingly, he computed the value of equity shares of Aegis Gujarat by taking the value of the shares of the equity shares at ₹ 400 per sh .....

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rdingly, adjustment was reduced to ₹ 151,41,11,996/-. 14. Before us, the Ld. Counsel Shri Rajan Vohra submitted that even if the DCF method is to be applied then the same comes to ₹ 84.63 per share and the actual working in accordance with DCF report has been given in paper book at page 386. He submitted that it is open for verification by the AO/TPO. The 1/3rd value of ₹ 84.63 will come down to approximately ₹ 29 per share and if at all any adjustment is to be made then .....

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being transfer of shareholding in subsidiary and second being issue of its own equity shares. Further, demerger of BPO Division has taken place only in financial year 2009-10 and does not pertain to the year under consideration. Thus, he submitted that this transaction should be seen as stand alone transaction . In the alternative, he stated that if the value is to be taken of DCF valuation then same should be done after taking various factors, which TPO/DRP have not followed the methodology co .....

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ng other contention, he submitted that the two transactions cannot be separately linked as here what is required to be seen whether the transaction of shares have been done at arms length price. For determination of correct ALP, the TPO has rightly benchmarked it with the other similar transactions made by the assessee, therefore, in principle, the order of the TPO should be upheld. 16. We have heard the rival submissions, perused the relevant material placed on record. The main issue raised bef .....

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equity shares to ESSAR Services Holdings and Arya Infrastructure Holdings Ltd at ₹ 400 per share whose fair market value in accordance with the CCI Guidelines was only ₹ 22.82 per share. He has also taken note of the fact that BPO division of Aegis Gurgaon was demerged with the ESSAR in subsequent year. Using swap ratio of 1:3, he has taken the value of each equity share of Aegis Gujarat at ₹ 133 i.e. 1/3rd. This has been reduced by the DRP as there was some erroneous calculat .....

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The valuation of the two transactions cannot be equated for the reason that they pertain to different financial years and therefore, same cannot be held to be inextricably linked. However, without going into merits of this aspect, whether they are two separate transactions or not, we are proceeding with the main arguments of the Ld. Counsel and we also feel 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 par .....

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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. Accordingly .....

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f the belief that maintenance of TP documentation did not specify guarantee arrangement and it does not constitute international transactions. The details of various guarantee arrangement made and entered into by the assessee with third party banks on behalf of its AE were as under: S. No. Details of guarantee Guarantee Amount (INR) Purpose of guarantee 1 Corporate guarantee given by the Appellant to Axis bank for extending foreign currency loan of USD 15,000,000 to its 100% Subsidiary Essar Ser .....

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should have been charged @ 5% from the AE for providing the corporate guarantee and accordingly, he made an adjustments of ₹ 17,84,64,859/-. The DRP on the other hand, held that the Indian Banks charge around 2% of commission for giving bank guarantee and over and above this, 1% for covering the risk taken by the assessee without any security should also be included. Thus, DRP directed the Assessing Officer to compute the guarantee fee commission at 3% per annum and accordingly, the amoun .....

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to the contention that the corporate guarantee given by the assessee cannot be benchmark in view of the peculiar factors, he also referred and relied upon various decisions of ITAT Mumbai Bench, wherein, the bank guarantee commission has been charged from 0.5% to 1%. List of such decisions, as relied upon, are as under: Sr. No. Name of case law 1 Glenmark Pharmaceuticals Limited (ITA No. 5031/Mum/2012) 2 Godrej Household Products Limited (ITA No. 7369/Mum/2010) 3 Everest Kanto Cylinder Limited ( .....

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nd submitted that DRP has already scaled down the percentage and guarantee commission and hence it should not reduced further. 22. We have heard the rival submissions and also perused the relevant material placed on record. The assessee has given corporate guarantee on behalf Aegis USA amounting to ₹ 666,46,80,000/- and on behalf of Essar Services, Mauritius for ₹ 75,73,50,000/-. Before us, the Ld. Counsel had submitted that in the subsequent years the assessee has suo moto entered i .....

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arious 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 .....

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subscription of preference shares does not impact profit & loss account or taxable income or any corresponding expense resulting into deduction in the hands of the assessee. Redemption of preference shares at par represents an uncontrolled price for shares, based on a comparison with such uncontrolled transaction price and, therefore, such redemption of preference share should be considered at arms length from Indian transfer pricing prospective. During the course of transfer pricing procee .....

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ion obtained from CRISIL, he determined the rate of interest at 15.41% and computed the adjustment of ₹ 59,90,19,794/-. The DRP agreed that the TPO s re-characterizations approach into loan and charging of interest thereon is correct. However, they did not agree with the TPO s approach of imputing the interest using credit rating and Indian bond yield. They instead directed the Assessing Officer to charge interest rate as charged by the assessee which was at 13.78% and thereby also directe .....

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roach. Sr. No. Name of case law 1 Besix Kier Dabhol SA (ITA No. 776/Mum/2011) 2 Zaheer Mauritius (WP 1648/2013 and CM 3105/2013) 3 Bharti Airtel Limited (ITA No. 5816/Del/2012) 4 Parle Biscuits Private Limited(ITA No. 9010/Mum/2010) 5 All Cargo Global Logistics Limited (ITA No. 4909 and 4910/Mum/2012 6 Tooltech Global Engineering Private Limited (ITA No. 273/PN/2014) Explaining the nature of transaction, Mr. Rajan Vohra submitted that the assessee had entered into arrangements for specific purpo .....

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ly on investment in shares. As an alternative, he submitted that interest should be on LIBOR basis and in support of this contention, he relied upon the following decisions: Sr. No. Name of case law 1 Cotton Naturals India Private Limited (22 ITR 438) 2 Cotton Naturals India Private Limited (ITA No. 3265/D/2011) 3 Everest Kanto Cylinder Limited (ITA No. 7073/Mum/2012) 4 Hinduja Global Solutions Limited v ACIT (145 ITD 361) 5 DCIT v Tech Mahindra Limited (ITA No. 1176/Mum/2010) 6 Tata Autocomp Sy .....

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these shares at par. The TPO has re-characterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as L .....

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r 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. The contention of the Ld. Counsel is also supported by the Hon ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August, 2012 and by various other decisi .....

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o. 15. 29. During the financial year 2008-09, the assessee has made advance to its AE which was disclosed in Form 3ECB. The assessee s case has been that for the purpose of identifying prospective companies for acquisition in South African region the assessee had given advance for engaging consultants and has in fact received advisory services from South African based consultants in this regard. The cost incurred towards hiring of these consultants was erroneously shown as advance in the name of .....

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6/-. Such an adjustment has also been confirmed by the DRP. 30. The Ld. Counsel submitted that, it was duly clarified before the TPO that the nature of advance was in fact, payment made for advisory services, which was wrongly classified as advance and therefore, it is an expense to the assessee and no interest can be charged. On the other hand, the Ld. DR relied upon the order of the DRP. 31. After considering the rival submissions, we find that the assessee has filed copies of invoices relatin .....

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eration 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. Thus, ground no. 15 is treated as allowed. 32. In ground no. 17, the assessee has challenged the disallowance of assessee s claim for carry forward and set off unabsorbed depreciation allowance of ₹ 2,16,63,135/- and business loss of ₹ 6,36,01,340/-, aggregating to ₹ 8,52,64,475/-. 33. Brief facts of the case are that in pursua .....

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ollowing business losses and unabsorbed deprecation pertaining to the GVPL, in the following manner:- AY to which Losses Pertains Nature of Losses Losses of GVPL Taken over by Appellant, under the scheme of demerger, and carried forward to AY 2009-10 Losses set off By appellant during AY 2009-10 Losses carried Forward by Appellant to AY 2010-11 2002-03 Unabsorbed Depreciation 76,55,312 76,55,312 - 2003-04 Business Loss 6,36,01,340 6,36,01,340 - 2003-04 Unabsorbed Depreciation 2,87,66,909 1,40,07 .....

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lt the revise business loss and unabsorbed depreciation loss in the case of GVPL were determined as under: AY Returned Loss of GVPL Assessed losses of GVPL post the Order of learned CIT(A), ITAT, Delhi High Court Revised Losses of GVPL available to Appellant, for carry Forward and set-off In AY 2009-10 2002-03 4,61,86,250 4,61,86,250 76,56,312 2003-04 11,80,25,770 10,96,37,145 8,39,79,624 (including unabsorbed depreciation of 2,87,66,909) That apart, during the financial year 2008-09, there was .....

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rward and set off of previous years business losses and unabsorbed depreciation of the GVPL to the assessee. 34. Before us, the Ld. Counsel submitted that section 72A(4) has an overriding effect on section 79 and hence, the year in which the demerger is given effect, the provisions of section 72A(4) shall come into play. The Assessing Officer has erred in law and on facts in not considering the fact that demerger was given effect in financial year 2008-09 and accordingly, the provisions of secti .....

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her hand, Ld. DR strongly relied upon the order of the Assessing Officer and submitted that the Assessing Officer has rightly applied section 79 which is a non obstante clause applicable for Chapter VI only. Therefore, the order of the Assessing Officer should be confirmed. 36. We have heard the rival submissions and perused the relevant material on record. It is an undisputed fact that pursuant to the demerger scheme, the BPO division of the GVPL was demerged and got vested into the assessee by .....

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ed depreciation allowance in the cases of amalgamation and demerger. Sub-section (4) is non obstante clause, which provides that notwithstanding anything contain in any other provision of this Act in the case of a demerger, the accumulated loss/allowance for the unabsorbed depreciation of the demerger company shall be as under: (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set of .....

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, as the case may be . Thus, by virtue of section 72A(4), in the case of the assessee, the accumulated loss and unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of the resulting company i.e. the assessee. The Assessing Officer has invoked section 79 which apparently is not applicable on the facts of the case; and secondly, it does not have an overriding effect on section 72A(4) which is a specific provision in case of carry forward a .....

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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. A .....

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see. 38. The brief facts are that, during the year the assessee purchased the BPO business of AOL India P Ltd. as a going concern by way of Business Transfer Agreement (BTA). The assessee paid stamp duty amounting to ₹ 35,55,000/- on this BTA. In the final statement as well as for the purpose of taxation, such stamp duty has been capitalized in the ratio of value of assets acquired from AOL India P Ltd. under BTA. The Assessing Officer held that what was transferred by way of DTA is the bu .....

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cquired on a slump sale basis. As an established practice the purchaser allocates the purchase price and other related cost incurred by it (i.e. to acquire an undertaking on slum sale basis) over assets on rational basis and claim depreciation accordingly. As per section 43(1) actual cost means the actual cost of the assets to the assessee. Since the stamp duty is the actual cost incurred by the assessee in order to purchase the assets, it shall be considered as cost to the assessee. As per AS-1 .....

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r a specific depreciable assets. Even as per accounting standard the stamp duty relatable cost should be capitalized which is also the plea of the assessee. However, no depreciation can be allowed on such a expense. Further, stamp duty cannot be held to be revenue expenditure as explained by subsequent decision of Hon ble Supreme Court. 41. We have heard the rival submissions and also perused the relevant material placed on record. Here the issue pertains to, whether the depreciation should be a .....

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amp 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 98 ITR 167 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 .....

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Annual Information Report (AIR) and the revenue reported by the assessee. 43. The Assessing Officer on the basis of AIR Information observed that the assessee had entered into a transaction with PA Poonacha and Supertending Engineer . The assessee s case before the Assessing Officer was that it had not entered into any such transaction with the said two parties and there must be some error in the AIR information. The assessee does not have any record of having received any sum of the money from .....

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been deposited in the bank account of the assessee. 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 .....

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nce of current year s loss on account of redemption of preference shares and loss on sale of shares. 46. The brief facts are that the during the financial year 2008- 09, the assessee incurred loss aggregating to ₹ 11,01,03,639/- on account of redemption of 2,04,00,000 preference shares of Essar Services, Mauritius redeemed at par @ 1$ per share. These shares were purchased during the financial year 2004-05 @ 1$ per share, therefore, the loss which arose during the year was primarily on acc .....

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of subscription of preference shares into advancing of unsecured loans as done by the TPO is not correct, because the actual transactions cannot be disregarded or substituted for some other transaction other then exceptional circumstances which has not been brought on record. Nowhere the Assessing Officer or the TPO has indicated how in the instant case exceptional circumstances can be inferred from the material on record. The assessee had entered into these arrangement for specific purpose and .....

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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. Thus, Ground no. 20 is treated as allowed. 47. In ground no. 21, the assessee has challenged disallowance of interest expense of ₹ 89,716/- arising out of lease payment, u/s 40(a)(ia) on the ground that TDS u/s 194A has .....

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Addl CIT vs Victor Shipping Services P Ltd, reported in 357 ITR 642. 50. On the other hand, the Ld. DR relied upon a decision of ITAT Mumbai Bench in the case of ITO vs M/s Pratibhuti Viniyog Ltd, ITA No. 1689/Mum/2011, order dated 22.08.2014 wherein the Tribunal after considering the Vector Shipping and Gujarat and Calcutta High Courts have decided the issue in favour of the Department by holding that provision of section 40(a)(ia) is applicable even on the paid amount . 51. After considering t .....

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cisions directly on the point. Accordingly, this ground no. 21, as raised by the assessee is treated as dismissed. 52. Ground no. 22, the assessee has challenged the disallowance of interest expense amounting to ₹ 78,60,025/- u/s 36(1)(iii) holding that money has been advanced on interest free loans to the sister concern/subsidiaries. 53. During the year under consideration, the assessee borrowed certain amounts from various banks and financial institutions on which it has paid interest am .....

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- 3,925 - Aegis BPO Services (South Africa) Ltd. Subsidiary - 10,313 Aegis BPO Services (Gurgaon) Limited Subsidiary - 18,408 BPO division demerged into Aegis Limited w.e.f. 01.04.2009 Total 13,206 61,319 The sums so advanced to these sister concerns, were utilized by these companies for payment of various expenses incurred by them like payment of service tax, sales tax, salary etc. The assessee s case had been that it has advanced the money from its own interest free funds and no borrowed fund .....

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,251,336 400 500,534,400 Iv March 30, 2009 2,542,875 400 1,017,150,000 Total (INR) 62,21,125,200 54. The Assessing Officer s case was that these advances have been made out of the borrowed funds and since no commercial expediency is established, the proportionate disallowance of interest on borrowed funds has to be made and accordingly, he applied the interest rate at 15.41%. 55. Before us, the Ld. Counsel, Shri Rajan Vohra submitted that assessee had own funds of ₹ 346.19 crores, out of w .....

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of Reliance Utilities and Power Ltd, reported in 313 ITR 343. Without prejudice, he submitted that looking to the business consideration and commercial expediency for making advance to the sister concern no portion of interest could be disallowed on the ground that they were for non-business purpose as held by Hon ble Supreme Court in the case of S A Builders Ltd vs CIT, reported in 288 ITR 1. 56. On the other hand, Ld. DR has strongly relied upon the order of the AO as well the directions of t .....

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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 (supra) which have been followed in various other decisions, we hold that no disallowance of interest is called for. Accordingly, ground no. 22 is treated as allowed. 58. In ground no. 2 .....

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580 27.10.2004 2,660,000 2,660,000 45.16 120,125,600 09.12.2004 8,995,333 8,995,333 44.47 400,000,000 Total 42,256,333 42,256,333 1,914,919,180 60. A portion of these preference shares were sold during the financial year 2008-09 i.e. AY 2009-10 and accordingly, the assessee credited an amount of ₹ 8,71,00,937/- on account of exchange gain on redemption of those preference shares under the head income credited under Schedule-14. The exchange gain on such redemption has subsequently been red .....

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887732 27.10.2004 (1st Tranche) 2660000 2660000 50.08 133225036 13099436 27.10.2004 (IInd Trache) 623163 623163 50.08 31210864 3500368 09.12.2004 (IIIrd Tranche) Total 20400000 20400000 1015122468 87100937 Since TPO has held that preference shares held by the assessee was akin to giving or interest free loan and, therefore, had arrived at interest rate based on assumed credit rating, the Assessing Officer following the TPO s order held that the resultant exchange gain of ₹ 871,000,973/- ea .....

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