TMI Blog2017 (2) TMI 1204X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act') after considering the adjustments made by learned Transfer Pricing Officer ('IPO') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the learned Dispute Resolution Panel ('DRP'). GROUNDS RELATING TO TRANSFER PRICING MATTERS: 2. The learned TPO / AO / DRP have erred in making an addition of INR 88,02,54,695 to the total income (as detailed below) of the appellant in respect of various international transactions entered into by the appellant with its associated enterprises ('AE'). S.No. Particulars Amount (INR) 1. Adjustment in respect of IT -enabled services 4,47,84,556 2. Adjustment in respect of subscription and redemption of preference share capital 63,64,02,739 3. Adjustment in respect of guarantee commission on intra-group guarantees extended by the applicant 19,90,67,400 Total 88,02,54,695 3. The learned TPO / AO / DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O / AO / DRP have erred in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act, while making adjustment to the value of international transactions of the appellant, applicable as per law. Adjustment in respect of issue and redemption of preference shares: 12. The learned TPO / AO / DRP have erred in re-determining the arm's length compensation pertaining to subscription and redemption of preference share capital by re-characterizing the same as interest-free loan and thereby imputing interest thereon. 13. Without prejudice to the above, the learned TPO / AO / DRP have erred in considering Indian bond rates for the purpose of computing interest on the alleged loan instead of LIBOR based rate. Adjustment in respect of corporate guarantee: 14. The learned TPO / AO / DRP have erred in re-determining the arm's length compensation for corporate guarantees extended by appellant on behalf of its AEs and confirming an adjustment of INR 19,90,67,400 on this account. 15. Without prejudice to above, the learned TPO / AO / DRP have erred in making double addition on account of gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned AO / DRP has failed to follow the law of the land that the deeming fiction under the Act is limited for the purpose it is so made and the same does not permeate through the entire assessment. c. The learned AO / DRP has travelled beyond the provisions of the Act in seeking to re-characterize lawfully consummated transaction(s), where no such power, express or implied, is conferred under the Act. 20. The learned AO / DRP have erred in making an addition by imputing a notional interest expense (amounting to INR 11,380) arising out of lease payments which is not covered under section 194A of the Act without appreciating the fact that the payee would have offered the payment to tax in its return of income. 21. The learned AO /DRP have erred on facts and in law in disallowing interest expense, amounting to INR 5,37,76,428, claimed by the appellant by holding that the appellant has not established the commercial expediency for advancing interest free loans to sister concerns I subsidiaries: a. the AO/DRP failed to consider the factual matrix and the circumstances of the case, evidencing the fact that appellant has extended loans from its own funds; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO or confirm the order of the AO. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 4. A copy of the order of the Directions of the DRP-I, Mumbai was received on 31.10.2014 by the erstwhile Assessing Officer i.e DCIT 5(1)(1). The Final assessment Order has been passed by DCIT 5(1)(1), Mumbai on 27.11.2014. Accordingly the last date for filing of appeal was 27/01/2015. Consequent to restructuring the case records was transferred to the AO of this charge i.e. DCIT 6(1)(1), Mumbai on 23.01.2015 and following three days were public holidays. The comments of TPO were obtained on 25.02.2015 by the AO. Thus the delay is regretted and therefore it is humbly requested that the delay may kindly be condoned. 3. Before we proceed to address the respective Grounds of appeal, we may briefly refer to the background of the case. The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing Customer interaction (customer acquisition, customer services), Back-office (Receivables management and data management) recovery and collection services for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid, during the year assessee also rendered Receivable management services to its associated enterprises. In its Transfer Pricing Studies, assessee had benchmarked the said transactions separately by using the Transactional Net Margin Method as the most appropriate method and Operational Profit/Operational Cost(OP/OC) was used as the Profit Level Indicator (PLI). The assertions of the assessee were that having regard to the margin of the comparable concerns selected, the margins of the assessee in the respective segments of Provision of ITE services and Receivable Management Services were favourable and thus, the stated value of the transactions was at an arm's length price. The Transfer Pricing Officer, however, merged the aforesaid two segments into a single ITE services segment and determined the assessee s margin at 20.11% on cost. Though the Transfer Pricing Officer did not disagree with the selection of TNM method as the most appropriate method but he has introduced some new filters, modified the threshold limit of various filters and/ or other comparability criteria applied by the assessee and arrived at the following final set of six comparables:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso sought to be pointed out that the said concern had acquired certain companies for SaaS Technology, which forms a part of its assets base which serves the purpose of providing niche services to the customers, which is quite different from the routine ITE services provided by the assessee. According to the Ld. Representative, assessee is employing routine tangible assets, and does not own any significant intangibles while rendering ITE services, and therefore, Accential Technologies Limited is incomparable to assessee s tested segment of Providing ITE services to its associated enterprises. 4.3 In this aspect, the Ld. Departmental Representative has opposed the plea of the assessee by relying on the discussion made by the Transfer Pricing Officer in para 10.4 of his order, whereby it is sought to be pointed out that the said concern has been rightly excluded. Firstly, it is sought to be pointed out that the said concern was considered as a comparable by the assessee itself and, therefore, there is no justification for the assessee to again seek its exclusion. Secondly, with regard to the merger of Accent Infoserve Private Ltd., with the said concern, the Ld. Departmental Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assessment year 2010-11, wherein the Tribunal has confirmed the exclusion of the said concern on the ground of the impact on the financial results. In fact, in the case of Zavita India Pvt. Ltd.(supra), the Tribunal was considering a situation, where the Assessing Officer had excluded the said concern after being directed by the DRP to examine whether any extraordinary event had effected the financial results. The Tribunal noticed that the Assessing Officer had excluded the concern from the list of comparables after carrying out the verification directed by the DRP. In this background, the Tribunal affirmed the exclusion of the said concern from the final set of comparables. To the similar effect is the judgment of the Delhi Bench of the Tribunal in the case of Techbooks International Pvt. Ltd. vs. DCIT, in ITA No.240/Del/2015 dated 06/07/2015 for assessment year 2010-11. In our considered opinion, the decision of the Hyderabad Tribunal in the case of M/s. Zavata India Pvt. Ltd.(supra)clearly dispels the stand of the Revenue in the context of the instant assessment year. Therefore, the said concern is excludable on the ground of existence of an extraordinary event in this year, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r itself based on the data then available in public domain. In this context, in our considered opinion, there cannot be an absolute proposition that once an assessee has included or excluded certain concerns from its list of comparables, it is thereafter precluded from contesting otherwise; no doubt where an assessee has included or excluded a concern from its list of comparables, and it seeks a change in its position, then there has to be justifiable and bonafide reasons for doing the same. In the present case, in so far as the exclusion of Cosmos Global Limited is concerned, it is quite clear that it has been found to be incomparable by the Tribunal in assessment year 2009-10 on account of the fact that it is operating with a different business model. The assessee has sought to explain the initial inclusion of the said concern on account of non-availability of the relevant data, which came in public domain subsequently. In any case, we find that the exclusion of Cosmos Global Limited has been sought by the assessee before the Transfer Pricing Officer itself, which clearly suggests that the assessing authority was in a position to adequately and appropriately carry out the necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive pointed out that though assessee has raised the plea of excluding the said concern before Transfer Pricing Officer but no such objection was raised before the DRP and, therefore, this being a new plea, it should not be admitted by the Tribunal. 6.3 We have carefully considered the rival submissions. In so far as the plea of the Ld. Departmental Representative to the effect that the exclusion of the said concern has not been raised before the DRP is concerned, the Ld. Representative for the assessee pointed out that the claim is based on the subsequent decision of the Tribunal on this aspect and that the plea be judged on its merits. Apart therefrom, it is also sought to be pointed out that no additional ground is required to be raised because the plea for exclusion of Infosys BPO Limited is subsumed in Ground of appeal No.6, which is quite omnibus. In our considered opinion, we do not find any merit in the objection raised by the Ld. Departmental Representative inasmuch as, assessee resisted the inclusion of the said concern in the list of comparables even in the course of proceedings before the Transfer Pricing Officer. The factum of assessee not having raised any objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to R Systems International Limited (BPO-Seg.) also. In this context, our attention has been invited to the decision of the Tribunal in assessee s own case for assessment year 2009-10(supra), wherein vide order dated 27/7/2015(supra), similar objection of the Revenue in the context of inclusion of R-Systems International Limited (BPO-Seg.) has been rejected in the following words: (v) R Systems International Ltd. (segmental): ....... If there are no extraordinary events and factors in these periods then proportionate operating margins on operating cost can be very well taken for benchmarking the margins. We find no 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. 7.2 We have carefully considered the rival submissions. Undoubtedly, the data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing a different financial year. The Revenue contended befoe the Hon'ble High Court that the difference in the two financial years was only of three months, which could be ignored. The Hon'ble High Court rejected the aforesaid plea of the Revenue and upheld the exclusion of such a concern from the final list of comparable. Notably, there was no plea before the Hon'ble High Court that the data for the relevant 12 months of the concern was available in public domain and, therefore, the situation before the Hon'ble High Court was quite different from what is before us. In fact, the situation before us is identical to that considered by Hon'ble Punjab Haryana High Court in the case of M/s. Mercer Consulting (India) Pvt. Ltd. Gurgaon(supra) and in this view of the matter we uphold the plea of the assessee for inclusion of M/s. Mercer Consulting (India) Pvt. Ltd. Gurgaon, in the final set of comparables. 7.5 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 compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er his own perception. The following discussion in the order of the Tribunal dated 27/07/2015(supra) is relevant in this context: 27. We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of 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 Loan transaction. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total value of guarantees given by the assessee on behalf of its associated enterprises was ₹ 670,57,31,000/-. The assessee did not treat the transaction of providing Corporate Guarantee as an international transaction within the meaning of section 92B of the Act. However, the Transfer Pricing Officer disregarded the said approach and instead held that assessee ought to have charged guarantee fee from its associated enterprises as it involved providing benefit to the associated enterprises. The Transfer Pricing Officer proceeded to determine credit ratings for the assessee as well as the concerned associated enterprises and came to conclude that guarantee fee equivalent to 4.43% of the outstanding amount of loans from the banks ought to have been charged by the assessee from its associated enterprises. Accordingly, the Transfer Pricing Officer worked out an adjustment of ₹ 29,39,56,194/- on this aspect. The Assessing Officer proposed the said addition in its draft assessment order dated 14/02/2014. The DRP, in principle, agreed with the approach of Transfer Pricing Officer but differed with the arm s length rate of guarantee fee. The DRP following its directions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances, the issue of charging of guarantee fee has been adjudicated by the Tribunal in assessee s own case for assessment year 2009-10(supra) in the following words:- 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 into Guarantee Agreements with its AE pursuant to which it has charged guarantee commission of 1% from its AE, w.e.f. financial year 2007-08 for a period of five years. The said guarantee commission recovered by the assessee has been recognized in the financial statement by the assessee for the assessment year 2012- 13 and has also been offered for tax in that year. In wake of these fact and without going into the other arguments of the assessee and also looking to the fact 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e BPO division of Aegis BPO Services Gurgaon Limited of ₹ 13,86,21,348/- and ₹ 9,79,88,094/- respectively. The Assessing Officer on the basis of assessment order passed by the Assessing Officer in the case of GVPL for assessment year 2003-04 disallowed the benefit of carry forward and set-off of unabsorbed depreciation of business loss. Similarly, with respect to the unabsorbed deprecation and business loss pertaining to the BPO division of Aegis BPO Services Gurgaon Limited, the Assessing Officer restricted the claim of carry forward and set-off of unabsorbed depreciation of business loss. In nutshell, the said carry forward and set-off of unabsorbed depreciation allowance of ₹ 40,22,26,882/- and ₹ 9,03,07,429/- was denied by the Assessing Officer. 11.2 Before us, the Ld. Representative for the assessee pointed out that similar situation had arisen before the Tribunal in assessee s own case for assessment year 2009-10(supra), wherein the Assessing Officer was directed to verify and allow business loss and unabsorbed depreciation pertaining to the erstwhile units, which had merged with the assessee company. The only plea of the assessee before us is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n dealt with by us, while deciding Ground no. 14, wherein transfer pricing Aegis Limited ITA No.1213/M/2014 33 adjustment made by the TPO on this account has been deleted. As already held above, such a recharacterization of transaction 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 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 loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 5,37,76,428/-. In this context, brief facts are that the Assessing Officer observed that assessee debited a sum of ₹ 18,67,04,773/- in the P L account on account of interest expenditure, whereas assessee had advanced ₹ 110,93,88,518/- to various sister concerns/ subsidiaries, either free of interest or at a rate lower than the rate at which assessee had borrowed the funds. The Assessing Officer also notes that at the end of the previous year under consideration outstanding loans were to the tune of ₹ 208.83 crores, whereas the total borrowing as on 31/3/2009 was of ₹ 49.73 crores. Similarly, it was noticed that the loans to subsidiaries/sister concerns stood at ₹ 110,93,88,518/- in this year as against ₹ 17,50,79,147/- as on 31/3/2009. In this background, the Assessing Officer show caused the assessee as to why the interest expenditure claimed in the P L account be allowed in its entirety as a portion of the borrowings were diverted towards loans and advances to the subsidiaries/sister concerns. In reply, assessee pointed out that the loans were advanced to the subsidiaries/sister concerns on the basis of commercial expediency, which was a norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not being repeated for the sake of brevity. 14.3 We have carefully considered the rival submissions. In the context of the disallowance out of interest expenditure, the initial plea of the assessee is that it is in possession of enough own non-interest bearing funds to cover the advances to the subsidiaries/sister concerns and, therefore, following the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra), no disallowance is called for. In this context, at the time of hearing, the Ld. Representative for the assessee had referred to the Annual Financial statements, which show that as on 31/3/2010 assessee had owned funds to the tune of ₹ 842,57,77,000/- comprising of Equity Share capital, Reserve and Surplus, In contrast, the advances to the subsidiaries/sister concerns stand at ₹ 110,93,88,519/- as on 31/3/2010. The aforesaid abundantly brings out that the non-interest bearing funds available with the assessee are enough to cover the amounts lent to subsidiaries/sister concerns and, therefore, in terms of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd.( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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