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TMI Blog2022 (9) TMI 1413X X X X Extracts X X X X X X X X Extracts X X X X ..... itional ground No.14 which is nothing but a facet of the argument of the assessee in connection with the determination of ALP viz., companies with high turnover cannot be taken as a comparable company for comparing profit margins of the assessee. The specific contention in this regard is that the lower authorities erred in not applying an upper limit of turnover upto INR 200 crores for selection of comparable companies for benchmarking. At the time of hearing, learned Counsel for the assessee submitted that if some of the comparable companies that remain after the order of the Dispute Resolution Panel (DRP) are excluded then he would not press for adjudication of other grounds with regard to determination of Arm's Length Price. Accordingly, we proceed to decide the issue with regard to determination of ALP. 3. The factual details with regard to the determination of ALP are that the assessee was incorporated on May 18, 2015, as a wholly owned subsidiary of Tyco Electronics Singapore Pte Ltd, Singapore, which is ultimately held by TE Connectivity Ltd., Switzerland. The assessee is a captive service provider and is engaged, inter-alia, in the business of providing shared services in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.41 12. SPI Technologies India Pvt Ltd 36.95 13. Inteq BPO Services Pvt Ltd 39.51 35th Percentile 22.37% Median 24.37% 65th Percentile 27.41% * Not adjusted for working capital differences 7. Based on the aforesaid comparable companies and their median profit martin, the TPO computed the ALP of the international transaction as follows: "20.4.1 The median of the weighted average Profit Level Indicators is taken as the A Length margin. Please see Annexure-A for details of computation of PLI of the comparabl Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its A is computed as under: ITeS SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 64,45,04,000 Taxpayers operating cost OC 56,07.00,000 Taxpayers operating profit OP 8,37,04,000 Taxpayers PLI PLI=OP/OC 14.92% 35th Percentile Margin of comparable set Yes Adjustment Required (if PLI< 35th Percentile) 22.37% Median Margin of comparable set M 24.37 Arm's Length Price ALP=(1+M) OC 69,73,42,590 Price Received OR 64.45.04.000 Shortfall being adjustment ALP-OR 5,28,38,590 20.4.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the TPO applied a filter of excluding companies whose turnover was less than one Crore but by the same logic should have applied to the upper turnover filter also which he failed to do. Learned DR submitted that high turnover cannot be criteria to reject a company as a comparable company, if the said company is functionally comparable. 11. We have considered the rival submissions. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No.18 of 2015 date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are nonjurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 12. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Penta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Learned AO has erred in rejecting the interest expense claimed in the computation of income, considering it as an actual interest income in the hands of the Company. In holding so, the learned AO has ignored the fact that CCD is a liability for the Company and hence, there cannot be any interest income arising out of the same in the hands of the Company 16. The factual details in so far as the aforesaid ground of appeal is concerned are that during the Assessment Year 2016-17, the assesee issued 6,50,00,000 Compulsory Convertible Debentures (CCD) of Rs.10/- each to TE Connectivity, Singapore, by way of rights issue. The CCDs are subject to a simple interest of 3 months MIBOR+ 150 Basis points, capped to 9.75% per annum. For the year under consideration, the assessee submitted that the average interest rate is 9%. During the F.Y.2015- 16, the assessee incurred interest expense of Rs 4,52,61,650/- and the same was charged to the P/L Account and claimed as deduction which was allowed by the AO. The interest payable during the Year 2016-17 on these CCDs was Rs 6,09,40,660/-. Out of the said interest payable on CCD's, the assessee debited to the profit and Loss Account only a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was a lower sum, the remaining amount of Rs 4,53,11,205/- was claimed as deduction by the assessee as a separate it item in its computation of income. The assessee submitted CCDs constitute debt instruments and the interest payable thereon is a deductible expenditure till the same is converted into equity. The assessee relied on the decisions rendered in M/s CAE Flight Training India Pvt Ltd by ITAT Bangalore and Zaheer Mauritius Vs DIT, 270 CTR 244, Delhi High Court. 18. However, the AO allowed a deduction of Rs 1,56,29,445/- only and the balance amount of Rs 4,53,11,205 was denied the deduction. The DRP upheld the order of the AO on the reasoning that under Section 36(1)(iii) of the Act, deduction is allowed only for amounts borrowed for business purposes and since CCD's are in the nature of Equity, no deduction is permissible for return paid on equity instruments. According to the DRP, as per Thin Capitalization Rules, debt instruments can be treated as equity. The DRP also observed that RBI treated the CCDs as Equity under the Foreign Direct Investment (FDI) policy. The RBI's FDI Policy was guided by the requirement to control future repatriation obligations of the count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onversion thereof. The DRP also made a reference to investment by a non-resident in an Indian Company, in any form, which is regulated by the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident outside India) Regulations, 2017 (FEMA Regulations'). The regulations prescribe the manner, limit, period, etc. of such investments. In other words, investment by a non-resident in a manner not prescribed, or in excess of the limits, etc. cannot be made in an Indian Company. Regulation 2(xviii) defines 'Foreign Investment' to mean any investment made by a person resident outside India on a repatriable basis in 'capital instruments' of an Indian company or to the capital of an LLP. 'Capital instruments' have been defined under Regulation 2(v) to mean equity shares, 'debentures', preference shares and share warrants issued by an Indian company. The Explanation further provides that the expression 'Debentures' means fully, compulsorily and mandatorily convertible debentures. Thus, the CCDs, which are fully and mandatorily convertible into equity, are considered as 'capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le back to the AE, as the amount invested gets compulsorily converted into equity in the due course. When the amount invested is not repaid/ repayable, it loses the character of a debt. In the debt instruments like short term/ long term loans there is an agreement, contractual understanding between the lender and receiver of the funds on a legal terms and conditions for the interest payments. The DRP gave examples like banking interest rates regulated by RBI, LIBOR (London Inter Bank Offer Rate) are bench mark interest rates for many adjustable-rate mortgages, business loans, and financial instruments traded on Global Financial Markets. In the case of assessee in the thirdparty scenario, no independent entity would lend any funds to the company, if the debt equity ratio is highly skewed as it makes the investment debt very risky. In CCDs the principal amount is never received back as entire funds are converted into Equity. Therefore, once the conversion option is exercised, it becomes an equity investment. Since the conversion is compulsory, it shall be treated as equity rather than debt. As the CCDs are hybrid instruments, they do not come under ECB guidelines and hence they are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a hypothetical income, which does not materialise. It was submitted that the assessee is entitled to deduction of entire amount of interest expense being INR 6.11 Crores. The learned DR reiterated the stand of the DRP and the reasoning given by the DRP. 22. We have carefully considered the rival submissions. The first aspect which needs to be considered is as to whether the revenue authorities were justified in treating the CCDs as Equity and disallowing claim for deduction of interest paid on CCD's. We are of the view that CCDs till such time they are converted into equity are in the nature of loans and therefore any interest paid on borrowings for the purpose of business has to be allowed as a deduction u/s. 36(1)(iii) of the Act. In this regard, we find that the ITAT Bangalore 'A' Bench in the case of ACIT v. M/s. CAE Flight Training (I) Pvt. Ltd. in IT(TP)A No.2060/Bang/2016 dated 25.7.2017 has exhaustively dealt with the issue and addressed all the issues raised by the DRP in it's directions. The DRP has disregarded the said decision on the ground that facts in the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decision of special bench of the Tribunal is not applicable in the facts of present case because the issue in dispute is different. In that case the issue in dispute is regarding expenditure incurred on issue of convertibles whereas in the present case the issue is regarding allowability of interest ITA No.1549/Bang/2019 expenditure on convertible debentures for the pre-conversion period. Hence we hold that the revenue does not find any support from this decision of Special Bench of the Tribunal in that case. 25. Apart from relying on this decision of Special Bench of the Tribunal, the ld. DR of revenue in written submissions as reproduced above has mainly reiterated the same arguments which are adopted by the TPO in its order i.e. regarding RBI Master Circular on Foreign Investment in India dated 02.07.2007 and 01.07.2008. We would like to observe that such circular in the context of FDI policy of RBI is in a different context i.e. regarding future re-payment obligations in convertible foreign currency and to have control over such future repaym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conversion. The same principle will apply to the other corporate laws cited by the DRP in its directions. 24. On the question whether on the basis of book entries by which the interest was not debited in the profit and loss account but claimed in the computation of income, the disallowance can be sustained. On this aspect, the law is well settled and laid down by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC), wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. It is undisputed that the assessee has deducted TDS on the entire interest expenditure. The assessee while benchmarking interest payment to Associated Enterprise for the purpose of Sec.92 of the Act has benchmarked the entire interest amount of Rs.6.09 Crores. Thus, looked at from any perspective, the claim of the assessee for deduction of the sum of Rs.4,53,11,205 deserves to be accepted. The disallowance of the said sum of interest expenses and the consequent addition to the total income is therefore deleted. The relevant ground of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RSUs are allotted at free of cost to the employees of the assessee. In other words, the employees of the assessee were given option to invest in shares of the market value of the shares and the price at which the shares were issued to the employees was paid by the assessee to its holding company and such difference was claimed as employee cost of the assessee in the profit and loss account. 27. The AO rejected the claim of the Assessee on the ground that the Employee Stock Option Plan (ESOP) expenditure being a capital expenditure. The DRP also upheld the order of the AO on the ground that the similar issue on ESOP was pending before the Hon'ble Supreme Court and the addition was upheld just to keep the issue alive. 28. We have heard the rival submissions. The learned counsel for the assessee submitted that the assessee had incurred expense by way of payment to its parent company which has in-turn issued shares to the employees of the assessee. He placed reliance on decision of the decision of the Hon'ble Jurisdictional Karnataka High Court decision in the case of Biocon Ltd. 430 ITR 151(Karn.) which upheld the decision rendered by the Jurisdictional Special Bench1 in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T in the case of Ranbaxy (supra) were also followed subsequently by the Hon'ble Hyderabad ITAT in the case of Medha Servo Drivers Limited ITA No 1114n-1yd/2008, the Hon'ble Mumbai Tribunal in the cases of DCIT Vs Blow Plast Limited ITA No 512/Mum/2009; Mahindra & Mahindra Vs DCIT ITA No 8597/Mum/2010; M/s VIP Industries Vs DCIT ITA No 7242/Mum/2008. 30. We have carefully considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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