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TMI Blog2022 (12) TMI 1564X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 ('Act') (Assessment order), in pursuance of the directions issued by Honourable Dispute Resolution Panel-2 (Hon'ble DRP), Mumbai, on the following grounds which are without prejudice to each other: General Ground 1. On the fact and in circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP has erred in determining the total taxable income of the Appellant for AY 2016-17 at Rs 5,73,07,23,232 instead of the income offered by the Appellant for the subject AY in its income-tax return of Rs. 4,85,66,82,220/-. Transfer Pricing Grounds Ground challenging the reference made to the transfer pricing officer and the transfer pricing adjustment 2. On the fact and in circumstances of the case and in law, the learned AO has erred in making a reference of the Appellant's case to the Deputy Commissioner of Income Tax, Transfer Pricing- 4(3)(2) (learned TPO) and then making a transfer pricing adjustment of Rs 17.87.70,865 to the income of the Appellant for AY 2016-17. Grounds challenging the partial disallowance of depreciation 3. On the fact and in circumstances of the case and in law, the learned TPO / learned AO/ Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned AO/Hon'ble DRP has erred in making transfer pricing adjustments by arbitrarily revising the value per share from USD 14.9 per share to USD 301.7 per share for the transaction of purchase of equity shares of an AE by a. erroneously not accepting the valuation report issued by a third-party valuation expert without giving cogent reasons for non-acceptance of the valuation undertaken by such expert and arbitrarily making certain changes to the valuation report issued by the expert by taking benefit of hindsight and incorrect application of valuation principles based on assumptions and speculations without allowing the Appellant an opportunity of being heard. b. erroneously not following any of the methods prescribed under Section 92C(1) of the Act for benchmarking the transaction of purchase of equity shares. c. erroneously not giving a specific show cause notice to the Appellant before arriving at the revised valuation of share in respect of the transaction of purchase of equity shares thereby denying the Appellant an opportunity of being heard. 10. On the fact and in circumstances of the case and in law, the learned TPO / learned AO/Hon'ble DRP has erred in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bor + 100 basis points, as agreed under the advance pricing agreement signed by the Appellant, to impute interest on the alleged excessive payment for the transaction of purchase of equity shares treated as a deemed loan. 17. On the fact and in circumstances of the case and in law, the learned TPO / learned AO/Hon'ble DRP has erred in computing transfer pricing adjustment on account of arm's length interest by computing interest for the entire year i.e. 365 days, ignoring the actual period for which alleged loan is outstanding during the year i.e. 224 days i.e. period to be counted from 21 August 2015). Non Transfer Pricing Grounds Grounds challenging disallowance of depreciation claimed on intangible assets 18. On the fact and in circumstances of the case and in law, the learned AO has erred in disallowing depreciation of Rs 14.50,931 on intangible assets acquired by the Appellant from WNS Global Services (UK) Limited contending that the business rights acquired by the Appellant do not fall under the definition of intangible assets under Section 32(1) of the Act. 19. On the fact and in circumstances of the case and in law, the learned AO has erred in not followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed Rs 9,29,819 under Section 14A of the Act. b) by imputing disallowance under Rule 8D(2)ii) of the Rules without appreciating the fact that the borrowed funds have been used for specific purposes for which they have been borrowed and not been utilised for investment in Mutual Funds. c) without appreciating the fact that the Appellant had surplus interest free funds available which was more than the amount of investment in Mutual Funds. d) without prejudice to the above by adding the amount of alleged disallowance under Section 14A of the Act read with Rule 8D of the Rules in the computation of Book Profits' under Section 115JB of the Act. Ground challenging initiation of penalty proceedings 24. The learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act. Each of the above ground of appeal is without prejudice to and independent of one another." 2. Brief facts of the case are that assessee is a recognised business process management service provider engaged in delivering a wide portfolio of out sourcing services to its customers around the globe. The nature of services includes back-office administration, data management an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 21). The valuation of an intangible requires expertise and knowledge in the domain of valuation principles, markets and business and even if the TPO/DRP were not in agreement with the variables assumed valuation undertaken by the independent valuer, they ought to have desire from their own exercise of adhoc valuation without having pointed a valuation expert to determine the value (Para 22). WCIL had pad Aviva Singapore an incentive payment of GBP 80 million for securing MSA with Aviva Singapore for the entire contract period of 8 years and 4 months and the unamortized portion of the incentive payment as on the date of purchase of MSA by the assessee was USD 106.83mn which ought to be a valid CUP benchmarking to determine arm length price of the transaction (Para-24). On the of projections not to be substituted by actual and hindsight ought not to affect the valuation report, any future happening/occurrence bed to the date of valuation cannot be foreseen and, therefore, the price has been determined in the valuation report needs no further adjustment for future events (para-25). The approach of TPO in determining the value of the international transaction based on incremental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is transaction originally took place in A.Y. 2011-12 and there is no international transaction in A.Y. 2016-17 in relation to the business and commercial rights purchased by assessee, hence, no addition on this ground also can be made merely consequential to the adjustments made by the TPO in A.Y. 2011-12. In the result, Ground No. 3 to 6 of the appeal raised by assessee is allowed and AO is directed to delete the disallowance made on account of depreciation of business rights. 9. Ground No. 7 to 17 pertains to adjustment in relation to the purchase of equity shares of an associate enterprise (AE) and treating the alleged excessive payment for purchase of equity shares as deemed loan and imputing notional interest on the same. We have considered the draft order of AO, order of TPO, directions of DRP and final order of AO passed u/s 143(3), r.w.s 144C(13) and 144B. 10. During the year under consideration assessee purchased 49495 shares of WNS (UK) Global Services Pvt. Ltd. for business expansion and synergies in the UK region for a consideration of USD 2,54,84,976 (INR 167,53,38,028/-) at a per share price of USD 514.9. Consideration was determined on the basis of valuation report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are price, the learned TPO computed of excess amount paid by WNS India on purchase of shares and alleged the excess as deemed loan to AE by learned TPO: Particulars Reference Amount Estimated Fair Value of Equity on a per share basis as per valuation report (USD) A 514.9 Estimated Fair Value of Equity on a per share basis (USD) B 301.7 Difference i.e. excess amount paid per share (USD) C=A-B 213.2 Total excess amount paid on purchase of shares (INR) D=C*49,495*62.5 65,95,20,875 On the excess consideration deemed as a loan, the learned TPO imputed arm/s length interest by adopting an interest rate of 6 month's LIBOR plus 600 bps and computed the adjustment as under: Particulars Reference Amount in INR Excess amount paid on purchase of shares deemed as loan A 65,95,20,875 Interest rate (6 month's LIBOR*+600 bps) B 6.458% Arm's Length interest C=A*B% 4,27,69,929 * 6 month average LIBOR for 2015 taken as 0.485 by the learned TPO * The learned TPO thus computed a transfer pricing adjustment of INR 4,27,69,929/- on account of interest to be charged for alleged excess amount provided as loan to AE Assessee's contentions: Specific show cause of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident AE which has a bearing on profit/ loss/ assets of the Assessee Transfer pricing provisions also take into account potential income and therefore Chapter X is applicable to the transaction of purchase of shares In case, excess consideration is paid over and above the FMV/ ALP, to the related party/ AE, for purchase of such shares, the cost of acquisition in such a situation will be higher amount or vice versa, the same shall impact computation of income/ loss in the year of sale The subject transaction in the rulings of the Hon'ble Bombay High Court in Vodafone (supra) & Shell (supra) were inbound investments where the foreign entity invested in Indian entity, not impacting the taxability of the Indian entity, being receipt of share capital The present transaction is of outbound investment by WNS India where taxability of Indian entity gets affected as sale of investments are liable for taxation under the head Capital Gains Therefore the decision of the Hon'ble Bombay High Court in the case of Vodafone (supra) and Shell (supra) are not applicable in the case of the Assessee Learned TPO has not given any finding distinguishing the jurisdictional High Court Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions: Pr Comm. Income tax-7 vs. PMP Auto Components Pvt. Ltd (Bombay HC 1685 of 2016) "In our view, therefore, the issue arising here stands concluded by the decision of this Court in Vodafone (supra). The distinction which is sought to be made by the revenue on the basis of this being an inbound investment and not an outbound investment as in the case of Vodafone (supra) is a distinction of no significance. On principle, if this court has held that Chapter X of the Act is machinery provision and can only be invoked to bring to tax any income arising from an international transaction, then, it is necessary for the revenue to show that income as defined in the Act does arise from the international transaction. The distinction between inbound and outbound investment is a distinction which does not take the case of revenue any further, as the Legislature has made no such distinction while providing for determination of any income on adjustments to arrive at ALP arising from an international transaction." Pr Comm. Income tax-13 vs.. Tops Group Electronics Systems Ltd (Bombay HC 1721 of 2016) has upheld order of the Hon'ble ITAT in M/s. Tops group Electronic Systems Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the law justify the recharacterisation of the acquisition of shares as deemed loan and hence, the same would be invalid and bad in law. The principle that the amount paid for acquiring equity share capital cannot be treated as loan has been upheld by Hon'ble Tribunals and the Hon'ble Bombay High Court in several rulings as there is no provision in law which permits such recharacterisation Besix Kier Dabhol (ITA 776/Mum/2011) (Bombay High Court) PCIT vs. Aegis Limited (ITA 1248 of 2016) PCIT V. M/s. PMP Auto Components Pvt. Ltd (Bombay HC-ITA 1685 of 2016 dated 20 February 2019) PCIT vs. Tops Group Electronics Systems Limited (Bombay HCITA 1721 of 2016 dated 26 February 2019] Assessee's Contentions: In the event the alleged excessive consideration is re-characterized as a 'deemed loan', the Assessee could not have lent this amount to its AE outside India in view of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000 ('Regulations. Considering the alleged excess consideration as a 'deemed loan is itself not permissible as per the FEMA, in the absence of a transaction, the resultant proceedings sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. ACIT (28 ITR (T) 212) (Hyderabad-Trib.) In valuation as per DCF approach, projections cannot be substituted by actual and hindsight ought not to affect a valuation report. DQ (International) Ltd. v. ACIT (ITA 151 (HYD.) OF 2015) Vodafone M-Pesa Ltd. Vs. DCIT [ITA No. 1073/Mum/2019] Rameshwaram Strong Glass Put. Ltd. v. ITO [2018-TIOL-1358-ITAT- Jaipur] Securities & Exchange Board of India & Ors [2015 ABR 291 (Bombay HC)] Tecumseh Products India (P) Ltd. v. ACIT [ITA 1686 (HYD) OF 2010)] Social Media India Ltd. v. ACIT (28 ITR (T) 212) (Hyderabad-Trib.) The approach adopted by learned TPO in arriving at revised value is without any basis and arbitrary in nature. The learned TPO has arbitrarily removed an item from the DCF valuation based on actual to prove that the shares of WNS UK were acquired at a price higher than fair market value and determined the value under DCF method as USD 153.80 million. Also, the learned TPO assumed that enterprise value under market approach (comparable companies' method) cannot be USD 258.00 million in the revised scenario as there is a substantial fall in the value under DCF method thus arbitrarily reducing the value under market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduced to arrive at the equity value. Hon'ble Chennai Tribunal in the case of Ascends (India) (P) Ltd v/s DCIT [(2013) 143 ITD 208 (Chennai)] has also laid down a detailed step by-step process to be followed in DCF valuation in a pictorial representation (Refer Page 44 of the DRP Application). Thus, without prejudice to the Assessee's contention that the item is not an exception item, even if the learned TPO's stand is accepted that the item is an exceptional item and not a part of operational activities, the cash received from sale of division should still be included in the equity valuation. As there is no dispute in the fact that there was a cash inflow of USD 93.3 million on sale of Assistance division, the same should be included in determining the enterprise value of WNS UK as per DCF method. Thus, the approach adopted by the learned TPO to exclude a substantial item of cash received from sale of division from DCF calculation is flawed and erroneous. Revised valuation taking into consideration the sale of assistance division is as under: Particulars Amount (USD million) Income Approach: Discounted Cash Flow method (50% weightage) (153.8 million as calculat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s Rebuttals: Without prejudice to the Assessee's submissions that no interest adjustment is warranted, the learned TPO has erred in the determining arm's length interest rate on an adhoc basis without undertaking a detailed search for selection of comparable transactions. While the international transaction under review is that of purchase of shares of an AE, the comparable interest rate considered by the learned TPO is a LIBOR plus rate which are charged on loans by commercial lenders to their customers for the purpose of making profits. The learned TPO should have identified comparable transactions between third parties to test the ALP of the impugned transaction Commissioner of Income-tax-1, Mumbai vs. Lever India Exports Ltd. [2017] 292 CTR 393 (Bombay)] Principal Commissioner of Income-tax, Vadodara-2 vs. Sabic Innovative Plastic India (P) Ltd [(2017) 292 CTR 393 (Bombay)] NOS 231 AND 248 OF 2018 dated 31 July 2018] John Deere India (P) Ltd. v. Income-tax Officer. Ward 11(2), Pune [IT APPEAL NO 828 (PUNE) OF 2014] Safilo India (P) Ltd. V Deputy Commissioner of Income-tax, Circle- 15 (3) (2), Mumbai (ITA 588 & 4940 (MUM) OF 2015] TPO's Contentions: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emicals Ltd. V Ram Naresh Tripathi, (2 SCC 115,123) D.K. Yadav v J.MA Industries Ltd., (3 SCC 259,267) Indian & Eastern Newspaper Society Vs. CIT (119 ITR 996) Premier Breweries Ltd. v Deputy Commissioner of Income-tax (36 ITD 197) Nagulakonda Venkata Subba Rao v Commissioner of Income-tax (31 ITR 781) (AP) Learned TPO's Actions: The learned TPO imputed transfer pricing adjustment INR 4, 27, 69,929 on account notional interest on alleged deemed loan by computing interest at the rate of LIBOR + 600bps for the entire year i.e. 365 days. Assessee's Rebuttals: WNS India purchased equity shares of its AE, WNS UK for a consideration of INR 1, 67, 53, 38,028; this amount was remitted by WNS India on 21 August 2015. Without prejudice to the objections of the Assessee against the transfer pricing adjustment, even if notional interest adjustment is to be imputed, the interest should be computed only for part of the year for which the excess amount for purchase of shares was outstanding during the year i.e. for 224 days as under: Particulars Amount in INR Alleged excess amount in INR 65,95,20,875 Date of remittance 21 August 2015 Year end 31 March 2015 Period for wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry with various third party clients. Similarly the Assessee acquired the business of WCIL on 24 March 2011 with respect to the MSA entered into between WCIL and Aviva Singapore. By virtue of acquisition of such customer contracts, the Assessee had acquired the commercial right and interest to receive the revenues arising out of servicing such contracts over the life of the contracts. Such commercial rights represent a particular benefit or advantage or reputation built over a certain span of time and the customer associate with such assets. The Assessee classified such rights acquired by it as 'intangible asset' as defined in Explanation 3(b) to Section 32(1) of the Act and accordingly, the Assessee claimed tax depreciation @25% on same on written down value basis amounting to Rs 39,03,28,049 for AY 2016-17 in terms of Section 32(1)(ii) of the Act. The adjustment made by the AO/TPO in the draft order with respect to depreciation on intangibles is as follows: Particulars Amount in INR Disallowance of depreciation on Town & Country contract acquired from WNS UK 65,95,20,875 Disallowance of depreciation on Aviva contract acquired from WCIL TP adjustment on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary 2020 for AY 2007-08 (ITA 1451/Mum/2012). Further, the issue has been decided by the Hon'ble CIT (A) in the Assessee's own case for AY 2009-10 and AY 2010-11 and there is no material change in facts & circumstances in AY 2016-17. Further, assessee placed reliance on the following case laws: (1) Areva T and D India Ltd. v. DCIT [2012]345 ITR 421 (Del) affirmed by Supreme Court (ii) CIT v. Smifs Securities Limited 348 [2012] ITR 302 (SC) (iii) India Capital Markets (P.) Ltd. v. DCIT [IT Appeal No. 2948 (MUM.) of 2010] (Mumbai Tribunal) (iv) Sonic Biochem Extractions Pvt Ltd [ITA No. 2088/Mum./2013] (Bom) 18. Accordingly, the commercial rights acquired by the Assessee would fall within the scope of the expression "business or commercial rights of a similar nature" under Section 32(1) (1) of the Act and hence depreciation should be allowed on their written down value. With regards to depreciation claimed on the contract acquired from WNS UK, the said issue was examined in detail for AY 2004-05 in WNS India's own case, wherein all the details had been furnished and the learned AO had accepted the tax depreciation on such intangibles for AY 2004-05 while conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on judicial precedents, the term 'in relation to as referred in Section 14A (1), can be interpreted to mean 'direct and proximate, as the same has not been defined in the Act. In this regard, reliance is placed on the following judgments: HH Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior [1971] (1 SCC 85) CIT v. Walfort Share & Stock Brokers (P) Ltd. (326 ITR 1) (Supreme Court) The words 'expenditure incurred by the assessee' referred in Section 14A(1) of the Act imply that the act of spending must be in relation to exempt income and the objective of the expenditure would be relevant in order to conclude on its deductibility. In nutshell, the expenditure sought to be disallowed from the computation of the Assessee's taxable income by virtue of Section 14A of the Act, should be the actual expenditure incurred by the Assessee for earning the exempt income and the section does not envisage any estimate of expenditure or attribution of any notional expenses to earn such exempt income. In this regard, reliance is placed on the following judgments. CIT vs. K. Raheja Corporation Pvt. Ltd (ITA No. 1260/2009) Wimco Seedlings Limited v DCIT [2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance made by WNS India in its books of accounts Maxopp Investment Ltd. & Ors. v. CIT [2018] 91 taxmann.com 154(SC) Maxopp Investment Ltd. & Ors. v. CIT [2011] 347 ITR 272 (Del.) Godrej & Boyce Manufacturing Co. Ltd. [2010] 328 ITR 81 (Bom) Auchtel Products Ltd v. ACIT (2012) (22 taxmann.com 99) (Mum). In the present case, the learned AO did not bring on record non-satisfaction of claim of the Assessee having regard to the accounts of the Assessee. The learned AO has merely held that suo-moto disallowance of expenses by the Assessee was not at all acceptable as the same was not in harmony with the formula prescribed under Section 14A of the Act read with Rule 8D of the Rules. Hence, the learned AO has erroneously invoked Rule 8D of the Rules without recording the prerequisite satisfaction in this regard. The learned AO relied on the decisions viz Daga Capital Management Pvt. Ltd. [2008] 117 ITD 169 (ITAT SB)(Mum) and Citicorp Finance (India) Limited [2006] 12 SOT 248 (Mum). The learned AO has failed to appreciate that while passing the order in the case of Godrej Boyce (supra), the Jurisdictional High Court has considered the Mumbai Tribunal judgment in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re availed and not for making investments for earning exempt income. Considering the same, interest expense on such borrowings cannot be said to be incurred in relation to exempt income and accordingly, the provisions of Section 14A of the Act are not applicable in respect of such interest expense. (e) No disallowance under Section 14A of the Act could be made where investment in tax free instruments have been made from own funds All investments made by the Assessee are from its own funds. As per the audited accounts, the Assessee had average owned funds of approx INR 1432.03 Crores (i.e. average of own funds as on 01 April 2015 and 31 March 2016) viz-a-viz an average total investment of INR 686.18 Crores as on 31 March 2016. As can be observed by your good self, the percentage of average investments of the company to average owned funds as on 31.03.2016 is 47.92 percent. In the following judicial precedents also, it has been held that where an assessee has owned funds which are sufficient to purchase the investments, then in such case, it has to be presumed that the investments are made out of owned funds: Godrej Boyce Co Pvt Ltd (328 ITR 81) (Bom) CIT vs. Torrent Power L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in mutual funds in the current year out of own funds and the interest expense incurred on borrowed funds amounting to Rs. 17,76,232 was incurred for a specific purpose i.e. towards funding WNS India's capital expenditure. In nutshell, the entire interest expenditure pertains to borrowed funds which has been utilised for the purpose of business and the same has not been utilised for making any investment in mutual funds. Hence, such expenses should not be considered for the purpose of computing disallowance under Rule 8D (2)(ii) of the Rules. In this regard, we have tabulated a fund flow statement for the past five years as under: A. Sources of funds (Amount in INR Crores) Own funds (Share capital and Reserves) Year ending 31 March 2016 Year ending 31 March 2015 Year ending 31 March 2014 Year ending 31 March 2013 Year ending 31 March 2012 1537.2 1140.99 818.04 712.85 530.34 B. Application of funds (Amount in INR Crores) Investment yielding exempt income Year ending 31 March 2016 Year ending 31 March 2015 Year ending 31 March 2014 Year ending 31 March 2013 Year ending 31 March 2012 783.12 589.24 109.78 243.63 134.22 Further, the percentage of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the method of computing disallowance was very fair reasonable and scientific Composite administrative Particulars Amount (INR) Communication Expenses 20.07 Miscellaneous expenses 13.99 Printing and stationery expenses 2.18 Total 36.24 (f) No disallowance of expenses computed as per Section 14A read with Rule 8D of the Rules under Section 115JB of the Act The provision of Section 14A of the Act can be applied for the purpose of computing total income under Chapter IV of the Act and cannot be extended to Section 115JB either in terms of its express language or by way of analogy Section 115JB of the Act is a complete code by itself and no adjustments other than those which are prescribed in the section can be made to the book profit. The clause (f) of Explanation 1 to S. 115JB (2) of the Act requires to add back of the amount or amounts of expenditure relatable to any income to which Section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply if any such amount is debited to the profit and loss account. Hence, the said clause requires addition of expenditure which is relatable to the exempt income which is debited ..... X X X X Extracts X X X X X X X X Extracts X X X X
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