WNS GLOBAL SERVICES P. LTD.,MUMBAI vs. ADDL/JT/DY/ASSTT/CIT/ITO, NATIONA FACELESS ASSESSMENT CENTRE,, DILHI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “J”, MUMBAI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 1259/Mum/2021 (A.Y. 2016-17) WNS Global Services Pvt. Ltd., PL 10, Gate No.4, Godrej & Boyce Complex, Pirojshanagar, LBS Marg, Vikhroli (West), Mumbai-400079. PAN: AAACW2598L ...... Appellant Vs.. Addl./JT/Dy./ACIT/ITO/NFAC, Room No. 455, Circle-14(3)(1), Mumbai. ..... Respondent Appellant/Assessee by : Sh. Porus Kaka, Sr. Adv. & Sh. Manish Kant Respondent/Revenue by : Sh. Jasdeep Singh, CIT-DR

Date of hearing : 29/09/2022 Date of pronouncement : 09/12/2022 ORDER PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of Assessing Officer, National E-assessment Centre (NEAC [for short ‘AO’] passed under section 143(3) r.w.s. 144C (13) and 144B of the Income Tax Act, 1961 [for short ‘the Act’] vide order dated 30.04.2021 for Assessment Year (AY) 2016-17. The assessee has raised the following grounds of appeal:

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“Based on the facts and in the circumstances of the case and in law, WNS Global Services Private Limited ("Appellant) respectfully craves leave to prefer an appeal against the order passed by the Additional Joint Deputy/ Assistant Commissioner of Income-Tax Income Tax Officer, National Faceless Assessment Centre, Delhi (Learned AO), under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 (‘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 pricingadjustment 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'bleDRP has erred in incorporating a partial disallowance of depreciation of INR 13,60,00,936 passedfor the year under consideration based on an adjustment proposed to the value of business and commercial rights purchased by the Appellant from its Associated Enterprise (AE) in AY 2011- 12, which has been capitalized in the books of accounts of the Appellant without appreciating the fact that the Hon'ble ITAT, in its order for AY 2011-12, has deleted the adjustment the value of the business and commercial rights. 4. On the fact and in circumstances of the case and in law, the learned TPO/learned AO/Hon'ble DRP has erred in not appreciating the fact that the Hon'ble ITAT, in its order for AY 2012-13,has deleted the partial disallowance of depreciation arising

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from the adjustment to the value of the business and commercial rights in AY 2011- 12. 5. On the fact and in circumstances of the case and in law, the learned TPO has erred in not giving a specific show cause notice to the Appellant before imputing a transfer pricing adjustment inrespect of the transaction of valuation of business and commercial rights purchased, thereby denying the Appellant an opportunity of being heard. 6. On the fact and in circumstances of the case and in law, the learned TPO learned AO Hon'ble DRP has erred in proposing a disallowance of depreciation for the year under consideration without appreciating that claim of depreciation is not an international transaction and therefore, does not fall within the scope of Chapter X of the Act. Grounds challenging the adjustment in relation to the purchase of equity shares of an AE 7. On the fact and in circumstances of the case and in law, the learned TPO / learned AO/Hon'bleDRP has erred in making a transfer pricing adjustment in respect of the transaction of purchase of equity shares of an AE without appreciating the fact that the said transaction does not give rise to income under the provisions of the Act leading to inapplicability of Chapter X of the Act for the said transaction 8.On the fact and in circumstances of the case and in law, the learned TPO/learned AO/Hon'bleDRP has erred in ignoring the Appellant's submission that purchase of shares of an AE is not aninternational transaction under Section 92B of the Act. 9. On the fact and in circumstances of the case and in law, the learned TPO/learned AO/Hon'bleDRP 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 withoutgiving cogent reasons for non-acceptance of the valuation undertaken by such expert andarbitrarily making certain changes to the valuation report issued by the expert by takingbenefit of hindsight and incorrect application of valuation principles based on assumptionsand speculations without allowing the Appellant an opportunity of being heard.

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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 removing from the valuation on actual basis, an amount of USD 93.3 million received by AE from sale of one division without appreciating the fact that the amount received was added to the cash and bank balance of the AE and which should be added to arrive at the valuation of shares. 11. On the fact and in circumstances of the case and in law, the Hon'ble DRP erred in not adjudicating on merits the issues raised in aforementioned grounds raised by the Appellant for challenging the adjustment in relation to the purchase of equity shares of an AE 12. On the fact and in circumstances of the case and in law, the learned TPO/learned AO/Hon'ble DRP has erred in re-characterizing the alleged excessive payment for purchase of equity shares asdeemed loan and imputing notional interest on the same. 13. On the fact and in circumstances of the case and in law, the Hon'ble DRP erred in not following the binding judgement of the jurisdictional High Court despite accepting that the issue is coveredby the jurisdictional Bombay HC judgement in the case Pr. Comm. of Income tax-13 vs.. Tops Group Electronics Systems Ltd (Bombay HC 1721 of 2016), and has rejected Appellant's objections in this regard by stating that the issue is pending before the Hon'ble Supreme Court vide Diary No. 37343/2019. 14. On the fact and in circumstances of the case and in law, the learned TPO/learned AQ/Hon'ble DRP has erred in a. imputing notional interest of INR 4,27,69,929 on alleged deemed loan without appreciatingthat such notional adjustment is bad in law. b. not adopting a scientific approach in conformity with the Act and the Income Tax Rules, 1962(the Rules") for identifying a comparable interest rate for the alleged excessive payment forthe transaction of purchase of equity shares treated as a deemed loan.

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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 and contract centre management. Assessee serves several industries including travel, insurance, financial services, health care, professional services, manufacturing distribution, distribution and retail. 3. The return of income for assessment year 2016-17 was filed on 30-11-2016, declaring total income at Rs 485,66,82,220/- and book profit u/s 115JB at Rs 524,17,52,406/-. Case of the assessee was assessed u/s 143(3) r.w.s. 144C (13) and 144B of the act. 4. This order has been passed after considering the order of TPO u/s 92CA (3) and directions of the DRP u/s 144C (5). Against this return income assessment was done at Rs 546, 05, 70,508/- and income under sec. 115JB at Rs 527, 65, 41,784/-. Against this order of AO assessee preferred this appeal before ITAT. 5. In this appeal assessee raise total 24 grounds of appeal with sub grounds. Ground No.1and 2 are general in nature hence no specific adjudication is being done. Ground no. 24 is premature so the same is not considered for adjudication purposes. 6. Ground No.3,4,5, and 6 are interrelated and pertains to partial disallowance of depreciation as the Ground Nos. 3 to 6 are interrelated, adjudicated by our consolidated findings as under:

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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 benefit from purchase of MSA was incorrect unless the value of customer relationship along with other incremental benefits/actual of profits are considered and thus the value of contract based on the approach as adopted by the TPO is self-contradictory and cannot be sustained (Para 26) The Hon’ble IAT also deleted the depreciation adjustment made by the Ld. TPO/DRP in AY 2012-13 by observing that since the price paid by the Assessee for AY 2011-12 is determined to be at arm’s length, depreciation is allowed to the Assessee (para 46). No transfer pricing adjustment can be made where there is no international transaction entered into by the Assessee during the year (Refer para 10 on page 15 of the DRP Application). International transaction of purchase of business rights has been undertaken in an earlier AY le. AY 2011-12 and the ALP has been determined by the learned TPO in AY 2011-12. There is no international transaction in AY 2016-17 in relation to the business and commercial rights purchased by WNS India in earlier AY. Disallowance proposed by the learned TPO is merely consequential to the adjustment made by the predecessor TPO in AY 2011-12.

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Thus no variation should have been proposed by the learned TPO in his order for AY 2016-17.No opportunity was provided by the learned TPO to the Assessee (Refer para 10.2 on page 16 of the DRP Application). Learned TPO denied sufficient opportunity of being heard to the Assessee as no show cause notice given before proposing the adjustment on this account. Even if the learned TPO had to make adjustment on this account the learned TPO ought to have issued a show cause notice to the Assessee and ought to have provided the Assessee an opportunity of being heard. Crescent Dyes & Chemicals Ltd. V Ram Naresh Tripathi (2 SCC 115 123) DK Yadav v JMA Industries Ltd 13 SCC 259,267) Indian & Eastern Newspaper Society Vs. CIT (119 ITR 996) Premier Breweries Ltd v Deputy Commissioner of Income tax (36 ITD 107) Nagulakonda Venkata Subba Rao vs. Commissioner of Income tax (31 ITR 761 (AP) 8. This issue has already been settled in favour of assessee for A.Ys. 2011-12 and 2012-13 vide ITA No. 2257/Mum/2017 and ITA No. 1955/Mum/2016. In these two years ITAT, Mumbai observed that since price paid by assesses is determined to be at arm’s length depreciation has to be allowed to the assessee. We further observed that this 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

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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 obtained from an independent and reputed merchant banker i.e. M/s Resurgent India, a third party valuation expert. As per the valuation report, the values of shares have been determined using income method (DCF Method) and Market Method (Comparable Companies Method). In valuation 50% weightage was assigned to both the methods. 11. Here-in-below, we are narrating the submissions of the assessee and consequential findings/actions of the TPO from assessment records. “TPO's Action (Refer para 3 on page 20 of the DRP Application) The TPO had asked the Assessee to submit me revised DCF valuation by replacing the projections with actual values and had asked to show cause in case of a wide variation in the final valuation figure, as to why price paid for acquiring shares should not be treated as deemed loan and be benchmarked accordingly.

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Past filing of such information the TPO went ahead in determining the ALF without discussing the approach being) adopted for determining such ALP under both the approaches as explained below: Revised valuation under Income approach (DCF Method) The learned TRO considered the revised working of valuation submitted by the Assessee. However, the learned TPO eliminated the sale value of the Assistance division. Accordingly revised enterprise value of WNS UK under DCF was determined at USD 153.80 million Revised valuation under Market approach (Comparable companies method) The learned TPO contended that since the enterprise value as per DCF has reduced from USD 283 million to USD 153.80 million the value under market approach should also reduce proportionately Accordingly he revised the value under market approach at USD 150.90 million in the following manner: Particulars Amount (USD million) Income Approach: Discounted Cash Flow method (50% 153.8 weightage) Market Approach: Comparable Companies method (50% 150.9 weightage [ as per valuation report] Concluded Business Enterprise Value 152.4 Less: Long term and Short term borrowings 6.9 Less: Derivate Financial Instruments- Non Current 0.1 Less: Non Current Liabilities 0.8 Less: Deferred Revenue 0.2 Add: Cash 6.2 Add: Derivative Financial Instruments – Non Current 1.8 Estimated Fair Value of Equity 152.4 Total number of shares outstanding 5,05,050 Estimated Fair Value of Equity on a per share basis (USD) 301.7

Based on the revised share 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:

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Particulars Reference Amount Estimated Fair Value of Equity on a per A 514.9 share basis as per valuation report (USD) Estimated Fair Value of Equity on a per B 301.7 share basis (USD) Difference i.e. excess amount paid per C=A-B 213.2 share (USD) Total excess amount paid on purchase D=C*49,495*62.5 65,95,20,875 of shares (INR)

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 A 65,95,20,875 of shares deemed as loan Interest rate (6 month’s B 6.458% LIBOR*+600bps) 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 methodology proposed to be used to arrive at a revised value of shares under both the approaches was not given to the Assessee The quantum of variation which would have been considered as wide by the learned TPO was not communicated to the Assessee Principles of nature justice were violated by not granting the Assessee a reasonable opportunity of being heard before making an adverse transfer pricing adjustment Crescent Dyes & Chemicals Ltd. V Ram Naresh Tripathi, (2 SCC 115.123) D.K. Yadav v J.M.A. 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)

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Assessee's Contentions (before the TPO): Where an international transaction does not result in taxable income or deductible expenditure as in the present case, TP provisions do not apply as TP regulations are machinery provisions applicable only when there is a charge of tax in India Dana Corporation (227 CTR 441) the Authority of Advance Rulings (AAR) The transaction of purchase of equity shares is a capital transaction and no income arises from the same, thus provisions of Chapter X of the Act are not applicable Vodafone India Services Private Limited vs. UOI (WP No. 871 of 2014) Shell India Markets Private Limited vs. ACIT (WP No. 1205 of 2013) Union Cabinet has accepted the order of Hon'ble Bombay High Court in the case of Vodafone India Services Private Limited (supra) vide press release dated 28 January 2015 Purchase of shares of an AE is not an international transaction as defined under Section 92 of the Act as there is no income arising on account of such transactions: Pr Comm. Income tax- 7 vs.. PMP Auto Components Pvt. Ltd (Bombay HC 1685 of 2016) Pr Comm. Income tax-13 vs.. Tops Group Electronics Systems Ltd (Bombay HC 1721 of 2016) has upheld the order of the Hon'ble ITAT in M/s. Tops group Electronic Systems Ltd vs. Income Tax Officer-8(3)(3) (ITA 2115/Mum 2015) M/s. TCG Life sciences Pvt. Ltd. vs. DCIT, Circle-11(2) (ITA No. 121/Kol/2016 & 647/Kol/2017) Vijay Electricals Ltd vs. Addl. Commissioner of Income-tax (ITA 842/Hyd/2012) TPO's Contentions: The transaction of purchase of equity shares is an international transaction between the Assessee and its non- resident 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

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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 Rulings in the case of PMP Auto (supra) and Tops Group (supra) Assessee's Rebuttals: Chargeability of income is determined by a combined reading of Sections 4, 5 and 9 of the Act, none of which are applicable to the transaction of purchase of equity shares as the same is a capital transaction No provisions under the Act to tax potential income in absence of which the transaction of purchase of equity shares cannot be subject to tax Section 92(1) cannot be used to bring to tax a new head of income which is otherwise not chargeable under the Act Where the income-tax legislation intended to bring notional income to tax, it has laid out specific charging provisions for the same, such as: Section 23-where income from house property is computed on notional basis in certain situations, irrespective of actual income earned thereon. Section 44AD- where income to be determined on presumptive basis for any business except plying, leasing, hiring, leasing Section 115VF- where tonnage income is computed at a fixed percentage of turnovers irrespective of actual profits earned by the taxpayer Hon'ble Bombay High Court, in the case of Pr Comm. Income tax-7 vs.. PMP Auto Components Pvt. Ltd (Bombay HC 1685 of 2016), has held as under "The further submission on behalf of the revenue that in future the respondent may sell these shares at a loss as they have purchased the same at much higher price than its fair market value. Thus gives rise to reduction of its tax liability in future. This submission is in the realm of speculation. At this stage, it is hypothetical. The issue has to be examined on the basis of law and facts as existing before the authorities in the subject assessment year No provision of the Act has been shown

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to us, which would allow the Revenue to tax a potential income in the present facts" (emphasis supplied) The transaction of purchase of equity shares, whether it is in the nature of inbound investment or outbound investment is a capital account transaction which does not give rise to any income chargeable to tax in India under the provision of the Act Cases of outbound investment have also been specifically adjudicated upon by Hon'ble Bombay High Court and Hon'ble Tribunals wherein it has been held that purchase of shares of an AE is not an international transaction as there is no income arising on account of such 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 Ltd vs. Income Tax Officer-8(3)(3) (ITA 2115/Mum 2015) M/s. TCG Life sciences Pvt. Ltd. vs. DCIT, Circle-11(2) (ITA No. 121/Kol/2016 & 647/Kol/2017) Vijay Electricals Ltd vs. Addl. Commissioner of Income-tax (ITA 842 / Hyd/2012) TPO’s Contentions: The learned TPO rejected the valuation report submitted by the Assessee without giving any cogent or sound reasoning for not accepting the Assessee's valuation Assessee’s Rebuttals: The Assessee has duly complied with the transfer pricing regulations as envisaged in the Act and there exist no circumstances as enumerated in clauses (a) to (d) of

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sub-Section (3) of Section 920 of the Act, which would warrant the learned TPO to disregard the analysis undertaken by the Assessee In the absence of any information to the contrary, the learned TPO was not justified in rejecting the valuation report issued by an expert used by the Assessee for determining arm's length price of the international transaction Mentor Graphics (Noida) Pvt. Ltd.'s case (109 ITD 101) Philips Software Centre Private Limited vs. Assistant Commissioner of Income Tax [(2008) 119 TTJ 721 (Bangalore)] Sony India Private Limited, (2007) 288 ITR 52 Rajesh Kumar v. DCIT (2006) 287 ITR 91 Maruti Suzuki India Limited vs. ACIT (Transfer Pricing) W. P. (C) 6876/2008) Indo American Jewellery Limited (supra) The adjustments made by the learned TPO should be deleted as the learned TPO was unable to provide any cogent or sound reasoning for rejection of the analysis undertaken by the Assessee TPO's Contentions: The AE got huge premium on sale of shares due to its special relation with the Assessee and the Assessee had failed to establish that the AE was capable of raising funds either by way of loan or share capital, on standalone basis. In absence of the premium paid on purchase of shares, the AE would have had to take loans Assessee or on open market which would entail it to pay huge interest costs. AE thus got the funds without being charged interest thereon and thus, the premium paid on shares was nothing but a loan given by the Assessee to its AE in the garb of share premium Assessee's Rebuttals: Treating the excess price paid for acquiring the shares as deemed loan is nothing but recharacterisation of the transaction of acquiring equity shares into a loan between the Assessee and its AE. None of the provisions 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)

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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 HC- ITA 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 should be dropped M/s Veer Gems v. ACIT, Special Civil Application No. 14646 of 2011 VI. No Transfer Pricing method followed by learned TPO to determine the ALP (Refer para 10.6 on page 37 of the DRP Application) Assessee's Contentions: The learned TPO has not followed any of the methods prescribed under provisions of the Act and/or Rules in determining the value of the shares of AE. The Assessee in its Transfer Pricing Study followed Comparable Uncontrolled Price (CUP) as the most appropriate method. The value determined under the valuation report given by an independent valuer was considered as CUP. Tecumseh Products India (P) Ltd. v. ACIT (ITA 1686 (HYD) OF 2010) Social Media India Ltd. v. ACIT (28 ITR(T) 212) (Hyderabad-Trib) Firmenich Armatics India (P) Ltd. v. DCIT [2018] 96 Taxmann.com 649 Hon'ble Delhi High Court in Li & Fung India (P) Ltd v. CIT (2014) 361 ITR 85 VII. Appropriateness of the valuation obtained from the independent valuation expert cannot be challenged (Refer para 10.7 on page 39 of the DRP Application) TPO’s Actions: The learned TPO rejected the valuation report submitted by the Assessee and reworked the valuation as discussed on Page 17 to 19 Assessee’s Rebuttals: Valuation of shares requires expertise and knowledge in the domain of valuation principles, markets, and business which was possessed by the third party valuer appointed by the Assessee. The learned TPO has not pointed out any flaw in the

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valuation report submitted by the Assessee but has in fact relied on the same assumptions and variables as used in the valuation report. In absence of any fault being pointed, the learned TPO has grossly erred in assuming that the valuation report cannot be relied upon and has stepped into the shoes of an expert without possessing the requisite knowledge and skill to undertake valuation. Even if the learned TPO were not in agreement with the variables assumed/ valuation undertaken by independent third party valuers, they ought to have desisted from their own exercise of adhoc valuation without having appointed a valuation expert to determine the value of shares of WNS UK G. L. Sultania and Anr v. SEBI & Ors (AIR 2007 SC 2172) Tecumseh Products India (P) Ltd. v. ACIT (ITA 1686 (HYD) OF 2010) Global Payments Asia Pacific (India) (P) Ltd. v. Deputy Commissioner of Income Tax Social Media India Ltd. 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 approach in the same proportion. Adhoc determination of arm's length price by the learned TPO is bad in law. CIT vs. Lever India Exports Ltd. [[2017] 292 CTR 393 (Bombay)] PCIT vs. Sabic Innovative Plastic India (P) Ltd [R/TAX APPEAL NOS. 231 AND 248 OF 2018 dated 31 July 2018 Firmenich Armatics India (P) Ltd. v. DCIT [(2018) 96 Taxmann.com 649]

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Assessee’s contentions (Before the TPO): WNS UK (I.e. entity whose shares are being valued), operated multiple divisions. In June 2016, a division named 'Assistance division' was sold by WNS UK to another entity for a consideration of approx. USD 93.30 million. As on the date of valuation, Assistance division was very much a part of WNS UK and thus the projections considered in the valuation report included revenues and profits from Assistance division as well. Since Assistance division was not part of WNS UK from June 2016 onwards, the actual results from that date did not include revenue or profit from Assistance division. At the time of submitting revised working of DCF as per actual results, the Assessee submitted that the value of USD 93.30 million derived on sale of Assistance division by WNS UK which forms part of the cash (i.e. assets) of WNS UK be added to the enterprise value of WNS UK and arrived at the total enterprise value of WNS UK under DCF method at USD 247.20 million as against USD 263.00 million TPO’s Contentions: The cash flow/ income from sale of Assistance division is an exceptional event and not a part of operational activities. Hence, the amount of USD 93.30 million from Assistance division sale is not considered in revised DCF analysis. Assessee's Rebuttals: The learned TPO has failed to adopt a consistent approach in determining the arm's length price for benchmarking this transaction of the Assessee in transfer pricing order since if the projections are replaced with actual under revised valuation, all events happening up to date of revision ought to have been considered. The valuation of equity shares should consider both operating as well as non-operating items to arrive at the enterprise value. As per the basic principle of DCF valuation method, cash flows from operating activities are projected and discounted to derive value of operating assets whereas the value of non-operating items (cash, investment etc) are directly added and value of debt is 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

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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% 247.2 weightage) (153.8 million as calculated by learned TPO + 93.3 million pertaining to sale of assistance division) Market Approach: Comparable Companies method (50% 288.0 weightage [ as per valuation report] Concluded Business Enterprise Value 252.6 Less: Long term and Short term borrowings 6.9 Less: Derivate Financial Instruments- Non Current 0.1 Less: Non Current Liabilities 0.8 Less: Deferred Revenue 0.2 Add: Cash 6.2 Add: Derivative Financial Instruments – Non Current 1.8 Estimated Fair Value of Equity 152.6 Total number of shares outstanding 5,05,050 Estimated Fair Value of Equity on a per share basis (INR) 31,254.1

Accordingly, the revised adjustment would be computed as under: Particulars Reference Amount Estimated Fair Value of Equity on a A 514.9 per share basis as per valuation report (USD) Estimated Fair Value of Equity on a B 6.458% per share basis (USD) Difference i.e. excess amount paid per C=A-B 14.79 share (USD) Total excess amount paid on D=C*49,495*62.5 4,57,65,682 purchase of shares (INR) Actual amount paid as per form 3CEB E 1,67,53,38,028 3% of the transaction value* F=3% of E 5,02,60,141 Adjusted to share price Since F >D NIL

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"Since benefit of tolerance range of +/-3% can be availed even in case of single price determined as ALP. Reliance is placed on Hon'ble Mumbai ITAT's rulings in the following cases: DDIT vs. Development Bank of Singapore [(2013) 144 ITD 265 (Mumbai)] and DDIT vs. Sonata Software Ltd. {ITA 594/Mum/2017 & ITA 721/Mum/2017] Action Plan 8-10 of OECD's Base Erosion and Profit Shifting Project where, in the context of hard to value intangibles. states that if the actual outcomes do not result in reducing/ increasing the compensation of such intangibles by more than 20% of the compensation determined at the time of transaction, the compensation determined at the time of transaction should be accepted as arm's length price (Refer para 10.9.13 on page 46 of the DRP Application) I. Adhoc adoption of interest rate (Refer para 10.1 on page 50 of the DRP Application) TPO's Actions: (Refer page 137 of the DRP Application) As discussed on Page 15, the learned TPO computed a transfer pricing adjustment of INR 427, 69.929 on account of List to be charged for alleged excess amount provided as loan to AE by adopting the interest rate of 6 months LIBOR plus 600 bps Assessee'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]

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Safilo India (P) Ltd. V Deputy Commissioner of Income-tax, Circle- 15 (3) (2), Mumbai (ITA 588 & 4940 (MUM) OF 2015] TPO's Contentions: (Refer page 137 of the DRP Application) The learned TPO has referred in the TP Order that the interest rate of LIBOR plus 600bps is as per SHR Assessee's Rebuttals: SHR are to be used only in scenarios where the Assessee has opted for the same and it is not open to the tax authorities to adopt SHR. Without prejudice, even when SHR are to be used, learned TPO ought to undertaken proper analysis before adopting the interest rate of 6 month LIBOR + 600 bps as SHR provides for a slab wise interest rate as under: CRISIL Credit Rating Rate of Interest AAA to A 6 months LIBOR+150bps BBB-,BBB or BBB+ 6 months LIBOR+300 bps BB to B 6 months LIBOR+450 bps C to D 6 months LIBOR+600 bps Credit rating not available and amount of loan does 6 months LIBOR+400 bps not exceed INR 100 Cr

The learned TPO has not undertaken any credit rating analysis to arrive at the credit rating of the AE and thus, without prejudice that no interest adjustment is warranted, even where SHR was referred to by the learned TPO, the rate of 6 months LIBOR + 400 bps is applicable Assessee’s Contentions: Without prejudice, even if interest is to be charged, the rate of interest should not exceed 6 months USD LIBOR + 100 points as agreed under the APA signed by WNS India with the CBDT for other covered transactions which also covers AY 2016-17. The rate of interest applied by the learned TPO is exorbitantly high even in view of the judicial precedents where LIBOR 2% has been accepted. Infotech Enterprises Limited vs. Asst CIT (ITA No 2184/Hyd/2011 & ITA No 115/Hyd/2011] Dr. Reddy's Laboratories Ltd vs.. Addl. CIT [ITA No. 1605/Hyd/2010]

Particulars Scenario 1- LIBOR Scenario 1- LIBOR + 100bps + 200 bps Alleged excess amount in INR 65,95,20,875 65,95,20,875

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Date of remittance 21-Aug-15 21-Aug-15 Year end 31-Mar-16 31-Mar-16 Period for which alleged loan is 224 224 outstanding during the year Rate of interest 1.485% 2.485% Revised Arm’s Length interest 60,10,494 1,00,57,964 Interest imputed by the learned TPO 4,27,69,929 4,27,69,929 (@LIBOR + 600 bps) Reduction in adjustment 3,67,59,435 3,27,11,964

Assessee’s contentions: The learned TPO ought to have issued a show cause notice to the Assessee and ought to have provided the Assessee an opportunity of being heard before imputing interest on alleged excess amount Crescent Dyes & Chemicals 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 which alleged loan is outstanding during 224

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the year Rate of interest (LIBOR + 600 bps) 6.485% Revised Arm’s Length interest 2,62,47,847 Interest imputed by the learned TPO 4,27,69,929 Reduction in adjustment 1,65,22,082

Based on the above computation, the alleged arm's length interest, if any, should be INR 2, 62, 47,847 instead of INR 4, 27, 69,929. Accordingly, the adjustment of INR 2, 62, 47,847 should be reduced and a relief of INR 1, 65, 22,082 should be granted.” 12. We have thoroughly considered the issue with reference to the contentions of the TPO / AO and point-wise rebuttal of the assessee. We thoroughly analysed the judicial pronouncements relied up on by both the parties. In our considered opinion we found force in the contentions of the assessee that Projections can’t be substituted by actual and hindsight ought not to effect a valuation report, without prejudice to this even if it is assumed otherwise for the time being in force, if projections are to be relied up on, all events that have occurred till that date should be considered.

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directions of DRP and final order of AO passed u/s 143(3), r.w.s 144C(13) and 144B. Moreover identical issue in assessee own case has been decided in favour of assessee vide for AY 2005-06,2007-08, 2009-10,2011-12 and 2012-13. Relevant extracts of assessment records and assessee’s submission are as under: “AO Action The learned AD has erred in disallowing depreciation amounting to Rs 39, 03, 28,049 on intangible assets acquired by the Assessee. Assessee’s contentions The Assessee acquired all the business of Town & Country from WNS UK vides agreement dated January 13, 2004 for a consideration of GBP 17, 50,000. The business acquired by the Assessee consisted of various contracts of Town & Country 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 65,95,20,875 acquired from WNS UK Disallowance of depreciation on Aviva contract acquired from WCIL TP adjustment on account of valuation adjustment of Aviva 13,60,00,936 contract Depreciation adjustment 38,88,77,118 Sub-total A+B) 52,48,78,054 Total (A+B) 52,63,28,985

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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)

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30 ITA No. 1259/Mum/2021-WNS Global Services Pvt. Ltd.

Factual and legal arguments by the Assessee (a) Only direct expenses incurred for earning exempt income should be disallowed under Section 14A Based 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 [2006] 107 ITD 267 (Mum) Justice Sam P. Bharucha [2012] 25 taxmann.com 381 (Mum) The words 'in relation to income' used under section 14A of the Act would have to be interpreted to mean a direct and proximate relationship between the expenditure and the exempt income. Further, the words 'expenditure incurred by the assessee' refers to actual expenditure incurred by the Assessee to earn exempt income and does not connote notional expenditure or expenditure computed on an estimated basis. It would be pertinent to note that though the learned AO has relied on the said judgment for the basic principle of disallowance of expenditure under Section 14A of the Act, however, he has not considered the aspect that there has to be proximate cause for disallowance in relation to the tax exempt income as enumerated in the above paragraph. During the year under consideration, the Assessee had invested the surplus funds accruing out of the receivable in various Mutual Fund units to the tune of Rs. 783.12 cr. Hence, the Assessee has earned dividend income of Rs. 32.99 cr. on account of investment made in Mutual Fund units and the same is exempt under the provisions of the Act. In this regard, Assessee has suo-moto identified the actual expenses incurred in connection with the earning of exempt income and made disallowance under Section 14A of

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the Act. However, the learned AO has failed to prove that the expenses incurred by the Assessee is not acceptable and it has incurred any additional expenses for the earning the exempt income during the course of the assessment proceedings No recording of satisfaction by the AO Section 14A(2) of the Act requires that in the event the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure having regard to books of account, he is required to record his satisfaction with respect to the same. Rule 8D of the Rules cannot be invoked by the AO automatically and without bringing on record that he was not satisfied with the claim made by the assessee. In this regard, reliance is placed on the following judgments: WNS Global Services Private Ltd (AY 2012-13) (Mum ITAT)((ITA No.2257/Mum/2017) wherein the Hon'ble Mumbai ITAT has deleted the disallowance under Section 14A of the Act for AY 2012-13 as the AO had failed to record any satisfaction with respect to the suo-moto disallowance 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 Daga Capital Management Private Limited (supra), and the Hon'ble Bombay HC has held that the AO is required to objectively arrive at a

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satisfaction that the claim of the Assessee is incorrect after considering all the relevant facts and circumstances. Further, the decision of Godrej Boyce passed by High Court (i.e. higher forum) should have precedence over the decision passed by Tribunal in aforesaid cases (viz. Daga Capital Management Private Limited, Citicorp) and accordingly, is binding on the learned AO. Reliance on Section 115-0 (5) of the Act by the learned AO is misplaced as the entire chapter refers to "Special provisions relating to tax on distributed profits if domestic companies'. Thus, the same is applicable where dividend is distributed by a company and does not apply to dividend income received by the taxpayer. Accordingly, the above mentioned provision is not applicable to the facts of the present case as Section 115-0(5) of the Act is about deduction of dividend and DDT thereon and not about deductibility of expenses in relation of earning exempt income. Incorrect computation under Rule 8D of the Rules (d) Incorrect computation under Rule 8D of the Rules Particulars Amount (INR) Amount (INR) (i) Disallowance of direct expenses 9,29,819 (ii) A Disallowance of interest expenses 17,76,232 B Average investments 6,86,18,33,915 C Average of total assets 25,38,10,50,000 A*B/C 4,80,209 (iii) 0.5% of average investments 3,43,09,169 Total Disallowance 3,57,19,197

For the purpose of computing disallowance under Rule 8D(2)(1) of the Rules, only the interest expenditure incurred during the previous year which is not directly attributable to any particular income or receipt is required to be considered. In this regard, reliance is placed on the following judgment: REI Agro Ltd. vs. DCIT 160 TTJ 107 (Cal) ACIT v Best & Crompton Engineering Ltd. (36 taxmann.com 555)

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The entire interest amount of Rs 50.75 Crores debited to the profit and loss account is directly attributable to a particular income or receipt. The detailed break-up of the said interest expenses has been provided on page nos. 81 and 82 of the DRP application. Accordingly, the Assessee has utilized the loan for the specific purpose for which they were 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 Ltd (2014) 44 taxmann.com 441 (Guj) Commissioner of Income-tax-l vs. Amod Stamping (P.) Ltd. (45 taxmann.com 427) (Guj) Without prejudice to the above, even where investments are made from a common pool of funds comprising of both borrowed and own funds, it has been held by the Courts that it shall be assumed that investments have been made with the Assessee's own funds and not with the borrowed funds. Reliance in this regard is placed on the following decisions:

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Jurisdictional Bombay High Court in the case of Reliance Utilities & Power (313 ITR 340) CIT v HDFC Bank Ltd [Income Tax Appeal No. 330 of 2012] [Bom] CIT v Sharada Erectors (P.) Ltd (76 taxmann.com 107) The above view is also supported from the fact that the CBDT vide official gazette dated 2nd June 2016 has notified the amended Rule 8D. Per such Rule, aggregate of only direct expenses and 1 percent of annual average of the monthly averages of the opening and closing balances of the value of investment. Income from which does not form part of total income can be disallowed. The normative/presumptive disallowance of interest expense has been done away with. The provisions of the Section 14(2) of the Act requires the AO to disallow an expenditure as per satisfied with the correctness of the claim of the Assessee in respect of expenditure in relation to Acme which does not form part of the total income under the Act. In the instant case, the learned AO has not demonstrated as to why he is not satisfied with the suo-moto disallowance made by the Assessee. Thus, no disallowance of any interest expense can be made, where no interest bearing funds are utilized for investing in assets which give rise to exempt income. the Assessee has made the investment in mutual funds in the current year out of own funds and the interest expense incurred on borrowed funds amounting to Rs. 50.75 Crores was incurred for a specific purpose. 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. The detailed break-up of the said interest expenses has been provided on page nos. 81 and 82 of the DRP application. Hence, such expenses should not be considered for the purpose of computing disallowance under Rule 8D (2)) of the Rules. The Assessee has made the investment 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

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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 Year ending 31 Year ending 31 Year ending 31 Year ending 31 March March 2015 March 2014 March 2013 31 March 2016 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 Year ending 31 Year ending 31 Year ending 31 Year ending 31 March March 2015 March 2014 March 2013 31 March 2016 2012 783.12 589.24 109.78 243.63 134.22

Further, the percentage of the investment yielding exempt income to own funds for the past five years is as follows: Percentage of Investment yielding exempt income of Own Funds Year ending Year ending 31 Year ending 31 Year ending 31 Year ending 31 March March 2015 March 2014 March 2013 31 March 2016 2012 48.87 46.70 13.63 34.07 25.20

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(f) Without prejudice to previous submission -Scientific apportionment of administrative expenses As mentioned, the Assessee has earned a dividend income of INR 32.99 crs. And the disallowance computed by the AO by invoking Rule 8D is INR 3.57 crs. Without prejudice, the Assessee has suo-moto identified composite expenditure under each head of expenses and apportioned the composite expenditure in the ratio of exempt income viz-a-viz total receipts during the year as under:

Particulars Amount (INR in crs) Total income as per financials 2,200 Exempt income 33 Ratio of exempt income to total income 1.5% Composite administrative expenditure* 36.24 Apportionment of composite expenditure 0.54

Given the above, disallowance, if any, under Section 14A should be restricted to INR 63,29,819/- (e. INR 54,00,000 plus direct expenditure of salary of personnel

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suo-moto disallowed by the Assessee of INR 9,29,819) vis-à-vis INR 3,57,19,197 computed by the AO by invoking Rule 8D In this regard, reliance is placed on the recent Hon'ble Mumbai ITAT decision in the case of Tata Projects Limited (ITA. No.459/Mum/2019) dated 22 October 2020 wherein the Hon'ble ITAT has accepted the above method of apportionment and disallowance computed by the assessee under Section 14A of the Act. The Tribunal ITAT held that on perusal of the method adopted by assessee it could be stated 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

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exempt income which is debited to the profit and loss account for purpose of computation of book profits In the absence of any specific statutory methodology, the disallowance needs to be computed on general principles having regard to the book profit without any reference to Section14A (2) of the Act read with Rule 8D of the Rules. In this regard, reliance is placed on the following judgments: Essar Technholdings Ltd v. DCIT (ITA no. 3850/Mum/2010) Goetze (India) Ltd. v. CIT (2009) 32 SOT 101 (Del) M/s National Commodity & Derivatives Exchange Ltd. (ITA no. 2923/Mum/2010) In the absence of the expenses, computed as per Section 14A of the Act read with Rule 8D of the Rules, being debited to the profit and loss account, the learned AO erred in disallowing expenses while computing the 'book profit' under Section 115JB of the Act.” 22. In view of the above facts and judicial pronouncements relied up on No disallowance under rule 8D (2)(i) can be made, as there is no direct expense in the case of assessee, still assessee itself offered Rs. 9,29, 819/-. Disallowance under rule 8D (2)(ii) Can’t be made at all as assessee is using its own funds and no borrowed funds were utilised and disallowance under rule 8D (2)(iii) Also must be limited to the extent of Rs. 54 Lacs only as worked out by the assessee reliance is placed on the recent ITAT decision in the case of Tata Projects Limited (ITA. No.459/Mum/2019) dated 22 October 2020 wherein the ITAT has accepted the above method of apportionment and disallowance computed by the assessee under Section 14A of the Act. The Tribunal held that on perusal of the method adopted by assessee it could be stated that the method of computing disallowance was very fair reasonable and scientific.

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Sd/- Sd/- (VIKAS AWASTHY) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, िदनांक/Dated: 09/12/2022 SK, Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकर आयु�(अ)/The CIT(A)- 4. आयकर आयु� CIT 5. िवभागीय �ितिनिध, आय.अपी.अिध., मुबंई/DR, ITAT, Mumbai 6. गाड� फाइल/Guard file.

BY ORDER, //True Copy// (Dy. /Asstt. Registrar) ITAT, Mumbai