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Income Tax Appellate Tribunal, “K”, BENCH
Before: SHRI M. BALAGANESH, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R PER M. BALAGANESH (A.M): These cross appeals in ITA.4683/Mum/2016 for A.Y.2010-11 arises out of the order by the ld.
M/s. Firstsource Solutions Ltd., Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)- 56/TP/DCIT-6(2)/2015-16/183-F dated 31/03/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 05/05/2014 by the ld. Dy. Commissioner of Income Tax 6(2), Mumbai (hereinafter referred to as ld. AO).
The first issue to be decided in the appeal of the revenue is as to whether the ld CITA was justified in directing the ld TPO to compute the Arm’s Length Price (ALP) by adopting LIBOR rates to benchmark the receipt of interest by the assessee from its Associated Enterprise (AE) without determining the spread on account of risk adjustment to be applied over and above the LIBOR rate in the facts and circumstances of the case.
We have heard the rival submissions and perused the materials available on record. We find that the assessee company is engaged in the business of Information Technology Enabled Transaction Processing Services. We find that the assessee had extended loan to First Ring Inc. US (FR US) and Firstsource Business Process Solutions, USA (FBPS) (i.e AEs) on which interest was charged at the rate of 6% and 7.50% per annum respectively. These loans were sourced in foreign currency and loans were also provided in foreign currency i.e US Dollars. The loan amount outstanding as on 1.4.2009 in respect of FR US was USD 17453676 and loan amount outstanding as on 1.4.2010 in respect of FBPS was USD 9267755. On 31.12.2009, FR US merged with FBPS. During the financial year 2010-11, the entire loan was repaid by FBPS to assessee company. We find that the assessee had submitted that the loans to the AEs were provided from its own funds sourced in US Dollar in as much as during September 2004, there was a capital infusion in the M/s. Firstsource Solutions Ltd., assessee company amounting to Rs 1619 million made by a shareholder and that a part of this capital infusion from shareholder has been given as loan to the AEs. We find that the assessee had stated that the loan was given by the assessee to its AE to acquire Accounts Solutions Group, LLC (ASG) which is a subsidiary of the AE. It was also stated that the business of ASG was into debt collection and the very purpose of acquisition of this entity was to partly shift the business of debt collection of all the clients from US to India with a view to move business and profits into India. It was pleaded accordingly that this acquisition had only enhanced the long term benefits of higher profits for the company in India. The assessee pleaded that interest rates to be used in benchmarking foreign currency loans should be the international rate relevant to the currency in which the loan is denominated. The assessee further submitted that in its own case for Asst Year 2007-08, the ld CITA had allowed to use the LIBOR rate as benchmarking rate for determination of ALP for calculating the interest on the loan. Thus it was submitted that interest charged by the assessee at the rates of 6% and 7.50% from its two AEs was much higher than the corresponding Arm’s length LIBOR of 2.79% being average of 6 months USD LIBOR plus 200 basis points for the financial year 2009-10. Accordingly, the assessee pleaded that the interest received from its AEs were considered to be at arm’s length.
3.1. We find that the ld TPO ignoring the contentions of the assessee resorted to adopt the prime lending rate (PLR) of State Bank of India (SBI) for benchmarking the interest received from AEs by the assessee for determination of ALP. The ld TPO then determined the credit rating of the AE based on corporate bonds data of USA as well as India and assigned credit rating to the AE based on 2 ratios. The ld TPO also computed an interest rate based on Net Interest Margins of 5 banks along
M/s. Firstsource Solutions Ltd., with combination of average cost of borrowing of the assessee. The ld TPO finally concluded by adopting an interest rate of 11.75% considering SBI PLR and placing reliance on safe harbour rules. Accordingly, applying the interest rate of 11.75% per annum, the ld TPO made an adjustment of Rs. 3,29,66,045/- towards ALP in respect of interest received by the assessee from its AEs .
3.2. We find that the ld CITA by appreciating the fact of availability of own funds with the assessee for providing loans to its AEs and by placing reliance on the decision of Hon’ble Jurisdictional High Court in the case of Tata Autocomp Systems Ltd reported in (2015) 56 taxmann.com 206 (Bombay) and the decision of the Hon’ble Delhi High Court in the case of Cotton Naturals (I) (P) Ltd reported in (2015) 55 taxmann.com 523 (Delhi), held that LIBOR rates should be adopted to benchmark the receipt of interest by the assessee from its AEs. The ld CITA also observed that in the assessee’s own case, the ld TPO himself had adopted LIBOR rate as the benchmark for determination of ALP of receipt of interest on loans. Accordingly, the ld CITA allowed the claim of the assessee and directed the ld TPO to delete the ALP adjustment made in the sum of Rs 3,29,66,045/-.
3.3. We find that this issue is squarely covered by the decision of this tribunal in assessee’s own case for the Asst Year 2008-09 in dated 27.6.2017 wherein it was held :-
3.4.We have heard the rival submissions and perused the material before us. We find that the assessee had advanced loan to its AE in US Dollar,that it had charged interest @ 6%-7.5% per annum that the LIBOR rate as on last date of 2008 was 2.49%, that the AE of the assessee had taken loan from a third party namely ANB and Amro Bank Ltd., that the bank had charged LIBOR +200 bps, that the assessee had benchmarked the transaction accordingly, that in the subsequent AY.(AY 2012-13),the
M/s. Firstsource Solutions Ltd., AO himself had made no adjustment on account of interest rate transaction even though the facts and circumstances were identical to the facts to the year under appeal. We also find that in the cases, relied upon by the assessee, the Tribunal has taken a consistent view that LIBOR+ 200bps or 300bps interest rate has to be considered arm's length rate of interest.In the case under consideration after adding 300 bps the rate would come to 5.49 %,whereas the assessee has charged 6%/7.5% interest from its AE thus, there was no justification for the FAA to uphold the order of the TPO/AO who had charged interest @14.39%.Therefore,reversing the order of the FAA,we decide third Ground of appeal in favour of the assessee .
Respectfully following the same, we do not find any infirmity in the order of the ld CITA granting relief to the assessee. Accordingly, the grounds raised by the revenue are dismissed. – Asst Year 2010-11 – Assessee Appeal
The Ground Nos 1.1 to 1.3 raised by the assessee is challenging the action of the ld CITA in respect of disallowance u/s 14A of the Act under normal provisions of the Act . The Ground Nos. 4.1. to 4.3. raised by the assessee is challenging the action of the ld CITA in respect of disallowance u/s 14A of the Act while computing the book profits u/s 115JB of the Act.
4.1. We have heard the rival submissions. It is not in dispute that there was no exempt income claimed by the assessee. The law is now very well settled that when there is no exempt income, there cannot be application of disallowance u/s 14A of the Act. Accordingly, we direct the ld AO to delete the disallowance made u/s 14A of the Act both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act. Accordingly, the Grounds 1..1 to 1.3. and 4.1 to 4.3. raised by the assessee are allowed.
M/s. Firstsource Solutions Ltd., 5. The Ground Nos. 2.1. to 2.3. raised by the assessee is challenging the action of the ld CITA confirming the action of the ld AO of holding that the amount of Rs 7,57,00,711/- being the reduction in its liability of buyback during the year of its Foreign Currency Convertible Bonds (FCCB) as taxable u/s 41(1) of the Act in the facts and circumstances of the case.
5.1. The brief facts of this issue are that the assessee issued FCCBs of USD 27.50 crores on 3.12.2007 redeemable on 4.12.2012 at 139.37% of the principal amount (implicit interest rate of 6.86% per annum) . The end proceeds of the FCCBs were utilized by the assessee for investing in its wholly owned subsidiary in the United States of America. During the year under consideration, pursuant to RBI notification, the assessee bought back 129 FCCBs under the Automatic Route. The assessee claimed the gains earned on the buyback of the FCCBs of Rs 7,57,00,711/- as non-taxable while filing the return of income. The assessee placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Xylon Holdings P Ltd reported in 211 Taxman 108 (Bom) before the ld AO to justify its contentions. The ld AO observed that the assessee had utilsied the proceeds raised from the issue of FCCBs to subscribe for shares in FSL –USA , its wholly owned subsidiary and FSL –USA then utilized the funds received by it for repayment of debt taken by it in connection with the acquisition of Med Assist Group, USA. The ld AO by following the order passed by his predecessor for the Asst Year 2009-10 wherein it was held that the proceeds of the FCCBs were not utlised in buying any capital asset for its business and instead utilized in buying a business interst by investing in shares of subsidiary company, which cannot tantamount to buying a capital asset and thus made an addition of Rs 7,57,00,711/- being reduction in the liability on buyback of FCCBs. The ld CITA upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us.
M/s. Firstsource Solutions Ltd., 5.2. We have heard the rival submissions. At the outset, there is no dispute that the proceeds of the FCCBs were utilized by the assessee for acquisition of shares of its wholly owned subsidiary in USA. Hence it could be safely concluded that the FCCBs were utilized for capital purposes. We find that the assessee had undertaken the buyback of few FCCBs at a discounted value , which resulted in rebut, or remission of a part of the FCCBs. The assessee claimed the gains earned (reduction in the liability) on the buyback of FCCBs of Rs 7,57,00,711/- as non taxable in the return of income since this was not a gain but an actual reduction in the liability which occurred due to buyback of FCCBs. We find that the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Xylon Holdings (P) Ltd reported in 211 Taxman 108 (Bom) clearly supports the case of the assessee wherein it was held that cessation / remission of liability to repay a loan taken to purchase a capital asset does not result in revenue receipt chargeable to tax. We find that the issue under dispute is also squarely covered by the decision of the Hon’ble Supreme Court in the case of Commissioner vs Mahindra and Mahindra Ltd reported in 302 CTR 213 (SC) wherein it was held as under:-
Discussion:— 10. The term "loan" generally refers to borrowing something, especially a sum of cash that is to be paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to pay back the principal amount along with the agreed rate of interest within a stipulated time.
It is a well-settled principle that creditor or his successor may exercise their "Right of Waiver" unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (1) of the IT Act.
M/s. Firstsource Solutions Ltd., 12. The first issue is the applicability of Section 28 (iv) of the IT Act in the present case. Before moving further, we deem it apposite to reproduce the relevant provision herein below:— '28. Profits and gains of business or profession.— The following income shall be chargeable to income-tax under the head "Profits and gains of business profession",— ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; ** ** **' 13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.
Another important issue which arises is the applicability of the Section 41 (1) of the IT Act. The said provision is re-produced as under: "41. Profits chargeable to tax.- (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or ** ** **"
On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is M/s. Firstsource Solutions Ltd., undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.
Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act.
To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money. (b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year.
In view of above discussion, we are of the considered view that these appeals are devoid of merits and deserve to be dismissed. Accordingly, the appeals are dismissed. All the other connected appeals are disposed off accordingly, leaving parties to bear their own cost.
5.2.1. Respectfully following the aforesaid decision of Hon’ble Supreme Court, we hold that the gains earned on reduction of liability on the buyback of FCCBs at a discounted value in the sum of Rs 7,57,00,711/- cannot be brought to tax in the facts and circumstances of the instant case. Accordingly, the Grounds 2.1. to 2.3.raised by the assessee are allowed.
M/s. Firstsource Solutions Ltd., 6. The Ground Nos. 3.1. to 3..3 raised by the assessee are challenging the action of the ld CITA in confirming the action of the ld AO of recomputing the deductions u/s 10A, 10B and 10AA of the Act by setting off the losses of non-STP / non-tax holiday units.
6.1. We have heard the rival submissions. We find that the issue in dispute is covered by the decision of this tribunal in favour of the assessee in its own case for the Asst Year 2012-13 in IT(TP)A No. 2258/Mum/2017 dated 12.4.2019 wherein it was held as under:-
7. We shall now advert to the part disallowance by the A.O of the assesses claim of deduction under Sec.10AA of the I.T Act. As per the facts discernible from the orders of the lower authorities, it stands revealed that the assessee had claimed deduction under Sec.10AA in respect of the eligible units at Rs. 48,13,86,995/-, as against its business income of Rs.32,52,00,938/-. Insofar the difference of Rs.15,61,86,050/- i.e excess of the claim of deduction under Sec.10AA as against the total business income was concerned, the same was partly „set off‟ by the assessee against the Short Term Capital Gain (for short „STCG‟) of Rs.9,42,03,318/-, while for the balance loss of Rs.6,19,82,738/- was carried forward to the subsequent assessment year. The A.O after deliberating on the claim of deduction raised by the assessee under Sec.10AA held a conviction that the same was to be allowed after aggregating the income and loss of various units, irrespective of the fact as to whether the same were eligible or not for the deduction under the other heads. As a result thereof, the A.O backed by his aforesaid conviction quantified the assesses entitlement towards deduction under Sec.10AA, as under: Business income before deduction U/s 10AA Rs.32,52,00,938/- (as per computation) Short term capital gain Rs. 9,42,03,318/- Total income considered for Sec.10AA Rs.41,94,04,256/- Deduction u/s. 10AA out of total claim of Rs.41,94,04,256/- Rs.48,13,86,995/- which is allowed to the extent of income available.
M/s. Firstsource Solutions Ltd., In the result, the excess disallowance claimed by the assessee under Sec.10AA amounting to Rs.6,19,82,739/- [Rs.48,13,86,995/- (-)Rs.41,94,04,256/-] was disallowed by the A.O and added back to the total income of the assessee.
The assessee has assailed the aforesaid restriction of its entitlement towards claim of deduction under Sec. 10AA by the A.O. It is the contention of the ld. A.R that as per the mandate of law deduction under Sec.10AA is to be allowed qua unit wise instead of aggregating profit/losses of all units. As observed by us hereinabove, the ld. A.R in order to buttress his aforesaid contention has drawn support from the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd. (2017) 391 ITR 274 (SC). We have deliberated at length on the issue under consideration and find substantial force in the contention advanced by the ld. A.R before us. In fact, the issue under consideration had came up for adjudication before a coordinate bench of the Tribunal i.e ITAT “F” Bench, Mumbai in the assesses own case i.e Firstsource Solution Ltd. Vs. DCIT 6(2)/ACIT-5(2), Mumbai (ITA No. 4752/Mum/2009, and ITA No. 2658/Mum/2011) for A.Y 2004-05 & A.Y. 2005-06. The Tribunal after giving a thoughtful consideration to the issue as to whether the profits on STP units were to be adjusted against the loss of non-STP units, had after relying on the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Black & Beatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom) and that of the Hon‟ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd. (2017) 391 ITR 274(SC) had directed the A.O to allow the deduction under Sec.10A of the I.T Act without setting off of loss from non-STP units. In our considered view as the provisions of Sec.10AA are pari materia to those envisaged in Sec.10A, therefore, the view taken by Tribunal in the assesses own case for the aforementioned preceding years i.e A.Y. 2004-05 and A.Y. 2005-06 squarely covers the issue under consideration in favour of the assessee. Apart there from, we find that the contention advanced by the assessee before us that the profits of STP units are not liable for adjustment against the loss of non-STP units for the purpose of quantifying the claim of deduction under Sec.10AA is also supported by the view taken by the Hon‟ble High Court of Bombay in the case of CIT Vs. Black & Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom). We thus
M/s. Firstsource Solutions Ltd., in terms of our aforesaid observations are of the considered view that the lower authorities had erred in disallowing part of the assesses claim of deduction under Sec.10AA by wrongly aggregating the income and loss of various units while quantifying its entitlement towards deduction under Sec.10AA of the I.T Act. In terms of our aforesaid observations, we vacate the disallowance under Sec.10AA of Rs. 6,19,82,739/- made by the A.O. The Ground of appeal No. 2 is allowed.
6.1.1. Respectfully following the same, the Grounds 3.1 to 3.3 raised by the assessee are allowed.
In the result, the appeal of the revenue is dismissed and appeal of the assessee is allowed.
Order pronounced in the open court on this 04/10/2019