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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S.PANNU & SHRI SANDEEP GOSAIN
PER G.S. PANNU,AM:
The captioned cross appeals filed by the assessee and Revenue pertaining to assessment year 2010-11 are relating to an order passed by DCIT, 5(1), (in short the Assessing Officer) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short the Act) dated 29/11/2014, which is in conformity with the direction of the Dispute Resolution Pannel-1, Mumbai (in short “the DRP”) dated 24/10/2014.
The Grounds of appeal raised by the assessee as well as Revenue read as under:-- “On the facts and circumstances of the case and in law, 1. The learned Assessing Officer ('AO') has erred in completing the assessment of appellant at INR 1,97,44,90,852 (as against returned income of INR 53,53,12,560) vide assessment order under section 143(3) r.w.s 144C of the Income-tax Act, 1961 ('the Act') after considering the adjustments made by learned Transfer Pricing Officer ('IPO') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the learned Dispute Resolution Panel ('DRP').
GROUNDS RELATING TO TRANSFER PRICING MATTERS:
The learned TPO / AO / DRP have erred in making an addition of INR 88,02,54,695 to the total income (as detailed below) of the appellant in respect of various international transactions entered into by the appellant with its associated enterprises ('AE').
S.No. Particulars Amount (INR) 1. Adjustment in respect of IT -enabled services 4,47,84,556 2. Adjustment in respect of subscription and redemption 63,64,02,739 of preference share capital 3. Adjustment in respect of guarantee commission on 19,90,67,400 intra-group guarantees extended by the applicant Total 88,02,54,695
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The learned TPO / AO / DRP have erred in not accepting the economic analysis undertaken by the appellant in respect of the impugned international transactions entered into by the appellant with its AEs in accordance with provisions of the Act and modifying the economic analysis for determination of arm's length price ('ALP') of the said transactions to hold that the same are not at arm's length.
Adjustment in respect of provision of IT-enabled services ("ITeS"): 4. The learned TPO / AO / DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing ('IP') documentation; and
b. Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2009-10 which was not available to the appellant at the time of complying with the Indian TP documentation requirements.
The learned TPO / AO / DRP have erred in applying inappropriate comparability criteria such as 'turnover less than INR 1 crore' and 'different accounting year' for rejecting certain comparable companies selected by the appellant in its TP documents in respect of international transaction pertaining to provision of IT enabled services.
6.The learned TPO / AO / DRP have erred in erroneously rejecting certain companies from and adding certain companies to the final set of comparables for bench marking the international transaction pertaining to provision of IT-enabled services on an ad-hoc basis, thereby resorting to cherry picking of comparables for benchmarking the said transaction.
The learned TPO / AO / DRP have erred in considering foreign exchange gains / losses arising from business operations as non-operating nature while computing operating margins of the appellant as well as comparable companies.
The learned TPO / AO / DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the appellant.
The learned TPO / AO / DRP have erred in not making suitable adjustments to account for differences in the working capital employed by the appellant vis-a-vis the comparable companies.
The learned TPO / AO / DRP have erred in not making suitable adjustments to account for differences in risk profile of the appellant vis-a-vis the comparable companies.
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The learned TPO / AO / DRP have erred in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act, while making adjustment to the value of international transactions of the appellant, applicable as per law.
Adjustment in respect of issue and redemption of preference shares:
The learned TPO / AO / DRP have erred in re-determining the arm's length compensation pertaining to subscription and redemption of preference share capital by re-characterizing the same as interest-free loan and thereby imputing interest thereon.
Without prejudice to the above, the learned TPO / AO / DRP have erred in considering Indian bond rates for the purpose of computing interest on the alleged loan instead of LIBOR based rate.
Adjustment in respect of corporate guarantee:
The learned TPO / AO / DRP have erred in re-determining the arm's length compensation for corporate guarantees extended by appellant on behalf of its AEs and confirming an adjustment of INR 19,90,67,400 on this account.
Without prejudice to above, the learned TPO / AO / DRP have erred in making double addition on account of guarantee commission, since the appellant has cumulatively recovered guarantee commission from its AEs in AY 2012-13 at 1 percent including guarantee commission for AY 2010-11;
Without prejudice to above, if the addition of on account of guarantee commission is upheld in the year under consideration, the guarantee commission offered to tax in AY 2012-13 should be excluded from the taxable income.
GROUNDS RELATING TO CORPORATE TAX MATTERS:
The learned AO / DRP have erred in making an addition of INR 58,96,32,789 to the total income (as detailed below) of the appellant on account of non-transfer pricing related disallowances.
S.No. Particulars Amount (INR) 1. Disallowance of carry forward and set-off of 49,25,34,311 unabsorbed depreciation allowance 2. Disallowance of interest expense under section 11,380 40(a)(ia) paid to non-banking financial institution 3. Disallowance of interest expenses claimed 5,37,76,428 4. Addition of exchange gain on repayment of laon 4,33,10,670
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Total 58,96,32,789
[[
The learned AO / DRP have erred in not upholding the claim of the appellant for carry forward and set-off of unabsorbed depreciation allowance (INR 40,22,26,882) and business loss (INR 9,03,07,429) aggregating to INR 49,25,34,311: a. by not making a due examination in accordance with law as to whether there was a change in the beneficial shareholding of the assessee beyond the limits specified under section 79; b. by not considering that the claim for carry forward and set-off of unabsorbed depreciation allowance aggregating to INR 40,22,26,882 is not regulated by the provisions of section 79 of the Act.
The learned AO / DRP have erred in making a disallowance of current year loss aggregating to INR 22,48,71,471 on account of redemption of preference shares. a. The learned AO / DRP has failed to give due regard to the express scheme of section 92C / Chapter X-B of the Act, whereby no power is vested in the learned AO to enhance or modify the findings of the learned TPO. b. The learned AO / DRP has failed to follow the law of the land that the deeming fiction under the Act is limited for the purpose it is so made and the same does not permeate through the entire assessment.
c. The learned AO / DRP has travelled beyond the provisions of the Act in seeking to re-characterize lawfully consummated transaction(s), where no such power, express or implied, is conferred under the Act.
The learned AO / DRP have erred in making an addition by imputing a notional interest expense (amounting to INR 11,380) arising out of lease payments which is not covered under section 194A of the Act without appreciating the fact that the payee would have offered the payment to tax in its return of income.
The learned AO /DRP have erred on facts and in law in disallowing interest expense, amounting to INR 5,37,76,428, claimed by the appellant by holding that the appellant has not established the commercial expediency for advancing interest free loans to sister concerns I subsidiaries: a. the AO/DRP failed to consider the factual matrix and the circumstances of the case, evidencing the fact that appellant has extended loans from its own funds;
b. follow the law laid down by the Hon'ble Supreme Court and the Jurisdictional High Court on allowability of interest on loans made to a sister concern, without interest, where commercial expediency is prima facie evidenced in the transaction.
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The learned AO has erred on facts and in law in making an addition of exchange gain on redemption of preference shares aggregating to INR 43,310,670 to the business income: a. The learned AO has failed to give due regard to the express scheme of section 92C I Chapter X-B of the Act, whereby no power is vested in the learned AO to enhance or modify the findings of the learned TPO.
b. The learned AO has failed to follow the law of the land that the deeming fiction under the Act is limited for the purpose it is so made and the same does not permeate through the entire assessment.
c. The learned AO has travelled beyond the provisions of the Act in seeking to re- characterize lawfully consummated transaction(s), where no such power, express or implied, is conferred on him by the Act.
d. The learned AO failed to follow the law laid down by the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. vs CIT (116 ITR 1) and CIT vs Woodward Governor India P. Ltd. (312 ITR 254) that where gain accrues on foreign currency held as a capital asset, the same would be of capital nature.
The learned AO I DRP have erred in charging interest under section 234B and section 234C of the Act.
The learned AO I DRP have erred in giving short credit of TDS deposited to the appellant, which was claimed by the appellant in its return of income.
The learned AO I DRP have erred, by initiating penalty proceedings under section 271(1)(c) of the Act without recording any adequate reasons for such initiation. Each of the ground is referred to separately, which may kindly be considered independent of each other.
Grounds of Revenue’s Appeal:-
1 " Whether on the facts and circumstances of the case and in law, the Hon’ble DRP erred in fact & Law while reducing the rate of Corporate guarantee fee when the same was arrived at by the TPO by adopting a scientific approach to apply differential in the corresponding credit rating of assessee and the AE"
2 The appellant prays that the direction of the Hon’ble DRP-I on the above grounds be set aside to the file of the AO or confirm the order of the AO. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
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A copy of the order of the Directions of the DRP-I, Mumbai was received on 31.10.2014 by the erstwhile Assessing Officer i.e DCIT 5(1)(1). The Final assessment Order has been passed by DCIT 5(1)(1), Mumbai on 27.11.2014. Accordingly the last date for filing of appeal was 27/01/2015. Consequent to restructuring the case records was transferred to the AO of this charge i.e. DCIT 6(1)(1), Mumbai on 23.01.2015 and following three days were public holidays. The comments of TPO were obtained on 25.02.2015 by the AO. Thus the delay is regretted and therefore it is humbly requested that the delay may kindly be condoned.
Before we proceed to address the respective Grounds of appeal, we may briefly refer to the background of the case. The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing Customer interaction (customer acquisition, customer services), Back-office (Receivables management and data management) recovery and collection services for its customers. For the assessment year under consideration, it filed a return of income on 14/10/2010 declaring an income of Rs.66,34,88,210/-, which was subsequently revised to Rs.53,53,12,560/-. In the ensuring scrutiny assessment finalized under section 143(3) r.w.s. 144C(13) of the Act dated 29/11/2014, the total income has been assessed at Rs.197,44,90,852/-. The assessment so finalized by the Assessing Officer was, inter-alia, in conformity with the arm's length price of the international transactions entered by the assessee with associated enterprises, which was determined by the Transfer Pricing Officer in an order passed under section 192CA(3) of the Act dated 13/01/2014; and, also in accordance with the directions passed by the DRP-1, Mumbai dated 24/10/2014. Not being satisfied with the order of the Assessing Officer, assessee is in appeal before us on the above said Grounds of appeal, whereas the Revenue in its cross-
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appeal is aggrieved by the directions of the DRP in the context of arriving at the arm’s length rate of the Corporate Guarantee Fee. In this background, the rival Counsels have been heard and the relevant material perused.
First, we may take up the appeal of the assessee. In so far as the Ground of appeal No.1 is concerned, the same is general in nature and does not require any specific adjudication. The Grounds of appeal No.2 & 3 relate to an addition of Rs.88,02,54,695/- made on account of transfer pricing adjustment in respect of three categories of international transactions entered by the assessee with its associated enterprise namely, IT Enabled Services(ITEs), subscription and redemption of Preference share capital; and, Guarantee commission on intra-group guarantees extended by the assessee. The issues raised in Ground of appeal No.2 & 3 are general in nature, and the specific issues have been raised in subsequent Grounds.
4.1 We may first take up the issues raised by the assessee in the context of the adjustment of Rs.4,47,84,556/- made in respect of ITE Services segment, and such issues are manifested in Grounds of appeal No.4 to 11. In the context of international transaction of ITE services, the relevant facts can be summarized as follows. Assessee is engaged in providing IT Enabled Business Process Outsourcing Services(BPO) to its associated enterprises and third parties. Apart from the aforesaid, during the year assessee also rendered Receivable management services to its associated enterprises. In its Transfer Pricing Studies, assessee had benchmarked the said transactions separately by using
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the Transactional Net Margin Method as the most appropriate method and Operational Profit/Operational Cost(OP/OC) was used as the Profit Level Indicator (PLI). The assertions of the assessee were that having regard to the margin of the comparable concerns selected, the margins of the assessee in the respective segments of Provision of ITE services and Receivable Management Services were favourable and thus, the stated value of the transactions was at an arm's length price. The Transfer Pricing Officer, however, merged the aforesaid two segments into a single ITE services segment and determined the assessee’s margin at 20.11% on cost. Though the Transfer Pricing Officer did not disagree with the selection of TNM method as the most appropriate method but he has introduced some new filters, modified the threshold limit of various filters and/ or other comparability criteria applied by the assessee and arrived at the following final set of six comparables:-
S.No. Name of comparable Operating Margin (OP/OC)% 1. Accentia Technologies Ltd. 43.07 2, Acropetal technologies Ltd. 22.22 3. Cosmic global Ltd. 14.97 4. E 4e Healthcare Business Services Pvt. Ltd. 19.52 5. Informed Technologies India Ltd. 26.15 6. Infosys BPO Ltd. 31.20 Total 157.13 Mean 26.18
The average margin of the said comparables arrived at 26.18% was computed as arm’s length margin and after comparing it with assessee’s margin, an amount of Rs.4,47,84,566/- was determined as an
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adjustment that was required to be made to bring the stated value of the transactions to their arm's length price. The DRP has also affirmed the ultimate decision of the Transfer Pricing Officer, and accordingly, the Assessing Officer has made an addition of Rs.4,47,84,566/- in the final assessment order passed under section 143(3) r.w.s. 144C(13) of the Act.
4.2 Although on this aspect assessee has raised multiple Grounds but the short point that has been argued before us is for inclusion and exclusion of certain concerns in the final set of comparables, which we shall discuss hereinafter in seriatim. The first plea of the assessee is for exclusion of Accentia Technologies Ltd. from the final set of comparables on the ground that the said concern is functionally dissimilar; that it has undergone extraordinary events during the year, i.e. amalgamation; and, the presence of significant intangibles. According to the assessee company, the said concern is functionally different because the said concern is a software and software products provider and, therefore, it is incomparable to assessee’s activity of ITE services. Secondly, it is pointed out that during the year under consideration, a company named, Asscent Infoserve Private Limited has merged with the said concern and, therefore, the financial results of the said concern are impacted on account of such exceptional events. It is also sought to be pointed out that the said concern had acquired certain companies for SaaS Technology, which forms a part of its assets base which serves the purpose of providing niche services to the customers, which is quite different from the routine ITE services provided by the assessee. According to the Ld. Representative,
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assessee is employing routine tangible assets, and does not own any significant intangibles while rendering ITE services, and therefore, Accential Technologies Limited is incomparable to assessee’s tested segment of Providing ITE services to its associated enterprises.
4.3 In this aspect, the Ld. Departmental Representative has opposed the plea of the assessee by relying on the discussion made by the Transfer Pricing Officer in para 10.4 of his order, whereby it is sought to be pointed out that the said concern has been rightly excluded. Firstly, it is sought to be pointed out that the said concern was considered as a comparable by the assessee itself and, therefore, there is no justification for the assessee to again seek its exclusion. Secondly, with regard to the merger of Accent Infoserve Private Ltd., with the said concern, the Ld. Departmental Representative pointed out that there was nothing on record to show that the said event had impacted the comparability of the said concern with the asessee’s tested activities, which are in the field of a classical BPO. The Ld. Departmental Representative pointed out that the Transfer Pricing Officer had rejected the said plea by relying on the decision of the Mumbai Tribunal in the case of Willis Processing (India) Pvt. Ltd.,ITA No.2152/Mum/2014 on the ground that, where the merger of two functionally similar concerns took place, then the event of merger by itself cannot be taken as a factor for exclusion of the said concern from the list of comparables. In this context, observation of the Delhi Bench of the Tribunal in the case of Agilent Technologies International Private Limited, ITA No. 1837/Del/2014 have also been referred to show that in
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such situation, a concern can be excluded only if, because of merger or demerger, the said concern becomes functionally different.
4.4 We have carefully considered the rival submissions. Though the said concern has been excluded from the final set of comparable in assessment year 2009-10 also by the Tribunal vide order in ITA No.1213/Mum/2014 dated 27/07/2015(supra), so however, the Ld. Representative for the assessee had pointed out that the reason for exclusion for assessment year 2009-10(supra) is not valid, in the instant assessment year. Primarily, in the instant year, the exclusion has been sought on the ground that certain extraordinary events have taken place during the financial under consideration namely, merger of Accent Infoserve Private Ltd. with the assessee company. Factually speaking, the said event is not disputed by the Revenue, but the case made out by the Revenue is that the said event of merger does not defeat the comparability of the said concern as no effect on financial results has been demonstrated. In principle, we have no quarrel with the proposition being advanced by the Revenue because the merger/demerger by itself would not render a concern dissimilar unless it is shown that such an exceptional or extraordinary event had impacted its comparability. So however, in this context of exclusion of Accentia Technologies Ltd., a reference may be made to the decision of the Hyderabad Bench of the Tribunal in the case of M/s. Zavata India Pvt. Ltd. vs. DCIT, in ITA No.473/HYD/2015 dated 29/07/2015 for assessment year 2010-11, wherein the Tribunal has confirmed the exclusion of the said concern on the ground of the impact on the financial results. In fact, in the case of Zavita India Pvt. Ltd.(supra), the
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Tribunal was considering a situation, where the Assessing Officer had excluded the said concern after being directed by the DRP to examine whether any extraordinary event had effected the financial results. The Tribunal noticed that the Assessing Officer had excluded the concern from the list of comparables after carrying out the verification directed by the DRP. In this background, the Tribunal affirmed the exclusion of the said concern from the final set of comparables. To the similar effect is the judgment of the Delhi Bench of the Tribunal in the case of Techbooks International Pvt. Ltd. vs. DCIT, in ITA No.240/Del/2015 dated 06/07/2015 for assessment year 2010-11. In our considered opinion, the decision of the Hyderabad Tribunal in the case of M/s. Zavata India Pvt. Ltd.(supra)clearly dispels the stand of the Revenue in the context of the instant assessment year. Therefore, the said concern is excludable on the ground of existence of an extraordinary event in this year, which has had an effect on its financial result, thereby impacting its comparability with assessee’s tested segment of IT enabled services. Thus, on this short point, we uphold the plea of the assessee for exclusion of Accentia Technologies Ltd. from the final set of comparables.
The next plea of the assessee is for exclusion of M/s.Cosmos Global Ltd. from the final set of comparables. The Ld. Representative for the assessee justified the plea for exclusion of Cosmos Global Limited on the ground that the business model of the said concern is significantly different from that of the assessee company. By referring to the relevant extracts of the Annual Report of the said concern, copy of which has been placed in the Paper Book at pages 420 to 434, it is
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sought to be pointed out that it has incurred significant expenditure on translation charges, which shows that it has outsourced a major portion of its activities, which is not so in the case of the assessee. Apart therefrom, it is pointed out that in assessment year 2009-10, the said concern has been excluded by the Tribunal also and in this context, a reference has been made to para 10(ii & iii) of the order of the Tribunal dated 27/7/2015(supra).
5.1 On the other hand, the plea of the Ld. Departmental Representative is primarily in support of the reasoning advanced by the Transfer Pricing Officer, which is to the effect that the assessee had itself included it as a comparable in its initial Transfer Pricing Study.
5.2 We have carefully considered the rival submissions. In assessment year 2009-10(supra), the said concern has been excluded from the final set of comparables on the ground that there was a significant difference in business strategies like outsourcing of the entire service segment, etc. In so far as the fact-position is concerned, in the instant assessment year also Revenue has not doubted the difference in the business strategies, so however, the plea raised is that the said concern has been included by the assessee itself as a comparable concern in its initial Transfer Pricing Study.
5.3 In this context, the Ld. Representative for the assessee pointed out that initially the said concern was included as a comparable based on the data available in public domain; and, subsequently the said concern was sought to be excluded at the time of proceedings before the Transfer Pricing Officer itself based on the data then available in
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public domain. In this context, in our considered opinion, there cannot be an absolute proposition that once an assessee has included or excluded certain concerns from its list of comparables, it is thereafter precluded from contesting otherwise; no doubt where an assessee has included or excluded a concern from its list of comparables, and it seeks a change in its position, then there has to be justifiable and bonafide reasons for doing the same. In the present case, in so far as the exclusion of Cosmos Global Limited is concerned, it is quite clear that it has been found to be incomparable by the Tribunal in assessment year 2009-10 on account of the fact that it is operating with a different business model. The assessee has sought to explain the initial inclusion of the said concern on account of non-availability of the relevant data, which came in public domain subsequently. In any case, we find that the exclusion of Cosmos Global Limited has been sought by the assessee before the Transfer Pricing Officer itself, which clearly suggests that the assessing authority was in a position to adequately and appropriately carry out the necessary verification. Without finding any fault on the merit or the bonafides of the exclusion, the action of the Transfer Pricing Officer in merely shutting out assessee’s plea is not justified. Therefore, considering the entire conspectus of the facts and circumstances of the case we deem it fit and proper to uphold the plea of the assessee for exclusion of Cosmos Global Limited from the final set of comparables.
The next plea of the assessee is for exclusion of Infosys BPO Limited from the final set of comparables primarily on the ground that the array and scale of operations of the said concern is quite
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incomparable to assessee’s activity of providing routine BPO services to the associated enterprise in the nature of data collection and analysis. The Transfer Pricing Officer has included said concern on the ground that it is engaged in similar functions and further, that the said concern was a part of set of comparables initially selected by the assessee itself.
6.1 Before us, the Ld. Representative for the assessee pointed out that the said concern is engaged in providing high end integrated services by assisting its clients in improving their competitive position by managing their business processes. The Ld. Representative for the assessee referred to the extract from the website of the said concern as also its Annual Report to point out that it is engaged in rendering of a wide range of BPO services in the nature of business platforms, customer service outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfilment, sourcing and procurement outsourcing, etc. It is also pointed out that it operates at a large scale of operations with a turnover of Rs.1126.63 crores, whereas the turnover of the assessee is quite small in comparison. By referring to the Annual Report, it has also been sought to be pointed out that during the year under consideration it has acquired a concern Mc Carnish Systems LLC, which is an exceptional event. It has also been pointed out that the said concern has a very high value of goodwill, which is quite incomparable with the scale of operations of the assessee company. It is pointed out that assessee is rendering routine services and is being remunerated at cost plus model basis, and thus the said concern is incomparable.
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6.2 Before us, the Ld. Departmental Representative pointed out that though assessee has raised the plea of excluding the said concern before Transfer Pricing Officer but no such objection was raised before the DRP and, therefore, this being a new plea, it should not be admitted by the Tribunal.
6.3 We have carefully considered the rival submissions. In so far as the plea of the Ld. Departmental Representative to the effect that the exclusion of the said concern has not been raised before the DRP is concerned, the Ld. Representative for the assessee pointed out that the claim is based on the subsequent decision of the Tribunal on this aspect and that the plea be judged on its merits. Apart therefrom, it is also sought to be pointed out that no additional ground is required to be raised because the plea for exclusion of Infosys BPO Limited is subsumed in Ground of appeal No.6, which is quite omnibus. In our considered opinion, we do not find any merit in the objection raised by the Ld. Departmental Representative inasmuch as, assessee resisted the inclusion of the said concern in the list of comparables even in the course of proceedings before the Transfer Pricing Officer. The factum of assessee not having raised any objection before the DRP does not preclude it from raising it before the Tribunal because it is not a plea which is alien to the Revenue, since it was very much before the Transfer Pricing Officer hitherto. In so far as the merits of the exclusion of Infosys BPO Limited is concerned, it is quite clear that whereas is engaged in providing routine BPO services to its associated enterprise, the Infosys BPO Limited is engaged in providing high end integrated services. Moreover, the said concern has a significantly large scale of
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operations and a high brand value, which makes it quite incomparable with the assessee on a qualitative basis. It has also been pointed out before us that in the case of Techbooks International Pvt. Ltd.(supra) for the very same assessment year, the said concern has been found to be incomparable on the ground of exceptional event reflected by the acquisition of Mc Carnish LLC. during the year under consideration . Even otherwise, in our considered opinion, the assessee concern is rendering routine services and is being remunerated on cost plus basis and it is incomparable to Infosys BPO Limited, which is ostensibly engaged in a variety of services and is admittedly able to charge a premium pricing for its services on account of its brand value and market reach. Therefore, we uphold the plea of the assessee for exclusion of Infosys BPO from the final set of comparables.
The next plea of the assessee is for inclusion of R Systems International Limited (BPO-Seg.) in the final set of comparables. The Transfer Pricing Officer rejected the aforesaid concern on the ground that it was following a different financial year ending on 31/12/2009 instead of 31/3/2010 and, therefore, it was not a good comparable. The DRP has also affirmed the rejection on the reasoning given by the Transfer Pricing Officer. Even before us, the Ld. Departmental Representative has supported the stand of the Transfer Pricing Officer by placing reliance on the decision of the Mumbai Tribunal in the case of Honeywell Automation India Ltd. ITA No.4/PN/08 dated 10/02/2009.
7.1 On the other hand, the Ld. Representative for the assessee pointed out that though the said concern was following a different
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financial year, but the data for each of quarters was available in public domain and, therefore, the data corresponding to the financial year of the assessee company was available in relation to R Systems International Limited (BPO-Seg.) also. In this context, our attention has been invited to the decision of the Tribunal in assessee’s own case for assessment year 2009-10(supra), wherein vide order dated 27/7/2015(supra), similar objection of the Revenue in the context of inclusion of R-Systems International Limited (BPO-Seg.) has been rejected in the following words:
“(v) R Systems International Ltd. (segmental):
....... If there are no extraordinary events and factors in these periods then proportionate operating margins on operating cost can be very well taken for benchmarking the margins. We find no fault for reworking the margin on the basis of adding the three months and excluding three months to work out the proportionate working margin if the financial data are duly audited and are available in the public domain, of course with a rider that during that period there are no other factors affecting the operating margin. Thus, we accept the contention of the Ld. Counsel that this company should be included in the list of final comparables for benchmarking the margins.”
7.2 We have carefully considered the rival submissions. Undoubtedly, the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction ought to be the data relating to the financial year in which the international transaction has been entered into. The aforesaid is the clear requirement of Rule 10(B)(4) of the Income Tax Rules, 1962(‘the Rules’). For the said reason, the data comprised in the financial year ending on 31/12/2009 of R- Systems International Limited (BPO-Seg.) cannot be used for the purpose of comparability with assessee’s tested segment. So
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however, the plea of the assessee is that the data for all the quarters is available in public domain and, therefore, on that basis it is possible to construct data corresponding to the instant financial year of the assessee company and, therefore, it would meet the test of even Rule 10(B)(4) of the Rules. The said approach of the assessee has been approved by the Tribunal in assessment year 2009-10(supra) and we find that it is also supported by the judgment of the Hon’ble Punjab & Haryana High Court in the case of CIT v. M/s. Mercer Consulting (India) Pvt. Ltd. Gurgaon, ITA No.101 of 2015(O&M) dated 24th August, 2016. The following discussion in the decision of the Hon’ble High Court in the context of R-Systems International Limited (BPO-Seg.) itself is relevant:
“27. The TPO excluded the case of R-Systems International Limited from the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of R-Systems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapang Lloyd Global Services Ltd. 2013-TH-68-ITATMUM-TP in which it had been held that a company with a different financial year ending cannot be compared. 28. We are unable to agree with the decision of the Transfer Pricing Officer and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding period, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP.
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As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- “10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into”. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule (4) of Rule 10B.” 7.3 In the above background, we are, therefore, inclined to uphold the plea of the assessee for inclusion of R-Systems International Limited (BPO-Seg.) in the final set of comparables.
7.4 In so far as the plea of the Ld. Departmental Representative based on the decision of Pune Tribunal in the case of Honeywell Automation India Ltd.(supra) is concerned, we find that the same has been rendered on a different footing. The Pune Bench of the Tribunal was considering the exclusion of a concern on the ground that the financial year comprised of 18 months ending as on 31/3/2005 and
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there was no separate data available for 12 months ending as on 31/03/2004. In this background, the Tribunal accepted the plea to exclude such a concern from the list of final comparables. Quite clearly, the facts in the instant case in relation to the R-Systems International Limited (BPO-Seg.) are quite different. Further, it may also be observed that the situation before us is also not liable to be governed by the ratio of the judgment of the Hon'ble Bombay High Court in the case of PTC Software (I) Pvt. Ltd.,75 taxmann.com 31(Bom). In the case before the Hon'ble Bombay High Court, Revenue was contesting the exclusion of a concern, which had been excluded by the Tribunal on the ground that it was following a different financial year. The Revenue contended befoe the Hon'ble High Court that the difference in the two financial years was only of three months, which could be ignored. The Hon'ble High Court rejected the aforesaid plea of the Revenue and upheld the exclusion of such a concern from the final list of comparable. Notably, there was no plea before the Hon'ble High Court that the data for the relevant 12 months of the concern was available in public domain and, therefore, the situation before the Hon'ble High Court was quite different from what is before us. In fact, the situation before us is identical to that considered by Hon'ble Punjab & Haryana High Court in the case of M/s. Mercer Consulting (India) Pvt. Ltd. Gurgaon(supra) and in this view of the matter we uphold the plea of the assessee for inclusion of M/s. Mercer Consulting (India) Pvt. Ltd. Gurgaon, in the final set of comparables.
7.5 At the time of hearing, it was stated by the Ld. Representative for the assessee that if Accentia Technologies Ltd., Cosmos Global Limited
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and Infosys BPO Ltd. are excluded and R Systems International Limited( BPO-Seg) is included in the final set of comparables, then the margin of the comparables shall be within +/- 5% range of the assessee’s margin reflecting that the transactions of the assessee of providing IT enabled services to the associated enterprise are at an arm’s length price and does not require any further adjustment. Since assessee has succeeded on the aforesaid plea, we find no reason to adjudicate other pleas on this aspect, which are kept open. Accordingly, the Assessing Officer/Transfer Pricing Officer is directed to re-determine the arm’s length price of the assessee in the above light. Thus, on this aspect assessee succeeds.
We may now take up Grounds of appeal No.12 & 13, which relate to transfer pricing adjustment of Rs.63,64,02,739/- in respect of subscription and redemption of Preference Share capital.
8.1 Briefly put, the relevant facts are that during the year under consideration assessee had subscribed to 1,85,03,468 redeemable Preference shares of Essar Services Mauritius and also redeemed 1,81,00,000 of such shares at par. The Assessing Officer notes that Essar Services Mauritius was an associated enterprise and that the said shares were non-cumulative and redeemable on par without dividend. The Transfer Pricing Officer also observed that assessee had a running account with the said associated enterprise, in terms of which monies were being advanced as and when the need arose. Considering the nature and frequency of transactions in the running account with the associated enterprise, the Transfer Pricing Officer inferred that the
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subscription and redemption of Preference shares was in the nature of loan and not as subscription for investment in shares. The Transfer Pricing Officer, thereafter, applied the arm’s length rate of interest chargeable on the amount given to the associated enterprise in the shape of Preference shares. The DRP has also affirmed the approach of the Transfer Pricing Officer in re-characterizing the transaction of Preference shares into a loan and charging of interest thereon. In this manner, assessee is in further appeal before us.
8.2 Before us, it was a common point between the parties that an identical situation has been considered by the Tribunal in assessee’s own case for assessment year 2009-10, wherein it has been held that the Transfer Pricing Officer cannot disregard the apparent transaction and substitute it with a transaction as per his own perception. The following discussion in the order of the Tribunal dated 27/07/2015(supra) is relevant in this context:
“ 27. We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. The TPO has re-characterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as Loan transaction. The TPO /Assessing Officer cannot disregarded any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand
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the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon’ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August, 2012 and by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed.” 8.3 At the time of hearing the Ld. Representative for the assessee also placed reliance on the judgment of the Hon'ble Bombay High Court in the case of Dexiskier Dhabol SA, (supra), which has been referred by the Tribunal in the assessee’s own case for assessment year 2009- 10(surpa), while holding the issue in favour of the assessee.
8.4 The Ld. Departmental Representative has not disputed the fact that the instant issue is covered by the decision of the Tribunal for assessment year 2009-10(supra), which continues to hold the field as it has not been altered by any higher authority. As a consequence, following the aforesaid precedent, the action of the Assessing Officer is set-aside and assessee succeeds in Grounds of appeal No.12 & 13.
We may now take up take up Grounds of appeal No.14 to 16, which relate to transfer pricing adjustment of Rs.19,90,67,400/- , made in respect of the arm's length fee for the Corporate Guarantee extended by the assessee on behalf of its associated enterprises.
9.1 In this context, the relevant facts are that during the year under consideration the Transfer Pricing Officer noticed that assessee had provided guarantee to banks on behalf of associated enterprises as per
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the details tabulated in para 5.1 of his order. The total value of guarantees given by the assessee on behalf of its associated enterprises was Rs.670,57,31,000/-. The assessee did not treat the transaction of providing Corporate Guarantee as an international transaction within the meaning of section 92B of the Act. However, the Transfer Pricing Officer disregarded the said approach and instead held that assessee ought to have charged guarantee fee from its associated enterprises as it involved providing benefit to the associated enterprises. The Transfer Pricing Officer proceeded to determine credit ratings for the assessee as well as the concerned associated enterprises and came to conclude that guarantee fee equivalent to 4.43% of the outstanding amount of loans from the banks ought to have been charged by the assessee from its associated enterprises. Accordingly, the Transfer Pricing Officer worked out an adjustment of Rs.29,39,56,194/- on this aspect. The Assessing Officer proposed the said addition in its draft assessment order dated 14/02/2014. The DRP, in principle, agreed with the approach of Transfer Pricing Officer but differed with the arm’s length rate of guarantee fee. The DRP following its directions in the assessee’s own case for earlier assessment year of 2009-10, directed that the guarantee fee be computed at 3% per annum and accordingly, in the final assessment order passed under section 143(3) r.w.s. 144C(13) of the Act dated 29/11/2014, the adjustment on account of guarantee fee has been reduced to Rs.19,90,67,400/- from Rs.29,39,56,194/-. Not being satisfied, assessee is in appeal before us by way of Grounds of appeal No.14 to 16, whereas Revenue has contested the decision of the DRP to reduce the arm's length rate of the
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guarantee fee in its cross appeal. Since the cross-grounds relates to the same issue, they have been taken up together.
9.2 At the time of hearing, the Ld. Representative for the assessee has raised varied arguments, inter-alia, contending that providing of guarantee is not an international transaction within the meaning of section 92B of the Act; that it was in the nature of shareholder activity and did not constitute any intra group services, so far as the instant assessment year is concerned. Apart therefrom, a pertinent point has been brought out to say that subsequent to the impugned assessment, on a suo-moto basis, assessee has recovered guarantee fee @1% of outstanding guaranteed amount from its associated enterprises for the period right from financial year 2007-08 onwards. It has been pointed out that the said guarantee fee recovered has been recognized in the financial statements for the previous year relevant to the assessment year 2012-13, copies of which have been placed in the Paper Book at pages 561 to 565. It was, therefore, contended that without prejudice to the assessee’s plea that no adjustment on account of guarantee fee was sustainable, it is canvassed that on account of the subsequent recovery no further addition is warranted. The Ld. Representative for the assessee pointed out that similar situation had prevailed before the Tribunal in assessment year 2009-10 also and it has been directed that the guarantee fee be benchmarked by taking the rate @ 1% of the outstanding guaranteed amount.
9.3 The Ld. Departmental Representative has not disputed the factual matrix brought out by the Ld. Representative for the assessee,
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but contended that the action of the Transfer Pricing Officer/Assessing Officer was justified.
9.4 Having considered the rival stands, we find that under similar facts and circumstances, the issue of charging of guarantee fee has been adjudicated by the Tribunal in assessee’s own case for assessment year 2009-10(supra) in the following words:-
“ 22. We have heard the rival submissions and also perused the relevant material placed on record. The assessee has given corporate guarantee on behalf Aegis USA amounting to Rs. 666,46,80,000/- and on behalf of Essar Services, Mauritius for Rs. 75,73,50,000/-. Before us, the Ld. Counsel had submitted that in the subsequent years the assessee has suo moto entered into Guarantee Agreements with its AE pursuant to which it has charged guarantee commission of 1% from its AE, w.e.f. financial year 2007-08 for a period of five years. The said guarantee commission recovered by the assessee has been recognized in the financial statement by the assessee for the assessment year 2012- 13 and has also been offered for tax in that year. In wake of these fact and without going into the other arguments of the assessee and also looking to the fact that the Tribunal in various cases has accepted guarantee commission chargeable between 0.5% to 1%, we hold that guarantee commission of 1% should be chargeable. Here in this case, assessee itself has agreed to charge guarantee commission @ 1% of the outstanding guaranteed amount, accordingly, we also hold that a guarantee commission should be benchmark by taking the rate of 1% of the outstanding guaranteed amount in line with the consistent views taken by the coordinate Benches, from its AE and adjustments should be made accordingly. Thus, grounds 12 & 13 as raised by the assessee are treated as partly allowed.” 9.5 Following the aforesaid precedent, we direct the Assessing Officer/Transfer Pricing Officer that the guarantee fee be benchmarked by adopting the rate at 1% of the outstanding guaranteed amount for maintaining consistency with the precedent in the assessee’s own case. Thus, in so far as Grounds of appeal No.14 to 16 are concerned, they are partly allowed and the Grounds raised by the Revenue in its cross- appeal are dismissed.
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The next Ground of appeal No.17 is general in nature and does not require any specific adjudication, therefore, the same is dismissed.
In Ground of appeal No.18, the grievance of the assessee is against the action of the lower authorities in denying carry forward and set-off of unabsorbed depreciation of Rs.40,22,26,882/- and business loss of Rs.9,03,07,429/-.
11.1 In this context, the brief facts are that in its return of income for assessment year 2010-11, assessee claimed carry forward and set-off of unabsorbed depreciation and business loss totalling to Rs. 32,32,55,033/- and Rs.13,86,21,348/-. Out of this, a sum of Rs.1,47,59,086/- pertained to Global Vantage Private Limited, because in terms of scheme of arrangement the BPO division of Global Vantage Private Limited was merged and vested into assessee company by the orders of the Hon'ble Bombay High Court and Hon'ble Delhi High Court dated 31/1/2008 and 04/03/2008 respectively. The said scheme of arrangement was effectuated during the financial year 2008-09 and in the return of income filed for the instant year assessee carry forward the set-off of unabsorbed depreciation of Rs.1,47,59,086/- pertaining to GVPL was claimed. Further, the BPO division of Aegis BPO Services Gurgaon Limited was merged with the assessee in the instant assessment year and as a consequence in the return of income assessee claimed carry forward and set-off of unabsorbed depreciation and business loss of the BPO division of Aegis BPO Services Gurgaon Limited of Rs.13,86,21,348/- and Rs.9,79,88,094/- respectively. The Assessing Officer on the basis of assessment order passed by the Assessing Officer
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in the case of GVPL for assessment year 2003-04 disallowed the benefit of carry forward and set-off of unabsorbed depreciation of business loss. Similarly, with respect to the unabsorbed deprecation and business loss pertaining to the BPO division of Aegis BPO Services Gurgaon Limited, the Assessing Officer restricted the claim of carry forward and set-off of unabsorbed depreciation of business loss. In nutshell, the said carry forward and set-off of unabsorbed depreciation allowance of Rs.40,22,26,882/- and Rs.9,03,07,429/- was denied by the Assessing Officer.
11.2 Before us, the Ld. Representative for the assessee pointed out that similar situation had arisen before the Tribunal in assessee’s own case for assessment year 2009-10(supra), wherein the Assessing Officer was directed to verify and allow business loss and unabsorbed depreciation pertaining to the erstwhile units, which had merged with the assessee company. The only plea of the assessee before us is that similar directions be given to the Assessing Officer in the instant year also.
11.3 The Ld. Departmental Representative has no objection to the aforesaid limited plea of the assessee.
11.4 Having considered the rival stands, we deem it fit and proper to restore the matter back to the file of Assessing Officer, who shall appropriately consider the claim of carry forward and set-off of unabsorbed depreciation and business loss in accordance with law, of- course after allowing the assessee a reasonable opportunity of being
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heard and putting forth its position on the subject. Thus, on this aspect, assessee succeeds for statistical purposes.
Now, we may take up Grounds of appeal No.19 and 22, which relate to a similar issue.
12.1 In brief, the relevant facts are that in earlier years, assessee had subscribed to the preference shares of Essar Services Mauritius and a part of such shares have been sold by the assessee during the previous year relevant to the assessment year under consideration. While computing the capital gains, assessee determined a loss of Rs.22,48,78,471/- primarily on account of indexation cost, which was claimed to be carry forward. Similarly, the assessee had credited an amount of Rs.4,33,10,670/- to the P&L account on account of exchange gain on redemption of the preference shares, which was reduced from the net profit while computing the taxable income, as the same was capital in nature. A working of the capital loss and the exchange gain arising on account of redemption of preference shares is placed at page 560 of the Paper Book.
12.2 As noted earlier, Transfer Pricing Officer had re-characterized the preference shares as being akin to giving of an interest free loan. The Assessing Officer relied upon the order of the Transfer Pricing Officer and held that there could not be any capital loss and the resultant exchange gain of Rs.4,33,10,670/- also could not be treated as capital in nature. Therefore, he assessed it as business income. The aforesaid stand has been affirmed by the DRP also.
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12.3 On both these aspects, it was a common point between the parties that similar situation prevailed in assessment year 2009-10, wherein the action of the Assessing Officer has been set-aside by the Tribunal vide its order dated 27/07/2015(supra) in the following words:-
“46. .......... This issue have already been dealt with by us, while deciding Ground no. 14, wherein transfer pricing Aegis Limited ITA No.1213/M/2014 33 adjustment made by the TPO on this account has been deleted. As already held above, such a recharacterization of transaction of subscription of preference shares into advancing of unsecured loans as done by the TPO is not correct, because the actual transactions cannot be disregarded or substituted for some other transaction other then exceptional circumstances which has not been brought on record. Nowhere the Assessing Officer or the TPO has indicated how in the instant case exceptional circumstances can be inferred from the material on record. The assessee had entered into these arrangement for specific purpose and in a capacity of shareholder was furthering its own interest by subscribing the shares. It had borrowed money from EXIM and Axis Bank at high interest rate. To reduce the interest burden, the assessee decided to pay these debt by redeeming its preference shares. Subsequently, it subscribed again for fresh preference shares in order to further its participation interest in downstream subsidiaries. This transaction cannot be recharacterized or inferred as a “loan”. The transaction of purchase and redemption cannot be held to be a loan transaction and accordingly such a loss cannot be disallowed which is purely on account of indexation. We thus, direct the Assessing Officer to work out gain/loss after treating it as a transaction of purchase and redemption of shares. Thus, Ground no. 20 is treated as allowed.” ......................................................................................................................... “60......... As admitted by both the parties, this issue is similar to Ground No. 14 and 20 and, therefore, in view of the finding given therein, we hold that the approach of the TPO as well as Assessing Officer is not correct. Such a foreign exchange gain, which has been separately accounted in the books, cannot be taxed as business income here in the case of the assessee, because same was on account of shares and therefore, same shall be considered while working out capital gain or loss as per section 48. Thus we hold that the gain arising to the assessee, shall be taxable under the head “capital gains” because the foreign exchange gain has been account of capital asset i.e. on account of shares and any such claim would also be of a capital in nature. The Assessing Officer has erred in law in making the said addition as normal business profits of the assessee. Accordingly, Ground no. 23 as raised by the assessee is treated as allowed.”
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12.4 In view of the aforesaid precedent, the action of the Assessing Officer in disallowing the current year’s loss of Rs.22,48,71,471/- and making addition on account of exchange gain amounting to Rs.4,33,10,670/- on account of redemption of preference shares is directed to be deleted.
Now, we may take up Ground of appeal No.20, which deals with a disallowance of interest expenditure of Rs.11,380/- by invoking provisions of section 40(a)(ia) of the Act. On this aspect, the Ld. Representative for the assessee conceded that section 40(a)(ia) of the Act has been justifiably invoked as assessee had not deducted tax at source under section 194A of the Act on interest payments to IBM India Private Limited and Orix Auto Infrastructure. Thus, on this aspect assessee has to fail.
14. By way of Ground of appeal No.21, assessee has challenged the decision of the lower authorities disallowing interest expenditure of Rs.5,37,76,428/-. In this context, brief facts are that the Assessing Officer observed that assessee debited a sum of Rs.18,67,04,773/- in the P&L account on account of interest expenditure, whereas assessee had advanced Rs.110,93,88,518/- to various sister concerns/ subsidiaries, either free of interest or at a rate lower than the rate at which assessee had borrowed the funds. The Assessing Officer also notes that at the end of the previous year under consideration outstanding loans were to the tune of Rs.208.83 crores, whereas the total borrowing as on 31/3/2009 was of Rs.49.73 crores.
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Similarly, it was noticed that the loans to subsidiaries/sister concerns stood at Rs.110,93,88,518/- in this year as against Rs.17,50,79,147/- as on 31/3/2009. In this background, the Assessing Officer show caused the assessee as to why the interest expenditure claimed in the P&L account be allowed in its entirety as a portion of the borrowings were diverted towards loans and advances to the subsidiaries/sister concerns. In reply, assessee pointed out that the loans were advanced to the subsidiaries/sister concerns on the basis of commercial expediency, which was a normal and acceptable business practice. It was also canvassed by the assessee that the funds advanced to the subsidiaries/sister concerns were out of own non-interest bearing funds. The Assessing Officer however, disagreed with the assessee, as according to him the advances to the subsidiaries/sister concerns were made out of borrowed funds and no commercial expediency was established. The Assessing Officer proceeded to disallow proportionate interest on the borrowed funds and accordingly a disallowance of Rs.5,37,76,428/- was made, which has also been affirmed by the DRP.
14.1 Before us, the Ld. Representative for the assessee has made various submissions on this aspect. Firstly, it is pointed out that assessee had sufficient own funds and, therefore, following the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd., 313 ITR 340(Bom), it has to be presumed that the loans and advances to the subsidiaries/sister concerns have made out of non-interest bearing funds. It has also been pointed out before us that the advances made to the subsidiaries/sister concerns are for their business consideration, which amounts to commercial
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expediency qua the assessee and thus, interest expenditure is allowable under section 36(1)(iii) of the Act. It is pointed out that the sums advanced to the subsidiaries/sister concerns were utilized by them for payment of service tax, sales tax, salary and other staff welfare expenses, etc. In this context, reliance has been placed on the judgment of the Hon’ble Supreme Court in the case of S.A. Builders vs. CIT, 288 ITR 1, to submit that where money is advanced to the subsidiaries/sister concerns for commercial expediency and the funds so advanced are utilized by the subsidiaries/sister concerns for some business purpose, then the interest expenses incurred for availing such funds is liable to be allowed. It has also been pointed out that out of the total advances of Rs.110,93,88,518/-, sums of Rs.33,35,73,000/- and Rs.44,43,98,000/- pertained to inter-corporate deposits placed with Essar Investments Ltd. and Essar Projects Ltd. respectively at the interest rate of 10%.
14.2 On the other hand, the Ld. Departmental Representative has primarily reiterated the reasoning advanced by the Assessing Officer, which we have already adverted to in the earlier paras and is not being repeated for the sake of brevity.
14.3 We have carefully considered the rival submissions. In the context of the disallowance out of interest expenditure, the initial plea of the assessee is that it is in possession of enough own non-interest bearing funds to cover the advances to the subsidiaries/sister concerns and, therefore, following the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd.
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(supra), no disallowance is called for. In this context, at the time of hearing, the Ld. Representative for the assessee had referred to the Annual Financial statements, which show that as on 31/3/2010 assessee had owned funds to the tune of Rs.842,57,77,000/- comprising of Equity Share capital, Reserve and Surplus, In contrast, the advances to the subsidiaries/sister concerns stand at Rs.110,93,88,519/- as on 31/3/2010. The aforesaid abundantly brings out that the non-interest bearing funds available with the assessee are enough to cover the amounts lent to subsidiaries/sister concerns and, therefore, in terms of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd.(supra), the presumption is that the advances to the subsidiaries/sister concerns are out of such owned non-interest bearing funds. On this count itself, we find that the disallowance of Rs. 5,37,76,428/- made by the Assessing Officer is liable to be deleted. Apart from the aforesaid plea, assessee had also pointed out at the time of hearing that the borrowings raised during the year from various banks and other financial institutions were acquired for specific utilization like acquisition of fixed assets, capital expenditure, etc. and, therefore, the same would not be presumed to have been lent to subsidiaries /sister concerns. Be that as it may, having regard to the fact-situation and the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd.(supra), we uphold the plea of the assessee for deletion of interest expenditure of Rs.5,37,76,428/-. Thus, on this aspect assessee succeeds.
In so far as Ground of appeal No.23 is concerned, the same relates to charging of interest under sections 234B and 234C of the Act ,
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which is consequential in nature and does not require any specific adjudication.
In Ground of appeal No.24, the grievance of the assessee is for grant of credit for TDS of Rs.55,89,46,412/- claimed by the assessee in its return of income as against a credit of Rs.51,37,06,620/- granted by the Assessing Officer. On this aspect, the Assessing Officer is directed to examine the plea of the assessee on the basis of the material on record and as per law. Thus, assessee succeeds for statistical purposes only.
The last Ground raised by the assessee is against initiation of penalty proceedings under section 271(1)(c) of the Act, which is premature and is hereby dismissed.
In the result, whereas appeal of the assessee is partly allowed, that of the Revenue is dismissed.
Order pronounced in the open court on 08/02/2017
Sd/- Sd/- (SANDEEP GOSAIN) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 08/02/2017 VM, Sr.PS Copy of the Order forwarded to : 1. The Appellant , 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai Guard file. 6.