Income Tax Appellate Tribunal - Mumbai
Prudential Process Management ... vs Dcit Rg 10(3), Mumbai on 13 April, 2018
आयकर अपील य अ धकरण "के" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM आयकर अपील सं./I.T.A. No. 1274/Mum/2014 ( नधारण वष / Assessment Year: 2009-10) and CO No. 102/Mum/2014 (Arising out of ITA No. 2131/Mum/2014) ( नधारण वष / Assessment Year: 2009-10) Prudential Process Management The Dy. Commissioner of Income Services India Private Limited, Tax, Range-10(3), बनाम/ Prudential Centre Avenue, Aayakar Bhavan, M. K. Road, Hiranandani Business Park, Vs. Mumbai-400 020 Powai, Mumbai-400 076 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AACCP 7204 Q (Assessee) : (Revenue) & आयकर अपील सं./I.T.A. No. 2131/Mum/2014 ( नधारण वष / Assessment Year: 2009-10) The Dy. Commissioner of Income Prudential Process Management Tax, Range-10(3), Services India Private Limited, th बनाम/ Room No. 451, 4 Floor, Prudential Centre Avenue, Aayakar Bhavan, M. K. Road, Vs. Hiranandani Business Park, Mumbai-400 020 Powai, Mumbai-400 076 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AACCP 7204 Q (Revenue) : (Assessee) Assessee by : Shri Percy J. Pardiwala/ Shri Madhur Agrawal Revenue by : Shri Jayant Kumar/ Shri V. Jenardhanan सनु वाई क तार ख / : 21.12.2017 & 23.03.2018 Date of Hearing घोषणा क तार ख / : 13.04.2018 Date of Pronouncement 2 Prudential Process Management Services India Private Limited आदे श / O R D E R Per Shamim Yahya, A. M.:
These are cross appeals by the Revenue and assessee and cross objection by the assessee arising out of the order's of the assessing officer passed u/s. 143(3) r.w.s.
144C dated 07.03.2013 for assessment year 2009-10, passed pursuant to Dispute Resolution Panel direction u/s. 92CA(3) dated 24.1.2013
2. The grounds of appeal read as under:
Grounds of appeal in Revenues appeal:
1. "On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in deleting the interest chargeable without considering that the tangible benefit has clearly been passed on to the AE by charging consideration below the ALP and therefore the same is required to be treated as interest free recoverable."
Grounds of appeal in Assessee's appeal:
Sale of Business division - Adjustment of Rs.1,04,03,50,000
1. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the action of the Assessing officer ('AO') / Transfer Pricing Officer ('TPO') of making an adjustment of Rs.
1,04,03,50,000 in respect of the transaction of sale of business division by the Appellant to an independent domestic company ('Capita India'). In doing so, the Hon'ble DRP has erred in agreeing with the AO / TPO's action of failing to appreciate that the transaction is not an international transaction. It is prayed that the said adjustment be deleted.
2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the AO / TPO in determining the value of the transaction of sale of business division by the Appellant to Capita India.
In doing so, the Hon'ble DRP has erred in agreeing with the AO / TPO's action of:
3Prudential Process Management Services India Private Limited a. Failing to appreciate that the transaction value is based on value derived by an independent valuer duly appointed by the Appellant b. Disregarding the submissions of the Appellant justifying the assumptions and acceptance of Replacement Cost Method c. Modifying the assumptions made in the valuation as per Discounted Cash Flow method d. Corroborating the revised value of transaction with Price Earning Capitalisation Value method e. Failing to appreciate the rectification application filed by the Appellant, requesting to consider the actual sales consideration received as Rs.86.99 crores as against the Rs 82.24 crores considered by AO / Transfer Pricing Officer It is prayed that an appropriate relief be granted.
3. Without prejudice to the above, on the facts and in the circumstances of the case and in Law, the Hon'ble DRP erred in not disposing the Appellant's argument against the AO's position that where an adverse judicial view is taken against the transfer pricing addition made by the TPO, an adjustment of Rs.1,040,350,000 can be alternatively made under the provisions of Section 50B of the Act.
It is prayed that no adjustment can be alternatively made under the provisions of Section 50B of the Act.
Provision of Information Technology enabled Services (ITeS) - Adjustment of Rs.14,37,35,552
4. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the AO / TPO in determining the arm's length price of the international transaction of provision of ITeS rendered to Associated Enterprises, at Rs.1,29,44,87,404 instead of Rs. 1,15,07,51,882.
5. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in failing to appreciate the rectification application filed by the Appellant, requesting either to consider pro-rata cost or total revenue (including revenue from domestic associated enterprise) for computation of the adjustment.
It is prayed that it be held that the aforesaid international transaction was at arm's length and accordingly, the AO be directed to delete the adjustment of Rs. 14,37,35,552.
4Prudential Process Management Services India Private Limited Disallowance under section 14A of the Act - Adjustment of Rs.29,01,303
6. On the facts and in the circumstance of the case and in law, the Hon'ble DRP has erred in upholding the action of the AO / TPO in computing the disallowance U/s 14A of the Act at Rs. 29,01,303.
The assessee prays that the proposed addition made by the AO be deleted.
The Grounds stated above are independent of, and without prejudice to one another.
Grounds of appeal in cross objection:
i. Without prejudice to the relief granted by the Hon'ble Dispute Resolution Panel ("DRP") in relation to the levy of interest on the difference between the amount received on sale of business division and the arm's length consideration determined by the TPO, ('secondary adjustment'), on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in not adjudicating on whether the interest to be taxed at the rate of fifteen percent or ten percent as proposed by the appellant.
It is therefore prayed that in the event, the secondary adjustment is confirmed by the Hon'ble ITAT, the learned TPO be directed to charge interest at the rate often percent instead of fifteen percent as proposed by the TPO.
Apropos assessee's appeal - Ground relating to sale of business division - adjustment of Rs.1,04,03,50,000/-.
3. The assessee is a captive back office support service provider providing call centre and other back office services to its group companies in the UK region. The services rendered by the assessee are in the nature of ITES. The Prudential Group Company is a leading insurance service provider providing range of life and pension products to the customers in the UK. Prudential Product Management Services (India) Pvt. Ltd. (PPMS), the assessee, was set-up in the year 2002-03 primarily to serve its group companies in the UK region. It had two divisions one in Powai and one in 5 Prudential Process Management Services India Private Limited Vikhroli for the purpose of providing ITES. One of the products offered by the Prudential Group to its customers is Metlife and Pension (MLP). The Vikhroli division of PPMS (VDPPMS) was primarily engaged in the processing related to MLP.
4. During the course of assessment proceedings, the transfer pricing officer noted that there was a transaction of sale of business division. The transfer pricing officer observed that this transaction was neither reported in Form No. 3 CEB nor benchmarked in the transfer pricing study report. That this transaction came to notice from a news item in business the standard. The Transfer Pricing Officer had noted from the website of Capita, UK and extracted certain crucial information about the business deal between Capita, UK and Prudential, UK. He had noticed that Capita, UK was selected by Prudential, UK as strategic outsourcing partner and accordingly the entire value of the deal was fixed at $722 million on 28.11.2007, spread over 15 years with a projected cost saving of $60 million to Prudential by the year 2010. The strategic outsourcing was mainly to administer 7 millions matured life and pension policies including group and individual pensions, investment bonds and endowment policies. It was evident from the website that Prudential UK (PPU) was to hive off a part of its business and assets including Mumbai division i.e. VDPPMS for a lump sum consideration of £25 millions. As a part of the deal, Vikhroli division was sold to Capita, India for a consideration of £10.35 million. According to Transfer Pricing 6 Prudential Process Management Services India Private Limited Officer, as per the information in the public domain, the assessee nowhere figured either in the negotiation or in the decision making process. The assessee's role in this deal was to give effect to the global deal between Prudential Process, UK and Capita, UK. The Transfer Pricing Officer noted that in spite of these facts, the assessee failed to acknowledge these transactions in its 3CEB report.
5. After the detailed scrutiny and analysis of information available in the public domain, the Transfer Pricing Officer was of the opinion that to give effect to the global deal, the two Indian entities have entered into a contract for sale and purchase of the Vikhroli division but for the global outsourcing agreement, this transaction would not have happened and in view of this, the Transfer Pricing Officer had given a specific opportunity on several occasions (from 07.02.2012 to 07.01.2013, 10 opportunities were given) directing the assessee to file the copy of the global agreement between Prudential, UK and Capita. UK.
6. When the Transfer Pricing Officer has directed the assessee to file the copy of the valuation report and due diligence report in support of consideration of £10.35 million received against the transfer of Vikhroli division, the assessee did not submit the Global outsourcing agreement but had submitted two agreements. The Transfer Pricing Officer from the examination of these agreements came to following deduction.7
Prudential Process Management Services India Private Limited
(i) Opportunity Agreement:- This Agreement dtd. 20.12.2007 was between Prudential Assurance Company Ltd. (PACL) and Capita International Ltd. (CIL)and accordingly PPMS proposes to sell and COS proposes to purchase the in scope undertaking in pursuant to terms of the business purchase agreement. As per this agreement, PAC agrees to make available to GIL (for the benefit of CIL and the Capita Group) the opportunity. The terms of the agreement makes it clear that the opportunity is linked to the global outsourcing agreement dated 28.11.2007.
(ii) The second Agreement also dated 20.12.2007 was between PPMS and Capita Offshore Business Services Pvt. Ltd. (Capita India) towards the sale and purchase of VDPPMS. The scope and the consideration agreed are as under:
"In-Scope Undertaking" means the seller's business undertaking of life and pensions related processing which the seller uses in order to provide services corresponding to the services (as defined in the IIAA) required pursuant to the IIAA, including the in scope employees, assets and liabilities, but not including the excluded assets.
"Purchase Price" means GBP 1,03,50,000 (exclusive of taxes)'.
7. From the contents of the above two agreements from the information extracted from the website available in the public domain and from the submissions of the assessee. The Transfer Pricing Officer opined that the assessee's AE, Prudential, UK gave a contract of £722 millions to Capita, UK towards business process outsourcing of its various life and pension products for the period of 15 years. That as mentioned already the assessee is a captive service provider in India to it's AE and is rendering the BPO services therefore, the AE of the assessee had entered into an arrangement 8 Prudential Process Management Services India Private Limited with Capita UK thereby assessee's Vikhroli division was to be sold to Capita UK , the Indian Arm M/s. Capita India Pvt. Ltd. as a going concern. Hence, he opined that there cannot be an iota of doubt that to give effect to the global outsourcing agreement between PAC and CIL, these two agreements were entered into on the same date i.e. on 20.12.2007. The bifurcation of £25 million which is the total consideration agreed for transfer of Vikhroli division is as under:-
(i) Consideration to transfer Vikhroli division £10.35 million
(ii) Balance towards transfer of IPRs £14.65 million That it is interesting to note that consideration of £10.35 million was directly paid by Capita India to the assessee and the balance £14.65 million related to IPRs was paid by Capita UK to Prudential UK. The way the agreed total consideration £25 million was split i.e transfer of a portion in India and a portion in UK is not possible in the absence of a global agreement.
8. The assessee's description of the transaction as noted by the transfer pricing officer was as under:
2.2.3 It is to be pointed out here that the transaction was neither reported in Form No. 3CEB nor it was benchmarked by the assessee in its TP study report./The TPO had browsed the website of Capita, UK and extracted certain crucial information about the business deal between Capita, UK and Prudential, UK. He had noticed that Capita, UK was selected by Prudential, UK as strategic outsourcing partner and accordingly the entire value of the deal was fixed at £722 million on 28. 11. 2007, spread over 15 years with a projected cost saving of £ 60 million to Prudential by the year 2010. The strategic outsourcing was mainly to administer 7 millions matured life and pension policies including group and individual pensions, investment bonds and endowment policies.9
Prudential Process Management Services India Private Limited 2.2.4 The following extracts from the website is worth to be mention here:-
"As a key element of the deal, Capita will acquired business and assets from Prudential, for a consideration of £25 million, including part of the business of PPMS, Prudential's offshore operation based in Mumbai, involving the transfer of 1,250 staff. Although TUPE does not apply in India, all affected employees will transfer in the spirit of the legislation, ensuring protection of their existing terms and conditions. £100 million of the deal is an investment by Prudential UK, over six years, to fund a transformation programme. The programme will deliver enhanced customer service through a substantial simplification of policy administration processes and migration of in-force and new business policies from Prudential's legacy IT systems to two Capita platforms."
2.2.5 It was evident from the website that Prudential UK (PPU) was to hive off a part of its business and assets including Mumbai division i.e. VDPPMS for a lump sum consideration of £25 millions. As a part of the deal, Vikhroli division was sold to Capita, India for a consideration of £10.35 million. As per the information in the public domain, the assessee nowhere figures either in the negotiation or in the decision making process. The assessee's role in this deal was to give effect to the global deal between Prudential Process, UK and Capita, UK. In spite of these facts, the assessee failed to acknowledge these transactions in its 3CEB report.
9. The transfer pricing officer noted that the assessee submitted that copies of two agreements in the course of transfer pricing proceedings. However the transfer pricing officer noted that assessee has not submitted the global agreement between Prudential UK and capital UK. From the above, the transfer pricing officer observed that From the above agreements, the information available in the public domain, and the submissions of the assessee, it was clear that the assessee's AE, Prudential Plc UK (PPU) gave a contract of GBP 722 million (Approximately Rs.5800 crores) to Capita UK (CU)for business process outsourcing of its various pension products for a period of 15 years. The AE of the assessee already had a captive service provider in India in the form of the assessee which was consistently rendering BPO services. Therefore, the AE entered into an arrangement with CUK whereby the assessee's Vikhroli Division was to be sold to CUK's Indian arm, Capita India Pvt Ltd (CIPL) on a going concern basis. Further, as already mentioned earlier, the decision to sell the Indian arm, 10 Prudential Process Management Services India Private Limited VDPPMS of the assessee was taken by assessee's AE and came in public domain on 28.11.2007. Thereafter, to give effect to global agreement between PAC and CIL, the above mentioned 2 agreements were entered into on same date i.e. 20.12.2007. The first agreement talks of the lump sum consideration of GBP 25 million for the deal between PAC and CIL. The second agreement talks of the valuation of VDPPMS being GBP 10.35 million and the modality of the transfer of funds from CIPL to PPMS as part of the overall consideration of GBP 25 million. During the course of TP proceedings, the assessee tried to represent as if PPMS independently sold VDPPMS to CIPL and it got consideration of GBP 10.5 million without the involvemen of PAC and CIL in this deal. However, the factual position is' that the 2 agreements produced by the assessee are the instruments to give effect to the global agreement between PAC and CIL. The transfer of funds from CIPL to PPMS is a bifurcation of total consideration of GBP 25 million by the assessee's AE. In absence of the Global Agreement and in view of the facts discussed supra, reliance is placed on sec 114(g) of the Evidence Act 1872.
10. Further, the transfer pricing officer made the following observations:
5.7 From the submissions filed by the assesses, the valuation report, and the 2 agreements given, the following issues were observed:
i) Replacement cost method is not applicable for valuing the business on going concern basis. Further, the valuer is not correct in stating that comparable companies' quoted multiple method cannot be applied in the instant case as there are sufficient number of comparables available in the public domain which are comparable to the Vikhroli division of the assessee which was sold.
ii) The valuer also assumed that there will be decline in revenues and margins without any supporting evidence and it is seen from the deal that the sale of division is linked with service agreement which is for an amount of approximately GBP 722 million for 15 years duration.
iii) The valuation has been done using the projections only for 10 years whereas the contract period is for 15 years.
iv) The valuer has not given any rationale for giving weightage of 66.6% on DCF method, and 33.33% for replacement cost method.
v) The valuer has not considered the arm's length profitability of the concern over the past year while projecting the profits of future years. He has taken OP/TC as 13% whereas for AY 2008-09 the assessee's OP/TC was 25.50%.
vi) The assessee projected revenues with positive growth rate till Dec 2010 and negative growth rate thereafter.
11Prudential Process Management Services India Private Limited
vii) It is seen that the AE and the assessee had got the valuation only in respect of Vikhroli division. The IPRs were never valued. The valuation of IPRs depended solely on the valuation of Vikhroli division. It was a package deal for GBP 25 million whereby Vikhroli division and the IPRs of the AE were transferred and the value attributable to these ideas was the difference between the total consideration of GBP 25 million and the valuation of Vikhroli division. Therefore, as per the assessee's submissions, it may be inferred that the value of IPRs could be as low as negligible.
viii) The assessee did not furnish the details of the outsourcing work likely to be assigned to Indian operations out of the total contract value of GBP 722 million. As per the write up available on Capita's website, this deal was to lead to a saving of GBP 60 million per annum by the end of year 2010. Thus, it is expected that PPU would have saved approximately Rs.500 Cr per annum by the end of year 2010. With such quantum of savings within 2 years of transferring the unit, the corresponding allocation of revenues in the DCF method for a period of 10 years is just Rs.992 crores. This is inconsistent with the data available on the website of Capita.
11. Thereafter, the transfer pricing officer analyzed the assessee's submission as under:
As per Section 92F, transaction includes arrangement, understanding or action in concert. In the present case, there was an agreement between AE of the assessee Prudential UK, and Capita UK by way of which Prudential UK was to give outsourcing business to the tune of GBP 722 million (Rs 5800 Cr) over a period of 15 to Capita UK. As a part of this arrangement, Prudential UK was to transfer a segment (Vikhroli division) of its Indian outsourcing operations (the assessee) to Capita's Indian AE (COS). The agreement entered between the assessee and COS India was made to give effect to the global outsourcing agreement between the AEs of two Indian Contracting Parties. Thus, there is an arrangement and an understanding and parties are also acting in concert. The term "international transaction" is defined in Sec.92B which is reproduced below:-
" Meaning of International Transaction 92B 92B (1) - For the purpose of this section and sections 92, 92C, 92D and 92E, "international transactions" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on profits, income, losses or assets of such 12 Prudential Process Management Services India Private Limited enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purpose of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise."
As per Section 92B(2), there is deeming provision for treating a transaction between an enterprise and a 3rd party as international transaction between 2 AEs, if the following conditions are satisfied:-
-There exists a prior agreement between AE and 3rd party in relation to relevant transaction: or
-Terms of the relevant transaction are determined in substance between 3rd party and the AE.
It is only due to the Global Outsourcing Agreement between Prudential UK and capita UK that the Indian arm of the outsourcing business was sold to the AE of capita UK in India. The 2 Indian entities entered into a contract of sale and purchase of the Vikhroli division just to give effect to the global arrangement. But for the global outsourcing agreement, this transaction would not have happened. Thus, it is clearly a deemed international transaction in which the Indian parties are merely giving effect to the global agreement. Further, as mentioned earlier from the chronology of the events it is seen that the decision to sell VDPPMS was taken by assessee's AE, PAC and CIL as early as on 28.11.2007. Thereafter, PPMS engaged M/s. Ernst & Young on 12.12.2007 to value VDPPMS. The consultant gave its valuation report on 19.12.2007 and on 20.12.2007 PAC signed an agreement with CIL for providing an opportunity to the latter for a consideration of GBP 25 million and on the same date PPMS signed an agreement with CIPL to transfer VDPPMS for a consideration of GBP 10.35 million. The undue haste in negotiation and decision making process, an the pace with which events have unfolded clearly indicates that all these agreements are nothing but a mechanism to give effect to the main decision taken on or before 28.11.2007. Clearly, the AE was to get a lump sum consideration of GBP 25 million from GIL out of which it arranged to 13 Prudential Process Management Services India Private Limited compensate the assessee for GBP 10.35 million and the amount was delivered through CIPL on behalf of PAC. It is this transaction, i.e. payment of GBP 10.35 million by the AE from out of lump sum proceeds of GBP 25 million which is being benchmarked. Even at the risk of repetition, it may be mentioned that the assessee did not even acknowledge this transaction in its form 3CEB, and it was only due to an article in Business Standard magazine that this transaction came to the TPO's notice.
From the assessee's own submission it is seen that the assessee stated that "It was agreed between Prudential Assurance Company Limited (PAC) and Capita International Limited (OIL) (Opportunity agreement) that PAC would grant OIL, rights to use intellectual property owned by any Prudential Group entity except for PPMS India in the form of Know-how and techniques, used by Prudential Group in off shoring the services and make available to CIL, the opportunity for Capita group to significantly develop its business."
This clearly indicates that now it is an admitted position that PPMS held certain intangibles which were to be valued white valuing VDPPMS but this valuation was never captured in the valuation report.
ii. In respect of the assessee's objections/contentions regarding the Replacement Cost method (RCM) used for the valuation of the Vikhroli division, it may be mentioned that RCM is not applicable to service sector. In service sector, revenue is generated using human resources whose value is not captured in the balance sheet. RCM is useful in industries where revenues are generated through use of fixed assets. Thus, industries such as power, steel, manufacturing etc which are capital intensive and have long gestation periods can be valued using RCM during the period when the project is yet to be commissioned.
Further, in the calculation furnished by the assessee in support of RCM, it is seen that the assessee has failed to establish the reliability of the assumptions made while carrying out the values.
In recent decision in the case of Ascendas (India) Pvt Ltd vs DCIT (ITAT Chennai), the hon'ble ITAT has held that DCF is the correct method of valuation of concern/shares.
In view of the above discussion, the assessee's reliance on RCM is incorrect and thus RCM is rejected.
14Prudential Process Management Services India Private Limited iii. The DCF and its application have been explained in the decision of hon'ble ITAT in the case of Ascendas (India) Pvt Ltd (supra). As per the said decision "The value of equity can be obtained in two methods under the Discounted Cash Flow method. The first method is to discount the cash flow expected from the equity investment and the second method is to ascertain the value of the enterprise by applying DCF on its future earnings and then dividing it with the number of shares. The most important aspect in the application of DCF is the discounting factor used for working out the net present value (NPV). The factor generally used is the Weighted Average Cost of capital. The difficult parts are (i) determining the future cash flows, (ii) determining the cost of equity,
(iii) determining the cost of debt and (iv) determining the period of discounting. For a valuation to have some amount of objectivity the variables must be considered within a reasonable limit so that acceptable values can be arrived at. Even a slight change in the discounting ratio will result in substantial change in the valuation of the company. If the ALP of the shares is worked out without considering a reasonable value for the enterprise, it will result in injustice."
Applying the above decision to the facts of this case, it is seen that the assesses has taken incorrect parameters in respect of two out of four variables. These are
a) determining the future cash flows, and b) determining the period of discounting.
While determining the future cash flows, the assessee has taken negative growth rate for the period ending Dec 2011 till December 2016. It has also taken negative growth rate of 5% till perpetuity after the year 201 7. The basic premise of the assessee here is that since the entity was servicing Mature Life and Pensions (MLP) which was a closed product as these policies were scheduled to mature within the next 5 to 8 years, there was no scope for growth in business as far as Vikhroli division was concerned. The assessee's premise is unreasonable. It is an admitted position that the assessee along with its segment Vikhroli division were rendering ITeS services to its AE. These services do not require highly qualified staff. Reasonable degree of computer literacy along with training in data entry and communication skills is sufficient for ITeS services. The assessee has failed to demonstrate that the negative growth rate adopted by it was based on any scientific study. On the contrary, the data available in public domain (http://nstore.accenture.com/Geneva/HP_lnsurer_of_the_Future_report.pdf ) suggests that insurance sector in the developed economies was going to have a long-term (from 2009 to 2015) growth rate of 2.2% per annum. The relevant portion of this report (Page 8) is reproduced as under:
15Prudential Process Management Services India Private Limited " Total business World 3.9% Industrialized countries 2.2% Emerging markets 11.4% Figure 10. Projected growth of insurance This trend offers huge potential for the insurance industry, as the demand for financial and pension products such as tailored equity release schemes and elderly- care packages is set to rise with the growth of these age segments. We believe that and health insurance in combination with assisted services such as home rare will be the key segments which will benefit from these demographic trends. Accenture estimates that life and pension insurance business in mature markets will grow by $200 billion to $350 billion over the next five years, of which about $160 billion will be generated by the old-age provisioning segment. The expected rise in demand for health insurance globally represents some $120 billion of premiums. At the same time, the demand for new assistance services will grow in significance: worldwide coverage for automotive, travel, health and life care or other assistance services to insurance customers is estimated to increase by about $12 billion over the course of the next five years. This section would not be complete without mentioning the fact that certain emerging markets also show a strong aging trend, especially China. However, we do not believe this to be as strong a source of growth as in mature markets owing to the fact that consumers in these sectors in emerging markets do not have the same buying power. "
From the above discussion, it is clear that while the growth rate in insurance sector in developed economies is projected to be at the rate of 2.2% per annum, the assessee to suit its own interest chose negative growth rate to define future cash flows for the purpose of DCF valuation.
In view of this, the assessee's calculation of DCF is modified by taking positive growth rate of 2.2% from the year 2011 onwards and 1% for perpetuity. Since the business will be outsourced from developed economy (UK) to developing economy (India), the growth rate of developed economy (2.2%) is considered.
In the context of future revenues, it is seen that the assessee has taken cost plus mark up of 13% to arrive at the projected revenues and profitability on the basis of which the value of the undertaking was arrived at GBP 10.35 million. It may be mentioned here that the assessee is a captive service provider for its AE and was operating on cost plus model. For the purpose of transfer pricing, its PLI of 16 Prudential Process Management Services India Private Limited OP/TC has been tested against the average PLI of comparables drawn by this office. For the year ending March 2008, the assessee's ALP OP/TC was found to be 25.5 %. However, for the purpose of valuation the assessee chose the PLI to be 13%. This is not acceptable. In view of this, the actual PLI i.e 25.5% for year ending March 2008 is being considered for valuing the concern using DCF and for perpetuity, this value is taken as 20% (to adjust for the recessionary trend over the long-term contract). While determining the period of discounting, the assessee has taken the period as 10 years. In this regard, as the global contract for services was for a period of 15 years the assessee was asked as to why the discounting period should not be taken as 15 years. The assessee has submitted in this regard that it has done the valuation upto 2017 and thereafter it has calculated value till perpetuity which covers the period of contract. Thus, on the basis of the assessee's submission, the discounting period is taken as 10 years plus perpetuity.
5.14 Conclusion regarding ALP:
Subject to the above remarks, it is seen that the original valuation as submitted by the assessee on the basis of DCF comes to Rs 91.89 Crores. However, as already mentioned above, the assessee's calculations have been modified by the TPO using the following variables:
- the rate of growth from 2011 onwards till perpetuity has been taken as 2.2% per annum instead of the negative growth rate taken by the assessee
- the PLI (OP/TC) has been taken as 25.5% for March 2008 onwards and 20% for perpetuity as against 13% adopted by the assessee for the corresponding period On the basis of the above, the revised valuation of the undertaking comes to 186.279 Cr. The AR was shown the calculation sheet and he did not find any mistake as far as the mathematical accuracy was concerned. As already mentioned above, the DCF valuation has been upheld by the hon'ble ITAT in the case of Ascendas (supra). Therefore, the arm's length value of the transaction is taken as Rs 186.279 Cr.
12. Thereafter, the transfer pricing officer tested the accuracy of this valuation and applied BEC, i.e, PE multiple method. Thereafter asking for further information and receiving the response of the assessee the transfer pricing officer held as under:
17Prudential Process Management Services India Private Limited
a)The assessee sold Vikhroli division on going concern basis. It is not the case where the division was sold because it was incurring losses. It was sold to give effect to the global outsourcing agreement between Prudential UK and Capita UK. At the time of transfer of this unit, the assessee was already making operating profit of 25.5% on cost much above the stated Mark up of 13%. Even though it was a captive service provider, by virtue of a global contract of the magnitude of Rs 5800 Cr, the revenue inflows were going to be assured in future. Even after the transfer of this unit, there was no change in the business model as it was to work as a captive service provider to Capita UK. In this context, this undertaking should command a "premium in the open market.
b) Theoretically, in an uncontrolled transaction between unrelated parties, the business would have been valued taking into account the trend of Indian ITES / BPO companies that are similarly placed and listed in stock exchanges either in India or abroad.
c) In general, prospective buyers or sellers of business of a company in any industry would, in addition to DCF base the decision on the running P/E multiples in the industry in which the company operates so as to know the growth potential and capital appreciation.
d) The assessee has applied an adjustment factor of 35% on two counts. Firstly it has sought an adjustment of 20% in line with Sony India's case in which 20% adjustment was allowed for intangibles. Secondly, it has further demanded an adjustment of 15% due to illiquid stock claiming that since it is a captive service provider, its share in the open market would be discounted by 15% due to lack of liquidity. As far as the assessee's contention in respect of the ITAT's decision in Sony India's case is concerned, the adjustment to the extent of 20% has been considered while arriving at the valuation of Rs. 188.88 crore as above. However, as far as the assessee's claim for allowing 15% further adjustment is concerned, it may be mentioned that such a claim is untenable as the assessee has not demonstrated the basis of such a claim. Moreover, the transaction is part of global agreement by assesee's parent and not an independent sale sought to be made by assessee. Additionally, in view of the future prospects of the undertaking sold and assurance of the business, there is no case for an adjustment for lack of liquidity. In view of this after allowing for the adjustment of 20%, the valuation comes to Rs 188.88 crore.
e) The assessee also contended that while using PE multiple method, PE multiples of ICRA and Mold Tek may be excluded from the working as these companies have high PE multiples as on 31.3.2008. In this regard it may be mentioned that on analysing the past data of these companies it is observed that they have consistently maintained high PE multiples. This is indicative of strong growth performance maintained by these companies. As these companies are functionally similar to the assessee, therefore, there is no reason 18 Prudential Process Management Services India Private Limited to exclude them. In view of this, the assessee's argument is rejected. However, it is seen that the correct PE multiple of Mod Tek after considering PAT is 77.07 instead of 88.78. So, the same has been considered for calculation and the assessee's calculation submitted on without prejudice basis have been modified to this extent and the final valuation of Rs 188.88 Cr. has been determined. As can be seen from the above, that as per PE multiple method, the valuation of the division comes to Rs 188.88 Cr which is nearly the same i.e. Rs 186.279 Cr as calculated using DCF method. However, the discounted cash flow method is considered most appropriate valuation technique as it gives the closest approximation of value of an enterprise based on its future revenue earning potential. ITAT has also upheld DCF in the case of Ascenda (Supra).
Even RBI guidance on valuation of shares, while a non-resident invests in an Indian company, also now mandates (from May, 2011) the use of Discounted Free Cash flow method to value shares of unlisted companies. Further, the value of business is related to valuation of shares as DCF method is on the basis of future revenue projections of business and thus valuation of shares is conterminous with the valuation of business. Thus, for the purpose of determining the ALP of the transaction, the valuation as per DCF is considered. This valuation gets further corroborated by the valuation arrived at using PECV/PE multiple method.
Therefore, the ALP is determined as under:
ALP Value as per DCF method Rs 186.279 Cr
Transaction value Rs 82.244 Cr
105% of transaction value Rs 86.3562
95% of transaction value Rs 78.1318
As the ALP falls outside +7- 5% of the transaction value, an amount of Rs 104.035 Cr or Rs.104,03,50,000/- is adjusted to the transaction value.
13. Thereafter, the transfer pricing officer further added interest at the rate of 15% per annum earned recoverable of Rs.10,40,35,000/- which came to Rs.7,80,26,250/-.
14. Against the above order, the assessee filed objections before the dispute resolution panel.
19Prudential Process Management Services India Private Limited
15. The DRP further observed that the manner in which the entire transaction has been carried out, there cannot be an iota of doubt that without global agreement, there would not have been a transaction between the two Indian entities as mentioned above. The bifurcations of the total consideration of £25 million into two portions, indicates that there are has to be a specific clause in the global agreement to this effect, and it would mean that the sale of VD PMSS for consideration of £10.5 million was decided by the Prudential UK without any say in this regard by the assessee. It further observed that this actually gives rise to practically taking over of VD PPM as by Prudential UK for £10.5 million and then selling it to Capita UK/Capita India. The dispute resolution panel further noted that counsel of the assessee was requested to file a copy of global agreement which it failed to do. The dispute resolution panel further observed as under:
2.2.13 As per the definition of Section 92F, the transaction includes an arrangement, understanding or action in concert. As discussed above, there exists a global outsourcing agreement between Prudential UK and Capita UK to give the outsourcing business to the tune of £722 million covering a period of 15 years to Capita UK. As a part of this arrangement, Prudential UK was to transfer the Vikhroli division to Capita's Indian AE (COS). Thus, there is not only an arrangement /understanding between the AE of the assessee and AE of Capita India, but they have also acted in concert, respectively influencing and causing the sale of VDPPMS by I India and purchase of the same by Capita India.
16. Thereafter, the dispute resolution panel referred to the provisions of section 92B. The dispute resolution panel observed that from Explanation 9(i) a of section 20 Prudential Process Management Services India Private Limited 92B of the Act, the purchases and sale transfer of intangible property, plant etc is an international transaction. Thereafter, the dispute resolution panel held as under:
2.2.15 It is stated that once the appellant has undertaken an international transaction which falls within the meaning of section 92B of the Act, it is imperative that the income arising from this international transaction is determined having regard to the arm's length principle. For determination of income arising from the international transaction having regard to the arm's length principle along with the necessity of looking at the factors of comparability and then doing comparability analysis, it is necessary to consider one of the five methods given in section 92C(1) as most appropriate method. It is further, mentioned that while applying any of the methods which are provided in section 92C(1), it is imperative to find the comparable uncontrolled transaction /enterprise. In the given circumstances, when the valuation of the equity issue has to be arrived at, it would be deemed as if the comparable uncontrolled price method is being used for determination of the ALP of the international transaction of issue of equity to the AE. In this method also, what is prescribed is to consider the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction. Then such comparable uncontrolled transaction identified is adjusted to account for difference, if any, between the international transaction and the comparable uncontrolled transaction which would materially affect the price in the open market. Further the said adjusted price is then considered to be an arm's length price. Accordingly, it actually does not matter whether or not the appellant company was a wholly owned subsidiary of parent holding company at all material times. For determination of arm's length price of the sale of shares, its fair market valuation or valuation in an uncontrolled environment as in the open market situation has to be arrived at. It is this fair market value or valuation in an uncontrolled environment that would be considered as comparable uncontrolled transaction for the purposes of comparability and benchmarking. Accordingly the contention of the assessee regarding TPO not using any of the methods prescribed in the Rules for benchmarking is not found to be acceptable.
2.2.16 One of the condition that is required to be satisfied for a transaction to constitute an international transaction under 92B(1), is that at least one among the associated enterprise should be a nonresident. In the present case though both the assessee and capita India are residents for the purpose of Indian taxation, but the presence of a global agreement makes the 21 Prudential Process Management Services India Private Limited appellant's AE part of the entire transaction and hence the conditions laid down in section 92B(1) is fully satisfied.
2.2.17 The transactions between the-assessee and its AE is deemed to be international transaction, as per section 92B(2). The scope of section 92B(2) is explained in CBDT circular No. 14 of 2001, dated 22.11.2001 with an illustration as under: "55.8 Sub-section (2) of section 92B extends the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined by the associated enterprise.
An illustration of such a transaction could be where the assessee, being an enterprise resident in India, exports goods to an unrelated person abroad, and there is a separate arrangement or agreement between the unrelated person and an associated enterprise which influences the price at which the goods are exported. In such a case the transaction with the unrelated enterprise will also be subject to transfer pricing regulations."
2.2.18 It is clear from the contents of the CBDT circular that the transaction between an enterprise and an unrelated person it is influenced by the associated enterprise of the first party having an arrangement or agreement with the unrelated party, then such transaction would be deemed to be an international transaction.
2.2.19 Section 92B(2) can take two forms. A per the first limb it can be in the form of a prior agreement in relation to the transaction in uestion between the associated enterprise and the unrelated person. Secondly, the terms of the transaction have to be in substance determined by the associate enterprise and the unrelated party.
2.2.20 Chapter X is applicable when such prior agreement would consequently be in the nature of an arrangement or an understanding or an action in concert between the unrelated party and the associate enterprise.
2.2.21 Even for a moment if we do not consider the global agreement, as per the second limb it is sufficient, if the unrelated person and the associated enterprise have in substance determined the terms of the transaction. The second type of influence will arise if the associate enterprise and the unrelated party are able to jointly and imperatively prescribe or fix the essence of the character of the transaction in question. In other words, the Indian entity will not have an opportunity of determining the substance of the transaction as per 22 Prudential Process Management Services India Private Limited its volition. The Indian entity will have to yield itself to the influence of its associate enterprise and the unrelated party. The above discussion makes it clear that the Indian entity PPMS has no role or a say in determining the substance of the transaction with Capita India on it's own volition but it is totally influenced by the presence of global agreement. Thus the second limb of subsection 2 is also fulfilled.
2.2.22 According to us, the preconditions to attract section 92B(2) has been satisfied in the instant case therefore the transaction can be treated as deemed international transaction. In the present case, there exists a prior agreement between the AE and third party. The terms of the relevant transactions are determined in substance between the AE and the third party.
2.2.23 As discussed in detail above, the two Indian entities have entered into a contract for sale and purchase of Vikhroli division only to give effect to the global outsourcing agreement otherwise the transactions between the two Indian entities would not have materialised. Hence, we feel it is an international transaction in which the Indian entity i.e. assessee is merely giving effect to the global agreement entered into by its AE and therefore it clearly falls within the provisions of Section 92B. It is further the fact gathered by TPO from public domain and as such not disputed by the assessee that the resultant saving of £60 million per year by 2010 to Prudential UK and no portion of such benefit is there to assessee.
2.2.24 In view of detailed discussion above, we are satisfied that the above transaction is an international transaction and the objection raised by the assessee has no merits.
17. Thereafter, the dispute resolution panel adjudicated the valuation arrived at by the assessee towards valuing the Vikhroli division. The distribution panel observed as under:
2.2.28 We have carefully gone through the submissions. As far as the objection of the assessee towards use of RCM for valuation of the Vikhroli division is concerned, a clear finding was given that this method is not applicable to service sector like that of assessee where revenue is generated using human resource whose value is not captured in the Balance Sheet. This method can be used in capital intensive industries such as power, steel, etc. where the projects are having long gestation period. According to us there 23 Prudential Process Management Services India Private Limited exists a global outsourcing agreement between Prudential UK and Capita UK to give the outsourcing business to the tune of £722 million covering a period of 15 years to Capita UK. As a part of this arrangement, Prudential UK was to transfer the Vikhroli division to Capita's Indian AE (COS). When the business is secured for 15 years and hence, the contention that after 3 years there is no commitment of further renewal is not found to be acceptable, The assessee was also not in a position to establish the reliability of the assumptions made while carrying out the values. We concur with the finding of the TPO in this regard.
18. Thereafter, the dispute resolution panel referred to the objections of the assessee and the transfer pricing officer's method and upheld the value arrived at by the transfer pricing officer.
19. The dispute resolution panel also referred to ITAT Chennai decision in the case of Ascendas India Private Limited in ITA No. 1736/MDS/2011 wherein it was held that DCF is the most appropriate method to determine the arms length price of international transaction, the dispute resolution panel further referred to ITAT Chennai decision in the case of VIHI LLC in ITA number 17/MDS/2012 dated 20/12/2013. Accordingly, the dispute resolution panel upheld the transfer pricing officer's valuation.
20. We have heard both the counsel and perused the records. At the outset, we note that in this case, the issue regarding the international transaction relating to sale of business was not referred by the Assessing Officer to the Transfer Pricing Officer. In this regard, the question was put to the assessee from the Bench as to whether or not the assessee has any grievance in this regard. The ld. Counsel of the assessee fairly 24 Prudential Process Management Services India Private Limited accepted that in view of this subsequent amendment in the Act, the Transfer Pricing Officer is duly empowered to go into the issue of the international transaction himself without the matter being referred by the Assessing Officer. Hence, the ld. Counsel of the assessee submitted that the assessee has no grievance in this regard.
21. We further note that apart from the Transfer Pricing Officer, making adjustment in this regard amounting to Rs.1,04,03,50,000/- on the same issue, the Assessing Officer has also passed an alternate order as under:
Addition u/s.50B on account of slump sale 5.1 Perusal of the details filed revealed that the assessee company has sold its business division to Capita India Pvt. Ltd. thereby, offering an amount of Rs.58,86,42,145/- as Capital Gains as per the provisions of section 50B of the Act.
In this case, the TPO vide its order dated 24.01.2013 has made an upward adjustment to the arm's length price by Rs.104,03,50,000/-. In this case, the total sale consideration received by the assessee company stood at Rs.82.244 crores on which capital gain of Rs.58,86 crores have been shown. 5.2 In the instant case, the TPO has recomputed the Arm's Length Price based on the fact that the sale of said property / business was purely a repercussion agreement entered between the assessee's holding company, Prudential, UK and Capita UK, the holding company of M/s. Capita India Pvt. Ltd. Although this transaction is entered between two resident companies assessed to tax in India, the:
TPO by applying the logic that this agreement was basically an outcome; of global outsourcing arrangement between the holding companies treated the transactions to be between two associate concerns within the meaning of section 92CA of the Act. Although the two companies are not associated enterprises; but, owning to the actual global outsourcing agreement between the holding companies was treated as transaction between two associate concerns. Although, the TPO has made an upward adjustment to the tune of Rs.104.035 crores, the issue is being examined afresh treating both the concerns as non-associate, enterprises to safeguard the interest of revenue.
5.3 The assessee company sold its Vikhroli division on going concern basis.
The division was not sold because of any incurring losses but was sold to give effect to the Global outsourcing agreement between Prudential UK, and Capita UK being-the holding companies of the assessee company and M/s. Capita India 25 Prudential Process Management Services India Private Limited Pvt Ltd; respectively. At the time of transfer of this business the, assessee company; was already making an operating profit of 25.5% on cost which; is much above the stated mark of 13% taken up by the assessee company while making its submissions' before the TPO / computing the arm's length price. The transaction between the assessee company and Capita India Pvt. Ltd. cannot be looked into isolation as the Global contract was of the magnitude of Rs.5800 crores. The Assessee company is a captive'; service provider to its holding company and the business transferred to Capita India Pvt. Ltd. did not change the basic character of the business activity as 'Capital India -Pvt. Ltd. also became a captive provider its holding company Capita UK. 'Although the transaction between the assessee and Capita India Pvt Ltd as an uncontrolled transaction between unrelated parties the transfer of business should command a good price in the open market due to the regular and good profits posted by it over the years. Moreover the business was transferred on going concern basis arid looking; at the Indian market, this sector has good growth potentials in the upcoming future. Going by the growth trends shown by the industry it can be comfortably construed that the business would have grown at a cumulative rate of at least 2% which by applying DCF (Discounted Cash Flow) method would have fetched good dividends; to the assessee company. As already discussed and established that the assessee company was posting good profits on the said business there was no need for it to undervalue the company and transfer the same to Capita India Pvt. Ltd. at a price much below the market rate. Therefore, there is a definite and certain Connection between the transaction carried out by the holding companies and the- assessee company and M/s. Capita India Pvt. Ltd. Although the global outsourcing: agreement between the holding companies does not have any tax implication in India the transaction entered between the assessee company and M/s. Capital India Pvt. Ltd. does have a taxation angle attached to it as the receipts on sale of such business transfer is taxable in the hands of the assessee company and by .undervaluing its business the assessee company has inflected, a loss to the exchequer Without prejudice to the above, even if it is construed and' -believed' that the local business transaction between the assessee company and Capita India is not as a result of the Global outsourcing agreement between the holding companies then also, the valuation done by the assessee company for a well established growth oriented business having huge future potentials cannot be justified. Therefore applying the DCF method as done by the TPO the total value of sale transaction is taken at Rs.186.279 crores as against assessee's sale receipts of Rs.82,244 crores applying the ratio that the said transaction is between unrelated parties and is given specific colour so as to adversely hit the exchequer thereby reducing the tax liability out of the transactions. Therefore, a sum of Rs.104.035 crores (186.279-82.244 crores) is added to the total income of the assessee company being the capital, gain taxable within the meaning of section 50B of the I.T.Act. However as this addition has already been made by the TPO the disallowance made u/s.92CA(3):of the Act shall remain final and this 26 Prudential Process Management Services India Private Limited disallowance will only come into picture in case of adverse judicial view against the addition made by the Transfer Pricing Officer.
22. We find that in this regard, there is no adjudication on this aspect by the ld.
Dispute Resolution Panel. The assessee has raised a ground in this ground in ground no. 3 above, which reads as under:
3. Without prejudice to the above, on the facts and in the circumstances of the case and in Law, the Hon'ble DRP erred in not disposing the Appellant's argument against the AO's position that where an adverse judicial view is taken against the transfer pricing addition made by the TPO, an adjustment of Rs.1,040,350,000 can be alternatively made under the provisions of Section 50B of the Act.
It is prayed that no adjustment can be alternatively made under the provisions of Section 50B of the Act.
23. We find that there is no adjudication by the Dispute Resolution Panel on this limb of the objection though the Assessing Officer in the draft assessment order has also made this addition. In our considered opinion, adjudication on this aspect of the assessee's ground is necessary. The Dispute Resolution Panel has erred in not adjudicating this issue raised before it. We further note that this issue raised by the assessee is without prejudice and, hence, it will be appropriate if on the issue of the sale of business, the Dispute Resolution Panel completes its order by also deciding upon the assessee's ground regarding the addition made by the Assessing Officer as slump sale. We are not adjudicating the merits of the Transfer Pricing Officer addition in this regard. As first, the order of the lower authority has to be completed before proper adjudication can be done. As a decision on the addition made by the Transfer 27 Prudential Process Management Services India Private Limited Pricing Officer on the same issue without adjudicating the addition by the Assessing Officer on the same issue as slump sale, would lead to multiplicity of the proceedings at different forums. As the party aggrieved by the adjudication on one part will have to go to higher forum, while the other limb of the same issue will be open to adjudication before the other forum upon remitting that issue. Such practice is not appropriate and desirable. For this proposition, we place reliance upon the decision of the Hon'ble Madras High Court in the case of CIT vs. Ramdas Pharmacy [1970] 77 ITR 276 (Mad). Accordingly, ground no. 1 relating to sale of business division which has resulted in adjustment of Rs.1,04,03,50,000/- is remitted to the file of the Dispute Resolution Panel. The Dispute Resolution Panel is directed to complete its order by adjudicating upon the ground relating to the addition made by the Assessing Officer, by treating the transaction as slump sale. We make it clear that we have not adjudicated the issue upon the addition of the sum involved as transfer pricing adjustment. Both the parties are free to raise appropriate grounds as deemed necessary subsequently.
Apropos ground no. 4 & 5 regarding an adjustment of Rs.14,37,35,552/- in the provision of information technology enabled services:
24. The assessee is a captive back office support services provider providing call centre and other back office services to its group companies in UK region. Hence the services rendered by the assessee is in the nature of ITES. The assessee in its TP study report arrived at PLI (OP/TC) of 15.21%. Initially using a set of 11 comparables, the Arithmetic Mean was arrived at 11.16% in it's TP study. The TPO has issued a show 28 Prudential Process Management Services India Private Limited cause for rejection of the TP study report since the assessee has failed to use single year data and some of the companies are functionally not comparable. In the show cause he had used a set of 8 comparable companies to arrive at Arithmetic Mean of 26.57%. After considering the various objections raised by the appellant the TPO has used final set of 12 comparables to arrive at the Arithmetic Mean of operating margin of comparables at 26.02% and made an adjustment of Rs.14,37,35,552/-.
25. The comparables considered by the transfer pricing officer for benchmarking the international transactions are as under:
Sr. No. Name of the Company NCR 2008-09 (%)
1 Accentia Technologies Ltd 43.44%
2 AcroPetal Technologies Ltd 32.43%
3 Aditya Birla Minacs Worldwide Ltd 1.85%
4 Crossdomain Solutions Private Limited 29.40%
5 Datamatics Financial Services Ltd 3.07%
6 E4e Healthcare Business Services 33.31%
Private Limited
7 Informed Technologies India Limited 23.13%
Assessee's comparables
8 B N R Udyog Ltd. (Medical 37.57
transcription segment)
9 Cosmic Global 43.11
10 Caliber Point Business Solutions Ltd. 31.62%
11 In House Productions Ltd (Media
division and healthcare division)
12 Shreejat Info Hubs Ltd. 33.33%
Arithmetical Mean 26.02%
The Assessee is earning an operating profit margin of 15.21% as against the comparables' operating margin of 26.02%. Therefore, the operating margin on total cost @ 26.02% is applied to the total cost of the assessee. The ALP is as under:
29Prudential Process Management Services India Private Limited Total Cost A 102,72,07,907/-
The Arm's length Price (A x 1 .2602) B 129,44,87,404/-
Transaction value C 115,07,51,882/-
105% of Transaction value 120,82,89,476/-
95% of Transaction value 109,32,14,288/-
Difference 14,37,35,552/-
As the ALP falls outside the limit of +7- 5%, the amount of Rs 14,37,35,5527- is adjusted to the international transaction.
26. Against the above order, the assessee filed objections before the dispute resolution panel. The dispute resolution panel found itself in the agreement with the order of the transfer pricing officer. It concluded as under:
4.2.10 The TPO has given valid reasons in respect of the addition of comparables such as Acropetal Technologies Ltd, (Segmental), Cross Domain Solutions Ltd., Eclerks Services Ltd. and Informed Technologies (I) Ltd.
Similarly in respect of Galaxy Commercials Ltd. and Sparsh BPO Ltd., a detailed reasoning has been given by the TPO for rejecting the comparables. We find the selection of fresh comparables by the TPO and the rejection of some of the comparables in the TP study by the assessee are found to be in order.
27. Against above order assessee is in appeal before us.
28. We have heard both the counsel and perused the records. The learned counsel of the assessee submitted that the transfer pricing officer has rejected six of the comparables selected by the assessee and added seven from his own search. The ld.
Counsel of the assessee submitted that comparables in this case are already covered in various order's of the ITAT. In this regard, both the parties have given submissions.
29. Upon careful consideration, we note that with regard to the issues raised relating to the provision for information technology enabled services, the assessee has 30 Prudential Process Management Services India Private Limited also raised an alternate ground. By way of this, it has been submitted that "Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in failing to appreciate the rectification application filed by the Appellant, requesting either to consider pro-rata cost or total revenue (including revenue from domestic associated enterprise) for computation of the adjustment."
30. We find that here also the assessee has raised the alternate ground by way of which it is emanating that one limb of this issue relating to the addition is pending adjudication at the Dispute Resolution Panel level. On the same reasoning and the case law as referred hereinabove in ground no. 1 above, we deem it appropriate to remit this issue also to the file of the Dispute Resolution Panel. Dispute Resolution Panel shall complete its direction by giving direction on the alternate (without prejudice) ground raised by the assessee.
31. Both the parties are at liberty to raise the necessary grounds subsequently as and if necessary.
Apropos ground no.6 - Adjustment of Rs.29,01,303/- on account of disallowance u/s. 14A of the Act:
32. On this issue, the assessing officer observed that during the year under consideration income of Rs.2,80,25,594/- was claimed exempt. In response to assessing officer's query, the assessee company submitted a statement of computation of disallowance u/s.14A read with Rule 8D wherein disallowance was arrived at 31 Prudential Process Management Services India Private Limited Rs.14,01,303/-. The assessing officer was not satisfied, he made the addition in this regard by observing as under:
6.2 The assessee has not disputed the applicability of Section 14A and Rule 8D in its case. However, while computing the disallowance: as per Rule 8D, the assessee has taken investments as on 31.03.2008 at Rs.290243353 whereas the investments on the said date as per the Balance Sheet amount to Rs.443342560.
Similarly, the assessee has taken investments as on 31.03.2009 at Rs.270277801 whereas, the investments on the said date as per the Balance Sheet amount to Rs.87598740. It is not explained as to why the figure as per the Balance Sheet is not adopted and why some of the investments have been excluded for the purpose of computing disallowance u/s 14A. Therefore, the said disallowance is computed as per the formula given in Rule 8D adopting the figures of investments appearing in the Balance Sheet as on 31.03.2008 and 31.03.2009, which is as under:
i. Disallowance of directly related expenditure Nil ii. Disallowance of interest expenses Nil iii. Disallowance of other expenses a. Average amount of Investments Opening balance 570277801 Closing balance 590243353 Total 1160521154 Average amount 580260577 0.5% of Average amount of Investments 0.5% of Rs.580260577 Rs.29,01,303 Total disallowance u/s 14A Rs.29,01,303 Disallowed by the assessee in computation Rs.14,01,303 ;
Net Disallowance u/s. 14A Rs.15,00,000
33. The dispute resolution panel rejected the objections of the assessee and upheld the action of the assessee officer in this regard.
34. Against this order, the assessee is in appeal before us.
35. We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the authorities below have totally erred in deciding the factual 32 Prudential Process Management Services India Private Limited aspects in this regard. He submitted that the assessee in its submissions before the Dispute Resolution Panel has duly submitted as under:
10. Factual and legal arguments against the addition proposed by the Assessing Officer An extract of sub section 1 of section 14A is reproduced below "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act"
Section 14A does not attract those investments, income from which is taxable under this Act.
The difference of Rs.300,000,000/- in value of investment as on 31.03.2008 and 31.03.2009 for the purpose of rule 8D as compared to the value of investments as per balance sheet is on account of investment in debt based mutual funds - growth option, income from which is not exempt from tax. Investments in Mutual Fund schemes with growth option do not earn dividend income and therefore the arise. Further, Capital Gains on Debt taxable and not exempt as contemplated u/s 10(38).
36. Referring to the above, the ld. Counsel of the assessee stated that the assessee's investment portfolio included those investments the dividend from which is not exempt and the assessee has been duly taxed/assessee has offered to tax the dividend on the same.
Hence, the ld. Counsel of the assessee submitted that the same should not be taken into account while computing the disallowance.
37. Per contra, the ld. Departmental Representative could not controvert the submissions of the ld. Counsel of the assessee. We find that these submissions were made before the Dispute Resolution Panel but the Dispute Resolution Panel has passed a laconic order without considering the legal and factual aspect of the situation. The Hon'ble Apex Court in the case of M/s Sahara India (Farms) Vs. CIT & Anr. 300 ITR 403 (SC) has expounded that even administrative order have to consistent with the rules 33 Prudential Process Management Services India Private Limited of natural justice. Accordingly, in light of the above factual submissions, we deem it appropriate to remit this issue to the file of the Dispute Resolution Panel. The Dispute Resolution Panel shall examine the factual aspect and pass a speaking order keeping in mind the assessee's submissions regarding the proposition of the law and the facts involved.
Revenues appeal:
38. The Revenue is aggrieved that the dispute resolution panel has erred in deleting the interest chargeable. The transfer pricing officer has made the addition in this regard by observing as under:
The assessee was to receive Rs.186.16 crores as Arm's Length consideration towards the sale of VDPPMS, since the assessee had received only Rs. 82.24 crores the TPO has treated the difference Rs.104.03 crores as outstanding as on 31-3-2009.
3.2.2 Since a tangible benefit has been passed to the AE by charging a consideration, which was below the ALP the TPO has treated the difference of Rs. 104.03 crores as interest free receivable and proceeded with the bench marking the benefit obtained by the AE. We find the observation of the TPO that had the actual difference which was charged by the assessee had been received it would have reduced the interest burden and also improved the working capital of the assessee. Had it been with any 3rd party, interest would have been charged on the interest receivable in such a situation, the TPO has considered the average PLRR 12% with markup of 3% risk factor and finally bench marked 15% as the ALP. Such interest benefit was charged for the period 1-10-2008 to 31-3-2009.
39. Upon the assessee's objection, the dispute resolution panel has directed for the deletion of the addition. The distribution panel has observed as under:34
Prudential Process Management Services India Private Limited 3.2.3 In respect of the assessee's contention regarding secondary adjustment on the notion that such amount was lying with the assessee's AE on which there is need of imputation of interest, it is stated that the concept of secondary adjustment is not expressly provided in the Chapter X of the Act. The mandate in this chapter is to determine arm's length price of the international transaction undertaken by the tax payer, which is what has been done by the TPO in the case on hand. Once this aspect is addressed, as per the requirement of law, there is nothing further provided to impute any secondary adjustment.
Accordingly the action of the AO/TPO in charging interest on such amount of adjustment arrived at towards the ALP of the issue of equity share, over and above the amount of adjustment, is not found to be in accordance with the provisions of law. The AO is therefore, directed not to make the addition of Rs.7,80,26,2507- arrived at by the TPO as secondary adjustment on the amount arrived at as adjustment towards the transaction of issue of equity shares. In the view of directions above in respect of secondary adjustment done by the TPO, the other contentions of the assessee regarding recharacterization of nature of transaction, interest rate charged, rate charged to be LIBOR based etc become inconsequential and hence not discussed and no separate directions are considered necessary in regard to them.
40. Against the above order revenue is in appeal before us.
41. We have heard both the counsel and perused the records. On this issue, we note that the Transfer Pricing Officer has made an addition on account of interest on the international transaction pertaining to sale computed by him. In this regard, we find that the Dispute Resolution Panel has noted that the concept of secondary expenditure is not expressly provided in the Chapter X of the Act. It has been observed that the mandate in this chapter is to determine arm's length price of the international transaction undertaken by the tax payer, which is what has been done by the Transfer Pricing Officer. We agree with the ld. Departmental Representative that once this aspect is addressed, as per the requirement of law, there is nothing further provided to 35 Prudential Process Management Services India Private Limited impute any secondary adjustment. Hence, we do not find any infirmity in the direction of the Dispute Resolution Panel that the action of the Transfer Pricing Officer in charging interest on such amount of adjustment arrived at towards the ALP of the issue of equity share, over and above the amount of adjustment, is not found to be in accordance with the provisions of law. Hence, we find ourselves in agreement withteh direction of the Dispute Resolution Panel and hence we uphold the same.
Accordingly, the Revenue's appeal stands dismissed.
Cross objection by the assessee:
42. The cross objection by the assessee is without prejudice to the ground in connection with the competition of interest by the transfer pricing officer being a secondary adjustment. In this regard assessee has urged that in the event when the secondary adjustments case conformed the TPO be directed to charge interest at the rate of 10% listed of 15% as proposed by the TPU. It has been submitted that the dispute resolution panel has not adjudicated as to whether the interest is to be charged at the rate of 15% or 10%.
43. Since, we have already dismissed the Revenue's appeal on this issue, the adjudication on this issue has become infructuous and, hence, the same is dismissed as infructuous.
36Prudential Process Management Services India Private Limited
44. In the result, the assessee's appeal is allowed for statistical purpose and the Revenue's appeal and cross objection by the assessee stands dismissed.
Order pronounced in the open court on 13.04.2018
Sd/- Sd/-
(Pawan Singh) (Shamim Yahya)
या यक सद य / Judicial Member लेखा सद य / Accountant Member
मंब
ु ई Mumbai; दनांक Dated : 13.04.2018
व. न.स./Roshani, Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai