AEGIS LTD, MUMBAI V. ADDL CIT RG 5(1), MUMBAI

ITA 1213/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93310 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 05-01-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 24-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction; Cost of acquisition; Initiation of penalty proceedings; Wholly owned subsidiary; Valuation report; Scheme of amalgamation; Notional interest; Commercial expediency; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 234B

Judgement Text

AEGIS LIMITED ITA NO.1213/M/2014 1 K IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI . . , , BEFORE SHRI R C SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIA L MEMBERITA ITA NO. : 1213 /MUM/20 1 4 (ASSESSMENT YEAR: 200 9 - 1 0) AEGIS LIMITED , ESSAR TECHNOPARK, OLD SWAN MILL COMPOUND, LBS MARG, KURLA (W), MUMBAI, MAHARASHTRA MUMBAI - 400 0 70 .: PAN : AAACE 8354 Q VS ADDITIONAL COMMISSIONER OF INCOME TAX, R ANGE - 5 ( 1 ), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJA N VORA SHRI HEMEN CHANDARIYA RESPONDENT BY : SHRI S D SRIVASTAVA /DATE OF HEARING : 17 - 0 4 - 2015 / DATE OF PRONOUNCEMENT : 27 - 07 - 2015 ORDER PER AMIT SHUKLA , J.M. : TH E AFORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 27.01.2014 PASSED IN PURSUANCE OF DIRECTIONS DAT E D 31.12.2013 GIVEN BY THE DISPUTE RESOLUTION P ANEL - I, MUMBAI (DRP) U/S 144C(5) , FOR THE ASSESSMENT YEAR 2009 - 10. 2. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAISED VARIOUS GROUNDS CHALLENGING ADDITIONS MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS AND ON OTHER DOMESTIC TAX ISS UES. FOR THE SAKE OF BREVITY THE ISSUES CHALLENGED BEFORE US ARE SUMMARIZED AS UNDER: - (I) TRANSFER PRICING ADJUSTMENTS MADE ON THE FOLLOWING INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE: S. NO. PARTICULARS AMOUNT INR 1 ADJUSTMENT I N RESPECT OF IT - ENABLED SERVICES 9,29,78,668 2 COMPENSATION RECEIVABLE ON PREFERENCE SHARES ISSUED BY THE AE 59,90,19,794 3 SALE OF SHARES BY THE APPLICANT TO ITS AE 1,51,41,11,996 AEGIS LIMITED ITA NO.1213/M/2014 2 4 GUARANTEE COMMISSION ON INTRA GROUP GUARANTEES EXTENDED BY THE APPLIC ANT 10,70,78,915 5 INTEREST ON ADVANCES EXTENDED TO AES 16,70,226 TOTAL 2,31,48,59,599 (II) GROUNDS CHALLENGING THE FOLLOWING ADDITIONS/DISALLOWANCES: S.NO. PARTICULARS AMOUNT INR 1 D ISALLOWANCE OF CARRY FORWARD AND SET - OFF OF UNABSORBED DEPRECIATIO N ALLOWANCE 8,52,64,475 2 DISALLOWANCE OF STAMP DUTY AND CUSTOMS DUTY ALONG WITH DISALLOWANCE OF CLAIM OF DEPRECIATION ON STAMP DUTY 73,18,345 3 ADDITION ON ACCOUNT OF ALLEGED MISMATCH BETWEEN AIR AND REVENUE REPORTED BY THE APPLICANT, IN ITS PROFIT & LOSS ACCOUNT 1,55,232 4 ADDITION OF NOTIONAL INTEREST EXPENSE ARISING OUT OF LEASE PAYMENTS 89,716 5 DISALLOWANCE OF INTEREST EXPENSES CLAIMED 78,60,025 6 ADDITION OF EXCHANGE GAIN ON REPAYMENT OF LOAN 8,71,00,937 TOTAL 18,77,88,730 (III) L EVY O F INTEREST U/S 234B & 234C ; (IV) A DDITIONAL GROUNDS OF APPEAL FILED VIDE PETITION DATED 21 ST OCTOBER, 2014, WHICH ARE ALTERNATIVE GROUNDS FOR T.P. ADJUSTMENTS ON GUARANTEE COMMISSIONS RAISED VIDE GROUND NOS. 1, 2 & 3, WHICH ARE AS UNDER: 24. WITHOUT PR EJUDICE TO ABOVE , 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% INCLUDING GUARANTEE COMMISSION FOR AY 2009 - 10; 25. 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. 3 . WE WILL DISCUSS THE ISSUES AS RAISED IN GROUND WISE. THE BRIEF FACTS QUA THE ISSUES RAISED VIDE GROUND NOS. 2 TO 8 WHICH ARE WITH REGARD TO THE TRANSFER PRICING ADJUSTMENTS OF RS. 9,29,78,668/ - ARE THAT , THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING IT ENABLED BUSINESS PROCESSING OUTSOURCING SERVICES (BPO) TO ITS ASSOCIATES ENTERPRISES (AES) FOR THE THIRD PARTY CONTRACTS AND IN - HOUSE C A MPAGINS AND RECEIVABLE MANAGEMENT SERVICES. IN SHORT ASSESSEE AEGIS LIMITED ITA NO.1213/M/2014 3 IS PROVIDING ITES BPO SERVICES TO ITS AES. THE ASSES S EE PROVIDES CUSTOMER INTERACTION, BACK OFFICE, RECOVERY AND CO LLECTIONS SERVICES TO ITS VARIOUS CENTERS IN INDIA . THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE IN FORM 3CEB WERE AS UNDER: NATURE OF TRANSACTION VALUE OF TRANSACTIONS (IN RS.) 1. P ROVISION OF IT ENABLED SERVICES TO M/S AEGIS - US , FOR 3 RD P ARTY CONTRACTS 242,763,079 2. PROVISION OF IT ENABLED SERVICES TO M/S AEGIS US, FOR IN - HOUSE CAMPAIGNS 28,387,634 3. PROVISION OF RECEIVABLE MANAGEMENT SERVICE TO M/S AEGIS RECEIVABLES MANAGEMENT INC. 8,28,558,769 4. REDEMPTION OF 2,04,00,000 PREF ERENCE SHARES OF M/S ESSAR SERVICES MAURITIUS 101,51,22,468 5. PURCHASE OF 7,91,36,000 PREFERENCE SHARES OF M/S ESSAR MAURITIUS 389,78,41,026 6. SALE OF 16528404 SHARES 21,09,14,000 7. ISSUE OF EQUITY SHARES TO ARYA INFRASTRUCTURE HOLDINGS LTD MAURITIUS AND ESSAR SERVICES HOLDINGS LTD MAURITIUS 275,92,21,200 8. ADVANCES AGAINST EXPENSES TO AEGIS BPO SERVICES, SOUTH AFRICA 1,03,12,805 9. ADVANCES AGAINST EXPENSES TO ESSAR SERVICES HOLDINGS LTD. 5,25,785 4 . SO FAR AS FIRST THREE INTERNATI ONAL TRANSACTION PERTAINING TO ITS A ES FOR THIRD PARTIES CONTRACTS ; IN HOUSE CAMPAIGNS AND RECEIVABLE MANAGEMENT SERVICES, THE ASSES S EE HAS BENCHMARKED THE MARGINS OF THESE SERVICES SEPARATELY AFTER ADOPTING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MO ST APPROPRIATE METHOD BY TAKING OPERATING PROFIT/OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI) ; AND USING DATA PERTAINING TO FINANCIAL YEAR 2008 - 09 WHEREVER IT WAS AVAILABLE , OTHERWISE FOR TWO PRECEDING YEARS I.E. FINANCIAL YEAR 2007 - 08, 2006 - 07. AS A RESULT OF TRANSFER PRICING EXERCISE, THE ASSESSEES MARGIN AND COMPARABLE MARGINS WERE REPORTED AS UNDER IN THE TRANSFER PRICING STUDY REPORT : SR. NO. NATURE OF INTERNATIONAL TRANSACTION AEGIS INDIAS MARGIN COMPARABLES MARGIN NO. OF COMPARAB LES 1 PROVISION OF IT ENABLED SERVICES (FOR THIRD PARTY CONTRACTS) 16.14 PERCENT 13.58 PERCENT 6 2 PROVISION OF IT ENABLED SERVICES (FOR IN - HOUSE CAMPAIGNS) 12.13 PERCENT 13.49 PERCENT 6 3 PROVISION OF RECEIVABLE MANAGEMENT SERVICES 15.83 PERCENT 14.15 PERCENT 6 5 . HOWEVER, THE LD. TRANSFER PRICING OFFICER (TPO), TO WHOM THE MATTER WAS REFERRED BY THE ASSESSING OFFICER FOR ANALYZING THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH THE AE S , DID NOT CONCUR WITH THE ASSESSEES TRANSFER PRICING ANALYS IS AND PROCEEDED TO MODIFY THE SAME. FIRST LY, HE MERGED THE THREE SEGMENTS OF PROVISIONS OF AEGIS LIMITED ITA NO.1213/M/2014 4 ITES INTO SINGLE IT ENABLED SERVICE SE G MENT WHICH WAS SEPARATELY BENCHMARKED BY THE ASSESSEE; SECONDLY, HE INTRODUCED CERTAIN FILTERS AND MODIFY THE THRESHOLD LIMIT S OF VARIOUS FILTER S AND ALSO THE COMPARABILITY CRITERIA ADOPTED BY THE ASSESSEE IN ITS TP STUDY REPORT . HE REJECTED MOST OF THE COMPARABLE COMPANIES SELECTED BY THE ASSES S EE AND ALSO INCLUDED SOME MORE COMPARABLES IN HIS SEARCH PROCESS . HE FINALLY ARRIVED AT SET OF EIGHT COMPARABLE COMPANIES AND ARRIVED AT AVERAGE ARMS LENGTH MARGIN AT 30.46% ON OPERATING COST TO BENCHMARK THE SAID TRANSACTION S OF THE ASSESSEE AND MADE AN UPWARD ADJUSTMENT OF RS. 13,88,67,536/ - IN RESPECT OF ITES SEGMENT . SUCH SET OF COMPA RABLES SELECTED BY THE TP O WERE ON ACCOUNT OF EITHER INCLUSION OF FRESH COMPARABLES OR EXCLUSION OF CERTAIN COMPARABLES AS SELECTED BY THE ASSESSEE. IN PURSUANCE OF DRPS DIRECTIONS, THE ARMS LENGTH MARGIN OF THE COMPARABLES WAS REDUCED FROM 30.46% TO 25.9 9% ON THE GROUND THAT FOREIGN EXCHANGE SHOULD BE TAKEN AS A NON - OPERATING ITEM FOR BOTH COMPARABLES AS WELL AS THAT OF THE ASSESSEE. FINALLY, THE AMOUNT OF ADJUSTMENT MADE UNDER IT E S SEGMENT WAS REDUCED TO RS. 9,29,78,668/ - . ACCORDINGLY , THE LIST OF ALL TH E DISPUTED COMPARABLES AS INCLUDED BY THE ASSESSEE, TPO AND ALSO THE EXCLUSION CONTESTED BY THE ASSESSEE AS WELL AS MADE BY THE TPO AND THE MARGINS ADOPTED WERE AS UNDER : - SL NO. COMPANY NAME UNADJUST - ED OPERA - TING MAR - GINS AS PER APPE - LLANTS TP STU DY (3 YEARS WEIGHTED AVERAGE MARGIN) SINGLE YEAR OP ERA TING MARGINS AS PER TP ORDER (CONSIDE - R ING FOREX AS NON OPERATING) SINGLE YEAR OPERATING MARGINS AFTER DRP DIRECTIONS ADDITION - AL COM - PARABLES TO PUT FORTH DURING TP PROCEED - INGS AND ACCE PTED BY THE TPO TO DRP) ADDITIONAL COMPARABLES TO PUT FORTH DURING TP PROCEEDINGS BUT REJECTED BY THE TPO (1) (2) (3) (4) (5) (6) (7) 1 ALLESEC TECHNO - LOGIES LIMITED - 0.81% - 17.51% - 8.90% 2 ADITYA BIRLA MI - NACS WORLDWIDE LIMITED 23.55% 0.49% 0. 50% 3 CEPHA IMAGING PRIVATE LIMITED 20.30% 2.06% 2.06% 4 CG VAK SOFTWARE & EXPORTS LIMI - TED(SEG.) - 1.41% AEGIS LIMITED ITA NO.1213/M/2014 5 5 FORTUNE INFOTECH LIMITED 7.29% 6 INFORMED TECH - NOLOGIES INDIA LTD. 19.46% 7 MICROGENETIC SYSTEMS LIMITED 1.13% 8 MICRO LAND LIMITED (SEG.) - 19.13% 9 R SYSTEMS INTR - NATIONAL LIMITED (SEG) 11.84% 10 ACCENTIA TECHNO - LOGIES LIMITED 52.24% 49.38% 11 VISHAL INFORMA - TION TECHNOLO - GIES LIMITED(NOW KNOWN AS CORAL HUB LIMITED) 52.07% 37.14% 36.93% 12 COSMIC GLO BAL LIMITED 17.94% 40.68% 40.68% 13 CROSSDOMAIN SOLUTIONS PVT LIMITED 29.40% 29.40% 14 GENESYS INTER - NATIONAL LIMITED 57.91% 57.91% OPERATING MARGINS 16.51% 30.46% 25.99% TOTAL NUMBER OF COMPARABLES 6 8 8 2 3 6 . BEFORE US, LD. COUNSEL , SHRI RAJAN V OHRA SUBMITTED THAT , SO FAR AS FIRST THREE COMPARABLES ARE CONCERNED I.E. ALLESEC TECHNOLOGIES LTD. ; ADITYA BIRLA MINACS WORLDWIDE LTD ; AND CEPHA IMAGING PRIVATE LTD., THE SAME WERE SELECTED BY THE ASSESSEE IN THE TP STUDY REPORT AND H A V E ALSO BEEN ACCEPTED BY THE TPO/DRP. HENCE THESE ARE NOT IN DISPUTE AND ARE TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES. HOWEVER, AS REGARD FIVE COMPARABLES LISTED AT SERIAL NO. 4 TO 8 I.E. ACCENTIA TECHNOLOGIES LTD., VISHAL INFORMATION TECHNOLOGY LTD , NOW K NOWN AS CORAL HUB L IMITED ; COSMIC GLOBAL L IMITED ; CROSS D OMAIN SOLUTIONS PVT LTD ; AND GENES Y S INTERNATIONAL LTD., WHICH HAVE BEEN SELECTED BY THE TPO ARE BEING CONTESTED BY THE ASSESSEE ON VARIOUS COUNTS , INCLUDING FUNCTIONALLY DISSIMILAR ITY AND ON VARIOUS OTHER FACTORS. AS REGARDS COMPARABLES FROM SERIAL NO. 9 TO 14, THESE COMPARABLES WERE ADOPTED BY THE ASSESSEE , BUT HAVE BEEN REJECTED BY THE TPO, WHICH TOO ARE BEING DISPUTED BEFORE US. HIS SUBMISSIONS ON VARIOUS INCLUSION AND EXCLUSION OF COMPARABLES ARE DISCUSSED HEREUNDER : AEGIS LIMITED ITA NO.1213/M/2014 6 ( I ) ACCENTIA TECHNOLOGIES LTD. (INCLUDED BY THE TPO) : MR RAJAN VORA SUBMITTED THAT FROM THE ANNUAL REPORT OF THE COMPANY IT CAN BE SEEN THAT THIS COMPANY IS ENGAGED IN PROVIDING HEALTHCARE RECEIVABLES C YCLE MANAGEMENT S ERVICES (HR CM ) AN D S OFTWARE D EVELOPMENT S ERVICES. THE COMPANY HAS STATED THAT ITS SERVICES ARE IN TWO AREAS, I.E. HRCM AND SOFTWARE PRODUCTS. IT HAS ALSO SUBSTANTIAL EARNING OF ITS INCOME FROM CODING ACTIVITIES, WHICH IS PRIMARILY RELATED TO SOFTWARE DEVELOPERS . THUS, IT I S FUNCTIONALLY DIFFERENT FROM IT ENABLED SERVICES COMPANIES . FURTHER, THERE IS NO SEGMENTAL INFORMATION AVAILABLE IN THE PUBLIC DOMAIN TO IDENTIFY THE REVENUES AND COSTS ATTRIBUTABLE TO VARIOUS BUSINESS AREAS AND HENCE THIS COMPANY CANNOT BE TAKEN AS COMPA RABLE F O R BENCHMARKING THE MARGINS OF THE ASSESSEE. HE ALSO REFERRED AND RELIED UPON VARIOUS DECISIONS OF THE TRIBUNAL, WHEREIN ACCENTIA TECHNOLOGIES LTD HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF ITS STRATEGY TO ACQUIRE COMPANIES FOR INO RGANIC GROWTH AND ALSO ON ACCOUNT OF ABSENCE OF SEGMENTAL INFORMATION FOR ASCERTAIN ING THE COMPARABILITY. THE LIST OF SUCH DECISIONS ARE AS UNDER: A ) PAREXEL INTERNATIONAL (INDIA) PRIVATE LIMITED VS ACIT (ITA NO. 144/HYD/2014) B ) EXCELLENCE DATA RESEARCH PRIVATE LIMITED V ITO ITA NO. 159/HYD/2014 C ) MINDTECK INDIA LIMITED V DCIT (ITA NO. 70/BANG/2014) ( II ) CORAL HUB LTD (VISHAL INFORMATION TECHNOLOGIES LTD) & COSMIC GLOBAL HUB : REGARDING CORAL HUB AND COSMIC GLOBAL HUB, HE SUBMITTED THAT THE BUSINESS MODEL OF THESE C OMPANIES ARE SIGNIFICANTLY DIFFERENT FROM THE ASSESSEE. THESE COMPANIES HAVE INCURRED SIGNIFICANT AMOUNT OF EXPENDITURE ON TRANSLATION CHARGES, WHICH IS INDICATIVE OF THE FACT THAT IT OPERATE ON DIFFERENT BUSINESS MODEL AND ARE ALSO ENGAGED INTO SIGNIFICAN T OUTSOURCING ACTIVITIES WHICH IS NOT THE CASE AEGIS LIMITED ITA NO.1213/M/2014 7 OF THE ASSESSEE. THIS IS HE SUBMITTED ARE APPARENT FROM THE REVIEW OF T HE I R FINANCIALS WHERE THE MAJORITY OF EXPENSES WERE ON ACCOUNT OF OUTSOURCING CHARGES. HE ALSO DREW OUR ATTENTION TO RELEVANT EXTRACTS OF ANNUAL REPORTS OF CORAL HUB & COSMIC GLOBAL AND SUBMITTED THAT IN CASE OF CORAL HUB, THE OUTSOURCING CHARGES WERE AT 90.57% OF THE OPERATING COST S AND IN CASE OF COSMIC GLOBAL LTD. IT IS 57.31%. THUS, WHEN THESE COMPANIES OUTSOURCE THEIR SIGNIFICANT PORTIO N OF THEIR WORK, THE SAME CANNOT BE COMPARED WITH THE ASSESSEE, WH I CH PERFORMS THE SERVICES ALL BY ITSELF. IN SUPPORT OF THEIR EXCLUSION HE RELIED UPON FOUR DECISIONS OF THE TRIBUNAL WHEREIN, THESE COMPANIES HAVE BEEN EXCLUDED ON ACCOUNT OF OUTSOURCING OPE RATIONS ; WHICH ARE AS UNDER: (A) ACIT V HAPAG LLOYD GLOBAL SERVICES PRIVATE LIMITED (ITA NO. 8499/MUM/2010); (B) ACIT V MAERSK GLOBAL SERVICE CENTRE INDIA PRIVATE LIMITED (ITA NO. 3774/MUM/2011); (C) SYMPHONY MARKETING SYSTEMS INDIA PRIVATE LIMITED (37 CCH 253); AND (D) HSBC ELECTRONIC DATA PROCESSING INDIA LIMITED V ACIT (1624/HYD/2010) LASTLY, HE SUBMITTED THAT IN CASE OF CORAL HUB AND THERE ARE SIGNIFICANT INTANGIBLE ASSETS LIKE GOODWILL , INTELLECTUAL PROPERTY AND TECHNICAL KNOW - HOW, WHOSE VALU E IS APPROXIMATELY 48.5% OF ITS NET BLOCK. HENCE, THESE TWO COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF FINAL LIST AND HAVE BENCHMARKING ITS FINANCIAL TRANSACTIONS. ( III ) CROSS DOMAIN SOLUTIONS PVT LTD : WITH RE GARD TO THIS COMPANY, MR. RAJAN VOHRA SUBMITTED THAT IT IS A PRIVATE LY H E L D COMPANY WHOSE FINANCIAL RESULTS AVAILABLE IN THE PUBLIC DOMAIN ARE QUITE LIMITED AND DO NOT CONTAIN DIRECTORS REPORT, MANAGEMENT DISCUSSION AND ANALYSIS AND ALSO DETAIL OF PROFIT AND LOSS ACCOUNT. THE ANNUAL REPORT PROVIDED BY THE LD. TPO WAS ALSO INCOMPLETE. THUS, IT IS VERY DIFFICULT TO CARRY OUT ANY COMPARABILITY ANALYSIS AND COMPUTE THE MARGINS. FURTHER THE AEGIS LIMITED ITA NO.1213/M/2014 8 WEBSITE OF THE SAID COMPANY, SUGGESTS THAT CROSS D OMAIN IS MAINLY ENGAGED IN PROVIDING NI CHE AND HIGH - END SERVICES IN TH E NATURE OF RE - ENGINEERED PAYROLL SERVICES, WHICH RANGES FR O M HIGH - END KPO SERVICES, DEVELOPMENT OF PRODUC T S , IT CONSULTING SERVICES ETC. FURTHER IN FOLLOWING CASES, THIS COMPANY HAS HELD TO BE NOT COMPARABLE WITH ITES COMPANIES. ( I ) MINDCREST INDIA P. LTD. IT A 7298/MUM/2012; ( II ) SYMPHONY MARKETING SYSTEMS INDIA PVT LTD (37 CCH 253); ( III ) MARKET TOOLS RESEARCH PRIVATE LIMITED (ITA 1811/HYD/2012); ( IV ) WILLIS PROCESSING SERVICES INDIA PRIVATE LIMITED (ITA NO. 2152/MUM/2014) THEREFORE, THIS COMPANY SHOULD BE EXCLUDED. ( IV ) GENES Y S INTERNATIONAL CORPORATION LTD (GENESYS) : MR. RAJAN VOHRA SUBMITTED THAT , FROM THE PERUSAL OF THE ANNUAL REPORT OF THE SAID COMPANY , IT WOULD BE SEEN THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF GEOGRAPHICAL INFORMATION SERVICES COMPRISING PHOTOGR AMMETRY , R EMOTE SENSING, CARTOGRAPHY, D ATA CONVERSION, RELATED COMPUTER BASE SERVICES AND OTHER RELATED SERVICES. IT MAINLY OPERATES IN N I C HE AREA OF LAND BASE MAPPING AND G EOGRAPHICAL INFORMATION SERVICES. IT IS EXCLUSIVE RESELLER FOR NAVTEQ DATA FOR ENTE RPRISE SPACE IN INDIA. THE MAJOR SERVICE PROVIDED BY GENESYS AS GIVEN IN I T S ANNUAL REPORT ARE GIS CONSULTING; 3 D MAPPING; NAVIGATION MAPS; L IDAR ; PHOTOGRAMMETRY REMOTE SENSING SERVICES; IMAG E PROCESSING AND SURVEYING . THUS, THIS COMPANY IS FUNCTIONALLY ENTIRELY DIFFERENT FROM THE ASSESSEE AND HENCE IT CANNOT BE INCLUDED IN THE FINAL LIST OF COMPARABLES FOR COMPARABILITY ANALYSIS. 7 . REGARDING INCLUSION OF VARIOUS COMPARABLES SELECTED BY THE ASSESSEE AND REJECTED BY THE LD. TPO, HIS ARGUMENTS REGARDING A LL THESE COMPARABLES ARE AS UNDER: (I) INFORMED TECHNOLOGIES INDIA LTD : - THE LD. COUNSEL SUBMITTED THAT THIS COMPANY WAS INCLUDED BY THE ASSESSEE BASED ON FUNCTIONAL SIMILARITY. TPO/DRP HAVE REJECTED THE SAID COMPANY AEGIS LIMITED ITA NO.1213/M/2014 9 ON ACCOUNT OF DIMINISHING REVENUE FI LTER ; TURNOVER LESS THAN 5 CRORES FILTER AND SERVICE S REVENUE LESS THAN 75%. THE TPO HAS NOT CITED ANY INSTANCES OF FUNCTIONAL DISSIMILARITY VIS - - VIS THE ASSESSEE. FURTHER , ITS REVENUES IN SUBSEQUENT YEARS HAVE INCREASED AND CRITERIA ADOPTED BY THE TPO A S ITS SALES ARE ON DECLINE CANNOT BE HELD TO BE REASON FOR ITS EX CLUSION. FURTHER, ITS INCOME FROM IT E S I S 99.57% AND, THEREFORE, IT IS A FIT CASE OF BEING COMPARABLE COMPANY . REGARDING TURNOVER FILTER OF LESS THAN 5 CRORES ADOPTED BY THE TPO, HE MADE HIS DETAILED SUBMISSIONS AND SUBMITTED THAT THE SAID COMPANY SHOULD BE INCLUDED IN THE FINAL COMPARABILITY. II) R. SYSTEMS INTERNATIONAL LTD. (SEGMENTAL) THE LD. TPO, HAS REJECTED THE AFORESAID COMPARABLE ON THE GROUND THAT THIS COMPANY IS FOLLOWING JANUARY , 2008 TO DECEMBER, 2008 AS ACCOUNTING YEAR INSTEAD OF APRIL 2008 TO MARCH, 2009. MR RAJAN VOHRA SUBMITTED THAT OTHERWISE THE FUNCTIONAL PROFILE OF THE BPO SEGMENT OF R SYSTEMS IS SIMILAR TO THAT OF THE ASSESSEE AND IT SATISFIE S ALL THE COMPARABILITY CRITE RIA . REGARDING DIFFERENT ACCOUNTING YEAR, HE SUBMITTED THAT THE RESULT S , OF THE PROFITABILITY AND MARGIN CAN BE EASILY WORKED OUT AND IF THE FINANCIALS OF THREE MONTHS IS WORKED OUT O N PROPORTIONATE BASIS AS PER MARCH, 2009, THE OPERATING MARGIN ON OPERATI NG COST FOR THE YEAR 2008 - 09 WOULD BE 5 . 8%. HE FURTHER RELIED UPON THE DECISION OF ITAT DELHI BENCH IN THE CASE OF MESSER CONSULTING INDIA PVT LTD. VS DCIT , WHEREIN THE ITAT HELD THAT IF THE AUDITED ACCOUNTS OF SUCH COMPARABLE DIRECTLY GIVE S FIGURES IN SUC H A MANNER THAT THE DATA OF THE FINANCIAL YEAR IN WHICH THE ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSACTION CAN BE EASILY DEDUCED THEN THERE IS NO REASON FOR EXCLUDING SUCH A OTHERWISE COMPARABLE CASE. THUS, THE BPO SEGMENT OF R SEGMENT SHOULD BE IN CLUDED IN THE SALES OF ALL FINANCIAL COMPARABLES. III) MICRO GENETIC SYSTEM LTD. THIS COMPANY TOO WAS EXCLUDED BY THE TPO ON ACCOUNT OF DIMINISHING REVENUE FILTER AND TURNOVER OF LESS THAN 5 CRORES. IN AEGIS LIMITED ITA NO.1213/M/2014 10 THIS REGARD, THE LD. COUNSEL SUBMITTED THAT THIS COM PANY HAS REPORTED INCREASING SALES AND HIGHER PROFIT BEFORE TAX FOR THREE CONSECUTIVE YEARS AND THIS IS INDICATIVE OF THE FACT THAT THE COMPANY IS NOT UNDERGOING ANY RECESSIONARY PHASE AND OPERATING UNDER NORMAL BUSINESS CIRCUMSTANCE. ITS INCOME HAS BEEN R EPORTED MAINLY FROM ITES . A S PER THE DIRECTORS REPORT , T HE SAID COMPANY IS ENGAGED IN THE PROVISION OF IT ENABLED SERVICES , WHICH IS FUNCTIONALLY SIMILAR, THEREFORE, THIS COMPANY SHOULD BE INCLUDED IN THE LIST OF FINAL COMPARABLES. IV) FORTUNE INFOTECH L TD. THIS COMPANY WAS REJECTED BY THE TPO ON ACCOUNT OF HAVING EXTRA ORDINARY EVENTS AND DIMINISHING REVENUE FILTER. HE SUBMITTED THAT THE TPO HAS NOT CITED ANY INSTANCES OF FUNCTIONAL DISSIMILARITY . IN FACT THE SAID COMPANY IS PRIMARILY INTO BPO, CLAIM PR OCESSING AND MEDICAL TRANSCRIPTION SERVICES. EVEN THOUGH THIS COMPANY HAS SHOWN DECLINE IN SALES FOR FY 2008 - 09 , YET IT HA S REPORT ED INCREASE IN TOTAL PROFITS BEFORE TAX IN THE SAME YEAR AS COMPARED TO THE EARLIER YEAR. THIS COMPANY IS NOT UNDERGOING A PHA SE OF DIMINISHING REVENUES. THUS, THIS COMPANY CANNOT BE EXCLUDED ON THE GROUNDS TAKEN BY THE TPO. V) MICROLAND LTD. THE SAID COMPANY HAS BEEN REJECTED BY THE TPO ON ACCOUNT OF UNRELIABLE SEGMENT INFORMATION. IN THIS REGARD, LD. COUNSEL SUBMITTED THAT T HE TPO HAS NOT CITED ANY INSTANCES OF FUNCTIONAL DISSIMILARITY OF THIS COMPANY VIS - A - VI S THE ASSESSEE. THIS COMPANY HAS SEPARATELY REPORTED ITE S SEGMENT IN ACCORDANCE WITH THE REQUIREMENTS OF AS - 17, ISSUED BY I C A I WHICH CLEARLY STATES THAT THE PURPOSE OF S EGMENTAL REPORTING IS TO DETERMINE THE PROFITABILITY OF GROUP OF SERVICES THAT ARE SUBJECT TO DIFFERENT RATES OF PROFITABILITY, OPPORTUNITIES OF GROWTH, FUTURE PROSPECTS AND R ISKS . THE ACCOUNTS OF THE COMPANY HAVE BEEN DULY AUDITED AND THEREFORE , TPO CANNO T QUESTION THE AUTHENTICITY OF THE AUDITED FINANCIAL YEAR STATEMENT A S HE HAS NOT PROVIDED ANY EVIDENCE TO SUPPORT HIS CONTENTIONS. AEGIS LIMITED ITA NO.1213/M/2014 11 8 . FINALLY, AS AN ALTERNATIVE, MR. RAJAN VOHRA SUBMITTED THAT, OUT OF ALL THE DISPUTED COMPARABLES, ACCENTIA TECHNOLOGIES L IMITED, CORAL HUB LTD; GENESYS INTERNATIONAL ARE REMOVED AND R SYSTEMS INTERNATIONAL LTD IS INCLUDED, THEN ASSESSEES MARGIN WILL FALL WITHIN THE RANGE OF 5%, OF ALP VIS - - VIS THE COMPARABLE AND ACCORDINGLY NO ADJUSTMENT WOULD BE REQUIRED TO BE MADE IN T HIS ITES SEGMENT. 9. ON THE OTHER HAND, THE LD. CIT DR, AFTER REFERRING TO THE VARIOUS OBSERVATIONS MADE BY THE TPO MADE HIS DETAILED SUBMISSIONS WITH REGARD TO EACH AND EVERY COMPARABLES ARGUED BY THE LD. COUNSEL. IN SUM AND SUBSTANCE, HE MAINLY RELIED U PON THE ORDER OF THE TPO & DRP. 1 0 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. THE ASSES S EE HAS SHOWN PROVISION OF IT ENABLED SERVICES UNDER THE THREE DIFFERENT SEGMENTS OF TRANSACTIONS ; VIZ., P ROVISION FO R IT E S FOR THIRD PARTY CONTRACTS ; P ROVISION FOR IT E S FOR IN HOUSE CAMPAIGNS ; AND P ROVISION FOR RECEIVABLE AND MANAGEMENT SERVICES. IT HA S ALSO SEPARATELY BENCHMARK THESE SERVICES USING TNMM AS MOST APPROPRIATE METHOD BY TAKING OPERATING PROFIT/OPERATING CO ST AS P L I . THE TPO AS WELL AS THE DRP HAVE TREATED ALL THE THREE SEGMENTS INTO A SINGLE IT ENABLED SERVICE SEGMENT. THE AVERAGE PROFIT MARGIN OF THE ASSESSEE FROM THESE IT E S SEGMENT S IS 16.16%. NOW AS DISCUSSED ABOVE, A FTER THE DRPS DIRECTION, THE ARITHME TIC MEAN OF THE EIGHT COMPARABLES TAKEN BY THE TPO COMES AT 25.99% RESULTING INTO UPWARD ADJUSTMENT OF RS. 9,29,78,668/ - . THE ASSESSEE HAS FINALLY CHALLENGED FIVE COMPARABLES INCLUDED BY THE TPO FOR EXCLUSION AND HAS CONTESTED SIX COMPARABLES, WHICH WAS TH OUGH SELECTED BY THE ASSESSEE , BUT HAVE BEEN REJECTED BY THE TPO. ACCORDINGLY, WE WILL TAKE THE INCLUSION AND EXCLUSION OF SOME OF SUCH COMPARABLES FOR BENCHMARKING THE ASSESSEES MARGIN FOR IT E S SEGMENT AS A WHOLE BY TREATING THEM AS SINGLE IT E S SEGMENT R ATHER THAN THREE DIFFERENT SEGMENTS, AS ADOPTED BY THE ASSESSEE. THE REASON BEING, NO COGENT AEGIS LIMITED ITA NO.1213/M/2014 12 REASONS HAVE BEEN CANVASSED BEFORE US, THAT THESE SERVICES HAVE TO SEPARATELY BENCHMARKED. WE WILL DISCUSSED THE DISPUTED COMPARABLES IN BRIEF: - ( I) ACCENTIA TECH NOLOGIES LTD : - THIS COMPARABLE HAS BEEN DISPUTED BY THE ASSESSEE FOR EXCLUSION FROM THE LIST OF COMPARABLES AS SELECTED BY THE LD. TPO. FROM THE PERUSAL OF THE RELEVANT RECORDS OF THE SAID COMPANY AS DISCUSSED ABOVE, WE FIND THAT THIS COMPANY IS MAINLY E NGAGED IN PROVIDING HRCM SERVICES AND SOFTWARE DEVELOPMENT SERVICES. THE SOFTWARE DEVELOPMENT SERVICE INCLUDES SOFTWARE PRODUCTS ALSO. FURTHER, THE SAID COMPANY IS EARNING SUBSTANTIAL PORTION OF I TS INCOME FROM CODING ACTIVITY, WHICH IS PRIMARILY RELATED T O SOFTWARE DEVELOPMENT. SUCH FUNCTIONS ARE SLIGHTLY DIFFERENT FROM IT ENABLED SERVICES. ANOTHER VERY SIGNIFICANT FACT IS THAT SEGMENTAL INFORMATION OF THE SAID COMPANY IS NOT AVAILABLE IN THE PUBLIC DOMAIN TO PROPERLY IDENTIFY THE RESERVES AND COSTS ATTRIB UTABLE TO VARIOUS BUSINESS AREAS AND SEGMENTS . ONCE IT IS DIFFICULT TO IDENTIFY THE REVENUES AND COST ATTRIBUTABLE IN ABSENCE OF SEGMENTAL INFORMATION , THEN IT BECOMES VERY DIFFICULT TO MAKE A COMPARISON OR CARRY OUT ANY COMPARABILITY ANALYSIS FOR THE PURP OSE OF BENCHMARKING THE MARGINS WITH THAT OF THE ASSESSEE AND THEREFORE , SUCH A COMPARABLE CANNOT BE HELD TO BE INCLUDIBLE IN THE LIST OF COMPARABLES. THUS, WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT THIS COMPANY SHOULD BE EX CLUDED FROM THE FINAL LIST OF COMPARABLES. FURTHER, IN THE DECISIONS RELIED UPON BY THE LD. COUNSEL, THIS COMPANY HAS BEEN EXCLUDED FROM THE COMPARING IT WITH IT E S COMPANIES ON THE GROUND OF UNAVAILABILITY OF THE SEGMENTAL INFORMATION IN THE PUBLIC DOMAIN. ACCORDINGLY, TH I S CO MPARABLE IS DIRECTED TO BE EXCLUDED. (II) & (III) CORAL HUB LTD. (VISHAL INFORMATION TECHNOLOGIES) & COSMIC GLOBAL LTD : - AS POINTED OUT BY THE LD. COUNSEL, THESE COMPANIES HAVE SIG NI FICANTLY OUTSOURCED THEIR ACTIVITIES, WHICH IS EVIDENT FROM THE AEGIS LIMITED ITA NO.1213/M/2014 13 FACT TH AT OUT OF THE TOTAL OPERATING COST S , THE OUTSOURCING CHARGES ARE MORE THAN 90% AND 57% RESPECTIVELY . THIS FACTOR ALONE MAKES A SIGNIFICANT DIFFERENCE VIS - - VIS THE BUSINESS MODE L OF THE ASSESSEE , WHICH IS CARRYING OUT ITS IT ENABLED SERVICES ON ITS OWN. FU RTHER, THE CORAL HUBS LTD IS HAVING SIGNIFICANT INTANGIBLE ASSETS LIKE GOODWILL, INTELLECTUAL PROPERTY AND TECHNICAL KNOWHOW WHOSE VALUE ARE APPROXIMATELY 50% OF THE NET BLOCK. SUCH AN INTANGIBLE ASSET S DEFINITELY HAS AN IMPACT ON THE PLI FACTOR BEC AUSE TH E MARGIN S IN SUCH CASES ARE GENERALLY HIGH , AS SUCH INTANGIBLE ASSETS AFFECT THE PRICING AND PROFITABILITY. FURTHER, AS POINTED OUT BY THE LD. COUNSEL, THE TRIBUNAL IN VARIOUS CASES, AS CITED ABOVE HAVE HELD THAT THESE COMPANIES ARE TO BE EXCLUDED DUE TO O UTSOURCING OPERATIONS AND, THEREFORE, WE ALSO HOLD THAT THESE TWO COMPANIES CANNOT BE INCLUDED IN THE LIST OF FINAL COMPARABLES. THE REASON BEING, DIFFERENT BUSINESS STRATEGIES LIKE OUTSOURCING OF ENTIRE SERVICE SEGMENT A FFECTS MANY FACTORS WHICH HAVE BEAR ING ON THE CONDUCT OF THE BUSINESS AND ALSO THE PROFITABILITY. ACCORDINGLY, THESE TWO COMPARABLES ARE DIRECTED TO BE EX CLUDED FROM THE LIST OF THE FINAL COMPARABLE S . (IV) GENESYS INTERNATIONAL CORPORATION LTD : FROM THE PERUSAL OF THE ANNUAL REPORT AND INFORMATION OF THIS COMPANY, IT IS SEEN THAT THIS COMPANY IS MAINLY ENGAGED IN GEOGRAPHICAL INFORMATION SERVICES WHICH IS MAINLY ENGAGED IN NICHE AREA OF LAND BASE MAPPING. ITS SERVICES INCLUDED GIS CONSULTING , 3D MAPPING , NAVIGATION MAPPING, LIDAR , PHOTOC ROMATIC REMOTE SENSING SERVICES, IMAGE PROCESSING, SURVEYING, REMOTE SENSING, CAR T OGRAPHY ETC. THIS COMPANY IS WORKING CLOSELY WITH MICROSOFT, NOKIA, DIGITAL GLOBE AND GOOGLE EARTH TO PROVIDE GEOGRAPHICAL DATA. IT IS EXCLUSIVE RESELLER FOR NAVTEQ DATA FOR SPACE ENTERPRISE IN INDIA. THUS, IT IS FUNCTIONALLY ENTIRELY DIFFERENT FIRM I TE S COMPANIES LIKE ASSESSEE AND HENCE THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE SO AS TO BE INCLUDED IN THE COMPARABLE LIST FOR THE PURPOSE OF BENCHMARKING THE MARGIN OF THE ASS ESSEE . ACCORDINGLY, THIS COMPANY IS DIRECTED TO BE EXCLUDED. AEGIS LIMITED ITA NO.1213/M/2014 14 (V) R SYSTEMS INTERNATIONAL LTD (SEGMENTAL) : THIS COMPANY HAS BEEN INCLUDED BY THE ASSESSEE AND REJECTED BY THE TPO/DRP ON THE GROUND THAT IT IS HAVING DIFFERENT FINANCIAL YEAR ENDING ON 31 S T DECEMBER 2008 , AS A CCOUNTING YEAR FOLLOWED BY THIS COMPANY IS JANUARY TO DECEMBER , WHEREAS, THE ASSESSEE IS FOLLOWING MARCH ENDING, I.E. 1 ST APRIL, 2008 TO 31 ST MARCH, 2009 . THE ASSESSEE HAS TAKEN THE PROPORTIONATE BASIS TO REWORK THE OPERATING MARGINS ON OPERATING COSTS BY ADDING THREE MONTHS FROM JANUARY 2009 TO MARCH 2009 AND EXCLUDING THE THREE MONTHS FROM JANUARY 2008 TO MARCH 2008. IF THERE ARE NO EXTRAORDINARY EVENTS AND FACTORS IN THESE PERIODS THEN PROPORTIONATE OPERATING MARGINS ON OPERATING CO ST 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 FINA NCIA L 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 COMPARABL ES FOR BENCHMARKING THE MARGINS. 11 . BEFORE US, THE LD. COUNSEL HAD SUBMITTED THAT IF THE AFORESAID FOUR COMPARABLES ARE EXCLUDED FROM THE LIST OF COMPARABL ES AND ONE COMPANY , NA ME LY, R. SYSTEMS ARE INCLUDED , THEN ASSESSEES MARGIN WILL FALL WITHIN THE RA NGE OF 5 OF ARMS LENGTH PRICE VIS - - VIS THE AVERAGE OPERATING MARGIN OF THE COMPARABLE COMPANIES. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER/TPO TO ANALYZE THE OPERATING MARGIN OF THE ASSESSEE VIS - - VIS THE FINAL COMPARABLES AFTER INCLUDING AND EXCLUDI NG THE COMPARABLES AS DECIDED ABOVE AND THE COMPARABLES WHICH ARE NOT IN DISPUTE AND IF THE AVERAGE MARGIN OF THE FINAL COMPARABLES FALLS WITHIN THE ARMS LENGTH PRICE OF 5 , THEN ASSESSEES MARGIN WITH AEGIS LIMITED ITA NO.1213/M/2014 15 REGARD THE PROVISION OF IT ENABLED SERVICES AS A WHOL E SHOULD BE ACCEPTED. WITH THIS DIRECTION, WE DISPOSE OFF THE GROUNDS NO. 2 TO 8 AS RAISED BY THE ASSESSE E . IN VIEW OF OUR FINDING GIVEN ABOVE , THE DISPUTE REGARDING OTHER COMPARABLES REMAIN PURELY ACADEMIC AND THEREFORE, NO FINDINGS IS GIVEN ON MERITS WIT H REGARD TO THE INCLUSION AND EXCLUSION OF SUCH COMPARABLE COMPANIES. 12 . THE NEXT ISSUE RELATE TO TRANSFER PRICING ADJUSTMENT OF RS. 151,41,11,996/ - ON ACCOUNT OF TRANSFER OF EQUITY SHARES. THIS ISSUE HAS BEEN RAISED VIDE GROUND NO. 9 TO 11 IN THE GROUN DS OF APPEAL. 1 3 . THE BRIEF FACTS QUA THE ISSUE INVOLVED ARE THAT , THE ASSESSEE HAD SOLD 1,65,28,404 SHARES OF AEGIS BPO SERVICES (GURGAON) LTD. TO ESSAR S ERVICES HOLDING LTD. MAURITIUS @ RS. 12.72. PER SHARE. IN ORDER TO UNDERTAKE ECONOMIC ANALYSIS IN RE SPECT OF INTERNATIONAL TRANSACTIONS OF SALE OF SHARE TO ITS AE, T HE ASSESSEE FILED REPORT OF A CHARTERED ACCOUNTANT FOR DETERMINING THE F AIR VALUE OF EACH EQUITY SHARE OF AEGIS (GUR GAON ) WHICH WAS VALUED AT NIL. SINCE THE TRANSACTION WAS CARRIED OUT AT A PRICE OF RS. 12.72 PER EQUITY SHARE, WHICH WAS HIGHER THAN THE PRICE DETERMINED BY THE CHARTERED ACCOUNTANT, IT WAS REPORTED THAT THE TRANSACTION UNDERTAKEN BY THE ASSESSEE WITH ITS AE WAS AT ARMS LENGTH. THE LD. TPO OBSERVED THAT THE ASSESSE E HAD ALSO IS SUED EQUITY SHARES TO ESSAR SERVICES HOLDING LTD, MAURITIUS , AND ARYA INTERNATIONAL HOLDING, MAURITIUS AT A PRICE OF RS. 400 PER SHARE WHOSE FA I R MARKET VALUE IN ACCORDANCE WITH THE CCI GUIDELINES WAS COMPUTED TO BE AT RS. 22.82. FURTHER , BPO DIVISION OF A EGIS ( GURGAON ) WAS DEMERGED INTO AEGIS LTD IN OCTOBER, 2010 W.E.F. 1 ST APRIL, 2009 USING A SWAP RATIO OF ONE EQUITY SHARE OF THE ASSESSEE FOR THREE SHARES OF AEGIS ( GURGAON ) AS APPROVED IN THE SCHEME OF AMALGAMATION AND DEMERGER BY THE HIGH COURT. THE ASSE SSEE HAD FURNISHED VALUATION REPORTS AND OTHER DETAILS FOR TRANSFER AND ISSUE OF SHARES BEFORE THE TPO. HOWEVER, THE TPO REJECTED THE VALUATION UNDERTAKEN BY THE ASSES S EE AND CONCLUDED THAT TRANSACTIONS RELATING TO SALE OF SHARES BY THE AEGIS GURGAON AND D EMERGER INTO AEGIS LIMITED ITA NO.1213/M/2014 16 THE ASSESSEE WERE INEXTRICABLY LINKED. ACCORDINGLY, HE COMPUTED THE VALUE OF EQUITY SHARES OF AEGIS GUJARAT BY TAKING THE VALUE OF THE SHARES OF THE EQUITY SHARES AT RS. 400 PER SHARE ON THE BASIS OF D ISCOUNTED C ASH F LOW M ETHOD (DCF) BY USING SWAP RATIO OF 1:3 TO COMPUTE THE VALUE OF EACH EQUITY SHARE OF AEGIS GURGAON AT RS. 133 PER SHARE. ACCORDINGLY, ADJUSTMENT OF RS. 227,99,28,047/ - WAS MADE TO THE INCOME OF THE ASSESSEE. THE DRP, HOWEVER, HELD THAT VALUATION DONE BY THE TPO WAS NOT CORRECT AND REVISE THE VALUATION OF EQUITY SHARE TO RS. 313 PER SHARE OF THE ASSESSEE AND THE VALUE WAS DETERMINED AT RS. 104 PER SHARE OF AEGIS GURGAON BEING 1/3 RD AND ACCORDINGLY , ADJUSTMENT WAS REDUCED TO RS. 151,41,11,996/ - . 1 4 . BEFORE US, THE LD. COUNSEL SH RI RAJAN VOHRA SUBMITTED THAT EVEN IF THE DCF METHOD IS TO BE APPLIED THEN THE SAME COMES TO RS. 84.63 PER SHARE AND THE ACTUAL WORKING IN ACCORDANCE WITH DCF REPORT HAS BEEN GIVEN IN PAPER BOOK AT PAGE 386. H E SUBMITTED THAT IT IS OPEN FOR VERIFICATION BY THE A O /TPO. THE 1/3 RD VALUE OF RS. 84.63 WILL COME DOWN TO APPROXIMATELY RS. 29 PER SHARE AND IF AT ALL ANY ADJUSTMENT IS TO BE MADE THE N THE SAME HAS TO BE MADE STRICTLY AS PER DCF METHOD , IF THE TPOS VERSION IS TO BE ACCEPTED. HOWEVER, THE TPO HAS ERRO NEOUSLY WORKED OUT THE VALUATION AS PER THE DCF METHOD; SECONDLY, HE SUBMITTED THAT THE THREE TRANSACTIONS I.E. SALE OF SHARES OF AEGIS GURGAON , ISSUE OF SHARES BY THE ASSESSEE AND DEMERGER OF BPO DIVISION OF AGEIS GURGAON INTO THE ASSESSEE ARE COMPLETELY ISOLATED TRANSACTIONS AND COULD NOT BE LINKED TO EACH OTHER , AS THE UNDERLINED NATURE OF TRANSACTION IS ENTIRELY DIFFERENT, ONE BEING TRANSFER OF SHAREHOLDING IN SUBSIDIARY AND SECOND BEING ISSUE OF ITS OWN EQUITY SHARES. FURTHER, DEMERGER OF BPO DIVISION HAS TAKEN PLACE ONLY IN FI NANCIAL YEAR 2009 - 10 AND DOES NOT PERTAIN TO THE YEAR UNDER CONSIDERATION. THUS, HE SUBMITTED THAT THIS TRANSACTION SHOULD BE SEEN AS STAND ALONE TRANSACTION. IN THE ALTERNATIVE, HE STATED THAT IF THE VALUE IS TO BE TAKEN OF DC F VALUATION THEN SAME SHOULD BE DONE AFTER TAKING VARIOUS FACTORS , WHICH TPO/DRP HAVE NOT AEGIS LIMITED ITA NO.1213/M/2014 17 FOLLOWED THE METHODOLOGY CORRECTLY AS THEY HAVE TAKEN THE FACTUALLY INCORRECT FIGURE S AND OTHER FACTORS. 1 5 . ON THE OTHER HAND, THE LD. CIT DR SUBMITTED THAT THE ASSE SSEES OBJECTIONS HAVE BEEN VERY WELL TAKEN NOTE OF BY DRP AND WHATEVER CORRECTIONS WAS REQUIRED TO BE MADE . HAS ALREADY BEEN DONE . I N ANY CASE, IF THERE IS SOME ERROR WHILE VALUING THE SHARES AS PER THE DCF METHOD, THEN THE MATTER SHOULD TO BACK TO THE FI LE OF THE TPO TO VERIFY THE FIGURE S AND OTHER FACTORS AND THEN DETERMINE THE VALUE OF THE SHARES. REGARDING OTHER CONTENTION, HE SUBMITTED THAT THE TWO TRANSACTIONS CANNOT BE SEPARATELY LINKED AS HERE WHAT IS REQUIRED TO BE SEEN WHETHER THE TRANSACTION OF SHARES HAVE BEEN DONE AT ARMS LENGTH PRICE. FOR DETERMINATION OF CORRECT ALP, THE TPO HAS RIGHTLY BENCHMARKED IT WITH THE OTHER SIMILAR TRANSACTIONS MADE BY THE ASSESSEE, T HEREFORE, IN PRINCIPLE , THE ORDER OF THE TPO SHOULD BE UPHELD. 16 . WE HAVE HEARD TH E RIVAL SUBMISSIONS, PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. THE MAIN ISSUE RAISED BEFORE US IS , WHETHER THE SALE OF SHARES OF AEGIS BPO GUR G A ON BY THE ASSESSEE TO ESSAR SERVICES HOLDING LTD MAURITIUS AT RS. 12.72 PER SHARE IS AT ARMS LENGTH PRICE OR NOT. THE ASSESSEE IN SUPPORT OF BENCHMARKING THE ALP HAS RELIED UPON THE VALUATION REPORT OF THE CHARTERED ACCOUNTANT, WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 466 TO 467, WHICH HAS BEEN VALUED AT NIL. ON THE OTHER HAND, THE TPO HAS ADOPTED TH E VALUE OF RS. 400 PER SHARE ON THE BASIS THAT THE ASSESSEE HAD ALSO ISSUED EQUITY SHARES TO E SSAR SERVICES HOLDINGS AND A RYA INFRASTRUCTURE HOLDINGS LTD AT RS. 400 PER SHARE WHOSE FA I R MARKET VALUE IN ACCORDANCE WITH THE CCI GUIDELINES WAS ONLY RS. 22.82 PER SHARE. HE HAS ALSO TAKEN NOTE OF THE FACT THAT BPO DIVISION OF AEGIS GUR G A ON WAS DEMERGED WITH THE E SSAR IN SUBSEQUENT YEAR. USING SWAP RATIO OF 1:3 , H E HAS TAKEN THE VALUE OF EACH EQUITY SHARE OF AEGIS GUJARAT AT RS. 133 I.E. 1/3 RD . THIS HAS BEEN REDU CED BY THE DRP AS THERE WAS SOME ERRONEOUS CA L C U L ATION. THIS ENTIRE VALUATION HAS BEEN DONE ON THE AEGIS LIMITED ITA NO.1213/M/2014 18 BASIS OF DCF METHOD. THE ASSESSEES CASE BEFORE US IS THAT THE TRANSACTION OF SALE OF SHARES OF AEGIS GUR G A ON , ISSUE OF SHARES BY THE ASSE S SEE AND DEMERGER O F BPO DIVISION OF GUR G A ON ARE COMPLETELY ISOLATED AND NOT LINKED TO EACH OTHER. THEREFORE, SAME SHOULD NOT BE BENCHMARKED ON THE BASIS OF SUCH A TRANSACTION , AS O NE TRANSACTION PERTAINS TO TRANSFER OF SHARE HOLDING IN A SUBSIDIARY AND SECOND TRANSACTION REL ATES TO ISSUE OF ITS OWN EQUITY SHARES. THE VALUATION OF THE TWO TRANSACTIONS CAN NOT BE EQUATED FOR THE REASON THAT THEY PERTAIN TO DIFFERENT FINANCIAL YEARS AND THEREFORE, SAME CANNOT BE HELD TO BE INEXTRICABLY LINKED . HOWEVER, WITHOUT GOING INTO MERITS OF THIS ASPECT, WHETHER THEY ARE TWO SEPARATE TRANSACTIONS OR NOT, WE ARE PROCEEDING WITH THE MAIN ARGUMENTS OF THE LD. COUNSEL AND WE ALSO FEEL THAT THE VALUATION OF THE SHARES HAS TO BE DONE CORRECTLY SO AS TO DETERMIN E THE ACTUAL ARMS LENGTH PRICE AND F OR THIS PURPOSE BOTH THE PARTY AGREE BEFORE US THAT DCF METHOD CAN BE APPLIED. SINCE IT HAS BEEN POINTED OUT BEFORE US THAT THERE ARE SEVERAL FLAWS AND DEFECTS IN THE TPOS METHODOLOGY AND CERTAIN FACTUAL CORRECTIONS NEED TO BE DONE , THEREFORE WE ARE OF THE OPINION THAT THIS ASPECT NEEDS TO BE EXAMINED AGAIN. THE ASSESSEE HAD VALUED THE SHARES AS PER DCF METHOD AT RS.84.63 THE WORKING OF EACH HAS BEEN GIVEN IN PAGES 386 OF THE PAPER BOOK AND 1/3 RD OF VALUE OF ASSESSEES SHARE COMES TO RS. 28 TO RS. 29, IF SWAP RATIO OF 1:3 IS TAKEN INTO ACCOUNT. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE WORKING GIVEN BY THE ASSESSEE AS PER DCF METHOD AND DETERMINE THE CORRECT VALUE OF SHARES AND THEREAFTER MAKE SUITABLE ADJUSTMENTS IF REQUIRED. THUS, THIS ISSUE IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR THE PURPOSE OF VERIFICATION AND EXAMINATION OF THE VALUATION AS PER THE DCF METHOD . THE ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO EXPLAIN THE CORRECT FIGURES AND VALUATION. ACCORDINGLY, GROUN D NO S . 9, 10 & 11 ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE . 1 7 . THE NEXT ISSUE RELATES TO ADJUSTMENT OF RS. 10,70,78,915/ - ON ACCOUNT OF CORPORATE GUARANTEE FEE, WHICH HAS BEEN RAISED VIDE GROUND NO. 12 & 13. AEGIS LIMITED ITA NO.1213/M/2014 19 18 . BRIEF FACTS ON THIS ISSUE AR E THAT THE ASSES S EE HAD ENTERED INTO CERTAIN GUARANTEE ARRANGEMENTS IN RESPECT OF CERTAIN BORROWINGS TAKEN BY ITS AE. THE SAID TRANSACTION WAS NOT DISCLOSED IN THE FORM 3 CEB FOR THE PURPOSE OF BENCHMARKING AS THE ASSESSEE WAS OF THE BELIE F THAT MAINTENANCE OF TP DOCUMENTATION DID NOT SPECIFY GUARANTEE ARRANGEMENT AND IT D OES NOT CONSTITUTE INTERNATIONAL TRANSACTIONS . THE DETAILS OF VARIOUS GUARANTEE ARRANGEMENT MADE AND ENTERED INTO BY THE ASSESSEE WI T H THIRD PARTY BANKS ON BEHALF OF ITS AE WERE AS UNDER: S.N O . DETAILS OF GUARANTEE GUARANTEE AMOUNT (INR) PURPOSE OF GUARANTEE 1 CORPORATE GUARANTEE GIVEN BY THE APPELLANT TO AXIS BANK FOR EXTENDING FOREIGN CURRENCY LOAN OF USD 15,000,000 TO ITS 100% SUBSIDIARY ESSAR SERVICES MAURITIUS 75,73,50,000 FOR R EDEMPTION OF PRE - FERENCE SHARES OF ESSAR SERVICES MAURI - T US HELD BY THE APPELLANT 2 CORPORATE GUARANTEE GIVEN BY THE APPELLANT ON BEHALF OF ITS 100% SUBSIDIARY, AEGIS USA INC. TO BANK OF INDIA (SINGAPORE), STATE BANK OF INDIA (CANADA), PUNJAB NATIONAL BANK (INTERNATIONAL LTD, LONDON) AND J P MORGAN SECURITIES (ASIA PACIFIC) LIMITED, SINGAPORE 6,66,46,80,000 FOR FINANCING THE ACQUISITION OF PEOPLE SUPPORT INC. FOR USD 132 MILLION 1 9 . THE TPO HELD THAT GUARANTEE FEE SHOULD HAVE BEEN CHARGE D @ 5% FROM THE AE FOR PROVIDING THE CORPORATE GUARANTEE AND ACCORDINGLY , HE MADE AN ADJUSTMENTS OF RS. 17,84,64,859/ - . THE DRP ON THE OTHER HAND, HELD THAT THE INDIA N BANKS CHA R GE AROUND 2% OF COMMISSION FOR GIVING BANK GUARANTEE AND OVER AND ABOVE THIS, 1% F OR COVERING THE RISK TAKEN BY THE ASSESSEE WITHOUT ANY SECURITY SHOULD ALSO BE INCLUDED. THUS, DRP DIRECTED THE ASSESSING OFFICER TO COMPUTE THE GUARANTEE FEE COMMISSION AT 3% PER ANNUM AND ACCORDINGLY , THE AMOUNT OF ADJUSTMENT ON ACCOUNT OF GUARANTEE FEE WAS REDUCED TO RS. 10,70,78,915/ - . 2 0 . BEFORE US, THE LD. COUNSEL SHRI RAJAN VOHRA BESIDES SUBMITTING THAT SUCH GUARANTEE FEE ARRANGEMENT CANNOT BE HELD TO AEGIS LIMITED ITA NO.1213/M/2014 20 BE INTERNATIONAL TRANSACTION IN VIEW OF THE DECISION OF ITAT DELHI BENCH IN THE CASE OF B HARTI AIRT EL LTD IN ITA NO. 5816/DEL/2012, HE FURTHER SUBMITTED THAT SUCH A GUARANTEE FEE PERCENTAGE AS DETERMINED BY THE DRP IS NOT CORRECT ON VARIOUS COUNTS . BESIDES MAKING DETAILED SUBMISSION WITH REGARD TO THE CONTENTION THAT THE CORPORATE GUARANTEE GIVEN BY THE ASSESSEE CANNOT BE BENCHMARK IN VIEW OF THE PECULIAR FACTORS, HE ALSO REFERRED AND RELIED UPON VARIOUS DECISIONS OF ITAT MUMBAI BENCH, WHEREIN, THE BANK GUARANTEE COMMISSION HAS BEEN CHARGED FROM 0 .5% TO 1%. LIST OF SUCH DECISIONS, AS RELIED UPON, ARE AS UNDER: SR.NO. NAME OF CASE LAW 1 GLENMARK PHARMACEUTICALS LIMITED (ITA NO. 5031/MUM/2012) 2 GODREJ HOUSEHOLD PRODUCTS LIMITED (ITA NO. 7369/MUM/2010) 3 EVEREST KANTO CYLINDER LIMITED (ITA NO. 7073/MUM/2012) 4 EVEREST KANTO CYLINDER LIMITED (ITA NO. 54 2/MUM/2012) 5 NIMBUS COMMUNICATIONS LIMITED (ITA NO. 3664/MUM/2010) 6 RELIANCE INDUSTRIES LTD. (ITA NO. 4475/MUM/2007) LASTLY , HE SUBMITTED THAT ASSESSEE IN AY 2012 - 13 HAS CHARGED 1% AS GUARANTEE COMMISSION FROM ITS AE AND THIS CHARGING OF 1% HAS BEEN MADE RETROSPECTIVELY FROM FY 2007 - 08. HENCE, CHARGING OF 1% SHOULD BE ACCEPTED AS ALP FOR THIS TRANSACTION. 2 1 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE DRP AND SUBMITTED THAT DRP HAS ALREADY SCALED DOWN THE PERCENTAGE AND GUARANTE E COMMISSION AND HENCE IT SHOULD NOT REDUCED FURTHER. 2 2 . 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 ASSE S SEE HAS SUO MOTO ENTERED INTO GUARANTEE AGREEMENTS WITH ITS AE PURSUANT TO WHICH IT HAS CHARGED GUARANTEE COMMISSIO N 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 ASSE S SEE HAS BEEN RECOGNIZED IN THE AEGIS LIMITED ITA NO.1213/M/2014 21 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 W ITHOUT 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 C OMMISSION OF 1% SHOULD BE CHARGEABLE. HERE IN TH IS 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 A CCORDINGLY . THUS, GROUNDS 12 & 13 AS RAISED BY THE ASSES S EE ARE TREATED AS PARTLY ALLOWED. 2 3 . NEXT ISSUE IS WITH REGARD TO A DJUSTMENT ON ACCOUNT OF SUBSCRIPTION AND REDEMPTION OF PREFERENCE SHARE S AT RS.59,90,19,794/ - , AS RAISED VIDE GROUND NO. 14. 2 4 . BRIEF FACTS ARE THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE SUBSCRIBED TO REDEEMABLE PREFERENCE SHARES OF ITS AE , ESSAR SERVICES MAURITIUS AND ALSO REDEEMED S O M E OF THESE SHARES AT PAR. THE ASSESSEES CASE HAD BEEN THAT SUBSCRIPTION OF PREFERENCE SHARES DOES NOT IMPACT PROFIT & LOSS ACCOUNT OR TAXABLE INCOME OR ANY CORRESPONDING EXPENSE RESULTING IN TO DEDUCTION IN THE HANDS OF THE ASSESSEE. REDEMPTION OF PREFERENCE SHARES AT PAR REPRESENTS AN UNCONTROLLED PRICE FOR SHARES , BASED ON A COMPARISON WITH SUCH UNCONTROLLED TRANSACTION PRICE AND, THEREFORE, SUCH REDEMPTION OF PREFERENCE SHARE SHOULD BE CONS IDERED A T ARMS LENGTH FROM INDIAN TRANSFER PRICING PROSPECTIVE. DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS, THE TPO OBSERVED THAT SAID SHARES WERE NON - CUMULATIVE AND REDEEMABLE AT PAR WITHOUT ANY DIVIDEND. FURTHER, THE PREFERENCE SHARES ARE EQUIVALE NT TO INTEREST FREE LOAN AND IN AN UNCONTROLLED THIRD PARTY SCENARIO , INTEREST WOULD BE CHARGED ON SUCH AN AMOUNT , AS THESE AEGIS LIMITED ITA NO.1213/M/2014 22 ARE NOT IN THE NATURE OF BUSINESS ADVANCES . AFTER MAKING REFERENCE TO FINMMDA GUIDELINES AND CONDUCTING ENQUIRES FROM CRISIL U/S 133 (6) , HE ASSUMED THE CREDIT RATINGS OF THE AE TO BE BBB( - ) AND ON THE BASIS OF B ON D RATE INFORMATION OBTAINED FROM CRISIL, HE DETERMINED THE RATE OF INTEREST AT 15.41% AND C O M P U TED THE ADJUSTMENT OF RS. 59,90,19,794/ - . THE DRP AGREED THAT THE TPOS RE - CHARA CTERIZATIONS APPROACH INTO LOAN AND CHARGING OF INTEREST THEREON IS CORRECT . HOWEVER, THEY DID NOT AGREE WITH THE TPOS APPROACH OF IMPUTING THE INTEREST USING CREDIT RATING AN D INDIAN BON D YIELD . THEY INSTEAD DIRECTED THE ASSESSING OFFICER TO CHARGE INTER EST RATE AS CHARGED BY THE ASSESSEE WHICH WAS AT 13.78 % AND THEREBY ALSO DIRECTED TO ADD MARKUP OF 1.65%, FOR RISKS. T HEY DIRECTED THE ADJUSTMENT TO MADE ACCORDINGLY. 25 . BEFORE US, LD. COUNSEL SUBMITTED THAT THE TPO CANNOT RE - CHARACTERIZE THE SUBSCRIPTI ON OF PREFERENCE SHARES TO ADVANCEMENT OF UNSECURED LOAN BY TERMING IT AT AS EXCEPTIONAL CIRCUMSTANCE AND HE CANNOT QUESTION THE COMMERCIAL EXPEDIENCY OF THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE. HE ALSO RELIED UPON FOLLOWING DECISIONS IN SUPPORT OF C ONTENTION THAT RE - CHARACTERIZ ATION OF TRANSACTIONS IS NOT A CORRECT APPROACH . SR.NO. NAME OF CASE LAW 1 BESIX KIER DABHOL SA (ITA NO. 776/MUM/2011) 2 ZAHEER MAURITIUS (WP 1648/2013 AND CM 3105/2013) 3 BHARTI AIRTEL LIMITED (ITA NO. 5816/DEL/2012) 4 PA RLE BISCUITS PRIVATE LIMITED(ITA NO. 9010/MUM/2010) 5 ALL CARGO GLOBAL LOGISTICS LIMITED (ITA NO. 4909 AND 4910/MUM/2012 6 TOOLTECH GLOBAL ENGINEERING PRIVATE LIMITED (ITA NO. 273/PN/2014) EXPLAINING THE NATURE OF TRANSACTION, MR. RAJAN VOHRA SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO ARRANGEMENTS FOR SPECIFIC PURPOSE AND IN THE CAPACITY OF A SHAREHOLDER FURTHERING ITS OWN INTEREST , IT HAD BORROWED MONEY FROM EXIM BANK AND AXIS BANK AND THESE LOANS WERE BEING SERVICED AT A HIGH INTEREST RATES . T O REDU CE ITS INTEREST BURDEN, THE ASSES S EE DECIDED TO PREPAY ITS DE BTS BY REDEEMING ITS PREFERENCE SHARES. SUBSEQUENTLY IT SUBSCRI BED FOR FRESH PREFERENCE SHARES IN ORDER TO FURTHER ITS PARTICIPATION INTEREST IN DOWNSTREAM SUBSIDIARIES . THUS, BY ANY STRETCH OF I MAGINATION IT AEGIS LIMITED ITA NO.1213/M/2014 23 CANNOT BE INFERRED TO BE LOAN BUT IS PURELY ON INVESTMENT IN SHARES. AS AN ALTERNATIVE, HE SUBMITTED THAT INTEREST SHOULD BE ON LIBOR BASIS AND IN SUPPORT OF T HIS CONTENTION, HE RELIED UPON THE FOLLOWING DECISIONS: SR.NO. NAME OF CASE LAW 1 COTTON NATURALS INDIA PRIVATE LIMITED (22 ITR 438) 2 COTTON NATURALS INDIA PRIVATE LIMITED (ITA NO. 3265/D/2011) 3 EVEREST KANTO CYLINDER LIMITED (ITA NO. 7073/MUM/2012) 4 HINDUJA GLOBAL SOLUTIONS LIMITED V ACIT (145 ITD 361) 5 DCIT V TECH MAHINDRA LI MITED (ITA NO. 1176/MUM/2010) 6 TATA AUTOCOMP SYSTEMS LIMITED V ACIT (52 SOT 48) 7 DANIA ORO JEWELLERY PRIVATE LIMITED (63 SOT 19) 8 AURIONPRO SOLUTIONS LIMITED (36 CCH 6) 26 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE TPO AND DRP . 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 SH ARES 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 TH E 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 SHARE S 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 GIV EN DIFFERENT COLOUR SO AS TO EXPAND THE SCOPE OF TRANSFER PRICING ADJUSTMENTS BY RE - CHARACTERIZING IT AS INTEREST FREE LOAN. NOW, AEGIS LIMITED ITA NO.1213/M/2014 24 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 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DEXISKIER DHBOAL SA, ITA NO. 776 OF 2011 ORDER DATED 30 TH 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. 28 . NEXT ISSUE RELATES TO ADJUSTMENT OF RS. 16,70,226/ - ON ACCOUNT OF INTEREST ON ADVANCE GIVEN TO THE AE , AS RAISE IN GROUND NO. 1 5. 29 . DURING THE FINANCIAL YEAR 2008 - 09, THE ASSESSEE HAS MADE ADVANCE TO ITS AE WHICH WAS DISCLOSED IN FORM 3EC B . THE ASSESSEES CASE HAS BEEN THAT FOR THE PURPOSE OF IDENTIFYING PROSPECTIVE COMPANIES FOR ACQUISITION IN SOUTH AFRICAN REGION THE ASSESSE E HAD GIVEN ADVANCE FOR ENGAGING CONSULTANTS AND HAS IN FACT RECEIVED ADVISORY SERVICES FROM SOUTH AFRICAN BASED CONSULTANTS IN THIS REGARD . THE COST INCURRED TOWARDS HI RING OF THESE CONSULTANTS WAS ERRONEOUSLY SHOWN AS ADVANCE IN THE NAME OF AEG I S BPO (SO UTH AFRICA) PTY. LTD. , WHICH WAS A SPECIAL PURPOSE VEHICLE FOR INVESTING IN SOUTH AFRICA. THIS WAS A COST PERTAINED TO THE ASSESSEE AND WHEN IN THE NEXT YEAR ACTUAL INVOICE WERE RECEIVED THE SAME WAS BOOKED IN THE PROFIT AND LOSS ACCOUNT. IN SUPPORT, THE C OPY OF THESE INVOICES WERE ALSO FILED. HOWEVER, THE TPO HELD THAT IT IS AN INTEREST FREE LOAN AND ASSESSEE SHOULD HAVE EARNED INTEREST ON IT AND ACCORDINGLY, HE IMPUTED THE INTEREST @ 15.41% AND MADE ADJUSTMENT OF RS. 16,70,226/ - . SUCH AN ADJUSTMENT HAS AL SO BEEN CONFIRMED BY THE DRP. AEGIS LIMITED ITA NO.1213/M/2014 25 30. THE LD. COUNSEL SUBMITTED THAT, IT WAS DULY CLARIFIED BEFORE THE TPO THAT THE NATURE OF ADVANCE WAS IN FACT, PAYMENT MADE FOR ADVISORY SERVICES, WHICH WAS WRONGLY CLASSIFIED AS ADVANCE AND THEREFORE, IT IS AN EXPENSE TO THE ASSESSEE AND NO INTEREST CAN BE CHARGE D. ON THE OTHER HAND, THE LD. DR RELIED UPON THE ORDER OF THE DRP. 3 1 . AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THE ASSESSEE HAS FILED COPIES OF INVOICES RELATING TO PAYMENT OF ADVISORY SERVICES RENDE RED BY THE SOUTH AFRICAN BASED CONSULTANTS , FOR ACQUIRING PROSPECTIVE COMPANIES FOR ACQUISITION IN SOUTH AFRICA. THIS WAS A COST INCURRED TOWARDS HIRING OF THE CONSULTANTS AND WAS IN THE NATURE OF EXPENDITURE. SUCH AN EXPENDITURE HAS BEEN BOOKED IN THE PRO FIT AND LOSS ACCOUNT ALSO IN THE SUBSEQUENT YEAR, THEREFORE, SUCH AN ADVANCE GIVEN IN THIS YEAR CANNOT BE TREATED AS A LOAN SO AS TO IMPUTE INTEREST THEREON. IT IS PURELY FOR BUSINESS AND COMMERCIAL CONSIDERATION AND HENCE NO INTEREST CAN BE CHARGED ON SUC H ADVANCE/EXPENSES. ACCORDINGLY, THE ADJUSTMENT OF INTEREST MADE BY THE AO IS DIRECTED TO BE DELETED. THUS , G ROUND NO. 15 IS TREATED AS ALLOWED. 3 2 . IN G ROUND NO. 17, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF ASSESSEES CLAIM FOR CARRY FORWARD AND S ET OFF UNABSORBED DEPRECIATION ALLOWANCE OF RS. 2,16,63,135/ - AND BUSINESS LOSS OF RS. 6,36,01,340/ - , AGGREGATING TO RS. 8,52,64,475/ - . 3 3 . BRIEF FACTS OF THE CASE ARE THAT IN PURSUANT TO DE MERGER SCHEME BETWEEN GV PL AND THE ASSES S EE, THE BPO DIVISION OF THE GVPL WA S DEMERGED AND GOT V ESTED INTO THE ASSESSEE BY THE ORDERS OF THE HONBLE BOMBAY HIGH COURT DATED 31 ST JANUARY, 2008 AND DELHI HIGH COURT DATED 4 TH MARCH, 2008. THE SAID SCHEME OF DEMERGER WAS GIVEN EFFECT BY THE ASSESSEE DURING THE FINANCIAL YEA R 2008 - 09. IN VIEW OF THE PROVISION OF SECTION 72A(4), THE ASSES S EE WHILE FILING ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009 - 10 AEGIS LIMITED ITA NO.1213/M/2014 26 CLAIMED CARRIED FORWARD AND SET OFF FOLLOWING BUSINESS LOSSES AND UNABSORBED DEPRECATION PERTAINING TO THE GVPL , IN THE FO LLOWING MANNER: - AY TO WHICH LOSSES PERTAINS NATURE OF LOSSES LOSSES OF GVPL TAKEN OVER BY APPELLANT, UNDER THE SCHEME OF DE - MERGER, AND CARRIED FORWARD TO AY 2009 - 10 LOSSES SET - OFF BY APPELLANT DURING AY 2009 - 10 LOSSES CARRIED FORWARD BY APPELLANT TO AY 2010 - 11 2002 - 03 UNABSORBED DEPRECIATION 76,55,312 76,55,312 - 2003 - 04 BUSINESS LOSS 6,36,01,340 6,36,01,340 - 2003 - 04 UNABSORBED DEPRECIATION 2,87,66,909 1,40,07,823 1,47,59,086 TOTAL (IN R) 10,00,23,561 8,52,64,475 1,47,59,086 FURTHER, ADJUSTMENT OF AFOREMENTIONED LOSSES OF GVPL WAS CARRIED OUT BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESS M E NT PROCEEDINGS FOR THE AY 2003 - 04. HOWEVER, AFTER THE ORDER OF THE CIT(A), WHICH WAS SUBSE QUENTLY UPHELD BY THE ITAT, DELHI, AND ALSO BY DELHI HIGH COURT THE LOSSES OF GVPL WERE FINALLY ASSESSED AT RS. 10,96,37,145/ - . FURTHER ADJUSTMENTS WERE MADE BY THE ASSESSING OFFICER FOR THE AY 2002 - 03 ALSO . AS A RESULT THE REVISE BUSINESS LOSS AND UNABSOR BED DEPRECIATION LOSS IN THE CASE OF GVPL WERE DETERMINED AS UNDER: AY RETURNED LOSS OF GVPL ASSESSED LOSSES OF GVPL POST THE ORDER OF LEARNED CIT(A), ITAT, DELHI HIGH COURT REVISED LOSSES OF GVPL AVAILABLE TO APPELLANT, FOR CARRY FORWARD AND SET - OFF I N AY 2009 - 10 2002 - 03 4,61,86,250 4,61,86,250 76,56,312 2003 - 04 11,80,25,770 10,96,37,145 8,39,79,624 (INCLUDING UNABSORBED DEPRECIATION OF 2,87,66,909) THAT APART, DURING THE FINANCIAL YEAR 2008 - 09, THERE WAS CHANGE IN HOLDING COMPANY OF THE ASSESSEE FROM ARYA INFRASTRUCTURE HOLDINGS TO ESSAR SERVICES HOLDINGS LTD. THEREFORE, OWN BUSINESS LOSS OF THE COMPANY WERE NOT AVAILABLE FOR CARRIED FORWARD AS PER SECTION 7 9. THE LD. ASSESSING OFFICER WITHOUT TAKING THE NOTE OF THE SUBSEQUENT APPELLATE ORDER S FO R THE AY 2003 - 04 WHEREIN SUBSTANTIAL RELIEF WAS ALLOWED TO THE GVPL HAS DISALLOWED THE ENTIRE LOSSES OF 2003 - 04 AND T HEREAFTER AFTER APPLYING SECTION 7 9 AEGIS LIMITED ITA NO.1213/M/2014 27 ASSESSING OFFICER DISALLOWED THE CLAIM OF CARRY FORWARD AND SET OFF OF PREVIOUS YEARS BUSINESS LOSSES AND UNABSORBED DEPRECIATION OF THE GVPL TO THE ASSESSEE . 34 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT SECTION 72A(4) HAS AN OVERRIDING EFFECT ON SECTION 79 AND HENCE, THE YEAR IN WHICH THE DEMERGER IS GIVEN EFFECT, THE PROVISIONS OF SECTION 72A(4) SHALL COME INTO PLAY. THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN NOT CONSIDERING THE FACT THAT DEMERGER WAS GIVEN EFFECT IN FINANCIAL YEAR 2008 - 09 AND ACCORDINGLY , THE PROVISIONS OF SECTION 72A(4) SHALL APPLY AND THEREFORE ASSESSEES CLAIM FOR SET OF F OF GVPL LOSSES SHOULD BE ALLOWED. AS AN ALTERNATIVE ARGUMENT, THE LD. COUNSEL SUBMITTED THAT PROVISIONS OF SECTION 79 ARE NOT APPLICABLE TO UNABSORBED DEPRECIATION AND THEREFORE, THIS SHOULD BE ALLOWED TO SET OFF AND CARRY FORWARD. I N SUPPORT OF T HIS CON TENTION , HE RELIED UPON THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF CIT VS. SUBHULAXMI MILLS LTD, REPORTED IN 143 ITR 863 AND THE OTHER DECISIONS ON THIS MATTER. 35 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE ASSESSING OFFICER A ND SUBMITTED THAT THE ASSESSING OFFICER HAS RIGHTLY APPLIED SECTION 79 WHICH IS A NON OBST A N T E CLAUSE APPLICABLE FOR CHAPTER VI ONLY . THEREFORE, THE ORDER OF THE ASSESSING OFFICER SHOULD BE CONFIRMED. 36 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E RELEVANT MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT PURSUANT TO THE DEMERGER SCHEME, THE BPO DIVISION OF THE GVPL WAS DEMERGED AND GOT VESTED INTO THE ASSESSEE BY THE ORDERS OF THE HONBLE HIGH COURTS ON 31 ST MARCH, 2008 AND 4 TH MARCH, 2008 AND SA ID SCHEME OF DEMERGER WAS GIVEN EFFECT TO DURING THE FINANCIAL YEAR 2008 - 09 RELEVANT T O THE AY 2009 - 10. FIRST OF ALL, THE MAIN ISSUE BEFORE US IS WHETHER THE CLAIM OF SET OFF OF UNABSORBED BUSINESS LOSSES AND UNABSORBED DEPRECIATION PERTAINING TO THE GVPL CAN BE ALLOWED IN THE HANDS OF THE ASSESSEE OR NOT . SECTION 72A DEALS WITH THE PROVISION RELATING TO CARRY FORWARD AND SET OFF OF AEGIS LIMITED ITA NO.1213/M/2014 28 ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN THE CASES OF AMALGAMATION AND DEMERGER . SUB - SECTION (4) IS NON OBST A N T E CLAUSE , WHICH PROVIDES THAT NOTWITHSTANDING ANYTHING CONTAIN IN ANY OTHER PROVISION OF THIS ACT IN THE CASE OF A DEMERGER , THE ACCUMULATED LOSS/ALLOWANCE FOR THE UNABSORBED DEPRECIATION OF THE DEMERGER COMPANY SHALL BE AS UNDER: (A) WHERE SUCH LOSS OR UNABSORBED DEPRECIATION IS DIRECTLY RELATABLE TO THE UNDERTAKINGS TRANSFERRED TO THE RESULTING COMPANY, BE ALLOWED TO BE CARRIED FORWARD AND SET OFF IN THE HANDS OF THE RESULTING COMPANY; (B) WHERE SUCH LOSS OR UNABSORBED DEPRECIATION IS NOT DIRECTLY RELA TABLE TO THE UNDERTAKINGS TRANSFERRED TO THE RESULTING COMPANY, BE APPORTIONED BETWEEN THE DEMERGED COMPANY AND THE RESULTING COMPANY IN THE SAME PROPORTION IN WHICH THE ASSETS OF THE UNDERTAKINGS HAVE BEEN RETAINED BY THE DEMERGED COMPANY AND TRANSFERRED TO THE RESULTING COMPANY, AND BE ALLOWED TO BE CARRIED FORWARD AND SET OFF IN THE HANDS OF THE DEMERGED COMPANY OR THE RESULTING COMPANY, AS THE CASE MAY BE. THUS, BY VIRTUE OF SECTION 72A(4), IN THE CASE OF THE ASSESSEE, THE ACCUMULATED LOSS AND UNABSOR BED DEPRECIATION OF THE DEMERGED COMPANY SHALL BE ALLOWED TO BE CARRIED FORWARD AND SET OF F IN THE HANDS OF THE RESULTING COMPANY I.E. THE ASSESSEE. THE ASSESSING OFFICER HAS INVOKED SECTION 79 WHICH APPARENTLY IS NOT APPLICABLE ON THE FACTS OF THE CASE; A ND SECONDLY, IT DOES NOT HAVE AN OVERRIDING EFFECT ON SECTION 7 2 A(4) WHICH IS A SPECIFIC PROVISION IN CASE OF CARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION IN CASE OF AMALGAMATION OR DEMERGER. SECTION 79 HA S ONLY AN OVERRIDING E FFECT SO FAR AS CHAPTER VI IS CONCERNED, HOWEVER, SECTION 72A(4) HAS AN OVERRIDING EFFECT O VE R ANY OTHER PROVISIONS OF THE INCOME TAX ACT INCLUDING THAT OF SECTION 79 BECAUSE IT IS A SPECIAL PROVISION APPLICABLE ONLY FOR AMALGAMATION AND DEMERGER . THUS, TH E ASSESSEE WOULD BE ENTITLED AEGIS LIMITED ITA NO.1213/M/2014 29 FOR CLAIM OF SET OF F OF CARRIED FORWARD UN - ACCUMULATED BUSINESS LOSS AND UNABSORBED DEPRECIATION OF G VPL. SO FAR AS THE FACT THAT THE ASSESSING OFFICER HAS DISALLOWED THE CARRY FORWARD O F BUSINESS LOSS FOR THE AY 2003 - 04 IN THE CASE OF GVPL, NOW CLAIMED BY THE ASSESSEE AFTER DEMERGER , IT APPEARS THAT HE HAS NOT TAKEN INTO EFFECT THE SUBSEQUENT APPELLATE ORDER S WHICH HAS BEEN AFFIRMED FROM THE STAGE OF DELHI HIGH C OURT . A S A RESULT OF SUCH ORDERS SUBSTANTIAL RELIEF HAS BEEN ALLOW ED TO THE G VPL, WHICH WILL RESULT IN TO REVISE CLAIM OF BUSINESS LOSS ES AND UNABSORBED DEPRECIATION. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE SAID EFFECT OF APPELLATE ORDERS AND TO GIVE CONSEQUENTIAL RELIEF TO THE ASSESSEE AND ALLOW THE BUSINESS LOSS ES AND UNABSORBED DEPRECIATION ALLOWANCE OF GVPL IN THE HANDS OF THE ASSESSEE COMPANY IN ACCORDANCE WITH SECTION 72A(4) . AS A RESULT, GROUND NO. 17 IS TREATED AS ALLOWED. 37 . IN G ROUND NO. 18, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE CLAI M OF DEPRECIATION ON ACCOUNT OF STAMP DUTY OF RS. 35,55,000/ - CAPITALIZED BY THE ASSESSEE. 38 . THE BRIEF FACTS ARE THAT, DURING THE YEAR THE ASSESSEE PURCHASED THE BPO BUSINESS OF AOL INDIA P LTD. AS A GOING CONCERN BY WAY OF BUSINESS TRANSFER AGREEMENT ( BTA) . THE ASSESSEE PAID STAMP DUTY AMOUNTING TO RS. 35,55,000/ - ON THIS B TA. IN THE FINAL STATEMENT AS WELL AS FOR THE PURPOSE OF TAXATION , SUCH STAMP DUTY HAS BEEN CAPITALIZED IN THE RATIO OF VALUE OF ASSETS ACQUIRE D FROM AOL INDIA P LTD. UNDER B TA. THE A SSESSING OFFICER HELD THAT WHAT WAS TRANSFERRED BY WAY OF DTA IS THE BUSINESS AND THE STAMP DUTY PAID ON SUCH AGREEMENT IS WITH REGARD TO THE BUSINESS AND NOT ANY SPECIFIC DEPRECIABLE ASSETS. AS PER AS - 10 STAMP DUTY PAID ON TRANSFER OF BUSINESS BEING NOT M ENTIONED IN THE LIST OF ITEMS TO BE INCLUDED IN THE COST OF FIXED ASSETS CANNOT BE ADDED TO COST OF SUCH FIXED ASSETS . SUCH AN ADDITION HAS ALSO BEEN CONFIRMED BY THE D RP. AEGIS LIMITED ITA NO.1213/M/2014 30 39 . BEFORE US, THE LD. COUNSEL SUBMITTED THE A CT NOWHERE SPECIFIES MODICUM AND H OW THE COST IS TO BE RECOGNIZED BY PURCHASE OF AN UNDERTAKING ACQUIRED ON A SLUMP SALE BASIS. AS AN ESTABLISHED PRACTICE THE PURCHASER ALLOCATES THE PURCHASE PRICE AND OTHER RELATED COST INCURRED BY IT (I.E. TO ACQUIRE AN UNDERTAKING O N SLUM SALE BASIS) OV ER ASSETS ON RATIONAL BASIS AND CLAIM DEPRECIATION ACCORDINGLY. AS PER SECTION 43(1) ACTUAL COST MEANS THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE. SINCE THE STAMP DUTY IS THE ACTUAL COST INCURRED BY THE ASSESSEE IN ORDER TO PURCHASE THE ASSETS, IT SHA LL BE CONSIDERED AS COST TO THE ASSESSEE. AS PER AS - 10 STAMP DUTY RELATES TO THE COST OF ACQUISITION AND HENCE IT SHOULD BE CAPITALIZED . THUS, THE PRINCIPLE OF APPORTIONMENT FOR DETERMINING THE ACTUAL COST OF A DEPRECIABLE ASSETS IS EMBEDDED IN THE ACT ITS ELF. WITHOUT PREJUDICE, HE SUBMITTED THAT STAMP DUTY IS OTHERWISE ALLOWABLE AS REVENUE EXPENSES AND IN SUPPORT, VARIOUS JUDICIAL PRECEDENTS WERE CITED BEFORE US. 4 0 . ON THE OTHER HAND, LD. DR SUBMITTED THAT THE STAMP DUTY IN THE PRESENT CASE HAS BEEN PAID ON BUSINESS TRANSFER AGREEMENT AND NOT FOR A SPECIFIC DEPRECIABLE ASSETS. EVEN AS PER ACCOUNTING STANDARD THE STAMP DUTY RELATABLE COST SHOULD BE CAPITALIZED WHICH IS ALSO THE PLEA OF THE ASSESSEE. HOWEVER, NO DEPRECIATION CAN BE ALLOWED ON SUCH A EXPENSE. FURTHER, STAMP DUTY CANNOT BE HELD TO BE REVENUE EXPENDITURE AS EXPLAINED BY SUBSEQUENT DECISION OF HONBLE SUPREME COURT. 4 1 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. HERE THE ISSUE PERTAINS TO , WHETHE R THE DEPRECIATION SHOULD BE ALLOWED ON THE STAMP DUTY PAID ON BUSINESS TRANSFER AGREEMENT, WHICH HAS BEEN CAPITALIZED BY THE ASSES S EE. THE COST OF THE STAMP DUTY HERE CANNOT BE SAID TO BE ON STAND ALONE CAPITAL EXPENSE BUT A PART OF THE COST OF ACQUIRING T HE BUSINESS/ UNDERTAKING O N SLUMP SALE BASIS. THE BUSINESS SO TRANSFERRED BY WAY OF B TA ITSELF COMPRISE S O N ASSET AND ANY EXPENSE LIKE STAMP DUTY PAID BECOMES THE COST OF AEGIS LIMITED ITA NO.1213/M/2014 31 ACQUISITION OF THE ASSET BY THE ASSESSEE AND GETS CAPITALIZED TO THE WHOLE OF ASSET V ALUE . SINCE THE STAMP DUTY IS THE ACTUAL COST INCURRED BY THE ASSESSEE IN ORDER TO PURCHASE THE ASSET, THEREFORE, IT ACQUIRES THE CHARACTER OF A COST OF THE CAPITAL ASSET AND HENCE BECOMES THE PART OF THE VALUE OF THE CAPITAL ASSET AC QUIRED. THE HONBLE SU PREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD VS CIT, REPORTED IN 98 ITR 167 HAD HELD THAT THE ACCEPTED ACCOUNTANCY RULES FOR DETERMINING THE COST OF FIXED ASSETS IS TO INCLUDE ALL THE EXPENDITURE NECESSARY TO BRING SUCH ASSET INTO EXISTENCE AND PUT TO THEM IN WORKING CONDITION. THUS, THE PAYMENT OF STAMP DUTY IS A COST WHICH IS DIRECTLY ATTRIBUTABLE TO THE ACQUISITION OF AN ASSET AND AS PER A CCOUNTING S TANDARD - 10 THE SAME SHOULD BE INCLUDED IN THE COST OF FIXED ASSETS AND, THEREFORE, BEING PART OF THE CAPITAL ASSET, THE ASSESSEE IS ENTITLED FOR DEPRECIATION. ACCORDINGLY, THE GROUND NO. 18 RAISED BY THE ASSESSEE IS TREATED AS ALLOWED. 4 2 . IN G ROUND NO. 19, THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS. 1,55,232/ - ON ACCOUNT OF MISMATCH BETWEEN ANNUAL I NFORMATION REPORT (AIR) AND THE REVENUE REPORT ED BY THE ASSESSEE. 43 . THE ASSESSING OFFICER ON THE BASIS OF AIR INFORMATION OBSERVED THAT THE ASSES S EE HAD ENTERED INTO A TRANSACTION WITH PA POONACHA AN D SUPERTENDING ENGINEER . THE ASSESSEES CASE BEFO RE THE ASSESSING OFFICER WAS THAT IT HAD NOT ENTERED INTO ANY SUCH TRANSACTION WITH THE SAID TWO PARTIES AND THERE MUST BE SOME ERROR IN THE AIR INFORMATION . THE ASSESSEE DOES NOT HAVE ANY RECORD OF HAVING RECEIVED ANY SUM OF THE MONEY FROM ANY SUCH PARTIE S IN THE RELEVANT ASSESSMENT YEAR. NEITHER THE ASSESSEE HAS CLAIMED ANY TDS CREDIT DEDUCTED BY TH E S E PART IES NOR HAS RECEIVED ANY SUCH MONEY. THE ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE COULD NOT GET ANY CONFIRMATION FROM THESE PARTIES TO SUBSTANTIA TE ITS CLAIM, THEREFORE , THE SAME WAS ADDED. AEGIS LIMITED ITA NO.1213/M/2014 32 44 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF RECORDS, WE FIND THAT ALL THE AMOUNTS RECEIVED BY THE ASSESSEE WERE THROUGH CHEQUES OR THROUGH BANKING CHANNELS WHICH HAS BEEN DEPOSITED IN THE B ANK ACCOUNT OF THE ASSESSEE . THE GROSS INCOME OFFERED BY THE ASSES S EE ALSO FAR EXCEEDS THE AMOUNT APPEARING IN THE AIR. THAT APART THE ASSESSEES BOOKS OF ACCOUNT HAVE BEEN DULY AUDITED AND NO DISCREPANCY AS SUCH HAVE BEEN FOUND BY THE ASSESSING OFFICER , T HAT ANY TRANSACTION HAS NOT BEEN ENTERED BY THE ASSESSEE. IF THE ASSESSEE HAD CATEGORICALLY DENIED ANY TRANSACTION WITH THOSE TWO PARTIES BY SHOWING IT FROM ITS OWN RECORDS , THEN THE ONUS HEAVILY LIES UPON THE DEPARTMENT TO SHOW THAT THE ASSESSEE HAD ACTUA LLY TRANSACTED WITH THE SAID PART IES . THUS, IN ABSENCE OF ANY SUCH MATERIAL OR ENQUIRY DONE BY THE ASSESSING OFFICER, NO ADDITION COULD BE MADE IN THE HANDS OF THE ASSESSEE SIMPLY RELYING UPON THE UNCORROBORATED AIR INFORMATION. ACCORDINGLY, ADDITION MADE BY THE ASSESSING OFFICER IS DIRECTED TO BE DELETED AND G ROUND NO. 19 IS THUS ALLOWED. 4 5. IN G ROUND NO. 20, THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS. 11,69,56,961/ - WHICH WAS ON ACCOUNT OF DISALLOWANCE OF CURRENT YEARS LOSS ON ACCOUNT OF REDEMPTION OF PREFERENCE SHARES AND LOSS O N SALE OF SHARES. 46 . THE BRIEF FACTS ARE TH A T THE DURING THE FINANCIAL YEAR 2008 - 09, THE ASSESSEE INCURRED LOSS AGGREGATING TO RS. 11,01,03,639/ - ON ACCOUNT OF REDEMPTION OF 2,04,00,000 PREFERENCE SHARES OF ESSAR SERVICES, MAURITIUS REDEEMED AT PAR @ 1$ PER SHARE. THESE SHARES WERE PURCHASED DURING THE FINANCIAL YEAR 2004 - 05 @ 1$ PER SHARE, THEREFORE, THE LOSS WHICH AROSE DURING THE YEAR WAS PRIMARILY ON ACCOUNT OF INDEXATION OF COST OF ACQUISITION. SINCE THE ASSESSING OFFI CER AS PER THE FINDING OF THE TPO HAD HELD THAT TRANSFER OF ASSET AND REDEMPTION OF PREFERENCE SHARES HAS BEEN CHARACTERIZED AS LOAN TRANSACTION, THEREFORE, HE HELD THAT THERE WOULD NOT BE ANY CAPITAL LOSS. THIS ISSUE HAVE ALREADY BEE N DEALT WITH BY US, WH ILE 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 RE CHARACTERIZATION 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 H OW 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 FURTHER ING ITS OWN INTEREST BY SUBSCRIBING THE SHARES . I T 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 SUBSCRIBE D AGAIN FOR FRESH PREFERENCE SHARES IN ORDER TO FURTHER ITS PARTICIPATION INTEREST IN DOWNSTREAM SUBSIDIARIES. THIS TRANSACTION CANNOT BE RE CHARACTERIZED 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 W HICH 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. 47 . IN G ROUND NO. 21, THE ASSES S EE HAS CHALLENGED DISALLOWANCE OF INTEREST EXPENSE OF RS. 89,716/ - ARISING OUT OF LEASE PAYMENT , U/S 40(A)(IA) ON THE GROUND THAT TDS U/S 194A HAS NOT BEEN DEDUCTED . 48 . THE ASSESSEE HAS MADE LEASE PAYMENT TO IBM INDIA PVT LTD AND OREN AUTO INFRASTRUCTURE . THE INTEREST AMOUNT AGGREGATING TO RS. 89,719/ - WAS PAID TO THESE PARTIES WITHOUT ANY DEDUCTION OF TAX. AEGIS LIMITED ITA NO.1213/M/2014 34 49 . BEFORE US, THE ASSESSEES CONTENTION HAS BEEN THAT NO DISALLOWANCE U/S 40(A)(IA) CAN BE MADE FOR THE AMOUNT PAID DURING THE YEAR AND IN SUPPORT RELI ANCE WAS PLACED ON THE DECISION OF ITAT SB IN THE CASE OF MALINLYN SHI PPING AND TRANSPORT VS ADDL CIT, REPORTED IN 146 TTJ 1 AND ADDL CIT VS VICTOR SHIPPING SERVICES P LTD, REPORTED IN 357 ITR 642. 5 0 . ON THE OTHER HAND, THE LD. DR RELIED UPON A DECISION OF ITAT MUMBAI BENCH IN THE CASE OF ITO VS M/S PRATIBHUTI VINIYOG LTD, ITA NO. 1689/MUM/2011, ORDER DATED 22.08.2014 WHEREIN THE TRIBUNAL AFTER CONSIDERING THE V E CTOR SHIPPING AND GUJARAT AND CALCUTTA HIGH COURTS HAVE DECIDED THE ISSUE IN FAVOUR OF THE DEP ARTMENT BY HOLDING THAT PROVISION OF S ECTION 40(A)(IA) IS APPLICABLE EVEN ON THE PAID AMOUNT . 5 1 . AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THE TRIBUNAL IN THE AFORESAID DECISION HAS DISCUSSED THE ISSUE O F PAID AND PAYABLE AFTER DISCUSSI NG THE DECISION OF V E CTOR SHIPPING OF ALLAHABAD HIGH COURT AND ALSO THE DECISIONS OF CALCUTTA HIGH COURT IN THECASE OF CIT VS CRESCENT EXPORTS SYNDICATE [2013] 262 CTS (CAL), 525 AND GUJARAT HIGH COURT IN CIT VS SIKANDARKHAN TUNVAR, 357 ITR 312 AND HELD TH AT DECISION OF M ERLIN SHIPPING AND TRANSPORT ( SUPRA ) WILL NOT BE APPLICABLE IN THE WAKE OF LATER HIGH COURT S DECISIONS DIRECTLY ON THE POINT . ACCORDINGLY, THIS GROUND NO. 21 , AS RAISED BY THE ASSESSEE IS TREATED AS DISMISSED. 5 2 . GROUND NO. 22, THE ASSE S S EE HAS CHALLENGED THE DISALLOWANCE OF INTEREST EXPENSE AMOUNTING TO RS. 78,60,025/ - U/S 36(1)(III) HOLDING THAT MONEY HAS BEEN ADVANCE D ON INTEREST FREE LOANS TO THE SISTER CONCERN/SUBSIDIARIES. 53 . DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE BOR ROWED CERTAIN AMOUNTS FROM VARIOUS BANKS AND FINANCIAL INSTITUTIONS ON WHICH IT HAS PAID INTEREST AMOUNTING TO RS. 4.62 CRORES. DURING THE AEGIS LIMITED ITA NO.1213/M/2014 35 YEAR, CERTAIN SUMS WERE ADVANCED BY THE ASSESSEE TO ITS SISTER CONCERN/SUBSIDIARIES, WHICH ARE AS UNDER: COMPANY NAME NATURE OF RELATIONSHIP OPENING BALANCE (AS ON 01.04.2008) CLOSING BALANCE (AS ON 31.03.2009) REMARKS (IF ANY) ESSAR ENGINEERING SERVICES LIMITED SUBSIDIARY 12,046 28,410 AMALGAMATED WITH AEGIS LIMITED W.E.F. 01.04.2009 GLOBAL VANTEDG E PRIVATE LIMITED FELLOW SUBSIDIARY 1,160 263 - AEGIS ASPIRE CONSUL - TANCY SERVICES LTD. OTHER GROUP COMPANY - 3,925 - AEGIS BPO SERVICES (SOUTH AFRICA) LTD. SUBSIDIARY - 10,313 AEGIS BPO SERVICES (GUR GAON) LIMITED SUBSIDIARY - 18,408 BPO DIVISION DEMERGED INTO AEGIS LIMITED W.E.F. 01.04.2009 TOTAL 13,206 61,319 THE SUMS S O ADVANCE D TO THESE SISTER CONCERNS, WE RE UTILIZED BY THESE COMPANIES FOR PAYMENT OF VARIOUS EXPENSES INCURRED BY THE M LIKE PAYMENT OF SERVICE TAX, SALES TAX, SALARY ETC. THE ASSESSEES CASE HAD BEEN THAT IT HAS ADVANCE D THE MONEY FROM ITS OWN INTEREST FREE FUNDS AND NO BORROWED FUNDS HAVE BEEN UTILIZED BY THE ASSESSEE FOR ADVANCING THE MONEY . THE DETAILED BREAK UP OF OW N FUNDS AS AVAILABLE WITH THE ASSESSEE WERE AS UNDER: PARTICULARS NO OF SHARES ISSUE PRICE(INR) VALUE (INR) OPENING BALANCE OF SHARE CAPITAL AS ON 01.04.2008 616,345,000 OPENING BALANCE OF SHARE PREMIUM AS ON 01.04.2008 2,845,559,000 TOTAL (INR) 3,461,904,000 SHARES ISSUED DURING THE YEAR FOR CASH I. ON JULY 15, 2008 219,642 400 87,856,800 II. NOVEMBER 4, 2008 2,884,200 400 1,153,680,000 III MARCH 17, 2009 1,251,336 400 500,534,400 IV MARCH 30, 2009 2,542,875 400 1,017,150,000 TOTAL (INR) 62,21,125,200 54 . THE ASSESSING OFFICERS CASE WAS THAT THESE ADVANCES HAVE BEEN MADE OUT OF THE BORROWED FUNDS AND SINCE NO COMMERCIAL EXPEDIENCY IS ESTABLISHED, THE PROPORTIONATE DISALLOWANCE OF INTEREST ON BORROWED FUNDS HAS TO BE MADE AND ACC ORDINGLY , HE APPLIED THE INTEREST RATE AT 15.41%. AEGIS LIMITED ITA NO.1213/M/2014 36 55 . BEFORE US, THE LD. COUNSEL, SHRI RAJAN VOHRA SUBMITTED THAT ASSESSEE HAD OWN FUNDS OF RS. 346.19 CRORES, OUT OF WHICH ONLY RS. 4 . 81 CRORES WAS GIVEN AS LOAN TO THE SISTER CONCERN/ SUBSIDIARIES . DURING T HE YEAR, THE ASSES S EE HAD RAISED 275.92 CRORES BY WAY OF ISSUE OF SHARES OUT OF WHICH RS. 4.81 CRORES HAVE BEEN LENT TO SISTER CONCERN/SUBSIDIARIES. THE LOAN AMOUNT RECEIVED BY THE ASSES S EE DURING THE YEAR UNDER CONSIDERATION WAS FOR SPECIFIC PURPOSE LIKE, CAPITAL EXPENDITURE, IMPORT OF IT EQUIPMENT ETC. IN SUPPORT OF HIS CONTENTION , HE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD, REPORTED IN 313 ITR 343. WITHOUT PREJUDICE, HE SUBMITTED THAT LOOKING TO THE BUSINESS CONSIDERATION AND COMMERCIAL EXPEDIENCY FOR MAKING ADVANCE TO THE SISTER CONCERN NO PORTION OF INTEREST COULD BE DISALLOWED ON THE GROUND THAT THEY WERE FOR NON - BUSINESS PURPOSE AS HELD BY HONBLE SUPREME COURT IN THE CASE OF S A BUILDERS L TD VS CIT, REPORTED IN 288 ITR 1. 56 . ON THE OTHER HAND, LD. DR HAS STRONGLY RELIED UPON THE ORDER OF THE AO AS WELL THE DIRECTIONS OF THE DRP WHO HAS CONFIRMED THE SAID ADDITION. 57 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVAN T MATERIAL ON RECORD, IT IS SEEN THAT THE ADVANCE GIVEN TO THE SUBSIDIARY WAS 1.32 CRORES AS ON 01.04.2008 AND AS ON 31.03.2009 IT STOOD AT RS. 6,13,19,000/ - . A S AGAINST THAT, THE ASSESSEE HAD OWN FUNDS TO THE TUNE OF RS. 346.19 CRORES IN THE FORM OF SHARE CAPITAL AND SHARE PREMIUM AND DURING THE YEAR IT HAS RAISED SHARES OF 279.93 CRORES OUT OF WHICH 4.81 CR O RES HAD BEEN LENT TO THE SISTER CONCERN. IN SUCH A SITUATION , WHERE THE ASSESSEE HAS SUBSTANTIAL OWN FUNDS, THEN PRESUMPTION IS THAT ASSES S EE HAS GIVE N ADVANCE TO ITS SISTER CONCERN FROM ITS OWN FUNDS. THUS, FOLLOWING THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD ( SUPRA ) WHICH HAVE BEEN FOLLOWED IN VARIOUS OTHER DECISIONS , WE AEGIS LIMITED ITA NO.1213/M/2014 37 HOLD THAT NO DI SALLOWANCE OF INTEREST IS CALLED FOR. ACCORDINGLY, GROUND NO. 22 IS TREATED AS ALLOWED. 5 8 . IN G ROUND NO. 23, THE ASSES S EE HAS CHALLENGED THE ADDITION ON ACCOUNT OF FOREIGN EXCHANGE GAIN ON REDEMPTION OF PREFERENCE SHARES AGGREGATING TO RS. 8,71,00,937/ - . 59 . THE ASSESSEE HAS SUBSCRIBED TO CERTAIN PREFERENCE SHARES OF ESSAR SERVICES MAURITIUS DURING THE FINANCIAL YEAR 2004 - 05, THE DETAILS OF WHICH ARE AS UNDER: DATE OF INVESTMENT NO. OF PREFERENCE SHARES SUBSCRIBED AMOUNT REMITTED (USD) EXCHANGE RATE AT THE TIME OF REMITTANCE AMOUNT REMITTED (INR) 27.10.2004 30,601,000 30,601,000 40.58 1,394,793,580 27.10.2004 2,660,000 2,660,000 45.16 120,125,600 09.12.2004 8,995,333 8,995,333 44.47 400,000,000 TOTAL 42,256,333 42,256,333 1,914,919,180 6 0 . A PORTION OF THESE PREFERENCE SHARES WERE SOLD DURING THE FINANCIAL YEAR 2008 - 09 I.E. AY 2009 - 10 AND ACCORDINGLY, THE ASSESSEE CREDITED AN AMOUNT OF RS. 8,71,00,937/ - ON ACCOUNT OF EXCHANGE GAIN ON REDEMPTION OF THOSE PREFERENCE SHARES UNDER THE HEAD I NCOME CREDIT ED UNDER SCHEDULE - 14. THE EXCHANGE GAIN ON SUCH REDEMPTION HAS SUBSEQUENTLY BEEN REDUCED FROM NET PROFIT, WHILE COMPUTING THE TOTAL INCOME OF THE AS S ESSEE AS THE SAME W AS CAPITAL IN NATURE. THE ASSESSEE HAD SUBMITTED THE DETAILED WORKING OF SU CH EXCHANGE GAIN IN THE FOLLOWING MANNER: DT OF SALE OF INVEST - MENT NO. OF PREFERENCE SHARES SOLD AMOUNT RECEIVED (USD) EXCHANGE RATE OF TIME OF REMITTANCE AMOUNT RECEIVED (INR) EXCHANGE GAIN/ (LOSS) SOLD OUT OF INVEST - MENTS MADE ON 24.12.08 58200 00 5820000 48.95 284889000 19613400 27.10.2004 (1 ST TRANCHE) 11296837 11296837 50.08 565797568 50887732 27.10.2004 (1 ST TRANCHE) 2660000 2660000 50.08 133225036 13099436 27.10.2004 (IIND TRACHE) 623163 623163 50.08 31210864 3500368 09.12.2004 (IIIRD TRANCHE) TOTAL 20400000 20400000 1015122468 87100937 SINCE TPO HAS HELD THAT PREFE RE NCE SHARES HELD BY THE ASSESSEE WAS AKIN TO GIVING O R INTEREST FREE LOAN AND, THEREFORE , HAD ARRIVED AT INTEREST RATE BASED ON ASSUMED CREDIT RATING, THE ASSESSING AEGIS LIMITED ITA NO.1213/M/2014 38 OF FICER FOLLOWING THE TPOS ORDER HELD THAT THE RESULTANT EXCHANGE GAIN OF RS. 871,000,973/ - EARNED BY THE ASSESSEE ON ACCOUNT OF REDEMPTION OF PREFERENCE SHARES CANNOT BE TREATED AS CAPITAL AND ACCORDINGLY , THE SAME WAS ASSESSED UNDER THE HEAD BUSINESS I NCOME. 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, WHI CH HAS BEEN SEPARATELY ACCOUNTED IN THE BOOKS, CANNOT BE TAXED AS BUSINESS INCOME HERE IN THE CASE OF THE ASSESSEE, B ECA U SE SAME WAS ON ACCOUNT OF SHARES AND THEREFORE, SAME SHALL BE CONSIDERED WHILE WORKING OUT CAPITAL GAIN OR LOSS AS PER SECTION 48. TH US 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 ASSES SING OFFICER HAS ERRED IN L AW 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. 6 1 . GROUND NOS. 24 & 2 5 , RELATES TO LEVY OF INTEREST U/S 234B & 234C, WHICH H AS BEEN ADMITTED BY BOTH THE PARTIES THAT THEY ARE CONSEQUENTIAL IN NATURE, ACCORDINGLY THE SAME ARE TREATED AS DISMISSED. 6 2 . GROUND NO. 26, IS WITH REGARDS TO INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C), WHICH IS PREMATURE AND ACCORDINGLY , SAME IS A LSO DISMISSED. 63 . AS REGARDS ADDITIONAL GROUND NO. 24 AND 25, THE SAME HAS ALREADY BEEN DISCUSSED WHILE ADJUDICATING GROUND RELATING GUARANTEE COMMISSION, AS RAISED VIDE GROUND NO. 12 & 13. ACCORDINGLY, ADDITIONAL GROUNDS AS RAISED BY THE ASSE S SEE ARE T REATED AS ALLOWED. AEGIS LIMITED ITA NO.1213/M/2014 39 64 . IN THE RESULT , APPEAL OF THE ASSES S EE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JU LY , 2015. SD/ - SD/ - ( . . ) ( ) ( R C SHARMA ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 27 TH JU LY , 2015 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3) THE CIT (A) /DRP CONCERNED ____ , MUMBAI 4 ) THE CIT 1 4 / CONCERNED __________ , MUMBAI . 5 ) , , / THE D.R. L BENCH, MUMBAI. 6 ) COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS