TaxTMI 
TaxTMI 
2019 (7) TMI 1439
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....ess of production of computer software products and provision of software development services of communication industry through the various 100% export oriented units set up in software technology parks at Gurgaon and Bangalore. 3. The international transactions entered into by the assessee are tabulated below:- Name of transaction Method selected Total value (Rs.) Paid Received Sales of services CPM 508,306,589 Sales of products CUP 27,096,734 Interest income CUP 2,428,061 Product Relates Services CPM 2,096,906 Purchase of services CPM 198,33,524 Reimbursement of travel cost CPM 107,536 Recharge of courier charges CPM 98,759 Legal and Professional Expenses CPM 241,398 Facility Rental CPM 19,333,061 Insurance Expenses CPM 23,484,987 Corporate Expenses CPM 24,022,522 Marketing Services CPM 49,565,029 4. The reference u/s. 92CA (1) of the Act was received by the TPO for determination of arms length price for the intern....
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....ganizing public events and trade shows vii. Insurance (a) Obtaining and continuing in force the business insurance policies pertaining to global Operations of Recipient (b) Formulating insurance strategy .and oversight 5. It was explained that TNMM is the most appropriate method with OP/OC as the profit level indicator and since the operating profit margin of the assessee at 21.84% is higher than that all the comparable companies at 20.36%, the international transaction of payment of corporate charges was considered to be at arms length price. 6. The TPO however rejected the TNMM method applied by the assessee and separately bench marked the said transaction allegedly applying CUP method. The TPO further held that since the assessee has not received any economic and commercial benefits from such payment and the evidence of incurring such expenditure by the AE has also been not placed on record, the arms length price of such international transaction shall be considered to be at nil. 7. The assessee raised objections before the DRP. Before the DRP it was strongly contended that Aricent Inc USA was created solely for the purpose of rendering the co....
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....hat the TPO should give effect to the directions of the DRP in letter and spirit. The direction of the DRP has been mentioned elsewhere and since the DRP has directed the TPO to compute the ALP at 1% of total cost the same should be followed. We accordingly direct the TPO / AO to follow the directions of the DRP and if found that after giving effect to the directions total cost of the assessee works out to be higher than what has been paid by the assessee towards corporate charges no adjustment on account of corporate charges need to made. Accordingly grounds No.2 to 2.7 are allowed. 12. Ground No.3 relates to the transfer pricing adjustment of Rs. 23,56,249/- on account of interest on foreign currency loan extended to AE. 13. Facts on record show that during the year under consideration the assessee earned interest income of Rs. 23,56,249/- in respect of loan of US dollar Nine Hundred thousand extended to its AE Aricent Japan Limited and Aricent Beijing Limited. The assessee has charged interest at LIBOR + 1.5%. The assessee claimed that the rate of interest charged was comparable to the prevailing rate of interest in the international market. Thus international transaction ....
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....ket and risks, therefore, rate adopted by the TPO should be accepted. 19. We have carefully considered the orders of the authorities below. We have also gone through the relevant loan agreement which is placed at pages 131 - 134 and 135-138 of the paper book. We find that the loan agreement with FSS, Japan clearly mentions that the borrower shall pay interest rate of 1.5% over prevailing LIBOR and the transaction is in US dollar. Similarly the agreement with FSS Beijing show interest at 150 basis points over prevailing LIBOR and the transaction is in US dollar. Considering the facts of the case in the light of the agreements and in the light of the decision of DRP in A. Y. 2012-13 wherein all the apprehensions raised by the DR has been duly considered by the DRP which is also under appeal before us in ITA No.1944/Del/2017, we are of the considered view that rate of interest at LIBOR + 1.5% should be taken as the rate and since the assessee has already charged the interest on loan at LIBOR + 150 basis points, the TP adjustment in interest on loan amounting to Rs. 2356249/- deserves to be deleted. We direct accordingly. 20. Ground No.4 relates to the disallowance of project ....
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....ecutive management, tax, treasury, legal, corporate, marketing and insurance provided by Aricent Inc USA. 27. While examining the expenses the Assessing Officer was of the opinion that the corporate charges are in the nature of consultation charges / technical fees having been remitted out of India on which no TDS was deducted by the assessee and was of the firm belief that provisions of section 40a squarely apply and accordingly disallowed 2.40 crores. Such disallowance was confirmed by the DRP. 28. Before us the Ld. Counsel for the assessee drew our attention to the provisions of section 195 (1) of the Act and pointed out that the liability to deduct tax at source under this section arises only if the amount paid / payable to the no resident is liable to tax in India. It is the say of the counsel that since the payee is a tax resident of US and eligible to be governed by the provisions of Act or the India US treaty, no disallowance can be made. 29. The DR relied upon the findings of the lower authorities but could not controvert the submissions of the counsel. 30. We have given a thoughtful consideration of the orders of the authorities below qua the issue. There is n....
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.... Aricent Technologies Holdings Limited i.e. the Applicant ) pursuant to scheme of amalgamation approved by the Hon'ble Delhi High Court vide order dated 16.05.2007." 35. At the outset the DR objected to the admission of the aforestated additional ground. It is the say of the DR that the assessee failed to claim depreciation on goodwill in its return which was filed by the assessee when the goodwill in question was accounted for in the books of the assessee. The return was duly verified by the assessee itself, and the assessee had access to legal advice being such a big, reputed company of a global group. The DR further pointed out that the assessee had further opportunity by filing a revised return but again failed to claim it by filing revised return. The DR continued by stating that the assessee further failed to claim depreciation before the Assessing Officer during the entire assessment proceedings and further failed to claim depreciation before the DRP. The DR concluded by saying that at this stage the additional ground raised by the assessee should not be admitted. 36. Per contra the counsel for the assessee stated that being a legal claim the assessee can raise the iss....
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....unal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier. In the case of Jute Corporation of India Ltd. CIT [1991] 187 ITR 688, this court, while dealing with the power of the Appellate Assistant Commissioner observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer. This court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must-be-satisfied that the ground raised was bona fide and that the same could not have b....
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.... before the Assessing Officer. Even if the assessee had not claimed depreciation on goodwill, the Assessing Officer was duty bound to compute the depreciation as per the provisions of the law. 44. The contention of the DR that the assessee had several opportunities to claim depreciation is not acceptable because when the assesee filed its return of income the claim of depreciation on goodwill was highly debatable issue. It is only after the decision of the Hon'ble Supreme Court in the case of Smifs Securities 348 ITR 302 the issue attained finality as the Hon'ble Supreme Court has held that goodwill is an intangible asset. 45. Since all the facts relating to the creation of goodwill are available on the record, we have no hesitation in admitting the additional ground for the adjudication. 46. Having admitted the additional ground relating to the claim of depreciation let us now examine the facts relating to the creation of goodwill. 47. Future Software Limited ('FSL') was incorporated on May 22, 1985 as Future Software Systems Limited and its name was changed to FSL on August 24, 2000. FSSL was incorporated in India on December 30, 1991 as Hughes Software Systems ....
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....ereto and doth hereby declare the same to be binding on all the shareholders and creditors of the Transferor and Transferee companies and all concerned and doth approve the said scheme of arrangement with effect from the appointed date i.e. 01.04.2007." 50. The salient features of the scheme of amalgamation are as follows : (a) The scheme was sanctioned by the High Court of Delhi on May 16, 2007 with retrospective effect from April 1, 2007, being the appointed date of the merger and August 10, 2007, being the effective date of amalgamation for accounting purpose; (b) Assessee adopted pooling-of-interest accounting method as approved by High Court for the purpose of transferring the assets and liabilities of the amalgamating companies at their respective book value, which was subject to the adjustments made for the difference in the accounting policies between the two companies as specified in the scheme of amalgamation; (c) As per clause 1(e) and 1(g) of the amalgamation scheme, the details of assets and liabilities of FSSL and FSL which were to vest on the Assessee, after the amalgamation were as follows: All secured and unsecured debts, pres....
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....Rs. Crs.) Remarks/Valuation methodology 1 Assessee company 9.51 crs Rs. 110.7 Rs. 1,053 Based on NAV method 2 Flextronics Software Systems Limited 3.31 crs Rs. 897.2 Rs. 2,967 Based on weighted average method 3 Future Software Limited 4.41 crs Rs. 55.9 Rs. 246 Based on weighted average method Thereafter, on the basis of the intrinsic value (refer supra), equity shares of Assessee were allotted to the shareholders of FSSl and FSL, as under : * To the shareholders of FSSL: 810 equity shares of Rs. 10 each of Assessee issued for every 100 equity shares of Rs. 5 each held by the shareholder of FSSL; * To the shareholders of FSL: 50 equity shares of Rs. 10 each of Assessee issued for every 100 equity shares of Rs. 5 each held by the shareholder of FSL. The aforesaid exchange ratio was duly approved in the meeting of the shareholders of FSSL and by the Hon'ble High Court, as part of the scheme of amalgamation. The aggregate fair value of acquired businesses, i.e., FSSL and FSL was determined at Rs. 3,213 crores, as follows: Rs. in crores 3.31 crore equity shares of FSSL @ 897.20 ....
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....r clause 14 of the Tax audit report in Form 3CD, which was filed before the assessing officer, during the course of the assessment proceedings. 51. This is how the goodwill was acquired and found place in the books of the assessee duly reflected in the fixed assets schedule. 52. The DR vehemently stated that goodwill acquired pursuant to amalgamation, is nothing but a book entry to account for the difference between the consideration and the net assets acquired. Elaborate factual exercise, in accordance with relevant accounting standards (present 1nd As 103 As 38, 37 and others, or the relevant standards applicable to the relevant year) has to be carried out to ascertain whether such difference is to be recognized as goodwill of amalgamation or not. 53. This contention of the DR is not acceptable as the Hon'ble High Court in its order giving effect to the scheme of amalgamation mentioned elsewhere has clearly stated that the difference in the net asset value of FSSL and FSL and the consideration paid by the assessee shall be towards goodwill. 54. The DR further contended that the goodwill generated in the process of amalgamation was used for the purpose of business of t....
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....(vi); (c) in the case of any block of assets,- (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,- (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced- (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Incometax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and ....
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....ire the goodwill). 58. To clarify further, Explanation 2 to clause 43(6)(c) reads as under Explanation 2. -Where in any previous year, any block of assets is transferred,- (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company; as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. Thus the Act clearly lay down that the actual cost of the block of asset (intangible block in this case) in the hand of the amalgamated company (assessee) would be written down value in the imm....
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....of goodwill as per the valuation report and there is no quarrel in so far as the net asset value of the amalgamating companies is concerned. The same has the sanction of the Hon'ble High Court. 61. Another argument of the DR is that the assessee has not paid anything for the goodwill acquired in business reconstruction. No consideration can be ascribed to acquisition of goodwill. There was no goodwill before amalgamation. Hence, it is not a case that goodwill has been bought or purchased and therefore, the cost of acquisition of such goodwill in the hands of the assessee should be taken as nil. Once again the DR has erred in not understanding the scheme of amalgamation. In the order of the Hon'ble High Court itself it is clearly mentioned that anything paid over and above the net asset value of the amalgamating companies shall be towards goodwill. 62. The DR further referred to the decision relied upon by the counsel in the case of Smifs Securities 348 ITR 302 and stated that the Hon'ble Supreme Court has only laid down the ratio that goodwill is an intangible asset and eligible for deprecation but has nowhere the Hon'ble Supreme Court has given any finding in respec....
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....ing on of its software development business has entered, interalia, into international transaction of payment of corporate charges of Rs. 48397589/-. We find that the associated enterprises allocated these corporate charges among the group companies on the basis of cost + 5% markup which are based on the report prepared by an independent consultant. 72. This international transaction of payment of corporate charges was bench marked and TNMM was considered as the most appropriate method with OP/OC as the profit level indicator. Before the TPO the assessee contended that since the operating profit margin of the assessee @ 27.36% is higher than that of the comparable companies @ 14.24%, the international transaction of payment of corporate charges was considered to be arms length. 73. This contention of the assessee was dismissed by the TPO who was of the opinion that CUP is the most appropriate method. The TPO further observed that since the assessee has not received any economic and commercial benefits from such payment and the evidence of incurring such expenditure by AE has not been placed on record. The TPO adopted the arms length price of such international transaction at ....
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.... AE's, whether the services were actually needed by it and whether the same were actually received by it, what cost benefit analyzed was done particularly when a huge payment has been made by it to the AE's. The TPO concluded by holding that the assessee failed to demonstrate the benefits passed to the assessee by the AE on availing such services. Applying CUP, the ALP of service fee was determined at Nil and the additions were made. 75. The objections were raised before the DRP. The DRP confirmed the ALP determination and the adjustment made by TPO and further directed the TPO to treat the arms length price of following international transaction aggregating to Rs. 54858133/- at Nil. 1. Legal and professional expenses 2. Facility rental 3. Insurance 4. Repairs and maintenance 5. Training 76. Aggrieved by this the assessee before us. 77. Before us the counsel for the assessee stated that the corporate charges relates to the entire turnover/ provision of services of the assessee and constitutes an essential part of the cost of the sales. The counsel once again reiterated that the OPM of the assessee @ 27.36% is higher than that of....
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....ur view find support from the decision of the Hon'ble High Court in the case of Reebok India Company 374 ITR 118 wherein Hon'ble High Court has held that once the expenditure is incurred for business purposes, the Assessing Officer cannot question requirement and quantum of expenditure the relevant finding read as under :- "54.........................So long as the expenditure is for business consideration, the Assessing Officer cannot question the quantum or the wisdom of the assessee in incurring the expense. Issue of arm's length price, per se does not arise, when deduction under Section 37(1) is claimed. Expenditure and decision of the assessee, whether or not to incur the said expenditure; the quantum thereof, cannot be a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose." 82. In another decision in the case of EKL Appliances 345 TIR 241, the Hon'ble Delhi High Court has laid down the law in this regard, as under :- "21. The position emerging from the above decisions is that it is not necessary....
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....hat the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives any benefit from the service. The Hon'ble Delhi High Court has opined that the determination of benefit to the tax payer is in the domain of the AO. The Hon'ble High Court held as follows: "34. The Court first notes that the authority of the TPO is to conduct a transfer pricing ............... analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the A O. This distinction was made clear by the IT AT in Dresser- Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422 .................. 35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP" for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Sec....
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....uated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters. For complex entities or where one of the entities is not 'plain vanilla distributor, it should be applied when necessary and applicable comparables on functional analysis, with or without adjustments are available. Otherwise, the TNM Method should not be adopted or applied on account of being an inappropriate method. Further the Hon'ble Delhi Court in the case of Sony Ericsson Mobile (supra) also held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further/separate compensation for AMP expenses is warranted. The Hon'ble Court held as under: "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international t....
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....ive in nature and nor are share holder activities, the DRP directed the Ld. transfer pricing officer to delete the adjustment proposed with respect to the intra group services of Rs. 3329766244/-, deserves to be upheld. The judicial precedents cited before us also supports the view that the needed test, the benefit test are also required to be viewed from the perspective of a businessperson and not from the perspective of the revenue. Further, no evidences have been led before us by revenue stating that these services are duplicative in nature and also serves only the interest of the shareholder. According to the information supplied by the assessee and examined by the Ld. dispute resolution panel does not give any such indication. Further regarding non-sharing of the cost by the joint-venture partners we have given our findings while deciding the appeal of the assessee that such an action of the joint-venture partners cannot be the reason to determine the arm's length price of the services which is been received by the assessee at nil. In view of this we uphold the finding of the Ld. dispute resolution panel holding that transactions of intra group services are interl....
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....d discussion therein the adjustment of Rs. 3831452/- is directed to be deleted. Ground No.6.1 to 6.2 are allowed. 95. Ground No.7 relates to the transfer pricing adjustment of Rs. 92668509/- allegedly on account of re-characterizing the inter company receivables as unsecured loan extended by the assessee of its AE. 96. Facts on record show that during the course of the transfer pricing adjustment proceedings the TPO noticed that the balancesheet of the assessee reveals receivables. The TPO observed that the payment for the invoices raised by the assessee have not been received within the stipulated time as provided in the service agreement with the AE. The assessee was asked to furnish the time period for payment as per the service agreement with the AE. The TPO further observed that the delayed payments have to be treated as unsecured loans advanced to the AE on which normal rate of interest @ 16% for the period of delay in receipt of payment beyond the time stipulated in the service agreement shall be charged. 97. The assessee strongly objected to this proposition of the TPO pointing out that receivable is not an international transactions which warrant benchmarking. The....
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....ying that the impugned adjustment should deleted. 100. Per contra the DR strongly supported the finding of the TPO and placed strong reliance on Explanation (1)(c) to section 92 B of the Act. 101. We have given a thoughtful consideration to the orders of the authorities below. We have carefully considered the rival submissions. In our considered view every indebtness cannot be construed to have arisen out of a loan transaction and interest is involved only in relation to a debt created out of loan transaction. For this proposition, we draw support from the decision of Hon'ble Supreme Court in the case of Bombay Steam Navigation reported in 56 ITR 52. This view further find support from the decision of Hon'ble High Court of Delhi in the case of Kusum Healthcare Private Limited 398 ITR 66 where in Hon'ble High court in the context of receivable held that not every item of receivable will be considered as an international transaction of receivable and each receivable has to be seen on case to case basis, the relevant finding read as under :- 10. "The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the A....
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....latedly cannot be faulted." 104. There is no dispute that the OPM of the assessee @ 27.36% is higher than the average working capital adjusted margins of the comparable companies @12.97%, this being so no adjustment is called for in the light of the decision of the Hon'ble High Court of Delhi in the case of Kusum Healthcare (supra). 105. In our considered view since the receivables have been received by the assessee within ordinary time period it cannot be re-characterized as unsecured loans and accordingly no adjustment on account of delay in receipt of receivables can be made in the income of the assessee considering the fact that the similar delay is there in respect of receivables from unrelated third parties. 106. Considering the facts of the case in hand in totality in the light of the factual matrix discussed here in above viz-a-viz judicial decisions on the point of issue we are of the considered view that resorting to Explanation (1)(c) to section 92B of the Act is uncalled for. We accordingly direct the Assessing Officer / TPO to delete the transfer pricing adjustment of Rs. 97780581/-. Ground No.7 is allowed. 107. Ground No.8 relates the charging of intere....