TaxTMI 
TaxTMI 
2022 (8) TMI 1285
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.... Ground No.6 is not pressed during the course of hearing and accordingly dismissed. Out of 16 sub-grounds raised by the assessee with regard to TP adjustment, ground No.3.5 pertains to applying / modifying of certain filters and ground no 3.14 relating to working capital adjustment. The ld AR during the course of hearing presented arguments relating to TPO not applying the correct filter for turnover while modifying the filters applied by the assessee for selecting comparables and the working capital adjustment and prayed that these issues can be taken up for adjudication leaving the rest of the grounds relating to TP adjustments open. 4. The brief facts are that the assessee operates as a global offshore service entre for the Atos group. It renders IT services to its AE and also to third parties in India. The assessee filed return of income for AY 2016-17 on 30.11.2016 declaring an income of Rs.21,12,75,670. The case was selected for scrutiny through CASS and notice u/s. 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions with its AE, the matter was referred to the Transfer Pricing Officer (TPO) in order to determine the Arms Len....
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.... 1,893,755,572 29,943,651 1,923,699,223 Total revenue from operations 1,893,755,572 29,943,651 1,923,699,223 Operating costs: Sub-contracting charges - 27,593,262 27,593,262 Employee benefit expenses 1,156,062,332 1,025,578 1,157,087,910 Depreciation/ amortisation expenses 172,779,722 - 172,779,722 Corporate support services 22,632,176 - 22,632,176 Other expenses 308,533,991 - 308,533,991 Total operating cost ('TC') 1,660,008,221 28,618,840 1,688,627,061 Operating Profit ('OP') 233,747,351 1,324,811 235,072,162 OP/ TC 14.08% 4.63% 13.92% 8. The TPO rejected 5 comparables selected by the assessee and accepted 3 companies. He applied fresh filters and selected the comparables the margin of which worked out to 25.59% as given below:- Sr No. Name of the Comparable Company Margins (OP/OC) 1. Kals Information Systems Ltd. (seg) 8.60% 2. E-Zest Solutions Limited 10.87% 3. Rheal Software Private Limited 14.50% 4. CG-VAK Software & Exports Limit....
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....vs DCIT (IT(TP)A No.229/Bang/2021) has held as follows:- "12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following w....
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....tion of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 14. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision holding that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:- "17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi Hig....
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.... (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfe....
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.... & 2013-14 vide order dated 4.8.2021 has allowed the working capital adjustment. The relevant observations are as follows:- "11. A reading of rule 10B(1)(e)(iii) of the Rules read with sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. ....
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....bles, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be d....
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....e companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com (2016) 75 taxmann.com 195(Del. - Trib.) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is n....
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....les, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.' 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 19. Respectfully following the above decision ....
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....Sr. No. Name of AE Invoice No. Doc Currency Invoice date Due date as per agreement with AE Recovery date Invoice Amount- INR (A) Credit Period Weighted Average (c) 1 Atos IT Outsourcing Services, LLC 2 USD 31/07/2015 30/08/2015 25/08/2015 197,666,597 25 4,941,664,924.25 2 Atos IT Outsourcing Services, LLC 18 USD 31/08/2015 30/09/2015 18/09/2015 186,900,285 18 3,364,205,123.16 3 Atos IT Outsourcing Services, LLC 34 USD 30/09/2015 30/10/2015 28/10/2015 206,004,443 28 5,768,124,409.32 4 Atos IT Outsourcing Services, LLC 50 USD 31/10/2015 30/11/2015 23/11/2015 197,147,060 23 4,534,382,377.47 5 Atos IT Outsourcing Services, LLC 66 USD 30/11/2015 30/12/2015 22/12/2015 181,366,411 22 3,990,061,036.72 6 Atos IT Outsourcing Services, LLC 82 USD 31/12/2015 30/01/2016 26/01/2016 191,261,611 26 4,972,801,883.92 7 Atos IT Outsourcing Services, LLC 98 USD 31/01/2016 01/03/2016 22/02/2016 182,724,271 22 4,019,933,965.52 8 Atos IT Outsourcing Services, LLC ....
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....mited (`XBSIPL'). The AO did not allow the depreciation claim on the said goodwill on the basis that the assessee has not provided any scientific basis for valuation of goodwill. The AO observed that the actual cost of the block of assets in the hands of the transferor company would be the written down value in the immediate preceding year in the case of transferor company and therefore disallowed the entire depreciation claim by holding as under:- "4.28: Conclusion: We have clearly demonstrated that the issue before Hon'ble SC in Smif Securities was only that whether goodwill is an intangible asset and hence eligible for depreciation under section 32(1) of the Act. We accept that SC has correctly laid down the law that goodwill is an intangible asset and eligible for depreciation under section 32(1) of the Act. However, we are raising a different issue here. There are certain sections of the Act which restrict allowability of depreciation acquired during slump sale. These sections of the Act have not been placed before Hon'ble SC in Smiff Securities or before Hon'ble SC/HC/ITAT in other cases cited above. We have cited relevant SC decisions to support our ....
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.... by it is an intangible asset eligible for depreciation under Section 32(1) of the Act. In our opinion, the claim of assessee is to be allowed on the following lines:- i. The said goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on transfer is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon'ble SC in the case of Smifs Securities Ltd. (348 ITR 302), wherein held that "in the present case, it is the valuation that is challenged and not the eligibility of depreciation on goodwill." The position of law held by the Hon'ble SC constitutes the law of the land and is binding on all the lower authorities, in terms of Article 141 of the Constitution of India. ii. In this regard, we place further reliance on the decision of the Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd., 255 ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon'ble HC allowed the claim of depreciation on goodwill arising on ....
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....dingly, apply in relation to AY 2021-22 and subsequent AYs. 13.14. Further, amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. 13.15. Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. 13.16 Further, it is also brought to our notice that the department accepted offer of capital gain by the individual assessee who has sold the goodwill i.e. in the case of Praveen Narayan Noojibail for the assessment year 2015-16, which is evident ....