TaxTMI 
TaxTMI 
2022 (5) TMI 1502
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....ollows:- "2.3 Rejecting the computation of Tested Party margin as undertaken by the Appellant and recomputing the margin considering amortisation of goodwill amounting to INR 91,371,302 as operating in nature. 2.4 Applying the provisions of Rule 10b(5) read with Rule 10CA(2) and Rule 10CA(4) of the Income-tax Rules, 1962 ['the Rules'] while undertaking the fresh benchmarking analysis." 5. The ld. AR submitted that goodwill was recorded by the Applicant pursuant to the acquisition of the 'Shared Services Business' of TE Connectivity Global Shared Services Pvt Ltd ("TECGSS"), on a slump sale basis on 30.6 2015. It therefore represents a part of the consideration actually paid by the Appellant for the said acquisition (i.e., the excess of purchase consideration paid, over the fair value of net assets taken over). The said goodwill represents a payment the made by an acquirer (the Appellant) in anticipation of future economic benefits. These benefits are not immediate but generally accrued over a period of time. 6. It is submitted that the said goodwill as an intangible asset, was not recorded or recognised by the Transferor, i.e., TECGSS, prior to the s....
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....India) Pvt. Ltd., Bang.Trib. DHR Holding India Pvt Ltd. Tribunal, TS-370-ITAT-2021 ST-Ericsson India Pvt Ltd Tribunal, Delhi ITA No.609 & 168/Del/2015 Imsofer Manufacturing India Pvt Ltd, ITA No.5158/Del/2015 & ITA No.1049/Del/2016 Comparable companies do not have Goodwill or Amortisation thereof 10. The ld. AR further submitted that the final set of comparable companies considered for the purpose of benchmarking and determination of ALP do not have similar amortization and accordingly, exclusion of amortisation in determining the Appellant's margin on cost is warranted, to bring consistency in comparison. This is demonstrated by way of a comparative chart. The requirement for the said adjustment is also supported by the Income Tax Rules, 1961 and the OECD guidelines cm transfer pricing, as summarized below:- • The Rule 10C(2)(e) of the Income-tax Rules, 1962 ("the Rules") states that in selecting the most appropriate method, the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into suc....
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....ds acquisition of the business along with a mark-up by the end of the 5-year period, by carrying on the same business that was undertaken by the transferor prior to such acquisition. The Appellant cannot be expected to earn double or multiple times the margin earned by the transferor or any other company in the same business, merely on account of payment of a premium for acquiring the said business. This proposition is impractical and absurd since no customer will be willing to pay an additional price for the same product / service even in an arms' length transactions, merely because the business is acquired by another party who is continuing to offer the same product / service. He referred to the illustration in Pg. 629 of the Case Law Compilation. Business Activity remains constant pre and post the acquisition: 15. The ld. AR submitted that the margin computation by the Appellant, by excluding the amortisation from the operating costs is in line with the manner of benchmarking that was undertaken for such business when considered independently or prior its acquisition. When the ALP of the revenue generated by a business is determined at a stated range, when considered i....
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....#39;s length, without any further adjustments in relation to the inclusion/exclusion of comparable companies and grant of working capital adjustment. 20. The ld. DR submitted that amortization of goodwill is an operative expenditure and it could not be removed while calculating PLI of the company or comparable. He further submitted that the assessee was incorporated on May 18, 2015 as a wholly owned subsidiary of Tyco Electronics Singapore Pte Ltd, Singapore having its registered office at Bangalore. On 30.6.2015, assessee (TECSIPL) purchased the shared services business of the CommScope Connectivity India Private Limited [erstwhile T11 Connectivity Global Shared Services India Private Limited ('TECGSS')] that supported the business operations (excluding Broadband Network Solutions segment) of TB Group. The business was, purchased on slump sale basis for an amount or INR 68.55 crores and according to the assessee, the goodwill has arisen out of such purchase consideration paid. Amortization of goodwill amounting to INR 9,13,71,302 was charged to P&L account. 21. The ld. DR further submitted that amortization of goodwill is the process of expensing the cost of a goodwi....
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....g (tallish company - booked in Pharma Distributor A A/S. The main question in the case was whether Pharma Distributor A A/S were entitled to disregard the goodwill amortization in the comparability analysis. The national tax court had ruled in favour of the company, but the national court reached the opposite result. Thus, the National Court found that the goodwill in question had to be regarded as an operating asset, and therefore the amortisation of goodwill had to be regarded as operating expenses for comparability purposes. 23. We have heard both the parties and perused the material on record. Similar issue came for consideration before in IT(TP)A No.713/Bang/2017 dated 24.11.2021 wherein it was held as under:- "45. We have heard both the parties and perused the material on record on this issue. This issue was considered by the Tribunal in the case of ST-Ericsson India Pvt. Ltd. v. DCIT in IT(TP)A No.609 & 168/Del/2015 dated 3.7.2018 and it was observed as follows:- "15. Assessee has challenged the findings returned by TPO/DRP treating amortization of goodwill as not extra ordinary in nature. It is the case of the assessee that goodwill is on account of acq....
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....s applied a lower turnover filter of INR 1 Crore, however, did not consider an upper limit of turnover filter. It is a well-settled principle that an upper limit of turnover filter ought to be applied for comparability analysis for the purpose of benchmarking. It has been held in various judicial precedents that Companies with a huge turnover of multiple times the turnover of the taxpayer or with a turnover of more than INR 200 Crores, ought to excluded in the selection of comparable companies for benchmarking as such companies cannot be equated to the small players on account several differentiating factors due to the differences in their size and scale of operations, that have a direct impact on the profitability. Reliance in this regard is also placed on the following judicial precedents, including the decisions rendered by this Hon'ble Tribunal, wherein the application of an upper turnover filter of INR 200 crores as an appropriate filter:- Pentair Water India Pvt Ltd., TS-566-HC-2015 Fulcrum Fund Services (India) Pvt Ltd., IT(TP)A No.2521/Bang/2017 Autodesk India Pvt Ltd., TS-62-ITAT-2013 Cenduit India Services Pvt Ltd., TS-19-ITAT-2022 Software Paradigms In....
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....to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores." 29. Accordingly, we direct the AO/TPO to consider the comparability of the companies in terms of the above order of the Tribunal and decide the issue. 30. Ground Nos. 2.8 and 2.9 read as under:- The DRP erred in : "2.8 Including the following companies even though such companies are functionally different (such as engaged in KPO activities, diversified activities with no segmentation, extra ordinary event, etc.) from the Appellant: • Tech Mahindra Busi....
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....ologies India Pvt Ltd. 336 4. Capgemini Solutions Ltd. 297 35. Reliance was placed on the decision of Hyderabad ITAT in Infor India Pvt. Ltd., TS-499-ITAT -2021 wherein for the same assessment year, i.e., AY 2016-17, the Tribunal held that the said companies (S.No. 1 to 3) ought to be excluded in view of their high turnover of over INR 200 Crores. The same ratio would be applicable to the company at S.No. 4 above. 36. As discussed in para 28, this issue is remitted to the AO/TPO with similar directions. Inclusion of comparable companies 37. The ld. AR submitted that the. TPO erroneously excluded Ace BPO Services Pvt. Ltd. on the sole ground that it is a 'persistent loss-making company'. In this regard, it is submitted that said company incurred a loss only for FY relevant to the Impugned AY, but recorded profits during the preceding two FYs (i.e., FY 2013-14 and 2014-15) and therefore cannot be considered as a persistent loss-making company. 38. He submitted that it has been settled by several jurisprudence on the subject, that incurrence of loss in a single year cannot be the basis for considering the said company as a 'persistent loss-making....
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.... items at 11, 13 and 14 are to be included in the comparables if their loss is on account of normal business reasons and segmental turnover is above Rs. 1 crore. This view of ours is also supported by the order of the Tribunal Delhi Bench in the case of Sapient Corporation (P.) Ltd. v. Dy. CIT [2011] 46 SOT 56/11 taxmann.com 69, Genisys Integrating Systems India (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) wherein held that when companies which are loss making are excluded from comparables, then super profit making companies are also to be excluded from the comparables for determining the ALP. Being so, in our opinion, the Assessing Officer has to recalculate the ALP after excluding only the data of the companies which have losses due to extraordinary reasons. In other words, if there is loss in ordinary course of business which is normal/nominal cannot be excluded from the comparables. However, we make it clear that if there is any abnormal loss or if there is continuous loss year by year, in such situation that company data cannot be considered as comparable with the assessee company. For example, F.I. Sofex Ltd., Vans Information Ltd. and Mukund Engineers Lt....
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....utation towards the said adjustment (Pg. 998 to 1002 of the Paperbook-Part B). However, the. TPO erroneously rejected the Appellant's claim for the said adjustment. It is a settled law that an adjustment for the differences in the levels of working capital ought to be made, to for a proper comparability analysis. It is essential to adjust for differences in the levels of working capital between the Appellant and comparable companies, as the variance in the said levels directly impacts margins. 46. The claim for the said adjustment is also supported by Rule 1oB(1)(e)(iii) of IT Rules provides that the net profit margin arising in comparable uncontrolled transactions should 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. Further support can also be drawn from Rule 1oB(3)(ii) of the IT Rules, which provides that reasonably accurate adjustments can be made to eliminate the material effects of differences between the Appellant and comparable companies. The need for working capital adjustment is supported by ....
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....efore the Tribunal in the case of M/s. Inflow Technologies P. Ltd. in ITA Nos.3338 & 3339/Bang/2018, order dated 4.8.2021 wherein it was observed as under:- "7.4 We have heard rival submissions and perused the material on record. The solitary reason assigned by the TPO which was endorsed by the DRP is that the assessee had not demonstrated the impact of working capital adjustment on profit margin of assessee as well as the comparable companies. In this context, we find on identical facts, the Bangalore Bench of the Tribunal in the case of Yahoo Software Development India Pvt. Ltd. v. JCIT (supra) had held that when the details required for working capital adjustment has been provided by the assessee, the Revenue Authorities were not justified in denying the claim of the assessee for deduction. The relevant finding of the Bangalore Bench of the Tribunal, reads as follow:- "14. We have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C ....
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....explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic 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 or 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. 15. 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 uncontro....
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....relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, 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 fr....
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....Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore, nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable 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 defense to say that the Assessee ha....
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....ially affect the amount of net profit margin in the open market. It is not the case of the TPO/DRP that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by the revenue authorities working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, 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." 22. In such a scenario there would remain no comparable uncon....
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....of the assessee for deduction. Hence, the AO / TPO is directed to allow the working capital adjustment in the light of the material placed on record, after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly." 50. In view of the above order of the Tribunal, we remit this issue to the AO/TPO with similar directions. 51. Ground Nos. 3 to 8 are as follows:- Disallowance of depreciation claimed by the Assessee on Intangible assets on account of slump purchase 3. That on the facts and circumstances of the case, the Learned AO / DRP erred in disallowing depreciation on various intangibles including but not limited Goodwill arising on account of slump purchase amounting to INR 15,22,85,504 claimed by the Assessee during the year. The Learned AO has ignored that intangibles comprise of various assets. 4. The Learned AO / DRP erred in invoking the sixth (originally fifth proviso) to section 32(1)(ii) of the Act and disallowing the claim of depreciation under section 36 of the Act (a) despite having admitted in page no. 7 of the order that the said proviso does not deal with slump purchase and (b) disregarding that proviso....
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....the accounting standards and general practices. The goodwill amortisation in the books of the Appellant for the Impugned AY amounted to INR 15.23 Crores. Subsequently, in determining the taxable income for the Impugned Year, the Appellant claimed depreciation on goodwill at the rate of 25% u/s. 32(1)(ii) of the Act, in its Return of Income furnished for the Impugned AY. 54. The AO rejected the valuation report and the value of goodwill recorded by the Appellant, by erroneously alleging that the said valuation was undertaken using the DCF method which is not an acceptable method in the present case. He failed to appreciate that DCF is only one of the methods adopted, and the final valuation is the weighted average of the two methods as stated above. 55. In light of the above, the AO concluded that the genuineness and the claim of Purchase Consideration is questionable as it is fixed at an abnormally high value, in comparison to the net asset value of the business. On this basis, the Ld. AO rejected the Purchase Consideration paid, and fixed the same at the book value of Net Assets acquired, in order to eliminate the premium paid (i.e., goodwill) for acquiring the said business....
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....the course of the assessment. Again, the TPO merely made a generic allegation that the details were not furnished, without recording a finding as to which details were not called for but not furnished. 61. In light of the above, the Appellant submits that the AO cannot simply disregard the valuation reports obtained from an expert independent valuer, without establishing that the said valuation is materially flawed based on the opinion of an export. Further, the examination of the AO ought to be confined to identification of any errors in the valuation, that is undertaken based on the method employed by the valuer. The AO cannot reject the valuation methodology in itself. 62. Further, DCF is an internationally recognized, which is also recognized and accepted by the RBI, ICAI as well as under the provision of the Act. Hence, the rejection of such an established method by the AO merely because it involves assumptions, is without any basis. A valuation exercise in itself, irrespective of the method adopted, is not an exact science and can never be done with arithmetic precision and involves several assumptions. vi. Further, it is a settled principle of law that a hinds....
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....le, and the said goodwill at the time of acquiring the business by paying a premium and is not an asset that was previously used for business and thereafter transferred. 66. In light of the above, the ld. AR submitted that in the absence of invocation of the above mentioned provision, the AO is not empowered under the Act, to determine the 'actual cost' of an asset, which is defined under section 43(1) of the Act to mean the actual cost of the assets to the Assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In the present case, the 'actual cost' for acquiring the business is the Purchase Consideration paid by the Appellant, and the same cannot be rejected and determined by the AO. Reliance was placed on the decision of Ashwin Vanaspati Industries, 255 ITR 26 (Guj). 67. Further, it was submitted that the lower authorities questioned the genuineness of transaction, without appreciating that the seller of the business i.e., FECGSS paid capital gain tax on the said slump sale transaction by adopting the said purchase consideration of INR 68.55 Crores as sale consideration. The sam....
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....proviso to Section 32(1) of the Act by the. AO in the present case is totally misplaced and not justified. The said proviso does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is intended only for apportioning the amount of depreciation between the predecessor company and the successor company, based on the respective periods of the use of an asset during the previous year. 70. The sixth proviso is therefore applicable, only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act [S.No./5 - Pg. 187 of the Case Law Compilation]. Thus, a commonality of assets should exist ....
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....eror KBDL had not claimed any depreciation on G/W prior to the transfer and hence, applying said proviso, it was concluded that no depreciation shall be allowed in the hands of UB, since the transferor did not claim any depreciation thereon. It was therefore concluded that the amalgamated company cannot claim such depreciation that was never claimed by the amalgamating company. 76. The above basis formed the twin grounds on which the depreciation was denied to the UB. However, it is important to note that the Tribunal has clarified at para 15 of the decision that goodwill is a depreciable asset having regard to the Supreme Court judgment in Sniffs Securities (Supra). Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation 77. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. 78. Further, amendments were made in section 55 ....
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....ed the issue to the AO with the following observations:- "5.0 We have heard the rival submissions and have also perused the material on record. So far as the issue of addition of Rs.1,07,82,453/- is concerned, it is seen that the Assessing Officer has disregarded the valuation report mainly on the ground that valuation of equity shares was based on projection of revenue which did not match with the actual revenue during the subsequent years. In addition, the Assessing Officer has also adopted the Fair Market Value of the shares at Rs.10/- being the price paid by the Rockland Hospital Limited to acquire shares of erstwhile shareholders in the month of November, 2014. Apparently, the Assessing Officer has proceeded on mere assumptions and surmises while disregarding the valuation report submitted by the assessee. The assessee has applied the DCF method for the purposes of valuation of shares and has relied on the valuation report of the Chartered Accountant in this regard. There is settled law on the issue that as per Sec. 56(2)(viib) of the Act read with Rule-11 UA of the Income tax Rules, 1962, every assessee has an option to do valuation of shares and determine its Fair M....
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....xpert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law." 5.1 Similarly, it has been held that where a valuation report is to be rejected, the authority should pinpoint any specific inaccuracies or short comings in the DCF valuation report. In the case of Intelligrape Software Pvt. Ltd., vs. ITO in ITA No.3925- Del2018 (Delhi Trib.), it has been held as under: '"23. The AO was not able to pinpoint any specific inaccuracies or short comings in the DCF valuation report of the Chartered Accountant/Valuer other than stating that year-wise results as projected are not matching with the actual results declared in the final accounts. Before the Id. CIT (A), reasons for variation between projected and actuals were duly explained. The Ld. CIT (A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the assessee on the basis of DCF method, impugned addition as made on the basis of net asset value method is liable to be deleted. The rejectio....