TaxTMI 
TaxTMI 
2022 (5) TMI 1502
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.... 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 said acquisition but arose pursuant to the acquisition on acc....
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....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 such transactions must be taken into consideration. * Reliance is also placed on para 2.75 of t....
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....aken 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 independently and in the absence of any acquisition, the same ought to be accepted even post acquisition if the same business activity co....
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....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 goodwill over the projected life of the asset for tax or accounting purposes. The intangible assets, such as goodwill, patents and trademarks are amortized into ....
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....odwill 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 acquisition of units through slump sale under Business Transfer Agreement and in these circumstances, amortization of goodwill is an extra ordinary item and is not pertaining t....
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.... 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 Infotech Pvt. Ltd., TS-676-ITAT-2021 Entercoms Solutions Pvt Ltd. TS-548-ITAT-2021 27. The ld. DR submitted that some of the comparables selected by the TPO are challenged on grounds of size and level of operations and also on account of its hig....
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....bsp; 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 Business Services Limited; * Infosys BPM Limited; and * SPI Technologies India Private Limited. 2.9 Excluding Ace BPO Services Pvt Ltd even though the same is functionally comparable to the Appellant." 31. The assessee has also raised additional grounds on this issue with the submission that these grounds are purely on a legal and juris....
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....bove. 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 company'. Loss making companies are part of the market and an entity's ability to make profits and losses is contingent upon market conditions. Profit or loss considered at random and in isolation of other business conditions based on the facts and circumstances of the case, does not by itself have any bearing on the profitability of such company. Therefore, merely because an otherwise functionally comparable company has ....
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....es 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 Ltd. and these companies are to be excluded from the comparables." Sella Synergy India P. Ltd. (supra) "6.17 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. TPO has wrongly excluded said comparables company as a persistent loss making company. Whereas the said company has earned net profit both in preceding and subsequent year. But the comparable turnover to be current financial year is less than Rs. ....
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....ly 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 the OECD guidelines as well. 47. The grant of economic adjustments such as working capital adjustment was also allowed by the Hon'ble Karnataka High Court, in the case of Novell Software Development (India) Pvt. Ltd., 126 taxmann.com 29 upon considering Rule 10B of the Rules. Reliance is also placed on the following decisions, which have upheld the working capital adjustment:- Novell Software Development (India) Pvt. Ltd., 126 taxmann.com 29 Philips Software Centre Pvt. Ltd....
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....galore 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 . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)...... (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associa....
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....ed 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 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. 16. 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....
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....r 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 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." 18. 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, inven....
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....garding 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 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 Vs. 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 ....
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....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 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 should be allowed. We hold and direct accordingly. 23. As we have already observed, the assessee in the present case has given all the details required for working capital adjustment and the revenue authorities were not justified in denying the claim of assessee for deduction. The TPO/AO is directed to allow working capital adjustment in the light of the material already available on record, after affording opportunity of being heard to the assessee. ....
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....e 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 applies only to assets transferred during amalgamation and not to assets arising due to amalgamation. 5. The Learned AO / DRP erred in not appreciating the generally accepted accounting principles for the purpose of calculation of goodwill. 6. The Learned AO / DRP erred in rejecting DCF method and brushing aside the valuation report of the business acquired by the Assessee as duly submitted by the Assessee for determination of goodwill by merely providing general comments on DCF Method without citing any particular error in the said report. Learned DRP has further erred in alleging that the assessee failed to furnish empirical data etc while it was (a) evident from valuation report and (b) nothing specific was ever called for. 7. The Learned AO / DRP erred in making an arbitrary compar....
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....laim 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. Consequently, the depreciation claim thereon was rejected. The Hon'ble DRP confirmed the said disallowance. 56. The ld. AR submitted that the basis for rejection of the valuation report obtained from the independent valuer was that DCF method of valuation is not acceptable for valuing the business acquired by the Appellant (on the premise that only DCF method was adopted); and huge variations between the projections used for the said valuations, and the actual revenues earned by the Appellant for the corresponding period. The Appellant's reliance on the decision of the Hon'ble Supreme Court in the case of Smifs Securities Limited, 348 ITR 302 was rejected on the ground that in the present case it is the valuation that is challenged and not the eligibility of depreciation on goodwill as a principle settled by the ....
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....on 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 hindsight comparison of the projections with the actual revenues cannot be a basis for rejecting any valuation. The Appellant relies on the following judicial precedents, wherein the said principle was reiterated and upheld: Town Essential (P) Ltd., 191 ITD 55 Innoviti Payment Solutions (P.) Ltd., 102 taxmann.com 59 Cinestaan Entertainment P. Ltd., 106 taxmann.com 300 Rockland Diagnostics, TS-114-ITAT-2021-DEL India Today Online P. Ltd., 176 ITD 459 Rameshwaram Strong Glass P. Ltd., 96 taxmann.com 542 Credtalpha Alt. Inv. Advisors Pvt Ltd., 7056/mum/2019 AO cannot reject the purchase consideration paid by the Assessee 63. The Appellant submits that the AO merely alleging that the slump sale is a colourable device for reducing the Appellant's tax liability, rejected the valuation and the purchase consideration actually paid by the Appellant.....
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.... 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 same was also accepted by the Revenue in completing the assessment of the seller for the Impugned AY [Pg. 304 and 338 of the Paperbook - Part A]. The lower authorities failed to appreciate that this establishes that the slump sale transaction is bona fide, and the said purchase consideration based on the valuation of business, ought to be accepted as genuine. Goodwill arising on slump sale - eligible for depreciation 68. The ld. AR submitted that while the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) of the Act, the Appellant submits its contentions in support of its claim, on a conservative basis as follows:- 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 ....
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....or 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 between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 71. He submitted the Hyderabad Tribunal, in the case of Mylan Laboratories Ltd.. 113 taxmann.com 6, upheld the position discussed above and rejected the invocation of the said proviso to disallow depreciation on Goodwill. Further, reliance in this regard is placed on the decision of the same bench in the case M/s Krishna Drugs Ltd., ITA No.198/Hyd/2011. 72. Further, he submitted that the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. 73. He s....
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....essee 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 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. 79. It is therefore submitted 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. 80. The ld. DR submitted that the AO has assailed the DCF method adopted for valuation based on a series of fallac....
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.... 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 Market Value either by DCF method or NAV method, and that the Assessing Officer cannot examine or substitute his own value in place of the value so determined. The ITAT Delhi Bench in the case of Cinestaan Entertainment (P.) Ltd. vs. ITO, reported in [2019] 106 taxmann.com 300 (Delhi Tribunal), has held as under: '"32. Section 56 (2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Asse....
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....rdingly, 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 rejection is unjustified as the valuation report is required under Rule 11UA of The Income Tax rules is based on the future aspects of the company at the time of issuing the shares, it may vary from the actual figures depending on the market condition at the present point of the time. 24. Thus, keeping in view the entire facts of the case, the reports of the valuer, the comparison of the actual and projected revenues, provisions of Section 56(2)(viib) and keeping in view the order of Co-ordinate Bench of ITAT in the case of Cinestaan Entertainment Pvt. Ltd. 177 ITD 809 wherein it has been held that the Assessing Officer cannot substitute his own value in place of the value determined either on DC" method or NAV method, the appeal of the assessee is hereby allowed.' 5.2 Thus, it has been held by the Co-ordinate Bench of the Tribunal that in absence of any specific inaccuracies or short comings in the DCF valuation report other than stating that yearwise results as proje....