TMI Blog2019 (7) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ₹ 2356249/- deserves to be deleted. TDS u/s 195 - Disallowance being expenses incurred on corporate charges u/s. 40a - HELD THAT:- As given a thoughtful consideration to the nature of services provided by AE. In our considered view no such services make available technical knowledge etc to the assessee. No technical knowledge experience or skill as required by article 12 is acquired as a result of provision of the services by Aricent USA. In terms of the provisions of article 12 of the Indo US DTAA fees paid by the assessee to its AE Aricent USA would not be taxable in India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is making such payment in lieu of receiving vide scope of services from its AE. We are of the considered view that these are all inter linked transactions and therefore, should not be evaluated on a separate basis. This is also supported by OECD guidelines which provide for evaluation of combined transactions where such transactions are closely linked or continues and cannot be evaluate separately. Technical know how fee paid by the assessee is to be benchmarked applying TNMM at the entity level - HELD THAT:- We hold that TNMM is the most appropriate method for this international transaction and since the OPM of the assessee is higher than the OPM of the comparable companies, we are of the considered view that the benefit and the necessity test applied by the TPO/ DRP is uncalled for and accordingly direct the TPO/ AO to delete the addition Transfer pricing adjustment on account of reimbursement of expenses - HELD THAT:- We are of the considered view that the transaction of reimbursement of expenses is closely linked with the entire business of the assessee. However, a careful perusal of the additional evidences shows that some of the evidences are not from third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. - ITA No.90/DEL/2013, ITA No.2671/DEL/2014 - - - Dated:- 26-7-2019 - Sh. N. K. Billaiya, Accountant Member And Ms. Suchitra Kamble, Judicial Member For the Appellant : Sh. Ajay Vohra, Sr. Advocate, Sh. Neeraj Jain, Advocate For the Respondent : Sh. Sandeep Kumar Mishra, Sr. DR ORDER PER N. K. BILLAIYA, AM: These two appeals by the assessee are preferred against the two separate orders framed u/s. 143 (3) r.w.s. 144 C of the Act. Since common issues are involved in both these appeals they were heard together and are being disposed of by this common order for the sake of convenience. 2. The appellant company was formerly known as Flextornics Software Systems Ltd. (FSS) which was formerly known as Hughes House Software Services Ltd. (HSS) and is a company incorporated under the companies Act. 1956. FSS is closely held public limited company and is subsidiary company of Flextronics Sales and Marketing Limited. The appellant is engaged in the business of production of computer software products and provision of software development services of communication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. During the course of the transfer pricing assessment proceedings the TPO noticed that the assessee has paid ₹ 24022522/- to its AE Aricent US market Inc on account of certain services purported to have been received by the assessee. The TPO found that this amount has been bench marked by including it in the cost base while comparing arms length margin using TNMM. The assessee was asked to furnish all the agreements entered into by the assessee company related to the Intra Group services obtained by the assessee company from the AE. The assessee was also asked to explain the rate of payment for Intra Group Services and whether any cost benefit analysis was done while entering into the agreement. The assessee was asked to furnish all the evidences in relation to such payments. Assessee filed a detailed reply vide submissions dated 17.08.2011 and 09.09.2011and also filed the relevant agreement. The services listed in the agreement are as under :- 3. SCOPE OF SER VICES Aricent shall provide following Services to Recipient: i. Accounting and Finance a) Audit liaison b) Consoli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial 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 corporate management services to the group companies which related to the entire group. It was brought to the notice of the DRP that the costs are charged on a rational basis in proportion to benefit accruing to each entity. The basis of cost share between the assessee and AE was furnished. After considering the facts and the submissions and after going through the TPO s report the DRP held as under :- 3.6 Thus in our view bits and pieces of work may benefit the Indian entity and there is no real way of quantification of such benefits. For example some costs of insurance premium and by Aricent US to benefit FSS India have been allocated on pro rata basis to three parties by the assessee. Thus it is difficult to actually quantity the amount spent for India entity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n foreign currency loan extended to AE. 13. Facts on record show that during the year under consideration the assessee earned interest income of ₹ 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 was considered as being at arms length price applying CUP as the most appropriate method as the same was adequately bench marked with respect to comparable uncontrolled transaction of expenses of payment of interest on similar loans. 14. However, the TPO was of the opinion that the manner in which the CUP method has been applied by the assessee is erroneous. The TPO applied rate of interest at 17.26% which was computed as under :- CUP Rate is thus arrived at as under. Basic interest rate for the credit rating of the AE 9.88% Add : Transaction cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 ₹ 2356249/- deserves to be deleted. We direct accordingly. 20. Ground No.4 relates to the disallowance of project expenses amounting to ₹ 171617599/- treating the same to be capital expenditure incurred on project which were yet to take off. 21. Facts on record show that the assessee has incurred expenses of ₹ 17.16 crores in respect of the various software project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no dispute that the payee Aricent Inc USA is a tax resident of US and is, therefore, governed by the provisions of the Act or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issue for the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Tribunal. We fail to see why the Tribunal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has claimed the deduction in respect of depreciation in computing his total income 43. This was very much available 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 incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware shall be debited to goodwill in the balance sheet of Kappa. 49. The issue of shares / accounting treatment has been dealt in the scheme of arrangement at Clause 13 and the Hon ble High Court held :- This court doth hereby sanction the scheme of arrangement set forth in Schedule-I annexed hereto 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 adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill recognition /computation For the purpose of amalgamation, the intrinsic value of equity share of each of KIL, FSSL and FSL, based on networth of these companies for the purpose of amalgamation, was determined on the basis of valuation report dated 10.11.2006 obtained from Ernst Young ( EY ) as under : S. No. Name of the company No. of equity shares Instrinsic Value of equity share Fair Value (in Rs. Crs.) Remarks/Valuation methodology 1 Assessee company 9.51 crs ₹ 110.7 ₹ 1,053 Based on NAV method 2 Flextronics Software Systems Limited 3.31 crs ₹ 897.2 ₹ 2,967 Based on weighted average method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in India and the prescribed accounting standards issued by the Institute of Chartered Accountants of India. As per the methodology approved as part of the scheme of amalgamation, the computation of goodwill arising on amalgamation of FSSL and FSL with the assessee company, is demonstrated hereunder : In this regard, it would be pertinent to mention that the aforesaid amount of goodwill comprises of the various intangible assets, as mentioned hereunder : (i) Reputation (ii) Customer relationship/contracts (iii) Technology for business verticals, e.g. technology, DataCom, SS7, VoIP, Wireless and mobile handsets (iv) Records, files, engineering process information, manuals, data (v) Catalogue, quotations, sales and advertisement materials, etc. (vi) Patents for processes - It may be noted that a list of such patents were appended as Schedule C of Hon ble High Court approved scheme of arrangement for the merger. Re : Net asset acquired from FSSL and FSS Break-up of net assets of FSSL and FSS as of 31st March 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR stated that the term used u/s. 32 (1) (ii) must be understood in light of terms placed before it and therefore the question is that under examination is not whether depreciation is allowable on goodwill acquired/ created during amalgamation. The DR further stated that as per section 32(1) of the Act 'depreciation', in the case of any block of assets, is to be computed on the written down value. According to explanation 2 of section 32(1) written down value of the block of assets shall have the same meaning as in section 43 (6) (c). This section lays down the meaning of the term written down value , as under: 43(6) written down value means- (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: Provided that in determining the written d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion referred to in item (i). 56. Thus, if an asset is acquired during the previous year and it falls in a block of asset (like intangible in this case), then the written down value of that block of asset (to which such acquired asset belongs) would be increased by the actual cost of the asset acquired. Now definition of 'actual cost is given in section 43(1). According to this actual cost means 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. Explanation 7 of section 43(1) reads as below: Explanation 7. -Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. 57. In the case before us, goodwill was transferred by the amalgamating company (FSL and FS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be NIL. 59. The aforestated interpretation of the relevant provisions, in our understanding of the law is not correct for the simple reason that by virtue of the scheme of the amalgamation the appellant paid consideration over and above the net asset value of the amalgamating companies and therefore, the difference has been rightly taken as the cost of acquisition of goodwill. 60. The DR further emphasized that if the 6th proviso to section 32 (i) is considered the depreciation under this provision is to be restricted to the amount considering that amalgamation has not taken place and since in the hands of the amalgamating companies the depreciation on goodwill would have been zero there cannot be deprecation in the hand of the amalgamated company. In support reliance was placed on the decision of the coordinate bench of the Tribunal Bangalore in ITA No.722, 801 and 1065/ Bang/ 2014. Once again the DR is not appreciating the facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Hindustan Coca Cola Beverages Private Limited 331 ITR 192 has upheld the findings of the Tribunal that payments made towards business acquired on slum price and a part of the price so paid was allocated to the intangible asset covered under the head goodwill. 63. Considering the settled position of law and in the light of the factual matrix of the assessee discussed elsewhere we direct the Assessing Officer to allow deprecation on goodwill as per rates applicable for the year under consideration. 64. In the result, the additional ground raised by the assessee is allowed and appeal of the assessee is allowed. ITA No.2671/Del/2014 (A. Y. 2009-10) 65. Ground No.1 is of general in nature and needs no separate adjudication. 66. Ground No.2 is in relation to the non giving of the correct credit of prepared taxes, tax deducted at sources and MAT credit. 67. We are of the considered view that the Assessing Officer should compute the correct tax liability and give all the credits of the prepaid taxes including credit of TDS. The Assessing Officer should also compute the MAT credit as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit of it. The TPO considered the following issues for determination of ALP in respect of this international transaction. a. The taxpayer's agreement with the associated enterprises related to intra group services is to be examined to see as to what kind of services were to be provided by the AE to the taxpayer. As normally such agreements refer to a large number of services which could be rendered by the AE, the taxpayer has to specify the service(s) which is actually received by it for which the payment is made. b. Whether the taxpayer really needed such services or not. If so, what direct or tangible benefit it has derived. c. Contemporaneous information on the basis of which rate or payment for the service is determined. This includes the cost benefit analysis done by the taxpayer at the time of entering into agreement. Whether any benchmarking analysis was done by the taxpayer so as to compare the amount which he would have paid to an independent person under similar circumstances. d. Whether an independent person would have paid such amount in comparable circumstances e. Whether the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner that assessee deems fit and the commercial or business expediency of incurring any expenditure is to be seen from the point of view of the assessee. The counsel further stated that as long as the item of expenditure has been incurred wholly and exclusively for the purpose of business of the assessee, whether or not such expenditure actually benefits assessee is irrelevant for the purpose of determination of ALP. 78. The counsel further stated that the TPO/ DRP grossly erred in holding that the transaction is having a bearing on income of the assessee and hence to be analyzed separately. 79. Referring to the enhancement in the TP adjustment by the DRP the counsel stated that without giving any opportunity to the assessee the TPO has made an adjustment of ₹ 54858133/-. In support the counsel moved an application for admission of additional evidence and prayed for the deletion of adjustment made by the TPO on account of reimbursement of expenses. 80. Per contra the DR strongly supported the findings of the TPO/ DRP. It is the say of the DR that the evidences furnished by the assessee do not show that they ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. XXX 22 ........... ....... So longastheexpenditureorpayment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. Similarly, the Hon ble Delhi High Court in the case of CIT vs Lumax Industries Limited (ITA No 102/2014) held that the Transfer Pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is nil given that an independent entity in a comparable transaction would not pay any amount However, this is different from the TPO stating that the did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO . 83. In the light of the aforestated judicial discussion we are of the considered view that the TPO/ DRP grossly erred in examining the impugned corporate charges in the light of benefits and necessity. 84. We find that in its transfer pricing report the assessee has treated payment of administrative corporate fees payment as part of operating expenses. The TPO has held that this transaction is having bearing on income of the assessee and hence to be analyzed separately. 85. The undisputed fact is that the OPM of the assessee is @ 27.36% whereas that of all the comparable companies is @ 14.24%. As mentioned elsewhere the AE was created as a SPV for the purpose of giving services to the group companies for which the AE has charged cost + 5% as a marker and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(l)(e). which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm s length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 87. The coordinate bench in the case of M/s. BG Exploration and Production India Ltd. Vs. DCIT (ITA No. 1170/Del/2015) wherein the Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. dispute resolution panel holding that transactions of intra group services are interlinked, therefore, they should be benchmarked together by adopting TNMM as the most appropriate method , hence, directing the Ld. transfer pricing officer to delete the adjustment proposed of ₹ 3329766244/-. In the result ground No. 1 to 3 of the appeal of the revenue are dismissed. 88. It would not be out of place to refer to the decision of the Hon ble Delhi High Court in the case of Magneti Mareli Powertrain India Pvt. Ltd. (ITA No.350/2014) wherein the Hon ble High Court held that technical know how fee paid by the assessee is to be benchmarked applying TNMM at the entity level. The said decision has been affirmed by the Hon ble Supreme Court in ITA No.15244/2017. 89. Considering the judicial decisions discussed here in above in the light of the under lying facts in the issue we hold that TNMM is the most appropriate method for this international transaction and since the OPM of the assessee is higher than the OPM of the comparable companies, we are of the considered view that the benefit and the necessity test applied by the TPO/ DRP is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 assessee further objected for imputing @16% for the delay in receipt of payments. 98. Dismissing the contention of the assessee the TPO resorted to Explanation (1)(c) to Section 92 B which has been inserted by Finance Act in 2012 with retrospective effect from 01.04.2002. The TPO was of the firm belief that the delay in receivables constitutes an international transaction in the light of the Explanation (1)(c) to section 92 B of the IT Act. The TPO observed that the assessee has provided benefit to its AE by way of advancing of interest free loan in the garb of delay in receipt of receivables. The TPO finally concluded by charging interest @ 15.77% and made adjustment of ₹ 97780581/-. The objection before the DRP was of no avail. 99. Before us the counsel for the assessee vehemently stated that the delay of remittances cannot be re-characterized as unsecured loans advanced to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceivable 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 Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capitalfof the Appellant will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that visa- vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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