2023 (7) TMI 1574 - AT - Income Tax

TP adjustment on account on account of purchase of shares of the AE - TPO re-worked the valuation as per DCF by replacing the projections with the actual for the reason that there is huge difference in the figures adopted for valuation and accordingly arrived at value of Rs. 19, 612/- per share - HELD THAT - During the course of hearing the ld AR submitted that the impugned transaction of sale of shares took place in tranches spread over 3 assessment years i.e. during AY 2016-17 9% of shares were sold during AY 2017-18 26% and during AY 2018-19 14% were sold. Considering this fact we are of the view that the above decision of coordinate bench in assessee s own case for AY 2016-17 2022 (12) TMI 1564 - ITAT MUMBAI is applicable for the year under consideration also. Therefore we hold that there cannot be any TP adjustment. These grounds are allowed in favour of the assessee Disallowance of depreciation on intangibles representing acquisition of business contract - HELD THAT - We notice that the co-ordinate bench in assessee s own case for A.Y. 2005-06 2019 (1) TMI 1128 - ITAT MUMBAI concluded that the contractual rights is a valuable commercial right and comes within the meaning of intangible asset as per section 32(l)(ii) r/w Explanation 3(b) of the Act. Applying the same ratio we hold that the depreciation claimed by the assessee on customer contracts acquired from WCIL Value Edge and Denali are allowable. Depreciation claimed on capitalization of non-compete fee - As relying on Serum Institute of India Ltd 2012 (4) TMI 373 - ITAT PUNE held that the payment made towards non-compete fee is an intangible depreciable asset. Respectfully following the above decision we hold that the depreciation claimed on non-compete fee acquired from Value Edge should be allowed. Accordingly this ground of the assessee is allowed. Disallowance u/s 14A - assessee has made investments in mutual funds equity and preference shares - HELD THAT - No disallowance can be made u/s 14A of the Act read with Rule 8D(iii) of the IT Rules where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. Therefore the disallowance made under section 14A r.w.r 8D(2)(iii) is deleted. This ground of the assessee is allowed Disallowance u/s 36(1)(va) - delayed payment of contribution towards PF ESI - entire amount as mentioned in the tax audit report has been disallowed - HELD THAT - The Hon ble Supreme court has now settled the issue of payment of employee s contribution to PF by holding that the same should be paid before the due date as specified in the respective Act. The assessee s claim that the contribution paid in the month of December 2016 is paid before the extended due date as per the notification issued under the Employees Provident Fund Act needs factual verification. We therefore remit the issue back to the AO to verify the claim of the assessee and allow the claim in accordance with law keeping in mind the decision of the Hon ble Supreme Court in the case of Checkmate Services Pvt Ltd 2022 (10) TMI 617 - SUPREME COURT . Disallowance u/s 43B - assessee during the year under consideration has reversed the provisions made towards bonus and leave encashment which was created for A.Y. 2016-17 - HELD THAT - It is noticed that the AO in the final order of assessment has retained the same disallowance made towards reversal of provisions claimed by the assessee based on the disallowance made in the earlier assessment year. It is also noticed that the DRP has given a direction to the AO to verify the facts and the consider the return of income filed by the assessee for this year as well as the earlier year and allow the claim if it has already been disallowed. We therefore remit this issue back to the Assessing Officer with the direction to consider the relevant details filed by the assessee in this regard and allow the claim in accordance with law. Short credit of TDS - AR in this regard submitted that the Assessing Officer did not give credit for the entire TDS claim by the assessee and prayed for a direction in this regard. We accordingly direct the Assessing Officer to verify the claim of the assessee with respect to the TDS and allow the credit in accordance with law after giving a reasonable opportunity of being heard to the assessee. Credit towards the advance tax paid by the assessee for an amount - AR in this regard submitted that the assessing officer has not provided any reason as why there was a short credit towards advance tax. We therefore remit the issue back to the AO with a direction to examine the advance tax paid by the assessee based on the supporting evidences and allow credit accordingly. Denial of Foreign Tax Credit (FTC) claimed - AR submitted that the AO did not call for any details in this regard and there was no reason provided as why the FTC is denied. We heard the parties and it is noticed that there is no mention in the assessment order with regard to the denial of FTC claimed by the assessee. In our view this issue needs factual verification and therefore we remit the issue back to the Assessing Officer to examine the claim of FTC afresh and allow credit in accordance with law after giving a reasonable opportunity of being heard to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals for assessment years 2017-18 and 2018-19 are as follows:

• Whether transfer pricing provisions are applicable to the purchase of shares of Associated Enterprises (AEs) and whether the valuation adopted by the assessee for such shares is acceptable or requires adjustment.
• Whether depreciation claimed on intangible assets representing acquisition of business contracts, customer contracts, customer relationships, and non-compete fees is allowable under the Income-tax Act.
• Whether disallowance under section 14A of the Income-tax Act read with Rule 8D is warranted in respect of exempt income earned by the assessee.
• Whether disallowance under section 36(1)(va) relating to employees' contribution towards Provident Fund and Employees' State Insurance is justified.
• Whether disallowance under section 43B of the Act concerning reversal of provisions for bonus and leave encashment is appropriate.
• Whether credit for short deduction of TDS and short credit for advance tax paid is rightly denied.
• Whether denial of Foreign Tax Credit (FTC) claimed by the assessee is justified.
• Whether penalty proceedings initiated are premature or justified.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustment on Purchase of Shares of AE

Relevant Legal Framework and Precedents: The transfer pricing provisions under sections 92 to 92F of the Income-tax Act govern international transactions between associated enterprises. The question whether purchase of shares amounts to an international transaction attracting transfer pricing provisions has been examined by various courts. The Bombay High Court in Vodafone Services (P) Ltd. and Shell India Market Pvt Ltd. held that in the absence of income arising from such transactions, transfer pricing provisions do not apply. The CBDT Instruction No. 2/2015 reiterates adherence to this ratio.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee acquired shares of WNS Global Services UK Ltd from WNS Holdings Ltd at a price supported by a valuation report prepared by an independent merchant banker using a weighted average of Discounted Cash Flow (DCF) and Market Multiple Method (MMM). The Transfer Pricing Officer (TPO) rejected the valuation method, preferring only the DCF method and replaced projected figures with actuals, resulting in a lower valuation and imputing the excess consideration as a deemed loan attracting interest adjustment.

The Tribunal observed that substituting projections with actuals constitutes impermissible hindsight and that the purchase of shares is a capital transaction without income implications, thus outside the ambit of transfer pricing provisions as per the coordinate bench's earlier ruling for AY 2016-17. The Tribunal also noted inconsistency in the department's stand as no adjustment was made for share sales in AY 2018-19.

Key Evidence and Findings: The valuation report submitted by the assessee, judicial precedents, and the coordinate bench's prior decision were pivotal. The Tribunal found merit in the assessee's contention that the transaction is not an international transaction under section 92 and that the valuation by an independent expert should not be interfered with.

Application of Law to Facts: Applying the law and precedents, the Tribunal held that the transfer pricing adjustment on purchase of shares was unwarranted and set aside the adjustment.

Treatment of Competing Arguments: While the department relied on the admitted Special Leave Petition (SLP) before the Supreme Court concerning the definition of international transaction including capital financing, the Tribunal gave precedence to binding coordinate bench decisions and CBDT instructions.

Conclusions: The Tribunal allowed the grounds challenging transfer pricing adjustments on share purchase.

Depreciation on Intangible Assets Representing Acquisition of Business Contracts

Relevant Legal Framework and Precedents: Section 32(1)(ii) of the Income-tax Act allows depreciation on intangible assets including "business or commercial rights of similar nature." Judicial decisions such as Areva T and D India Ltd, Skyline Caterer, Weizmann Forex Ltd, India Capital Markets, and Serum Institute of India Ltd. have recognized customer contracts and non-compete fees as intangible assets eligible for depreciation. The Tribunal's coordinate bench has consistently allowed depreciation on customer contracts acquired through business acquisitions.

Court's Interpretation and Reasoning: The Tribunal noted that customer contracts acquired from various entities are similar in nature and fall within the ambit of intangible assets. It relied on the coordinate bench rulings allowing depreciation on such contracts. Regarding non-compete fees, the Tribunal followed the reasoning in Serum Institute of India Ltd. that payment for non-compete creates a vested commercial right akin to monopoly for a definite period, qualifying as an intangible depreciable asset.

Key Evidence and Findings: The assessee's claim was supported by prior Tribunal orders and judicial precedents. The Assessing Officer's disallowance was based on the view that such intangibles did not qualify under section 32(1)(ii), which the Tribunal rejected.

Application of Law to Facts: The Tribunal applied the settled principles that customer contracts and non-compete fees acquired post 1.4.1998 are intangible assets eligible for depreciation and allowed the claim accordingly.

Treatment of Competing Arguments: The department relied on the Delhi High Court's decision in Sharp Business Systems disallowing depreciation on such assets. The Tribunal distinguished these decisions on facts and followed coordinate bench rulings favorable to the assessee.

Conclusions: The Tribunal allowed depreciation on customer contracts and non-compete fees.

Disallowance under Section 14A read with Rule 8D

Relevant Legal Framework and Precedents: Section 14A disallows expenditure incurred in relation to income exempt from tax. Rule 8D provides the methodology for computing disallowance. The Supreme Court in Maxopp Investment Ltd. v. CIT held that before making disallowance under section 14A read with Rule 8D(iii), the Assessing Officer must record satisfaction regarding the correctness of the assessee's claim.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had made a suo moto disallowance of Rs. 12,52,224/- while the Assessing Officer computed a higher disallowance of Rs. 5.42 crores without recording any satisfaction or reasons. The DRP confirmed the disallowance based on its earlier order without considering the facts of the current year.

Key Evidence and Findings: The assessee's balance sheet showed sufficient own funds to cover investments, negating the need for borrowing costs disallowance. The Assessing Officer failed to call for details or analyze the computation.

Application of Law to Facts: Applying the Supreme Court's ruling, the Tribunal held that disallowance under section 14A cannot be made without recording requisite satisfaction. The Tribunal also relied on coordinate bench decisions deleting similar disallowances.

Treatment of Competing Arguments: The department relied on the Assessing Officer's and DRP's orders without addressing the legal requirement to record satisfaction.

Conclusions: The Tribunal deleted the disallowance under section 14A read with Rule 8D.

Disallowance under Section 36(1)(va) - Employees' Contribution to PF and ESI

Relevant Legal Framework and Precedents: The Supreme Court in Checkmate Services Pvt Ltd held that employees' contribution to PF and ESI is allowable only if paid within the due date specified under the respective Acts.

Court's Interpretation and Reasoning: The Tribunal noted the assessee's claim that the contribution was paid within an extended due date notified by the authorities. Since this fact requires verification, the Tribunal remitted the issue to the Assessing Officer for factual determination in light of the Supreme Court's decision.

Conclusions: The issue was remitted for fresh verification and decision.

Disallowance under Section 43B - Reversal of Provisions for Bonus and Leave Encashment

Relevant Legal Framework: Section 43B allows deduction only when certain specified payments are actually made.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer disallowed reversal of provisions that were already disallowed in the earlier year, and the DRP had directed the AO to verify and allow the claim if already disallowed previously. Since the AO did not comply with this direction, the Tribunal remitted the issue for reconsideration.

Conclusions: The issue was remitted to the AO for fresh consideration in accordance with the DRP's directions.

Short Credit for TDS and Advance Tax

Court's Reasoning and Findings: The Tribunal directed the Assessing Officer to verify the assessee's claim for credit of TDS and advance tax with supporting evidence and allow credit if due, after giving the assessee a reasonable opportunity of hearing.

Denial of Foreign Tax Credit (FTC)

Court's Reasoning and Findings: The Tribunal observed that the assessment order did not mention reasons for denial of FTC. The issue requires factual verification and was remitted to the Assessing Officer to examine the claim afresh and allow credit in accordance with law.

Penalty Proceedings

The Tribunal found the ground relating to penalty proceedings premature and did not adjudicate on it.

3. SIGNIFICANT HOLDINGS

"Projections can't be substituted by actual and hindsight ought not to affect a valuation report."

"Transaction of purchase of equity shares is a capital transaction and does not fall within the definition of international transaction under section 92 of the Act as there is no income arising on account of such transactions."

"Customer contracts and non-compete fees acquired post 1.4.1998 are intangible assets eligible for depreciation under section 32(1)(ii) read with Explanation 3(b) of the Act."

"Non-compete fee paid to restrain competition creates a vested commercial right, which is an intangible depreciable asset."

"Before applying disallowance under section 14A read with Rule 8D(iii), the Assessing Officer must record satisfaction regarding the correctness of the assessee's claim."

"Employees' contribution to PF & ESI is allowable only if paid within the due date as specified under the respective Acts."

"Disallowance under section 43B for reversal of provisions already disallowed in earlier years must be reconsidered in light of DRP directions."

"Credit for TDS, advance tax, and foreign tax credit must be allowed if supported by evidence and not arbitrarily denied."

Final determinations included deletion of transfer pricing adjustments on share purchase, allowance of depreciation on intangible assets including non-compete fees, deletion of disallowance under section 14A, remand of issues relating to PF/ESI contribution, section 43B disallowance, TDS and advance tax credits, and foreign tax credit claims.