TMI Blog2019 (12) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. Interest on foreign currency loan extended to the AE. - TPO applied the Comparable Uncontrolled Price method to benchmark the aforesaid international transaction - Held that:- where the transaction is in foreign currency, then the rate of interest is to be applied is LIBOR plus. In the present case, it may also be pointed out that the loan was advanced after taking permission of the RBI and even the rate of interest was approved. - no transfer pricing adjustment needs to be made in the hands of the assessee on account of interest on foreign currency loan wherein the assessee himself had charged interest @ LIBOR + 150 basis points. - Additions deleted. Re-characterizing the inter-company receivables as unsecured loan extended by the assessee to its AEs. - Held that:- where the operating profit margin shown by the assessee from its transactions with its AEs was higher than the mean margins of the comparable companies, then no separate adjustment could be made on account of imputing interest on outstanding receivables. In any case, the aforesaid receivables have been received by the assessee as and when due and the same could not be re-characterized as unsecured loan. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) r.w.s. 144C of the Income Tax Act, 1961 (in short Act ) dated 31.12.2014 relating to Assessment Year 2010-11. Further both the assessee and the Revenue have filed cross-appeals against the order of Assessing Officer u/s 143(3) r.w.s. 144C dated 21.04.2015 relating to Assessment Year 2011-12. Further, the assessee is in appeal against separate orders of the Assessing Officer dated 31.01.2017/ /13.10.2017/ 22.10.2018 u/s 144C(1) r.w.s 143(3) relating to Assessment Years 2012-13 to 2014-15 respectively. 2. This bunch of appeals relating to same assessee on similar issues were heard together and are being disposed off by this consolidated order for the sake of convenience. ITA No.1308/Del/2015 [Assessee s appeal] Assessment Year: 2010-11 3. The assessee has raised following grounds of appeal relating to Assessment Year 2010-11:- 1. That the assessing officer erred on facts and in law in completing the assessment under Section 144C/143(3) of the Income-tax Act, 1961 ('the Act ) at an income of ₹ 120,22,91,210 under the normal provisions of the Act, as against income of ₹ 114,65,96,393 returned by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and its AE. 2.6 That the DRP erred on facts and in law in not appreciating that payment made by the appellant to its associated enterprise on account of corporate charges, represents actual cost incurred by the associated enterprise on behalf of the appellant. 2.7 That the DRP erred on facts and in law in not appreciating the additional evidences submitted in the form of affidavits of employees of the associated enterprise rendering various services to the appellant. 2.8 That the assessing officer/ DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was wholly and exclusively for the purpose of business of the appellant. 2.9 That the assessing officer/DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was validly benchmarked along with other closely linked transactions applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. That the assessing officer/ DRP erred on facts and in law i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its associated enterprise. 4.4 That the assessing officer/TPO erred on facts and in law in not appreciating that since the margin earned by the appellant is higher than the margin earned by the comparable companies after making adjustment on account of working capital requirements, no addition on account of notional interest for delay is receipt of receivables is otherwise warranted. 4.5 Without prejudice, that the DRP/TPO erred on facts and in law in disregarding the fact that the invoice for services were raised by the assessee to its associated enterprise in foreign denominated currency and accordingly, arm s length interest rate shall be computed considering Libor rates applicable on foreign denominated loans. 4.6 Without prejudice the assessing officer/ TPO erred in not giving effect to the directions of the DRP to consider Base Rate of SBI for computing the arms length rate of interest and instead considering PLR of SBI. 5. That the DRP erred on facts and in law in not adjudicating the claim of allowance of depreciation under section 32(1)(i) of the Act on the difference between the aggregate book value of investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is general in nature and does not require any adjudication. Hence, the same is dismissed. 5. The issue in Ground of appeal Nos. 2 to 2.11 is against the transfer pricing adjustment on account of payment of Corporate Charges. 6. Briefly in the facts relating to the issue, the assessee company was engaged in the business of production of computer software products and provision of software development services for communication industry. The assessee was engaged in the development of packaged software and providing software consultancy services and other ancillary products and services, primarily for use in telecommunications industry. The assessee had entered into various international transactions with its Associated Enterprises (in short AE ) and one of the said transaction was payment of Corporate Charges of ₹ 3,66,31,346/-. The case of the assessee was that the AE was allocating the said corporate charges among the group companies on the basis of cost plus 5% mark up. The assessee further claims that the said payment of corporate charges of ₹ 3.66 crores, was included in the cost base for the purpose of benchmarking the interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whether or not the services had resulted in any benefit to the assessee. Further referring to the order of the DRP, it was pointed out by the Ld.AR that vide para 6.6.19 at page 25 of the order, the panel says that there is no agreement between the parties. However, in para 6.6.5 at page 19, the Panel had observed that there was an agreement between the parties and at page 20, they did refer to the alleged agreement. He further pointed out that the issues raised stand covered by the order of the Tribunal in assessee s own case in ITA No.90/Del/2013 2671/Del/2014 relating to Assessment Years 2008-09 2009-10, vide consolidated order dated 26.07.2019. The Ld.AR for the assessee took us through the various aspects of the issues which have been deliberated upon by the Tribunal. 10. The Ld.DR for the Revenue pointed out that the assessee in TP study report had clubbed the international transaction of payment of corporate charges with other transactions of provision of software services and software development services. The assessee had applied Transactional Net Margin Method and on this combined approach, had benchmarked the international transaction at arms length. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of corporate charges as cost base. It had further applied Transactional Net Margin Method as the most appropriate method with PLI of OP/OC. The margin of the assessee worked out to 25.54% as against the mean margins of comparables selected by the assessee, at 14.79%. The TPO however, was of the view that the assessee had failed to establish its case of receipt of economic and commercial benefits from such payment and also evidence of incurring such expenditure by the AE and thus, the TPO adopted the arms length price for the aforesaid transaction at NIL. The DRP confirmed the determination of Arm's Length Price by the TPO on the Ground that the assessee talks of agreement, but no agreement between the parties was filed. One more aspect which has been considered by the TPO and which has not been disturbed by the DRP is that the assessee has failed to demonstrate the benefit arising on the availment of such services from the AE. 13. We find that similar approach was adopted by the Assessing Officer in benchmarking the international transaction of payment of corporate charges in Assessment Year 2009-10. The Tribunal in ITA No.2671/Del/2014 relating to Assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Hon ble Delhi High Court and also the decision of Coordinate Bench observed as under:- 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 assessee 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 para 1.42 and 1.43 of the OECD guidelines which provide for evaluation of combined transactions where such transactions are closely linked or continues and cannot be evaluate separately. 86. This further finds support from the decision of the Hon ble High Court in the case of Sony Ericson Mobile Others in ITA No.16/2014 wherein the Hon ble High Court affirm the benchmarked of closely linked transaction. The Hon ble High Court held as under :- 91. In case the tested party is engaged in single line of business, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has deleted the adjustment on account of payment made for intra group services. The Tribunal held as under :- 72. On the examination of the volume and us details submitted by the assessee. The Ld. dispute resolution panel has come to the conclusion that assessee has received the services and those services are useful services.. With respect to the clubbing of the transaction it was held that when the transactions are closely interrelated it is but natural to club such transaction and benchmarked it together. The Ld. dispute resolution panel at page No. 30 - 31, has considered the suspect and agreed with the contention of the assessee that intra group services received from its associated enterprise are closely linked to the main business activity of the assessee company placing reliance on the US regulations, OECD reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 uncalled for and accordingly direct the TPO/ AO to delete the addition of ₹ 48397589/- Ground of appealNo.5.1 to 5.6 are allowed. 16. In view of the above said ratio laid down, we hold that where the assessee had demonstrated the need for the services and had also produced evidence of availment of such services and had also established the benefit derived from the said services, and where those services were neither deliberative in nature nor were shareholder activities, then the said availment of the intra-group services being inter linked with the other international transaction, then the same should be benchmarked on aggregate basis by adopting the Transactional Net Margin Method as the most appropriate method. Consequently, we reverse the orders of the authorities below and delete the upward adjustment of ₹ 3.66 crores. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan as in the earlier years and had charged interest by applying LIBOR +150 basis point. The Assessing Officer/DRP/TPO however applied the prime lending rate of 14.88%, which was reduced to 13.25% finally. However, the case of the assessee before us is that it had advanced foreign exchange loan to its AE and the prime lending rate cannot be applied in such circumstances. We find merit in the plea of the assessee and hold that where the transaction is in foreign currency, then the rate of interest is to be applied is LIBOR plus. In the present case, it may also be pointed out that the loan was advanced after taking permission of the RBI and even the rate of interest was approved. In such facts and circumstances, we find no merit in the orders of the authorities below and hold that no transfer pricing adjustment needs to be made in the hands of the assessee on account of interest on foreign currency loan wherein the assessee himself had charged interest @ LIBOR + 150 basis points. Similar issue has been decided in favour of the assessee in Assessment Years 2008-09 2009-10 also. Thus, Ground of appeal Nos. 3 to 3.2 raised by the assessee are allowed. 22. The issue rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds of appeal is against the adjustment made on account of notional interest due on the outstanding receivables. The TPO had noted the regular trade debtors which were outstanding and had treated the same as deemed loan, incase the said outstandings were not paid within period of 30 days. The transaction had been assumed by the TPO, rejecting the consistent approach applied by the assessee. First of all, we hold that there is no merit in the deeming adjustment made by the Assessing Officer/TPO in this regard. In any case where the operating profit margin shown by the assessee from its transactions with its AEs was higher than the mean margins of the comparable companies, then no separate adjustment could be made on account of imputing interest on outstanding receivables. In any case, the aforesaid receivables have been received by the assessee as and when due and the same could not be re-characterized as unsecured loan. Accordingly, we reverse the order of the authorities below and delete the adjustment made on account of delay in receipt of receivables. The Tribunal in assessee s own case in Assessment Year 2009-10 had deleted the aforesaid addition and also held that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Nos. 5 5.1 is against the allowability of depreciation of goodwill. 33. Coming to the issue in hand, the Tribunal in Assessment Year 2008-09 (supra) had admitted the additional Ground of appeal vide paras 34 to 41 and then adjudicated the issue on merits vide para 42 onwards. The first aspect which was decided by the Tribunal was that all the facts in relation to creation of goodwill were available on record. Thereafter, looking into the aspects of amalgamation of two companies with assessee, under scheme of arrangement and amalgamation w.e.f 01.04.2007, which was approved by the Hon ble High Court and after taking note of salient features of the amalgamation in paras 47 to 50 at page 25 to 33 of the order, wherein Tribunal also took note of the methodology approved as part of scheme of amalgamation, for computation of goodwill arising on amalgamation of two concerns of the assessee company, observed that the said methodology was approved by tax auditor of the assessee company. In para 52 onwards, the contention of the DRP was noted and one of the contentions was that exercise had to be carried out to determine the valuation of the assets and vide para 53, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arging any interest u/s 234A of the Act. The Assessing Officer may verify the stand of the assessee and in case the assessee had filed the return of income within extended period of filing the return of income then no interest u/s 234A of the Act is to be charged. 38. Now coming to the next charge of interest u/s 234B of the Act, where the case of the assessee is that it is to be charged on assessed income and the interest u/s 234C of the Act is to be charged on the returned income. There is no dispute about the provisions of section 234B 234C of the Act. The interest chargeable u/s 234B 234C is consequential; hence, the Assessing Officer is directed to verify the stand of the assessee. Ground of appeal No.7 is thus, allowed for statistical purposes. 39. In the result, the appeal of the assessee is partly allowed. ITA No.4913/Del/2018 [Assessee s appeal] ITA No.5026/Del/2018 [Revenue s appeal] Assessment Year: 2011-12 40. Now coming to the cross-appeal filed by the assessee and the Revenue relating to Assessment Year 2011-12. 41. Following grounds of appeal are raised by the assessee and Revenue respectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that there was no allegation in the order passed by the TPO under section 92CA(3) of the Act that the services rendered by the associated enterprises are in the nature of shareholder activity. 1.9. That the Ld. CIT(A) erred on facts and in law in holding that the aforesaid services are in the nature of shareholder activity without providing any opportunity of being heard to the appellant to furnish its rebuttal or additional details/evidence in support of its arguments, specifically in the absence of any finding to this effect by the learned TPO in his order under section 92CA(3) of the Act. 1.10. That the Ld. CIT(A) erred on facts and in law in determining the arm s length price of international transaction on payment of corporate charges on an adhoc and arbitrary basis without applying any of the methods prescribed under section 92C of the Act. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not entertaining the claim of deduction of ₹ 2,77,79,494 under section 43B of the Act in respect of leave encashment and gratuity paid before the due date of filing of return merely on the Ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that TPO has already reduced the expenses to the level of arm s length? 3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 42. The Ground of appeal Nos.1 to 1.10 raised by the assessee in this appeal are against the transfer pricing adjustment made on account of payment of corporate charges. It was also pointed out by the Ld.AR for the assessee that in the appeal filed by the Revenue, the issue was also in relation to the transaction of payment of corporate charges. 43. We have heard the rival contentions and perused the record. For the year under consideration, the assessee had selected Transactional Net Margin Method as the most appropriate method OP/OC as PLI. The operating margins of the assessee were 22.75% as compared to the mean margins of the comparable companies selected at 13.35% and hence were considered to be at arms length. The TPO did not dispute the rendition of services by the AEs but rejected the Transactional Net Margin Method and benchmarked the international transaction of payment of corporate char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratuity paid, before the due date of filing of return of income. The said amount was paid on 31.07.2011 and the same was claimed to be allowable u/s 43B of the Act. The Assessing Officer did not allow the claim of the assessee in view of no claim being made in the return of income and applied the ratio laid down by the Hon ble Supreme Court in Goetze (India) Ltd. [2006] 284 ITR 323 (SC). The CIT(A) upheld the order of the Assessing Officer against which the assessee is in appeal. 50. We have heard the rival contentions and perused the record. The Hon ble Delhi High Court in CIT vs Jai Parabolic Springs Ltd. [2008] 306 ITR 42 (Del) has explained that the Tribunal has the power to adjudicate the fresh claim raised for the first time and has also explained the ratio of the decision of Hon ble Supreme Court in Goetze India Ltd. (supra). In view thereof, we adjudicate the claim of the assessee u/s 43B of the Act. As per Proviso to the said section, incase any amount, which is due to be paid, to which provision of section 43B of the Act are attracted, then no disallowance is to be made u/s 43B of the Act, incase the assessee deposits the said amount before the due date of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs Sugauli Sugar Works Ltd. (supra) where the creditors are outstanding in the books of accounts of the assessee and they have not been reversed, then such outstanding balance of creditors cannot be treated as income of the assessee. The CIT(A) has fairly pointed out that the issue is decided in favour of the assessee. However, while deciding the issue, reference was made to the rectification order u/s 154 of the Act, which is in respect of the computation of book profits under the MAT provision and not the income under the Income tax Act. Accordingly, we direct the Assessing Officer to allow the claim of the assessee in entirety and delete the addition of ₹ 19,12,401/-, as this is the addition made in the hands of assessee. The Ground of appeal Nos. 3 to 3.1 are thus allowed. 57. The appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed. ITA No.1944/Del/2017 [Assessee s appeal] Assessment Year: 2012-13 58. The assessee has raised following grounds of appeal relating to Assessment Year 2012-13:- 1. That the assessing officer erred on facts and in law in completing the assessment unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... face value of share capital of Flextronics held by the appellant and FSL held by Flextronics accounted as goodwill amounting to ₹ 2675,57,10,570 pursuant to amalgamation of Flextronics and FSL with the appellant. 2.6. That the DRP/ assessing officer erred on facts and in law in not appreciating that the Goodwill depreciation claim could not have been part of Tax Audit Report in Form 3CD since the claim was made pursuant to the decision of Supreme Court in the case of CIT vs. Smifs Securities Ltd.: (2012) 348 ITR 302. As per Supreme Court the depreciation ought to be allowed in terms of section 32(1 )(ii) of the Act in respect of Goodwill pursuant to amalgamation of Flextronics and FSL with the appellant while computing the taxable income of the appellant. 2.7. That the DRP/ assessing officer erred on facts and in law in denying depreciation on goodwill by relying upon the decision of the Bangalore Tribunal in the case of United Breweries Ltd. vs. ADIT: 722/Bang/2014, wherein it has been held that depreciation on enhanced value of goodwill is barred in terms of sixth proviso to section 32(1 )(ii) of the Act. 2.8. Without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment proceedings. 5. That the DRP/ assessing officer erred on facts and in law in disallowing the loss on sale of shares of Aricent Japan Limited on the Ground of appealthat the valuation report of chartered accountant suffered from ambiguity. 5.1. That the DRP/assessing officer erred on facts and in law in not appreciating that valuation report obtained by Aricent Japan Limited from a technical expert was binding on the assessing officer. 5.2. That the DRP/ assessing officer erred on facts and in law in not appreciating that valuation report obtained by Aricent Japan Limited from a technical expert was as per the guidelines issued by the Reserve Bank of India in relation to transfer of shares by a resident to a non-resident. 6. That the DRP/ assessing officer erred on facts and in law in making addition of ₹ 8,84,112 on account of interest on late deposit of TDS without appreciating that such interest is an allowable expenditure under section 37(1) of the Act. 7. That the DRP erred on facts and in law in alternatively disallowing u/s 37(1), the payment of corporate charges amounting to ₹ 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise on account of corporate charges, represents actual cost incurred by the associated enterprise on behalf of the appellant. 8.7 That the DRP erred on facts and in law in not appreciating the additional evidences submitted in the form of affidavits of employees of the associated enterprise rendering various services to the appellant. 8.8 That the assessing officer/ DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was wholly and exclusively for the purpose of business of the appellant. 8.9 That the assessing officer/DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was validly benchmarked along with other closely linked transactions applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 8.10 That the TPO/ DRP erred on facts and in law in computing adjustment on account of international transaction of payment made for services received from the associated enterprise without applying any pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han that working capital adjusted margin of the comparables companies. 10.7 Without prejudice that the TPO erred on facts and in law in failing to appreciate that no adjustment is warranted if complete set off is given for interest on payables due to all associated enterprises. 10.8. Without prejudice, that the TPO failed to appreciate that no adjustment was made on account of interest due from associated enterprise in Assessment Year 2011-12 and Assessment Year 2013-14. 59. The Ground of appeal No.1 raised by the assessee is general in nature and does not require any adjudication. Hence, the same is dismissed. 60. The Ground of appeal No.2 raised by the assessee against the corporate issue of non-allowance of depreciation on goodwill. 61. The Ld.AR for the assessee at the outset pointed out that the issue raised vide present grounds of appeal is similar to the issue raised vide Ground of appeal Nos. 5 to 5.3 of appeal in Assessment Year 2010-11. 62. We have already adjudicated the issue in paras above, while deciding the appeal for Assessment Year 2010-11 and following the same parity of reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of carrying on the business and were booked as expenditure against the sale of asset and the same may be allowed in the hands of the assessee. 66. The Ld.DR for the Revenue pointed out that the expenditure incurred by the assessee have not been verified by either by the authorities below and the same may be directed to be verified. 67. We have heard the rival contentions and perused the details of legal expenses which have not been allowed in the hands of the assessee. The expenditure comprises of house tax payment of ₹ 30 lakhs against the bill of ₹ 26,26,296/-. The said expenditure is allowable in the hands of the assessee u/s 37(1) of the Act and we direct the Assessing Officer to verify the payment and allow the same. The assessee has also incurred legal consultancy charges relating to the sale of Banglore land, which are also allowable as an expenditure u/s 48(1) of the Act. The stand of the assessee may be verified and the Assessing Officer is directed to allow the same u/s 48(1) of the Act. 68. Now coming to the balance expenditure which was in relation to Jwala Land transaction, against which the assessee declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s there were no powers with the Assessing Officer to substitute the value of actual consideration. He further referred to the agreement placed at page 265 of the Paper Book and it was brought to our notice that the shares of the said company of Japan were sold by the assessee to Cyprus company and the sale consideration was duly mentioned in the agreement at page 268 of the Paper Book. He pointed out that the valuation report were for RBI purpose, copy of which is placed at pages 400 to 404 of the Paper Book, under which the shares were valued @ ₹ 40,424 per share. It was stressed by the Ld.AR for the assessee that the said report does not give any power to the Assessing Officer to substitute of value of actual consideration. 74. The Ld.DR for the Revenue on the other hand pointed out that only question which remains is fair market value of the shares. He fairly submitted that the sale consideration cannot be disturbed but it was not clear how the assessee had arrived at those figures. 75. We have heard rival contentions and perused the record. The issue which arises in the present appeal is the computation of capital gain on sale of shares of Aric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -. The Ld.AR pointed out that the interest paid by the assessee was compensatory and hence, deductible in the hands of the assessee. He also pointed out that the said interest was not covered u/s 40(a)(ii) of the Act. 78. The Ld.DR for the Revenue placed reliance on the order of the Assessing Officer at page 18 of the assessment order. 79. Briefly in the facts relating to the issue the assessee had paid interest amounting to ₹ 8,84,112/- on late deposit of TDS on the foreign remittances u/s 195 of the Act. The assessee claimed the said expenditure as allowable u/s 37(1) of the Act, being compensatory and not penal in nature. However, the said plea of the assessee was not accepted by the authorities below. Hence, the assessee is in appeal before us. 80. The Ld.AR for the assessee pointed out that interest paid on late deposit of tax by the recipient, was compensatory and deductible in the hands of the assessee. He also pointed out that the said interest was not covered under the provisions of section 40(a)(ii) of the Act. 81. The Ld.DR placed reliance on the order of the Assessing Officer in para 13 at page 18 of the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011. On 01.04.2011, the AE moved an application before the Chinese authorities seeking permission for repayment of the aforesaid loan. The Ld.AR for the assessee placed reliance on the on the decision of Delhi Bench of Tribunal in DCIT vs M/s TMW ASPF i Cyprus Holding Company Ltd. in ITA No.879/Del/2016) relating to Assessment Year 2011-12, order dated 09.08.2019. 88. We have heard the rival contentions and perused the record. The issue which arises before us is against the transfer pricing adjustment made in the hands of the assessee on account of interest due from Aricent-China on the loans advanced to it. The assessee had advanced the said loans to Aricent-China under the loan agreement of March, 2008 and as per clause 8, the said loan was repayable after a period of three years. The AE in China moved an application for repayment of the said loan and as per the laws of China, once the application is moved for repayment of loan, no interest would accrue till the time, permission is given by the authorities to make the aforesaid repayment. Under the international transactions reported for benchmarking the assessee had accounted for the amount remitted by Aricent-Chin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction must satisfy the test of income under the Act and must find its home in one of the charging provisions. Here in this case, nowhere the TPO/AO has been able to establish that notional interest satisfy the test of income arising or received under the charging provision of Income Tax Act. If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international transactions with regard to the ALP. Only the interest income chargeable to tax can be subject matter of transfer pricing in India. Making any transfer pricing adjustment on interest which has neither been received nor accrued to the assessee cannot be held to be chargeable in terms of the Income Tax Act read with Article 11(1) of DTAA. Here it cannot be the case of accrual of interest also, because none of the investee companies have acknowledge that any interest payment is due, albeit they have been requesting for waiving of interest of even coupon rate of 4%, leave alone the return of 18% which was dependent upon some future contingencies. Assessee despite all its efforts has acceded to such request. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961 ( the Act ) at an income of ₹ 297,48,60,850 as against the income of ₹ 119,58,24,310 returned by the appellant. Corporate Tax issues 2. That the assessing officer erred on facts and in law in not allowing depreciation of ₹ 158,73,13,884 claimed under section 32(1 )(i) of the Act on written down value of Goodwill of ₹ 634,92,55,536 arising out of amalgamation of Flextronics Software Limited (Flextronics) and Futures Software Limited (FSL) into the assessee on the sole Ground of appealthat appellant has not assigned fair value to other assets while computing Goodwill. 2.1 That the assessing officer erred on facts and in law in not appreciating that the Goodwill represents difference between the aggregate book value of investment in the equity shares of Flextronics Software Systems Limited ( Flextronics ) in the books of the appellant and Future Software Limited ( FSL ) in the books of Flextronics and the aggregate face value of share capital of Flextronics held by the appellant and FSL held by Flextronics accounted as goodwill amounting to ₹ 2675,57,10,570 pursuant to amalgamation of Flextronics and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law in denying depreciation on goodwill by relying upon the decision of the Bangalore Tribunal in the case of United Breweries Ltd. vs. ADIT: 722/Bang/2014, wherein it has been held that depreciation on enhanced value of goodwill is barred in terms of sixth proviso to section 32(1 )(ii) of the Act. 2.10 Without prejudice, the assessing officer has erred in facts and in law in inadvertently disallowing ₹ 163,81,18,105 as against ₹ 122,72,31,644 claimed as depreciation on goodwill by the appellant in the return of income. 3. That on the facts and circumstances of the case and in law, consideration amounting to ₹ 54,27,737 received by the appellant for transfer of certain customer relationships to Aricent Technologies Mauritius Limited is Capital by nature (part of Goodwill) and ought not to be considered as part of taxable income of the appellant. 3.1 That the assessing officer erred on facts and in law in failing to appreciate that the customer relationships/ contracts transferred to ATML were intangible assets which had been reduced from the goodwill eligible for deduction under section 32(1 )(ii) of the Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the DRP erred on facts and in law in not appreciating that payment made by the appellant to its associated enterprise on account of corporate charges, represents actual cost incurred by the associated enterprise on behalf of the appellant. 4.7. That the DRP erred on facts and in law in not appreciating the evidences submitted in the form of affidavits of employees of the associated enterprise rendering various services to the appellant. 4.8 That the assessing officer/ DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was wholly and exclusively for the purpose of business of the appellant. 4.9 That the assessing officer/DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was validly benchmarked along with other closely linked transactions applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 4.10 That the TPO/ DRP erred on facts and in law in computing adjustment on account of international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal No.7 is against the charging of interest u/s 234B of the Act, is consequential; hence, the same is dismissed. 100. In the result, the appeal of the assessee is partly allowed. ITA No.7637/Del/2018 [Assessee s appeal] Assessment Year: 2014-15 101. The assessee has raised following grounds of appeal relating to Assessment Year 2014-15:- 1. That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer ( Ld. AO ) is barred by limitation in terms of section 153 r.w.s 144C of the Act and therefore, is liable to be quashed. On the facts and circumstances of the case and in law, the Ld. AO has erred in passing the assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 ( the Act ) after considering the adjustments made by the learned Transfer Pricing Officer ( Ld. TPO ) in his order passed under section 92CA(3) of the Act passed in accordance with the directions provided by the Hon ble Dispute Resolution Panel ( Hon ble DRP ). Each of the Ground of appealis referred to separately, which may kindly be considered ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med on account of reimbursement paid to the parent company towards ESOP for granting stock options to employee s assesses. 4.1 That the Ld. AO erred on facts and in law in proposing to hold that employees section 37 of the Act alleging that the same was not incurred wholly and exclusively for the purpose of the business of the assessee company. 4.2 That the Ld. AO erred on facts and in law alleging that the expenditure claimed did not represent a crystallized liability and being without any objective evidence for justification, the same was not allowable as deduction. 4.3 That the Ld. AO erred on facts and in law in holding that ESOP is a part of salary and since the assessee did not deduct any tax at source on payment to the group company, the amount claimed was disallowable under section 40(a) of the Act. 4.4 Without prejudice, that the Ld. AO failed to appreciate that: (a) tax was not deductible on mere issuance of options and (b) no disallowance, in any case, can be made under section 40(a) of the Act on account of alleged non-deduction of tax on payments made in the nature of emoluments to employees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO/Hon ble DRP have erred in not appreciating that working capital adjustment takes into account the difference in working capital intensities of the comparable companies vis-a-vis the appellant which inevitably considers f'e impact of receivables and payables arising from main service transaction 6. Without prejudice, that the AO/DRP erred on facts and in law in incorrectly allowing credit of TDS of ₹ 11,87,62,498 as against the credit of ₹ 15,01,53,517 claimed by the appellant. 7. Without prejudice, that the AO/DRP erred on facts and in law in charging interest of ₹ 1,00,45,784 under section 234A of the Act. The assessing officer has erred in law and on facts, in levying interest under sections 234A and 234B of the Act. 102. The Ground of appeal Nos.1 1.1 raised by the assessee are general in nature and do not require any adjudication. Hence, the same are dismissed. 103. The Ground of appeal Nos. 2 to 2.6 raised by the assessee is against the disallowance of depreciation on goodwill. We have already adjudicated this issue in paras above while deciding Ground of appeal Nos.5 to 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) ESOP is a part of salary and since the appellant did not deduct any tax at source on payment to the group company, the amount claimed was disallowable under section 40(a) of the Act. 107. The Assessing Officer thus disallowed the said expenditure in the hands of the assessee, which disallowance was confirmed by the DRP and by the Assessing Officer in the final assessment order. 108. The assessee is in appeal against the order of the Assessing Officer. 109. It was pointed out by the Ld.AR for the assessee that the fair market value of the shares was USD 0.77 dollars per share and options were exercised at USD 0.01 per shares. The difference was reimbursed to the AE in Cayman Island. Since the liability accrued /crystallized during the year and as the assessee was following mercantile system of accounting then the same is to be allowed as a deduction u/s 37(1) of the Act. In this regard reliance was placed on the following decisions:- [i] CIT vs M/s PVP Ventures Ltd. 211 Taxman 554 (Madras High Court); [ii] CIT vs Lemon Tree Hotels Ltd. 104 taxmann.com 26 (Delhi High Court); and [iii] Biocon Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees, which was debited to the P L account in accordance with SEBI Guidelines, is an ascertained liability, and thus, allowable as revenue expenditure under section 37(1) of the Act. 115. The said proposition has been applied by the Hon ble High Court in CIT vs Lemon Tree Hotels Ltd. (supra) and the claim of ESOP expenditure has been allowed as expenditure u/s 37 of the Act. 116. Further, the Special Bench in Biocon Ltd. vs DCIT (supra) held that discount on issue of ESOP, i.e. the difference between the market price of shares on date of exercise was deductible as business expenditure, since the same represents consideration/compensation for services rendered by employees. The Special Bench observed that the company incurs obligation of issuing shares at a discounted price on a future date in lieu of services rendered by the employees, which is allowable as deduction under section 37(1) of the Act. The Special Bench further held that the said discount was an ascertained liability, since the employer incurred obligation to compensate the employees over the vesting period, notwithstanding the fact that the exact amount of discount which is quantified o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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