TMI Blog2022 (8) TMI 1285X X X X Extracts X X X X X X X X Extracts X X X X ..... y of ay notional interest. We therefore delete the adjustment made in this regard. Partial denial of claim of depreciation on goodwill - Goodwill arising on slump sale - eligible for depreciation - difference between the purchase consideration and net assets taken over - HELD THAT:- As relying on M/S. I B SEEDS PRIVATE LIMITED [ 2022 (6) TMI 1295 - ITAT BANGALORE] hold that depreciation on goodwill is an allowable claim u/s. 32(1) of the Act. This ground is allowed in favour of the assessee. - IT(TP)A No.226/Bang/2021 - - - Dated:- 25-8-2022 - Shri George George K., Judicial Member And Ms. Padmavathy S, Accountant Member For the Appellant : Shri Dhanesh Bafna, CA For the Respondent : Shri Bijoy Kumar Panda, CIT(DR)(ITAT), Bengaluru ORDER PER PADMAVATHY S., ACCOUNTANT MEMBER This appeal by the assessee is against the final order of assessment passed by the National e-Assessment Centre, Delhi u/s. 143(3) r.w.s. 144C(3)(3A) (3B) of the Income-tax Act, 1961 [the Act] dated 31.3.2021 for the assessment year 2016-17. 2. The assessee has raised 6 grounds as follows:- Ground 3 TP adjustment in relation to software development services Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,893,755,572 Payment for receipt of intra-group services 22,632,176 Deemed international transaction covered u/s. 92B(2): Payment of purchase consideration towards business acquisition Xerox India 103,72,53,706 6. The assessee in the SWD services segment has determined the ALP by applying TNM Method to be the most appropriate method. The Operating Profit to Operating Cost (OP/OC) has been taken as the Profit Level Indicator [PLI]. The assessee has chosen the following comparables whose median margin is at 14.12% :- Sr. No. Name of the company Adjusted OP/TC 1. CG-VAK Software Exports Ltd. 9.53% 2. Cigniti Technologies Ltd. 18.72% 3. Melstar Information Technologies Ltd. - 0,88% 4. Tata Elxsi Ltd. 22.99% 5. Tera Software Ltd. 1.29% 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 233,747,351 1,324,811 235,072,162 OP/ TC 14.08% 4.63% 13.92% 8. The TPO rejected 5 comparables selected by the assessee and accepted 3 companies. He applied fresh filters and selected the comparables the margin of which worked out to 25.59% as given below:- Sr No . Name of the Comparable Company Margins ( OP / OC ) 1. Kals Information Systems Ltd. (seg) 8.60% 2. E-Zest Solutions Limited 10.87% 3. Rheal Software Private Limited 14.50% 4. CG-VAK Software Exports Limited 18.50% 5. Cigniti Technologies Ltd. 19.43% 6. R S Software (India) Ltd. 20.87% 7. Tata Elxsi Limited 22.17% 8. L T Infotech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,535 and accordingly the turnover of companies more than Rs.200 crores need to be excluded from the final set of comparables. He relied on the decision of the coordinate Bench of the Tribunal in the case of Xchanging Solutions Ltd. v. ACIT, IT(TP)A No.294/Bang/2021 dated 12.5.2022 . 12. The DRP relied on the orders of the lower authorities. 13. We have considered the rival submissions and perused the material on record. The coordinate Bench of the Tribunal in the case of M/s. Barracuda Networks India Private Limited vs DCIT (IT(TP)A No.229/Bang/2021) has held as follows:- 12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 42. The Assessee s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 14. The Tribunal in the case of Autodesk India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Tribunal) - LG soft India Private Limited vs. DCIT IT(TP)A No. 266/Bang/2021 (Bangalore Tribunal - M/s. SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT IT(TP)A No. 288/Bang/2021 (Bangalore Tribunal) 18. We have considered the rival submissions and perused the material on record. We notice that the coordinate Bench of the Tribunal in the case of Huawei Technologies India (P). Ltd. v. ACIT, in IT(TP)A Nos. 1940, 2140, 2051 (BANG.) OF 2017 for AYs 2010-11 2013-14 vide order dated 4.8.2021 has allowed the working capital adjustment. The relevant observations are as follows:- 11. 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. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money 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. 14. 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) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence 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 v. E Value Serve.com (2016) 75 taxmann.com 195(Del. - Trib.) has held that insisting on daily balances of working capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 18. 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 adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that all invoices were received within the period of 30 days as per the agreement with the AE. He accordingly prayed for deletion of the addition. 24. We notice that the assessee has submitted the details in relation to invoice-wise details and payments received from the AE as follows:- Sr . No . Name of AE Invoice No . Doc Currency Invoice date Due date as per agreement with AE Recovery date Invoice Amount - INR ( A ) Credit Period Weighted Average 1 Atos IT Outsourcing Services, LLC 2 USD 31 / 07 / 2015 30 / 08 / 2015 25 / 08 / 2015 197,666,597 25 4,941,664,924 . 25 2 Atos IT Outsourcing Services, LLC 18 USD 31 / 08 / 2015 30 / 09 / 2015 18 / 09 / 2015 186,900,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93 37,717,602,266 . 98 10 Atos IT Outsourcing Services, LLC Unbilled INR Revenue 31/03/2016 B 163,150,079 Revenue as per Financials A+B 1,893,755,572 Computation of Weighted Average Days 37,717,602,267 = 21/79 days Agreed credit period of 30 days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich restrict allowability of depreciation acquired during slump sale. These sections of the Act have not been placed before Hon'ble SC in Smiff Securities or before Hon'ble SC/HC/ITAT in other cases cited above. We have cited relevant SC decisions to support our contention that the decisions cited above should be read only in the context of issues which were placed before them and the issues which were not before them should be decided independently on merit. We have demonstrated that the actual cost of goodwill acquired by the transferee company is to be taken as goodwill pre existing with the company before a slump sale in view of provisions of explanation 7 to section 43(1) and explanation 2 to section 43(6)(c). 28. The DRP confirmed the disallowance. 29. The ld. AR submitted that the assessee has taken over the business in relation to Information Technology Outsourcing services from XBSIPL as a going concern on slump sale basis, pursuant to the agreement dated 24.3.2015 for a consideration of Rs.98,09,65,904. Out of the total consideration, Rs.93,51,41,592 represents intangible assets like business, employees, customer contracts and business records. The same is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd., 255 ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon'ble HC allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon'ble SC in the case of Smifs Securities (Supra). iii. Further, we place reliance on the following decisions, wherein it was principally held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale: Areva T D India Ltd. 345 ITR 21 Truine Energy Services (P) Ltd. 65 taxmann.com 238 Toyo Engineering India Limited TS-811-HC-2012 Volvo India Pvt. Ltd. TS 391-ITAT-2019 Dorma India Pvt. Ltd. TS-735-ITAT-2019 13.11. The sixth proviso to Section 32(1) of the Act also not applicable. It is applicable, only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such sl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent accepted offer of capital gain by the individual assessee who has sold the goodwill i.e. in the case of Praveen Narayan Noojibail for the assessment year 2015-16, which is evident from the statement of income filed before us. Which is kept on record in assessee s paper book at page no.65 and also accepted by the AO for the assessment year 2015-16 vide assessment order u/s 143(3) of the Act dated 31.12.2017, which is kept on record in assessee s paper book at page no.89. Once the department accepted the capital gain offered by individual assessee in the respective hand, the same transaction cannot be doubted in the hands of purchaser. On this count also, we find force in the argument of Ld. A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact, it has to be established that apart from claiming additional depreciation on enhanced cost, there is other main purpose for acquiring the asset i.e. goodwill in question. The AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also support ..... X X X X Extracts X X X X X X X X Extracts X X X X
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