Appeal Details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 3511 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 2 month(s) 27 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
24-08-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
C
Assessment Year
2016-2017
Appeal Filed On
27-05-2021
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.226/Bang/2021 Assessment year : 2016-17 Atos IT Services Private Limited, Plot 8B, RMZ Centennial Campus-B, 5 th Floor, ITPL Main Road, Whitefield, Bangalore – 560 048. PAN: AAACX 1727G Vs. The Assistant Commissioner of Income Tax, Circle 1(1)(1), Bengaluru. APPELLANT RESPONDENT Appellant by : Shri Dhanesh Bafna, CA Respondent by : Shri Bijoy Kumar Panda, CIT(DR)(ITAT), Bengaluru. Date of hearing : 22.08.2022 Date of Pronouncement : 25.08.2022 O R D E R 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 IT(TP)A No.226/Bang/2021 Page 2 of 25 Ground 4 – Notional interest on outstanding receivables. Ground 5 – Partial denial of claim of depreciation on goodwill. Ground 6 – Denial of deduction of Education Cess and Higher & Secondary Education Cess. 3. Ground Nos. 1 & 2 are general in nature. Ground No.6 is not pressed during the course of hearing and accordingly dismissed. Out of 16 sub-grounds raised by the assessee with regard to TP adjustment, ground No.3.5 pertains to applying / modifying of certain filters and ground no 3.14 relating to working capital adjustment. The ld AR during the course of hearing presented arguments relating to TPO not applying the correct filter for turnover while modifying the filters applied by the assessee for selecting comparables and the working capital adjustment and prayed that these issues can be taken up for adjudication leaving the rest of the grounds relating to TP adjustments open. 4. The brief facts are that the assessee operates as a global offshore service entre for the Atos group. It renders IT services to its AE and also to third parties in India. The assessee filed return of income for AY 2016-17 on 30.11.2016 declaring an income of Rs.21,12,75,670. The case was selected for scrutiny through CASS and notice u/s. 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions with its AE, the matter was referred to the Transfer Pricing Officer (TPO) in order to determine the Arms Length Price (ALP) of the international transaction. The TPO passed the order u/s.92CA making an adjustment of Rs.16,40,49,447 in the software development services [SWD] segment of the assessee. The IT(TP)A No.226/Bang/2021 Page 3 of 25 AO passed a draft assessment order incorporating the TP adjustment and also made a disallowance towards depreciation on goodwill for Rs.23,37,85,398. The assessee filed objections before the DRP who confirmed the TP adjustment that got enhanced to Rs.18,69,37,357 and also confirmed the disallowance of depreciation on goodwill made by the AO. The AO passed the final order of assessment as per the directions of the DRP. Aggrieved, the assessee is in appeal before the Tribunal. Transfer Pricing adjustment 5. During the year under consideration, the assessee had the following international transactions:- Description Amount (INR) Provision of Software Development Service 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% IT(TP)A No.226/Bang/2021 Page 4 of 25 5. Tera Software Ltd. 1.29% 6. Akshay Software Technologies Ltd. 2.10% 7. R Systems International Ltd. 25,97% 8. Sasken Communication Technologies Ltd. – Software services 33.73% Count 8 Median 14.12% 35 th Percentile 2.10% 65 th Percentile 22.99% 7. The operating margin of the assessee is computed at 14.08% and the assessee therefore concluded that the international transaction of software development services rendered by the assessee to its AE is within ALP as follows:- Particulars AE Non-AE Total in INR A B C=A+B Revenue from operations: Software services 1,893,755,572 29,943,651 1,923,699,223 Total revenue from operations 1,893,755,572 29,943,651 1,923,699,223 Operating costs: Sub-contracting charges - 27,593,262 27,593,262 Employee benefit expenses 1,156,062,332 1,025,578 1,157,087,910 Depreciation/ amortisation expenses 172,779,722 - 172,779,722 Corporate support services 22,632,176 - 22,632,176 Other expenses 308,533,991 - 308,533,991 Total operating cost ('TC') 1,660,008,221 28,618,840 1,688,627,061 Operating Profit ('OP') 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:- IT(TP)A No.226/Bang/2021 Page 5 of 25 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 Ltd. 24.83% 9. Nihilent Limited 26.36% 10. Inteq Software Private Limited 28.2o% 11. Persistent Systems Ltd. 30.89% 12. Infobeans Technologies Ltd 32.42% 13. Thirdware Solution Ltd 36.9o% 14. Infosys Ltd 38.61% 15. Aspire Systems (India) Pvt Ltd. 39.28% 16. Cybage Software Private Limited 66.45% 35th Percentile 20.15% Median 25.59% 65th Percentile 29.54% 9. The TPO therefore arrived at the TP adjustment as per computation given below:- Adjusted margin (without working capital adjustment) 25.59% Taxpayer operating cost (`OC') Rs. 1,63,73,76,045 Arm's length price (125.59% of OC) Rs. 2,05,63,80,575 Price received Rs. 1,90,03,68,535 Shortfall being adjustment u/s. 92CA Rs. 15,60,12,040 10. The DRP upheld the 15 comparables and excluded 1 comparable selected by the TPO. The DRP included 1 comparable sought for inclusion by the assessee. The DRP based on the final list of comparables reworked the median margin to 26.74% which resulted in IT(TP)A No.226/Bang/2021 Page 6 of 25 enhancement of TP margin of Rs.17,48,41,864. Aggrieved, the assessee is in appeal before the Tribunal. 11. The ld. AR submitted that while the TPO excluded the companies having low turnover i.e., companies having turnover below Rs.1 crore, but he failed to apply the same yardstick to exclude companies with high turnover. He submitted that it is settled position that companies whose turnover exceeds Rs.200 crores ought to be excluded from the final set of comparables where the turnover is below Rs.200 crores. In the assessee’s case, the operating revenue from SWD segment is Rs.1,90,03,68,535 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 IT(TP)A No.226/Bang/2021 Page 7 of 25 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 after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): “41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down IT(TP)A No.226/Bang/2021 Page 8 of 25 reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & 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 Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision holding that high turnover is a ground IT(TP)A No.226/Bang/2021 Page 9 of 25 for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:- “17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non- jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case 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 IT(TP)A No.226/Bang/2021 Page 10 of 25 (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 Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.” IT(TP)A No.226/Bang/2021 Page 11 of 25 15. We also notice that the coordinate Bench of the Tribunal in the case of Xchanging Solutions Ltd. (supra) has also held a similar view where it was held that – “6.9.2 In this case, the assessee’s turnover is Rs.40.87 crore and the assessee cannot be compared to the companies having high turnover exceeding Rs.200 crore. Therefore, in view of the order of the ITAT in the case of Barracuda Networks India Private Limited(supra), we direct the AO / TPO to exclude Larsen & Toubro Infotech Limited, Nihilient Technologies Limited, Persistent Systems Limited, Thirdware Solutions Limited, Infosys Limited, Aspire Systems (India) Private Limited and Cybage Software Private Limited, from the list of comparables.” 16. Following the above decisions of the coordinate Bench of the Tribunal, we hold that companies having turnover in excess of Rs.200 crores should be excluded from the list of comparables. We direct the AO/TPO to recompute the ALP accordingly. Working capital adjustment 17. Ground No.3.14 is with regard to an adjustment for the differences in working capital of the assessee and the comparable companies. The ld. AR submitted that the TPO has not granted working capital adjustment for the TP adjustment and the DRP has confirmed the same. He relied on the following decisions:- - M/s.Airlinq Technology Pvt. Ltd vs. DCIT (ITA No. 231/Bang/2021) (Bangalore Tribunal) - LG soft India Private Limited vs. DCIT IT(TP)A No. 266/Bang/2021 (Bangalore Tribunal IT(TP)A No.226/Bang/2021 Page 12 of 25 - 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 analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or IT(TP)A No.226/Bang/2021 Page 13 of 25 ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus 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: IT(TP)A No.226/Bang/2021 Page 14 of 25 ♦ 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) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. IT(TP)A No.226/Bang/2021 Page 15 of 25 (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No. 2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department 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 capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to IT(TP)A No.226/Bang/2021 Page 16 of 25 see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of rule 10B(1)(e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference 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— IT(TP)A No.226/Bang/2021 Page 17 of 25 (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 adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.' 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 19. Respectfully following the above decision of the Tribunal in the case of Huawei Technologies India (P) Ltd. (supra), we direct the AO to allow the working capital adjustment and re-compute the ALP accordingly. 20. The rest of the grounds raised with regard to TP adjustment are left open. Notional interest on outstanding receivables 21. Ground No.4 raised by the assessee reads as follows:- “4. On the facts and circumstances of the case and in law, the Learned AO/ Learned TPO erred in making an TP adjustment of INR 1,20,95,493/- as interest on outstanding receivables from Associated Enterprises (`AEs'). While doing so, the Learned AO/ IT(TP)A No.226/Bang/2021 Page 18 of 25 Learned TPO erred in not recomputing the adjustment as directed by the Hon'ble DRP and thus resulting in erroneous computation of adjustment amounting to INR 1,20,95,493/-, instead of INR Nil: The Appellant humbly prays the notional interest on overdue receivables be deleted.” 22. The AO computed the notional interest on delayed receivables at 4.98% on the ground that the assessee has failed to furnish the details of invoice-wise receipt and arrived at an adjustment of Rs.1,20,95,493. The DRP directed the AO to verify the invoice-wise receipt of payments and compute the interest as per SBI short term deposit rate. The relevant directions of the DRP is extracted below:- “2.5.26. The TPO in the absence for proper invoice wise details has charged interest on delayed trade receivables from AES adopting LIBOR rate. As discussed above, the panel has directed the TPO to consider and adopt SBI short-term deposit interest rate in charging the interest on delayed receivables. Considering the above discussion and in the principles of natural justice the TPO is directed to verify invoice wise the date of receipt of payments and if the realisation is within the credit period as per the agreement or as per the standard credit period of 30 days the same may be allowed accordingly this objection is disposed off.” 23. The ld. AR submitted that the details were submitted before the lower authorities but the same were not considered. He also submitted 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:- IT(TP)A No.226/Bang/2021 Page 19 of 25 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 186,900,285 18 3,364,205,123.16 3 Atos IT Outsourcing Services, LLC 34 USD 30/09/2015 30/10/2015 28/10/2015 206,004,443 28 5,768,124,409.32 4 Atos IT Outsourcing Services, LLC 50 USD 31/10/2015 30/11/2015 23/11/2015 197,147,060 23 4,534,382,377.47 5 Atos IT Outsourcing Services, LLC 66 USD 30/11/2015 30/12/2015 22/12/2015 181,366,411 22 3,990,061,036.72 6 Atos IT Outsourcing Services, LLC 82 USD 31/12/2015 30/01/2016 26/01/2016 191,261,611 26 4,972,801,883.92 7 Atos IT Outsourcing Services, LLC 98 USD 31/01/2016 01/03/2016 22/02/2016 182,724,271 22 4,019,933,965.52 8 Atos IT Outsourcing Services, LLC 114 USD 29/02/2016 30/03/2016 21/03/2016 186,354,558 21 3,913,445,711.70 9 Atos IT Outsourcing Services, LLC 130 USD 31/03/2016 30/04/2016 11/04/2016 201,180,258 11 2,212,982,834.92 Total-Export A 1,730,605,493 37,717,602,266.98 10 Atos IT Outsourcing Services, LLC Unbilled Revenue INR 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 1,730,605,493 period of 30 days 25. From the above table, it is clear that the assessee has realized payments against all the invoices within a period of 30 days as agreed between the assessee and the AE. We are therefore of the considered view that there is no delay in receipt of payment warranting levy of ay notional interest. We therefore delete the adjustment made in this regard. Partial denial of claim of depreciation on goodwill 26. Ground No.5 by the assessee is as follows:- “5. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the action of the Learned AO to partially deny claim of depreciation to the extent of INR 23,23,54,949 on goodwill/intangible assets acquired as a part of acquisition of business on slump sale basis from Xerox Business Services India Private Limited (`XBSIPL'). The Appellant humbly prays that the Learned AO be directed to allow the entire claim of depreciation on goodwill under section 32(1) of the Act.” IT(TP)A No.226/Bang/2021 Page 20 of 25 27. The assessee has made an addition of intangible assets for Rs.93,51,41,592 and claimed depreciation on goodwill of Rs.23,37,85,398. The assessee submitted before the AO that goodwill has arisen out of the business transfer agreement between the assessee and Xerox Business Services India Private Limited (`XBSIPL'). The AO did not allow the depreciation claim on the said goodwill on the basis that the assessee has not provided any scientific basis for valuation of goodwill. The AO observed that the actual cost of the block of assets in the hands of the transferor company would be the written down value in the immediate preceding year in the case of transferor company and therefore disallowed the entire depreciation claim by holding as under:- “4.28: Conclusion: We have clearly demonstrated that the issue before Hon'ble SC in Smif Securities was only that whether goodwill is an intangible asset and hence eligible for depreciation under section 32(1) of the Act. We accept that SC has correctly laid down the law that goodwill is an intangible asset and eligible for depreciation under section 32(1) of the Act. However, we are raising a different issue here. There are certain sections of the Act which 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. IT(TP)A No.226/Bang/2021 Page 21 of 25 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 accounted as goodwill in the books of accounts itself, value being the difference between the purchase consideration and net assets taken over. The ld AR submitted that the assessee has claimed depreciation on the goodwill so acquired and in this regard placed reliance in this regard on the decision of the Hon’ble Supreme Court in the case of Smiff Securities Ltd. [2012] 348 ITR 302 (SC). 30. The ld. AR further submitted that the coordinate Bench of the Tribunal in the case of I & B SEEDS Pvt. Ltd. v. DCIT in ITA No.3415/Bang/2018 dated 15.6.2022 and in the case of Altimetrik India Pvt. Ltd. v. DCIT in IT(TP)A No.2511/Bang/2019 dated 3.2.2022 has dealt with the issue of depreciation on goodwill and held it to be as an allowable claim. The ld. AR further submitted that the AO has invoked Explanation 7 to section 43(1) and Explanation 2 to section 43(6)(c) which are not applicable to the assessee’s case and submitted that the coordinate Bench of the Tribunal in the above referred cases have considered these Explanations while rendering the decision in favour of the assessee. IT(TP)A No.226/Bang/2021 Page 22 of 25 31. We have considered the rival submissions and perused the material on record. We notice that the Tribunal in the case of I & B Seeds Pvt. Ltd. (supra) has held as follows:- “Goodwill arising on slump sale — eligible for depreciation 13.10. In this case, the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) of the Act. In our opinion, the claim of assessee is to be allowed on the following lines:- i. The said goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on transfer is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon'ble SC in the case of Smifs Securities Ltd. (348 ITR 302), wherein held that “in the present case, it is the valuation that is challenged and not the eligibility of depreciation on goodwill.” The position of law held by the Hon'ble SC constitutes the law of the land and is binding on all the lower authorities, in terms of Article 141 of the Constitution of India. ii. In this regard, we place further reliance on the decision 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 IT(TP)A No.226/Bang/2021 Page 23 of 25 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 slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation 13.13. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. IT(TP)A No.226/Bang/2021 Page 24 of 25 13.14. Further, amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. 13.15. Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. 13.16 Further, it is also brought to our notice that the department 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 supported by the order of the Tribunal relied by the Ld. A.R. in the case of M/s. Dorma India Pvt. Ltd., Chennai in ITA Nos.1664 to 1666/Chny/2019 dated 20.11.2019. Further, we also place reliance on the judgement of Hon’ble IT(TP)A No.226/Bang/2021 Page 25 of 25 Karnataka High Court in the case of Padmini Products (P) Ltd. Vs. Deputy Commissioner of Income-tax in ITA No.154 of 2014 dated 5.10.2020, wherein similar circumstances Hon’ble High Court has allowed the claim of the assessee.” 32. Respectfully following the above decision of the Tribunal, we 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. 33. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 25 th day of August, 2022. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 25 th August, 2022. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.
