Saxo India Private Ltd. , Delhi V. DC/ACIT-TP, 3(1)(2), Delhi

ITA 369/DEL/2022

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Saxo India Private Ltd. appealed against the order of the Assessing Officer which included a transfer pricing adjustment of INR 15,55,31,595 to the income of the assessee for the assessment year 2017-18. This adjustment was based on the TPO's direction following the business transfer of certain assets to Saxo AS, an associated enterprise. The primary contention was whether the entire business undertaking was transferred or only part of it, as the assessee claimed that certain assets and liabilities were retained post-transfer. The Tribunal found that the TPO and the Dispute Resolution Panel (DRP) had not adequately considered the evidence provided by the assessee, including the Addendum to the Business Transfer Agreement (BTA), which detailed the assets and liabilities actually transferred. Consequently, the Tribunal directed a re-evaluation of the assets and liabilities for the purpose of determining the ALP.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 113347 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 22-09-2022
• Assessment Year: misc
• Appeal Filed On: 23-03-2023
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Assessee Lawyers: S KAMAL SAWHNEY
• Keywords: Transfer pricing; International transaction; Additional evidence; Valuation report; TDS; Capital Gains
• Section: 143(3)

Judgement Text

I.T.A.No.369/Del/2022 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I” NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.स ं /.I.T.A No.369/Del/2022 /Assessment Year: 2017-18 Saxo India Private Ltd. 10, Plaza Cinema Building, Connaught Circus, Delhi. ब म Vs. DC/ACIT-TP, 3(1)(2), Delhi. PAN No. AACCC1382J अ Appellant /Respondent िनधा रतीक ओरसे /Assessee by S/Shri Kamal Sawhney, Prashant Meharchandani & Nishank Vashisht, Advs. राज वक ओरसे /Revenue by Shri Mahesh Shah, CIT DR स ु नवाईक तारीख/ Date of hearing: 23.09.2022 उ ोषणाक तारीख/Pronouncement on 02.12.2022 आदेश /O R D E R PER C.N. PRASAD, J.M. This appeal is filed by the assessee against the order dated 24.01.2022 of the Assessing Officer passed u/s 143(3) read with Section 144C(13) read with 144B of the Act pursuant to the directions of the DRP dated 24.11.2021 u/s 144C(5) of the Act. The assessee in its appeal raised the following grounds of appeal: - “Ground 1: Making an upward adjustment in determining the Arm’s Length Price (ALP) of the international transaction pertaining to consideration received for the transfer of business undertaking I.T.A.No.369/Del/2022 2 On the facts and circumstances of the case and in law, the learned AO, based on the directions of the Hon’ble DRP, erred in making an upward adjustment of INR 15,55,31,595 in determining the ALP of the international transaction pertaining to consideration received for the transfer of business undertaking, to the Associated Enterprise (AE) by the Appellant. Ground 2: Adjustment to the Arm’s Length Price (ALP) of the consideration received for the transfer of business undertaking 2. On the facts and circumstances of the case and in law, the learned AO, based on the directions of the Hon’ble DRP, inter- alia erred on the following grounds: 2.1 In rejecting the analysis undertaken by the Appellant to determine the ALP as documented in the valuation report for the consideration received for the transfer of business undertaking to the associated enterprise (AE). 2.2 In failing to take the cognizance of the fact that certain assets and liabilities were retained by the Appellant during the transfer of business undertaking to the AE. 2.3 In incorrectly alleging that several submissions filed and documents submitted as additional evidence did not substantiate the fact that certain assets and liabilities were actually retained by the Appellant post the transfer of business undertaking to the AE. 2.4 In incorrectly adjusting the value of the subjected transaction by not allowing the deduction for the assets and liabilities not transferred by the Appellant and instead equating the value of the assets and liabilities transferred with the total value of the business as determined in the valuation report. Ground 3: Incorrect computation of total tax demand under section 156 of the Act Without prejudice to the above, the learned AO erred in computing the final tax demand by incorrectly adding the transfer pricing adjustment amounting to INR 15,55,31,595 to the Income from Business or Profession instead of Income from Capital Gains. Ground 4: Initiation of penalty proceedings under section 270A of the Act On the facts and circumstances of the case, the learned AO erred in initiating penalty proceedings under section 270A of I.T.A.No.369/Del/2022 3 the Act for the transfer pricing adjustment made in the final assessment order.” 2. Ground no. 1 & 2 relates to upward adjustment of Rs.15,55,31,595/- made by the Assessing Officer in determining the Arm’s Length Price (ALP) of the International Transaction pertaining to consideration received for the transfer of business undertaking to AE of the assessee. 3. The facts are that the assessee company which is engaged in the business of design and development of customized software applications filed its return of income on 30.11.2017 declaring income of Rs.6,22,58,710/- for the AY 2017-18. As the assessee during the year under consideration entered into International Transactions and filed Form No. 3CEB the case was referred to Transfer Pricing Officer (TPO) for determination of Arm’s Length Price. The TPO noticed that the assessee had entered into the following International Transactions with its Associated Enterprises (AE) during the assessment year under consideration. Sl. No. Description of the Transaction Method Amount (Rs.) 1. Recovery of expenses from Bank SAXO Other Method 1,39,44,083/- 2. Consideration received from SAXO AS for transfer of business undertaking Other Method 15,83,80,367/- Total 17,23,24,450/- 4. The TPO noticed from the TP documentation filed by the assessee that during the FY 2016-17 the Assessee Saxo India on 01.04.2016 transfer its IT Support Services and back office support services business units to I.T.A.No.369/Del/2022 4 Saxo AS by way of business transfer and received consideration of Rs.15,83,80,367/- from Saxo AS. The TPO noticed that the assessee obtained a Valuation Report from an independent valuer for the purpose of deriving the valuation of its entire business and the valuation of the shares as per Valuation Report has been done by DCF Method and the valuation has been determined at Rs.13,80,42,771/-. The assessee was required to furnish details, working for arriving at the terminal value along with the valuation report. The TPO also required the assessee to furnish detailed working of arrival at the present market value of the assets taken by AE as on the date of the transfer. The assessee vide letter dated 15.01.2021 filed copy of unaudited balance sheet along with relevant annexures and notes to accounts for the period ended 31.01.2016, net asset value of assets and liability taken over as on 31.01.2016. 5. With regard to transaction pertaining to sale of business undertaking by the assessee to its AE Saxo AS it was stated that a business transfer agreement was entered between assessee and Saxo AS on 29.02.2016, however, the actual transfer of assets was undertaken on 01.04.2016. Copy of the agreement was furnished before the TPO. The assessee further stated that the valuation of the said transaction was undertaken by the independent valuer using Discounted Cash Flow (DCF) Method as mentioned in the valuation report as on 31.01.2016. The assessee also furnished copy of valuation report before the TPO. The I.T.A.No.369/Del/2022 5 assessee also contended that DCF is the most appropriate and judicially accepted method for valuation in cases with similar facts. The assessee also furnished the net asset value of assets and liabilities taken over by its AE as on 31.01.2016. The TPO on examining the details furnished by the assessee observed that assessee has submitted only copy of agreement and the exhibit which was mentioned as part of agreement was not furnished. The TPO observed that as per the valuation provided by the assessee based on NAV Method the net asset value as on 31.01.2016 is Rs.25,23,06,207/- and this comes to 521.3746 per share. The TPO also observed that the Authorized Representative pointed out that some assets were not transferred to Saxo AS. The assessee also pointed out to the TPO that in the internal communication between Saxo India and Saxo AS that the Business Transfer Agreement is discussed and it was clearly mentioned that the consideration payable by the Branch Office to assessee shall be Rs.15,83,80,367/- which is termed as purchase price. The TPO observed that the assessee made submissions pointing out that the total asset value as per DCF Method is Rs.31,39,11,962/- and as per NAV value the total asset value is Rs.25,23,06,207/- as on 31.01.2016. The TPO also observed that according to the assessee valuation the price per share as per DCF Method is 648, according to NAV Method it is 521 and finally the actual transfer has taken place for 327.28 per share and the assessee has not provided any document or reasoning or justification which would explain why the sale occurred at lower price I.T.A.No.369/Del/2022 6 than the DCF valuation. The TPO also observed that on perusal of business transfer agreement it is nowhere mentioned that the assessee company sold part of assets and liabilities and the agreement in itself contained all details of assets and liabilities which are to be transferred after execution of the agreement. Therefore, the TPO observed that the claim of the assessee that some assets were retained and not transferred is not reliable in the absence of any supporting documents. Therefore, the TPO was of the view that the actual sale should have occurred at Rs.31,39,11,962/- and accordingly, he directed the Assessing Officer to make adjustment of Rs.15,55,31,595/- (31,39,11,962 – 15,83,80,367) as cumulative adjustment. 6. Draft assessment order was passed by the Assessing Officer on 12.02.2021 making adjustment of Rs.15,55,31,595/- as directed by the TPO. The assessee before the DRP furnished additional evidences vide letter dated 28.07.2021 to substantiate its claim that part of assets and liabilities were retained and not transferred to its AE. The additional evidences include “Addendum to Business Agreement” dated 07.05.2016 between the assessee and Saxo AS giving the details of value of assets and liabilities transferred by the assessee Saxo India Pvt. Ltd. to Saxo AS branch office of Saxo Bank AS w.e.f. 01.04.2016. A remand report was called for by the DRP from the TPO and the TPO in the remand report stated that the assessee’s contention that some of the assets/liabilities were not part of business transfer has not been mentioned in the I.T.A.No.369/Del/2022 7 Business Transfer Agreement. In the remand report TPO also observed that assessee itself submitted that its entire business undertaking including fixed assets was sold to Saxo AS w.e.f. 01.04.2016. 7. Considering the remand report and also the submissions of the assessee the DRP was of the view that as per clause (19) of the Business Transfer Agreement, Exhibit 1.1, all the assets and liabilities were to be transferred and this clause was also referred to in Addendum to Business Transfer Agreement dated 07.05.2016. The DRP was of the view that the Addendum only gives the value of the assets and liabilities transferred by the assessee to Saxo AS under various heads and there is no narrative as to why the entire asset have not been transferred and why specific assets have been retained when the Business Transfer Agreement refers to entire assets. The DRP finds no reason to interfere with the finding of the AO/TPO. 8. Before us the Ld. Counsel for the assessee submits that the DRP failed to consider the Addendum to Business Transfer Agreement in spite of the assessee making elaborate submissions with evidences demonstrating that certain assets and liabilities were actually in possession with the assessee even after the transfer of business to Saxo AS. The Ld. Counsel submits that these documents include Addendum to Business Transfer Agreement dated 07.05.2016, bank statements, fixed deposit statements, rent agreement, payments made for utilities, I.T.A.No.369/Del/2022 8 application for refund of SENVAT credit, service tax ledger, EPF payments, etc. Ld. Counsel for the assessee submits that the findings of the Ld. DRP are completely perverse as the assessee had filed an elaborate submission before the DRP clearly explaining the entire additional evidences as to how it demonstrates what amount of assets and liabilities have been retained by it during the transfer and pointing out the relevant annexures in the evidence. The Ld. Counsel for the assessee further submits that despite taking note of the above documents and despite noting that the Addendum is in pursuance of Clause 5.3 of the Business Transfer Agreement itself which provides for adjustment to the consideration basis the identity and value of the assets and liabilities actually transferred the DRP failed to appreciate the evidences filed by the Assessee. Ld. Counsel submits that the observation of Ld. DRP that the Addendum does not mention as to why the entire assets have not been transferred is in clear violation of the settled law that the AO cannot dictate the manner in which an Assessee ought to carry out its business. Ld. Counsel submits that deciding what assets and liabilities to ultimately transfer in pursuance of the BTA is completely a commercial prerogative of the Appellant and Saxo AS. Both the parties even agreed for this prerogative as per Clause 5.3 of the BTA and pursuant to that even mutually agreed for the assets and liabilities which will actually be transferred. It is submitted that there is no requirement for an explanation as to why certain assets and liabilities were not transferred. I.T.A.No.369/Del/2022 9 It purely falls into the commercial wisdom of the Appellant which cannot be questioned by the Ld. DRP or by the Ld. TPO. In any case, the reason for not transferring the assets and liabilities which were in the nature of cash and cash equivalents was duly submitted before the DRP wherein it has been clearly mentioned that the assets and liabilities not transferred were primarily in the nature of cash/receivables which the Assessee wished to retain for certain business contingencies, such as i.e., ongoing service tax litigation, potential liability, etc. 9. The third finding of the Ld. DRP that Assessee itself stated that entire assets were transferred is again erroneous because the statement made by the Appellant has been taken completely out of context and singled out to allege that the Appellant itself has admitted that the entire undertaking has been transferred (at pg 43-44 of Appeal set, para 4.13 read with pg 45, para 4..24) while all that the Appellant in its statement reproduced in para 4.13 states is that since the valuation was obtained under DCF method which takes into account the future projections from the business as a whole, there was no requirement to do a valuation again. This by no stretch means that the entire undertaking has been sold. 10. Ld. Counsel further submits that in its case, there was no possibility of any such finding by the authorities because Appellant had filed submissions prior to 23.12.2020 and post such date submitting I.T.A.No.369/Del/2022 10 consistently, along with evidence, that the entire undertaking of the Appellant has not been transferred. Submissions made by the Appellant are enumerated herein below: a. Submission dated 31.01.2020 (@pg 82 of PB, point 3) submitting the audited financials which made it clear (@pg 447 of PB) that the entire undertaking was not transferred, and Appellant had retained back assets and liabilities. b. Submission dated 09.03.2020 wherein the Appellant submitted reconciliation statement to demonstrate as to how the Appellant arrived at the consideration price after reducing the value of the assets and liabilities not transferred from the valuation of the entire undertaking (@pg 129 of PB read with pg 183 of PB) c. Submission dated 17.08.2020 submitting the management certificate stating the particulars and value of assets and liabilities not transferred by the Appellant (@pg 184-186 of PB) d. Submission dated 15.01.2021 wherein, on being sought by the Ld. TPO, the Appellant had filed the Net Asset Valuation (NAV) of the assets which were transferred after reducing the value of the net assets not transferred by the Appellant. (@pg 189 of PB read with pg 196-197 of PB) 11. The only other case that the Ld. TPO had in addition to the DRP findings was that the Appellant’s case that part of the assets were not transferred to Saxo AS is unverifiable and not reliable as neither details of assets not transferred nor exhibits of the BTA were submitted during the TP proceedings. Ld. Counsel in this regard submitted that the Appellant was prevented from submitting the aforementioned additional evidence before Ld. TPO for lack of an opportunity and for the mere reason that no such question was asked by the Ld. TPO. (@pg. 20 of PB, Objection 3.2). I.T.A.No.369/Del/2022 11 12. The finding of the Ld. TPO is completely perverse in light of the fact as already submitted that all the details with respect to assets and liabilities retained by the Appellant were duly submitted before the Ld. TPO as following: i. Addendum dated 07 May 2016 specifying that instead of the entire undertaking, only certain assets (having book value of INR 11.29 Cr.) and liabilities (having book value of INR 3.93 Cr.) will be transferred under the BTA. (@pg 109 of PB) was filed before the TPO as Annexure 3 along with the BTA (@pg 82 of PB, point 2 read with pg 109 of PB). ii. A management certificate in this regard listing the assets and liabilities retained back by the Appellant was also filed before the Ld. TPO/AO during the assessment proceedings vide submission dated 17 Aug 2020 in response to a specific request by the Ld. TPO/AO. (@pg 184- 186 of PB) iii. Audited financials of the Appellant for year ending 31 Mar 2017 were also filed before the Ld. TPO/AO (@pg 82 of PB, point 3) and a mere perusal of the financials made it clear (@pg 447 of PB) that the entire undertaking was not transferred and Appellant had retained back assets and liabilities. iv. A reconciliation of the adjusted consideration was provided to the Ld. TPO vide letter dated 09 Mar 2020 in response to a specific request from the TPO during hearing dated 03 Mar 2020. (@pg 129 read with pg 183 of PB) v. Further, the exhibits only gave the list of assets and liabilities as on 31 Jan 2016. The same did not give any details about the assets and liabilities which were retained. Irrespective, the same were submitted before the DRP as additional evidence. (@pg 198-201 and 347- 381 of PB) 13. After having the above evidence, the only question put forth by the TPO was if the Appellant has undertaken a valuation for arriving at the present market value of the fixed assets as on the date of transfer. There was no further enquiry and no further questions asked by the Ld. I.T.A.No.369/Del/2022 12 TPO and it directly gave such findings in its order regarding non submission of BTA exhibits and evidence. 14. Ld. Counsel submits that the observation of Ld. TPO that nowhere in the BTA has it been mentioned that the Appellant is transferring part assets and liabilities the agreement itself contains details of all assets and liabilities which need to be transferred after execution of the agreement and, therefore, assessee’s claim that some assets are retained and not transferred is not reliable in absence of supporting documents and in light of BTA is not justified. 14.1 The Ld. Counsel submits that this finding of the Ld. TPO is absolutely perverse because the decision to sell only part assets and liabilities was taken post the signing of the BTA. Therefore, this fact could not have been mentioned in the BTA. But the BTA does contemplate this change in the future in Clause 5.3 (@pg 101 of PB) which clearly provides that the parties can agree for an adjusted consideration basis the identity and value of the actual assets and liabilities that may be transferred pursuant to the BTA. Further, the finding that no supporting documents were provided is further erroneous and in violation of natural justice because after providing the management certificate and audited financials for demonstrating the retained assets and liabilities, this finding has been recorded by the Ld. TPO without giving any opportunity to the Appellant to further file I.T.A.No.369/Del/2022 13 supporting documents. This objection was duly taken by the Appellant before the DRP (@pg. 20 of PB, Objection 3.2) and supporting documents were also filed (@pg 198-346 of PB). 14.2 Ld. Counsel submits that there is no dispute either by the Ld. TPO or by the Ld. DRP on the valuation of the entire undertaking. Both the authorities have accepted INR 3 1,39,11,962/- as the fair value for the transfer of the entire undertaking of the Appellant taken as a whole. Further, there is also no dispute on the fact that INR 31,39,11,962/- is the valuation for the entire undertaking. DRP has itself given a finding of fact on the same. This is also evident from the fact that both the authorities have assumed that the entire undertaking has been transferred and accordingly has considered the aforesaid valuation of INR 31,39,11,962/- for the entire undertaking. The dispute arises only because both the Ld. TPO as well as the Ld. DRP firstly has perversely disregarded the assets and liabilities which were not actually transferred to Saxo AS but were duly retained by the Appellant giving complete prominence to the BTA as well as the initial valuation report which was carried out for the entire undertaking. 14.3 It is submitted that the following assets and liabilities (values as on 31.03.2016) were retained by the Appellant as per the Management Certificate: I.T.A.No.369/Del/2022 14 Particulars Amount (In INR) Amount (In INR) Assets not transferred: Cash and cash equivalents 9,86,96,254 Net tax receivables (net of provision/tax payable) 58,25,699 Security deposits 2,58,65,309 Tangible assets (Old lights) 12,87,309 Receivables from customers 14,27,667 Service tax receivable/refund 2,57,93,751 TOTAL ASSETS NOT TRANSFERRED 15,88,95,988 Liabilities not transferred TDS Payable 6,566 Accrued pension contributions 97,716 Other Payables (Creditors not transferred) 32,60,110 TOTAL LIABILITIES NOT TRANSFERRED 33,64,392 It is submitted that the above assets and liabilities clearly do not form part of the addendum in which the assets and liabilities have been listed which were transferred. (@pg 109 of PB). It is submitted that the aforementioned assets and liabilities were not transferred will also be conclusively evident from the audited financials of the Appellant for the period ending 31 Mar 2017. (@pg 447 of PB) Had the entire undertaking been transferred, there would not be any assets with the Appellant except for Bank/Cash or receivables. For instance, the Appellant had a cash balance of INR 5.6 Cr. as on 31 March 2016 prior to the date of transaction (07.05.2016) and INR 25.87 Cr. as on 31.03.2017 after the date of transaction. (@pg 447 of PB) Even if we assume that out of this amount, the Appellant had INR 15.83 Cr. as consideration price in cash, it still held additional INR 10.04 Cr. post the transfer date. Therefore, this I.T.A.No.369/Del/2022 15 makes it evident that the Appellant had retained back assets and liabilities which were not transferred to Saxo AS. 15. The Ld. DR strongly supported the orders of the AO/TPO. 16. Heard rival submissions, perused the orders of the authorities below. The dispute between the assessee and the Revenue before us is as to whether the assessee had transferred its entire business undertaking to its AE or whether the assessee has retained part of assets and liabilities pursuant to Business Transfer Agreement. It is the contention of the assessee that part of the assets and liabilities were retained and in support of its contention that assessee has placed various documents in the form of Addendum to BTA, etc. to demonstrate that part of the assets only were transferred to its AE. 17. On perusal of the order of the TPO, we noticed that the contention of the assessee was rejected as neither the Addendum to BTA nor the exhibits forming part of Business Transfer Agreement (BTA) were filed before the TPO. We also noticed that even though the Addendum to BTA and exhibits forming part of BTA were filed before the Ld. DRP the Ld. DRP finds no reason to interfere with the order of the TPO which in our view is not correct. The Addendum to BTA which was placed before us clearly show what all the assets and liabilities to be transferred by the assessee to its AE as per BTA. Therefore, since what all the assets and liabilities to be transferred by the assessee are clearly reflected in the I.T.A.No.369/Del/2022 16 Addendum to BTA the TPO/DRP are not justified in assuming that the assessee has transferred the entire assets and liabilities to its AE under BTA as slump sale completely ignoring the evidences on record and making some observations on assumptions. The assessee has clearly demonstrated with evidences that it has transferred only part of the assets to its AE under BTA read with Addendum to BTA and, therefore, there is no reason as to why the Addendum should not be considered and acted upon. Therefore, taking the totality of facts and circumstances into consideration, we direct the TPO to take cognizance of the Addendum the exhibits forming part of BTA and the other evidences and calculate the value of only those assets transferred by the assessee and exclude the assets which were retained, for the purpose of determining the ALP. 18. Ground no. 3 of grounds of appeal of the assessee is in respect of adding the Transfer Pricing Adjustment amounting to Rs.15,55,31,595/- under the head “Income from business or profession” instead of income from capital gains. 19. The Ld. Counsel for the assessee submits that the AO/TPO erred in computing the Transfer Pricing Adjustment as income from business or profession instead of capital gains. The ld. Counsel submits that the addition on issue of capital gains will add to the income from capital gains since there is no dispute on the nature of income. Therefore, I.T.A.No.369/Del/2022 17 directions may be given to the AO/TPO to assess the adjustment if any under the head “Income from capital gains” and not under the head “Income from Business”. 20. On hearing both the parties, we are of the view that the consideration received by the assessee on transfer of assets shall be computed under the head “Income from capital gains” and not under the head “Income from Business”. Thus, the AO is directed to compute the adjustment under the head “Capital gains” and not under the head “Income from Business”. 21. Ground no.4 of grounds of appeal is in respect of initiation of penalty proceedings u/s 270A of the Act for the Transfer Pricing Adjustment made in the assessment order. This ground is pre-mature and accordingly this ground is dismissed. 22. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 02/12/2022 Sd/- Sd/- (G.S. PANNU) (C.N. PRASAD) PRESIDENT JUDICIAL MEMBER Dated: 02.12.2022 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. I.T.A.No.369/Del/2022 18 By order Assistant Registrar, ITAT: Delhi Benches-Delhi