Cadence Designs Systems India Pvt. Ltd., Noida V. DCIT, Circle-4(2), New Delhi

ITA 597/DEL/2021

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5591 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2016-2017
• Appeal Filed On: 25-05-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: SPARSH BHARGAVA
• Keywords: Transfer pricing; Bad and doubtful debts; TDS; Set aside
• Section: 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DLEHI BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA NO. 597/DEL/2021 ASSESSMENT YEAR: 2016-17 CADENCE DESIGNS SYSTEMS INDIA PVT. LTD., VS. DCIT CIRCLE 4(2), PLOT NO. 57A & B,NOIDA SPECIAL ECONOMIC NEW DELHI ZONE, PO NEPZ, NOIDA. PAN : AAACC1138 (APPELLANT) (RESPONDENT) APPELLANT BY : SH. SPARSH BHARGAVA, ADV. RESPONDENT BY: SH. SURENDER PAL, CIT/DR DATE OF HEARING: 20.09.2021 DATE OF ORDER : 20.09.2021 ORDER PER K. NARASIMHA CHARY, J.M. THIS APPEAL BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2016-17 IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 31.03.2 021 IN PURSUANCE TO THE DIRECTIONS OF LD. DISPUTE RESOLUTION PENAL-2, N EW DELHI (DRP) DATED 16.11.2020. 2. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPING AND EXPORTING SOFTWARE TO ITS HOLDING COMPANY, CADENCE INC., USA AND PROVIDING TECHNICAL SUPPORT AND MARKETING RELATED S ERVICES TO CUSTOMERS OF CADENCE (IRELAND) LTD. UNDER THE SCHEME OF AMALG AMATION APPROVED 2 BY HONBLE HIGH COURT OF KARNATAKA BY ORDER DATED 2 1.04.2016, THREE COMPANIES, NAMELY, CADENCE AMS DESIGN PVT. LTD., DE NALI DESIGN SYSTEM PVT. LTD. AND TENSILICA TECHNOLOGIES INDIA PVT. LTD . WERE AMALGAMATED INTO THE ASSESSEE AND ALL ASSETS AND LIABILITIES OF THE SAID COMPANIES WERE TRANSFERRED TO THE ASSESSEE. FOR THE ASSESSMENT YEA R 2016-17, ASSESSEE FILED RETURN OF INCOME ON 29.11.2016 DECLARING INCO ME OF RS.1,10,09,38,770/- AND IN VIEW OF INTERNATIONAL TR ANSACTIONS ENTERED INTO BY THE ASSESSEE WITH THEIR ASSOCIATE ENTERPRIS ES (AES), LD. ASSESSING OFFICER REFERRED THE DETERMINATION OF ARMS LENGTH PRICE TO THE TRANSFER PRICING OFFICER (TPO). LD. TPO SUGGESTED ADJUSTMENT OF RS.24,06,976/- IN RESPECT OF MARKETING SUPPORT SERVICES AND RS.75,60, 525/- IN RESPECT OF INTEREST ON RECEIVABLES. WHEN THE ASSESSEE FILED OB JECTIONS BEFORE THE LD. DRP, THE DRP GAVE CERTAIN DIRECTIONS, IN VIEW O F WHICH, THE ADDITION WAS REDUCED TO RS.10,86,422/-. LD. ASSESSING OFFICE R ALSO DISALLOWED A SUM OF RS.1,01,03,561/- ON ACCOUNT OF PROVISION FOR LEAVE ENCASHMENT PAID AND ON THIS ASPECT, LD. DRP DIRECTED THE ASSES SING OFFICER TO VERIFY THE CLAIM OF THE ASSESSEE AS TO WHETHER IT HAS PAID SUCH AMOUNT DURING THE YEAR UNDER CONSIDERATION AND ON VERIFICATION, L D. ASSESSING OFFICER ALLOWED THE CLAIM. ON THE SAME LINE, FOLLOWING THE DRP DIRECTIONS, LD. ASSESSING OFFICER ALLOWED THE MAT CREDIT. LD. ASSES SING OFFICER, HOWEVER, DISALLOWED A SUM OF RS.1,75,88,014/- ON ACCOUNT OF BAD DEBTS BY OBSERVING THAT PURSUANT TO DRP DIRECTIONS, THE CLAI M WAS VERIFIED AND IT WAS FOUND THAT THE ASSESSEE HAD NOT FULFILLED THE C ONDITIONS LAID DOWN U/S. 36(2) OF THE ACT. LD. ASSESSING OFFICER, THERE FORE, BY ORDER DATED 31.03.2021 MADE DISALLOWANCE TO THE TUNE OF RS.10,8 6,422/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AND DISALLOWED BAD D EBTS TO THE TUNE OF RS.1,78,88,014/-. 3 3. ASSESSEE IS, THEREFORE, BEFORE US IN THIS APPEAL CHALLENGING THE FINAL ASSESSMENT ORDER ON AS MANY AS NINE GROUNDS. GROUNDS NOS. 1 & 2 ARE GENERAL IN NATURE AND GROUND NO. 9 IS CONSEQUEN TIAL IN NATURE AND THEY DO NOT REQUIRE ANY ADJUDICATION. GROUND NO. 3 IS IN RESPECT OF DISALLOWANCE OF BAD DEBT WRITTEN OFF, GROUND NO. 4 TO 6 RELATE TO INCORRECT ASSESSED INCOME, GROUND NO. 7 RELATES TO EDUCATION CESS AND GROUND NO. 8 IS IN RESPECT OF TRANSFER PRICING ADJU STMENT. WE SHALL NOW DEAL WITH THESE ISSUES UNDER DISPUTE. 4. COMING TO BAD DEBTS WRITTEN OFF, LD. ASSESSING O FFICERS CONTENTION IS THAT SUCH BAD DEBTS RELATE TO THE AMALGAMATING C OMPANY, I.E., CADENCE AMS DESIGN INDIA PVT. LTD. AND THE PROVISIO N FOR DOUBTFUL DEBTS WAS TO BE ALLOWED ONLY IN RESPECT OF THE ASSESSEE A ND NONE ELSE. 5. LD. AR PLACED RELIANCE ON THE DECISION OF HONBL E SUPREME COURT IN THE CASE OF CIT VS. T. VEERABHADRA RAO, 155 ITR 152 (SC) AND OF HONBLE GUJRAT HIGH COURT IN CIT VS. SAMBHAV MEDIA LTD., 33 TAXMANN.COM 363(GUJ. HC) FOR THE PRINCIPLE THAT THE SUCCESSOR ENTITY IS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF BAD DEBTS RELATING TO THE PREDECESSOR ENTITY BEFORE AMALGAMATION. HONBLE GUJ RAT HIGH COURT HELD THAT WHERE THE AMALGAMATED COMPANY CARRIED CERTAIN DOUBTFUL DEBTS TILL THE DATE OF AMALGAMATION, CLAIMS FOR BAD DEBTS SUBS EQUENT TO AMALGAMATION IS ALLOWABLE IN THE HANDS OF TRANSFERE E-COMPANY. IT IS, THEREFORE, CLEAR THAT THE BAD DEBTS RELATING TO THE AMALGAMATING COMPANY, IF ARE WRITTEN OFF BY THE AMALGAMATED COMP ANY, THE AMALGAMATED COMPANY IS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF THE SAME. 4 6. IT IS NOT IN DISPUTE THAT THE LD. DRP DIRECTED T HE LD. ASSESSING OFFICER TO VERIFY THE CLAIM OF THE ASSESSEE REGARDI NG ALLOWANCE FOR PROVISION FOR DOUBTFUL DEBTS IN THE CASE OF AMALGAM ATING COMPANY IN THE EARLIER YEARS AND TO VERIFY THE ALLOWABILITY OF THE SAME IN THE HANDS OF THE ASSESSEE IN TERMS OF THE CONDITIONS LAID DOWN I N SECTION 36(2). LD. ASSESSING OFFICER, HOWEVER, APART FROM STATING THAT INCOME WAS BOOKED IN THE ACCOUNT OF ANOTHER ENTITY, I.E., CADENCE AMS DESIGN INDIA PVT. LTD., WHICH IS NOT THE ASSESSEE, DOES NOT GIVE ANY REASON , WHATSOEVER, FOR MAKING THE RELEVANT DISALLOWANCE. WE, THEREFORE, DI RECT THE LD. ASSESSING OFFICER TO VERIFY THE CLAIM OF THE ASSESSEE REGARDI NG THE DISALLOWANCE OF THE PROVISION FOR DOUBTFUL DEBTS IN THE CASE OF AMA LGAMATING COMPANY IN THE EARLIER YEARS AND IF HE FINDS THEM TO BE PROPER , ALLOW THE DEDUCTION IN THE HANDS OF THE AMALGAMATED COMPANY. THIS GROUN D IS, ACCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES. 7. NOW COMING TO GROUND NO. 4 TO 6, IT IS SUBMITTED BY THE LD. AR THAT IN RESPECT OF GRIEVANCE OF ASSESSEE UNDER GROU NDS NOS. 4 TO 6, A RECTIFICATION APPLICATION WAS FILED VIDE EMAIL DATE D 23.04.2021 ALONGWITH FOLLOW UP/REMINDERS DATED 08.07.2021 AND 13.07.2021 , BUT THE LD. ASSESSING OFFICER HAS NOT ATTENDED THE MATTER SO FA R. LD. AR PRAYED THAT DIRECTIONS MAY BE GIVEN TO THE LD. ASSESSING OFFICE R TO DISPOSE OF THE RECTIFICATION APPLICATION ON DUE VERIFICATION OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF THE ASSESSMENT OF TOTAL INCOME, NON-G RANT OF MAT CREDIT AND SHORT GRANT OF ADVANCE TAX AND TDS. LD. DR FAIR LY CONCEDES THAT THE MATTER MAY BE SENT BACK TO THE LD. ASSESSING OFFICE R FOR TAKING A VIEW WHILE DISPOSING OF THE RECTIFICATION APPLICATION. W E, THEREFORE, DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE GRIEVANCE OF THE ASSESSEE IN RESPECT 5 OF THE ASSESSMENT OF INCOME AT RS.1,15,72,72,280/- IN THE COMPUTATION SHEET INSTEAD OF RS.1,11,96,13,210/-; IN RESPECT OF GRANT OF MAT CREDIT; AND IN RESPECT OF SHORT GRANT OF ADVANCE TAX AND TD S. ACCORDINGLY, GROUNDS NOS. 4 TO 6 ARE ALLOWED FOR STATISTICAL PUR POSES. 8. NOW, COMING TO GROUND NO. 7, IT RELATES TO THE C LAIM OF THE ASSESSEE FOR DEDUCTION OF EDUCATION CESS TO THE TUN E OF RS.97,09,002/-. LD. AR FAIRLY SUBMITS THAT THIS GROUND WAS AGITATED NEITHER BEFORE THE ASSESSING OFFICER NOR BEFORE LD. DRP AT ANY STAGE O F THE PROCEEDINGS. HOWEVER, LD. AR SUBMITS THAT IN VIEW OF THE DECISIO NS OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CHAMBAL FERTILI ZERS AND CHEMICALS LTD. VS. JCIT (2019) 107 TAXMANN.COM 484 (RAJ), BOM BAY HIGH COURT IN THE CASE OF SESA GOA LTD. VS. JCIT, 117 TAXMANN.COM 96 AND FOLLOWED IN MANY CASES, THE ASSESSEE IS ENTITLED TO CLAIM DEDUC TION OF EDUCATION CESS. 9. LD. DR ON THIS ASPECT SUBMITS THAT THERE IS A DI FFERENCE IN THE CESS WHICH IS LEVIED UNDER THE INCOME-TAX ACT AND OTHER ENACTMENTS, INASMUCH AS, THE CESS LEVIED UNDER INCOME-TAX ACT P ARTAKES THE CHARACTER OF INCOME-TAX ITSELF AND THEREFORE, IT IS NOT ALLOWABLE AS DEDUCTION, WHEREAS THE CESS LEVIED UNDER OTHER ENAC TMENTS IS IN RESPECT OF SOME SERVICES RENDERED BY THE GOVERNMENT AND THE REFORE, IT STANDS ON A DIFFERENT FOOTINGS AND ALLOWABLE AS A DEDUCTIO N. HE PLACES RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE O F CIT VS. K. SRINIVASAN, AIR 1972-SC-491 IN SUPPORT OF HIS CONTENTION THAT T HE CESS LEVIED UNDER THE IT ACT FORMS PART OF THE INCOME TAX ITSELF. HE SUBMITTED THAT THE DECISION OF HONBLE SUPREME COURT IS NOT CONSIDERED BY THE HIGH COURT IN THE CASE OF CHAMBAL FERTILIZERS AND CHEMICALS LT D. (SUPRA) AND SESA 6 GOA LTD. (SUPRA) AND THEREFORE, HE ADDRESSES THE BE NCH TO FOLLOW THE DECISION OF HONBLE SUPREME COURT. 10. BE THAT AS IT MAY, IT REMAINS AN UNDISPUTED FAC T THAT THE ASSESSEE DOES NOT RAISE THIS ISSUE AT ANY STAGE BEFORE THE A UTHORITIES BELOW. WE, THEREFORE, FIND FORCE IN THE ARGUMENTS OF THE LD. A R THAT THIS ISSUE MAY BE RESTORED TO THE FILE OF LD. ASSESSING OFFICER TO TAKE A VIEW AFTER GIVING OPPORTUNITY TO THE ASSESSEE. NEEDLESS TO SAY, THE A SSESSING OFFICER SHALL GIVE AN OPPORTUNITY TO THE ASSESSEE AND TAKE A VIEW ACCORDING TO LAW. THIS GROUND IS, ACCORDINGLY, ALLOWED FOR STATISTICA L PURPOSES. 11. NOW COMING TO GROUND NO. 8, IT RELATES TO THE B ENCH MARKING OF THE INTEREST OUTSTANDING ON RECEIVABLES. LD. AR SUB MITS THAT THIS ISSUE IS COVERED BY THE DECISION OF HONBLE JURISDICTIONAL H IGH COURT IN THE CASE OF PCIT VS. KUSUM HEALTHCARE PVT. LTD. ORDER DATED 25.04.2017 IN ITA NO. 765/2016. APART FROM THAT HE SUBMITS THAT THE ASSES SEE ENTERED INTO BILATERAL ADVANCE PRICING AGREEMENT(BAPA) WITH CBDT ON 03.03.2021 WHICH COVERS THE PRESENT ASSESSMENT YEAR AND CERTAI N TRANSACTIONS (SOFTWARE DEVELOPMENT SEGMENT) AND HAS ALREADY FILE D ITS MODIFIED RETURN UNDER SECTION 92CD(1) ON 28.06.2021. HE SUBM ITTED THAT THE DIRECTIONS OF LD. DRP WERE TO CALCULATE INTEREST ON NET BASIS WHEREAS THE LD. TPO HAS IGNORED THE AMOUNTS PAYABLE WHILE DOING THE COMPUTATION AND IF THE NET RECEIVABLES ARE CONSIDERED THEN NO A DDITION WOULD ARISE. IN THESE CIRCUMSTANCES, LD. AR PRAYED THAT THE ISSUE M AY BE RESTORED TO THE FILE OF LD. ASSESSING OFFICER TO CONSIDER THE SAME IN THE LIGHT OF DECISION OF HONBLE JURISDICTIONAL HIGH COURT AS WELL AS BAPA. 7 12. LEARNED DR FAIRLY CONCEDES THE REQUEST OF THE A SSESSEE. WE, THEREFORE, SET ASIDE THE IMPUGNED ASSESSMENT ORDER AND DIRECT THE LD. ASSESSING OFFICER TO TAKE PLAUSIBLE VIEW IN COMPLIA NCE WITH DRP DIRECTIONS IN THE LIGHT OF THE DECISION OF HONBLE DELHI HIGH COURT IN CIT VS. KUSUM HEALTH CARE (SUPRA) AND ALSO BAPA. 13. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 20 TH DAY OF SEPTEMBER, 2021. SD/- SD/- ( O.P. KANT) (K. NARSIMHA CHAR Y) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 20/09/2021 AKS