M/s. Aricent Technologies (Holdings) Ltd., New Delhi V. DCIT, New Delhi

ITA 90/DEL/2013

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 7506 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 06-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 04-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AJAY VOHRA SR SH NEERAJ JAIN
• Keywords: Capital asset; Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; International transaction; Retrospective amendment; Additional evidence; Question of law; Cost of acquisition; Valuation report; Scheme of amalgamation; Right to appeal; Notional interest; Revised return; Revenue expenditure; Capital expenditure; TDS
• Section: 32; 28; 15; 92; 92B; 37(1); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SH. N. K. BILLAIYA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.90/DEL/2013 ASSESSMENT YEAR: 2008-09 ARICENT TECHNOLOGIES (HOLDINGS) LTD. 5, JAIN MANDIR MARG CONNAUGHT PLACE NEW DELHI PAN NO. AAACH0152P VS DCIT CIRCLE 1(1) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. AJAY VOHRA, SR. ADVOCATE SH. NEERAJ JAIN, ADVOCATE RESPONDENT BY SH. SANDEEP KUMAR MISHRA, SR. DR DATE OF HEARING: 11/07/2019 DATE OF PRONOUNCEMENT: 26/07/2019 ITA NO.2671/DEL/2014 ASSESSMENT YEAR: 2009-10 ARICENT TECHNOLOGIES (HOLDINGS) LTD. 5, JAIN MANDIR MARG CONNAUGHT PLACE NEW DELHI PAN NO. AAACH0152P VS DCIT CIRCLE 1(1) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. AJAY VOHRA, SR. ADVOCATE SH. ANSHUL SACHHAR, ADVOCATE SH. RAMIT KATYAL, CA SH. NEERAJ JAIN, ADVOCATE RESPONDENT BY SH. SANDEEP KUMAR MISHRA, SR. DR 2 DATE OF HEARING: 15/07/2019 DATE OF PRONOUNCEMENT: 26/07/2019 ORDER PER N. K. BILLAIYA, AM: THESE TWO APPEALS BY THE ASSESSEE ARE PREFERRED AGA INST THE TWO SEPARATE ORDERS FRAMED U/S. 143 (3) R.W.S. 144 C OF THE ACT. SINCE COMMON ISSUES ARE INVOLVED IN BOTH THESE APPE ALS THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY TH IS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE APPELLANT COMPANY WAS FORMERLY KNOWN AS FLEX TORNICS SOFTWARE SYSTEMS LTD. (FSS) WHICH WAS FORMERLY KNOW N AS HUGHES HOUSE SOFTWARE SERVICES LTD. (HSS) AND IS A COMPANY INCORPORATED UNDER THE COMPANIES ACT. 1956. FSS IS CLOSELY HELD PUBLIC LIMITED COMPANY AND IS SUBSIDIARY COMPANY OF FLEXTRONICS SALES AND MARKETING LIMITED. THE APPELLANT IS ENGA GED IN THE BUSINESS OF PRODUCTION OF COMPUTER SOFTWARE PRODUCT S AND PROVISION OF SOFTWARE DEVELOPMENT SERVICES OF COMMU NICATION INDUSTRY THROUGH THE VARIOUS 100% EXPORT ORIENTED U NITS SET UP IN SOFTWARE TECHNOLOGY PARKS AT GURGAON AND BANGALO RE. 3 3. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY T HE ASSESSEE ARE TABULATED BELOW:- NAME OF TRANSACTION METHOD SELECTED TOTAL VALUE (RS.) PAID RECEIVED SALES OF SERVICES CPM 508,306,589 SALES OF PRODUCTS CUP 27,096,734 INTEREST INCOME CUP 2,428,061 PRODUCT RELATES SERVICES CPM 2,096,906 PURCHASE OF SERVICES CPM 198,33,524 REIMBURSEMENT OF TRAVEL COST CPM 107,536 RECHARGE OF COURIER CHARGES CPM 98,759 LEGAL AND PROFESSIONAL EXPENSES CPM 241 ,398 FACILITY RENTAL CPM 19,333,061 4 INSURANCE EXPENSES CPM 23,484,987 CORPORATE EXPENSES CPM 24,022, 522 MARKETING SERVICES CPM 49,565,029 4. THE REFERENCE U/S. 92CA (1) OF THE ACT WAS RECEI VED BY THE TPO FOR DETERMINATION OF ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS UNDER TAKEN BY THE APPELLANT COMPANY. DURING THE COURSE OF THE TRANSFER PRICING ASSESSMENT PROCEEDIN GS THE TPO NOTICED THAT THE ASSESSEE HAS PAID RS.24022522/- TO ITS AE ARICENT US MARKET INC ON ACCOUNT OF CERTAIN SERVICE S PURPORTED TO HAVE BEEN RECEIVED BY THE ASSESSEE. THE TPO FOUND THAT THIS AMOUNT HAS BEEN BENCH MARKED BY INCLUDING IT IN THE COST BASE WHILE COMPARING ARMS LENGTH MARGIN USING TNMM. THE ASSESSEE WAS ASKED TO FURNISH ALL THE AGREEMENTS ENTERED INT O BY THE ASSESSEE COMPANY RELATED TO THE INTRA GROUP SERVICE S OBTAINED BY THE ASSESSEE COMPANY FROM THE AE. THE ASSESSEE WAS ALSO ASKED TO EXPLAIN THE RATE OF PAYMENT FOR INTRA GROUP SERV ICES AND WHETHER ANY COST BENEFIT ANALYSIS WAS DONE WHILE EN TERING INTO THE AGREEMENT. THE ASSESSEE WAS ASKED TO FURNISH AL L THE EVIDENCES IN RELATION TO SUCH PAYMENTS. ASSESSEE F ILED A DETAILED REPLY VIDE SUBMISSIONS DATED 17.08.2011 AND 09.09.2 011AND ALSO 5 FILED THE RELEVANT AGREEMENT. THE SERVICES LISTED IN THE AGREEMENT ARE AS UNDER :- 3. SCOPE OF SER VICES ARICENT SHALL PROVIDE FOLLOWING SERVICES TO RECIPIENT: I. ACCOUNTING AND FINANCE A) AUDIT LIAISON B) CONSOLIDATIONS C) FINANCIAL REVIEWS D) REPORTING TO INVESTORS A) UNDERTAKING GROUP FINANCIAL PROJECTS AND PROVIDING FORECASTS II. EXECUTIVE MANAGEMENT A) DEVELOPMENT OF CORPORATE STRATEGY FOR THE BUSINESS AS A WHOLE B) DECIDING ORGANIZATIONAL STRUCTURE C) OPERATING PROCEDURES TO ENSURE EFFICIENT OPERATION S D) ANTICIPATION OF COMPETITORS' ACTIONS, CUSTOMERS' P REFERENCES IN ORDER TO INCREASE MARKET SHARE AS WELL AS REVENUES AND MARGINS. III TAX A) REGULATORY COMPLIANCE B) MINIMIZING OVERALL EFFECTIVE TAX COST. IV. LEGAL (A) FORMULATING WORLDWIDE CUSTOMER SELLING TERMS ANA CONDITIONS (A) PROVIDING DOCUMENTATION AND REVIEW OF CUSTOMER CONT RACTS; (B) ASSURING GLOBAL COMPLIANCE V. TREASURY (A) GLOBAL CASH MANAGEMENT (B) GLOBAL CREDIT COLLECTION (C) BANKING (LOAN SYNDICATION) (D) DEBT MANAGEMENT (E) FOREIGN EXCHANGE ' VI CORPORATE MARKETING (A) DEVELOPING MARKETING STRATEGIES AND CONTENT (B) DEVELOPING PUBLIC RELATIONS 6 (C) CONDUCTING ROAD SHOWS, CAMPAIGNS AS WELL AS ORGANIZ ING PUBLIC EVENTS AND TRADE SHOWS VII. INSURANCE (A) OBTAINING AND CONTINUING IN FORCE THE BUSINESS INSU RANCE POLICIES PERTAINING TO GLOBAL OPERATIONS OF RECIPIENT (B) FORMULATING INSURANCE STRATEGY .AND OVERSIGHT 5. IT WAS EXPLAINED THAT TNMM IS THE MOST APPROPRIA TE METHOD WITH OP/OC AS THE PROFIT LEVEL INDICATOR AND SINCE THE OPERATING PROFIT MARGIN OF THE ASSESSEE AT 21.84% IS HIGHER T HAN THAT ALL THE COMPARABLE COMPANIES AT 20.36%, THE INTERNATIONAL T RANSACTION OF PAYMENT OF CORPORATE CHARGES WAS CONSIDERED TO B E AT ARMS LENGTH PRICE. 6. THE TPO HOWEVER REJECTED THE TNMM METHOD APPLIED BY THE ASSESSEE AND SEPARATELY BENCH MARKED THE SAID TRANS ACTION ALLEGEDLY APPLYING CUP METHOD. THE TPO FURTHER HEL D THAT SINCE THE ASSESSEE HAS NOT RECEIVED ANY ECONOMIC AND COMM ERCIAL BENEFITS FROM SUCH PAYMENT AND THE EVIDENCE OF INCU RRING SUCH EXPENDITURE BY THE AE HAS ALSO BEEN NOT PLACED ON R ECORD, THE ARMS LENGTH PRICE OF SUCH INTERNATIONAL TRANSACTION SHALL BE CONSIDERED TO BE AT NIL. 7 7. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP. BEFORE THE DRP IT WAS STRONGLY CONTENDED THAT ARICENT INC USA WAS CREATED SOLELY FOR THE PURPOSE OF RENDERING THE CORPORATE M ANAGEMENT SERVICES TO THE GROUP COMPANIES WHICH RELATED TO TH E ENTIRE GROUP. IT WAS BROUGHT TO THE NOTICE OF THE DRP THAT THE CO STS ARE CHARGED ON A RATIONAL BASIS IN PROPORTION TO BENEFIT ACCRUI NG TO EACH ENTITY. THE BASIS OF COST SHARE BETWEEN THE ASSESS EE AND AE WAS FURNISHED. AFTER CONSIDERING THE FACTS AND THE SUB MISSIONS AND AFTER GOING THROUGH THE TPOS REPORT THE DRP HELD A S UNDER :- 3.6 THUS IN OUR VIEW BITS AND PIECES OF WORK MAY B ENEFIT THE INDIAN ENTITY AND THERE IS NO REAL WAY OF QUANTIFIC ATION OF SUCH BENEFITS. FOR EXAMPLE SOME COSTS OF INSURANCE PREM IUM AND BY ARICENT US TO BENEFIT FSS INDIA HAVE BEEN ALLOCATED ON PRO RATA BASIS TO THREE PARTIES BY THE ASSESSEE. THUS IT IS DIFFICULT TO ACTUALLY QUANTITY THE AMOUNT SPENT FOR INDIA ENTITY. THE RE PORT IS ALSO A PRELIMINARY DRAFT FOR DISCUSSION PURPOSE ONLY (PAGE S 234 OF PAPER BOOK). IT IS OBVIOUS THAT QUANTIFICATION IS NOT CO NCLUSIVE NOR IS IT POSSIBLE TO BE CONCLUSIVE FROM THE RECIPIENTS PERS PECTIVE. AS WE SAID EARLIER THAT SOME COSTS MAY BE ATTRIBUTABLE TO THE ASSESSEE BUT ARE DIFFICULT TO QUANTIFY. SO AN ADHOC ALLOWANCE O F 1% OF TOTAL COSTS 8 CAN BE ALLOWED TO THE ASSESSEE AND THE REMAINING TO BE CONSIDERED FOR DETERMINATION OF ALP FOR TRANSACTIONS TESTED UN DER TNMM. THE TPO IS DIRECTED TO RECOMPUTED THE ALP ACCORDINGLY. OBJECTION IS PARTLY ACCEPTED BY THE DRP. 8. THE ASSESSEE IS IN APPEAL BEFORE US VIDE GROUND NO.2 TO 2.7. ASSESSEE HAS OBJECTED TO THE TP ADJUSTMENT OF RS.24 022522/-. 9. BEFORE US THE COUNSEL FOR THE ASSESSEE VEHEMENTL Y STATED THAT THE TPO GROSSLY ERRED IN NOT FOLLOWING THE DIR ECTIONS OF THE DRP. IT IS THE SAY OF THE COUNSEL THAT THE DRP HAS DIRECTED THE TPO TO ALLOW 1% OF TOTAL COST TO THE ASSESSEE AS AG AINST 1% OF CORPORATE CHARGES ALLOWED BY THE TPO. THE COUNSEL FURTHER STATED THAT IF 1% OF THE TOTAL COST OF THE ASSESSEE IS TAK EN THAN IT WILL COME TO RS.8883840653/- WHICH IS HIGHER THAN THE AM OUNT OF RS.24022522/- PAID BY THE ASSESSEE TOWARDS CORPORAT E CHARGES. THE COUNSEL CONCLUDED BY SAYING THAT IF THE DIRECTI ONS OF THE DRP ARE GIVEN EFFECT TO NO ADJUSTMENT ON ACCOUNT OF COR PORATE CHARGES WOULD SURVIVE. 10. THE DR STRONGLY SUPPORTED THE FINDINGS OF THE A O/TPO. 9 11. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW. SINCE THE REVENUE IS NOT IN APPEAL BEFORE U S, THE DIRECTION OF THE DRP HAS ATTAINED FINALITY. THIS MEANS THAT THE TPO SHOULD GIVE EFFECT TO THE DIRECTIONS OF THE DRP IN LETTER AND SPIRIT. THE DIRECTION OF THE DRP HAS BEEN MENTIONED ELSEWHERE A ND SINCE THE DRP HAS DIRECTED THE TPO TO COMPUTE THE ALP AT 1% O F TOTAL COST THE SAME SHOULD BE FOLLOWED. WE ACCORDINGLY DIRECT THE TPO / AO TO FOLLOW THE DIRECTIONS OF THE DRP AND IF FOUND TH AT AFTER GIVING EFFECT TO THE DIRECTIONS TOTAL COST OF THE ASSESSEE WORKS OUT TO BE HIGHER THAN WHAT HAS BEEN PAID BY THE ASSESSEE TOWA RDS CORPORATE CHARGES NO ADJUSTMENT ON ACCOUNT OF CORPO RATE CHARGES NEED TO MADE. ACCORDINGLY GROUNDS NO.2 TO 2.7 ARE ALLOWED. 12. GROUND NO.3 RELATES TO THE TRANSFER PRICING AD JUSTMENT OF RS.23,56,249/- ON ACCOUNT OF INTEREST ON FOREIGN CU RRENCY LOAN EXTENDED TO AE. 13. FACTS ON RECORD SHOW THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE EARNED INTEREST INCOME O F RS.23,56,249/- IN RESPECT OF LOAN OF US DOLLAR NINE HUNDRED 10 THOUSAND EXTENDED TO ITS AE ARICENT JAPAN LIMITED A ND ARICENT BEIJING LIMITED. THE ASSESSEE HAS CHARGED INTEREST AT LIBOR + 1.5%. THE ASSESSEE CLAIMED THAT THE RATE OF INTERE ST CHARGED WAS COMPARABLE TO THE PREVAILING RATE OF INTEREST IN TH E INTERNATIONAL MARKET. THUS INTERNATIONAL TRANSACTION WAS CONSIDE RED AS BEING AT ARMS LENGTH PRICE APPLYING CUP AS THE MOST APPRO PRIATE METHOD AS THE SAME WAS ADEQUATELY BENCH MARKED WITH RESPECT TO COMPARABLE UNCONTROLLED TRANSACTION OF EXPENSES OF PAYMENT OF INTEREST ON SIMILAR LOANS. 14. HOWEVER, THE TPO WAS OF THE OPINION THAT THE MA NNER IN WHICH THE CUP METHOD HAS BEEN APPLIED BY THE ASSESS EE IS ERRONEOUS. THE TPO APPLIED RATE OF INTEREST AT 17. 26% WHICH WAS COMPUTED AS UNDER :- CUP RATE IS THUS ARRIVED AT AS UNDER . BASIC INTEREST RATE FOR THE CREDIT RATING OF THE AE 9.88% ADD : TRANSACTION COST 395 BASIS POINTS CUP RATE ADD : ADJUSTMENT FOR SECURITY NOT COMPUTED FINAL CUP RATE > 13.83+ ADJUSTMENT FOR SECURIT Y + RISK ADJUSTMENT FOR SINGLE CUSTOMER 11 15. ASSESSEE RAISED OBJECTIONS BEFORE THE DRP. THE DRP UPHELD THE ADJUSTMENT MADE BY THE TPO, HOWEVER IMPUTED RAT E OF INTEREST @ 13.25% BEING PLR OF SBI. AGGRIEVED BY TH IS THE ASSESSEE BEFORE US. 16. THE COUNSEL FOR THE ASSESSEE STATED THAT THE PR ESENT TRANSACTION OF LENDING LOAN TO THE ASSOCIATE IS IN FOREIGN CURRENCIES GIVEN TO FOREIGN ASSOCIATE ENTERPRISES. HENCE, THE COMPARABLE TRANSACTION FOR THE PURPOSE OF APPLICATI ON OF EXTERNAL CUP SHOULD BE CONSIDERED TO BE FOREIGN CURRENCY LEN DING BY UNRELATED PARTIES. THE COUNSEL FURTHER POINTED OUT THAT EVEN THE RBI HAS ISSUED DIRECTIONS SUBSEQUENTLY MENTIONING T HAT LIBOR RATE HAS TO BE APPLIED FOR CHARGING INTEREST ON EXP ORT CREDIT. 17. THE COUNSEL DREW OUR ATTENTION TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF COTTON NATU RALS INDIA PRIVATE LIMITED REPORTED IN 276 CTR 445. THE COUNSE L FURTHER POINTED OUT THAT IN SUBSEQUENT ASSESSMENT YEAR 2012 -13 THE DRP HAS FOLLOWED THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN COTTON NATURALS AND REVENUE IS NOT IN APPEAL. IT IS THE SAY OF THE 12 COUNSEL THAT IN VIEW OF THE DIRECT DECISION OF HON BLE HIGH COURT OF DELHI (SUPRA) THE LIBOR RATE + 1.5% SHOULD BE AC CEPTED AND NO TP ADJUSTMENT SHOULD BE MADE. 18. THE DR STRONGLY RELIED UPON THE FINDINGS OF THE AO/ TPO. IT IS THE SAY OF THE DR THAT THE HONBLE DELHI HIGH CO URT IN THE CASE OF COTTON NATURALS HAS CONSIDERED THE FACTS WHERE T HE LOAN TRANSACTIONS HAVE BEEN DONE IN THE FOREIGN CURRENCI ES. THE DR FURTHER POINTED THAT WHILE CHARGING THE RATE OF INT EREST MANY FACTORS HAVE TO BE CONSIDERED NAMELY TRANSACTION CO ST, SECURITY VOLATILITY IN THE MARKET AND RISKS, THEREFORE, RATE ADOPTED BY THE TPO SHOULD BE ACCEPTED. 19. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE RELEVANT LOAN AGREEMENT WHICH IS PLACED AT PAGES 131 134 AND 135-138 OF T HE PAPER BOOK. WE FIND THAT THE LOAN AGREEMENT WITH FSS, JAP AN CLEARLY MENTIONS THAT THE BORROWER SHALL PAY INTEREST RATE OF 1.5% OVER PREVAILING LIBOR AND THE TRANSACTION IS IN US DOLLA R. SIMILARLY THE AGREEMENT WITH FSS BEIJING SHOW INTEREST AT 150 BASIS POINTS OVER PREVAILING LIBOR AND THE TRANSACTION IS IN US DOLLAR. 13 CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF T HE AGREEMENTS AND IN THE LIGHT OF THE DECISION OF DRP IN A. Y. 20 12-13 WHEREIN ALL THE APPREHENSIONS RAISED BY THE DR HAS BEEN DUL Y CONSIDERED BY THE DRP WHICH IS ALSO UNDER APPEAL BEFORE US IN ITA NO.1944/DEL/2017, WE ARE OF THE CONSIDERED VIEW THA T RATE OF INTEREST AT LIBOR + 1.5% SHOULD BE TAKEN AS THE RAT E AND SINCE THE ASSESSEE HAS ALREADY CHARGED THE INTEREST ON LO AN AT LIBOR + 150 BASIS POINTS, THE TP ADJUSTMENT IN INTEREST ON LOAN AMOUNTING TO RS.2356249/- DESERVES TO BE DELETED. WE DIRECT ACCORDINGLY. 20. GROUND NO.4 RELATES TO THE DISALLOWANCE OF PROJ ECT EXPENSES AMOUNTING TO RS.171617599/- TREATING THE SAME TO BE CAPITAL EXPENDITURE INCURRED ON PROJECT WHICH WERE YET TO T AKE OFF. 21. FACTS ON RECORD SHOW THAT THE ASSESSEE HAS INCU RRED EXPENSES OF RS.17.16 CRORES IN RESPECT OF THE VARIO US SOFTWARE PROJECTS. SUCH EXPENSE WERE CLAIMED TO BE ROUTINE B USINESS EXPENSES SUCH AS TRAINING AND TRAVELLING EXPENSES I NCURRED IN THE COURSE OF CARRYING ON SOFTWARE BUSINESS. 14 22. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER ASKED THE ASSESSEE TO SUBMIT DETAIL OF THE PROJECT EXPENSE AND SUCH DETAILS WERE FURNISHED BY THE ASSESSEE. AFTER CONSIDERING THE SUBMISSIONS AND THE DETAILS, THE ASSESSING OFFI CER WAS OF THE BELIEF THAT THESE EXPENSES ARE OF CAPITAL NATURE GI VING ENDURING BENEFITS TO THE BUSINESS OF THE ASSESSEE AND ARE IN RESPECT OF PROJECTS WHICH WERE YET TO TAKE OFF. ACCORDINGLY T HE EXPENDITURE WAS DISALLOWED. THE OBJECTIONS RAISED BY THE ASSESS EE BEFORE THE DRP WERE OF NO AVAIL. 23. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE DREW OUT ATTENTION TO THE PAST ASSESSMENT / APPELLATE HISTOR Y OF THE ASSESSEE IN RESPECT OF SUCH EXPENSES AND POINTED OU T THAT IN THE EARLIER ASSESSMENT YEAR SUCH EXPENSES WERE ALLOWED AS REVENUE EXPENDITURE AND THE APPEALS OF THE REVENUE HAVE BEE N DISMISSED. THE DR COULD NOT BRING ANY DECISION IN FAVOUR OF TH E REVENUE. 24. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE PAST ASSESSMEN TS/ APPELLATE HISTORY IN RESPECT OF THE IMPUGNED ADDITI ON. IN A. Y. 2003-04 THE TRIBUNAL DELETED THE ADDITIONS IN 28 SO T 371 WHICH 15 ORDER WAS AFFIRMED BY THE HONBLE DELHI HIGH COURT IN ITA NO.778/2011. IN A. Y. 2004-05 THE TRIBUNAL HAS DEL ETED THE ADDITIONS IN ITA NO.1897/DEL/2009 AND IN A. Y. 2006 -07 THE TRIBUNAL ONCE AGAIN DELETED THE ADDITION 9 TAXMAN.C OM 287 WHICH ORDER AFFIRMED BY THE HONBLE DELHI HIGH COUR T IN ITA NO.1071/2011. CONSIDERING THE PAST ASSESSMENTS/ APP ELLATE HISTORY OF THE ASSESSEE WE DIRECT THE ASSESSING OFF ICER TO DELETE THE DISALLOWANCE OF RS.1716599/-. 25. GROUND NO.5 RELATES TO THE DISALLOWANCE OF RS.2 4022522/- BEING EXPENSES INCURRED ON CORPORATE CHARGES U/S. 4 0A OF THE ACT. 26. FACTS SHOW THAT THE ASSESSEE HAS CLAIMED OF RS. 24022522/- AS DEDUCTION IN THE PROFIT AND LOSS ACCOUNT AS CORP ORATE CHARGES BEING EXPENSES ALLOCATED BY ARICENT INC USA COMPANY FOR VARIOUS SERVICES INCLUDING ACCOUNTING AND FINANCE EXECUTIVE MANAGEMENT, TAX, TREASURY, LEGAL, CORPORATE, MARKETING AND INSU RANCE PROVIDED BY ARICENT INC USA. 27. WHILE EXAMINING THE EXPENSES THE ASSESSING OFFI CER WAS OF THE OPINION THAT THE CORPORATE CHARGES ARE IN THE N ATURE OF 16 CONSULTATION CHARGES / TECHNICAL FEES HAVING BEEN R EMITTED OUT OF INDIA ON WHICH NO TDS WAS DEDUCTED BY THE ASSESSEE AND WAS OF THE FIRM BELIEF THAT PROVISIONS OF SECTION 40A SQUA RELY APPLY AND ACCORDINGLY DISALLOWED 2.40 CRORES. SUCH DISALLOWAN CE WAS CONFIRMED BY THE DRP. 28. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 195 (1) OF T HE ACT AND POINTED OUT THAT THE LIABILITY TO DEDUCT TAX AT SOU RCE UNDER THIS SECTION ARISES ONLY IF THE AMOUNT PAID / PAYABLE TO THE NO RESIDENT IS LIABLE TO TAX IN INDIA. IT IS THE SAY OF THE CO UNSEL THAT SINCE THE PAYEE IS A TAX RESIDENT OF US AND ELIGIBLE TO BE GO VERNED BY THE PROVISIONS OF ACT OR THE INDIA US TREATY, NO DISALL OWANCE CAN BE MADE. 29. THE DR RELIED UPON THE FINDINGS OF THE LOWER AU THORITIES BUT COULD NOT CONTROVERT THE SUBMISSIONS OF THE COUNSEL . 30. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION OF THE ORDERS OF THE AUTHORITIES BELOW QUA THE ISSUE. THERE IS NO D ISPUTE THAT THE PAYEE ARICENT INC USA IS A TAX RESIDENT OF US AND I S, THEREFORE, 17 GOVERNED BY THE PROVISIONS OF THE ACT OR THE INDIA US TAX TREATY, WHICHEVER IS MORE BENEFICIAL. 31. ARTICLE 12 OF THE DTAA BETWEEN THE INDIA AND US A PROVIDES FOR THE TAXABILITY OF TRANSACTIONS IN THE NATURE OF ROYALITY AND FEES FOR INCLUDED SERVICES. ARTICLE 12 (2) PROVIDES THAT ROYALITIES /FEE FOR INCLUDED SERVICES ARISING IN INDIA AND PAID TO A RE SIDENT IN USA MAY BE TAXED IN INDIA IF THE RECIPIENT IS A BENEFIC IAL OWNER OF THE ROYALITIES OR FTS. AS PER ARTICLE 12 ROYALITIES AN D FEES FOR INCLUDED SERVICES IF PAID FOR MAKE AVAILABLE TECHNICAL KNOW LEDGE, EXPERIENCE, SKILL, KNOW HOW OR PROCESSES OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF TECHNICAL PLAN OR TECHN ICAL DESIGN WILL ONLY BE CONSIDERED FOR TAXABILITY. 32. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE NATURE OF SERVICES PROVIDED BY AE. IN OUR CONSIDERED VIEW NO SUCH SERVICES MAKE AVAILABLE TECHNICAL KNOWLEDGE ETC TO THE ASS ESSEE. NO TECHNICAL KNOWLEDGE EXPERIENCE OR SKILL AS REQUIRED BY ARTICLE 12 IS ACQUIRED AS A RESULT OF PROVISION OF THE SERVICE S BY ARICENT USA. IN TERMS OF THE PROVISIONS OF ARTICLE 12 OF THE IND O US DTAA FEES PAID BY THE ASSESSEE TO ITS AE ARICENT USA WOULD NO T BE TAXABLE 18 IN INDIA AND THEREFORE, THE ASSESSEE WAS NOT REQUIR ED TO DEDUCT TAX AT SOURCE. WE ACCORDINGLY DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE. 33. GROUND NO.6 NEEDS NO SEPARATE ADJUDICATION. GRO UND NO.7 RELATES TO THE CHARGING OF INTEREST U/S. 234 B AND 234 C OF THE ACT. THE LEVY OF INTEREST IS MANDATORY THOUGH CONS EQUENTIAL. WE DIRECT THE ASSESSING OFFICER TO CHARGE INTEREST AS PER THE PROVISIONS OF THE LAW. INTEREST U/S. 234 C OF THE ACT HAS TO BE CHARGED ON THE RETURNED INCOME OF THE ASSESSEE. ADDITIONAL GROUNDS OF APPEAL ON DEDUCTION OF DEPREC IATION ON GOODWILL 34. VIDE APPLICATION DATED 26.08.2014 THE ASSESSEE HAS PRAYED TO RAISE THE FOLLOWING BY WAY OF ADDITIONAL GROUND OF APPEAL. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DEPRECIATION SHOULD BE DIRECTED TO BE ALLOW ED IN TERMS OF SECTION 32 (1) (I) OF THE ACT IN RESPECT OF INTA NGIBLE ASSET IN THE NATURE OF GOODWILL AMOUNTING TO RS.26,75,57,10 ,570 ARISING ON AMALGAMATION OF FLEXTRONICS SOFTWARE SYST EMS 19 LIMITED (FLEXTRONICS) AND FUTURE SOFTWARE LIMITED ( FSL) WITH KAPPA INVESTMENT LIMITED (LATER RENAMED AS ARICENT TECHNOLOGIES HOLDINGS LIMITED I.E. THE APPLICANT ) P URSUANT TO SCHEME OF AMALGAMATION APPROVED BY THE HONBLE DELH I HIGH COURT VIDE ORDER DATED 16.05.2007. 35. AT THE OUTSET THE DR OBJECTED TO THE ADMISSION OF THE AFORESTATED ADDITIONAL GROUND. IT IS THE SAY OF TH E DR THAT THE ASSESSEE FAILED TO CLAIM DEPRECIATION ON GOODWILL I N ITS RETURN WHICH WAS FILED BY THE ASSESSEE WHEN THE GOODWILL I N QUESTION WAS ACCOUNTED FOR IN THE BOOKS OF THE ASSESSEE. TH E RETURN WAS DULY VERIFIED BY THE ASSESSEE ITSELF, AND THE ASSES SEE HAD ACCESS TO LEGAL ADVICE BEING SUCH A BIG, REPUTED COMPANY O F A GLOBAL GROUP. THE DR FURTHER POINTED OUT THAT THE ASSESSE E HAD FURTHER OPPORTUNITY BY FILING A REVISED RETURN BUT AGAIN FA ILED TO CLAIM IT BY FILING REVISED RETURN. THE DR CONTINUED BY STAT ING THAT THE ASSESSEE FURTHER FAILED TO CLAIM DEPRECIATION BEFOR E THE ASSESSING OFFICER DURING THE ENTIRE ASSESSMENT PROCEEDINGS AN D FURTHER FAILED TO CLAIM DEPRECIATION BEFORE THE DRP. THE D R CONCLUDED BY SAYING THAT AT THIS STAGE THE ADDITIONAL GROUND RAI SED BY THE ASSESSEE SHOULD NOT BE ADMITTED. 20 36. PER CONTRA THE COUNSEL FOR THE ASSESSEE STATED THAT BEING A LEGAL CLAIM THE ASSESSEE CAN RAISE THE ISSUE FOR TH E FIRST TIME BEFORE THE TRIBUNAL. STRONG RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF NTPC LIMITED 2 29 ITR 383. 37. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. DEPRECIATION ON GOODWILL IS NO MORE RE S-INTEGRA AS THIS ISSUE HAS BEEN SETTLED DOWN BY THE HONBLE SUP REME COURT IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE IN T HE CASE OF CIT VS. SMIFS SECURITIES LIMITED 348 ITR 302 WHERE IN T HE HONBLE SUPREME COURT WAS CONCERNED WITH CLAIM OF DEPRECIAT ION ON GOODWILL MADE BY THE AMALGAMATED COMPANY. 38. HOWEVER, THE ISSUE WHICH HAS TO BE DECIDED FIRS T IS WHETHER SUCH CLAIM OF DEPRECIATION CAN BE MADE FOR THE FIRS T TIME AT THIS STAGE IN THE LIGHT OF THE RATIO LAID DOWN BY THE HO NBLE SUPREME COURT IN THE CASE OF NTPC LIMITED (SUPRA). 39. THE HONBLE SUPREME COURT IN THE CASE OF NTPC L IMITED (SUPRA) REFRAMED THE QUESTION FOR CONSIDERATION AS FOLLOWS :- 21 QUES : WHERE ON THE FACTS FOUND BY THE AUTHORITIES BELOW A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHORI TIES) WHICH BEARS ON THE TAX LIABILITY OF THE ASSESSEE, WHETHER THE TRIB UNAL HAS JURISDICTION TO EXAMINE THE SAME ? 40. THE HONBLE SUPREME COURT ANSWERED AS UNDER :- ANS : UNDER SECTION 254 OF THE INCOME TAX ACT, THE APPELLATE TRIBUNAL MAY AFTER GIVING BOTH THE PARTIES TO THE APPEAL AN OPPORTUNITY OF BEING HEARD, PASS SUCH ORDERS THEREON AS IT THINKS FIT. T HE POWER OF THE TRIBUNAL IN DEALING WITH APPEAL IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS B EFORE THE TAXING AUTHORITIES IS TO ASSESSEE CORRECTLY THE TAX LIABIL ITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUN AL, IT IS FOUND THAT A NON-TAXABLE ITEMS IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED, WE DO NOT SEE ANY REASON WHY THE ASSESSEE SHOULD BE PREVEN TED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIM E, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THAT ITEM . WE DO NOT SEE ANY REASON TO RESTRICT THE POWER OF THE TRIBUNAL UNDER S ECTION 254 ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF THE C OMMISSIONER OF INCOME TAX (APPEALS). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL / CROSS-OBJECTIONS B EFORE THE TRIBUNAL. WE 22 FAIL TO SEE WHY THE TRIBUNAL SHOULD BE PREVENTED FROM CONSIDERING QUESTIONS OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. IN THE CASE OF JUTE CORPORATION OF INDIA LTD. CIT [1 991] 187 ITR 688, THIS COURT, WHILE DEALING WITH THE POWER OF TH E APPELLATE ASSISTANT COMMISSIONER OBSERVED THAT AN APPELLATE AUTHORITY HA S ALL THE POWERS WHICH THE ORIGINAL AUTHORITY MAY HAVE IN DECIDING TH E QUESTION BEFORE IT SUBJECT TO THE RESTRICTIONS OR LIMITATIONS, IF ANY, PRESCRIBED BY THE STATUTORY PROVISIONS. IN THE ABSENCE OF ANY STATUTO RY PROVISION, THE APPELLATE AUTHORITY IS VESTED WITH ALL THE PLENARY P OWERS WHICH THE SUBORDINATE AUTHORITY MAY HAVE IN THE MATTER. THERE IS NO GOOD REASON TO JUSTIFY CURTAILMENT OF THE POWER OF THE APPELLAT E ASSISTANT COMMISSIONER IN ENTERTAINING AN ADDITIONAL GROUND RAI SED BY THE ASSESSEE IN SEEKING MODIFICATION OF THE ORDER OF AS SESSMENT PASSED BY THE INCOME-TAX OFFICER. THIS COURT FURTHER OBSERVED THAT THERE MAY BE SEVERAL FACTORS JUSTIFYING THE RAISING OF A NEW PLE A IN AN APPEAL AND EACH CASE HAS TO BE CONSIDERED ON ITS OWN FACTS. THE APPELLATE ASSISTANT COMMISSIONER MUST-BE-SATISFIED THAT THE GROUND RAISE D WAS BONA FIDE AND THAT THE SAME COULD NOT HAVE BEEN RAISED EARLIER FOR GOOD REASONS. THE APPELLATE ASSISTANT COMMISSIONER SHOULD EXERCISE HIS DISCRETION IN PERMITTING OR NOT PERMITTING THE ASSESSEE TO RAISE AN ADDITIONAL GROUND 23 IN ACCORDANCE WITH LAW AND REAON. THE SAME OBSERVATI ONS WOULD APPLY TO APPEALS BEFORE THE TRIBUNAL ALSO. THE VIEW THAT THE TRIBUNAL IS CONFINED ONLY TO ISSUE S ARISING OUT OF THE APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (A PPEALS) TAKES TOO NARROW A VIEW OF THE POWERS OF THE APPELLATE TR IBUNAL (VIDE, E.G., CIT V. ANAND PRASAD [1981] 128 ITR 388 (DELHI), CIT V. KARAMCHAND PREMCHAND P. LTD. [1969] 74 ITR 254 (GUJ) A ND CIT V. CELLULOSE PRODUCTS OF INDIA LTD. [1985] 151 ITR 499 ( GUJ) [FB]). UNDOUBTEDLY, THE TRIBUNAL WILL HAVE THE DISCRETION TO ALLOW OR NOT ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUN AL IS ONLY REQUIRED TO CONSIDER A QUESTION OF LAW ARISING FROM T HE FACTS WHICH ARE ON RECORD IN THE ASSESSMENT PROCEEDINGS WE FAIL TO SEE WHY SUCH A QUESTION SHOULD NOT BE ALLOWED TO BE RAISED WH EN IT IS NECESSARY TO CONSIDER THAT QUESTION IN ORDER TO CORRE CTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. THE REFRAMED QUESTION, THEREFORE, IS ANSWERED IN THE AFFIRMATIVE, I.E. THE TRIBUNAL HAS JURISDICTION TO EXAMINE A QUE STION OF LAW WHICH ARISES FROM THE FACTS AS FOUND AS FOUND BY THE AUTHORITIES BELOW AND HAVING A BEARING ON THE TAX LIABILITY OF T HE ASSESSEE. WE REMAND THE PROCEEDINGS TO THE TRIBUNAL FOR CONSIDERA TION OF THE NEW GROUNDS RAISED BY THE ASSESSEE ON THE MERITS. 41. IN OUR UNDERSTANDING OF THE DECISION OF HONBLE SUPREME COURT (SUPRA), THE EMPHASIS IS ON FACTS AS FOUND B Y THE AUTHORITIES BELOW AND HAVING BEARING ON THE TAX LIA BILITY OF THE 24 ASSESSEE ON SUCH EMPHASIS THE HONBLE SUPREME COUR T HELD THAT THE TRIBUNAL HAS JURISDICTION TO EXAMINE THE QUESTI ON OF LAW. 42. THE FACT THAT THE SCHEME OF AMALGAMATION APPROV ED BY THE HONBLE HIGH COURT IS AVAILABLE ON RECORD. GOODWIL L WAS SHOWN AS AN INTANGIBLE ASSET IN THE BALANCE SHEET AND WAS AVAILABLE BEFORE THE ASSESSING OFFICER AT THE TIME OF THE ASS ESSMENT PROCEEDINGS. EXPLANATION-5 TO SECTION 32 (1) OF TH E ACT READS AS UNDER :- FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED TH AT THE PROVISIONS OF THIS SUB-SECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED THE DEDUCTION IN RESPECT OF DEPRE CIATION IN COMPUTING HIS TOTAL INCOME 43. THIS WAS VERY MUCH AVAILABLE BEFORE THE ASSESSI NG OFFICER. EVEN IF THE ASSESSEE HAD NOT CLAIMED DEPRECIATION O N GOODWILL, THE ASSESSING OFFICER WAS DUTY BOUND TO COMPUTE THE DEP RECIATION AS PER THE PROVISIONS OF THE LAW. 25 44. THE CONTENTION OF THE DR THAT THE ASSESSEE HAD SEVERAL OPPORTUNITIES TO CLAIM DEPRECIATION IS NOT ACCEPTAB LE BECAUSE WHEN THE ASSESEE FILED ITS RETURN OF INCOME THE CLA IM OF DEPRECIATION ON GOODWILL WAS HIGHLY DEBATABLE ISSUE . IT IS ONLY AFTER THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SMIFS SECURITIES 348 ITR 302 THE ISSUE ATTAINED FIN ALITY AS THE HONBLE SUPREME COURT HAS HELD THAT GOODWILL IS AN INTANGIBLE ASSET. 45. SINCE ALL THE FACTS RELATING TO THE CREATION OF GOODWILL ARE AVAILABLE ON THE RECORD, WE HAVE NO HESITATION IN A DMITTING THE ADDITIONAL GROUND FOR THE ADJUDICATION. 46. HAVING ADMITTED THE ADDITIONAL GROUND RELATING TO THE CLAIM OF DEPRECIATION LET US NOW EXAMINE THE FACTS RELATI NG TO THE CREATION OF GOODWILL. 47. FUTURE SOFTWARE LIMITED (FSL) WAS INCORPORATE D ON MAY 22, 1985 AS FUTURE SOFTWARE SYSTEMS LIMITED AND ITS NAM E WAS CHANGED TO FSL ON AUGUST 24, 2000. 26 FSSL WAS INCORPORATED IN INDIA ON DECEMBER 30, 1991 AS HUGHES SOFTWARE SYSTEMS LIMITED. THEREAFTER, ITS NA ME WAS CHANGED TO FSSL ON FEBRUARY 18, 2005. AS ON OCTOBER 27, 2006, THE ASSESSEE HELD 82.01 PER CENT STAKE IN FSL. THE ASSESSEE [EARLIER KNOWN AS KAPPA INVESTMENT LIM ITED (KIL)], AN UNLISTED INDIAN COMPANY, WAS INCORPORA TED ON JUNE 14, 2006 FOR THE PURPOSE OF PROMOTING, ESTABLISHING , FORMING, ACQUIRING OR INVESTING IN ENTITIES ENGAGED IN THE B USINESS OF DESIGNING, DEVELOPING, MARKETING AND DISTRIBUTING I T SOFTWARE AND HARDWARE. THE ASSESSEE (EARLIER KNOWN AS KIL) COMME NCED BUSINESS ON AUGUST 11, 2006 AND ACQUIRED CONTROLLIN G EQUITY STAKE IN FSSL AND FSL. IN ORDER TO FUND THE AMALGAMATION OF FSSL AND FSL W ITH THE ASSESSEE, THE PARENT COMPANY OF THE ASSESSEE INVEST ED ADDITIONAL FUNDS OF ABOUT RS.2,462 CRORES IN THE ASSESSEE FOR ACQUIRING SHARES IN FSSL AND FSL. THEREAFTER, FSSL AND FSL AMALGAMATED INTO THE ASSES SEE WITH EFFECT FROM APRIL 1, 2007 UNDER A SCHEME OF AR RANGEMENT & AMALGAMATION ('SCHEME OF MERGER) UNDER THE PROVISI ONS OF SECTION 391 TO 394 OF THE COMPANIES ACT, 1956. THE SAID SCHEME OF MERGER WAS ALSO IN ACCORDANCE WITH THE PROVISION S OF SECTION 2(1 B) OF THE INCOME-TAX ACT, 1961 (ACT) AND THE SHAREHOLDERS OF FSSL AND FSL WERE ISSUED SHARES IN THE ASSESSEE (EA RLIER KNOWN AS KIL), PURSUANT TO THE SAID MERGER. 27 48. THE SCHEME OF ARRANGEMENT APPROVED BY HONBLE H IGH COURT WHICH WAS BETWEEN FLEXTRONICS SOFTWARE SYSTEMS LIMI TED (FSSL) AND FUTURE SOFTWARE LIMITED (FSL) AND KAPPA INVESTM ENTS LIMITED CLAUSE 15.8 READ :- 15.8 THE AMOUNT REPRESENTING THE DIFFERENT BETWEEN (A) THE AGGREGATE VALUE OF : (A) BOOK VALUE OF INVESTMENT IN THE EQUITY SHARES OF FLEXTRONICS SOFTWARE IN THE BOOKS OF KAPPA CANCELLED PURSUANT TO CLAUSE 14.1 (B) BOOK VALUE OF INVESTMENT IN THE EQUITY SHARES OF FUTURE SOFT IN THE BOOKS OF FLEXTRONICS SOFTWARE CANCELLED PURSUANT TO CLAUSE 14.2 AND (B) THE AGGREGATE VALUE OF : (A) FACE VALUE OF SHARE CAPITAL OF FLEXTRONICS SOFTWARE HELD BY KAPPA (B) FACE VALUE OF SHARE CAPITAL OF FUTURE SOFT BY FLEXTRONICS SOFTWARE SHALL BE DEBITED TO GOODWILL IN THE BALANCE SHEET O F KAPPA. 49. THE ISSUE OF SHARES / ACCOUNTING TREATMENT HAS BEEN DEALT IN THE SCHEME OF ARRANGEMENT AT CLAUSE 13 AND THE H ONBLE HIGH COURT HELD :- THIS COURT DOTH HEREBY SANCTION THE SCHEME OF ARR ANGEMENT 28 SET FORTH IN SCHEDULE-I ANNEXED HERETO AND DOTH HER EBY DECLARE THE SAME TO BE BINDING ON ALL THE SHAREHOLDERS AND CRED ITORS OF THE TRANSFEROR AND TRANSFEREE COMPANIES AND ALL CONCERN ED AND DOTH APPROVE THE SAID SCHEME OF ARRANGEMENT WITH EFFECT FROM THE APPOINTED DATE I.E. 01.04.2007. 50. THE SALIENT FEATURES OF THE SCHEME OF AMALGAMAT ION ARE AS FOLLOWS : (A) THE SCHEME WAS SANCTIONED BY THE HIGH COURT OF DELHI ON MAY 16, 2007 WITH RETROSPECTIVE EFFECT FROM APRI L 1, 2007, BEING THE APPOINTED DATE OF THE MERGER AND AU GUST 10, 2007, BEING THE EFFECTIVE DATE OF AMALGAMATION FOR ACCOUNTING PURPOSE; (B) ASSESSEE ADOPTED POOLING-OF-INTEREST ACCOUNTING METHOD AS APPROVED BY HIGH COURT FOR THE PURPOSE OF TRANSFERRING THE ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANIES AT THEIR RESPECTIVE BOOK VAL UE, WHICH WAS SUBJECT TO THE ADJUSTMENTS MADE FOR THE DIFFERENCE IN THE ACCOUNTING POLICIES BETWEEN THE T WO COMPANIES AS SPECIFIED IN THE SCHEME OF AMALGAMATIO N; (C) AS PER CLAUSE 1(E) AND 1(G) OF THE AMALGAMATION SCHEME, THE DETAILS OF ASSETS AND LIABILITIES OF FS SL AND FSL WHICH WERE TO VEST ON THE ASSESSEE, AFTER THE AMALGAMATION WERE AS FOLLOWS: 29 ALL SECURED AND UNSECURED DEBTS, PRESENT AND FUTURE LIABILITIES, CONTINGENT LIABILITIES, DUTIES AND OBL IGATIONS AND ALL ASSETS AND PROPERTIES, WHEREVER SITUATED WHETHE R MOVABLE OR IMMOVABLE, REAL OR PERSONAL, IN POSSESSI ON OR REVERSION, CORPOREAL OR INCORPOREAL, TANGIBLE OR IN TANGIBLE, PRESENT OR CONTINGENT, ALL LAND AND BUILDINGS, ALL PLANT AND MACHINERIES, COMPUTERS AND ACCESSORIES, SOFTWARE, LEASEHOLD IMPROVEMENTS, VEHICLES, FIXED ASSETS, WOR K-IN- PROGRESS, APPLIANCES, ACCESSORIES, SUNDRY DEBTORS, INVENTORIES CURRENT ASSETS, DEFERRED TAX ASSETS, IN VESTMENTS INCLUDING INVESTMENTS IN OVERSEAS SUBSIDIARIES, OVE RSEAS OFFICES, RESERVES, PROVISIONS, FUNDS, AS ON THE APP OINTED DATE. OFFICES, IMPORT ENTITLEMENTS, IMPORT LICENSES, OTHE R LICENSES, REGISTRATIONS, COPYRIGHTS, PATENTS, TRADE NAMES, TR ADEMARKS, APPLICATIONS OF COPYRIGHTS, PATENTS, TRADE NAMES, A ND TRADEMARKS, ANY OTHER INTELLECTUAL PROPERTY RIGHTS WHETHER REGISTERED OR NOT, LABELS, LABEL DESIGNS, QUALITY C ERTIFICATES, LEASES, LICENSES, TENANCY RIGHTS, PREMISES, HIRE PU RCHASE AND LEASE AGREEMENTS, OFFICE EQUIPMENT, ELECTRICAL FITT INGS, FURNITURE AND FITTINGS, CAPITAL WORK-IN-PROGRESS, T ELEPHONES, TELEXES, EMAIL AND FACSIMILE CONNECTIONS, COMMUNICA TION FACILITIES, EQUIPMENT AND INSTALLATIONS AND UTILITI ES, ELECTRICITY, WATER AND OTHER SERVICE CONNECTIONS, B ENEFITS OF AGREEMENTS, CONTRACTS AND ARRANGEMENTS INCLUDING CU STOMER CONTRACTS ETC AND ALL THE RIGHTS, TITLE, INTEREST, GOODWILL BENEFIT AND ADVANTAGE ETC. 30 D) AS PER THE SCHEME OF AMALGAMATION AGREEMENT, EQU ITY SHARES OF ASSESSEE WERE ALLOTTED TO THE SHAREHOLDER S OF FSSL AND FSL IN THE FOLLOWING AGREED RATIO: TO THE SHAREHOLDERS OF FSSL: 810 EQUITY SHARES OF RS.10 EACH OF ASSESSEE ISSUED FOR EVERY 100 EQUITY SHARES OF RS.5 EACH HELD BY THE SHAREHOLDER OF FSSL; TO THE SHAREHOLDERS OF FSL: 50 EQUITY SHARES OF RS. 10 EACH OF ASSESSEE ISSUED FOR EVERY 100 EQUITY SHARES OF R S.5 EACH HELD BY THE SHAREHOLDER OF FSL RE : GOODWILL RECOGNITION /COMPUTATION FOR THE PURPOSE OF AMALGAMATION, THE INTRINSIC VALU E OF EQUITY SHARE OF EACH OF KIL, FSSL AND FSL, BASED O N NET- WORTH OF THESE COMPANIES FOR THE PURPOSE OF AMALGAM ATION, WAS DETERMINED ON THE BASIS OF VALUATION REPORT DAT ED 10.11.2006 OBTAINED FROM ERNST & YOUNG (EY) AS UN DER : S. NO. NAME OF THE COMPANY NO. OF EQUITY SHARES INSTRINSIC VALUE OF EQUITY SHARE FAIR VALUE (IN RS. CRS.) REMARKS/ VALUATION METHODOLOGY 31 1 ASSESSEE COMPANY 9.51 CRS RS.110.7 RS.1,053 BASED ON NAV METHOD 2 FLEXTRONICS SOFTWARE SYSTEMS LIMITED 3.31 CRS RS.897.2 RS.2,967 BASED ON WEIGHTED AVERAGE METHOD 3 FUTURE SOFTWARE LIMITED 4.41 CRS RS.55.9 RS.246 BASED ON WEIGHTED AVERAGE METHOD THEREAFTER, ON THE BASIS OF THE INTRINSIC VALUE (RE FER SUPRA), EQUITY SHARES OF ASSESSEE WERE ALLOTTED TO THE SHAR EHOLDERS OF FSSL AND FSL, AS UNDER : TO THE SHAREHOLDERS OF FSSL: 810 EQUITY SHARES OF RS.10 EACH OF ASSESSEE ISSUED FOR EVERY 100 EQUITY SHARES OF RS.5 EACH HELD BY THE SHAREHOLDER OF FSSL; TO THE SHAREHOLDERS OF FSL: 50 EQUITY SHARES OF RS.10 EACH OF ASSESSEE ISSUED FOR EVERY 100 EQUITY SHARES OF RS.5 EACH HELD BY THE SHAREHOLDER OF FSL. THE AFORESAID EXCHANGE RATIO WAS DULY APPROVED IN T HE MEETING OF THE SHAREHOLDERS OF FSSL AND BY THE HON BLE 32 HIGH COURT, AS PART OF THE SCHEME OF AMALGAMATION. THE AGGREGATE FAIR VALUE OF ACQUIRED BUSINESSES, I. E., FSSL AND FSL WAS DETERMINED AT RS.3,213 CRORES, AS FOLLO WS: RS. IN CRORES 3.31 CRORE EQUITY SHARES OF FSSL @ 897.20 = 2,967. 14 4.41 CRORE EQUITY SHARES OF FSL @ 55.90- = 246.2 6___ 3 , 213.40 THE DETAILS OF FAIR VALUE AND ACTUAL DISCHARGE OF P URCHASE CONSIDERATION BY THE ASSESSE ARE PROVIDED BELOW FOR REFERENCE: 33 THE AFORESAID FACTS WERE DULY STATED VIDE NOTE NO1 AND 5 OF THE NOTES TO ACCOUNTS, FORMING PART OF THE AUDITED ACCOUNTS FOR THE FINANCIAL YEAR 2007-08. THE SAME IS REPRODUCED HERE UNDER : THE EXCESS OF BOOK VALUE OF INVESTMENTS IN EQUITY SHARES AND THE FACE VALUE OF INVESTMENTS IN EQUITY SHARES OF FLEXTRONICS SOFTWARE SYSTEMS LIMITED RECORDED IN THE BOOKS OF A CCOUNT OF ARICENT 'TECHNOLOGIES (HOLDINGS) LIMITED AND THAT O F FUTURE SOFTWARE LIMITED RECORDED IN THE BOOKS OF ACCOUNT O F FLEXTRONICS SOFTWARE SYSTEMS LIMITED HAS BEEN DEBITED TO GOODWI LL IN SCHEDULE D. IN TERMS OF THE SCHEME OF AMALGAMATION, THE GOODWILL WILL NOT BE AMORTISED BUT WILL HE TESTED FOR IMPAIR MENT AT EACH BALANCE SHEET DATE IN ACCORDANCE WITH GENERALLY ACC EPTED ACCOUNTING PRINCIPLES IN INDIA AND THE PRESCRIBED A CCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCO UNTANTS OF INDIA. AS PER THE METHODOLOGY APPROVED AS PART OF THE SCHE ME OF AMALGAMATION, THE COMPUTATION OF GOODWILL ARISING O N AMALGAMATION OF FSSL AND FSL WITH THE ASSESSEE COMP ANY, IS DEMONSTRATED HEREUNDER : 34 IN THIS REGARD, IT WOULD BE PERTINENT TO MENTION TH AT THE AFORESAID AMOUNT OF GOODWILL COMPRISES OF THE VARIO US INTANGIBLE ASSETS, AS MENTIONED HEREUNDER : (I) REPUTATION (II) CUSTOMER RELATIONSHIP/CONTRACTS (III) TECHNOLOGY FOR BUSINESS VERTICALS, E.G. TECHNOLOGY , DATACOM, SS7, VOIP, WIRELESS AND MOBILE HANDSETS (IV) RECORDS, FILES, ENGINEERING PROCESS INFORMATION, MANUALS, DATA (V) CATALOGUE, QUOTATIONS, SALES AND ADVERTISEMENT MATERIALS, ETC. (VI) PATENTS FOR PROCESSES - IT MAY BE NOTED THAT A LIST OF SUCH PATENTS WERE APPENDED AS SCHEDULE C OF HONBLE HIGH COURT APPROVED SCHEME OF ARRANGEMENT 35 FOR THE MERGER. RE : NET ASSET ACQUIRED FROM FSSL AND FSS BREAK-UP OF NET ASSETS OF FSSL AND FSS AS OF 31 ST MARCH 2007 I.E. PRIOR TO THE AMALGAMATION IS AS FOLLOWS : IN THIS REGARD, IT WOULD ALSO BE PERTINENT TO MENTI ON THAT THE AFORESAID MECHANISM HAS BEEN DULY CERTIFIED BY THE TAX AUDITOR OF THE ASSESSEE COMPANY INASMUCH AS THE SAM E WAS DULY 36 REFLECTED UNDER THE HEAD 'INTANGIBLE ASSETS IN THE DEPRECIATION CHART AS PER CLAUSE 14 OF THE TAX AUDIT REPORT IN F ORM 3CD, WHICH WAS FILED BEFORE THE ASSESSING OFFICER, DURIN G THE COURSE OF THE ASSESSMENT PROCEEDINGS. 51. THIS IS HOW THE GOODWILL WAS ACQUIRED AND FOUND PLACE IN THE BOOKS OF THE ASSESSEE DULY REFLECTED IN THE FIX ED ASSETS SCHEDULE. 52. THE DR VEHEMENTLY STATED THAT GOODWILL ACQUIRED PURSUANT TO AMALGAMATION, IS NOTHING BUT A BOOK ENTRY TO ACC OUNT FOR THE DIFFERENCE BETWEEN THE CONSIDERATION AND THE NET AS SETS ACQUIRED. ELABORATE FACTUAL EXERCISE, IN ACCORDANC E WITH RELEVANT ACCOUNTING STANDARDS (PRESENT 1ND AS 103 AS 38, 37 AND OTHERS, OR THE RELEVANT STANDARDS APPLICABLE TO THE RELEVAN T YEAR) HAS TO BE CARRIED OUT TO ASCERTAIN WHETHER SUCH DIFFERENCE IS TO BE RECOGNIZED AS GOODWILL OF AMALGAMATION OR NOT. 53. THIS CONTENTION OF THE DR IS NOT ACCEPTABLE AS THE HONBLE HIGH COURT IN ITS ORDER GIVING EFFECT TO THE SCHEME OF AMALGAMATION MENTIONED ELSEWHERE HAS CLEARLY STATED THAT THE DIFFERENCE IN THE NET ASSET VALUE OF FSSL AND FSL A ND THE CONSIDERATION PAID BY THE ASSESSEE SHALL BE TOWARDS GOODWILL. 54. THE DR FURTHER CONTENDED THAT THE GOODWILL GENE RATED IN THE PROCESS OF AMALGAMATION WAS USED FOR THE PURPOS E OF BUSINESS OF THE ASSESSEE FOR THE ENTIRE PREVIOUS YE AR OR ONLY AFTER THE DATE OF AMALGAMATION IS NOT KNOWN. AS CAN BE S EEN FROM THE 37 SCHEME SANCTIONED BY THE HONBLE HIGH COURT VIDE OR DER DATED 16.05.2007 THE SCHEME HAS BEEN GIVEN A RETROSPECTIV E FROM 01.04.2007 BEING THE APPOINTED DATE OF THE MERGER A ND 10.08.2007 BEING THE EFFECTIVE DATE OF AMALGAMATION FOR ACCOUNTING PURPOSE. THUS IT CAN BE SEEN THAT THE DA TE OF AMALGAMATION FOR ACCOUNTING PURPOSE IS 10.08.2007. 55. THE ANOTHER CONTENTION OF THE LD. DR IS THAT TH ERE IS NO COST OF ACQUISITION OF GOODWILL, THEREFORE, THE ACTUAL C OST OF GOODWILL OF AMALGAMATION IS ZERO. TO BUTTERRESS HIS CLAIM THE DR STATED THAT SUCH CLAIM OF DEPRECIATION IS WITHOUT SANCTION OF THE LAW. REFERRING TO THE RELEVANT PORTION OF SECTION 32 OF THE ACT THE DR STATED THAT THE TERM USED U/S. 32 (1) (II) MUST BE UNDERSTOOD IN LIGHT OF TERMS PLACED BEFORE IT AND THEREFORE THE Q UESTION IS THAT UNDER EXAMINATION IS NOT WHETHER DEPRECIATION IS AL LOWABLE ON GOODWILL ACQUIRED/ CREATED DURING AMALGAMATION. TH E DR FURTHER STATED THAT AS PER SECTION 32(1) OF THE ACT 'DEPRECIATION', IN THE CASE OF ANY BLOCK OF ASSETS, IS TO BE COMPUT ED ON THE WRITTEN DOWN VALUE. ACCORDING TO EXPLANATION 2 OF S ECTION 32(1) 'WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS' SHALL H AVE THE SAME MEANING AS IN SECTION 43 (6) (C). THIS SECTION LAYS DOWN THE MEANING OF THE TERM 'WRITTEN DOWN VALUE', AS UNDER: 43(6) 'WRITTEN DOWN VALUE' MEANS (A) IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEA R, THE ACTUAL COST TO THE ASSESSEE; (B) IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, 38 THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATI ON ACTUALLY ALLOWED TO HIM UNDER THIS ACT, OR UNDER TH E INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), OR ANY AC T REPEALED BY THAT ACT, OR UNDER ANY EXECUTIVE ORDERS ISSUED WHEN THE INDIAN INCOME-TAX ACT, 1886 (2 OF 1886), WAS IN FORCE: PROVIDED THAT IN DETERMINING THE WRITTEN DOWN VALUE IN RESPECT OF BUILDINGS, MACHINERY OR PLANT FOR THE PURPOSES OF CLAUSE (II) OF SUB-SECTION (1) OF SECTI ON 32, 'DEPRECIATION ACTUALLY ALLOWED' SHALL NOT INCLUDE DEPRECIATION ALLOWED UNDER SUB-CLAUSES (A), (B) AND (C) OF CLAUSE (VI) OF SUB-SECTION (2) OF SECTION 10 OF THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), WHERE SUCH DEPRECIATION WAS NOT DEDUCTIBLE IN DETERMINING THE WRITTEN DOWN VALUE FOR THE PURPOSES OF THE SAID CLA USE (VI); (C) IN THE CASE OF ANY BLOCK OF ASSETS, (I) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, THE AGGREGATE OF THE WRITTEN DOWN VALUES OF A LL THE ASSETS FALLING WITHIN THAT BLOCK OF ASSETS AT T HE BEGINNING OF THE PREVIOUS YEAR AND ADJUSTED, (A) BY THE INCREASE BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK, ACQUIRED DURING THE PREVIOUS YEAR; (B) BY THE REDUCTION OF THE MONEYS PAYABLE IN RESPECT 39 OF ANY ASSET FALLING WITHIN THAT BLOCK, WHICH IS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THAT PREVIOUS YEAR TOGETHER WITH THE AMOUNT OF THE SCRAP VALUE, IF ANY, SO, HOWEVER, THAT THE AMOUNT OF SUCH REDUCTION DOES NOT EXCEED THE WRITTEN DOWN VALUE AS SO INCREASED; AND (C) IN THE CASE OF A SLUMP SALE, DECREASE BY THE ACTUAL COST OF THE ASSET FALLING WITHIN THAT BLOCK AS REDUCED (A) BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED TO HIM UNDER THIS ACT OR UNDER THE CORRESPONDING PROVISIONS OF THE INDIAN INCOME- TAX ACT, 1922 (11 OF 1922) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING BEFORE THE 1ST DAY OF APRIL, 1988; AND (B) BY THE AMOUNT OF DEPRECIATION THAT WOULD HAVE BEEN ALLOWABLE TO THE ASSESSEE FOR ANY ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1988 AS IF THE ASSET WAS THE ONLY ASSET IN THE RELEVANT BLOCK OF ASSETS, SO, HOWEVER, THAT THE AMOUNT OF SUCH DECREASE DOES NOT EXCEED THE WRITTEN DOWN VALUE; (II) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO TH E ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1989, THE WRITTEN DOWN VALUE OF THAT BLOC K OF 40 ASSETS IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED IN RESPECT OF THAT BLOCK OF ASSETS IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR AND AS FURTHER ADJUSTED BY THE INCREASE OR THE REDUCTION REFERRED TO IN ITEM ( I). 56. THUS, IF AN ASSET IS ACQUIRED DURING THE PREVIO US YEAR AND IT FALLS IN A BLOCK OF ASSET (LIKE INTANGIBLE IN THIS CASE), THEN THE WRITTEN DOWN VALUE OF THAT BLOCK OF ASSET (TO WHICH SUCH ACQUIRED ASSET BELONGS) WOULD BE INCREASED BY THE ACTUAL COS T OF THE ASSET ACQUIRED. NOW DEFINITION OF 'ACTUAL COST' IS GIVEN IN SECTION 43(1). ACCORDING TO THIS 'ACTUAL COST' MEANS THE ACTUAL CO ST OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRE CTLY BY ANY OTHER PERSON OR AUTHORITY. EXPLANATION 7 OF SECTION 43(1) READS AS BELOW: EXPLANATION 7. WHERE, IN A SCHEME OF AMALGAMATION, ANY CAPITAL ASSET IS TRANSFERRED BY THE AMALGAMATING CO MPANY TO THE AMALGAMATED COMPANY AND THE AMALGAMATED COMPANY IS AN INDIAN COMPANY, THE ACTUAL COST OF THE TRANSFERRED CAPITAL ASSET TO THE AMALGAMATED COMPANY SHALL BE T AKEN TO BE THE SAME AS IT WOULD HAVE BEEN IF THE AMALGAMATI NG COMPANY HAD CONTINUED TO HOLD THE CAPITAL ASSET FOR THE PURPOSES OF ITS OWN BUSINESS. 41 57. IN THE CASE BEFORE US, GOODWILL WAS TRANSFERRED BY THE AMALGAMATING COMPANY (FSL AND FSSL) TO AMALGAMATED COMPANY (ASSESSEE). ACCORDING TO THIS EXPLANATION, THE 'ACTUAL COST' OF GOODWILL TO THE AMALGAMATED COMPANY (I.E T HE ASSESSEE) SHALL BE SAME AS IT WOULD HAVE BEEN IF THE AMALGAMA TING COMPANIES (FSL AND FSSL) HAD CONTINUED TO HOLD THE CAPITAL ASSET (I.E. GOODWILL) FOR THE PURPOSE OF ITS OWN BU SINESS. SINCE THE ACTUAL COST OF GOODWILL IN THE CASE OF AMALGAMATING COMPANIES IS ZERO, THE ACTUAL COST IN THE CASE OF AMALGAMATED CO MPANY (I.E. ASSESSEE) SHALL ALSO BE ZERO (AND NOT THE AMOUNT IT PAID TO ACQUIRE THE GOODWILL). 58. TO CLARIFY FURTHER, EXPLANATION 2 TO CLAUSE 43 (6)(C) READS AS UNDER EXPLANATION 2. WHERE IN ANY PREVIOUS YEAR, ANY BLO CK OF ASSETS IS TRANSFERRED, (A) BY A HOLDING COMPANY TO ITS SUBSIDIARY COMPANY OR BY A SUBSIDIARY COMPANY TO ITS HOLDING COMPANY AND THE CONDITIONS OF CLAUSE (IV) OR, AS THE CASE MAY B E, OF CLAUSE (V) OF SECTION 47 ARE SATISFIED; OR (B) BY THE AMALGAMATING COMPANY TO THE AMALGAMATED COMPANY IN A SCHEME OF AMALGAMATION, AND THE AMALGAMATED COMPANY IS AN INDIAN COMPANY, THEN, NOTWITHSTANDING ANYTHING CONTAINED IN CLAUSE (1), THE ACTUAL COST OF THE BLOCK OF ASSETS IN THE CASE OF THE TRANSFEREE-COMPANY OR THE AMALGAMATED COMPANY; AS 42 THE CASE MAY BE, SHALL BE THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AS IN THE CASE OF THE TRANSFEROR-CO MPANY OR THE AMALGAMATING COMPANY FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE SA ID PRECEDING PREVIOUS YEAR. THUS THE ACT CLEARLY LAY DOWN THAT THE ACTUAL COST OF THE BLOCK OF ASSET (INTANGIBLE BLOCK IN THIS CASE) IN THE HAN D OF THE AMALGAMATED COMPANY (ASSESSEE) WOULD BE WRITTEN DOW N VALUE IN THE IMMEDIATE PRECEDING YEAR IN THE CASE OF AMAL GAMATING COMPANIES. SINCE, THE WRITTEN DOWN VALUE OF THE INT ANGIBLE BLOCK OF ASSET WAS ZERO IN THE BOOKS OF THE AMALGAM ATING COMPANIES, THE ACTUAL COST WOULD REMAIN ZERO IN THE HAND OF AMALGAMATED COMPANY (THE ASSESSEE). THE WRITTEN DOW N VALUE OF BLOCK OF ASSETS 'INTANGIBLES/GOODWILL' IN THE IM MEDIATELY PRECEDING PREVIOUS YEAR (I.E. FY 2006-07 FOR AY 200 8-09) WAS ZERO. FURTHER, THERE IS NO ACTUAL COST INCURRED FOR ACQUISITION OF GOODWILL DURING THE PREVIOUS YEAR. HENCE, WDV OF T HIS BLOCK OF ASSETS FOR THE PREVIOUS YEAR WILL ALSO BE ZERO. AC CORDINGLY THE DEPRECIATION WILL BE NIL. 59. THE AFORESTATED INTERPRETATION OF THE RELEVANT PROVISIONS, IN OUR UNDERSTANDING OF THE LAW IS NOT CORRECT FOR THE SIMPLE REASON THAT BY VIRTUE OF THE SCHEME OF THE AMALGAMA TION THE APPELLANT PAID CONSIDERATION OVER AND ABOVE THE NET ASSET VALUE OF THE AMALGAMATING COMPANIES AND THEREFORE, THE DI FFERENCE HAS BEEN RIGHTLY TAKEN AS THE COST OF ACQUISITION O F GOODWILL. 43 60. THE DR FURTHER EMPHASIZED THAT IF THE 6 TH PROVISO TO SECTION 32 (I) IS CONSIDERED THE DEPRECIATION UNDER THIS PROVISION IS TO BE RESTRICTED TO THE AMOUNT CONSIDE RING THAT AMALGAMATION HAS NOT TAKEN PLACE AND SINCE IN THE H ANDS OF THE AMALGAMATING COMPANIES THE DEPRECIATION ON GOOD WILL WOULD HAVE BEEN ZERO THERE CANNOT BE DEPRECATION IN THE HAND OF THE AMALGAMATED COMPANY. IN SUPPORT RELIANCE WA S PLACED ON THE DECISION OF THE COORDINATE BENCH OF THE TRIB UNAL BANGALORE IN ITA NO.722, 801 AND 1065/ BANG/ 2014. ONCE AGAIN THE DR IS NOT APPRECIATING THE FACTS OF THE C ASE IN HAND IN THEIR TRUE PERSPECTIVE. IT HAS TO BE UNDERSTOOD THAT THERE WAS NO GOODWILL IN THE BOOKS OF AMALGAMATING COMPAN IES AND ONLY AFTER THE SCHEME OF AMALGAMATION, WHEN THE AMALGAMATING COMPANIES AMALGAMATED, GOODWILL CAME I NTO EXISTENCE BEING THE DIFFERENCE BETWEEN THE CONSIDER ATION PAID BY AMALGAMATED COMPANY OVER AND ABOVE THE NET ASSET VALUE OF THE AMALGAMATING COMPANIES. THE RELIANCE PLACED ON THE JUDGMENT OF COORDINATE BENCH IS MISPLACED IN AS MUC H AS IN THAT CASE THE VALUE OF THE GOODWILL IN THE BOOKS OF AMALGAMATING COMPANY WAS ONLY RS.7.45 CRORES WHICH HAS BEEN SHOWN BY THE ASSESSEE AT RS.62.30 CROES AND ON THIS IT WAS HELD BY THE APPELLATE AUTHORITY THAT THE ASSESS EE HAS FAILED TO JUSTIFY THE VALUATION OF GOODWILL AT RS.62.30 CR ORES. THE FACTS OF THE CASE IN HAND CLEARLY SHOW THE VALUATION OF G OODWILL AS PER THE VALUATION REPORT AND THERE IS NO QUARREL IN SO FAR AS THE NET ASSET VALUE OF THE AMALGAMATING COMPANIES IS CO NCERNED. 44 THE SAME HAS THE SANCTION OF THE HONBLE HIGH COURT . 61. ANOTHER ARGUMENT OF THE DR IS THAT THE ASSESSEE HAS NOT PAID ANYTHING FOR THE GOODWILL ACQUIRED IN BUSINESS RECONSTRUCTION. NO CONSIDERATION CAN BE ASCRIBED TO ACQUISITION OF GOODWILL. THERE WAS NO GOODWILL BEFORE AMALGAMAT ION. HENCE, IT IS NOT A CASE THAT GOODWILL HAS BEEN BOUG HT OR PURCHASED AND THEREFORE, THE COST OF ACQUISITION OF SUCH GOODWILL IN THE HANDS OF THE ASSESSEE SHOULD BE TAK EN AS NIL. ONCE AGAIN THE DR HAS ERRED IN NOT UNDERSTANDING TH E SCHEME OF AMALGAMATION. IN THE ORDER OF THE HONBLE HIGH COURT ITSELF IT IS CLEARLY MENTIONED THAT ANYTHING PAID OVER AND ABOVE THE NET ASSET VALUE OF THE AMALGAMATING COMPANIES SHALL BE TOWARDS GOODWILL. 62. THE DR FURTHER REFERRED TO THE DECISION RELIED UPON BY THE COUNSEL IN THE CASE OF SMIFS SECURITIES 348 ITR 302 AND STATED THAT THE HONBLE SUPREME COURT HAS ONLY LAID DOWN T HE RATIO THAT GOODWILL IS AN INTANGIBLE ASSET AND ELIGIBLE F OR DEPRECATION BUT HAS NOWHERE THE HONBLE SUPREME COURT HAS GIVEN ANY FINDING IN RESPECT OF DEPRECATION ON GOODWILL IN TH E CASE OF AMALGAMATION. WE DO NOT FIND ANY MERIT IN THIS CON TENTION OF THE DR. A CONSPECTUS READING OF THE JUDGMENT OF TH E HONBLE SUPREME COURT CLEARLY SHOW THAT THE HONBLE SUPREME COURT WAS SEIZED WITH THE FACTS OF AMALGAMATION OF ONE CO MPANY WITH THE ASSESSEE COMPANY AND HAS HELD THAT THE EXCESS CONSIDERATION PAID BY IT OVER VALUE OF NET ASSET AC QUIRED OF THE 45 AMALGAMATING COMPANY AMOUNTED TO GOODWILL FOR WHICH THE DEPRECIATION WAS TO BE ALLOWED. THE HONBLE HIGH C OURT OF DELHI IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES PRIVATE LIMITED 331 ITR 192 HAS UPHELD THE FINDINGS OF THE TRIBUNAL THAT PAYMENTS MADE TOWARDS BUSINESS ACQUIRED ON SLU M PRICE AND A PART OF THE PRICE SO PAID WAS ALLOCATED TO TH E INTANGIBLE ASSET COVERED UNDER THE HEAD GOODWILL. 63. CONSIDERING THE SETTLED POSITION OF LAW AND IN THE LIGHT OF THE FACTUAL MATRIX OF THE ASSESSEE DISCUSSED ELSEWH ERE WE DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECATION O N GOODWILL AS PER RATES APPLICABLE FOR THE YEAR UNDER CONSIDERATI ON. 64. IN THE RESULT, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ALLOWED AND APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.2671/DEL/2014 (A. Y. 2009-10) 65. GROUND NO.1 IS OF GENERAL IN NATURE AND NEEDS N O SEPARATE ADJUDICATION. 66. GROUND NO.2 IS IN RELATION TO THE NON GIVING OF THE CORRECT CREDIT OF PREPARED TAXES, TAX DEDUCTED AT SOURCES A ND MAT CREDIT. 67. WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSIN G OFFICER SHOULD COMPUTE THE CORRECT TAX LIABILITY AND GIVE A LL THE CREDITS 46 OF THE PREPAID TAXES INCLUDING CREDIT OF TDS. THE ASSESSING OFFICER SHOULD ALSO COMPUTE THE MAT CREDIT AS PER T HE PROVISIONS OF THE LAW. WE DIRECT ACCORDINGLY. 68. GROUND NO. 3 AND 4 RELATES TO THE CLAIM OF DEPR ECIATION IN RESPECT OF GOODWILL PURSUANT TO THE SCHEME OF AMALG AMATION. 69. THIS ISSUE HAS BEEN RAISED FOR THE FIRST TIME B EFORE THE TRIBUNAL IN ITA NO.90/DEL/2013 (SUPRA). WE HAVE AD JUDICATED UPON THE ADMISSION OF THE ADDITIONAL GROUND AND THE CLAIM OF DEPRECIATION. FOR A DETAILED DISCUSSION THERE IN W E DIRECT THE ASSESSING OFFICER TO COMPUTE THE DEPRECIATION OF GO ODWILL AS PER THE RATES APPLICABLE FOR THE YEAR UNDER CONSIDERATI ON. 70. GROUND NO.5.1 TO 5.6 TRANSFER PRICING ADJUSTM ENT OF RS.4,83,97,589/- ON ACCOUNT OF PAYMENT OF CORPORATE CHARGES. 71. FACTS ON RECORD SHOW THAT DURING THE YEAR THE A SSESSEE IN THE COURSE OF CARRYING ON OF ITS SOFTWARE DEVELOPME NT BUSINESS HAS ENTERED, INTERALIA, INTO INTERNATIONAL TRANSACT ION OF PAYMENT OF CORPORATE CHARGES OF RS.48397589/-. WE F IND THAT THE ASSOCIATED ENTERPRISES ALLOCATED THESE CORPORAT E CHARGES AMONG THE GROUP COMPANIES ON THE BASIS OF COST + 5% MARKUP WHICH ARE BASED ON THE REPORT PREPARED BY AN INDEPE NDENT CONSULTANT. 47 72. THIS INTERNATIONAL TRANSACTION OF PAYMENT OF CO RPORATE CHARGES WAS BENCH MARKED AND TNMM WAS CONSIDERED AS THE MOST APPROPRIATE METHOD WITH OP/OC AS THE PROFIT LE VEL INDICATOR. BEFORE THE TPO THE ASSESSEE CONTENDED T HAT SINCE THE OPERATING PROFIT MARGIN OF THE ASSESSEE @ 27.36 % IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES @ 14.24%, THE INTERNATIONAL TRANSACTION OF PAYMENT OF CORPORATE C HARGES WAS CONSIDERED TO BE ARMS LENGTH. 73. THIS CONTENTION OF THE ASSESSEE WAS DISMISSED B Y THE TPO WHO WAS OF THE OPINION THAT CUP IS THE MOST APPROPR IATE METHOD. THE TPO FURTHER OBSERVED THAT SINCE THE AS SESSEE HAS NOT RECEIVED ANY ECONOMIC AND COMMERCIAL BENEFITS F ROM SUCH PAYMENT AND THE EVIDENCE OF INCURRING SUCH EXPENDIT URE BY AE HAS NOT BEEN PLACED ON RECORD. THE TPO ADOPTED THE ARMS LENGTH PRICE OF SUCH INTERNATIONAL TRANSACTION AT N IL. THE TPO FURTHER OBSERVED THAT THE ASSESSEE HAS NOT BEEN ABL E TO PROVE THAT IT HAS ACTUALLY RECEIVED SERVICES OF SOME VALU E THAT CALL FOR COST ALLOCATION. THE TPO WAS OF THE FIRM BELIEF TH AT THE QUESTION OF BENEFIT TEST IS A HIGHLY RELEVANT FACTO R IN DETERMINATION OF ALP AS NO INDEPENDENT PERSON WOULD PAY FOR SERVICES UNLESS HE RECEIVES DIRECT OR TANGIBLE BENE FIT OF IT. THE TPO CONSIDERED THE FOLLOWING ISSUES FOR DETERMINATI ON OF ALP IN RESPECT OF THIS INTERNATIONAL TRANSACTION. A. THE TAXPAYER'S AGREEMENT WITH THE ASSOCIATED ENTERPR ISES RELATED TO INTRA GROUP SERVICES IS TO BE EXAMINED TO SEE AS TO WHAT KIND OF SERVICES WERE TO BE PROVIDED BY THE AE TO THE TAXPAYE R. AS NORMALLY 48 SUCH AGREEMENTS REFER TO A LARGE NUMBER OF SERVICES WHICH COULD BE RENDERED BY THE AE, THE TAXPAYER HAS TO SPECIFY THE SERVICE(S) WHICH IS ACTUALLY RECEIVED BY IT FOR WHICH THE PAYMENT IS MADE. B. WHETHER THE TAXPAYER REALLY NEEDED SUCH SERVICES OR NOT. IF SO, WHAT DIRECT OR TANGIBLE BENEFIT IT HAS DERIVED. C. CONTEMPORANEOUS INFORMATION ON THE BASIS OF WHICH RATE OR PAYMENT FOR THE SERVICE IS DETERMINED. THIS INCLUDES THE COST BENEFIT ANALYSIS DONE BY THE TAXPAYER AT THE TIME OF ENTERING INTO AG REEMENT. WHETHER ANY BENCHMARKING ANALYSIS WAS DONE BY THE TAXPAYER SO AS TO COMPARE THE AMOUNT WHICH HE WOULD HAVE PAID TO AN IN DEPENDENT PERSON UNDER SIMILAR CIRCUMSTANCES. D. WHETHER AN INDEPENDENT PERSON WOULD HAVE PAID SUCH A MOUNT IN COMPARABLE CIRCUMSTANCES E. WHETHER THE EXPECTED BENEFIT COMMENSURATE WITH THE PAYMENT F. WHETHER THE TAXPAYER HAS SEPARATELY INCURRED ANY E XPENDITURE ON SIMILAR SERVICE'S AND IF SO THE NECESSITY OF MAKING FURTHER PAYMENT TO THE AE FOR THE SAME ACTIVITY OR IT IS A DUPLICATE PAYMENT. G. WHETHER THE PAYMENT IS IN THE NATURE OF SHAREHOLDER 'S ACTIVITY OR LARGELY FOR THE BENEFIT OF THE AE. H. WHETHER THE AE IS RENDERING SUCH SERVICES TO OTHER A ES OR INDEPENDENT PARTIES AND IF SO THE RATE/ AMOUNT CHARGE D FROM SUCH PERSONS. I. THE COST INCURRED BY THE AE FOR PROVIDING SUCH SERV ICES AND THE BASIS OF ALLOCATION KEY HAS CHARGED ANY MARKUP ON SU CH PAYMENTS THE ARMS LENGTH MARGIN IS ALSO EXAMINED. 49 74. AFTER JOTTING DOWN THE ABOVE MENTIONED POINTS THE TPO OPINED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW AS TO WHEN AND HOW THE VARIOUS SERVICES WERE REQUISITIONED FRO M THE AES, WHETHER THE SERVICES WERE ACTUALLY NEEDED BY IT AND WHETHER THE SAME WERE ACTUALLY RECEIVED BY IT, WHAT COST BE NEFIT ANALYZED WAS DONE PARTICULARLY WHEN A HUGE PAYMENT HAS BEEN MADE BY IT TO THE AES. THE TPO CONCLUDED BY HOLDI NG THAT THE ASSESSEE FAILED TO DEMONSTRATE THE BENEFITS PASSED TO THE ASSESSEE BY THE AE ON AVAILING SUCH SERVICES. APPL YING CUP, THE ALP OF SERVICE FEE WAS DETERMINED AT NIL AND TH E ADDITIONS WERE MADE. 75. THE OBJECTIONS WERE RAISED BEFORE THE DRP. THE DRP CONFIRMED THE ALP DETERMINATION AND THE ADJUSTMENT MADE BY TPO AND FURTHER DIRECTED THE TPO TO TREAT THE ARMS LENGTH PRICE OF FOLLOWING INTERNATIONAL TRANSACTION AGGREGATING TO RS.54858133/- AT NIL. 1. LEGAL AND PROFESSIONAL EXPENSES 2. FACILITY RENTAL 3. INSURANCE 4. REPAIRS AND MAINTENANCE 5. TRAINING 76. AGGRIEVED BY THIS THE ASSESSEE BEFORE US. 77. BEFORE US THE COUNSEL FOR THE ASSESSEE STATED T HAT THE 50 CORPORATE CHARGES RELATES TO THE ENTIRE TURNOVER/ P ROVISION OF SERVICES OF THE ASSESSEE AND CONSTITUTES AN ESSENTI AL PART OF THE COST OF THE SALES. THE COUNSEL ONCE AGAIN REITERAT ED THAT THE OPM OF THE ASSESSEE @ 27.36% IS HIGHER THAN THAT OF ALL THE COMPARABLE COMPANIES @ 14.24%. THE ADJUSTMENT MADE BY THE TPO AND ENHANCED BY THE DRP IS UNWARRANTED AND SHOU LD BE DELETED. IT IS THE SAY OF THE COUNSEL THAT THE ASS ESSEE IS FREE TO CONDUCT BUSINESS IN THE MANNER THAT ASSESSEE DEEMS FIT AND THE COMMERCIAL OR BUSINESS EXPEDIENCY OF INCURRING ANY EXPENDITURE IS TO BE SEEN FROM THE POINT OF VIEW OF THE ASSESSEE. THE COUNSEL FURTHER STATED THAT AS LONG AS THE ITEM OF EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, WHETHER OR NOT SUCH EXPENDITURE ACTUALLY BENEFITS ASSESSEE IS IRRELEVAN T FOR THE PURPOSE OF DETERMINATION OF ALP. 78. THE COUNSEL FURTHER STATED THAT THE TPO/ DRP GR OSSLY ERRED IN HOLDING THAT THE TRANSACTION IS HAVING A BEARING ON INCOME OF THE ASSESSEE AND HENCE TO BE ANALYZED SEPARATELY. 79. REFERRING TO THE ENHANCEMENT IN THE TP ADJUSTME NT BY THE DRP THE COUNSEL STATED THAT WITHOUT GIVING ANY OPPO RTUNITY TO THE ASSESSEE THE TPO HAS MADE AN ADJUSTMENT OF RS.54858133/-. IN SUPPORT THE COUNSEL MOVED AN APP LICATION FOR ADMISSION OF ADDITIONAL EVIDENCE AND PRAYED FOR THE DELETION OF ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF REIMBUR SEMENT OF EXPENSES. 51 80. PER CONTRA THE DR STRONGLY SUPPORTED THE FINDIN GS OF THE TPO/ DRP. IT IS THE SAY OF THE DR THAT THE EVIDENC ES FURNISHED BY THE ASSESSEE DO NOT SHOW THAT THEY ARE FROM THE THIRD PARTY. IT IS THE SAY OF THE DR THAT SUCH EVIDENCES NEED FU RTHER VERIFICATION FROM TPO FOR FRESH ADJUDICATION. 81. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW. IN SO FAR AS THE QUARREL RE LATING TO THE TP ADJUSTMENT MADE BY THE TPO RS.4,83,97,589/- IS CONC ERNED, THE FACTS HAVE TO BE UNDERSTOOD IN THEIR TRUE PERSP ECTIVE. THE FACT IS THAT ARICENT USA WAS FORMED ONLY TO PROVIDE CENTRALIZED CORPORATE MANAGEMENT SERVICES TO ALL ENTITIES IN TH E GROUP AND IT DOES NOT HAVE ANY OTHER BUSINESS ACTIVITY OR SOU RCES OF REVENUE. THIS MEANS THAT ARICENT USA WAS FORMED AS A SPECIAL PURPOSE VEHICLE (SPV). THIS HAS TO BE FURTHER CONSI DERED WITH THE AGREEMENT BETWEEN THE ASSESSEE AND THE AE. THE EVIDENCES PLACED BEFORE US ARE COPIES OF EMAILS EXCHANGED BET WEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISES TO SUBSTAN TIATE THAT SIGNIFICANT SERVICES WERE RENDERED BY THE AE. IN O UR CONSIDERED VIEW IT IS THE PREROGATIVE OF THE ASSESSEE TO DECID E AS TO WHETHER OR NOT THE SERVICES ARE REQUIRED. OUR VIEW FIND S UPPORT FROM THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF REEBOK INDIA COMPANY 374 ITR 118 WHEREIN HONBLE HIGH COUR T HAS HELD THAT ONCE THE EXPENDITURE IS INCURRED FOR BUSI NESS PURPOSES, THE ASSESSING OFFICER CANNOT QUESTION REQ UIREMENT AND QUANTUM OF EXPENDITURE THE RELEVANT FINDING REA D AS UNDER 52 :- 54.SO LONG AS THE EXPENDITURE IS FOR BUSINESS CONSIDERATION, THE ASSESSING OFFICER CANNO T QUESTION THE QUANTUM OR THE WISDOM OF THE ASSESSEE IN INCURRING THE EXPENSE. ISSUE OF ARM'S LENGTH PRICE, PER SE DOES NOT ARISE, WHEN DEDUCTION UNDER SECTION 37(1) IS CLAIMED. EXPENDITURE AND DECISION OF THE ASSESSEE, WHETHER OR NOT TO INCUR THE SAID EXPENDITURE; THE Q UANTUM THEREOF, CANNOT BE A SUBJECT MATTER OF CHALLENGE OR DISALLOWANCE BY THE ASSESSING OFFICER, ONCE IT IS A CCEPTED THAT THE EXPENDITURE WAS WHOLLY I.E. THE QUANTUM OF EXPENDITURE INCURRED WAS FULLY, AND EXCLUSIVELY FOR BUSINESS PURPOSE. 82. IN ANOTHER DECISION IN THE CASE OF EKL APPLIANC ES 345 TIR 241, THE HONBLE DELHI HIGH COURT HAS LAID DOWN THE LAW IN THIS REGARD, AS UNDER :- 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS I S THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEG ITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSIN ESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EIT HER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CO NDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS 53 PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE O ECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. XXX 22 ........... ....... SO LONGASTHEEXPENDITUREORPAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR TH E PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW T HE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELI NES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICUL ARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CON TEMPLATED OR AUTHORISED. SIMILARLY, THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS LUMAX INDUSTRIES LIMITED (ITA NO 102/2014) HELD THA T THE TRANSFER PRICING PROVISIONS DO NOT AUTHORIZE DISALL OWANCE OF ANY EXPENDITURE ON THE BASIS THAT IT WAS NOT NECESSARY FOR THE ASSESSEE TO INCUR THE EXPENDITURE. THE HONBLE COUR T HELD AS UNDER: 16. ON THE QUESTION OF ADDITION MADE BY THE AO ON ACCOUNT OF ALP FOR THE PAYMENT OF ROYALTY, LEARNED COUNSEL F OR THE ASSESSEE HAS RIGHTLY REFERRED TO THE DECISION IN COM MISSIONER OF INCOME TAX V. SONY ERICSSON MOBILE COMMUNICATION (2015) 374 ITR 118 WHERE THE DETERMINATION OF THE ALP OF TH E ROYALTY PAID AS NIL WAS NOT APPROVED. THE COURT'S AT TENTION HAS ALSO BEEN DRAWN TO THE DECISION IN COMMISSIONER O F INCOME TAX V. EKL APPLIANCES LIMITED (2012) 345 ITR 24'1 WHEREIN IT WAS HELD THAT RULE I OB (1) (A) DID NOT AU THORIZE 54 DISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY FOR THE ASSESSEE TO HAVE INCURRED SUCH EXPENSE. IT WAS OBSERVED THAT THOUGH THE QUANTUM OF EXPENDITURE COULD BE EXAMINED . THE ENTIRE EXPENDITURE COULD NOT BE DISALLOWED ON THE GROUND THAT U WAS NOT NECE SSARY. THE DELHI HIGH COURT IN THE CASE OF CIT VS CUSHMAN AND WAKEFIELD (INDIA) PVT LTD. (ITA 475/ 2012) HAS HELD THAT THE AUTHORITY OF THE TPO IS TO CONDUCT A TP ANALYSIS TO DETERMINE THE ALP AND NOT TO DETERMINE WHETHER THE TAX PAYER DERI VES ANY BENEFIT FROM THE SERVICE. THE HONBLE DELHI HIGH CO URT HAS OPINED THAT THE DETERMINATION OF BENEFIT TO THE TAX PAYER IS IN THE DOMAIN OF THE AO. THE HONBLE HIGH COURT HELD AS FOLLOWS: 34. THE COURT FIRST NOTES THAT THE AUTHORITY OF TH E TPO IS TO CONDUCT A TRANSFER PRICING ............... ANALYSIS TO DETERMINE THE ALP AND NOT TO DETERMINE WHETHER THERE IS A SERVICE OR NOT FROM WHICH THE ASSESSEE BENEFITS. THAT ASPECT OF THE EXE RCISE IS LEFT TO THE A O. THIS DISTINCTION WAS MADE CLEAR BY THE IT AT IN DRESSER- RAND INDIA PVT. LTD. V. ADDITIONAL COMMISSIONER OF INC OME TAX, 2012 (13) ITR (TRIB) 422 .................. 35. THE TPOS REPORT IS, SUBSEQUENT TO THE FINANCE ACT, 2007, BINDING ON THE AO. THUS, IT BECOMES ALL THE MORE IMPORTANT TO CLARIFY THE EXTENT OF THE TPOS AUTHORITY IN THIS C ASE, WHICH IS TO DETERMINING THE ALP FOR INTERNATIONAL TRANSACTIONS REFERRED TO HIM OR HER BY THE AO, RATHER THAN DETERMINING WHETHER S UCH SERVICES EXIST OR BENEFITS HAVE ACCRUED. THAT EXERCISE OF FACTUAL 55 VERIFICATION IS RETAINED BY THE AO UNDER SECTION 37 IN THIS CASE. INDEED, THIS IS NOT TO SAY THAT THE TPO CANNOT - AFTER A CONSIDERATION OF THE FACTS - STATE THAT THE ALP IS NIL GIVEN THAT AN INDEPENDENT ENTITY IN A COMPARABLE TRANSACTION WOULD NOT PAY ANY AMOUNT HOWEVER, THIS IS DIFFERENT FROM THE TPO STAT ING THAT THE DID NOT BENEFIT FROM THESE SERVICES, WHICH AMOUNTS TO D ISALLOWING EXPENDITURE. THAT DECISION IS OUTSIDE THE AUTHORITY OF THE TPO. 83. IN THE LIGHT OF THE AFORESTATED JUDICIAL DISCUS SION WE ARE OF THE CONSIDERED VIEW THAT THE TPO/ DRP GROSSLY ERRED IN EXAMINING THE IMPUGNED CORPORATE CHARGES IN THE LIG HT OF BENEFITS AND NECESSITY. 84. WE FIND THAT IN ITS TRANSFER PRICING REPORT THE ASSESSEE HAS TREATED PAYMENT OF ADMINISTRATIVE CORPORATE FEES PA YMENT AS PART OF OPERATING EXPENSES. THE TPO HAS HELD THAT THIS T RANSACTION IS HAVING BEARING ON INCOME OF THE ASSESSEE AND HENCE TO BE ANALYZED SEPARATELY. 85. THE UNDISPUTED FACT IS THAT THE OPM OF THE ASSE SSEE IS @ 27.36% WHEREAS THAT OF ALL THE COMPARABLE COMPANIES IS @ 14.24%. AS MENTIONED ELSEWHERE THE AE WAS CREATED AS A SPV FOR THE PURPOSE OF GIVING SERVICES TO THE GROUP COMPANI ES FOR WHICH THE AE HAS CHARGED COST + 5% AS A MARKER AND THE A SSESSEE IS MAKING SUCH PAYMENT IN LIEU OF RECEIVING VIDE SCOPE OF SERVICES FROM ITS AE. WE ARE OF THE CONSIDERED VIEW THAT TH ESE ARE ALL INTER LINKED TRANSACTIONS AND THEREFORE, SHOULD NOT BE EV ALUATED ON A SEPARATE BASIS. THIS IS ALSO SUPPORTED BY PARA 1.4 2 AND 1.43 OF 56 THE OECD GUIDELINES WHICH PROVIDE FOR EVALUATION OF COMBINED TRANSACTIONS WHERE SUCH TRANSACTIONS ARE CLOSELY LI NKED OR CONTINUES AND CANNOT BE EVALUATE SEPARATELY. 86. THIS FURTHER FINDS SUPPORT FROM THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF SONY ERICSON MOBILE & OTH ERS IN ITA NO.16/2014 WHEREIN THE HONBLE HIGH COURT AFFIRM TH E BENCHMARKED OF CLOSELY LINKED TRANSACTION. THE HON BLE HIGH COURT HELD AS UNDER :- 91. IN CASE THE TESTED PARTY IS ENGAGED IN SINGLE LINE OF BUSINESS, THERE IS NO BAR OR PROHIBITION FROM APPLYING THE TNM METHOD O N ENTITY LEVEL BASIS. THE FOCUS OF THIS METHOD IS ON NET PROFIT AMOUNT IN PR OPORTION TO THE APPROPRIATE BASE OR THE PLI. IN FACT, WHEN TRANSACTIO NS ARE INTERCONNECTED, COMBINED CONSIDERATION MAY BE THE MOST RELIABLE MEA NS OF DETERMINING THE ARMS LENGTH PRICE. THERE ARE OFTEN SITUATIONS WHERE CLOSELY LINKED AND CONNECTED TRANSACTIONS CANNOT BE EVALUATED ADEQUATE LY ON SEPARATE BASIS. SEGMENTATION MAY BE MANDATED WHEN CONTROLLED BUNDLE D TRANSACTIONS CANNOT BE ADEQUATELY COMPARED ON AN AGGREGATE BASIS . THUS, TAXPAYER CAN AGGREGATE THE CONTROLLED TRANSACTIONS IF THE TRANSAC TIONS MEET THE SPECIFIED COMMON PORTFOLIO OR PACKAGE PARAMETERS. FOR COMPLEX ENTITIES OR WHERE ONE OF THE ENTITIES IS NOT 'PLAIN VANILLA DISTRIBUTOR, IT SHOULD BE APPLIED WHEN NECESSARY AND APPLICABLE COMPARABLES ON FUNCTIO NAL ANALYSIS, WITH OR WITHOUT ADJUSTMENTS ARE AVAILABLE . OTHERWISE, THE TNM METHOD SHOULD NOT BE ADOPTED OR APP LIED ON ACCOUNT OF BEING AN INAPPROPRIATE METHOD. FURTHER THE HONBLE DELHI COURT IN THE CASE OF SONY ERICSSON MOBILE (SUPRA) ALSO HELD THAT IF THE INDIAN ENTITY HAS SATISFIED TRANSACTIONAL NET MARGIN METHOD (TNMM), I.E., AS LO NG AS THE OPERATING MARGINS OF THE INDIAN ENTERPRISE ARE HIGH ER THAN THE 57 OPERATING MARGINS OF COMPARABLE COMPANIES, NO FURTH ER/SEPARATE COMPENSATION FOR AMP EXPENSES IS WARRANTED. THE HON BLE COURT HELD AS UNDER: '101. HOWEVER, ONCE THE ASSESSING OFFICER/TPO ACCEP TS AND ADOPTS TNM METHOD, BUT THEN CHOOSES TO TREAT A PARTI CULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TR ANSACTION WITHOUT BIFURCATION/SEGREGATION, IT WOULD AS NOTICED ABOVE, LEAD TO UNUSUAL AND INCONGRUOUS RESULTS AS AMP EXPENSES IS T HE COST OR EXPENSE AND IS NOT DIVERSE. IT IS FACTORED IN THE NET PROFIT OF THE INTER-LINKED TRANSACTION. THIS WOULD BE ALSO IN CONS ONANCE WITH RULE 10B(L)(E). WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT MARGIN BY COMPARING THE PROFITS AND LOSS ACCOUNT OF THE TESTED PARTY WITH THE COMPARABLE. THE TNM METHOD PROCEEDS O N THE ASSUMPTION THAT FUNCTIONS, ASSETS AND RISK BEING BRO ADLY SIMILAR AND ONCE SUITABLE ADJUSTMENTS HAVE BEEN MADE, ALL T HINGS GET TAKEN INTO ACCOUNT AND STAND RECONCILED WHEN COMPUTING THE NET PROFIT MARGIN. ONCE THE COMPARABLES PASS THE FUNCTI ONAL ANALYSIS TEST AND ADJUSTMENTS HAVE BEEN MADE, THEN THE PROFIT MARGIN AS DECLARED WHEN MATCHES WITH THE COMPARABLES WOULD RESU LT IN AFFIRMATION OF THE TRANSFER PRICE AS THE ARMS LENG TH PRICE. THEN TO MAKE A COMPARISON OF A HORIZONTAL ITEM WITHOUT SEGR EGATION WOULD BE IMPERMISSIBLE. 87. THE COORDINATE BENCH IN THE CASE OF M/S. BG EXP LORATION AND PRODUCTION INDIA LTD. VS. DCIT (ITA NO. 1170/DE L/2015) WHEREIN THE TRIBUNAL HAS DELETED THE ADJUSTMENT ON ACCOUNT OF PAYMENT MADE FOR INTRA GROUP SERVICES. THE TRIBUNA L HELD AS 58 UNDER :- 72. ON THE EXAMINATION OF THE VOLUME AND US DETAILS SUBMITTED BY THE ASSESSEE. THE LD. DISPUTE RESOLUTION PANEL HAS COME TO THE CONCLUSION THAT ASSESSEE HAS RECEIV ED THE SERVICES AND THOSE SERVICES ARE USEFUL SERVICES.. WI TH RESPECT TO THE CLUBBING OF THE TRANSACTION IT WAS HELD THAT WHE N THE TRANSACTIONS ARE CLOSELY INTERRELATED IT IS BUT NATU RAL TO CLUB SUCH TRANSACTION AND BENCHMARKED IT TOGETHER. THE LD. DISPUTE RESOLUTION PANEL AT PAGE NO. 30 31, HAS CONSIDERED THE SUSPECT AND AGREED WITH THE CONTENTION OF THE ASSESSE E THAT INTRA GROUP SERVICES RECEIVED FROM ITS ASSOCIATED EN TERPRISE ARE CLOSELY LINKED TO THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE COMPANY PLACING RELIANCE ON THE US REGULATIONS, OECD REGULATIONS AND OECD DRAFT NOTES ON COMPARABILITY. IN VIEW OF THIS WE DO NOT FIND ANY INFIRMITY AND NONE WAS POINTE D OUT BEFORE US BY THE LD. DEPARTMENTAL REPRESENTATIVE IN THE ORDER OF THE LD. DISPUTE RESOLUTION PANEL. CONSEQUENTLY, AFT ER VERIFYING THAT ASSESSEE HAS DEMONSTRATED NEED FOR THOSE SERVICES , BENEFIT DERIVED FROM THOSE SERVICES, EVIDENCE OF REC EIPT OF SUCH SERVICES AND SUBMITTING THAT THOSE SERVICES ARE NEIT HER DUPLICATIVE IN NATURE AND NOR ARE SHARE HOLDER ACTIVIT IES, THE DRP DIRECTED THE LD. TRANSFER PRICING OFFICER TO DELE TE THE ADJUSTMENT PROPOSED WITH RESPECT TO THE INTRA GROUP SERVICES OF RS. 3329766244/-, DESERVES TO BE UPHELD. THE JUDICIAL PRECEDENTS CITED BEFORE US ALSO SUPPORTS THE VIEW THA T THE NEEDED TEST, THE BENEFIT TEST ARE ALSO REQUIRED TO BE VIEWED FROM THE PERSPECTIVE OF A BUSINESSPERSON AND NOT FRO M THE PERSPECTIVE OF THE REVENUE. FURTHER, NO EVIDENCES H AVE BEEN LED 59 BEFORE US BY REVENUE STATING THAT THESE SERVICES AR E DUPLICATIVE IN NATURE AND ALSO SERVES ONLY THE INTEREST OF THE S HAREHOLDER. ACCORDING TO THE INFORMATION SUPPLIED BY THE ASSESSE E AND EXAMINED BY THE LD. DISPUTE RESOLUTION PANEL DOES NOT GIVE ANY SUCH INDICATION. FURTHER REGARDING NON-SHARING OF T HE COST BY THE JOINT-VENTURE PARTNERS WE HAVE GIVEN OUR FINDIN GS WHILE DECIDING THE APPEAL OF THE ASSESSEE THAT SUCH AN ACT ION OF THE JOINT-VENTURE PARTNERS CANNOT BE THE REASON TO DETE RMINE THE ARM'S LENGTH PRICE OF THE SERVICES WHICH IS BEEN RE CEIVED BY THE ASSESSEE AT NIL. IN VIEW OF THIS WE UPHOLD THE FINDI NG OF THE LD. DISPUTE RESOLUTION PANEL HOLDING THAT TRANSACTIONS OF INTRA GROUP SERVICES ARE INTERLINKED, THEREFORE, THEY SHOU LD BE BENCHMARKED TOGETHER BY ADOPTING TNMM AS THE MOST APPROPRIATE METHOD , HENCE, DIRECTING THE LD. TRANSFE R PRICING OFFICER TO DELETE THE ADJUSTMENT PROPOSED OF RS.3329 766244/-. IN THE RESULT GROUND NO. 1 TO 3 OF THE APPEAL OF THE REVENUE ARE DISMISSED.' 88. IT WOULD NOT BE OUT OF PLACE TO REFER TO THE DE CISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAGNETI MAR ELI POWERTRAIN INDIA PVT. LTD. (ITA NO.350/2014) WHEREI N THE HONBLE HIGH COURT HELD THAT TECHNICAL KNOW HOW FEE PAID BY THE ASSESSEE IS TO BE BENCHMARKED APPLYING TNMM AT THE ENTITY LE VEL. THE SAID DECISION HAS BEEN AFFIRMED BY THE HONBLE SUPR EME COURT IN ITA NO.15244/2017. 89. CONSIDERING THE JUDICIAL DECISIONS DISCUSSED HE RE IN ABOVE IN THE LIGHT OF THE UNDER LYING FACTS IN THE ISSUE WE HOLD THAT TNMM IS THE MOST APPROPRIATE METHOD FOR THIS INTERN ATIONAL 60 TRANSACTION AND SINCE THE OPM OF THE ASSESSEE IS HI GHER THAN THE OPM OF THE COMPARABLE COMPANIES, WE ARE OF THE CONS IDERED VIEW THAT THE BENEFIT AND THE NECESSITY TEST APPLIED BY THE TPO/ DRP IS UNCALLED FOR AND ACCORDINGLY DIRECT THE TPO/ AO TO DELETE THE ADDITION OF RS.48397589/- GROUND NO.5.1 TO 5.6 ARE ALLOWED. 90. GROUND NO.5.7 TO 5.8 TRANSFER PRICING ADJUSTM ENT OF RS.5,48,58,133/- ON ACCOUNT OF REIMBURSEMENT OF EXP ENSES. 91. PROCEEDING FURTHER AND COMING TO THE TP ADJUSTM ENT OF RS.54858133/- WHICH WERE MADE PURSUANT TO THE DIREC TIONS OF THE DRP ON ACCOUNT OF REIMBURSEMENT OF EXPENSES, WE ARE OF THE CONSIDERED VIEW THAT THE TRANSACTION OF REIMBURSEME NT OF EXPENSES IS CLOSELY LINKED WITH THE ENTIRE BUSINESS OF THE ASSESSEE. HOWEVER, A CAREFUL PERUSAL OF THE ADDITI ONAL EVIDENCES SHOWS THAT SOME OF THE EVIDENCES ARE NOT FROM THIRD PARTY. HOWEVER, SINCE THE TPO HAS MADE THE ADDITION WITHOU T OFFERING ANY OPPORTUNITY TO THE ASSESSEE, WE RESTORE THIS IS SUE TO THE FILES OF THE TPO. THE ASSESSEE IS DIRECTED TO FURNISH AL L THE RELATED EVIDENCES AND THE TPO IS DIRECTED TO EXAMINE SUCH E VIDENCES AND DECIDE THE ISSUE AFRESH AS PER THE PROVISIONS OF TH E LAW. 92. GROUND NO.5.7 TO 5.8 ARE ALLOWED FOR STATISTICA L PURPOSES. 93. GROUND NO.6 TO 6.2 RELATES TO THE TRANSFER PRIC ING ADJUSTMENTS OF RS.38,31,452/- ON ACCOUNT OF INTERES T ON FOREIGN CURRENCY LOAN EXTENDED TO AE. 61 94. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECI DED BY US IN ITA NO.90/DEL/2013 VIDE GROUND NO.3. FOR THE DETAIL ED DISCUSSION THEREIN THE ADJUSTMENT OF RS.3831452/- I S DIRECTED TO BE DELETED. GROUND NO.6.1 TO 6.2 ARE ALLOWED. 95. GROUND NO.7 RELATES TO THE TRANSFER PRICING ADJ USTMENT OF RS.92668509/- ALLEGEDLY ON ACCOUNT OF RE-CHARACTERI ZING THE INTER COMPANY RECEIVABLES AS UNSECURED LOAN EXTENDED BY T HE ASSESSEE OF ITS AE. 96. FACTS ON RECORD SHOW THAT DURING THE COURSE OF THE TRANSFER PRICING ADJUSTMENT PROCEEDINGS THE TPO NOTICED THAT THE BALANCESHEET OF THE ASSESSEE REVEALS RECEIVABLES. T HE TPO OBSERVED THAT THE PAYMENT FOR THE INVOICES RAISED B Y THE ASSESSEE HAVE NOT BEEN RECEIVED WITHIN THE STIPULATED TIME A S PROVIDED IN THE SERVICE AGREEMENT WITH THE AE. THE ASSESSEE WA S ASKED TO FURNISH THE TIME PERIOD FOR PAYMENT AS PER THE SERV ICE AGREEMENT WITH THE AE. THE TPO FURTHER OBSERVED THAT THE DEL AYED PAYMENTS HAVE TO BE TREATED AS UNSECURED LOANS ADVA NCED TO THE AE ON WHICH NORMAL RATE OF INTEREST @ 16% FOR THE P ERIOD OF DELAY IN RECEIPT OF PAYMENT BEYOND THE TIME STIPULATED IN THE SERVICE AGREEMENT SHALL BE CHARGED. 97. THE ASSESSEE STRONGLY OBJECTED TO THIS PROPOSIT ION OF THE TPO POINTING OUT THAT RECEIVABLE IS NOT AN INTERNATIONA L TRANSACTIONS WHICH WARRANT BENCHMARKING. THE ASSESSEE FURTHER O BJECTED FOR 62 IMPUTING @16% FOR THE DELAY IN RECEIPT OF PAYMENTS. 98. DISMISSING THE CONTENTION OF THE ASSESSEE THE T PO RESORTED TO EXPLANATION (1)(C) TO SECTION 92 B WHICH HAS BEE N INSERTED BY FINANCE ACT IN 2012 WITH RETROSPECTIVE EFFECT FROM 01.04.2002. THE TPO WAS OF THE FIRM BELIEF THAT THE DELAY IN RE CEIVABLES CONSTITUTES AN INTERNATIONAL TRANSACTION IN THE LIG HT OF THE EXPLANATION (1)(C) TO SECTION 92 B OF THE IT ACT. THE TPO OBSERVED THAT THE ASSESSEE HAS PROVIDED BENEFIT TO ITS AE BY WAY OF ADVANCING OF INTEREST FREE LOAN IN THE GARB OF D ELAY IN RECEIPT OF RECEIVABLES. THE TPO FINALLY CONCLUDED BY CHARGING INTEREST @ 15.77% AND MADE ADJUSTMENT OF RS.97780581/-. THE O BJECTION BEFORE THE DRP WAS OF NO AVAIL. 99. BEFORE US THE COUNSEL FOR THE ASSESSEE VEHEMENT LY STATED THAT THE DELAY OF REMITTANCES CANNOT BE RE-CHARACTE RIZED AS UNSECURED LOANS ADVANCED TO THE AES AND IMPUTING O F THE NOTINAL INTEREST THEREON, IS NOT IN ACCORDANCE WITH LAW. THE COUNSEL STATED THAT THE OPM OF THE ASSESSEE @ 27.36 % IS HIGHER THAN THE AVERAGE WORKING CAPITAL ADJUSTED MARGINS O F THE COMPARABLE COMPANIES FINALLY ACCEPTED BY THE TPO AT 12.97%. IN SUPPORT OF HIS CONTENTION STRONG RELIANCE WAS PLACE D ON THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF KUSUM HEALTHCARE PVT. LTD REPORTED IN 398 ITR 66. FURTHER RELIANCE WAS PLACED ON THE DECISION OF THE COORDINATE BENCH IN T HE CASE OF PITNEY BOWES SOFTWARE INDIA PVT. LTD. (ITA NO.5052/ DEL/2018) WHEREIN THE TRIBUNAL DELETED THE ADJUSTMENT ON ACCO UNT OF 63 OUTSTANDING RECEIVABLES AFTER TAKING INTO CONSIDERA TION THE WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLE COMPANIES. THE COUNSEL FURTHER STATED THAT CONTINUING DEBIT BA LANCE CANNOT BE REGARDED AS INTERNATIONAL TRANSACTION ON THE CON TRARY A CONTINUING DEBIT IS A RESULT OF INTERNATIONAL TRANS ACTIONS. THE COUNSEL FURTHER STATED THAT THE TPO/ DRP GROSSLY ER RED IN RE- CHARACTERISING THE ACCOUNT RECEIVABLE AS UNSECURED LOANS. THE COUNSEL FURTHER POINTED OUT THAT EVEN IF THE BENCHM ARKING OF DELAY IN RECEIPT HAS TO BE DONE THE SAME SHOULD BE DONE WITH INTERNAL COMPARABLES. SINCE THE ASSESSEE HAS RECEIV ED REMITTANCES FROM UNRELATED THIRD PARTY WITH A TIME LAG EXCEEDING THE CREDIT PERIOD AND SINCE NO INTEREST HAS BEEN CH ARGED FOR DELAY IN RECEIPT OF SUCH REMITTANCES FROM UNRELATED PARTI ES THE SAME SHOULD BE CONSIDERED. THE COUNSEL CONCLUDED BY PRAY ING THAT THE IMPUGNED ADJUSTMENT SHOULD DELETED. 100. PER CONTRA THE DR STRONGLY SUPPORTED THE FINDI NG OF THE TPO AND PLACED STRONG RELIANCE ON EXPLANATION (1)(C) T O SECTION 92 B OF THE ACT. 101. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO TH E ORDERS OF THE AUTHORITIES BELOW. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN OUR CONSIDERED VIEW EVERY INDEBTNE SS CANNOT BE CONSTRUED TO HAVE ARISEN OUT OF A LOAN TRANSACTION AND INTEREST IS INVOLVED ONLY IN RELATION TO A DEBT CREATED OUT OF LOAN TRANSACTION. FOR THIS PROPOSITION, WE DRAW SUPPORT FROM THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEAM N AVIGATION 64 REPORTED IN 56 ITR 52. THIS VIEW FURTHER FIND SUPP ORT FROM THE DECISION OF HONBLE HIGH COURT OF DELHI IN THE CASE OF KUSUM HEALTHCARE PRIVATE LIMITED 398 ITR 66 WHERE IN HON BLE HIGH COURT IN THE CONTEXT OF RECEIVABLE HELD THAT NOT EV ERY ITEM OF RECEIVABLE WILL BE CONSIDERED AS AN INTERNATIONAL T RANSACTION OF RECEIVABLE AND EACH RECEIVABLE HAS TO BE SEEN ON CA SE TO CASE BASIS, THE RELEVANT FINDING READ AS UNDER :- 10. THE COURT IS UNABLE TO AGREE WITH THE ABOVE SUBMIS SIONS. THE INCLUSION IN THE EXPLANATION TO SECTION 92B OF THE ACT OF THE EXPRESSION 'RECEIVABLES' DOES NOT MEAN THAT DE HORS THE CONTEXT EVERY ITEM OF RECEIVABLES' APPEARING IN THE ACCOUNTS OF AN ENTITY, WHICH MAY HAVE DEALINGS WITH FOREIGN AES WO ULD AUTOMATICALLY BE CHARACTERISED AS AN INTERNATIONAL T RANSACTION. THERE MAY BE A DELAY IN COLLECTION OF MONIES FOR SU PPLIES MADE, EVEN BEYOND THE AGREED LIMIT, DUE TO A VARIETY OF FACT ORS WHICH WILL HAVE TO BE INVESTIGATED ON A CASE TO CASE BASIS . IMPORTANTLY, THE IMPACT THIS WOULD HAVE ON THE WORKING CAPITALFOF THE APPELLANT WILL HAVE TO BE STUDIED. IN OTHER WORDS, THERE HAS TO BE A PROPER INQUIRY BY THE TPO BY ANALYSING THE STATIS TICS OVER A PERIOD OF TIME TO DISCERN A PATTERN WHICH WOULD INDIC ATE THAT VIS- A-VIS THE RECEIVABLES FOR THE SUPPLIES MADE TO AN A E, THE ARRANGEMENT REFLECTS AN INTERNATIONAL TRANSACTION I NTENDED TO BENEFIT THE AE IN SOME WAY. 11. THE COURT FINDS THAT THE ENTIRE FOCUS OF THE AO WAS ON JUST ONE AY AND THE FIGURE OF RECEIVABLES IN RELATION TO THAT A Y C AN HARDLY REFLECT A PATTERN THAT WOULD JUSTIFY A TPO CO NCLUDING THAT THE FIGURE OF RECEIVABLES BEYOND 180 DAYS CONSTITUTE S AN 65 INTERNATIONAL TRANSACTION BY ITSELF. 102. IT IS NOT THE CASE OF THE REVENUE THAT THE IMP UGNED TRANSACTION IS SHAM OR BOGUS TRANSACTION, THEREFORE , THE RE- CHARACTERIZATION OF THE RECEIVABLES AS UNSECURED LO ANS IS UNCALLED FOR. 103. THERE IS NO DISPUTE THAT REMITTANCES FROM UNRE LATED THIRD PARTIES HAVE ALSO COME WITH A TIME LAG EXCEEDING TH E AGREED PERIOD AND THE UNDISPUTED FACT IS THAT THE ASSESSEE HAS NOT CHARGED ANY INTEREST FOR DELAY IN RECEIPT OF SUCH R EMITTANCES FROM UNRELATED PARTIES. IN THE LIGHT OF SUCH UNDIS PUTED FACT ANY DELAY IN REMITTANCES FROM ASSOCIATED ENTERPRISES SH OULD NOT BE RE-CHARACTERIZED AS UNSECURED LOANS. WE DRAW SUPPO RT FROM THE DECISION OF HONBLE HIGH COURT OF BOMBAY IN THE CAS E OF INDO AMERICAN JEWELLERY LIMITED IN ITA NO.1053/2012 THE RELEVANT FINDING READ AS UNDER :- HOWEVER, IN THE FACTS OF THE PRESENT CASE, THE SPE CIFIC FINDING OF THE IT AT IS THAT THERE IS COMPLETE UNIFORMITY I N THE ACT OF THE ASSESSEE IN NOT CHARGING INTEREST FROM BOTH THE ASS OCIATED ENTERPRISES AND NON ASSOCIATED ENTERPRISES DEBTORS AN D THE DELAY IN REALIZATION OF THE EXPORT PROCEEDS IN BOTH T HE CASES IS SAME. IN THESE CIRCUMSTANCES THE DECISION OF THE TRI BUNAL IN DELETING THE NOTIONAL INTEREST ON OUTSTANDING AMOUNT OF EXPORT PROCEED REALIZED BELATEDLY CANNOT BE FAULTED. 66 104. THERE IS NO DISPUTE THAT THE OPM OF THE ASSESSEE @ 27.36% IS HIGHER THAN THE AVERAGE WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLE COMPANIES @12.97%, THIS BEING SO NO ADJUSTMENT IS CALLED FOR IN THE LIGHT OF THE DECISION OF THE H ONBLE HIGH COURT OF DELHI IN THE CASE OF KUSUM HEALTHCARE (SUPRA). 105. IN OUR CONSIDERED VIEW SINCE THE RECEIVABLES H AVE BEEN RECEIVED BY THE ASSESSEE WITHIN ORDINARY TIME PERIO D IT CANNOT BE RE-CHARACTERIZED AS UNSECURED LOANS AND ACCORDINGLY NO ADJUSTMENT ON ACCOUNT OF DELAY IN RECEIPT OF RECEIV ABLES CAN BE MADE IN THE INCOME OF THE ASSESSEE CONSIDERING THE FACT THAT THE SIMILAR DELAY IS THERE IN RESPECT OF RECEIVABLES FR OM UNRELATED THIRD PARTIES. 106. CONSIDERING THE FACTS OF THE CASE IN HAND IN T OTALITY IN THE LIGHT OF THE FACTUAL MATRIX DISCUSSED HERE IN ABOVE VIZ-A-VIZ JUDICIAL DECISIONS ON THE POINT OF ISSUE WE ARE OF THE CONSIDERED VIEW THAT RESORTING TO EXPLANATION (1)(C) TO SECTIO N 92B OF THE ACT IS UNCALLED FOR. WE ACCORDINGLY DIRECT THE ASSESSI NG OFFICER / TPO TO DELETE THE TRANSFER PRICING ADJUSTMENT OF RS.977 80581/-. GROUND NO.7 IS ALLOWED. 107. GROUND NO.8 RELATES THE CHARGING OF INTEREST U /S. 234 B AND 234 C OF THE ACT. LEVY OF INTEREST IS MANDATORY TH OUGH 67 CONSEQUENTIAL. WE DIRECT THE ASSESSING OFFICER/ TPO TO LEVY INTEREST AS PER THE PROVISIONS OF THE LAW. INTEREST U/S. 234 C OF THE ACT HAS TO BE CHARGED ON THE RETURNED INCOME. 108. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26.07.2019. SD/- SD/- (SUCHITRA KAMBLE) (N . K. BILLAIYA) JUDICIAL MEMBER ACCOUNT ANT MEMBER *NEHA* DATE:- 26.07.2019 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGI STRAR ITAT NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 26.07.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGIST RAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER