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2020 (3) TMI 1418 - AT - Income TaxTP Adjustment - ALP determination - ALP for the purchase of MSA Masters Services Agreement - from the associate concern as argued that neither the TPO nor the DRP has followed any of the transfer pricing method as specified in section 92C of the Act to determine the ALP for the purchase of MSA from the associate concern HELD THAT - Section 92C(1) of the Act provides that the international transaction between the assessee and AE has to be on the basis of any of the method being the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. Thus, it has been specifically provided in the provisions of section 92C(1) that TPO is duty bound to determine the arm s length price of the international transaction only by following any one of the method prescribed. In the present case the TPO has not followed any of those methods, which is not a curable defect and goes to the root of the matter. We are of the considered view that the addition made by the TPO cannot be sustained. We further note that the DRP has also erred in not following any of the prescribed method and agreed with the incremental benefit approach adopted by the TPO by taking the actual figures up to A.Y. 2014-15 and for subsequent year directing the TPO to deflate the projected revenue figures by applying average rate of 22.68%. The case of the assessee is supported by case of Tecumseh Products India (P) Ltd. 2014 (4) TMI 816 - ITAT HYDERABAD In the case of Firmenich Armatics India (P) Ltd. 2018 (9) TMI 1007 - ITAT MUMBAI as held that TPO is duty bound to determine arm s length price of international transaction by adopting one of the methods prescribed under statute and cannot deviate from restrictions/conditions imposed under statute. It further held that there is no provisions under the Act empowering TPO to determine arm s length price on estimate basis, that too, by entertaining doubts with regard to business expediency of payment and in process stepping into shoes of the AO for making disallowance u/s. 37(1) We are of the view that the adjustment as made by the TPO/DRP is without any jurisdiction and cannot be sustained. Adjustment made to the cost of MSA - Even on the issue of determining arm s length price on the basis of valuation report from the independent valuer, we find that the TPO/DRP has not found any fault in the report in which the projected revenue and projected operating from the unexpired period of the MSA was considered to determine the price payable by WNS India to WCIL and, therefore, the TPO/DRP cannot resort to their own estimate in determining the arm s length price. We find merit in the contention of the learned AR that valuation of an intangible requires expertise and knowledge in the domain of valuation principles, markets and business. Even if the TPO/DRP were not in agreement with the variables assumed/valuation undertaken by the independent valuer, they ought to have desisted from their own exercise of adhoc valuation without having appointed a valuation expert to determine the value of the MSA. In this case, we note that the total incremental benefit in respect of extension of the contract with Aviva Singapore would be USD 57.61 million. The assessee has signed the extension of MSA in November 2014 as against the renewal in November 2016 and the contract was renewed up to March 2022. In our opinion, this hindsight post the valuation date has to be considered if the TPO/DRP has determined the arm s length price on actual results. On this issue also we do not find the approach of TPO in determining the value of the international transaction based on incremental benefit from purchase of MSA as correct unless the value of customer relationship along with other incremental benefits/actual of profits are considered. We note that the incremental benefit in respect of customer relationship with Aviva Singapore works out to USD 39.61 million. In view of these facts, the value of contract based on the approach as adopted by the TPO is self contradictory and cannot be sustained. We are inclined to set aside the order of DRP and direct the AO to delete the adjustment made to the cost of MSA. The ground raised by the assessee is allowed. Deduction u/s. 10A - disallowance in respect of Pune Unit II under the provisions of erstwhile subsection (9) of Section 10A on account of change in shareholding of the assessee during A.Y. 2003-04 - Since the issue is identical to the one as decided by the co-ordinate Bench in assessee s own case A.Y. 2003-04 respectfully, following the said order allow the ground raised by the assessee. Deduction u/s 10A after setting off the losses of certain STP/SEZ units against the profits of the STP/SEZ units of the assessee - HELD THAT - As decided in own case for A.Y. 2005-06 2019 (1) TMI 1128 - ITAT MUMBAI decided the issue in favour of the assessee as relying on case of Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT Disallowance of deprecation on intangible assets acquired by the assessee on acquisition of customer contracts, which do not fall under the definition of intangible assets u/s. 32(1) - HELD THAT - We find that co-ordinate Bench of the Tribunal has decided identical issue in favour of the assessee in its own case for A.Ys. 2005-06 2019 (1) TMI 1128 - ITAT MUMBAI there is no dispute that by acquiring M/s. Town and Country Assistance Ltd. the assessee has also acquired contractual rights which, no doubt, is a valuable commercial right. Therefore, it comes within the meaning of intangible asset as per section 32(1)(ii) r/w Explanation 3(b) of the Act. Hence, depreciation claimed by the assessee is allowable. - Decided in favour of assessee. Profits derived by eligible STP units (u/s. 10A of the Act) to be computed without considering the gain from forex derivative contracts - HELD THAT - While computing deduction u/s. 10A, the AO did not treat the said gain as part of the profit from export activity for the purpose of deduction u/s. 10A. However, during the year the AO treated the said gain differently. In other words, while computing deduction u/s. 10A, the AO did not treat the said gain as part of the export activity for the purpose of deduction u/s. 10A - there being no change in the facts and circumstances during the year, we are quiet in agreement with contentions of the learned AR that the principle of consistency should be followed and forex gain should be treated as profit from export activity and deduction should be allowed u/s. 10A of the Act. The case of the assessee is supported by the decision of the Apex court in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT wherein the Hon ble Court has held that while dealing with the principle of consistency and principle of res judicata, unless there is a material change justifying to take a different view in the matter, shall not be appropriate for the Revenue to take a contrary view. Forex gain resulting from the settlement of derivative contract is part of the profit from export activity and eligible for deduction u/s. 10A. Besides, Hon ble Bombay High Court has held in a series of decisions referred to by learned counsel for the assessee namely CIT vs. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT , PCIT vs. Jindal Drugs Ltd. 2018 (12) TMI 1339 - BOMBAY HIGH COURT and CIT vs. Symantec Software (P) Ltd. 2015 (1) TMI 110 - BOMBAY HIGH COURT that loss or gain derived from forward contracts entered into by an assessee engaged in export activity should be eligible for deduction. Accordingly, we set aside the order of the DRP on this issue and direct the AO to treat the forex gain as part of the profit for deduction u/s. 10A of the Act. Set off brought forward business losses and unabsorbed depreciation pertaining to earlier years - HELD THAT - We find that the learned DRP has directed the Assessing Officer to verify the claim of the assessee regarding the business and depreciation loss and allow the same to the extent available as per law. However, the Assessing Officer has not given effect to the order of the DRP. We direct the Assessing Officer to give effect to the order of the DRP and after verifying the claim of the assessee, allow the same to the extent available in terms of the directions of DRP. This ground is allowed. Disallowance of depreciation on the acquisition of MSA from foreign AE WCIL - HELD THAT - Since for A.Y. 2011-12 we have already decided the issue in favour of the assessee holding that the price paid by the assessee to foreign AE on account of purchase of MSA is at arm s length price and is a commercial right. Since this is a intangible assets being commercial rights within the meaning of section 32(1)(ii) of the Act and eligible for depreciation. Accordingly , we hold that depreciation is to be allowed to assessee. The AO is directed accordingly by setting aside the order of DRP on this issue. Disallowance of depreciation on intangible assets - HELD THAT - Commercial rights acquired by the assessee are in the nature of intangible asset as per section 32(1)(ii) read with Explanation 3(b) of the Act and depreciation is allowable on the said rights. Accordingly, we allow the grounds raised by the assessee. Grounds are allowed. Disallowance u/s 14A - need of recording satisfaction - assessee earned dividend income from Mutual Funds which was claimed as exempt u/s. 10(35) - assessee incurred direct expenses in relation to the said income And the same was suo moto disallowed u/s. 14A - HELD THAT - As recording of satisfaction is a pre-requisite under the provisions of section 14A(2) before invoking the provisions of section 14A Rule 8D, which the Assessing Officer has failed to do. The case of the assessee is squarely covered by the decision of the jurisdictional High Court in the case of Godrej Boyce Manufacturing Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein the Hon ble Court has held that satisfaction of the Assessing Officer has to be objectively arrived at after considering all relevant facts and circumstances and books of accounts of the assessee. In the case of Maxopp Investment Ltd. Ors. 2011 (11) TMI 267 - DELHI HIGH COURT as held that provisions of section 14A Rule 8D would be triggered only if Assessing Officer records a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This decision has been further upheld by the Hon ble Apex Court 2018 (3) TMI 805 - SUPREME COURT . We, therefore, respectfully following the ratio laid down by the Apex Court and Bombay High Court as discussed above , set aside the order of the DRP and direct the Assessing Officer to delete the disallowance. We are not dealing with the other contentions of the assessee, as we have already allowed the ground on first plea. Disallowing the set off of brought forward business losses and unabsorbed depreciation relating to earlier years - HELD THAT - We were informed the AO has not given effect to the directions of the DRP. Therefore, we, deem it necessary to direct the AO to follow the directions of the DRP and adjudicate the matter accordingly.
Issues Involved:
1. Determination of total taxable income. 2. Transfer pricing adjustment. 3. Disallowance of deduction under Section 10A. 4. Disallowance of depreciation on intangible assets. 5. Computation of profits derived from eligible units. 6. Set-off of brought forward business losses and unabsorbed depreciation. 7. Initiation of penalty proceedings under Section 271(1)(c). Detailed Analysis: 1. Determination of Total Taxable Income: The learned AO/Hon'ble DRP erred in determining the total taxable income of the Appellant for AY 2011-12 at Rs 85,35,18,207 instead of the income offered by the Appellant for the subject AY under normal provisions of the Act in its income-tax return. 2. Transfer Pricing Adjustment: The learned AO made a reference to the TPO for computation of the Arm’s Length Price (ALP) in relation to the international transactions. The TPO determined the ALP based on incremental benefit approach, proposing a transfer pricing adjustment of Rs 213,35,00,600 for the purchase of a customer contract. The DRP upheld the TPO's approach, noting substantial overvaluation of projected revenues by the assessee, and directed the TPO to use actual figures for the period up to FY 2014-15 and deflate projected revenues for subsequent years by 22.68%. The Tribunal, however, found that the TPO did not follow any of the prescribed methods under Section 92C of the Act, rendering the adjustment unsustainable. The Tribunal emphasized the necessity of using prescribed methods and accepted the valuation report by the independent valuer, directing the AO to delete the transfer pricing adjustment. 3. Disallowance of Deduction under Section 10A: The learned AO/DRP disallowed deduction under Section 10A amounting to Rs. 30,80,76,458, in respect of the profits earned by the Pune Unit-II of the Appellant, citing a change in shareholding during AY 2003-04. The Tribunal noted that similar issues in the assessee's own case for previous years were decided in favor of the assessee, holding that the omission of sub-section (9) of Section 10A was retrospective. The Tribunal directed the AO to allow the deduction under Section 10A. 4. Disallowance of Depreciation on Intangible Assets: The learned AO/DRP disallowed depreciation amounting to Rs 61,14,212 on intangible assets acquired by the Appellant, contending that the rights acquired do not fall under the definition of intangible assets under Section 32(1) of the Act. The Tribunal, relying on its own decisions in the assessee's previous years, held that the commercial rights acquired are intangible assets under Section 32(1)(ii) and directed the AO to allow the depreciation. 5. Computation of Profits Derived from Eligible Units: The learned AO/DRP held that the profits derived by eligible STP units should be computed without considering the gain from forex derivative contracts. The Tribunal found that the AO had adopted inconsistent positions in different years and emphasized the principle of consistency, directing the AO to consider forex gains as part of the profits for deduction under Section 10A. 6. Set-off of Brought Forward Business Losses and Unabsorbed Depreciation: The learned AO did not set off brought forward business losses and unabsorbed depreciation against the assessed total income for the assessment year under consideration. The Tribunal directed the AO to verify the claim of the assessee regarding business and depreciation loss and allow the same to the extent available as per law. 7. Initiation of Penalty Proceedings under Section 271(1)(c): The learned AO initiated penalty proceedings under Section 271(1)(c) of the Act. The Tribunal found this ground premature and dismissed it. Conclusion: The Tribunal allowed the appeals partly, directing the AO to delete the transfer pricing adjustment, allow the deduction under Section 10A, permit depreciation on intangible assets, consider forex gains for deduction under Section 10A, and verify and allow the set-off of brought forward losses and unabsorbed depreciation. The initiation of penalty proceedings was dismissed as premature.
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