2017 (3) TMI 29 - AT - Income Tax

Transfer pricing adjustment - international transaction relating to acquisition of intangible assets by assessee from its associated enterprise - Held that - The authoritative pronouncement by the Hon ble High Court in Vodafone India Services Pvt. Ltd case 2014 (10) TMI 278 - BOMBAY HIGH COURT clearly brings out that the mechanism of measurement of income by application of arm s length principle prescribed in Chapter X of the Act can be invoked only where income arises from international transaction . Applying the aforesaid ratio to the instant facts it is quite clear that the consideration paid for acquisition of Goodwill and Customer lists has not been considered while computing the taxable income and therefore the same cannot be subject to application of arm s length principle contained in Chapter X of the Act. Therefore so far as the stand of Revenue qua the adjustment made on account of cost of acquisition of Goodwill and Customer lists is concerned the same is hereby directed to be deleted. Adjustment made in the cost of acquisition of Trademark - the plea of assessee has been that the valuation has been carried out by an expert and the weightage has been assigned on the basis of variety of considerations inter-alia including the potential of generating business in future - Held that - In our considered opinion the assessee has explained the basis of arriving at the consideration and the basis is not alien to the theories of valuation. So however in contrast if we were to examine the stand of TPO same is quite adhoc and unscientific and is only a guesstimate. The TPO observed that assessee has paid almost 25% extra for the acquisition which is devoid of any rationale or scientific methodology. Therefore in our considered opinion the TPO has not rejected the valuation of assessee on the basis of any objective reasoning. At the time of hearing the learned representative also pointed out that the result of valuation carried out by TPO is minimal inasmuch as it would result in the reduction in claim of depreciation by a sum of 2, 32, 874/- which is quite insignificant. Be that as it may after having considered the entire conspectus of facts and circumstances of the case we do not find any justification to approve the approach of TPO to compute the arm s length price of the transaction of acquisition of Trademark as it is neither scientific and nor it is in the manner prescribed in the statute. Therefore with respect to the adjustment made on account of cost of acquisition of Trademark the Assessing Officer is directed to delete the addition. Thus transfer pricing adjustment made on account of international transaction relating to acquisition of intangible asset is hereby directed to be deleted and assessee accordingly succeeds.

Summary

Issues Involved:
1. Transfer pricing adjustment on acquisition of intangible assets.
2. Levy of interest under Section 234B of the Income Tax Act.
3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment on Acquisition of Intangible Assets:

The primary issue in this appeal concerns a transfer pricing adjustment of ?5.53 crores made by the income-tax authorities regarding the acquisition of intangible assets (Goodwill, Trademarks, and Customer lists) by the assessee from its associated enterprise. The assessee, a subsidiary of Global Payments Asia-Pacific India Pvt. Ltd., acquired the credit card processing and merchant acquiring business of Hongkong and Shanghai Banking Corporation (HSBC) in India for a total consideration of ?28.51 crores, which included ?27.64 crores for the intangible assets.

The Transfer Pricing Officer (TPO) determined that the stated value of consideration was not at arm’s length price, concluding that the assessee paid almost 25% extra for the acquisition of the intangibles. Consequently, the TPO adjusted the value to ?22.11 crores, resulting in an addition of ?5.53 crores to the returned income.

The assessee argued that no deduction was claimed on the acquisition costs of Goodwill and Customer lists, either as revenue expenditure or by way of depreciation. Relying on the decision of the Pune Bench of the Tribunal in the case of Eaton Technologies (P.) Ltd. and the judgment of the Hon'ble Bombay High Court in Vodafone India Service Pvt. Ltd., the assessee contended that no adjustment on account of arm’s length price could be made if the amount had not been considered while computing taxable income.

The Tribunal agreed with the assessee, referencing the Hon'ble Bombay High Court's ruling that the arm’s length principle in Chapter X of the Act applies only where income arises from an international transaction. Since the consideration paid for acquiring Goodwill and Customer lists was not considered in computing taxable income, the adjustment was deemed inappropriate and was deleted.

Regarding the acquisition of the Trademark, the Tribunal noted that the assessee had capitalized the cost and claimed depreciation. The TPO’s adjustment was based on an unscientific and ad hoc methodology. The Tribunal found the assessee's valuation, which considered future business potential, to be reasonable and directed the deletion of the adjustment made by the TPO.

2. Levy of Interest Under Section 234B:

The Tribunal noted that the issue of interest under Section 234B of the Act is consequential in nature and does not require specific adjudication.

3. Initiation of Penalty Proceedings Under Section 271(1)(c):

The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(c) of the Act as premature.

Conclusion:

The Tribunal directed the deletion of the transfer pricing adjustment of ?5.53 crores related to the acquisition of intangible assets. The appeal was partly allowed, with the issues of interest under Section 234B being consequential and the initiation of penalty proceedings under Section 271(1)(c) being dismissed as premature.