2020 (2) TMI 156 - AT - Income Tax

TP Adjustment - rendition of services by the AE to the appellant company - HELD THAT - Lower authorities erred in questioning the need and benefit arrived by the assessee from payment in respect of availing of services from its AE. All that is required to be seen is as to whether there was actual rendition of services or not. We have carefully gone through the emails and invoices placed in the paper book vis a vis TSA Agreement. In our considered opinion, these documentary evidences clearly show the rendition of services by the AE to the appellant company. Moreover, the TPO himself has accepted the fees received by the assessee from rendering these services. We fail to understand why the payments have been subjected to different treatments. Hon'ble High Court of Delhi in the case of EKL Appliances 2012 (4) TMI 346 - DELHI HIGH COURT has held that the TPO does not have power to adjudicate the allowance/disallowance of expenditure incurred by the assessee thereby demolishing the need and benefit derived by the assessee.- Decided in favour of assessee Disallowance of depreciation on goodwill - main reason for dismissing the claim of depreciation by the Assessing Officer is that in none of the valuation reports, good will has been separately mentioned - HELD THAT - Carefully gone through the valuation reports mentioned elsewhere, which are part of the paper book filed before us. It is true that in none of the valuation reports, goodwill has been separately valued. But it is equally true that the assessee has paid consideration over and above the fair value of the assets of Amex. In our considered opinion, differential amount represents payment towards goodwill. We do not concur with the observations of the DRP that the assessee, with the motive of reducing profits in form of depreciation, had entered into this transaction. In our considered view, no prudent business man would pay a sum of ₹ 45.48 crores to claim depreciation of ₹ 10.93 crores over a period of five years, not to mention that the Amex have confirmed that they have paid capital gain tax on the consideration paid by the assessee to acquire Corporate Travel Division. Assessing Officer has confused himself with the valuation report of the independent valuer with another report wherein the value of the transferred business had been determined at negative value of ₹ 1.9 million. We find that this valuation report was prepared only for FEMA purposes to justify the determination of price of shares issued by the assessee to its share holders. In so far as the depreciation of goodwill issue is by now well settled by the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT wherein the Hon'ble Apex Court has held that good will acquired on amalgamation being the difference between cost of assets and consideration paid is a capital right and thus eligible for depreciation u/s 32 of the Act. We direct the Assessing Officer to allow claim of depreciation. This ground is, accordingly, allowed. Claim of bad debts - Out of the receivables the assessee was unable to recover ₹ 2.25 crores from certain parties - HELD THAT - There is no dispute that on the acquisition of Corporate Travel Division, the appellant company also acquired receivables. It is also not in dispute that out of the receivables, the receivables amounting to ₹ 2.25 crores from certain parties could not be recovered. It is a settled proposition of law that to claim bad debt, all that is required for the assessee is to actually write off the debts in his books of account. The receivables written off by the appellant company were erstwhile receivables to Amex duly reflected in their balance sheet and, therefore, it can be safely presumed that the receivables were part of business profits of the Amex. Assessee has successfully discharged its onus and has fulfilled the conditions laid down u/s 36 of the Act. We, therefore, do not find any reason why the write off of bad debts should not be allowed.

Summary

Issues Involved:
1. Additions made on account of Transfer Pricing (TP) issues.
2. Additions made on corporate issues.

Detailed Analysis:

1. Additions Made on Account of Transfer Pricing (TP) Issues:

The appellant, a wholly-owned subsidiary of GBT III BV, Netherlands, engaged in the travel services business, had several international transactions with its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) proposed additions based on the Comparable Uncontrolled Price (CUP) method, questioning the arm's length price (ALP) of services availed by the appellant from its AEs. The TPO argued that the appellant failed to provide evidence of actual services received and deemed the transactions as profit-shifting mechanisms. The TPO's adjustments included:

(a) Provision of operational and business support services amounting to ?34,55,989/- by including/excluding certain comparable companies.
(b) Disallowance of availing forward TSA and Regional Headquarter Services amounting to ?33,10,68,560/-.

The appellant contended that the TPO and the Dispute Resolution Panel (DRP) erred by applying the CUP method selectively while accepting the Transactional Net Margin Method (TNMM) for other transactions. The appellant argued that the payments for availing TSA and RHQ services form the cost base, ensuring a 3% assured margin as per the global transfer pricing policy. The appellant provided documentary evidence, including emails and invoices, to demonstrate the actual rendition of services.

The Tribunal referred to the Delhi High Court's judgment in Magneti Marelli Powertrain India Pvt Ltd, which held that when intra-group services are linked to the main business activity, they should be benchmarked using TNMM. The Tribunal noted that the TPO had accepted the fees received by the appellant for rendering services but disallowed the payments under the same agreement, leading to inconsistent treatment. The Tribunal also cited the Delhi High Court's decision in EKL Appliances, which emphasized that the TPO does not have the authority to adjudicate the necessity or benefit of the expenditure incurred by the assessee.

Based on the judicial precedents and the documentary evidence provided, the Tribunal found no merit in the TP adjustment of ?33,10,68,560/- and directed the Assessing Officer/TPO to delete the same. The grounds relating to TP adjustments were allowed.

2. Additions Made on Corporate Issues:

a. Disallowance of Depreciation on Goodwill:

The appellant acquired the Corporate Travel Division of AMEX through a slump sale, paying ?45,48,85,303/-. The differential amount over the net assets was accounted as goodwill, and depreciation was claimed. The Assessing Officer disallowed the claim, arguing that the valuation reports did not separately mention goodwill. The Tribunal noted that the appellant paid consideration over the fair value of the assets, representing payment towards goodwill. The Tribunal referred to the Supreme Court's decision in Smifs Securities Ltd, which held that goodwill acquired on amalgamation is a capital right eligible for depreciation under Section 32 of the Act. The Tribunal directed the Assessing Officer to allow the claim of depreciation.

b. Disallowance of Bad Debts:

The appellant wrote off ?2,25,26,524/- as bad debts, which were part of the receivables acquired from AMEX. The Assessing Officer disallowed the claim, questioning the credibility of the entities involved. The Tribunal emphasized that to claim bad debts, the assessee only needs to write off the debts in the books of account. The Tribunal found that the appellant had successfully discharged its onus and fulfilled the conditions under Section 36 of the Act. The Tribunal directed the Assessing Officer to allow the claim of bad debts.

Other grounds raised by the appellant were consequential in nature.

In conclusion, the appeal of the assessee was allowed, and the order was pronounced in the open court on 31.01.2020.