9911796707
TMI Blog2019 (12) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... This bunch of appeals relating to same assessee on similar issues were heard together and are being disposed off by this consolidated order for the sake of convenience. ITA No.1308/Del/2015 [Assessee's appeal] Assessment Year: 2010-11 3. The assessee has raised following grounds of appeal relating to Assessment Year 2010-11:- 1. "That the assessing officer erred on facts and in law in completing the assessment under Section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 120,22,91,210 under the normal provisions of the Act, as against income of Rs. 114,65,96,393 returned by the appellant. 2. That the assessing officer erred on facts and in law in making adjustment of Rs. 5,56,94,818 to the arm's length price of the 'international transactions' undertaken by the appellant with its associated enterprise on the basis of the order passed under Section 92CA(3) of the Act by the Transfer Pricing Officer ("TPO") read with directions of Dispute Resolution Panel ('DRP') passed under section 144C(5) of the Act. 2.1 That the assessing officer/DRP erred on facts and in law in determining the arms length price of the international transactions of paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the appellant. 2.9 That the assessing officer/DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was validly benchmarked along with other closely linked transactions applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. That the assessing officer/ DRP erred on facts and in law in computing adjustment on account of international transaction of payment made for services received from the associated enterprise without applying any prescribed methods. 3. That the assessing officer erred on facts and in law in making an addition of Rs. 14,75,217 on account of the alleged difference in interest charged on foreign currency loan of USD 9,00,000 extended to the associated enterprise by applying the interest rate of 13.25%. 3.1 That the assessing officer / DRP erred on facts and in law in disregarding the fact that the loan was advanced by the appellant to its associated enterprise in foreign denominated currency and accordingly, loan available in the international market with interest rate computed considering Libor rates shall be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase Rate of SBI for computing the arms length rate of interest and instead considering PLR of SBI. 5. That the DRP erred on facts and in law in not adjudicating the claim of allowance of depreciation under section 32(1)(i) of the Act on the difference between the aggregate book value of investment in the equity shares of Flextronics Software Systems Limited ('Flextronics') in the books of the appellant and Future Software Limited ('FSL') in the books of Flextronics and the aggregate face value of share capital of Flextronics held by the appellant and FSL held by Flextronics accounted as goodwill amounting to Rs. 26,75,57,10,570 pursuant to amalgamation of Flextronics and FSL with the appellant. 5.1 That on the facts and circumstances of the case and in law, pursuant to the decision of Supreme Court in the case of CIT vs. Smifs Securities Ltd.: (2012) 348 ITR 302, depreciation ought to be allowed in terms of section 32(1)(i) of the Act in respect of 'Goodwill' pursuant to amalgamation of Flextronics and FSL while computing the taxable income of the appellant, 5.2 That on the facts and circumstances of the case and in law, consideration received by the appellant for transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % mark up. The assessee further claims that the said payment of corporate charges of Rs. 3.66 crores, was included in the cost base for the purpose of benchmarking the international transactions undertaken by assessee. The assessee applied Transactional Net Margin Method as the most appropriate method and OP/OC as the Profit Level Indicator (in short "PLI"). The margin of the assessee worked out to 25.54%. The comparables which were selected had mean margin of 14.79% and hence, the international transaction of payment of corporate charges, was benchmarked by the assessee, to be at arms length. 7. The Assessing Officer made reference to the Transfer Pricing Officer (in short "TPO") to determine the arms length price of the aforesaid international transaction. The TPO in the TP proceedings show-caused the assessee in order to analysis the arms length price of the aforesaid international transaction. After considering the submissions made by the assessee, the TPO observed that there was no evidence that the services had actually been provided and also the assessee had failed to demonstrate the need for such services as also the receipt of the same. The TPO also stated that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactional Net Margin Method and on this combined approach, had benchmarked the international transaction at arms length. It was further pointed out by the Ld. DR for the Revenue that the law allowed to benchmark the two transactions, if the same were closely linked; but the assessee has to demonstrate the same. Referring to the order of TPO at page 7, the Ld. DR for the Revenue pointed out that from the nature of services, it was clear that these were not services in the field of software services. In such circumstances, the said transaction had to be benchmarked separately. He then pointed out that only question which arises is whether there was any rendition of services and incase the answer is 'yes' then no adjustment to be made, but in case the answer is 'no' then the TPO has to look into the same. Referring to the order of the Tribunal in para 81, the Ld. DR for the Revenue stated that for this year, the evidences have been filed as additional evidences. 11. The Ld.AR for the assessee in re-joinder pointed out that the DRP at pages 13 & 14 had looked into the scope of services and all the services received by the assessee were integrally and inextricably linked to the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment Year 2009-10. The Tribunal in ITA No.2671/Del/2014 relating to Assessment Year 2009-10, with lead order in ITA No.90/Del/2013, vide order dated 26.07.2019 had addressed this issue and noted the case of the Revenue and the contention of the assessee, which are similar to the issue raised in the present appeal. The Tribunal looked into the evidences filed by the assessee to substantiate its case of rendition of services by the AE which is availed by the assessee against which payment as made on cost plus 5% mark up. It was pointed out that the AE was providing similar services to the group companies and the expenditure was allocated on the basis of report of an independent valuer, on cost plus 5% mark up. The first issue is whether it is open to the assessee to decide as to avail the service or not? The said issue stands decided by the Hon'ble Delhi High Court in Reebok India Company, 374 ITR 118 (Del.) which has also been applied by the Tribunal in para 81 at Page 51 of the order, to come to the findings that where the expenditure has been incurred for business purposes, the Assessing Officer cannot question requirement and quantum of expenditure. 14. Now coming to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are interconnected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can aggregate the controlled transactions if the transactions 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 functional analysis, with or without adjustments are available. Otherwise, the TNM Method should not be adopted or applied on account of being an inappropriate method. Further the Hon'ble Delhi Court in the case of Sony Ericsson Mobile (supra) also held that if the Indian entity has satisfied Transactional Net Margin M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n comparability. In view of this we do not find any infirmity and none was pointed out before us by the Ld. departmental representative in the order of the Ld. dispute resolution panel. Consequently, after verifying that assessee has demonstrated need for those services, benefit derived from those services, evidence of receipt of such services and submitting that those services are neither duplicative in nature and nor are share holder activities, the DRP directed the Ld. transfer pricing officer to delete 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 that the needed test, the benefit test are also required to be viewed from the perspective of a businessperson and not from the perspective of the revenue. Further, no evidences have been led before us by revenue stating that these services are duplicative in nature and also serves only the interest of the shareholder. According to the information supplied by the assessee and examined by the Ld. dispute resolution panel does not give any such indication. Further regarding non-sharing of the cost by the joint-ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. Now, coming to the next issue of transfer pricing adjustment of Rs. 14,75,217/- made on account of interest on foreign currency loan extended to the AE. The assessee has raised Ground of appeal Nos. 3 to 3.2 in this regard. 18. Briefly in the facts relating to the issue, the assessee during the Financial Year 2009-10 had earned interest income of Rs. 4,16,801/- in respect of loan of USD 9,00,000 extended to its AEs-Aricent Japan Ltd & Aricent Technologies (Beijing) Ltd. The interest on the said loans advanced was charged LIBOR + 1.5%. The case of the assessee was that the rate of interest which was charged by it from its AE was comparable to the rate of interest in the international market. The TPO however, applied the Comparable Uncontrolled Price method to benchmark the aforesaid international transaction and he applied rate of 14.88% being the prime lending rate, and made an adjustment of Rs. 14,75,217/-. The DRP upheld the aforesaid adjustment but applied the rate of interest at 13.25%. The Assessing Officer accordingly, passed the assessment order against which the assessee is in appeal before us. 19. The Ld.AR for the assessee pointed out that the loan to the AEs was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded by the assessee to its AEs. 23. Briefly in the facts relating to the issue the assessee had raised invoices on account of provision of services to its AEs. Some of the said payments were not received by the assessee. The TPO noted that the receivables were outstanding for long period. He allowed credit of 30 days, treating the same to be normal period within which the amount due should have been paid by the debtors. He re-characterized the amount due from regular debtors, which was outstanding and treated the same as deemed loan. He then imputed notional interest on the delay in receipt of receivable @ 14.88% and proposed an adjustment of Rs. 22.62 crores. The DRP upheld the adjustment made by the TPO, but directed the TPO to impute interest @ 11.75% and allow set off in respect of delayed payments by the assessee to its AEs. The TPO accordingly made an adjustment of Rs. 8.72 crores, against which the assessee is in appeal before us. 24. The Ld.AR for the assessee submitted that the regular debtors which were outstanding for period more than 30 days, were treated as deemed loans by the TPO. It was pointed out that the delay of remittance could not be re-characterized as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. The issue raised in Ground of appeal Nos. 5 to 5.3 is against the claim of depreciation of goodwill arising out of amalgamation in Assessment Year 2008-09. 28. The Ld.AR for the assessee fairly pointed out that the assessee had not made the aforesaid claim in the return of income and the DRP did not adjudicate the same as no claim was made in return of income. The Assessing Officer also in the final assessment order applied the ratio laid down by the Hon'ble Supreme Court in Goetze (India) Ltd. [2006] 284 ITR 323 (SC). 29. The Ld.AR for the assessee pointed out that the depreciation was claimed in the accounts from Assessment Year 2008-09; but in terms of income tax, no such claim was made. The Ld.AR for the assessee further pointed out that ratio laid down by the Hon'ble Supreme Court in Goetze India Ltd.(supra) has been explained by Hon'ble Delhi High Court in Jai Parabolic Springs Ltd. [2008] 306 ITR 42 (Del) and the ratio of Hon'ble Apex Court does not apply to the appellate authorities. He thus pointed out that DRP had erred in not entertaining this Ground of appeal. He further pointed out that the issue now stands covered by the orders of Tribunal in Assessment Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FSSL and FSL and the consideration paid by the assessee shall be towards goodwill." 34. The Tribunal vide paras 54 to 63 dealt with all other aspects of the issues and the arguments of the DRP on different facets of goodwill acquired in business reconsideration and held that the assessee to be entitled to claim depreciation on goodwill, as per the rates applicable for the year under consideration. We are referring to the findings of the Tribunal in paras 54 to 63, but not reproducing the same for the sake of brevity. However, following same parity of reasoning, we allow the claim of the assessee of depreciation on goodwill. The Ground of appeal Nos. 5 & 5.1 are thus allowed. Ground of appeal No.5.2 is dismissed as not pressed and Ground of appeal Nos. 5.3 & 5.4 also stand allowed. 35. The assessee has raised Ground of appeal No.6 against its claim of credit of tax deducted at source. The Ld.AR for the assessee pointed out that the Assessing Officer has failed to allow the credit of TDS, on the subsequent TDS Certificates received by the assessee. He fairly submitted that the credit be allowed on verification. We find merit in the plea of the assessee and direct the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate charges as shareholder activities and holding them to be of no economic and commercial value to the business of the appellant. 1.3. That the Ld. CIT(A) erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was wholly and exclusively for the purpose of business of the appellant. 1.4. That the Ld. CIT(A) erred on facts and in law in not appreciating that the associated enterprise has already reduced the amount incurred towards shareholder activity from the cost allocated to the appellant and accordingly, no cost attributable to shareholder activity has been allocated to the appellant. 1.5. That the Ld. CIT(A) erred on facts and in law in not appreciating that the appellant had benchmarked the impugned transaction in its TP documentation in accordance with provisions of section 92C(1) of the Income-tax Act, 1961 ("the Act") and there was no occasion to re-determine the arm's length price ("ALP") thereof in the absence of satisfaction of any of the conditions specified under section 92C(3) of the Act. 1.6. That the learned CIT(A) erred on facts and in law in not appreciating the detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout prejudice, that on the facts and circumstances of the case and in law, the Ld. assessing officer may be directed to allow deduction of Rs. 2,77,79,494 under section 43B of the Act in respect of leave encashment and gratuity paid by exercising the power conferred under Section 254 of the Act. 3. That the Ld. CIT(A) erred on facts and in law in not adjudicating on addition of Rs. 19,12,401 on account of outstanding sundry credit balances completely ignoring the fact that the Ld. Assessing officer has not deleted the said addition on merits, vide rectification order dated 26.05.2017 passed under section 154/143(3) of the Act. 3.1. That the Ld. CIT(A) erred on facts and in law in not allowing the addition made on account of sundry credit balances outstanding from past three years completely ignoring the facts of the present case. The appellant craves leave to add, amend, alter, forgo, delete, rescind or withdraw the above grounds of appeal either before or during the hearing before the Hon'ble Tribunal. Further, the aforesaid grounds are mutually exclusive and without prejudice to each other." ITA No.5026/Del/2018 1. "Whether the Hon'ble CIT(A) erred in directed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the CIT(A) was bad in law. 46. We have heard the rival contentions and perused the record. The Ground of appeal of appeal raised by the assessee and the Revenue is in appeal against the benchmarking of the aforesaid transaction of payment of corporate charges by applying Transactional Net Margin Method as the most appropriate method. We have already adjudicated the issue of benchmarking of the international transaction of payment of corporate charges in the paras above and following the same parity of reasoning, we find no merit in the Ground of appeal raised by the Revenue hence, the same are dismissed. 47. Now coming to the disallowance retained by the CIT(A) at 20% of the total expenses; we find no merit in the same as the said amount attributable to shareholder activity has already been reduced by the AE while allocating the cost to the assessee. Accordingly, there is no merit in disallowing 20% of the aforesaid expenditure. Thus, we allow the claim of the assessee. The Ground of appeal Nos.1 to 1.10 stand allowed. 48. The issue in Ground of appeal Nos.2 to 2.3 is against the claim of deduction u/s 43B of the Act in respect of leave encashment and gratuity paid, befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m past three years. 52. Briefly in the facts of the case the Assessing Officer had made an addition of Rs. 19,12,401/- on account of alleged static creditors. The addition made by the Assessing Officer is of Rs. 19,12,401/-. The case of the assessee before us is that there is totaling error and amount totals to Rs. 11,92,401/-. The said credit balances as per the assessee were enforceable and recoverable by the creditors and were reflected as payable in the books of accounts of the assessee and hence, the Assessing Officer could not make the aforesaid addition u/s 41(1) of the Act, unless it is established that the liability had seized to exist. 53. The CIT(A) vide para 5.15 & 5.16 observed that the issue has been decided in favour of the taxpayer by the Hon'ble Delhi High Court in CIT vs Dalmia Finance Ltd. ITA No.833/2010 relying upon the order of Hon'ble Supreme Court in CIT vs Sugauli Sugar Works Ltd. [1993] 236 ITR 518. However, it was observed by the CIT(A) that the Assessing Officer had rectified the above addition u/s 154/143(3) of the Act and hence, no grievance remains with the assessee. 54. The Ld.AR for the assessee pointed out that the rectification was carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other assets while computing Goodwill. 2.2 That the DRP/ assessing officer erred on facts and in law in relying on the ITAT Ruling of DCIT vs. Toyo Engineering Ltd., ITA No. 3279/ Mum/2008 without appreciating that the same was reversed by the Hon'ble Mumbai Bench of the Tribunal. 2.3. That the DRP erred on facts and in law in holding that the amalgamated company cannot claim depreciation on assets acquired under amalgamation that is more than the depreciation allowable to the amalgamating company in terms of 5th proviso to section 32(1) of the Act. 2.4. That the DRP erred on facts and in law in holding that the Supreme Court in the case of CIT vs. Smifs Securities Ltd.; 348 ITR 302 has merely held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act and the Supreme Court has not dwelled into the aspect of applicability of 5th proviso to section 32(1) of the Act to the depreciation to be claimed on goodwill arising under amalgamation. 2.5. That the DRP/ assessing officer erred on facts and in law in not appreciating that the Goodwill represents difference between the aggregate book value of investment in the equity shares of Flextro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly holding that the appellant had received interest under section 244A of the Act on the income tax refund of Rs. 24,77,65,100 during the year under consideration. 3.1. That the DRP/ assessing officer erred on facts and in law in not appreciating that the appellant did not receive any interest under section 244A of the Act from the Government treasury during the year under consideration. 4. That the DRP/ assessing officer erred on facts and in law in disallowing expense to the extent of Rs. 60,51,351 while computing long term capital gain from sale of land on the Ground of appealthat the same were not incidental for sale of land. 4.1. That the DRP/ assessing officer erred on facts and in law in failing to appreciate that the expenses of Rs. 60,51,351 were incurred by the appellant towards legal charges paid to the legal advisors in respect of sale of land. 4.2 That the DRP erred on facts and in law In holding that the appellant failed to file the supporting documents as additional evidences without appreciating that the necessary supporting documents were duly placed on record in the course of the assessment proceedings. 5. That the DRP/ assessing officer erred on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost in the nature of stewardship expenditure. 8.3 That the DRP/TPO erred on facts and in law in not appreciating that the allocation of expenditure by the associated enterprise was duly supported by a global transfer pricing report prepared by an independent consultant, namely, Deloitte Tax LLP, USA. 8.4 While allegedly holding that no benefit was received by the assessee from payment of corporate charges, the DRP erred on facts and in law in summarily disregarding the correlation between services received from the associated enterprise and increase in the revenue and profits of the appellant. 8.5 That the assessing officer/DRP grossly misunderstood and misinterpreted the facts of the cost allocation agreement entered into between the appellant and its AE. 8.6 That the DRP erred on facts and in law in not appreciating that payment made by the appellant to its associated enterprise on account of corporate charges, represents actual cost incurred by the associated enterprise on behalf of the appellant. 8.7 That the DRP erred on facts and in law in not appreciating the additional evidences submitted in the form of affidavits of employees of the associated enterprise re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since the operating profit margin earned by the assessee is higher than the comparable companies, the assessee has already factored the cost of interest in its pricing while providing software development services to its associated enterprise. 10.5 That the DRP erred on facts and in law by holding that the working capital adjustment does not address the mispricing where the interest free receivables are outstanding beyond the average collection period. 10.6 Without prejudice, the TPO/DRP erred on facts and in law in failing to appreciate that the impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee, which is more than that working capital adjusted margin of the comparables companies. 10.7 Without prejudice that the TPO erred on facts and in law in failing to appreciate that no adjustment is warranted if complete set off is given for interest on payables due to all associated enterprises. 10.8. Without prejudice, that the TPO failed to appreciate that no adjustment was made on account of interest due from associated enterprise in Assessment Year 2011-12 and Assessment Year 2013-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation had declared income from long term capital gains totaling to Rs. 136.94 crores. The assessee had claimed legal expenses totaling to Rs. 4.58 crores. The Assessing Officer allowed the brokerage fee paid by the assessee totaling to Rs. 3.98 crores, but the balance expenditure was disallowed in the hands of the assessee. The Ld.AR for the assessee has taken us through the details of the expenditure booked by the assessee and pointed out the evidences in this regard were filed both before the Assessing Officer & DRP. He further pointed out that the expenses were incurred for the purpose of carrying on the business and were booked as expenditure against the sale of asset and the same may be allowed in the hands of the assessee. 66. The Ld.DR for the Revenue pointed out that the expenditure incurred by the assessee have not been verified by either by the authorities below and the same may be directed to be verified. 67. We have heard the rival contentions and perused the details of legal expenses which have not been allowed in the hands of the assessee. The expenditure comprises of house tax payment of Rs. 30 lakhs against the bill of Rs. 26,26,296/-. The said expenditure is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer thus passed final assessment order making the aforesaid addition in the hands of the assessee. 72. The assessee is in appeal before us in this regard. 73. After taking us through the factual aspects, the Ld.AR for the assessee pointed out that there are no provision under Act to substitute the actual consideration with notional value. He further stated that section 50C(A) were inserted by Finance Act, 2017 w.e.f 01.04.2018 and prior to this there were no powers with the Assessing Officer to substitute the value of actual consideration. He further referred to the agreement placed at page 265 of the Paper Book and it was brought to our notice that the shares of the said company of Japan were sold by the assessee to Cyprus company and the sale consideration was duly mentioned in the agreement at page 268 of the Paper Book. He pointed out that the valuation report were for RBI purpose, copy of which is placed at pages 400 to 404 of the Paper Book, under which the shares were valued @ Rs. 40,424 per share. It was stressed by the Ld.AR for the assessee that the said report does not give any power to the Assessing Officer to substitute of value of actual consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were sold by the assessee at a price of JPY 35 million. Accordingly, we direct the Assessing Officer to allow the loss claimed by the assessee on the sale of shares of its AE, Aricent-Japan. Ground of appeal Nos.5 to 5.2 raised by the assessee are allowed. 77. The issue in Ground of appeal No.6 is against the disallowance of interest paid on late deposit of TDS amounting to Rs. 8,84,112/-. The Ld.AR pointed out that the interest paid by the assessee was compensatory and hence, deductible in the hands of the assessee. He also pointed out that the said interest was not covered u/s 40(a)(ii) of the Act. 78. The Ld.DR for the Revenue placed reliance on the order of the Assessing Officer at page 18 of the assessment order. 79. Briefly in the facts relating to the issue the assessee had paid interest amounting to Rs. 8,84,112/- on late deposit of TDS on the foreign remittances u/s 195 of the Act. The assessee claimed the said expenditure as allowable u/s 37(1) of the Act, being compensatory and not penal in nature. However, the said plea of the assessee was not accepted by the authorities below. Hence, the assessee is in appeal before us. 80. The Ld.AR for the assessee pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest due on foreign currency loan extended to the AE, against which the assessee is in appeal before us. 87. The Ld.AR for the assessee referred to the loan agreement executed in March, 2008 and as per clause 8, the said loan was repayable in March, 2011. On 01.04.2011, the AE moved an application before the Chinese authorities seeking permission for repayment of the aforesaid loan. The Ld.AR for the assessee placed reliance on the on the decision of Delhi Bench of Tribunal in DCIT vs M/s TMW ASPF i Cyprus Holding Company Ltd. in ITA No.879/Del/2016) relating to Assessment Year 2011-12, order dated 09.08.2019. 88. We have heard the rival contentions and perused the record. The issue which arises before us is against the transfer pricing adjustment made in the hands of the assessee on account of interest due from Aricent-China on the loans advanced to it. The assessee had advanced the said loans to Aricent-China under the loan agreement of March, 2008 and as per clause 8, the said loan was repayable after a period of three years. The AE in China moved an application for repayment of the said loan and as per the laws of China, once the application is moved for repayment of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing provision, has been dealt by the Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd. vs. Union of India (supra), wherein their Lordships have held that even income arising from international transaction must satisfy the test of income under the Act and must find its home in one of the charging provisions. Here in this case, nowhere the TPO/AO has been able to establish that notional interest satisfy the test of income arising or received under the charging provision of Income Tax Act. If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international transactions with regard to the ALP. Only the interest income chargeable to tax can be subject matter of transfer pricing in India. Making any transfer pricing adjustment on interest which has neither been received nor accrued to the assessee cannot be held to be chargeable in terms of the Income Tax Act read with Article 11(1) of DTAA. Here it cannot be the case of accrual of interest also, because none of the investee companies have acknowledge that any interest payment is due, albeit they hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessing officer erred on facts and in law in completing the assessment under Section 144C(1) r.w.s. 143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 297,48,60,850 as against the income of Rs. 119,58,24,310 returned by the appellant. Corporate Tax issues 2. That the assessing officer erred on facts and in law in not allowing depreciation of Rs. 158,73,13,884 claimed under section 32(1 )(i) of the Act on written down value of Goodwill of Rs. 634,92,55,536 arising out of amalgamation of Flextronics Software Limited (Flextronics) and Futures Software Limited (FSL) into the assessee on the sole Ground of appealthat appellant has not assigned fair value to other assets while computing Goodwill. 2.1 That the assessing officer erred on facts and in law in not appreciating that the Goodwill represents difference between the aggregate book value of investment in the equity shares of Flextronics Software Systems Limited ('Flextronics') in the books of the appellant and Future Software Limited ('FSL') in the books of Flextronics and the aggregate face value of share capital of Flextronics held by the appellant and FSL held by Flextronics accounted as goodwill amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill by relying upon the decision of the Bangalore Tribunal in the case of United Breweries Ltd. vs. ADIT: 722/Bang/2014, wherein it has been held that depreciation on enhanced value of goodwill is barred in terms of sixth proviso to section 32(1 )(ii) of the Act. 2.10 Without prejudice, the assessing officer has erred in facts and in law in inadvertently disallowing Rs. 163,81,18,105 as against Rs. 122,72,31,644 claimed as depreciation on goodwill by the appellant in the return of income. 3. That on the facts and circumstances of the case and in law, consideration amounting to Rs. 54,27,737 received by the appellant for transfer of certain customer relationships to Aricent Technologies Mauritius Limited is Capital by nature (part of Goodwill) and ought not to be considered as part of taxable income of the appellant. 3.1 That the assessing officer erred on facts and in law in failing to appreciate that the customer relationships/ contracts transferred to ATML were intangible assets which had been reduced from the goodwill eligible for deduction under section 32(1 )(ii) of the Act and therefore, the said amount ought to be reduced while computing the taxable income of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the DRP erred on facts and in law in not appreciating the evidences submitted in the form of affidavits of employees of the associated enterprise rendering various services to the appellant. 4.8 That the assessing officer/ DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was wholly and exclusively for the purpose of business of the appellant. 4.9 That the assessing officer/DRP erred on facts and in law in not appreciating that the expenditure on the payment for services received from the associated enterprise was validly benchmarked along with other closely linked transactions applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 4.10 That the TPO/ DRP erred on facts and in law in computing adjustment on account of international transaction of payment made for services received from the associated enterprise without applying any prescribed methods. 5 That the assessing officer erred on facts and in law in not granting MAT credit claimed under section 115JAA of the Act 6 That the assessing officer erred on facts and in law in g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r passed by the assessing officer ("Ld. AO") is barred by limitation in terms of section 153 r.w.s 144C of the Act and therefore, is liable to be quashed. On the facts and circumstances of the case and in law, the Ld. AO has erred in passing the assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 ("the Act") after considering the adjustments made by the learned Transfer Pricing Officer ("Ld. TPO") in his order passed under section 92CA(3) of the Act passed in accordance with the directions provided by the Hon'ble Dispute Resolution Panel ("Hon'ble DRP"). Each of the Ground of appealis referred to separately, which may kindly be considered independent of each other. Corporate Tax issues That the Ld. AO erred on facts and in law in not allowing depreciation of Rs. 1,19,04,85,413 claimed under section 32(1 )(i) of the Act on written down value of Goodwill of Rs. 4,76,19,41,652 arising out of amalgamation of Flextronics Software Limited (Flextronics) and Futures Software Limited (FSL) into the assessee on the Ground of appealthat appellant has not assigned fair value to other assets while computing Goodwill. 2.1 That the Ld. AO erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a part of salary and since the assessee did not deduct any tax at source on payment to the group company, the amount claimed was disallowable under section 40(a) of the Act. 4.4 Without prejudice, that the Ld. AO failed to appreciate that: (a) tax was not deductible on mere issuance of options and (b) no disallowance, in any case, can be made under section 40(a) of the Act on account of alleged non-deduction of tax on payments made in the nature of 'emoluments' to employees. 4.5 That the Ld. AO erred on facts and in law in failing to appreciate that the assessee had merely reimbursed the expenses to its group company and the same was not subject to deduction of tax at source. 4.6 That the Ld. AO erred on facts and in law in treating the amount of discount a short capital receipt and the entire expenditure to be in the nature of capital expenditure. 5. The Ld. AO/TPO/Hon'ble DRP have erred in law and on facts of the case by delinking the inter-company receivables arising from the primary international transaction i.e. provision of software development services ("main service transaction") and proceeding to benchmark the same as a separate transaction without appreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and do not require any adjudication. Hence, the same are dismissed. 103. The Ground of appeal Nos. 2 to 2.6 raised by the assessee is against the disallowance of depreciation on goodwill. We have already adjudicated this issue in paras above while deciding Ground of appeal Nos.5 to 5.1 in Assessment Year 2010-11 and following the same parity of reasoning, we allow Ground of appeal Nos. 2 to 2.6 raised by the assessee. 104. The issue raised in Ground of appeal Nos. 4 to 4.6 is against the disallowance of ESOP expenses of Rs. 6.58 crores. 105. Briefly in the facts of the issue raised, the assessee had claimed sum of Rs. 6.58 crores as deduction on account of reimbursement of ESOP expenses to the parent company. The assessee was asked to provide the details of tax deducted at source and proof of deposit of the same. The assessee in reply pointed out that the said amount was paid towards ESOP, on which no tax was deducted. The Assessing Officer show-caused the assessee to explain why the deduction on account of salary may not be disallowed, since it was not an allowable expenditure. The explanation of the assessee in this regard was as under:- I. "ESOP expense represents re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxmann.com 26 (Delhi High Court); and [iii] Biocon Limited vs DCIT 155 TTJ 649 (Banglore) (Special Bench) 110. It was also pointed out that the Assessing Officer has placed reliance on the decision of Special Bench but u/s 192 r.w.s 17(2), when the option is exercised by the employee, then tax is to be deducted at source. 111. The Ld.DR for the Revenue placed reliance on the order of the Assessing Officer and DRP with special reference to page 24 of the order of the DRP. 112. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is with regard to claim of the expenses on account of reimbursement paid to the parent company towards ESOP for granting stock auctions to the assessee's employees. Share incentive plan for the employees of Aricent Group was floated and under the scheme, as part of the employee compensation measure, an option to purchase the shares after the completion of the vesting period was granted to the employees of the company at a discounted price to the fair market value of the share. The difference between the fair market value of the shares and the amount paid by the employee on actual exercise of opti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising the options. 117. Following the same parity of reasoning, we hold that the said expenses are allowable as a business expenditure in the hands of the assessee. 118. Now coming to the second aspect of the case that whether aforesaid payment requires tax deduction or not. The requirement to deduct tax would arise when the employee exercises the option granted under ESOP and it would be treated as perquisite in the hands of the employee on actual allocation/transfer of such shares, which is provided u/s 17(2)(vi) of the Act. Further, even the provision of section 192 of the Act mandate the deduction of tax at source on actual payment which is allotment of shares in the case of ESOP and not prior to that. Hence, there was no requirement to deduct tax at source by the assessee while reimbursing the amount to its AE during the year under consideration. Accordingly, we direct the Assessing Officer to allow the said expense totaling to Rs. 6.58 crores. Ground of appeal Nos. 4 to 4.6 are thus allowed. 119. The issue raised in Ground of appeal No.5 by the assessee is against the transfer pricing adjustment of Rs. 3.90 crores on account of interest on receivables. The said issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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