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TMI Blog2022 (1) TMI 1386X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant : Himanshu Sinha and Bhuwan Dhooper, Advs. For the Respondents : Surendra Pal, CIT - D.R. ORDER Per Amit Shukla, JM The aforesaid appeal has been filed by the assessee against final assessment order 30.03.2021 passed by the ld. Assessing Officer for the quantum of assessment passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (the Act) on the directions given by the ld. DRP vide order dated 30.09.2020 for assessment year 2016-17. 2. In various grounds of appeal the assessee has challenged following additions/adjustments:- (a) transfer pricing adjustment at ₹ 24,33,04,705/- on account of Intra Group Services paid to AE for failing transfer support services; (b) disallowance of depreciation claimed on goodwill of ₹ 8,20,48,398/-; and (c) disallowance of expenses in respect of bad debts written off amounting to ₹ 22,96,719/-. 3. At the outset, the ld. Counsel for the assessee submitted that, all the three issues involved are covered by the decision of the Tribunal in assessee's own case for the assessment year 2015-16 vide judgment order dated 31st January, 2020. This fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under process . It is further observed that since filing of further appeal has been recommended and the same being under process, the addition has been retained. The Ld. CIT (DR) has not controverted the factual matrix, but reiterated the detailed arguments made before the Coordinate Bench which decided the Appeal in AY 2015-16 (Supra) and attempted to justify the stand of the Revenue. Be that as it may, it is imperative to ascertain the sustenance of three additions on the touchstone as to whether or not, any appeal has been preferred by the Revenue against the order of the Tribunal for AY 2015-16, as is the uncontroverted direction of the Ld. DRP in its order dated 30.09.2020. The Ld. Counsel for the appellant also made a statement at the Bar that till now no appeal has been preferred by the Revenue in the Hon'ble High Court. In order to impart certainty and finality to the litigation and noting the submissions of the parties, it is desired that the status of the process of filing of appeal of the Revenue before the Hon'ble High Court against the order of the Tribunal for AY 2015-16 (Supra) is brought on record. For this purpose, the Ld. CIT (DR) seeks ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... travel business segment and transferred GBT assets, operations, employees and shares of certain Amex affiliates to GBT III BV. A local business transfer agreement was entered between American Express India Pvt. Ltd. (AEIPL) and the assessee on 1 June, 2014 under which the corporate travel business division in India was transferred to the assessee vide a slump sale on a going concern basis for which the assessee had paid a consideration of ₹ 45,48,85,303/-. 8. During the relevant year the assessee had undertook various international transactions as noted in the TP's order. In so far as international transaction of availing of decision of support services of ₹ 24,33,04,705/-, the TPO had proposed adjustment of the entire amount on account of intra group services paid to the AE by applying CUP method to determine the NIL mainly on the following reasons:- The assessee has failed to provide any cogent evidence to demonstrate that services were received by the Applicant and it is only a clandestine methodology adopted for collusion to shift the profits from Indian territory. He held that the assessee has failed to establish any direct nexus between increa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h bad debts were considered in computing the income of the preceding assessment year. The Assessing Officer has disallowed such expenses mainly on the ground that firstly, no supporting evidence in relation to bad debts was furnished and secondly, quantum of bad debts is un-reasonable considering it is to be the second year of operations. 11. As noted above, now on all the issues are covered by the decision of the Tribunal in assessee's own case for the earlier year (supra). Even the DRP has noted and acknowledged this fact. For the sake of ready reference, the observations and the findings of the DRP are reproduced hereunder wherein the DRP has taken note of the Tribunal in assessee's own case for the earlier year:- Decision and Directions of the DRP 3. The Panel has very carefully considered the grounds of objections and written and oral arguments made on behalf of the assessee. The decision of the Panel on various objections is as follows: 3.1 Ground No. 1 to 6 relate to the transfer pricing adjustment of ₹ 243,304,705 in respect of transaction of availing of transitional support services. It was submitted that as part of a spin off exercise in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rival arguments. This issue had travelled to the ITAT for AY 2015-16 and the ITAT had decided the issue in favour of the assessee. The observations of the ITAT are as follows: 15. We have given thoughtful consideration to the orders of the authorities below and the rival contentions. There is no dispute that TNMM has been accepted as the most appropriate method. It is equally true that the TPO has singled out one transaction and applied CUP as most appropriate method. 16. The Hon'ble High Court of Delhi in the case of Magneti Marelli Powertrain India (P.) Ltd. v. Dy. CIT [2016] 75 taxmann.com 213/389 ITR 469 has held that when intra group services are linked to the main business activity of the company, they should be bench marked by adopting TNMM. The relevant findings of the Hon'ble High Court read as under: 17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of ₹ 38,58,80,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m is known as comparable uncontrolled price method is provided for in Rule 10B(1)(a) of the Income-tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (in) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B(1). The following three steps have been prescribed: - (a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. (ii) such price is adjusted to account for differences, if a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon David Co. Pvt. Ltd. v. CIT (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1)required that the expenditure should have been incurred wholly, necessarily and exclusively for the purposes of business in order to merit deduction. Pursuant to public protest, the word necessarily was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate 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 business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) (sic) the years deleting the disallowance of the brand of royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs. 19. Considering the facts of the case in totality in light of the judicial decisions referred to hereinabove, we do not find any merit in the TP adjustment of ₹ 33,10,68,560/-. The Assessing Officer/TPO is, accordingly, directed to delete the same. Grounds relating to TP adjustments with all i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill is concerned, this issue is by now well settled by the decision of the Hon'ble Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] taxmann.com 222/210 Taxman 428/348 ITR 302 wherein the Hon'ble Apex Court has held that good will acquired on amalgamation [being the difference between cost of asstts and consideration paid] is a capital right and thus eligible for depreciation u/s. 32 of the Act. 3.2.3.1 Considering the facts of the case in totality, in the light of decision of the Hon'ble Supreme Court Smifs Securities [supra], we direct the Assessing Officer to allow claim of depreciation. This ground is, accordingly, allowed. 3.2.3.1 The Panel, accordingly, directs the AO to verify from its records and see whether any appeal has been preferred against the aforesaid IT AT order for AY 2015-16 in assessee's own case and exclude the said addition on account of depreciation on goodwill, if no appeal has been preferred. The AO, however, will retain the addition, if this order of the TTAT for AY 2015-16 has been challenged before the High Court or the Supreme Court as the case may be. 3.3 Ground No. 8 relates to the disallowance of bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex. 37. In our considered opinion, the 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. We, accordingly, direct the Assessing Officer to allow the claim of bad debts. [Emphasis Supplied] 3.3.2.1 The Panel, accordingly directs the AO to verify from its records and see whether any appeal has been preferred against the aforesaid ITAT order for AY 2015-16 in assessee's own case and exclude the said addition on account of bad debts, if no appeal has been preferred. The AO, however, will retain the addition, if this order of the ITAT for AY 2015-16 has been challenged before the High Court or the Supreme Court as the case may be. 12. From the perusal of the above observations as highlighted us in bold, it is an undisputed fact that all the issues involved are covered by the decision of the Tribunal in assessee's own case. In fact the ld. DRP has categorically directed the Assessing Officer to verify from the record if no appeal has been preferred by the Department before the Hon'ble High Court against the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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