M/S. GENPACT SERVICES LLC,,GURGAON vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI

BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER

ITA No.2524/Del/2016 Assessment Year: 2010-11 M/s. Genpact Services LLC, Vs. DCIT, Genpact Tower, Sector-53, Circle-1(3)(1), (International DLF City, Phase-V, Taxation), Gurgaon New Delhi PAN :AACCG3353P (Appellant) (Respondent)

Appellant by Sh. Tarandeep Singh, Advocate Sh. Tarun Singh, Advocate Respondent by Sh. Anand Kumar Kedia, CIT (DR) Sh. Mrinal Kumar Das, Sr. DR Date of hearing 20.01.2023 Date of pronouncement 31.01.2023 ORDER PER SAKTIJIT DEY, JM: Captioned appeal by the assessee arises out of order dated

15.02.2016 of learned Commissioner of Income Tax (Appeals)-42,

New Delhi, pertaining to assessment year 2010-11.

issues arise for consideration. Firstly, whether the expenditure

incurred by the assessee for acquiring customer contracts and

assembled workforce from M/s. Genpact India is revenue or

capital in nature and secondly, whether learned first appellate

ITA No.2524/Del/2016 AY: 2010-11

authority was justified in reducing the value of customer related

contracts and goodwill by tinkering with the value determined by

registered valuer.

a non-resident corporate entity incorporated under the laws of

Delaware, United State of America (USA). As stated by the

Assessing Officer, the assessee is engaged in the business of

providing Information Technology Enabled Services (ITES), such

as, data entry, conversion/processing data, business support,

billing services. For the assessment year under dispute, the

assessee filed its return originally on 12.10.2010 declaring loss of

Rs.3,89,17,092/-. Thereafter, the assessee filed a revised return

on 27.12.2011, declaring loss of Rs.6,78,78,188/-. In course of

assessment proceeding, while examining the return of income

filed by the assessee along with financial statements, Assessing

Officer noticed that in the year under consideration, the assessee

had acquired third party debt collection services as well as part of

analytical business of M/s. Genpact India as slump sale as a

going concern on “as is where is basis” for a total consideration of

Rs. 62,12,70,648/-. Out of which, an amount of

Rs.39,96,70,372/- was paid towards acquisition of tangible 2 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

assets. Whereas, the balance amount of Rs.22,16,00,276/-

represents payment made towards customer contracts, assembled

workforce etc. The Assessing Officer found that in the return of

income, the assessee had claimed the amount of

Rs.22.16,00,276/- as revenue/business expenditure.

enduring benefits to the assessee, the Assessing Officer called

upon the assessee to show-cause, as to why, it should not be

treated as capital expenditure. In response to the query raised by

the Assessing Officer, the assessee furnished detailed submission

stating that by incurring the expenditure, the assessee has not

derived any enduring benefit, nor acquired any capital asset.

Therefore, it has to be allowed as revenue expenditure. The

Assessing Officer, however, was not convinced with the

submissions of the assessee. He observed, the assessee has

recorded the payments in the books of account as intangible

assets in terms of Accounting Standard -26 (AS-26). Thus, he

observed that the accounting treatment given by the assessee

itself presupposes that the expenditure incurred is capital in

nature. In this context, the Assessing Officer also referred to the

note appended by the Auditor to the Audit Report. 3 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

expenditure incurred of Rs.22,16,00,276/- is in the nature of

capital expenditure. Accordingly, he allowed depreciation at the

rate of 25% on such expenses. The balance amount of

Rs.16,62,00,276/- was added back to the income of the assessee.

The assessee contested the aforesaid disallowance before learned

Commissioner (Appeals). While agreeing with the view of the

Assessing Officer that the expenditure incurred is capital in

nature, learned Commissioner (Appeals) did not stop there. On

verifying the break-up of total consideration paid for acquiring the

business from M/s. Genpact India, learned Commissioner

(Appeals) found that the said consideration was based on

valuation made by an independent valuer, namely, Grant

Thornton. On examining the break-up, he found that the

valuation of goodwill included value of trained and assembled

workforce, amounting to Rs.2,91,63,000/-. He observed, the

assessee had acquired the business on a slump sale as a going

concerns on “as is where is basis”. He observed that business was

acquired along with all assets and liabilities for a fixed

consideration. Therefore, the consideration paid is for acquiring

business as a whole and cannot be assigned to 4 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

recruitment/training cost of employees that may have been

imparted in the earlier years. He observed, the employees were

not bound to work with the assessee, as, no such contract exists

with the assessee in that regard. Thus, he was of the view that the

amount of Rs.2,91,63,000/- cannot be assigned to employees

cost.

terms and conditions of services and emoluments as existed

before, the agreement with the assessee and their services were

deemed as continued. In the aforesaid premises, he was of the

view that the Assessing Officer had granted excess depreciation,

thereby, resulting in under assessment of income. Therefore, he

issued notice proposing to enhance the income. Though, the

assessee filed detailed submission objecting to the proposed

enhancement, however, learned Commissioner (Appeals) rejected

submissions of the assessee. In this context, he observed that

while valuing the intangible assets, which includes customer

contracts, the Valuer has valued it for a period of 2 years and 4

months by taking the earnings before interest and taxed for 2010,

2011 and 2012 separately and thereafter discounted at the rate of

19.20%, which resulted in value of customer contract at 5 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

Rs.11,53,26,000/-. Further, the remaining life of customer

contracts has been further multiplied by amortization tax benefit

factor of 1.28% resulting in valuation of customer contract at

Rs.14,72,22,000/-. Thus, according to him, assessee is claiming

double benefit by first enhancing the present value of customer

contract with the amount of likely tax benefit at the rate of 25%,

on which further benefit in the form of depreciation allowance is

being claimed. Stating that the value of customer contracts has

been arbitrarily raised by Rs.3,18,96,000/-, he reduced the value

to Rs.11,53,26,000/-. Further, he observed, while valuing the

goodwill at Rs.7,43,78,276/-, the independent Valuer has

included the value of assembled workforce amounting to

Rs.2,91,63,000/-, which, according to learned first appellate

authority, cannot be included in the valuation of goodwill.

Accordingly, he reduced the value of goodwill to that extent.

materials on record. At the outset, we need to address the nature

of expenditure incurred by the assessee, whether capital or

revenue. Facts and materials on record clearly reveal that the

assessee had incurred the cost of Rs.22.16 crores for acquiring

customer collection services business of M/s. Genpact India, on 6 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

slump sale as a going concerns on “as is where is basis”. Though,

from the stage of assessment proceeding the assessee has made

an attempt to justify its claim of revenue expenditure, however,

no substantive evidence could be furnished by the assessee to

demonstrate that the assessee had identical business activity of

debt collection services.

that the assessee could not establish that it was in the same line

of business of debt collection services prior to acquisition of the

new business, specific query was made to learned counsel

appearing for the assessee at the time of hearing to furnish any

substantive evidence to demonstrate the aforesaid fact. However,

learned counsel for the assessee expressed his inability to furnish

any such documentary evidences, except, whatever is available on

record.

that there is nothing therein which could even remotely suggest

that the assessee, at any point of time, before acquiring the debt

collection services business, was in the same line of business. It

is a fact on record that the assessee has made payment for

acquiring the customer contracts and assembled workforce, 7 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

which are nothing but capital assets and would give enduring

benefits to the assessee.

assessee has acquired a completely new business set up, which is

nothing but an income generation tool. Therefore, in our view, the

expenditure incurred is in the nature of capital expenditure. To

that extent, we agree with the view expressed by the departmental

authorities. However, insofar as, the issue of enhancement of

income by learned first appellate authority, we must observe, the

assessee has paid the consideration for acquiring the business on

the basis of value determined by an independent valuer. It is a

fact that the assessee has paid the consideration as determined

by the Valuer for acquiring the business. There is nothing on

record to suggest that the payment claimed to have been made for

acquiring the business is either non-genuine or doubtful. At least,

no such view, either express or implied, can be found either in the

observations of the Assessing or learned first appellate authority.

Thus, when the payment made by the assessee is not disputed

and is in terms of an agreement between two parties, learned

Commissioner (Appeals) cannot arbitrarily and unitarily reduce a

part of the payment made for computing depreciation. In any 8 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

case of the matter, the consideration paid by the assessee is

supported by valuation report of an independent Valuer, who is

an expert in the field. In case, learned first appellate authority

had any doubt regarding valuation report, he should have

referred the valuation to an expert, instead assuming the role of

Valuer himself and tinkering with valuation of certain assets

made in the valuation report, viz., customer and contract

goodwill. Thus, in our view, the action of learned Commissioner

(Appeals) in reducing the value of customer contract and goodwill,

as determined by the independent Valuer is wholly inappropriate,

hence, unsustainable. Accordingly, we reverse the decision of

learned Commissioner (Appeals) on the issue of valuation.

Consequently, the computation of the Assessing Officer in

allowing depreciation at 25% on the amount of

Rs.22,16,276,000/- is upheld. Grounds are partly allowed.

Order pronounced in the open court on 31st January, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 31st January, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 9 | P a g e

ITA No.2524/Del/2016 AY: 2010-11

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