ATOS IT SERVICES PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND MS. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No. 732/Bang/2022 Assessment Year : 2018-19 M/s. Atos IT Services Pvt. Ltd., The Assistant 5th Floor, Campus-B, Commissioner of Plot 8B, RMZ Centennial, Income Tax, ITPL Main Road, Circle – 1(1)(1), Whitefield, Vs. Bangalore. Bangalore – 560 048. PAN: AAACX1727G APPELLANT RESPONDENT Assessee by : Shri Dhaneesh Bafna, CA Revenue by : Shri D.K. Mishra, CIT (DR) Date of Hearing : 15-03-2023 Date of Pronouncement : 29-03-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order dated 29.06.2022 passed by the Ld.ACIT, Circle – 1(1)(1), Bangalore on following grounds of appeal for A.Y. 2018-19. “The grounds mentioned herein by the Appellant are without prejudice to one another. 1. Ground 1: Notional Interest on delayed receivables On the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel (`DRP') has erred in confirming the view of the IA. Assessing Officer (`A0')/ IA. Transfer Pricing Officer (`TPO') of considering overdue receivables from Associated Enterprises (`AEs') as a separate international transaction under the provisions of

Page 2 IT(TP)A No. 732/Bang/2022 section 92B of the Income-tax Act, 1961 (`the Act') and confirming the Transfer Pricing adjustment of INR 1,00,11,131/- as interest on delayed receivables from AEs. Further, the Ld. DRP/Ld. AO have erred in upholding the Ld. TPO's reasoning and not providing the working capital adjustment while determining the arm's length price. The Appellant humbly prays that the aforesaid adjustment ought to be deleted. Without prejudice to the above, the Ld. AO/ Ld. TPO has erred in not computing the adjustment of notional interest on outstanding receivables from AEs at INR 76,71,297/- which is in line with the Directions issued by the IA. DRP and the approach adopted by the IA. TPO. 2. Ground 2: Penalty proceedings under section 270A of the Act On the facts and in the circumstances of the case and in law, the IA. AO has erred in proposing to initiate penalty proceedings under section 270A of the Act without appreciating that none of the provisions of section 270A of the Act get attracted in the facts of the Appellant's case. The Appellant humbly prays to Your Honours to kindly direct the Ld. AO to drop/ abate the penalty proceedings and oblige. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.” 2. At the outset, the Ld.AR submitted that assessee has raised additional ground nos. 5 to 6 vide application dated 24.01.2023, wherein the assessee is challenging notional interest computed on delayed receivables as alternative plea. He submitted that assessee has raised the main issue in Ground no. 1, however various aspects of the issue is challenged by way of additional grounds. Further, it is submitted that additional Ground no. 7 is raised by assessee on disallowance of depreciation on goodwill that arose out of the business acquired on slump sale basis by assessee in A.Y. 2016-17.

Page 3 IT(TP)A No. 732/Bang/2022 3. The Ld.AR submitted that inadvertently this issue was not raised in the original ground of appeal and therefore the same are raised by way of additional grounds. Additional grounds of appeal: “Grounds relating to Transfer Pricing issues 3. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer (learned AO')/ the Learned Transfer Pricing Officer (`Ld. TPO') and the Learned Dispute Resolution Panel (learned DRP') erred in not providing an adjustment for the differences in working capital of the Appellant and the comparable companies while computing arm's length price for the international transaction with respect to the software development services segment. The Appellant prays that working capital adjustment ought to be granted while computing arm's length price with respect to the software development services segment. 4. On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. DRP/Ld. TPO erred in not considering that the working capital adjustment will appropriately take into account the delayed/outstanding receivables from the Associated Enterprises (`AEs') and separate transfer pricing adjustment thus will not be warranted. The Appellant prays that the transfer pricing (`TP') adjustment on account of interest on delayed receivables from the Associated Enterprises be deleted. 5. Without prejudice to above, on the facts and in the circumstances of the case and in law, the Ld. AO /Ld. DRP/Ld. TPO erred in computing notional interest on overdue foreign currency receivables at SBI short term deposit rate instead of foreign currency denominated rate i.e. LIBOR rate. The Appellant prays that the TP adjustment on account of interest on delayed receivables from the Associated Enterprises ought to be calculated using LIBOR rate. 6. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld.AO/Ld. DRP/Ld. TPO erred in including the outstanding receivables from Indian AEs and Third Parties while computing transfer pricing adjustment on outstanding receivables from the AEs. The Appellant prays that the TP adjustment on account of interest on outstanding receivables from the AEs should be

Page 4 IT(TP)A No. 732/Bang/2022 restricted to the outstanding receivables from Foreign AEs only. Ground relating to Corporate Tax Issues: 7. On the facts and in the circumstances of the case and in law, depreciation on goodwill generated during AY 2016- 17, on account of acquisition of business on a slump sale basis from Xerox Business Services India Private Limited (`XBSIPL'), should be allowed u/s 32(1) of the Act for the year under consideration. The Appellant humbly prays that the Ld. AO be directed to allow depreciation on goodwill u/s 32(1) of the Act amounting to Rs. 13,15,04,286/-. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.” 3.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 3.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional grounds, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us. 3.3 The Ld.DR did not object for the additional grounds being admitted. 3.4 We note that the additional grounds are directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts.

Page 5 IT(TP)A No. 732/Bang/2022 3.5 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Accordingly, the application filed by the assessee dated 24.01.2023 stands allowed. 4. Brief facts of the case are as under: 4.1 The assessee field its return of income for year under consideration on 29.03.2019 declaring total income of Rs.39,69,81,380/-. The case was selected for scrutiny and notice u/s. 143(2) was issued to assessee. A reference was made by the Ld.AO to the TPO for determination of the ALP of the international transactions. 4.2 During the course of the transfer pricing proceedings, the Ld.TPO found that assessee had following transactions with its associated enterprises. Sl.No. Description of the international Paid/ Received/ transactions Payable (INR) Receivable (INR) 1 Payment of trademark royalty 192080 Provision of software 2 2412743204 development services Reversal of software 3 7236442 development income 4 Project related charges 251985 Receipt of parental guarantee 5 8420 charges Receipt of communication 6 853745 network charges 7 Receipt of general services 3448694

Page 6 IT(TP)A No. 732/Bang/2022 8 Receipt of global IT services 63215208 Receipt of global strategic sales 9 615 engagement services Reversal of payment for global 10 14417 management services Receipt of group market leader 11 60952 services Receipt of global system 12 4729197 integration services 13 Receipt of training services 9808065 Receipt of integration 14 acquisition and group transform 5662122 services 4.3 The Ld.TPO noted that assessee used TNMM as the most appropriate method and computed its margin by using OP/OC as PLI at 13.43%. 4.4 The Ld.TPO noted that assessee has used 13 comparables to hold its transaction to be at arms length. 4.5 The Ld.TPO dissatisfied with the comparability selected a set of 20 comparables with the median of 23.6% and computed the shortfall in the hands of the assessee at Rs.25,49,12,782/-. The Ld.TPO also computed the notional interest on delayed receivables by using six month short term SBI interest, after allowing 30 days of credit period at Rs.1,00,11,131/-. 4.6 On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order by proposing the addition in respect of transfer pricing adjustments in the hands of the assessee at Rs.26,49,23,913/- by order dated 13.09.2021. 4.7 On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP while passing the directions,

Page 7 IT(TP)A No. 732/Bang/2022 granted certain reliefs to the assessee wherein the transfer pricing adjustment was revised to Rs.1,00,11,131/- pertaining to the notional interest computed on outstanding receivables. Against the imputed order, the assessee is in appeal before this Tribunal. Ground no. 1 read with Addl. Ground nos. 3-6: 5. The only issue that is raised by the assessee in respect of transfer pricing adjustments is on the interest on receivables computed by the Ld.AO by using SBI short term deposit rates. The Ld.AR submitted that even the DRP upheld the addition computation without appreciating the currency in which the payment is realised / realisable by the assessee. 5.1 The Ld.AR submitted that assessee has realised all the payments against the invoices in foreign currency and therefore LIBOR rate is to be applied. On the contrary, the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 5.2 We note that the assessee is on an average realised the payments within a period of 24 days and the credit period granted by the Ld.TPO is 30 days. Before us, the assessee has not filed the details of the invoices and the date of recovery and therefore we are unable to substantiate the claim of assessee. In the interest of justice, we remand this issue back to the Ld.AO/TPO for necessary verifications. The Ld.AO/TPO shall verify the invoices and the date of recovery. In the event, the payment have been realised by the assessee within the credit

Page 8 IT(TP)A No. 732/Bang/2022 period of 30 days, no adjustment is warranted. On the contrary, if any of the payment fails outside the credit period, LIBOR rate must be applied. Accordingly, based on the above discussions, we remand this issue back to the Ld.AO/TPO to consider the claim of assessee in accordance with law. 6. Additional Ground no. 7 – Claim of depreciation on goodwill by assessee. 6.1 The Ld.AR submitted that assessee had taken over business from XBSIPL as ongoing concern on slump sale basis pursuant to the agreement dated 24.03.2015. During assessment year 2015- 16, goodwill arose in the books of the assessee amounting to Rs.23,37,85,398/-. He submitted that assessee had been claiming depreciation from AY 2016-17 onwards which has been allowed by Coordinate Bench of this Tribunal in IT(TP)A No. 226/Bang/2021 vide order dated 25.08.2022. The Ld.AR submitted that for the year under consideration, assessee failed to claim the depreciation and that Explanation 5 to section 32(1). Assessee is to be granted depreciation whether or not it has been claimed. The Ld.AR in support of eligibility to claim depreciation on goodwill relied on the decision of Hon’ble Supreme Court in case of Smifs Securities Ltd. reported in (2012) 348 ITR 302. On the contrary, the Ld.DR relied on the orders passed by the authorities below. 6.2 The Ld.DR submitted that no claim has been made by assessee and therefore the argument advanced by the Ld.AR cannot be appreciated.

Page 9 IT(TP)A No. 732/Bang/2022 We have perused the submissions advanced by both sides in the light of records placed before us. 6.3 Admittedly, the assessee has not made any claim regarding depreciation on goodwill either in the return of income or before the authorities below. It is for the first time that the assessee has raised this claim before this Tribunal. Hon’ble Supreme Court in case of Goetze India Ltd. vs. CIT reported in (2006) 284 ITR 323 has decided the issue whether the appellant assessee could make claim for deduction for the first time other than by filing a revised return. Hon’ble Supreme Court relying on the ratio of its own, Coordinate Bench in case of National Thermal Power Corporation Ltd. vs. CIT reported in (1998) 229 ITR 383 held that: “4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs.” [Emphasis supplied] The Hon’ble Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the appellate authorities. 10.8 A Division Bench of the Hon’ble Delhi High Court in the case of CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42/172 Taxman 258 had distinguished the Hon’ble Apex Court judgement in the case of Goetze (India) Ltd. (Supra). The Hon’ble Delhi

Page 10 IT(TP)A No. 732/Bang/2022 High Court, in paragraph 17 of the judgment held that the Supreme Court dismissed the appeal making it clear that the decision was limited to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return and did not impinge on the powers of the Tribunal. In paragraph 19, the Hon’ble High Court held that there was no prohibition on the powers of the Tribunal to entertain an additional ground which, according to the Tribunal, arises in the matter and for the just decision of the case.” 6.4 In the instant case, assessee is invoking explanation 5 to section 32(1) of the Act to consider his claim of depreciation on goodwill which has been allowed by this Tribunal in the preceding assessment year by observing as under: “26. Ground No.5 by the assessee is as follows:- “5. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the action of the Learned AO to partially deny claim of depreciation to the extent of INR 23,23,54,949 on goodwill/intangible assets acquired as a part of acquisition of business on slump sale basis from Xerox Business Services India Private Limited (`XBSIPL'). The Appellant humbly prays that the Learned AO be directed to allow the entire claim of depreciation on goodwill under section 32(1) of the Act.” 27. The assessee has made an addition of intangible assets for Rs.93,51,41,592 and claimed depreciation on goodwill of Rs.23,37,85,398. The assessee submitted before the AO that goodwill has arisen out of the business transfer agreement between the assessee and Xerox Business Services India Private Limited (`XBSIPL'). The AO did not allow the depreciation claim on the said goodwill on the basis that the assessee has not provided any scientific basis for valuation of goodwill. The AO observed that the actual cost of the block of assets in the hands of the transferor company would be the written down value in the immediate preceding year in the case of transferor company and therefore disallowed the entire depreciation claim by holding as under:- “4.28: Conclusion: We have clearly demonstrated that the issue before Hon'ble SC in Smif Securities was only that whether goodwill is an intangible asset and hence eligible for depreciation under section 32(1) of the Act.

Page 11 IT(TP)A No. 732/Bang/2022 We accept that SC has correctly laid down the law that goodwill is an intangible asset and eligible for depreciation under section 32(1) of the Act. However, we are raising a different issue here. There are certain sections of the Act which restrict allowability of depreciation acquired during slump sale. These sections of the Act have not been placed before Hon'ble SC in Smiff Securities or before Hon'ble SC/HC/ITAT in other cases cited above. We have cited relevant SC decisions to support our contention that the decisions cited above should be read only in the context of issues which were placed before them and the issues which were not before them should be decided independently on merit. We have demonstrated that the actual cost of goodwill acquired by the transferee company is to be taken as goodwill pre existing with the company before a slump sale in view of provisions of explanation 7 to section 43(1) and explanation 2 to section 43(6)(c).” 28. The DRP confirmed the disallowance. 29. The ld. AR submitted that the assessee has taken over the business in relation to Information Technology Outsourcing services from XBSIPL as a going concern on slump sale basis, pursuant to the agreement dated 24.3.2015 for a consideration of Rs.98,09,65,904. Out of the total consideration, Rs.93,51,41,592 represents intangible assets like business, employees, customer contracts and business records. The same is accounted as goodwill in the books of accounts itself, value being the difference between the purchase consideration and net assets taken over. The ld AR submitted that the assessee has claimed depreciation on the goodwill so acquired and in this regard placed reliance in this regard on the decision of the Hon’ble Supreme Court in the case of Smiff Securities Ltd. [2012] 348 ITR 302 (SC). 30. The ld. AR further submitted that the coordinate Bench of the Tribunal in the case of I & B SEEDS Pvt. Ltd. v. DCIT in ITA No.3415/Bang/2018 dated 15.6.2022 and in the case of Altimetrik India Pvt. Ltd. v. DCIT in IT(TP)A No.2511/Bang/2019 dated 3.2.2022 has dealt with the issue of depreciation on goodwill and held it to be as an allowable claim. The ld. AR further submitted that the AO has invoked Explanation 7 to section 43(1) and Explanation 2 to section 43(6)(c) which are not applicable to the assessee’s case and submitted that the coordinate Bench of the Tribunal in the above referred cases have considered these Explanations while rendering the decision in favour of the assessee.

Page 12 IT(TP)A No. 732/Bang/2022

Page 13 IT(TP)A No. 732/Bang/2022 existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation 13.13. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. 13.14. Further, amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. 13.15. Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such

Page 14 IT(TP)A No. 732/Bang/2022 an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. 13.16 Further, it is also brought to our notice that the department accepted offer of capital gain by the individual assessee who has sold the goodwill i.e. in the case of Praveen Narayan Noojibail for the assessment year 2015-16, which is evident from the statement of income filed before us. Which is kept on record in assessee’s paper book at page no.65 and also accepted by the AO for the assessment year 2015-16 vide assessment order u/s 143(3) of the Act dated 31.12.2017, which is kept on record in assessee’s paper book at page no.89. Once the department accepted the capital gain offered by individual assessee in the respective hand, the same transaction cannot be doubted in the hands of purchaser. On this count also, we find force in the argument of Ld. A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact, it has to be established that apart from claiming additional depreciation on enhanced cost, there is other main purpose for acquiring the asset i.e. goodwill in question. The AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also supported by the order of the Tribunal relied by the Ld. A.R. in the case of M/s. Dorma India Pvt. Ltd., Chennai in ITA Nos.1664 to 1666/Chny/2019 dated 20.11.2019. Further, we also place reliance on the judgement of Hon’ble Karnataka High Court in the case of Padmini Products (P) Ltd. Vs. Deputy Commissioner of Income-tax in ITA No.154 of 2014 dated 5.10.2020, wherein similar circumstances Hon’ble High Court has allowed the claim of the assessee.” 32. Respectfully following the above decision of the Tribunal, we hold that depreciation on goodwill is an allowable claim u/s. 32(1) of the Act. This ground is allowed in favour of the assessee.” 6.5 Based on the above discussions, we are inclined to consider the claim of depreciation of goodwill that has been raised for the first time before this Tribunal by way of additional ground. However, as the Ld.AO has to verify the claim of depreciation on goodwill, we remand this issue in the interest of justice for proper verification in accordance with law. We direct the Ld.AO to

Page 15 IT(TP)A No. 732/Bang/2022 consider the claim of assessee as observed by this Tribunal in assessee’s own case for A.Y. 2016-17. Accordingly, the additional ground no. 7 raised by assessee stands allowed for statistical purposes. In the result, the appeal filed by the assessee stands allowed for statistical purposes. Order pronounced in the open court on 29th March, 2023.

Sd/- Sd/- (PADMAVATHY S) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 29th March, 2023. /MS /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order

Assistant Registrar, ITAT, Bangalore