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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAJESH KUMAR
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the final assessment order dated nil passed under section 143(3) read with section 144C(13) of the Act in consonance with the directions issued by Dispute Resolution Panel [hereinafter referred to as the DRP) relevant to assessment year 2012-13.
The facts in brief are that the assessee filed the return of income on 30.11.2013 declaring income of Rs.97,53,290/- which was processed under section 143(1) of the Act. Thereafter
2 M/s. Misys Trade and Risk Management India Pvt. Ltd. the case of the assessee was selected under scrutiny and statutory notices were duly issued and served upon the assessee. The assessee is a subsidiary of Turaz Global Ltd Singapore and engaged in the business of distribution and trading of software products owned by Misys group companies and has entered into agreement for non exclusive distribution, licensing and marketing of AE software product in India. The AO observed that the assesse has entered into international transactions during the year and accordingly made a reference to the TPO under section 92CA(1) of the Act to examine the ALP of transactions which took place between assessee and its associate enterprise. The TPO vide his order dated 29.01.2016 passed under section 92CA(3) of the Act recommended the following adjustments: 1. Adjustment of royalty Rs.55,19,649/- 2. Adjustment on account of delay in receipt of receivable from AE Rs.8,87,074/-
In the draft assessment order passed under section 143(3) read with section 144C(3) of the Act dated 18.03.2016, the AO also made disallowances in respect of depreciation on goodwill of Rs.79,55,582/- and difference of revenue from operation was Rs.1,27,54,021/-. The aggrieved assessee by the various additions proposed to the real income in the draft assessment order , the assesse filed objections before DRP and thereafter the DRP passed the order under section 144C(5) of the Act dated 29.12.2016 by giving various directions and finally the assessment order under section 143(3) read with section 144C(13) of the Act dated 25.01.2017 was made in pursuance to DRP direction assessing the total income at Rs.5,37,88,620/-.
Being aggrieved, the assessee preferred an appeal before us. Now the issue raised by the assessee is being adjudicated in the following paras:
The issue raised in ground No.1 is general in nature and needs no specific adjudication.
The issue raised in ground No.2 is against the transfer pricing adjustment of Rs.5,68,940/- made by the AO in the final assessment order in pursuance of DRPs direction towards notional interest on outstanding debtors.
The facts in brief are that the TPO during the course of assessment proceedings observed from the perusal of related party schedule that an amount of Rs.5,54,42,098/- was due to assessee from Turaj Global Sarl, Luxemburg (AE). According to the TPO the assessee has not benchmarked this transaction and accordingly after issuing a show cause notice dated 12.01.2016 the TPO proposed an addition of Rs.8,87,074/- on account of notional interest from late realization of debtors by applying the SBI fixed deposit rate of 8% for the period of delay up to 31.03.2012. Thereafter, the DRP modified the order of TPO by directing the TPO to apply a rate of 5% as the ALP in respect of interest on account of sundry debtor due from the AE and re- compute the adjustment accordingly. The DRP while giving direction to the TPO/AO observed that assessee has not furnished any information about credit rating of the AE and considered the 5% rate of interest on receivable as reasonable to cover various risk related to tenure, amount, lack of collateral security, creditworthiness of the debtor and service mark up.
8. After hearing both the parties and perusing the material on record, we find that an amount of Rs.5,54,42,098/- was outstanding from AE Turaj Global Sarl, Luxemburg as on 31.03.2012 under the head trade receivable. We also note that the amount was outstanding from 18.01.2012 for 73 days till the year end. The said amount was due as a result of business transfer agreement on 31.01.2012 with Thompson Reuters India Pvt. Ltd. (TRIPL) to take over the Trade and Risk Management (TRM) of the said company on ongoing concern basis. Similarly, on the basis of this agreement the assessee took over all existing contracts of TRIPL for software maintenance services. Besides a similar takeover of the business took place at global level also between AE of the assesse Turaj Global SARL, Luxemburg and AE of TRIPL. Accordingly, the assessee raised an invoice on its AE on 18.01.2012 for US$ 10,83,912 towards net amount of assets and liability receivables representing the assessee share of such advances/amounts received from customs in respect of on going software maintenance contracts along with amounts payable to the employees towards accrued sale commission, bonus and social security charges and the amount shown in the balance sheet as trade receivable arose out of invoice so raised. The assessee submitted before us that a reasonable period of credit has to be allowed to the assessee to realize the trade receivable from the AE. It was also submitted before us that assessee is a zero debt company and there are no cost of funds to the assessee, however, the main thrust plea of the assesse was that a reasonable period of 90 days has to be allowed to the 5 M/s. Misys Trade and Risk Management India Pvt. Ltd. assessee to realize the debtor keeping in view of the commercial expediency. The Ld. A.R. submitted that in any case no addition can be made in the current year as the trade debtors remained outstanding for a period of 73 days only till the year end.
The Ld. D.R., on the other hand, relied on the order of authorities below.
Having considered all these facts and rival submissions, we are of the view that a reasonable period of time has to be allowed to the assessee to realize these debtors. Normally in the business, it customary that the 90 days period is considered as reasonable period. We find merit in the contention of the assesse that a reasonable period of 90 days should be considered for realization of debtors. Therefore, we are inclined to set aside the direction of DRP and direct the TPO/AO to delete the disallowance of Rs.5,68,940/- made on account of delay in receiving the trade receivable from its AE. Ground No.2 is allowed.
11. The issue raised in ground No.3 is against the direction of DRP confirming the order of TPO/AO in respect of addition of Rs.79,55,582/- on account of depreciation on goodwill.
The facts are that the assessee has entered into the business transfer agreement dated 31.01.2012 with Thompson Reuters India Pvt. Ltd. to acquire the Trade and Risk Management unit of Thompson Reuters on a going concern/slump sale basis for a consideration of Rs.6,36,44,658/-. Such payment was considered as goodwill and payment for intangible assets and accordingly the assessee
6 M/s. Misys Trade and Risk Management India Pvt. Ltd. claimed depreciation of 25% thereon. According to the assessee while entering into business transfer agreement it had gained control over Indian market in terms of contracts, experience and knowledge etc. and therefore the said consideration should be attributed to market reputation, relationship, customer data base and contracts with Trade and Risk Management division of Thompson Reuters India Pvt. Ltd. However according to the AO in order to claim the depreciation of goodwill the intangible has to be valued on the basis of valuation report whereas on the other hand the assessee claims that valuation report was submitted in the course of assessment proceedings as an additional evidence to support intrinsic value of intangible acquired by the assessee and classified the same under the head ‘Goodwill’ and as such can not be considered as sham transaction. The assessee relied on the decision of Hon’ble Supreme Court in the case of Smifs Securities Ltd. 348 ITR 302 (SC).
However, the DRP dismissed the appeal of the assessee by affirming the order of AO on this issue by observing that the claim of the assessee of not taking over any assets and liability under the business transfer agreement was in contradiction to the language of the agreement itself. The DRP noted that there is no mention at all in the DTA regarding existence of transfer of goodwill from Thompson Reuters India Pvt. Ltd. to the assessee and further that assessee has failed to furnish the balance sheet of Thompson Reuters India Pvt. Ltd. prior to taking over of Trade and Risk Management business of the said company to the assessee.
7 M/s. Misys Trade and Risk Management India Pvt. Ltd.
We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has entered into the business transfer agreement dated 31.01.2012 with Thompson Reuters India Pvt. Ltd. to acquire the Trade and Risk Management unit of Thompson Reuters on a going concern/slump sale basis for a consideration of Rs.6,36,44,658/- and treated the same as goodwill and payment for intangible assets and accordingly the assessee claimed depreciation of 25% thereon. We note that the assesse has acquired business and commercial rights attached to the existing contracts and no physical assets were taken over under BTA by the assesse. We note that the assesse had gained control over Indian market in terms of contracts, experience and knowledge etc. and rightly attributed the consideration to market reputation, relationship, customer data base and contracts with Trade and Risk Management division of Thompson Reuters India Pvt. Ltd. We are not in agreement with the conclusion drawn by the DRP/AP no assets and liability were taken over as under BTA the assesse was given all rights attached to the contracts. The case of the assessee find supports from the several decisions cited by the ld AR which are discussed as under: a) In the case of CIT vs. Smifs Securities Ltd.( 348 ITR 302 (SC), the Hon’ble Apex Court has held that depreciation is allowable on the amount of goodwill which has come into being as a result of amalgamation of two companies.
b) In the case of Toyo Engineering Ltd. (supra), the coordinate bench after following the decision of Apex Court in 8 M/s. Misys Trade and Risk Management India Pvt. Ltd. the case of CIT Vs Smifs Securities Ltd (supra) and also the Hon’ble Bombay High Court in Toyo Engineering India Ltd. Vs ACIT ITA No. 129 of 2013 and others decided the issue in favour of the assessee. The operative part is extracted as under: “7. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited judgments of the higher judiciary. On considering the relevance and importance of the said judgments, we have extracted the relevant portions in the above mentioned paras of this order. It is now binding on us that the difference, if any, between the book value of the assets and the liabilities, should be transferred to goodwill account of the assessee. Therefore, considering the judgment of the Bombay High Court, neither the nature of the goodwill nor the quantity of the goodwill can be now disputed. In any case, it is not the case of the Assessing Officer that there are any differences in quantity of the goodwill. It is also a decided issue in view of the Apex Court judgment in the case of Smifs Securities Limited (supra) that the goodwill is now eligible for depreciation. Relevant portion from the said Supreme Court judgment reads as under: “Taxpayer had acquired a capital asset in the form of „goodwill‟ pursuant to amalgamation. Further, the SC in a brief order observed that “the words „any other business or commercial rights of similar nature‟ in clause (b) of Explanation 3 to section 32 indicates that goodwill would fall under the expression „any other business or commercial right of a similar nature‟. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation (b). In the circumstances, we are of the view that „Goodwill‟ is an asset under Explanation 3(b) to section 32(1) of the Act”.
Considering the above settled position, the issue of allowability of depreciation on goodwill should be decided in favour of the assessee. As such, Revenue has not bought any contrary material to suggest that the claim of depreciation on goodwill is not genuine and the same is not eligible for depreciation. Accordingly ground no.1 raised by the Revenue is dismissed. Ground nos. 2, 3a, 3b and 4 need no specific adjudication as they were already adjudicated and decided by the Tribunal in the first round vide its order dated 25th May, 2012 (supra).”
c) In the case of M/s. MTANDT Rentals Ltd. vs. ITO (Supra), the coordinate bench decided the issue of depreciation on goodwill in favour of the assessee by holding and observing as under: “In our opinion observation of the ld. Commissioner of Income Tax (Appeals) that goodwill shown by the assessee in its books was an unreal and artificially inflated one is incorrect. Assessee had worked out the share swap ratio considering net worth of the rental division of M/s.Mtandt Ltd transferred to it and divided such net worth with value of its own share as on 31.12.2011. The valuation of the rental division was supported by a certificate issued by a competent Chartered Accountant and Revenue has not placed anything on record to prove that the valuation was unfair or incorrectly done. Thus, in our opinion goodwill which came into the books of the assessee on account of rounding off of the decimal in share
9 M/s. Misys Trade and Risk Management India Pvt. Ltd. swap ratio was not an artificial one. Issue of equity shares by the assessee to M/s. Mtandt Ltd was not artificial but real. Even in the case of Smifs Securities Ltd (supra) considered by Hon’ble Apex Court, goodwill was result of an scheme of amalgamation which is not much different from a scheme of demerger. In the circumstances, we are of the opinion that the lower authorities fell in error in disallowing the claim of depreciation. Orders of the lower authorities are set aside. Depreciation claimed by the assessee stands allowed.” d) In the case of M/S Sprit Infrapower & Multiventures Pvt. Ltd. vs. PCIT (supra), the coordinate bench has held that the assessee is entitled to depreciation on goodwill. The operative part is as under: “10. We find that the assesees claim of depreciation on „goodwill‟ in the case before us falls within the four corners of the judgement of the Hon’ble Supreme Court in the case of CIT, Kolkata Vs. Smifs Securities Limited (2012) 348 ITR 302(S.C). As is discernib le from the „Notes‟ forming part of the financial statements of the assessee company before us, the excess consideration of Rs. 145,29,10,901/- paid by the assessee company over the value of net assets acquired of M/s Premier Finance & Trading Company Private Limited (amalgamating company) had been considered as „goodwill‟ arising in the process of amalgamation. On a perusal of the order passed by the Pr.CIT under Sec. 263 of the Act, we find, that he had held the order passed by the A.O as erroneous for two fold reasons viz. (i) that, as per „Proviso 5‟ to Sec. 32(1), what the merged entity can claim as depreciation consequent to amalgamation/merger can at the most be the arithmetic sum of depreciation claimed by the two merging companies prior to amalgamation and cannot be more consequent to merger; and (ii) that, the introduction of the balancing figure of excess of liabilities over the assets as „goodwill‟ and treating it as tangible assets and claiming depreciation on the same under the Income Tax Act was in violation of „Proviso 5‟ to Sec. 32(1). In our considered view, the aforesaid observations of the Pr.CIT are absolutely misconceived and in contradiction of the judgment of the Hon‟ble Supreme Court of in the case of Smifs Securities Ltd. (supra). On a perusal of „Proviso 5‟ to Sec. 32(1), we find that the same is only in the nature of a rider which inter alia disentitles the amalgamating company and the amalgamated company in the case of amalgamation to claim depreciation on tangible assets or intangible assets, the aggregate of which would exceed the claim of such deduction as per the prescribed rates in case the amalgamation had not taken place. Apart therefrom, it is therein envisaged that the claim for such deduction for depreciation on assets shall be inter alia apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were used by them. In our considered view, in the case before us the „goodwill‟ had arisen in the books of the assessee company in the course of the process of the scheme of amalgamation of M/s Premier Finance Trading Company Private Limited with the assessee company, that was approved by the Hon‟ble High Court of judicature at Bombay, vide its order dated 20.09.2013, pursuant whereto the assets
10 M/s. Misys Trade and Risk Management India Pvt. Ltd. and liabilities of the amalgamating company were transferred to and vested with the assessee company from the appointed date i.e. 01.04.2013. In our considered view, the aforesaid claim of depreciation raised by the assessee on the value of „goodwill‟ is in conformity with the judgment of the Hon‟ble Supreme Court in the case of M/s Smifs Securities Ltd. (supra). Also, we are unable to comprehend as to how the aforesaid claim of depreciation raised by the assessee is found to be in violation of „Proviso 5‟ to Sec. 32(1) of the Act. Further, we find that the claim of the assessee towards depreciation on „goodwill‟ which was acquired in process of amalgamation is also fortified by the order of a coordinate bench of the Tribunal viz. ITAT, Pune Bench “A”, Pune in the case of The Cosmos Co-op Bank Limited Vs. Dy.CIT, Circle 7, Pune [ITA No. 460 & 461/PN/2012, dated 23.01.2014]. Be that as it may, in our considered view, as the A.O in the course of the assessment proceedings had examined the assesees entitlement towards claim of depreciation on „goodwill‟, and had only after necessary deliberations finding the same to be in order had accepted the same, therefore, the Pr.CIT in exercise of the powers vested with him under Sec. 263 of the Act, was divested of his jurisdiction for seeking dislodging of the aforesaid possible, or infact a balanced and a reasonable view taken by the A.O. Our aforesaid observation that a possible view arrived at by the A.O after necessary deliberations cannot be dislodged by the CIT/Pr.CIT in exercise of revisional jurisdiction under Sec. 263 is fortified by the judgments of the Hon‟ble Supreme Court in the case of Malabar Industrial Company (2000) 243 ITR 83 (SC) and CIT Vs. Max India Ltd (2007) 295 ITR 282 (SC). Also, support his drawn from the judgments of the Hon‟ble High Court of Bombay in the case of Grasim Industries Ltd. Vs. CIT (2010) 321 ITR 92 (Bom) and CIT Vs. Gabriel India Ltd (1993)203 ITR 108 (Bom). Accordingly, not being able to persuade ourselves to subscribe to the view taken by the Pr.CIT that the order passed by the A.O under Sec. 143(3), dated 23.12.2016 was erroneous insofar it was prejudicial to the interest of the revenue, we „set aside‟ his order and restore the order passed by the A.O.
The appeal filed by the assessee is allowed in terms of our aforesaid observations.”
e) In the case of M/S Cosmos Coop Bank Ltd. vs. DCIT (Supra), the coordinate bench has taken the same view on depreciation on goodwill.
In view of the above facts and circumstances and the various decisions as discussed above, we set aside the order of DRP and direct the AO to allow the depreciation on goodwill. The appeal of the assessee is allowed.
11 M/s. Misys Trade and Risk Management India Pvt. Ltd. 16. The issue raised in ground No.4 is against the direction of DRP confirming and enhancing the addition on account of under statement of Revenue to Rs.3,54,65,341/-.
The facts in brief are that during the financial year the assessee offered a revenue from operation of Rs.2,27,11,320/-. Besides, assessee has received some revenue in advance which was characterized as deferred revenue under the head “Other current liabilities” as on 31.03.2012. The assessee submitted before the AO vide letter dated 16.01.2016 along with the ledger extract of deferred revenue that the income has been offered to tax in the subsequent year and was received in fact for a period which falls beyond the close of the accounting period in respect of service maintenance contracts where the revenue is related to the period of the contract and not with the entering into the contract for rendering of such services. However, the AO rejected the contention of the assessee and proposed a sum of Rs.1,27,54,021/- being difference between the revenue from operation and the deferred revenue as addition despite assessee’s submission that the income of the assessee was booked in accordance with the system of accounting followed regularly.
In the appellate proceedings before the DRP, the DRP not only confirmed the addition but enhanced the same to Rs.3,54,65,341/-. The total amount of deferred revenue by issuing a show cause notice dated 23.12.2016 calling upon the assessee to show cause as to why the entire deferred revenue should not be treated as income for the current financial year instead of Rs.1,27,54,021/- proposed by the AO in the draft
12 M/s. Misys Trade and Risk Management India Pvt. Ltd. assessment order. Ultimately, the DRP enhanced the addition to Rs.3,54,65,341/- by rejecting the contentions of the assessee such as that the revenue is booked according to mercantile system of accounting and by following AS-9 issued by ICAI with respect to revenue recognition of services, contention of period related services and non crystallization of revenue with the date of service contract by observing and holding as under: “6.10 Having regard to the discussion above, the contentions advanced by the assessee are considered to untenable. In this regard, we are of the view that once a contract for software maintenance is entered into with a customer, the consideration stated in the contract accrues to the assessee as per the Mercantile System of accounting, since the right to receive the said income has crystallized on entering into the contract. In the circumstances, the entire amount of Rs.35465341/- treated as deferred revenue by the assessee is required to be treated as the revenue for the present assessment year itself. However, since the AO has considered only a portion of the same amounting to Rs.12754021/- for the purpose of addition instead of the entire of deferred revenue, we direct the AO to enhance the addition to Rs.35465341.
Objection No. 5 Penalty proceedings and interest under section 234B. 234C and 234D of the Act:
The learned AO has erred in levying interest under Section 234B, 234C and 234D of the Act.
The learned AO has erred in law and on facts in initiating penalty proceedings under section 27IB and 271BA of the Act.
The learned AO has erred in law and on facts in initiating penalty proceedings under section 271(l)(c) of the Act based on the proposed additions as per draft assessment order.”
Having heard the rival submissions and perused the material on record, we find that the assessee is following mercantile system of accounting and in the course of financial year received revenues under service contract agreements. The assesse recognized the revenue till the financial year end and the revenue pertaining to the subsequent period was treated as deferred revenue and shown as such under the head “Current liabilities”. The another undisputed fact is that the assessee has 13 M/s. Misys Trade and Risk Management India Pvt. Ltd. offered this amount in the subsequent year pursuant to mercantile system of accounting followed by ICAI, however, DRP/AO was of the view that once the contract for software maintenance is entered into, the entire consideration stated in the contract accrued to the assessee as per mercantile system of accounting since the right to receive the said income has crystalized during the year with the entering into the contract. Considering the facts of the case, we are unable to agree with the DRP/AO on this issue as the software maintenance agreement are period related service agreement under which the services are to be rendered for a specific period and the consideration covered mentioned in the agreement has to be spread over the period of the service maintenance agreement. Besides the assessee has already offered this income to tax in the subsequent year pursuant to the mercantile system of accounting. In view of these facts we set aside the direction of DRP and direct the AO to delete the addition.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 15.11.2021.