M/S. ARICENT TECHNOLOGIES (HOLDINGS) LTD.,NEW DELHI vs. DCIT, NEW DELHI

PER N. K. BILLAIYA, AM:

These two appeals by the assessee are preferred against the

two separate orders framed u/s. 143 (3) r.w.s. 144 C of the Act.

Since common issues are involved in both these appeals they

were heard together and are being disposed of by this common

order for the sake of convenience.

Software Systems Ltd. (FSS) which was formerly known as

Hughes House Software Services Ltd. (HSS) and is a company

incorporated under the companies Act. 1956. FSS is closely held

public limited company and is subsidiary company of Flextronics

Sales and Marketing Limited. The appellant is engaged in the

business of production of computer software products and

provision of software development services of communication

industry through the various 100% export oriented units set up

in software technology parks at Gurgaon and Bangalore.

are tabulated below:-

Name of transaction Method Total value (Rs.)

selected

Paid Received

Sales of services CPM 508,306,589

Sales of products CUP 27,096,734

Interest income CUP 2,428,061

Product Relates CPM 2,096,906

Services

Purchase of services CPM 198,33,524

CPM Reimbursement of 107,536

travel cost

Recharge of courier CPM 98,759

charges

Legal and CPM 241,398

Professional Expenses

Facility Rental CPM 19,333,061

4 Insurance Expenses CPM 23,484,987

Corporate Expenses CPM 24,022,522

CPM Marketing Services 49,565,029

TPO for determination of arms length price for the international

transactions under taken by the appellant company. During the

course of the transfer pricing assessment proceedings the TPO

noticed that the assessee has paid Rs.24022522/- to its AE

Aricent US market Inc on account of certain services purported to

have been received by the assessee. The TPO found that this

amount has been bench marked by including it in the cost base

while comparing arms length margin using TNMM. The assessee

was asked to furnish all the agreements entered into by the

assessee company related to the Intra Group services obtained by

the assessee company from the AE. The assessee was also asked

to explain the rate of payment for Intra Group Services and

whether any cost benefit analysis was done while entering into

the agreement. The assessee was asked to furnish all the

evidences in relation to such payments. Assessee filed a detailed

reply vide submissions dated 17.08.2011 and 09.09.2011and also

filed the relevant agreement. The services listed in the agreement

are as under :-

ii. Executive Management a) Development of corporate strategy for the business as a whole b) Deciding organizational structure c) Operating procedures to ensure efficient operations d) Anticipation of competitors' actions, customers' preferences in order to increase market share as well as revenues and margins.

iii Tax a) Regulatory compliance b) Minimizing overall effective tax cost.

iv. Legal (a) Formulating worldwide customer selling terms ana conditions (a) Providing documentation and review of customer contracts; (b) Assuring global compliance

v. Treasury (a) Global cash management (b) Global credit collection (c) Banking (loan syndication) (d) Debt management (e) Foreign exchange '

vi Corporate Marketing (a) Developing marketing strategies and content (b) Developing public relations

(c) Conducting road shows, campaigns as well as organizing public events and trade

shows

vii. Insurance (a) Obtaining and continuing in force the business insurance policies pertaining to global Operations of Recipient (b) Formulating insurance strategy .and oversight

with OP/OC as the profit level indicator and since the operating

profit margin of the assessee at 21.84% is higher than that all the

comparable companies at 20.36%, the international transaction

of payment of corporate charges was considered to be at arms

length price.

assessee and separately bench marked the said transaction

allegedly applying CUP method. The TPO further held that since

the assessee has not received any economic and commercial

benefits from such payment and the evidence of incurring such

expenditure by the AE has also been not placed on record, the

arms length price of such international transaction shall be

considered to be at nil.

DRP it was strongly contended that Aricent Inc USA was created

solely for the purpose of rendering the corporate management

services to the group companies which related to the entire group.

It was brought to the notice of the DRP that the costs are charged

on a rational basis in proportion to benefit accruing to each

entity. The basis of cost share between the assessee and AE was

furnished. After considering the facts and the submissions and

after going through the TPO’s report the DRP held as under :-

“3.6 Thus in our view bits and pieces of work may benefit the Indian entity and there is no real way of quantification of such benefits. For example some costs of insurance premium and by Aricent US to benefit FSS India have been allocated on pro rata basis to three parties by the assessee. Thus it is difficult to actually quantity the amount spent for India entity. The report is also a preliminary draft for discussion purpose only (pages 234 of paper book). It is obvious that quantification is not conclusive nor is it possible to be conclusive from the recipient’s perspective. As we said earlier that some costs may be attributable to the assessee but are difficult to quantify. So an adhoc allowance of 1% of total costs

8 can be allowed to the assessee and the remaining to be considered for determination of ALP for transactions tested under TNMM. The TPO is directed to recomputed the ALP accordingly. Objection is partly accepted by the DRP.”

Assessee has objected to the TP adjustment of Rs.24022522/-.

that the TPO grossly erred in not following the directions of the

DRP. It is the say of the counsel that the DRP has directed the

TPO to allow 1% of total cost to the assessee as against 1% of

corporate charges allowed by the TPO. The counsel further stated

that if 1% of the total cost of the assessee is taken than it will

come to Rs.8883840653/- which is higher than the amount of

Rs.24022522/- paid by the assessee towards corporate charges.

The counsel concluded by saying that if the directions of the DRP

are given effect to no adjustment on account of corporate charges

would survive.

below. Since the revenue is not in appeal before us, the direction

of the DRP has attained finality. This means that the TPO should

give effect to the directions of the DRP in letter and spirit. The

direction of the DRP has been mentioned elsewhere and since the

DRP has directed the TPO to compute the ALP at 1% of total cost

the same should be followed. We accordingly direct the TPO / AO

to follow the directions of the DRP and if found that after giving

effect to the directions total cost of the assessee works out to be

higher than what has been paid by the assessee towards

corporate charges no adjustment on account of corporate charges

need to made. Accordingly grounds No.2 to 2.7 are allowed.

Rs.23,56,249/- on account of interest on foreign currency loan

extended to AE.

consideration the assessee earned interest income of

Rs.23,56,249/- in respect of loan of US dollar Nine Hundred

10 thousand extended to its AE Aricent Japan Limited and Aricent

Beijing Limited. The assessee has charged interest at LIBOR +

1.5%. The assessee claimed that the rate of interest charged was

comparable to the prevailing rate of interest in the international

market. Thus international transaction was considered as being

at arms length price applying CUP as the most appropriate

method as the same was adequately bench marked with respect

to comparable uncontrolled transaction of expenses of payment of

interest on similar loans.

which the CUP method has been applied by the assessee is

erroneous. The TPO applied rate of interest at 17.26% which was

computed as under :-

CUP Rate is thus arrived at as under.

Basic interest rate for the credit rating of the AE 9.88% Add : Transaction cost 395 basis points CUP Rate Add : Adjustment for security Not computed Final CUP rate > 13.83+ Adjustment for security + Risk adjustment for single customer

the adjustment made by the TPO, however imputed rate of

interest @ 13.25% being PLR of SBI. Aggrieved by this the

assessee before us.

transaction of lending loan to the associate is in foreign

currencies given to foreign associate enterprises. Hence, the

comparable transaction for the purpose of application of external

CUP should be considered to be foreign currency lending by

unrelated parties. The counsel further pointed out that even the

RBI has issued directions subsequently mentioning that LIBOR

rate has to be applied for charging interest on export credit.

Hon’ble Delhi High Court in the case of Cotton Naturals India

Private Limited reported in 276 CTR 445. The counsel further

pointed out that in subsequent assessment year 2012-13 the DRP

has followed the judgment of the Hon’ble Delhi High Court in

Cotton Naturals and revenue is not in appeal. It is the say of the

12 counsel that in view of the direct decision of Hon’ble High Court

of Delhi (supra) the LIBOR rate + 1.5% should be accepted and no

TP adjustment should be made.

is the say of the DR that the Hon’ble Delhi High Court in the case

of Cotton Naturals has considered the facts where the loan

transactions have been done in the foreign currencies. The DR

further pointed that while charging the rate of interest many

factors have to be considered namely transaction cost, security

volatility in the market and risks, therefore, rate adopted by the

TPO should be accepted.

below. We have also gone through the relevant loan agreement

which is placed at pages 131 – 134 and 135-138 of the paper

book. We find that the loan agreement with FSS, Japan clearly

mentions that the borrower shall pay interest rate of 1.5% over

prevailing LIBOR and the transaction is in US dollar. Similarly

the agreement with FSS Beijing show interest at 150 basis points

over prevailing LIBOR and the transaction is in US dollar.

13 Considering the facts of the case in the light of the agreements

and in the light of the decision of DRP in A. Y. 2012-13 wherein

all the apprehensions raised by the DR has been duly considered

by the DRP which is also under appeal before us in ITA

No.1944/Del/2017, we are of the considered view that rate of

interest at LIBOR + 1.5% should be taken as the rate and since

the assessee has already charged the interest on loan at LIBOR +

150 basis points, the TP adjustment in interest on loan

amounting to Rs.2356249/- deserves to be deleted. We direct

accordingly.

amounting to Rs.171617599/- treating the same to be capital

expenditure incurred on project which were yet to take off.

expenses of Rs.17.16 crores in respect of the various software

projects. Such expense were claimed to be routine business

expenses such as training and travelling expenses incurred in the

course of carrying on software business.

14 22. During the assessment proceedings the Assessing Officer

asked the assessee to submit detail of the project expense and

such details were furnished by the assessee. After considering

the submissions and the details, the Assessing Officer was of the

belief that these expenses are of capital nature giving enduring

benefits to the business of the assessee and are in respect of

projects which were yet to take off. Accordingly the expenditure

was disallowed. The objections raised by the assessee before the

DRP were of no avail.

attention to the past assessment / appellate history of the

assessee in respect of such expenses and pointed out that in the

earlier assessment year such expenses were allowed as revenue

expenditure and the appeals of the revenue have been dismissed.

The DR could not bring any decision in favour of the revenue.

below. We have also gone through the past assessments/

appellate history in respect of the impugned addition. In A. Y.

2003-04 the Tribunal deleted the additions in 28 SOT 371 which

15 order was affirmed by the Hon’ble Delhi High Court in ITA

No.778/2011. In A. Y. 2004-05 the Tribunal has deleted the

additions in ITA No.1897/Del/2009 and in A. Y. 2006-07 the

Tribunal once again deleted the addition 9 taxman.com 287

which order affirmed by the Hon’ble Delhi High court in ITA

No.1071/2011. Considering the past assessments/ appellate

history of the assessee we direct the Assessing Officer to delete

the disallowance of Rs.1716599/-.

being expenses incurred on corporate charges u/s. 40a of the Act.

as deduction in the profit and loss account as corporate charges

being expenses allocated by Aricent Inc USA company for various

services including accounting and finance executive management,

tax, treasury, legal, corporate, marketing and insurance provided

by Aricent Inc USA.

the opinion that the corporate charges are in the nature of

16 consultation charges / technical fees having been remitted out of

India on which no TDS was deducted by the assessee and was of

the firm belief that provisions of section 40a squarely apply and

accordingly disallowed 2.40 crores. Such disallowance was

confirmed by the DRP.

attention to the provisions of section 195 (1) of the Act and

pointed out that the liability to deduct tax at source under this

section arises only if the amount paid / payable to the no resident

is liable to tax in India. It is the say of the counsel that since the

payee is a tax resident of US and eligible to be governed by the

provisions of Act or the India US treaty, no disallowance can be

made.

could not controvert the submissions of the counsel.

the authorities below qua the issue. There is no dispute that the

payee Aricent Inc USA is a tax resident of US and is, therefore,

17 governed by the provisions of the Act or the India US tax treaty,

whichever is more beneficial.

for the taxability of transactions in the nature of royality and fees

for included services. Article 12 (2) provides that royalities /fee for

included services arising in India and paid to a resident in USA

may be taxed in India if the recipient is a beneficial owner of the

royalities or FTS. As per Article 12 royalities and fees for included

services if paid for “make available technical knowledge,

experience, skill, know how or processes or consist of the

development and transfer of technical plan or technical design

will only be considered for taxability.”

services provided by AE. In our considered view no such services

‘make available’ technical knowledge etc to the assessee. No

technical knowledge experience or skill as required by article 12

is acquired as a result of provision of the services by Aricent USA.

In terms of the provisions of article 12 of the Indo –US DTAA fees

paid by the assessee to its AE Aricent USA would not be taxable

18 in India and therefore, the assessee was not required to deduct

tax at source. We accordingly direct the Assessing Officer to

delete the disallowance.

relates to the charging of interest u/s. 234 B and 234 C of the

Act. The levy of interest is mandatory though consequential. We

direct the Assessing Officer to charge interest as per the

provisions of the law. Interest u/s. 234 C of the Act has to be

charged on the returned income of the assessee.

Additional Grounds of appeal on deduction of depreciation on

goodwill

to raise the following by way of additional ground of appeal.

“That on the facts and circumstances of the case and in law, the depreciation should be directed to be allowed in terms of section 32 (1) (i) of the Act in respect of intangible asset in the nature of ‘Goodwill amounting to Rs.26,75,57,10,570 arising on amalgamation of Flextronics Software Systems

19 Limited (‘Flextronics’) and Future Software Limited (‘FSL’) with Kappa Investment Limited (later renamed as Aricent

Technologies Holdings Limited i.e. the Applicant ) pursuant to scheme of amalgamation approved by the Hon’ble Delhi High Court vide order dated 16.05.2007.”

aforestated additional ground. It is the say of the DR that the

assessee failed to claim depreciation on goodwill in its return

which was filed by the assessee when the goodwill in question

was accounted for in the books of the assessee. The return was

duly verified by the assessee itself, and the assessee had access

to legal advice being such a big, reputed company of a global

group. The DR further pointed out that the assessee had further

opportunity by filing a revised return but again failed to claim it

by filing revised return. The DR continued by stating that the

assessee further failed to claim depreciation before the Assessing

Officer during the entire assessment proceedings and further

failed to claim depreciation before the DRP. The DR concluded by

saying that at this stage the additional ground raised by the

assessee should not be admitted.

legal claim the assessee can raise the issue for the first time

before the Tribunal. Strong reliance was placed on the decision of

Hon’ble Supreme Court in the case of NTPC Limited 229 ITR 383.

submissions. Depreciation on goodwill is no more res-integra as

this issue has been settled down by the Hon’ble Supreme Court in

favour of the assessee and against the revenue in the case of CIT

Vs. Smifs Securities Limited 348 ITR 302 where in the Hon’ble

Supreme Court was concerned with claim of depreciation on

goodwill made by the amalgamated company.

such claim of depreciation can be made for the first time at this

stage in the light of the ratio laid down by the Hon’ble Supreme

Court in the case of NTPC Limited (supra).

(supra) reframed the question for consideration as follows :-

21 “Ques : Where on the facts found by the authorities below a question

of law arises (though not raised before the authorities) which bears on

the tax liability of the assessee, whether the Tribunal has jurisdiction to

examine the same ?”

Ans : “Under section 254 of the Income Tax Act, the Appellate Tribunal

may after giving both the parties to the appeal an opportunity of being

heard, pass such orders thereon as it thinks fit. The power of the

Tribunal in dealing with appeal is thus expressed in the widest possible

terms. The purpose of the assessment proceedings before the taxing

authorities is to assessee correctly the tax liability of an assessee in

accordance with law. If, for example, as a result of a judicial decision

given while the appeal is pending before the Tribunal, it is found that a

non-taxable items is taxed or a permissible deduction is denied, we do

not see any reason why the assessee should be prevented from raising

that question before the Tribunal for the first time, so long as the

relevant facts are on record in respect of that item. We do not see any

reason to restrict the power of the Tribunal under section 254 only to

decide the grounds which arise from the order of the Commissioner of

Income – tax (Appeals). Both the assessee as well as the Department

have a right to file an appeal / cross-objections before the Tribunal. We

22 fail to see why the Tribunal should be prevented from considering

questions of law arising in assessment proceedings although not raised

earlier.

In the case of Jute Corporation of India Ltd. CIT [1991] 187 ITR

688, this court, while dealing with the power of the Appellate Assistant

Commissioner observed that an appellate authority has all the powers

which the original authority may have in deciding the question before it

subject to the restrictions or limitations, if any, prescribed by the

statutory provisions. In the absence of any statutory provision, the

appellate authority is vested with all the plenary powers which the

subordinate authority may have in the matter. There is no good reason

to justify curtailment of the power of the Appellate Assistant

Commissioner in entertaining an additional ground raised by the

assessee in seeking modification of the order of assessment passed by

the Income-tax Officer. This court further observed that there may be

several factors justifying the raising of a new plea in an appeal and

each case has to be considered on its own facts. The Appellate Assistant

Commissioner must-be-satisfied that the ground raised was bona fide

and that the same could not have been raised earlier for good reasons.

The Appellate Assistant Commissioner should exercise his discretion in

permitting or not permitting the assessee to raise an additional ground

23 in accordance with law and reaon. The same observations would apply

to appeals before the Tribunal also.

The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal (vide, e.g., CIT v. Anand Prasad [1981] 128 ITR 388 (Delhi), CIT v. Karamchand Premchand P. Ltd. [1969] 74 ITR 254 (Guj) and CIT v. Cellulose Products of India Ltd. [1985] 151 ITR 499 (Guj) [FB]). Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. The reframed question, therefore, is answered in the affirmative, i.e. the Tribunal has jurisdiction to examine a question of law which arises from the facts as found as found by the authorities below and having a bearing on the tax liability of the assessee. we remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits.”

Court (supra), the emphasis is “on facts as found by the

authorities below and having bearing on the tax liability of the

24 assessee” on such emphasis the Hon’ble Supreme court held that

the Tribunal has jurisdiction to examine the question of law.

Hon’ble High Court is available on record. Goodwill was shown

as an intangible asset in the balance sheet and was available

before the Assessing Officer at the time of the assessment

proceedings. Explanation-5 to section 32 (1) of the Act reads as

under :-

“For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income”

Even if the assessee had not claimed depreciation on goodwill, the

Assessing Officer was duty bound to compute the depreciation as

per the provisions of the law.

25 44. The contention of the DR that the assessee had several

opportunities to claim depreciation is not acceptable because

when the assesee filed its return of income the claim of

depreciation on goodwill was highly debatable issue. It is only

after the decision of the Hon’ble Supreme Court in the case of

Smifs Securities 348 ITR 302 the issue attained finality as the

Hon’ble Supreme Court has held that goodwill is an intangible

asset.

available on the record, we have no hesitation in admitting the

additional ground for the adjudication.

of depreciation let us now examine the facts relating to the

creation of goodwill.

26 FSSL was incorporated in India on December 30, 1991 as Hughes Software Systems Limited. Thereafter, its name was changed to FSSL on February 18, 2005. As on October 27, 2006, the assessee held 82.01 per cent stake in FSL.

The assessee [earlier known as Kappa Investment Limited (‘KIL’)], an unlisted Indian company, was incorporated on June 14, 2006 for the purpose of promoting, establishing, forming, acquiring or investing in entities engaged in the business of designing, developing, marketing and distributing IT software and hardware. The assessee (earlier known as KIL) commenced business on August 11, 2006 and acquired controlling equity stake in FSSL and FSL.

In order to fund the amalgamation of FSSL and FSL with the assessee, the parent company of the assessee invested additional funds of about Rs.2,462 crores in the assessee for acquiring shares in FSSL and FSL.

Thereafter, FSSL and FSL amalgamated into the assessee with effect from April 1, 2007 under a scheme of arrangement & amalgamation ('Scheme of Merger’) under the provisions of section 391 to 394 of the Companies Act, 1956. The said scheme of Merger was also in accordance with the provisions of Section 2(1 B) of the Income-tax Act, 1961 (‘Act’) and the shareholders of FSSL and FSL were issued shares in the assessee (earlier known as KIL), pursuant to the said merger.

27 48. The scheme of arrangement approved by Hon’ble High Court which was between Flextronics Software Systems Limited (FSSL) and Future software Limited (FSL) and Kappa Investments Limited Clause 15.8 read :- “15.8 The amount representing the different between (a) the aggregate value of : (a) book value of investment in the equity shares of Flextronics Software in the books of Kappa cancelled pursuant to Clause 14.1 (b) book value of investment in the equity shares of Future Soft in the books of Flextronics Software cancelled pursuant to Clause 14.2 and (b) the aggregate value of : (a) face value of share capital of Flextronics Software held by Kappa (b) face value of share capital of Future Soft by Flextronics Software

shall be debited to goodwill in the balance sheet of Kappa.

“This court doth hereby sanction the scheme of arrangement

28 set forth in Schedule-I annexed hereto and doth hereby declare the same to be binding on all the shareholders and creditors of the Transferor and Transferee companies and all concerned and doth approve the said scheme of arrangement with effect from the appointed date i.e. 01.04.2007.”

follows :

(a) The scheme was sanctioned by the High Court of Delhi on May 16, 2007 with retrospective effect from April 1, 2007, being the appointed date of the merger and August 10, 2007, being the effective date of amalgamation for accounting purpose;

(b) Assessee adopted pooling-of-interest accounting method as approved by High Court for the purpose of transferring the assets and liabilities of the amalgamating companies at their respective book value, which was subject to the adjustments made for the difference in the accounting policies between the two companies as specified in the scheme of amalgamation;

(c) As per clause 1(e) and 1(g) of the amalgamation scheme, the details of assets and liabilities of FSSL and FSL which were to vest on the Assessee, after the amalgamation were as follows:

29 All secured and unsecured debts, present and future liabilities, contingent liabilities, duties and obligations and all assets and properties, wherever situated whether movable or immovable, real or personal, in possession or reversion, corporeal or incorporeal, tangible or Intangible, present or contingent, all Land and buildings, all plant and machineries, computers and accessories, software, leasehold improvements, vehicles, fixed assets, work-in- progress, appliances, accessories, sundry debtors, inventories current assets, deferred tax assets, investments including investments in overseas subsidiaries, overseas offices, reserves, provisions, funds, as on the appointed date. Offices, import entitlements, import licenses, other licenses, registrations, copyrights, patents, trade names, trademarks, applications of copyrights, patents, trade names, and trademarks, any other intellectual property rights whether registered or not, labels, label designs, quality certificates, leases, licenses, tenancy rights, premises, hire purchase and lease agreements, office equipment, electrical fittings, furniture and fittings, capital work-in-progress, telephones, telexes, email and facsimile connections, communication facilities, equipment and installations and utilities, electricity, water and other service connections, benefits of agreements, contracts and arrangements including customer contracts etc and all the rights, title, interest, goodwill benefit and advantage etc.

d) As per the scheme of amalgamation agreement, equity shares of Assessee were allotted to the shareholders of FSSL and FSL in the following agreed ratio:

To the shareholders of FSSL: 810 equity shares of • Rs.10 each of Assessee issued for every 100 equity shares of Rs.5 each held by the shareholder of FSSL;

To the shareholders of FSL: 50 equity shares of Rs.10 each • of Assessee issued for every 100 equity shares of Rs.5 each held by the shareholder of FSL

Re : Goodwill recognition /computation

For the purpose of amalgamation, the intrinsic value of equity share of each of KIL, FSSL and FSL, based on net- worth of these companies for the purpose of amalgamation, was determined on the basis of valuation report dated 10.11.2006 obtained from Ernst & Young (‘EY’) as under :

S. Name of No. of Instrinsic Fair Remarks/ No. the equity Value of Value (in Valuation company shares equity Rs. Crs.) methodology share

1 Assessee 9.51 Rs.110.7 Rs.1,053 Based on company crs NAV method

2 Flextronics 3.31 Rs.897.2 Rs.2,967 Based on Software crs weighted Systems average Limited method

3 Future 4.41 Rs.55.9 Rs.246 Based on Software crs weighted Limited average method

Thereafter, on the basis of the intrinsic value (refer supra), equity shares of Assessee were allotted to the shareholders of FSSl and FSL, as under :

• To the shareholders of FSSL: 810 equity shares of Rs.10 each of Assessee issued for every 100 equity shares of Rs.5 each held by the shareholder of FSSL; • To the shareholders of FSL: 50 equity shares of Rs.10 each of Assessee issued for every 100 equity shares of Rs.5 each held by the shareholder of FSL.

The aforesaid exchange ratio was duly approved in the meeting of the shareholders of FSSL and by the Hon’ble

32 High Court, as part of the scheme of amalgamation.

The aggregate fair value of acquired businesses, i.e., FSSL and FSL was determined at Rs.3,213 crores, as follows:

Rs. in crores 3.31 crore equity shares of FSSL @ 897.20 = 2,967.14 4.41 crore equity shares of FSL @ 55.90- = 246.26___

3,213.40

The details of fair value and actual discharge of purchase consideration by the assesse are provided below for reference:

33 The aforesaid facts were duly stated vide Note no1 and 5 of the Notes to Accounts, forming part of the audited accounts for the financial year 2007-08. The same is reproduced here under :

“The excess of book value of investments in equity shares and the face value of investments in equity shares of Flextronics Software Systems Limited recorded in the books of account of Aricent 'Technologies (Holdings) Limited and that of Future Software Limited recorded in the books of account of Flextronics Software Systems Limited has been debited to Goodwill in Schedule D. In terms of the scheme of amalgamation, the goodwill will not be amortised but will he tested for Impairment at each balance sheet date in accordance with generally accepted accounting principles in India and the prescribed accounting standards issued by the Institute of Chartered Accountants of India. ”

As per the methodology approved as part of the scheme of amalgamation, the computation of goodwill arising on amalgamation of FSSL and FSL with the assessee company, is demonstrated hereunder :

In this regard, it would be pertinent to mention that the aforesaid amount of goodwill comprises of the various intangible assets, as mentioned hereunder :

(i) Reputation

(ii) Customer relationship/contracts (iii) Technology for business verticals, e.g. technology, DataCom, SS7, VoIP, Wireless and mobile handsets (iv) Records, files, engineering process information, manuals, data (v) Catalogue, quotations, sales and advertisement materials, etc. (vi) Patents for processes - It may be noted that a list of such patents were appended as Schedule C of Hon’ble High Court approved scheme of arrangement

35 for the merger.

Re : Net asset acquired from FSSL and FSS

Break-up of net assets of FSSL and FSS as of 31st March 2007 i.e. prior to the amalgamation is as follows :

In this regard, it would also be pertinent to mention that the aforesaid mechanism has been duly certified by the tax auditor of the assessee company inasmuch as the same was duly

36 reflected under the head 'intangible assets’ in the depreciation chart as per clause 14 of the Tax audit report in Form 3CD, which was filed before the assessing officer, during the course of the assessment proceedings.

37 scheme sanctioned by the Hon’ble High Court vide order dated 16.05.2007 the scheme has been given a retrospective from 01.04.2007 being the appointed date of the merger and 10.08.2007 being the effective date of amalgamation for accounting purpose. Thus it can be seen that the date of amalgamation for accounting purpose is 10.08.2007.

43(6) "written down value" means— (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year,

38 the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi); (c) in the case of any block of assets,— (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,— (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;

(B) by the reduction of the moneys payable in respect

39 of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced— (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income- tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value; (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of

40 assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).

Explanation 7. —Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.

41 57. In the case before us, goodwill was transferred by the amalgamating company (FSL and FSSL) to amalgamated company (assessee). According to this explanation, the 'actual cost' of goodwill to the amalgamated company (i.e the assessee) shall be same as it would have been if the amalgamating companies (FSL and FSSL) had continued to hold the capital asset (i.e. goodwill) for the purpose of its own business. Since the actual cost of goodwill in the case of amalgamating companies is zero, the actual cost in the case of amalgamated company (i.e. assessee) shall also be zero (and not the amount it paid to acquire the goodwill).

Explanation 2. —Where in any previous year, any block of assets is transferred,— (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company; as

42 the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. Thus the Act clearly lay down that the actual cost of the block of asset (intangible block in this case) in the hand of the amalgamated company (assessee) would be written down value in the immediate preceding year in the case of amalgamating companies. Since, the written down value of the intangible block of asset was zero in the books of the amalgamating companies, the actual cost would remain zero in the hand of amalgamated company (the assessee). The written down value of block of assets "intangibles/goodwill" in the immediately preceding previous year (i.e. FY 2006-07 for AY 2008-09) was zero. Further, there is no actual cost incurred for acquisition of goodwill during the previous year. Hence, WDV of this block of assets for the previous year will also be zero. Accordingly the depreciation will be NIL.

44 The same has the sanction of the Hon’ble High Court.

45 amalgamating company amounted to goodwill for which the depreciation was to be allowed. The Hon’ble High Court of Delhi in the case of Hindustan Coca Cola Beverages Private Limited 331 ITR 192 has upheld the findings of the Tribunal that payments made towards business acquired on slum price and a part of the price so paid was allocated to the intangible asset covered under the head goodwill.

ITA No.2671/Del/2014 (A. Y. 2009-10)

46 of the prepaid taxes including credit of TDS. The Assessing Officer should also compute the MAT credit as per the provisions of the law. We direct accordingly.

47 72. This international transaction of payment of corporate charges was bench marked and TNMM was considered as the most appropriate method with OP/OC as the profit level indicator. Before the TPO the assessee contended that since the operating profit margin of the assessee @ 27.36% is higher than that of the comparable companies @ 14.24%, the international transaction of payment of corporate charges was considered to be arms length.

a. The taxpayer's agreement with the associated enterprises related to intra group services is to be examined to see as to what kind of services were to be provided by the AE to the taxpayer. As normally

48 such agreements refer to a large number of services which could be rendered by the AE, the taxpayer has to specify the service(s) which is actually received by it for which the payment is made. b. Whether the taxpayer really needed such services or not. If so, what direct or tangible benefit it has derived. c. Contemporaneous information on the basis of which rate or payment for the service is determined. This includes the cost benefit analysis done by the taxpayer at the time of entering into agreement. Whether any benchmarking analysis was done by the taxpayer so as to compare the amount which he would have paid to an independent person under similar circumstances. d. Whether an independent person would have paid such amount in comparable circumstances e. Whether the expected benefit commensurate with the payment f. Whether the taxpayer has separately incurred any expenditure on similar service's and if so the necessity of making further payment to the AE for the same activity or it is a duplicate payment.

g. Whether the payment is in the nature of shareholder's activity or largely for the benefit of the AE. h. Whether the AE is rendering such services to other AEs or independent parties and if so the rate/ amount charged from such persons. i. The cost incurred by the AE for providing such services and the basis of allocation key has charged any markup on such payments the arm’s length margin is also examined.

49 74. After jotting down the above mentioned points the TPO opined that the assessee has not been able to show as to when and how the various services were requisitioned from the AE’s, whether the services were actually needed by it and whether the same were actually received by it, what cost benefit analyzed was done particularly when a huge payment has been made by it to the AE’s. The TPO concluded by holding that the assessee failed to demonstrate the benefits passed to the assessee by the AE on availing such services. Applying CUP, the ALP of service fee was determined at Nil and the additions were made.

50 corporate charges relates to the entire turnover/ provision of services of the assessee and constitutes an essential part of the cost of the sales. The counsel once again reiterated that the OPM of the assessee @ 27.36% is higher than that of all the comparable companies @ 14.24%. The adjustment made by the TPO and enhanced by the DRP is unwarranted and should be deleted. It is the say of the counsel that the assessee is free to conduct business in the manner that assessee deems fit and the commercial or business expediency of incurring any expenditure is to be seen from the point of view of the assessee. The counsel further stated that as long as the item of expenditure has been incurred wholly and exclusively for the purpose of business of the assessee, whether or not such expenditure actually benefits assessee is irrelevant for the purpose of determination of ALP.

52 :-

“54…………………….So long as the expenditure is for business consideration, the Assessing Officer cannot question the quantum or the wisdom of the assessee in incurring the expense. Issue of arm's length price, per se does not arise, when deduction under Section 37(1) is claimed. Expenditure and decision of the assessee, whether or not to incur the said expenditure; the quantum thereof, cannot be a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose.”

“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 the purpose of business and nothing more. It is this

53 principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.

XXX 22 ........... „ ....... So longastheexpenditureorpayment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. ’

Similarly, the Hon’ble Delhi High Court in the case of CIT vs Lumax Industries Limited (ITA No 102/2014) held that the Transfer Pricing provisions do not authorize disallowance of any expenditure on the basis that it was not necessary for the assessee to incur the expenditure. The Hon’ble Court held as under:

“16. On the question of addition made by the AO on account of ALP for the payment of royalty, learned counsel for the Assessee has rightly referred to the decision in Commissioner of Income Tax v. Sony Ericsson Mobile Communication (2015) 374 ITR 118 where the determination of the ALP of the royalty paid as Nil was not approved. The Court's attention has also been drawn to the decision in Commissioner of Income Tax v. EKL Appliances Limited (2012) 345 ITR 24'1 wherein it was held that Rule I OB (1) (a) did not authorize

54 disallowance of any expenditure on the ground that it was not necessary for the assessee to have incurred such expense. It was observed that though the quantum of expenditure could be examined. the entire expenditure could not be disallowed on the ground that U was not necessary. ”

The Delhi High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/ 2012) has held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives any benefit from the service. The Hon’ble Delhi High Court has opined that the determination of benefit to the tax payer is in the domain of the AO. The Hon’ble High Court held as follows:

“34. The Court first notes that the authority of the TPO is to conduct a transfer pricing ............... analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the A O. This distinction was made clear by the IT AT in Dresser- Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422 .................. 35. The TPO’s Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO’s authority in this case, which is to determining the ALP” for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise — of factual

55 verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is ‘nil’ given that an independent entity in a comparable transaction would not pay any amount However, this is different from the TPO stating that the did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO….”

56 the OECD guidelines which provide for evaluation of combined transactions where such transactions are closely linked or continues and cannot be evaluate separately.

“91. In case the tested party is engaged in single 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 Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the

57 operating margins of comparable companies, no further/separate compensation for AMP expenses is warranted. The Hon’ble Court held as under:

"101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(l)(e). which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm‘s length price. Then to make a comparison of a horizontal item without segregation would be impermissible.

58 under :-

“72. On the examination of the volume and us details submitted by the assessee. The Ld. dispute resolution panel has come to the conclusion that assessee has received the services and those services are useful services.. With respect to the clubbing of the transaction it was held that when the transactions are closely interrelated it is but natural to club such transaction and benchmarked it together. The Ld. dispute resolution panel at page No. 30 — 31, has considered the suspect and agreed with the contention of the assessee that intra group services received from its associated enterprise are closely linked to the main business activity of the assessee company placing reliance on the US regulations, OECD regulations and OECD draft notes on 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

59 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-venture partners we have given our findings while deciding the appeal of the assessee that such an action of the joint-venture partners cannot be the reason to determine the arm's length price of the services which is been received by the assessee at nil. In view of this we uphold the finding of the Ld. dispute resolution panel holding that transactions of intra group services are interlinked, therefore, they should be benchmarked together by adopting TNMM as the most appropriate method , hence, directing the Ld. transfer pricing officer to delete the adjustment proposed of Rs.3329766244/-. In the result ground No. 1 to 3 of the appeal of the revenue are dismissed."

60 transaction and since the OPM of the assessee is higher than the OPM of the comparable companies, we are of the considered view that the benefit and the necessity test applied by the TPO/ DRP is uncalled for and accordingly direct the TPO/ AO to delete the addition of Rs.48397589/- ground No.5.1 to 5.6 are allowed.

62 imputing @16% for the delay in receipt of payments.

63 outstanding receivables after taking into consideration the working capital adjusted margins of the comparable companies. The counsel further stated that continuing debit balance cannot be regarded as international transaction on the contrary a continuing debit is a result of international transactions. The counsel further stated that the TPO/ DRP grossly erred in re- characterising the account receivable as unsecured loans. The counsel further pointed out that even if the benchmarking of delay in receipt has to be done the same should be done with internal comparables. Since the assessee has received remittances from unrelated third party with a time lag exceeding the credit period and since no interest has been charged for delay in receipt of such remittances from unrelated parties the same should be considered. The counsel concluded by praying that the impugned adjustment should deleted.

64 reported in 56 ITR 52. This view further find support from the decision of Hon’ble High Court of Delhi in the case of Kusum Healthcare Private Limited 398 ITR 66 where in Hon’ble High court in the context of receivable held that not every item of receivable will be considered as an international transaction of receivable and each receivable has to be seen on case to case basis, the relevant finding read as under :-

“The Court is unable to agree with the above submissions. 10. The inclusion in the Explanation to Section 92B of the Act of the expression "receivables" does not mean that de hors the context every item of “receivables" appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capitalfof the Appellant will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.

65 international transaction by itself.”

“However, in the facts of the present case, the specific finding of the IT AT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceed realized belatedly cannot be faulted.”

66 104. There is no dispute that the OPM of the assessee @ 27.36% is higher than the average working capital adjusted margins of the comparable companies @12.97%, this being so no adjustment is called for in the light of the decision of the Hon’ble High Court of Delhi in the case of Kusum Healthcare (supra).

consequential. We direct the Assessing Officer/ TPO to levy interest as per the provisions of the law. Interest u/s. 234 C of the Act has to be charged on the returned income.

Order pronounced in the open court on 26.07.2019.

Sd/- Sd/- (SUCHITRA KAMBLE) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER *NEHA* Date:- 26.07.2019 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for Pronouncement Date on which the fair order comes back to the Sr. PS/ PS Date on which the final order is uploaded on the 26.07.2019 website of ITAT Date on which the file goes to the Bench Clerk Date on which file goes to the Head Clerk. The date on which file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order