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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: Shri Rajesh Kumar & Shri Ram Lal Negi
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “K”, MUMBAI
Before Shri Rajesh Kumar, Accountant Member & Shri Ram Lal Negi, Judicial Member ITA No.2257/Mum/2017 Assessment Year : 2012 -13 ITA No.1955/Mum/2016 Assessment Year : 2011 -12
WNS Global Services P. Ltd. Dy. CIT Circle 14(3)(1), Pl. No.10, Gate No.4, Mumbai Vs. Godrej & Boyce Complex, Phirojshanagar, LBS Marg, Vikhroli (W), Mumbai 400 079.
PAN: AAACW 2598L (Appellant) (Respondent)
Appellant By : Shri Porus Kaka & Shri Manish Kanth Respondent By : Shri Kumar Sanjay & Smt. Kavita Kaushik Date of Hearing :31.01.2020 Date of Pronouncement : 19.03.2020
O R D E R Per Rajesh Kumar, Accountant Member
These appeals by the assessee are directed against the two separate orders of the DRP-2, Mumbai, dated 14.12.2015 & 26.12.2016, u/s. 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relating to assessment years 2011-12 & 2012-13 respectively.
We shall first take up appeal in ITA No.1955/Mum/2016 for A.Y. 2011-12, wherein following Grounds of appeal have been raised:
“Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax, Circle - 14(3)(1), Mumbai [ learned AO], under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 ('Act') ('Assessment order'), in pursuance of the directions issued by Dispute Resolution Panel - 2 ('Hon'ble DRP'), Mumbai, on the following grounds :
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On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon'ble DRP has:
General Ground 1. The learned AO/Hon'ble DRP erred in determining the total taxable income of the Appellant for AY 2011-12 at Rs 85,35,18,207 instead of the income offered by the Appellant for the subject AY under normal provisions of the Act in its income-tax return.
The learned AO has erred in passing a draft assessment order in the case of the Appellant in lieu of the final assessment order given that the Appellant is an Indian Company in whose case the Transfer Pricing order passed under section 92CA(3) of the Act for the subject AY has not resulted in any variation to the income or loss returned for the subject AY.
Transfer Pricing Grounds
The learned AO has erred in making a reference of the Appellant's case to the learned TPO, pursuant to which the learned TPO erred in proposing a transfer pricing adjustment of Rs 213,35,00,600 for the purchase of a customer contract.
Without prejudice to the above, the learned AO/ Hon'ble DRP has erred in substituting the revenues projected by the Appellant while undertaking a valuation for the contract purchased by it with the actual numbers/ deflated numbers and thereby enhancing the adjustment from Rs. 171,93,20,475 to Rs. 213,35,00,600 without providing the Appellant an opportunity to be heard.
Non Transfer Pricing Grounds
5 (a) The learned AO/Hon'ble DRP erred in disallowing deduction under Section 10A of the amounting to Rs. 30,80,76,458, in respect of the profits earned by the Pune Unit- II of the Appellant, under the provisions of erstwhile sub-section (9) of Section 10A of the Act on account of the change in shareholding of the Appellant during AY 2003- 04.
(b) The learned AO/Hon'ble DRP erred in not following the order of the Hon'ble ITAT in the Appellant's own case for AY 200-05, contenting that the issue before the Hon'ble ITAT was only related to the validity of the order passed by the Commissioner of Income-tax under section 263 of the Act.
The learned AO/Hon'ble DRP erred in holding that the deduction under Section 10A of the "Act should be allowed, after setting off the
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losses of certain STP/ SEZ units against the profits of the STP/ SEZ units of the Appellant.
The learned AO/Hon'ble DRP erred in disallowing depreciation amounting to Rs 61,14,212 on intangible assets acquired by the Appellant contenting that the rights acquired by the Appellant on acquisition of customer contracts do not fall under the definition of intangible assets under Section 32(1) of the Act.
On the facts and circumstances of the case and without prejudice to the position adopted by the Appellant in the tax return, the learned AO/Hon'ble DRP erred in following inconsistent approach and holding that the profits derived by eligible STP units (under section 10A of the Act) should be computed without considering the gain from forex derivative contracts.
The learned AO erred in not setting off brought forward business losses and unabsorbed depreciation pertaining to earlier years to the tune of Rs. 189,06,58,168 (as per the return of income) against the assessed total income for the assessment year under consideration and carry forward of the balance business loss and unabsorbed depreciation to future years as per the provisions of the Act.
The learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act.”
The facts in brief are that that assessee i.e. WNS Global Services Private Limited, hereinafter referred to as WNS India. The assessee filed its return of income on 30.11.2011 declaring total income at Rs Nil, which was processed u/s. 143(1) of the Act. Subsequently, the case was selected for scrutiny and statutory notices were duly issued and served upon the assessee. It is engaged in the business of providing information technology enabled business process outsourcing servicing, including data processing and transmission of data. During the year under consideration, the assessee carried out the said business activities through various units registered with Software Technology Park of India (STP)/ Special Economic Zone of India (SEZ).
Ground no. 1 is general in nature and does not require any adjudication.
The issue raised in Ground nos. 3 and 4 relates to transfer pricing adjustment. The Assessing Officer on verification of audit report filed by the
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assessee in Form No.3CEB noticed that during the year the assessee had transactions with its associate concerns and accordingly, reference was made u/s. 92CA(1) of the Act to the TPO for computation of the Arm’s Length Price (ALP) in relation to the international transactions detailed in the audit report in Form 3CEB. The facts in brief are that WNS Capital Investment Private Limited (WCIL), a WNS group entity entered into a Masters Services Agreement (MSA) with Aviva Global Services (Management service Private Limited (Aviva Singapore) on 11.07.2008 to provide BPO services as mentioned in the MSA to Aviva Singapore and Aviva Group entities. As per the MSA, WCIL was required to provide services to Aviva entities across the world for a period of eight years and four months. However, in Mar 2011, with five years and eight months of MSA remaining, WNS India purchased all rights and obligations in respect of the said MSA from WCIL for a consideration of USD 110 million (i.e. Rs 4,916,175,000). The purchase of the MSA was undertaken with the approval of Aviva Singapore, as evidenced by the Novation and Amendment of Agreement (MSA Amendment) dated 24.03.2011. The assessee determined consideration of USD 110 million (Rs 4,916,175,000) based on the valuation report obtained from third party valuation expert, who undertook the valuation based on expected earnings from the MSA for the balance unexpired period of the MSA and the expected growth in the revenues from Aviva Singapore over a period of time. Prior to entering into agreement with the assessee with regard to the purchase of business and commercial rights, WCIL had outsourced the work under the MSA to various legal entities within the group across India and Sri Lanka on a non-exclusive basis under a revenue sharing arrangement in the ratio of 15:85 in favour of the legal entities in India and Sri Lanka. In the year 2009, as a part of restructuring exercise carried out by WNS, all Indian legal entities servicing Aviva under the MSA were merged into the assessee under the Scheme of Amalgamation sanctioned by the Hon’ble Bombay High Court vide its order dated 11.08.2009. With the merger of various WNS group Indian legal entities servicing Aviva having merged into one entity, assessee became the primary entity servicing the MSA in India. The assessee also became liable for entire service deliveries not only in India but also in Sri Lanka and thereby responsible for all the economic profits derived from the Sri Lankan operations of the MSA. Further pursuant to the purchase of MSA, the 15:85 arrangement between WCIL and WNS Sri Lanka was
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terminated and new agreement was entered into by the assessee with WNS Sri Lanka under which WNS Sri Lanka operated on a cost plus mark-up basis.
The learned TPO determined the ALP based on incremental benefit approach. He determined the ALP by considering only incremental value earned by WNS India by replacing actual billings for the period 1.4.2011 to 31.03.2014. Accordingly, by passing an order u/s. 92CA(3) of the Act on 30.01.2015 made an adjustment of Rs 171,93,20,475/- to the ALP on account of purchase of business rights (MSA for Rs 4,91,61,75,000/- by the assessee. During the year the Assessing Officer noted that the payment was made by the assessee company to the AE on account of capital expenditure to buy business rights and the payment is capitalized in the financial year 2011-12 relevant to A.Y. 2012-13 and the depreciation has been claimed in the year 2012-13. Accordingly, no transfer pricing adjustment is to be made to the income of the assessee while computing the assessed income during the year. Being aggrieved by the order of the TPO assessee filed appeal before the learned DRP.
The learned DRP after considering the submissions of the assessee as made during the appellate proceedings, dismissed the same and agreed with the incremental approach adopted by the TPO on certain adjustments viz a viz actual should be used up to 2014-15 and for the subsequent years average of the variation of the period A Y 2012-13 to A.Y. 2014-15 ought to be used to deflate the revenue figures by observing as under:
8.18 As per the valuation report, the forecast of revenue from the MSA was provided by the management. The DRP has noted that the assessee company has substantially overvalued the projected revenues to be received as per MSA for the future years, to justify the payment of USD 110 million to the AE. The actual figures of the revenue generated was available for 3 financial years Le. F.Y. 2011-12.F.Y. 2012-13 & F.Y. 2013-14, which have been referred to by the TPO in his order. A comparison of the actuals with the projected revenues is revealing and hence tabulated below: -
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S.No. Financial Projected Actual Difference % Year Revenues Revenues (In Million Overvaluation (In Million (In Million USD) with Projected USD) USD) Revenues as Base 1 2011-12 88.3 81.18 7.12 8.06 2 2012-13 100.3 76.67 23.63 23.55 3 2013-14 113.7 75.87 37.83 33.27 Total 302.3 233.72 68.58 22.68
8.19. The DRP is constrained to note that the revenues are over- projected by more than 33.27% for the F.Y. 2013-14, if the projected revenue is used as a base. It is also pertinent to note that just for 3 years the revenues have been over-valued by an amount of USD 68.58 million. In these circumstances, the DRP has come to a conclusion that the projected figures provide by the assesses compandor the valuation are highly inflated. Thus, the entire valuation Report is vitiated because of the wrong projected revenues provided by the assesses company.
8.20 It is also noted by the DRP that the revenues are over-projected by more than 49.86% for the F.Y, 2013-14, if the projected revenue is used as a base. The relevant calculation for the various years is tabulated below:-
S.No. Financial Projected Actual Difference % Year Revenues Revenues (In Million Overvaluation (In (In Million USD) with Actuals Million USD) as Base USD) 1 2011-12 88.3 81.18 7.12 8.77 2 2012-13 100.3 76.67 23.63 30.82 3 2013-14 113.7 75.87 37.83 49.86 Total 302.3 233.72 68.58 29.34
8.21 Similar overvaluation of revenues is also seen for the earnings / revenue attributable to Srilanka. A comparison of the actuals with the projected revenues is revealing and thus is tabulated below:-
S.No. Financial Projected Actual Difference % % Year Revenues Revenues (In Million Overvaluation Overvaluation (In Million (In Million USD) with Actuals as with Projected USD) USD) Base Revenues as
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Base 1 2011-12 13.25 12.18 1.07 8.78 8.07
2 2012-13 15.05 11.5 3.55 30.86 23.58 3 2013-14 17.06 11.38 5.68 49.91 33.29 Total 45.36 35.06 10.3 29.37 22.70
8.22 The DRP has noted that the revenues of Srilanka are over-projected by more than 49% for the F.Y. 2013-14, if the actual revenue earned is used as a base.
8.23 It is also a matter of record that before entering into the tripartite agreement, the services were provided to Aviva Group by the assessee company and the revenues were being shared between the Indian company and the Mauritius AE in the ratio of 85:15. Thus, to compute the ALP of this transaction, the appropriate approach will be to compute the incremental revenue of this contract Le. what more profits will the assessee company earn after entering into the 'Novation and Amendment Agreement'
8.24. Before the DRP, the assessee company has contended that it has successfully signed an 'extension of the deal for 6 more years without paying any upfront fees, therefore, the incremental revenues for these 6 years should also be taken into account In this regard, the DRP has noted that the initial MSA was only for 100 months, out of which 33 months have already elapsed. Thus, after entering into the 'Novation and Amendment Agreement', the assessee company has got the contract for the balance 67 months only. Neither, the MSA dated 11.7.2008 nor the 'Novation and Amendment Agreement’ dated 24.3.2011 talks of any extension of the provision of services beyond the period of 8 years and 4 months. In any case, the price paid by the assessee company to WCIL is for the remaining period of 67 months and not for the extension of the agreement beyond the stipulated period of 100 months.
8.25 For the purpose of determining the ALP, the DRP is of the view that actual figures of revenue available on record should be used, as the figures of projected revenue of the assessee company are highly unreliable. Further, for the next two years for which the actuals are not available, the AO/ TPO are directed to get the actuals for F.Y. 2014-15 from the assessee company and if the assessee company provides the actual figure for F.Y. 2014-15, the same should be used.
8.26 However, for the years for which the figures of actual revenue are not on record, the projected revenue figure should be deflated, accordingly by using the average percentage of 22.68%. It is to be
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noted that the projected revenues for Srilanka also needs to be deflated by 22.70%. Such deflation is required, as the assessee company has over-projected the revenues in a substantial manner. Accordingly, the Assessing Officer/TPO is directed to re-compute the ALP of the international transaction and the TP adjustment on this account.
Aggrieved by the order of the DRP, the assessee preferred appeal before us.
During the course of hearing, learned senior counsel for the assessee Shri Porus Kaka vehemently argued that neither the TPO nor the DRP has followed any of the transfer pricing method as specified in section 92C of the Act to determine the ALP for the purchase of MSA from the associate concern viz. WCIL. The learned AR submitted that the assessee in its transfer pricing study has followed Comparable Uncontrolled Price (CUP) as the most appropriate method with the value determined under the valuation report given by an independent valuer as a valid CUP. In defence of this arguments, the learned AR relied on the following decisions:
i) Tecumseh Products India (P) Ltd. vs. ACIT ITA 1686/Hyd/2010 and
ii) Social Media India Ltd. vs. ACIT 28 ITR (T) 212
The learned AR further submitted that TPO is duty bound to determine the ALP of international transactions by adopting one of the methods prescribed under the act and cannot deviate therefrom. He further argued that no provision under the Act empower the TPO to determine the ALP on estimate basis that too by entertaining doubts with regard to business expediency of payment and in process stepping into the shoes of the AO for making disallowance u/s. 37(1). He further relied on the decision of Hon’ble Delhi High Court in the case of Li & Fung India (P) Ltd. v. CIT [2014] 361 ITR 85, wherein it has been held that Section 92C(1) states that “ALP in relation to an international transaction could be determined by any of the methods provided in the said sub-section which is most appropriate having regard to the nature of transactions or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors which may be prescribed by the Board”
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The learned AR further submitted that while servicing of the MSA, WCIL subcontracted the work under the MSA to various legal entities that were part of the WNS Group across India and Sri Lanka on a non-exclusive basis. Accordingly, the contract for MSA was valued by an independent valuation expert, who valued the MSA at a price that a third party service provider would be willing to pay for the purchase of MSA from WCIL. The learned AR further submitted that the independent valuation report obtained by the assessee to price the customer should be considered as the ALP for the following reasons:
“i. Since the valuation was based on expected earnings from the MSA for the balance unexpired period of the MSA and factoring suitably the expected growth in revenues from Aviva Singapore over a period of time, Mutli period Excess Earning Method ('MEEM') was selected as the best method for the valuation
ii. MEEM determines the fair value i.e. the price at which an asset / liability is to be transferred between market participants as on the date of transfer. Market participants are buyers and sellers in the principal (or most advantageous) market who are: (i) independent of each other; (ii) knowledgeable about the asset or liability; and (iii) able and willing to/enter into a transaction for the asset or liability.
iii. Fair value is a market-based measurement, not an entity-specific measurement. For example, synergies available to a specific buyer are not considered in the valuation of an asset.”
The learned AR further placed before the Bench the detailed methodology and steps undertaken by the valuer to arrive at the valuation. He submitted that since the TPO & the DRP have found no fault in steps/methodology adopted by the independent valuer to arrive at the valuation, the same should be accepted as the ALP. The learned AR also referred and relied upon the note from Duff & Phelps India Private Limited (earlier known as American Appraisal India Private Limited) which clearly explains the rationale of undertaking the valuation from a market participant approach i.e. determination of fair value of a market based measurement is not an entity specific measurement. Accordingly, the learned AR contended the projected revenue and projected operating EBIT from unexpired period of the MSA was considered to determine the price payable by WNS India to WCL. The learned AR also referred and relied on the decision of Hon’ble Apex Court in the case of G L Sultania and Anr. Vs. SEBI & Ors (AIR 2007 SC 2172), wherein
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the Apex court while dealing with objections related to the issue on valuation has clearly held that “unless it is shown that some well accepted principle of valuation has been department from without any reason, or that the approach adopted is patently erroneous or relevant factors have not been considered by the valuer or that the valuation was made on a fundamentally erroneous basis or that the valuer adopted a demonstrable wrong approach or a fundamental error going to the root of the matter, this court would not interfere with the valuation of an expert.” The learned AR therefore submitted that valuation of intangible requires expertise and knowledge in the domain of valuation principles, markets and business niceties. He further contended that even if the TPO/DRP were not in agreement with the variables assumed/valuation undertaken by the independent third party valuers, they ought to have done their own exercise of adhoc valuation without having appointed a valuation expert to determine the value of the MSA. In defence of his arguments, learned AR place reliance on the following decisions: • Tecumseh Producs India (P.) Ltd. vs. ACIT (ITA 1686/Hyd/2010) • Global Payments Asia Pacific (India) (P.) Ltd. vs. Dy. CIT • Social Media India Ltd. vs. ACIT (28 ITR (T) 212) 10. The learned AR also submitted before the Bench that for securing this contract of MSA WCIL had paid Aviva Singapore an incentive payment of GBP 80 million with a minimum business of 3,000 full time employees for the entire contract period of 8 years and 4 months. The learned AR submitted that such type of incentive payments to the customer are fairly common in the IT/BPO industry, especially in the context of large, multi-year outsourcing contracts. The learned AR submitted that given the upfront fees by WCIL to Aviva Singapore, it may be appreciated that the minimum amount that any seller would expect to recover from the sale of MSA is the portion of the incentive payment which is akin to cost incurred by WCIL to acquire the customer contract with Aviva at first place and remains attributable over the unexpired period of the MSA which works out to USD 106.83 million. The learned AR also filed before the Bench the calculation of the value of the unamortized portion of the MSA incentive payment, which is reproduced below:
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Particulars Amount/Months MSA incentive Payment in July 2008 (GBP million) 80 USD/GBP exchange ratio (based on exchange rate in July 2008) 1.99 MSA Incentive Payment (USD million) 159.45 Total term of MSA (Number of months) 100 Expired portion of MSA as on 31 March 2011 (Number of months) 33 Unexpired portion of MSA (Number of moths) 67 Unamortized portion of the MSA Incentive Payment (USD million) 106.83
The learned AR submitted that the amortized value (USD 106.83 million) of the incentive payment for remaining number of months being the payment made to Aviva (the third party customer) ought to be a valid CUP benchmark to determine the ALP of the transaction and, accordingly, the consideration of USD 110 million paid by the assessee to WCIL should be considered as the ALP and no adjustment to the value of the international transaction be made in the present case. The learned AR relied on the decision of the Tribunal in the case of DCIT vs. Calance Software (P.) Ltd. (ITA 5023/Del/2012).
The learned AR also contended that the projections cannot be substituted by actuals and hindsight ought not to affect a valuation report. The learned AR submitted that the value determined as of a specific point of time is a function of facts that existed and events anticipated as at that point of time of undertaking the valuation. Because factual evidence from subsequent events that occurred would not have been available to a willing buyer and willing seller at a effective valuation date, it is only what would have been reasonable anticipated viz a viz the future, which is presumed by the parties at that point of time. The learned AR submitted as a hindsight is not available to a buyer and seller in the open market transaction, it should be admissible in reaching a valuation conclusion in notional market transactions. Accordingly, where the valuation has been carried out based on management’s projections, the same should be considered as reasonable. The learned AR placed his reliance on the decision of the Tribunal in the case of DQ (International) Ltd. vs. ACIT (TA 151/Hyd/2015).
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The learned AR also submitted that the assessee has signed an extension of the MSA in November 2014 well in advance of the date on which the MSA would have come up for renewal in November 2016. Given this, as an alternative, the total expected earnings from the extended period of the contract from November 2016 to March 2022 ( which has already been sighed up in November 2014) should be considered as an incremental benefit accruing to the assessee from the actual working of the contract. He further contended that the total incremental benefits only in respect of the extension of the contract with Aviva Singapore amounts to USD 57.61 million. The learned AR contended that by ignoring the said factors, the TPO has computed the value of the contract on an approach, which is contradictory, erroneous and deserves to be set aside.
The learned AR submitted that DRP has made an adhoc estimate by reducing the projections by an average of 22.68%, which is arbitrary and against the provisions of law. The adhoc estimate is not based on valuation principle/method of transfer pricing. The learned AR referred and relied on the decision of Hon’ble Bombay High Court in the case of CIT vs. Lever India Exports Ltd. [2017] 292 CTR 393 and the judgment of Hon’ble Gujarat High Court in the case of PCIT vs. Sabic Innovative Plastic India (P.) Ltd ITA NO.s 231 and 248 dt. 31.07.2018, wherein the Hon’ble Court has upheld the order of Tribunal and quashed the order of the TPO, which was merely based on perceptions and without any cogent material. The learned AR also relied on the decision of Mumbai Bench of the Tribunal in the case of Firmenich Armatics India (P) Ltd. vs. DCIT [2018] 96 Taxmann.com 649 wherein it has been held that there is no provision under Act empowering TPO to determine ALP on estimate basis.
The learned AR stated that assessee has purchased the business and commercial rights from WCIL in March 2011 on the basis of a valuation undertaken by an independent valuer, who valued the rights from servicing of the MSA entered into between WCIL and Aviva Singapore on 11th July 2008. He submitted that prior to restructuring undertaken in 2009, the delivery centres in India and Sri Lanka received 85% of the revenues collected by WCIL from Aviva Singapore while 15% of the revenue was retained by WCIL. Pursuant to the purchase of MSA, the assessee became the primary entity servicing the contract and, accordingly, 100%
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of the revenues in respect of this MSA accrued to the assessee from Aviva Singapore. Given the above scenario, the learned AR submitted that it is quite evident that 15% of the total billings to Aviva Singapore which would have otherwise been retained by WCIL should also now additionally be considered as the incremental earnings for the assessee, which are directly resulting from the purchase of the MSA. The total incremental earnings on this account amounts to USD 61.39 million (calculation thereof is placed at page 802 of the paper-book).
The learned AR further submitted that WCIL was also sub contracting some portion of the work under the MSA to delivery centers in Sri Lanka under the 15:85 revenue sharing arrangements. Thus, prior to purchase of the MSSA by the assessee from WCIL, the profits from the operations of the Sri Lanka delivery centers did not accrue to the assessee. Based on the above, the learned AR submitted that 85% of the client billings for the work done by WNS Sri Lanka as reduced by the cost mark-up paid by the assessee to WNS Sri Lanka is another incremental benefit for the assessee from the purchase of the MSA from WCIL. Total incremental earnings on this account amounts to USD 10.14 million (calculation thereof is placed at page 803 of the paper-book.
Summarising the benefits which was calculated at USD 111.14 million, the learned AR submitted that the incremental benefits of USD 111.14 million on the basis of actual is more than the price of USD 110 million paid by the assessee. Further the incremental benefits as calculated by the assessee based on projected revenues from the valuation report and the customer relationship as submitted before the TPO and the learned DRP comes to USD 125.19 million, which is higher than the price paid by the assessee for purchasing the contract from WCIL. The learned AR also submitted for the Bench that incremental benefit arising from the purchase of MSA including value attributable to extension of contract works out to USD 129.14 million, which is also more than the price paid by the assessee of USD 110 million for the purchase of MSA.
On the issue of observation of DRP that there is no mention of consideration of USD 110 million in the tripartite ‘Novation and Amendment Agreement’ and the failure on the part of the assessee to produce the agreement, the learned AR
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submitted that the assessee was not asked to submit the required documents and the TPO had not disputed the same. He also drew our attention to the additional evidence filed on 22nd February 2019, which is a copy of the agreement between WNS India and WCIL in support of consideration of USD 110 million. Finally, he submitted that the entire transfer pricing adjustments may kindly, be directed to be deleted.
Per contra, the learned DR at the beginning submitted before the Bench that there are two appeals pertaining to A.Ys. 2011-12 and 2012-13. He requested to hear the appeals simultaneously so that the orders are passed together as A.Y. 2012-13 has a bearing for A.Y. 2011-12. The learned DR submitted that for A.Y. 2012-13, the learned DRP has held the core issue is whether depreciation is allowable or nor on the business or commercial rights purchased by the assessee. According to the DR, the provision of section 32(1)(ii) of the Act depreciation is intended to a limited category of intangible asset. The customer base acquired by the assessee cannot be termed as knowhow, patent, copyright or trademark or franchise as these are enforceable rights while in the instant case is of commercial rights not having the similar nature. It also cannot be considered as license or business or commercial right of similar nature, as it does not relate to any intellectual property, whereas section 32(1 )(ii) contemplate depreciation in respect of those license or right which relate to intellectual property. The section 32(1)(ii) contemplates business or commercial right relating to intellectual property and not to all categories of business or commercial right. The learned DR while reiterating the facts before the Bench as has been done by the learned AR submitted that so far as consideration of USD 110 millions paid by WNS India to WCIL for acquisition of customer rights, learned DR submitted that there is no merit in the arguments of the learned AR that any fault or infirmity have been found by the TPO/DRP with the valuation and he heavily relied on the order of the TPO and adjustment made and the order of the DRP, who has dealt with the issue in a detailed manner as is apparent from pages 3 to 27 of the DRP order. On the issue of valuation commercial rights, the independent valuer i.e. American Appraisal has estimated the fair value of MSA for its remaining life as of the valuation date. The assessee has stated that in the TP study, he has followed CUP as the most appropriate method
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with the value determined under the valuation report given by an independent valuer as a valid CUP. The learned DR stated that the assessee has gone to extent of saying that independent valuation report is a valid CUP which is not factually correct. There are assumptions in the valuation report which has been considered by the valuer while determining the value. These assumptions are embedded with assumptions and presumptions. By referring to various pages of the Americal Appraisal report, learned DR also referred to the transfer pricing report of the assessee and pointed out that the assessee clearly outlined that none of the direct methods can be applied to establish Arm's length value of the companies international transaction, due to paucity of comparables. Whereas, section 92C(1) clearly outlines the method to be followed in determining the ALP of the transactions with the foreign Associate Enterprise. He further submitted that the valuation report is based on expected growth in revenue over a period of time which is nothing but incremental benefits which has also been considered by the TPO on actual basis. Both the department and the assessee are routing for the same method to determine the actual cost, the only difference being in the first the assessee is taking the hypothetical values while the department is harping on the actual values. The learned DR submitted that for determining the actual cost of the asset, actual figure is to be taken in to account instead of any paid figure by the assessee company. Reliance was placed on judgment of Hon’ble Delhi High Court in the case of CIT vs Dalmia Dadri Cement Ltd [1980] 124 ITR 510. The learned DR also relied on the order of the Tribunal, dated 04.11.2016, in the case of Sanyo BPL Pvt. Ltd vs. DCIT being TA No. 1395/Bang/2014 for A.Y. 2006-07, wherein it has held that the Assessing Officer is justified in denying depreciation claim on the intangible asset of distribution network on the inflated value of the asset. It is an attempt by the assessee company to claim higher depreciation and avoid payment of tax in the hands of the transferor of the business by claiming to be a slump sale transaction. This has been done by invoking the provisions of Explanation 3 to section 43(1) of the Act dealing with actual cost. The Tribunal observed that it is nothing but a colourful device adopted with an intention to avoid tax. The learned DR submitted that depreciation is allowable and admissible on the actual cost as defined u/s. 143(1) of the Act.
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The Legislature has prefixed the word 'actual' to the word 'cost' in section 43(1) which suggests that the intention of the Legislature was to curb the malpractices and tendencies to inflate capital costs for obtaining higher depreciation while not burdening the other with any material tax liability and to exclude collusive, inflated and fictitious cost. The learned DR countering the argument of the learned AR that hindsight has been used. The purpose of using hindsight is that it is giving the actual price rather than conjecturing the price subject to certain assumptions. The learned DR submitted that it is very rare that these data were not available, makes an alibi for the assessee. He further submitted that since it was laced with too many assumptions, their limitations are inherent. Now with the hindsight if the actuals are available, then, considering actual cost on the basis of estimates and projections do not hold good and make sense. The method employed by the assessee has various limitations and on the TP adjustment, the assessee can have reasons for not imposing the penalty, if the assessee can show the bona fide of data given, but the logic that TP adjustment itself cannot be operated is not a Sound logic, as the process is for determining the actual cost of the asset which is relevant for determining depreciation in future years. The learned DR relied heavily on the orders of the TP and the learned DRP in support of the transfer pricing adjustment proposed to the income of the assessee and prayed before the Bench that the order of the DRP may kindly be affirmed so that the assessee is not given the benefit of depreciation in the subsequent years on the cost, which is hypothetical and unreasonable.
We have heard the rival parties and perused the material on record as placed before us including the written submissions filed by both the sides. We note that in this case the TPO has determined arm’s length price on incremental benefit approach and none of the transfer pricing methods as prescribed u/s. 92C of the IT Act has been followed. Whereas, the assessee has followed in its transfer pricing study as the CUP method as the most appropriate method by determining the value of the MSA on the basis of valuation report given by the independent valuer. Section 92C(1) of the Act provides that the international transaction between the assessee and AE has to be on the basis of any of the method being the most appropriate method having regard to the nature of transaction or class of
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transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. Thus, it has been specifically provided in the provisions of section 92C(1) that TPO is duty bound to determine the arm’s length price of the international transaction only by following any one of the method prescribed. However, in the present case the TPO has not followed any of those methods, which is not a curable defect and goes to the root of the matter. Under these circumstances, we are of the considered view that the addition made by the TPO cannot be sustained. We further note that the DRP has also erred in not following any of the prescribed method and agreed with the incremental benefit approach adopted by the TPO by taking the actual figures up to A.Y. 2014-15 and for subsequent year directing the TPO to deflate the projected revenue figures by applying average rate of 22.68%. The case of the assessee is supported by the decision of the Hyderabad Bench of the Tribunal in the case of Tecumseh Products India (P) Ltd. vs. ACIT ITA (supra). The relevant para is reproduced as under:
"... This being so, the value paid by Assessee duly supported by valuation report cannot be ignored. In case of any doubt on the matter, the best way is to refer the machinery to the valuation officer under the IT Act. Without doing so, the TPO or the DRP has no base to determine the value at Nil and consequently denying the depreciation claim of the assesses while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. ..."
"The learned counsel in the course of arguments relied on the decision of the coordinate bench of IT A T, Mumbai in the case of Ballast Nedam Dredging (supra) to submit that in the absence of any contrary certificate, the certificate relied upon by Assessee has to be accepted. In the said case, Assessee has filed two certificates and TPO tweaked with two certificates so as to arrive at the so called difference in the ALP. On those facts, it was held that "if proper analysis was made there would not be any difference from the price paid to the price determined, as demonstrated before the TPO both on the basis of the third party quotations which are considered as internal CUP and the VG Bomv Certificates as external CUP. Under both the workings Assessee is able to justify the price paid and on this reason also, we have to accept Assessee 's contentions. "Similarly, in the case under consideration, Assessee justified the price paid by way of a certificate which can be considered as external CUP. Since TPO/DRP did not rely on any other certificate and in the absence of any contrary
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information, price paid by Assessee, which was lesser than the value mentioned in the certificate can be accepted as such. For these reasons, we allow Assessee 's ground and direct the AO/TPO to accept Assessee's valuation and allow depreciation as claimed. Grounds pertaining to this issue are allowed. " In the case of Social Media India Ltd. vs. ACIT (supra), the Hon’ble Bench has held as under:
"Further, the assessee also furnished the valuation report where the valuer adopted the cost method and the assessee has paid only the cost incurred by AE.As seen from the order of DRP, the DRP stated that valuer arrived at the cost ofwebsite at Rs. 5,38,31,832/-, as against the cost valued by the Valuer at Rs. 3,67,82,863/-. We are unable to understand from where the said price was taken up by the TPO/DRP. Be that as it may, the assessee has paid only the cost price to its AE and justified the same by providing a valuation report as external CUP. Nothing has been brought on record by the TPO or by the DRP to determine the ALP against the value shown by the assessee. In the absence of any counter report by the TPO/DRP or separate valuation done by the TPO, the assessee 's valuation has to be accepted as it was supported by an independent valuer, who determined the cost price on the actual expenditure incurred by the AE. Considering the totality of the facts of the case, we are of the opinion that the website purchased by the assessee has to be considered at Arm's length. " In the case of Firmenich Armatics India (P) Ltd. vs. DCIT [2018] 96 Taxmann.com 649, the Co-ordinate Bench has held that TPO is duty bound to determine arm’s length price of international transaction by adopting one of the methods prescribed under statute and cannot deviate from restrictions/conditions imposed under statute. It further held that there is no provisions under the Act empowering TPO to determine arm’s length price on estimate basis, that too, by entertaining doubts with regard to business expediency of payment and in process stepping into shoes of the AO for making disallowance u/s. 37(1) of the Act.
The Hon’ble Delhi High Court in the case of Li & Fung India (P) LTd. vs. CIT [2014] 361 ITR 85, has held that section 92C(1) states that “ALP in relation to an “”international transaction could be determined by any of the methods provided in the said sub-section which is “most appropriate” having regard to the nature of transactions or class of transaction or class of associated persons or functions performed by such persons or such other relevant facts which may be prescribed by
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the Board...” The Hon’ble Court further emphasized that Revenue must operate within the boundaries of law, by observing as under:
“…This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. Rule 10B(1)(e) recognizes that "the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise ..." (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear.
The TPO's reasoning to enhance the assessee's cost base by considering the cost of manufacture and export of finished goods, i.e., readymade garments by the third-party vendors (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. " Having considered the facts of the case in the light of the ratio laid down in the above decisions by the Delhi High Court and various co-ordinate Benches of the Tribunal, we are of the view that the adjustment as made by the TPO/DRP is without any jurisdiction and cannot be sustained.
Even on the issue of determining arm’s length price on the basis of valuation report from the independent valuer, we find that the TPO/DRP has not found any fault in the report in which the projected revenue and projected operating from the unexpired period of the MSA was considered to determine the price payable by WNS India to WCIL and, therefore, the TPO/DRP cannot resort to their own estimate in
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determining the arm’s length price. The case of the assessee is supported by the decision of the Hon’ble Supreme Court in the case of G L Sultania & Anr. Vs. SEBI & Ors. (AIR 2005 SC 2172), wherein the Apex Court while dealing with the objection related to the issue on valuation has clearly held as under:
"80.... It appears to us that the appellant expects this Court to act as an expert itself. This, we are forbidden from doing. Unless it is shown that some well accepted principle of valuation has been departed from without any reason, or that the approach adopted is patently erroneous or relevant factors have not been considered by the valuer or that the valuation was made on a fundamentally erroneous basis or that the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter, this court would not re with the valuation of an expert. ..." 22. We find merit in the contention of the learned AR that valuation of an intangible requires expertise and knowledge in the domain of valuation principles, markets and business. Even if the TPO/DRP were not in agreement with the variables assumed/valuation undertaken by the independent valuer, they ought to have desisted from their own exercise of adhoc valuation without having appointed a valuation expert to determine the value of the MSA. The case of the assessee is supported by Tecumseh Products India (P.) Ltd. (supra), wherein the Bench has held as under:
"... This being so, the value paid by Assessee duly supported by valuation report cannot be ignored. In case of any doubt on the matter, the best way is to refer the machinery to the valuation officer under the IT Act. Without doing so, the TPO or the DRP has no base to determine the value at Nil and consequently denying the depreciation claim of the assessee while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. ..."
"The learned counsel in the course of arguments relied on the decision of the coordinate bench of IT AT, Mumbai in the case of Ballast Nedam Dredging (supra) to submit that in the absence of any contrary certificate, the certificate relied upon by Assessee has to be accepted. In the said case, Assessee has filed two certificates and TPO tweaked with two certificates so as to arrive at the so called difference in the ALP. On those facts, it was held that "if proper analysis was made there would not be any difference from the price paid to the price determined, as demonstrated before the TPO both on the basis of the third party quotations which are considered as internal CUP and the VG Bouv Certificates as external CUP. Under both the workings Assessee is able to justify the price paid and on this reason also, we have to accept Assessee
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's contentions. "Similarly, in the case under consideration, Assessee justified the price paid by way of a certificate which can be considered as external CUP. Since TPO/DRP did not rely on any other certificate and in the absence of any contrary information, price paid by Assessee, which was lesser than the value mentioned in the certificate can be accepted as such. For these reasons, we allow Assessee's ground and direct the AO/TPO to accept Assessee's valuation and allow depreciation as claimed. Grounds pertaining to this issue are allowed. " 23. In view of these facts, we are not able to subscribe to the conclusion reached by the learned DRP/TPO.
We further note that WCIL had paid Aviva Singapore an incentive payment of GBP 80 million for securing contract with Aviva Singapore with a minimum business of 3000 Full Time Employees for the entire contract period of 8 years and 4 months and the unamortized portion of the MSA incentive payment as on the date of purchase of MSA by the assessee was USD 106.83 million and the assessee was to be benefitted by the higher hourly charge outs agreed with Aviva Singapore. This payment is akin to the cost incurred by the assessee in acquiring/securing customer contract with Aviva at the first place and remains to be attributable over the unexpired period of the MSA. Thus, we find merit in the argument of the learned AR that unamortised value of USD 106.83 million for remaining number of months being the payment to Aviva Singapore ought to be a valid CUP benchmarking to determine arm’s length price of the transaction. On this score, USD 110 million paid by the assessee to WCIL is at arm’s length standard and consequently, no adjustment to the value of international transaction is required to be made.
On the issue of projections not to be substituted by actual and hindsight ought not to affect the valuation report as submitted by the learned AR, we note that on the specific valuation date, the valuation has to be done on the basis of certain parameters or forecasts made as at the point of time of valuation. Thus, any future happening/occurrence based to the date of valuation canoe be foreseen and, therefore, the argument of the assessee merits consideration that whatever price has been determined in the valuation report needs no further adjustment as that events were not foreseeable on the date of valuation. The case of the assessee is supported by the decision of the Tribunal in the case of DQ (International) Ltd. vs. ACIT , wherein it has held as under:
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“ - the valuation method adopted for determining the future years cannot be replaced with actuals down the line, the valuation will go either way. When it goes to north, the revenue may adopt the same time, when it goes to south, the assessee may adopt, there won't be any consistency. What is important is the value available at the time of making business decision. It should be left to the wisdom of the businessman, he knows what is good for the organization. No doubt, 'IP' was sold to 'AE'. The method adopted should be consistent and should be documented to review in the future. The review does not mean replacing the projection with actuals. It is the rational of adopting the values for making decision at the point of time of making decision. When the values are replaced subsequently, it is not valuation but evaluation, i.e., moving the post of result determined out of projections. The revenue is doubting the valuation because the actual revenues were favourable. In rational decision making the actual results are irrelevant. In the present case, the valuation was done by two independent valuers not by the assessee. The other issue with this are that the revenue adopted the actuals of AE without considering whether they were revenues generated out of the 'IP' or not. They simply adopted the revenues ofAE without giving proper findings that the revenues ofAE were all generated only out of this 'IP' (Jungle Book). The assessee submitted that these revenues were generated by 'AE' out of other properties (IPs) as well. The revenue cannot adopt such values without proper verification. For valuation of an intangible asset, only the future projections alone can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by assessee are allowed.” 26. We are also of the view that in case the actual working of the contract/hindsight is to be treated as genuine for valuation then transfer of customer relationship by WCIL to the assessee and renewal/extension of contract apart from the MSA incentive payment for the unamortized period must be taken into account for determining the ALP. In this case, we note that the total incremental benefit in respect of extension of the contract with Aviva Singapore would be USD 57.61 million. The assessee has signed the extension of MSA in November 2014 as against the renewal in November 2016 and the contract was renewed up to March 2022. In our opinion, this hindsight post the valuation date has to be considered if the TPO/DRP has determined the arm’s length price on actual results. On this issue also we do not find the approach of TPO in determining the value of the international transaction based on incremental benefit from purchase of MSA as correct unless the value of customer relationship along with other incremental benefits/actual of profits are considered. We note that the
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incremental benefit in respect of customer relationship with Aviva Singapore works out to USD 39.61 million. In view of these facts, the value of contract based on the approach as adopted by the TPO is self contradictory and cannot be sustained.
In view of the above facts and circumstances, we are inclined to set aside the order of DRP and direct the AO to delete the adjustment made to the cost of MSA. The ground raised by the assessee is allowed.
The issue raised in ground no.5 pertains to disallowance of deduction u/s. 10A of the Act amount to Rs 30,80,76,458/- in respect of Pune Unit II under the provisions of erstwhile subsection (9) of Section 10A of the Act on account of change in shareholding of the assessee during A.Y. 2003-04.
At the outset, learned counsel for the assessee submitted that the issue is squarely covered by the decision of the co-ordinate Bench in assessee’s own case for A.Ys 2003-04, 2004-05, 2005-06 and 2008-09. The learned DR, on the other hand, fairly agreed with the contention of the AR. He, however, relied on the orders of the authorities below.
After hearing both the parties, we observe that the issue is squarely covered in favour of the assessee in its own case. The relevant operative part of the order for A.Y. 2003-04 is reproduced as under:
“3.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. The issue before us for consideration and adjudication is whether the order of the authorities below were correct or not in disallowing the assessee’s claim for deduction under section 10A of the Act amounting to Rs.31,89,63,,890/- in respect of the assessee’s STPI units in Mumbai and Pune in the light of the erstwhile provisions of sub-section(9) of section 10A of the Act. 3.5.2 In the year under consideration WNS(Mauritius) Ltd. a wholly owned subsidiary of WNS Holdings acquired the entire share capital of the assessee from British Airways Ltd., U.K. In the return of income the assessee for assessment year 2003-04 the assessee had claimed deduction under section 10A of the Act; submitting that the amendment carried out by Finance Act, 2003, wherein section 10A(9) of the Act was deleted was an amendment of clarificatory nature and such deletion should be considered to have been omitted retrospectively. In original scrutiny assessment proceedings, the assessment was completed under section 143(3) of the Act vide order dated 17/3/2006 allowing this claim
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and accordingly the assessee was granted the deduction under section10A of the Act. In the order of re-assessment for assessment year 2003-04, passed under section 143(3) r.w.s. 263 of the Act vide order dated 23/12/2008, pursuant to revisionary proceedings, the assessee’s claim for deduction under section 10A of the Act was disallowed by applying the provisions of sub-section (9) of section 10 of the Act. This finding was upheld by the CIT(A) in the impugned order and the matter is before us for consideration. 3.5.3 Sub-section (9) of section 10A of the Act was omitted from the statute by Finance Act, 2003,w.e.f. 1/4/2004. Para 102 of the Finance Minister’s speech while presenting the Union Budget for 2003-04 has been perused and we find that the statement of intent of the legislature for omitting sub-section (9) of section 10A of the Act was that the concessions extended to the IT Sector under sections 10A & 10B of the Act are to be continued as originally envisaged. In this context, the present position as per law that such companies as currently covered by these tax exemption lose these benefits upon change in ownership is not logical, and therefore, these restrictions are being removed so that the benefit of such tax exemptions will remain even in cases of amalgamation or demerger. In this regard, we refer to the judgment in the case of the Bangalore Bench of the ITAT in the case of GE Thermometrics India Pvt. Ltd. in ITA Nos. 257 & 258/Bang/2008 for assessment years 2003-04 and 2005-06, which we feel squarely covers the issue before us in favour of the assessee. In this order (supra) the Bench, in respect of the effect of deletion of section 10B(9) of the Act (which is pari-materia to section 10A(9) of the Act) at para 11 of its order has held that even though the Finance Act, 2003 mentions that the aforesaid sub-section (9) is omitted w.e.f. 1/4/2004; in view of the fact that the said omission is different from repeal, the saving clause provided in section 6 of the General Clauses Act is not applicable, therefore, section 10B of the Act is to be read as though it never had sub-section (9) in it at all in all proceedings of the Act. 3.5.4 In coming to this view we place reliance and draw support on the decision of the Hon’ble Karnataka High Court in the case of GE Thermometrics India Pvt. Ltd. in ITA Nos. 876/2008 dated 25/11/2014 for assessment year 2003-04 on Revenue’s appeal against the order of the Co-ordinate Bench of the ITAT(supra). In para 4 of this order the substantial question of law before the Hon’ble High Court was: “Whether the Tribunal was correct in holding that in view of the omission of sub-section 9 to Section 10B of the Act, w.e.f. 01.04.2004, it should be understood that the said section never existed in the statute book and therefore the benefit claimed by the assessee u/s. 10B should be allowed?” Their Lordships at para 7 and 8 of their order (supra) have answered the question holding as under:-
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“7. The Apex Court in the case of KOLHAPUR CANESUGAR WORKS LTD. VS UNION OF INIDA reported in AIR 2000 SC 811 dealing with the effect of deletion of a provision in the statute is held at Para 38 as under:- “38. The position is well-known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as completely as if it had never been passed, and the statute must be considered as a law that never existed. To this Rule, an exception is engrafted by the provisions of Section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in Section 6 or in special Acts may modify the position. Thus the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the Legislature is that the pending proceeding for the same purpose may be initiated under the new provision.” 8. Admittedly, in the instant case, there is no saving clause or provision introduced by way of an amendment while omitting sub-section (9) of Section 10B. Therefore, once the aforesaid section is omitted from the statute book, the result is it had never been passed and be considered as a law that never exists and therefore, when the assessment orders were passed in 2006, the Assessing Officer was not justified in taking note of a provision which was not in the statute book and denying benefit to the assessee. The whole object of such omission is to extend the benefit under Section 10B of the Act irrespective of the fact whether during the period to which they are entitled to the benefit, the ownership continues with the original assessee or it is transferred to another person. Benefit is to the undertaking and not to the person who is running the business. We do not see any merit in these appeals. The substantial question of law is answered in favour of the assessee and against the revenue. Accordingly, the appeals are dismissed. 3.5.5 In the facts and circumstances of the case and taking into account the legal precedents, we are of the considered opinion that the aforesaid finding rendered by the Hon’ble Karnataka High Court in the case of GE Thermometrics India Pvt. Ltd. (supra) squarely applies to the case of the assessee; section 10B and 10A of the Act being pari-materia . Respectfully following the aforesaid decision of the Hon’ble Karnataka High Court in the case of GE Thermometrics India Pvt. Ltd. (supra) we hold that there being no saving clause or any amendment while omitting
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sub-section (9) of section 10A of the Act, the result is that it is to be read as having never been passed and had never existed on the statute. In this view of the matter, we reverse the order of the CIT(A) on this issue and direct the Assessing Officer to allow the assessee’s claim for deduction under section 10A of the Act for assessment year 2003-04. It is accordingly ordered. 3.5.6 Before parting, we record that we have carefully perused the orders of the Co-ordinate benches of ITAT in ITA No.2566/Mum/2009 for assessment year 2004-05 and ITA No.348/Mum/2008 dated 17/06/2008 cited by the Ld. Departmental Representative. We find that contrary to this averments, these Co-ordinate benches have not adjudicated on the merits of the assessee’s claim for deduction under section10A of the Act for assessment year 2003-04. In the Tribunal’s order for assessment year 2004-05, the bench could not have adjudicated on the matter, as the present appeal for assessment year 2003-04 was not before it. In respect of the Tribunal’s order dated 17/6/2009 the CIT’s order under section 263 of the Act for assessment year 2003-04(supra), the bench has only upheld the CIT(A)’s assumption of jurisdiction under section 263 and not adjudicated on the assessee’s claim for deduction under section 10A of the Act.” Since the issue is identical to the one as decided by the co-ordinate Bench in assessee’s own case, respectfully, following the said order allow the ground raised by the assessee.
The issue raised in ground no.6 is against the DRP in holding that deduction u/s 10A of the Act after setting off the losses of certain STP/SEZ units against the profits of the STP/SEZ units of the assessee.
At the outset, learned counsel for the assessee submitted that the issue is squarely covered by the decision of the co-ordinate Bench in assessee’s own case for A.Ys 2005-06 to 2008-09, vide order dated 16.01.2019. The learned AR therefore, prayed that the issue may kindly be decided in favour of the assessee. He also pointed out that the DRP has issued directions in A.Y. 2012-13 following the co-ordinate Bench decision in the case of the assessee itself. On the other hand, the learned DR, relied on the orders of the authorities below.
After hearing both the parties, we observe that the issue is squarely covered in favour of the assessee in its own case for A.Ys 2005-06 to 2008-09. The relevant operative part of the order for A.Y. 2005-06 is reproduced as under:
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“52. We have considered rival submissions and perused materials on record. In our considered opinion, the issue does not required deliberation at length in view of the ratio laid down by the Hon'ble Supreme Court in Yokogawa India Ltd. (supra). In fact, the DRP following the aforesaid decision of the Hon'ble Supreme Court has decided the issue in favour of the assessee in assessment year 2012– 13, vide order dated 26th December 2016. In view of the aforesaid, we do not find any infirmity in the decision of the learned Commissioner (Appeals) on the issue. Ground raised is dismissed.” 34. Following the decision of the co-ordinate Bench, we set aside the order of the DRP and direct the TPO to allow the ground raised by the assessee:
The issue in ground no. 7 relates to disallowance of deprecation amounting to Rs 61,14,212/- on intangible assets acquired by the assessee on acquisition of customer contracts, which do not fall under the definition of intangible assets u/s. 32(1) of the Act. We find that co-ordinate Bench of the Tribunal has decided identical issue in favour of the assessee in its own case for A.Ys. 2005-06 and 2008- 09. The relevant operative part of the order for A.Y. 2005-06 is reproduced as under:
“40. We have considered rival submissions and perused materials on record. Insofar as factual aspect of the issue is concerned, there is no dispute that by virtue of acquisition of M/s. Town and Country Assistance Ltd., various contracts executed by the said concern with third party clients were assigned to the assessee. It is also a fact that such acquisition took place by virtue of an agreement executed on 13th January 2004. It is also a fact on record that in assessment year 2004– 05, the assessee for the first time claimed depreciation by treating the capitalized value of the amount paid towards acquiring M/s. Town and Country Assistance Ltd., as an intangible asset and claimed depreciation @ 25%. Notably, the Assessing Officer while completing assessment under section 143(3) of the Act also allowed assessee’s claim of depreciation. However, learned Commissioner of Income Tax revised the assessment order under section 263 of the Act. Subsequently, while deciding assessee’s appeal against the said 29 WNS Global Services Pvt. Ltd. order the Tribunal quashed the order passed under section 263 of the Act and restored the assessment order. Thus, in effect, assessee’s claim of depreciation in respect of intangible asset became final. In any case of the matter, there is no dispute that by acquiring M/s. Town and Country Assistance Ltd. the assessee has also acquired contractual rights which, no doubt, is a valuable commercial right. Therefore, it comes within the meaning of intangible asset as per section 32(1)(ii) r/w Explanation 3(b) of the Act. Hence, depreciation claimed by the assessee is allowable. The decisions relied upon by the learned Sr. Counsel for the
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assessee also supports our aforesaid view. Accordingly, we uphold the decision of the learned Commissioner (Appeals) by dismissing the grounds raised.” Respectfully, following the said order, we set aside the order of the DRP and allow the ground raised by the assessee.
The grievance of the assessee in ground no.8 is with regard to the AO/DRP following inconsistent approach and holding that the profits derived by eligible STP units (u/s. 10A of the Act) to be computed without considering the gain from forex derivative contracts.
The facts in brief are that the assessee has entered into foreign exchange forward and option contracts to cover the risks associated with the change in foreign exchange rates on forecasted revenue dominated in foreign currencies and on revaluation of monetary assets and liabilities. The profit and loss arising out of the foreign currency forward and option contracts was recognized in the year in which settlement took place. During A.Y 2011-12, an amount of Rs 63,50,36,264/- representing net realised foreign currency exchange gains on settlement of derivative contracts was offered to tax while computing the income from business or profession not eligible for deduction u/s. 10A of the Act. During the assessment proceedings, the assessee submitted that profits derived from eligible units for the purpose of computing deduction u/s. 10A of the Act should not be computed after considering loss/gain from forex derivative contracts. However, the AO came to the conclusion that loss/gain from forex derivative contracts formed part of export activity. The AO in A.Y. 2009-10, 10-11 and 2012-13 has held that loss/gain from forex derivative contract form part of the export activity. However, during the year under consideration the AO has not apportioned the foreign currency exchange gain while computing deduction u/s. 10A of the Act in line with the position adopted by him in earlier years despite there being no change in facts and law. Similarly, the learned DRP was also of the view that the foreign exchange gain is not directly generated or derived from export activity and results from a post export activity after the payment has been received and as such gain cannot be considered as profit derived by the assessee from export of goods. The observations of the DRP are as under:
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“16.1 On this issue, the DRP is of the view that the foreign exchange gain is not directly generated or derived from the export activity and results from a post export activity after the payment has been received. In these facts, such gain cannot be considered as profit derived by the assesses from the export of goods. Reliance in this regard, is placed on the judgment of CIT Vs. Shah Originals 327 ITR 19 (Bom), wherein it was held that exchange fluctuation in the EEFC account as well as the interest which has arisen as a result of the deposits maintained in the EEFC account, cannot be regarded as being part of the profits derived by the assesses from the export of goods or merchandise, therefore, cannot be included in the profit of business, while calculating deduction under s. 80HHC, The relevant portion of the judgment is reproduced below:- "11, The assessee admittedly in the present case received the entire proceeds of the export transaction. The RBl has granted a facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC account. The proceeds of the account are to be utilized for bona fide payments by the account holder subject to the limits and the conditions prescribed. An assesses who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account but, this is a facility which is made available by the Reserve Bank. The transaction of export is complete in all respects upon the repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirely or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, -what the seller does with the proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived* by the assesses in sub-s. (1) of s. 80HHC. Both the AO and the CIT(A) have made a distinction, which merits emphasis. The exchange fluctuation, as both those authorities noted, arose subsequent to the transaction of export. In other words, the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise.
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The interest which has arisen as a result of the deposits maintained in the EEFC account can similarly not be regarded as representing the business income of the assesses. The business of the assessee consists of the manufacture and export of garments. The interest income which was generated from the deposits held in the EEFC account would not fall for classification as income under the head of business and profession but, would fall for classification as income from other sources. Undoubtedly, as counsel appearing on behalf of the assessee submits, in determining under which head income would fall, the Court must be guided by the principle laid down by the Supreme Court in Nalinikant Ambalal Mody vs. S.A.L. Narayan Row, CIT (1966) 61 JTR 428 (SQ. The Supreme Court held that "whether an income falls under one head or another has to be decided according to the common notions of practical man, for the Act does not provide any guidance in the matter". The interest which accrued to the assessee on the deposits held in the EEFC account cannot be treated as business income, " 16.2 Reliance in this regard is also placed, on the following judgments of the Hon'ble Supreme Court: -
(a) Cambay Electric Supply Co. Vs. CIT i 13 ITR 84 (SC) (b) CIT vs. Sterling Foods [1999] 237 ITR 579 (SC) (c) Pandian Chemicals Ltd. 262 ITR 278 (SC)
16.3 Also reliance is placed on the judgment of Hon'ble Madras High Court in the case of CIT vs. Eastern Sea Foods Exports P. Ltd. 215 ITR 64 (Mad.) Further, reliance is also placed on the judgment of Hon'ble Madras High Court in the case of India Cement International Vs. ITO [2009], 185 Taxman 51 (Mad.)., which has been followed by Hon'ble ITAT Mumbai in the case of Larsen & Tubro Infotech Limited Vs DCIT (2012) 19 ITR(Trib) 361 (Mum 'G' Bench).
16.4 On the same issue, the Hon'ble Mumbai ITAT in the case of Lionbridge Technologies P Ltd Vs ACIT in ITA No. 1952/Mum/ 2010 has decided in favour of the Revenue. In view of these facts, the DRP is of the view that no direction needs to be issued on this issue. 16.5 Further, the DRP has noted that the AO has not made any variation to the returned income on this issue. On the claim of the assesses company that the principle of consistency should have been followed by the AO, the DRP has noted that such a claim has not been accepted by the assessee company in the earlier year and is being contested. Even legally, in the case of Goetze (India) Ltd. (284 ITR 323), the Hon'ble Supreme Court has held that the Assessing Officer cannot entertain any claim for allowing deduction resulting in a reduction in the total income returned, which is not claimed in the original return or a revised return. Accordingly, no directions are given to the AO/ TPO on this issue.”
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The learned AR vehemently submitted before the Bench that the AO has erred in adopted different positions with regard to the issue of whether profits derived from eligible units should be computed after considering the loss/gain from forex derivative contracts and should be consisted with the position with the position adopted for the earlier assessment years. In defence, the learned AR relied on the following decisions:
• Radhasoami Satsang vs. CIT [1992] 193 ITR 321 (SC); • CIT vs. Darius Pandole [2011] 330 ITR 485 (Bom)
The learned AR submitted that in view of the ratio laid down in the above two decisions, the AO was required to adopt a consistent position that loss/gain from forex derivative contracts form part of the export activity of the assessee and prayed before the Bench that the net foreign exchange gain of Rs 63,50,36,264/- may kindly be directed to be treated as part of the profits of the undertaking to arrive at eligible profit u/s. 10A of the Act and should not be separately taxed as income from business and profession not eligible for deduction u/s. 10A of the Act. The learned AR also cited following decisions to defend the position of the assessee that gain/loss derived from forward contracts entered into by the assessee engaged in export activity should be eligible for deduction:-
• CIT vs. Gem Plus Jeweller India Ltd. 330 ITR 175 • PCIT vs. Jindal Drugs Ltd. 101 taxmann.316 (Bom) • CIT vs. Symantee Software India (P) Ltd. (Bom)
In view of the above, the learned AR prayed that the AO’s approach in assessee’s own case for A.Ys. 2009-10, 2010-11 and 2012-13 and as has been held in the above judgments by the Hon’ble Bombay High Court, the AO be directed to follow consistency and forex gain on forward contracts be considered for computation of deduction u/s. 10A/10AA of the Act.
The learned DR, on the other hand, relied on the orders of the AO and learned DRP. He submitted that since such a huge gain is derived from the activities which are post export therefore, they should not be allowed to form part of the profit derived from export activity for the purpose of deduction u/s. 10A of
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the Act. On the issue of consistency, the AO submitted that year is different and the principle of res judicata is not applicable in the income-tax proceedings.
We have heard both the parties and perused the material available on record. We observe that during the year the assessee has made net foreign exchange gain of Rs 63,50,36,264/- on settlement of derivative contracts, which were entered into by the assessee. We find that the AO for A.Y. 2009-10, 2010-11 and 2012-13, in the assessee’s own case, has treated profit/loss from forex derivative contracts as part of the export activity for deduction u/s. 10A of the Act. However, during the year, the AO treated the said gain differently. In other words, while computing deduction u/s. 10A, the AO did not treat the said gain as part of the profit from export activity for the purpose of deduction u/s. 10A. However, during the year the AO treated the said gain differently. In other words, while computing deduction u/s. 10A, the AO did not treat the said gain as part of the export activity for the purpose of deduction u/s. 10A of the Act. Apparently, there being no change in the facts and circumstances during the year, we are quiet in agreement with contentions of the learned AR that the principle of consistency should be followed and forex gain should be treated as profit from export activity and deduction should be allowed u/s. 10A of the Act. The case of the assessee is supported by the decision of the Apex court in the case of Radhasoami Satsang vs. CIT (supra), wherein the Hon’ble Court has held that while dealing with the principle of consistency and principle of res judicata, unless there is a material change justifying to take a different view in the matter, shall not be appropriate for the Revenue to take a contrary view. Similarly, Hon’ble Bombay High Court in the case of CIT vs. Darius Pandole (supra), has held as under:
"The Tribunal, while deciding the appeal for the assessment year 2003-04 has observed that there was no change in the set of facts and circumstances as they obtained for the assessment years 1997-98 and 2002-03. The Tribunal was correct in holding that there was due application of mind by the Assessing Officer to the very same issue during the course of the earlier two assessment years and that the assessments were finalized after considering the reply filed by the assesses specifically to the query raised by the Assessing Officer. In the circumstances, the Tribunal was, in our view, justified in following the decision of the Supreme Court in Radhasoami Satsang v. CIT [1992] 193ITR 321 (SC). While the principle ofresjudicata could not as an
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abstract principle apply to assessment proceedings since each year of assessment has to be considered separately, yet when a fundamental aspect was duly considered after a query was raised by the Assessing Officer and was answered by the assessee on the same facts, a change in view, was evidently not warranted for the assessment year in question. So construed, we do not find that the decision of the Tribunal will give rise to any substantial question of law.”
In view of the aforesaid facts and the ratio laid down by the Hon’ble Bombay High Court, we are of the view that the forex gain resulting from the settlement of derivative contract is part of the profit from export activity and eligible for deduction u/s. 10A. Besides, Hon’ble Bombay High Court has held in a series of decisions referred to by learned counsel for the assessee namely CIT vs. Gem Plus Jewellery India Ltd., PCIT vs. Jindal Drugs Ltd. and CIT vs. Symantec Software (P) Ltd. , that loss or gain derived from forward contracts entered into by an assessee engaged in export activity should be eligible for deduction. Accordingly, we set aside the order of the DRP on this issue and direct the AO to treat the forex gain as part of the profit for deduction u/s. 10A of the Act.
Ground raised by the assessee is allowed.
The grievance of the assessee in ground no.9 is that the AO did not set off brought forward business losses and unabsorbed depreciation pertaining to earlier years to the tune of Rs. 189,06,58,168/- against the assessed total income for the assessment year under consideration and carry forward of the balance business loss and unabsorbed depreciation to future years as per the provisions of the Act.
After hearing the parties and on perusal of the material available on record, we find that the learned DRP has directed the Assessing Officer to verify the claim of the assessee regarding the business and depreciation loss and allow the same to the extent available as per law. However, the Assessing Officer has not given effect to the order of the DRP. We direct the Assessing Officer to give effect to the order of the DRP and after verifying the claim of the assessee, allow the same to the extent available in terms of the directions of DRP. This ground is allowed.
Ground no.10 is premature and, hence, dismissed.
Appeal is partly allowed.
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We shall now take up the appeal in ITA No. 2257/Mum/2017 for A.Y. 2012- 13, wherein following grounds have been raised:
“General Ground 1. erred in determining the total taxable income of the Appellant for AY 2012-13 at Rs 216,45,38,415 instead of the income offered by the Appellant for the subject AY in its income-tax return of Rs. NIL
Transfer Pricing Grounds 2. erred in not providing adequate opportunity of being heard to the Assessee prior to incorporating a disallowance of depreciation of Rs 42,98,30,119 in his order passed for the year under consideration. Therefore, the learned Hon'ble DRP/ learned TPO has violated the principles of natural justice and the impugned order passed by the learned Hon'ble DRP/ learned TPO should be quashed.
erred in incorporating a disallowance of depreciation in his order passed for the year under consideration based on an adjustment proposed to the value of business and commercial rights purchased by the Assessee from its associated enterprise in AY 2011-12, which has been capitalized in the books of accounts of the Assessee.
erred in proposing a disallowance of depreciation in his order passed for the year under consideration which is a consequence of the adjustment proposed by the learned TPO's predecessor to the valuation of business and commercial rights purchased by the Assessee from its associated enterprise in AY 2011-12 without appreciating that disallowance of depreciation, if any, does not fall within Chapter X of the Act.
Non Transfer Pricing Grounds 5. erred in disallowing depreciation amounting to Rs 45,85,659 on intangible assets acquired from WNS Global Services (UK) Limited by the Appellant contending that the rights acquired by the Appellant on acquisition of customer contracts do not fall under the definition of intangible assets under Section 32(1) of the Act.
erred in enhancing the disallowance of depreciation amounting to Rs 122,90,43,750 on intangible assets acquired from WNS Capital Investments Private Limited, Mauritius by the Appellant contending that the business rights acquired by the Appellant do not fall under the definition of intangible assets under Section 32(1) of the Act.
(a) The learned AO/Hon'ble DRP erred in holding that the loss from forex derivative contracts form part of the export activity of the
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Appellant and thus the profits derived from eligible units should be computed after considering the loss from forex derivative contracts.
(b) On the facts and circumstances of the case and without prejudice to the position adopted by the Appellant in the tax return, the learned AO/Hon'ble DRP erred in adopting inconsistent approach by not following their respective orders for AY 2011-12 wherein it was held that the profits derived by eligible STP units (under section 10A of the Act) should be computed without considering the gain from forex derivative contracts.
(c) Without prejudice to the position adopted by the Appellant in the tax return, the learned AO/Hon'ble DRP erred in not apportioning the foreign exchange loss between the STP and SEZ units of the Appellant, though the foreign exchange loss can be said to be attributable to export activity carried from STP and SEZ units.
(a) The learned AO/Hon'ble DRP erred in making a disallowance of Rs 2,63,20,568 under Section 14A of the Act read with Rule 8D of the Income tax Rules, 1962.
(b) The learned AO erred in making a disallowance under Section 14A of the Act without giving an opportunity of being heard to the Appellant to explain the nature of suo moto disallowance of expenses in detail, thereby violating the principles of natural justice.
(c) Without prejudice to the above Ground 8 (b), the learned AO/Hon'ble DRP erred in invoking the provisions of Section 14A(2) read with Rule 8D of the Rules, without appreciating the fact that the Appellant has suo moto disallowed Rs 7,53,750 under Section 14A of the Act.
(d) Without prejudice to all the above grounds, the learned AO/Hon'ble DRP erred in imputing disallowance under Rule 8D(2)(ii) of the Rules without appreciating the fact that the borrowed funds have been used for specific purposes for which they have been borrowed and not been utilised for investment in Mutual Funds.
(e) Without prejudice to all the above grounds, the learned AO/Hon'ble DRP has erred in adding the amount of alleged disallowance under Section 14A read with Rule 8D of the Rules in the computation of'Book Profits' under Section 115JB of the Act.
The learned AO erred in not setting off brought forward business losses and unabsorbed depreciation pertaining to earlier years to the tune of Rs. 142,46,11,016 (as per the return of income) against the assessed total income for the assessment year under consideration as per the provisions of the Act.
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The learned AO has erred in initiating penalty proceedings under Section 271 (1)(c) of the Act. Ground no.1 is general in nature and needs no adjudication. Accordingly, it is dismissed.
Ground nos. 2 to 4 is with regard to the disallowance of depreciation of Rs 42,98,30,119/- on the acquisition of MSA from foreign AE WCIL. Since for A.Y. 2011-12 we have already decided the issue in favour of the assessee holding that the price paid by the assessee to foreign AE on account of purchase of MSA is at arm’s length price and is a commercial right. Since this is a intangible assets being commercial rights within the meaning of section 32(1)(ii) of the Act and eligible for depreciation. Accordingly , we hold that depreciation is to be allowed to assessee. The AO is directed accordingly by setting aside the order of DRP on this issue.
Ground nos. 5 and 6 pertain to disallowance of depreciation on intangible assets amounting to Rs 1,23,36,29,409/-. During the year the assessee has claimed depreciation on two commercial rights. One, the rights acquired by the assessee of Town & Country Assistance Limited , an UK based company, from WNS Global Services (UK) Pvt Ltd [WNS UK] vide agreement dated 13.01.2004 for consideration of GBP 17,50,000. Secondly, business and commercial rights were acquired by WNS India from WNS Capital Investment Limited [WCIL] in respect of MSA entered into between WCIL and Avival Global Services Private Limited (Aviva Singapore). The assessee has claimed depreciation @25% on same on Written Down Value basis amounting to Rs 45,85,659/- in relation to the commercial rights acquired from WNS UK and Rs 1,22,90,43,750/- qua the commercial rights acquired from WCIL in terms of section 32(1)(ii) of the Act and accordingly, added the same to the income of the assessee. At the outset, the learned counsel for the assessee submitted that the issue involved in these grounds is covered by the order of the Tribunal in its own case for A.Ys. 2005-06 and 2008-09. There being no material change in the facts and circumstances of the case in the year under consideration, depreciation may kindly be allowed on business/commercial rights.
We have heard the parties and perused material available on record. We find that the issue involved in these grounds is covered in favour of the assessee by the
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order of the Tribunal for A.Ys. 2005-06 and 2008-09, wherein it has been held as under:
'We have considered rival submissions and perused materials on record. Insofar as factual aspect of the issue is concerned, there is no dispute that by virtue of acquisition of M/s. Town and Country Assistance Ltd., various contracts executed by the said concern with third party clients were assigned to the assessee. It is also a fact that such acquisition took place by virtue of an agreement executed on 13th January 2004. It is also a fact on record that in assessment year 2004-05, the assessee for the first time claimed depreciation by treating the capitalized value of the amount paid towards acquiring M/s. Town and Country Assistance Ltd., as an intangible asset and claimed depreciation @ 25%. Notably, the Assessing Officer while completing assessment under section 143(3) of the Act also allowed assessee's claim of depreciation. However, learned Commissioner of Income Tax revised the assessment order under section 263 of the Act. Subsequently, while deciding assessee's appeal against the said order the Tribunal quashed the order passed under section 263 of the Act and restored the assessment order. Thus, in effect, assessee's claim of depreciation in respect of intangible asset became final. In any case of the matter, there is no dispute that by acquiring M/s. Town and Country Assistance Ltd. the assessee has also acquired contractual rights which, no doubt, is a valuable commercial right. Therefore, it comes within the meaning of intangible asset as per section 32(l)(ii) r/w Explanation 3(b) of the Act. Hence, depreciation claimed by the assessee is allowable. The decisions relied upon by the learned Sr. Counsel for the assessee also supports our aforesaid view. Accordingly, we uphold the decision of the learned Commissioner (Appeals) by dismissing the grounds raised.'
From the perusal of the above, it is clear that the commercial rights acquired by the assessee are in the nature of intangible asset as per section 32(1)(ii) read with Explanation 3(b) of the Act and depreciation is allowable on the said rights. Accordingly, we allow the grounds raised by the assessee. Grounds are allowed.
The issue in ground no.7 is identical to ground no.8 as decided by us in the appeal for A.Y. 2011-12 above. Facts and circumstances being same, our finding therein will mutatis mutandis apply for this year as well. The AO is directed to treat the loss/gain from forex derivative contracts as part of export activity for the purpose of calculation of deduction u/s. 10A of the Act. Accordingly, loss incurred of Rs 41,64,19,647/- shall be considered while computing deduction u/s. 10A of the Act. Ground is allowed.
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With regard to Ground no.8, facts in brief are that during the year assessee earned dividend income from Mutual Funds amounting to Rs 2,09,64,709/- which was claimed as exempt u/s. 10(35) of the Act. The assessee incurred direct expenses in relation to the said income amounting to Rs 7,53,750/- and the same was suo moto disallowed u/s. 14A of the Act. The said disallowance was made in consonance with the report of the Tax Auditor given in Form 3CD in terms of provisions of section 44AB of the Act. The Assessing Officer in the draft assessment order has observed that the assessee has made huge investment in F Y 2011-12 and the suo moto disallowance made is not acceptable as it is not in accordance with the provisions of section 14A read with Rule 8D of the Rules. The Assessing Officer further held that disallowance u/s. 14A of the Act should be made without any discretion in accordance with the mechanism provided in Rule 8D of the Rules. The order of the Assessing Officer was affirmed by the DRP by holding that the Assessing Officer has recorded his satisfaction with respect to the correctness of the claim made by the assessee and, thus, confirmed the addition.
The learned AR submitted before the Bench that the order of the DRP is wrong in as much as he failed to appreciate the fact that the Assessing Officer has not recorded any satisfaction with respect to the incorrectness of the suo moto disallowance having regard to the books of account. He further submitted that the Assessing Officer is duty bound to record his dissatisfaction as to how the expenses incurred by the assessee. Accordingly, the ld counsel submitted that the disallowance sustained by the DRP is erroneous and wrong. The learned AR relied on the following decisions
• Godrej & Boyce Manufacturing Co. Ltd. [2010] 328 ITR 81 (Bom) • Maxopp Investment Ltd. & Ors. vs. CIT [2011] 347 ITR 272 (Del), which was upheld by the Hon’ble Apex Court reported in 91 taxmann.com 154 (SC) [2018]
51.1. Without prejudice to the arguments of the assessee in relation to invoking of Rule 8D, the learned AR submitted that interest expenditure of Rs 55.38 crores were directly attributable to a particular income/receipt. The learned AR submitted that the said interest comprised:-
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i) Interest on compulsorily convertible debentures of Rs 48.31 crores of interest; proceeds therefore were utilised for the purpose of acquiring customer contract. ii) Bank interest of Rs 3.84 crores, pertaining to pre-shipment credit in Foreign Currency facility taken for working capital purposes from BNP Paribas Bank/Citibank NA/Other banks and were specifically used for the purpose of export business and meet working capital requirements. Hence, the interest expenses of Rs 3.84 crores should not be considered for the purpose of computing disallowance under Rule 8D(2)(ii) of the Rules. iii) Interest on loan from related party of Rs 3.17 crores: The assessee had borrowed funds of Rs 22.55 cr from WNS Business Consulting Pvt. Ltd during the merger process in 2009 and, therefore, the interest should not be considered for the purpose of computing disallowance under Rule 8D(2)(ii). iv) Other interest of Rs.0.06 crores: This amount was on account of delayed payment of TDS and other payments and, therefore, they cannot be attributable to any particular source of income and also required to be excluded while computing disallowance under Rule 8D(2)(ii) of the Rules.
51.2. Further the learned AR relied on the decision of the co-ordinate Bench in the case of REI Agro Ltd. vs. DCIT 160 TTJ 107 (Cal), wherein the Bench has held that if any interest expenditure, which is directly relatable to any particular income or receipt, such receipt expenditure is not to be considered under Rule 8D(2)(ii). He also submitted that the assessee’s own funds were far more than the investments made in the Mutual Funds by referring to the audition accounts, wherein the own funds were Rs 532.52 crores vis-à-vis total investments were Rs 134.22 crores as on 31.03.2012. He submitted that no disallowance is called for by relying on a series of decisions viz. CIT vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom); Ultratech Cement Ltd. vs. ACIT [2017] 186 TTJ 547; Daga Global Chemicals Pvt. Ltd. vs. ACIT [2017] 46 ITR 70 (Mum) and Gujarat Fluorochemicals Ltd. vs. DCIT [2018] 97 taxmann.com 10 (Ahmedabad). Without prejudice to the above
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submissions, the learned AR further submitted that the disallowance u/s. 14A read with Rule 8D cannot exceed the exempt income earned by the assessee. He also submitted that the disallowance made u/s. 14A cannot be extended to the book profit as calculated u/s. 115JB of the Act as is apparent from the provisions of section 14A, which can only be applied for the purpose of computing total income under Chapter IV of the Act. The learned AR further submitted that section 115JB by itself is a complete code and no adjustments other than those prescribed in the section can be made to the book profit.
The learned DR, on the other hand, relied on the orders of the authorities below by submitting that the application of section 14A Rule 8D is mandatory from A.Ys. 2007-08 and, thus, the same has been rightly been affirmed by the DRP. He also referred to the assessment order and pointed that the Assessing Officer has candidly recorded his satisfaction that suo moto disallowance is incorrect as the same is not in accordance with the provisions of section 14A Rule 8D.
After hearing the rival parties and on perusal of record, we observe that the Assessing Officer has only noted in the assessment order that disallowance of Rs 7,53,750/- is not correct as the same is not in accordance with the provisions of section 14A rule 8D. A reading of the said order reveals that the Assessing Officer has failed to record any satisfaction with respect to suo moto disallowance and how the disallowance as calculated by the Tax Auditor in the Tax Audit Report in Form 3CB in terms of section 44A of the Act is wrong having regard to the book of accounts. In our view, recording of satisfaction is a pre-requisite under the provisions of section 14A(2) before invoking the provisions of section 14A Rule 8D, which the Assessing Officer has failed to do. The case of the assessee is squarely covered by the decision of the jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra), wherein the Hon’ble Court has held that satisfaction of the Assessing Officer has to be objectively arrived at after considering all relevant facts and circumstances and books of accounts of the assessee. In the case of Maxopp Investment Ltd. & Ors. vs. CIT (supra), Hon’ble Delhi High Court has held that provisions of section 14A Rule 8D would be triggered only if Assessing Officer records a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This decision has been further upheld
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by the Hon’ble Apex Court in 91 taxmann.com 154 (2018). We, therefore, respectfully following the ratio laid down by the Apex Court and Bombay High Court as discussed above , set aside the order of the DRP and direct the Assessing Officer to delete the disallowance. We are not dealing with the other contentions of the assessee, as we have already allowed the ground on first plea.
In respect of Ground no.9, we note that the issue in this ground is qua not allowing the set off of brought forward business losses and unabsorbed depreciation relating to earlier years to the tune of Rs 142,46,11,016 as per the income tax return filed against the assessed income for the instant assessment year and also allowing the carry forward of balance unabsorbed losses and depreciation to subsequent year. We note that the DRP has already issued directions to the Assessing Officer to verify the loss and unabsorbed depreciation as under:
“16.1 This ground of objection relates to set off of brought forward business loss and unabsorbed depreciation. In this regard, the DRP has noted that factual position regarding brought forward business loss and depreciation is not ascertainable from material on its record. Thus, the Assessing Officer is directed to verify the claim of the assessee from the original records in his position, regarding the business and depreciation loss & allow the same to the extent available, as per the provisions of the I.T Act, 1961 and the Rules made there under.” We were informed the AO has not given effect to the directions of the DRP. Therefore, we, deem it necessary to direct the Assessing Officer to follow the directions of the DRP and adjudicate the matter accordingly.
Appeal is partly allowed.
In the result, the appeals are partly allowed.
Order pronounced in the open court on this day of 19th March, 2020.
Sd/- Sd/- (Ram Lal Negi) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated : 19th March, 2020 SA
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Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT(A), Mumbai. 4. The CIT 5. The DR, ‘K’ Bench, ITAT, Mumbai BY ORDER
//True Copy// (Assistant Registrar) Income Tax Appellate Tribunal, Mumbai