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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
The captioned appeal by the assessee is directed against the order of CIT(A)-15, Mumbai dated 21.06.2012, pertaining to the Assessment Year 2007-08, which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 28.02.2011 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal although assessee has raised multiple Grounds of appeal, the solitary dispute relates to a transfer pricing adjustment of Rs.553 lacs made by income-tax authorities on account of international
2 Global Payments Asia Pacific (India) Pvt. Ltd. transaction relating to acquisition of intangible assets by assessee from its associated enterprise.
The appellant before us is a company incorporated under the provisions of the Companies Act, 1956. It is a subsidiary of Global Payments Asia-Pacific India Pvt. Ltd. engaged in merchant acquiring and credit card processing business. The assessee had commenced business operations during the previous year relevant to the assessment year under consideration. During the year under consideration, assessee- company acquired the assets of credit card processing and merchant banking acquiring business of Hongkong and Shanghai Banking Corporation, in India for a total consideration of Rs.28.51 crores which, inter-alia, included consideration for the Trademarks, Customer lists and Goodwill amounting to Rs.27.64 crores. The Assessing Officer noted that the aforesaid is an international transaction within the meaning of Sec. 92B of the Act and accordingly, made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for determination of its arm’s length price. The TPO considered the submissions and evidence put forth by the assessee and held that the stated value of consideration was not at arm’s length price and observed that assessee had paid almost 25% extra for the acquisition of intangibles - Goodwill, Trademark and Customer lists. Therefore, as against the stated value of consideration of Rs.27.64 crores, the arm’s length price was determined at Rs. 22.11 crores thereby the TPO worked out the adjustment of Rs.5.53 crores on account of purchase of intangibles in his order passed u/s 92CA(3) of the Act dated 29.10.2010. The Assessing Officer passed an order u/s 143(3) of the Act dated
3 Global Payments Asia Pacific (India) Pvt. Ltd.
28.2.2011 making addition of Rs.5.53 crores to the returned income on account of determination of arm’s length price in conformity with the order passed by TPO u/s 92CA(3) of the Act. The aforesaid addition was carried in appeal before the CIT(A), who has since affirmed the stand of Assessing Officer/TPO and hence the present appeal of assessee is before us.
Before us, the rival counsels have made their submissions and we have perused the relevant record. The brief background is that assessee is engaged in merchant acquiring and credit card processing business as a joint venture between Hongkong and Shanghai Banking Corporation Ltd. and Global Payments Inc. During the year, it acquired the credit card processing and merchant acquiring business of Hongkong and Shanghai Banking Corporation Ltd. – India branches which, inter-alia, involved acquisition of the following intangible assets:- i) Trademarks - Rs. 46,57,000/- ii) Customer lists - Rs. 4,19,19,000/- iii) Goodwill - Rs.22,99,61,000/- Total Rs.27,65,37,000/-
In support of the above valuation of intangibles acquired, assessee had obtained a Valuation report from an independent Valuer. On that basis, assessee had asserted before the TPO that the payments made for the purchase was in accordance with the arm’s length price as per the Indian Transfer Pricing Regulations. A discussion in the order of TPO reveals that the TPO examined the manner in which the 4 Global Payments Asia Pacific (India) Pvt. Ltd.
consideration was arrived at. The plea of assessee was that the value of intangibles have been allocated to assessee-company in the same ratio in which the India sales stand vis-a-vis the sales of other countries whose HSBC credit card business have been acquired by the assessee. The Assessing Officer, however, found fault with the valuation arrived at by the independent Valuer as according to him higher weightage has been allocated to the India business (i.e. assessee) in comparison to other countries where the credit card business was higher than in India. On this basis, the TPO proceeded to hold that the assessee had paid “almost 25% extra for acquisition of intangibles Goodwill, Trademark and Customer Lists”. In sum and substance, the CIT(A) has also affirmed the aforesaid reasoning of TPO.
Before us, the assessee has made two set of arguments; firstly, in relation to transfer pricing adjustment made on account of acquisition of Goodwill and Customer lists and; secondly, with respect to adjustment on account of acquisition of Trademark. Insofar as the consideration paid for acquisition of Customer lists and Goodwill is concerned, the learned representative pointed out that assessee had not claimed any deduction on account of such payments either as a revenue expenditure or by way of depreciation. The learned representative pointed out that the aforesaid fact-situation is not disputed and, therefore, where the amount has not been considered while computing the taxable income, no adjustment on account of arm’s length price can be made. In this context, reliance has been placed on the decision of Pune Bench of Tribunal in the case of Eaton Technologies (P.) Ltd., 32 taxmann.com 103 (Pune – Trib.). In support of 5 Global Payments Asia Pacific (India) Pvt. Ltd.
the said proposition, reliance has also been placed on the judgment of Hon'ble Bombay High Court in the case of Vodafone India Service Pvt. Ltd. in Writ Petition No. 871 of 2014 dated 10.10.2014, copy of which has been placed on record.
On the first issue relating to acquisition of Customer lists and Goodwill, the ld. CIT-DR has reiterated the stand of CIT(A) on this aspect, which reads as under :-
“vi. It has been contended by the appellant that it has not claimed such costs allocated of intangibles in its P & L account and accordingly even if the ALP determined is different than what has been recorded in the books of accounts of the assessee, then the same would have no impact or such determination of the ALP would be redundant as far as its consequences are concerned. In this regard it is stated that there is no special mention of the kind in the Chapter X of the Act, as has been contended by the appellant. Further there is nothing mentioned in the chapter X of the Act that there is difference in the treatment in respect of the ALP determined in respect of the item of revenue nature and items of capital in nature. Any person who has undertaken international transaction has to be taxed as per the normal/applicable provisions of the Act and in addition to the same has to be governed and consequently taxed, if there is additional income that is arrived at, out of the international transactions. It only leads to the conclusion that in the scheme of things under I.T. Act, the income from the international transaction is to be treated as an additional and separate source of the income and that such income from the international transaction is to be determined having regard to the arm’s length principle and has to be taxed accordingly.”
According to the ld. CIT-DR, it is not in dispute that the acquisition of Goodwill and Customer lists is an international
6 Global Payments Asia Pacific (India) Pvt. Ltd. transaction within the meaning of Sec. 92B of the Act and, therefore, the Assessing Officer was quite justified in determining its income in terms of its arm’s length price.
We have carefully considered the rival submissions. Sec. 92(1) of the Act prescribes that any “income arising” from international transaction shall be computed having regard to the arm’s length price. Sub-section (2) of Sec. 92 of the Act further prescribes that where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, services or facility provided or to be provided to any one or more of such enterprises, the cost or expenses allocated or apportioned to, or, as the case may be, contributed by any such enterprise shall be determined having regard to the arm’s length price of such benefit or service or facility, as the case may be. We are only trying to emphasise that the mandate of Sec. 92 to 92CB of the Act is to determine the “income arising” from international transaction. In the present case, qua the cost of acquisition of Goodwill and Customer lists, the plea of assessee is that such international transaction is not in the nature of giving rise to any income and, therefore, the question of determination of its arm’s length price does not arise. This is based on the plea that no deduction whatsoever has been claimed while computing taxable income qua the consideration paid for acquiring Goodwill and Customer lists. Per contra, the claim of Revenue is that so long as a person has undertaken an international transaction within the meaning of Sec. 92B of the Act, the same is to be treated as an 7 Global Payments Asia Pacific (India) Pvt. Ltd.
“additional and separate source of income” and, therefore, income from such a transaction is to be determined having regard to the arm’s length principle. In our considered opinion, the aforesaid controversy is no longer res integra and is settled by the judgment of the Hon'ble Bombay High Court in the case of Vodafone India Service Pvt. Ltd. (supra). The following discussion in the order of Hon’ble Court is worthy of notice :-
“37. The learned Solicitor General next contended that the issue is no long res intergra as the issue stands covered by the decision of the Apex Court in Mazgaon Dock Ltd. (supra) while interpreting Section 42(2) of 1922 Act. It is submitted that the above Section 42(2) of the 1922 Act dealt with transfer pricing. In the above case, the Apex Court held that under Section 42(2) of the 1922 Act, the tax is charged on the resident in respect of profits which he would have normally made but not made, because of a business association with a non resident. The resident was subjected to tax on notional profits in respect of its business dealing with a non resident with whom he had close connection. Section 42(2) of the 1922 Act reads as under:-
“ Where a person not resident or not ordinarily resident in the taxable territories carries an business with a person resident in the taxable territories, and it appears to the Income Tax Officer that owing to the close connection between such persons, the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom, or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income tax in the name of the resident person who shall be deemed to be, for all the purpose of this Act, the assessee in respect of such income tax.” (emphasis supplied)
8 Global Payments Asia Pacific (India) Pvt. Ltd.
If the above provision is contrasted with the provisions of Chapter X of the Act and in particular Section 92 thereof, it would be noticed that the crucial words “shall be chargeable to income tax” which are found in Section 42(2) of the 1922 Act are absent in Chapter X of the Act. We pointed out this difference in the two provisions to the learned Solicitor General and he agreed that the above difference exists. However, according to him this was in view of the fact that Sections 4, 5, 14 and 56 of the Act does create a charge to income tax on deemed income earned from International taxation. Therefore, it is clear that the deemed income which was charged to tax under Section 42(2) of the 1922 Act was done away with under the Act. The charge of Income now has to be found in Section 4 of the Act. If it is income which is chargeable to tax, under the normal provision of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amounts received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2) (viib) of the Act. Thus such capital account transaction not falling within a statutory exception cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in the impugned order.
39 In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:-
(a) subject of tax; (b) person liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied.
Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above. This distinction is brought out by the Supreme Court in Bombay Tyres India Ltd. Vs. Union of India reported in 1984 (1) SCC 467 wherein it was held that the charge of 9 Global Payments Asia Pacific (India) Pvt. Ltd. excise duty is on manufacture while the measure of the tax is the selling price of the manufactured goods. In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, then the measure is to be found on application of ALP so far Chapter X of the Act is concerned. The arriving at the transactional value/ consideration on the basis of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise. The ingredient (a) above is not satisfied i.e. subject of tax is income which is chargeable to tax. The issue of shares at a premium is a capital account transaction and not income. The classical distinction between income and capital is that which exists between fruits and tree. Income is a flow while capital is a fund. The Privy Council in CIT v/s. Shaw Wallace & Co., Ltd. 6 ITC 178 (PC) has colourfully stated “Thus income has been likened pictorially to the fruit of a tree or the crop of a field. It is essentially the produce of something which is often loosely spoken of as capital.”
(underlined for emphasis by us)
The aforesaid authoritative pronouncement by the Hon'ble High Court clearly brings out that the mechanism of measurement of income by application of arm’s length principle prescribed in Chapter X of the Act can be invoked only “where income arises from international transaction”. Applying the aforesaid ratio to the instant facts, it is quite clear that the consideration paid for acquisition of Goodwill and Customer lists has not been considered while computing the taxable income and, therefore, the same cannot be subject to application of arm’s length principle contained in Chapter X of the Act. Therefore, so far as the stand of Revenue qua the adjustment made on account of 10 Global Payments Asia Pacific (India) Pvt. Ltd.
cost of acquisition of Goodwill and Customer lists is concerned, the same is hereby directed to be deleted.
The second proposition canvassed by the assessee is with regard to the adjustment made in the cost of acquisition of Trademark. Notably, insofar as the cost of Trademark is concerned, the same has been capitalised by the assessee and depreciation has been claimed while computing the taxable income. On this aspect, we find that the assessee sought to justify its valuation on the basis of Valuation report of an independent Valuer. On the point of allotting weightage to the different territories for which the credit card business was acquired from HSBC, assessee explained that higher weightage was given to India territory as the credit card penetration was low in comparison to other countries, which showed that there was more scope to increase the business in India. In this context, we find that the entire discussion in the order of TPO revolves around the fact that the credit card business of HSBC was acquired in India as well as non-Indian territories and that in other countries the credit card business was much more advanced and, therefore, the valuation of intangibles ought to have been given a higher weightage in those countries and a lower weightage to the India business. On the contrary, the plea of assessee has been that the valuation has been carried out by an expert and the weightage has been assigned on the basis of variety of considerations, inter-alia, including the potential of generating business in future. In our considered opinion, the assessee has explained the basis of arriving at the consideration and the basis is not alien to the theories of valuation. So however, in contrast, if we were to examine the stand of TPO, same is 11 Global Payments Asia Pacific (India) Pvt. Ltd.
quite adhoc and unscientific, and is only a guesstimate. The TPO observed that “assessee has paid almost 25% extra” for the acquisition, which is devoid of any rationale or scientific methodology. Therefore, in our considered opinion, the TPO has not rejected the valuation of assessee on the basis of any objective reasoning. At the time of hearing, the learned representative also pointed out that the result of valuation carried out by TPO is minimal inasmuch as it would result in the reduction in claim of depreciation by a sum of Rs.2,32,874/-, which is quite insignificant. Be that as it may, after having considered the entire conspectus of facts and circumstances of the case, we do not find any justification to approve the approach of TPO to compute the arm’s length price of the transaction of acquisition of Trademark as it is neither scientific and nor it is in the manner prescribed in the statute. Therefore, with respect to the adjustment made on account of cost of acquisition of Trademark, the Assessing Officer is directed to delete the addition.
Thus, transfer pricing adjustment of Rs.5.53 crores made on account of international transaction relating to acquisition of intangible asset is hereby directed to be deleted and assessee accordingly succeeds.
The other Ground relates to levy of interest u/s 234B of the Act, which is consequential in nature and does not require any specific adjudication.
12 Global Payments Asia Pacific (India) Pvt. Ltd.
The last Ground relates to initiation of penalty proceedings u/s 271(1)(c) of the Act, which is premature and is dismissed.
Resultantly, the appeal of assessee is partly allowed, as above.
Order pronounced in the open court on 25th January, 2017.