2025 (7) TMI 1167 - AT - Income Tax

Claim of depreciation on manufacturing supply and maintenance contracts and goodwill pursuant to the acquisition of two undertakings in a slump sale arrangement in earlier years - HELD THAT - Entire exercise of determining the nature of manufacturing contracts supply contracts and maintenance contracts acquired by the assessee from the afore-mentioned slump sale acquisitions is merely academic as even if these contracts are not considered as separate intangible assets as per the provisions of Accounting Standard-26 even then the excess consideration paid over and above the fair value of the recognised assets and liabilities acquired by way of slump sale transactions has been held to be goodwill in nature and the assessee was allowed depreciation on the same under the provisions of the Act by the coordinate bench of the Tribunal. Accordingly accepting the alternative plea of the assessee and respectfully following the decision of the coordinate bench of the Tribunal rendered in assessee s own case we direct the AO to treat the excess of consideration paid over and above the fair value of the assets and liabilities as goodwill and allow the depreciation on same to the assessee under the provisions of the Act. On similar lines the depreciation on goodwill claimed by the assessee in the year under consideration is also allowed. Set off of brought forward unabsorbed depreciation of preceding years - It is the plea of the assessee that the entire claim which was carried forward and set off during the year under consideration is in relation to the unabsorbed depreciation and not business loss - HELD THAT - Respectfully following the decision of Govind Nagar Sugar Ltd 2011 (3) TMI 1023 - DELHI HIGH COURT we direct the AO to allow the brought forward and set off of unabsorbed depreciation pertaining to the assessment year 2008-09 in the year under consideration. As a result ground raised in assessee s appeal are allowed. TP Adjustment on account of advertisement marketing and sale promotion ( AMP ) expenses incurred by the assessee - As in the present case it is evident that the TPO for making the impugned addition has adopted the Bright Line Test which has been held to be not having any statutory mandate in Sony Ericson Mobile Communications (India) Pvt. Ltd 2015 (3) TMI 580 - DELHI HIGH COURT Further we find that no material has been brought on record by the Revenue to prove the existence of any arrangement understanding or action in concert between the assessee and its Associated Enterprises for incurring the AMP expenses on behalf of the Associated Enterprises. Thus we do not find any merits in the impugned Transfer Pricing Adjustment made on account of AMP expenses incurred by the assessee. As a result ground no.9 raised in assessee s appeal is allowed. TP Adjustment in respect of the international transaction of import of finished goods - Comparable selection - Satyatej Commercial Co. Ltd - We do not find any merit in the findings of the lower authorities in excluding Satyatej Commercial Co. Ltd. as a comparable on the basis that it is dealing in different products. We direct the TPO/AO to consider Satyatej Commercial Co. Ltd. as a comparable to the assessee and exclude freight and forwarding costs while computing the margin of this company. As regards the other company which was excluded by the TPO we are not expressing any findings in light of the submission of the learned AR as noted above and objections if any against the same are kept open for adjudication if it arises in the assessee s case in future. As a result ground no.10 raised in assessee s appeal is allowed. TP Adjustment in respect of the international transaction of receipt of indenting commission - exclusion of Hand Innovations Inc. and RG Medical Diagnostics as sought by the learned AR - From the perusal of the Sales Representative Agreement entered into between Hand Innovations Inc. and Harry Kraus forming part of the paper book from pages 1068-1072 we find that the product was Distal Radius Fractures Plate which is similar to the product profile of Smith Nephew Inc. excluded by the TPO. Further it is also pertinent to note that both companies have similar Sales Representative Agent i.e. Harry Kraus. Therefore we concur with the submissions of the learned AR and direct the TPO to also exclude Hand Innovations Inc. for benchmarking the international transaction of receipt of the indenting commission. Cincinnati Sub-Zero Products Inc. - From the perusal of the Sales Representation Agreement entered into by RG Medical Diagnostics we find that this company was also operating in Maine New Hampshire Vermont Massachusetts Connecticut Rhode Island and New York. Further we find that the products dealt with by this company are in temperature monitoring. Therefore it is evident that not only this company is having similar product line as that of Cincinnati Sub-Zero Products Inc. but this company is also operating in the territory similar to Cincinnati Sub-Zero Products Inc. Therefore we agree with the submissions of the learned AR and direct the TPO to also exclude RG Medical Diagnostics for benchmarking the international transaction of receipt of the indenting commission. TP Adjustment relating to reimbursement of expenses - As in the present case no search was conducted to find out the independent entity in a comparable transaction and the arm s length price of the international transaction was treated to be NIL. In the present case no doubts about payments made by the assessee have been raised by the AO under section 37 of the Act. Further accrual of benefit to the assessee or the commercial expediency of any expenditure incurred by the assessee cannot be the basis for disallowing the same as held in the case of CIT v/s EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT . We are of the considered opinion that TPO as well as learned DRP were not justified in treating the value of the international transaction of reimbursement of expenses to be NIL in the present case. Accordingly ground no.12 raised in assessee s appeal is allowed.

Summary

ISSUES:

Whether depreciation is allowable on manufacturing, supply, and maintenance contracts acquired in slump sale transactions under section 32(1) read with section 2(11) of the Income Tax Act, 1961.Whether depreciation is allowable on goodwill acquired in slump sale transactions under section 32(1) read with section 2(11) of the Act, including Explanation 5 thereto.Whether brought forward unabsorbed depreciation from earlier assessment years is allowable as deduction against current year's income despite late or revised filing of returns, and the applicability of sections 72, 80, and 139(3) of the Act in this context.Whether Transfer Pricing adjustments relating to advertisement, marketing and promotional (AMP) expenditure incurred by the assessee are justified under the provisions of the Act and applicable jurisprudence.Whether Transfer Pricing adjustments relating to international transactions of import of finished goods and receipt of indenting commission are justified, including the selection and exclusion of comparable companies.Whether Transfer Pricing adjustment relating to reimbursement of expenses to Associated Enterprises at arm's length price of Nil is justified.Whether short credit of tax deducted at source (TDS) claimed by the assessee is correctly disallowed.Whether initiation of penalty proceedings under sections 271(1)(c) and 271B of the Act is justified.

RULINGS / HOLDINGS:

Depreciation on manufacturing, supply, and maintenance contracts acquired in slump sale transactions is not allowable as separate intangible assets under section 32(1) read with section 2(11) of the Act, as these contracts do not satisfy the recognition criteria under Accounting Standard-26; however, the excess consideration paid over the fair value of net assets acquired is to be treated as goodwill, an intangible asset eligible for depreciation.Depreciation on goodwill acquired in slump sale transactions is allowable under section 32(1) read with section 2(11) and Explanation 5 of the Act; the claim for depreciation for prior years cannot be allowed in the appeal for the current assessment year.Brought forward unabsorbed depreciation is allowable as a deduction against current year's income under section 32(2) of the Act without the requirement of timely filing of returns under sections 72, 80, or 139(3); these provisions apply only to business losses and not to unabsorbed depreciation.The Transfer Pricing adjustment on AMP expenditure based on the Bright Line Test and presumption of benefit to Associated Enterprises is not sustainable, as the test lacks statutory mandate and no evidence of arrangement or benefit to Associated Enterprises was established.The exclusion of certain comparable companies in Transfer Pricing adjustments relating to import of finished goods and receipt of indenting commission was not justified where functional comparability exists; functional attributes take precedence over strict product similarity under the Resale Price Method (RPM) and Comparable Uncontrolled Price (CUP) method.The Transfer Pricing adjustment treating reimbursement expenses as having an arm's length price of Nil was erroneous where the assessee demonstrated payment of expenses incurred on its behalf and no benchmarking or comparable analysis was undertaken by the TPO.The short credit of TDS claimed by the assessee requires verification and appropriate credit must be granted in accordance with law.Initiation of penalty proceedings under sections 271(1)(c) and 271B of the Act is premature and not justified where no concealment or inaccurate particulars of income have been established.

RATIONALE:

The Court applied the provisions of section 32(1) and section 2(11) of the Income Tax Act, 1961, along with Accounting Standard-26, to determine the nature and recognition of intangible assets. It distinguished slump sale transactions from amalgamations and held that Explanation 7 to section 43(1) and Explanation 2 to section 43(6) are not applicable to slump sales.The Court relied on coordinate bench decisions holding that goodwill arising from slump sale acquisitions is eligible for depreciation and that depreciation claims for prior assessment years must be pursued through appropriate remedies.For carry forward and set off of unabsorbed depreciation, the Court followed authoritative judicial precedents, including the decision of the Hon'ble Delhi High Court in CIT v. Govind Nagar Sugar Ltd, and Supreme Court rulings, establishing that sections 72, 80, and 139(3) apply only to business losses and not to unabsorbed depreciation governed by section 32(2).Regarding Transfer Pricing on AMP expenditure, the Court found that the Bright Line Test has no statutory basis as per the Delhi High Court in Sony Ericson Mobile Communications and that no evidence of arrangement or benefit to Associated Enterprises was presented, rendering the adjustment unsustainable.On Transfer Pricing comparables, the Court emphasized the primacy of functional comparability over strict product similarity under the RPM and CUP methods as prescribed under Rule 10B(1)(b) and consistent Tribunal precedents, directing inclusion or exclusion of comparables accordingly.The Court noted that the TPO failed to conduct a benchmarking analysis or produce evidence to justify treating reimbursement expenses as having an arm's length price of Nil, relying on judicial pronouncements that the TPO's role is limited to ALP determination and not to factual verification of service receipt or benefit.The Court directed factual verification by the Assessing Officer regarding TDS credit claims to ensure compliance with applicable law.Penalty proceedings were dismissed as premature in absence of concealment or inaccurate particulars, consistent with principles of natural justice and statutory safeguards under the Act.