TMI Blog2015 (9) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial rights that were of the similar nature as mentioned in sec. 32 (1) (ii) of the Act. Same is the case about use of brand name. The assessee had assigned value to various assets namely Fixed assets (Rs. 6. 68 crores), Intangible assets (Rs. 54. 94 crores), Goodwill (41. 87crores). We are of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisions of the Act. We have already held that business right, distribution network and brand usage fall in the same category of commercial rights mentioned in Section 32 of the Act. Therefore, we hold that assessee was entitled to claim depreciation on the intangible assets. - Decided in favour of assessee. Disallowance of expenditure on payment basis u/s. 43 B - Held that:- If a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent : Shri G M Doss-CIT ORDER Per Rajendra, AM Challenging the orders of the Assessing officer (AO) dated 13. 01. 2014 and 29. 03. 2014, passed by him under section 143 (3) r. w. s 144C (13)of the Act, incorporating the directions of the Dispute Resolution Panel (DRP), the assessee has raised following Grounds of Appeal for the above mentioned two AY. s. : ITA No. 3916/M/14 (AY. 07-08): GROUND NO. 1: Disallowance of depreciation on intangibles 1. 1 The learned Assessing Officer/Dispute Resolution Panel has erred in disallowing depreciation of ₹ 13, 73, 50, 000/- claimed by the Appellant on the intangible assets viz. , material supply contracts, distribution network and right to brand usage. 1. 2. The learned Assessing Officer/Dispute Resolution Panel has erred in further observing that the aforementioned intangible assets were not appearing in the books of accounts of CIBA Speciality Ltd. and Diamond Dyechem Ltd. and also erred in concluding that there was no transfer of such aforementioned intangibles by way of slump sale. The learned Assessing Officer/Dispute Resolution Panel erred in disallowing depreciation on the basis that such aforemention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the share issue expenditure incurred by the Appellant. GROUND NO. 3: Disallowance of expenditure on payment basis under section 43B of the Act 3. 1 The learned Assessing Officer/Dispute Resolution Panel erred in not allowing deduction for payment towards leave encashment, incentive, bonus and special payment totaling to ₹ 55, 81, 862/- made by the appellant in connection with liabilities of CIBA Speciality Ltd. taken over by the appellant by way of slump sale. 3. 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject it is entitled to claim a deduction under section 43B of the Act for payments of statutory and other liabilities of Ciba Speciality Ltd. which were acquired by it pursuant to the slump sale. 3. 3 The learned Assessing Officer/Dispute Resolution Panel erred in observing that the claim such expenditure was made during the course of assessment whereas the claim was made by the appellant by way of a note to the return of income. 3. 4. The Appellant submits that the learned Assessing Officer/Dispute Resolution Panel be directed to grant due deduction to it under section 43B of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO/TPO erred in the DRP erred in upholding the action of AO/TPO in rejecting the segmental computation provided by the Appellant in its transfer pricing study report without appreciating the fact of the case and allocation keys adopted by the Appellant. 5. Application of (+1-5%) in computation of adjustment 5. 1 The Appellant craves that in computing the amount of Transfer Pricing adjustment if any, the benefit of +1-5% range be granted to the Appellant. 6. Disallowance of depreciation on intangibles 6. 1 The learned Assessing Officer/Dispute Resolution Panel has erred in disallowing depreciation of ₹ 6, 84, 70, 313/- claimed by the Appellant on the intangible assets viz. , material supply contracts and distribution network. 6. 2 The learned Assessing Officer/Dispute Resolution Panel erred in disallowing depreciation on the basis that such aforementioned intangible assets are not in existence. 6. 3 The learned Assessing Officer/Dispute Resolution Panel erred in holding that the aforementioned intangible assets viz. material supply contracts and distribution network are not akin to the intangible assets referred to in the provisions of section 32(1)(ii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing of the appeal. During the course of hearing before us, the Authorised Representative (AR) did not press ground no. 2 for the AY. 2007-08. Hence same stand dismissed. Similary, grounds no 8-10 for the AY. 2009-10 were also not pressed. It was stated that grounds no. 9 10 was not pressed considering the smallness of tax effect. We are dismissing Ground no. 8-10 for the AY. 2009-10, as not pressed. 2. Assessee-company, engaged in the business of manufacturing of chemicals. Details of dates of filing of returns, incomes returned, dates of assessment, assessed incomes, dates of orders of the DRP can be summarised as under: AY. Return filed on Returned Income Assessment dt. Assessed Income Dt. of orders of DRP 2007-08 31. 12. 2008 ₹ 14, 77, 25, 342/- 27. 12. 2010 ₹ 21, 84, 75, 151/- 25. 3. 2014 2009-10 26. 09. 2009 ₹ 53, 97, 90, 433/- 13. 01. 2014 ₹ 72, 51, 75, 838/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e use of brands, that payment was made for using the brand for only a short period, that benefit accruing to the assessee from such payment for use of brand was transit in nature, that the assessee did not derive any enduring benefit or any permanent advantage. The assessee referred to the case of CIBA-India Ltd. (69 ITR 692), IAEC Pumps Ltd. (232 ITR 316). Without prejudice to the above, it was contended that if the payments made for brand use was treated as capital asset then depreciation@ 25% as per the provisions of section 32(1)(ii)of the Act should be allowed. With regard to MSC, it was stated that on acquisition of textile effect business the manufacturing facilities of DDCL were not transferred to the assessee, that in order to protect its business interest it entered into an MSC with DDCL to ensure consistency in quality and quantity of the textile chemicals, that the MSC was a business/commercial right and was similar to know how, patents, copy rights, trade marks licences and franchisees, that the agreement secured supply of certain products for a period of five years, that the supply of minimum quantity was to be at cost of manufacturing, that owing to the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ji Co. CA. To enquire into the genuineness of the claim of the assessee, the AO called for information from DDCL and CIBA India under sec. 131 of the Act. He directed them to furnish details of written down value (WDV) of all the blocks of assets transferred to the assessee and also a copy of the report prepared by an accountant in accordance with the provisions of sec. 50B of the Act. On perusal of the same, he found that no intangible assets were transferred to the assessee on account of slump sale. Therefore, a show cause notice was issued on 9. 12. 2012 to the assessee calling for explanation/justification for claim of ₹ 18. 42 crores(Depreciation on MSC ₹ 2. 97 crores + depreciation of DN ₹ 9. 20 crores + BUE-Rs. 6. 25 crores). On 20. 12. 2010, the assessee filed its explanation in that regard. After considering the submission of the assessee, he held that the assessee had not incurred any expense on brand use, that the notional value ascribed by the valuer was on the basis of future estimated sales, that there was no existence of any brand uses right at the time of transfer, that the transferor had admitted that the asset as a brand uses was not in exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation under the Act. 2. 4. We have heard the rival submissions and perused the material before us. Before proceeding further, we would like to consider the cases dealing with intangible assets and Goodwill. In the case of Smifs Securities Ltd. (supra) the Hon'ble Supreme Court has held that provisions of sec. 31(2) are applicable to goodwill. It is also found that business rights, list of clients, brand equity, non compete fee etc. have been held to be intangible assets by the Hon'ble Court/ITAT, while dealing with the issue of depreciation. We would like to reproduce the relevant portions of the judgments dealing with the issue. The Hon'ble Supreme Court in the case of Smifs Securities (supra)has held that a reading of the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 to section 32(1) indicates that goodwill would fall under the expression. The principle of ejusdem generis would strictly apply while interpreting the expression which finds place in Explanation 3(b), that Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. In the matter of Raveendra Pillai the Hon'ble Kerala High Court (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind. For interpreting the expression business or commercial rights of similar nature specified in section 32(1)(ii) of the Act, such rights need not answer the description of know-how, patents, trade marks, licences or franchises but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term business or commercial rights of similar nature , it is seen that the intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words business or commercial rights of similar nature have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets, which it is neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of business or commercial rights cannot be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, defined the expression asset to include intangible assets like goodwill. Goodwill is an asset under Explanation 3(b) to section 32(1)of the Act, that depreciation was allowable even on the goodwill, that that the assessee would be entitled to claim depreciation in respect of an amount of ₹ 98, 73, 25, 000 (including goodwill) and not the amount of ₹ 51. 63 crores as reflected in the sale agreement for purchase of the distance learning division. In the matters of SKS Microsoft finance Ltd. and Weiamann Forex Ltd. (supra)it has been held that acquisition of client base/customers' list forms part of intangible assets mentioned in the section 32(1)of the Act. 2. 4. 1. We find that the assessee had acquired Textile Effect(TE) Business from CIBA-India and DDCL as a going concern on a lump sale basis, that manufacturing facilities of both the entities were not transferred as part of slump sale, that as a part of slump sale the entire distribution channel was handed over to the assessee including the customer, dealers, marketing people, marketing plans, laboratory, supply-chain and the warehouses, that the services of textile effects employees was transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Therefore, we hold that assessee was entitled to claim depreciation on the intangible assets. Here, we would like to refer to the case of KEC International [(2010)-TIOL 478-ITAT-Mum]. In that matter, the Tribunal has observed that in case of a slump sale the value adopted by the assessee on the basis of valuation report can be considered for depreciation purpose. The Hon'ble Gujarat High Court in the case of Aswin Vanaspati Industries Ltd. (255 ITR 26) has approved the principle of valuation of acquired asset by a valuer and held that in absence of adequate material on record in form of departmental valuation report and the opinion of the technical experts could not be ignored. In light of the above discussion, ground no. 1 is decided in favour of the assessee. 3. Ground No. 3, deals with disallowance of expenditure on payment basis u/s. 43 B of the Act of ₹ 55. 81 lakhs. During the assessment proceedings, the AO found that the assessee had claimed an expenditure of ₹ 55. 81 lacs under the heads leave encashment (Rs. 8. 84 lacs), incentive/ motivator (Rs. 46. 58 lacs), bonus (Rs. 29, 000/-) and special payment (Rs. 9, 500). As per the directions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability clause clearly indicate that the the assessee had taken over liabilities attributable to the prior period. So, the assessee was legally bound to make payments that were to be made by TE unit of the CIBA-India if it had not been acquired by the assessee. Here, we would like to refer to the case of T. VeerbhadraRao (supra). In the matter the Hon'ble Supreme Cout had held as under:- If a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, the same right should be recognised in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded as belonging to the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see explained to the TPO that the segmental profitability statement was prepared using scientific basis, that the expenses were identified to each segment on actual basis. It also objected to adhoc allocation of all the expenses by the TPO, using turnover ratio. Without prejudice it was submitted that if any TP adjustment was to be proposed same should be restricted only to AE segment and not to the entire Unit/entity as a whole. Vide his order, dtd. 23. 01. 13, the TPO proposed adjustment of ₹ 11, 44, 72, 502/-in respect of international transactions entered in to by the assessee and recommended upward adjustment. The adjustment were proposed for manufacturing segment of Polyurethenes Unit (PU) of ₹ 6. 81 crores and disallowance of corporate service charges for Textile Effect Unit (TEU) of ₹ 4. 62 crores. 4. 1. Aggrieved by the order of the TPO the assessee approached the DRP. Before it the assessee produced additional evidence and made a request to admit the same. The DRP after considering the submissions of the assessee and the order of the TPO upheld his order and issued certain directions to the AO/TPO. We will discuss the order of the DRP at appropriate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to turnover instead of reducing it from operating cost If the revised margins are taken into account, the arithmetic mean comes to 5. 57% instead of 5. 78% as calculated by the TPO. On this issue we direct the AO/TPO to verify the computation of the OP/OR and correctly compute the Arithmetic Mean and accordingly work out the quantum of adjustment. 5. 2. 3 The assessee has submitted that the TPO has erred in rejecting the TP Study report without appropriate justifications for doing so and has erred in using entity level for the purposes of bench marking international transactions. In this regard, we find that the TPO has correctly pointed out the infirmities in the TP Study report before rejecting it and we are in agreement with his views. The TPO in his order has clearly brought out the reasons for making the adjustment at the entity level. Therefore, we are in agreement with the TPO on this issue. 5. 2. 4 The assessee has submitted that the TPO is entitled only to determine arms length price in relation to the international transaction therefore, the adjustment, if any, based on the arms length operating margin should be worked out only in respect of the revenues in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the order of the TPO in principle subject to verification of the computational error' as claimed by the applicant. A glance at the order of the DRP shows that the order is a non speaking order and it has not given any reasons for arriving at its conclusion. In para no. 5. 2. 1. the DRP talks of failure of the assessee to submit 'even a single evidence' to prove that it had received any services from its AE in lieu of which the payment was made to the AE 'in spite of being given a number of opportunities by the TPO'. We find that DRP has not mentioned anything about the documents submitted by the assessee, as stated earlier. In para 5. 2. 2 the DRP has issued directions but we are not aware as how far same were followed by the officers concerned. The assessee has specifically alleged that the directions of the DRP were not carried out. In next para i. e. para 5. 2. 3 the DRP mentions that the TPO had rightly rejected the TP Study but reasons have not been given for agreeing with the views of the TPO especially when the assessee had made extensive submissions stating that as how the stand taken by the TPO was flawed. Similar is the position of the next para ..... X X X X Extracts X X X X X X X X Extracts X X X X
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