TMI Blog2017 (1) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... discussion in the draft assessment order. The DRP also noted that in assessment year 2006-07, the Tribunal in assessee’s own case had allowed the claim of the assessee and similar position prevailed in assessment year 2009-10, wherein the Tribunal allowed the claim too - Decided in favour of assessee Deduction u/s 43B - certain liabilities pertaining to the Textile effects division taken over from CIBA Speciality Ltd. - Held that:- , the direction of the DRP is based on the order of the Tribunal for assessment year 2007- 08, which continues to hold the field and, therefore, no fault can be found with the said decision of the DRP. Even otherwise, we find that the said plea of the Revenue is misconceived because in the final assessment order passed by the Assessing Officer no such deduction has been allowed. The Assessing Officer notes in para 14 of the assessment order that no such claim u/s. 43B of the Act has been put forth and, therefore, no deduction was warranted on this issue. In view of the said discussion in the assessment order, it is quite clear that the said Ground is otherwise also misconceived - decided against revenue Transfer pricing adjustment - international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on estimation by applying adhoc number of hours for each sub-category of services and then applying estimated hourly rate of ₹ 8,500/-. 1.4 The DRP in upholding the actions of the AO/TPO, erred in holding that the appellant failed to produce evidence to prove receipt of services without appreciating the facts and the evidences submitted before it in a correct perspective. GROUND NO. 2: Disallowance of depreciation on intangible assets 2.1 The learned AO erred in allowing deprecation under section 32(1 )(ii) of the Income-tax Act, 1961 of ₹ 3,85,14,551 on intangible assets as against depreciation of ₹ 4,34,58,398, while computing the taxable income for the captioned assessment year. GROUND NO. 3: Disallowance under section 14A 3.1 The learned AO / DRP has erred in disallowing a sum of ₹ 5,95,20,534 under section 14A of the Income-tax Act,. 1961 read with rule 8D of the Income-tax Rules, 1962 without appreciating the facts of the case and law applicable thereto. 3.2 The learned AO /DRP erred in not appreciating that investments made were by way of strategic investments in subsidiary. 3.3 The learned AO / DRP erred in appreciating that inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest of revenue. v. On the facts and in the circumstances of the case and in law, and without prejudice to the preceding grounds, the Hon'ble DRP erred in directing the Assessing Officer to allow the depreciation on Goodwill whereas neither assesse nor DRP has specified as to how the quantification for Goodwill has been arrived at. VI. On the facts and in the circumstances of the case and in law, the Hon 'ble DRP erred in not appreciating that CIBA Speciality and DDCL is merely assigning the right for a limited period and not transferring the ownership of Distribution network, Material supply Contract and Goodwill to assessee company implying that the assessee company is not the owner of the asset as it never acquired a right so as to alienate the said asset from itself and hence it fails in the primary test of eligibility of depreciation, which is 'ownership' of the asset . 3. Before we address the specific Grounds raised in the captioned cross-appeals, the brief background of the case is as follows. The assessee before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case vide ITA No.3916/Mum/2014 dated 31/08/2015 has allowed the claim of the assessee . Before us, the Revenue is in appeal against such direction of the DRP. 5.1 Before us, the Ld. CIT-DR has not disputed the fact position that in its order dated 31/08/2015(supra), the Tribunal has considered similar controversy for assessment year 2007-08 and 2009-10. It is also not in dispute that the said decision has since been followed by the Tribunal in assessment year 2010-11 also vide ITA No.980/Mum/2015 dated 18/12/2015. So however, the plea of the Ld. CIT-DR is that the Legislature, while prescribing depreciation allowance for intangibles under section 32(1)(ii) of the Act has sought to restrict it only to the specified categories of intangible assets. The Ld. CIT-DR has emphasized that the expression in other business or commercial rights of similar nature contained in section 32(1)(ii) of the Act does not cover the impugned assets because they do not have the trapping similar to the other categories of asset prescribed therein, namely, know-how, patents, copy rights, trademarks, licence or franchisees. On this basis, it is sought to be pointed out that the claim of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee did not carry the risk attached with the manufacturing of the products,that it was granted discounts such as volume discount of 3% and a further discou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 existence at the time of transfer, that the claim of the assessee that an amount of ₹ 6.25 crores should be allowed as revenue expenditure was legally untenable, that the alternative claim of the assessee to allow d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(supra)has deliberated upon the facts of the case and allowability of depreciation on intangible assets.In that matter the assessee had purchased a hospital in Quilon with its land, building,equipment, staff, name, trade mark and goodwill as a going concern under two separate sale deeds.Under the sale deed, the value of the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 restricted only to the six categories of assets, viz., know-how, patents,trade-marks,copyrights,licences or franchises. The nature of business or commercial rights can be of the same genus in which all these six assets fall. All of them fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee,that it had entered into agreement with CIBA-India and DDCL for material supply and for supply of chemical products to the newly acquired TE business,that it regarded the fixed assets and intangible assets of acquired TE business at fair market value as determined by an independent valuer. In case of a slump sale,generally no separate value is assigned to each and every asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pati Industries Ltd.(255ITR26)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. 5.4 The aforesaid finding of the Tribunal clearly brings out that the Distribution network rights acquired by the assessee have been found to be in the nature of business or commercial rights for the purposes of section 32(1)(ii) of the Act. Although the Ld. CIT-DR has canvassed that the said finding is erroneous, so however, no specific error has been sought to be made out. In fact, we find that similar arguments were set-up by the Revenue before the Tribunal even when the matter came up in relation to assessment year 2010-11, as such a plea has been specifically note by the Tribunal in para 6.2 of its order dated 10/12/2015(supra). After having considered the said arguments, the Tribunal followed the earlier decision of the Co-ordinate Bench of the Tribunal dated 31/08/2015(supra) and held that the impugned assets fall within the category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain liabilities pertaining to the Textile effects division taken over from CIBA Speciality Ltd. 6.4 In this context, the DRP noted that on acquisition of the Textile effects business, in assessment year 2007-08 assessee had acquired certain unpaid liabilities from CIBA Speciality Ltd., which were to be allowed on payment basis in terms of section 43B of the Act . The DRP further noticed that there was discussion in the draft assessment passed by the Assessing Officer despite the claim made by the assessee. It was also noticed that in assessment year 2007-08, the Tribunal vide its order dated 31/08/2015(supra) had allowed similar claim of the assessee. Accordingly, following the order of the Tribunal dated 31/08/2015(supra), the DRP directed the Assessing Officer to allow the claim of payment of statutory dues of the Textile effects business taken over from CIBA Speciality Ltd. applying section 43B of the Act after due verification. 6.5 The Revenue has contested the said direction of the DRP in its Grounds of appeal filed before us. Quite clearly, the direction of the DRP is based on the order of the Tribunal for assessment year 2007- 08, which continues to hold the field and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of hearing, it was brought out that the Tribunal, in assessee s own case in ITA No.1539/Mum/2014 for assessment year 2009-10 vide order dated 31/08/2015 has remitted the matter back to the file of DRP for re-adjudication by passing a speaking and reasoned order. The operating portion of the order of the Tribunal dated 31/08/2015(supra) in this regard is reproduced hereafter:- 4.3.We have gone through the available material.We find that while filing objection before the DRP the assessee had raised various issues.The assessee had requested the DRP to admit additional evidence as per provisions of the DRP Rules.But,the DRP has not mention anything in its order about the issue raised by the assessee and the documents submitted.In our opinion,it was duty of the DRP to reject or accept the additional evidence produced by the assessee once same were filed before it.Secondly,the ground of appeal relating to was not decided.Non-adjudication of a ground raised by an assessee is miscarriage to justice.We would like to reproduce the order of the DRP dealing with TP issue and same reads as under: 5.2.1 The applicant has submitted before the DRP that the entire payment of corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in taking the PLI margin on the entity basis.We find that the assessee has not maintained separate accounts for the AE and non-AE segments.The segments prepared just for the reason of calculation of PLI are not acceptable as the basis of allocation of expenses and the correctness of allocation are not verifiable.Therefore,these are not reliable.In the absence of the same, and considering the interlinking between AE and non-AE imports, it is not possible to prepare reliable segment-wise accounts.Further,it is noted that the assessee itself has bench -marked its international transactions using entity-level operating margin as the PLI.This would indicate that though making the claim Assessee understands the impossibility of its application. However in so far as the adjustment to be made we find that the judicial precedence suggests that the adjustment should be limited to the AE transactions and not on the entity level turnover. In the facts and circumstances of the case,therefore, while the TPO s action is sustained,the TPO should recalculate the PLI and limit the adjustment to the AE transaction. 5.2.5 The applicant has also objected to the TPO/s action of considering single ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emitting back the matter to the file of the DRP who would adjudicate the issues raised by the assessee in grounds no.2 to 5 of by passing a speaking and reasoned order and after affording a reasonable opportunity of hearing to the assessee.The additional evidences produced by the assessee before the DRP have to be taken in to consideration during fresh adjudication proceedings.Grounds no.2-5 are allowed in favour of the assessee in part. 7.2 Subsequently, in assessment year 2010-11 also the Tribunal vide order dated 18/12/2015(supra) has remanded the matter back to the file of DRP for fresh adjudication following the earlier precedent, in assessee s own case for assessment year 2009-10(supra). In the instant year also the facts as well as rival stands are similar to those for the earlier assessment years and, therefore, following the precedents in the assessee s own case for assessment years 2009- 10(supra) and assessment year 2010-11 (supra), the matter is remanded back to the file of DRP to re-adjudicate the issue relating to the computation of arm s length price of the international transactions of payment of corporate service charges to the associated enterprise in the ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. Representative for the assessee explained that in assessment year 2007-08, the Tribunal allowed the claim of assessee for depreciation on intangibles including the value of brand and the alternate plea for allowing cost of brand as revenue expenditure has been dismissed. 8.3 In so far as admission of Additional Ground is concerned, it does not raise any new issue, inasmuch as, it is subsumed in the Ground of appeal No.2 originally raised by the assessee in the Memo of appeal, and is thus admitted. On this aspect, we direct the Assessing Officer to re-work the depreciation allowable on the intangibles following the precedents in the asessee s own case for the earlier assessment years. Thus, on this aspect, assessee succeeds for statistical purposes. 9. The last issue raised by the assessee is with regard to a disallowance of ₹ 5,95,20,534/- made by the income-tax authorities by invoking the provisions of section 14A of the Act. In this context, brief facts are that assessee was found to have made investment in the equity shares of a subsidiary Baroda Textile Effects Pvt. Ltd. and an associate concern, namely, M/s. Swati Organics. It is also noticed by the lower au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleting the disallowance u/s.14A of the Act, when no exempt income was earned, received or receivable by the assessee in the relevant year. The Hon ble High Court observes that in the case of Holcim India (P) Ltd.(supra) the Court had referred to the decision in the case of Maxopp Investment Ltd.(supra) and of the ITAT Special Bench in the very same case i.e. Cheminvest Ltd. vs. CIT(2009) 317 ITR 86 and also to the decision of High Courts against Revenue i.e. Lakhani Marketing Incl.(supra), Shivam Motors (P) Ltd. (supra), etc. After considering the various decisions referred to at length, the Hon ble Court at para 23 of its order held as under:- 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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