TMI Blog2018 (9) TMI 1706X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not earned any exempt income by way of dividend or otherwise in the relevant previous year has not been controverted either by the Assessing Officer or by the DRP. Therefore, in the absence of any exempt income earned in the relevant previous year, no disallowance u/s. 14A read with Rule 8D could have been made. Thus, in view of the ratio laid down in the decisions cited by the learned counsel for the assessee, we delete the disallowance made by the Assessing Officer u/s. 14A read with Rule 8D. This ground is allowed. - ITA No. 1099/Mum/2017 - - - Dated:- 12-9-2018 - Shri Saktijit Dey, Judicial Member And Shri Manoj Kumar Aggarwal, Accountant Member For The Appellant : Shri F V Irani For The Respondent : Shri Rignesh Das ORDER Per Saktijit Dey, Judicial Member This appeal by the assessee is directed against the assessment order dated 17. 01. 2017 passed u/s. 143(3) r. w. s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2012-13, in pursuance to the directions of the Dispute Resolution Panel (1) (DRP), Mumbai. 2. In ground no. 1 with its sub grounds, the assessee has challenged the disallowance of corporate service ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, according to him the ALP of the payment made towards service charges has to be taken as Nil . Proceeding further and referring to the decision taken by him for A. Y. 2009-10, the TPO observed that by applying Comparable Uncontrolled Price (CUP) method, the ALP of the services on man hour rate basis is to be computed at ₹ 51, 00, 000/- as against ₹ 11, 05, 04, 393/- shown by the assessee. Thus, he made an adjustment of ₹ 10, 54, 04, 393/-. In terms with the adjustment made by the TPO, the Assessing Officer added the TP adjustment in the draft assessment order. 3. Being aggrieved, the assessee challenged the additions made by filing objections before the DRP. However, the learned DRP following its own decision on identical issue in A. Y. 2011-12, rejected the objections raised by the assessee. 4. Shri F V Irani, learned Senior Counsel, appearing for the assessee, at the outset, submitted that the issue in dispute has been decided by the Tribunal in favour of the assessee in A. Y. 2011-12. In this context, he drew our attention to the relevant observations in the order of the Tribunal dated 31. 01. 2017 in ITA No. 5637/Mum/2015. The learned DR relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 803/- was disallowed . The DRP has also affirmed the stand of the TPO, against which assessee is in further appeal before us . 7 . 1 At the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine 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 the AE segment . The assessee has submitted that if this is done no adjustment would be necessary . Asssessee states that TPO has erred 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 judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 paragraph . The DRP has endorsed the views of the TPO in a very mechanical way without giving any reasoned finding on the arguments taken by the assessee . Therefore, in the interest of justice we are remitting 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 adjudicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee s claim, however, since the department has no remedy of appeal against the order of DRP, to protect the interest of Revenue, DRP rejected assessee s claim. 7. The learned AR, at the outset, submitted that the issue is covered by the decision of the Tribunal in assessee s own case for the preceding assessment years including A. Y. 2011-12. The learned DR relied upon the observations of the Assessing Officer and DRP. 8. We have considered rival submissions and perused material on record. Pertinently, assessee s claim of depreciation on intangibles such as material supply contract, distribution network and brand usage was continuing from A. Y. 2007-08. Though assessee s claim was rejected repeatedly by the department from A. Ys 2007-08 to 2011-12 however, when the dispute reached the Tribunal, the issue was decided in favour of the assessee. In the latest order passed in assessee s own case for A. Y. 2011-12 in ITA NO. 5637/Mum/2015 dated 31. 01. 2017, the Tribunal while referring to its earlier decision on the issue has decided as under: 5 . 3 We have carefully considered the rival submissions . Before proceeding further, we may reproduce hereinafter the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 discount of 4 . 5% on invoice value if the payment was made within five days, that MSC was an intangible asset in terms of s . 32(1)(ii) and was eligible for depreciation @ 25% . The assessee relied upon the cases of Skyline Caterers Ltd . ( 306 ITR-AT-369) Kotak Forex Brokerage Ltd . and Coca Cola Beverage P Ltd . About the DN, it was contended that over the years CIBA-India and DDCL had crea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs . 18 . 42 crores (Depreciation on MSC Rs . 2 . 97 crores + depreciation of DN Rs . 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 Rs . 6 . 25 crores should be allowed as revenue expenditure was legally untenable, that the alternative claim of the assessee to allow depreciation u/s . 32(1)(ii) of the Act was not acceptable, that even if there were asset like MSC, DN and brand uses right as an intangible asset the assessee was not eligible fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taka High Court the court held that Explanation 3 to section 32(1) of the 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 Rs . 98, 73, 25, 000(including goodwill) and not the amount of Rs . 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, labora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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 . Here, we would like to refer to the case of KEC International [(2010)- TIOL 478-ITAT-Mum] . In that matter, he 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 . ( 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT 376 TR 33 and the decision of Hon ble Bombay High Court in the case of Principal CIT vs. Ballarpur Industries Ltd. in Income Tax Appeal No. 51 of 2016 dated 13. 10. 2016. The learned DR relied upon the observations of the Assessing Officer and DRP. 11. We have considered the rival submissions and perused material on record. The fact that the assessee has not earned any exempt income by way of dividend or otherwise in the relevant previous year has not been controverted either by the Assessing Officer or by the DRP. Therefore, in the absence of any exempt income earned in the relevant previous year, no disallowance u/s. 14A read with Rule 8D could have been made. Thus, in view of the ratio laid down in the decisions cited by the learned counsel for the assessee, we delete the disallowance made by the Assessing Officer u/s. 14A read with Rule 8D. This ground is allowed. 12. Ground nos. 4 5 are not pressed, hence are dismissed. 13. Ground no. 6 being general in nature is not required to be adjudicated. 14. In the result, assessee s appeal is partly allowed. Order pronounced in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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