TMI Blog2019 (5) TMI 773X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to the service provider for connectivity within India and therefore the expenditure was not attributable to the delivery of article or things incurred in foreign exchange - HELD THAT:- Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are of the view that communication charges should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld in the case of CIT v. HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT] . In view of the acceptance of Gr.No.3, We are of the view that Gr.NO.2 that the expenditure in question ought not to be excluded from the Export Turnover is academic and therefore left open without any decision. Addition of Special Additional Duty of Customs at 4% - HELD THAT:- We are of the view that in the light of the statutory provisions cited for getting an order of refund of SAD, the mere fact that it was recognized as income in the books of accounts by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure - HELD THAT:- There was specific agreement not to compete and the consideration was fixed as per the terms of the agreement. In the present case however, there exists no such agreement. Since the transfer of business was on a slump sale basis, the transferee has split the lump sum consideration as attributable to several tangible and intangible assets acquired consequent to slum sale. The consideration paid for acquiring business is sought to be characterized as revenue expenditure, which does not appear to be appropriate. Nevertheless, the intangible benefit to the Assessee as a result of existence of agreement not to compete with business of the Assessee can be said to be an intangible right, which can be characterized as commercial rights and the Assessee should be allowed the benefit of depreciation on the value as estimated by the Assessee in its valuation report u/s 32(1)(ii) as laid down in several decisions which we will refer to while dealing with claim of depreciation on goodwill. Depreciation on Goodwill - claim as revenue expenditure or in the alternative treat is as commercial right on which depreciation should be allowed - HELD THAT:- In our view, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al equipments already manufactured and sold by IRIL existed in the market and the Assessee gets a right to sell spare parts for such equipments. Expected sale of spare parts and the margin likely to be earned on such sale has been estimated and value assigned to such right and allocated out of the lump sum consideration paid on slump sale. The claim of the Assessee before us is that if the aforesaid payment is held to be capital in nature, then, depreciation may be directed to be allowed in terms of section 32(1)(ii) . The basis of valuation is set out in para-11 of the valuation report of Bizworth in our view is in fact an intangible acquired by the Assessee and the basis of estimation of its value is reasonable and acceptable. We therefore direct that depreciation be allowed on this intangible treating it as commercial right u/s.32 Allowability of provision for warranty - deduction towards obsolescence of inventory - HELD THAT:- Actual payment of warranty claims needs to be allowed as deduction as it was revenue expenditure incurred wholly and exclusively for the purpose of business of the Assessee. As far as the Assessee is concerned, it is liability of the Assessee and since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant Commissioner of Income Tax (ACIT), Large Tax Payer Unit ( LTU), Bangalore, passed u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 ( the Act) in relation to assessment year 2008-09. 2. The Assessee is a company engaged in the business of Manufacture/dealing in tractors, trailers, bus-chassis and trading in construction equipments. The various issues that emanate from the draft order of assessment against which the Assessee filed objections before the Dispute Resolution Panel (DRP), the order of DRP and the final order of assessment are discussed with reference to the individual grounds of appeal raised by the Assessee challenging various additions made to the total income declared by the Assessee in its return of income. The Assessee has also filed applications for admitting additional grounds of appeal vide application dated 14.1.2016 and another additional ground of appeal dated 22.11.2018 filed in the registry on 4.1.2019. 3. Before we deal with the grounds of appeal raised by the Assessee, we need to first consider the Assessee s application dated 22.11.2018 for admission of the following additional ground of appeal because it is a prelim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No order of assessment shall be made under section 143 or section 144 at any time after the expiry of- ( a ) two years from the end of the assessment year in which the income was first assessable ; or ( b ) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, is filed under sub-section (4) or sub-section (5) of section 139, whichever is later : Provided that in case the assessment year in which the income was first assessable is the assessment year commencing on or after the 1st day of April, 2004 but before the 1st day of April, 2010 , the provisions of clause ( a ) shall have effect as if for the words two years , the words twenty-one months had been substituted : Provided further that in case the assessment year in which the income was first assessable is the assessment year commencing on or after the 1st day of April, 2005 but before the 1st day of April, 2009 and during the course of the proceeding for the assessment of total income, a reference under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period specified in sub-section (2). (4) The Assessing Officer shall, notwithstanding anything contained in section 153 or section 153B , pass the assessment order under sub-section (3) within one month from the end of the month in which,- ( a ) the acceptance is received; or ( b ) the period of filing of objections under sub-section (2) expires. (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:- ( a ) draft order; ( b ) objections filed by the assessee; ( c ) evidence furnished by the assessee; ( d ) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; ( e ) records relating to the draft order; ( f ) evidence collected by, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Resolution Panel and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee. The following sub-section (14A) shall be inserted after subsection (14) of section 144C by the Finance Act, 2012, w.e.f. 1- 4-2013 : (14A) The provisions of this section shall not apply to any assessment or reassessment order passed by the Assessing Officer with the prior approval of the Commissioner under subsection (12) of section 144BA. (15) For the purposes of this section,- ( a ) Dispute Resolution Panel means a collegium comprising of three Commissioners of Income-tax constituted by the Board 5 for this purpose; ( b ) eligible assessee means,- ( i ) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and ( ii ) any foreign company. 6. It is not in dispute that the Assessee is an eligible Assessee and therefore the Assessment in the case of the Assessee is to be completed keeping in mind the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. According to the revenue, the non-obstante clause in Section 144C(13) of the Act, gives the AO, a time limit of one month from the end of the month in which direction is received by the AO and if that be so, the order of assessment passed on 18.10.2012 is within the period of limitation and is valid. 10. The contention of the Assessee on the other hand is that an assessment order passed by the assessing officer pursuant to the directions of the DRP is under section 143(3) read with section 144C(13) of the Act. Such an order cannot be construed as having been passed independently and on a stand-alone basis under section 144C(13) of the Act. The further contention of the Assessee is that the time limit for completion of assessment in terms of section 153(1) of the Act is ordinarily 2 years from the end of the relevant assessment year. The said limit was enhanced to 3 years in case of an assessee wherein reference was made to the TPO (i.e., in the case of eligible assessee). It was submitted that the enhanced time limit of 3 years is provided in the statute in order to take care of the time that would be taken, inter alia, in the TPO passing the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Dispute Resolution Panel was constituted to expedite the dispute resolution process involving eligible assessees. In this regard, our attention was drawn to the Memorandum to the Finance (No. 2) Bill, 2009 while introducing the provisions of section 144C in the statute clarifying the legislative intent in the following terms:- The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only after a long drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to prolonged uncertainty in tax related matter. Therefore, it is proposed to amend the Income-tax Act to provide for an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track basis 12. It was submitted that if the non-obstante clause in sections 144C(4)/ 144C(13) of the Act is interpreted as allowing the assessing officer additional time over and above the limit provided under section 153(1) third proviso, of the Act, the same would defeat the entire purpose of expediting the dispute resolution process, by enlarging the time available for completio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther grossly erred in ignoring the above plea and also the alternative plea of the appellant that the issue was squarely covered by the decision of the High Court in the case of Tata Elxsi Ltd Others in ITA No. 70/2009 dt. 30.08.2011 which was binding on them. 17. The Assessee was entitled to claim deduction u/s.10A of the Act on the profits derived from its Software Technology Parks of India (STPI) registered unit. Sec.10A(4) provides the methodology of computation of deduction u/s.10A of the Act and it lays down that the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Export turnover has been defined under Explanation 2 (iv) to Sec.10A as:- export turnover means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the profit from export, a formula has been provided whereby if the business is of a composite nature, meaning thereby, it includes both exports as well as domestic sales, the proportionate profit relatable to the export business is to be calculated by apportioning the profits of the business in the same proportion as the Export Turnover , as defined under clause (iv) of the Explanation 2 to section 10A of the Act, bears to the Total Turnover . Export Turnover as defined in Explanation 2 to section 10A means the consideration in convertible foreign exchange excluding freight, telecommunication charges or insurance attributable to the delivery of computer software outside India and expenses incurred by an assessee in foreign exchange in providing the technical services outside India. The term Total Turnover has, however, not been defined for the purposes of section 10A of the Act. In view of the aforesaid definition, what needs to be excluded from the export turnover are, interalia, the telecommunication charges attributable to delivery of software outside India. It was submitted that in the present case, the telecommunication charges incurred by the Assessee relates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22. During the relevant assessment year 2008-09, the Assessee had shown as income in the profit and loss account a sum of ₹ 5,74,87,167/- being refund of Special Additional Duty of customs ( SAD ). However in the computation of total income, the Assessee reduced the said sum from the taxable income taking a stand that the income in question did not accrue or arise to the Assessee during the previous year and therefore under the mercantile system of accounting followed by the Assessee, the said income should not be brought to tax in this year. The AO rejected the plea of the Assessee and brought the said sum to tax. On objection to the draft order of assessment making the aforesaid addition, the Assessee preferred objections before the DRP. The DRP set aside the issue for examination afresh by the AO. 23. Pursuant to the directions of the DRP, the Assessee vide letter dated 15th October 2012 , submitted before the assessing officer that the refund of SAD amounting to ₹ 5,74,87,167 was sanctioned only in the subsequent years by the custom authorities who passed the necessary orders approving the claim on 6.7.2009 , 29.1.2009 and 5.3.2009 (the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee had lodged claim for refund with the custom authorities, the SAD refund was not sanctioned by the authorities. Therefore the Assessee had no right to receive refund. Since the grant of refund is subject to verification and satisfaction of the custom authorities, the right to receive the same in future is contingent and does not crystallize at the time of filing the application for refund. Therefore under the mercantile system of accounting, income cannot be said to have accrued to the assessee. It was submitted that the decision of the Hon ble Supreme Court in the case of CIT vs. Excel Industries Ltd.: (2013) 358 ITR 295 (SC) supports the plea of the Assessee. In the aforesaid decision, the assessee was maintaining its accounts on mercantile basis and accordingly accounted for the benefit of entitlement to make duty free imports in the year of export. However, the aforesaid amounts were excluded by the assessee from computation of total income since the same could not be said to have accrued until imports were made and the raw material consumed. The assessing officer did not accept the assessee's claim on the ground that the assessee had acquired vested right o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entries in the books of accounts by the Assessee are not conclusive in the matter of deciding the point of time at which income can be said to have accrued to an Assessee. Apart from that, we find that out of the total SAD refund aggregating to ₹ 5,74,87,167, the amount sanctioned by the custom authorities amounted to ₹ 5,71,37,509 only. Out of total sanctioned amount, ₹ 4,27,71,514 was offered to tax by the Assessee in assessment year 2009-10 and ₹ 1,43,65,995 was offered to tax in assessment year 2010-11, as and when the order in this regard was passed by the Custom authorities. The relevant orders of the customs authorities are at pages 640 and 670 of PB-Vol 1 / pages 2823 and 2829 of PB-Vol 4 respectively ). The issue is therefore revenue neutral and do not affect the tax liability of the assessee likely to be collected by the Department as a whole: In the light of the above discussion, we are of the view that the addition made is unsustainable and the same is directed to be deleted. Ground No.4 raised by the Assessee is accordingly allowed. 28. Ground Nos.5, 7 to 8 raised by the Assessee reads as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide depreciation on the same. 21. AO/DRP ought to have held goodwill of ₹ 43,40,89,871 as being a depreciable asset and allowed depreciation as per the provisions of the Act. 22. The Appellant also craves for leave to claim an amount of ₹ 13,87,00,000 as revenue expenditure paid towards the right to supply spare parts to customers of IR. Notwithstanding this argument, in case this amount is considered as a payment towards acquiring a capital asset, then the AO ought to allow depreciation on the same. 23. Without prejudice to the principal grounds and the aforesaid additional grounds, the Appellant pleads that the total consideration paid to IR towards acquisition of business, with the exception of value of land, should either be allowed as revenue expenditure or be entitled to depreciation on the capitalised value. 30. Ground Nos.5, 7 to 8 and Additional grounds No.15 16 and 19, 21 to 23 arise out of a Business Transfer Agreement ( BTA ) dated 04.05.2007, whereby the Assessee acquired the Road Machinery Division ( RMD ) (also known as Road Development Business or RDB ) of Ingersoll Rand India Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over were recognized and accounted for individually in the books of accounts of the purchaser i.e., the assessee for accounting and tax purposes on the basis of valuation report dated 28.03.2008 obtained from H.V Krishna Swamy (refer pages 286-296 of PB Vol 1 / pages 2730 - 2740 of PB Vol 4) and valuation report dated 5.08.2008 obtained from Bizworth for valuation of tangible and intangible assets respectively, as under (refer pages 324-371 of PB). Particulars Amount (Rs. in lacs) Remarks TANGIBLE ASSETS (A) Valuation report from H.V. Krishna Swamy, Chartered Engineer (refer pages 286-296 of PB - Vol 1 / pages 2730 - 2740 of PB - Vol 4) Plant and machinery 1059.80 Patterns 27.05 Furnitures and Fixtures 203.74 V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Claimed as revenue expenditure. Alternate claim of depreciation (refer Addl. ground 16) Licenses 70.00 Claimed as revenue expenditure. Alternate claim of depreciation (refer Addl. ground 19) Warranties 101.00 Claimed as revenue expenditure. Alternate claim of depreciation Total (C) 8,808.00 Total (A +B + C) 17,581.10 Add : Other current assets (Net) 1,260.00 Total 18,841.10 Add: Goodwill 4,340.90 Depreciation claim made before AO vide letter dated 15.10.2012 (also refer Addl. ground 21 of the present appeal) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 175,77,55,740, the Assessee claimed depreciation on the following value of tangible and intangible assets acquired as under: INTANGIBLE ASSETS Amount (Rs. In lacs) Design Drawing 3,278.00 Marketing intangibles 2,223.00 Order backlog 400.00 Supplier database 600.00 Software acquired 194.00 Total Intangible assets on which depreciation claimed in ITR 6695.00 TANGIBLE ASSETS Amount (Rs. In lacs) Plant and machinery 1,504.24 Building 876.60 Total Tangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of RDB was a sum of ₹ 231,82 lacs. After allocation of values for various Assets and intangibles there was a difference of ₹ 43,40,89,870/- which was treated as Goodwill. However, no depreciation was initially claimed in the return of income on goodwill aggregating to ₹ 43,40,89,870. The relief in respect of depreciation on Goodwill is sought by the Assessee in (Additional) Ground No.15 21 specifically. 39. Also, certain business and commercial rights related to spare parts supply rights and benefits amounting to ₹ 13,87,00,000 and sales promotion material aggregating to ₹ 15,00,000 were neither capitalised nor claimed as revenue expenditure. However, claim of depreciation was made before the assessing officer vide letter dated 15.10.2012 on the aforesaid amounts (refer pages 603-606 of PB-Vol 1 / pages 2817-2820 of PB Vol 4). The non allowance of depreciation on commercial rights related to spare parts supply rights and benefits of ₹ 13,87,00,000/- is agitated in (Additional) Ground No.22. 40. In Ground No.23, the Assessee has sought to raise a plea that total consideration paid to IRIL towards acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the WDV of the assets (as appearing in the books of IRIL on basis of Form 3CEA report) forming part of the business purchased by the appellant and not with reference to the values on the basis of valuer s report. Accordingly, the assessing officer disallowed the claim of depreciation to the extent of ₹ 18,19,73,312, as under Asset Cost as per Valuation report WDV as per IR as on 4.5.2007 Rate of depreciation Depreciation as per valued cost Depreciation as per adopted cost Difference Depreciation Buildings 8,76,60,000 3,34,24,359 10 87,66,000 33,42,435 54,23565 Furniture fittings 2,03,74,000 1,12,98,402 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on the correctness of the valuation based on which the Assessee recorded actual cost of the individual items of assets that he acquired in a slump sale. On the other hand, if the AO wants to dispute the correctness of the claim made by the Assessee, he has to substantiate the same and further he has also to establish that condition precedent for invoking Explanation-3 to Sec,43(1) of the Act exists in a given case. It is the case of the Assessee that in the absence of any method provided in the Act, the cost of acquisition of individual assets, forming part of undertaking acquired by way of slump sale, in the hands of purchasing company has to be recorded at the values determined by independent valuers, on a scientific / rational basis. Such value of assets acquired as part of slump sale, determined by the independent valuers is required to be considered as actual cost / written down value for claiming depreciation under section 32 of the Act, in the hands of the transferee. 45. The AO rejected the claim of the Assessee for the reasons given in Para 5.7.5 5.7.6 of the Draft Assessment order dt.26.12.2011. The reasons in short was that (i) the valuers did not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght over the orders that were booked by IRIL and those rights were of the value of 4.85 crores. The expected period of execution of the orders and realization of sale proceeds after giving effect to tax implications has been estimated at ₹ 4 crores. Each item of intangible assets have been identified and valued. The valuation has been done by expert in the field. Such valuation cannot be brushed aside for no valid reason or basis. Explanation 3 to section 43(1) of the Act, provides that in case the assessing officer is satisfied that the main purpose of transfer of the asset, including slump sale of an undertaking, was reduction of liability to income tax by claiming depreciation on enhanced cost of acquisition, the assessing officer can substitute the cost of such assets in the hands of transferee with fair value of such assets. The mere fact that the sale in question was a slump sale, does not empower the assessing officer to tinker with the split up of the lump-sum consideration over various tangible and intangible assets, on the basis of values determined by an independent valuer on a rational and scientific basis. The mischief of Explanation 3 to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir non-production has led to some adverse conclusions being drawn by the revenue authorities. We are of the view that these agreements, the genuineness of which are not disputed, are necessary for proper adjudication of the disputes in the appeal and therefore they are admitted as additional evidence. 50. Clause 5.12 of the Global Business Transfer Agreement between the Assessee s parent company and Ingersoll Rand provides that Ingersoll Rand shall not conduct any business activity which is the subject matter of transfer i.e., the Road Development Business. Therefore, the general understanding for worldwide acquisition of Road Development Business of Ingersoll Rand by the Assessee s group entities worldwide is subject to the aforesaid non-compete agreement. Though this does not find specific mention in the BTA between the Assessee and IRIL, the overall understanding for global acquisition of RDB of Ingersoll Rand cannot be disputed. So also, the license to use the brand name IR by the Assessee stands established by the license agreement between the parent company of the Assessee and Ingersoll Rand. Thus, the acquisition of these rights under the global takeover o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54. The assessing officer disallowed the aforesaid claim as revenue expenditure allegedly holding that (i) non-competition agreement was not entered into / provided by the Assessee (ii) a part of the consideration paid to take over the Ingersoll Rand business was treated as non-competition fee based on the valuation report and (iii) the same being a payment made to take over a business creates a new source of income and is to be regarded as capital expenditure. The DRP concurred with the findings of the assessing officer. 55. We have heard the rival submissions. We have already mentioned in the earlier part of this order that the Assessee has filed application dated 24.07.2015 under Rule 29 of the Income-tax (Appellate Tribunal) Rules 1963, placing on record relevant extract of the Global Business Transfer Agreement dated 27.02.2007 entered into between Ingersoll Rand Company Limited (on behalf of itself and the other sellers named therein) and AB Volvo (Publ) (on behalf of itself and the other buyers named therein) which was also referred to during the course of the assessment proceedings. The said agreement is equally applicable to the appellant an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of five years. For that reason, the combined consideration was allocated by the valuer in their report towards non-compete fee. In fact, after the acquisition of Road Development Business, in order to maintain such business s profitability, the non-compete fee was payable merely to prevent Ingersoll from engaging in competitive business to the detriment of the appellant. Therefore, the non-compete fees was paid wholly and exclusively for smooth functioning of business operations, which did not result in acquisition of any capital asset or benefit of enduring nature so as to constitute capital expenditure. 57. The basis of valuation of the consideration attributable to noncompete clause from and out of the lump sum consideration paid for slum sale is set out in para-16 of the valuation report of Bizworth (page-2780 of paper book-4). Since the non-compete clause was valid for 5 years, the value of non-compete fee has been fixed at the estimated net present value of future sales (fir 5 years) based on market share of IRIL and consequent profit after tax that the Assessee might earn. To our mind the basis of valuation appears to be reasonable an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts (refer page 25 of PB - Vol 1 / page 2662 of PB Vol 4). However, depreciation was not claimed by the assessee, in the return of income on the value of Goodwill and certain other intangibles. 61. However, during the course of the assessment proceedings, in view of decision of the Supreme Court in the case of CIT vs. Sniffs Securities Ltd.: 348 ITR 302 , the assessee vide letter dated 15.10.2012, made claim of depreciation @ 25% amounting to ₹ 14,35,72,468 on goodwill and certain other intangibles. The working of depreciation on goodwill was also filed before the assessing officer vide the said reply dated 15.10.2012 (refer pages 604-606 of PB Vol 1 / pages 2818-2820 of PB-Vol 4). The assessing officer in the impugned order, did not, however, deal with the claim of depreciation on goodwill and other intangible assets. The grounds of objection for the claim of depreciation on goodwill was not raised before the DRP. In the additional grounds, however, the Assessee has raised a claim for allowing depreciation on good will. As we have already observed, such a claim, which is based on material already available on record, can be entertained, as the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... + (B) + (C) 2317.89 63. It was the plea of the Assessee that the excess of purchase consideration over the value assigned to tangible assets, was allocated to intangible assets to the extent of ₹ 88.08 crores and goodwill to the extent of ₹ 43.40 crores. Such portion of the purchase consideration (which is in excess of the value allocated to tangible assets acquired as part of the undertaking), represents consideration paid for acquisition of various intangible assets in the form of leases, licenses, customer/ supplier database, business contracts, patents, trademarks, etc. The same was reflected in the accounts as (a) intangible assets and (b)goodwill. Irrespective of the nomenclature placed thereupon, the amount is for acquisition of invaluable business and commercial rights, eligible for depreciation in terms of section 32(1)(ii) of the Act. 64. The learned counsel for the Assessee invited our attention to the decision of the Supreme Court in the case of CIT vs. Smiffs Securities Ltd.: 348 ITR 302 wherein the Supreme Court was concerned with claim of depreciation on g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court observed that all the intangible assets fall in the same genus of assets forming part of tool of trade, facilitating smooth carrying of business. The High Court further held that the various intangible assets acquired by the assessee, viz., business claims, business information, records, contracts, etc., were invaluable commercial rights, which were necessary to carry on the business acquired through slump sale. Accordingly, the High Court held that the same were in the nature of intangible assets eligible for depreciation under section 32(1)(ii) of the Act in the residual category of business or commercial rights . The relevant observations of the High Court are as under:- 13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression business or commercial rights of similar nature specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of knowhow, patents, trademarks, licenses or franchise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the items falling in Section 32(1)(ii) of the Act. 14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of business or commercial rights of similar nature specified in Section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section (emphasis supplied) 66. Our attention was also drawn to a similar decision of Hon ble Delhi High Court in the case of Triune Energy Services Private Limited vs. DCIT: 237 Taxman 230 , wherein it was held that goodwill is an intangible asset providing a competitive advantage to an entity which includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc.; the expression 'goodwill' subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. The Court further held that from an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.8 to 18.10 of this report and in our view, it is in fact an intangible acquired by the Assessee and the basis of estimation of its value is reasonable and acceptable. We therefore direct that depreciation be allowed on this intangible treating it as commercial right u/s.32 of the Act. Gr.No.19 is thus allowed. 70. As far as (additional) Gr.No.22 is concerned, the assessee claimed deduction in respect of the amount of ₹ 13.87 crores allocated out of slump consideration towards the rights acquired for supply of spare parts to customers of Ingersoll Rand. The assessing officer disallowed the same on the basis that the same is in the nature of capital expenditure creating new source of income. It is alternatively submitted by the Assessee that in case the said amount is held to form part of the lump sum consideration towards acquisition of RDB undertaking, then, depreciation may be directed to be allowed thereon in terms of section 32(1)(ii) of the Act as elaborated supra. We are of the view that the alternative claim of the Assessee alone needs to be considered as the main claim for deduction has rightly been negative by the revenue authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the Assessee acquired RDB from IRIL by way of a slump sale. All assets and liabilities of the RDB was acquired by the Assessee. The following liabilities also became the liability of the Assessee:- (a) Provision for inventory obsolescence ₹ 3,79,30,783 (refer page 240 of PB- Vol 1 / 2707 of PB-Vol 4) (b) Provision for warranty ₹ 1,16,44,629 (refer page 271 of PB Vol 1 / 2715 of PB Vol 4) Total ₹ 4,95,75,412 74. During the relevant previous year, the assessee had paid/discharged liability against the aforesaid provisions, to the extent of ₹ 1,32,65,192 (₹ 36,34,779 + ₹ 96,30,413) and claimed deduction thereof in the return of income (refer page 93 of PB Vol 1 / page 2665 of PB Vol 4) . The details of utilization of aforesaid provisions by appellant dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29 Provision made during the year (disallowed during the year) - 16,39,78,725 16,39,78,725 17,40,99,834 1,01,21,109 Utilized/reversed during the year (96,30,413) (5,79,06,886) (6,75,37,299) (7,76,58,408) (1,01,21,109) Closing balance 20,14,216 15,76,81,741 15,96,95,956 NIL 75. The assessing officer did not dispute the claim of deduction of similar costs on account of provision for warranty and obsolete inventory incurred for the business other than acquired from IRIL. The assessing officer disallowed the aforesaid deductions claimed by the Assessee on the ground that (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for obsolete inventory, it is the plea of the Assessee that the said sum represents write back of provision to the credit of the profit and loss account. Since no deduction was claimed in respect of provision for obsolescence by the assessee or Ingersoll Rand, the write back was regarded as not constituting income of the appellant under section 41(1) of the Act. 78. We have considered the rival submissions on the aforesaid grounds of appeal. We are of the view that the actual payment of warranty claims needs to be allowed as deduction as it was revenue expenditure incurred wholly and exclusively for the purpose of business of the Assessee. As far as the Assessee is concerned, it is liability of the Assessee and since it is in relation to the business of the Assessee, the same deserves to be allowed. 79. As far as the deduction of provision for obsolete inventory is concerned, the claim of the Assessee that the sum reversed was not claimed as deduction by IRIL needs to be verified and if found correct, the same should not be taxed as the conditions precedent for invoking the provisions of Sec.41(1) of the Act are not satisfied. Ground No.6 and Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned by the Assessee was 14.74% and therefore the Assessee claimed that the price received in the international transaction was at Arm s Length. 82. The Transfer Pricing Officer (TPO) to whom the AO referred the question of determining ALP of the international transaction in terms of Sec.92CA of the Act, treated the services rendered by the Assessee as akin to Information Technology Enabled Services (ITES) and chose a set of 20 comparable companies and the arithmetic mean of the operating profits of these 20 companies were 24.75% without working capital adjustment and 20.71% after working capital adjustment. Based on the above, the TPO computed the shortfall in price received at ₹ 1,82,98,434 and the said sum was added to the total income of the Assessee, as follows: Operating cost ₹ 30,65,40,000 Arm s length margin 20.71% of operating cost ALP @120.71% of operating cost ₹ 37,00,24,434 Price received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pgreen Solutions P. Ltd 377 ITR 533 (Del) held that this company was outsourcing its activity of providing ITES to its AE and this would have a bearing on its profitability and therefore this company cannot be compared with a company providing ITES to its AE on its own. (ii) In the case of Pr. CIT vs New River Software Services Pvt Ltd (ITA No 924/2016) the Hon ble Delhi High Court, relying on the decision in the case of Rampgreen Solutions (supra) rejected this company as comparable. (Page 1889 of CL PB 1) (iii) In the case of Symphony Marketing Solutions India Pvt Ltd (IT (TP) A No1316/Bang/2012) for assessment year 2008-09, the Hon ble Bangalore Bench of the Tribunal rejected this company as a comparable on the basis that this company was outsourcing most of its work. (iv) In the case of DCIT vs Novo Nordisk India Pvt Ltd (IT (TP) A No 1222/Bang/2013) for assessment year 2008-09, the Hon ble Bangalore Bench of the Tribunal rejected this company as comparable. (Page 1961-1962 of CL PB 1) (v) The Mumbai Bench of Tribunal in the case of ACIT vs. Maersk Global Service Centre (India) Pvt. Ltd. (ITA No. 3774 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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