TMI Blog2020 (8) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... justment and the fact that the assessee has filed the aforesaid additional evidence for the first time before the Tribunal and the fact that we have already held that the additional evidence furnished by the assessee has direct relevance qua the grounds of appeal, which required consideration and verification at the end of AO, therefore, we remit the issue to the file of AO for consideration and decision on the issue afresh. AO/TPO is also directed to follow the order of Tribunal for AY 2014-15 as well. Needless to order that before deciding the issue, the AO shall grant opportunity to the assessee. Depreciation of goodwill - assessee submits that he acquired goodwill pursuant to acquisition of business from Rahul Healthcare, the valuation of business and goodwill cannot be questioned by revenue authorities - HELD THAT:- A perusal of draft assessment order shows that the assessee failed to discharge the source of goodwill‟. The ld. DRP while considering the objections of the assessee though deleted disallowance of cost of acquisition of goodwill, however, the depreciation claimed on goodwill was upheld. In our view the AO as well as ld. DRP have not considered the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 234A and 234B afresh in accordance with law. - ITA No.7204/Mum/2019 - - - Dated:- 27-7-2020 - Shri R.C. Sharma, Accountant Member And Shri Pawan Singh, Judicial Member For the Appellant : Shri Neeraj Seth (AR) For the Respondent : Shri Anand Mohan (CIT-DR) ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the assessment order dated 14.10.2019 passed under section 143(3) rws 144C (13), passed in pursuance of direction of Dispute Resolution Panel-1(WZ) (DRP), Mumbai dated 20.09.2019 for Assessment Year 2015-16. The assessee has raised following grounds of appeal: Following grounds are without prejudice to each other: GENERAL 1. erred in assessing the total income at INR 413.09 crores as against INR 153.60 crores computed by the Appellant. I. TRANSFER PRICING GROUNDS A. Adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenses Adjustment proposed by incorrectly applying Section 92CA(3) of the Act and disregarding the relevant submissions made during the assessment proceedings 2. Erred in making an addition of ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the Appellant's contention that the issue of marketing intangibles (AMP) is not applicable to the Appellant, as the Appellant is an entrepreneur licensee in the Indian market, and is entitled to entrepreneurial returns in the form of residual profit loss associated with India business, remaining after the overseas AEs are compensated with an arm's-length return for royalty, goods and services and that the said Entrepreneur charaterisation is in line with the economic organisation of L'Oreal Group globally. Therefore, the AMP expenses incurred by the Appellant has to be considered as being incurred on account of its entrepreneurial activities (full risk and return of which lies with the Appellant itself) and therefore cannot be construed as an international transaction which warrants a separate adjustment; 12. erred in artificially bifurcating the Appellant's entrepreneurial business activities into manufacturing and distribution segment without any cogent reasons for the same and arbitrary and ad hoc selection of comparable companies for manufacturing and distribution segment without adopting a scientific search process for applying bright line test ('BL T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n proposing an adjustment to the arm's length price of the international transaction payment for packaging design cost, training to salon customers and promotional goods without providing sufficient opportunity of being heard; 22. erred in disregarding evidences/ information submitted by the Appellant to substantiate services received/ benefits derived/ basis of allocation of cost and disregarded the same without giving any cogent reasons; 23. erred in determining the arm's length price of the international transaction of payment for packaging design cost, training to salon customers and promotional goods as NIL based on 'Other Method' as the most 'appropriate method. II. CORPORATE TAX GROUNDS A. Disallowance of depreciation on goodwill - arising on purchase of existing business unit on 'slump sale' basis 24. erred in disallowing deprecation of ₹ 1.03 crores on goodwill arising on purchasing of existing business of Rahul Health Care (RHC), an unrelated party, on a going concern basis; 25. erred in not appreciating the fact that the transaction was undertaken with unrelated enterprise (RHC) and the transaction value was commerciall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax debited to Profit and Loss account amounting to ₹ 1,75,13,010/- ought to be allowed as tax deductible expense while computing the taxable income. Short grant of self-assessment tax and incorrect levy of interest under section 234A and 234B of the Act 36. erred in not granting self-assessment tax credit of INR 53 lakhs claimed by the Appellant in the return of income; 37. erred in levying interest under section 234A of the, Act without appreciating that the Appellant had filed the return of income within timeline as prescribed under 139(1) of the Act; 38. erred in levying interest under section 234B of the Act. E. Initiation of penalty proceedings 39. Erred in initiating penalty proceedings under section 271 (1)(c) of the Act. 2. Brief facts of the case are that the assessee-company is engaged in the business of manufacturing of cosmetic, marketing and sale of product, filed its return of income for relevant AY on 29.11.2015 declaring income of ₹ 153.60 crore. Along with the return, the assessee furnished report under Form-3CEB reporting certain international transaction with its various Associated Enterprises (AEs). On reporting international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 8.27 crore on acquiring existing manufacturing unit from Rahul Healthcare and the assessee claimed depreciation of ₹ 1.03 core of goodwill @ 25% at half rate. The AO further noted that the assessee acquired the unit on Shop located at Baddi H.P from Rahul Healthcare on slum sale basis vide business agreement dated 26.02.2014 for ₹ 12.94 crore. As per the Schedule-3 of Business Transfer Agreement (BTA), Rahul Healthcare had current asset in the form of refund from tax authorities, inventories and cash, which cannot be aggregated into negative value. The assessee has shown fair value of Rahul Healthcare at (-) ₹ 3.14 crore in the valuation report. As per Business Transfer Agreement both the parties agreed on non-compete clause, meaning thereby the value of non-compete and no how are not considered in the valuation report. On the basis of aforesaid facts, the AO was of the view that Rahul Healthcare is not a brand name and merely has any goodwill and thus acquiring the business on such high price was doubted by him. 5. The AO issued show-cause notice as to why goodwill recognized in the books of account should not be treated as Nil and accordingly correspon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Oreal. Hence, even though agreement has reference to non-compete clause as part of standard template, this does not have any relevance in the present situation. There is no commercial value to non-compete and technical knowhow of Rahul Healthcare. Accordingly, there is no value assigned to non-compete and knowhow while calculating the goodwill. 6. After considering the reply of assessee, the AO treated the goodwill as unexplained investment and made addition under section 69 of the Act. The AO also disallowed the depreciation on the goodwill claimed by the assessee. The treated the investment on goodwill as unexplained investment and disallowed depreciation on goodwill by passing the following order: 4.5. The assessee has claimed depreciation of ₹ 1,03,45,097/- on the Goodwill @ 25% at half rate. As established above, there was no goodwill to be recognized for purchase of business from M/s Rahul Healthcare. Hence, the amount of ₹ 1,03,45,097/- is disallowed u/s 32 of the Act and added to the total income of the assessee. Particulars INR in million INR in million ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3;s submissions in the matter, the assessee has claimed unjustified goodwill of ₹ 8,27,60,777/- towards purchase of running business from M/s Rahul Healthcare on Slum Sale‟ basis. Therefore, a sum of ₹ 8,27,60,777/- is treated as unexplained investment within the meaning of section 69 of the Act and added back to the total income of the assessee. -------------- -------------- 4.8---------- 5. Disallowance of Depreciation: The assessee has claimed depreciation of ₹ 1,03,45,097/- on the Goodwill @ 25% at half rate. As established above, there was no goodwill to be recognized for purchase of business from M/s Rahul Healthcare. Hence, the amount of ₹ 1,03,45,097/- is disallowed u/s 32 of the Act and added to the total income of the assessee. 7. The copy of draft assessment was served upon the assessee. The assessee exercised its option for filing objection before the DRP. The DRP upheld the addition on account of AMP expenses and depreciation of goodwill. However, the addition on account of unexplained investment under section 69 of ₹ 8.27 crore was deleted. On receipt of direction of DRP, the AO passed the final assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to A.Y. 2010-11 (page 16-17 and para 2.4), A.Y. 2011-12 (page 13 and para 16) and A.Y. 2012-13 (page 23-24 and para 12) (copy of aforesaid orders were submitted during the course of hearing. (B) Alternate adjustment on manufacturing segment on account of payment of royalty for use of technical know-how (₹ 38.82 crores) and trademark (₹ 25.16 crores) :- (i) Appellant‟s own ITAT order for A.Y. 2013-14 : Trademark royalty - page No. 35 para 23 Technical know-how royalty- page No. 37 para 25. (ii) Also appellant‟s own ITAT order for A.Y. 2012-13 - page No. 29 para 18 (iii) Further the TPO in his order has not examined whether or not the method adopted by the appellant to determine the Arm‟s length price (ALP) is the most appropriate method and has instead concluded that the payments for trademark and technical know-how royalty are excessive in nature (page 176 of appeal memo) (iv) Accordingly, the TPO has exceeded his jurisdiction by making an addition to the international transaction of payment of royalty for technical know-how and trademark. In this regard, the appellant relies on the Judgment of Bombay High Court in the case of CIT Vs. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoices, Organisation structure of Marketing support services team, sample email correspondences, product and marketing dossiers, public relationship guidelines, screenshot of global database and websites of AEs accessible to appellant, etc. along detailed write up on the nature of service/evidences and benefits of the services. [Page 536-642 (Paper book Volume 1 and 2); Page No. 1092-1780 (Paper book Volume 3 and 4); Page 2174-3272 (Paper book Volume 5 and 6)]. Further, the Appellant submitted additional evidences to DRP comprising of cost allocation certificate and tables along copies of invoices [Page No. 3707- 4536 (Volume 7 and 8)]. These have been examined by TPO in remand proceedings and no fault is found with the same [Refer remand report on Page No. 498 to 535 of Paper book (Volume 1)] 4. Accordingly, the Appellant submits that considering that no adverse comments are provided by the TPO as well as the DRP, the said transaction should not be remanded back to the file of the AO/DRP as it would tantamount to giving a second inning to the Department and taking advantage of its own wrong. 5. In this regard, reliance is placed on the following judicial precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Page 536-678 (Paperbook Volume 1 and 2); Page 1092-1193 (Paperbook Volume 3)]. Further, the Appellant submitted additional evidences before DRP comprising of agreement, certificate for costs allocated, evidences for technical/ consulting advise provided by AE through sample emails in relation to Packaging Services, Environmental, Health and Safety Services, Finance Services, Supply Chain Services, HR Services along with a list summarizing the evidences submitted and benefits derived thereof [Page No. 3707- 4536 (Volume 7 and 8)]. 4. After verifying the evidences, the TPO in his remand report has accepted that the services were rendered, that they have benefited the Appellant and were necessary. He has only made a vague allegation that cost justification in a third-party situation needs to be established. (Refer remand report on Page No. 535 of Paperbook Volume 1) 5. Accordingly, the Appellant submits that the said transaction should not be remanded back to the file of the AO / DRP as it would tantamount to giving a second inning to the Department and taking advantage of its own wrong. 6. In this regard, reliance is placed on the following judicial precedents: - Kansai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h may exist or may be created. Further it excludes duty free shops located in the duty free or travel retail area which is specialized in sales against foreign currency to foreigner or diplomatic corps, ship chlanders, airlines companies or shipping companies. Though the AE has reserves its right for the zones of excluded areas. The contentions of the ld. A.R for the assessee is that clause 8 of the agreement does not obligates the assessee to incur expenses on AMP so as to promote the brand owned by its AE s. And that the expenses are incurred by assessee in the normal course of its business. The perusal of the Clause 7 and 8 reveals that there is no agreement between the assessee and the AEs for sharing the expenses and the payments made by the assessee for the expenses of AMP. The TPO has also not brought any fact on record that there exist any agreement between the assessee and its AE to share or reimburse the AMP expenses. Moreover, we have seen that there is no material change in the facts for the year under consideration. Therefore, considering the above factual discussions and the decision of the coordinate bench of Tribunal for A.Y. 2008-09 to 2010-11, on the identical iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application for additional evidence. The assessee is also furnished copies of all those evidences running from page no. 3046 to 3312 of Paper book (PB). The ld. AR for the assessee prayed that additional evidences furnished by the assessee may be admitted and the issue may be restored to the file of assessing officer for considering the issue afresh. 14. On the other hand, the ld. DR for the revenue submits that assessee has not furnished sufficient evidence, thus, the assessee cannot find fault in the finding of lower authorities. The assessee is filing the alleged supporting evidences at this stage, which were not before the lower authorities. The ld. DR further submits that in case the Hon‟ble Bench deems it appropriate to take additional evidence on record, in such eventuality issue may be restored to the file of AO/TPO for verification of evidence and consideration of issue afresh at their end. 15. We have considered the rival contention of both the parties and gone through the orders of authorities below. We have also gone through the additional evidences filed by assessee along with the application dated 04.02.2020. In the application for admission of addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know-how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal. 21. We find that ratio from the above Hon'ble Jurisdictional High Court decision is squarely applicable here. Hence transfer pricing adjustment at nil fails on both counts. Firstly on the account of benefit test which is not to be applied by the TPO and secondly none of the method of benchmarking the international transaction as speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c, amongst these are intangibles, one of the key intangibles was excise licence which allows manufacturing of goods without payment of excise duty due to area which based at exemption provided by Government of Himachal Pradesh at Baddi. The assessee obtained substantial benefit by way of acquisition of a business from third party in the form of increase in sales/stock transfer of goods etc. The computation of goodwill, as excess of consideration paid over net asset, is in the lines Accounting Standard -10. In support of his submission the learned AR of the assessee relied upon the following decision; Triune energy Services (P) Ltd (65 taxmann.com 288) (Delhi High Court), Cyber India Online versus ACIT [2014] 42 taxmann.com 108 (Delhi Trib), ThyssenKrupp Elevator (India) P Ltd versus ACIT 50 taxmann.com 279 (Delhi Trib), ACIT Versus Zydus Wellness Ltd [2017] 87 taxmann.com 82 (Gujarat High Court) 18. On the other hand the learned AR for the revenue supported the order of lower authorities. The learned AR further submits that during the assessment proceedings the assessing officer from the lodges of business transfer agreement noted that the fair market value of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted that Goodwill is not defined under the Income tax Act but the qualifications to get the character of Goodwill one has to look into the definitions of Goodwill as per Accounting Standard (AS) as well as the decisions of Higher Courts. As per AS-10 and other AS(s) issued by Institute of Chartered Accountants of India (ICAI), the definition of goodwill is read as; 16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money s worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess is termed as goodwill . Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise. Ind AS 103, dealing with Business Combinations, provides as under in respect of goodwill: 2. Definition of goodwill: An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. Ind AS 38- There may also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmits that real reason for such a claim lies in the Sub-Contract Manufacturing Agreement between L‟Oreal India Pvt. Ltd. and Rahul Healthcare dated 20th February 2013. A perusal of various clauses of contract manufacturing agreement shows that before the sub-contract agreement only soaps are manufactured by RHC while subsequent to the agreement the hair colour products bearing L‟Oreal India brand are proposed to be manufactured using the technology provided by L‟Oreal SA, France. Hence, the claim of Intellectual Property Rights (IPR) that are claimed to come in possession of the assessee with the Business Transfer Agreement (BTA) were either already pre-owned by the assessee or internally generated. And as per AS-38 no depriciation is available on self generated goodwill being not intangible asset. 22. In fifth alternative submissions the ld. DR for the revenue submits that no transferrable intangible of RHC is created even after entering into sub-contract agreement. It is the assessee, which has made huge advances to the RHC, which has been partly utilized for purchase of adjustment land and inventories. Thus, intangible if any is self created intangible. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of the lower Authorities etc. Reliance in case of Mahindra Mahindra Ltd. v. DCIT [2009] 30 SOT 374 (Mumbai) (SB) is totally misplaced. It is submitted that the ld. DR has only supported and elaborated the stand of the AO/TPO with the help of PB filed by the assessee. In without prejudice submissions the ld AR for the assessee that indirect benefits were also obtained by the assessee company, for quantification of benefit he has relied on the additional evidences furnished by assessee on alternate T.P. adjustment. 25. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the various case laws and the voluminous paper book furnished by the assessee. During the relevant financial year involved in this case, the assessee entered into a business transfer agreement with Rahul Healthcare for purchase of Soap manufacturing unit of Rahul Healthcare as a going concern on the lump-sum basis. The business transfer agreement was amended vide agreement dated 8th July 2014 and again on 31st October 2014. As per agreement the parties agreed for a lump sum consideration for purchase of ongoing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g officer to delete the addition under section 69 by holding that even if the payment represents excess payments by the assessee, is still these payments were made from the books of the assessee and there is no question of applicability of section 69 in this case. However, the disallowance of depreciation on goodwill was upheld holding that there is no proper documentation. 28. Before us the ld AR for the ld AR for the assessee vehemently argues that along with the acquisition of business of RHC the assessee also acquired the business of Rahul Healthcare was acquired on a slump sale basis, which included not only tangible assets but also bundle of intangible assets collectively called goodwill. The assessee claimed that reference of intangible assets includes permits, employee, and contracts. The contention of the ld. AR for the assessee is strongly contested by ld. DR for the revenue by making multiple submissions, which we have recorded above. 29. The Hon‟ble Apex Court in CIT Vs Smifs Securities Ltd (supra) held that Goodwill is an asset under Explanation 3(b) to section 32(1) and, thus, it is eligible for depreciation. The Hon‟ble Court observed that Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the result these grounds of appeal are allowed for statistical purpose. 32. Ground No. 33 to 34 relates to treatment of income from other sources of ₹ 1.89 crore considering twice. The ld. AR of the assessee submits that computation of income for AY 2015-16 is placed on record evidencing breakup profit and gain from business /profession and other income to show that income from Other Sources of ₹ 1.89 crore has been considered twice in the assessment order. The ld. AR of the assessee submits that the same should be deleted. 33. On the other hand, the ld. DR for the revenue in all fairness submits that this issue may be restored to the file of AO for verification of fact and for passing order, if required. 34. Considering the submission of both the parties, we remit these grounds of appeal to the file of AO, with the direction to verify the fact and rectify the order if the same income of ₹ 1.98 Crore is taxed twice in the assessment order. The assessee also directed to explain the fact and provide necessary information/document to the assessing officer for passing the order in accordance with law. 35. Ground No. 35 relates to deduction in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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