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TMI Blog2015 (12) TMI 1842X X X X Extracts X X X X X X X X Extracts X X X X ..... emical ingredients for producing different type of Polymethanes catering to the needs of various industries. For assessment year 2010-11, the assessee filed its return of income on 14/10/2010 declaring income of Rs. 758, 840, 928/-. The return of income was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessee had reported international transactions in Form No. 3CEB and in order to determine the Arm's Length Price ('ALP') thereof, the Assessing Officer ('AO') made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO") after obtaining the approval of the CIT-10, Mumbai. The Transfer Pricing Officer vide his order under section 92CA(3) of the Act proposed an adjustment of Rs. 5, 26, 86, 111/- to the Arm's Length Price in respect of the international transactions on account of corporate cost allocation charges paid by the TE and PU divisions of the assessee company to its Associated Enterprise. The Assessing Officer proceeded to complete the draft order of assessment under section 143(3) r. w. s. 144C of the Act vide order dated 12/3/2014, wherein the income of the assessee was determined at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 2. 1 The learned AO erred not following the directions issued by the DRP to allow depreciation on goodwill under section 32(1)(ii) of the Income-tax Act. GROUND NO. 3 Disallowance of depreciation on intangibles 3. 1 The learned AO/DRP erred in disallowing depreciation of Rs. 5, 13, 52, 735/- claimed by the Appellant on the intangible asset viz. , material supply contracts and distribution network under section 32(1)(ii) of the Act. 3. 2 The learned AO/DRP erred in holding that the aforementioned intangible assets viz. material supply contracts and distribution network are not akin to the intangible assets referred to in the provisions of section 32(1)(ii) of the Act and hence erred in holding that such aforementioned are not eligible for depreciation. GROUND NO. 4. Disallowance under section 14A of the Act. 4. 1 The learned AO/DRP has erred in disallowing a sum of Rs. 47, 24, 097 under section 14A read with rule 8D of the Income-tax Rules, 1962 without appreciating the facts of the case and law applicable thereto. 4. 2 The learned AO/DRP erred in not appreciating that investments made were by way of strategic investments insubsidiary. 4. 3 The learned AO/DRP er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on account of corporate service charges paid by the assessee to its Associated Enterprise's. 4. 2 Before the DRP, the assessee submitted that it had paid corporate service charges amounting to Rs. 1, 84, 20, 226/- and Rs. 3, 87, 70, 885/- towards services claimed to be utilized from the Associated Enterprise in the PU and TE divisions of the assessee company respectively. As per Agreement dated 1/7/2008, executed with Huntsman International LLC. the services were stated to be Legal Services, Purchasing, Transporting and Logistics, Travel Co-ordination Services, Treasury and credit, Public Relations, Internal control and Internal Audit, Compliance and Ethics, Tax administration support services and Human Resources services. The DRP after considering the submissions of the assessee and the order of the Transfer Pricing Officer, upheld the order of the Transfer Pricing Officer by following its own findings and decisions for the earlier assessment year 2009-10, as it was of the view that the facts of the issue, in this year under consideration, i. e. assessment 2010-11, were similar to those of the earlier year. 4. 3. 1 Before us, the Ld. Representative for the assessee reiterat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 corporate expenses of Rs. 46, 299, 732/- as an adjustment U/s 92CA. We have considered the submissions filed by the applicant and found that the assessee failed to submit even a single evidence to prove that it had received any services from its AE in lieu of which the payment was made to the AE in spite of being given a number of opportunities by the TPO. Thus the arm's length price of allocation of corporate expenses paid was rightly treated as Rs. Nil by the TPO due to inadequacy of the assessee's argument and the entire payment of allocation of corporate expenses of Rs. 46, 299, 732 /- was treated as an adjustment U/s 92CA. We agree with the order of the TPO and the addition proposed on this count in the draft order. 5. 2. 2 The assessee has submitted that TPO has reworked the margin calculation incorrectly as following errors were fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 year data for the comparable companies selected by him for the year ended 31 st March 2009 as against three year data used by the assessee. We have considered the order of the TPO and the submissions filed by the applicant and found that the action of the TPO is as per the provisions of Rule 10B( 4) of the Income Tax Rules, 1962. Thus, we confirm the action of the TPO in this regard. 5. 2. 6 Regarding claim of standard deduction of 5% from the arm's length price, we are unable to agree with the assessee, in view of the amendments carried out in section 92C by the Finance Acts 2009 and 2012. Further, with due respects to the Hon'ble ITAT, there have been several decisions rendered by different benches of the ITAT holding that the +/- 5%)variation is not to be allowed as standard deduction[e. g. DCIT Vs Roche D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of equity and justice, remit this matter of the computation of the ALP of the international transactions on account of the payment of corporate service charges by the assessee to its AE, to the file of the DRP for fresh adjudication by way of a speaking and reasoned order after affording reasonable opportunity to the assessee of being heard. It is accordingly ordered. Consequently, ground no. 1 is treated as allowed for statistical purposes. 5. Ground no. 2 (2. 1) : Disallowance of Depreciation on goodwill 5. 1 In this ground, the assessee contends that the AO erred in not following the directions issued by the DRP to allow the assessee depreciation on goodwill u/s. 32(1)(ii) of the Act. The learned AR was heard in support of the ground raised and requested that directions in this regard be issued to the AO. 5. 2 The learned DR also submitted that directions in this regard may be issued to the AO to comply with the directions of the DRP. 5. 3 We have heard both parties and perused the material on record. We find from a perusal of the impugned order of assessment dated 31. 12. 2014 for A. Y. 2010-11 that the AO has not considered and allowed the assessee depreciation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions section 32(1)(ii) wrongly. It was submitted that the judicial pronouncements cited by the assessee and referred to by the co-ordinate bench are not applicable to the facts of the case on hand as they are factually different. 6. 3. 1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. We find that the very same issue of allowability of the assesee's claim of depreciation on intangible assets viz. Material supply contracts, brand usage and distribution networks was considered at length by a coordinate bench of this Tribunal in ITA Nos. 3916 & 1539/Mum/2014 in the assessee's own case for A. Ys. 2007-08 and 2009-10, wherein it has been held that the assessee is entitled to claim depreciation on intangible assets. The operative part of the order of the co-ordinate Bench for A. Y. 2007-08 at paras 2. 4 and 2. 4. 1 wherein the Tribunals findings have been rendered is extracted hereunder: " 2. 4. We have heard the rival submissions and perused the material before us. Before proceeding further, we would like to consider the cases dealing with intangible assets and Goodwill. In the case of Smifs S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring a business and commercial rights and it was comparable with trade mark, franchise, copyright etc. , referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation......Goodwill is not specifically mentioned in section 32(1)(ii) of the Income-tax Act, 1961. Depreciation is allowable not only on tangible assets covered by clause (i) of section 32(1), but on the intangible assets specifically enumerated in clause (ii) and such of the other business or commercial rights similar to the items specifically covered therein. " The Hon'ble Delhi High Court in the matter of Areva T and D India Ltd. (supra)has discussed the issue of depreciation to be granted on intangible assets. It has also discussed the facts of the case. Following are the finding of the court: The principle of ejusdem generis 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. For interpreting the expression "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the trade name and through the network created by the seller for sale in India were entitled to depreciation. In the case of Manipal Universal Learning Pvt. Ltd. (supra)the assessee had agreed in the sale agreement to the price of Rs. 51. 63 crores as the value of the SMU agency rights. On the very next day, it revalued such rights at Rs. 98, 73, 25, 000 and claimed depreciation on the revalued rights. The assessing authority held that the excess consideration paid over the value of the net assets was in the nature of goodwill paid for the future profits of the business. Therefore, he allowed depreciation only on the value mentioned in the agreement. The FAA affirmed the order of the AO. However, theTribunal allowed depreciation on the entire amount arrived at on revalua -tion including the value of goodwill. On appeal to the Hon'ble Karnataka 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free license to use trade-marks, domain names for a period of two years. Not only that the assessee got the distribution network. In short, the assessee got valuable business/commercial rights. Therefore, we are of the opinion that by entering into MCS and getting distribution network, the assessee had acquired business/commercial rights that were of the similar nature as mentioned in sec. 32(1)(ii) of the Act. Same is the case about use of brand name. The assessee had assigned value to various assets namely Fixed assets(Rs. 6. 68 crores), Intangible assets(Rs. 54. 94 crores), Goodwill(41. 87crores). We are of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisions of the Act. We have already held that business right, distribution network and brand usage fall in the same category of commercial rights mentioned in Section 32 of the Act. Therefore, we hold that assessee was entitled to claim depreciation on the intangible assets. Here, we would like to refer to the case of KEC International [(2010)-TIOL 478ITAT-Mum]. In that matter, the Tribunal has observed that in case of a slump sale the value adopted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee did not earn or receive any exempt dividend income during the year, no disallowance u/s. 14A of the Act could be made. 7. 1. 3 The Ld. Representative for the assessee submitted that the disallowance u/s. 14A of the Act r. w. Rule 8D was also not called for since the interest free funds available with the company were sufficient to meet the investment, then the presumption would arise that investments would be out of the interest free funds generated or available with the company. In support of this contention, the Ld. Representative for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (313 ITR 340). 7. 1. 4 The Ld. Representative for the assessee also submitted that since the investments were made in subsidiaries for strategic purposes and not for earning exempt income, disallowance u/s. 14A r. w. Rule 8D would not be attracted. In support thereof, the Ld. Representative for the assessee placed reliance on the decision of the Co-ordinate Bench of this Tribunal in the case of Garware Wall Ropes ( 65 SOT 86). 7. 2 Per contra, the Ld. Departmental Representative appearing for the Revenue strongly suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the aforesaid decisions of the Hon'ble Delhi High Court in the cases of Holcim India (P) Ltd. (supra) for assessment year 2008-09 and Cheminvest Ltd. (supra) we hold that since the assessee has not earned any exempt income in the year under consideration, i. e. assessment year 2010-11, no disallowance u/s. 14A of the Act can be made and accordingly delete the disallowance made in this regard by the authorities below. Consequently, Ground No. 4(1) raised by the assessee is allowed. Since assessee's Grievance is addressed, Ground s 4(2) and (3) are now academic in nature and are not being separately adjudicated. 8. Ground No. 5- Disallowance of Expenditure on payment basis u/s. 43B of the Act. 8. 1 The assessee contends that the authorities below erred in not allowing deduction for payment it made in connection with liabilities of CIBA Speciality Ltd. , taken over by way of slump sale. Before us, the Ld. Representative for the assessee submitted that the assessee had taken over the liabilities of CIBA Ltd. and that these being known liabilities of which the assessee had to bear the expenditure as per the agreement. It was also submitted that the authorities below had not q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings as alleged by the AO. We are of the opinion that once all the liabilities were taken over by the assessee in pursuance of the agreement, then to make payment of the agreed sums was a legal obligation and it was his duty to fulfill that obligation. It is also a fact that there is no doubt about the incurring of expenditure. In our opinion. Clauses (b) and (c) of the liability clause clearly indicate that the the assessee had taken over liabilities attributable to the prior period. So, the assessee was legally bound to make payments that were to be made by TE unit of the CIBA-India if it had not been acquired by the assessee. Here, we would like to refer to the case of T. VeerbhadraRao (supra). In the matter the Hon'ble Supreme Cout had held as under :- If a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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