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TMI Blog2021 (3) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... income. 3. Transfer Pricing Issues: 3.1 That on the facts and circumstances of the case and in law, the AO / DRP /transfer pricing officer ("TPO") have erred in disallowing payment of INR 90,936,248 by the Appellant to its associated enterprises on account of allocation of management and support charges incurred by the Appellant. 3.2 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding the international transaction of allocation of management and IT support charges to be not at arm's length in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10D of the Income-tax Rules, 1962 ("Rules"). 3.3 That on the facts and circumstances of the case and in law, the AO / TPO have not appreciated the business model, functional, asset and risk profile of the Appellant and have further erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules for the determination of the arm's length price ("ALP"). 3.4 That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in not appreciating the documentary evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding an opportunity of being heard, which is sine qua non as per section 144C(1 1) of the Act. 3.10 That on facts and circumstances of the case and in law, the directions are bad in law and void ab-initio as the DRP has erred in observing / directing that the management support and IT charges amounting to INR 90,936,248 are alternatively disallowable under section 37(1) of the Act, without passing a speaking order on the issue and providing an opportunity of being heard, which is sine qua non as per section 144C( 11) of the Act. 3.11 That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in undertaking separate benchmarking analysis for allocation of management and support charges, ignoring the fact that the reimbursements were benchmarked with the primary transaction using entity level Transactional Net Margin Method ("TNMM"). 4. CORPORATE TAX GROUNDS 4.1. That on the facts and circumstances of the case and in law, AO erred in making disallowance and DRP erred in upholding disallowance of INR 20,713,187 being depreciation claimed under section 32(1 )(ii) of the Act, on the amount of goodwill. 4.2 That on the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4.2, the same is also covered by the said decision of the Tribunal. 6. The Ld. DR relied upon the order of the TPO and DRP and further submitted that goodwill is not inclusive and hence the adjustment and the additions made by the TPO/A.O are just and proper. 7. We have heard both the parties and perused the material available on record. Since, Ground No. 1 & 2 are general. The same are not adjudicated upon. As regards Ground No. 3, 3.1 to 3.11, the same are dismissed as withdrawn. As regards Ground No. 4 & 4.1, the Tribunal in assessee's own case for A.Y. 2010-11 held as under:- "40. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, disallowed depreciation on goodwill on the ground that the assessee has not become the sole logistic service provider to IBM India, the value of workforce does not facilitate the smooth carrying on of the business of the assessee and the supplier contracts forming part of the acquisition agreement have expired in the previous year relevant to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as Rs. 28.11 Crores. The said assets and liabilities were recorded in the books of transferee at the same value as appeared in the books of the transferor. The balance payment of Rs. 16,58,76,000/- over and above the book value of net tangible assets, was allocated by the transferee towards acquisition of bundle of business and commercial rights, clearly defined in the slump sale agreement, compendiously termed as "goodwill" in the books of accounts, which comprised, inter alia, the following:- (i) Business claims, (ii) Business information, (iii) Business records, (iv) Contracts, (v) Skilled employees, (vi) knowhow. It is also observed that the AO accepted the allocation of the slump consideration of Rs. 44.7 Crores paid by the transferee, between tangible assets and intangible assets (described as goodwill) acquired as part of the running business. The AO, however, held that depreciation in terms of Section 32(1)(ii) of the Act was not, in law, available on goodwill. The CIT(A) and the ITAT approved the reasoning of the AO thereby holding disallowance of depreciation on the amount d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd.(supra) wherein it was held that intangible assets owned by the assessee and used for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly and separately. In this light, he held that the expression 'or any other business or commercial rights of similar nature' would include only such assets which are transferrable distinctly. Goodwill of a business, being, an intangible asset which cannot be transferred separately de hors the transfer of business, was, ergo, held to be not includible in the expression used in the provision to explain the unspecified intangible assets. In our considered opinion, this issue is no more res integra in view of the judgment of the Hon'ble Summit court in CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) in which it ITA No.1976/Del/2006 has been held: "that goodwill will fall under the expression 'or any other business or commercial rights of similar nature'" and, hence, qualifies for depreciation u/s 32(1) of the Act. We, therefore, answer the legal issue raised in the question before the Special bench in affirmative by holding, in principle, that depreciation is available on genuine goodwill." 46. The various other decisions relied on by the ld. Counsel for the assessee also support his case to the proposition that depreciation is allowable on goodwill. 47. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch in assessee's own case [supra]. 24. The relevant findings read as under: "40. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, disallowed depreciation on goodwill on the ground that the assessee has not become the sole logistic service provider to IBM India, the value of workforce does not facilitate the smooth carrying on of the business of the assessee and the supplier contracts forming part of the acquisition agreement have expired in the previous year relevant to the assessment year under consideration. According to the AO, the assessee has not acquired any business during the year and, hence, there is no question of making payment over and above for any commercial or business rights as defined under Explanation 3 to section 32(1). Further, the purchase price is not verifiable from any calculation or valuation report. According to the AO, there is decline in the business receipts even after paying so much on account of goodwill and, therefore, there is no justification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as "goodwill" in the books of accounts, which comprised, inter alia, the following:- (i) Business claims, (ii) Business information, (iii) Business records, (iv) Contracts, (v) Skilled employees, (vi) knowhow. It is also observed that the AO accepted the allocation of the slump consideration of Rs. 44.7 Crores paid by the transferee, between tangible assets and intangible assets (described as goodwill) acquired as part of the running business. The AO, however, held that depreciation in terms of Section 32(1)(ii) of the Act was not, in law, available on goodwill. The CIT(A) and the ITAT approved the reasoning of the AO thereby holding disallowance of depreciation on the amount described as goodwill. It was thus argued on behalf of the assessee Company that Section 32(1)(ii) would mean rights similar in nature as the specified assets, viz., intangible, valuable and capable of being transferred and that such assets were eligible for depreciation. On behalf of the respondent it was argued that applying the doctrine of noscitur sociis the expression "any other business or commercial rights of similar nature" used in Explanation 3(b) to Section 32(1) has to take colour from the precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd.(supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the judgment of the Hon'ble Summit court in CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) in which it ITA No.1976/Del/2006 has been held: "that goodwill will fall under the expression 'or any other business or commercial rights of similar nature'" and, hence, qualifies for depreciation u/s 32(1) of the Act. We, therefore, answer the legal issue raised in the question before the Special bench in affirmative by holding, in principle, that depreciation is available on genuine goodwill." 46. The various other decisions relied on by the ld. Counsel for the assessee also support his case to the proposition that depreciation is allowable on goodwill. 47. We further find the allegation of the AO that the year-wise revenue from logistic services to IBM India is showing a declining trend is also incorrect. A perusal of the chart at para 32 of this order shows that there is, in fact, increase of revenue from IBM. 48. In view of the above discussion and relying on the decisions cited (supra), we hold that the assessee is entitled to depreciation on goodwill. The ground raised by the assessee is accordingly allowed." 25. Respectfully following the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X
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