TMI Blog2022 (2) TMI 1291X X X X Extracts X X X X X X X X Extracts X X X X ..... and additional evidence go to the root of the matter. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings. Acquisition of companies by the Assessee on Merger - Depreciation on Goodwill was claimed on account of Acquisition of business by the assessee on merger and on Slum sale basis - HELD THAT:- Goodwill arising on amalgamation, in the hands of amalgamated company is an intangible asset in terms of Section 32(1)(ii) of the Act and thus eligible for depreciation under the Act. The issue whether Goodwill arising on amalgamation is eligible for depreciation or not, is no longer Res-Integra. Further, it is not disputed by the Revenue that the assessee paid consideration which is said to be in excess of the fair value of assets taken over. See SMIFS SECURITIES LTD. [ 2012 (8) TMI 713 - SUPREME COURT] Allowance of depreciation generated as a result of amalgamation in the hands of amalgamated company needs depper judicial scrutiny especially in the light of the intent of the legislature to keep amalgamation a tax neutral scheme for companies and not to provide any scope to derive undue tax benefits. In particular he drew attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shadri, Advocate Revenue by: Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru ORDER Per N V Vasudevan, Vice President This appeal by the assessee is directed against the final Order of Assessment dated 29.10.2018, passed by ACIT, Circle 2, LTU, Bengaluru, under section 143(3) read with Section 144C of the Income Tax Act, 1961 (Act), in relation to AY 2014-2015. 2. The concise grounds of appeal filed by the assessee before the Tribunal reads as follows: I. GENERAL [Original GoA - No. 1] ISSUE GROUNDS OF APPEAL 1. Common Ground 1.1. The lower authorities erred in finalizing an order of assessment which suffers from legal defects such as being devoid of merits, contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such bad in law and is liable to be quashed II. TRANSFER PRICING [Original GoA - No. 2 - 15] ISSUE GROUNDS OF APPEAL 2. Common Ground [Original GoA - No. 2] 2.1. The lower authorities erred in making a transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nks Ltd. 6.2. The lower authorities erred in not considering the following companies that were identified by the Appellant as comparable to itself, in undertaking a comparability analysis for benchmarking and determination of ALP of the Appellant s margin in relation to its licensed manufacturing segment: (a) Easun Reyrolle Ltd; (b) Fine-Line Circuits; (c) Akasaka Electronics Ltd. 6.3. The lower authorities erred in arbitrarily holding that only such companies that are available in the search matrix of the Ld. TPO as on the day of his search, would qualify as comparable companies for benchmarking analysis. 7. Economic Adjustment 7.1. The lower authorities erred in not providing working capital adjustment that the Appellant is eligible to, in relation to its Licensed Manufacturing segment. 8. Proportionate adjustment 8.1. The lower authorities erred in determining the transfer pricing adjustment at the segment level, in relation to the Appellant s margin from its licensed manufacturing segment, without restricting su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is fictitious in nature and erroneously depriving the Appellant of its claim of depreciation thereon, under section 32 of the Act. 13.4. The lower authorities failed to appreciate the claim of depreciation under section 32 of the Act is a mandatory allowance goodwill arising on merger satisfied the conditions specified under section 32(1)(ii) of the Act, as certified in the tax audit report issued by Chartered Accountant. 14. Disallowance of spl. discount given to dealers under section 40(a) of the Act [Original GoA - No. 31-36] 14.1. The lower authorities erred in disallowing special discount of INR 43.25 Crores, given by the Appellant to dealers who are also its customers, under section 40(a) of the Act, without considering the sample copies of agreements furnished by the Appellant, in connection with the provision of the said discounts. 14.2. The lower authorities erred in not appreciating that the special discount is not in the nature of commission payments warranting deduction of tax at source under section 194H of the Act. 14.3. The lower authorities e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of the comparable companies was operating profit / operating revenue (OP/OR). The assessee chose 10 comparable companies from Prowess and Captaline Plus database and the profit margin of those 10 comparable companies were comparable with that of the assessee. Hence, the assessee claimed that the price received in the international transaction was at arm s length. 5. The TPO accepted 1 out of 10 comparable companies chosen by the assessee. The TPO also applied TNMM as the most appropriate method for determination of the ALP. The PLI chosen for the purpose of comparison was operating profit / operating cost (OP/OC). The TPO selected 8 other comparable companies and arrived at a set of 9 comparable companies. The average arithmetic mean of the 9 comparable companies was as follows: Sl No Company Name OP/OC 1 Kavveri Telecom Infrastructure Ltd. 16.23% 2 Centum Electronics Ltd. 13.80% 3 Veto Switchgears Cables Ltd. 11.11% 4 Bir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less: Provision for doubtful trade receivables 29192266 Less: Provision for doubtful loans and advances 8374830 Total Cost 5981963756 Operating Profit -47680929 OP/OC -0.80% OP/OR -0.80% As can be seen from the computation of OP/OR by the TPO, the TPO did not exclude Price adjustment of Rs. 278,025,432/- from the cost base and therefore the OP/OR or OP/OC computed by the TPO lower than what was computed by the Assessee. 7. Ultimately, the TPO computed the ALP and the consequent addition to be made to the total income is as follows: 9. Computation of Arm's Length Price: 9.1 The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure 'A' for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: Arm's Length Mean Margin on cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next aspect pointed out by the learned Counsel for the assessee was that the TPO fell into an error in disturbing the computation of OP/OR as done by the assessee. He pointed out that one of the items of cost which the assessee sought to exclude was purchase price adjustment of Rs.27,80,25,432/-. He made the following submissions as to why this adjustment was necessary: i. This adjustment is claimed in order to eliminate the effect of long-term depreciation in the Indian Rupee via-a-vis the foreign currencies in which the Assessee undertakes its regular business operations. The Assessee has significant transactions in foreign exchange and therefore such impact has a material impact on its profitability. ii. The Assesseee demonstrated in its TP documentation, based on an analysis of exchange rates over the past 10 financial years, that the fluctuation in the Indian rupee in FY 2013-14 was anomalous, and accordingly, a forex adjustment in the nature of an economic adjustment discussed under Rule 10B(3)(ii) of the IT Rules, is imperative. Reference in this regard was made to Appendix K of Assessee s TP Study Report [Pg. 692 of Paperbook Part b] and Form 35A [Pg.75 to 80 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges Segment. The assessee paid a sum of Rs.33,41,55,226/- to its AE. The assessee submitted that it received IS services from Tyco Electronics Corporation, USA, an AE, for which it made the payment. TE Group and its overseas entities, during the year under consideration, was in the business of manufacturing and distributing products and systems for a broad set of markets namely (a) Electronic components, (b) Network solutions, (c) Wireless Systems and (d) Undersea telecommunications. TE Group, being a global company, present in multiple countries, is required to have an integrated approach in its operations wherein the requirement of an ERP implementation arises. As TE Group did not have a uniform pre-existing ERP package that could cater to multiple entities having varying modules, hence the requirement of consistent ERP for the Group as a whole, which was decided to be SAP worldwide. Given the use of such services across the various entities in the Group, the costs pertaining to the same were charged to the respective entities based on the extent of the utilization. TE US' IT shared services center ( TEIS Shared Services organization') is the global organization that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and EDI applications. The charges pertained to licence fee/ usage fee for the software, hardware and other applications. In addition to the above, TE Group provides various other IT Infrastructure support services the details of which were also given to the TPO. 15. The TPO, however, did not accept the plea of the assessee. He held that in terms of Rule 10B of the Income Tax Rules, 1962 (Rules), the determination of ALP for providing intergroup services has to be decided either by applying the Comparable Uncontrolled Price (CUP) or TNMM. The TPO held that the transaction of rendering intergroup services has to be separately analyzed and he applied the CUP method as the MAM. The TPO thereafter held that there was no evidence that services were rendered by the AE for which the assessee made payment. In this regard, the AO observed as follows: Thus the Taxpayer's agreement says that the AE would charge for services only to the extent of the costs incurred in providing such services to the Taxpayer. The Taxpayer produced copies of invoices raised by the AE. But this invoice does not contain any details of services provided and costs incurred for each type of service except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. Before the Tribunal, the learned Counsel for the assessee has filed an application for admission of the following documents as additional evidence: SI No Particulars Page No 1 Report on Information Services received from Tyco Electronics Corporation, US 1- 55 2 Sample copies of related invoices 56 - 72 The learned counsel for the Assessee submitted that the allegation that no documentation / information was furnished by the Assessee before the lower authorities is incorrect. He gave the details of documents/information filed before the TPO in the following summary: IS charges are received pursuant to the Agreement for Support Functions entered with Tyco Electronics Corporation, USA, dated October 1, 2002 [refer Pg. 702 of Paperbook - Part B]; Corporate services rendered by Tyco electronics Limited, Switzerland, to TECIL primarily comprised of services in relation to (i) Financial Planning and analysis (ii) Treasury (iii) Taxes (iv) Legal and government affairs (v) corporate governance (vi) op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marelli Power-tain India (P.) Ltd.2 Supreme Court S.No. 67 Pg. 495 Magneti Marelli Powertain India (P.) Ltd 3 High Court, Delhi S.No. 68 Pg. 497 Bonfigioli Transmissions (P.) Ltd4 Tribunal, Chennai S.No. 71 Pg. 524 iii. Further, the margin for the distribution and services segments, which factors the above charges in the cost-base, were accepted to be at arm s length by the TPO. In view of this, the TPO cannot arbitrarily reject its aggregation only in respect of the license manufacturing segment. iv. Without prejudice, if the separate benchmarking of IS and corporate service charges is upheld, the same shall be excluded from the segment costs considered under the licensed manufacturing segment, for margin determining. In such event, the margin as computed in the TP order in this regard, at -0.80% will increase to 3%, as shown below: Particulars AS PER TP ORDER [Pg. 3 4] Ref. Amount (INR Crores) Operating Revenue A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question. which provides that where a transaction (international or specified domestic) continues for a period of more than one year, fresh documentation need not be maintained separately for each year, unless there is any significant change in either nature or terms of the transaction, assumptions made or other factor which could influence the transfer price. The principle of consistency in respect of a transaction undertaken across years with no change in the facts and circumstances, is well settled by the Hon ble SC. It was pointed out that this principle is also provided in rule 10D(4) of the IT Rules. 21. The learned Counsel for the assessee therefore submitted that the issue with regard to determination of ALP in respect of international transaction on payment of IS charges is also required to be set aside to the AO to be done afresh in the light of the submissions as made above in the light of the additional evidence now filed before the Tribunal. Learned DR however relied on the order of the TPO and the DRP but was of the view that the prayer of set aside to the AO in the light of the additional evidence may be considered by the Bench. 22. We have given a careful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e: 28.28 Cancellation of the Assessee s investment in equity shares of XOL Excess consideration treated as Goodwill 1.72 27.16 Total Goodwill 28.88 Depreciation u/s.32 of the Act @ 25% 7.22 Acqusition of Business on Slump Sale: On March 30, 2014, the Assessee purchased the Infocomm business unit of Raychem RPG Private Limited ( RRPGL ), a JV between TE Connectivity Group and the RPG Group, on a slump purchase basis under a Business Transfer Agreement ( BTA ). [BTA in Pg. 236 of Paperbook - Part A; Affirmative vote agreement in Pg. 314 of Paperbook - Part A; Note on accounting the acquisition in the Audited Financial Statements - Note No. 47 in Pg. 38 of Paperbook - Part A]. The said acquisition was accounted by the Assessee, as per the relevant accounting standard and generally accepted accounting principles. A summary of the said accounting is provided below: Particulars INR Cr. Basis Fair Value of net asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the swap ratio analysis report, evidences the basis for issue of shares to the shareholders of TESIL on merger of TESIL with the assessee. 27. It was submitted that Goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on amalgamation is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon ble SC in the case of Smifs Securities (Supra). It was submitted that the Hon'ble SC categorically held that, a reading of the words 'any other business or commercial rights of similar nature' in clause (b) to Explanation 3 of Section 32(1), indicates that goodwill would fall under the said clause. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Having considered the explanation that excess of consideration over the value of net assets acquired is to be considered as Goodwill in the hands of amalgamated company arising on amalgamation, laid down that such Goodwill is a depreciable asset. Therefore, both v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erger and slump sale was not on account of revaluation of assets by the assessee. Therefore, Goodwill recorded in the present case, on account of merger and slump sale, is not fictional in nature. It was submitted that the Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent Ays. Further, amendments were made in section 55 of the Act, in relation to the meaning of cost of acquisition etc. This amendment recognizes that depreciation on Goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. It was submitted that it would be evident from the above, that the intention of the legislature, that depreciation on Goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue arises under the following facts and circumstances. During the previous relevant to AY 2014-15, the Assessee incurred expenses (INR 43.25 Crores) in the nature of discounts, referred to as Special Discounts , to dealers who essentially its customers amounting. The same is disclosed under the nomenclature Commission in the P L A/c. The AO disallowed the same under section 40(a) of the Act for failure to deduct tax at source, alleging that it is in the nature of commission, warranting deduction of tax at source under section 194 of the Act. The Hon ble DRP confirmed the same, holding that special discount were rightly confirmed to be in the nature of commission since the assessee itself grouped the special discount under the head commission in its financials. 32. The learned counsel for the assessee submitted before the tribunal that the nature of the transaction is sale and not agency. It was submitted that the assessee appointed distributors for the purpose of sale and distribution of its products under various dealer agreements, with the following key features of the arrangement with its dealers/distributors: - The title to the goods, risks and rewards in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 194H of the Act. Reliance is placed on the decision of the Hon ble Bombay High Court in the case of Harihar Cotton Pressing Factory 9 39 ITR 594 (Bom), which held that there is a distinction between commission and rebate and therefore rebate cannot be treated as commission. iv. The learned counsel for the Assessee further relied on the following judicial precedents including that of the Hon ble Karnataka High Court and other Courts wherein it was held the provisions of section 194H are not applicable in the absence of principal-agent relationship between the parties: Decision Forum Ahmedabad Stamp Vendors Association10 Supreme Court 348 ITR 378(SC) Ahmedabad Stamp Vendors Association11 High Court, Gujarat 257 ITR 202 (Guj) Bharti Airtel Ltd12 High Court, Karnataka 372 ITR 33(Kar) Kerala State Stamp Vendors Association13 High Court, Kerala 282 ITR 7 (Ker) 33. It was submitted that the mere nomenclature does not determine the nature of transaction. In this regard i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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