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TMI Blog2024 (5) TMI 1473X X X X Extracts X X X X X X X X Extracts X X X X ..... er Pricing Officer (hereinafter referred to as 'the Learned TPO') under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') and under section 92CA(3) read with section 144C(5) of the Act respectively, the final assessment order dated April 29, 2022 passed by the Learned Assessing Officer (hereinafter referred to as 'Learned AO' or 'Ld. AO') under section 143(3) read with section 144C and section 144C(5) of the Act and the Directions of the Hon'ble Dispute Resolution Panel (hereinafter referred to as 'Hon'ble DRP') dated February 18, 2022 for the said assessment year 2017-18 are contrary to the provisions of law and erroneous on the facts of the case and are liable to be set aside and/or quashed. Ground 2: That on the facts and in the circumstances of the case, the final assessment order dated April 29, 2022 passed by the Learned AO is invalid and bad in law since the Computation Sheet and the Notice of demand under section 156 of the Act have not been served upon the appellant. Ground 3: That on the facts and in the circumstances of the case, the final assessment order dated April 29, 2022 passed by the Learned AO is invalid since it does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant's self-generated asset. Ground 5(a): That further and in any event and without prejudice to the grounds taken hereinabove, the Learned AO grossly erred in making an arithmetical error in computation of business income at Rs. 7,83,74,814/- instead of Rs. 5,43,83,696/- in the final assessment order dated April 29, 2022. Ground 5(b): That further and in any event and without prejudice to the grounds taken hereinabove, the Learned AO grossly erred in making an arithmetical error in computation of assessed income at Rs. 14,76,67,699/- instead of Rs. 6,92,92,885/- in the final assessment order dated April 29, 2022. Ground 6: That further and in any event and without prejudice to the grounds taken hereinabove, the Learned AO grossly erred in computing demand of Rs. 5,01,12,510/- in case of the appellant for the assessment year under consideration, as appearing on the income-tax portal. Ground 7: That further and in any event and without prejudice to the grounds taken hereinabove, on the facts and in the circumstances of the case, it is apparent that the authorities below erred in not allowing credit for taxes deducted at source. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions even if they are in different sectors is wholly arbitrary, illegal, without any justification and/or basis and perverse. Ground 15(a): That the authorities below erred in making a transfer pricing adjustment of Rs. 36,30,977/- on account of intra-group services. Ground 15(b): That the purported finding of the authorities below that the authorized representative of the appellant did not object to the proposed reduction of the mark-up @ 3 percent for determining the arm's length price for the receipt of IT services is wholly arbitrary, erroneous, unreasonable and perverse. Ground 15(c): That the authorities below completely ignored the detailed submissions made by the appellant in this behalf duly supported by a robust economic analysis and the Report of an independent auditor. Ground 16: That on the facts and in the circumstances of the case, the Ld. AO grossly erred in initiating penalty under section 270A of the Act. Ground 17: That the appellant craves leave to add and / or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal." 2.1. The assessee has rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Learned AO in the scrutiny assessment for the assessment year 2015-16, relevant to the financial year 2014-15, being the year of acquisition, and the appellant was thereafter entitled to depreciation on the opening WDV in subsequent years. Ground 4(e): That further and in any event and without prejudice to the grounds taken hereinabove, the authorities below failed to appreciate that the said claim of depreciation on goodwill, being an intangible asset within the meaning of Explanation 3(b) to section 32(1) of the Act, is allowable in view of the decision of Hon'ble Supreme Court in the case of CIT, Kolkata v. Smifs Securities Limited, reported in (2012) 348 ITR 302 (SC). Ground 4(f): That further and in any event and without prejudice to the grounds taken hereinabove, the authorities below grossly erred in disallowing the claim of depreciation on opening WDV of goodwill as if the instant case was one of amalgamation or succession and by incorrectly placing reliance on the order of Bangalore Bench of the Hon'ble Tribunal in the case of United Breweries Ltd v/s Addl CIT, Range-12 Bangalore, reported in [2016] 76 taxmann.com 103 (Bangalore - Trib.). Ground 4(g): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ): That on the facts and in the circumstances of the case, the authorities below erred in rejecting the capacity utilisation adjustment of Rs. 6,31,47,981/- made for under-utilization of installed capacity while computing the margin of the appellant. Ground 11(b): That the purported findings of the authorities below that the idle capacity should not be considered to be an abnormal event requiring adjustment or that the claim of underutilization had not been explained with any reliable evidence or any supporting documents/data or any auditor certificate are wholly arbitrary, illegal, without any justification and/or basis and perverse. Ground 12(a): That the authorities below erred in considering foreign exchange loss of Rs. 2,49,62,367/- as operating expense while computing the margin of the appellant. Ground 12(b): That the Learned TPO did not carry out the directions of the Hon'ble DRP with respect to the foreign exchange loss. Ground 13(a): That the authorities below erred in rejecting adjustment of Rs. 3,71,81,824/- made for the purpose of normalizing the impact of non-conformance cost over runs on the margin of the appellant. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has raised additional grounds of appeal for both the Assessment Years and has prayed that in view of the judgments of the Hon'ble Supreme Court in the case of NTPC Ltd. v. CIT reported in (1998) 229 ITR 383 (SC) and Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688 (SC), the additional grounds may be admitted. In view of the settled judicial pronouncements, as the issues go to the root of the matter, we admit the same. 4. The assessee has raised the following additional ground of appeal for Assessment Year 2017-18:- "1. That on the facts and circumstances of the case and in law the Ld. TPO / DRP erred in selecting BGR Energy System Ltd. (Seg.) as a comparable company not appreciating that the company is primarily engaged in construction and maintenance of power plants and is therefore not an appropriate comparable in terms of Rule 10B (2) of the Rules for benchmarking the international transactions undertaken by the appellant, a company engaged in providing services primarily to companies engaged in metal sector. 2. That on the facts and circumstances of the case and in law the Ld. TPO/DRP erred in selecting Engineers India Ltd. as a comparable not appreciating that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment Year 2017-18 was furnished on 30/11/2017 declaring Nil income and current year's loss at Rs. 113,76,18,808/- under the normal provisions and book profit u/s 115JB of the Act at a loss of Rs. 7,22,03,084/-. Assessee subsequently revised the return on 13/09/2018 declaring loss of Rs. 113,97,95,930/-. Case selected for scrutiny through CASS for various reasons mentioned in the draft order u/s 144C of the Act. Since the assessee entered into international transactions with Associate Enterprise (AE) during the year and Form 3CEB stood submitted, reference was made to the ld. Transfer Pricing Officer (in short 'ld. TPO') u/s. 92CA(1) of the Act. The ld. TPO made certain upward and downward adjustments and further when the assessee approached the ld. DRP against the said proposed adjustment by the ld. TPO, assessee got part relief. Thereafter, the ld. Assessing Officer prepared the final assessment order making various additions/disallowance along with TP adjustments as confirmed by the ld. DRP. 7. Aggrieved the assessee is now in appeal before this Tribunal. 8. The ld. Counsel for the assessee argued at length on all the issues raised in the grounds of appeal re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee or any other person, on or after 15/10/2019, unless a computer-generated DIN has been allotted and is duly quoted in the body of such communication. When the ld. Counsel for the assessee was confronted with the fact that when impugned order was communicated to the assessee on the e-portal along with attachment of intimation letter duly containing the DIN No. , how can the impugned order can be held to be bad in law for not mentioning the DIN in the body of the order. Though reliance was placed on various judgments, but when the ld. Sr. Counsel for the assessee was confronted with the CBDT Circular, referring to the body of such communication and in the instant case, communication of the intimation letter which had attachment of the impugned order, the ld. Assessing Officer has duly complied to the directions given under the CBDT Circular to which no satisfactory reply could be filed and at this juncture, the ld. Sr. Counsel requested for not pressing this legal ground challenging the sanctity of the impugned order for non-mentioning of DIN. Accordingly, Ground No. 3 raised for Assessment Year 2017-18 and 2018-19 are dismissed as not pressed. 13. In Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the amalgamating company. Reliance was placed by the ld. AO on decision of the ITAT Bangalore Bench in the case of United Breweries Ltd vs ACIT 76 taxmann.com 103 (Bang Trib.). 13.2. Before us, the ld. Counsel for the assessee submitted that the claim of the assessee that residual paid to Siemens Ltd. over and above the value attributable to the net asset is in the nature of goodwill only and is supported by the ratio laid down by the judgment of the Hon'ble Apex Court in the case of CIT vs Smifs Securities Ltd 348 ITR 302 (SC) wherein the assessee, being the amalgamated company, claimed depreciation on goodwill acquired pursuant to/ as a result of amalgamation of a company, viz., YSN Shares and Securities Private Limited. The assessee claimed depreciation on the extra consideration paid over the value of net assets, by treating such excess consideration to be in the nature of goodwill, being paid towards reputation that the amalgamating company was enjoying in order to retain its existing clientele. In these facts, the Hon'ble Supreme Court, upholding the claim of depreciation on goodwill in the hands of the amalgamated company, held as under: ".................. It was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding..........................................." (emphasis supplied) 13.3. Similar view was taken by the Hon'ble Delhi High Court in the case of Triune Energy Services Private Limited vs DCIT 237 Taxman 230 (Del), wherein the assessee purchased business of another company as going concern by way of slump sale. The amount paid over and above net value of assets was capitalized as goodwill. The assessing officer treated the transaction in nature of succession and did not admit the assessee's claim for depreciation. On appeal before the Hon'ble High Court, 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 business of another as going concern. 13.4. The Hon'ble High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and whether depreciation on 'goodwill' is allowable under the said section" in favour of the Assessee. 13. Goodwill is an intangible asset providing a competitive advantage to an entity. This 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. ........................ 19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill. 20. In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." 14.1. On going through the above proviso, we note that the same refers to the assets already standing in the books of amalgamating company/de-merged company and that the depreciation claim, shall not exceed in any previous year the amount calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act. 16. Under the 'block of assets' concept, it is now settled law that once an asset enters into the block, it loses its independent identity. The Delhi High Court in the case of Bharat Aluminum Co Ltd [2010] 187 Taxman 111 (Delhi) held that once asset enters the block and forms part of opening WDV, claim of depreciation cannot be individually examined qua specific assets forming part of the block. The High Court held as under: "Prior to the introduction of new concept of block of assets with effect from 1-4-1988, the depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block of assets and allowability of depreciation on such a block. The rationale behind such a provision is contained in Circular No. 469, dated 23-9- 1986 issued by the Central Board of Direct Taxes. Intention behind these provisions is apparent. Once the various assets are clubbed together and become block of assets within the meaning of section 2(11), for the purpose of depreciation it is one asset. Every time a new asset is acquired, it is to be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which it is first brought into use." (emphasis supplied) 17. Similar view was taken by the Delhi High Court in the case of CIT vs Oswal Agro Mills Ltd 341 ITR 467 (Del), wherein the Hon'ble Court held that once an asset enters the block of asset, it losses its identity and depreciation has to be allowed on entire block of assets. 18. Specific reliance is also placed on the decision of the Bombay High Court in the case of DIT vs HSBC Asset Management (I) (P) Ltd 228 Taxman 365 (Bom), wherein the High Court affirmed the view taken by the Tribunal that once an asset forms part of block of asset and depreciation on the same has been allowed in the previous years, the assessing officer in subsequent years cannot alter or examine the correctness of the opening written down value of block of asset and depreciation on consistent basis shall be allowed in all the years. The relevant extracts of the decision are reproduced hereunder: "9. Having perused this Appeal Memo including the impugned orders, we are of the opinion that the Delhi High Court judgment has been delivered on 5th November 2012 and the impugned order was passed on 15th June 2011. The Tribunal has essentially based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ials available on record. The facts of the case have been duly elaborated in the preceding paragraphs which are not in dispute. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience. Admittedly, the assessee claimed the depreciation 1st time on the intangible assets acquired in the scheme of amalgamation at Rs. 2,53,45,655.00 in the assessment 2006-07. The assessee carried forward the written down value to the year under consideration under the intangible block of assets and accordingly claimed depreciation thereon as per the provisions of law. As such, the claim of the assessee for the depreciation was accepted by the Revenue in the immediate preceding assessment year 2006-07. No action was taken by the Revenue under section 263 and 147 of the Act disputing the deduction allowed to the assessee for the depreciation on the intangible assets acquired by it in the scheme of amalgamation. However, there was no information brought before us whether there was any assessment under section 143(3) of the Act pertaining to the assessment year 2006-07 though the assessee before the learned CIT (A) has submitted as under: "The depreciation on goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 5 for AY 2017-18 and Ground No. 6 for AY 2018-19, is against the error in computation of business income and assessed income in final assessment order. The only prayer made is that for the purpose of calculation, the matter may be restored to the ld. AO to compute the business income and assess the income of the assessee correctly. The ld. D/R has raised no objection to this request of the ld. Counsel for the assessee. Accordingly, Ground No. 5 for AY 2017-18 and Ground No. 6 for AY 2018-19 are allowed for statistical purposes. 23. The common Ground No. 6 for AY 2017-18 and Ground No. 7 for AY 2018-19, is against the error in computation of demand raised by the department. The ld. Counsel for the assessee submitted that the demand, as appearing on the income-tax portal for both AYs, has erroneously been computed and prayed that the issue be set aside to the file of the ld. AO for computing the demand correctly and in accordance with law. The ld. D/R has raised no objection to this request of the ld. Counsel for the assessee. Accordingly, Ground No. 6 for AY 2017-18 and Ground No. 7 for AY 2018-19 are allowed for statistical purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding services, AEs charged service free at cost + 3% basis. Though the ld. TPO has accepted that the services have been rendered by the AE but on observing that such mark-up has been charged on the third party cost also, the same tantamounts to double mark-up because on one hand, the third party had its mark-up and again AE has charged his mark-up of 3%. During the course of hearing before the ld. TPO when the ld. TPO proposed that this addition of mark-up on third party cost needs to be reduced for determination of ALP, the ld. Counsel for the assessee did not object and accordingly the ld. TPO proposed the adjustment by reducing 3% mark-up on the payments made for receipt of IT services. Before us, the ld. Counsel for the assessee has not made any reference to the mark-up on the third party cost, however, reference has been made to Section 92C(2) of the Act, which provides that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main grounds/additional grounds relating to exclusion/inclusion of comparables and fate of the remaining grounds shall be decided accordingly by the ld. AO as the matter would be restored to the file of the ld. AO for necessary calculation of the mean PLI as per our decision infra. We will first take up the additional grounds of appeal for AY 2017-18. 28.1. So far as the inclusion and exclusion of comparables is concerned, the only grounds remaining to the dealt are Ground No. 14(a) & 14(b) for AY 2017-18 and Ground Nos. 15(a) to 15(c) for AY 2018-19. So far as the common grounds raised for exclusion of Power Mech Projects Ltd. is concerned, we on going through the records notice that the assessee itself has considered Power Mech Projects Ltd. as a comparable in both the captioned years. However, before us, the assessee has raised this ground that he has wrongly selected Power Mech Projects Ltd., as a comparable because they both work in different areas. We observe that Power Mech Projects Ltd., is engaged in the business of construction of power plant, providing integrated services in erection, testing and commissioning of boilers, turbines and generators and balance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed by the Government of India and is under the administrative control of Ministry of Petroleum and Natural Gas. It is an admitted fact that Government owned and controlled companies have a separate style of working because the public interest is of foremost concern. Further such companies enjoy the support of the Government in relation to flow of business and funds and have different business model. The Hon'ble Delhi High Court in the case of International SOS India P. Ltd (ITA No. 454/2016) held that Public Sector Companies cannot be regarded as an appropriate comparable for the purpose of undertaking benchmarking analysis. Similar view was taken by the Hon'ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt Ltd (ITA No. 2218/2013) upheld the rejection of Engineers India Ltd. as a comparable on the basis that it is a Govt. owned company. 30. Respectfully following the same, we are inclined to accept the contentions of the ld. Counsel for the assessee and hold that Engineers India Ltd., should not be included as a comparable for calculating the profit level indicator i.e., the Average OP/OC and Average OP/OR. 31. Now, we take up BGR Energy Syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than that of the assessee company and, therefore, the ld. TPO has applied turnover filter and has not considered High Quality Steels Ltd. as a comparable. The gross revenue of High Quality Steels Ltd., for the FY 2016-17, is Rs. 9.24 Crores (approx.) whereas that of the assessee company is Rs. 611.12 Crores. This fact clearly indicates that there is a vast difference between the turnover and the level of business activities carried out by both these concerns. Had there been a difference of turnover ranging between 10%- 20% then also, it might have been considered but here the turnover of the assessee company is almost 66 times of High Quality Steels Ltd. and, therefore, level of business dealing with the buyers and vendors, geographical location of businesses, strategy of fixing the price for sales as well as the commanding of purchase price since the same varies on the basis of assessee's belief would certainly be different for both the concerns i.e., the assessee having huge turnover and that of High Quality Steels Ltd. with a very less turnover and which, therefore, makes them unfit for the purpose of comparison for determination of PLI. Thus, we fail to find any infi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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