2015 (11) TMI 16 - AT - Income Tax

Indian Company Prevails in Tax Dispute, Significant Disallowances Overturned

The Tribunal ruled in favor of the assessee, an Indian company, in the assessment year 2006-07. It allowed the appeal, deleting significant disallowances ... Disallowance of 50% of purchase value of second hand machineries - Transfer pricing adjustment - Held that:- When the Transfer Pricing Officer has failed to refer the valuation to the DVO and on the contrary has proceeded to quantify the value of the machineries at 50% by adopting a method which is not in conformity with the statutory provisions, in our view, the matter cannot be restored back to him again for giving him a second innings. Considering the fact that 50% disallowance made out of the purchase value of machineries is without any basis and in violation of statutory provision, we are inclined to delete the addition made on account of adjustment made by the Transfer Pricing Officer by disallowing 50% of purchase value of second hand machineries. - Decided in favour of assessee. Cost sharing arrangement towards information technology, commercial, finance, legal and administrative support - Transfer Pricing determined the arm’s length price of the cost sharing arrangement at “NIL” on the basis of certain general and sweeping observation - Held that:- Determination of arm’s length price at “NIL” without following the method prescribed under the statute is legally unsustainable. The DRP, in our view, has also upheld the determination of arm’s length price at “NIL” in a mechanical manner without proper application of mind. It is pertinent to mention here that in the immediately succeeding year i.e., assessment year 2007–08, the Transfer Pricing Officer, while considering the issue relating to determination of arm’s length price of similar cost sharing arrangement and I.T. support, has disallowed 20% of the total cost incurred by the assessee. This itself shows that the Transfer Pricing Officer accepts the fact that the A.E. has provided certain services to the assessee and the assessee has availed such services. In view of the aforesaid, we hold that the determination of arm’s length price of the cost sharing arrangement and I.T. support cannot be taken as “NIL” and the cost incurred by the assessee on actual basis deserves to be allowed. We order accordingly. - Decided in favour of assessee. Disallowance of depreciation on goodwill - Held that:- In view of the observations of the Co–ordinate Bench of the Tribunal in assessee’s own case for the preceding assessment year, on materially identical facts, we have no hesitation in allowing assessee’s claim of depreciation on goodwill. Insofar as the learned Departmental Representative’s contention that goodwill having not been specifically included in Explanation 3(b) to section 32 of the Act, depreciation is not allowable, we have to observe, the issue is no more res integra in view of the Hon’ble Supreme Court’s decision in SMIFS Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT), wherein in no uncertain terms it has been held that goodwill being in the nature of any other business or commercial rights is an intangible asset under Explanation 3(b) to section 32(1) of the Act.- Decided in favour of assessee. Enhancing the value of closing stock of raw material by the amount of unutilized CENVAT credit - Held that:- If any adjustment is required to be made in terms with section 145A, effect to the same should be given irrespective of any consequences on the computation of income for tax purposes. The Court held for giving effect to section 145A of the Act, if there is change in the closing stock of the relevant previous year, then there must necessarily be a corresponding adjustment made in the opening stock as on the beginning of the relevant previous year. The aforesaid view was accepted in the case of CIT v/s Mahalaxmi Glass Works Pvt. Ltd., [2009 (4) TMI 182 - BOMBAY HIGH COURT]. In the present case, since the assessee has not made any adjustment to the opening stock by including the CENVAT credit, there is no need to make adjustment to the closing stock only by including the unutilised CENVAT credit. On the flip side, if adjustment is made to the closing stock, then corresponding adjustment has to be made to the opening stock of raw material for the next year. In either case, it will be revenue neutral. Hence, in our view, the adjustment made by the Assessing Officer and confirmed by the learned CIT(A) is not sustainable. Accordingly, we delete the same - Decided in favour of assessee. Issues Involved:1. Disallowance of 50% out of purchase value paid for machinery from the A.E.2. Disallowance of amount paid towards cost sharing arrangement and IT support.3. Disallowance of depreciation on goodwill.4. Enhancement of the value of closing stock of raw material by the amount of unutilized CENVAT credit.5. Levy of interest under section 234B and 234C.6. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Disallowance of 50% out of purchase value paid for machinery from the A.E.:The assessee, an Indian company and a wholly owned subsidiary of Koch Glistsch, Mauritius, engaged in manufacturing mass transfer equipment, filed its return of income for the assessment year 2006-07. During the assessment, the Transfer Pricing Officer (TPO) noticed that the assessee purchased second-hand machinery from its A.E. worth Rs. 98,59,634 and Rs. 1,24,272. The TPO questioned the valuation and disallowed 50% of the purchase value due to a lack of detailed valuation basis. The Dispute Resolution Panel (DRP) upheld this disallowance.The Tribunal observed that the assessee provided a valuation report from an approved valuer, which the TPO did not adequately refute or refer to a Departmental Valuation Officer (DVO). The Tribunal ruled that the TPO's ad-hoc disallowance of 50% was not justified without a proper valuation method or comparable transactions. The disallowance was deleted, and the ground was allowed in favor of the assessee.2. Disallowance of amount paid towards cost sharing arrangement and IT support:The assessee paid Rs. 33,72,714 and Rs. 8,21,370 for cost sharing and IT support services to its A.E. The TPO determined the arm's length price (ALP) of these transactions at 'NIL,' alleging insufficient evidence of services received. The DRP upheld this determination.The Tribunal found that the TPO did not dispute the existence of cost-sharing agreements or the actual payment but failed to follow any prescribed method to determine the ALP. The Tribunal noted that in the subsequent year, the TPO accepted similar transactions with a 20% disallowance, indicating acknowledgment of services received. The determination of ALP at 'NIL' was deemed unsustainable, and the cost incurred was allowed.3. Disallowance of depreciation on goodwill:The assessee acquired the business of Savli unit from Topack Industries, apportioning Rs. 13,30,31,000 towards goodwill and claimed depreciation of Rs. 72,47,405. The Assessing Officer disallowed this, stating goodwill is not an intangible asset under Explanation 3(b) to section 32 of the Act. The DRP upheld this view.The Tribunal referred to its previous decision in the assessee's case for AY 2005-06 and the Supreme Court's ruling in CIT v/s SMIFS Securities Ltd., which recognized goodwill as an intangible asset eligible for depreciation. The disallowance was deleted, and the ground was allowed.4. Enhancement of the value of closing stock of raw material by the amount of unutilized CENVAT credit:The Assessing Officer added Rs. 1,04,59,372 to the closing stock for unutilized CENVAT credit, which the CIT(A) upheld. The assessee argued that it accounted for purchases net of CENVAT credit, making the adjustment unnecessary.The Tribunal held that adjustments to closing stock should be mirrored in the opening stock to avoid revenue neutrality, as established by the Delhi High Court in CIT v/s Mahavir Aluminum Ltd. and accepted by the Bombay High Court in CIT v/s Mahalaxmi Glass Works Pvt. Ltd. The addition was deleted.5. Levy of interest under section 234B and 234C:Both parties agreed that the levy of interest under sections 234B and 234C is consequential. The Tribunal directed the Assessing Officer to give consequential effect while recomputing the income.6. Initiation of penalty proceedings under section 271(1)(c):The ground related to the initiation of penalty proceedings was deemed premature and not maintainable at this stage. The ground was dismissed.Summary:The Tribunal allowed the assessee's appeal for AY 2006-07, partly allowed the appeal for AY 2007-08, and dismissed the Revenue's appeal for AY 2007-08. The significant disallowances and adjustments made by the TPO and upheld by the DRP were deleted, favoring the assessee.