2017 (1) TMI 1615 - AT - Income Tax

Tribunal decision: Assessee appeal partly allowed, Revenue appeal dismissed. Remanded issues on service charges, depreciation. Disallowance under section 14A deleted.

The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the Revenue. The issues related to corporate service charges and ... Entitled to depreciation u/s 32(1)(ii) with respect to the intangible assets - Held that:- As decided in assessee's own case [2015 (9) TMI 286 - ITAT MUMBAI] Distribution network rights acquired by the assessee have been found to be in the nature of ‘business or commercial rights’ for the purposes of section 32(1)(ii) of the Act. Although the Ld. CIT-DR has canvassed that the said finding is erroneous, so however, no specific error has been sought to be made out. - Decided in favour of assessee Depreciation on goodwill - Assessee had acquired Textile effects business from CIBA Speciality Ltd. also the Polyurethane business from ICI Ltd. in the earlier assessment years - Held that:- For both the aforesaid acquisition, assessee had paid a lumpsum consideration and the portion of purchase consideration, which was in excess of the value of tangible and intangible assets was treated as ‘goodwill’. The DRP noted that assessee had made the claim for depreciation on goodwill in the course of assessment before the Assessing Officer but there was no discussion in the draft assessment order. The DRP also noted that in assessment year 2006-07, the Tribunal in assessee’s own case had allowed the claim of the assessee and similar position prevailed in assessment year 2009-10, wherein the Tribunal allowed the claim too - Decided in favour of assessee Deduction u/s 43B - certain liabilities pertaining to the Textile effects division taken over from CIBA Speciality Ltd. - Held that:- , the direction of the DRP is based on the order of the Tribunal for assessment year 2007- 08, which continues to hold the field and, therefore, no fault can be found with the said decision of the DRP. Even otherwise, we find that the said plea of the Revenue is misconceived because in the final assessment order passed by the Assessing Officer no such deduction has been allowed. The Assessing Officer notes in para 14 of the assessment order that no such claim u/s. 43B of the Act has been put forth and, therefore, no deduction was warranted on this issue. In view of the said discussion in the assessment order, it is quite clear that the said Ground is otherwise also misconceived - decided against revenue Transfer pricing adjustment - international transactions on account of corporate service charges paid by the assessee to its associated enterprise - matter remitted back for reconsideration Addition u/s 14A - Held that:- No disallowance under section 14A can be made if there is no exempt income actually received by the assessee in the relevant year. We accordingly delete the disallowance made by the Assessing Officer and enhanced by the ld. CIT(Appeals) under section 14A read with Rule 8D. See case of Cheminvest Limited [2009 (8) TMI 126 - ITAT DELHI-B ]. Issues Involved:1. Erroneous disallowance of corporate service charges.2. Disallowance of depreciation on intangible assets.3. Disallowance under section 14A.4. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Erroneous Disallowance of Corporate Service Charges:The assessee objected to the disallowance of corporate service charges amounting to Rs. 63,411,803 paid to its associated enterprises (AEs). The Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) failed to appreciate the method followed by the assessee to benchmark the international transaction regarding corporate services. The TPO computed the Arm's Length Price (ALP) of the corporate services as Rs. 4,505,000 based on an estimation of hours and hourly rates. The Tribunal noted that similar issues had been remanded back to the DRP in previous assessment years (2009-10 and 2010-11) for re-adjudication by passing a speaking and reasoned order. The Tribunal directed the DRP to re-adjudicate the issue following the earlier directions, allowing the assessee a reasonable opportunity of being heard.2. Disallowance of Depreciation on Intangible Assets:The Revenue contested the DRP's direction to allow depreciation on intangible assets, specifically the Material Supply contract and Distribution network. The Tribunal noted that similar controversies had been resolved in favor of the assessee in earlier assessment years (2007-08 to 2010-11), where the Tribunal allowed the claim of depreciation on such intangible assets. The Tribunal affirmed the DRP's direction, stating that the impugned assets fall within the category of 'business or commercial rights' mentioned in section 32(1)(ii) of the Act. Additionally, the Tribunal upheld the DRP's direction to allow depreciation on goodwill, following precedents in the assessee's own case for earlier years.3. Disallowance under Section 14A:The AO disallowed Rs. 5,95,20,534 under section 14A read with Rule 8D, without appreciating that the investments were strategic and made out of interest-free funds. The Tribunal observed that no exempt income was earned or received during the year under consideration. Citing the Hon'ble Delhi High Court's decisions in Cheminvest Ltd. and Holcim India (Pvt.) Ltd., the Tribunal held that section 14A would not apply if no exempt income is received or receivable during the relevant previous year. Consequently, the Tribunal directed the AO to delete the impugned addition.4. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee objected to the initiation of penalty proceedings under section 271(1)(c) read with Explanation 7 of the Act. The Tribunal did not specifically address this issue in the detailed analysis, implying that the primary focus was on the substantive grounds of appeal related to disallowances and depreciation claims.Conclusion:The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the Revenue. The issues related to corporate service charges and depreciation on intangible assets were remanded back to the DRP for re-adjudication, while the disallowance under section 14A was deleted. The initiation of penalty proceedings under section 271(1)(c) was not specifically adjudicated.