ITAT allows goodwill depreciation, remits non-compete fee and TDS issues back for fresh examination

ITAT Chennai-AT remitted multiple issues back to AO for fresh examination due to lack of supporting documentation. The Tribunal set aside orders regarding depreciation on non-compete fee, directing AO to examine records from 2001-02 to 2005-06 and decide per Pentasoft Technologies judgment. Depreciation on goodwill was allowed based on Delhi HC precedent. TDS under section 195 for testing fee paid to Netherlands company was held not applicable as no technical knowledge was transferred. Payments to French and US entities were remitted back for re-examination due to insufficient evidence. Warranty provision disallowance and additional depreciation claims were also sent back to AO for proper verification. Only depreciation at 60% on UPS was allowed.

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Issues Involved:
1. Disallowance of provision for contingencies.
2. Disallowance of depreciation on non-compete fee.
3. Disallowance of depreciation on goodwill.
4. Disallowance under Section 40(a)(i) for payments made to non-residents without deducting tax at source.
5. Disallowance of claim for warranties.
6. Additional depreciation claimed by the assessee.
7. Depreciation on UPS.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Contingencies:
The first issue was the disallowance of Rs. 1,06,65,000/- provision for contingencies. The assessee's counsel did not press this ground of appeal, leading to its dismissal as not pressed.

2. Disallowance of Depreciation on Non-compete Fee:
The assessee claimed depreciation on a non-compete fee of Rs. 83,05,664/-. The Tribunal had previously allowed this in the assessee's case for the assessment year 2006-07, relying on the Madras High Court judgment in M/s Pentasoft Technologies Ltd. However, the copies of assessment orders from 2001-02 to 2006-07 were not available. The Tribunal remitted the issue back to the Assessing Officer to examine earlier records and decide afresh following the Madras High Court's judgment.

3. Disallowance of Depreciation on Goodwill:
The assessee's counsel argued that depreciation on goodwill was allowed by the Tribunal for the assessment year 2006-07 and by the Delhi High Court for the assessment year 2005-06. The Tribunal, following its previous decision and the Delhi High Court's judgment, directed the Assessing Officer to allow depreciation on goodwill for the current year.

4. Disallowance under Section 40(a)(i) for Payments Made to Non-residents without Deducting Tax at Source:
- Payment to Kema, Netherlands: The Tribunal found that the payment for testing transformers did not constitute a fee for technical services as per the Double Taxation Avoidance Agreement between India and the Netherlands. Hence, it was not liable for tax deduction at source.
- Payment to Areva T&D Finance, France: The Tribunal noted the lack of documentation to support the claim that the payment was a reimbursement of expenses. The issue was remitted back to the Assessing Officer for re-examination.
- Payment to Converteam, USA: The Tribunal found no evidence that erection and commissioning charges were integral to the machinery cost. This issue was also remitted back for re-examination by the Assessing Officer.

5. Disallowance of Claim for Warranties:
The Tribunal noted that the assessee's counsel could not explain the method for the provision of warranties. The issue was remitted back to the Assessing Officer to re-examine the method and compare it with past expenditures.

6. Additional Depreciation Claimed by the Assessee:
The Tribunal highlighted the need for the assessee to establish the purchase and installation of machinery in the assessment year 2006-07. The matter was remitted back to the Assessing Officer to verify the facts and decide afresh.

7. Depreciation on UPS:
The Tribunal upheld the lower authority's decision to allow depreciation at the rate of 60% on UPS, following a previous decision in the case of Sundaram Asset Management Co. Ltd.

Conclusion:
Both the appeals of the assessee and the Revenue were partly allowed for statistical purposes, with several issues remitted back to the Assessing Officer for re-examination and fresh decisions. The order was pronounced on 23rd March 2018 at Chennai.

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