TaxTMI 
TaxTMI 
2015 (9) TMI 286
X X X X Extracts X X X X
X X X X Extracts X X X X
....ving that the aforementioned intangible assets were not appearing in the books of accounts of CIBA Speciality Ltd. and Diamond Dyechem Ltd. and also erred in concluding that there was no transfer of such aforementioned intangibles by way of slump sale. The learned Assessing Officer/Dispute Resolution Panel erred in disallowing depreciation on the basis that such aforementioned intangible assets are not in existence and that there was on evidence of transfer of these self generated assets to the Appellant. 1. 3. The learned Assessing Officer/Dispute Resolution Panel has erred in concluding that the valuer's report is incomplete and inconclusive and cannot be accepted. 1. 4. The learned Assessing Officer/Dispute Resolution Panel erred in holding that the aforementioned intangible assets viz. material supply contracts, distribution network and brand usage right are not akin to the intangible assets referred to in the provisions of section 32(1 )(ii) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") and hence, such aforementioned intangibles are not eligible for depreciation. 1. 5. The Appellant submits that considering the facts and circumstances of its case an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rred in observing that the claim such expenditure was made during the course of assessment whereas the claim was made by the appellant by way of a note to the return of income. 3. 4. The Appellant submits that the learned Assessing Officer/Dispute Resolution Panel be directed to grant due deduction to it under section 43B of the Act and to recompute its total income accordingly. GROUND NO. 4: General 4. 1 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 4. 2 Each one of the above grounds of appeal is without prejudice to the above. ITA No. 1539/M/2014(AY. 2009-10): The Appellant objects to the order under section 143(3) r. w. s 144C (13) of the Income Tax Act, 1961 ('the Act') dated 13 January 2014 (received on 1 February 2014) passed by the learned Deputy Commissioner of Income Tax ('AO') incorporating the directions of the Dispute Resolution Panel ('DRP') for the aforesaid assessment year on the following grounds: 1. Erroneous in not following the direction issued by the DRP 1. 1 The AO erred by not following the directions issued by the DRP u/s 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... are not in existence. 6. 3 The learned Assessing Officer/Dispute Resolution Panel erred in holding that the aforementioned intangible assets viz. material supply contracts and distribution network are not akin to the intangible assets referred to in the provisions of section 32(1)(ii) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") and hence, such aforementioned intangibles are not eligible for depreciation. 7. Disallowance of depreciation on goodwill claimed under section 32(1)(ii) of the Act 7. 1 The learned Assessing Officer/Dispute Resolution Panel erred in disallowing depreciation on goodwill of Rs. 6, 38, 78, 278/- as claimed under section 32(1)(ii) of the Act by it. 8. Disallowance of share issue expenditure 8. 1 The learned Assessing Officer/Dispute Resolution Panel erred in disallowing share issue expenditure of Rs. 24, 00, 100/- (1/5th of Rs. 1, 20, 00, 500/-) claimed by the appellant under section 35D of the Act. 8. 2 Further, the learned Assessing Officer/Dispute Resolution Panel, while computing the total income of the Appellant, erroneously made the addition of Rs. 24, 00, 100/- on account of disallowed under section 35D of the Act even thoug....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ief facts of the case are that in this matter original order passed by the AO, in pursuance of the directions issued by DRP-II Mumbai, was challenged before the Tribunal. It was argued before the Tribunal stating that the constitution of DRP was contrary to the principles of natural justice on account of one of the members being the jurisdiction commissioner of the assessee. Vide its order dt. 13. 4. 2012, theTribunal set aside the order passed by the AO and remitted back the matter to the file of DRP/AO for fresh adjudication. In pursuance of the direction of the Tribunal, DRP-Mumbai, vide its order dated, 27. 3. 2014, gave directions to the AO who completed the assessment on 29. 3. 2013. 2. 2. First ground of appeal is about disallowance of depreciation on intangibles, amounting to Rs. 13. 73crores. During the assessment proceedings, the AO found that the assessee-company had claimed depreciation of Rs. 12. 07 crores under the head depreciation on Material Supply Contract (MSC) and on Distribution Network (DN) and Rs. 6. 25 crores under the head Brand Uses Expenses (BUE). He directed the assessee to explain as to why the above referred claim should be allowed as revenue expendit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t it was granted discounts such as volume discount of 3% and a further discount of 4. 5% on invoice value if the payment was made within five days, that MSCwas an intangible asset in terms of s. 32(1) (ii) and was eligible for depreciation @ 25%. The assessee relied upon the cases of Skyline Caterers Ltd. (306 ITR-AT-369) Kotak Forex Brokerage Ltd. and Coca Cola Beverage P Ltd. About the DN, it was contended that over the years CIBA-India and DDCL had created strong distribution network for selling their products, that through the DN agreement the assessee got access to the buyers, that DN was an intangible asset and was eligible for depreciation u/s. 32 (1) (ii) of the Act, that the expression any other business or commercial rights of similar nature used in section 32 of the Act had not been defined or explained in the Act, that the agreement was made for a period of five years, that the distribution network developed by CIBA-India was crucial to achieve the sales target. It was further stated that the assessee had acquired the polyurethane business from ICI Ltd. in the AY 2002-03 as a going concern in accordance with business Transfer Agreement (BTA), that it had acquired the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... allowed as revenue expenditure was legally untenable, that the alternative claim of the assessee to allow depreciation u/s. 32(1)(ii) of the Act was not acceptable, that even if there were asset like MSC, DN and brand uses right as an intangible asset the assessee was not eligible for claim of depreciation as the same were not akin to the assets defined in the provision like knowhow, patents, copyrights etc. Finally, he rejected the claim of depreciation on MSC, DN and right to use brand. 2. 3. Before us, the AR contended that as per the Toll Manufacturing Agreement (TMA) the assessee was to get the things manufactured for a period of 5 years at no profit /loss basis, that the independent valuer had valued the benefit occurring to the assessee, that all the three intangibles were entitled for depreciation u/s. 32(1)of the Act, that there was transfer of intangibles by way of slump sale, that the valuer's report was complete and conclusive in all regard, that in absence of assignment of some value to the intangibles in the balance sheet of the transferors was not the decisive factor. He relied upon the cases of Smifs Securities Ltd. (248 ITR 302), B. Ravindran Pillai (332 ITR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee had purchased a hospital in Quilon with its land, building, equipment, staff, name, trade mark and goodwill as a going concern under two separate sale deeds. Under the sale deed, the value of the goodwill which included the name of the hospital and its logo and trade mark was Rs. 2 crores. The assessee was allowed depreciation on the goodwill. However, in the scrutiny assessment, the AO held that goodwill was not covered by section 32(1)(ii). The appeals filed by the assessee before the FAA) and the Tribunal were unsuccessful. The Hon'ble High Court decided the issue as follow: ...in fact, without resorting to the residuary entry the assessee was entitled to claim depreciation on the name, trade mark and logo under the specific head provided under section 32(1)(ii) which covers trade mark and franchise. Admittedly the hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. The nature of "business or commercial rights" can be of the same genus in which all these six assets fall. All of them fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. ....... in the case of the assessee, intangible assets, viz. , business claims, business information, business records, contracts, skilled employees and know-how were all assets, which were invaluable and resulted in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The intangible assets were, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the business rights along with the tangible assets, the assessee got an up and running business. The specified intangible assets acquired under the slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e newly acquired TE business, that it regarded the fixed assets and intangible assets of acquired TE business at fair market value as determined by an independent valuer. In case of a slump sale, generally no separate value is assigned to each and every asset by the transferor and the party taking over the assets assign specific values to the acquired assets. In the case before us, the assessee had obtained a valuation report from an expert and on the basis of that report had recorded the value of the tangible and intangible assets in the books of account. We find that in the valuation report the valuer had assigned value to MSC, DN and Brand uses, that the AO/DRP has not brought anything on record to disprove the correctness of the valuer. As far as the entries in the balance sheet of CIBA-India and DDCL is concerned, in our opinion same are not decisive factors. What has to be seen in case of a slump sale is the treatment given by the assessee in its books of account to the assets acquired and as to whether the valuation is based on some scientific basis. The assessee had entered into agreements for a period of five years with CIBA India and DDCL and because of the agreements th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d made the claim about the expenditure during the course of assessment proceedings. 3. 1. During the course of hearing before us, the AR stated that the assessee had taken over the liabilities of CIBA India Ltd, that these were known liabilities, that as per the agreement the assessee had to incur the expenditure, that the AO or DRP had not doubted the genuineness of the expenditure incurred. He relied upon the decision of T. Veerbhadra Rao (155 ITR 152) in his support. 3. 2. We have heard the rival submissions and perused the material before us. We find that the assessee had taken over all the liabilities of CIBA-India, including the leave encashment, incentive/motivator etc. We have perused the agreement entered into between the assessee and CIBA-India (Page 198-202 of the paper book). Para 1. 1 xxvii of the BTA, defines TE Business as follows (Pg-203 of PB). "TE Business" means the development, manufacturing and marketing of dyes and chemical products used in or the benefit of textile franchise in Republic of India and shall include the assets, transfer of employees / encumbrances, permitted liens and liabilities. In sub para xiv of Para 1. 1 term liability has been defined ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... we decide ground No. 3 in favour of the assessee. ITA/1539/Mum//AY. 2009-10: 4. First effective ground of appeal (Ground No. 2-5) deal with transfer pricing adjustments. During the assessment proceedings the AO found that the assessee had shown international transactions with its Associate Enterprises (AE. s). For determining the Arm's length Price (ALP) of such transactions, he made a reference to the Transfer Pricing Officer(TPO). Along-with the TP documentation, a copy of the agreement entered into by the assessee with its AE. s in relation to the corporate service charges was submitted before the TPO. With reference to the direction dated 20/12/2012 of the TPO, the assessee submitted the nature of types of service availed from its AE. s for payment for its corporate service charges. The TPO asked the assessee as to why Comparable Uncontrolled Price (CUP) method should not be applied to benchmark the international transaction. In its reply the assessee stated that during the year under consideration it had not entered into similar transaction with third parties as that of its AE. s, that nor had its AE. s entered into similar comparable transaction with third parties duri....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or reject the said papers, that non adjudication of the issue had kept the issue alive. He referred to the pg. 967 to 1341 of the paper book, ground no. 3 raised in form no. 35A, Annexture 3 and pg. 27-29. DR stated that the DRP had observed that papers were not produced before it. 4. 3. We have gone through the available material. We find that while filing objection before the DRP the assessee had raised various issues. The assessee had requested the DRP to admit additional evidence as per provisions of the DRP Rules. But, the DRP has not mention anything in its order about the issue raised by the assessee and the documents submitted. In our opinion, it was duty of the DRP to reject or accept the additional evidence produced by the assessee once same were filed before it. Secondly, the ground of appeal relating to was not decided. Non-adjudication of a ground raised by an assessee is miscarriage to justice. We would like to reproduce the order of the DRP dealing with TP issue and same reads as under: 5. 2. 1 The applicant has submitted before the DRP that the entire payment of corporate expenses of Rs. 46, 299, 732/- as an adjustment U/s 92CA. We have considered the submissions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ined separate accounts for the AE and non-AE segments. The segments prepared just for the reason of calculation of PLI are not acceptable as the basis of allocation of expenses and the correctness of allocation are not verifiable. Therefore, these are not reliable. In the absence of the same, and considering the interlinking between AE and non-AE imports, it is not possible to prepare reliable segment-wise accounts. Further, it is noted that the assessee itself has bench -marked its international transactions using entity-level operating margin as the PLI. This would indicate that though making the claim Assessee understands the impossibility of its application. However in so far as the adjustment to be made we find that the judicial precedence suggests that the adjustment should be limited to the AE transactions and not on the entity level turnover. In the facts and circumstances of the case, therefore, while the TPO's action is sustained, the TPO should recalculate the PLI and limit the adjustment to the AE transaction. 5. 2. 5 The applicant has also objected to the TPO/s action of considering single year data for the comparable companies selected by him for the year ended 3....