TaxTMI 
TaxTMI 
2015 (11) TMI 16
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.... way of this consolidated order for the sake of convenience. ITA No. 7236/Mum/2010 2. In the present appeal the assessee has raised three issues in this appeal which are as under:- i) Disallowance of 50% out of purchase value paid from purchase of machinery from the A.E; (Ground Nos. 1.1 to 1.5) ii) Disallowance of amount paid towards cost sharing arrangement and IT support ( Ground Nos. 2.1 & 2.2) iii) Disallowance of depreciation on goodwill. (Ground No. 3). 2.1 It is worth mentioning, though, the assessee, during the relevant previous year, entered into a number of international transactions with its A.E., but since the Transfer Pricing Officer made adjustment to the arm's length price in respect of two categories of international transactions i.e., purchase of fixed assets and payment made under cost sharing agreement, we will discuss facts relevant to these two issues only. 3. As far as the first issue raised in ground Nos. 1.1 to 1.5 is concerned, briefly the facts are, the assessee an Indian company is a wholly owned subsidiary of Koch Glistsch, Mauritius, which in turn is entirely held by Koch Engineering Co. Inc., U.S.A. As stated, assessee is basically engaged in ....
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.... Pricing Officer upheld the ad-hoc disallowance of 50% of the cost of machinery. 5. The learned Counsel for the assessee submitted before us that the assessee had purchased certain second hand machineries from its A.E. during the year. It was submitted, these machineries were acquired by the A.E. in earlier years and from the make and model of the machineries, it appears that they are of the year 1997, 1998, 2000 and 2004. He submitted that since these were acquired by the AE and used by it, the assessee, at the time of purchase, got them surveyed through a surveyor and thereafter got them valued by an approved valuer in U.S.A. and as per the valuation done by the approved valuer taking into account the fair market value of the machineries as on date of purchase, the assessee had paid the purchase price to the A.E. It was submitted, though, the assessee, had purchased some other second hand machineries from the A.Es but the Transfer Pricing Officer, except these two items of second hand machineries, accepted the value of all other machineries. In this context, the learned counsel drew our attention to the details of purchase of machineries, a copy of which is at Page-278 of the pa....
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.... details or evidence the approved valuer's report cannot be accepted. He, therefore, submitted that in the given circumstances, the Transfer Pricing Officer was competent to determine the value of the machineries in the manner he has determined. 7. We have considered rival submissions and perused the relevant material available on record including the orders of the Revenue authorities. The undisputed facts are, the assessee, during the year, had purchased certain fixed assets i.e., machineries from third parties as well as its A.Es. It is to be observed that the assessee, during the year, placed orders with its A.E. for purchase of machineries worth U.S. $224914.84 and in terms with the purchase orders of the assessee, the A.E. supplied the machineries. It appears, out of the machineries supplied by the A.Es, which are second hand, the Transfer Pricing Officer has accepted the purchase value in respect of some machineries, whereas, in respect of two machineries worth Rs. 1,24,611 and Rs. 98,59,634, he has raised objections by observing that the assessee has not been able to establish the value of the machineries. It is to be noted that the invoices submitted by the assessee indica....
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....ue determined by M/s SGS Global Trade Solutions. Assessee paid customs duty and also countervailing duty and the valuation was accepted by the authorities at the time of import. Though TPO as well as DRP were of the opinion that the machinery does not have any value, we do not understand on what basis they have come to this opinion. There is no dispute with the fact that the machinery was imported and used in Assessee's business for manufacturing of its compressors / parts, so, there is no dispute with reference to usage of second hand machinery. It is also not the case of the revenue that machinery imported was kept idle and Assessee unnecessarily paid the amount to the AE. This being so, the value paid by Assessee duly supported by valuation report cannot be ignored. In case of any doubt on the matter, the best way is to refer the machinery to the valuation officer under the IT Act. Without doing so, the TPO or the DRP has no base to determine the value at and consequently denying the depreciation claim of the assessee while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. Not only that, as submitted by Assessee and as seen fro....
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.... Act mandates determination of ALP by applying any one of the six modes provided under clause (a) to (f) of section 92C(1). As far as clause (f) is concerned, it is not applicable to the AY under consideration as the Board has not prescribed any such method. Thus, it was incumbent upon the TPO to determine the ALP by applying any one of the method as prescribed under section 92C(1)(a) to (e). In the present case, admittedly the assessee has benchmarked the transaction with AE by applying TNMM. On carefully going through the order of TPO it appears, he has not rejected TNMM as most appropriate method. In fact, TPO is totally silent on what method he has adopted for determining the ALP of international transaction relating to purchase of machineries. TPO has not brought even a single instance of comparable uncontrolled transaction to justify the ALP determined by him. The determination of ALP on adhoc basis is not one of the method prescribed under the provisions as existed during the relevant assessment year. 7.2 We may observe, the learned Departmental Representative had submitted before us that at this stage also, the matter can be remitted back to the file of the Transfer Pricin....
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....ertain common cost in respect of all the companies in the Group for providing various support service including commercial cervices, financial services, administrative support, legal services and information technology support. It was submitted, for this purpose, the A.E. has entered into an agreement / arrangement with all group companies including the assessee. It was submitted, the common cost incurred by the A.E. is allocated to all the companies in the group who share the cost in the shape of reimbursement without any mark-up. In this context, the learned counsel referred to the agreement entered between the A.E. and other group companies for providing support services. He also drew our attention to the nature of services provided by the A.E. as well as the invoices raised for the services rendered. The learned counsel also drew our attention to certain e-mail exchanged between the assessee and the A.E. in relation to the services availed and cost incurred. The learned counsel submitted, all the details relating to cost sharing agreement were submitted before the Transfer Pricing Officer and ignoring those evidences, he could not have determined the arm's length price of the c....
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....ayments made were for availing services from the A.E. In any case of the matter, the Transfer Pricing Officer, as per the provisions of section 92C, has to determine the arm's length price by adopting any one of the modes prescribed therein. However, in the present case, the order passed by the Transfer Pricing Officer, in no manner, indicate the specific method adopted by the Transfer Pricing Officer to determine the arm's length price. That being the case, the 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....
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....assessment order, which is under challenge in the present appeal before us. 14. At the outset, the learned Counsel for the assessee submitted before us that the issue stands decided in favour of the assessee by virtue of the order of the Tribunal in assessee's own case for the assessment year 2005-06. In this context, he drew our attention to the order passed by the Tribunal in ITA no.6499/Mum./2010, etc., dated 29th March 2012. The learned Counsel further submitted, the issue whether goodwill is an intangible asset and depreciation is allowable on goodwill has also been decided by the Hon'ble Supreme Court in CIT v/s SMIFS Securities Ltd., [2012] 348 ITR 302 (SC). 15. The learned Departmental Representative, on the other hand, strenuously submitted before us, goodwill cannot be considered to be a business or commercial right of the nature envisaged under Explanation-3(b) to section 32 of the Act. He submitted, the commercial rights which can be considered as intangible asset on which depreciation is allowable are know-how, patents, copy rights, trade marks, license and franchisee. The term "any other business or commercial rights" must be of similar nature as it takes colour fro....
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....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. (supra), 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. In view of the aforesaid, we are unable to accept the contention of the learned Departmental Representative. Accordingly, we delete the addition made by the Assessing Officer on account of disallowance of depreciation on goodwill. The ground raised by the assessee is allowed. 18. In the result, assessee's appeal for assessment year 2006-07 stands allowed. 19. We now proceed to dispose of assessee's appeal in ITA no.7958/ Mum./2011, for the assessment year 2007-08. 20. In this appeal, the assessee has raised in total five grounds. Ground no.1, reads as follows:- "The learned CIT(A) erred in fact and in law in confirming the action of the Assessing Officer in disallowing depreciation on intangibles amounting to Rs. 54,35,554." 21. Briefly stated the facts are, asses....
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....ase of capital goods and balance 50% in the next year. While computing the depreciation on fixed asset, the assessee has already reduced such CENVAT availed on capital goods, hence, depreciation was claimed on reduced rate. Thus, it was submitted, as the assessee has already offered CENVAT credit to tax by claiming depreciation at reduced value of capital goods, no addition need be made in respect of unutilized CENVAT shown under the head "loans and advances". Insofar as unutilized CENVAT on raw material is concerned, it was submitted, the assessee has already offered such unutilized CENVAT credit to tax by reducing the said amount from the cost of total purchase debited to the Profit & Loss account. Thus, it was submitted that as purchases are accounted net of CENVAT credit in the books of account and while debiting the cost of purchase to the Profit & Loss account, the assessee has taken the cost of purchases net of CENVAT credit and CENVAT credit is separately debited to Profit & Loss account, no separate addition on the unutilized CENVAT credit should be made as it will amount to double taxation. It was submitted, though, unutilized CENVAT credit on raw material was not include....
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....s raw material is concerned, the Assessing Officer has added the difference of CENVAT credit as on 31st March 2007 and 1st April 2006, amounting to Rs. 1,04,59,372. We do not find any justifiable reason for such differential treatment. When the assessee has reduced the CENVAT from the purchase value of raw material and accounted for the purchase value in the books net of CENVAT credit, there is no reason for making adjustment to the closing stock only by including the unutilized CENVAT credit. Though section 145A of the Act provides for adjustment by including any tax, duty, cess or fee while valuing the purchase and sale of goods and inventory but as held by the Hon'ble Delhi High Court in CIT v/s Mahavir Aluminum Ltd., [2008] 297 ITR 77 (Del.), whenever any adjustment is made in the valuation of inventory, it will affect both the opening stock and closing stock. 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 th....
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....f the international transaction in respect of cost sharing arrangement and in respect of payment for information technology support services." 33. In ground no.1, the Revenue has challenged the decision of the learned Commissioner (Appeals) in deleting the addition made of Rs. 24,95,977, on account of adjustment to the arm's length price of international transaction involving purchase of machinery from the A.E. 34. Briefly stated the facts are, during the relevant previous year, assessee had purchased second hand machinery from its A.E. worth Rs. 49,91,953. The Transfer Pricing Officer, during the course of proceedings before him, after verifying the documentary evidences produced before him as well as other material available on record, held that in the valuation report submitted by the assessee since the valuer has not provided the basis for valuation of the machinery, the price paid by the assessee towards purchase of machinery cannot be considered to be at arm's length. He observed that the valuer had not established that the value determined by him is the fair market value of the machinery having regard to the fair market value of similar new machinery in the open market af....
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....haring arrangement with its A.E. The nature of services claimed to have been provided by AE are commercial services, financial services and legal services. Similarly, an amount of Rs. 13,50,606, was paid to the A.E. on cost sharing arrangement towards provision of I.T. support services. Alleging that the assessee has not been able to submit the gross allocation base out of which the cost allocation to the assessee has been computed, the Transfer Pricing Officer disallowed an amount of 20% out of the amount paid by the assessee to its A.E. on cost sharing arrangement. As a result, an adjustment of Rs. 3,88,155, was made to the arm's length price. 39. Being aggrieved of such adjustments, the assessee challenged the same before the learned Commissioner (Appeals). The learned Commissioner (Appeals) deleted the addition by observing that the Transfer Pricing Officer has not been able to point out any specific defect or deficiency in respect of allocation of cost. It was held by the learned Commissioner (Appeals) that when the Transfer Pricing Officer has not disputed the fact that the assessee and the A.E. have entered into cost sharing arrangement and cost has been allocated in the ca....