TaxTMI 
TaxTMI 
2020 (8) TMI 795
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncorrectly applying Section 92CA(3) of the Act and disregarding the relevant submissions made during the assessment proceedings 2. Erred in making an addition of Rs. 256.56 crore (Rs. 129.57 crore for the distribution segment and Rs. 126.99 crore for the manufacturing segment) to the total income of the Assessee under Section 92CA(3) of the Act on account of adjustments in the arm's length price of the alleged international transactions undertaken by the Assessee. Presumption of fictitious transaction in the nature of 'provision of brand promotion services' since AMP is not an international transaction 3. Erred in alleging that the AMP expense incurred by the Assessee is an international transaction under Section 92B of the Act; 4. erred in ignoring that the Appellant has not rendered any service to the Associated Enterprises ('AEs') and hence erroneously treating and categorizing AMP expenses incurred by the Appellant on its own behalf, as an international transaction between the Appellant and AEs under Section 92B of the Act; 5. failed to appreciate the fact that AMP expenses were incurred 'wholly and exclusivel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on segment without any cogent reasons for the same and arbitrary and ad hoc selection of comparable companies for manufacturing and distribution segment without adopting a scientific search process for applying bright line test ('BL T') using 'Other Method' to determine the arm's length price of the AMP expenses incurred by the Appellant; Business and commercial expediency 13. erred in holding that the Appellant incurred AMP expenses for promoting the brands owned by overseas AE, instead of appreciating that the Appellant was only carrying out its business by using the well-established brands and any benefit derived by the AE is purely incidental; 14. erred in ignoring that the advertisements by the Appellant are product advertisements to enable higher sales of the products in the Indian market and not brand advertisements. Most appropriate method 15. without prejudice to the above, erred in applying bright line test ('BLT') and treating the same as routine ALP determination method under "Other Method" to determine the arm's length price of the AMP expenses incurred by the Appellant; 16. without p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 24. erred in disallowing deprecation of Rs. 1.03 crores on goodwill arising on purchasing of existing business of Rahul Health Care (RHC), an unrelated party, on a going concern basis; 25. erred in not appreciating the fact that the transaction was undertaken with unrelated enterprise (RHC) and the transaction value was commercially agreed between the two parties; 26. erred in holding that valuation of goodwill at Rs. 8.27 crore was not justified; 27. failed to appreciate that by entering into the transaction for purchase for purchase of existing business of RHC, the Appellant had acquired significant intangible assets, including but not limited to permits, approvals, registrations, licences, know-how, skilled manpower, contracts, other business or commercial rights, etc. 28. failed to appreciate that assets and liabilities (including goodwill) were valued at their respective fair values based on a valuation report in accordance with the prevailing accounting norms. 29. erred in not appreciating the documents submitted by the Appellant justifying the value of goodwill as well as other assets & liabilities and disregarded the same witho....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under section 271 (1)(c) of the Act. 2. Brief facts of the case are that the assessee-company is engaged in the business of manufacturing of cosmetic, marketing and sale of product, filed its return of income for relevant AY on 29.11.2015 declaring income of Rs. 153.60 crore. Along with the return, the assessee furnished report under Form-3CEB reporting certain international transaction with its various Associated Enterprises (AEs). On reporting international transaction more than the prescribed limit of Rs. 15 crore, the assessing officer (AO) made reference to Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP). During the T.P. assessment proceeding, the TPO noted that the assessee has incurred huge expenses of Rs. 711.57 crore on advertising and marketing and promotion (AMP), and thus creating valuable marketing intangible by incurring huge expenses for L‟Orial brand. The assessee is not the legal owner of the brand in India and by way of huge marketing expenses which effectively translate into development of brand and thus contributing the huge expenses for development of brand AEs. On the aforesaid view, the TPO issued show-cause notice as to wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eaning thereby the value of non-compete and no how are not considered in the valuation report. On the basis of aforesaid facts, the AO was of the view that Rahul Healthcare is not a brand name and merely has any goodwill and thus acquiring the business on such high price was doubted by him. 5. The AO issued show-cause notice as to why goodwill recognized in the books of account should not be treated as Nil and accordingly corresponding depreciation should not be disallowed. The assessee filed its reply dated 21.12.2018. The reply of assessee is extracted by AO in paragraph-4.4 of the draft assessment order, relevant part of the reply is extracted below: "The company vide that BTA had agreed to acquire various business assets and liabilities from Rahul Healthcare. Accordingly, the company had acquired the current assets and current liabilities from Rahul Healthcare. The details of the net current assets / liabilities purchased on going concern basis from Rahul Healthcare are as under: Particulars INR in million INR in million Inventory 160.14 Deposits 1.13 Trade Receivables 13.60 &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entory 160.14 Deposits 1.13 Trade Receivables 13.60 Loans & Advances 0.15 175.02 Less: Trade Payables (0.50) Less: Others payable (0.21) Net Current Assets 174.31 In view of the above, the purchase price allocation should have to be as under: Particulars INR in million INR in million Consideration paid by the company 129.39 Fair Value of Land & Building 69.55 Fair Value of Fixed Asset 8.46 Fair Value of net current Assets 174.31 252.32 Goodwill recognized (122.93) In view of the above facts, the Goodwill claimed by the assessee is not correct. Therefore, it is presumed that the assessee has claimed unjustified Goodwill amounting to Rs. 8,27,60,777/- towards purchase of running business from M/s Rahul Healthcare on "Slum Sale basis‟. 4.6 The claim of the assessee is not acceptable as the primary onus is on the assessee to establish the genuineness of the claim. As per section 101, 102 and 106 of the Evidence Act, the onus li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenses (AMP). The ld. AR of the assessee submits that these grounds of appeal are covered in favour of assessee by the decision of Tribunal in A.Y. 2008-09 to 2014-15. The ld. AR of the assessee furnished the copy of consolidated decision of Tribunal for A.Y. 2008-09 to 2020-11, order of Tribunal for AYs 2011-12, 2012-13, 2013-14 & 2014-15 respectively. 10. On the other hand, the ld. DR for the revenue relied upon the order of lower authorities. The ld. DR for the revenue further submits that revenue has already filed appeal against the order of Tribunal for various assessment years before the jurisdictional High Court and the issue is sub-judice before the Hon‟ble High Court. 11. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also gone through the orders of Tribunal for various earlier years. We have noted that the TPO while passing the order under section 92CA basically followed the order for AY 2014-15. We have further noted that in appeal for AY 2014-15 in ITA No. 6448/Mum/2018, the Tribunal while considering the orders for earlier year passed the following order: "9. We have heard both....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ein an alternate adjustment for the distribution segment (based on AMP) was deleted by the ITAT on the ground that once AMP was held not to be an international transaction, this adjustment which was based thereon, could not survive. (vii) It is further submitted that L'Oreal SA, France (recipient of income) has offered the royalty income received from the Appellant and the said royalty income has been accepted to be at arm's length by the TPO in hands of L'Oreal SA. In view of the above, the appellant prays that the adjustment on account of royalty should be deleted. (C) Alternate adjustment on the distribution segment-international transaction of import of finished goods from AEs for resale. Appellant‟s own ITAT order for A.Y. 2013-14 (page 33 and para 20). (D) Alternate adjustment on the manufacturing segment- international transaction of payment for availing of marketing support services to AEs. (a brief description of marketing support services availed is described in Annexure 2 to this note). 1. The TPO in his order has instead of examining whether or not the method adopted to determine the ALP is the most appropriate metho....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... submitted before the ITAT. However, in the year under consideration, all evidences which are filed before the ITAT were filed before the lower authorities and the TPO has himself examined them in remand proceedings and not adversely commented thereon, thereby accepting the same. 7. Further, it is submitted that L'Oreal SA, France (recipient of income) has offered to tax the income received from the Appellant and the said service income has been accepted to be at an arm's length by the TPO in hands of L'Oreal SA. Thus, the provision of services being availed by the Appellant, its rendition and benefits of services etc. stands accepted in the case of the income recipient, L'Oreal SA. 8. In light of the above, it is humbly submitted that the matter should not be remanded back since there were extensive evidences submitted before the lower authorities and the same was accepted by the TPO in remand proceedings. E) Alternate adjustment on the manufacturing segment- international transaction of payment for availing of consulting services. (Brief description 1). The TPO in his order has instead of examining whether or not the method adop....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lied upon the orders of the authorities below. 11. Upon careful consideration we hold as under :- As regards the adjustment on account of AMP expenses in manufacturing segment the ITAT has decided the issue in favour of the assessee. In this regard, we may refer to ITAT order in assessee‟s own case for A.Y. 2013-14 vide order dated 23.8.2019 for following concluding adjudication on this issue :- "8. We find that in the backdrop of our aforesaid observations that de hors any 'understanding' or an 'arrangement' or 'action in concert', as per which the assessee had agreed for incurring of AMP expenses for brand building of its AE, viz L‟Oreal S.A., France, the provisions of Chapter-X could not have been invoked for undertaking TP adjustment exercise. Apart there from, we find that a similar view had been taken by the Tribunal while disposing off the appeals of the assessee for the preceding years viz. A.Ys 2008-09 to 2011-12. In fact, the Tribunal while disposing off the appeal of the assessee for A.Y 2012-13 in M/s L"Oreal India Pvt. Ltd. Vs. ACIT-7(1)(2), Mumbai [ITA No. 1417/Mum/2017; dated 30.01.2019], had followed the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the same. Accordingly, being of the considered view that as the revenue had failed to discharge the onus that was cast upon it as regards proving that there was any 'understanding' or an 'arrangement' or 'action in concert' as per which the assessee had agreed for incurring of AMP expenses for brand building of its AE, viz. L‟Oreal S.A., France, the TP adjustment of Rs. 354.73 crores in respect of AMP expenses cannot be sustained and is liable to be vacated." 12. Since the facts are identical we set aside the order of authorities below and direct that the TP adjustment of Rs. 198.18 crores is to be deleted." 12. Considering the consistent decision of Tribunal on identical set of fact on identical issue for earlier years, wherein no factual difference for the year under consideration is brought to our notice, nor any contrary law is shown to us, to take any other view, therefore, respectfully following the orders for earlier years the Ground No.2 to 18 are allowed. 13. Ground no.19 to 23 relates to alternate adjustment on account of payment for packaging design, cost, training to Saloon customers and promotional goods. The ld. AR....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to substantiate the genuineness of payment made to AE containing need of services, benefit of services, evidence of receipt of services, cost allocation methodology, agreements with list of copies of invoices, the copies of which is at page no. 3046 to 3082 in the form of Appendix A to D. We have noted that the documentary evidences furnished by the assessee relates to the payment on account of packaging, design cost, training to Saloon Customers and promotion of various products and goods. Considering the nature of the evidences which has relevance with the issue under consideration, we admit the additional evidences furnished by the assessee. We have further noted that on alternate adjustment in AY 2014-15, Tribunal restored the similar issue(s) to the file of AO/TPO by passing the following order: "20. Upon careful consideration, we note that the reference to the excessive nature/benefit derived by the assessee by the TPO is not at all sustainable in the light of Hon'ble Jurisdictional High Court decision in the case of Lever India Exports Ltd. (supra). In the said decision it was expounded by Hon'ble Jurisdictional High Court that it is not for the TPO to appl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble on the touchstone of honourable jurisdictional High Court decision in the case of Lever India Exports Ltd. (supra). In the present case we note that detailed evidences has been submitted before the DRP and the same have been examined by the TPO in remand proceedings, who has reiterated his reservations on the need and benefit to the assessee instead of applying any method of determining the arms length price. Accordingly in the background of aforesaid discussion and precedent from honourable jurisdictional High Court in the case of Lever India Exports Ltd. (supra) and Johnson & Johnson Limited (supra) we direct that these alternative adjustments as above are liable to be deleted. We order accordingly. 16. Considering the decision of Tribunal for earlier year on alternate adjustment and the fact that the assessee has filed the aforesaid additional evidence for the first time before the Tribunal and the fact that we have already held that the additional evidence furnished by the assessee has direct relevance qua the grounds of appeal, which required consideration and verification at the end of AO, therefore, we remit the issue to the file of AO for consideration and decision o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pplication of 69 in treating the payment of goodwill as unexplained investment is inappropriate as the same is recorded in the books of assessee. However, the disallowance of depreciation of goodwill was upheld by following the decision of Mumbai Tribunal in Toyo Engineering Ltd (ITA No. 3279/Mum/2008). The learned DRP not accepted the valuation of goodwill and intangible, which has not been explained by the assessee through proper documentation and valuation but rather it is an arbitrary and indeterminate. The learned DR for the revenue submits that the core issue to be decided is whether on the facts and circumstances of the case, the excess considerations paid by assessee over the value of net assets on acquisition of Rahul healthcare will partake the character of "goodwill‟. If it comes within the definition or parameter of goodwill, depreciation will be allowed under section 32 of the Act in view of the decision of Hon‟ble Apex Court in Smifs Securities Ltd [2012] 24 taxmann.com 222. 19. The ld DR for the revenue further submits the claim of the assessee that extra consideration paid is with respect to acquisition of bundle of intangibles from Rahul Healthcare (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oes not result in the creation of an intangible asset that meets the recognition criteria in this Standard. Such expenditure is often described as contributing to internally generated goodwill. Internally generated goodwill is not recognised as an asset because it is not an identifiable resource (i.e it is not separable nor does it arise from contractual or other legal rights) controlled by the entity that can be measured reliably at cost. 50 Differences between the market value of an entity and the carrying amount of its identifiable net assets at any time may capture a range of factors that affect the value of the entity. However, such differences do not represent the cost of intangible assets controlled by the entity. On the basis of aforesaid definition of Goodwill, the ld. DR would submits that no depreciation can be allowed on the self-generated goodwill in accounting as it is not an intangible asset. 20. The ld DR for the revenue strongly relied on the decision of Hon‟ble Apex Court in the case of CIT Vs B.C. Srinivasa Setty [1981] 128 ITR 294 (SC), wherein the Hon‟ble Court held that "Goodwill denotes the benefit arising from connection and reputa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of BTA as mentioned in the said agreement. The second is unwritten contract between Rahul Healthcare and Oirpil Biotech Ltd. Since the contract is unwritten, the terms and conditions are not on record. Moreover, there is nothing on record, which suggests that Oirpil Biotech Ltd. was either a dealer or customer of Rahul Healthcare, whose continuation is of any benefit to the assessee. And third contract is the sub-manufacturing contract dated 20/02/2013 between Rahul Healthcare and the assessee itself. This had no bearing on the goodwill. From all three contracts it is clear that there exists no contract, which can be claimed to be acquired from Rahul Healthcare for future benefit or of economic value of the business of the assessee. The ld for the revenue finally submits that as per the 5th Proviso to section 32(1) the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the written down value (WDV) of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. To buttress his submissions he also relied on the decision of Bangalore Tribunal in United Breweries Ltd. (20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he purchase price allocation report prepared by M/s SSPA & Co, Chartered Accountant. As per valuation the land and building was valued at Rs. 6.96 crore. All other fixed asset, current asset and current liabilities in the unit were taken over at their book value. The difference of Rs. 8.27 crore between the considerations paid and the fair value of the asset and liability was claimed by assessee as Goodwill. On the basis of aforesaid facts the assessee claimed depreciation of Rs. 1.03 crore on the goodwill of Rs. 8.27 crore at 25% of half of the year. 26. The assessing officer while passing the draft assessment order issued show cause notice as to why net current asset were taken at a negative value of Rs. 3.14 crore and also why depreciation of Rs. 1.03 crore should not be disallowed. The assessee filed its reply dated 21st December 2018. In the reply the assessee stated that current assets of Rahul Healthcare were negative because of the liabilities of Rahul Healthcare were also purchased by the assessee. It was also contended that no value was assigned to non-compete and knowhow, while calculating the goodwill because the assessee‟s core business activities was manufact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial rights of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3 (b). 30. Hon‟ble Delhi High Court in Triune Energy Services (P.) Ltd. vs DCIT (supra) also held that Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression "goodwill" subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. 31. A perusal of draft assessment order shows that the assessee failed to discharge the source of "goodwill‟ (para 4.6). The ld. DRP while considering the objections of the assessee though deleted disallowance of cost of acquisition of goodwill, however, the depreciation claimed on goodwill was upheld. In our view the AO as well as ld. DRP have not considered the aforesaid submission of the assessee that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rts and Tribunal; • Chambal Fertilizer and Chemical Limited Vs JCIT (ITA No. 52/2018) Rajasthan High Court, • Tata Steel Limited Vs DCIT (ITA No.5616/M/2012, 4043,5573/M/2012), • DCIT Vs Bajaj Allianz General Insurance Co (ITA No. 1111 & 1113/Pun/2017), • Atlas Copco (India) Ltd Vs ACIT (ITA No. 732/Pun/2011) and • ITC Vs ACIT (ITA 685/Kol/2014) 36. On the other hand, the ld. DR for the revenue submits that assessee has not raised such ground before the lower authorities. This ground of appeal is raised belatedly. 37. We have considered the rival submission of the parties and deliberated on various case laws relied by ld. AR of the assessee. Considering the fact that the ground of appeal raised by assessee is purely legal in nature. Further, considering the decision of Hon‟ble Bombay High Court in Sesa Goa (supra), we admit the ground of appeal and direct the AO to consider the claim of assessee and allow appropriate relief in accordance with the decision of Hon‟ble Bombay High Court in Sesa Goa (supra) wherein it was held that Education Cess and Higher and Secondary Education Cess are liable for ded....