TaxTMI 
TaxTMI 
2022 (6) TMI 1194
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....hat: ITA No. 4155/M/2015 (Revenue's appeal) "1. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to Rs. 2,19,74,033/- without appreciating the fact that the segmental account and the net segmental margins filed by the assessee are not reliable as the same is based on proportionate allocation of indirect expenses with the sales. 2. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to Rs. 2,19,74,033/- and holding that the benchmarking at entity level using TNMM by the TPO is not correct without appreciating the fact that all transactions are closely linked. 3. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to Rs. 2,19,74,033/- without appreciating the fact that different international transactions with the AE are closely linked and overlooked various judicial pronouncement. 4. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of expenditure incurred on license fees/royalt....
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....leave to add, alter, amend, delete, modify or withdraw all or any ground or grounds of appeal herein and to submit such statements, documents and papers as may be considered necessary either all or before the appeal hearing." CO No. 148/M/2015 (Assessee's): "1. The learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/Cross-Objector, that the learned TPO has legally erred by denying the Appellant Company an opportunity to justify its treatment of 'Foreign Exchange fluctuation loss' and 'Provision for Credit balances written back' for the purpose of determining the operating margin while applying Transactional Net Margin Method ('TNMM') at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A). 2. Without prejudice to any other ground/objection, on the facts and circumstances of the case, the learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/Cross-Objector that the learned TPO has factually and legally erred in not excluding 'Foreign exchange fluctuation loss' amounting to Rs. 9....
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....ecution of EPC turnkey projects in the food, dairy and chemical and pharma sectors. During the year under assessment assessee company entered into international transactions with its Associate Enterprise (AE) as reported in form 3 CEB as under: SL. Nature of transaction F.Y. 2007-08 (Rs) Method Used 1 Purchase of Components & Spares 6,80,75,380 Resale Price Method 2 Payment of Design & Engineering Fees 1,86,83,436 Resale Price Method 3 Receipt of Commission 1,19,51,956 Transactional Net Margin Method 4 Receipt for Supervisory Assistance 51,85,376 Transactional Net Margin Method 5 Contribution to Common Costs 1,10,08,756 Not Applicable Total 11,49,04,904 3. In its return of income assessee company claimed a net loss of Rs. 23,32,26,686/-. The assessee company in order to benchmark its international transactions had adopted different methods to determine arms length price. However, the Transfer Pricing Officer (TPO) has taken the view that the transactions are inter related and the assessee company was called upon to show cause as to why the segmental profit and loss shoul....
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....aordinary costs 5,05,40,000 Total Operating Costs 58,38,69,616 4 Operating Profit/ (Loss) (7,40,71,642) 5 PLI (Operating Profit / Sales) {%) -14.53 5. In order to benchmark the international transactions assessee company chosen 12 comparables having arithmetic mean of 6.62% which the Ld. TPO has accepted. Accordingly, the PLI of assessee company is computed at loss of 4.87% resulting into a difference of 11.49% and consequently the Ld. TPO proposed the adjustment on account of ALP at Rs. 2,19,74,033/-. 6. Pursuant to the TP adjustment made by the Ld. TPO, the AO made addition of Rs. 2,19,74,033/- to the total income of the assessee. The AO also disallowed the claim of depreciation of the assessee company to the tune of Rs. 5,19,11,719/- on opening WDV of intangible assets of Rs. 20,76,46,875/- by following A.Y. 2006-07. The AO also disallowed an amount of Rs. 1,13,20,000/- debited by the assessee as provision for warranty and liquidated damages on the ground that its very nature suggests that this is a contingent in nature hence not allowable. The AO also made disallowance on account of prov....
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....out any factual or legal basics. 11. The Ld. A.R. for the assessee challenging the impugned disallowance made by the AO as well as the Ld. CIT(A) on account of depreciation on intangible assets contended that this issue has already been decided in favour of the assessee in its own case for A.Y. 2007-08 vide order dated 03.01.2019 in ITA Nos. 4154 & 4337/M/2015 & CO No. 147/M/2015 and facts of the case under consideration vis-à-vis A.Y. 2008-09 are identical. This factual position has not been controverted by the Ld. D.R. who has otherwise relied upon the order passed by the Ld. CIT(A) to support his argument. 12. We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2007-08 (supra) which is on identical facts and CIT(A) after thrashing the facts in the light of the law laid down by Hon'ble Supreme Court in CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) decided the issue in favour of assessee by returning following findings: "9. We have considered rival contentions and perused the material on record including cited case laws. We have observed that the assessee company is engaged in the business ....
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....under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.-- For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean-- [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the v....
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.... purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature :" 10. Explanation 3 states that the expression "asset" shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words "any other business or commercial rights of similar nature" in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 11. In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act.' 12. In the present case the 'Business Identification Schedule' appended to the Agreement specified the b....
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....l definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill was nothing more than 'the probability that the old customers would resort to the old places' was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business." The Court had further explained that: "A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in IRC v. Muller and Co.'s Margarine Limited [1901] AC 217 (HL) that although goodwill was easy to describe, it was nonetheless difficult to define. In a progressing business goodwill tends to show progressive....
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....liabilities. Positive goodwill arises when the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities. Negative goodwill arises when the aggregate fair values of the identifiable assets and liabilities of the entity exceed the acquisition cost." 17. At this stage, it is also relevant to refer to Accounting Standard 10 as issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under:-- "16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess id termed as 'goodwill'. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise." 18. It is also relevant to note that Smifs Securities Ltd. (supra) was a case where assets of company - YSN shares and Securities (P.) Ltd. were transferred to Smifs Securities Ltd. under a scheme of amalgam....
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....f decision of Hon'ble Supreme Court in the case of CIT v. Smifs Securities Limited(supra). This disposes of ground No. 1 to 4 of the assessee's appeal. We order accordingly." 13. So following the order passed by the co-ordinate Bench of the Tribunal in assessee's own case qua the identical issues, we are of the considered view that when undisputedly the assessee has acquired food and pharma division of L&T by virtue of agreement dated 26.05.2005 by paying excess consideration of net asset value, the excess was reflected as goodwill in the books of accounts of the assessee under the head "intangibles and as such assessee is entitled for claiming depreciation on the said intangible assets/goodwill as held by Hon'ble Supreme Court in case of CIT vs. Sumit Securities Ltd. (supra). Consequently, ground Nos. 1, 2, 3 & 4 raised by the assessee are allowed. Ground No. 5 14. This ground has not been pressed by the Ld. A.R. for the assessee during the course of argument, hence the same is dismissed. ITA No. 4155/M/2015 for A.Y. 2008-09 (Revenue's appeal) Ground Nos. 1, 2 & 3 & CO No. 148/M/2015 for A.Y. 2008-09 (Assessee's objections) Ground Nos. 1, ....
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....s of generic observations without going into the functionality of the particular segments/international transactions TP adjustment cannot be deleted. 20. In these circumstances it is agreed by the authorized representatives of the parties to the appeal that TP issue is required to be decided afresh by the TPO by grouping commission income and supervisory income together and the remaining international transactions are to be benchmarked independently by going into the functionality of the same. So grounds No. 1 to 3 of Revenue's appeal and grounds No. 1 to 4 of assessee's cross objection are remitted back to the Ld. TPO to decide afresh after providing opportunity of being heard to the assessee. Ground No. 4 of Revenue's appeal 21. The AO made disallowance of Rs. 95,67,696/- on account of license fee/royalty. In the P&L account in schedule No. 1 under the head "Operating expenses" the AO noticed that there is a payment shown in the nature of license fee/royalty. The AO disallowed the same by returning following findings: "(i) The company has failed to provide any justification of this expense and whether any income was generated during this year by the ....