TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1167
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.... Income-tax - 15(3)(1), Mumbai ("DCIT") are bad in law and merit to be set aside. 2. Ground 2 - Depreciation on contracts - Acquisition from Glaxosmithkline Pharmaceuticals Ltd ('GSK') in AY 2008-09 2.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 10,05,95,058 on the written down value of business or commercial rights being the manufacturing contracts as on 1 April 2009 under section 32(1) r.w.s 2(11) of the IT Act. 2.2 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 2,42,65,076 on the written down value of business or commercial rights being the supply contracts as on 1 April 2009 under section 32(1) r.w.s 2(11) of the IT Act. 2.3 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation on the written down value of manufacturing and supply contracts based on the following observations which are incorrect on facts: * Claim for depreciation on contracts was not made in the return of income fo....
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....ition from GSK in AY 2008-09 4.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 10,53,85,945 on the written down value of purchased goodwill as on 1 April 2009 acquired from GSK which is an intangible asset eligible for deprecation under section 32(1) r.w.s. 2(11) of the IT Act. 4.2 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation on the written down value of purchased goodwill as on 1 April 2009 although depreciation is a mandatory allowance under section 32(1) read with Explanation 5 thereto of the IT Act. 4.3 Without prejudice to the above, the learned DCIT and the Hon'ble DRP erred in concluding that the claim for depreciation made by the Appellant during the assessment proceedings is an additional claim which cannot be accepted. Ground 5 - Depreciation on purchased goodwill - Acquisition from CTPL in AY 2009-10 5.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 5,42,34,074 on the wri....
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....om GSK. 7.4 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing depreciation of Rs. 262,345 relating to depreciation on software expenses treated as capital expenditure in AY 2007-08. 8. Ground 8 - Allowance of brought forward unabsorbed depreciation pertaining to AY 2009-10 8.1 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing the unabsorbed depreciation of Rs. 17,82,24,085 carried forward and brought forward as per the original return of income of AY 2009-10 and AY 2010-11 respectively. 8.2 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing brought forward and consequent set off of the unabsorbed depreciation of AY 2009-10 of Rs. 14,05,14,593 on the written down value of goodwill purchased from GSK as on 1 April 2008. 8.3 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing brought forward and consequent set off of the unabsorbed depreciation of AY 2009-10 of Rs. 7,23,12,099 on goodwill purchased ....
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....DRP erred in confirming learned TPO's actions of - a. applying bright line test for determining compensation towards AMP expenditure incurred by the Appellant and failing to appreciating that no such method has been prescribed under the IT Act and Income-tax Rules, 1962; b. including the expenditure in the nature of cost of discounted sales pertaining to the locally acquired chemical manufacture division (referred to in para 9.4 above) within the ambit of AMP for the purpose of computing AMP/Sales ratio; c. disregarding the fact that total advertisement and marketing expenditure included substantial expenses towards cost of goods sold that were in the nature of discount; d. failing to appreciate that the alleged AMP expenditure incurred by Appellant was towards promoting its products and not towards promoting the brand; e. erroneously holding that the Appellant should have earned a mark-up on the AMP expenses incurred for providing the purported brand promotion services to AEs and applying aforementioned mark-up; and f. considering inappropriate comparables for computation of the aforementioned mark-up The Appellant therefore prays that the addition made by the le....
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....justment of Rs. 5,98,88,781 relating to reimbursement expenses On the facts and in the circumstances of the case and in law, the Hon'ble DRP and learned DCIT erred in confirming the learned TPO's action of determining the arm's length price of the appellant's international transaction of reimbursement of expenses (in the nature of SAP development cost, inter-connectivity charges, professional expenses and administrative expenses) as Nil and in doing so the Hon'ble DRP failed to take cognizance of the fact that these expenses are essential to the business of the Appellant. 13. Ground 13 - Short credit of tax deducted at source (TDS') On the facts and circumstances of the case and in law, the learned DCIT erred in granting credit for TDS of Rs. 33,83,093 as against Rs. 43,83,437 (as per Form 26AS) claimed by the Appellant, thereby there is a short tax credit of TDS of Rs. 10,00,344. 14. Ground 14A - Penalty proceedings On the facts and in the circumstances of the case and in law, the learned DCIT erred in initiating penalty proceedings under section 271(1)(c) of the IT Act without appreciating that the Appellant has neither concealed particulars of i....
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....ee filed its return of income on 30/03/2011, declaring a total loss of INR 21,55,61,952. During the assessment proceedings, upon perusal of the details of depreciation claimed by the assessee, it was observed that the assessee has claimed depreciation on manufacturing contracts and supply/maintenance contracts based on acquisition of undertakings from GSK Pharma Ltd and Chemito Technologies Pvt. Ltd. Accordingly, the assessee was asked to justify the allowability of claim of depreciation on manufacturing contracts and supply/maintenance contracts. In its response, the assessee placed reliance upon the Business Transfer Agreements, Valuation Report, and some judicial rulings. The Assessing Officer ("AO"), vide draft assessment order dated 24/03/2014 passed under section 143(3) read with section 144C of the Act, disagreed with the submissions of the assessee on the following basis: - (a) No such intangible assets, such as manufacturing contracts, and supply/maintenance contracts have been transferred to the assessee company in a slump sale. (b) No evidence of these intangible assets being self-generated, and the same were transferred to the assessee in a slump sale. (c) Manufac....
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...., supply contracts and maintenance contracts, which were recognised by the assessee as intangible assets in the financial statements of the concerned year in accordance with the asset recognition criteria as stipulated under Accounting Standard-26. Further, the assessee treated the difference between the purchase consideration paid and the value of all assets (tangible and intangible assets) acquired in the slump sale as goodwill in its financial statements. In support of the submission that the impugned contracts qualify as intangible assets as per the Accounting Standard-26 and were accordingly recorded in the assessee's books of accounts as separate intangible assets, the assessee placed reliance upon the valuation reports from Bansi S. Mehta and Company, Chartered Accountants for acquisition of undertakings from GSK Pharma Ltd and Chemito Technologies Pvt. Ltd. During the hearing, reliance was also placed on the response to comments of the AO by Bansi S. Mehta and Company and additional opinion on the valuation report from M/s Anmol Sekhri Consultants Private Limited. Without prejudice to the aforesaid submission, the learned AR, inter-alia, submitted that even assuming without....
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....d into with customers for annual maintenance of the products sold by Chemito Technologies Pvt. Ltd. business and were entered on the expiry of the warranty period of the products, normally for a period of 5 years. Thus, it was submitted that the maintenance contracts that were unexpired on the date of transfer of business were transferred to the assessee and have been valued on the basis of the discounted net contribution arising from the maintenance contracts. Further, the learned AR by referring to the sample copy of these contracts submitted that these contracts continued between the parties and the assessee beyond the period mentioned in the Business Transfer Agreements, which clearly demonstrates that the future economic benefits have flowed to the assessee from the impugned contracts. 13. From the perusal of the details of manufacturing contracts, supply contracts and maintenance contracts acquired by the assessee pursuant to the above-mentioned slump sale acquisitions, forming part of the paper book from pages 73-83 and pages 214-220, we find that only few of these contracts continued in the year under consideration. Further, the maintenance contracts were all entered into ....
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....ale and not, amalgamation as stated by the Assessing Officer. 5.19 The learned Assessing Officer has further relied on the Explanation 7 to section 43(1) of the Act, to hold that assessee is not entitled for depreciation on the Goodwill recognised. For ready reference, the relevant explanation is reproduced as under: "Explanation 7.-Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. Explanation 7A.-Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business : Provided that such actual cost shall not exceed the w....
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....if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." 5.24 On plain reading of the above proviso, it is clear that same is in relation to allocation of the depreciation on the asset between predecessor and successor entities, whereas in the instant case goodwill was not in existence as intangible asset in the case of predecessor companies from whom the assessee has acquired corresponding units under slump sale. Therefore, the said provision is also not applicable of the facts of the instant case. 5.25 The ratio is in the case of United Breweries (supra) is also not applicable over the facts of case as in the said case there was amalgamation of the three wholly owned subsidiaries whereas in the instant case there is a acquisition of units of third parties by way of slump sale. 5.26 The learned DR before us submitted that allocation of values to the fixed....
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....w of our aforesaid findings, additional ground no.15 needs no separate adjudication. 16. Ground no.6, raised in assessee's appeal, was not pressed during the hearing. Accordingly, the same is dismissed as not pressed. 17. Grounds no.7.1 and 7.2, raised in assessee's appeal, pertain to the set off of brought forward unabsorbed depreciation of preceding years. 18. The brief facts of the case pertaining to this issue, as emanating from the record, are: Vide draft assessment order dated 24/03/2014, the AO denied the set off of brought forward losses as well as unabsorbed depreciation pertaining to the assessment year 2008-09 on the basis that for the assessment year 2008-09 the assessee filed its return of income under section 139(4) of the Act and as per the provisions of section 139(3) of the Act, for carry forward of losses, the return should have been filed as per the provisions of section 139(1) of the Act. Further, the AO also referred to the provisions of section 80 of the Act. The learned DRP rejected the objections filed by the assessee and upheld the addition proposed by the AO vide draft assessment order. In conformity, the AO passed the impugned final assessment order di....
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.... a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, then so much of the loss shall be carried forward to the next assessment year. Similarly, section 73 deals with losses in speculation business. Sub-section (2) of section 73 provides that for any assessment year any loss computed in respect of speculation business has not been wholly set off under sub-section (1), so much of the loss as is not set off or the whole loss where the assessee had no income from any other speculation business, shall be carried forward on certain conditions. section 74 deals with losses under the head 'capital gains', which is not relevant for the present case. On examining the aforesaid provisions, as referred in section 80 of the Act, prima facie, these sections do not cover or deal with procedure of setting off of unabsorbed depreciation and investment allowance. 10. Section 32 of the Act deals with different types of depreciations. From a plain reading of provisions of sections 72 and 32 it is manifestly clear that section 72 deals with carry forward of unabsorb....
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....chinery which was being used for soap and oil. It was during the assessment proceedings relating to the assessment year 1965-66, the assessee claimed that the unabsorbed depreciation should be brought forward and set off against the profits of the new business in respect of it pertained to the old machinery utilized in the new business. The Apex Court ruled that a depreciation allowance which remained unabsorbed could be set off against the income of the accounting period for relevant to the assessment year 1965-66. " 12. In the case of Haryana Hotels Ltd. (supra), the question for consideration was same as is before us in the present case. Referring to various decisions of different Courts it was held as under:- "Under section 32(2) of the Act the unabsorbed depreciation of earlier previous years forms part of the current year's depreciation and thereafter allowance for depreciation is given from the current year's income. There is no such provision in section 72 of the Act by virtue of which business losses of earlier years shall form part of the current year's business losses and be allowed to be set off from current year's income. However, only the business ....
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....e Act. If there is any other loss apart from the depreciation, then that loss will get added to the amount of depreciation allowable to the assessed under section 32 read with the rules. It is the total of this amount which will be allocated among the partners under the provisions of section 75. However, the Act thus makes a distinction between the unabsorbed allowance of depreciation and other losses. It has already been seen that section 72(2) of the Act provides that where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward; effect shall first be given to the provisions of section 72. In other words, section 72(2) contemplates the loss other than the unabsorbed depreciation being given a priority in the matter of set-off, as there is a time-limit within which such loss can be adjusted. Under section 72(3) the loss other than from depreciation is eligible for being carried forward and set-off only for a period of eight assessment year immediately succeeding the assessment year for which the loss was first computed; in the case of unabsorbed depreciation allowance, there is no such time-limit. The Legislatur....
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....learned counsel is not right in interpreting the provisions of law and also the aforementioned judgment of Supreme Court. In this case, the Supreme Court held that though 'depreciation' is component element of the genus described as 'loss', there is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for the purpose of carrying forward and providing for a special or different treatment to unabsorbed depreciation. 16. We have already noted above that section 32 deals with the different types of depreciation whereas section 80 deals with carry forward of unabsorbed losses other than losses on account of depreciation. If that was not so, there was no need for Legislature to provide specific provision for carrying forward of depreciation under section 32 of the Act. It has already been noted that in case of Nagapatinam Import & Export Corpn. (supra), which was relied by our High Court in the case of J. Patel & Co. (supra) whereby, it was held that section 72 contemplates loss other than unabsorbed depreciation and there was a time-limit within which loss can be adjusted, whereas in the case of unabsorbed depreciation there is no....
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....re: During the Transfer Pricing Assessment proceedings, pursuant to the reference by the AO under section 92CA(1) of the Act to the Transfer Pricing Officer ("TPO") for the determination of the arm's length price of the international transactions entered into by the assessee, it was observed that the assessee had incurred an expenditure of INR 26,03,52,241 on advertisement and sales promotion as per the profit and loss account of the assessee. Accordingly, the assessee was asked to show cause as to why the said expenditure should not be considered as creating a valuable brand for its Associated Enterprises. In the absence of any response from the assessee, the TPO proceeded to conclude the Transfer Pricing Assessment on the basis of the material available on record. Vide order dated 29/01/2014 passed under section 92CA(3) of the Act, the TPO held that the assessee is creating a valuable brand by incurring huge expenses on AMP in India. It was further held that in the present case, there is an arrangement in which the ownership in the Thermo Fisher brands is not transferred to the assessee, but the assessee is incurring substantial AMP expenses, which improves the brand value of the....
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....expenses incurred by the assessee. Being aggrieved, the assessee is in appeal before us. 28. Having considered the submissions of both sides and perused the material available on record, in the present case, it is evident that the TPO for making the impugned addition has adopted the Bright Line Test, which has been held to be not having any statutory mandate by the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT, reported in (2015) 374 ITR 118 (Del). Further, we find that no material has been brought on record by the Revenue to prove the existence of any arrangement, understanding or action in concert between the assessee and its Associated Enterprises for incurring the AMP expenses on behalf of the Associated Enterprises. Thus, on this basis alone, we do not find any merits in the impugned Transfer Pricing Adjustment made on account of AMP expenses incurred by the assessee. As a result, ground no.9 raised in assessee's appeal is allowed. 29. The issue arising in ground no.10, raised in assessee's appeal, pertains to the Transfer Pricing Adjustment in respect of the international transaction of import of finished goods. 30. The brief fact....
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....essee would fall within the arm's length margin range. By referring to the relevant extract of the Annual Report of Satyatej Commercial Co. Ltd., the learned AR submitted that this company is engaged in the trading of surgical and medical instruments, which is similar to the trading of laboratory equipment undertaken by the assessee. Thus, it was submitted that this company is comparable to the assessee for benchmarking the international transaction entered into by adopting RPM as the most appropriate method. 34. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities and submitted that as per the annual report of this company, it has inventory in the nature of "surgical, medical goods and disposables", therefore, it is necessary to examine the percentage of revenue from trading in disposables. 35. We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the profile of the assessee, that it was engaged in importing laboratory equipment and related products from its Associated Enterprises and selling the same to the Indian customers. Further, the tran....
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....sent case, before proceeding further, it is pertinent to analyse the relevance of product similarity for benchmarking the international transactions by applying the RPM as the most appropriate method. The RPM has been prescribed as one of the methods under Rule 10B(1)(b) of the Income Tax Rules ("the Rules") for the determination of arm's length price under section 92C of the Act. Rule 10B(1)(b) of the Rules reads as follows: - "Section 10B(1)(b) in Income Tax Rules, 1962 (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of servi....
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....by an independent enterprise in comparable uncontrolled transactions vis-a-vis the one in the controlled transactions, therefore, in such a situation, the nature of products has not much relevance though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than similarity of products. In RPM other attributes of comparabilities than the product itself can produce a reliable measure of arm's length conditions. The main reason is that the product differentiation does not materially effect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen. Since the gross profit margin is the main criteria while evaluating the transactions in the RPM wherein price is identified at which property or services are resold and normal gross profit margin is derived at by the enterprise which is ded....
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....f the products were procured by this company locally is of no relevance. Further, as regards the freight and forwarding cost forming part of the operating cost, we find that before the learned DRP, the assessee agreed that the same could be excluded from the cost of goods sold for the purpose of benchmarking. Accordingly, in view of the aforesaid findings, we direct the TPO/AO to consider Satyatej Commercial Co. Ltd. as a comparable to the assessee and exclude freight and forwarding costs while computing the margin of this company. As regards the other company which was excluded by the TPO, we are not expressing any findings in light of the submission of the learned AR as noted above, and objections, if any, against the same are kept open for adjudication if it arises in the assessee's case in future. As a result, ground no.10 raised in assessee's appeal is allowed. 40. The issue arising in ground no.11 and additional ground no.16, raised by the assessee, pertains to the Transfer Pricing Adjustment in respect of the international transaction of receipt of indenting commission. 41. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the ....
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....the comparable companies selected. It was submitted that the TPO has excluded certain companies engaged in particular product profiles, even though other companies having similar product profiles have been accepted for benchmarking. The learned AR submitted that Smith & Nephew, Inc., excluded by the TPO, has a similar product profile to Hand Innovations Inc. Further, it was submitted that, similarly, Cincinnati Sub-Zero Products Inc., excluded by the TPO, has a similar product profile to RG Medical Diagnostics. Thus, the learned AR sought the exclusion of Hand Innovations Inc. and RG Medical Diagnostics for benchmarking the international transaction of receipt of the indenting commission. 47. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities. 48. Having considered the submissions of both sides and perused the material available on record, we are confining our findings only in respect of the exclusion of Hand Innovations Inc. and RG Medical Diagnostics as sought by the learned AR. Other objections, if any, against the TPO's findings on this adjustment are kept open for adjudication if they arise in the assessee's case in future. 49....
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....t line as that of Cincinnati Sub-Zero Products Inc. but this company is also operating in the territory similar to Cincinnati Sub-Zero Products Inc. Therefore, we agree with the submissions of the learned AR and direct the TPO to also exclude RG Medical Diagnostics for benchmarking the international transaction of receipt of the indenting commission. As a result, ground no.11 and additional ground no.16 raised in assessee's appeal are allowed. 51. The issue arising in ground no.12, raised in assessee's appeal, pertains to the Transfer Pricing Adjustment relating to reimbursement of expenses. 52. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee reimbursed certain expenditure total amounting to INR 5,98,88,781 in the nature of SAP development expenses, Internet charges, professional expenses and administrative expenses to its Associated Enterprises. Accordingly, during the Transfer Pricing Assessment proceedings, the assessee was asked to show cause why the arm's length price for the international transaction of reimbursement of expenditure should not be considered as Nil. The TPO, vide order ....
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....ollout project. As regards the Internet services received by the assessee, the assessee placed on record the invoices raised by AT&T relating to the assessment year 2011-12 on the basis that the invoices for the year under consideration are not available, as the data is very old. Further, as regards the reimbursement of professional expenses, the assessee placed on record the invoices raised by the legal consultant for various assignments in India. It is evident from the record that the TPO neither undertook any benchmarking analysis nor searched for any comparable transaction for considering the arm's length price at NIL. In this regard, it is relevant to note the following observations of the Hon'ble Delhi High Court in CIT v/s Cushman and Wakefield (India) Pvt. Ltd., reported in [2014] 367 ITR 730 (Del.): - "35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercis....