TaxTMI 
TaxTMI 
2025 (7) TMI 1167
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....sessment order passed by the learned Deputy Commissioner of 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....
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....will acquired from CTPL, which is an intangible asset eligible for deprecation under section 32(1) r.w.s 2(11) of the IT Act. 4. Ground 4 - Depreciation on purchased goodwill - Acquisition 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 ....
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....t year's income. 7.3 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 2008-09 of Rs. 18,73,52,790 on goodwill purchased from 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 dow....
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....ailing to appreciate that the issue of alleged provision of brand promotion services by way of incurring excessive AMP expenditure does not arise in the Appellant's case; 9.5 Without prejudice to the above, on the facts and in the circumstances of the case and in law, while arriving at the arm's length AMP expenditure, learned DCIT and Hon'ble 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 product....
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....ncinnati Sub-Zero Products, Inc. and Dimension Distributing Inc. from the economic analysis, which are comparable to the Appellant's indenting activity in terms of functions, asset base and risk profile. The Appellant therefore prays that the addition made by the learned DCIT of Rs. 4,41,90,721 under Section 143(3) read with Section 144(C) of the Act on the basis of the order passed by the learned TPO under Section 92CA(3) of the Act be deleted. 12. Ground 12 - TP adjustment 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 an....
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....in nature. Therefore, the same needs no specific adjudication. 6. Grounds no.2-5, raised in assessee's appeal, pertain to the claim of depreciation on manufacturing, supply and maintenance contracts and goodwill pursuant to the acquisition of two undertakings in a slump sale arrangement in earlier years. 7. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the manufacturing, installation and sale (including trading) of scientific/medical laboratory equipment and chemicals. For the year under consideration, the assessee 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 t....
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....sides and perused the material available on record. During the assessment year 2008-09, the assessee acquired by way of slump sale on a going concern basis the Qualigens Fine Chemicals Division from GSK Pharma Ltd. Further, during the assessment year 2009-10, the assessee acquired on a slump sale basis the Analytical Technologies and Environmental Instrumentation Division from Chemito Technologies Pvt. Ltd. As per the assessee, amongst various other assets acquired as part of the above-mentioned slump sale acquisitions, the assessee, inter-alia, acquired certain business/commercial rights in the form of certain manufacturing contracts, 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 th....
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....tilisation leading to considerable cost advantages. Thus, the learned AR submitted that the same is likely to continue in the future. As regards the supply contracts, the learned AR submitted that the Qualigens business enjoys a leadership position with about 30% market share in the speciality chemicals market, and thus, even though supply contracts entered into on an annual basis, majority of these relationships with customers/distributors date back to 30 to 40 years and thus expected to be renewed and continued on year-on-year basis. Further, as regards the maintenance contracts, the learned AR submitted that these contracts were entered 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 tha....
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....ion on Goodwill recognised by the assessee in two transaction of acquisition of two units. The assessee claimed that those acquisitions are for purchase of unit for lumpsum consideration, as going concerns in the nature of slump sale, which is subject to capital gain tax us 50B in the hand of seller. Whereas the according the Assessing officer the acquisitions are in the nature of amalgamation. Before us, the learned counsel has referred to various clauses of business transfer agreement (BTA) in respect of units acquired from GSK and CTPL respectively. On perusal of relevant clauses referred, we find that transaction in both the cases are of slump sale 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 ....
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.... "Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as 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 i....
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....eld to be goodwill in nature and the assessee was allowed depreciation on the same under the provisions of the Act by the coordinate bench of the Tribunal. Accordingly, accepting the alternative plea of the assessee and respectfully following the decision of the coordinate bench of the Tribunal rendered in assessee's own case, we direct the AO to treat the excess of consideration paid over and above the fair value of the assets and liabilities as goodwill and allow the depreciation on same to the assessee under the provisions of the Act. On similar lines, the depreciation on goodwill amounting to INR 15,96,20,019 claimed by the assessee in the year under consideration is also allowed. As a result, grounds no.2-5, raised in assessee's appeal, are allowed. In view 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, a....
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.... section 80 of the Income-tax Act do not apply to unabsorbed depreciation covered by section 32(2) of the Act?" 20. While answering the aforesaid questions in favour of the assessee, the Hon'ble Delhi High Court observed as follows: - "9. The question that follows for consideration is as to whether the loss referred under section 80 of the Act also includes unabsorbed depreciation and investment allowances. For this we may examine the provisions of losses referred to under section 80 of the Act. Section 72 provides for provisions with regard to carry forward and set off of business losses. According to this section, where for any assessment year, the net result of computation under the head 'profits and gains of business or profession' is a loss to the assessee, not being 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....
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....n within the time allowed under section 139(1) and thus the determination of the loss is permissible when the return is filed within the stipulated time under section 139(1). There is no reference to the provision for carry forward of depreciation or investment allowance in section 80." 11. In the case of CIT v. Virmani Industries (P.) Ltd. [1995] 216 ITR 607 / 83 Taxman 343 (SC), it was held as under:- "The assessee was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The assessee had stopped the business in that year and had let out the factory on hire. Ten years later, i.e., in the previous year relevant to the assessment year 1965-66, the assessee started the business of manufacture of steep pipes and that business used part of the old machinery 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 dep....
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....d current year's depreciation had to be deducted from the total income of the assessment year." 13. In the case of CIT v. J. Patel & Co. [1984] 149 ITR 682/ 18 Taxman 204, the Division Bench of our High Court endorsed with approval the case of Madras High Court titled as CIT v. Nagapatinam Import & Export Corpn. [1975] 119 ITR 444/[1980] 3 Taxman 150 wherein it was held as under :- "The point to be considered is whether the allowance for depreciation is to be equated with the loss that had been contemplated for apportionment among the partners. For some purposes of the Act, depreciation forms part of the loss. The income of the firm or the loss in the hands of the firm cannot be computed without making allowance for depreciation in case the assessee is eligible for, and has made such a claim by complying with the relevant provisions of the 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 d....
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....able in case of such depreciation allowance. Further, section 32(2) being the provision providing the manner of carry forward and set off of such allowances, the provisions of section 75 are inapplicable section 75 which provides that the partners of a registered firm are exclusively entitled to carry forward and set off losses are only applicable in respect of business losses or losses in speculation business and cannot be applicable to carry forward and set off of depreciation allowance." 15. Learned counsel appearing for the Revenue relied upon the case of Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512/56 Taxman 4K (SC) in support of his submission that unabsorbed depreciation is indeed a part of loss and if the same was not claimed within the due time under section 139, it could not be allowed to be carried forward. In view of what has been discussed above the 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 statut....
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....crores instead of INR 17.82 crores as reflected in the return of income on account. Since this issue only requires factual verification, therefore, we restore this issue to the file of the jurisdictional AO with a direction to consider the correct figure of brought forward losses and unabsorbed depreciation pertaining to the assessment year 2009-10 for carry forward and set off in the year under consideration. As a result, ground no.8.1, raised in assessee's appeal, is allowed for statistical purposes. 24. Grounds no.8.2-8.4 were not pressed during the hearing. Accordingly, the same are dismissed as not pressed. 25. The issue arising in ground no.9, raised in assessee's appeal, pertains to Transfer Pricing Adjustment on account of advertisement, marketing and sale promotion ("AMP") expenses incurred by the assessee. 26. The brief facts of the case pertaining to this issue, as emanating from the record, are: 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 assesse....
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....s the contention of the assessee that out of the total expenditure of INR 26.03 crore incurred by the assessee and shown under the head selling and distribution expenses in the profit and loss account, an amount of INR 24.39 crore pertain to the expenditure incurred by the assessee in the form of sale of goods which relate to assessee's chemical manufacturing business which was acquired in the earlier year within India, the learned DRP directed the TPO to examine whether the sum of INR 24 crore forming part of the AMP expenses actually pertain to the chemical unit. The learned DRP further directed the TPO that if the said expenditure is not related to the transaction related to Associated Enterprises, then the adjustment on account of AMP expenditure may be suitably modified after excluding such expenditure. Pursuant to the DRP's directions, no changes were made to the Transfer Pricing Adjustment on account of AMP 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 h....
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....s) 33.38 31. Since the arithmetic mean of gross profit margin of the companies considered as comparable by the TPO was 44.55%, by considering the same as arm's length margin, the TPO computed the transfer pricing adjustment of INR 6,42,81,180.86 in respect of the international transaction of import of finished goods. 32. The learned DRP, vide its directions, rejected the contentions of the assessee and upheld the rejection of 2 companies, i.e. Satyatej Commercial Co. Ltd. and Siemens Ltd., by the TPO. In conformity, the AO passed the impugned final assessment order, incorporating the transfer pricing adjustment on account of the international transaction of import of finished goods. Being aggrieved, the assessee is in appeal before us. 33. During the hearing, the learned AR submitted that if only one company, i.e. Satyatej Commercial Co. Ltd., which is in a similar line of business, is directed to be included as a comparable, then the assessee 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 medic....
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....same is not comparable to the assessee. The learned DRP, vide its directions, upheld the exclusion of this company on the basis that the goods dealt with by this company are different from the goods traded by the assessee. 37. Therefore, from the record, it is evident that one of the factors for excluding this company as a comparable by the lower authorities is product dissimilarity, as Satyatej Commercial Co. Ltd. is dealing in surgical, medical goods and disposables. On the other hand, the assessee is importing laboratory equipment and related products from its Associated Enterprises. We find that while analysing the relevance of product similarity for benchmarking the international transactions by adopting the RPM as the most appropriate method, the coordinate bench of the Tribunal in its recent decision in Troy Chemicals India Pvt. Ltd. v/s CIT, in ITA No. 5933/Mum./2024, vide order dated 30/05/2025, observed as follows: - "13. Therefore, in the present 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 pre....
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....matter, i.e., the relevance of product similarity for benchmarking the international transaction by adopting the RPM as most appropriate method, the Co-ordinate Bench of the Tribunal in the case of Mattel Toys (I) (P) Ltd. vs. DCIT, reported in (2014) 30 ITR(T) 283 (Mumbai), observed as follows:- "38. Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made. Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent enterprise in comparable uncontrolled transactions vis-a-vis the one in the controlled transactions, therefore, in such a situation, the nat....
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....perties or services rather than the similarity of products, and therefore, the functional attribute is a primary factor while undertaking the comparability analysis under the RPM." 38. Thus, in the aforesaid decision, the coordinate bench arrived at the conclusion that for benchmarking under the RPM, functional attribute is a primary factor rather than the similarity of the products. Therefore, respectfully following the aforesaid decision, we do not find any merit in the findings of the lower authorities in excluding Satyatej Commercial Co. Ltd. as a comparable on the basis that it is dealing in different products. 39. As regards the finding of the TPO that this company has purchases in foreign currency only amounting to INR 51 lakh out of the total purchases of INR 3.53 crore, as compared to total purchases in foreign currency of the assessee amounting to INR 51 crore, we are of the considered view that purchase in foreign currency will not have any impact on the gross sales margin which are compared under RPM, and thus the fact that the major part of the products were procured by this company locally is of no relevance. Further, as regards the freight and forwarding cost f....
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....that some of the companies selected by the assessee from the RoyaltyStat database were not comparable due to differences in the FAR. Accordingly, the TPO, vide order passed under section 92CA(3) of the Act, excluded the following companies for benchmarking the international transaction of receipt of indenting commission: - Contractor Sales Agent Smith & Nephew, Inc (S&N) Harry Kraus VipMed Fulfillment Services, Inc Cincinnati Sub-Zero Products, Inc. Dimension Distributing Inc. 44. As the mean of the commission rate of the remaining 5 comparable companies was 15.83%, the TPO made a Transfer Pricing Adjustment of INR 4,41,90,721 in respect of the international transaction of receipt of indenting commission. 45. The learned DRP, vide its directions, upheld the aforementioned companies by the TPO for benchmarking the international transaction of receipt of indenting commission. In conformity, the AO passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us. 46. During the hearing, the learned AR submitted that the TPO has adopted an inconsistent stand vis-à-vis the comparable companies selected. It was submi....
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....the assessee, which is operating in India, having a large population. Accordingly, the TPO held that this company is not comparable to the assessee and directed the exclusion of the same. The learned DRP upheld the exclusion of this company as a comparable on the basis that the products dealt with are different from the medical laboratory equipment distributed by the assessee. The learned DRP noted that most of the products dealt with are for the maintenance of room temperature, such as Hypo/Hypothermia Systems (Water), Convective Air Therapy System (Air) and Heater/Cooler System. Thus, the learned DRP held that this company is not comparable to the assessee as the products distributed are different. From the perusal of the Sales Representation Agreement entered into by RG Medical Diagnostics, forming part of the paper book from pages 1107-1110, we find that this company was also operating in Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island and New York. Further, we find that the products dealt with by this company are in temperature monitoring. Therefore, it is evident that not only this company is having similar product line as that of Cincinnati Sub-Zero P....
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.... this evidence does not pertain to the year under consideration. Accordingly, the determination of the Nil arm's length price by the TPO. In conformity, the AO passed the impugned final assessment order. 54. We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee reimbursed expenditures in the nature of SAP development expenses, Internet charges, professional expenses and administrative expenses to its Associated Enterprises for the cost incurred on behalf of the assessee. Such reimbursement was made by the assessee without paying any markup on the cost. The TPO, as well as the learned DRP, treated the arm's length price of this transaction at NIL on the basis that the assessee has failed to justify/prove the rendition, necessity and benefit of this expenditure. We find that during the proceedings before the learned DRP, the assessee filed the details of reimbursement paid to the Associated Enterprises by way of additional evidence. As regards the SAP development expenses, the assessee furnished the invoice raised by Dell Perot Systems in respect of the India rollout project. As regards the ....
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....ows: - "7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TP....