TaxTMI 
TaxTMI 
2025 (9) TMI 1119
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....iation on Goodwill a) erred in disallowance of depreciation amounting to Rs 60,97,69,927 on goodwill acquired during last year on purchase of switchgear division from Indo Asian Fusegear Limited on slump sale basis; b) erred in denying depreciation on goodwill on the ground that in case of amalgamation as per 6 proviso to section 32 of the Income Tax Act, 1961 ('the Act'), aggregate depreciation of amalgamated company and amalgamating company cannot exceed the depreciation which would have been allowed if there was no amalgamation, without appreciating that in the present case, goodwill is acquired through slump sale and not under amalgamation. c) erred in upholding disallowance on the ground that depreciation on opening WDV of goodwill is not the issue under consideration for AY 2012-13; without appreciating the fact that the appellant had acquired the switchgear division in AY 2011-12 through slump sale from Indo Asian Fusegear Limited and the Hon'ble CIT(A) for AY 2011-12 has mistakenly treated the transaction of slump sale as amalgamation. Ground 3-Transfer pricing adjustments General ground a) erred in confirming the act....
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....unt of import of raw material, sample spare parts and finished goods of INR 11,10,85,819 i) erred in stating that deprecation on goodwill to be considered as non-operating for the purpose computation of PLI only in case depreciation on goodwill is disallowed without appreciating that the said depreciation on goodwill and non- compete fees are exceptional/extraordinary in nature and cannot be linked with its allowability under section 32; j) erred in rejecting the economic analysis conducted by the Appellant wherein the appellant applied TNMM with respect to benchmarking the transaction of import of raw material, sample spares parts and finished goods from AE; k) erred in considering depreciation on goodwill and amortization of non-compete fees as operating expense while calculating operating margin of tested party without appreciating that depreciation/amortization on goodwill and non- compete are exceptional/extraordinary in nature, l) erred in considering depreciation on goodwill and amortization of non-compete fees as operating expenses on the ground that as per transfer pricing provisions there is no mechanism under which an adjustment can be....
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....er on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in directing to exclude the depreciation on goodwill from operating cost for the purpose of calculating PLI of the assessee on the ground that the same was disallowed by the AO and upheld by the CIT (A), even though the assessee has debited the said depreciation to the profit and loss account and the same was claimed by the assessee as an expense while computing the taxable income without appreciating the fact that operating cost relating to PLI working for TP comparability purpose has got nothing to do with the disallowance made on corporate issues. 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in directing to exclude the depreciation from operating cost for the purpose of calculating PLI of the assessee, without understanding the nuances of TP procedures that such exclusion would lead to skewed results in IP comparability as all the depreciation in the nature of operating expenses have been taken into account in comparables as operating cost while working out the PLI of comparables and that exclusion of the same in the hands of assessee alon....
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.... separately and will be dealt along with other grounds. Ground No.2 deals with corporate issue in respect of depreciation on goodwill. Ground no.3 to 6 relates to transfer pricing adjustments. We will take up the grounds seriatim. 5. Brief facts of the case are that assessee is a company engaged in business of manufacturing and sale of miniature circuit breakers, residual current circuit breakers and wiring accessories and trading of distribution boards and circuit breakers. It was incorporated on 11.08.2010 in the name of Era Electricals Pvt Ltd. (EEPL). It acquired the business of switch gear division of Indo Asian Fusegear Ltd. (IAFL) who was an unrelated third-party seller, through a slump sale on 22.07.2010 for which the effective date of business transfer was 09.09.2010. Name of the assessee after the said acquisition was changed to Indo Asian Electric Pvt. ltd. (IAEPL) on 14.04.2011. Later, assessee again changed its name on 21.03.2012 to Novateur Electrical and Digital Systems Pvt. Ltd. (hereinafter referred to as 'Novateur' or the 'assessee'). Assessee filed its return of income on 30.11.2012 reporting a loss at Rs. 69,68,351/-. The return was revised on 28.11.2013 repo....
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....in the books of accounts of the assessee. Assessee claimed depreciation on goodwill so accounted for, it being goodwill arising on account of acquisition of switchgear division, not being a self-generated goodwill. 5.3. Claim of depreciation on the said goodwill in Assessment Year 2011-12 was disallowed by the ld. Assessing Officer on the premise that fair market value adjustment made to land, building and plant and machinery is not correct. Ld. CIT(A) also confirmed the said disallowance made by the ld. Assessing Officer. While confirming this disallowance, ld. CIT(A) referred to the provisions under the Act which dealt with case of amalgamation wherein goodwill arose. He referred to the sixth proviso (fifth proviso) of section 32(1), explanation 7 to section 43(1) and explanation 2 to section 43(6)(c). Ld. CIT(A) also noted while accepting the arguments of the assessee that ld. Assessing Officer had not brought on record anything concrete showing that the valuation report for the purpose of purchase price allocation is incorrect. Ld. Assessing Officer did not refer the matter to DVO, in case he was not in agreement with the valuation made by the assessee. Thus, he noted that a....
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....sment Year 2011-12 stands quashed by the order of Coordinate Bench, the disallowance for the claim of depreciation so made also stands deleted which would give rise to opening WDV for the block of assets in respect of goodwill. Therefore, on this premise alone, the statement made by ld. CIT(A) while sustaining the addition is effaced. Thus, assessee asserted that once the asset is included in the block of assets and depreciation of such an asset is allowed in the year in which addition is made, depreciation should also be allowed in the subsequent years. 6. It is undisputed fact that the claim of assessee in respect of depreciation on goodwill arising on account of slump sale transaction stands on the strength of decision of the Coordinate Bench held in favour of the assessee on the jurisdictional issue without going to the merits of the claim. The assessment order itself had been quashed as bad in law, being barred by limitation. The transaction of slump sale giving rise to goodwill on account of acquiring switchgear division by the assessee, is not in dispute except for the issue raised by the ld. Assessing Officer regarding the valuation of assets. In respect of this, from th....
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.... computing the profit level indication (PLI) for the transactions of import of raw materials, etc., he noted that payment of goodwill and non-compete fees is related to the business of the assessee which is substantiated by gradual increase in the business of the assessee in the subsequent years and thus, upheld the findings of the ld. TPO of treating the depreciation as operating in nature. However, according to him, since the depreciation on goodwill itself has been disallowed, he held that the same should not form part of expenses while computing the operating margin. Thus, he directed the ld. TPO that in case the depreciation on goodwill is held as allowable in subsequent appellate proceedings, then in that case, the depreciation on goodwill is to be treated as operative expense while computing the margin. We will deal with this aspect of depreciation on goodwill separately while adjudicating upon the grounds relating to transfer pricing adjustment. 7. For the present issue raised vide ground no.2 along with its sub- grounds, we note that goodwill per se is an intangible asset within the meaning of explanation 3 to section 32(1)(ii) and is thus eligible for depreciation. We ....
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....st of the asset transferred by the amalgamating company to the amalgamated company shall be the same as it would have been in the hands of the amalgamating company. This explanation will not have any application where the asset is not transferred by the amalgamating company and the where the amalgamated entity incurred a cost for acquiring the asset. In the present case before us, assessee has paid consideration for acquiring the assets of the switchgear division which is more than the fair market value of the assets. Similarly, in respect of explanation 2 to section 43(6)(c), it relates to acquisition of a subsidiary company by its holding company or vice versa and for the transaction of amalgamation. It does not deal with transaction of slump sale. Thus, the provisions referred by the authorities below are misplaced for the impugned transaction of slump sale undertaken by the assessee which gave rise to the goodwill on which depreciation is claimed. 7.3. Considering the factual matrix on record and judicial precedents referred above as well as applicable provisions of the Act, we hold that assessee is eligible to claim depreciation on the goodwill which is arising out of acqui....
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.... in nature to arrive at its PLI at 10.65% (OP/OR). The working of the same is tabulated below: Particulars Amt. (INR in Lakhs) Sales/Operating Income (OR) 102,832 Less: Operating Expenses 91,885 Operating Profit (OP) 10,947 OP/OR (Percentage) 10.65% 9.1. Contrary to this, ld. TPO treated depreciation on goodwill and amortisation of non-compete fees as operating in nature by holding that acquisition of business was carried out in Assessment Year 2011-12 and therefore, goodwill cannot be considered to be extraordinary item in the year under consideration. He also observed that assessee had only excluded the depreciation on account of intangible while computing PLI, though it had acquired both tangible and intangible assets under the business transfer agreement for the purpose of executing the slump sale transaction. He also noted that any adjustment for the purpose of benchmarking is possible only in the hands of comparable and not the assessee under the Income-tax Rules. For the treatment of foreign exchange loss as operating expenses, ld. TPO noted that this is purely linked with the business of purchase and sale of the assessee. He further noted th....
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.... Electro Teknica Switchgears Pvt. Ltd. -3.90% 6 O/E/N India Ltd. 16.29% 7 Spaceage Switchgears Ltd. NA 8 S P E L Semiconductor Ltd. 2.90% 9.6. Contrary to the above, ld. TPO applied the filters with certain modifications. There was no change to the export sales filter. For the turnover filter, ld. TPO took average sales greater than or equal to Rs. 50 Crores. For the RPT filter, he took 25% as against 10% by the assessee and ld. Assessing Officer took single year margins instead of multiple year margins by the assessee. Based on these modified filters, the final set of comparable companies which were left for the purpose of bench marking were only three which gave the mean operating margin of 14.83%. Details of the same is tabulated below: Sr. No. Name Average NPI 1. Easun Reyrolle Ltd 6.63% 2. Havells India Ltd 27.69% 3. L & T Ltd (seg) 10.16% Mean 14.83% 9.7. Based on this comparability exercise, ALP adjustment was calculated as tabulated below: ALP of the Import/Purchase transactions Amount (in INR) Import Cost from AE (purchase of components & payment for IT & support service....
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....Rs. 8,56,17,387/- which had been recognized in the final statement and in this year, a sum of Rs. 1,42,69,565/ has been amortized and debited to P&L Account. The assessee submitted before the DRP that amortization of goodwill was an extraordinary item and was not pertaining to the regular operation of the assessee and the same has to be considered as non-operating in nature. The DRP without considering the relevant aspect held that the appellant cannot claim depreciation of goodwill arising out of amalgamation even though they challenged before the DRP whether it is operating or non-operating. Since the amortization of goodwill, one time expenditure, the same should be excluded for the purpose of operating cost." 10.1. Findings of the Coordinate Bench on this issue are dealt in para- 30, whereby it is held that ld. TPO erred in including amortisation of goodwill as part of operating cost. It directed the ld. TPO to exclude amortisation of goodwill from operating cost. The said para is reproduced as under: "30. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regar....
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.... companies which do not exhibit goodwill or amortisation expenses in their financials for the purpose of comparability. Sr. No. Name of the Company Technology Know-how Non-compete fees Product development Software Goodwill Trademark Remarks Page No. 1. Easun Reyrolle Limited INR 5.50 crores Amortisation period- As per IT Act (25%) INR 1 crores Amortisation 20% under SLM INR 7 19 crores Amortisation period -Basis Lease period NR 0.11 crores Amortisation period -16. 21% under SLM 2142-2143 2. Havells India Limited INR 0.51 crores Amortisation period 6 Years Product under development Amortisation period- 5 years NR 9 03 crores Amortisation period 6 Years 2144-2145 3. Larsen & Toubro Limited INR 16 2 crores Amortisation period- 6 years for foreign technology and 3 for Indigenous NR 163 crores Amortisation period - 6 years 2146-2147 4. SPEL Semiconductor Limited INR 0 57 crores Amortisation basis SLM 2148-2149 5.....
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....ime extraordinary expense, not an asset actively employed in the business operations. Further, profit level indicator is a function of different items of income and expenditure which are accounted for in the financial statements, both for the tested party and the comparable. From the factual data tabulated above for the comparable, we note that for a like to like comparison between the assessee and the comparable companies, the amortisation of intangibles asset was not considered while computing the operating margin. Calculation of PLI enables comparability with other similar companies on the basis of margin earned. Objective of calculating PLI is to get the best comparability possible. Non inclusion of depreciation on goodwill and non-compete fees in operating expense is nothing but an adjustment to increase the comparability between the two comparable. 11.1 Considering the facts on record and elaborate discussion made above, we find that goodwill accounted for by the assessee is arising out of the acquisition of switchgear division under a slump sale transaction which is not a self generated one. This is a one time extraordinary expense which cannot be said to be an asset acti....
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....alities of the tested party. This leads to reliable transfer pricing analysis for the purpose of arriving at arms' length pricing and would be more robust and consistent. There are standard turnover filters which evolved over a period of time, such as 1/10 - 10 times. However, there is no such specific rule to provide any guidance on such filters which can be applied. 12.2. In the present case, assessee has adopted turnover filter of Rs. 1 crore against which ld. TPO took it at Rs. 50 crores without any upper limit. Based on the approach of assessee, a list of 18 comparables were identified. Based on the approach of ld. TPO, only three comparables remained for the purpose of benchmarking. We find that a more balanced approach needs to be adopted for taking turnover filter, so as to arrive at a wider pool of potential comparables for a more reliable transfer pricing analysis so as to be in accordance with arm's length principle. Accordingly, in the given set of facts, we find it appropriate to remit this specific issue back to the file of ld. TPO/AO for undertaking the exercise once again with a relaxed quantitative filter having lower and upper range of turnover and comparable w....
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....nished and are placed on record. This comparable was rejected on account of it being consistent loss making. Contrary to this observation, it was submitted that this company incurred a loss only for AY 2012-13 but recorded profits during the preceding two years, i.e., AY 2011-12 and 2010-11. In this respect the details were furnished, reproduced as under: Particulars AY 2012-13 AY 2011-12 AY 2010-11 Operating Revenue 3,76,71,332 4,84,07,076 4,40,26,254 Operating Cost 7,15,85,458 4,25,94,712 4,25,60,017 Operating Profit 3,39,14,126 58,12,364 14,66,237 OP/OR% -90.03% 12.01% 3.33% 15.1. Assessee thus, asserted that this company cannot be tainted as a loss making company, as it is not incurring operating losses on a continuous basis. Reliance was placed on the decision of Hon'ble High Court of Bombay in the case of CIT vs. Goldman Sachs India Securities Pvt. Ltd. in ITA No.2222 of 2013. Assessee contended that merely because an otherwise functionally comparable company has incurred a loss in one of the years, it cannot be a ground to reject it for comparability. Loss making companies are part of market and an entity's abili....
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....ed goods being cable tray, shutter socket and switches. 16.1. Before us, assessee has demonstrated differences in the products sold by it to the third parties and to the AEs for their non comparability to apply CUP method. Ld. TPO has applied CUP only on the basis of product similarity without appreciating various other differences pointed out by the assessee, which includes cash discount, excise, freight expenses, administration and finance expenses, warehousing expenses, etc. Accordingly, in the given set of facts, the approach of ld. TPO of adopting two different methods for the transaction of export of finished goods is not justifiable. He has not found any defect with the method adopted by assessee for a certain part of the said transaction, i.e., TNMM. Accordingly, we allow ground No.3(c) to (h) so as to accept the TNMM method arrived at by assessee as its most appropriate method. 17. Ground No.4 seeks inclusion of one comparable SPEL Semiconductor Ltd., which the ld. TPO has rejected from the list of comparable companies. Claim of the assessee is that this comparable company satisfies all the filters applied by the ld. TPO to the other comparable companies. Details of ....