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2019 (5) TMI 773 - AT - Income TaxReference to DRP u/s 144C - eligible Assessee - first to pass a draft assessment order as per the provisions of Sec.144C(1) which has a non-obstante clause - allowing the AO additional time over and above the limit provided u/s 153(1) third proviso - HELD THAT - We however find similar issue has already been considered and decided against the Assessee by the ITAT Delhi Bench in the case of Honda Trading Corporation vs. CIT 2015 (9) TMI 846 - ITAT DELHI wherein it was held that the provisions of section 144C override the provisions of section 153. While rejecting the assessee s contention that the limitation in section 153 referred to passing of draft assessment order held that - Section 144C gives a complete go bye to section 153; and the Act does not contemplate any limitation for passing of draft assessment order, which can be passed within a reasonable time. Additional ground raised by the Assessee on the question of limitation is rejected. Deduction u/s 10A computation - exclusion of tele-communication charges that the payments were made to the service provider for connectivity within India and therefore the expenditure was not attributable to the delivery of article or things incurred in foreign exchange - HELD THAT - Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that communication charges should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT . In view of the acceptance of Gr.No.3, We are of the view that Gr.NO.2 that the expenditure in question ought not to be excluded from the Export Turnover is academic and therefore left open without any decision. Addition of Special Additional Duty of Customs at 4% - HELD THAT - We are of the view that in the light of the statutory provisions cited for getting an order of refund of SAD, the mere fact that it was recognized as income in the books of accounts by the Assessee would not be sufficient to bring the same to tax. The decisions cited by the Assessee in this regard supports the plea that there would be no accrual of income unless the authorities concerned, pass an order sanction of refund and that the entries in the books of accounts by the Assessee are not conclusive in the matter of deciding the point of time at which income can be said to have accrued to an Assessee. Apart from that, we find that out of the total SAD refund. Aggregating to ₹ 5,74,87,167, the amount sanctioned by the custom authorities amounted to ₹ 5,71,37,509 only. Out of total sanctioned amount, ₹ 4,27,71,514 was offered to tax by the Assessee in assessment year 2009-10 and ₹ 1,43,65,995 was offered to tax in assessment year 2010-11, as and when the order in this regard was passed by the Custom authorities. The issue is therefore revenue neutral and do not affect the tax liability of the assessee likely to be collected by the Department as a whole - addition made is unsustainable Depreciation on the cost of assets incurred while taking over the Road development Business - asset acquired through slump sale - HELD THAT - Global acquisition of RDB by Volvo group entities worldwide, there is no basis for the AO to invoke Explanation-3 to Sec.43(1) that is motive for valuation of depreciable assets at higher value is to get benefit of higher depreciation and avoid tax. The fair market value of the assets on which depreciation has been claimed by the Assessee, as on the date of transfer, has not been disputed by the revenue authorities on germane grounds. The reasons given by the AO for invoking Explanation-3 to Sec.43(1) in our view are very vague. The valuation report is given by experts in the respective fields. Their conclusions cannot be brushed aside on mere surmises and conjectures. It is undisputed that but for invoking Explanation-3 to Sec.43(1) there is no other basis for not allowing the claim for depreciation as made by the Assessee. On the facts of the case, we are convinced that the AO has not established the existence of facts to justify invoking Explanation-3 to Sec.43(1) and therefore, we hold that the depreciation on the cost of acquisition of various assets as claimed by the assessee in the return of income should be allowed. Non-compete fee paid to IRIL pursuant to BTA agreement - revenue expenditure - HELD THAT - There was specific agreement not to compete and the consideration was fixed as per the terms of the agreement. In the present case however, there exists no such agreement. Since the transfer of business was on a slump sale basis, the transferee has split the lump sum consideration as attributable to several tangible and intangible assets acquired consequent to slum sale. The consideration paid for acquiring business is sought to be characterized as revenue expenditure, which does not appear to be appropriate. Nevertheless, the intangible benefit to the Assessee as a result of existence of agreement not to compete with business of the Assessee can be said to be an intangible right, which can be characterized as commercial rights and the Assessee should be allowed the benefit of depreciation on the value as estimated by the Assessee in its valuation report u/s 32(1)(ii) as laid down in several decisions which we will refer to while dealing with claim of depreciation on goodwill. Depreciation on Goodwill - claim as revenue expenditure or in the alternative treat is as commercial right on which depreciation should be allowed - HELD THAT - In our view, the decisions in AREVA T D INDIA LTD. VERSUS DCIT 2012 (4) TMI 79 - DELHI HIGH COURT Triune Energy Services Private Limited vs. DCIT 2015 (11) TMI 1218 - DELHI HIGH COURT are squarely applicable to the facts of the present case since in the present case also, the appellant had acquired the business undertaking on a going concern basis and the goodwill acquired upon acquiring the business which is nothing but the difference between the consideration paid in excess of the book value of the assets is eligible for depreciation u/s 32(1)(ii) . The Hon ble Karnataka High Court in the case of CIT v. Manipal Universal Learning (P.) Ltd 2013 (7) TMI 169 - KARNATAKA HIGH COURT following the decision of the Supreme Court in Smiffs Securities 2012 (8) TMI 713 - SUPREME COURT held that goodwill is an asset under Explanation 3(b) to section 32(1) and therefore depreciation is allowable on goodwill. We hold that the purchase consideration paid in excess of the value assigned to the tangible assets, has to be regarded as payment towards acquisition of goodwill which is a specie of business and commercial rights and depreciation as claimed by the Assessee should be allowed. Disallowance of the value assigned to license, permits, certification, accreditation etc. acquired from IR - allowable revenue expenses - HELD THAT - The claim of the Assessee before us is that if the aforesaid payment is held to be capital in nature, then, depreciation may be directed to be allowed in terms of section 32(1)(ii). The details of the licenses and permits and certifications are set out which is part of the valuation of intangibles report of Bizworth. The basis of valuation is set out of this report and in our view, it is in fact an intangible acquired by the Assessee and the basis of estimation of its value is reasonable and acceptable. We therefore direct that depreciation be allowed on this intangible treating it as commercial right u/s.32 Deduction of slump consideration towards the rights acquired for supply of spare parts to customers of Ingersoll Rand - HELD THAT - Depreciation on the value of right of supply of spare parts to customers of IR is concerned, we have considered the submission of the Assessee. The valuation report of Bizworth explains the method of valuation in paragraph 11 of its report. It is explained that on acquisition of IRIL s RDB several equipments already manufactured and sold by IRIL existed in the market and the Assessee gets a right to sell spare parts for such equipments. Expected sale of spare parts and the margin likely to be earned on such sale has been estimated and value assigned to such right and allocated out of the lump sum consideration paid on slump sale. The claim of the Assessee before us is that if the aforesaid payment is held to be capital in nature, then, depreciation may be directed to be allowed in terms of section 32(1)(ii) . The basis of valuation is set out in para-11 of the valuation report of Bizworth in our view is in fact an intangible acquired by the Assessee and the basis of estimation of its value is reasonable and acceptable. We therefore direct that depreciation be allowed on this intangible treating it as commercial right u/s.32 Allowability of provision for warranty - deduction towards obsolescence of inventory - HELD THAT - Actual payment of warranty claims needs to be allowed as deduction as it was revenue expenditure incurred wholly and exclusively for the purpose of business of the Assessee. As far as the Assessee is concerned, it is liability of the Assessee and since it is in relation to the business of the Assessee, the same deserves to be allowed. Deduction of provision for obsolete inventory is concerned, the claim of the Assessee that the sum reversed was not claimed as deduction by IRIL needs to be verified and if found correct, the same should not be taxed as the conditions precedent for invoking the provisions of Sec.41(1) are not satisfied. Determination of Arm s Length Price (ALP) in respect of an international transaction of rendering captive engineering design services to its Associated Enterprise (AE) - it is not in dispute that the TNMM was chosen as the MAM - exclusion of comparable - HELD THAT - Coral Hubs Ltd. comparability of this company in the case of an Assessee providing ITES to its AE such as the Assessee was considered, in the light of the very same objection that this company outsources major portion of its activities, in the following decisions and it was held that this company is not comparable with a company providing ITES to its AE such as the Assessee, thus company should be excluded from the list of comparable companies Wipro Ltd. from the list of comparable companies company was excluded from the list of comparable companies in the case of companies providing ITES such as the Assessee on the aforesaid ground in the case of Pr. CIT vs Oracle (OFSS) BPO Services Pvt Ltd 2018 (3) TMI 222 - DELHI HIGH COURT on the basis that the company has a significant brand presence and brand value of an entity has a significant role in the ability to garner profits and negotiate contracts. We hold that this company should be excluded from the list of comparable companies. TPO is directed to compute the ALP after excluding the aforesaid two companies from the list of comparable companies and also provide permissible variation of ( ) (-) 5% margin in accordance with the provisions of Sec.92CA .
Issues involved:
1. Admission of additional ground of appeal on the issue of limitation. 2. Exclusion of telecommunication charges from export turnover. 3. Addition of Special Additional Duty of Customs refund. 4. Disallowance of depreciation on assets acquired through slump sale. 5. Disallowance of warranty claim. 6. Disallowance of non-compete fee. 7. Exclusion of certain comparables in Transfer Pricing adjustment. 8. Charging of interest under sections 234B and 234C. Issue-wise Detailed Analysis: 1. Admission of Additional Ground of Appeal on the Issue of Limitation: The Assessee contended that the assessment order was barred by limitation and therefore non est in law. The Tribunal admitted the additional ground, citing that it raised a purely legal issue that could be decided based on existing records. However, the Tribunal rejected the Assessee's contention on merits, holding that the provisions of Section 144C override Section 153 concerning the time limit for passing the final assessment order. 2. Exclusion of Telecommunication Charges from Export Turnover: The Assessee argued that telecommunication charges should not be excluded from export turnover as they were incurred for connectivity within India. The Tribunal relied on the Karnataka High Court's decision in Tata Elxsi Ltd., which mandates that expenses excluded from export turnover should also be excluded from total turnover. Consequently, the Tribunal directed the AO to exclude the telecommunication charges from both export and total turnover. 3. Addition of Special Additional Duty of Customs Refund: The Assessee claimed that the refund of Special Additional Duty (SAD) did not accrue during the relevant year. The Tribunal accepted the Assessee's argument, noting that the refund was sanctioned in subsequent years and thus did not accrue in the year under consideration. The Tribunal directed the deletion of the addition made by the AO. 4. Disallowance of Depreciation on Assets Acquired Through Slump Sale: The Tribunal examined the valuation reports and found that the AO had incorrectly invoked Explanation 3 to Section 43(1) without substantiating the claim that the main purpose of the transfer was to reduce tax liability. The Tribunal concluded that the depreciation on the cost of acquisition of various assets as claimed by the Assessee should be allowed, thus allowing the Assessee's ground. 5. Disallowance of Warranty Claim: The Tribunal noted that the Assessee did not have an opportunity to be heard on this issue before the AO and DRP. The Tribunal set aside the order of the AO and DRP and directed a fresh examination of the warranty claim by the AO. 6. Disallowance of Non-Compete Fee: The Tribunal found that the non-compete fee was part of a global business transfer agreement and was essential for the smooth functioning of the business. While the Tribunal did not accept the non-compete fee as a revenue expenditure, it allowed the Assessee to claim depreciation on it as an intangible asset under Section 32(1)(ii). 7. Exclusion of Certain Comparables in Transfer Pricing Adjustment: The Tribunal agreed with the Assessee's contention to exclude Coral Hubs Ltd. and Wipro Ltd. from the list of comparables, as these companies were functionally different and owned significant intangibles. The Tribunal directed the TPO to recompute the ALP after excluding these companies and to apply the permissible variation margin. 8. Charging of Interest under Sections 234B and 234C: The Tribunal held that the charging of interest under Section 234B is consequential and directed the AO to give effect accordingly. Interest under Section 234C should be charged on the returned income. Conclusion: The appeal was partly allowed, with directions for fresh examination on certain issues and specific relief granted on others. The Tribunal's decision was pronounced on May 8, 2019.
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