2020 (3) TMI 416 - AT - Income Tax

TP Adjustment - Central Service Charges - Cost Allocation - HELD THAT - Respectfully following the decision of the Hon'ble jurisdictional High Court in the case of Johnson Johnson 2017 (3) TMI 1520 - BOMBAY HIGH COURT we hold that the action of the Revenue in accepting only 75% of the expenses to be at arm's length is not correct. Accordingly, we direct the ld.TPO to consider the entire 1,07,000 Euro (8,000 48,000 51,000) in respect of three expenses as stated supra, as the expenditure incurred for the purpose of business of the assessee and which is determined to be at arm's length and accordingly no adjustment in that regard is called for. Depreciation of non-compete fees - As decided in CIT vs Ingersoll rand internationa 2014 (6) TMI 934 - KARNATAKA HIGH COURT and Pentasoft technologies vs DCIT 2013 (11) TMI 1057 - MADRAS HIGH COURT held that depreciation/amortisation of the non-compete fee was held to be allowable on the ground that as held by honourable Madras High Court it strengthens the transfer of IPR and as held by honourable Karnataka High Court it fell into the realm of definition under section 32. No decision from honourable jurisdictional High Court has been cited before us. In this view of the matter honourable Apex Court decision in the case of Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT has to be followed. In the said case law honourable court had expounded that if two constructions are possible the one in favour of assessee should be adopted. Since the decision of the learned CIT(A) is in accordance with the ratio arising from the decision of honourable Karnataka High Court and honourable Madras High Court as above we do not find any infirmity in the same in absence of any direct jurisdictional High Court decision on the subject. Hence we uphold the order of ld CIT(A) on this issue Applicability of provision of section 43A - CIT(A CIT(A) held that since this criteria is not fulfilled as person from whom business is acquired is also an Indian company hence, he has held that section 43A is not at all applicable - HELD THAT - CIT(A) in his adjudication has not considered the finding of the Assessing Officer that the asset involved in slump sale included areas of Nepal, Sri Lanka and other. In this view of the matter learned CIT(A) s finding is not at all sustainable. Since learned CIT(A) has not considered all aspect of the reasoning given by the Assessing Officer for making the addition, we deem it appropriate to remit this issue to the file of learned CIT(A) to consider them afresh and pass a speaking order on this issue. Needless to add the assessee should be granted adequate opportunity of being heard. CIT(A) in his adjudication has neither referred to this decision nor dealt with the aspect of Assessing Officer s order that the asset acquired included a reference to Sri Lanka and Nepal. However, in this regard, we note that the said decision of Hon'ble Delhi High Court was with respect to section 9(1)(i) of the Act. It was not rendered in connection with section 43A of the Act. It is settled law that decision has to be considered in terms of context in which it is rendered.

Summary

Issues Involved:
1. Treatment of non-compete fees as deferred revenue expenditure.
2. Applicability of Section 43A and depreciation claim.
3. Transfer pricing adjustments related to Central Service Charges.

Detailed Analysis:

1. Treatment of Non-Compete Fees as Deferred Revenue Expenditure:
The Revenue challenged the CIT(A)'s decision to treat non-compete fees as deferred revenue expenditure over eight years, arguing it should be considered a capital expenditure. The CIT(A) allowed the assessee's claim based on various precedents, including CIT vs. Ingersoll Rand International Ind. Ltd. and Pentasoft Technologies Ltd vs. DCIT, which treated non-compete fees as business or commercial rights eligible for depreciation under Section 32(1)(ii). The CIT(A) also considered the alternative argument that the non-compete fees could be treated as deferred revenue expenditure under Section 37(1) and allowed over the period of the agreement. The Tribunal upheld the CIT(A)'s decision, noting the absence of a jurisdictional High Court decision and relying on the principle from the Supreme Court's decision in Vegetable Products Ltd. that favors the assessee when two interpretations are possible.

2. Applicability of Section 43A and Depreciation Claim:
The Assessing Officer (AO) argued that the foreign exchange gain on the purchase consideration should reduce the cost of assets under Section 43A, leading to a reduced depreciation claim. The CIT(A) disagreed, stating Section 43A applies only when assets are acquired from outside India, which was not the case here as the transaction involved an Indian company. The Tribunal found that the CIT(A) did not consider the AO's finding that the assets included rights in Nepal and Sri Lanka. Consequently, the Tribunal remitted the issue back to the CIT(A) for a fresh consideration, emphasizing the need for a detailed examination of all aspects mentioned by the AO.

3. Transfer Pricing Adjustments Related to Central Service Charges:
The Transfer Pricing Officer (TPO) made adjustments to the Central Service Charges paid by the assessee to its Associated Enterprises (AEs), determining the arm's length price (ALP) as nil for certain services and making an ad-hoc disallowance of 25% for others. The CIT(A) upheld the TPO's adjustments. The Tribunal, however, referred to its earlier decisions in the assessee's own case, where similar adjustments were deleted. The Tribunal reiterated that the TPO should determine the ALP using prescribed methods and cannot make ad-hoc disallowances. It found that the assessee had justified the payments with proper documentation and certifications from independent accountants. The Tribunal concluded that the lower authorities were not justified in determining the ALP at nil and allowed the assessee's appeal, directing that the entire amount be considered at arm's length.

Conclusion:
The Tribunal's judgment addressed three primary issues:
1. It upheld the CIT(A)'s decision to treat non-compete fees as deferred revenue expenditure, allowing depreciation under Section 32(1)(ii).
2. It remitted the issue of foreign exchange gain and applicability of Section 43A back to the CIT(A) for a fresh decision.
3. It deleted the transfer pricing adjustments made by the TPO, directing that the Central Service Charges be accepted as at arm's length based on the assessee's documentation and previous Tribunal decisions.