2022 (6) TMI 1194 - AT - Income Tax

Depreciation of certain intangible assets including non computing fee, rights, patents, trademarks etc. @ 25% of the opening WDV - AO has disallowed on the ground that in the schedule of fixed assets the assessee had shown as goodwill of loan and under the head intangible assets no other intangible assets were shown to have been held by assessee in the balance sheet - HELD THAT - Undisputedly the assessee has acquired food and pharma division of L T by virtue of agreement dated 26.05.2005 by paying excess consideration of net asset value, the excess was reflected as goodwill in the books of accounts of the assessee under the head intangibles and as such assessee is entitled for claiming depreciation on the said intangible assets/goodwill as held in case of SMIFS SECURITIES LTD. 2012 (8) TMI 713 - SUPREME COURT . Consequently, ground raised by the assessee are allowed. TP Adjustment - TPO rejected the TP study undertaken by the assessee and proceeded to apply TNMM at the entity level which the assessee company has objected to - HELD THAT - We have perused the order passed by the CIT(A) particularly para 9 which is cryptic in nature and fails to lead to the specific conclusions as to why the TP adjustment made by the TPO are being deleted. Merely on the basis of generic observations without going into the functionality of the particular segments/international transactions TP adjustment cannot be deleted. In these circumstances it is agreed by the authorized representatives of the parties to the appeal that TP issue is required to be decided afresh by the TPO by grouping commission income and supervisory income together and the remaining international transactions are to be benchmarked independently by going into the functionality of the same. Disallowance on account of license fee/royalty - HELD THAT - We are of the considered view that facts on the issue are not completely brought out, neither discussed by the AO nor by the Ld. CIT(A). No findings have been returned if the same is a license fee or royalty. Even no detail of commission or royalty paid has been brought on record. So this issue is required to be remitted back to the AO to decide afresh after providing opportunity of being heard to the assessee. Disallowance u/s 36(1)(va) - employees contribution to PF has been paid late after the due date as per the provisions of the PF Act - HELD THAT - We have perused the findings returned by the Ld. CIT(A) which need no inference as the assessee has deposited the employees contribution prior to the filing of the income tax return. In A.Y. 2005-06 the co-ordinate Bench of the Tribunal in assessee's own case deleted the same addition by relying upon the decision rendered by Hon'ble Apex Court in case of CIT vs. Vineet Cement Ltd. 2007 (3) TMI 346 - SC ORDER - Hon'ble Bombay High Court in case of CIT vs. Ghatge Patil Transports Ltd. 2014 (10) TMI 402 - BOMBAY HIGH COURT also decided the identical issue in favour of the assessee by upholding the Tribunal order that payment of employees contribution on account of PF before filing of income tax return is allowable deduction and has also decided in case of CIT v. Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT . So in view of the matter, we find no illegality or perversity in the impugned findings delivered by the Ld. CIT(A), hence ground are determined against the Revenue.

Summary

Issues Involved:

1. Deletion of ALP adjustment by CIT(A).
2. Disallowance of depreciation on intangible assets.
3. Disallowance of expenditure on license fees/royalty.
4. Disallowance under Section 36(1)(va) for belated payments towards employees' contribution to EPF.
5. Provision for contingencies or onerous expenses.
6. Treatment of 'Foreign Exchange fluctuation loss' and 'Provision for Credit balances written back' in determining operating margin.

Issue-wise Detailed Analysis:

1. Deletion of ALP Adjustment by CIT(A):

The Revenue challenged the deletion of ALP adjustment amounting to Rs. 2,19,74,033/- by CIT(A), arguing that the segmental account and net segmental margins filed by the assessee were unreliable. The Tribunal noted that the assessee had undertaken three international transactions with its AE and adopted different methods for benchmarking. The TPO rejected the TP study and applied TNMM at the entity level, which was contested by the assessee. The Tribunal directed the TPO to re-evaluate the transactions by grouping commission income and supervisory income together and benchmarking other transactions independently.

2. Disallowance of Depreciation on Intangible Assets:

The assessee claimed depreciation on intangible assets, including goodwill. The AO disallowed this, stating that no other intangible assets were shown in the balance sheet. The CIT(A) upheld this disallowance. The Tribunal, however, referred to its earlier decision in the assessee's own case for A.Y. 2007-08 and the Supreme Court's ruling in CIT vs. Smifs Securities Ltd., which recognized goodwill as an asset eligible for depreciation. Consequently, the Tribunal allowed the assessee's claim for depreciation on goodwill and other intangible assets.

3. Disallowance of Expenditure on License Fees/Royalty:

The AO disallowed Rs. 95,67,696/- claimed as license fees/royalty, suggesting it was a one-time capital expense. The CIT(A) allowed this expenditure under Section 37(1) of the Act, treating it as a business expense. The Tribunal found that the facts were not fully discussed by the AO or CIT(A) and remitted the issue back to the AO for fresh consideration.

4. Disallowance under Section 36(1)(va) for Belated Payments towards Employees' Contribution to EPF:

The AO disallowed Rs. 22,06,711/- under Section 36(1)(va) for late payment of employees' contribution to PF. The CIT(A) deleted this disallowance, citing that the payment was made before the due date for filing the income tax return. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT vs. Vinay Cement Ltd. and other relevant case laws, confirming that such payments made before the return filing date are allowable deductions.

5. Provision for Contingencies or Onerous Expenses:

The AO disallowed Rs. 1,26,96,905/- claimed as provision for contingencies or onerous expenses, treating it as contingent in nature. The CIT(A) upheld this disallowance. The Tribunal did not specifically address this issue in detail, as it was not pressed by the assessee during the arguments.

6. Treatment of 'Foreign Exchange Fluctuation Loss' and 'Provision for Credit Balances Written Back' in Determining Operating Margin:

The assessee objected to the TPO's treatment of 'Foreign Exchange fluctuation loss' and 'Provision for Credit balances written back' in determining the operating margin under TNMM. The CIT(A) did not adjudicate these grounds, considering them academic after deciding the main issue. The Tribunal remitted these issues back to the TPO for fresh adjudication, emphasizing the need to consider the functionality of the transactions.

Conclusion:

The Tribunal partly allowed the appeals and cross objections filed by the assessee and the Revenue for statistical purposes, directing fresh adjudication on certain issues by the TPO and AO. The Tribunal upheld the CIT(A)'s decision on the allowability of depreciation on goodwill and the deletion of disallowance under Section 36(1)(va) for belated PF payments.