2024 (5) TMI 1473 - AT - Income Tax

Validity of the assessment order on account of not mentioning the DIN No. on the body of the assessment order - HELD THAT - When the assessee was confronted with the fact that when impugned order was communicated to the assessee on the e-portal along with attachment of intimation letter duly containing the DIN No. , how can the impugned order can be held to be bad in law for not mentioning the DIN in the body of the order. Though reliance was placed on various judgments, but when the assessee was confronted with the CBDT Circular, referring to the body of such communication and in the instant case, communication of the intimation letter which had attachment of the impugned order, the AO has duly complied to the directions given under the CBDT Circular to which no satisfactory reply could be filed and at this juncture, the ld. Sr. Counsel requested for not pressing this legal ground challenging the sanctity of the impugned order for non-mentioning of DIN. Disallowance of depreciation claimed of goodwill - Claim of the assessee that residual paid to Siemens Ltd. over and above the value attributable to the net asset is in the nature of goodwill only and is supported by the ratio laid down by the judgment of CIT vs Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT wherein the assessee, being the amalgamated company, claimed depreciation on goodwill acquired pursuant to/ as a result of amalgamation of a company, viz., YSN Shares and Securities Private Limited. The assessee claimed depreciation on the extra consideration paid over the value of net assets, by treating such excess consideration to be in the nature of goodwill, being paid towards reputation that the amalgamating company was enjoying in order to retain its existing clientele. Similar view was taken by the Hon ble Delhi High Court in the case of Triune Energy Services Private Limited 2015 (11) TMI 1218 - DELHI HIGH COURT wherein the assessee purchased business of another company as going concern by way of slump sale. The amount paid over and above net value of assets was capitalized as goodwill. The assessing officer treated the transaction in nature of succession and did not admit the assessee s claim for depreciation. On appeal before the Hon ble High Court, it was held that goodwill is an intangible asset providing a competitive advantage to an entity which includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc.; the expression goodwill subsumes within it a variety of intangible benefits that are acquired when a person acquires business of another as going concern. 13.4. The Hon ble High Court observed that from an accounting perspective, it is well established that goodwill is an intangible asset, which is required to be accounted for when a purchaser acquires business as a going concern by paying more than the fair market value of the net tangible assets, i.e., assets less liabilities; the difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Relying on the decision in the case of Smifs Securities 2012 (8) TMI 713 - SUPREME COURT it was held that the amount of lump sum consideration ascribed to goodwill was eligible for depreciation under section 32. We are of the considered view that the assessee paid total consideration of Rs. 1022.40 Crores to Siemens Ltd. for acquiring the Metals Technologies Business as a going concern business and since the value attributed to the assets appearing in the books of Siemens Ltd., for the metal technology unit was approximately Rs. 300 Crores, the remaining consideration has to be treated as intangible asset including goodwill and that the assessee had rightly claimed depreciation in AY 2015-16 and 2016-17 at the prescribed rates and that the impugned depreciation allowance on the said goodwill has been rightly claimed in the written down value of the goodwill as on 01/04/2017 and as on 01/04/2018 and the said claim of the assessee is also allowable on the basis of rule of consistency since the revenue authorities have accepted the said claim of the depreciation of the goodwill in the preceding years. TP Adjustment - adjustment in respect of intra-group services - HELD THAT -Assessee has not made any reference to the mark-up on the third party cost, however, reference has been made to Section 92C(2) of the Act, which provides that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price. We find merit in the contention of assessee and since the adjustment falls within the 3% range of the value of international transaction, no adjustment on account of international transaction of availing intra-group services undertaken by the assessee is warranted. The TP adjustment and for AY 2017-18 and 2018-19, respectively, are hereby deleted. Accordingly, raised by the assessee are allowed. Downward adjustments towards purchase of raw material and finished goods and TP adjustment for export of finished goods for the transaction undertaken with AE - Since the additions have been made on the basis of mean PLI of the comparables, we will first deal with the main grounds/additional grounds relating to exclusion/inclusion of comparables and fate of the remaining grounds shall be decided accordingly by the ld. AO as the matter would be restored to the file of the ld. AO for necessary calculation of the mean PLI as per our decision infra. We will first take up the additional grounds of appeal for AY 2017-18. Comparable selection - Exclusion of Power Mech Projects Ltd.- It is an admitted fact that the profit margins in the operations and maintenance segment are generally higher than the EPC segment and therefore, a company deriving revenue and profitability from operations and maintenance activity cannot be considered as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by the assessee, a company solely engaged in provision of EPC services. Thus, considering the factual aspect of the area in which Power Mech Projects Ltd., is working and the working area of the assessee company, we are inclined to hold that Power Mech Projects Ltd., cannot be considered as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by the assessee company. Therefore, we direct the ld. AO to exclude Power Mech Projects Ltd., as a comparable for the purpose of calculating the mean PLI. Including Engineers India Ltd. and BGR Energy System Ltd. as comparables - It is an admitted fact that Government owned and controlled companies have a separate style of working because the public interest is of foremost concern. Further such companies enjoy the support of the Government in relation to flow of business and funds and have different business model. The Hon ble Delhi High Court in the case of International SOS India P. Ltd. 2017 (5) TMI 1588 - DELHI HIGH COURT held that Public Sector Companies cannot be regarded as an appropriate comparable for the purpose of undertaking benchmarking analysis. Similar view was taken by the Hon ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. 2016 (4) TMI 88 - BOMBAY HIGH COURT upheld the rejection of Engineers India Ltd. as a comparable on the basis that it is a Govt. owned company. Respectfully following the same, we are inclined to accept the contentions of the ld. Counsel for the assessee and hold that Engineers India Ltd., should not be included as a comparable for calculating the profit level indicator i.e., the Average OP/OC and Average OP/OR. BGR Energy System Ltd. - It prima facie indicate that the specific characteristic of services and products sold by BGR Energy System Ltd. and the assessee company are significantly different. Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. 2015 (8) TMI 931 - DELHI HIGH COURT held that comparability analysis should be undertaken on the basis of functional profile and characteristics of services provided. Respectfully following the same, we hold that as the functional profile of BGR Energy System Ltd. is significantly different from the assessee company, the ld. AO erred in including the same as comparable for calculating the mean PLI of the assessee company. Thus, to conclude, for AY 2017-18, we direct the ld. AO to exclude Engineers India Ltd. and BGR Energy System Ltd. from the list of comparables for calculating the mean PLI and accordingly direct him to re-calculate the average OP/OC and average OP/OR and then decide in accordance with the law the adjustments, if any, to be made in the hands of the assessee. Thus, the additional ground raised by the assessee for Assessment Year 2017-18 are allowed and consequentially the respective grounds raised for TP adjustment for purchase of raw material and finished goods are allowed for statistical purposes. Rejecting High Quality Steels Ltd., without considering the functions carried out by High Quality Steels Ltd. and the nature of its business activities - Had there been a difference of turnover ranging between 10%- 20% then also, it might have been considered but here the turnover of the assessee company is almost 66 times of High Quality Steels Ltd. and, therefore, level of business dealing with the buyers and vendors, geographical location of businesses, strategy of fixing the price for sales as well as the commanding of purchase price since the same varies on the basis of assessee s belief would certainly be different for both the concerns i.e., the assessee having huge turnover and that of High Quality Steels Ltd. with a very less turnover and which, therefore, makes them unfit for the purpose of comparison for determination of PLI. Thus, we fail to find any infirmity in the finding of the ld. Assessing Officer in not including it as a comparable. Thus, this additional ground no. 3 for Assessment Year 2017-18 raised by the assessee is dismissed. Excluding Engineers India Ltd., from the list of comparables - We have already adjudicated this issue while dealing with additional grounds for Assessment Year 2017-18 and held that Engineers India Ltd., being a Government Company, shall not be considered as a comparable. Consistent with our view taken, we direct the ld. Assessing Officer to exclude Engineers India Ltd. as a comparable and re-compute the mean PLI and calculate the adjustments accordingly. Accordingly, the additional ground no. 1 for Assessment Year 2018-19 is allowed. Rejecting High Quality Steels Ltd. as a comparable - AO has rightly rejected High Quality Steels Ltd. as a comparable on account of turnover filter.

Summary

Issues Involved:

1. Validity of the assessment orders due to lack of Document Identification Number (DIN).
2. Disallowance of depreciation on goodwill.
3. Arithmetical errors in computation of business and assessed income.
4. Incorrect computation of tax demand.
5. Non-credit of taxes deducted at source.
6. Non-allowance of setoff of brought forward losses.
7. Transfer pricing adjustments related to intra-group services and international transactions.
8. Inclusion and exclusion of comparables for transfer pricing analysis.

Detailed Analysis:

1. Validity of Assessment Orders (DIN Issue):

The assessee challenged the validity of the assessment orders for not containing a DIN. However, it was noted that the orders were communicated with a covering letter containing the DIN, which complies with CBDT Circular No. 19/2019. The assessee's counsel, upon confrontation, chose not to press this ground. Hence, the challenge to the validity of the orders on this ground was dismissed.

2. Disallowance of Depreciation on Goodwill:

The assessee claimed depreciation on goodwill, which was disallowed by the AO on the grounds of double deduction in a prior year and misclassification as a self-generated asset. The Tribunal referred to the Supreme Court decision in CIT v. Smifs Securities Ltd., which allows depreciation on goodwill as an intangible asset. The Tribunal found that the goodwill was a result of a slump sale agreement and had been consistently allowed in prior years. Therefore, the disallowance for the current years was set aside, and the depreciation claim was allowed based on the principle of consistency.

3. Arithmetical Errors in Income Computation:

The assessee pointed out errors in the computation of business and assessed income. The Tribunal directed the AO to recompute the income correctly, allowing these grounds for statistical purposes.

4. Incorrect Computation of Tax Demand:

The assessee claimed errors in the computation of tax demand. The Tribunal directed the AO to recompute the demand correctly, allowing these grounds for statistical purposes.

5. Non-Credit of Taxes Deducted at Source:

The AO failed to allow full credit for TDS. The Tribunal directed the AO to allow the correct credit for TDS in accordance with the law, allowing these grounds for statistical purposes.

6. Non-Allowance of Setoff of Brought Forward Losses:

The AO did not allow the setoff of brought forward losses. The Tribunal directed the AO to examine and allow the setoff of losses as claimed, allowing these grounds for statistical purposes.

7. Transfer Pricing Adjustments:

- Intra-Group Services: The AO made adjustments for intra-group services by reducing the markup on third-party costs. The Tribunal found that the adjustment fell within the permissible range under Section 92C(2) and deleted the adjustment.

- International Transactions: The Tribunal addressed the selection of comparables for benchmarking international transactions. It directed the exclusion of Power Mech Projects Ltd. and Engineers India Ltd. as comparables due to functional dissimilarities and government ownership, respectively. It also upheld the rejection of High Quality Steels Ltd. as a comparable due to significant turnover differences.

8. Inclusion and Exclusion of Comparables:

The Tribunal directed the AO to exclude Engineers India Ltd. and BGR Energy System Ltd. for AY 2017-18 and Engineers India Ltd. for AY 2018-19 from the list of comparables. The Tribunal upheld the exclusion of High Quality Steels Ltd. for both years due to turnover discrepancies. The AO was instructed to recalculate the mean PLI and make adjustments accordingly.

Conclusion:

The appeals for both assessment years were partly allowed for statistical purposes, with directions for recomputation and adjustments as per the Tribunal's findings.