2015 (9) TMI 286 - AT - Income Tax

Disallowance of depreciation on the intangible assets viz. , material supply contracts, distribution network and right to brand usage - Held that - The assessee had acquired Textile Effect(TE) Business from CIBA-India and DDCL as a going concern on a lump sale basis, that manufacturing facilities of both the entities were not transferred as part of slump sale, that as a part of slump sale the entire distribution channel was handed over to the assessee including the customer, dealers, marketing people, marketing plans, laboratory, supply-chain and the warehouses, that the services of textile effects employees was transferred to the assessee, that it had entered into agreement with CIBA-India and DDCL for material supply and for supply of chemical products to the newly acquired TE business, that it regarded the fixed assets and intangible assets of acquired TE business at fair market value as determined by an independent valuer. By entering into MCS and getting distribution network, the assessee had acquired business/commercial rights that were of the similar nature as mentioned in sec. 32 (1) (ii) of the Act. Same is the case about use of brand name. The assessee had assigned value to various assets namely Fixed assets (Rs. 6. 68 crores), Intangible assets (Rs. 54. 94 crores), Goodwill (41. 87crores). We are of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisions of the Act. We have already held that business right, distribution network and brand usage fall in the same category of commercial rights mentioned in Section 32 of the Act. Therefore, we hold that assessee was entitled to claim depreciation on the intangible assets. - Decided in favour of assessee. Disallowance of expenditure on payment basis u/s. 43 B - Held that - If a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, the same right should be recognised in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded as belonging to the new owner - See T. Veerbhadra Rao case 1985 (7) TMI 2 - SUPREME Court - Decided in favour of assessee. Transfer pricing adjustments - Held that - DRP has not mentioned anything about the documents submitted by the assessee, as stated earlier. In para 5. 2. 2 the DRP has issued directions but we are not aware as how far same were followed by the officers concerned. The assessee has specifically alleged that the directions of the DRP were not carried out. In next para i. e. para 5. 2. 3 the DRP mentions that the TPO had rightly rejected the TP Study but reasons have not been given for agreeing with the views of the TPO especially when the assessee had made extensive submissions stating that as how the stand taken by the TPO was flawed. Similar is the position of the next paragraph. The DRP has endorsed the views of the TPO in a very mechanical way without giving any reasoned finding on the arguments taken by the assessee. Therefore, in the interest of justice we are remitting back the matter to the file of the DRP who would adjudicate the issues raised by the assessee in grounds no. 2 to 5 of by passing a speaking and reasoned order and after affording a reasonable opportunity of hearing to the assessee. The additional evidences produced by the assessee before the DRP have to be taken in to consideration during fresh adjudication proceedings. - Decided in part in favour of assessee by way of remand. Disallowance of depreciation on intangibles and goodwill - Held that - the assessee is entitled to claim depreciation u/s 32(1) (ii) of the Act with regard to MSC, DN and Brand usage. Similar is the position about Goodwill in light of the judgment of the Hon ble Supreme Court delivered in the case of Smifs Securities 2012 (8) TMI 713 - SUPREME COURT - Decided in favour of assessee.

Issues Involved:
1. Disallowance of depreciation on intangibles
2. Disallowance of share issue expenditure
3. Disallowance of expenditure on payment basis under section 43B of the Act
4. Erroneous disallowance of corporate service charges
5. Erroneous approach in computing adjustment for Polyurethanes (PU) division
6. Rejection of segmental computation
7. Application of (+1-5%) in computation of adjustment
8. Disallowance of depreciation on goodwill
9. Disallowance of unpaid service tax and works contract tax under section 43B of the Act
10. Penalty proceedings under section 271 (1)(c) read with Explanation 7 of the Act

Detailed Analysis:

1. Disallowance of Depreciation on Intangibles:
The assessee claimed depreciation on intangible assets such as material supply contracts, distribution network, and right to brand usage. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) disallowed this claim, arguing that these assets were not appearing in the books of CIBA Speciality Ltd. and Diamond Dyechem Ltd. and there was no evidence of their transfer through slump sale. The AO also found the valuer's report incomplete and inconclusive. However, the Tribunal held that the assessee had acquired business/commercial rights similar to those mentioned in Section 32(1)(ii) of the Act. The Tribunal relied on various judicial precedents and concluded that the assessee was entitled to claim depreciation on these intangible assets.

2. Disallowance of Share Issue Expenditure:
The AO/DRP disallowed the share issue expenditure claimed under section 35D of the Act, stating that the claim was made during the assessment proceedings rather than in the return of income. The Tribunal did not specifically address this issue in the final judgment, as it was not pressed by the assessee during the hearing.

3. Disallowance of Expenditure on Payment Basis Under Section 43B:
The AO/DRP disallowed the deduction for payments towards leave encashment, incentive, bonus, and special payment totaling Rs. 55,81,862, arguing that these liabilities were of CIBA India Ltd. and not of the assessee. The Tribunal reversed this decision, stating that the liabilities were taken over by the assessee as part of the slump sale agreement and were therefore legally binding on the assessee. The Tribunal referred to the Supreme Court's decision in T. Veerbhadra Rao to support its conclusion.

4. Erroneous Disallowance of Corporate Service Charges:
The AO/DRP upheld the Transfer Pricing Officer's (TPO) contention that the Arm's Length Price (ALP) of the corporate service charges paid to the assessee's Associate Enterprises (AEs) was NIL due to inadequate evidence of services received. The Tribunal found that the DRP had not properly adjudicated the issue and had failed to consider additional evidence submitted by the assessee. The matter was remitted back to the DRP for fresh adjudication.

5. Erroneous Approach in Computing Adjustment for Polyurethanes (PU) Division:
The AO/TPO and DRP rejected the approach followed by the assessee in its transfer pricing study report, opting to benchmark the manufacturing and trading segments separately. The Tribunal found the DRP's order to be non-speaking and lacking in reasoned findings. The matter was remitted back to the DRP for fresh adjudication.

6. Rejection of Segmental Computation:
The AO/TPO and DRP rejected the segmental computation provided by the assessee, arguing that the basis of allocation of expenses was not verifiable. The Tribunal found that the DRP had not properly considered the assessee's submissions and additional evidence. The matter was remitted back to the DRP for fresh adjudication.

7. Application of (+1-5%) in Computation of Adjustment:
The DRP rejected the assessee's claim for a standard deduction of 5% from the ALP, citing amendments to section 92C by the Finance Acts 2009 and 2012. The Tribunal did not specifically address this issue in the final judgment, as it was not pressed by the assessee during the hearing.

8. Disallowance of Depreciation on Goodwill:
The AO/DRP disallowed depreciation on goodwill claimed under section 32(1)(ii) of the Act. The Tribunal, following its decision for the AY 2007-08 and the Supreme Court's judgment in Smifs Securities, held that the assessee was entitled to claim depreciation on goodwill.

9. Disallowance of Unpaid Service Tax and Works Contract Tax Under Section 43B:
The AO/DRP disallowed unpaid service tax and works contract tax under section 43B of the Act. The Tribunal did not specifically address this issue in the final judgment, as it was not pressed by the assessee during the hearing.

10. Penalty Proceedings Under Section 271 (1)(c) Read with Explanation 7:
The AO initiated penalty proceedings under section 271 (1)(c) read with Explanation 7 of the Act. The Tribunal did not specifically address this issue in the final judgment.

Conclusion:
The appeals filed by the assessee were partly allowed. The Tribunal remitted several issues back to the DRP for fresh adjudication, emphasizing the need for a speaking and reasoned order. The Tribunal also upheld the assessee's entitlement to claim depreciation on intangible assets and goodwill.

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