2019 (5) TMI 1590 - AT - Income Tax

Depreciation on exclusive business rights (good will) - HELD THAT - As decided in assessee's own case 2016 (3) TMI 590 - ITAT DELHI AO is directed to grant the depreciation on the consideration for the purchase of the exclusive business rights which are to be treated as intangible assets - Decided in favour of assessee TP Adjustment - selection of MAM - Resale Price Method ( RPM ) OR Transactional Net Margin Method ( TNMM ) - Expenses directly attributable to the manufacturing activity - HELD THAT - Only airconditioners are imported from AE and water cooler plus air cleaners are manufactured and no sales are made to the AE. The bench marking done by the TPO is on erroneous facts. Unless a proper bench marking is done the dispute cannot be decided. We find that the TPO has adopted TNMM as the most appropriate method by saying that the comparables are not clear and their operating profit margin is not capable of applying RPM as most appropriate method though the same comparables have been used for bench marking by applying TNMM. This contradiction needs to be examined once again. We restore this issue to the files of the AO/ TPO with a direction that the manufacturing activity should not be considered as part of international transaction. Expenses directly attributable to the manufacturing activity should be ignored and the comparables should be once again examined to decide whether RPM is the most appropriate method. The assessee is free to raise any other issue relating to the bench marking and the TPO is also free to decide the issue after giving a reasonable opportunity of being heard to the assessee. Ground treated as allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of depreciation on exclusive business rights (goodwill) by the Assessing Officer.
2. Rejection of the benchmarking analysis conducted by the assessee using the Resale Price Method (RPM) and upholding of the Transactional Net Margin Method (TNMM) by the CIT(A).
3. Non-adjudication of grounds related to the reduction of non-operating extraordinary expenses by the CIT(A).

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Exclusive Business Rights (Goodwill):
The sole grievance of the revenue was that the CIT(A) erred in deleting the disallowance of ?1,15,27,735/- made by the Assessing Officer on account of depreciation of exclusive business rights (goodwill). The Tribunal found that a similar dispute was considered in the assessee's case for A.Y. 2003-04, where the issue was settled in favor of the assessee. The ITAT Delhi Bench had previously decided that the assessee was entitled to depreciation on the purchase of exclusive business rights, treating them as intangible assets under section 32 of the Income-tax Act. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal since no change in facts was presented for the assessment year in question.

2. Rejection of Benchmarking Analysis Using RPM and Upholding TNMM:
The substantive grievance of the assessee was the rejection of the benchmarking analysis where RPM was adopted as the most appropriate method (MAM) for benchmarking the international transaction of purchase of finished goods for resale. The CIT(A) upheld the TPO's adoption of TNMM as the MAM. The Tribunal noted that the TPO erroneously included manufacturing activities while considering the total sales of the assessee and that the TPO's benchmarking was based on erroneous facts. The Tribunal restored the issue to the AO/TPO with the direction to exclude manufacturing activities from the international transaction and re-examine the comparables to decide whether RPM is the most appropriate method. The Tribunal allowed all grounds under dispute for statistical purposes.

3. Non-Adjudication of Grounds Related to Reduction of Non-Operating Extraordinary Expenses:
The assessee contended that the CIT(A) erred in not adjudicating the grounds related to the reduction of non-operating extraordinary expenses, such as expenses incurred on discontinuation of assembling/manufacturing, interest on working capital loan, forex loss, and provisions for doubtful debts and advances. The Tribunal observed that these expenses were incurred due to extraordinary commercial circumstances and were not related to the import of finished goods from associated enterprises (AEs). The Tribunal directed the AO/TPO to exclude expenses directly attributable to the manufacturing activity and to re-examine the comparables, giving the assessee a reasonable opportunity to be heard.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the disallowance of depreciation on exclusive business rights (goodwill). It restored the issues related to the benchmarking analysis and non-operating extraordinary expenses to the AO/TPO for re-examination, allowing the assessee's appeal for statistical purposes. The order was pronounced in the open court on 02.04.2019.