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TMI Blog2015 (1) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... b) of the Act on account of royalty/supervision charges. The ld. CIT(Appeals) erred in not appreciating the fact that the assessee had failed to establish with supporting evidence that these expenditure was reasonable compared to the nature of service received by it in return. 3. The Departmental Representative submitted that the facts and issue involved in all the three years under consideration are same and he is arguing the appeal for Assessment Year 2001-02 and the same arguments should be taken for Assessment Years 2002-03 and 2005-06 also. He submitted that the Assessing Officer in the Assessment Year 2001-02 made the addition by observing as under:- "3. Addition u/s. 40A(2)(b) 3.1. From the details furnished by the assessee, it was noted that that heavy amounts were paid by Alkyl Finance & Trading Limited to various concerns on account of royalty, commission, service charges, etc. Further, all the concerns to whom these payments have been made fell under the category of concerns covered u/s.40A(2)(b) of the Income-tax Act. Therefore, a show cause letter dated 17.3.2004 was issued to the assessee stating as under:- "From the details filed by you, it is noticed that you ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts. Also the cost of manufacturing EDS from EDC was much higher than the landed cost of the imported EDS. The company started making losses in the years 1994-95 and landed up in BIFR in the year 1998. The accumulated loss as at 31.3.00 is Rs. 26.66 crores as is apparent from the reported accounts. The new promoters i.e. Alkyl Amines & Chemicals Ltd. and S. Amit group acquired Diamines from Sintex group the provisions owners and management. To facilitate this takeover Alkyl Finance & Trading Ltd. was used as a special purpose vehicle. This company was ultimately merged with Diamines & Chemicals ltd. with effect from 1.4.2000. The new promoters of Diamines retrofitted the plant, discontinued the use of EDC as the raw material, discontinued EDA as the main product, introduced piprazine as the main product which was produced with Crue Piperazine Amine (CPA) as the main raw material and the technical know-how from Alkyl Amines Chemicals Ltd. Technical knowledge/royalty Alkyl Amines and Chemicals Ltd. to whom royalty has been paid, has been in the business of manufacturing of amines since last more than 25 years. They provided the technical knowledge for project retrofitting and establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduction in the profit of the company". 3.3. I have considered the reply of the assessee. The contention of the assessee that the merged entity was having accumulated losses and depreciation to the extent of Rs. 19 crores and, therefore, even if the amounts in question were paid to sister concerns by Alkyl Finance & Trading Pvt. Ltd., it did not affect the overall taxability as the final income after set off of losses was nil is not acceptable. As a matter of fact, the payments in question were made between April, 2000 to March, 2001 .y Further, the scheme of amalgamation was approved only in July, 2001. Had the scheme of amalgamation not been approved, there would have been a higher tax liability on Alkyl Finance & Trading Limited. Further, by transferring the amounts in question to the concerns covered u/s.40A(2)(b), the assessee reduced its tax liability because all the concerns to whom the payments were made were running huge losses. 3.3.1. Without prejudice to the above, it is also noted that the amounts paid in question are very heavy compared to the nature of services received, which are discussed in the show-cause letter dated 17.3.2004 reproduced in paragraph 3.1 above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decessor's orders for A.Ys. 2001-02 and 2002-03 stating that similar amounts were disallowed in the said assessment years and that there was no change in the facts of the case. The details of the amount of Rs. 18,79,106 are as under: 5.1 In appeal, the Id. AR reiterated the background of the assessee company as mentioned in para 3.1 above. It was further submitted that in the earlier years when the assessee company had landed up in the BIFR, most of its competent employees whether in marketing, technical and finance / accounts had left the company resulting in an acute shortage of competent manpower. Technical, marketing and general support was, therefore, required to be extended to the assessee company when the new management took over. The aforesaid entities extended the services of the competent people available with them to the assessee company. In fact, the successful restructuring of the appellant was done with the help of such competent people from the aforesaid entities whose services were availed for operational matters like imports / exports, secretarial, finance, marketing and accounts or even for general management. Sr. No. Name of the concern Amount (Rs.) 1. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n brought on record to show that the payments in question exceeded the fair value of the services received. Accordingly, the disallowance of Rs. 18,79,106/- is directed to be deleted." 6. The CIT(A) has followed the order for Assessment Year 2005-06 in Assessment Year 2001-02 and 2002-03 for deleting the additions. 7. The Authorized Representative of the assessee relied on the order of the CIT(A). 8. We have heard the rival submissions and perused the orders of the lower authorities and material available on record. We find that the Assessing Officer disallowed the expenditure in question on the ground that the payments were made to loss making companies and therefore, payments were made to reduce the tax liability. We find that the assessee claimed to have made payments of royalty to M/s. Alkyl Amines and Chemicals Ltd. (AACL) @ 2% of sales on ex-factory selling price of Rs. 34,26,720/- amounting to Rs. 68,534/- and supervision charges @ Rs. 20 per kilogram on 6090 kilogram amounting to Rs. 1,20,800/- for sale of Tri-ethylene diamine (TEDA) and royalty @ 2% on ex-factory selling price of Rs. 1,32,29,550/- amounting to Rs. 2,64,591/- and supervision charges @ Rs. 4/- per kilogra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the addition of Rs. 5,60,000/-, being the amount of depreciation on goodwill, by holding that goodwill is not eligible for depreciation. 15. The brief facts of the case are that the assessee claimed depreciation on goodwill which was disallowed by the Assessing Officer on the ground that it was not eligible for depreciation. 16. On appeal, the CIT(A) in the Assessment Years 2005-06 allowed the claim of the assessee by following the decision of Mumbai Bench of the Tribunal in the case of Skyline Caterers vs. ITO, 306 ITR (80) 369 (Mum) and the decision of the Delhi Bench of the Tribunal in the case of Hindustan Coca Cola Beverage vs. DCIT in appeal No.1884/Del/06 for Assessment Year 2001-02 holding that the assessee acquired the goodwill at the cost of over and above the tangible asset and therefore depreciation would be allowable on the intangible asset. However, in Assessment Year 2002-03, the CIT(A) confirmed the order of the Assessing Officer disallowing the claim of the depreciation. 17. Both the parties before us agreed that the issue stands covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Smifs Securities Ltd., [2012] 24 taxmann.com 22 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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