9911796707
TMI Blog2011 (8) TMI 1083X X X X Extracts X X X X X X X X Extracts X X X X ..... id towards acquisition of technical knowhow and other business as well as commercial rights, and further in holding that Rs. 5,08,00,000/- was paid towards goodwill and therefore, the assessee company was not entitled to claim depreciation on the said amount. 5. Besides above, the assessee has sought permission to raise following additional ground for the adjudication of the Tribunal : "1] Without prejudice to the grounds of appeal raised, the appellant requests that the amount of Rs. 5.09 Crs. Paid to Greaves Cotton Ltd. for acquiring know how and brand name, trademark and logo be allowed as a revenue expenditure." 6. The Ld. A.R. submitted that the issue raised in the additional ground is legal in nature which goes to the root off the matter and adjudication of which does not require consideration of fresh material outside the record. The ld. D.R opposed the above application. 7. Considering the above submission, we find substance in the submission of the ld. A.R that the issue raised in the additional ground is legal in nature which goes to the root of the matter, and adjudication of which does not require consideration of fresh material outside the record. We thus allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship of land with it and the leasehold right acquired are different from ownership rights. The Ld. A.R. submitted further that leasehold right depreciate with the reduction in the lease period since they are enjoyable for a limited period. Hence, it was submitted by him that the claim of the assessee is justified. The Ld. A.R. submitted that Hon'ble Supreme Court has reversed the decision of the Hon'ble jurisdictional High Court of Bombay rendered in the case of Techno Shares, 323 ITR 69 (SC). 12. The Ld. CIT- D.R., on the other hand, tried to justify the assessment order on the issue. He submitted that the terms "free hold" and "leasehold" are used in connection with land property, these are two different ways in which property can be owned. Leasehold rights in a property are nothing but a tool to enjoy and exploit that property. Until the end of the lease period, the leasehold has the right to remain in occupation as an assured tenant paying an agreed rent to the owner. The Ld. D.R. has submitted as no depreciation is allowable on land, no depreciation can be allowed on the road to use that land. She submitted that on perusal of Section 32 of the Act as amended w.e.f. 1.4. 1998, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egories of tangible/intangible assets which are specifically enumerated in the Section. The intangible asset on which the depreciation is allowable u/s. 32(1)(ii) of the Act are know-how, patent, copy rights, trade marks, franchise or any other business or commercial rights of similar nature acquired on or after 1.4.1998. Under these circumstances, we fully concur with the submission of the Ld. D.R. that the provisions of the Act cannot be interpreted to mean that leasehold rights granting such type of ownership over land etc., would also qualify as intangible assets for the purpose of depreciation under the Act. Certainly, this would lead to a conflicting situation where land acquired on freehold basis would not be eligible for depreciation but similar land acquired on leasehold basis would be eligible for depreciation that too at a higher rate. Under these circumstance, we are not inclined to interfere with the action of the A.O in disallowing the claimed depreciation in question on leasehold rights over the land treating the same as intangible asset u/s. 32(1)(ii) of the Act. The ground Nos. 2 & 2.1 are thus rejected. 14. Since no argument has been advanced in support of the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.41 Crores and royalty payable for use of brand name, trade mark, logo etc, at Rs. 2.67 Crores. In this regard, the Ld. A.R. referred page Nos. 303 of the paper book i.e. relevant page of the submissions made by the assessee to the A.O on 26.11.2009. The Ld. A.R. submitted that there is no dispute about the valuation of the above rights, the A.O has disallowed the claimed depreciation on the basis that as per agreement, the assessee has not purchased any know-how from Greaves Cotton Ltd. and the assessee is entitled to use trade market, logo and brand name of Greaves Cotton Ltd. free of cost for a period of 3 years. 17. The Ld. A.R. drew our attention to Clause 1.2.6 on page 243 of the paper book stating that assessee would be acquiring all intellectual property rights such as designs, drawings, manufacturing processes and technical knowhow in respect of the products manufactured by the unit. Accordingly, it is clear that the assessee had acquired technical knowhow from Greaves Cotton Ltd. The Ld. A.R. submitted that the A.O has referred to Annexure 8 of the agreement wherein there is no mention of technical knowhow (page No. 277 of paper book). Thus, the A.O has stated that sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs. 5.08 Crores is for goodwill. In fact, it is for the commercial assets mentioned above and hence, depreciation is allowable. In support, he placed reliance on the following decisions : i) Skyline Caterers P. Ltd., 116 ITD 348 (Mum) ii) B. Ravindran Pillai v/s. CIT, 47 DTR 81 (Kerala) iii) Hindustan Coco Cola Breverage Pvt. Ltd. v/s. DCIT, 43 DTR 416 (Delhi) 22. The Ld. A.R. submitted that Special Bench of the Tribunal in the case of Amway India, 111 ITD 112 (SB) held that if the software is useable/used for more than 2 years, it is a capital expenditure and if it is for less than 2 years, it is a revenue expenditure. 23. Without prejudice to the above submissions, the Ld. A.R. submitted that as per the agreement, the trade mark, logo and brand name can be used by the assessee for a limited period of 3 years ( 7.1, page 251), therefore, since the assessee's right of user of these assets is limited to only for 3 years, amount paid should be allowed as a revenue expenditure. In this context, the Ld. A.R. also advanced an alternative argument on the following additional ground : : "1] Without prejudice to the grounds of appeal raised, the appellant requests that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, Greaves Cotton Ltd. clearly mention that intellectual properties rends in the form of designs, drawings, manufacturing processes and technical knowhow are being transferred to the assessee company. The assessee did not have any experience in this line of business and was totally dependent on the technical know purchased by it from Greaves Cotton for manufacturing the various products. Secondly, simply because there was no specific value shown to the intangible assets in the Balance Sheet of Greaves, did not mean that there was no intangible assets in the form of technical knowhow, drawings, designs etc., The Ld. A.R. submitted that the valuation report was submitted before the A.O as well as before the DRP. The A.O. has held that amount paid by assessee towards technical knowhow is in fact, payment made towards goodwill and since depreciation is not allowable on goodwill, the amount of depreciation claimed by assessee has been disallowed by him. However, the A.O has never stated that the valuation made by assessee towards technical knowhow and royalty is very high. He submitted that as per the agreement entered into with Greaves, it has paid Rs. 2.41 Crores for technical knowho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tering into the agreement to purchase in question the unit in its entirety. We also find substance in the submission of the Ld. A.R. that the agreement between the seller and purchaser does not put restriction on the right of the purchaser to record the asset at its fair value in its books. The fact that the assessee paid lumpsum amount of Rs. 17.01 Crores for all these rights and assets is very clear and hence, the apportionment thereof amongst the various assets and rights has to be made and which has been done in the present case as per the valuer's report. The approved valuer has valued the knowhow acquired at Rs. 2.41 Crores and royalty payable for use of brand name, trademark, logo at Rs. 2.67 Crores (Page No. 303 of the paper book). The authorities below have not disputed the above values determined by approved valuer. The Special Bench of the Tribunal in the case of Amway India (supra) has held that if the software is useable/used for more than 2 years, it is a capital expenditure and if it is for less than 2 years, it is revenue expenditure. We thus following the ratio laid down therein come to the conclusion that in the present case, since the assessee had purchased the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4% and gross margin in the total export segment has been computed by him at 5.42%. The Assessee has questioned this action of the Ld TPO before us . 30. In support of the grounds, the Ld. A.R. submitted that before purchasing of the running unit of Greaves Cotton Ltd., by the assessee, the Greaves Cotton used to sell the products to Driltools Dubai. Since similar products were sold by Groups to its AE in the earlier years, and the rate charged by Greaves was lesser than the rates charged by the assessee company, the transactions entered into by the assessee with its AE are at ALP. In this regard, he referred page Nos. 144 and 162 of the paper book wherein details of the products sold by Greaves to the AE of assessee are given. The Ld. AR submitted that as per the Ld TPO, the comparable prices are available only for 9 products while the assessee has sold around 61 products to its AE and therefore, the CUP method cannot be considered as the most appropriate method. 31. The Ld. A.R submitted that there are evidences of comparable prices in respect of 9 products and the rates charged by the assessee is much higher. Therefore, this fact indicates that the transactions entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons respectively. In fact, ALP adjustment was required in A.Y. 2006-07, though the same cannot be said of A.Y. 2007-08. The Ld. A.R. submitted that even if the Tribunal considers the assessee's claim that United Drilling may be accepted as a comparable, the adjustment on account of significant intangibles claimed by the assessee should be allowed because none of the comparables selected by the assessee has this sort of intangibles. The assessee also claimed to have acquired a very substantial brand which has been valued in Crores of Rupees. An appropriate adjustment will have to be considered in the alleged brand value as well. He submitted further that if the issues raised in the quantum appeal such as those of royalty payments, owning of intangibles etc., raised in the same appeal are allowed in favour of assessee, there will be a change in assessee's PLI as well as business profile. 35. On the contention of the Ld. A.R. that domestic market and the export market are not comparable, the ld. D.R. submitted that the external comparable selected by the assessee - United Drilling does not show any export income, still the company is assessee's favourite comparable. The Ld. D.R. subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 to 71 of the paper book. The details of the company selected as comparables have been made available on page No. 146 of the paper book. The Ld TPO did not agree with the assessee and held that the CUP method and TNMM are not applicable for determining the ALP. The Ld TPO has adopted the cost Plus Method (CPM) for determining the ALP. The Ld TPO has held that the gross margin in the domestic segment is much higher than the margin earned in the export segment and hence, he has made addition of Rs. 58,54,128/-. The gross margin in the domestic segment has been computed by him at 23.54% and the gross margin in the export segment has been computed by him at 5.42% (page No. 39 of his order ). 39. On the applicability of different method to find out Arms Length Price, the parties have argued at length. Applicability of CUP Method 40. On the applicability of CUP methods for determining the ALP, the submission of the Ld. A.R. remained that the assessee has purchased the running unit of Greaves Cotton Ltd. Earlier Greaves Cotton Ltd. used to sell products to Driltools Dubai. Since similar products were sold by Greaves Cotton to its AE in the earlier years and the rate charged by Grea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic segments and therefore, comparison of the rates of the products in the domestic segments and the export segments is not justified. 42. We also find substance in the submission of the Ld. A.R. that the rates charged by the assessee are much higher than the rates charged by Greaves while selling the products to its AEs in earlier years. It can be verified from page No. 162 of the paper book i.e. Extract of submission comparing rates charged by Greaves Cotton Ltd. and the assessee. Thus, we are of the view that the date of Greaves' transaction is irrelevant and should be considered. Greaves' sale transactions are ranging in the period from December 2004 to April 2005 and assessee's transactions are ranging during the period from August 2005 to March 2006. Even though, the Rule 10B(4) states that the comparable date should be relating to the Financial Year in which the international transaction is entered into, when the transactions are entered into by the Greaves and the assessee in the same calendar year though the Financial Year is different, still the same should be treated as comparable transactions. Secondly, the proviso to Rule 10B(4) provides date relating to period n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions of the Ld AR that TNMM can also be accepted during the year for determining the ALP. 44. On the applicability of TNMM, the contention of the Ld AR as an alternative submission remained that the ALP should be determined. He submitted that the assessee has considered 5 companies as comparable and the net margin earned by the assessee is much higher than the average net operating margin earned by the 5 comparable companies. In this regard, the assessee has elaborately clarified on page Nos. 146 and 147 of the paper book that these 5 companies are comparable, hence TNMM method should have been adopted for determining ALP. Ld TPO has rejected the submission of the assessee on the basis that 5 companies selected are not comparable with the assessee company. The Ld TPO has stated that but for United Drilling Ltd., all other companies are operating in different field. Regarding United Drilling, the Ld TPO has further stated that it also manufactures hole tools, gas lift equipment, wire line etc. The contention of the Ld. AR in this regard remains that the 5 companies selected by it are comparable and the details of the companies are given on page 146 of the paper book. Applicabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -vis gross margin in domestic segment without appreciating that there are various differences in functions pertinent and the risk assumption in these two segments and therefore, the same cannot be considered as comparables for determining the ALP. He submitted that there is no marketing reason in the export segment whereas in the domestic segment, the assessee has to bear substantial marketing cost. There is no risks of bad debt in exports while the assessee has to bear the said risks in domestic segments. There is no product liability risks (Like retention money, bank guarantee, warranty etc.,), in exports segment, but the assessee has to bear the said risks in the domestic segments. The contractual terms also defer in the domestic segment vis-à-vis the export segment. The Ld. AR submitted further that in the domestic segment, the Public Sector Undertakings are the main customers of the assessee, wherein more follow up at every stage till the recovery of due payment is required to be done. 47. Without prejudice to the above submissions, the Ld. A.R. submitted that the addition made by the Ld TPO by adopting the CPM is not justified. The Ld TPO has computed the gross profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freight expenses, bank interests etc., which has been ignored by the Ld TPO since these expenses form part of Profit & Loss Account and not Trading A/c., submitted the Ld. A.R. He submitted further that working of the net profits of the 2 segments is given on page no. 141 of the paper book and the net profit of the domestic segment is 13.04% and that of export segment is 12.55%. Hence, there is hardly any difference between two segments. 49. Apart from the above factors, the Ld AR submitted that in respect of transactions with AE, the assessee does not have to bear the bad debt risk, product/warranties etc., at least 40 % deduction should be given in the margin computed of the domestic segment for the above risks. He submitted that this view has been accepted in the case of Soni (India) Ltd., 118 TTJ 865, wherein on account of difference in the various factors/functions performed, the Tribunal gave reduction of 20%. He submitted that because of the difference in the functions performed and the risk undertaken, such benefits has to be allowed. 50. Considering the above submissions, vis-à-vis the method i.e. CPM (Cost Plus Method) adopted by the Ld TPO to determine the Arms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mestic unit and balance to the export segments. We are thus of the view that Ld TPO was not justified in rejecting such submission of the assessee treating the same has having no basis. In our view, the apportionment of these costs is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the Ld A.R. that assessee has also to incur selling and administrative expenses, freight expenses, bank interests etc., which cannot be ignored as ultimately the income tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the 2 Divisions as per which, the net profit of the domestic segment is 13.04 % and that of the export segment is 12.55%. We find that there is hardly any difference between 2 segments. We also find substance in the submission of the Ld AR that in respect of transaction with AE, the assessee also does not have to bear bad debt risks, product/warranty risks etc., hence some % of reduction should he given in the margin computed for the domestic segment for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
