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TMI Blog2015 (11) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... n general and sweeping observation - Held that:- Determination of arm’s length price at “NIL” without following the method prescribed under the statute is legally unsustainable. The DRP, in our view, has also upheld the determination of arm’s length price at “NIL” in a mechanical manner without proper application of mind. It is pertinent to mention here that in the immediately succeeding year i.e., assessment year 2007–08, the Transfer Pricing Officer, while considering the issue relating to determination of arm’s length price of similar cost sharing arrangement and I.T. support, has disallowed 20% of the total cost incurred by the assessee. This itself shows that the Transfer Pricing Officer accepts the fact that the A.E. has provided certain services to the assessee and the assessee has availed such services. In view of the aforesaid, we hold that the determination of arm’s length price of the cost sharing arrangement and I.T. support cannot be taken as “NIL” and the cost incurred by the assessee on actual basis deserves to be allowed. We order accordingly. - Decided in favour of assessee. Disallowance of depreciation on goodwill - Held that:- In view of the observations of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J.M. These are group of three appeals, out of which, two appeals belong to the same assessee and the remaining appeal is by the Revenue. Appeal pertaining to the assessment year 2006 07 is by the assessee against the assessment order passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short the Act ) pursuant to the directions of the Dispute Resolution Panel (DRP), whereas there are cross appeals filed against the order dated 12th May 2011, passed by the learned Commissioner (Appeals) 15, Mumbai, pertaining to the assessment year 2007 08. Since the facts and issues are more or less common, these appeals have been clubbed together and are being disposed of by way of this consolidated order for the sake of convenience. ITA No. 7236/Mum/2010 2. In the present appeal the assessee has raised three issues in this appeal which are as under: i) Disallowance of 50% out of purchase value paid from purchase of machinery from the A.E; (Ground Nos. 1.1 to 1.5) ii) Disallowance of amount paid towards cost sharing arrangement and IT support ( Ground Nos. 2.1 2.2) iii) Disallowance of depreciation on goodwill. (Ground No. 3). 2.1 It is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and depreciation thereon for the period of use has been taken into consideration by the valuer. Alleging that the assessee did not furnish the relevant details relating to the value of second hand machinery, he opined that an adjustment to the extent of 50% of the value of purchases of the second hand machinery amounting to ₹ 49,91,953, is required to be made. In terms with the adjustment made to the value of the second hand machinery, the Assessing Officer also made the disallowance in the Draft Assessment Order. 4. Being aggrieved of such disallowance, the assessee raised objection before the DRP. Before the DRP, though the assessee reiterated the stand taken before TPO but the DRP adopting the reasoning of the Transfer Pricing Officer upheld the ad hoc disallowance of 50% of the cost of machinery. 5. The learned Counsel for the assessee submitted before us that the assessee had purchased certain second hand machineries from its A.E. during the year. It was submitted, these machineries were acquired by the A.E. in earlier years and from the make and model of the machineries, it appears that they are of the year 1997, 1998, 2000 and 2004. He submitted that since these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without following any method or bringing any comparable, the Transfer Pricing Officer has determined the value on estimate basis which is not in accordance with the provisions of the Act. He, therefore, submitted that the disallowance is not legally sustainable. 6. The learned Departmental Representative, on the other hand, submitted before us that in the course of proceedings before the Transfer Pricing Officer, the assessee did not furnish any details with regard to the year of purchase of the machineries by the A.E. and the depreciated value of the machineries in the books of the A.E. Moreover, the valuation report also does not indicate the basis on which approved valuer determined the value of machineries. In the absence of any details or evidence the approved valuer s report cannot be accepted. He, therefore, submitted that in the given circumstances, the Transfer Pricing Officer was competent to determine the value of the machineries in the manner he has determined. 7. We have considered rival submissions and perused the relevant material available on record including the orders of the Revenue authorities. The undisputed facts are, the assessee, during the year, had pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, Hyderabad Bench, in Tecumseh Products Ltd. v/s ACIT, ITA no.1686/Hyd./2010, dated 13th November 2013, while considering more or less similar nature of dispute, had observed in the following manner: F) Disallowance of Assessee s claim for depreciation. i) As briefly stated above, Assessee has imported certain machinery (old as well as new machinery) from TPC USA. The purchase price of these machineries was based on fair market value and supported by an independent valuer s report M/s SGS Global Trade Solutions Inc., who certified second hand machinery procured by Assessee. As Assessee submitted before the authorities, the comparative analysis of the machinery prepared indicates that purchase price paid to M/s TPC USA is lower than the value determined by M/s SGS Global Trade Solutions. Assessee paid customs duty and also countervailing duty and the valuation was accepted by the authorities at the time of import. Though TPO as well as DRP were of the opinion that the machinery does not have any value, we do not understand on what basis they have come to this opinion. There is no dispute with the fact that the machinery was imported and used in Assessee s business for m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP and the VG Bouw Certificates as external CUP. Under both the workings Assessee is able to justify the price paid and on this reason also, we have to accept Assessee s contentions. Similarly, in the case under consideration, Assessee justified the price paid by way of a certificate which can be considered as external CUP. Since TPO/DRP did not rely on any other certificate and in the absence of any contrary information, price paid by Assessee, which was lesser than the value mentioned in the certificate can be accepted as such. For these reasons, we allow Assessee s ground and direct the AO/TPO to accept Assessee s valuation and allow depreciation as claimed. Grounds pertaining to this issue are allowed. (emphasis by us) 7.1 Moreover, section 92C of the Act mandates determination of ALP by applying any one of the six modes provided under clause (a) to (f) of section 92C(1). As far as clause (f) is concerned, it is not applicable to the AY under consideration as the Board has not prescribed any such method. Thus, it was incumbent upon the TPO to determine the ALP by applying any one of the method as prescribed under section 92C(1)(a) to (e). In the present case, admittedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it it received from the A.E. He also observed that certain documents submitted by the assessee do not pertain to India. Alleging that the information submitted by the assessee is incomplete and some of them do not pertain to the year under consideration, he proceeded to determine the arm s length price of the transactions at NIL . As a result of such determination of arm s length price by the Transfer Pricing Officer, the Assessing Officer also added the amounts of ₹ 33,72,214 and ₹ 8,21,370, to assessee s income of the year. The DRP also sustained the addition made on account of determination of arm s length price at NIL by more or less adopting the view expressed by the Transfer Pricing Officer. 9. The learned Counsel for the assessee submitted, the A.E. incurred certain common cost in respect of all the companies in the Group for providing various support service including commercial cervices, financial services, administrative support, legal services and information technology support. It was submitted, for this purpose, the A.E. has entered into an agreement / arrangement with all group companies including the assessee. It was submitted, the common cost incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es including the assessee was on actual basis without any mark up. It is also not in dispute that the assessee has made payments to the A.E. in terms with the cost sharing agreement. That being the case, we fail to understand as to how the Transfer Pricing Officer can determine the arm s length price of the cost sharing arrangement at NIL on the basis of certain general and sweeping observation. When the Transfer Pricing Officer does not dispute the fact that the assessee had furnished the cost sharing agreements and other ancillary and relevant documents relating to sharing of cost, we fail to understand, how he can again comment that information sought for was not supplied. He has not specified as to what more information was required from the assessee to establish the fact that the payments made were for availing services from the A.E. In any case of the matter, the Transfer Pricing Officer, as per the provisions of section 92C, has to determine the arm s length price by adopting any one of the modes prescribed therein. However, in the present case, the order passed by the Transfer Pricing Officer, in no manner, indicate the specific method adopted by the Transfer Pricing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be eligible for depreciation unless it is in the nature of business or commercial rights having the character of knowhow, patents, copy rights, trademark, license, franchisee. He was of the view that goodwill does not possess any of the characteristic of intangible asset as enumerated in Explanation 3(b) to section 32, which are considered to be tools of business. He observed, as goodwill is not at all a right it is not eligible for depreciation. Accordingly, he disallowed the claim of depreciation of ₹ 72,47,405. 13. The assessee challenged the disallowance before the DRP. The DRP observing that the Commissioner (Appeals) in the preceding years, have disallowed depreciation on goodwill upheld the disallowance. In terms with the orders passed by the DRP, the Assessing Officer passed the impugned assessment order, which is under challenge in the present appeal before us. 14. At the outset, the learned Counsel for the assessee submitted before us that the issue stands decided in favour of the assessee by virtue of the order of the Tribunal in assessee s own case for the assessment year 2005 06. In this context, he drew our attention to the order passed by the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made the payment for acquiring the business and commercial rights, it was comparable with the trademark, copyrights etc. referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill is covered by the provisions of Act entitling the assessee for depreciation and accordingly, we delete the disallowance of depreciation on goodwill made by the AO and sustained by the ld. CIT(A). The ground taken by the assessee is, therefore, allowed. 17. In view of the aforesaid observations of the Co ordinate Bench of the Tribunal in assessee s own case for the preceding assessment year, on materially identical facts, we have no hesitation in allowing assessee s claim of depreciation on goodwill. Insofar as the learned Departmental Representative s contention that goodwill having not been specifically included in Explanation 3(b) to section 32 of the Act, depreciation is not allowable, we have to observe, the issue is no more res integra in view of the Hon ble Supreme Court s decision in SMIFS Securities Ltd. (supra), wherein in no uncertain terms it has been held that goodwill being in the nature of any other business or commercial rights is an intangible asset u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1 Without prejudice to above the learned CIT(A) erred in fact and in law in not directing the Assessing Officer to increase the valuation of the opening stock of raw material for A.Y. 2008 09 by the amount added in the closing stock of raw material of the current year. 25. Briefly stated the facts are, in the course of assessment proceedings, the Assessing Officer found that the assessee has not adjusted his closing stock by including the amount of CENVAT credit in terms of section 145A of the Act. He, therefore, called upon the assessee to explain as to why the difference of such credit amounting to ₹ 1,17,72,672, as on 31st March 2006, and 31st March 2007, should not be added to the closing stock. Objecting to the addition proposed by the Assessing Officer, it was submitted by the assessee that it is eligible to claim 50% of CENVAT in the year of purchase of capital goods and balance 50% in the next year. While computing the depreciation on fixed asset, the assessee has already reduced such CENVAT availed on capital goods, hence, depreciation was claimed on reduced rate. Thus, it was submitted, as the assessee has already offered CENVAT credit to tax by claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is following the exclusive method of accounting by reducing the CENVAT from the cost of capital goods as well as raw material while accounting the purchase value in the books of account. Therefore, as the purchase value of raw material and capital goods are net of CENVAT credit, there is no need to make adjustment of closing stock by including the unutilized CENVAT credit. It is the further contention of the assessee that in case CENVAT credit is included in the closing stock, then corresponding adjustment has to be made to the opening stock in the next year. Hence, in either case, it will be revenue neutral. On a perusal of the assessment order, it is seen that as far as adjustment of CENVAT credit on purchase of capital goods is concerned, the Assessing Officer has accepted assessee s explanation and no adjustment has been made to the closing stock. However, as far as raw material is concerned, the Assessing Officer has added the difference of CENVAT credit as on 31st March 2007 and 1st April 2006, amounting to ₹ 1,04,59,372. We do not find any justifiable reason for such differential treatment. When the assessee has reduced the CENVAT from the purchase value of raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainable before us. Hence, the ground raised by the assessee is dismissed. 31. In the result, assessee s appeal for the assessment year 2007 08 is partly allowed. 32. We now take up Revenue s appeal in ITA no.8091/Mum./2011, for the assessment year 2007 08. The effective grounds raised by the Revenue are as under: 1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the adjustment of ₹ 24,95,977, made to the arm s length price of international transaction in respect of machineries and ignoring the fact that the Assessing Officer had rightly determined the arm s length price of sound hand machineries acquired by the company being 50% of the actual value of the transactions. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the adjustment of ₹ 3,88,155, made to the arm s length price of the international transaction in respect of cost sharing arrangement and in respect of payment for information technology support services. 33. In ground no.1, the Revenue has challenged the decision of the learned Commissioner (Appeals) in deleting the addition made of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 07. While considering identical nature of dispute in the earlier part of this order, we have held that ad hoc disallowance of 50% of the value of international transaction relating to the purchase of second hand machinery is not valid in law and accordingly deleted the addition made on that account. Following our detail reasoning in Para 7 to 7.2 of the order, we uphold the order passed by the learned Commissioner (Appeals) on this issue. Ground no.1 is thus dismissed. 37. Ground no.2, raised by the Revenue relates to the decision of learned CIT(A) in deleting the addition of ₹ 3,88,155, being adjustment made to the arm s length price of the international transaction relating to cost sharing arrangement and I.T. support services. 38. Briefly stated the facts are, in the course of proceedings before him, the Transfer Pricing Officer found that the assessee has entered into international transaction worth ₹ 5,90,170, relating to cost sharing arrangement with its A.E. The nature of services claimed to have been provided by AE are commercial services, financial services and legal services. Similarly, an amount of ₹ 13,50,606, was paid to the A.E. on cost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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