9911796707
TMI Blog2019 (5) TMI 773X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. Deduction u/s 10A computation - exclusion of tele-communication charges that the payments were made to the service provider for connectivity within India and therefore the expenditure was not attributable to the delivery of article or things incurred in foreign exchange - HELD THAT:- Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are of the view that communication charges should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld in the case of CIT v. HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT] . In view of the acceptance of Gr.No.3, We are of the view that Gr.NO.2 that the expenditure in question ought not to be excluded from the Export Turnover is academic and therefore left open without any decision. Addition of Special Additional Duty of Customs at 4% - HELD THAT:- We are of the view that in the light of the statutory provisions cited for getting an order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid to IRIL pursuant to BTA agreement - revenue expenditure - HELD THAT:- There was specific agreement not to compete and the consideration was fixed as per the terms of the agreement. In the present case however, there exists no such agreement. Since the transfer of business was on a slump sale basis, the transferee has split the lump sum consideration as attributable to several tangible and intangible assets acquired consequent to slum sale. The consideration paid for acquiring business is sought to be characterized as revenue expenditure, which does not appear to be appropriate. Nevertheless, the intangible benefit to the Assessee as a result of existence of agreement not to compete with business of the Assessee can be said to be an intangible right, which can be characterized as commercial rights and the Assessee should be allowed the benefit of depreciation on the value as estimated by the Assessee in its valuation report u/s 32(1)(ii) as laid down in several decisions which we will refer to while dealing with claim of depreciation on goodwill. Depreciation on Goodwill - claim as revenue expenditure or in the alternative treat is as commercial right on which depreciation sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of IRIL s RDB several equipments already manufactured and sold by IRIL existed in the market and the Assessee gets a right to sell spare parts for such equipments. Expected sale of spare parts and the margin likely to be earned on such sale has been estimated and value assigned to such right and allocated out of the lump sum consideration paid on slump sale. The claim of the Assessee before us is that if the aforesaid payment is held to be capital in nature, then, depreciation may be directed to be allowed in terms of section 32(1)(ii) . The basis of valuation is set out in para-11 of the valuation report of Bizworth in our view is in fact an intangible acquired by the Assessee and the basis of estimation of its value is reasonable and acceptable. We therefore direct that depreciation be allowed on this intangible treating it as commercial right u/s.32 Allowability of provision for warranty - deduction towards obsolescence of inventory - HELD THAT:- Actual payment of warranty claims needs to be allowed as deduction as it was revenue expenditure incurred wholly and exclusively for the purpose of business of the Assessee. As far as the Assessee is concerned, it is liability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to assessment year 2008-09. 2. The Assessee is a company engaged in the business of Manufacture/dealing in tractors, trailers, bus-chassis and trading in construction equipments. The various issues that emanate from the draft order of assessment against which the Assessee filed objections before the Dispute Resolution Panel (DRP), the order of DRP and the final order of assessment are discussed with reference to the individual grounds of appeal raised by the Assessee challenging various additions made to the total income declared by the Assessee in its return of income. The Assessee has also filed applications for admitting additional grounds of appeal vide application dated 14.1.2016 and another additional ground of appeal dated 22.11.2018 filed in the registry on 4.1.2019. 3. Before we deal with the grounds of appeal raised by the Assessee, we need to first consider the Assessee's application dated 22.11.2018 for admission of the following additional ground of appeal because it is a preliminary issue challenging the impugned order as one passed beyond the period of limitation and therefore non est in law:- "That on the facts and circumstances of the case and in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2010, the provisions of clause (a) shall have effect as if for the words "two years", the words "twenty-one months" had been substituted : Provided further that in case the assessment year in which the income was first assessable is the assessment year commencing on or after the 1st day of April, 2005 but before the 1st day of April, 2009 and during the course of the proceeding for the assessment of total income, a reference under sub-section (1) of section 92CA- (i) was made before the 1st day of June, 2007 but an order under sub-section (3) of that section has not been made before such date; or (ii) is made on or after the 1st day of June, 2007, the provisions of clause (a) shall, notwithstanding anything contained in the first proviso, have effect as if for the words "two years", the words "thirty-three months" had been substituted: Provided also that in case the assessment year in which the income was first assessable is the assessment year commencing on the 1st day of April, 2009 or any subsequent assessment year and during the course of the proceeding for the assessment of total income, a reference under sub-section (1) of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),- (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation.-For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. (9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year as the time within which Assessment has to be completed. As per the third proviso the period of limitation in the case of the Assessee would end on 31.3.2012 i.e., three years from the end of the relevant AY, which is AY 2008-09 in this case. The order of assessment has however been passed in this case only on 18.10.2012. 8. It is the plea of the Revenue that in the case of an eligible Assessee the procedure to be followed is first to pass a draft assessment order as per the provisions of Sec.144C(1) of the Act which has a nonobstante clause. The Assessee has a right to file objection to the draft assessment order or convey his acceptance to the proposals in the draft assessment order and the time limit for doing so is 30 days from the date of receipt of the draft assessment order. If the Assessee conveys his acceptance to the draft assessment order or does not file objections to the DRP within the time limit specified in Sec.144C(2), the AO has do pass final assessment order within one month from receipt of acceptance or expiry of period for filling objection to DRP and no such objection is filed (Sec.144C(3) of the Act). If objections are filed before DRP, the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t nor do provisions of the latter section override the former, notwithstanding the non-obstante clause in sub-sections (4) and (13) thereof. It was submitted that the non-obstante clause in Sec.144C(1) of the Act, is only with regard to the procedure to be followed in the case of eligible assessee requiring passing of a draft assessment order in case of an eligible assessee and should be read limited to the context, i.e., exception to the ordinary rule that there will be only one assessment order passed by the assessing officer on culmination of the assessment proceedings. 11. It was further submitted that the non-obstante clause in section 144C(4) of the Act curtailing the time limit to pass a final assessment order within one month, in case where the assessee does not make an application to the DRP, notwithstanding the time limit provided in section 153(1) of the Act is to curtail the limitation that would otherwise have been available to the assessing officer to pass the final assessment order. The time limit of one month in section 144C(4) cannot be read as additional time provided to the assessing officer, over and above limitation in section 153 of the Act to pass the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 233 wherein it was held that the provisions of section 144C override the provisions of section 153 of the Act. While rejecting the assessee's contention that the limitation in section 153 referred to passing of draft assessment order, the Tribunal held that: (i) Section 144C gives a complete go bye to section 153; and (ii) The Act does not contemplate any limitation for passing of draft assessment order, which can be passed within a reasonable time. 14. Though arguments were advanced that the aforesaid decision does not lay down the correct law, we are of the view that a co-ordinate Bench decision is binding on us, and we find no reason for not following the same. We therefore reject the additional ground raised by the Assessee on the question of limitation. 15. We shall now take up the grounds of appeal raised by the Assessee. Gr.No.1 raised by the Assessee in the grounds of appeal reads as follows:- "1. The impugned order of the Assessing Officer passed consequent t the order of the Dispute Resolution Panel (for short DRP) is not sustainable in the eyes of law as the same is passed without considering the explanations of the appellant in proper prospective, the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, 1961. The AO therefore excluded the aforesaid sum from the export turnover without excluding them from the total turnover. As a result, the deduction claimed u/s.10A of the Act by the Assessee was allowed at a lesser sum than what was claimed by the Assessee. It was the plea of the Assessee in the appeal against the assessment order before the CIT(A) that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Communication expenses were incurred not for export of computer software outside India and therefore the exclusion from export turnover as done by the AO was not correct. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) wherein it was held that while computing deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, submitted that the aforesaid telecommunication charges are incurred by the assessee for connectivity only within India and cannot by any stretch of imagination be attributable to delivery of software outside India. It was submitted that the Assessee did not incur any expenditure in foreign currency for providing technical services outside India so as to exclude it from the definition of export turnover. The learned DR relied on the order of the CIT(A). 20. We have considered the rival submissions. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that communication charges should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon'ble Karnataka High Court has been upheld by the Hon'ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 & Ors. dated 24.04.2018. In view of the acceptance of Gr.No.3, We are of the view that Gr.NO.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p, and thus income on account of SAD refund had accrued to the appellant during the relevant assessment year. Aggrieved by the aforesaid observations of the AO in the final order of assessment, the Assessee has raised Gr.No.4 before the Tribunal. 25. We have heard the rival submissions. The Assessee is an importer of certain raw materials/components from outside India which are to be utilized in manufacturing of final products. The aforesaid import of raw material/components, is inter alia subject to, SAD, which is levied in lieu of value added tax on similar goods had the same been manufactured in India, under section 3(5) of the Customs Tariff Act, 1975. Pursuant thereto, upon export of finished product, the assessee was eligible to claim refund of SAD paid at the time of import of raw materials/components. Accordingly, in the books of accounts, the SAD amount is reduced from the cost of materials used in the export of finished products. Procedurally, upon export of the goods, a refund claim is required to be lodged with the customs authority for refund of SAD. The custom authorities, after verifying the claim on the basis of documents so furnished, pass an order for refund of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen corresponding liability would arise on the customs authorities to pass on the benefit of duty free imports to the assessee. It was, thus, held that until the goods were actually imported, the benefits would only be in the nature of hypothetical income which may or may not materialise and its money value, therefore, would not be income of the assessee. 26. It was submitted that the law is well settled that entries in the books of account are not determinative of the ambit of taxation. If an item of income / expenditure is taxable / deductible, the same has to be taken into account as per the provisions of the Act and not as per the book entries. Reference in this regard was made to the decision of the Supreme Court in the case of Kedarnath Jute Manufacturing Company v. CIT 82 ITR 363(SC) laying down the aforesaid proposition. The learned DR reiterated the stand of the AO that when the Assessee has recognized accrual of income in the books of accounts, that by itself would be sufficient to bring to tax the same. 27. We have considered the rival submissions. We are of the view that in the light of the statutory provisions cited for getting an order of refund of SAD, the mere fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee has filed an application seeking to raise additional grounds vide its letter dated 14.1.2016. Additional grounds No.15 & 16 and 19 to 23 raised therein are linked to the grounds of appeal (Gr.No.5, 7 to 8) already raised in the original grounds of appeal filed along with Form No.36B along with the appeal. The additional grounds raised therein are therefore admitted for adjudication. The additional grounds viz., ground Nos.15 & 16 and 19, 21 to 23, reads as follows: "Raised as Additional Ground of appeal No.15 & 16 15. Without prejudice to the Ground No.5, the AO/DRP ought to have treated the difference between, the value of tangible and intangible assets assigned as per the valuation report and the written down value of the assets in the books of IR as being Goodwill and allowed depreciation as per the provisions of the Act. 16. Without prejudice to Ground No.8, the AO/DRP ought to have held non-compete fee of ₹ 5,40,00,000 as being a depreciable asset and allowed depreciation as per the provisions of the Act. Raised as Additional Ground of Appeal No. 19, 21 to 23 :- 19. AO/DRP ought to have allowed the value assigned to license, permits, certification, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undivided sales consideration, with no independent values being assigned to various components of the RDB. However after the conclusion of transfer of the RDB, the Assessee has in its books of accounts recorded the break-up/bifurcation of various assets and liabilities acquired and the same is explained in Note No.18 of Schedule 18 to the note to the Accounts (at Page 2662 of Paper Book Vol.-4). 31. As per section 2(42C) of the Act, Slump Sale means, the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. There is no dispute that the transfer of RDB by IRIL to the Assessee under the BTA is a slump sale. The Assessee is the transferee and taxation of Slum Sale in the hands of the Transferor (IRIL) is governed by Sec.50B of the Act. As far as Assessee is concerned, after the transfer, he has to record the individual items of assets that were transferred under the Slum Sale in his books of Accounts. Since at the time of purchase of business, no values were assigned for individual assets and liabilities forming part of the undertaking acquired by way of slump s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide letter dated 15.10.2012 (also refer Addl. ground 21 of the present appeal) Total Consideration 23,182.00 32. Accordingly, the cost of acquisition of individual assets, forming part of RDB undertaking acquired by way of slump sale from Ingersoll Rand India Limited ('IRIL'), for claim of depreciation in the hands of the Assessee was recorded at the aforesaid values and was determined by independent valuers. Note 18 to the Notes on Accounts as appearing in the financial statements of the Assessee was as follows: "Pursuant to a business agreement dated May 4, 2007 between Ingersoll-Rand (India)Ltd., (Ingersoll-Rand), the Company has during the year acquired the following Assets and Liabilities of the Road Machinery Division of Ingersoll-Rand. Fixed Assets (Note (a) below) 175,77,55,740 Current Assets Inventories 20,17,44,753 Sundry Debtors 19,83,27,779 Cash and Bank 1,66,03,937 217,44,32,209 Other current Assets Less: Current Liabilities & Provisions Liabilities 26,84,64,784 Provisions 2,18,57,296 9,03,22,080 Net Assets taken over from Ingersoll-Rand 188,41,10,129 The difference between the Purchase consideration of ₹ 231,82,00,000 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has sought deduction of Non-compete fee as revenue expenditure. With prejudice to the aforesaid claim, in (additional) ground No.16 & 19 the payment for non-competition agreement and Licenses is claimed as commercial rights/intangibles on which the Assessee is entitled to claim depreciation as intangible assets viz., commercial rights on which the Assessee is entitled to claim depreciation. 38. The Total consideration payable to IRIL for slump sale of RDB was a sum of ₹ 231,82 lacs. After allocation of values for various Assets and intangibles there was a difference of ₹ 43,40,89,870/- which was treated as Goodwill. However, no depreciation was initially claimed in the return of income on goodwill aggregating to ₹ 43,40,89,870. The relief in respect of depreciation on Goodwill is sought by the Assessee in (Additional) Ground No.15 & 21 specifically. 39. Also, certain business and commercial rights related to spare parts supply rights and benefits amounting to ₹ 13,87,00,000 and sales promotion material aggregating to ₹ 15,00,000 were neither capitalised nor claimed as revenue expenditure. However, claim of depreciation was made before the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case." 43. The assessing officer invoked Explanation 3 to section 43(1) of the Act held that depreciation would be admissible only with reference to the WDV of the assets (as appearing in the books of IRIL on basis of Form 3CEA report) forming part of the business purchased by the appellant and not with reference to the values on the basis of valuer's report. Accordingly, the assessing officer disallowed the claim of depreciation to the extent of ₹ 18,19,73,312, as under Asset Cost as per Valuation report WDV as per IR as on 4.5.2007 Rate of depreciation Depreciation as per valued cost Depreciation as per adopted cost Difference Depreciation Buildings 8,76,60,000 3,34,24,359 10 87,66,000 33,42,435 54,23565 Furniture & fittings 2,03,74,000 1,12,98,402 10 20,37,400 11,29,840 9,07,560 Machinery & plant 11,58,00,000 5,40,10,049 15 1,73,70,000 81,01,507 92,68493 Vehicles 11,36,000 10,17,277 15 1,70,400 1,52,592 17,808 Computers and So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000/- was on the basis of estimate by the Assessee that the designs would have further useful life of 7 years after acquisition by the Assessee; (iii) The Assessee had claimed before the AO that there was an world wide acquisition of Ingersoll Rand Road Development Business or Road Machinery Division by the parent company of the Assessee and in terms of understanding between the parties on such acquisition that the brand name of Ingersoll Rand (IR) would be used for a period of one year from the date of acquisition in India on road making machinery. The Copy of the said understanding was not furnished. (iv) the allocation of value for brand value was made only on the basis of statement of Assessee's sales and marketing team which was to the effect that the Assessee without the brand name of IR would not be able to penetrate the market for next three years. (v) The valuation of supplier database which was estimated at ₹ 3 lacs per vendor was not based on visit of the potential supplier, obtaining prototypes and samples and due diligence evaluation. Customer database cannot be regarded as a depreciable asset. 46. The DRP upheld the conclusions of the AO by observing at para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of tax liability by claiming depreciation with reference to enhanced cost. The satisfaction to be recorded by the assessing officer is not based on his ipse dixit but on an objective evaluation of material placed / to be brought on record. The Hon'ble Gujarat High Court in the case of Ashwin Vanaspati Industries 255 ITR 26 (Gujarat) wherein the Court held that where the assessee makes a claim for depreciation on enhanced cost, which is actual cost in its hands, it was necessary for the authority who wanted to determine the 'actual cost' as required by Explanation 3 to section 43(1) to place some evidence on record. The ITO is required to determine actual cost to the assessee having regard to all the circumstances of the case and if in his opinion the written down value was the actual cost, he ought to have supported the same by placing sufficient evidence so as to dislodge the valuation report of the registered valuer. 48. Similarly in the case of Unimed Technologies Ltd. vs. DCIT 73 ITD 150 (Ahd.), it was held that Explanation 3 to section 43(1) of the Act could be invoked only if the Assessing Officer was of the view that fair market value of assets had been inflated to clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher value is to get benefit of higher depreciation and avoid tax. The fair market value of the assets on which depreciation has been claimed by the Assessee, as on the date of transfer, has not been disputed by the revenue authorities on germane grounds. The reasons given by the AO for invoking Explanation-3 to Sec.43(1) in our view are very vague. The valuation report is given by experts in the respective fields. Their conclusions cannot be brushed aside on mere surmises and conjectures. It is undisputed that but for invoking Explanation-3 to Sec.43(1) of the Act, there is no other basis for not allowing the claim for depreciation as made by the Assessee. On the facts of the case, we are convinced that the AO has not established the existence of facts to justify invoking Explanation-3 to Sec.43(1) of the Act and therefore, we hold that the depreciation on the cost of acquisition of various assets as claimed by the assessee in the return of income should be allowed. Thus Ground No.5 is allowed. 52. As far as Ground No.7 is concerned, the complaint of the Assessee is that it did not have opportunity of being heard on this issue. Neither before AO nor before DRP, the Assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on competing Activities following closing: Each of the sellers agrees that from the closing until the fifth anniversary of the closing, they will not, and they will ensure that each of the Sellers Affiliates (other than the sold Companies ) will not directly or indirectly engage or invest in any business in competition with the business as conducted immediately prior to the closing. Notwithstanding the foregoing, this section 5.12(a) shall not prohibit (i) the Sellers, directly or through any Affiliate, from conducting any business activities conducted by them as of the date of this agreement(other than the Business), including the business activities of all IR company stores retained by sellers (provided that any business activities conducted by such retained IR company stores shall always be conducted in accordance with the terms of the IRES Sales & Service Agreements ), and the business activities required of the sellers pursuant to the Closing Agreements and pursuant to this Agreement;(ii)Sellers, directly or through any Affiliate, from investing in or holding not more than 10% of the outstanding capital stock or other ownership interests of any person; (iii) the Sellers, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the transfer of business was on a slump sale basis, the transferee has split the lump sum consideration as attributable to several tangible and intangible assets acquired consequent to slum sale. The consideration paid for acquiring business is sought to be characterized as revenue expenditure, which does not appear to be appropriate. Nevertheless, the intangible benefit to the Assessee as a result of existence of agreement not to compete with business of the Assessee can be said to be an intangible right, which can be characterized as commercial rights and the Assessee should be allowed the benefit of depreciation on the value as estimated by the Assessee in its valuation report under section 32(1)(ii) of the Act, as laid down in several decisions which we will refer to while dealing with claim of depreciation on goodwill. We hold and direct accordingly and allow Gr.No.16 (Additional) and dismiss Gr.No.8 raised by the Assessee. 59. Additional Gr.No.15 & 21 are concerned, the same are in relation to Goodwill claimed by the Assessee as deductible revenue expenditure or in the alternative treat is as commercial right on which the Assessee should be allowed depreciation. 60. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Value (Rs. in millions) Tangible assets Land and Building 724 Plant & Machinery 153 Net Current assets 126 Total (A) 1003 Intangible assets 880 Design & Drawing 327.8 Marketing intangibles 222.3 Order backlog 40.0 Spare parts supply rights & benefits 138.7 Supplier database 60.0 Software acquired 19.4 Sales promotion material 1.5 Non-competition agreement 54.0 Licenses 7.0 Warranties 10.4 Total (B) 880.80 Goodwill 434.09 Total (C) 434.09 Total (A) + (B) + (C) 2317.89 63. It was the plea of the Assessee that the excess of purchase consideration over the value assigned to tangible assets, was allocated to intangible assets to the extent of ₹ 88.08 crores and goodwill to the extent of ₹ 43.40 crores. Such portion of the purchase consideration (which is in excess of the value allocated to tangible assets acquired as part of the undertaking), represents consideration paid for acquisition of various intangible assets in the form of leases, licenses, customer/ supplier database, business contracts, patents, trademarks, etc. The same was reflected in the accounts as (a) intangible assets and (b)goodwill. Irrespect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the aforesaid claim of depreciation on intangible assets/goodwill. On further appeal, the High Court allowed the appeal of the assessee, holding that nature of intangible assets in the residual category of "business or commercial rights" could not be restricted to the preceding six category of assets which are of distinct kind and nature. The High Court observed that all the intangible assets fall in the same genus of assets forming part of tool of trade, facilitating smooth carrying of business. The High Court further held that the various intangible assets acquired by the assessee, viz., business claims, business information, records, contracts, etc., were invaluable commercial rights, which were necessary to carry on the business acquired through slump sale. Accordingly, the High Court held that the same were in the nature of intangible assets eligible for depreciation under section 32(1)(ii) of the Act in the residual category of "business or commercial rights". The relevant observations of the High Court are as under:- "13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares & Stocks Ltd. (supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of the items falling in Section 32(1)(ii) of the Act. 14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section…" (emphasis supplied) 66. Our attention was also drawn to a similar decision of Hon'ble Delhi High Court in the case of Triune Energy Services Private Limited vs. DCIT: 237 Taxman 230, wherein it was held that goodwill is an intangible asset providing a competitive advantage to an entity which includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc.; the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion may be directed to be allowed in terms of section 32(1)(ii) of the Act. The details of the licenses and permits and certifications are set out in paragraphs 18.1 to 18.10 at pages 2783 to 2785 of paper-4 which is part of the valuation of intangibles report of Bizworth. The basis of valuation is set out in para-18.8 to 18.10 of this report and in our view, it is in fact an intangible acquired by the Assessee and the basis of estimation of its value is reasonable and acceptable. We therefore direct that depreciation be allowed on this intangible treating it as commercial right u/s.32 of the Act. Gr.No.19 is thus allowed. 70. As far as (additional) Gr.No.22 is concerned, the assessee claimed deduction in respect of the amount of ₹ 13.87 crores allocated out of slump consideration towards the rights acquired for supply of spare parts to customers of Ingersoll Rand. The assessing officer disallowed the same on the basis that the same is in the nature of capital expenditure creating new source of income. It is alternatively submitted by the Assessee that in case the said amount is held to form part of the lump sum consideration towards acquisition of RDB undertaking, then, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t figure). The error is purely typographical error and the request for modification is accepted). 73. The facts with regard to the aforesaid grounds of appeal are that the Assessee acquired RDB from IRIL by way of a slump sale. All assets and liabilities of the RDB was acquired by the Assessee. The following liabilities also became the liability of the Assessee:- (a) Provision for inventory obsolescence ₹ 3,79,30,783 (refer page 240 of PB- Vol 1 / 2707 of PB-Vol 4) (b) Provision for warranty ₹ 1,16,44,629 (refer page 271 of PB - Vol 1 / 2715 of PB - Vol 4) Total ₹ 4,95,75,412 74. During the relevant previous year, the assessee had paid/discharged liability against the aforesaid provisions, to the extent of ₹ 1,32,65,192 (₹ 36,34,779 + ₹ 96,30,413) and claimed deduction thereof in the return of income (refer page 93 of PB - Vol 1 / page 2665 of PB - Vol 4). The details of utilization of aforesaid provisions by appellant during the year are as under:- (a) Provision for inventory obsolescence - ₹ 36,34,779 (Refer to Schedule 7 - Inventories in financial statements - page 10 of PB-Vol 1 / 2647 of PB-Vol 4) Particulars Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. In view of the aforesaid, the aforesaid provisions were also acquired as part of slump purchase from IRIL. The Assessee provides for warranty in the books of account. The amounts actually paid against warranty claims are adjusted against the provision created and outstanding in the books. However, for tax purposes, the Assessee has consistently added back the provision for warranty debited to profit and loss account and claimed deduction for actual warranty claim. In the revised return of income, the Assessee has added back provision for warranty debited to profit and loss account amounting to ₹ 17,40,99,834 and claimed deduction for the actual warranty claims paid out during the relevant previous year to the extent of ₹ 7,76,58,408. The assessing officer accepted the method followed by the assessee of adding back provision for warranty and claiming deduction for actual warranty claims, except to the extent of warranty claim actually paid in respect of RDB business acquired from Ingersoll Rand. The amount of ₹ 96,30,413, being actual payment of warranty claims in respect of the outstanding warranty for products sold by Ingersoll Rand prior to the slump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO/ TPO to the Arm's Length Price received in respect of the transaction relating to services to its Associated Enterprises by rejecting the comparables adopted by it alleging the same to be functionally different from its business. Additional Ground of Appeal No.18 18. Without prejudice to the additional ground No. 17 above, the learned TPO erred in not selecting comparables that are functionally comparable to the Appellant which is engaged in the provision of engineering and design services." 81. The Assessee provided captive engineering design service to its associated enterprise. It is not in dispute that the said transaction of providing captive engineering design services by the Assessee to its AE was an international transaction and income from such international transaction has to be determined keeping in mind the Arm's Length Price as is required under the provisions of Sec.92 of the Act. It is also not in dispute that the Transaction Net Margin Method (TNMM) was chosen as the Most Appropriate Method (MAM) for the purpose of determination of ALP. The Profit Level Indicator (PLI) chosen for the purpose of comparison was operating profit of the Assessee and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. 86. The comparability of this company in the case of an Assessee providing ITES to its AE such as the Assessee was considered, in the light of the very same objection that this company outsources major portion of its activities, in the following decisions and it was held that this company is not comparable with a company providing ITES to its AE such as the Assessee: (i) The Hon'ble Delhi High Court in the case of Rampgreen Solutions P. Ltd 377 ITR 533 (Del) held that this company was outsourcing its activity of providing ITES to its AE and this would have a bearing on its profitability and therefore this company cannot be compared with a company providing ITES to its AE on its own. (ii) In the case of Pr. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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