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TMI Blog2020 (8) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... ce - HELD THAT:- Considering the decision of Tribunal for earlier year on alternate adjustment and the fact that the assessee has filed the aforesaid additional evidence for the first time before the Tribunal and the fact that we have already held that the additional evidence furnished by the assessee has direct relevance qua the grounds of appeal, which required consideration and verification at the end of AO, therefore, we remit the issue to the file of AO for consideration and decision on the issue afresh. AO/TPO is also directed to follow the order of Tribunal for AY 2014-15 as well. Needless to order that before deciding the issue, the AO shall grant opportunity to the assessee. Depreciation of goodwill - assessee submits that he acquired goodwill pursuant to acquisition of business from Rahul Healthcare, the valuation of business and goodwill cannot be questioned by revenue authorities - HELD THAT:- A perusal of draft assessment order shows that the assessee failed to discharge the source of goodwill‟. The ld. DRP while considering the objections of the assessee though deleted disallowance of cost of acquisition of goodwill, however, the depreciation claimed on goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit of self-assessment tax and re-compute the interest under section 234A and 234B afresh in accordance with law. - Shri R.C. Sharma, Accountant Member And Shri Pawan Singh, Judicial Member For the Appellant : Shri Neeraj Seth (AR) For the Respondent : Shri Anand Mohan (CIT-DR) ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the assessment order dated 14.10.2019 passed under section 143(3) rws 144C (13), passed in pursuance of direction of Dispute Resolution Panel-1(WZ) (DRP), Mumbai dated 20.09.2019 for Assessment Year 2015-16. The assessee has raised following grounds of appeal: Following grounds are without prejudice to each other: GENERAL 1. erred in assessing the total income at INR 413.09 crores as against INR 153.60 crores computed by the Appellant. I. TRANSFER PRICING GROUNDS A. Adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenses Adjustment proposed by incorrectly applying Section 92CA(3) of the Act and disregarding the relevant submissions made during the assessment proceedings 2. Erred in making an addition of ₹ 256.56 crore (₹ 129.57 crore for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AMP) is not applicable to the Appellant, as the Appellant is an entrepreneur licensee in the Indian market, and is entitled to entrepreneurial returns in the form of residual profit loss associated with India business, remaining after the overseas AEs are compensated with an arm's-length return for royalty, goods and services and that the said Entrepreneur charaterisation is in line with the economic organisation of L'Oreal Group globally. Therefore, the AMP expenses incurred by the Appellant has to be considered as being incurred on account of its entrepreneurial activities (full risk and return of which lies with the Appellant itself) and therefore cannot be construed as an international transaction which warrants a separate adjustment; 12. erred in artificially bifurcating the Appellant's entrepreneurial business activities into manufacturing and distribution segment without any cogent reasons for the same and arbitrary and ad hoc selection of comparable companies for manufacturing and distribution segment without adopting a scientific search process for applying bright line test ('BL T') using 'Other Method' to determine the arm's length price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost, training to salon customers and promotional goods without providing sufficient opportunity of being heard; 22. erred in disregarding evidences/ information submitted by the Appellant to substantiate services received/ benefits derived/ basis of allocation of cost and disregarded the same without giving any cogent reasons; 23. erred in determining the arm's length price of the international transaction of payment for packaging design cost, training to salon customers and promotional goods as NIL based on 'Other Method' as the most 'appropriate method. II. CORPORATE TAX GROUNDS A. Disallowance of depreciation on goodwill - arising on purchase of existing business unit on 'slump sale' basis 24. erred in disallowing deprecation of ₹ 1.03 crores on goodwill arising on purchasing of existing business of Rahul Health Care (RHC), an unrelated party, on a going concern basis; 25. erred in not appreciating the fact that the transaction was undertaken with unrelated enterprise (RHC) and the transaction value was commercially agreed between the two parties; 26. erred in holding that valuation of goodwill at ₹ 8.27 crore was not justified; 27. failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x and incorrect levy of interest under section 234A and 234B of the Act 36. erred in not granting self-assessment tax credit of INR 53 lakhs claimed by the Appellant in the return of income; 37. erred in levying interest under section 234A of the, Act without appreciating that the Appellant had filed the return of income within timeline as prescribed under 139(1) of the Act; 38. erred in levying interest under section 234B of the Act. E. Initiation of penalty proceedings 39. Erred in initiating penalty proceedings under section 271 (1)(c) of the Act. 2. Brief facts of the case are that the assessee-company is engaged in the business of manufacturing of cosmetic, marketing and sale of product, filed its return of income for relevant AY on 29.11.2015 declaring income of ₹ 153.60 crore. Along with the return, the assessee furnished report under Form-3CEB reporting certain international transaction with its various Associated Enterprises (AEs). On reporting international transaction more than the prescribed limit of ₹ 15 crore, the assessing officer (AO) made reference to Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP). During the T.P. assessment p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the unit on Shop located at Baddi H.P from Rahul Healthcare on slum sale basis vide business agreement dated 26.02.2014 for ₹ 12.94 crore. As per the Schedule-3 of Business Transfer Agreement (BTA), Rahul Healthcare had current asset in the form of refund from tax authorities, inventories and cash, which cannot be aggregated into negative value. The assessee has shown fair value of Rahul Healthcare at (-) ₹ 3.14 crore in the valuation report. As per Business Transfer Agreement both the parties agreed on non-compete clause, meaning thereby the value of non-compete and no how are not considered in the valuation report. On the basis of aforesaid facts, the AO was of the view that Rahul Healthcare is not a brand name and merely has any goodwill and thus acquiring the business on such high price was doubted by him. 5. The AO issued show-cause notice as to why goodwill recognized in the books of account should not be treated as Nil and accordingly corresponding depreciation should not be disallowed. The assessee filed its reply dated 21.12.2018. The reply of assessee is extracted by AO in paragraph-4.4 of the draft assessment order, relevant part of the reply is extracted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As established above, there was no goodwill to be recognized for purchase of business from M/s Rahul Healthcare. Hence, the amount of ₹ 1,03,45,097/- is disallowed u/s 32 of the Act and added to the total income of the assessee. Particulars INR in million INR in million Inventory 160.14 Deposits 1.13 Trade Receivables 13.60 Loans Advances 0.15 175.02 Less: Trade Payables (0.50) Less: Others payable (0.21) Net Current Assets 174.31 In view of the above, the purchase price allocation should have to be as under: Particulars INR in million INR in million Consideration paid by the company 129.39 Fair Value of Land Building 69.55 Fair Value of Fixed Asset 8.46 Fair Value of net current Assets 174.31 252.32 Goodwill recognized (122.93) In view of the above facts, the Goodwill claimed by the assessee is not correct. Therefore, it is presumed that the assessee has claimed unjustified Goodwill amounting to ₹ 8,27,60,777/- towards purchase of running business from M/s Rahul Healthcare on Slum Sale basis‟. 4.6 The claim of the assessee is not acceptable as the primary onus is on the assessee to establish the genuineness of the claim. As per section 101, 102 and 106 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR of the assessee submits that these grounds of appeal are covered in favour of assessee by the decision of Tribunal in A.Y. 2008-09 to 2014-15. The ld. AR of the assessee furnished the copy of consolidated decision of Tribunal for A.Y. 2008-09 to 2020-11, order of Tribunal for AYs 2011-12, 2012-13, 2013-14 2014-15 respectively. 10. On the other hand, the ld. DR for the revenue relied upon the order of lower authorities. The ld. DR for the revenue further submits that revenue has already filed appeal against the order of Tribunal for various assessment years before the jurisdictional High Court and the issue is sub-judice before the Hon‟ble High Court. 11. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also gone through the orders of Tribunal for various earlier years. We have noted that the TPO while passing the order under section 92CA basically followed the order for AY 2014-15. We have further noted that in appeal for AY 2014-15 in ITA No. 6448/Mum/2018, the Tribunal while considering the orders for earlier year passed the following order: 9. We have heard both the counsel and perused the records. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P was held not to be an international transaction, this adjustment which was based thereon, could not survive. (vii) It is further submitted that L'Oreal SA, France (recipient of income) has offered the royalty income received from the Appellant and the said royalty income has been accepted to be at arm's length by the TPO in hands of L'Oreal SA. In view of the above, the appellant prays that the adjustment on account of royalty should be deleted. (C) Alternate adjustment on the distribution segment-international transaction of import of finished goods from AEs for resale. Appellant‟s own ITAT order for A.Y. 2013-14 (page 33 and para 20). (D) Alternate adjustment on the manufacturing segment- international transaction of payment for availing of marketing support services to AEs. (a brief description of marketing support services availed is described in Annexure 2 to this note). 1. The TPO in his order has instead of examining whether or not the method adopted to determine the ALP is the most appropriate method or whether the comparable companies selected are appropriate or not, has gone into the question of determining the need for such services, proof of renditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely commented thereon, thereby accepting the same. 7. Further, it is submitted that L'Oreal SA, France (recipient of income) has offered to tax the income received from the Appellant and the said service income has been accepted to be at an arm's length by the TPO in hands of L'Oreal SA. Thus, the provision of services being availed by the Appellant, its rendition and benefits of services etc. stands accepted in the case of the income recipient, L'Oreal SA. 8. In light of the above, it is humbly submitted that the matter should not be remanded back since there were extensive evidences submitted before the lower authorities and the same was accepted by the TPO in remand proceedings. E) Alternate adjustment on the manufacturing segment- international transaction of payment for availing of consulting services. (Brief description 1). The TPO in his order has instead of examining whether or not the method adopted to determine the ALP is the most appropriate method or whether the comparables selected are appropriate or not, has gone into the question of determining the need for such services, proof of rendition of such services, commercial expediency, basis of cost alloca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 23.8.2019 for following concluding adjudication on this issue :- 8. We find that in the backdrop of our aforesaid observations that de hors any 'understanding' or an 'arrangement' or 'action in concert', as per which the assessee had agreed for incurring of AMP expenses for brand building of its AE, viz L‟Oreal S.A., France, the provisions of Chapter-X could not have been invoked for undertaking TP adjustment exercise. Apart there from, we find that a similar view had been taken by the Tribunal while disposing off the appeals of the assessee for the preceding years viz. A.Ys 2008-09 to 2011-12. In fact, the Tribunal while disposing off the appeal of the assessee for A.Y 2012-13 in M/s L Oreal India Pvt. Ltd. Vs. ACIT-7(1)(2), Mumbai [ITA No. 1417/Mum/2017; dated 30.01.2019], had followed the view earlier taken in the preceding years and had vacated the adjustment of 304.69 crores that was made by the TPO by alleging that the AMP expenses incurred by the assessee was an international transaction under Sec. 92B of the Act. The Tribunal while so concluding had observed as under: 12. We have also perused the agreement of assessee with its AE dated 4th Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TP adjustment of ₹ 354.73 crores in respect of AMP expenses cannot be sustained and is liable to be vacated. 12. Since the facts are identical we set aside the order of authorities below and direct that the TP adjustment of ₹ 198.18 crores is to be deleted. 12. Considering the consistent decision of Tribunal on identical set of fact on identical issue for earlier years, wherein no factual difference for the year under consideration is brought to our notice, nor any contrary law is shown to us, to take any other view, therefore, respectfully following the orders for earlier years the Ground No.2 to 18 are allowed. 13. Ground no.19 to 23 relates to alternate adjustment on account of payment for packaging design, cost, training to Saloon customers and promotional goods. The ld. AR of the assessee further submits that these grounds of appeal are also covered by the decision of Tribunal for AY 2014-15. The ld. AR for the assessee submits that the assessee has also filed an application for admission of additional evidence. The additional evidences furnished by the assessee have direct relevance with the issue under consideration. The lower authorities however, did not gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, design cost, training to Saloon Customers and promotion of various products and goods. Considering the nature of the evidences which has relevance with the issue under consideration, we admit the additional evidences furnished by the assessee. We have further noted that on alternate adjustment in AY 2014-15, Tribunal restored the similar issue(s) to the file of AO/TPO by passing the following order: 20. Upon careful consideration, we note that the reference to the excessive nature/benefit derived by the assessee by the TPO is not at all sustainable in the light of Hon'ble Jurisdictional High Court decision in the case of Lever India Exports Ltd. (supra). In the said decision it was expounded by Hon'ble Jurisdictional High Court that it is not for the TPO to apply benefit test. Hence, this limb of TPO‟s reasoning is not sustainable. Further it is clear that the assessee has submitted enormous additional evidence before the DRP and they have been remanded to the TPO also. The TPO has not made any adverse comment rather he has again reiterated that expenses are excessive and has justification aspect in third party situation. In other words, TPO‟s has again reite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f aforesaid discussion and precedent from honourable jurisdictional High Court in the case of Lever India Exports Ltd. (supra) and Johnson Johnson Limited (supra) we direct that these alternative adjustments as above are liable to be deleted. We order accordingly. 16. Considering the decision of Tribunal for earlier year on alternate adjustment and the fact that the assessee has filed the aforesaid additional evidence for the first time before the Tribunal and the fact that we have already held that the additional evidence furnished by the assessee has direct relevance qua the grounds of appeal, which required consideration and verification at the end of AO, therefore, we remit the issue to the file of AO for consideration and decision on the issue afresh. The AO/TPO is also directed to follow the order of Tribunal for AY 2014-15 as well. Needless to order that before deciding the issue, the AO shall grant opportunity to the assessee. In the result these grounds of appeal are allowed for statistical purpose. 17. Ground No. 24 to 32 relates to disallowance on depreciation of goodwill. The ld. AR for the assessee submits the assessee acquired goodwill pursuant to acquisition of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed DR for the revenue submits that the core issue to be decided is whether on the facts and circumstances of the case, the excess considerations paid by assessee over the value of net assets on acquisition of Rahul healthcare will partake the character of goodwill‟. If it comes within the definition or parameter of goodwill, depreciation will be allowed under section 32 of the Act in view of the decision of Hon‟ble Apex Court in Smifs Securities Ltd [2012] 24 taxmann.com 222. 19. The ld DR for the revenue further submits the claim of the assessee that extra consideration paid is with respect to acquisition of bundle of intangibles from Rahul Healthcare (RHC) as provided in the Business Transfer Agreement (BTA) viz; intangibles identified by the assessee are (i) Existing permits, approvals, licenses, registration etc.,( ii) skilled employees of RHC, which are inducted by the assessee and (iii) existing business contracts of RHC acquired for the business of the assessee. The ld. DR further submits that his First contention on the claim of Goodwill or depreciation is that it is not an automatic claim, had that been so, the assessee would pay any extra consideration viz., & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of factors that affect the value of the entity. However, such differences do not represent the cost of intangible assets controlled by the entity. On the basis of aforesaid definition of Goodwill, the ld. DR would submits that no depreciation can be allowed on the self-generated goodwill in accounting as it is not an intangible asset. 20. The ld DR for the revenue strongly relied on the decision of Hon‟ble Apex Court in the case of CIT Vs B.C. Srinivasa Setty [1981] 128 ITR 294 (SC), wherein the Hon‟ble Court held that Goodwill denotes the benefit arising from connection and reputation . The ld. DR also refereed the decision of Hon‟ble Delhi High Court in Triune Energy Services (P.) Ltd. vs DCIT [2016] 65 taxmann.com 288 (Delhi), wherein it was has held as under; 13. Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression goodwill subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. 21. In the second alternative submissions the ld. DR for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be claimed to be acquired from Rahul Healthcare for future benefit or of economic value of the business of the assessee. The ld for the revenue finally submits that as per the 5th Proviso to section 32(1) the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the written down value (WDV) of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. To buttress his submissions he also relied on the decision of Bangalore Tribunal in United Breweries Ltd. (2016) 76 taxmann.com 103 (Bangalore Trib.). The ld. DR also furnished his submissions in the form of written notes. 24. In the rejoinder submission the ld. AR for the assessee filed detailed written submissions running in to more than 30 pages. In rejoinder written submissions the ld. AR refuted all the submissions of the ld. DR for the revenue and re-treated his submission. Besides that the ld. AR for the assessee further submitted that the ld. DR is trying to make out an altogether new case, which is without any basis. It was argued that during the course of hearing, the ld. AR has put forth the same line of argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order issued show cause notice as to why net current asset were taken at a negative value of ₹ 3.14 crore and also why depreciation of ₹ 1.03 crore should not be disallowed. The assessee filed its reply dated 21st December 2018. In the reply the assessee stated that current assets of Rahul Healthcare were negative because of the liabilities of Rahul Healthcare were also purchased by the assessee. It was also contended that no value was assigned to non-compete and knowhow, while calculating the goodwill because the assessee‟s core business activities was manufacturing, marketing and sales of cosmetic product and not Soaps and that the assessee and Rahul healthcare were not in competition in anyway. 27. The reply furnished by assessee was not accepted by the assessing officer. The assessing officer while passing the draft assessment order on 28th December 2018 treated the goodwill recorded by assessee is at ₹ 8.27 crore as an unexplained investment under section 69 of the Act. The assessing officer also took his view that amount of current liabilities and expenses payable by Rahul Healthcare was taken into account as on 30th September 2013 instead of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expression goodwill subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. 31. A perusal of draft assessment order shows that the assessee failed to discharge the source of goodwill‟ (para 4.6). The ld. DRP while considering the objections of the assessee though deleted disallowance of cost of acquisition of goodwill, however, the depreciation claimed on goodwill was upheld. In our view the AO as well as ld. DRP have not considered the aforesaid submission of the assessee that the assessee acquired not only tangible assets but also bundle of intangible assets collectively called goodwill, which includes various permits, employee, and contracts, though the assessee in Annexure-2 of its reply dated 21.12.2018 has specifically contended about its claim of goodwill‟ (page 2237 to 2245 of PB). Considering the facts that neither the AO nor the ld. DRP considered the aforesaid facts as placed before us, therefore, we remit these grounds of appeal to the file of AO to consider these issues afresh by considering the aforesaid submission of the assessee and the evidences and pass the order in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. Considering the fact that the ground of appeal raised by assessee is purely legal in nature. Further, considering the decision of Hon‟ble Bombay High Court in Sesa Goa (supra), we admit the ground of appeal and direct the AO to consider the claim of assessee and allow appropriate relief in accordance with the decision of Hon‟ble Bombay High Court in Sesa Goa (supra) wherein it was held that Education Cess and Higher and Secondary Education Cess are liable for deduction in computing income chargeable under head of 'profits and gains of business or profession‟. In the result, this ground of appeal allowed for statistical purpose. 38. Ground No.36 to 38 relates to interest under section 234A and 234B. The ld. AR of the assessee submits that the assessee paid self-assessment tax of ₹ 53 lakhs on 31.03.2017, the credit of which has not been granted by AO. The AO may be directed to grant the credit of the same. The ld. AR of the assessee further submits that the return of income was filed on 30.11.2015, therefore, interest under section 234A is not applicable as return was filed within due date. The ld. AR of the assessee submits that the direction ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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