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TMI Blog2022 (6) TMI 1194X X X X Extracts X X X X X X X X Extracts X X X X ..... eded to apply TNMM at the entity level which the assessee company has objected to - HELD THAT:- We have perused the order passed by the CIT(A) particularly para 9 which is cryptic in nature and fails to lead to the specific conclusions as to why the TP adjustment made by the TPO are being deleted. Merely on the basis of generic observations without going into the functionality of the particular segments/international transactions TP adjustment cannot be deleted. In these circumstances it is agreed by the authorized representatives of the parties to the appeal that TP issue is required to be decided afresh by the TPO by grouping commission income and supervisory income together and the remaining international transactions are to be benchmarked independently by going into the functionality of the same. Disallowance on account of license fee/royalty - HELD THAT:- We are of the considered view that facts on the issue are not completely brought out, neither discussed by the AO nor by the Ld. CIT(A). No findings have been returned if the same is a license fee or royalty. Even no detail of commission or royalty paid has been brought on record. So this issue is required to be remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the segmental account and the net segmental margins filed by the assessee are not reliable as the same is based on proportionate allocation of indirect expenses with the sales. 2. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to Rs. 2,19,74,033/- and holding that the benchmarking at entity level using TNMM by the TPO is not correct without appreciating the fact that all transactions are closely linked. 3. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to Rs. 2,19,74,033/- without appreciating the fact that different international transactions with the AE are closely linked and overlooked various judicial pronouncement. 4. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of expenditure incurred on license fees/royalty holding it to be business expenditure without appreciating the fact that the assessee had not justified the basis and purpose of the expenditure without documentary evidence during the course of assessment proceedings. 5. On the fact and in circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/Cross-Objector, that the learned TPO has legally erred by denying the Appellant Company an opportunity to justify its treatment of 'Foreign Exchange fluctuation loss' and 'Provision for Credit balances written back' for the purpose of determining the operating margin while applying Transactional Net Margin Method ('TNMM') at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A). 2. Without prejudice to any other ground/objection, on the facts and circumstances of the case, the learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/Cross-Objector that the learned TPO has factually and legally erred in not excluding 'Foreign exchange fluctuation loss' amounting to Rs. 9,58,104 while determining the operating margin for applying TNMM at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A). 3. Without prejudice to any other ground/objection, on the facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction F.Y. 2007-08 (Rs) Method Used 1 Purchase of Components Spares 6,80,75,380 Resale Price Method 2 Payment of Design Engineering Fees 1,86,83,436 Resale Price Method 3 Receipt of Commission 1,19,51,956 Transactional Net Margin Method 4 Receipt for Supervisory Assistance 51,85,376 Transactional Net Margin Method 5 Contribution to Common Costs 1,10,08,756 Not Applicable Total 11,49,04,904 3. In its return of income assessee company claimed a net loss of Rs. 23,32,26,686/-. The assessee company in order to benchmark its international transactions had adopted different methods to determine arms length price. However, the Transfer Pricing Officer (TPO) has taken the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating Income 1,19,51,956 2 Total Expenses 74,21,53,308 3 Less. Extraordinary /Non Recurring and Non Operating Exp Interest 7,65,69,636 Unrealised loss on Projects 56,41,382 Inventory written off 64,18,458 Warranty Liquidated damages 1,35,92,495 Bad Debts written off 2,47,796 Purchases wrongly recorded 52,73,925 Extraordinary costs 5,05,40,000 Total Operating Costs 58,38,69,616 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's appeal) Ground Nos. 1, 2, 3 4 9. Undisputedly, the assessee company had acquired food and pharma division of L T Ltd. by virtue of agreement dated 26.05.2005 with net assets and liability of this division being a negative figure of Rs. 26.49 crores. However, sale consideration paid by the assessee to L T for acquisition was Rs. 22.74 crores. The assessee company has claimed depreciation of Rs. 5,19,11,719/- on certain intangible assets including non computing fee, rights, patents, trademarks etc. @ 25% of the opening WDV of Rs. 20.6 crore, which the AO has disallowed on the ground that in the schedule of fixed assets the assessee had shown an aggregate amount of Rs. 49.92 crores as goodwill of loan and under the head intangible assets no other intangible assets were shown to have been held by assessee in the balance sheet. 10. The Ld. CIT(A) also upheld the disallowance made by the AO on the ground that the claim of the assessee for allowance of depreciation on its so called unidentifiable intangible assets including goodwill based on valuation report prepared much after the acquisition of the concerned business unit is without any factual or legal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, after the takeover, as Goodwill under the head 'intangibles'. Hon'ble Supreme Court in the case of CIT v. Smifs Securities Limited(supra) has dealt with this issue elaborately and then came to conclusion that the excess consideration paid over and net asset value of the business acquired shall be goodwill being 'any other business or commercial rights of similar nature' and will be entitled for depreciation u/s. 32 of the 1961 Act. The Hon'ble Supreme Court elaborately discussed Explanation 3 to Section 32(1) of the 1961 Act in the case of CIT v. Smifs Securities Limited(supra), wherein Hon'ble Supreme Court held as under: 2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee. We have also observed that Hon'ble Delhi High Court in the case of Triune Energy Services Private Limited v. DCIT(supra) has also taken the similar view, by holding as under: 9. We have heard the learned counsel for the parties. 10. The issue whether depreciation is allowable on goodwill is no longer res integra. In Smifs Securities Ltd. (supra), the Supreme Court had answered the question Whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said section in favour of the Assessee. 11. The Supreme Court had further held as under:-- 'We quote hereinbelow Explanation 3 to section 32(1) of the Act: Explanation 3. - For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the number or substitution of any employees as well as any modification to their respective employment contacts between as on 31.03.2006 as listed in Appendix 5A shall be subject the previous written approval of Saipem, BJ and TPPL. A copy of each of the employment contracts for the employees listed in Appendix 5B shall be available by 22nd September, 2006. (9) Goodwill: Goodwill includes the goodwill in relation to the name associated to the Business. 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. 14. In CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC), the Supreme Court had explained that:-- Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill was nothing more than 'the probability that the old customers would resort to the old p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. The 'Financial Reporting Standard 10' issued by Accounting Standard Board which is applicable in United Kingdom and by Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements . 16. The abovementioned Financial Reporting Standard 10 also provides for accounting of purchased goodwill as the difference between the cost of an acquired entity and the aggregate of the fair values of that entity's identifiable assets and liabilities. Positive goodwill arises when the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities. Negative goodwill arises when the aggregate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted. 21. In view of the aforesaid, the question framed is answered in the negative, that is, in favour of the Assessee and against the Revenue. The Assessee's appeal (ITA 40/2015) is, accordingly, allowed. We have observed that the assessee while acquiring Food and Pharma division of L T vide agreement dated 26.05.2005 had paid consideration in excess of net asset value of the said divisions of L T as on the date of takeover and consequently, the excess was reflected as Goodwill in the books of accounts of the assessee under the head 'Intangibles' and we are of the considered view that the assessee will be entitled for claiming depreciation on the said excess consideration being Goodwill as the same being 'any other business or commercial rights of similar nature' as defined in Explanation 3 to Section 32(1) of the 1961 Act, keeping in view ratio of decision of Hon'ble Supreme Court in the case of CIT v. Smifs Securities Limited(supra). This disposes of ground No. 1 to 4 of the assessee's appeal. We order accordingly. 13. So following the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This argument has not been controverted by the Ld. A.R. for the assessee and Bench is also inclined to agree that both the segments i.e. receipt of commission and receipt of fee for supervisor assistance are to be grouped together to benchmark the same on the basis of their functions. As such to benchmark the same TNMM at the entity level as applied by Ld. TPO is not sustainable. 18. Even the Ld. TPO has not brought on record any material to prove if the transactions under consideration were inter linked because numerous international transactions could be clubbed together for the purpose of benchmarking only if it is shown that they are closely linked transactions. So the benchmarking made by the Ld. TPO is challenged both by assessee as well as Revenue. 19. We have perused the order passed by the Ld. CIT(A) particularly para 9 which is cryptic in nature and fails to lead to the specific conclusions as to why the TP adjustment made by the TPO are being deleted. Merely on the basis of generic observations without going into the functionality of the particular segments/international transactions TP adjustment cannot be deleted. 20. In these circumstances it is agreed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(va) of the Act on the ground that the amount in question being employees contribution to PF has been paid late after the due date as per the provisions of the PF Act. However, the Ld. CIT(A) decided the issue by returning following findings: 19. The eighth ground of appeal is against the disallowance by the AO of the belated payment of employees contribution to EPF of Rs. 22,06,711/-. The AO had disallowed such employees contribution to PF on the ground that the same had been paid beyond the due dates mentioned in the provisions of the Provident Fund Act. However, in this context, it is seen that the second proviso to section 43B of the Act that had mandated such a condition had been deleted by the Finance Act, 2003 with effect from 01.04.2004. The first proviso to section 43B had also been appropriately modified by the same Finance Act. Such condition having been removed from the statute, insistence of the AO in the meeting of that condition by the assessee would no longer be valid for the period under consideration. It is also seen that the Hon'ble ITAT in the assessee's own case for A.Y. 2005-06 had deleted a similar addition made in that year by placing reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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