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TMI Blog2022 (7) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... se, we direct the Assessing Officer/TPO to delete primary transfer pricing adjustment made in respect of AMP expenses in both AY 2016-17 and secondary adjustment made in AY 2016-17. Disallowance of claim of depreciation on good will - HELD THAT:- We notice that the issue relating to claim of depreciation on good will has been restored to the file of AO in the immediately preceding year and hence the decision taken by the AO in that year shall have bearing on this claim made during the instant year. Accordingly, we restore this issue to the file of AO for examining it in accordance with the decision taken by him in the immediately preceding year. Disallowance of claim of Provision for expenses - HELD THAT:- There is distinction between accrual of liability and liability to pay for expenses . There should not be any dispute that the accrued liability cannot be considered as unascertained liability . Accrued liability is an ascertained liability, but the liability to pay it has not arisen. We notice that the the tax officials have been carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to manufacturing segment. The above said adjustment is referred to as Primary adjustment in this order. The TPO also made secondary adjustment of Rs.3.51 crores on the AMP adjustment made in manufacturing segment of Rs. 162.05 on account of payment made for training to saloon customers and promotional goods treating the same as advance payments. In Assessment year 2017-18, the TPO made primary adjustment of Rs.120.81 crores. 5. At the outset, learned AR submitted that identical adjustments have been made by the TPO in the earlier years and those adjustments have been deleted by the Coordinate Bench of the Tribunal in various years. The Learned AR invited our attention to the order dated 27.7.2020 passed by the Coordinate Bench in assessee s own case in ITA No. 7204/Mum/2019 relating to A.Y. 2015-16 in support his submissions. 6. We have heard learned Departmental Representative and perused the record. We noticed that the issue of primary adjustment relating to AMP expenses and secondary adjustment on account of training, saloon, promotional goods have been deleted by the Coordinate Bench in assessee s own case with following observations :- 9. Ground No. 2 to 18 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant s own ITAT order for A.Y. 2012-13 - page No. 29 para 18 (iii) Further the TPO in his order has not examined whether or not the method adopted by the appellant to determine the Arm s length price (ALP) is the most appropriate method and has instead concluded that the payments for trademark and technical know-how royalty are excessive in nature (page 176 of appeal memo) (iv) Accordingly, the TPO has exceeded his jurisdiction by making an addition to the international transaction of payment of royalty for technical know-how and trademark. In this regard, the appellant relies on the Judgment of Bombay High Court in the case of CIT Vs. Lever India Exports Ltd. (78 taxmann.com 88) (copy enclosed as Annexure1) (v) Without prejudice to the above, it is submitted that the TPO has proposed the royalty adjustment, inter alia on the basis of AMP spend of the Appellant (page 141 and 142 of the appeal memo). Therefore, in the event it is held that AMP does not constitute an international transaction, then this adjustment would not survive. (vi) In this connection, a reference may be made to Para 20 on Page 33 of ITAT order for AY 2013-14, wherein an alternate adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprising of cost allocation certificate and tables along copies of invoices [Page No. 3707- 4536 (Volume 7 and 8)]. These have been examined by TPO in remand proceedings and no fault is found with the same [Refer remand report on Page No. 498 to 535 of Paper book (Volume 1)] 4. Accordingly, the Appellant submits that considering that no adverse comments are provided by the TPO as well as the DRP, the said transaction should not be remanded back to the file of the AO/DRP as it would tantamount to giving a second inning to the Department and taking advantage of its own wrong. 5. In this regard, reliance is placed on the following judicial precedents: - Kansai Nerolac Paints Ltd. Vs Deputy Commissioner of Income-tax, [2014] 49 taxmann.com 208 (Bombay High Court) (Copy enclosed as Annexure 3); - K. Rajiv v. Additional Commissioner of Income-tax, [2018] 98 taxmann.com 418 (Madras High Court) (Copy enclosed as Annexure 4). 6. Further, it may be noted that in AY 2011 -12, the ITAT has remanded the issue of marketing support services availed to the DRP since additional evidences were submitted before the ITAT. However, in the year under consideration, all evidences wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07- 4536 (Volume 7 and 8)]. 4. After verifying the evidences, the TPO in his remand report has accepted that the services were rendered, that they have benefited the Appellant and were necessary. He has only made a vague allegation that cost justification in a third- party situation needs to be established. (Refer remand report on Page No. 535 of Paperbook Volume 1) 5. Accordingly, the Appellant submits that the said transaction should not be remanded back to the file of the AO / DRP as it would tantamount to giving a second inning to the Department and taking advantage of its own wrong. 6. In this regard, reliance is placed on the following judicial precedents: - Kansai Nerolac Paints Ltd. Vs Deputy Commissioner of Income-tax (supra); -K. Rajiv v. Additional Commissioner of Income-tax (supra) 7. Further, it is humbly submitted that Transfer Pricing officer allowed identical expenses in earlier years and subsequent years of AY 2015-16 and AY 2016-17 after detailed scrutiny. 10 Per contra, learned Departmental Representative relied upon the orders of the authorities below. 11. Upon careful consideration we hold as under :- As regards the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts AE s. And that the expenses are incurred by assessee in the normal course of its business. The perusal of the Clause 7 and 8 reveals that there is no agreement between the assessee and the AEs for sharing the expenses and the payments made by the assessee for the expenses of AMP. The TPO has also not brought any fact on record that there exist any agreement between the assessee and its AE to share or reimburse the AMP expenses. Moreover, we have seen that there is no material change in the facts for the year under consideration. Therefore, considering the above factual discussions and the decision of the coordinate bench of Tribunal for A.Y. 2008-09 to 2010-11, on the identical issue the ground No. 2 to 21 of the appeal is allowed. We thus in terms of our aforesaid observations, finding ourselves to be in agreement with the view taken by the Tribunal in the assesses own case for A.Y 2012-13 viz M/s L Oreal India Pvt. Ltd. Vs. ACIT-7(1)(2), Mumbai [ITA No. 1417/Mum/2017; dated 30.01.2019], therefore, respectfully follow the same. Accordingly, being of the considered view that as the revenue had failed to discharge the onus that was cast upon it as regards proving that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities. The assessee is filing the alleged supporting evidences at this stage, which were not before the lower authorities. The ld. DR further submits that in case the Hon ble Bench deems it appropriate to take additional evidence on record, in such eventuality issue may be restored to the file of AO/TPO for verification of evidence and consideration of issue afresh at their end. 15.We have considered the rival contention of both the parties and gone through the orders of authorities below. We have also gone through the additional evidences filed by assessee along with the application dated 04.02.2020. In the application for admission of additional evidence the assessee stated that TPO while making T.P. Adjustment made alternative T.P. Adjustment on account of payment of packaging, design cost, training to Saloon Customers and promotional goods by assessee to its AEs. It is further contended that the assessee furnished various information/documents vide its letter dated 22.10.2018 to substantiate the genuineness of payment made to AE containing need of services, benefit of services, evidence of receipt of services, cost allocation methodology, agreements with list of copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as given no reasons justifying the technical know-how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was adhoc and arbitrary as held by the CIT(A) and the Tribunal. 21. We find that ratio from the above Hon'ble Jurisdictional High Court decision is squarely applicable here. Hence transfer pricing adjustment at nil fails on both counts. Firstly on the account of benefit test which is not to be applied by the TPO and secondly none of the method of benchmarking the international transaction as specified in section 92C has been applied. Furthermore as rightly contended by the learned counsel of the assessee the ITAT in earlier year had remanded the issue as the issue of additional evidences was there, However ITAT was in principle of the view that application of benefit test by the TPO is not at all sustainable on the touchstone of honourable jurisdictional High Court decision in the case of Lever India Exports Ltd. (supra). In the present case we note that detailed evidences has been submitted before the DRP and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be restored to the file of AO in this year also to the file of AO. 9. We heard Ld D.R on this issue and perused the record. In AY 2015- 16, the co-ordinate bench has restored the issue relating to claim of depreciation on good will to the file of AO with the following discussions:- 25. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the various case laws and the voluminous paper book furnished by the assessee. During the relevant financial year involved in this case, the assessee entered into a business transfer agreement with Rahul Healthcare for purchase of Soap manufacturing unit of Rahul Healthcare as a going concern on the lump-sum basis. The business transfer agreement was amended vide agreement dated 8th July 2014 and again on 31st October 2014. As per agreement the parties agreed for a lump sum consideration for purchase of ongoing concern for a consideration of ₹ 12.94 crore. The sale transaction of Rahul Healthcare was completed on 3rd November 2014. The consideration of ₹ 12.94 crore was allocated over various assets and liabilities of the unit as per value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case. However, the disallowance of depreciation on goodwill was upheld holding that there is no proper documentation. 28. Before us the ld AR for the ld AR for the assessee vehemently argues that along with the acquisition of business of RHC the assessee also acquired the business of Rahul Healthcare was acquired on a slump sale basis, which included not only tangible assets but also bundle of intangible assets collectively called goodwill. The assessee claimed that reference of intangible assets includes permits, employee, and contracts. The contention of the ld. AR for the assessee is strongly contested by ld. DR for the revenue by making multiple submissions, which we have recorded above. 29.The Hon ble Apex Court in CIT Vs Smifs Securities Ltd (supra) held that Goodwill is an asset under Explanation 3(b) to section 32(1) and, thus, it is eligible for depreciation. The Hon ble Court observed that Explanation 3 to section 32(1) states that the expression 'asset' shall mean an intangible asset, being knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words 'any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r shall have bearing on this claim made during the instant year. Accordingly, we restore this issue to the file of AO for examining it in accordance with the decision taken by him in the immediately preceding year. 11. The next issue urged in AY 2016-17 relates to the disallowance of claim of Provision for expenses. The assessee had made Provision for outstanding expenses to the tune of Rs.96,28,68,265/- as per the requirement of mercantile system of accounting and claimed the same as deduction. Since it had not deducted tax at source from the above said provision claimed as deduction, the assessee voluntarily disallowed 30% of the above said claim u/s 40(a)(ia) of the Act. The AO treated the above said provision as unascertained liability and accordingly took the view that the same is not allowable as deduction. The AO noticed that the assessee has voluntarily disallowed 30% of the expenses u/s 40(a)(ia) of the Act and further a sum of Rs.68,04,24,906/- has been included in the Transfer pricing adjustment. Accordingly, the AO deducted the above said amount of Rs.68.04 crores from the claim of Rs.96.28 crores and from the balance so arrived, he allowed further deduction of 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned liability, but the liability to pay it has not arisen. We notice that the the tax officials have been carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and have not considered its accrual. The fact that there was an obligation upon the assessee to pay for the liability as a result of past event cannot be denied. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to the assessee. It is also fact that the assessee has been providing for known expenses and losses year after year and the said provision has been verified by the statutory auditors of the assessee company. The Ld A.R submitted that the provision for expenses so created has been accepted by the AO in the past. Accordingly, we are of the view that the tax authorities are not justified in holding that the Provision for expenses is an unascertained liability. As per the accounting principles discussed above, it is an ascertained liability and the same is eligible for deduction while computing total income. Accordingly, we direct the AO to delete the disallowance of Provision for expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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