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TMI Blog2022 (2) TMI 1291X X X X Extracts X X X X X X X X Extracts X X X X ..... enovo in the light of the submissions and additional evidence filed before us and these submissions and additional evidence go to the root of the matter. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings. Acquisition of companies by the Assessee on Merger - Depreciation on Goodwill was claimed on account of Acquisition of business by the assessee on merger and on Slum sale basis - HELD THAT:- Goodwill arising on amalgamation, in the hands of amalgamated company is an intangible asset in terms of Section 32(1)(ii) of the Act and thus eligible for depreciation under the Act. The issue whether Goodwill arising on amalgamation is eligible for depreciation or not, is no longer Res-Integra. Further, it is not disputed by the Revenue that the assessee paid consideration which is said to be in excess of the fair value of assets taken over. See SMIFS SECURITIES LTD. [ 2012 (8) TMI 713 - SUPREME COURT] Allowance of depreciation generated as a result of amalgamation in the hands of amalgamated company needs depper judicial scrutiny especially in the light of the intent of the legislature to keep amalgamation a tax neutral scheme for companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri. Sriram Seshadri, Advocate Revenue by: Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru ORDER Per N V Vasudevan, Vice President This appeal by the assessee is directed against the final Order of Assessment dated 29.10.2018, passed by ACIT, Circle -2, LTU, Bengaluru, under section 143(3) read with Section 144C of the Income Tax Act, 1961 (Act), in relation to AY 2014-2015. 2. The concise grounds of appeal filed by the assessee before the Tribunal reads as follows: I. GENERAL [Original GoA - No. 1] ISSUE GROUNDS OF APPEAL 1. Common Ground 1.1. The lower authorities erred in finalizing an order of assessment which suffers from legal defects such as being devoid of merits, contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such bad in law and is liable to be quashed II. TRANSFER PRICING [Original GoA - No. 2 - 15] ISSUE GROUNDS OF APPEAL 2. Common Ground [Original GoA - No. 2] 2.1. The lower authorities erred in making a transfer pricing adjustment of INR 87.89 Crores, comprising of INR 54.48 Crores in respect of licensed manufacturing segment and INR 33.42 Crores in respect of payments towards Informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities erred in arbitrarily holding that only such companies that are available in the search matrix of the Ld. TPO as on the day of his search, would qualify as comparable companies for benchmarking analysis. 7. Economic Adjustment 7.1. The lower authorities erred in not providing working capital adjustment that the Appellant is eligible to, in relation to its Licensed Manufacturing segment. 8. Proportionate adjustment 8.1. The lower authorities erred in determining the transfer pricing adjustment at the segment level, in relation to the Appellant's margin from its licensed manufacturing segment, without restricting such adjustment to the proportion of its international transactions in the said segment. B. TP Adjustment - IS charges and corporate service charges[Original GoA - No. 14 - 15] 9. ALP cannot be held as 'NIL' 9.1. The lower authorities erred in determining the ALP of IS Charges and Corporate Service charges at NIL, on the allegation that no services were rendered by the AEs to the Appellant. 10. Absence of comparability analysis 10.1. The lower authorities erred in determining the ALP of IS Charges and corporate service charges, without undertaking a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not appreciating that the special discount is not in the nature of 'commission payments' warranting deduction of tax at source under section 194H of the Act. 14.3. The lower authorities erred in not appreciating that no disallowance shall be made under section 40(a) of the Act where the payee (in this case, the recipient of discounts) has remitted the taxes due in respect of the payments made towards the expenditure incurred by the payer. 15. Short grant of tax Credits [Original GoA - No. 37-40] 15.1. The Ld. AO erred in granting lower amount of TDS credit, i.e., INR 1,43,66,866 as against the actual deduction of INR 1,59,50,812. 15.2. The Ld. AO erred in granting the lower amount of Advance Tax credit, of INR 26,30,00,000, as against the actual payment of INR 28,30,00,000. The Ld. AO further erred in not granting selfassessment tax credit of INR 15,96,000, as claimed in the return of income. 3. Ground Nos.1 and 2 raised by the assessee are general in nature. As far as ground Nos.3 to 8 raised by the assessee is concerned, the same relates to addition made to the total income on account of determination of Arm's Length Price (ALP) under section 92 of the Act in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Ltd. 7.29% 8 Kaycee Industries Ltd. 3.14% 9 S P E L Semiconductors Ltd. 7.08% Average 9.03% 6. The OP/OR computed by the assessee was at 5.99% but the TPO did not accept the said computation. The computation as done by the assessee for OP/OR was as follows: Particulars Manufacture of interconnects, connectors, fibre optical wires Sales and service income 5,870,115,674 Cost of materials 3,002,220 322 Employee expenses 1,058,977,900 Other operating expenses 1,578,559,181 Depreciation 156,781,968 Total Cost 5,796,539,370 Less: Purchase price adjustment 278,025,432 Adjusted Total Cost 5,518,513,939 Operating Profit 351,601,735 Add: Other income Less: other expenses Profit before tax Operating Profit/Sales 5.99% The TPO however computed OP/OC as follows: Particulars Manufacture of interconnects, connectors, fibre optical wires Sales and service income 5870115674 Add: Forex gain 64167153 Operating Revenue 5934282827 Cost of materials 3002220322 Employee expenses 1336262400 Other expenses 1510580130 Depreciation 170468000 Less: Provision for doubtful trade receivables 29192266 Less: Provision for doubtful loans and advances 83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO as well as the DRP fell into an error in selecting Kavveri Telecom Infrastructure Ltd., as a comparable company. He pointed out that the aforesaid company was engaged in rendering services and was not into manufacture and this flaw in the search process conducted by the TPO vitiates the entire approach of the TPO in choosing comparable companies. He pointed out that when these specific defects were pointed out by the assessee before the DRP, the DRP held that broad comparability is to be seen in the TNMM and rejected the plea of the assessee. 11. The next aspect pointed out by the learned Counsel for the assessee was that the TPO fell into an error in disturbing the computation of OP/OR as done by the assessee. He pointed out that one of the items of cost which the assessee sought to exclude was purchase price adjustment of Rs.27,80,25,432/-. He made the following submissions as to why this adjustment was necessary: i. This adjustment is claimed in order to eliminate the effect of long-term depreciation in the Indian Rupee via-a-vis the foreign currencies in which the Assessee undertakes its regular business operations. The Assessee has significant transactions in foreign ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and set aside the order of the AO and remand the issue for denovo consideration to the AO/TPO to carry out the exercise of determination of ALP in the licence manufacturing segment denovo. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings. The relevant grounds of appeal are accordingly treated as allowed for statistical purpose. 14. Grounds 9 to 12 of the concise grounds of appeal are with regard to determination of ALP in respect of Information Service (IS) charges and corporate service charges Segment. The assessee paid a sum of Rs.33,41,55,226/- to its AE. The assessee submitted that it received IS services from Tyco Electronics Corporation, USA, an AE, for which it made the payment. TE Group and its overseas entities, during the year under consideration, was in the business of manufacturing and distributing products and systems for a broad set of markets namely (a) Electronic components, (b) Network solutions, (c) Wireless Systems and (d) Undersea telecommunications. TE Group, being a global company, present in multiple countries, is required to have an integrated approach in its operations wherein the requirement of an ERP i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, US (Manufacturing-Pro) and in Singapore (AMPICS). Post the implementation of the SAP ERP, TE Group provided hardware, software and applications to run TECIL's SAP applications, including Financial, Sales & Distribution, Purchasing, SAP Shop Floor User Fee and SAP Development and Consulting. The Group also helped to develop and support TECIL's Global SAP system (PR2/APO) and the TE US HR/ Payroll System (HRP). In addition, TEIS team members supported the certified softwares: Xelus, Vertex and Firmware. It also supported legacy US Manufacturing finance and EDI applications. The charges pertained to licence fee/ usage fee for the software, hardware and other applications. In addition to the above, TE Group provides various other IT Infrastructure support services the details of which were also given to the TPO. 15. The TPO, however, did not accept the plea of the assessee. He held that in terms of Rule 10B of the Income Tax Rules, 1962 (Rules), the determination of ALP for providing intergroup services has to be decided either by applying the Comparable Uncontrolled Price (CUP) or TNMM. The TPO held that the transaction of rendering intergroup services has to be separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 16. The TPO thereafter called upon the assessee to explain as to how the services are quantified under each head or expense under IS charges for which the assessee could not give a proper answer. The TPO therefore proceeded to hold that the ALP of the IS charges was NIL and therefore the entire payment made by the assessee by the assessee to its AE had to be considered as adjustment of determination of ALP under section 92CA of the Act. Accordingly, the AO added as sum of Rs.33,41,55,226/- to the total income of the assessee. The DRP confirmed the order of the AO. 17. Before the Tribunal, the learned Counsel for the assessee has filed an application for admission of the following documents as additional evidence: SI No Particulars Page No 1 Report on Information Services received from Tyco Electronics Corporation, US 1- 55 2 Sample copies of related invoices 56 - 72 The learned counsel for the Assessee submitted that the allegation that no documentation / information was furnished by the Assessee before the lower authorities is incorrect. He gave the details of documents/information filed before the TPO in the following summary: * IS charges are received pursuant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors the adjustment for the IS and corporate charges as well. The TPO shall therefore not make further adjustment in this regard, as it would result in a double adjustment. It was submitted that the aforesaid view was upheld by the following judicial pronouncements: Decision Forum Ref. - Case law Compilation Magneti Marelli Power-tain India (P.) Ltd.2 Supreme Court S.No. 67 - Pg. 495 Magneti Marelli Powertain India (P.) Ltd 3 High Court, Delhi S.No. 68 - Pg. 497 Bonfigioli Transmissions (P.) Ltd4 Tribunal, Chennai S.No. 71 - Pg. 524 iii. Further, the margin for the distribution and services segments, which factors the above charges in the cost-base, were accepted to be at arm's length by the TPO. In view of this, the TPO cannot arbitrarily reject its aggregation only in respect of the license manufacturing segment. iv. Without prejudice, if the separate benchmarking of IS and corporate service charges is upheld, the same shall be excluded from the segment costs considered under the licensed manufacturing segment, for margin determining. In such event, the margin as computed in the TP order in this regard, at -0.80% will increase to 3%, as shown below: Particulars AS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en across years with no change in the facts and circumstances, is well settled by the Hon'ble SC. It was pointed out that this principle is also provided in rule 10D(4) of the IT Rules. 21. The learned Counsel for the assessee therefore submitted that the issue with regard to determination of ALP in respect of international transaction on payment of IS charges is also required to be set aside to the AO to be done afresh in the light of the submissions as made above in the light of the additional evidence now filed before the Tribunal. Learned DR however relied on the order of the TPO and the DRP but was of the view that the prayer of set aside to the AO in the light of the additional evidence may be considered by the Bench. 22. We have given a careful consideration to the rival submissions and are of the view that the issue with regard to determination of ALP in respect of payment of IS charges should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions and additional evidence filed before us and these submissions and additional evidence go to the root of the matter. The AO and TPO will afford opportunity of being heard to the assessee in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Audited Financial Statements - Note No. 47 in Pg. 38 of Paperbook - Part A]. The said acquisition was accounted by the Assessee, as per the relevant accounting standard and generally accepted accounting principles. A summary of the said accounting is provided below: Particulars INR Cr. Basis Fair Value of net assets acquired 11.73 [ Refer Note on accounting the acquisition in the Audited Financial Statements - Note No. 47 in Pg. 38 of Paperbook - Part A] Consideration discharged by the Appellant (USD 6.25 Mio.) Mode of discharge of consideration: a. Payment to RRGPL (USD 2.5 Mio.) b. Payment to shareholders of RRGPL (USD 3.75 Mio.) 38.39 a. 14.72 b. 3.67 [Refer Note on accounting the acquisition in the Audited Financial Statements - Note No. 47 in Pg. 38 of Paperbook - Part A]. Excess consideration - G/W 26.66 Depreciation u/s 32 of the Act @ 25% 3.33 [Refer ITR in Pg. 57 of the Paperbook - Part A] 25. The claim for depreciation on Goodwill was disallowed by the AO both depreciation on G/W arising on merger as well as on the business acquisition on slump sale basis, alleging that intangible asset capitalised as goodwill is fictitious in nature, without any bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mated company arising on amalgamation, laid down that such Goodwill is a depreciable asset. Therefore, both valuation and characterization has been settled by the Hon'ble SC in this judgment [Para 2 and 4 of the order]. The lower authorities are bound to apply this decision in all other cases involving the same issue, based on the facts and circumstances of the case, and shall not try to distinguish the position of law settled by the Hon'ble SC on frivolous grounds. In light of the above, Goodwill arising on amalgamation, in the hands of amalgamated company is an intangible asset in terms of Section 32(1)(ii) of the Act and thus eligible for depreciation under the Act. The issue whether Goodwill arising on amalgamation is eligible for depreciation or not, is no longer Res-Integra. Further, it is not disputed by the Revenue that the assessee paid consideration which is said to be in excess of the fair value of assets taken over. 28. The learned counsel for the assessee besides relying on several decisions also referred to decision of Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd.8359 ITR 369 (Karn) , wherein the facts and circumstances of which are sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. 29. The learned DR submitted that in so far as depreciation on acquisition of business on Slump Sale is concerned, he would rely on the order of the DRP. In so far as depreciation on acquisition of business on merger is concerned, the learned DR submitted that there was no real outflow in the form of consideration to the subsidiary XOL and TESIL. It was submitted that the investment in subsidiary company i.e., XOL got diminished. In the absence of any payment in the form of consideration the same cannot be assigned as value of goodwill. He distinguished case laws cited by the learned counsel for the Assessee by pointing out that in all case laws cited there was flow of consideration. According to him allowance of depreciation generated as a result of amalgamation in the hands of amalgamated co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngement with its dealers/distributors: - The title to the goods, risks and rewards in the goods pass to the distributors on delivery of the goods by the Assessee; - The goods sold by the Assessee to such distributors is reduced from the inventory of the Assessee and reflected accordingly in its accounts as sales; - The recovery against the sales made by the Assessee is not contingent upon the sales made by the distributors; - The Assessee only gives a discount to the distributors on the goods purchased by them; - The distributors invoice the retailers/ consumers in their own names and earn a margin on the difference between the value of sales effected by them and the price paid to the Assessee; - The Assessee does not control the operations of the distributors; - The Assessee does not restrict the distributors from appointing sub-distributors. i. Once a party agrees to act as a Regional Distributor ("RD") and signs an agreement, such RD shall abide by the conditions of the agreement and shall be eligible to receive price discount on the distributor price. The discount given to distributors on the sale price is sales discount in normal business parlance and not commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely based on the disclosure in the Profit & Loss Account as 'commission' . It was submitted that mere nomenclature is not conclusive for determining the nature of a transaction and it is the essence the transaction that should be considered, while determining its real nature. The Learned counsel for Assessee reiterated that the said expense is in the nature of special discount given to its dealers/ customers and not in the nature of commission as contended by the lower authorities, so as to attract the applicability of section 194H of the Act. It was also submitted that the Assessee's stand on identical payment that it was not in the nature of Commission attracting the provisions of Sec.194 H of the Act was accepted by the AO in AY 2015-16 and no disallowance was made. The learned DR relied on the order of the DRP. 34. We have given a careful consideration to the rival submissions and are of the view that the issue with regard to the question whether the payment in question is in the nature of discount or commission should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions made before us, the case laws cited and the real nature of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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