9911796707
TMI Blog2024 (5) TMI 1473X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of depreciation claimed of goodwill - Claim of the assessee that residual paid to Siemens Ltd. over and above the value attributable to the net asset is in the nature of goodwill only and is supported by the ratio laid down by the judgment of CIT vs Smifs Securities Ltd. [ 2012 (8) TMI 713 - SUPREME COURT ] wherein the assessee, being the amalgamated company, claimed depreciation on goodwill acquired pursuant to/ as a result of amalgamation of a company, viz., YSN Shares and Securities Private Limited. The assessee claimed depreciation on the extra consideration paid over the value of net assets, by treating such excess consideration to be in the nature of goodwill, being paid towards reputation that the amalgamating company was enjoying in order to retain its existing clientele. Similar view was taken by the Hon ble Delhi High Court in the case of Triune Energy Services Private Limited [ 2015 (11) TMI 1218 - DELHI HIGH COURT ] wherein the assessee purchased business of another company as going concern by way of slump sale. The amount paid over and above net value of assets was capitalized as goodwill. The assessing officer treated the transaction in nature of succession and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price. We find merit in the contention of assessee and since the adjustment falls within the 3% range of the value of international transaction, no adjustment on account of international transaction of availing intra-group services undertaken by the assessee is warranted. The TP adjustment and for AY 2017-18 and 2018-19, respectively, are hereby deleted. Accordingly, raised by the assessee are allowed. Downward adjustments towards purchase of raw material and finished goods and TP adjustment for export of finished goods for the transaction undertaken with AE - Since the additions have been made on the basis of mean PLI of the comparables, we will first deal with the main grounds/additional grounds relating to exclusion/inclusion of comparables and fate of the remaining grounds shall be decided a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cific characteristic of services and products sold by BGR Energy System Ltd. and the assessee company are significantly different. Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. [ 2015 (8) TMI 931 - DELHI HIGH COURT ] held that comparability analysis should be undertaken on the basis of functional profile and characteristics of services provided. Respectfully following the same, we hold that as the functional profile of BGR Energy System Ltd. is significantly different from the assessee company, the ld. AO erred in including the same as comparable for calculating the mean PLI of the assessee company. Thus, to conclude, for AY 2017-18, we direct the ld. AO to exclude Engineers India Ltd. and BGR Energy System Ltd. from the list of comparables for calculating the mean PLI and accordingly direct him to re-calculate the average OP/OC and average OP/OR and then decide in accordance with the law the adjustments, if any, to be made in the hands of the assessee. Thus, the additional ground raised by the assessee for Assessment Year 2017-18 are allowed and consequentially the respective grounds raised for TP adjustment for purchase of raw material and finished goods a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Dispute Resolution Panel -2, New Delhi, dt. 18/02/2022 for Assessment Year 2017-18 and dt. 04/03/2022 for Assessment Year 2018-19, passed u/s 144C(5) of the Act. 2. The assessee has raised the following grounds of appeal for Assessment Year 2017-18:- Ground 1: That the orders dated January 22, 2021 and March 11, 2022 passed by the Learned Transfer Pricing Officer (hereinafter referred to as the Learned TPO ) under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) and under section 92CA(3) read with section 144C(5) of the Act respectively, the final assessment order dated April 29, 2022 passed by the Learned Assessing Officer (hereinafter referred to as Learned AO or Ld. AO ) under section 143(3) read with section 144C and section 144C(5) of the Act and the Directions of the Hon ble Dispute Resolution Panel (hereinafter referred to as Hon ble DRP ) dated February 18, 2022 for the said assessment year 2017-18 are contrary to the provisions of law and erroneous on the facts of the case and are liable to be set aside and/or quashed. Ground 2: That on the facts and in the circumstances of the case, the final assessment order dated April 29, 2022 pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of United Breweries Ltd v/s Addl CIT, Range-12 Bangalore, reported in [2016] 76 taxmann.com 103 (Bangalore - Trib.). Ground 4(g): That the authorities below erred in proceeding on the basis as if the goodwill acquired by the appellant from Siemens Limited was the appellant s self-generated asset. Ground 5(a): That further and in any event and without prejudice to the grounds taken hereinabove, the Learned AO grossly erred in making an arithmetical error in computation of business income at Rs. 7,83,74,814/- instead of Rs. 5,43,83,696/- in the final assessment order dated April 29, 2022. Ground 5(b): That further and in any event and without prejudice to the grounds taken hereinabove, the Learned AO grossly erred in making an arithmetical error in computation of assessed income at Rs. 14,76,67,699/- instead of Rs. 6,92,92,885/- in the final assessment order dated April 29, 2022. Ground 6: That further and in any event and without prejudice to the grounds taken hereinabove, the Learned AO grossly erred in computing demand of Rs. 5,01,12,510/- in case of the appellant for the assessment year under consideration, as appearing on the income-tax portal. Ground 7: That furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. Ground 14(b): That the purported findings of the authorities below that the appellant and Power Mech Projects Ltd. are carrying on the same functions even if they are in different sectors is wholly arbitrary, illegal, without any justification and/or basis and perverse. Ground 15(a): That the authorities below erred in making a transfer pricing adjustment of Rs. 36,30,977/- on account of intra-group services. Ground 15(b): That the purported finding of the authorities below that the authorized representative of the appellant did not object to the proposed reduction of the mark-up @ 3 percent for determining the arm s length price for the receipt of IT services is wholly arbitrary, erroneous, unreasonable and perverse. Ground 15(c): That the authorities below completely ignored the detailed submissions made by the appellant in this behalf duly supported by a robust economic analysis and the Report of an independent auditor. Ground 16: That on the facts and in the circumstances of the case, the Ld. AO grossly erred in initiating penalty under section 270A of the Act. Ground 17: That the appellant craves leave to add and / or to alter, amend, rescind, modify the grounds herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim for depreciation on goodwill was allowed by the Learned AO in the scrutiny assessment for the assessment year 2015-16, relevant to the financial year 2014-15, being the year of acquisition, and the appellant was thereafter entitled to depreciation on the opening WDV in subsequent years. Ground 4(e): That further and in any event and without prejudice to the grounds taken hereinabove, the authorities below failed to appreciate that the said claim of depreciation on goodwill, being an intangible asset within the meaning of Explanation 3(b) to section 32(1) of the Act, is allowable in view of the decision of Hon ble Supreme Court in the case of CIT, Kolkata v. Smifs Securities Limited, reported in (2012) 348 ITR 302 (SC). Ground 4(f): That further and in any event and without prejudice to the grounds taken hereinabove, the authorities below grossly erred in disallowing the claim of depreciation on opening WDV of goodwill as if the instant case was one of amalgamation or succession and by incorrectly placing reliance on the order of Bangalore Bench of the Hon ble Tribunal in the case of United Breweries Ltd v/s Addl CIT, Range-12 Bangalore, reported in [2016] 76 taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case, the authorities below erred in rejecting the capacity utilisation adjustment of Rs. 6,31,47,981/- made for under-utilization of installed capacity while computing the margin of the appellant. Ground 11(b): That the purported findings of the authorities below that the idle capacity should not be considered to be an abnormal event requiring adjustment or that the claim of underutilization had not been explained with any reliable evidence or any supporting documents/data or any auditor certificate are wholly arbitrary, illegal, without any justification and/or basis and perverse. Ground 12(a): That the authorities below erred in considering foreign exchange loss of Rs. 2,49,62,367/- as operating expense while computing the margin of the appellant. Ground 12(b): That the Learned TPO did not carry out the directions of the Hon ble DRP with respect to the foreign exchange loss. Ground 13(a): That the authorities below erred in rejecting adjustment of Rs. 3,71,81,824/- made for the purpose of normalizing the impact of non-conformance cost over runs on the margin of the appellant. Ground 13(b): That the authorities below completely ignored the detailed submissions filed by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. CIT reported in (1998) 229 ITR 383 (SC) and Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688 (SC), the additional grounds may be admitted. In view of the settled judicial pronouncements, as the issues go to the root of the matter, we admit the same. 4. The assessee has raised the following additional ground of appeal for Assessment Year 2017-18:- 1. That on the facts and circumstances of the case and in law the Ld. TPO / DRP erred in selecting BGR Energy System Ltd. (Seg.) as a comparable company not appreciating that the company is primarily engaged in construction and maintenance of power plants and is therefore not an appropriate comparable in terms of Rule 10B (2) of the Rules for benchmarking the international transactions undertaken by the appellant, a company engaged in providing services primarily to companies engaged in metal sector. 2. That on the facts and circumstances of the case and in law the Ld. TPO/DRP erred in selecting Engineers India Ltd. as a comparable not appreciating that the company is a public sector undertaking owned by Government of India and is therefore not an appropriate comparable for undertaking benchmarking analysis of the international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 7,22,03,084/-. Assessee subsequently revised the return on 13/09/2018 declaring loss of Rs. 113,97,95,930/-. Case selected for scrutiny through CASS for various reasons mentioned in the draft order u/s 144C of the Act. Since the assessee entered into international transactions with Associate Enterprise (AE) during the year and Form 3CEB stood submitted, reference was made to the ld. Transfer Pricing Officer (in short ld. TPO ) u/s. 92CA(1) of the Act. The ld. TPO made certain upward and downward adjustments and further when the assessee approached the ld. DRP against the said proposed adjustment by the ld. TPO, assessee got part relief. Thereafter, the ld. Assessing Officer prepared the final assessment order making various additions/disallowance along with TP adjustments as confirmed by the ld. DRP. 7. Aggrieved the assessee is now in appeal before this Tribunal. 8. The ld. Counsel for the assessee argued at length on all the issues raised in the grounds of appeal referring to the detailed paper books and also placed reliance on various judgments appearing in the index of case-laws and also filed synopsis in respect of the grounds of appeal raised before us. Reference was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommunicated to the assessee on the e-portal along with attachment of intimation letter duly containing the DIN No. , how can the impugned order can be held to be bad in law for not mentioning the DIN in the body of the order. Though reliance was placed on various judgments, but when the ld. Sr. Counsel for the assessee was confronted with the CBDT Circular, referring to the body of such communication and in the instant case, communication of the intimation letter which had attachment of the impugned order, the ld. Assessing Officer has duly complied to the directions given under the CBDT Circular to which no satisfactory reply could be filed and at this juncture, the ld. Sr. Counsel requested for not pressing this legal ground challenging the sanctity of the impugned order for non-mentioning of DIN. Accordingly, Ground No. 3 raised for Assessment Year 2017-18 and 2018-19 are dismissed as not pressed. 13. In Ground Nos. 4(a) to 4(g) for Assessment Year 2017-18 and 2018- 19, the issue involved is disallowance of depreciation claimed of goodwill at Rs. 118,51,19,424/- and Rs. 88,88,39,567/- for Assessment Years 2017-18 and 2018-19 respectively. 13.1. Brief facts relevant to this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ens Ltd. over and above the value attributable to the net asset is in the nature of goodwill only and is supported by the ratio laid down by the judgment of the Hon ble Apex Court in the case of CIT vs Smifs Securities Ltd 348 ITR 302 (SC) wherein the assessee, being the amalgamated company, claimed depreciation on goodwill acquired pursuant to/ as a result of amalgamation of a company, viz., YSN Shares and Securities Private Limited. The assessee claimed depreciation on the extra consideration paid over the value of net assets, by treating such excess consideration to be in the nature of goodwill, being paid towards reputation that the amalgamating company was enjoying in order to retain its existing clientele. In these facts, the Hon ble Supreme Court, upholding the claim of depreciation on goodwill in the hands of the amalgamated company, held as under: 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 Amalgamat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Energy Services Private Limited vs DCIT 237 Taxman 230 (Del), wherein the assessee purchased business of another company as going concern by way of slump sale. The amount paid over and above net value of assets was capitalized as goodwill. The assessing officer treated the transaction in nature of succession and did not admit the assessee s claim for depreciation. On appeal before the Hon ble High Court, 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 expression goodwill subsumes within it a variety of intangible benefits that are acquired when a person acquires business of another as going concern. 13.4. The Hon ble High Court observed that from an accounting perspective, it is well established that goodwill is an intangible asset, which is required to be accounted for when a purchaser acquires business as a going concern by paying more than the fair market value of the net tangible assets, i.e., assets less liabilities; the difference in the purchase consideration and the net value of assets and liabilities is attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of another as a going concern. 19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill. 20. In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at Rs. 40,58,75,529.40/-. As indicated hereinbefore Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, as the case may be, in the ratio of the number of days for which the assets were used by them. 14.1. On going through the above proviso, we note that the same refers to the assets already standing in the books of amalgamating company/de-merged company and that the depreciation claim, shall not exceed in any previous year the amount calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. In simple words, if any such transactions of takeover or amalgamation or merger takes place then the depreciation normally allowable can only be claimed by both the entities for the year in which such merger/amalgamation takes place. So, the 6th proviso to Section 32(1)(ii) of the Act only refers to the depreciation claimed on the assets existing prior to such merger/amalgamation. However, in the instant case during Assessment Year 2015-16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with effect from 1-4-1988, the depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block of assets and allowability of depreciation on such a block. The rationale behind such a provision is contained in Circular No. 469, dated 23-9- 1986 issued by the Central Board of Direct Taxes. Intention behind these provisions is apparent. Once the various assets are clubbed together and become block of assets within the meaning of section 2(11), for the purpose of depreciation it is one asset. Every time a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block of assets on meeting the requirement of depreciation allowable at the same rate. The value of the block of assets increases and the depreciation is to be given on the aforesaid value, which is to be treated as written down value. Individual asset loses its identity from that very moment when it becomes inseparable part of block of assets insofar as calculation of depreciation is concerned. Fusion of various assets into the block of assets gets disturbed only when e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view taken by the Tribunal that once an asset forms part of block of asset and depreciation on the same has been allowed in the previous years, the assessing officer in subsequent years cannot alter or examine the correctness of the opening written down value of block of asset and depreciation on consistent basis shall be allowed in all the years. The relevant extracts of the decision are reproduced hereunder: 9. Having perused this Appeal Memo including the impugned orders, we are of the opinion that the Delhi High Court judgment has been delivered on 5th November 2012 and the impugned order was passed on 15th June 2011. The Tribunal has essentially based its conclusion on the consistent stand of the Assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-2004. The Assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head intangible assets . The Assessing Officer allowed the claim for that assessment year by an order under Section 143(3) dated 28.03.2006. The Tribunal then, proceeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as per the provisions of law. As such, the claim of the assessee for the depreciation was accepted by the Revenue in the immediate preceding assessment year 2006-07. No action was taken by the Revenue under section 263 and 147 of the Act disputing the deduction allowed to the assessee for the depreciation on the intangible assets acquired by it in the scheme of amalgamation. However, there was no information brought before us whether there was any assessment under section 143(3) of the Act pertaining to the assessment year 2006-07 though the assessee before the learned CIT (A) has submitted as under: The depreciation on goodwill is allowed and was correctly granted as per law in the assessment order for A.Y 2006-07. The above submission of the assessee before the learner CIT (A) has not been disputed by the learned CIT (A) in his order. 10. Now, the issue arises whether the Revenue can deny the deduction claimed by the assessee on the written down value in the year under consideration. In our view, the answer stands in favour of the assessee. It is because, the revenue once allowed the deduction for the depreciation claimed by the assessee, then it is debarred to reject the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e error in computation of demand raised by the department. The ld. Counsel for the assessee submitted that the demand, as appearing on the income-tax portal for both AYs, has erroneously been computed and prayed that the issue be set aside to the file of the ld. AO for computing the demand correctly and in accordance with law. The ld. D/R has raised no objection to this request of the ld. Counsel for the assessee. Accordingly, Ground No. 6 for AY 2017-18 and Ground No. 7 for AY 2018-19 are allowed for statistical purposes. 24. The common Ground No. 7 for AY 2017-18 and Ground No. 8 for AY 2018-19, is against the action of the ld. AO in not allowing the credit of TDS to the assessee for both the AYs. The ld. Counsel for the assessee submitted that the assessing officer has grossly erred in not allowing full credit of TDS which the assessee is entitled to and prayed that directions may be given to the assessing officer to allow correct credit of TDS, in accordance with law. The ld. D/R has raised no objection to this request of the ld. Counsel for the assessee. Accordingly, Ground No. 7 for AY 2017-18 and Ground No. 8 for AY 2018-19 are allowed for statistical purposes. 25. The commo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has not made any reference to the mark-up on the third party cost, however, reference has been made to Section 92C(2) of the Act, which provides that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price. 26.1. We find merit in the contention of the ld. Counsel of the assessee and since the adjustment falls within the 3% range of the value of international transaction, no adjustment on account of international transaction of availing intra-group services undertaken by the assessee is warranted. The TP adjustment of Rs. 36,30,977/- and Rs. 33,53,065/- for AY 2017-18 and 2018-19, respectively, are hereby deleted. Accordingly, Ground Nos. 15(a) to 15(c) for AY 2017-18 and Ground Nos. 16(a) to 16(d) raised by the assessee are allowed. 27. Now, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as wrongly selected Power Mech Projects Ltd., as a comparable because they both work in different areas. We observe that Power Mech Projects Ltd., is engaged in the business of construction of power plant, providing integrated services in erection, testing and commissioning of boilers, turbines and generators and balance of plants and civil works. The company also provides operation and maintenance services. The company is undertaking various projects globally which includes power projects, thermal projects, hydroelectric plants etc. Further in addition to aforesaid projects, the company is also engaged in providing the maintenance, renovation, modernization and annual maintenance of running plants whereas the appellant does not provide such services. On the other hand, the assessee company is engaged in providing EPC services to the companies operating in metal sector. The assessee company is not providing any operation and maintenance services. It is an admitted fact that the profit margins in the operations and maintenance segment are generally higher than the EPC segment and therefore, a company deriving revenue and profitability from operations and maintenance activity cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully following the same, we are inclined to accept the contentions of the ld. Counsel for the assessee and hold that Engineers India Ltd., should not be included as a comparable for calculating the profit level indicator i.e., the Average OP/OC and Average OP/OR. 31. Now, we take up BGR Energy System Ltd.. We note that this company is primarily engaged in construction and maintenance of power plants. On the other hand, the assessee company is engaged in the providing of EPC services to the companies operating in the metal sector and is not providing services relating to construction of power plants. Also we note that BGR Energy System Ltd., provides operation and maintenance services in respect of power plants, which the assessee does not provide. It prima facie indicate that the specific characteristic of services and products sold by BGR Energy System Ltd. and the assessee company are significantly different. Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT [2015] 377 ITR 533 (Del) held that comparability analysis should be undertaken on the basis of functional profile and characteristics of services provided. Respectfully following the same, we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elief would certainly be different for both the concerns i.e., the assessee having huge turnover and that of High Quality Steels Ltd. with a very less turnover and which, therefore, makes them unfit for the purpose of comparison for determination of PLI. Thus, we fail to find any infirmity in the finding of the ld. Assessing Officer in not including it as a comparable. Thus, this additional ground no. 3 for Assessment Year 2017-18 raised by the assessee is dismissed. 35. Now, so far as the additional ground for Assessment Year 2018- 19 is concerned, the assessee has only raised the issue of excluding Engineers India Ltd., from the list of comparables. We have already adjudicated this issue while dealing with additional grounds for Assessment Year 2017-18 and held that Engineers India Ltd., being a Government Company, shall not be considered as a comparable. Consistent with our view taken, we direct the ld. Assessing Officer to exclude Engineers India Ltd. as a comparable and re-compute the mean PLI and calculate the adjustments accordingly. Accordingly, the additional ground no. 1 for Assessment Year 2018-19 is allowed. 36. Now, we are left with the Ground No. 15(c) for AY 2018-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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