THERMO FISHER SCIENTIFIC INDIA P. LTD,MUMBAI vs. DCIT 15(3)(1), MUMBAI

Date of Hearing – 03/06/2025 Date of Order - 16/07/2025

O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal challenging the impugned final assessment order dated 24/02/2015, passed under section 143(3) read with section 144C (13) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 29/12/2014 passed by the learned Dispute Resolution Panel (“learned DRP”) under section 144C(5) of the Act, for the assessment year 2010-11.

– “1. Ground 1 – General On the facts and in the circumstances of the case and in law, the directions of the Hon'ble Dispute Resolution Panel- II (DRP') and the final assessment order passed by the learned Deputy Commissioner of Income-tax - 15(3)(1), Mumbai (“DCIT”) are bad in law and merit to be set aside.

2. Ground 2 - Depreciation on contracts - Acquisition from Glaxosmithkline Pharmaceuticals Ltd ('GSK') in AY 2008-09 2.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 10,05,95,058 on the written down value of business or commercial rights being the manufacturing contracts as on 1 April 2009 under section 32(1) r.w.s 2(11) of the IT Act. 2.2 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 2,42,65,076 on the written down value of business or commercial rights being the supply contracts as on 1 April 2009 under section 32(1) r.w.s 2(11) of the IT Act. 2.3 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation on the written down value of manufacturing and supply contracts based on the following observations which are incorrect on facts: • Claim for depreciation on contracts was not made in the return of income for AY 2010-11 • Issue for depreciation on contracts was considered by the Hon'ble DRP in the earlier years • Manufacturing and supply contracts are not self-generated by GSK and have not been transferred to the Appellant • Manufacturing and supply contracts are not an intangible asset as per Accounting Standard ('AS')-26 issued by the Institute of Chartered Accountants of India 2.4 Without prejudice to para 2.1 and 2.3 above, the learned DCIT and Hon'ble DRP erred in not considering the value of manufacturing contracts as goodwill acquired from GSK, which is an intangible asset eligible for deprecation under section 32(1) r.w.s 2(11) of the IT Act. 2.5 Without prejudice to para 2.2 and 2.3 above the above, the learned DCIT and Hon'ble DRP erred in not considering the value of supply contracts as goodwill acquired from GSK, which is an intangible asset eligible for deprecation under section 32(1) r.w.s 2(11) of the IT Act.

3. Ground 3 - Depreciation on contracts - Acquisition from Chemito Technologies Private Limited ('CTPL) in AY 2009-10 3.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 48,82,491 on the written down value of business or commercial rights being the maintenance contracts as on 1 April 2009 under section 32(1) r.w.s 2(11) of the IT Act. 3.2 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation on the written down value of maintenance contracts based on the following observations which are incorrect on facts: • Claim for depreciation on contracts was not made in the return of income • Issue for depreciation on contracts was considered by the Hon'ble DRP in the earlier years • Maintenance contracts are not self-generated by CTPL and have not been transferred to the Appellant • Maintenance contracts are not an intangible asset as per AS-26 issued by the Institute of Chartered Accountants of India 3.3 Without prejudice to the above, the learned DCIT and Hon'ble DRP erred in not considering the value of maintenance contracts as goodwill acquired from CTPL, which is an intangible asset eligible for deprecation under section 32(1) r.w.s 2(11) of the IT Act.

4. Ground 4 - Depreciation on purchased goodwill - Acquisition from GSK in AY 2008-09 4.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 10,53,85,945 on the written down value of purchased goodwill as on 1 April 2009 acquired from GSK which is an intangible asset eligible for deprecation under section 32(1) r.w.s. 2(11) of the IT Act. 4.2 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation on the written down value of purchased goodwill as on 1 April 2009 although depreciation is a mandatory allowance under section 32(1) read with Explanation 5 thereto of the IT Act. 4.3 Without prejudice to the above, the learned DCIT and the Hon'ble DRP erred in concluding that the claim for depreciation made by the Appellant during the assessment proceedings is an additional claim which cannot be accepted. Ground 5 - Depreciation on purchased goodwill - Acquisition from CTPL in AY 2009-10 5.1 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation of Rs. 5,42,34,074 on the written down value of purchased goodwill as on 1 April 2009 acquired from CTPL which is an intangible asset eligible for deprecation under section 32(1) r.w.s 2(11) of the IT Act. 5.2 On the facts and in the circumstances of the case and in law, the learned DCIT and the Hon'ble DRP erred in not granting depreciation on the written down value of the purchased goodwill as on 1 April 2009 although depreciation is a mandatory allowance under section 32(1) read with Explanation 5 thereto of the IT Act. 5.3 Without prejudice to the above, the learned DCIT and the Hon'ble DRP erred in concluding that the claim for depreciation made by the Appellant during the assessment proceedings is an additional claim which cannot be accepted.

6. Ground 6 - Deduction for non-compete fee payment 6.1 On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the learned DCIT ought to have allowed full deduction of Rs. 7,00,00,000 as per the second proviso to section 40(a)(ia) of the IT Act and not just a proportion of the said amount as deductible revenue expenditure since the payees have discharged their tax liability on the non-compete fee paid by the Appellant by furnishing their return of income during the subject year.

7. Ground 7 - Allowance of brought forward unabsorbed depreciation of AY 2008-09 7.1 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing the unabsorbed depreciation of Rs. 23,42,60,932 carried forward and brought forward as per the original return of income of AY 2008-09 and AY 2010-11 respectively. 7.2 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not holding that the provisions of sections 72 r.w.s. 80 and 139(3) of the IT Act apply only to business loss and do not cover the amount of unabsorbed depreciation which is treated as depreciation of current year as per section 32(2) of the IT Act and consequently they ought to have held that unabsorbed depreciation of AY 2008-09 is allowable as a deduction against current year's income. 7.3 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing brought forward and consequent set off of the unabsorbed depreciation of AY 2008-09 of Rs. 18,73,52,790 on goodwill purchased from GSK. 7.4 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing depreciation of Rs. 262,345 relating to depreciation on software expenses treated as capital expenditure in AY 2007-08.

8. Ground 8 - Allowance of brought forward unabsorbed depreciation pertaining to AY 2009-10 8.1 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing the unabsorbed depreciation of Rs. 17,82,24,085 carried forward and brought forward as per the original return of income of AY 2009-10 and AY 2010-11 respectively. 8.2 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing brought forward and consequent set off of the unabsorbed depreciation of AY 2009-10 of Rs. 14,05,14,593 on the written down value of goodwill purchased from GSK as on 1 April 2008. 8.3 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing brought forward and consequent set off of the unabsorbed depreciation of AY 2009-10 of Rs. 7,23,12,099 on goodwill purchased from CTPL. 8.4 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in not allowing depreciation of Rs. 104,938 relating to depreciation on software expenses treated as capital expenditure in AY 2007-08.

9. Ground 9 - Transfer pricing (‘TP') adjustment of Rs. 19,18,64,661 relating to alleged excessive advertisement, marketing and promotional ('AMP') expenditure 9.1 On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in confirming the upward adjustment of Rs. 19,18,64,661 to the income of the Appellant under the presumption that the Associated Enterprises ('AEs') have benefitted from the AMP expenses incurred by the Appellant. 9.2 Without prejudice to the above, on facts and circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in confirming learned TPO's action of alleging that there exists an arrangement between the Appellant and AEs and thereby erred in contending that AEs needs to compensate the Appellant towards AMP expenses; 9.3 Without prejudice to the above, on facts and circumstances of the case and in law, learned DCIT and Hon'ble DRP erred in confirming the actions of learned TPO of disregarding the economic characterization of the Appellant as a normal risk bearing distributor and failing to appreciate that no separate compensation is required for the alleged AMP expenditure, when the Appellant has achieved more than arm's length return for the distribution activity; 9.4 Without prejudice to the above, on facts and circumstances of the case and in law, learned DCIT and Hon'ble DRP erred in confirming the actions of learned TPO of disregarding that a substantial portion of AMP expenditure pertained to the Appellant's locally acquired chemical manufacture division; and that the Appellant is the legal and economic owner of all the marketing intangibles (trademarks, copyrights, etc.) relating to this business; thus, failing to appreciate that the issue of alleged provision of brand promotion services by way of incurring excessive AMP expenditure does not arise in the Appellant's case; 9.5 Without prejudice to the above, on the facts and in the circumstances of the case and in law, while arriving at the arm's length AMP expenditure, learned DCIT and Hon'ble DRP erred in confirming learned TPO's actions of – a. applying bright line test for determining compensation towards AMP expenditure incurred by the Appellant and failing to appreciating that no such method has been prescribed under the IT Act and Income-tax Rules, 1962; b. including the expenditure in the nature of cost of discounted sales pertaining to the locally acquired chemical manufacture division (referred to in para 9.4 above) within the ambit of AMP for the purpose of computing AMP/Sales ratio; c. disregarding the fact that total advertisement and marketing expenditure included substantial expenses towards cost of goods sold that were in the nature of discount; d. failing to appreciate that the alleged AMP expenditure incurred by Appellant was towards promoting its products and not towards promoting the brand; e. erroneously holding that the Appellant should have earned a mark-up on the AMP expenses incurred for providing the purported brand promotion services to AEs and applying aforementioned mark-up; and f. considering inappropriate comparables for computation of the aforementioned mark-up The Appellant therefore prays that the addition made by the learned DCIT of Rs. 19,18,64,661 under Section 143(3) read with Section 144(C) of the Act on the basis of the order passed by the learned TPO under Section 92CA(3) of the Act be deleted.

10. Ground 10 - TP adjustment relating to import of finished goods (Rs. 6,42,81,181) On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in confirming the upward adjustment of Rs. 6,42,81,181 to the income of the Appellant in relation to the international transaction of purchase of finished goods; and in doing so the learned DCIT and Hon'ble DRP grossly erred in agreeing with the learned TPO's action of - a. rejecting the TP documentation maintained by the Appellant; and b. rejecting (i) Sataytej Commercial Company Ltd. and (ii) Siemens Ltd. - Healthcare and Other services segment from the economic analysis, which are comparable to the Appellant's distribution activity in terms of functions, asset base and risk profile. The Appellant therefore prays that the addition made by the learned DCIT of Rs. 6,42,81,181 under Section 143(3) read with Section 144(C) of the Act on the basis of the order passed by the learned TPO under Section 92CA(3) of the Act be deleted. Ground 11 - TP adjustment relating to receipt of indenting commission (Rs. 4.41,90,721)

On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP erred in confirming the upward adjustment of Rs. 4,41,90,721 to the income of the Appellant in relation to the international transaction of receipt of indenting commission; and in doing so the learned DCIT and Hon'ble DRP grossly erred in agreeing with the learned TPO's action of – a. rejecting the TP documentation maintained by the Appellant; and b. rejecting commission agreements (i) Smith & Nephew Ine S&N and Harry Kraus; (ii) VipMed and Fulfilment Services Inc; and (iii) Cincinnati Sub-Zero Products, Inc. and Dimension Distributing Inc. from the economic analysis, which are comparable to the Appellant's indenting activity in terms of functions, asset base and risk profile. The Appellant therefore prays that the addition made by the learned DCIT of Rs. 4,41,90,721 under Section 143(3) read with Section 144(C) of the Act on the basis of the order passed by the learned TPO under Section 92CA(3) of the Act be deleted.

12. Ground 12 - TP adjustment of Rs. 5,98,88,781 relating to reimbursement expenses On the facts and in the circumstances of the case and in law, the Hon'ble DRP and learned DCIT erred in confirming the learned TPO's action of determining the arm's length price of the appellant's international transaction of reimbursement of expenses (in the nature of SAP development cost, inter- connectivity charges, professional expenses and administrative expenses) as Nil and in doing so the Hon'ble DRP failed to take cognizance of the fact that these expenses are essential to the business of the Appellant.

13. Ground 13 - Short credit of tax deducted at source (TDS') On the facts and circumstances of the case and in law, the learned DCIT erred in granting credit for TDS of Rs. 33,83,093 as against Rs. 43,83,437 (as per Form 26AS) claimed by the Appellant, thereby there is a short tax credit of TDS of Rs. 10,00,344.

14. Ground 14A - Penalty proceedings On the facts and in the circumstances of the case and in law, the learned DCIT erred in initiating penalty proceedings under section 271(1)(c) of the IT Act without appreciating that the Appellant has neither concealed particulars of its income nor furnished any inaccurate particulars of income.

15. Ground 14B - Penalty proceedings On the facts and in the circumstances of the case and in law, the learned DCIT erred in initiating penalty proceedings under section 271B of the IT Act.”

4. Since the issues raised by way of additional grounds can be decided on the basis of the material available on record, the same are admitted for adjudication.

5. Ground no.1 is general in nature. Therefore, the same needs no specific adjudication.

6. Grounds no.2-5, raised in assessee’s appeal, pertain to the claim of depreciation on manufacturing, supply and maintenance contracts and goodwill pursuant to the acquisition of two undertakings in a slump sale arrangement in earlier years.

(a) No such intangible assets, such as manufacturing contracts, and supply/maintenance contracts have been transferred to the assessee company in a slump sale. (b) No evidence of these intangible assets being self-generated, and the same were transferred to the assessee in a slump sale. (c) Manufacturing contract, and supply/maintenance contracts are not akin to the assets identified under the provision of section 32(1)(ii) of the Act.

(d) From the valuation report, “future economic benefits” and “cost measurement” cannot be measured reliably. (e) Regarding the supply contracts purchased from GSK Pharma Ltd, it is seen from the valuation report that the agreements are valid only for one year; thus, such contracts cannot be said to be enforceable in a court of law. Hence, these contracts are not going to create defined future economic benefits, and thus, fail to qualify the definition of intangible assets as per Accounting Standard-26. (f) Regarding the maintenance contracts purchased from Chemito Technologies Pvt. Ltd., from the valuation report, it is evident that the “future economic benefits” cannot be measured reliably. Thus, the “maintenance contracts” do not satisfy the definition of an asset to be recognised as an intangible asset as per Accounting Standard- 26.

11. On the contrary, the learned Departmental Representative (“learned DR”) submitted that as per the provisions of the Accounting Standard-26, manufacturing contracts, supply contracts and maintenance contracts acquired by the assessee pursuant to the above-mentioned slump sale acquisitions cannot be recognised as intangible assets. The learned DR further submitted that the Accounting Standard-26 specifically requires the capacity of an enterprise to control future economic benefits from an intangible asset. However, in the present case, the assessee has not been able to demonstrate its capacity to control future economic benefits from the contracts, which are only for the duration of 1 year, 2 years or 5 years. It was further submitted that the cost of these contracts cannot be measured reliably. Thus, the learned DR submitted that these contracts cannot be recognised as intangible assets in view of the provisions of the Accounting Standard-26.

14. In any case, it is pertinent to note that in the present case, the total consideration paid by the assessee for the afore-mentioned slump sale acquisitions from GSK Pharma Ltd and Chemito Technologies Pvt. Ltd. includes consideration paid for manufacturing contracts, supply contracts and maintenance contracts acquired by the assessee. Thus, even if it is assumed that these contracts are not separate intangible assets under section 32(1)(ii) of the Act, it cannot be disputed that the consideration paid also covered the consideration for these contracts, and the said consideration was over and above the net asset value of other recognised tangible and intangible assets. We find that the coordinate bench of the Tribunal in assessee’s own case in Thermo Fisher Scientific India Pvt. Ltd. v/s DCIT, in for the assessment year 2009-10, vide order dated 31/07/2023 held that the consideration paid over and above the fair value of the assets and liabilities acquired by way of slump sale from GSK Pharma Ltd and Chemito Technologies Pvt. Ltd. is attributable to goodwill. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: -

“5.18 We have heard rival submission of parties. The issue in dispute is claim of depreciation on Goodwill recognised by the assessee in two transaction of acquisition of two units. The assessee claimed that those acquisitions are for purchase of unit for lumpsum consideration, as going concerns in the nature of slump sale, which is subject to capital gain tax us 50B in the hand of seller. Whereas the according the Assessing officer the acquisitions are in the nature of amalgamation. Before us, the learned counsel has referred to various clauses of business transfer agreement (BTA) in respect of units acquired from GSK and CTPL respectively. On perusal of relevant clauses referred, we find that transaction in both the cases are of slump sale and not, amalgamation as stated by the Assessing Officer. 5.19 The learned Assessing Officer has further relied on the Explanation 7 to section 43(1) of the Act, to hold that assessee is not entitled for depreciation on the Goodwill recognised. For ready reference, the relevant explanation is reproduced as under: "Explanation 7.—Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. Explanation 7A.—Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business : Provided that such actual cost shall not exceed the written down value of such capital asset in the hands of the demerged company." 5.20 On perusal of the above Explanation, we find that same is in relation to transactions of amalgamation and not related to slump sale transactions, which is the case of the assessee. 5.21 The learned Assessing Officer has further relied Explanation-2 to section 43(6) of the Act, which reads as under: "Explanation 2.—Where in any previous year, any block of assets is transferred,— (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. 5.22 On perusal of above Explanation, we find that it is in relation to acquisition of a subsidiary company by its holding company or vice versa and in relation to transactions of amalgamation and not in respect of slump sale.

5.23 The learned Assessing Officer has further relied on fifth proviso (now sixth proviso) to section 32(1)(ii) of the Act, which is reproduced for ready reference: "Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction 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." 5.24 On plain reading of the above proviso, it is clear that same is in relation to allocation of the depreciation on the asset between predecessor and successor entities, whereas in the instant case goodwill was not in existence as intangible asset in the case of predecessor companies from whom the assessee has acquired corresponding units under slump sale. Therefore, the said provision is also not applicable of the facts of the instant case. 5.25 The ratio is in the case of United Breweries (supra) is also not applicable over the facts of case as in the said case there was amalgamation of the three wholly owned subsidiaries whereas in the instant case there is a acquisition of units of third parties by way of slump sale. 5.26 The learned DR before us submitted that allocation of values to the fixed asset acquired has been on lower side for creating goodwill as intangible asset. But in our opinion, if the quantum of goodwill is reduced, the valuation of the fixed asset will increase, which are also eligible for depreciation and thus in the exercise of reallocation of values among the goodwill and other fixed asset, will be a revenue neutral exercise. 5.27 In view of the above discussion, we concur with the arguments of the learned counsel of the assessee that goodwill arising from transactions of acquisition of units of GSK and CTPL, is eligible for depreciation under the provisions of the Act. As far as claim of the assessee for allowing depreciation on said goodwill corresponding to assessment year 2008-09, we are of the opinion that claim with respect to depreciation for assessment years 2008-09, cannot be allowed in the appeal for assessment year 2009-10. It is for the assessee to explore necessary remedy under the provisions of the Act or any other legal remedy as advised. The ground No.2 (two) of the appeal of the assessee is accordingly allowed.”

15. Therefore, we are of the considered view that the entire exercise of determining the nature of manufacturing contracts, supply contracts and maintenance contracts acquired by the assessee from the afore-mentioned slump sale acquisitions is merely academic, as even if these contracts are not considered as separate intangible assets as per the provisions of Accounting Standard-26, even then the excess consideration paid over and above the fair value of the recognised assets and liabilities acquired by way of slump sale transactions has been held to be goodwill in nature and the assessee was allowed depreciation on the same under the provisions of the Act by the coordinate bench of the Tribunal. Accordingly, accepting the alternative plea of the assessee and respectfully following the decision of the coordinate bench of the Tribunal rendered in assessee’s own case, we direct the AO to treat the excess of consideration paid over and above the fair value of the assets and liabilities as goodwill and allow the depreciation on same to the assessee under the provisions of the Act. On similar lines, the depreciation on goodwill amounting to INR 15,96,20,019 claimed by the assessee in the year under consideration is also allowed. As a result, grounds no.2-5, raised in assessee’s appeal, are allowed. In view of our aforesaid findings, additional ground no.15 needs no separate adjudication.

16. Ground no.6, raised in assessee’s appeal, was not pressed during the hearing. Accordingly, the same is dismissed as not pressed.

17. Grounds no.7.1 and 7.2, raised in assessee’s appeal, pertain to the set off of brought forward unabsorbed depreciation of preceding years.

"(a) Whether ITAT was correct in law in holding that for carried forward of unabsorbed depreciation, it was not necessary that the return should have been filed within the time allowed under section 139(1) read with section 139(3) of the Income-tax Act? (b) Whether ITAT was correct in law in holding that the provisions of section 80 of the Income-tax Act do not apply to unabsorbed depreciation covered by section 32(2) of the Act?"

“9. The question that follows for consideration is as to whether the loss referred under section 80 of the Act also includes unabsorbed depreciation and investment allowances. For this we may examine the provisions of losses referred to under section 80 of the Act. Section 72 provides for provisions with regard to carry forward and set off of business losses. According to this section, where for any assessment year, the net result of computation under the head 'profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, then so much of the loss shall be carried forward to the next assessment year. Similarly, section 73 deals with losses in speculation business. Sub-section (2) of section 73 provides that for any assessment year any loss computed in respect of speculation business has not been wholly set off under sub-section (1), so much of the loss as is not set off or the whole loss where the assessee had no income from any other speculation business, shall be carried forward on certain conditions. section 74 deals with losses under the head 'capital gains', which is not relevant for the present case. On examining the aforesaid provisions, as referred in section 80 of the Act, prima facie, these sections do not cover or deal with procedure of setting off of unabsorbed depreciation and investment allowance.

10. Section 32 of the Act deals with different types of depreciations. From a plain reading of provisions of sections 72 and 32 it is manifestly clear that section 72 deals with carry forward of unabsorbed business losses other than losses on account of depreciation and that is so because the carry forward depreciation has been provided under section 32(2) of the Act. The manner of carry forward in the two provisions is entirely different. In this manner of interpretation of the provisions of losses as noted above, we may see that sections 80 and 139(3) of the Act apply to business losses and not to unabsorbed depreciation which is exclusively governed by the provisions of section 32(2) of the Act. That being so, the period of limitation for filing loss return as provided under section 139(1) shall not be applicable for carrying forward of unabsorbed depreciation and investment allowances. There is a catena of judgments in support of this proposition of law. In Sri Hari Mills Ltd.'s case (supra) and Sathappa Textiles (P.) Ltd.'s case (supra) it was held that the section 80 refers to the loss and not for unabsorbed depreciation and, therefore, in respect of carry forward of depreciation, there is no obligation to file return within the time prescribed for the return under section 139(1). This view was reiterated by Madras High Court in Sathappa Textiles (P.) Ltd.'s case (supra). In Brahmaver Chemicals (P.) Ltd.'s. case(supra) it was held as under:- "The above provision contemplates determination of loss in pursuance of the return filed under section 139(3) of the Income-tax Act which are to be carried forward to be set off under section 72, 73, 74 or 74A. Section 139(3) also refers to the same provision contemplating for filing of the return within the time allowed under section 139(1) and thus the determination of the loss is permissible when the return is filed within the stipulated time under section 139(1). There is no reference to the provision for carry forward of depreciation or investment allowance in section 80."

12. In the case of Haryana Hotels Ltd. (supra), the question for consideration was same as is before us in the present case. Referring to various decisions of different Courts it was held as under:-

"Under section 32(2) of the Act the unabsorbed depreciation of earlier previous years forms part of the current year's depreciation and thereafter allowance for depreciation is given from the current year's income. There is no such provision in section 72 of the Act by virtue of which business losses of earlier years shall form part of the current year's business losses and be allowed to be set off from current year's income. However, only the business losses of earlier years which are notified by the Assessing Officer are allowed to be carried forward and set off from the current year's income. Similarly, there is no provision under the Act which makes it mandatory for the assessee to file return for carry forward and set off of unabsorbed depreciation which is to be notified by the Assessing Officer as in the case of unabsorbed business loss. Thus, from a reading of the provisions of the Act, the distinction between unabsorbed depreciation and unabsorbed business loss for the purposes of set off and carry forward is clear. " ** ** ** "A reading of section 32(2) of the Act makes it clear that a carried forward unabsorbed depreciation allowance is deemed to be part of and stands on the same footing as current depreciation, i.e., in the assessment of the assessee, if full effect cannot be given to any allowance in any previous year owing to there being no profits or gains chargeable for that previous year, the allowance or part of the allowance to which effect has not been given, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of the said allowance. There is no time-limit provided under section 32(2) of the Act for carry forward of unabsorbed depreciation to any subsequent year. The Apex Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966]59ITR555(SC) has held that unabsorbed depreciation of past years had to be added to depreciation of the current year and the aggregate unabsorbed and current year's depreciation had to be deducted from the total income of the assessment year."

13. In the case of CIT v. J. Patel & Co. [1984] 149 ITR 682/ 18 Taxman 204, the Division Bench of our High Court endorsed with approval the case of Madras High Court titled as CIT v. Nagapatinam Import & Export Corpn. [1975] 119 ITR 444/[1980] 3 Taxman 150 wherein it was held as under :- "The point to be considered is whether the allowance for depreciation is to be equated with the loss that had been contemplated for apportionment among the partners. For some purposes of the Act, depreciation forms part of the loss. The income of the firm or the loss in the hands of the firm cannot be computed without making allowance for depreciation in case the assessee is eligible for, and has made such a claim by complying with the relevant provisions of the Act. If there is any other loss apart from the depreciation, then that loss will get added to the amount of depreciation allowable to the assessed under section 32 read with the rules. It is the total of this amount which will be allocated among the partners under the provisions of section 75. However, the Act thus makes a distinction between the unabsorbed allowance of depreciation and other losses. It has already been seen that section 72(2) of the Act provides that where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward; effect shall first be given to the provisions of section 72. In other words, section 72(2) contemplates the loss other than the unabsorbed depreciation being given a priority in the matter of set-off, as there is a time-limit within which such loss can be adjusted. Under section 72(3) the loss other than from depreciation is eligible for being carried forward and set-off only for a period of eight assessment year immediately succeeding the assessment year for which the loss was first computed; in the case of unabsorbed depreciation allowance, there is no such time-limit. The Legislature has, therefore, made a specific provision for priority in setting off the loss other than unabsorbed depreciation allowance so that the unabsorbed depreciation allowance can be carried forward if necessary without any time-limit and set off in the appropriate succeeding years. It is thus clear that there is a separate identity maintained under the statute with reference to the unabsorbed depreciation allowance though at the time of computation it forms part of 'loss'. It may be that at the time of allocation among the partners, the unabsorbed depreciation is taken along with any other loss that may have been sustained by the registered firm; but this identity of unabsorbed depreciation is required to be maintained in order to unable it to be set off against the future income separately and independently of the other losses. If we approach the construction of section 32(2) in the light of the above background, there appears to be no difficulty in construing the reference."

15. Learned counsel appearing for the Revenue relied upon the case of Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512/56 Taxman 4K (SC) in support of his submission that unabsorbed depreciation is indeed a part of loss and if the same was not claimed within the due time under section 139, it could not be allowed to be carried forward. In view of what has been discussed above the learned counsel is not right in interpreting the provisions of law and also the aforementioned judgment of Supreme Court. In this case, the Supreme Court held that though 'depreciation' is component element of the genus described as 'loss', there is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for the purpose of carrying forward and providing for a special or different treatment to unabsorbed depreciation.

16. We have already noted above that section 32 deals with the different types of depreciation whereas section 80 deals with carry forward of unabsorbed losses other than losses on account of depreciation. If that was not so, there was no need for Legislature to provide specific provision for carrying forward of depreciation under section 32 of the Act. It has already been noted that in case of Nagapatinam Import & Export Corpn. (supra), which was relied by our High Court in the case of J. Patel & Co. (supra) whereby, it was held that section 72 contemplates loss other than unabsorbed depreciation and there was a time-limit within which loss can be adjusted, whereas in the case of unabsorbed depreciation there is no time-limit and further that under the statute there is a separate identity with respect to unabsorbed depreciation though at the time of computation, it becomes a part of loss.

18. In view of our aforesaid discussions, both, questions (a) and (b) are answered in affirmative in favour of the assessee and against the Revenue.”

S. Name of the Company GP/Sales% No. 1 Hicks Thermometers (India) Ltd. 43.63 2 3M India Ltd. – Healthcare Market Segment 45.47 Mean 44.55 Assessee’s margin (audited segmental accounts) 33.38

“13. Therefore, in the present case, before proceeding further, it is pertinent to analyse the relevance of product similarity for benchmarking the international transactions by applying the RPM as the most appropriate method. The RPM has been prescribed as one of the methods under Rule 10B(1)(b) of the Income Tax Rules (“the Rules”) for the determination of arm's length price under section 92C of the Act. Rule 10B(1)(b) of the Rules reads as follows: - “Section 10B(1)(b) in Income Tax Rules, 1962 (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions;

(iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise;”

14. From a plain reading of the provisions of Rule 10B(1)(b) of the Rules, it is evident that in RPM the gross sale margin realised by an enterprise from a control transaction are compared with gross margins realised by the enterprise or an unrelated party from comparable uncontrolled transaction of purchase and resale of the “same or similar” property or from obtaining and providing the “same or similar” services. Thus, it is evident that Rule 10B(1)(b) of the Rules, which prescribes the RPM as one of the methods for the determination of arm's length price, also does not require strict product similarity for benchmarking the international transaction. We find that while analysing this aspect of the matter, i.e., the relevance of product similarity for benchmarking the international transaction by adopting the RPM as most appropriate method, the Co-ordinate Bench of the Tribunal in the case of Mattel Toys (I) (P) Ltd. vs. DCIT, reported in (2014) 30 ITR(T) 283 (Mumbai), observed as follows:- “38. Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made. Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent enterprise in comparable uncontrolled transactions vis-a-vis the one in the controlled transactions, therefore, in such a situation, the nature of products has not much relevance though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than similarity of products. In RPM other attributes of comparabilities than the product itself can produce a reliable measure of arm's length conditions. The main reason is that the product differentiation does not materially effect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen. Since the gross profit margin is the main criteria while evaluating the transactions in the RPM wherein price is identified at which property or services are resold and normal gross profit margin is derived at by the enterprise which is deducted from the resale price of such property or service in comparable uncontrolled transactions. The gross profit margin earned by the independent enterprise in comparable uncontrolled

transactions is served as a guidance factor. This is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales. In the instant case, the assessee is a distributor of Mattel toys and gets the finished goods from its A.E. and resells the same to independent parties without any value addition. In such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP.”

The learned DRP noted that most of the products dealt with are for the maintenance of room temperature, such as Hypo/Hypothermia Systems (Water), Convective Air Therapy System (Air) and Heater/Cooler System. Thus, the learned DRP held that this company is not comparable to the assessee as the products distributed are different. From the perusal of the Sales Representation Agreement entered into by RG Medical Diagnostics, forming part of the paper book from pages 1107–1110, we find that this company was also operating in Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island and New York. Further, we find that the products dealt with by this company are in temperature monitoring. Therefore, it is evident that not only this company is having similar product line as that of Cincinnati Sub-Zero Products Inc. but this company is also operating in the territory similar to Cincinnati Sub-Zero Products Inc. Therefore, we agree with the submissions of the learned AR and direct the TPO to also exclude RG Medical Diagnostics for benchmarking the international transaction of receipt of the indenting commission. As a result, ground no.11 and additional ground no.16 raised in assessee’s appeal are allowed.

“35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure.”

“7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific. and limited l.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT (A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained.”