MARVELL INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BENGALURU

The present appeal preferred by the Assessee is directed against the Final Assessment Order, dated 27/06/2024, passed by the Deputy Commissioner of Income Tax, Circle-4(1)(1), Bangalore under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] as per the direction of the Dispute Resolution Panel -2, Bengaluru [hereinafter referred to as ‘DRP’] issued vide Order, dated 29/05/2024 for the Assessment Year 2020-2021. Assessment Year 2020-2021

The Assessee has raised following grounds of appeal : “1. The impugned order passed by the learned AO is bad in law

1. On the facts and in the circumstances of the case and in law, the learned AO has erred, both on facts and in law, in confirming the disallowance of depreciation claimed on goodwill, addition on account of free of cost assets and addition under Section 40(a)(i) of the Act without providing any cogent reasoning and without taking into consideration any submissions filed by the Appellant.

Disallowance of depreciation claimed on Goodwill

1. The learned AO has erred, in law and on facts, by confirming disallowance of INR 3,08,21 ,235 made under Section 32 of the Act, in relation to the depreciation claimed on goodwill.

Addition on account of Free of Cost Assets

1. The learned AO has erred, in law and on facts, by confirming addition of INR 1,93,90,395 made under Section 28(iv) of the Act, in relation to the assets received free of cast by the Appellant.

2. The learned AO has erred, in law and on facts, assets made free of cost do not satisfy section 28(iv) and in any case the addition of full amount is based on incorrect presumptions and not justified in law.

Addition under Section 40(a)(i) of the Act

1 . The learned AO has erred, in law and on facts, by confirming addition of INR 12,690 made under Section 40(a)(i) of the Act, in relation to TDS demand under Section 200A of the Act. 5. Other grounds

1. The learned AO has erred, in law and on facts, by computing interest liability of INR 6,79,322 under Section 234A, INR.92,01,062 under section 234B and INR 9,20,335 under section 234C of the Act.

Penalty Proceedings

1. The learned AO has erred, in law and on facts, in initiating penalty proceedings under section 274 read with section 270A of the Act.”

The relevant facts in brief are that the Assessee is a company engaged in design, development and testing of integrated circuits and provides services to its group companies. For the Assessment Assessment Year 2020-2021

The Assessee filed objections against the Draft Assessment Order before the DRP. Vide Order, dated 29/05/2004, the DRP granted relief by rejecting proposed transfer pricing adjustment of INR.16,00,55,328/-. As regards corporate tax issues, the DRP agreed with the Assessing Officer and declined to grant any relief to the Assessee. Therefore, the Assessing Officer concluded the assessment and passed Final Assessment Order, dated 27/06/2024, making the following additions/disallowances:

Being aggrieved, the Assessee has preferred the present appeal before this Tribunal on the grounds reproduced in paragraph 2 above. Assessment Year 2020-2021

Ground No.1 raised by the Assessee challenges the Final Assessment Order passed by the Assessing Officer on the ground that the same is bad in law. The aforesaid ground is general in nature. Since specific grounds have been raised by the Assessee, Ground No.1 raised by the Assessee is disposed of as being general in nature.

Ground No.2 raised by the Assessee pertains to disallowance of claim of depreciation amounting to INR.3,08,21,235/- made by the Assessee during the relevant previous year under Section 32(1)(ii) of the Act in respect of goodwill on intangible assets.

1. On perusal of records, we find that during the relevant previous year, the Assessee had entered into two separate Business Transfer Agreements to acquire business undertaking of Global Foundries Engineering Pvt. Ltd. (GFEPL) and Aquifina Semi-Conductors India Pvt. Ltd. by way of slump sale transactions. It has been contended on behalf of the Assessee that under the aforesaid BTAs, the Assessee had acquired intangible assets on which assessee was eligible to claim deduction @25% u/s 32(1)(ii) of the Act. During the course of assessment proceedings, the Assessee filed submissions, dated 25/08/2023, furnishing following explanation/details:

2. After taking into consideration the above submission, the Assessing Officer issued show-cause notice, dated 14/09/2023, to the Assessee and in response to the same submission, dated 21/09/2023, was filed by the Assessee wherein it was contended that claim of depreciation of goodwill made by the Assessee was not hit by the amended provisions of Section 32 of the Act since the amendment introduced by the Finance Act, 2021 excluding ‘goodwill of a business or profession’ out of the definition of ‘Intangible Asset’ contained in Explanation 3(b) to Section 32 of the Act was effective from Assessment Year 2021-2022. 7.3. The submissions made by the Assessee did not find favour with the Assessing Officer. The Assessing Officer formed a view that the Assessee had failed to furnish documents giving basic details like the basis of arriving at the value of consideration, proof of actual payment made, the rationale for categorizing the entire amount as intangible asset and the valuation report. On the basis of the aforesaid, the Assessing Officer concluded the Assessee had failed to demonstrate and prove that the goodwill was acquired by the Assessee and that the same was akin to an intangible asset. Assessment Year 2020-2021

4. The above disallowance proposed in the Draft Assessment Order was not accepted by the Assessee and objections were filed before the DRP in relation to the same. The DRP rejected the objections raised by the Assessee observing that the provisions of Section 32(1) of the Act were amended w.e.f. 01/04/2021 to specifically exclude goodwill from the category of asset/depreciable assets. The aforesaid amendment introduced by Finance Act, 2021 was clarificatory in nature, and the same also applied to Assessment Year 2020-2021. 7.5. The Assessing Officer passed the Final Assessment Order rejecting Assessee’s claim for depreciation of INR.3,08,21,235/- in respect of goodwill.

6. Being aggrieved, the Assessee has carried the issue in appeal before this Tribunal.

7. We have considered the rival submissions and perused the materials available on record.

8. Finance Act, 2021 amended Explanation 3 to Section 32 of the Act to provide that ‘goodwill of a business or profession’ shall not be considered as an asset for the purposes of the Section 32(1) of the Act. The relevant extract of the memorandum in relation to the above amendment stated as under “Depreciation on Goodwill –

9. Thus, a bare reading of the above extract of Memorandum to the Finance Bill, 2021 shows that amendment made in Section 32 of the Act would apply to Assessment Year 2021-2022 and subsequent assessment years. This become clear on perusal of the following extract of Notes to Clauses to Finance Bill, 2021: “Clause 7 of the Bill seeks to amend section 32 of the Income- tax Act relating to depreciation.

10. We find that assessee has relied by the various decisions of the Tribunal wherein it has been held that the above amendment introduced by Finance Act, 2021 is prospective in nature and shall apply to Assessment Years 2020-2122 and the subsequent assessment years. The relevant extract of recent decision of the Tribunal in the case of I&B Seeds (P.) Ltd. vs. Deputy Commissioner of Income-tax [2022] 142 taxmann.com 274 (Bangalore - Trib.)[15- 06-2022] reads as under:

11. In view of the above, we hold that the basis on which the objections raised by the Assessee were rejected by DRP cannot be sustained.

12. As regards observations made by the Assessing Officer regarding failure of the Assessee to furnish relevant supporting documents and evidences, we find that the Assessee has now filed additional evidences by placing on record the following additional evidences/submissions: (a) Bank payment approval and invoice of Global Foundries Engineering Private Limited (Global Foundries) evidencing proof of payment (in relation to Ground 2)

13. We are of the considered view that the above documents now placed on record by the Assessee travel to the root of the matter and are relevant for the determination of the issue at hand. Since the DRP had rejected the claim of the Assessee on the ground that the said claim was hit by the amendment made in the Section 32(1) of the Finance Act, 2021, the other aspects of the claim under dispute were Assessment Year 2020-2021

Ground No.3 raised by the Assessee relates to addition of INR.1,93,90,395/- made by the Assessing Officer under Section 28(iv) of the Act.

1. During the assessment proceedings, the Assessing Officer noted that the Assessee had received some assets free of cost. According to the Assessing Officer, the cost of the aforesaid assets constituted benefit or perquisite that had accrued to the Assessee from the business carried on by the Assessee during the relevant previous year and therefore, the same fell into the ambit of Section 28(iv) of the Act. Therefore, the Assessee was asked to provide explanation in relation to the same. In response, the Assessee filed Response, dated 25/08/2023, providing the following explanation: “Provide the details Free of Cost (FOC) assets received by the company during the year under consideration by the company: Details of FOC assets received during the AY 2020-21 are tabulated as under: Assessment Year 2020-2021

2. Thereafter, the Assessee filed another Letter, dated 21/09/2023, in response to show cause notice issued by the Assessing Officer whereby the assessee had provided following explanation:

3. The above explanation did not find favour with the Assessing Officer as the Assessing Officer proposed addition of INR.1,93,90,395/- in the Draft Assessment Order.

4. Being aggrieved, the Assessee filed objections before DRP which did not yield any favourable result as the DRP concluded that cost of assets received for free by the Assessee was income chargeable to tax in the hands of the Assessee in terms of Section 28(iv) of the Act and therefore, no interference with the proposed addition made by the Assessing Officer was called for. Thus, in the Final Assessment Order, the Assessing Officer made the above addition of INR.1,93,90,395/-.

5. Being aggrieved, the assessee has carried the appeal before this Tribunal.

6. We have heard the rival submissions and perused the materials available on record. During the course of bearing both sides Assessment Year 2020-2021

7. During the course of hearing, it was further contended on behalf of the Assessee that part of free of cost assets received by the Assessee were actually destroyed and to that extent no benefit had accrued to the Assessee during the relevant previous year. In this regard, the Learned Departmental Representative had submitted that the aforesaid contention made on behalf of the Assessee was not supported by any material forming part of the record. On giving thoughtful consideration to the rival submission, we are of the view that given the aforesaid facts, this issue can also be restored back to the file of Assessing Officer with the directions to delete the addition made in respect of free of cost assets received by the Assessee after verifying documents/details to be furnished by the Assessee showing that the free of cost assets received were destroyed as per the instructions received from the actual owner of such goods.

8. In terms of paragraph 8.6 & 8.7 above, Ground No.3 raised by the Assessee is partly allowed. Assessment Year 2020-2021

Ground No.4 raised by the Assessee relates to disallowance of INR.12,690/- made by the Assessing Officer under Section 40(a)(i) of the Act for failure to deduct tax at source.

1. In this regard, the Assessee has now taken a stand that in respect of payment of INR.10,518/- made to Adamas Builders Pvt. Ltd, the Assessee had deducted tax at lower rate as per tax withholding certificate issued by the Income Tax Department. Therefore, the provisions of Section 40(a)(i) of the Act were incorrectly invoked to make disallowance of INR.10,518/-. Consequently, interest of INR.1,890/- was also incorrectly levied. Learned Departmental Representative submitted that the stand taken by the Assessee required examination as the tax withholding certificates now furnished as additional evidence were not provided to authorities below.

2. We have perused the tax withholding certificates filed as additional evidence and the same provide for deduction of tax at lower rate of 0.1% under Section 194C [valid from 25/06/2019 to 21/03/2020] and 5% under Section 194I(b) [valid from 25/06/2019 to 21/03/2020]. These certificates were issued by the TDS Circle 1(1), Bangalore and not by a third party. Therefore, we deem is appropriate to direct the Assessing Officer decide the issue afresh after verifying the certificates and their applicability to the payments of INR.10,518/- made by the Assessee to Adamas Builders Pvt. Ltd in respect of which provisions of Section 40(a)(i) of the Act were invoked o make the disallowance. Accordingly, disallowance to the extent of INR.12,410/- is set aside in terms of the aforesaid directions. Thus, Ground No. 4 raised by the Assessee is partly allowed. Assessment Year 2020-2021

Ground No. 6 raised by the Assessee challenges the initiation of penalty proceedings which are separate and distinct from the assessment proceedings. Therefore, Ground No. 6 is dismissed as being premature.

In the result, the appeal filed by the assessee is partly allowed.