SIGNODE INDIA LIMITED ,HYDERABAD vs. DEPUTY COMMISSIONER OF INCOME TAX ,CIRCLE-3(1), HYDERABAD

PER MANJUNATHA G. :

These appeals have been filed by the assessee- company against (i) the Final Assessment Order dated
26.04.2021 passed by the A.O. under Section 143(3) r.w.s.

2
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

144C(13) r.w.s. 144B of the Income Tax Act, 1961 (in short
“the Act”) in pursuance to the Directions dated 15.03.2021 of the learned Dispute Resolution Panel–1 (“DRP”), Bengaluru, passed under Section 144C(5) of the Act, relating to the assessment year 2016-17, and (ii) the order of the Ld. CIT(A)
– 10, Hyderabad, dated 28.02.2023, passed under Section 143(3) r.w.s. 92CA(3) of the Act, relating to the assessment year 2015-16. 2. Since common issues are involved in both the appeals, these appeals were heard together and are being disposed of by this single consolidated order for the sake of convenience and brevity.
3. First we take up assessee’s appeal in ITA
No.434/Hyd/2021 for A.Y. 2016-17. The grounds raised by the assessee read as under :
“Ground No. 1: General Ground
1.1 The assessment order passed by the Learned Assessing Officer
("AD") is not in accordance with provisions of Income-tax Act, 1961, contrary to the facts and circumstances of the case and is in violation of principle of natural justice.
1.2 In the facts and circumstances of the case, the Ld. Dispute Resolution
Panel ("DRP") and Ld. AO/ the Learned Transfer Pricing Officer ("Ld. TPO)

3
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited have erred in making the transfer pricing adjustment of INR 1,95,55,466
to the international transactions relating to manufacture and sale of Wheelchairs to Associated Enterprises ("AE").
1.3. In the facts and circumstances of the case, the Ld. DRP and Ld. AO have erred in disallowance of depreciation of INR 3,57,97,208. Ground No. 2: Corporate Tax: Denial of Depreciation
2.1. In law and facts and circumstances of the case, the Ld. AO/DRP have erred in denying the depreciation claimed by the Assessee on the following grounds:
2.1.1. That the Ld. AO/DRP erred in not granting depreciation on building under section 32 of the Act which has been put to use in the subject financial year/assessment year and all other conditions for such grant were satisfied.
2.1.2. That the Ld. AO/DRP erred in relying on extraneous material and came to conclusion on conjectures and surmises that the building was not put to use, when the fact remains that the building was put to use by the Appellant/Assessee for its use as a factory and disregarded the extra-ordinary circumstances (due to Covid-19) and the evidence produced by the Appellant supporting the aforementioned claim.
Ground No.3: Transfer Pricing: Rejection of Transfer Pricing
Documentation
3.1 In law and facts and circumstances of the case, the Ld. DRP and Ld.
TPO/AO have erred in rejecting the Transfer Pricing documentation maintained by the Appellant, disregarding the economic analysis carried out and in not appreciating the fact that the TP documentation maintained by the Appellant cannot be rejected merely on account of difference of opinion.
3.2 In law and facts and circumstances of the case, the Ld. DRP and Ld.
TPO/AO have erred in conducting a fresh search for identifying comparable companies following an arbitrary approach towards selection/rejection of the companies.
Ground No.4: Transfer Pricing: Erroneous Quantitative filters
4.1. In law and facts and circumstances of the case, the Ld. DRP and Ld.
TPO/AO have erred in conducting the fresh search process on the following grounds.
4.1.1. Have erred in applying the filter Income from manufacturing activity greater than 75 percent to sales.

4
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

5
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

6
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited contention that, since the invoices are raised in foreign currency, LIBOR based rate should be considered for computing interest on receivable.
8. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto.
9. In law and facts and circumstances of the case, the Appellant in the interest of justice, may be allowed to adduce additional evidence as may be necessary in support of the grounds raised hereinabove after following due procedures laid down in the Income-tax (Appellate
Tribunals) Rules, 1963. 10. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.”

7
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited on 14.07.2017. Subsequently, the Assessing Officer issued notices u/sec.142(1) of the Act calling for information and it’s explanations on TP issues. Further, the Assessing Officer had referred the issues to the Transfer Pricing Officer [in short
“TPO”] under section 92CA(1) of Income-tax Act, 1961, with the prior approval of the Pr. Commissioner of Income Tax-3,
Hyderabad, for determination of arm's length price in respect of the Specified domestic/ International transactions reported by the assessee company for the financial year relevant to the assessment year 2016-2017. The TPO had issued notices u/sec.92CA of the Act and the assessee company had filed it’s reply on 05.02.2019, 13.08.2019 and 14.10.2019 and the Authorised Representative of the assessee company was also appeared before the TPO and explained it’s case. The TPO after examining the profile of the assessee company and as per Form-3CEB report and the TP analysis document filed by the assessee company, has summarized the Domestic/International transactions which is evident from the order of the TPO dated 30.10.2019. The learned TPO further noted that the assessee company has 8
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited two segments i.e., trading and manufacturing and has adopted Resale Price Method [in short “RPM”] as Most
Appropriate Method [in short “MAM”] for benchmarking the trading of finished goods under Trading Segment wherein the gross margin of the respective segment was at 36.30% when compared with the comparable companies and concluded that are at Arm’s Length. The TPO further observed that, the assesse company has clubbed Purchase Of Raw Material and Components, Payment of Commission and Design Charges,
Payment for Training Charges, Sale of Finished Goods and has chosen Transactional Net Marginal Method [in short
“TNMM”] as MAM and compared it’s margin at 2.13% with the averages of comparable companies, and concluded that, the respective transactions are at arm's length. The TPO further noted that, in respect of other transactions including reversal of traded goods, buy back of equity shares, the assesse company has adopted ‘Other Method’ to prove the arms length nature of the transactions. The TPO noted with respect to Trading Segment that, the assesse company has purchased the finished goods from Associated Enterprises [In 9
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited short “AEs”] and are reselling the same to third parties. From the examination of the TP document submitted by the assessee company, the TPO noticed that, the tax payer chosen Resale Price Method [in short “RPM”] as MAM for trading of finished goods. The TPO noted that, the assessee company in order to benchmark it’s transactions, has selected 10 companies as comparables for trading of finished goods on the basis of search conducted in the public databases namely Prowess, Capitaline Plus. The TPO has analysed the TP document and noted that, though MAM adopted by the assessee company is acceptable, the search conducted suffers from certain infirmities like wrong classification and inappropriate use of key words. Therefore, the TPO observed that, the comparables selected by the assessee company are not acceptable and, therefore, an independent search was conducted by the TPO using Prowess and Capitaline databases provided in Rule 10B, after applying certain filters a set of comparables have arrived at and concluded that, the margin of the taxpayer is within range of comparable companies. Similarly, with respect to 10
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited manufacturing segment also the TPO has not proposed for any adjustment. However, with respect to marketing support services, the learned TPO has rejected the TP study furnished by the assessee company as the data used in computation of Arms Length Price [in short “ALP”] is not reliable or correct and determined the ALP of the assessee company by conducting an independent search for comparables considering the functions of the assessee company, the assets employed and the risks taken and proposed transfer pricing adjustment u/sec.92CA of the Act in respect of Marketing Support Services of the assessee company’s international transactions at Rs.1,76,042/-. Further, the TPO has also proposed adjustment on ‘Receivables’
amounting to Rs.3,76,746/-. Thus, the TPO had proposed TP adjustment on International Transactions at Rs.5,52,788/- for the impugned assessment year 2016-2017 vide order dated 30.10.2019. Subsequently, the Assessing Officer issued notices u/sec.142(1) of the Act to the assessee company calling for information and its explanations on TP issues as per order passed by TPO dated 30.10.2019. In 11
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited response to thereof, the assessee company filed information from time to time. The Assessing Officer after considering the submissions of the assessee company determined the total assessed income of the assessee company at Rs.143,99,26,151/- by making additions on account of TP adjustments proposed by the TPO and by making disallowance of depreciation on ‘Goodwill’ amounting to Rs.130,06,83,295/- as against the returned income of the assessee company at Rs.13,86,90,068/- vide
Draft
Assessment Order dated 10.12.2019 passed u/sec.143(3) r.w.s.92CA(3) of the Income Tax Act, 1961. 5. Aggrieved by the Draft Assessment Order, the assessee company preferred Objections before the DRP. The learned
DRP after considering the objections of the assessee company, sustained the disallowance made by the Assessing
Officer on account of goodwill by observing that, the transactions of the assessee company are nothing, but, a colorable device between the related parties. Therefore, the claim of the assessee company in respect of non-acceptance

12
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited of valuation of Goodwill and disallowance of depreciation on goodwill by the Assessing Officer is found to be in order and with respect to TP adjustment addition made by the Assessing Officer, the DRP directed the Assessing Officer to adopt SBI short term deposit interest rate for the impugned assessment year as the ALP interest rate and re-compute the adjustment to be made to the total income of the assessee company. In pursuance to the Directions of the DRP, the Assessing Officer passed his Final Assessment by making addition on account of TP adjustment u/sec.92CA(3) amounting to Rs.4,21,722/- and disallowance of depreciation on Goodwill amounting to Rs.130,06,83,295/- and determined the total assessed income of the assessee company at Rs.130,11,05,017/- vide Order dated 26.04.2021
passed u/sec.143(3) r.w.s.144C(13) r.w.s.144B of the Income
Tax Act, 1961. 6. Aggrieved by the Final Assessment Order passed by the Assessing Officer, the assessee company is now, in appeal before the Tribunal.

13
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

14
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited division and the value of goodwill and other intangibles as per the said report was at Rs.792.79 Crores. Learned Counsel for the Assessee further submitted that, the assessee company had determined the Goodwill of the packaging unit purchased from M/s. ITW India Ltd., on the pretext that, the same is having a sizeable market share in the packaging activities and clientele basis and therefore computed the Goodwill and claiming depreciation on the said goodwill value amounting to Rs.130,06,83,295/-. The Learned Counsel for the Assessee submitted that, the Goodwill and other Intangibles include order book, customer relationship, distributor relationship, machine design, plastic IP, new product design, supply chain software, right to use brand name and trademark, non-compete agreement and parts and service IP.
Learned Counsel for the Assessee submitted that, from the assessment year
2014-2015, the assessee claimed depreciation on goodwill u/sec.32 of the Income Tax Act,
1961 and during the financial year 2015-2016 relevant to the assessment year 2016-2017, the depreciation claimed by the assessee company on goodwill was amounting to 15
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

Rs.130,06,83,295/- and the said claim is allowable as expenditure in view of the fact that goodwill, being a business/commercial right, being an intangible is covered under the ambit of Sec 32(1) of the Income Tax Act, 1961
since the said acquisition gave an enduring benefit to the business of the company. Further, the assessee company had actually paid the consideration to the vendee in compliance with the Accounting Standard-26 issued by ICAI and the same was capitalized by the assessee company in the books of accounts. He submitted that, there are plethora of Judgments in favour of the assessee that, goodwill is indeed an intangible and depreciation on goodwill has to be allowed as a deduction u/sec.32(1) of the Income Tax Act, 1961. In support of the above contentions, the Learned Counsel for the Assessee relied upon the Judgment of Hon’ble Supreme
Court in the case of CIT vs., M/s SMIFS Securities Limited
[2012] 348 ITR 302 (SC) where it was held that, “the excess consideration paid towards the reputation which the amalgamating company was enjoying for retaining its existing clientele was considered to be goodwill and thereby, eligible

16
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited for tax depreciation on intangible asset”. The Hon’ble Supreme
Court further observed that, “Explanation-3 states that, the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation-3 indicates that goodwill would fall under the expression ‘any other business or commercial right of a similar nature’. The principle of eju em generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act." The Learned Counsel for the Assessee submitted that, on identical facts and circumstances, the Coordinate
Bench of ITAT, Hyderabad in the case of A.P. Paper Mills Ltd., vs., ACIT [2010] 128 TTJ 596 [ITAT-Hyd.] has allowed the claim of depreciation on Goodwill. He submitted that, although, the assessee company has brought-out all these to the notice of the Assessing Officer during the course of 17
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited assessment proceedings, the Assessing Officer did not consider the settled legal position of law or the provisions of the sec.32(1) of the Income Tax Act, 1961 and simply disallowed the claim of the assessee company and, therefore, the impugned disallowance of ‘Goodwill’ made by the Assessing Officer shall be deleted in the interest of justice.
The learned counsel for the assessee further referring to various additional evidences submitted by the assessee in support of its case justifying depreciation on goodwill on account of purchase of another company on slump sale basis submitted that, there are factual errors in the order of the Tribunal for assessment year 2014-15 where the Tribunal without considering the various evidences filed by the assessee has held that, the assessee has failed to justify creation of goodwill being difference between net asset value of the transferor company and the consideration paid for purchase of company as the same was not backed by relevant evidences. Further, the Tribunal has also dismissed the M.A.
filed by the assessee on the order passed by the Tribunal and rejected all contentions. Since the Tribunal has given a 18
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited finding without considering various evidences and further, the assessee has furnished additional evidences to justify its case, the matter may be considered afresh without being influenced by the order passed by the Tribunal for A.Y. 2014-
15. 8. Dr. Narendra Kumar Naik, learned CIT-DR, on the other hand, supporting the Final Assessment Order of the Assessing Officer and the Directions of the DRP submitted that, the learned DRP after considering the submissions of the assessee company and the documentary evidences placed on record has rightly sustained the disallowance on account of Goodwill made by the Assessing Officer. He submitted that, the transaction of the assessee company is nothing, but, a colorable device between the related parties and, therefore, the claim of the assessee company has rightly been denied by the Assessing Officer. Learned CIT-DR has drew the attention of the Bench decision of ITAT, Bangalore Bench in the case of United Breweries Vs., Addl. CIT, Range-12, Bangalore in ITA.No.722, 801 and 1065/Bang./2014 where the Tribunal

19
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited has held that, ‘an amalgamated company cannot claim depreciation on the assets acquired in the scheme of amalgamation including goodwill more than which is permitted to the amalgamating company. Learned DR submitted that, in the present case, the claim of the assessee is regarding disallowance of claim of depreciation on goodwill as well as valuation of goodwill. He further submitted that, the claim of the assessee company is subjected as per 5th proviso to sec.32(1) of the Income Tax Act, 1961. With respect to non-acceptance of valuation report by the Assessing
Officer, Learned DR submitted that, it is the settled position of law that, the Assessing Officer has power to determine the actual cost under Explanation-3 to sec.43(1) of the Income
Tax Act, 1961. The Ld. CIT-DR further submitted that, this issue is squarely covered in favour of the Revenue by the decision of ITAT, Hyderabad Benches in assessee’s own case for A.Y. 2014-15 in ITA No.954/Hyd/2019 dated 24.02.2021
where the Tribunal had considered all arguments of the assessee in respect of depreciation of goodwill and held that, the depreciation of goodwill arising out of acquisition of the 20
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited company is not allowable. Further, the Tribunal had also dismissed M.A. filed by the assessee on the very same issue and from the above, it is very clear that, the issue is now settled in favour of the Revenue and thus, the arguments of the counsel for the assessee that there are differences in facts for the present year when compared to the facts considered by the Tribunal for A.Y. 2014-15 in ITA No.954/Hyd/2019
dt.24.02.2021, are totally baseless and cannot be accepted.
Therefore, he submitted that, the addition made by the A.O.
should be sustained.

“13. After careful examination of the Assessment Order, and submissions made by the AR before me, I am of opinion that the observations made by the AO, that prior to slump sale, ITW India
Limited did not have any good will or intangible asset in its books and the good will existing in the books of ITW India Limited is relatable to M/s Wintek unit acquired by it earlier year and not pertain to the unit purchased by the appellant. The good-will introduced in the appellant's books is completely new and artificial and is not equitable to commercial rights or business rights as defined in the Act. Moreover, the valuation report made by the independent valuers MIs B.S.R. & Co. also did not record any good will in its books. Therefore, I am in agreement with the view of the AO and the addition made by the AO of Rs.44,04,43,000/- as "disallowance of the depreciation" is confirmed and the grounds raised in this regard are dismissed.”

2 Terms of engagement

23
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

“3.2 This Report is based on and relies solely on the Management
Business Plan provided by the Management of ITW for the period 01 July
2013 to 31 December 2019 ("Management Business "Plan"). B S R has read and analyzed but not independently verified the financial projections and underlying data and assumptions and accordingly provided no opinion on the factual basis of the same. If there were any omissions, inaccuracies or misrepresentations of the information provided by the Management of ITW, this may have a material effect on our findings.

“3.9 We have heard our analysis on the unaudited financial statements for the Division for the period 1 January, 2010 to 31 December 2012 and provisional financial statement for the period 1 January 2013 to 30 June
2013. Additionally, our analysis is based on Management Business Plan for the period 1 July 2013 to 31 December 2019. Any changes in the assumptions or methodology used to consolidate the financial statements may significantly impact our analysis and therefore the Valuation.

“4.1 Unaudited financial statement of Signode for the period 1 January,
2010 to 31 December 2012 and Provisional Financial Statement of Signode for the period 1 January 2013 to 30 June 2013 (“Historical
Period”)

24
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.

Cost Approach:

Due consideration has been given, on broad level basis, to factors such as negotiation discount, location and accessibility, land use, size and shape, frontage, developed/ undeveloped condition etc., while arriving at market rate of specified industrial land parcels. We have relied on verbal enquiries as it is difficult to get written commitments regarding market rates given the sensitivity of information.

Following factors have been considered while arriving at RCN of buildings and civil infrastructure works:

• type of construction of buildings and civil infrastructure works
• technical parameters such as type of foundation, specification of finishes, floor to floor height of building etc.,
• built-up area of buildings
• areal quantity of civil infrastructure works
• unit rate of construction of similar type of buildings and civil infrastructure works, around the Valuation Date, in the nearby vicinity

RCN of buildings and civil infrastructure works was then depreciated based on used life (age) and total useful life of buildings and civil infrastructure works to arrive at its DRC

Straight line method has been adopted for depreciation calculation considering suitable percentage of RCN (depending on the type of construction) as salvage value.

General.

We have assumed that specified land and buildings have a clear and marketable title and are transferable, without any independent verification from our side. We have not carried out the title search with respect to the specified land and the information as provided by the Management has been considered as the basis for our valuation.

• The valuation is carried out on the assumption that specified land and buildings are free from any litigation, encumbrances, encroachments, etc.
and are transferable. No input of any kind of liabilities has been considered in the valuation. We have not carried out any legal technical due-diligence with respect to the specified tangible assets as it was not part of our scope of work.
• As part of the PPA, we have carried out fair valuation of specified land and buildings. Other assets group such as plant & machinery, office equipments, furniture & fixtures, motor vehicles etc. have been considered at respective net book value as at Valuation Date as per the information provided by the Management.

• We have not verified any regulatory approvals related to operation of specified tangible fixed assets, including the clearance from other regulatory authority as it was beyond our scope of work. Specific to Land

26
ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023
M/s. Signode India Limited

• Details such as land area, land use etc. of specified land has been considered based on the information and representation provided by Management.

• As normally practiced, transaction costs like stamp duty, registration charges, brokerage, legal expenses etc.
pertaining to sale/purchase/transfer of the land have not been considered while estimating the fair value of land.

• Market price related information pertaining to similar land parcels available for sale in the nearby locality of specified land, based on the information provided by local real estate agents/ dealers has been taken as the basis for valuation analysis.

• There are no authentic databases/official market data sources of prevailing market rates of real estate properties in India. The transaction rates maintained in the sub-