SIGNODE INDIA LIMITED,HYDERABAD vs. ACIT, CIRCLE-3(1), HYDERABAD

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 4.1.2. Have erred in computation of RPT filter by taking only RPT Income/Total Income or RPT Expenditure/Total Expenditure instead of taking the total value of RPT transactions (RPT income + RPT Expenditure) in the numerator and sales in the denominator. 4.1.3. Have erred in selecting the companies only if the data pertaining to FY 2020-21 is available in the public databases. 4.1.4. Have erred in rejecting companies having different FY ending or whose data does not fall within the 12-month period of 1 April 2020 to 31 March 2021, leading to having a limited set of comparable companies and would have bearing on the comparability analysis. 4.1.5. Have erred in rejecting companies having losses for two out of three years. 4.2. In law and the facts and circumstances of the case, the Ld. DRP and Ld. TPO/ΑΟ have erred in rejecting the filters applied by the Appellant on the following grounds. 4.2.1. Have erred in not applying the upper limit for the sales turnover filter, considering the underlying factor that the companies having high turnover has the benefit of economies of scale. 4.2.2. Have erred in not applying the forex filter while the business of the Appellant is majorly on account of export. Ground No.5: Transfer Pricing: Inappropriate PLI Computation 5.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in treatment of certain items in the computation of PLI of the Appellant on the following grounds. 5.1.1 Have erred in considering forex loss as operating in nature. 5.1.2 Have erred in considering discount provided as negative income and did not add the same to the cost base while computing the PLI of the Appellant. Ground No.6: Transfer Pricing: Erroneous Qualitative Analysis 6.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in selecting the functionally different comparable companies as mentioned below: 6.1.1. Anitha Texcot (India) Private Limited, the company is engaged in the business of manufacture of n-95 masks, head and face protection which is functionally different from manufacture of wheelchairs and rehabilitation equipment.

5 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited 6.1.2. Biorad Medisys Private Limited, which is engaged in the extensive research and development activity for innovation of new technologies for medical devices. 6.1.3. Dental Cermists India Private Limited which is engaged in the activity of manufacturing of Dentures and medical lab equipment which is functionally different from manufacture of Wheelchairs. 6.1.4. Roots Industries Limited that is into manufacturing of horns for automobiles. 6.1.5. B L Lifesciences Private Limited which is engaged in manufacture of blood bags and component manufacturing for OEM. 6.1.6. Sahajanand Medical Technologies Limited, which is engaged in significant Research and Development activities and engaged in manufacture of heart stent and valves. 6.1.7. Paramount Surgimed Limited, which is engaged in the manufacture of medical disposable products. 6.1.8. Bhat Biotech India Private Limited which is engaged in significant research and development activities. Ground No.7: Transfer Pricing: Trade Receivables treated as Advance 7.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TΡΟ/ΑΟ have erred in considering receivables outstanding from AE as an international transaction and have erred in not accepting the contention of the Appellant that it does not fall within the purview of capital financing as stated under Section 928 of Income-tax Act, 1961 ('the Act'). 7.2. in law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in making a transfer pricing adjustment with respect to certain receivables by the Appellant, not considering the fact that the Assessee has received advance for most of the sales undertaken during the year and have erred in not considering weighted average outstanding receivables for determining period of receivables outstanding. 7.3. The Ld. DRP and Ld. TPO/AO have erred in considering receivables outstanding from AE as "debt receivable (loan)" advanced to the AEs for the period of delay, and thereby erred in imputing an interest on the same during the year. 7,4. The Ld. DRP and Ld. TPO/AO have erred in computation of interest based on SBI Short Term Deposit Rate and not appreciating Appellant's

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.

13 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited 7. Sri H. Srinivasulu, Advocate-Learned Counsel for the Assessee, submitted that, the Assessing Officer was erred in disallowing claim of goodwill amounting to Rs.130,06,83,295/- by drawing certain analytical and logical conclusions by not appreciating the provisions of the Act and favourable judicial pronouncements and further, the Assessing Officer has come to the conclusion based on assessment proceedings for the assessment year 2014-2015, although, in income tax proceedings, each assessment year is independent. The Learned Counsel for the Assessee submitted that, during the financial year 2013-2014, the assessee company had acquired the Packaging Business Unit of M/s. ITW India Limited on a slump sale and on ‘as is where is basis’ as a going concern for a purchase consideration was Rs.1,240 Crores which was arrived at by M/s. BSR & Company using the most accepted valuation methods viz., Discounted Cash Flow Method [in short “DCM”], Comparable Method [in short “CM”] and Comparable Transactions Method [in short “CTM”] and that, the average of these three methods was considered as the value of the said packaging 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 ejusdem 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.

in this regard are dismissed.” 7.3 As far as the merits of the issue of disallowance is concerned, the CIT(A) while confirming the disallowance relied on 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 M/s B.S.R. & Co. also did not record any good will in its books.” 7.4 We have gone through the valuation made by an independent valuer named M/s BSR & Co. We are reproducing from the reports of the said independent valuer, are as under:

2. Terms of engagement 2.1 BSR and Associates Chartered Accountants ("BSR") has been appointed by Illinois Tool Works Inc. ("lTW" or the "Client") to act as financial advisor in relation to proposed slump sale of Signode India by ITW India Limited to Signode India Limited ("Project Total").

23 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited 2.2 BSR is to undertake a valuation of the Division ("the "Valuation") as at 30 June 2013 ("Valuation Date"). The Valuation is to be used for the proposed slump sale only. 2.3 …………………... 2.4 …………………… 2.5 ……………………. 2.6 This Report is based on the information provided by the Client and has been confirmed by the Client. We have not independently verified or checked the accuracy or timeliness of the same. 7.5 The scope and limitation of work is as under: “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. 7.6 Sources of Information: “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”) 7.7 Under the DCF Method the growth rate is as under: 2013 2014 2015 2016 2017 2018 2019 Tv 6mts 12 mts 12 mts 12 mts 12 mts 12 mts 12 mts Revenue 7.8 4889.5 11153.1 13052.7 15262.5 17889.8 20036.5 21238.7 21875.9 14% 17% 17% 17% 12% 6% 3% 7.1.4 As per AS 14: Accounting for Amalgamation, under the purchase method, the transferee company 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. 7.9. 8.1.14 From the tangible assets valuation perspective, the market approach measures the value of an asset through an analysis of recent sales or offerings of comparable assets. When applied to the valuation of an asset, consideration is given to the financial condition and operating performance of the company that owns the asset. 8.1.15 We have used market approach for valuation of land and commercial/ office space. Cost Approach: 8.1 .17 From the tangible assets valuation perspective, the cost approach measures the value of an asset based on the cost to replace it new with an identical or similar unit of equal utility. Under this approach, replacement cost new or reproduction cost new of the asset is determined first and then fair value is determined by adjusting the replacement cost new or reproduction cost new by the loss in value due to physical deterioration and functional and economic obsolescence. 7.10 8.1.19 Land - Market approach (Sales comparison method)/ Sales comparison method establishes value of an asset through the analysis of recent transactions/ sales/ transfers or offerings/ bid prices of comparable assets. For valuation of specified industrial land, V prevailing market rate of land based on recent transactions/ sales/ transfer or bid prices applicable for similar type of industrial land in the nearby locality has been considered as basis. We made enquiries ) with local real estate agents/ dealers, land allotment authorities and also relied on various data sources to establish the prevailing market rate of similar type of land in the vicinity of the specified land. 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. 8.1.20 Buildings and civil infrastructure - Cost approach (Depreciated replacement cost method) In depreciated replacement cost (DRC) method, DRC of buildings and civil infrastructure works has been estimated using replacement cost new (RCN) as the basis. RCN means price expected to 25 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited replace/ reproduce the existing asset with similar or equivalent new asset as on the Valuation Date. 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. 7.11 Tangible fixed assets: 9.5.1 Basis of valuation 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-registrar office are not fully reliable and may not be reflective of actual transaction rates. Therefore, it is an accepted valuation practice to rely on verbal enquiries on prevailing market rates of land from local real estate agents I property dealers I market players in good faith during site visits based on the recent transactions of similar properties or asking prices of properties available for sale/transfer in the locality. Since discussion with the real estate brokers/market players are verbal and brief only and they having no obligation to tell their true market perception of the prices and quality of title of available properties for sale, our analysis is limited to that extent. Specific to Buildings and civil infrastructure works • Details such as built-up area of buildings, areal quantity of civil infrastructure works etc. have been taken based on the information provided by the Management. As informed by the Management, we understand that the built-up area of buildings provided to us is based on the as-built drawings of buildings. • We have been given to understand that buildings constructed are within legally permissible built-up area and conforming to rules and regulations of concerned local development authority, which has not been independently verified by us as independent verification was out of our scope of work. • We have assumed that required and relevant policies and practices of maintenance adopted by Signode would be continued in future also. • Year of construction of the buildings and civil infrastructure works as per the details provided by the Management has been taken as the base year for estimation of age of the buildings and civil infrastructure works used for depreciation calculation. All these assumptions and presumptions made by the Valuer has rightly been negated by the authorities below as well as Ld. CIT-DR. In this case, 27 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited there is a transfer of all fixed assets including lands and buildings as well as current assets. The lands value has not been accepted by the AO, the plant and machineries have been transferred at the book value as was done in the former unit of ITW India Ltd. We note from the valuer’s report that the assets have been recorded at their fair value, the fair value has not been defined anywhere in the report of the Valuer. The book value of the depreciable assets are not fair value. It is just a notional depreciated value provided by the assessee in its books of account. Certainly the fair value would be different from the recorded value as noted infra . In case of lands, the authorities below have rightly dealt this issue. The financial growth is constant for 2015, 2016 & 2017 and thereafter, it is going down which is not a good sign of the future business prospects and the assessee has recorded huge amount of goodwill in his books of account after purchasing a unit of the ITW India Ltd. 7.12 During the year, the company has purchased industrial packaging business from ITW India Ltd on slump sale basis. Based on independent valuation total purchase consideration of Rs. 124,000.00 lacs has been allocated to following assets as under as per note no. 36 of the Balance Sheet for the impugned assessment year: ** ----- ---- 7.13 We observe the fact that the basis for transfer price is in the individual knowledge of the transferor and transferee and also the fact that both the parties are under the control of same management clearly indicate that the claim of fictional goodwill is nothing but deriving undue benefit out of oneself at the cost of Revenue. 7.14 We observe that the two valuation reports of BSR Associates which are available at pages 111 to 191 of the first paper book filed by the assessee has limited relevance in the above context. The first valuation report is dated 28/10/2013 with valuation date 30/06/2013 as per statement of work assigned by ITW Inc on 30/08/2013. From the terms of engagement available at clause 2 of the note of the valuers (at page 117 of the paper book filed by the assessee), it is evident that BSR Associates was appointed by Illinois Tool Works Inc (ITW) which is mentioned as client by the valuer to act as financial advisor to the proposed slump sale. From the fact that it is the parent company which appointed the valuer and not the assessee, it is apparent there is unfair fixation of transfer price to benefit the transferor at the cost of the assessee, the matter being an affair between parent of the assessee and the assessee. It is also clearly stated in the terms of the agreement that the valuation is for the purpose of slump sale only and not for the purpose of arriving at a fictional goodwill after the slump sale. 7.15 We observe that at clause 3 of the valuation report which mentions the scope and limitation of the work, it is evident that the report is based and relies solely on the underlying management assumptions and 28 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited management business plans provided by the management of ITW Inc and the valuer did not carry out independent verification of financial projections and underlying data. The valuer also clearly states that he does not express any opinion on the factual basis of the information and if there were any omissions, inaccuracies or misrepresentation of the information provided by the management of ITW, this may have a material effect on his findings. Therefore, the valuation report is nothing but an arithmetical exercise feeding management given input into a financial model to arrive at mere numbers without much support. The BSR and Co. has relied only on the unaudited data provided by the Management without verifying the reliable financial data of the companies. The valuer has relied on the unaudited financial data which cannot give correct result / valuation of the assets and liabilities, financial projections etc. Therefore, the accuracy of the resultant valuation is not reliable. The authorities below have also questioned the valuation reports submitted by the assessee. 7.16 As seen from clause 5.2.6 of the report of the valuer, Signode recorded goodwill of Rs. 143.20 Cr in Calendar Year 2012 on account of acquisition of the partnership firm Wintek Flexi Prints. As per clause 6.1.2.4 of the report, goodwill of Rs. 143.20 Cr was expected to remain constant throughout the forecast period. However, a much higher value of fictional goodwill is computed merely on the basis of balancing charge based on arbitrary price fixed for transfer. 7.17 The second valuation report is dated 02/06/2014 and is meant for purchase price allocation of Signode India Division of ITW India Limited. This report is also as per the terms of engagement with ITW Inc. This report is also of limited value and relevant only for the purpose of claiming depreciation on the assets acquired as per Explanation 4A to section 43( 1) which reads as under: "Explanation 4A. -Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, notwithstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the some as the written down value of the said assets at the time of transfer thereof by the second mentioned person". 7.18 Clause 10.2 of the second valuation report clearly indicate that the purchase consideration is for acquisition of 100% equity. Therefore, the price is paid for 100% control of equity and more in the nature of premium for acquisition of 100% equity control and therefore the balancing charge 29 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited is not in the nature of goodwill. We find that during the relevant Previous year, just one day before the business transfer, the ownership;' of the assessee changed by way of transfer of share capital from the transferor (Inn India Ltd) to Strapex Holdings Ltd, UK. Therefore, the transfer of the packaging unit is part of a comprehensive business arrangement within Inn Inc and cannot be seen as an isolated transaction. In light of this, the price fixed for transfer is not only for the assets but also for 100% control between the entities of the same group whose parent is same. Allowing depreciation on fictional good will in such a case would be a case of one making profit/loss out of oneself. In such circumstances, we are of the view that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and one reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law". 7.19 We observe that the valuation report is also faulty and in contradiction to the "Business Transfer Agreement" in working out a fictional goodwill and the mentioning the same at 792.79 Cr by assigning the same to certain intangibles in arbitrary manner without any valuation, which in fact cannot be fixed as per the "Business Transfer Agreement. Even the second valuation report fixed the value of' 792.79 Cr not only to good will but also to other intangible assets like order book, customer relationship, distributor relationship, machine design, plastic IP, new Product design, supply chain software, right to use brand and trade mark, non-compete agreement and parts and service IP. None of these items are valued. As per section 2 of the Transfer Deed, the following assets as per exhibit “C” which were not to be transferred which is as under: “All Intellectual Property of Transferor, other than the Business Intellectual Property. All trade names, logos, Internet addresses and domain names, trademarks and service marks and related registrations and applications used in the business that consist of or contain “ITW”, “ILLinois Tool Works” or any derivation thereof. : As per assessee’s contention the business has been transferred as a going concern to the transferee, but, as per the above “section 2” the intellectual property of the transferor has not been transferred the above assets, then how the assessee has calculated all intangible assets in the form of goodwill. 7.20 We observe that when there is no transfer of the asset as well as there is no valuation of the asset, there cannot be any claim of ownership or claim of depreciation. With regard to non-compete agreement, there is no such agreement on record and even if it exists, the amount paid for 30 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited non-compete agreement is capital payment and not eligible for depreciation. 7.21 We notice that clauses 10.2.7 and 10.2.8 of the valuation report clearly indicate that the amount is only a balancing entry and may exclude certain closing account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. The balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act. 7.22 We observe that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee assessee also. Fifth proviso to section 32(1) is also attracted in the present case being a case of succession in an independent business and the same reads as under: "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” 7.23 We are of the opinion that this is a fit case for application of third proviso to section 43(1) because the business transfer agreement is part of a comprehensive international arrangement between two groups and there is no rationale for the fixation of the transfer price. 7.24 In the case of United Breweries Ltd., [2016] 76 Taxmann.com 103 (Bang. Trib.), on which reliance placed by the ld. DR, the coordinate bench has held as under: “During the year under consideration the assessee inter alia amalgamated its wholly owned subsidiary KBDL. The assessee acquired the entire shareholding of the company from the 31 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited shareholders for consideration of Rs. 180.52 crores. In the books of account the assessee has recorded the value of the assets on the basis of revaluation done by the valuer and thereby shown the goodwill at Rs.62.30 crores, The Assessing Officer has not accepted the claim of depreciation on goodwill by holding that the assessee has not acquired any intangible assets in pursuant to the amalgamation of its subsidiary with the assessee and therefore as per the Assessing Officer the goodwill was not at all in existence. It is pertinent to note that the Assessing Officer has the jurisdiction and power to examine the valuation of the assets as per Explanation 3 to section 43(1). It is clear from the Explanation 3 to section 43(1) that if the Assessing Officer is satisfied that the main purpose of the transfer of such assets was the reduction of liability to income tax by claiming depreciation on the enhanced cost then the actual cost to the assessee shall be determined by the Assessing Officer. In the case on hand, since there is an amalgamation of the subsidiary with the assessee therefore all the assets which came to the assessee are already in use by the subsidiary and consequently the valuation of all the assets are subjected to the verification of the Assessing Officer as per Explanation 3 of section 43(1). However, the Assessing Officer chose to examine the valuation of goodwill alone in order to disallow the claim of depreciation on the enhanced value of goodwill. It is found that the Assessing Officer has not adopted any prescribed or well accepted method for valuation or actual cost of the goodwill in :- the hands of the assessee but he has doubted the valuation of the tangible assets and was of the view that the assessee has deflated the valuation of the tangible assets by the method of cost of replacement instead of FMV. The scope and objective of the Explanation 3 of section 43 (I) is to check the excess claim of depreciation by enhancing cost of assets acquired which were already in use by other person. Therefore in case of valuation of goodwill the Assessing Officer ought to have examined the valuation of all the assets taken over by the assessee under the amalgamation and thereby to determine the actual cost to the assessee for the purpose of claim of depreciation. In this case there is no doubt that the value of the goodwill was shown in the books of the KBDL at Rs.7.45 crores which has been enhanced in the books of account of the assessee to Rs.62.30 crores. The assessee has forcefully contended that the valuation of the goodwill is nothing but only the differential value between the consideration and FMV of the tangible assets. Thus the assessee has contended that Assessing Officer cannot disturb the valuation of the goodwill when it is a differential amount between the consideration and the FMV of the tangible assets. If such claim of goodwill and depreciation is allowed then it would render the provisions of Explanation 3 to section 43(I) redundant, otherwise in every case of transfer, succession or amalgamation the party would claim excessive depreciation by assigning arbitrary value to the goodwill. Therefore the entire assets taken 32 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited over by the assessee under the amalgamation are subjected to the Explanation 3 of section 43(1) and if the Assessing 0fficer finds that the assessee has claimed excess claim of depreciation by enhancing the cost of goodwill then actual cost of goodwill can be determined only by considering the actual cost of the other assets so acquired under amalgamation. There is another aspect involved in this issue of claiming depreciation on the enhanced cost of goodwill the in cases of succession/amalgamation as it is restricted in the hand of successor or amalgamated company only to extent as apportioned between the amalgamating and amalgamated company in the ratio of number of days for which the assets used by them. Further the deduction shall he calculated at the prescribed rate as if the amalgamation has not taken place. This proviso to section 32(1) provides that depreciation allowable in the case of succession, amalgamation or merger, demerger should not exceed the depreciation allowable had the succession not taken place. In other words, the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the written down value of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. The case of amalgamation is not regarded as transfer for the purpose of capital gain as provided under section 47(vi) and therefore such cases are exempted from capital gain which is otherwise chargeable to tax on transfer of assets. In the case on hand the business of the subsidiary was transferred to the assessee by way of amalgamation therefore it would not be regarded as transfer of asset for the purpose of capital gain. Hence the claim of depreciation on the assets acquired under the scheme of amalgamation is restricted only to the extent if such amalgamation has not taken place. The Assessing Officer made a reference to 5th proviso to section 32 and held that as per 5th proviso under section 32(1)(ii), the aggregate deduction i u respect of depreciation on any tangible or intangible assets allowable to amalgamating company and the amalgamated company shall not exceed the deduction calculated at the prescribed rates as if the amalgamation had not taken place and such deduction shall be apportioned between these companies in the ratio of period of usage of assets. In view of this explanation, KBDL was not claiming any goodwill as an asset eligible for depreciation. If amalgamation is not considered, there would not he any deduction of depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill. However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. 11 is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(ii) then the valuation issue become irrelevant. The Commissioner (Appeals) has also concurred with the view of the 33 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited Assessing Officer regarding the applicability of the 5th proviso to section 32(1). It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore, by virtue of 5th proviso to section 32(1), the depreciation on the hands of the assessee is allowable only to the extent if such succession has not taken place. Therefore, the assessee being amalgamated company cannot claim or be allowed depreciation on the assets acquired in the scheme of amalgamation more than the depreciation is allowable to the amalgamating company. The consideration paid by the assessee for acquiring the shareholding of the subsidiary in the earlier years is not relevant for the issue of depreciation on the assets taken under amalgamation and for the purpose of 5th proviso to section 32(1). Accordingly, in view of the above facts and circumstances of the case as well as the above discussion, it is held that the claim of depreciation in the hands of the assessee is subjected to the 5th proviso to section 32(1). Accordingly, this issue is decided against the assessee.” 7.25 In view of the above discussion, we do not find any infirmity in the order of CIT(A) in confirming the disallowance of the claim of depreciation of Rs. 44,04,03,000/- and dismiss the ground Nos. 2 to 6 raised by the assessee on this count. The case laws relied by the ld. Authorized Representative are not applicable in the present facts of the case. The ld. Authorized Representative could not controvert the findings recorded by the authorities below.”

35 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited 12. The next issue that came up for our consideration from ground nos.17 to 23 of assessee’s appeal is Transfer Pricing adjustment of Rs. 1,76,042/- towards marketing support services. The learned counsel for the assessee submitted that, the assessee had various international transactions with its Associated Enterprise (A.E.) and one of the transactions was provision for marketing support services for a sum of Rs. 24,98,665/-. The assessee company is engaged in the business of providing specific software services has provided marketing support services to it’s A.E. SPG, UK and benchmarked the said transactions with it’s A.E. by applying Transactional Net Marginal Method (TNMM) as Most Appropriate Method (MAM). The assessee has selected 5 comparables with PLI of 11.41%, whereas the assessee company has earned mark up of 10% on services provided to it’s A.E. which is within the ± 3% tolerance range prescribed under the Act. Although, these evidence has been filed before the Ld. TPO, but the Ld. TPO has rejected the T.P. Study of the assessee and has selected new comparables even though, the said comparables are not functionally similar to 36 ITA.No.434/Hyd/2021 & ITA 240/Hyd/2023 M/s. Signode India Limited the assessee company. The learned counsel for the assessee further referring to Ugam Solutions (P) Ltd., Scarecrow Communications Ltd., and I runway India (P) Ltd. submitted that, all the above three companies are functionally different from the assessee company and further, the above companies have huge turnover when compared to the assessee company and therefore, should be excluded on turnover filter itself. The Ld. Ld. DRP, without appreciating the relevant facts, simply upheld the T.P. Adjustment made by the A.O. towards Marketing Support Services. Therefore, he submitted that, the T.P. Adjustment should be deleted.

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