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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SMT. BEENA PILLAI
Date of Hearing : 16-08-2021 Date of Pronouncement : 23-09-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 28/01/2017 passed by Ld. ACIT circle 7 (1) (2), Bangalore for assessment year 2011-12 on following grounds of appeal: “Based on the facts and circumstances of the case and in law, Kontoor Brands India Private Limited [Formerly known as VF Brands India Private Limited] ("Kontoor India" or "Assessee" or "Appellant") respectfully craves leave to prefer an appeal against the order issued by the Assistant Commissioner of Income Tax, Circle 7(1)(2), Bangalore (Ld.
Page 2 of 11 IT(TP)A No.1285/Bang/2017 AO"), dated 28 January 2017 (served on the Appellant on 13 April 2017), under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act") in pursuance of the directions issued by the Dispute Resolution Panel ("DRP"), Bangalore dated 06 December 2016 (received by the Appellant on 23 December 2016) under Section 144C(5) of the Act on the following grounds:
Each of the following grounds are without prejudice to each other: The assessment order passed by Ld. AO is invalid and bad in law The assessment order issued under Section 143(3) of the Act dated 28 January 2017 (served on the Appellant on 13 April 2017) by the Ld. AO pursuant to DRP directions under Section 144C is time barred and invalid in law
2. Ld. AO has erred, in assessing the total income at INR 15,40,63,273 as against the returned income of INR NIL computed by the Appellant Without prejudice to the above, we have provided below transfer pricing and corporate tax grounds: Grounds relating to transfer pricing matter:
3. Ld. AO/ Transfer Pricing Officer ('TPO")/ DRP erred in law and in fact, by making an addition of INR 9,67,47,546 to the total income of the Appellant by treating the advertisement, marketing and promotion ("AMP") expenditure incurred by the Appellant as an international transaction
4. Ld. AO/ TPO/ DRP erred in law and in facts, by computing transfer pricing adjustment by applying Bright Line Test ("BLT") while naming it as Cost Plus Method 5, Contrary to decision of Hon'ble Courts, Ld. AO/ TPO/ DRP erred in law and in fact, by not separating selling expenses from other AMP expenses, for the purpose of determining the excess AMP expenditure
6. Ld. AO/ TPO/ DRP has erred in law and in fact, by concluding that the Appellant provides marketing support provided to its Associated Enterprises ('AEs") and must be remunerated with a mark-up for the same, disregarding the fact that the Appellant is a full-fledged distributor
7. Ld. AO/ TPO/ DRP erred in not following law laid down by Hon'ble Courts in identical situation
8. Ld. AO/ TPO/ DRP erred in law, in applying BLT in the garb of cost plus method considering the margins earned by functionally different companies
9. Ld. AO/ TPO! DRP failed to appreciate that even if the incurrence of excessive AMP expenditure is considered as a separate international transaction, the Appellant has already been adequately remunerated/ compensated for the same.
10. Ld. AO/ TPO / DRIP erred in law and in fact, by treating the AMP expenditure incurred by the Appellant as a separate international transaction and benchmarking it separately, as in the absence of any Page 3 of 11 IT(TP)A No.1285/Bang/2017 computation mechanism prescribed under the Act or the rules made thereunder, the machinery provision fails Grounds relating to corporate tax matters: 11. Ld. AO! DRIP has erred in law and in fact, in holding that Design & Technical Know-how, Vendor Network Relationship and Customer Network Relationship acquired as a part of slump sale are not entitled to depreciation under Section 32(1)(ii) of the Act 12. Ld. AO/DRP has erred in law and in fact, in not appreciating that the Appellant had acquired the business of Arvind Fashions Limited ("AFL"), as a going concern on a slump sale basis, for a lump sum consideration without assigning values to individual assets and liabilities in such sale 13. Ld. AO/ DRP has erred in upholding disallowance made in respect of depreciation on intangibles on surmises and conjectures and therefore, the order issued is bad in law 14. Ld, AO/ DRP has erred in upholding the disallowance made in respect of depreciation on intangibles, without appreciating the submissions/ arguments put forth by the Appellant during the course of assessment! DRP proceedings 15. Ld. AO/ DRP has erred in not following the principle of judicial discipline and accordingly, the order issued is bad in law 16. Ld. AO/ DRP has erred in law and in fact, in holding that assignment of values to intangible assets in the books of AFL is necessary for the purpose of claiming depreciation 17. Ld. AO! DRIP has erred in fact, in holding that Design & Technical Know-how has not been acquired by VF India and used for the purpose of its business 18. Ld. AO/ DRP has erred in facts, in observing that no right towards Vendor Network Relationship and Customer Network Relationship has actually arisen/ acquired by VF India pursuant to slump sale 19. Ld. AO! DRP has erred in law, in disregarding that Vendor Network Relationship and Customer Network Relationship is in the nature of 'any other business or commercial right of similar nature' and hence, an intangible asset under Section 32(1 )(ii) of the Act 20. Without prejudice to the above, Ld. AO/ DRP has erred in not appreciating that if consideration paid by the Appellant for Design & Technical Know-how, Vendor Network Relationship and Customer Network Relationship is not found to be included within the terms specified under Section 32(1)(ii) of the Act, the same would be treated as Goodwill and therefore, eligible for depreciation 21. Without prejudice to the above, Ld. AO/ DRP has erred in not considering the settled law that once any asset has formed part of block of assets, the value in the said block should not be altered unless the conditions prescribed are satisfied Page 4 of 11 IT(TP)A No.1285/Bang/2017
22. Ld. AO/ DRP has erred in disregarding that depreciation under Section 32 is mandatory and has to be allowed to the Assessee as per Explanation 5 to Section 32 of the Act 23. Ld. AO/ DRP has erred in law and in facts, by not allowing depreciation on Goodwill acquired at the time of acquisition of business of AFL, without appreciating that Goodwill is covered under the definition of intangible asset as provided under Section 32 (1 )(ii) of the Act 24. Without prejudice to the above, Ld. AO/ DRP has erred in not appreciating that excess consideration paid over net assets acquired on acquisition of business through slump sale would be classified as an Intangible asset! Goodwill, entitled to depreciation as per the provisions of Section 32(1 )(ii) of the Act 25. Ld. AO has erred, in not following CBDT Circular No. 14 (XL-35) in respect of Assessee's claim for depreciation on Goodwill, which makes it incumbent on the Income-tax officer to grant relief which a taxpayer is entitled to, though not made in the return of income 26. Without prejudice to the above, the Appellant prays to the Honorable ITAT, being an appellate authority to admit! consider VF India's claim for depreciation on Goodwill not made by way of a return of income General Grounds 27. Without prejudice to the above grounds, Ld. AO has erred in not granting benefit of brought forward losses of INR 1,16,05,65,133 pertaining to AYs 2007-08, 2008-09, 2009-10 and 2010-11 as per the provisions of Section 72 of the Act while computing tax liability on assessed income 28. Ld. AO/ DRIP has erred in law and in facts, by computing tax liability of INR 4,99,85,282 and consequential interest of INR 2,38,71,312 and INR 25,11,462 under Section 234B and 234C of the Act, respectively 29. Ld. AO has erred, in law and in facts in initiating penalty proceedings under Section 271(1)(c) of the Act The Appellant submits that each of the above grounds is independent and without prejudice to one another.”
2.1 At the outset the Ld.AR and the Ld. CIT DR submitted that identical issues have been considered by coordinate bench of this Tribunal in assessee’s own case for assessment year 2012-13 by order dated 16/02/2021 in ITA (TP) A No. 2491/B/2019. It has been submitted by both sides that no new issues have been raised in the present appeal.
Page 5 of 11 IT(TP)A No.1285/Bang/2017 2.2 On perusal of the record based on the submissions made by assessee as well as Ld.CIT.DR, we note that in the present appeal before, following issues arise.
Transfer pricing adjustment made in respect of AMP expenditure and 2. Rejection of depreciation claimed on intangible assets. 2.3 It is submitted by the Ld.AR that there is no agreement in order to compute AMP in the hands of assessee and the issue stands squarely covered by the decision of orderable Delhi High Court in case of Maruti Suzuki Ltd. reported in 381 ITR 117. 2.4 We note that coordinate bench of this Tribunal in assessee’s own case (supra) decided both these issues as under: “ 4. The assessee company is engaged in the business of manufacturing and marketing of readymade garments.
5. We shall first take up the second issue urged by the assessee. During the course of assessment proceedings the A.O. noticed that the assessee has claimed depreciation of Rs.2,41,80,072/- on intangible assets as detailed below: IT(TP)A No.2491/Bang/2019 The A.O. noticed that the assessee had claimed depreciation on the above said intangible assets in the past years also and the same was disallowed in those years by the AO. Accordingly, the A.O. disallowed the above said claim of depreciation in this year also, after discussing in detail about the merits of claim. The Ld. DRP confirmed the disallowance by following its decision rendered for Page 6 of 11 IT(TP)A No.1285/Bang/2017 assessment year 2012-13.
The Ld. A.R. submitted that an identical issue was considered by the coordinate Bangalore bench of Tribunal in the assessee’s own case for assessment year 2011-12 (ITA No.42/Bang/2017 dated 28.6.2019). At that time the name of the assessee was VF Brands India Pvt. Ltd. and earlier to that the assessee was known as VF Arvind Brands Pvt. Ltd. Identical issue was considered in assessment year 2008-09 by Ahmedabad bench of Tribunal in the hands of VF Arvind Brands Pvt. Ltd. (ITA No.1904/AHD/2013 and CO 204/AHD/2013 dated 1.1.2019). The Ld. A.R. submitted that the disallowance of depreciation made in respect of above said intangible assets has been deleted by the Tribunal in both the years referred above. In AY 2011-12 the Tribunal followed the decision rendered in AY 2008-09.
We heard Ld. D.R. and perused the record. We notice that an identical issue has been considered in the assessee’s own case by the coordinate bench in AY 2011-12 (referred supra) when the name of the assessee was M/s. VF Brands India Pvt. Ltd. For the sake of convenience, we extract below the operative portion of the order of the Tribunal in respect of this issue. “5. Now the issue on merit is regarding allowability of depreciation on intangible assets. On this aspect, the issue is covered by the Tribunal order rendered in the case of DCIT Vs. V.F. Arvind Brands Pvt. Ltd. (supra). Para nos. 12 to 12.5 of this Tribunal order are relevant in this regard and hence, the same are reproduced hereinbelow. "12. The next question arises about the allowability of the cost incurred by the assessee in connection with the business. In our view, such deductions cannot be disallowed on a technical basis. Supposing the assessee does not allocate the expenses under the head design and technical know-how and it prefers to allocate the same under the head goodwill. There is no dispute for the depreciation on the goodwill as held by the Honourable Supreme Court in the case of semifs securities Ltd. reported in 348 ITR 302 wherein it was held as under: 4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, 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).
Page 7 of 11 IT(TP)A No.1285/Bang/2017
In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.
6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 9 of 13 were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee- Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assesseeCompany stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding. 7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee. 12.1 Thus in our considered view there could not have been any dispute regarding the claim of depreciation on the goodwill as discussed above. Therefore, in our considered view, the expenses incurred by the assessee in connection with the business cannot be disallowed merely on the ground that these have been claimed under different nomenclatural. Thus, we hold that the expenses have been incurred for the business then the deduction has to be allowed to the assessee under the provisions of the Act. 12.2 We also note that the assessee has claimed depreciation on the same intangible assets in the immediately preceding year in its income tax return which was processed under section 143(1) of the Act. Thus, it is clear that there was written down value of these intangible assets which were brought forward in the year under consideration. Thus, in our considered view the opening written down value in the year cannot be disputed. In this regard we find support and guidance from the judgment of Hon'ble High Court of Page 8 of 11 IT(TP)A No.1285/Bang/2017 Bombay in case of HSBC asset management India Pvt. Ltd. reported in 47 taxmann.com 286 wherein it was held as under: "Having perused this Appeal Memo including the impugned orders, we are of the opinion that the Delhi High Court judgment has been delivered on 5th November 2012 and the impugned order was passed on 15th June 2011. The Tribunal has essentially based its conclusion on the consistent stand of the Assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-2004. The Assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head "intangible assets". The Assessing Officer allowed the claim for that assessment year by an order under Section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under Section 143(3) for the assessment year 20032004 continues to operate and no proceedings under the Act were initiated to disturb the same." 12.3 We also note that the Ld. DR have not brought anything on records suggesting that any action against the assessee was taken under section 147 of the Act on account of escapement of income. 12.4 In view of above there remains no ambiguity that the assessee is eligible for the depreciation in respect of the intangible assets as discussed above. Accordingly, we do not find any reason to interfere in the order of Ld. CIT(A). 12.5. Thus, the ground of appeal
of the Revenue is dismissed." In AY 2011-12, the Ld CIT(A) had deleted the disallowance of depreciation on intangible assets and hence the Revenue was in appeal before the Tribunal. The coordinate bench, following the decision rendered in 2008-09, confirmed the order of Ld. CIT(A) in deleting the disallowance in AY 2011-12.
8. We notice that the co-ordinate benches are taking a consistent view on this matter. Accordingly, following the above said decision of coordinate bench, we direct the assessing officer to delete the disallowance of depreciation on intangible assets.
9. We shall now take up the first issue relating to the Transfer pricing adjustment made in respect of AMP expenditure. In its Transfer pricing report, the assessee did not disclose AMP expenses as an item of international transaction. The assessee had paid Page 9 of 11 IT(TP)A No.1285/Bang/2017 royalty of Rs.31.67 crores to its AE and the assessee had followed CUP method to bench mark the same.
10. The TPO took the view that the AMP expenses incurred by the assessee is on the higher side and hence, by applying bright line test, split the AMP expenses into routine expenses and nonroutine expenses. The TPO chose to adopt “Profit Split Method” to bench mark both royalty and AMP expenses. For this purpose, the TPO re- worked the profit margin of the assessee by considering only routine AMP expenses and the same worked out to 21.58%. The TPO worked out the profit margin of comparable companies without including brand expenses and the average profit margin worked out to 7.76%. Accordingly, the TPO held that the difference between 21.58% and 7.76%, i.e., 13.82% is the non-routine profit. He held that this profit should be shared between the assessee and its AE. The TPO determined the AE’s share to be 25% and accordingly worked out AE’s share in nonroutine profit at Rs.18.41 crores. The aggregate amount of royalty payment and non-routine AMP expenses was Rs.40.25 crores. The TPO accordingly held that the difference between the above said amount of Rs.40.25 crores and Rs.18.41 crores is liable to be adjusted. Accordingly, he adjusted Rs.21.94 crores as transfer pricing adjustment. The Ld Dispute Resolution Panel (DRP) also confirmed the same.
We heard the parties on this issue and perused the record. Before us, the Ld A.R placed his reliance on the decision rendered by Hon’ble Delhi High Court in the case of Sony Ericsson (374 ITR 118) and submitted that “Residual profit split method” is not appropriate method to bench mark AMP transactions. He further submitted that the TPO was not justified in considering Royalty payments along with AMP expenses. The Ld D.R, however, supported the order passed by tax authorities.
The question of bench marking the AMP expenses has been examined and decided by Hon’ble Delhi High Court in the case of Sony Ericsson (supra) and Maruti Suzuki Ltd (381 ITR 117). The bright line test adopted by the TPO has been specifically rejected in the case of Sony Ericsson (supra). The Hon’ble Delhi High Court has held in the case of Maruti Suzuki Ltd (supra) that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. Hence, the approach of the TPO cannot be upheld. Since the TPO has combined Royalty payments also along with AMP expenses while making Transfer pricing adjustments by adopting Residual Profit Split Method, since the existence of international transactions in AMP expenses is required to be shown separately, we are of the view that this issue requires fresh examination at the end of AO/TPO. Accordingly, we set aside the order passed by the AO on AMP expenses and restore Page 10 of 11 IT(TP)A No.1285/Bang/2017 the same to the file of AO/TPO for examining it afresh. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law.
In the result, the appeal of the assessee is treated as allowed.” 2.5 There is nothing has that has been brought on record by the revenue in order to deviate from the aforestated view. Respectfully following the view taken by coordinate bench of this Tribunal in assessee’s own case, we direct Ld.AO to compute depreciation in accordance with law. Accordingly, the grounds raised
by assessee stands allowed. In the result appeal filed by assessee stands allowed. Order pronounced in the open court on 23rd Sept, 2021 Sd/- Sd/- (B.R BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 23rd Sept, 2021. /Vms/ Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore
6. Guard file By order Assistant Registrar, ITAT, Bangalore Page 11 of 11 IT(TP)A No.1285/Bang/2017 Date Initial On Dragon 1. Draft dictated on Sr.PS 2. Draft placed before -9-2021 Sr.PS author -9-2021 3. Draft proposed & placed JM/AM before the second member -9-2021 4. Draft discussed/approved JM/AM by Second Member. -9-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS 6. -9-2021 Sr.PS Kept for pronouncement on 7. -9-2021 Sr.PS Date of uploading the order on Website 8. If not uploaded, furnish -- Sr.PS the reason 9. File sent to the Bench -9-2021 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk.
12. Date of dispatch of Order.
13. Draft dictation sheets are No Sr.PS attached