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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI CHANDRA MOHAN GARG & SHRI G. MANJUNATHA
आयकरअपीलसं./I.T.A.No.3444/Chny/2016 & C.O. No.28/Chny/2017 [in (�नधा�रणवष� / Assessment Year: 2011-12) Vs M/s. CH Robinson Worldwide The Assistant Commissioner of Income Tax, Freight India Pvt.Ltd. 54/28, SBL House, 1st floor, Corporate Circle-1(2) Chennai-600 034. Montieth Road, Egmore, Chennai-600 008. PAN: AACCC 9617L (अपीलाथ�/Appellant) (��यथ�/Respondent/Cross Objector) : Mr. G.Johnson, Addl.CIT अपीलाथ�क�ओरसे/ Appellant by : ��यथ�क�ओरसे/Respondent by Mr. Vikram Vijayaraghavan, Advocate : 17.02.2022 सुनवाई क� तार�ख/Date of hearing : घोषणा क�तार�ख /Date of Pronouncement 23.02.2022 आदेश / O R D E R
PER G. MANJUNATHA, AM:
This appeal filed by the revenue and cross objection filed by the assessee are directed against order of learned Commissioner of Income Tax (Appeals)-1, Chennai, dated 26.09.2016 and pertains to assessment year 2011-12.
The Revenue has raised following grounds of appeal:-
1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.
2. The learned CIT(A) erred in deleting the adjustment made by the TPO to the tune of Rs.1.92 crores.
CO No.28/Chny/2017 2.1 The learned CIT(A) failed to appreciate that amortization of goodwill expenses has nexus to the international transactions of the assessee and forms part of the operating costs for the purpose of computing margins for transfer pricing analysis.
2.2 The learned CIT(A) failed to appreciate that depreciation/amortization expenditure of both the tangible and intangible assets forms part of the cost base of the assessee company and to get a true picture of the operating margins of the assessee, the cost base of the assessee in its entirety, is required to be considered.
2.3 The learned CIT(A) failed to appreciate the fact that the assessee itself has claimed amortization of goodwill over a period of 5 years which indicates that it has a bearing on cash flow of the company and hence cannot be an item of extra-ordinary nature so as to be excluded from computation of ALP.
2.4 The learned CIT(A) failed to appreciate that since goodwill has an impact on yield of revenue, amortization of goodwill needs to be considered as an operative item.
3. The learned CIT(A) erred in upholding that working capital adjust sought by the assessee was required to be granted for making transfer pricing analysis more equitable.
3.1 The learned CIT(A) failed to appreciate that the claim of working capital adjustment would be relevant only in the event of assess working capital being negative.
3.2 The learned CIT(A) failed to appreciate that in the instant case the assessee’s margins are not affected by negative working capital.
3.3 The learned CIT(A) failed to follow the decision relied upon by the TPC of the jurisdiction Tribunal in the case of Mobis India Limited vs. DCIT in wherein on identical facts, the Tribunal has held that assessee has CO No.28/Chny/2017 not been able to justify the adjustments were required to be made on account negative working capital.
4. The CIT(A) erred in deleting the disallowance of depreciation claimed on “Non Compete Fee”
4.1 The CIT(A) erred in not following the decision of the Hon’ble Delhi High Court in the case M/s. Sharp Business Systems Ltd Vs DCIT 133 lTD 275 (Delhi) and the Hon’ble jurisdictional Tribunal in the case of M/s. Arkema Peroxides India Pvt Ltd vs. ACIT (2013) 31 taxmann. Com 4(Chennai)
4.2 The learned CIT(A) has failed to appreciate the fact that the decision of the Hon’ble jurisdictional Madras High Court relied on by him in the case of M/s. Pentasoft Technologies Ltd has been challenged by the Department by way of a SLP before the Apex Court and the issue could not be held to have reached finality."
Brief facts of the case are that the assessee is engaged in the business of freight forwarding, logistic and distribution services filed its return of income for the assessment year 2011-12 on 30.11.2011 declaring total income of Rs.1,14,75,960/-. The case was selected for scrutiny and assessment has been completed u/s.143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961, on 07.05.2015, and determined total income at Rs.3,96,25,920/- by making additions towards adjustments to arm’s length price of international transactions of the assessee as suggested by the TPO vide his order dated 23.01.2015 and also additions towards disallowance of CO No.28/Chny/2017 depreciation on non-compete fee. The assessee carried the matter in appeal before first appellate authority and the learned CIT(A) for the reasons stated in the appellate order dated 26.09.2016, has directed the TPO to recompute transfer pricing adjustment by excluding goodwill amortized for the purpose of computing operating margin and also deleted additions made by the Assessing Officer towards disallowance of depreciation on non-compete fee by following order of the ITAT., Chennai in the assessee’s own case for earlier years. Aggrieved by the learned CIT(A) order, the Revenue is in appeal before us.
The first issue that came up for our consideration from grounds No.2 to 2.4 of the revenue appeal is deletion of additions made towards TP adjustment of Rs.1,92,00,000/- in respect of international transactions of the assessee by re- computing operating margin.
4.1 The facts with regard to impugned dispute are that the assessee has derived goodwill on account of acquisition of certain undertakings and same has been treated as intangible assets, as defined u/s.32(1) of the Act, and claimed
CO No.28/Chny/2017 depreciation. However, for the purpose of computing operating margin of the assessee, to test its international transactions, the assessee has excluded amortization of goodwill as non- operating expenditure on the ground that goodwill does not have any bearing on the operations of the assessee. The TPO did not accept arguments of the assessee and according to him, amortization of goodwill is operating expenses which have direct bearing on day to day operations of the assessee and thus, same needs to be considered as operating in nature for the purpose of computation of margin and hence, recomputed operating margin by including amortization of goodwill as operating expenses.
4.2 The learned DR submitted that the learned CIT(A) erred in not appreciating the fact that amortization of goodwill has nexus to the international transactions of the assessee and forms part of operating costs for the purpose of computing margins for transfer pricing analysis. The DR further submitted that depreciation / amortization of tangible and intangible assets forms part of cost base of the assessee company and to get true picture of operating margin. Therefore, the learned CIT(A)
CO No.28/Chny/2017 has completely erred in coming to the conclusion that amortization of goodwill is an item of extraordinary item, which cannot be considered as operating in nature, even though the assessee has very well aware of cost incurred for creation of goodwill in its books of account and further, needs to be absorbed those costs in the coming years.
4.3 The learned A.R for the assessee, on the other hand, submitted that this issue is covered in favour of the assessee by the decision of the ITAT, Chennai in the case of M/s.Motonic India Automotive Pvt. Ltd. in where it was held that amortization of goodwill is an extraordinary item which cannot be considered as operating in nature for the purpose of computing operating margin of the assessee.
We have heard both the parties, perused material available on record and gone through orders of the authorities below. The goodwill is an intangible asset which arises to an assessee either by way of acquisition of any company or self- generated by the assessee by considering its intangible like technical know-how, trade mark, patent etc. Further, all assessees do not have goodwill in their books of account,
CO No.28/Chny/2017 because it arises only in very few instances as stated by us in earlier part of this order and thus, definitely it is in the nature of extraordinary item which cannot be considered as part of operating cost of the assessee. Further, it cannot be said that amortization of goodwill does having bearing on operations of the assessee. Therefore, we are of the considered view that the Assessing Officer has erred in considering amortization of goodwill as operating in nature for the purpose of computing margin of the assessee to determine arms’ length price of international transactions. The learned CIT(A) after considering relevant facts and also by following decision of the ITAT., Chennai in the case of M/s.Motonic India Automotive Pvt. Ltd. in has rightly held that amortization of goodwill is an extraordinary item of expenditure which cannot be considered as operating expenses for the purpose of computing operating margin of the assessee. Hence, we are inclined to uphold order of the learned CIT(A) and reject grounds taken by the Revenue.
The next issue that came up for our consideration from grounds no.3 to 3.3 of the revenue appeal is working capital
CO No.28/Chny/2017 adjustment for the purpose of computing operating margin of the assessee.
6.1 The assessee has made suitable adjustment for working capital by considering working capital levels of comparable companies while testing its international transactions with AEs for the purpose of determination of arm’s length price in light of Rule 10B(3) of the Income Tax Rules, 1962, which provides for comparability analysis for eliminating differences among comparable companies. The TPO did not allow working capital adjustment on the ground that the assessee has failed to make out a case for providing working capital adjustment.
6.2 The learned DR submitted that the learned CIT(A) erred in upholding working capital adjustment sought by the assessee without appreciating fact that working capital adjustment would be relevant only in the event of assessee’s working capital being negative. The learned DR referring to decision of the ITAT., Chennai Bench in the case of M/s. Mobis India Limited vs. DCIT in submitted that when the assessee has not been able to justify adjustments which were required to be made on account working capital, then no CO No.28/Chny/2017 adjustment can be made for working capital. Therefore, the learned DR submitted that the learned CIT(A) without appreciating facts has simply directed the TPO to allow working capital adjustment.
6.3 The learned A.R for the assessee, on the other hand, supporting order of the learned CIT(A) submitted that this issue is covered in favour of the assessee by the decision of the ITAT., Chennai in the case of M/s.Foxteq Services India Pvt. Ltd. in where it was held that without comparing working capital employed by comparable companies and that of the assessee, no adjustment can be made in respect of international transactions of the assessee. The learned CIT(A), after considering relevant facts has rightly held that the TPO is required to provide working capital adjustments in comparability with the comparable companies selected by the Assessing Officer for the purpose of determining arm’s length price of international transactions of the assessee.
We have heard both the parties, perused material available on record and gone through orders of the authorities below. We find that the learned CIT(A) has recorded
CO No.28/Chny/2017 categorical finding that in light of Rule 10B(3) of the Income Tax Rules, 1962, that the assessee has demonstrated by presenting working capital position and also details of working capital days and proved that there is difference between working capital cycle of assessee with that of comparables.
Therefore, suitable adjustment should be made to provide working capital for comparing operating margin of the assessee with that of comparables selected for testing international transactions of the assessee. The learned CIT(A), while doing so, has relied upon the decision of the ITAT., Chennai in the case of M/s.Foxteq Services India Pvt. Ltd. in where it was clearly held that working capital employed by the assessee and that of comparable companies needs to be taken into consideration and further, without making suitable adjustments there cannot be any transfer pricing adjustments to international transactions of the assessee. The relevant findings of the learned CIT(A) are as under:-
10. I have carefully’ considered the facts in issue, order of the AO /TPO, submissions made by the Appellant and materiel on record, Alter taking into consideration detailed submissions made by the appellant, the following issues arise for consideration:
(i) Rule 10B(3) of the Income—tax Rules provides that, in cases where any difference exists in a comparability analysis, the same needs to be eliminated by performing reasonably accurate adjustments to mitigate the effects of such differences. (ii) On perusal of detailed submission relating to working capital adjustment, it is pertinent to note that working capital of the company have direct bearing in the profitability of the appellant and comparable companies.
(iii) The appellant demonstrated this by presenting the working capital position and also furnished the details of the working capital days. It can be observed that a wide gap exists between the working capital cycle of the appellant and the comparable companies chosen i.e. 16.29 days of the appellant vis-ã-vis 58.44 days of working capital cycle of the comparables. This difference would materially affect the operating margins of the appellant and comparable companies, thus warranting an economic adjustment.
(iv) The methodology of computation of the working capital adjustment was also presented by the appellant, which is prepared in line with .the transfer pricing guidelines prescribed by the Organisation for Economic Cooperation and Development in Annexure to Chapter Ill and can be considered to be appropriate.
Accordingly, it would be appropriate that, while comparing the operating margins earned by the comparable companies’ Vis-à-vis the appellant, differences on account of working capital employed should be factored So far as the merits of the issue raised in the aforesaid ground is concerned, the view finds support in the Jurisdictional Tribunal decision in the case of Foxteq Services India Private Limited (TA No. 174/Mds/2016) for AY. 201 112 order dated 1.9.2016 wherein it was held as under:
7 The assessee objected to the adjustment made by the Transfer Pricing Officer. With regard to working capital adjustment, the asseessee claims that the difference in working capital between the assessee and the comparable companies - would materially affect the profit determined. Therefore, ‘certain
CO No.28/Chny/2017 adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP that the working capital adjustment, which was to ensure the profit derived by the comparable companies, can be compared with the profit of the asessee. This Tribunal is of the considered opinion that the capital employed on the assessee, including working capital, is one of the relevant factors for the purpose of determining the arm’s length price. Therefore, the capital employed by the assessee, including the working capital, and that of comparable companies needs to be taken into consideration. Without comparing working capital employed by the comparable companies and that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment..
12. Hence, I am of the considered view that for the purposes of transfer pricing analysis any difference arising on account of working capital positions is required to be factored, so as to make the comparability analysis more equitable. Accordingly, the working capital adjustment sought for needs be granted to the appellant.”
In this view of the matter and considering facts and circumstances of the case, we are of the considered view that there is no error in the reasons given by the learned CIT(A) to direct the TPO to provide working capital adjustments and thus, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the revenue.
The next issue that came up for our consideration from grounds No.4 to 4.2 of the revenue appeal is disallowance of depreciation on non-compete fee. The assessee has claimed
CO No.28/Chny/2017 depreciation on non-compete fee in terms of section 32(1)(ii) of the Act, and argued that it is in the nature of ‘any other business of commercial rights of similar nature’ which qualifies to be intangible asset and eligible for depreciation. The Assessing Officer had disallowed depreciation on non-compete fee on the ground that non-compete fee paid by the assessee did not give rise to any capital asset of enduring nature and thus, it cannot be considered as intangible asset to allow depreciation u/s.32(1)(ii) of the Income Tax Act, 1961.
9.1 The learned DR submitted that the learned CIT(A) has erred in not appreciating fact that the Hon’ble Delhi High Court in the case of Spark Business System Vs. CIT 133 ITD 275 and the Jurisdictional High Court of Madras in the case of M/s.
Pentasoft Technologies Ltd. (2013) 41 taxmann.com 120 has very clearly held that non-compete fee is an item of capital in nature. However, it does not qualify for depreciation, because it is not in the nature of intangible asset which qualifies for depreciation u/s.32(1)(ii) of the Act.
9.2 The learned A.R for the assessee, on the other hand, submitted that this issue is squarely covered in favour of the CO No.28/Chny/2017 assessee by the decision of ITAT., Chennai, in the assessee’s own case for the assessment years 2007-08 to 2009-10 in to 490/Mds/2015, where the Tribunal by following decision of the Hon'ble Jurisdictional High Court of Madras in the case of M/s. Pentasoft Technologies Ltd in T.C.A No.1195 of 2008 held that non-compete fee is entitled for depreciation.
We have heard both the parties, perused material available on record and gone through orders of the authorities below in light of the decision of the ITAT., Chennai in assessee’s own case for the assessment years 2007-08 to 2009-10 in to 490/Mds/2015 dated 01.06.2016. We find that the learned CIT(A) by following decision of the Tribunal in assessee’s own case for earlier years and also decision of the Hon'ble Jurisdictional High Court of Madras in the case of M/s.Pentasoft Technologies Ltd. (supra) allowed depreciation on non-compete fee. The relevant findings of the learned CIT(A) are as under:-
“16. The appellant in this regard has pleaded that non-compete fee paid by the assesse is in the nature of indirect license to enable the appellant to carry on business for a period of three years. Therefore non-compete fee represents a qualifying intangible asset on which depreciation is admissible. Non- compete fee conferred a right on the appellant which is akin to a commercial right, falling within the scope of intangible asset falling under the scope of the Income-tax act. Further, past judicial precedents have laid down certain indicative criteria based on which such payments could be regarded capital in nature and accordingly, be construed as a capital asset Thus, non-compete payments satisfying the illustrative criteria, as mentioned in the below table, could be regarded as a capital asset: S.No. Illustrative criteria to regard a non Facts of the Appellant’s compete payment as a capital case asset
1. Payment has been made in lump the appellant has made a sum lump sum payment of Rs.4,47,50,000/- as non- compete fee Payment has been made toward 2. Payment is madeto off competition and not to protect or prevent KMP to carry on facilitate existing business any competing business for a period of three years. 3. Payment has been identified Clause 3.1 of asset separately towards non compete and purchase agreement does not form part of the consideration clearly bifurcates for acquisition of business payment made for purchase of assets for non-compete fee 4 Payment has been made to seller and Payment has been made its promoters i.e same parties from KMP who were seller and whom business has been acquired controlling shareholders of company which was acquired. 5 Expenditure though connected with the Payment of non-compete business is not in regular course of fee was in connection business. with business and is not in regular course of business.
CO No.28/Chny/2017 17. In view of the above arguments, the appellant pleaded for a direction to be made to the AO to allow depreciation at the rate of 25% on the non- compete fees in computation of assessed income for subject AY. In this regard, reliance was placed by the appellant on the Jurisdictional Tribunal in its own cnse in 489 & 490/Mds/2015 dated 01.06.2016 for A.Ys 2007-08, 2008-09 and 2009-10 wherein it was held that the appeIlant was eligible for depreciation on non-compete fee. The extract from the order of the Tribunal is as under:
“5 The issue before this Tribunal is whether the asessee is entitled for depreciation on non-compete fee compete fee. This issue was examined by this Tribunal in the case of AB Maruti India Pvt. Ltd(supra) and found that the assessee is eligible for depreciation on non-compete fee. The Madras High Court had an occasion to examine this issue in Pentasoft TechnoIogies Ltd.(supra). The Madras High Court found that depreciation can be allowed on non-compete fee.”
Having regard to the discussion in the foregoing and the relied upon decision of the Honble ITAT in the appellant’s own case and other judicial precedents on this issue, I am of the considered view that the appellant is entitled to claim depreciation on non-compete fee. Hence the disallowance of depreciation on non-compete fee is not sustainable.”
11. In this view of the matter and consistent with view taken by the co-ordinate Bench in assessee’s own case for earlier years, we are of the considered view that there is no error in the reasons given by the learned CIT(A) to delete additions made towards disallowance of depreciation on non-compete
CO No.28/Chny/2017 fee and hence, we are inclined to uphold findings of the learned CIT(A) and reject the grounds taken by the revenue.
In the result, appeal filed by the revenue is dismissed.
Cross Objection No.28/Chny/2017:
The assessee has filed present cross objection in support of order of the learned CIT(A). Since, we have dismissed appeal filed by the Revenue on all issues, the cross objection filed by the assessee becomes infructuous and thus, same is dismissed as infructuous.
In the result, appeal filed by the revenue and cross objection filed by the assessee are dismissed. Order pronounced in the open court on 23rd February, 2022.