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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
ORDER PER RAVISH SOOD, J.M: The captioned appeals filed by the revenue are directed against the respective orders passed by the CIT(A)-16, Mumbai for A.Y. 2014-15 & A.Y. 2015-16, dated 26.09.2018 & 09.11.2018, which in turn arises from the orders passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 31.12.2016 and 28.12.2017, respectively. As common issues are involved in the captioned appeals, the same, thus, are taken up and disposed off together by way of a consolidated order. We shall first advert to the appeal of the revenue for A.Y. 2014-15, wherein the impugned order has been assailed on the following grounds of appeal before us: Whether on the facts and in the circumstances of the case and in law, was Ld. CIT(A) right in “1. deleting the disallowance made by the AO on account of depreciation on goodwill?
2. Whether on the facts and in circumstances of the case and in law, was Ld. CIT(A) in not appreciating the fact that goodwill acquired by the assessee enhances the value of entire FedEx brand?‟
848/Mum/2019 A.Ys. 2014-15 & 2015-16 2 The Assistant Commissioner of Income Tax-9(3)(1) Vs. M/s Fedex Express Transportation and Supply Chain Services (India) Pvt. ltd.
Briefly stated, the assessee company which is a courier and express service provider and logistics service provider had e-filed its return of income for A.Y. 2014-15 on 26.11.2014, declaring a loss of Rs.187,32,67,010/-. The return of income filed by the assessee was initially processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings it was observed by the A.O that the assessee had acquired a warehouse transportation service and express delivery undertaking of AFL Pvt. Limited., and also the transportation services undertaking of Unifreight India Pvt. Ltd. as a going concern on slump sale basis during the financial year 2010-11 relevant to A.Y. 2011-12. As observed by the A.O, the assessee on acquisition of the aforesaid business undertakings on slump sale basis, had in its books of accounts for the year of acquisition i.e A.Y. 2011-12 raised goodwill amounting to Rs.396,00,68,730/- i.e the difference between the tangible value of assets and liabilities taken over. It was the claim of the assessee that the aforesaid amount was paid for acquiring intangible assets like business information, business records, marketing network, commercial knowledge relevant to the territory, customer database and information etc. Accordingly, the aforesaid intangible assets were collectively referred by the assessee as goodwill in its fixed assets schedule of its audited financial statements. It was observed by the A.O that the assessee during the year in question i.e A.Y. 2014-15 had claimed depreciation of Rs.48,72,74,082/- on goodwill under Sec. 32 of the Act. On being called upon to justify its aforesaid claim of depreciation the assessee vide its reply dated 02.12.2016 tried to impress upon the A.O that its aforesaid claim was in order. However, the A.O was not inclined to accept the aforesaid explanation of the assessee. It was observed by the A.O that the issue pertaining to valuation of a goodwill and admissibility of depreciation of goodwill had earlier came up before his predecessor during the course of the scrutiny assessment proceedings under Sec. 143(3) r.w.s 263 in the case of the assessee for A.Y. 2011-12. It was noticed by the A.O, that the Pr.CIT vide his order passed under Sec. 263, dated 21.02.2016 in the case of the assessee for A.Y. 2011-12 had observed that as the assessee was a subsidiary of FedEx Corporation which was world‟s largest transport company having a global ground and air network for delivery of shipments in the entire U.S. and more than 220 countries and territories, thus, the acquisition of the aforesaid undertakings would enhance not only the business of the assessee but also that of its parent and affiliates/subsidiaries worldwide. It was observed by the A.O, that the Pr. CIT backed by his aforesaid conviction was of the view that if indeed some goodwill had been acquired by the assessee then, partially such goodwill was for the business of the international affiliates of the assessee company. Backed by his aforesaid conviction, it was noticed by the A.O that the Pr. CIT had observed that the goodwill was required to be reasonably
848/Mum/2019 A.Ys. 2014-15 & 2015-16 3 The Assistant Commissioner of Income Tax-9(3)(1) Vs. M/s Fedex Express Transportation and Supply Chain Services (India) Pvt. ltd. apportioned and only part of the same would be relatable to the assessee company. Accordingly, the A.O adopting the reasoning given in the assessment order passed by his predecessor under Sec. 143(3) r.w.s 263, dated 30.12.2016 for A.Y. 2011-12, therein concluded that the goodwill claimed was liable to be apportioned between the assessee company and its ultimate parent company viz. FedEx Corporation including its global affiliates and subsidiaries in the ratio of 25% and 75%, respectively. As such, following the same rationale and reasoning as in A.Y. 2011-12, the A.O apportioned and therein attributed to the assessee company 25% of the goodwill shown in its books of account for the year in question. Resultantly, a sum of Rs.36,54,55,562/- being 75% of the total claim of depreciation on goodwill amounting to Rs.48,72,74,082/- was disallowed by the A.O and added back to the total income of the assessee.
Aggrieved, the assessee assailed the assessment order in appeal before the CIT(A). It was observed by the CIT(A) that the Tribunal while disposing off the assesse‟s appeal for A.Y. 2011-12 in dated 17.11.2017 had held that the Pr.CIT was not justified in exercising jurisdiction under Sec. 263 of the Act and accordingly, had quashed his findings. It was noticed by the CIT(A), that the Tribunal while quashing the order passed by the Pr.CIT under Sec. 263, dated 21.02.2016, had observed, that the directions of the Pr.CIT on the issue of apportionment of goodwill was without any material on record and based on surmises and conjectures. Observing, that the legal and factual position for the year in question i.e A.Y. 2014-15 was similar to that for A.Y. 2011-12, the Pr.CIT held a conviction that now when the findings given by the Pr.CIT vide his order passed under Sec. 263, dated 21.02.2016 for A.Y. 2011-12 had been quashed thus, the order passed by the A.O for the year in question i.e A.Y. 2014-15 which w.r.t the issue under consideration was based on A.Y. 2011-12 had to meet the same fate and would not survive. Accordingly, the CIT(A) directed the A.O to delete the disallowance of depreciation on goodwill of Rs.36,54,55,562/-.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee at the very outset of the hearing of the appeal submitted that the issue herein involved was squarely covered by the order of the Tribunal in the assessee‟s own case for A.Y. 2011-12 in ITA No. 3621/Mum/2016. Our attention was drawn by the ld. A.R to the observations that were arrived at by the Tribunal while disposing off the assessee‟s appeal for A.Y. 2011-12. It was submitted by the ld. A.R that the A.O had disallowed the assessee‟s claim for depreciation on goodwill on the standalone basis that a view to the said effect was taken by his predecessor vide his order passed under Sec. 143(3) r.w.s 263, dated 30.12.2016 for A.Y. 2011-12. It was submitted by the ld. A.R that now when the order passed by the Pr.CIT under Sec. 263 of the Act, dated 21.02.2016 had been quashed by the Tribunal with specific observations that the 848/Mum/2019 A.Ys. 2014-15 & 2015-16 4 The Assistant Commissioner of Income Tax-9(3)(1) Vs. M/s Fedex Express Transportation and Supply Chain Services (India) Pvt. ltd.
affiliates of the assessee could not be said to have acquired the goodwill along with the assessee, thus, the CIT(A) by rightly relying on the aforesaid order of the Tribunal had vacated the disallowance on deprecation of goodwill so made by the A.O during the year in question.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. As is discernible from the orders of the lower authorities, the A.O relying on the order passed by the Pr. CIT under Sec. 263 of the Act, dated 21.02.2016, wherein the latter had observed that if some goodwill had been acquired by the assessee then, partially such goodwill was for the business of the international affiliates of the assessee company and only a reasonable part of the same would be relatable to the assessee company, had thus, adopting the same line of action attributed 25 % of the value of goodwill to the assessee and disallowed the balance 75% of its value. Admittedly, the order passed by the Pr. CIT under Sec. 263, for A.Y. 2011-12, dated 21.02.2016 had been quashed by the Tribunal vide its order passed in dated 17.11.2017 . As observed by us hereinabove, the Tribunal while quashing the order passed by the Pr.CIT under Sec. 263 had categorically observed that as the agreement for acquiring the business of AFL and UFL was between the assessee and AFL/UFL and none of the affiliates of the FedEx Group were a party to the same thus, it cannot be said that the affiliates had acquired the goodwill along with the assessee. For the sake of clarity the observations recorded the Tribunal while disposing off the appeal in the assessee‟s own case for A.Y. 2011-12 in ITA No. 3621/Mum/2016, dated 17.11.2017 are culled out as under “12. With respect to ground no.3 dealing with depreciation on goodwill, assessee in the course of the hearing brought to our notice the order giving effect to 263 order passed by the AU on 30th December 2016 wherein the AO has accepted the valuation of the goodwill and also accepted the claim of depreciation on the goodwill. In the light of these subsequent facts, what survives to the adjudicated is whether the CIT was justified in giving a direction in para 10.5 of his order on apportionment of goodwill between the assessee and its affiliates. The assessee relied upon the decision of the Bombay High Court in the case of Herdillia Chemicals reported in 221 ITR 194 and based on this decision submitted that since there is a specific direction on merits by the CIT to the AU, the Tribunal ought to adjudicate this issue. On perusal of the CITs order and applying the decision of the jurisdictional High Court, the assessee is justified in raising this issue before us. The direction of the CIT on this issue is without any material on record and based on surmises and conjectures. The agreement for acquiring the business of AFL and UFL is between the assessee and AFL/LJFL. None of the affiliates of the FedEx group are a party to this agreement. Therefore, it cannot be said that the affiliates have acquired the goodwill along with the assessee. Provisions of section 43(1) which defines "cost" also do not provide for such an apportionment of cost. Section 38 of the Income Tax Act which empowers the revenue to disallow items specified therein also does not deal with apportionment of cost. It is also important to note that goodwill is not covered by provisions of section 38(2) of the Act. The Hon‟ble Supreme Court in the case of Vodafone International reported in 341 ETR I at pg 34 has in detail explained the relationship between
848/Mum/2019 A.Ys. 2014-15 & 2015-16 5 The Assistant Commissioner of Income Tax-9(3)(1) Vs. M/s Fedex Express Transportation and Supply Chain Services (India) Pvt. ltd. parent and subsidiary and its economic independence. The Hon'ble Supreme Court has categorically stated that parent and subsidiary are totally independent tax payers and they are subjected to income tax on standalone basis irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to shareholders.
The Hon‟ble Delhi High Court in the case of Maruti Suzuki reported in 381 ITR 117 while dealing with transfer pricing adjustment on AMP expenses incurred by Indian company has negative the contention that such expenses, in the absence of any understanding with AE empower the revenue to make adjustment. It is also important to note that if there are any transactions between the assessee and its affiliates that would be a subject matter of transfer pricing regulation. In our view, the CIT was not justified in giving a direction for apportionment of goodwill and the said direction is without any material or any basis and therefore the directions given by the CIT on apportionment of goodwill between the assessee compan y and its affiliates are contrary to law and hence such a finding is quashed.”
Observing, that the controversy in hand had its genesis in A.Y. 2011-12, we find, that the CIT(A) had rightly, observed that now when the order of the Pr.CIT under Sec. 263, dated 21.02.2016 had been quashed by the Tribunal, therefore, the disallowance of depreciation on goodwill made by the A.O by relying on the order passed by his predecessor under Sec. 143(3) r.w.s 263, dated 30.12.2016, cannot survive on a standalone basis and was liable to be vacated. Accordingly, finding no infirmity in the view taken by the CIT(A), we herein uphold his order.
The appeal filed by the revenue is dismissed.
We shall now take up the appeal of the revenue for A.Y. 2015-16, wherein the revenue has assailed the impugned order on the following grounds of appeal before us:
1. Whether on the facts and in the circumstances of the case and in law, was Ld. CIT(A) right in deleting the disallowance made by the A.O on account of depreciation on goodwill? 2. Whether on the facts and in circumstances of the case and in law, was L. CIT(A) in not appreciating the fact that goodwill acquired y the assessee enhances the value of entire FedEx brand?
Briefly stated, the assessee company had e-filed its return of income for A.Y. 2015-16 on 28.11.2015, declaring a loss of Rs.203,80,20,850/-. The return of income filed by the assessee was initially processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings, the A.O following the view taken by his predecessor in A.Y.2011-12 restricted the goodwill attributable to the assessee company to 25% of that as was shown in its books of account for the year in question. Accordingly, the sum of 848/Mum/2019 A.Ys. 2014-15 & 2015-16 6 The Assistant Commissioner of Income Tax-9(3)(1) Vs. M/s Fedex Express Transportation and Supply Chain Services (India) Pvt. ltd.
Rs.30,05,46,047/- i.e 75% of total claim of depreciation on goodwill amounting to Rs.40,07,28,062/- was disallowed and added back to the total income of the assessee.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). Observing, that the order passed by the Pr.CIT under Sec. 263 of the Act, dated 21.02.2016 for A.Y. 2011-12 had been quashed by the Tribunal vide its order passed in dated 17.11.2017, the CIT(A) directed the A.O delete the disallowance of depreciation on goodwill for the year in question.
13. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We find that as the facts and the issue herein involved remain the same as were there before us in the revenue‟s appeal for the immediately preceding year i.e A.Y. 2014-15 thus, our order therein passed shall apply mutatis mutandis for the purpose of disposal of the present appeal. Accordingly, finding no infirmity in the view taken by the CIT(A) for the year in question i. e A.Y. 2015- 16, we uphold the same.
The appeal of the revenue is dismissed.
Resultantly, the appeals of the revenue for A.Y. 2014-15, A.Y. 2015-16, are dismissed.
Order pronounced in the open court on 24.02.2021