GRINDWELL NORTON LTD,MUMBAI vs. DCIT (OSD)-1, MUMBAI

Assessee by: Mr. Akram Khan Department by: Shri M. V. Rajguni (Sr.DR) सुनवाईकीतारीख / Date of Hearing: 01.06.2018 घोषणाकीतारीख /Date of Pronouncement:. 30.08.2018 आदेश / O R D E R

PER AMARJIT SINGH, JM:

ITA. No.3589/M/2016 A.Y. 2010-11 Assets Depreciation (Rs.) Trademarks 21,51,032/- Technical Knowhow 43,59,391/- Goodwil 53,71,805/- Marketing Network 32,78,934/- Non-compete rights 49,65,586/- Total Depreciation 2,01,26,748/- Both the lower authorities erred in relying on the CIT(A) order for the assessment year 2007-O8, which were erroneous as they contain several finding which are irrelevant or incorrect for disallowing depreciation u/s 32. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is allowable only on those intangible assets which are protected rights. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is available under section 32 only in respect of a "registered trade mark' or "patented know how''. Both the lower authorities erred in not following the decision of the Supreme Court in the case of CIT v, Smifs Securities Ltd. (348 1TR 302). Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to allow depreciation under section 32 amounting to Rs.2,01.26,748/- on the intangible assets referred to above. Without prejudice to all the foregoing Grounds, and in the alternative, even if it were to be held that the Appellant did not acquire any valuable intangible asset from Orient Abrasives Ltd., the amount of Rs.16.47,50,000/- paid by the Appellant over and above the value of net tangible acquired, is an intangible asset in the nature of goodwill and depreciation is allowable on the same under section 32 of the Income-tax Act. The Commissioner of Income-tax (Appeals) erred in holding that the arm's length price of the financial guarantee given by A.Y. 2010-11 the Appellant on behalf of it Associated Enterprise, Saint Gobain Ceramic Material Bhutan Pvt. Ltd., Bhutan was 2% per annum and therefore erred in partly confirming the transfer pricing adjustment made by the Transfer Pricing Officer. The Commissioner of Income-tax (Appeals) erred in relying on the guarantee commission rate of 2% per annum prescribed under the Safe Harbour Rule 101D of the Income-tax Rules, 1962, for benchmarking the transaction of financial guarantee given by the Appellant on behalf of its Associated Enterprise. The Transfer Pricing Officer / Commissioner of Income-tax (Appeals) erred in rejecting the Appellant's contention that giving of financial guarantee on behalf of an associated enterprise/subsidiary was not an “International transaction” u/s 92B of the Income-tax Act. The transfer pricing officer/commissioner of income-tax (A) ought to have appreciated that giving of financial guarantee by the appellant on behalf of its subsidiary was a shareholder activity for which no charge is required. The transfer pricing officer/CIT(A) erred in law and in facts in rejecting the benchmarking analysis undertaken by the appellant in respect of the guarantee commission.”

ITA. No.3589/M/2016 A.Y. 2010-11 confirmed the disallowance of depreciation of Rs.2,01,26,748/- and also confirmed the transfer pricing adjustment of Rs.8,49,589/- in respect of corporate guarantee given by the appellant on behalf of its AE M/s.Saint Gobain Ceramic Material Bhutan Pvt. Ltd., Bhutan. Aggrieved by said order, the assessee filed the present appeal before us. ISSUE NO. 1& 7:- 4. Under these issues the assessee has challenged the confirmation of disallowance on depreciation of Rs.2,01,26,748/- on intangible assets. The assessee has claimed the depreciation u/s 32 of the Act in respect of the following intangible assets.:- Assets Depreciation (Rs.) Trademarks 21,51,032/- Technical Knowhow 43,59,391/- Goodwill 53,71,805/- Marketing Network 32,78,934/- Non-compete rights 49,65,586/- Total Depreciation 2,01,26,748/- 5. At the very outset, the Ld. Representative of the assessee has argued that the Hon’ble ITAT in the assessee’s own case Bearing No. & 5800/M/2013 for the A.Y.2007-08 & 2008- 09 respectively has decided the issue in favour of the assessee.

ITA. No.3589/M/2016 A.Y. 2010-11 Therefore in the said circumstances the claim of the assessee is liable to be allowed. Copy of order in & 5800/M/2013 for the A.Y.2007-08 & 2008-09 is on the file and on appraisal of the said order we find that the similar issue has been decided in favour of the assessee and the claim of the depreciation on intangible assets has been allowed. Before going further we deemed it necessary to advert the finding of the Hon’ble ITAT in this regard on record.:-

“5.7. We have gone through the orders of the lower authorities and judgments relied upon before us. The solitary issue involved here is about the allowability of the depreciation on the amount of intangible assets acquired by the assessee as part of deal of acquisition of Grinding Wheel Business of OAL 20 Grindwell Norton Ltd. in terms of the Business Transfer Agreement dated 18.04.2006 entered by the assessee with the said company. It is noted by us that from the perusal of the business agreement enclosed at paper book no. 27 to 87 that assessee acquired Grinding Wheel Business of OAL along with its tangible and intangible assets including Goodwill, intellectual property rights e.g. patents, copyrights, past and present R & D works, brands, trademark, service marks, registered design etc. and all other rights available to prevent the misuse or disclosure of trade secrets. The assessee also submitted valuation report from M/s. Anmol Sekhri and Associates, the Registered Valuers (enclosed at page no. 10 to 192 of the paper book) for ascertaining valuation of the business giving values of each and every fixed assets and other intangible assets acquired by the assessee under the aforesaid deal. It is noted by us that the lower authorities have granted the benefit of depreciation on the amount of fixed assets acquired i.e. plant and machinery etc. Thus, genuineness of transaction has not been doubted, but what has been doubted merely is the ‘valuation’ of intangible assets acquired under the deal. It is to be noted here that factum of acquisition of intangible assets has also not been disputed. Thus, under these circumstances, case made out by the lower authorities is that the amount paid by the assessee for its business is more than the appropriate value of its intangible assets. The assessee has also admitted this position that the assessee has paid an amount which is more than the amount of its tangible assets because of numerous intangible assets acquired by the assessee which were quite A.Y. 2010-11 valuable in the opinion of the assessee. Under these circumstances, we can say that since the assessee had purchased the Grinding Wheel Business from OAL as a going concern, therefore, amount of consideration paid in excess of value of tangible assets would be accounted for in its books of accounts as ‘Goodwill’. Under these circumstances, no further exercise would be required to make precise valuation of the amount of ‘Goodwill’. There are no doubts about the legal position that as per law, the assessee is eligible to claim depreciation on the amount of Goodwill. It is worth noting that this legal position has been accepted by Ld. CIT(A) in the subsequent year i.e. A.Y. 2008-09 wherein claim of depreciation on Goodwill was accepted and order of CIT(A) has been accepted by the revenue also as no appeal has been filed against the said decision. Our view finds support from the judgment of Hon’ble Delhi High Court in the case of TRIUNE ENERGY SERVICES PRIVATE LIMITED v. DCIT 65 taxmann.com 288(Delhi) wherein identical issue was involved, in similar facts and circumstances. Hon’ble Delhi High Court relied upon the judgment of Apex Court in the case of CIT vs. Smifs Securities Ltd. (348 ITR 302) and held as under: “Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc. The expression 'goodwill' subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to. be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible asset, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. The 'Financial Reporting Standard 10' issued by Accounting Standard Board which is applicable in United Kingdom and by the Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. In view of Accounting Standard 10 as issued by the [CAI the assessee's contention was right that the consideration paid by the assessee in excess of value of tangible A.Y. 2010-11 assets was rightly classified as goodwill. In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The agreement itself indicates that slump sale included sale of goodwill and the balance sheet specifically recorded goodwill at Rs. 40.58 crore. Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accountinpractice. 23 Grindwell Norton Ltd. Thus, a further exercise to value the goodwill is not warranted.” 5.8. In the case before us also the facts are identical. The Grinding Wheel Business has been acquired under a slump sale, under a Business Transfer Agreement with OAL. The said agreement has not been held to be bogus or sham. It can neither be rewritten or nor has been written by the lower authorities. The AO had made direct inquiries with OAL wherein it was confirmed that the assessee had paid sales consideration as per the terms of the agreement and the tangible assets were acquired as stated in the said agreement and accepted by the AO and depreciation was allowed on the same as per facts brought before us. Under these circumstances, any amount of consideration paid over and above the value of tangible assets would be classified as amount of Goodwill on which the assessee would be entitled for depreciation in view of judgment of Hon’ble Supreme Court in the case of CIT vs Smifs Securities Ltd,(supra). Similar view has been taken by Hon’ble Pune Bench in the case of Cosmos Co-op Bank Ltd. v. DCIT (64 SOT 90) and coordinate Bench of Mumbai in the case of DCIT vs. Worldwide Media Pvt Ltd 153 ITD 162. It is further noted by us that Delhi Bench of ITAT in the case of Thyssenkrup Elevator (India) Pvt. Ltd. v. ACIT 167 TTJ 131 also held that where the assessee had acquired business of another company on slump sale basis, excess consideration paid by it over and above the value of net asset acquired, was to be considered as Goodwill u/s 32(1)(ii) which was eligible for depreciation.. 5.9. In addition to the above, on facts also, it is noted by us that the assessee brought on record ample evidences in support of its claim to justify the acquisition of various other intangible assets and the justification of their valuation as well as admissibility of depreciation on these assets. It is noted that the Business Transfer Agreement was quite exhaustive having elaborate ITA. No.3589/M/2016 A.Y. 2010-11 schedules and annexures containing item wise description of each and every tangible and intangible assets acquired by the assessee. The assessee acquired entire plant and machinery, various trademarks, commercial list of customers and dealers, entire data and information in relation to sales and distribution network, of technical know-how, Goodwill of Grinding Wheel Business, rights of noncompetition etc were described in the said agreement. It is further noted that proper break-up and justification for the consideration has been narrated in the said agreement. The said agreement also contains lists of employees of OAL to be taken-over by the assessee company. It also containing the list of trademarks, particulars of goodwill of business of the OAL in the form of business data, customer details, specifications and quality requirement for the products, trade secrets and other confidential information, software process and similar other intangible assets. There was a proper valuation report specifying separate value of each and every asset of tangible or intangible nature. It is also noted that the AO made direct inquiries with OAL in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 to the AO wherein it was 25 inter alia confirmed that the said company transferred its abrasive division situated at Bhiwadi (Rajasthan) to the assessee company for a total consideration of Rs.26.17 crores. It is also brought to our notice that subsequent to the takeover, the assessee company filed petitions with the concerned departments for registration of trademarks in the name of Assessee Company. It is further noted by us from the perusal of the order of Ld. CIT(A) wherein it has been accepted that the assessee had produced before him (i.e. CIT(A)) more than 26 files containing evidences with regard to acquisition of technical know-how. Under these circumstances, we find that there was no basis with the lower authorities to hold that no intangible assets were acquired by the assessee. Thus, viewed from any angle, the assessee is eligible for the claim of depreciation u/s 32(1)(ii) on the amount of intangible assets acquired by it as per Business Transfer Agreement, and thus action of lower authorities was not factually or legally justified while making disallowance of the depreciation on the intangible assets. The AO is directed to grant the benefit of depreciation in terms of section 32(1)(ii) upon the intangible assets acquired by the assessee. Thus, these grounds are allowed in favour of the assessee.”

ISSUE NO. 8 & 12:- 7. Under these issues the assessee has challenged the confirmation of transfer pricing adjustment of Rs.8,49,589/- in respect of corporate guarantee given by appellant on behalf of its AE M/s. Saint Gobain Ceramic Material Bhutan Pvt. Ltd., Bhutan. The Ld. Representative of the assessee has argued that the these issues have been decided in favour of the assessee in the assessee’s own case by the Hon’ble ITAT in dated 30.09.2016, therefore, in this connection the claim of the assessee is liable to be allowed. Copy of order dated 30.09.2016 in the assessee’s own case is on the file. Accordingly, the matter of controversy has been adjudicated by the Hon’ble ITAT in favour of the assessee in the above mentioned appeal. The relevant finding has been given in para no. 22 to 24 which are hereby reproduced below.:-

“22. We have carefully considered the rival submissions. In the present case, AE of the assessee, M/s. Saint-Gobain Ceramic Materials Bhutan Pvt. Ltd., which is based in Bhutan, raised a term loan from Bank of Bhutan Ltd., Bhutan in the month of January, 2009 and the amount outstanding as on 31st March was Rs. 6,29,32,450/-. The assessee-company provided Corporate Guarantee to the Bank of Bhutan in connection with the said borrowing on behalf of its AE. The provision of such Corporate Guarantee is quite well understood and it means that if the AE A.Y. 2010-11 was to default in the repayment of loan availed from the Bank, assessee would step in and make good the dues owned to the Bank. The assessee-company has charged Corporate Guarantee fee @ 1% from its AE and such transaction has been considered as an ‘international transaction’ within the meaning of Sec. 92B of the Act. Accordingly, the arm’s length price of such transaction has been determined by the TPO at 3.35%, which has resulted in enhancement of assessee’s income by a sum of Rs. 2,12,937/-. The issue before us is restricted to whether the arm’s length rate of the Corporate Guarantee is to be taken at 1%, which has been charged by the assessee, or the rate of 3.35% determined by the income-tax authorities.

no. 13 & 14 are allowed.”

8. Since the issues has been squarely covered by the decision of Hon’ble ITAT in the assessee’s own case for the A.Y. 2009-10 in ITA. No.523/M/2014. Therefore, in the said circumstances, we allowed the claim of the assessee and delete the addition. Accordingly, these issues are decided in favour of the assessee against the revenue.