FEDEX EXPRESS TRANPORTATION AND SUPPLY CHAIN SERVICES (INDIA) P.LTD,MUMBAI vs. PR CIT 9, MUMBAI

Per D.T. GARASIA, Judicial Member:

The above titled appeal has been preferred by the assessee against the order dated 21.02.2016 of the Commissioner of Income Tax (Appeals) 9, Mumbai [hereinafter referred to as the CIT(A)] relevant to assessment year 2011-12. 2. The only ground is challenging the jurisdiction u/s.263 of the Act. 3. The CIT(A) erred on misconceived basis, in holding that the goodwill acquired should be apportioned between the appellant and the international affiliates of the appellant. 4. The short facts of the case are as under:- The assessee has filed the return of income on 30.09.2011 declaring total loss of (-)Rs.13,21,13,466/- and subsequently filed a purported revised return declaring total loss of (-) Rs.62,71,22,057/-. As per section 139(5) of the Act, if any person having furnished a return under sub section (1) discovers any “omission or wrong statement therein”. The Assessing Officer failed to seek any explanation with regard to the

2 ITA No3621/M/16 A.Y.2011-12 fact that there was variation in the contents of the original and revised return could not be attributed to any omission or wrong statement as referred to above and failed to appreciate that the subsequent return may not qualify as a revised return. During the year under consideration, the assessee has acquired the warehousing, transportation services and express delivery undertaking of AFL Pvt. and transportation services undertaking of Unifreight India Pvt. Ltd. as a going concern on slump sale basis. The assessee has shown goodwill amounting to Rs.3,96,00,68,730/- in the audited statement and has claimed depreciation thereon of Rs.52,28,95,318/-. In Form No.3 CD is Rs.3,21,29,204/- the addition made to fixed assets during the year as a provision were enclosed in Annexure 2A and the claim of depreciation allowable as the provision of the Income Tax Act was mentioned in Annexure 2 of Form No.3CD. On the additions made under various block of assets during the year, the depreciation determined to be allowed in Form No.3 CD is Rs.3,21,29,204/-. The Assessing Officer has completely failed to make any worthwhile enquiry with regard to the aforesaid acquisitions, the nature of goodwill, manner in which it had been valued, the admissibility of non-compete fees as revenue expenditure and the eligibility of huge claim of depreciation particularly when such claim is at variance with the depreciation computed in Form No.3CD. The Commissioner was of a view that the Assessing Officer did not make proper enquiry, therefore, show cause notice was issued to the assessee and after considering the reply of the assessee, the Commissioner was of a view that the order is passed mechanically and without application of mind and on the basis of revised return, without appreciating the fact that contrary in original and revised return of income. Therefore, Commissioner has directed the AO to confirm a fresh assessment order in accordance with law provision statue and considering the judicial decision and pass the order as per law. 5. The learned AR has filed the return submission and orally also argued the matter. The written submission is on the record. The learned AR submitted that the order of the Assessing Officer can be revised not only to be erroneous but also prejudicial to the interest of revenue. It was also submitted that if the issues are examined in the course of assessment proceedings and a plausible view is taken which is in accordance with the precedents then the order cannot be treated as erroneous and prejudicial to the interest of the

3 ITA No3621/M/16 A.Y.2011-12 revenue. Merely because there may not be a detailed discussion in the assessment order then the order cannot be treated as erroneous and prejudicial to the interests of the revenue since the assessment proceedings are not adversarial proceedings. The learned AR submitted that during the course of assessment proceedings, assessee filed reply and claim was accepted by the AO. The learned AR submitted that Commissioner wanted to meet to revise the order wherein no enquiry at all on the issues. The order is passed as per section 119 of the Act. The learned AR submitted that original return e-filed on 30.09.2011 was based on unaudited accounts. In the said return depreciation of Rs.2.78 crore was claimed. In the said e-filed return the assessee had to give audit information, since the assessee was liable for tax audit under section 44AB, without which the return could not have been uploaded. The assessee gave the audit information details in the e-filed return but however since the audit was not done the information relating to date of audit was not filed. However, the return could not be uploaded unless this information was given and therefore the assessee was compelled to put the date so that return could be filed in time as required by section 139(3) read with 139(1) of the Act. In the instructions issued for filing form ITR 6 it is specifically mentioned that if the items specified in form no.6 is not filed then the return will be treated as invalid. On 28.05.2011 the accounts were audited under the Companies Act, 1956 and under section 44AB of the Act. The revised return of income on 21.11.2012 based on the audited accounts. The assessee claimed depreciation on goodwill in the revised return being the difference between the consideration paid and tangible assets acquired on account of purchase of business from AFL and UFL. The goodwill figure was arrived at as stated herein and was certified by the auditors in the audited accounts read with the valuer’s report. Therefore, the difference between the loss claimed in the original return of income and the revised return of income is on account of claim in respect of depreciation on goodwill. In the audited

4 ITA No3621/M/16 A.Y.2011-12 accounts, the auditor recorded the goodwill under the head intangible assets at Rs.396 crores but did not claim depreciation on the same. The said figure of Rs.396 crores is arrived at based on the valuer’s report and Rs.397 crores i.e. Rs.1 Crore is on account of post closing adjustments. The learned AR submitted that AO has made a specific query regarding revising the income and assessee has filed the reply. In the original assessment order AO has examined and accepted the return after taking consideration the said revised return of income. Therefore, the order is not erroneous and prejudicial to the interest of the revenue. The learned AR submitted that as per section 139C, 139D and Rule 12(2) of the IT Rules read with circular no.9/2006 dated 10.10.2006 (Annexure 5) and instructions it does not provide for any provision to hold return filed on unaudited accounts as invalid return. The assessee’s return is first year of incorporation, the assessee under the Companies Act could have got its accounts audited in accordance with section 166 read with section 210 of the Companies Act, 1956. 6. The learned AR relied upon the decision of CIT Vs. Nirav Modi 241 Taxmann 255, CIT Vs. Design and Automation Engineers 323 ITR 632, CIT Vs.Fine Jewellery (I) Ltd. 372 ITR 303, Vanshree Builders & Developers (P) Ltd. Vs. CIT 63 SOT 30, Escorts Mahle Ltd. Vs. DCIT 119 ITD 119 (Delhi), ACIT Vs. Pratap Rajasthan Special Steels Limited 99 TTJ 67 (Jaipur). 7. The learned DR submitted that the AO passed the order mechanically without application of mind on the basis of revised return income without appreciating that contradictory information has been given in original and revised return. The Ld. D.R. submitted that the AO completely failed to enquire with regard to acquisition of AFL and UFL made during the year. The basis of valuation of goodwill and validity of claim of depreciation thereon failed to call for examination of relevant agreement and working of nett worth of assets particularly such nett worth was a negative figure and goodwill was

5 ITA No3621/M/16 A.Y.2011-12 substantially more than the consideration paid for acquisition. Therefore, this is a case of non application of mind by AO. Therefore, section 263 is valid.

6 ITA No3621/M/16 A.Y.2011-12 section 139(1) as invalid and therefore cannot be revised under section 139(5) of the Act. The CIT has dealt with this issue in his order at pg 9 onwards. The CIT has exercised his jurisdiction on the ground that the issue of validity of return and the revised return has not been examined by the AO and therefore the assessment order was erroneous and prejudicial to the interest of the revenue. In this connection it is important to note that the Assessing Officer had raised a specific query vide letter dated 25th November 2013 and 17th February 2014 calling upon the assessee to furnish audit report, balance sheet, profit and loss account and a specific query with respect to reason for revising the return. The assessee in his submissions to the AO vide letter dated 26th February 2014 and 14th February 2014 gave a detailed explanation with respect to reasons for revising the return of income the reason being delay in finalizing the books of accounts due to acquisition by the assessee of transportation business of AFL and UFL. The assessee also stated that the original return was based on draft unaudited books of accounts and the return was filed based on unaudited accounts to protect its claim of carry forward losses under section 80 of the Act. The assessee also filed a letter dated 14 January 2014 giving reasons for revising the return. The reason being the accounts being audited and the subsequent decision of the Supreme Court in the case of Smifs Securities whereby the Supreme Court upheld the claim of depreciation on goodwill and based on this the return was revised along with other reasons. The assessee have got their accounts audited on 28th May 2012 which is within the time limits specified under section 166 read with section 210 of the Companies Act, 1956 and till that time the tax audit could not have been done. The assessee also filed detailed legal submissions on the validity of the revised return and relied upon various decisions of the High Court and the Tribunal in its submissions. Furthermore, the assessee in its return uploaded on 30th September 2011

7 ITA No3621/M/16 A.Y.2011-12 I had in columns relating to audit information stated that the audit was done on 29th September 2011 when, in fact, it was not so. The assessee has explained the reason why this was done. The reason being unless this column was filled up the return could not have been uploaded which would have resulted into the claim of carry forward of loss being lost. The site of the revenue requiring c-filing did not have the mechanism of uploading the return it a particular column is not filled. This reason has not been controverted by the revenue till today. It was under these circumstances that the assessee was compelled to fill a wrong date which was subsequently rectified in the revised return along with the actual date of audit along with other reasons mentioned by the assessee for revising the return. In the light of these facts it cannot be said that the issue of validity of revised return has not been examined by the AO in the course of the assessment proceedings. The AO had raised a specific query which was followed by a detailed response of the assessee and since same was accepted after due application of mind same did not find place in the assessment order. The assessee has relied upon the decision of the Delhi Tribunal in the case of Escorts and Jaipur Tribunal in the case of Pratap Rajasthan Special Steels Ltd. in its submissions. The said 2 decisions state that original return can be filed based on unaudited accounts and such a return can later on be revised after getting the accounts audited. The decision relied upon by the Revenue in the case oll-Timachal Pradesh State Forest Corporation reported in 231 ITR 556 and Gauhati High Court decision in case of Sunanda Ram Deka 210 ITR 988 are distinguishable on facts. The said 2 decisions did not deal with e-filing of return and furthermore the assessee in those decisions did not file the audit report at all. The Hon'ble Bombay High Court in the case of Fine Jewellery reported in 372 ITR 303 has held that merely because a particular item does not find mention in the assessment order, it cannot be said that the AO has not applied his mind if a query is raised andreplied to by the

8 ITA No3621/M/16 A.Y.2011-12 assessee. Therefore in our view the jurisdiction exercised by the CIT on the issue of validity of revised return cannot be upheld. In view of above, the CIT was not justified in exercising jurisdiction under section 263 of the Act on this issue. 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 AU 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

9 ITA No3621/M/16 A.Y.2011-12 341 ETR I at pg 34 has in detail explained the relationship between 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. 13. 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 company and its affiliates are contrary to law and hence such a finding is quashed. 14. With respect to ground no.4 dealing with non-compete fees, the assessee in its submissions to the AO vide letter dated 25th November 2013 and 17th February 2014 brought to the notice of the AO about the non- compete fees and deduction of TDS thereon. The assessee filed the accounts with the AO wherein in the accounts depreciation was claimed on non- compete fees as “intangible asset”. The assessee vide letter dated 14th January 2013 also submitted to the AO the reason for its claim of non- compete fees being allowed as revenue expenditure since it did not result in any benefit of enduring nature. The assessee relied upon the decision of Karnataka High Court in support of its claim for deduction as revenue expenditure. The Assessing Officer accepted the claim of the assessee in the assessment order and therefore there was no reason for him to make a

10 ITA No3621/M/16 A.Y.2011-12 mention of it and merely because lie has not mentioned or discussed in the assessment order same cannot be treated as erroneous and prejudicial to the interests of the revenue as held by the Bombay High Court in the case of Fine Jewellery (supra). Furthermore the assessee has relied in its submissions on various decisions on this issue wherein conflicting views are taken by various Courts/Tribunals. There are rulings which have allowed the payment of non-compete fees as revenue expenditure and there are also rulings which have treated the non- compete fees as intangible asset eligible for depreciation and the assessee has also relied on the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd. reported in 225 ITR 802 for the proposition that since the period of non-compete is 3 years the claim alternatively should be allowed over a period of 3 years. In our view, the issue of non-compete fees was examined by the AO and accepted in the course of the assessment proceedings and therefore the CIT was not justified in exercising jurisdiction oil issue. Furthermore, the AO has accepted one of the possible views and such an action cannot be treated by CIT as erroneous and prejudicial to the interest of the revenue. In this connection we are supported by the decision of the Supreme Court in the case of Malabar Industrial Company Ltd. reported in 243 ITR 83 and Max India Ltd. reported in 295 ITR 282.

Sd/- Sd/- (RAJESH KUMAR) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 17.11.2017. * MP.

11 ITA No3621/M/16 A.Y.2011-12 आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent. 2. आयकर आयु� अपील / ( The CIT(A) ) 3. आयकर आयु� / CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण ,मुंबई / DR, ITAT, 5. Mumbai गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, स�ािपत �ित //True Copy// उप/सहायक पंजीकार /(Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण ,मुंबई / ITAT, Mumbai