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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S.PANNU & SHRI AMARJIT SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA No.5637/Mum/2015 (Assessment Year 2011-12) M/s.Huntsman International (India) Private Limited, B-Wing, Lighthall, Hiranandani Business Park, Saki Vihar Road, Mumbai 400 072 PAN: AAACH9149J ...... Appellant Vs. The DCIT, 10(1)(1), Mumbai. .... Respondent ITA No.382/Mum/2016 (Assessment Year 2011-12)
The DCIT, 10(1)(1), Mumbai. ..... Appellant
Vs.
M/s.Huntsman International (India) Private Limited, B-Wing, Lighthall, Hiranandani Business Park, Saki Vihar Road, Mumbai 400 072 PAN: AAACH9149J ...... Appellant
Assessee by : Shri S.N.Soparkar Revenue by : Shri N.K.Chand Date of hearing : 27/01/2017 Date of pronouncement : 31/01/2017
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ORDER PER G.S.PANNU,A.M:
The captioned cross appeals filed by the assessee and Revenue pertaining to assessment year 2011-12 are directed against an order passed by DCIT, 10(1)(1), (in short the Assessing Officer ) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short the Act) dated 26/11/2015, which is in conformity with the direction of the Dispute Resolution Pannel-1, Mumbai ( in short “the DRP”) dated 22/09/2015.
In this appeal, assessee has raised the following Grounds/ Additional Grounds of appeal:-
“ The Appellant objects to the order under section 143(3) r.w.s 144C (13) of the Income Tax Act, 1961 ('the Act') dated 26 November 2015 (received on 30 November 2015) passed by the learned Deputy Commissioner of Income Tax (' AO') incorporating the directions of the Dispute Resolution Panel ('DRP') for the aforesaid assessment year on the following grounds: Ground No. 1: Erroneous disallowance of the corporate service charges 1.1 The learned AOIDRP erred in upholding the Transfer Pricing Officer's ('TPO') contention for the disallowance of corporate service charges paid by the Appellant to its AEs amounting to Rs. 63,411,803/- by failing to appreciate and consider the facts of the case, including the submissions made by the Appellant and the evidences produced. 1.2 The AO/ TPOIDRP failed to appreciate the method followed by the appellant to benchmark: the international transaction in relation to receipt of corporate services. 1.3 The learned AO/TPO/DRP erred in computing the Arm's Length Price (‘ALP') of the corporate services as Rs. 4,505,000/- merely based on estimation by applying adhoc number of hours for each sub-category of services and then applying estimated hourly rate of Rs. 8,500/-. 1.4 The DRP in upholding the actions of the AO/TPO, erred in holding that the appellant failed to produce evidence to prove receipt of services
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without appreciating the facts and the evidences submitted before it in a correct perspective. GROUND NO. 2: Disallowance of depreciation on intangible assets 2.1 The learned AO erred in allowing deprecation under section 32(1 )(ii) of the Income-tax Act, 1961 of Rs. 3,85,14,551 on intangible assets as against depreciation of Rs. 4,34,58,398, while computing the taxable income for the captioned assessment year. GROUND NO. 3: Disallowance under section 14A 3.1 The learned AO / DRP has erred in disallowing a sum of Rs. 5,95,20,534 under section 14A of the Income-tax Act,. 1961 read with rule 8D of the Income-tax Rules, 1962 without appreciating the facts of the case and law applicable thereto. 3.2 The learned AO /DRP erred in not appreciating that investments made were by way of strategic investments in subsidiary. 3.3 The learned AO / DRP erred in appreciating that investments were made out of interest free funds, 3.4 Without prejudice to the above, the learned AO / DRP has erred in not reducing the suo-moto disallowance made by the Appellant from the total disallowance under section 14A of the Act. GROUND NO. 4: General 4.1 The learned AO erred in initiating Penalty Proceeding U/S 271 (1)( c) read with Explanation 7 of the Act. 4.2 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 4.3 Each one of the above grounds of appeal is without prejudice to the above. Grounds of Revenue’s appeal:- i. “On the facts and in the circumstances of the case and in law, the Hon’ble DRP is not justified in as much as while holding that the Distribution network and Material supply Contract are eligible for depreciation, it has failed to specify any reason as to how it falls within the clause “any other business or commercial rights of a similar nature” of Section 32(1)(iii) and as to how the doctrine of “ejusdem generis” is applicable in the instant case.”
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ii. “On the facts and in the circumstances of the case and in law, the Hon’ble DRP failed to appreciate that distribution network and material contract even if the contention that these constitute assets is accepted, are in the nature of tangible assets, and further, every commercial or business right is not eligible for depreciation unless it partakes the nature of "Know-how, patents, copyrights, trademarks, licenses, franchieses..........” iii. "On the facts and in the circumstances of the case and in law the Hon.ble DRP exceeded the jurisdiction conferred on it u/s 144C (subsection 1 & 8 thereof) which mandate it to adjudicate only with reference to any variations from the returned income in the draft order which is prejudicial to the interest of the assesse and, therefore, could not have adjudicated in respect of claim for depreciation on Goodwill and deduction u/s 43B made during the assessment proceedings and not in the return of income. " IV. "On the facts and in the circumstances of the case and in law, and without prejudice to the preceding grounds, the Hon'ble DRP ought to have adjudicated on matters not included in the draft order only after giving an opportunity of being heard to the assessing officer when such adjudication was prejudicial to the interest of revenue. " v. "On the facts and in the circumstances of the case and in law, and without prejudice to the preceding grounds, the Hon'ble DRP erred in directing the Assessing Officer to allow the depreciation on Goodwill whereas neither assesse nor DRP has specified as to how the quantification for Goodwill has been arrived at." VI. "On the facts and in the circumstances of the case and in law, the Hon 'ble DRP erred in not appreciating that CIBA Speciality and DDCL is merely assigning the right for a limited period and not transferring the ownership of Distribution network, Material supply Contract and Goodwill to assessee company implying that the assessee company is not the owner of the asset as it never acquired a right so as to alienate the said asset from itself and hence it fails in the primary test of eligibility of depreciation, which is 'ownership' of the asset". 3. Before we address the specific Grounds raised in the captioned cross-appeals, the brief background of the case is as follows. The assessee before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of supply Polyurethane, automotive and footwear in India. The assessee is an indirectly held wholly owned subsidiary of M/s. Huntsman
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International LLC. For the assessment year under consideration, it filed the return of income declaring a total income of Rs.66,56,67,790/-, which was subject to a scrutiny assessment, wherein the final income has been assessed at Rs.75,26,58,594/-, after considering the directions of the DRP dated 14/10/2015 in terms of section 144C(5) of the Act. In this background, the assessee as well as the Revenue are in appeal on the above stated Grounds of appeal.
First, we may take up the appeal of the Revenue. Although Revenue has raised multiple Grounds of appeal, but only three substantive disputes are involved . It was a common point between the parties that all the three disputes have been a subject matter of consideration by the Tribunal in the assessee’s own case for earlier assessment years. However, in order to impart completeness to the order, these three issues are being dealt with hereinafter in seriatim.
The first issue in the appeal of the Revenue arises from the direction of the DRP that the assessee is entitled to depreciation under section 32(1)(ii) of the Act with respect to the intangible assets, namely, Material Supply contract and Distribution network. In this context, brief facts are that during the previous year relevant to the assessment year of 2007-08 assessee had acquired ‘Textile Effects’ business from Ciba Speciality Limited and Diamond Dychem Limited for a lumpsum consideration. The lumpsum consideration paid for the acquisition of business included consideration for tangible as well as intangible assets including the Distribution Network and Material supply contract. In respect of Distribution Network and Material
6 ITA No.5637/Mum/2015 382/mum/2016 (Assessment Year 2011-12) supply contract, assessee claimed depreciation considering it as ‘intangible assets’ in terms of section 32(1)(ii) of the Act for the first time in assessment year 2007-08. In assessment year 2007-08, the Assessing Officer denied such claim of the assessee and following the same in the present year also the Assessing Officer proposed denial of depreciation in the draft assessment order passed under section 143(3) r.w.s. 144C(1) of the Act. The DRP, however, directed the Assessing Officer to allow depreciation noting that for assessment year 2007-08, the Tribunal in assessee’s own case vide ITA No.3916/Mum/2014 dated 31/08/2015 has allowed the claim of the assessee . Before us, the Revenue is in appeal against such direction of the DRP.
5.1 Before us, the Ld. CIT-DR has not disputed the fact position that in its order dated 31/08/2015(supra), the Tribunal has considered similar controversy for assessment year 2007-08 and 2009-10. It is also not in dispute that the said decision has since been followed by the Tribunal in assessment year 2010-11 also vide ITA No.980/Mum/2015 dated 18/12/2015. So however, the plea of the Ld. CIT-DR is that the Legislature, while prescribing depreciation allowance for intangibles under section 32(1)(ii) of the Act has sought to restrict it only to the specified categories of intangible assets. The Ld. CIT-DR has emphasized that the expression “ in other business or commercial rights of similar nature” contained in section 32(1)(ii) of the Act does not cover the impugned assets because they do not have the trapping similar to the other categories of asset prescribed
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therein, namely, know-how, patents, copy rights, trademarks, licence or franchisees. On this basis, it is sought to be pointed out that the claim of the assessee was rightly denied by the Assessing Officer in the draft assessment order.
5.2 On the other hand, Ld. Representative for the assessee pointed out that the dispute was no longer res-integra, so far as assessee is concerned because in the earlier assessment years of 2007-08 to 2010-11, the Tribunal has allowed the claim of the assessee vide orders dated 31/08/2015 and 18/12/2015(supra).
5.3 We have carefully considered the rival submissions. Before proceeding further, we may reproduce hereinafter the relevant findings of the Tribunal in its order dated 31/8/2015(supra) for assessment year 2007-08, which is the lead year of dispute:-
“ 2.2.First ground of appeal is about disallowance of depreciation on intangibles,amounting to Rs.13.73crores.During the assessment proceedings,the AO found that the assessee-company had claimed depreciation of Rs.12.07 crores under the head depreciation on Material Supply Contract (MSC)and on Distribution Network(DN)and Rs.6.25 crores under the head Brand Uses Expenses (BUE).He directed the assessee to explain as to why the above referred claim should be allowed as revenue expenditure.The assessee in its reply stated that Huntsman Group took global acquisition of the textile effects of CIBA Speciality Chemical Group, that the group operated in India through its Indian companies namely CIBA Speciality Chemicals (I) Ltd. CIBA-India, and Diamond Dye-chem Ltd.(DDCL),that assessee entered into an agreement with CIBA- India and DDCL for acquiring the textile business effect assets on a slump sale basis, that the assessee also entered into toll manufacturing agreement(material supply agreement with CIBA- India and DDCL),that it had recorded the fixed assets and intangible assets at fair value as determined by an independent valuer,that as per the agreement it was granted non exclusive irrevocable and royalty fee licence to use trademarks,domain name for a period of
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24 months,that based on valuation report of independent valuer it had valued the aforesaid right(to use brands), as revenue expenditure,that the payment made by the assessee was not for acquisition of brand name itself,that it did not acquire ownership of CIBA brand,that it did not have exclusive right over the use of brands,that payment was made for using the brand for only a short period, that benefit accruing to the assessee from such payment for use of brand was transit in nature, that the assessee did not derive any enduring benefit or any permanent advantage.The assessee referred to the case of CIBA-India Ltd.(69 ITR 692), IAEC Pumps Ltd.(232 ITR 316).Without prejudice to the above,it was contended that if the payments made for brand use was treated as capital asset then depreciation@25% as per the provisions of section 32(1)(ii)of the Act should be allowed. With regard to MSC,it was stated that on acquisition of textile effect business the manufacturing facilities of DDCL were not transferred to the assessee,that in order to protect its business interest it entered into an MSC with DDCL to ensure consistency in quality and quantity of the textile chemicals,that the MSC was a business/commercial right and was similar to know how, patents, copy rights,trade marks licences and franchisees,that the agreement secured supply of certain products for a period of five years,that the supply of minimum quantity was to be at cost of manufacturing,that owing to the agreement the assessee did not carry the risk attached with the manufacturing of the products,that it was granted discounts such as volume discount of 3% and a further discount of 4.5% on invoice value if the payment was made within five days, that MSCwas an intangible asset in terms of s.32(1)(ii) and was eligible for depreciation @ 25%.The assessee relied upon the cases of Skyline Caterers Ltd.(306 ITR-AT-369)Kotak Forex Brokerage Ltd. and Coca Cola Beverage P Ltd. About the DN,it was contended that over the years CIBA-India and DDCL had created strong distribution network for selling their products,that through the DN agreement the assessee got access to the buyers,that DN was an intangible asset and was eligible for depreciation u/s. 32(1)(ii) of the Act,that the expression any other business or commercial rights of similar nature used in section 32 of the Act had not been defined or explained in the Act, that the agreement was made for a period of five years, that the distribution network developed by CIBA-India was crucial to achieve the sales target. It was further stated that the assessee had acquired the polyurethane business from ICI Ltd.in the AY 2002-03 as a going concern in accordance with business Transfer Agreement (BTA),that it had acquired the fixed assets,intellectual properties,intangibles
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and the net current assets, that the actual cost of the fixed assets for the assessee was the consideration which it had paid to ICI Ltd.,that a similar disallowance had been made by the AO in the earlier A.Y.s, that the Tribunal had deleted the addition for the A.Y.s 2002-03, 2003-04 and 2004-05.With regard to Textile effect division (TED) it was contended similar arguments were made. The assessee further stated that when unit was acquired at slump price as going concern, no separate price was assigned to each individual asset, that it was necessary for the assessee to carryout valuation of each asset for which a consolidated price was paid, that it had obtained the valuation report for its own specific purpose i.e. to record the individual value of the assets acquired on payment of slump sale consi-deration,that it was not a case of revaluation of the assets.The assessee referred to the case of Ashwin Vanaspati (255 ITR 26) in its support. In its support the assessee furnished valuation report dt.19.1.2007 prepared by M.M. Ravji & Co.CA. To enquire into the genuineness of the claim of the assessee,the AO called for information from DDCL and CIBA India under sec.131 of the Act.He directed them to furnish details of written down value (WDV)of all the blocks of assets transferred to the assessee and also a copy of the report prepared by an accountant in accordance with the provisions of sec.50B of the Act. On perusal of the same,he found that no intangible assets were transferred to the assessee on account of slump sale.Therefore,a show cause notice was issued on 9.12.2012 to the assessee calling for explanation/justification for claim of Rs.18.42 crores(Depreciation on MSC Rs.2.97 crores + depreciation of DN Rs.9.20 crores + BUE-Rs.6.25 crores).On 20.12.2010,the assessee filed its explanation in that regard.After considering the submission of the assessee,he held that the assessee had not incurred any expense on brand use, that the notional value ascribed by the valuer was on the basis of future estimated sales, that there was no existence of any brand uses right at the time of transfer,that the transferor had admitted that the asset as a brand uses was not in existence at the time of transfer, that the claim of the assessee that an amount of Rs.6.25 crores should be allowed as revenue expenditure was legally untenable, that the alternative claim of the assessee to allow depreciation u/s.32(1)(ii) of the Act was not acceptable, that even if there were asset like MSC,DN and brand uses right as an intangible asset the assessee was not eligible for claim of depreciation as the same were not akin to the assets defined in the provision like know-how, patents,copyrights etc.Finally,he rejected the claim of depreciation on MSC,DN and right to use brand. 2.3.Before us,the AR contended that as per the Toll Manufacturing Agreement (TMA) the assessee was to get the things manufactured
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for a period of 5 years at no profit /loss basis,that the independent valuer had valued the benefit occurring to the assessee,that all the three intangibles were entitled for depreciation u/s.32(1)of the Act,that there was transfer of intangibles by way of slump sale,that the valuer’s report was complete and conclusive in all regard, that in absence of assignment of some value to the intangibles in the balance sheet of the transferors was not the decisive factor.He relied upon the cases of Smifs Securities Ltd.(248 ITR 302),B.Ravindran Pillai(332 ITR 531), Areva T&D India Ltd.(345ITR 421),Techno shares and Stocks Ltd.(327ITR 323),Birla Global Asset Fin.Co.Ltd.(221Taxmann176),Manipal Universal learning P.Ltd.(359 ITR369),SKS Micro Finance Ltd.(145ITD111),Guruji Entertainments Network Ltd.(108TTJ 180),ONGC Videsh Ltd(37SOT97),Weizmann Forex Ltd.(51SOT535), Sarabhai Zydus Animal Health Ltd.(ITA /26/Del./2005) and Drill Bits International Pvt. Ltd. (ITA/ 1361/ Pun/ 2010).He referred to page No.42, 309-311, of the paper book.Departmental Representative (DR) argued that the transaction was a slump purchase,that valuation of each unit was not made,that business as a single unit was sold by CIBA and Dye Chem,that both those entities had not mentioned anything about the so-called intangible assets in their balance sheets,that only good will was to be valued,that the valuation was based on future projection and not on present benefits,that valuation was not immediately on acquiring the business,that in the MSC no intangible asset were involved,that there was no place for such valuation under the Act. 2.4.We have heard the rival submissions and perused the material before us.Before proceeding further,we would like to consider the cases dealing with intangible assets and Goodwill.In the case of Smifs Securities Ltd.(supra)the Hon’ble Supreme Court has held that provisions of sec. 31(2)are applicable to goodwill.It is also found that business rights,list of clients,brand equity, non compete fee etc. have been held to be intangible assets by the Hon’ble Court/ITAT,while dealing with the issue of depreciation.We would like to reproduce the relevant portions of the judgments dealing with the issue.The Hon’ble Supreme Court in the case of Smifs Securities (supra)has held that a reading of the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 to section 32(1)indicates that goodwill would fall under the expression.The principle of ejusdem generis would strictly apply while interpreting the expression which finds place in Explanation 3(b),that Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. In the matter of Raveendra Pillai the Hon’ble Kerala High Court(supra)has deliberated upon the facts of the case and
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allowability of depreciation on intangible assets.In that matter the assessee had purchased a hospital in Quilon with its land, building,equipment, staff, name, trade mark and goodwill as a going concern under two separate sale deeds.Under the sale deed, the value of the goodwill which included the name of the hospital and its logo and trade mark was Rs.2 crores. The assessee was allowed depreciation on the goodwill.However,in the scrutiny assessment,the AO held that goodwill was not covered by section 32(1)(ii).The appeals filed by the assessee before the FAA) and the Tribunal were unsuccessful.The Hon’ble High Court decided the issue as follow: …in fact, without resorting to the residuary entry the assessee was entitled to claim depreciation on the name, trade mark and logo under the specific head provided under section 32(1)(ii) which covers trade mark and franchise. Admittedly the hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who were patients of the previous owners. When the goodwill paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial rights and it was comparable with trade mark, franchise, copyright etc., referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation……Goodwill is not specifically mentioned in section 32(1)(ii) of the Income-tax Act, 1961. Depreciation is allowable not only on tangible assets covered by clause (i) of section 32(1), but on the intangible assets specifically enumerated in clause (ii) and such of the other business or commercial rights similar to the items specifically covered therein.” The Hon’ble Delhi High Court in the matter of Areva T and D India Ltd.(supra)has discussed the issue of depreciation to be granted on intangible assets.It has also discussed the facts of the case.Following are the finding of the court: The principle of ejusdem generis provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind. For interpreting the expression “business or commercial rights of similar nature” specified in section 32(1)(ii) of the Act, such rights need not answer the description of “know-how, patents, trade marks, licences or franchises” but
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must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term “business or commercial rights of similar nature”, it is seen that the intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words “business or commercial rights of similar nature” have been additionally used,clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets, which it is neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of “business or commercial rights” cannot be restricted only to the six categories of assets, viz., know-how, patents,trade-marks,copyrights,licences or franchises. The nature of “business or commercial rights” can be of the same genus in which all these six assets fall. All of them fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. …….in the case of the assessee, intangible assets, viz., business claims, business information, business records, contracts, skilled employees and know-how were all assets, which were invaluable and resulted in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The intangible assets were, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the business rights along with the tangible assets, the assessee got an up and running business. The specified intangible assets acquired under the slump sale agreement were in the nature of “business or commercial rights of similar nature” specified in section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that section.…the commercial rights acquired to sell products under the trade name and through the network created by the seller for sale in India were entitled to depreciation. In the case of Manipal Universal Learning Pvt.Ltd.(supra)the assessee had agreed in the sale agreement to the price of Rs. 51.63 crores as the value of the SMU agency rights. On the very next day,it revalued such rights at Rs.98,73,25,000 and claimed depreciation on the revalued rights.The assessing authority held that the excess
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consideration paid over the value of the net assets was in the nature of goodwill paid for the future profits of the business. Therefore, he allowed depreciation only on the value mentioned in the agreement.The FAA affirmed the order of the AO.However,theTribunal allowed depreciation on the entire amount arrived at on revalua -tion including the value of goodwill.On appeal to the Hon’ble Karnataka High Court the court held that Explanation 3 to section 32(1) of the Act,defined the expression “asset” to include intangible assets like goodwill.Goodwill is an asset under Explanation 3(b) to section 32(1)of the Act,that depreciation was allowable even on the goodwill,that that the assessee would be entitled to claim depreciation in respect of an amount of Rs.98,73,25,000(including goodwill) and not the amount of Rs.51.63 crores as reflected in the sale agreement for purchase of the distance learning division.In the matters of SKS Microsoft finance Ltd.and Weiamann Forex Ltd.(supra)it has been held that acquisition of client base/customers’ list forms part of intangible assets mentioned in the section 32(1)of the Act. 2.4.1.We find that the assessee had acquired Textile Effect(TE)Business from CIBA-India and DDCL as a going concern on a lump sale basis,that manufacturing facilities of both the entities were not transferred as part of slump sale,that as a part of slump sale the entire distribution channel was handed over to the assessee including the customer,dealers,marketing people, marketing plans, laboratory,supply-chain and the warehouses,that the services of textile effects employees was transferred to the assessee,that it had entered into agreement with CIBA-India and DDCL for material supply and for supply of chemical products to the newly acquired TE business,that it regarded the fixed assets and intangible assets of acquired TE business at fair market value as determined by an independent valuer. In case of a slump sale,generally no separate value is assigned to each and every asset by the transferor and the party taking over the assets assign specific values to the acquired assets.In the case before us,the assessee had obtained a valuation report from an expert and on the basis of that report had recorded the value of the tangible and intangible assets in the books of account. We find that in the valuation report the valuer had assigned value to MSC,DN and Brand uses, that the AO/DRP has not brought anything on record to disprove the correctness of the valuer. As far as the entries in the balance sheet of CIBA-India and DDCL is concerned,in our opinion same are not decisive factors.What has to be seen in case of a slump sale is the treatment given by the assessee in its books of account to the assets acquired and as to whether the valuation is based on some scientific basis.The assessee had entered into
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agreements for a period of five years with CIBA India and DDCL and because of the agreements the products manufactured by both the entities were made available at cost to the assessee,the assessee was granted non-exclusive, irrevocable, royalty free license to use trade-marks,domain names for a period of two years.Not only that the assessee got the distribution network.In short, the assessee got valuable business/commercial rights.Therefore,we are of the opinion that by entering into MCS and getting distribution network,the assessee had acquired business/commercial rights that were of the similar nature as mentioned in sec.32(1)(ii) of the Act. Same is the case about use of brand name.The assessee had assigned value to various assets namely Fixed assets(Rs.6.68 crores), Intangible assets(Rs.54. 94 crores),Goodwill(41.87crores).We are of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisions of the Act. We have already held that business right,distribution network and brand usage fall in the same category of commercial rights mentioned in Section 32 of the Act.Therefore,we hold that assessee was entitled to claim depreciation on the intangible assets. Here,we would like to refer to the case of KEC International [(2010)- TIOL 478-ITAT-Mum].In that matter,the Tribunal has observed that in case of a slump sale the value adopted by the assessee on the basis of valuation report can be considered for depreciation purpose.The Hon’ble Gujarat High Court in the case of Aswin Vanaspati Industries Ltd.(255ITR26)has approved the principle of valuation of acquired asset by a valuer and held that in absence of adequate material on record in form of departmental valuation report and the opinion of the technical experts could not be ignored.In light of the above discussion,ground no.1 is decided in favour of the assessee. 5.4 The aforesaid finding of the Tribunal clearly brings out that the Distribution network rights acquired by the assessee have been found to be in the nature of ‘business or commercial rights’ for the purposes of section 32(1)(ii) of the Act. Although the Ld. CIT-DR has canvassed that the said finding is erroneous, so however, no specific error has been sought to be made out. In fact, we find that similar arguments were set-up by the Revenue before the Tribunal even when the matter came up in relation to assessment year 2010-11, as such a plea has been specifically note by the Tribunal in para 6.2 of its order dated
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10/12/2015(supra). After having considered the said arguments, the Tribunal followed the earlier decision of the Co-ordinate Bench of the Tribunal dated 31/08/2015(supra) and held that the impugned assets fall within the category of ‘business or commercial rights’ mentioned in section 32(1)(ii) of the Act. In our considered opinion, in view of the aforesaid precedents, we find no merit in the plea of the Ld. CIT-DR, which would require us to depart from the afore-stated precedents. Therefore, on this aspect the Revenue has to fail.
Another issue raised in the appeal of the Revenue arises from the direction of the DRP to allow depreciation on goodwill which formed a of the consideration paid by the assessee for acquisition of Polyurethane business from ICI Ltd. as well Textile effects business form CIBA Speciality Ltd. and Diamond Dyechem Ltd.
6.1 In this context, as noted earlier, assessee had acquired Textile effects business from CIBA Speciality Ltd. also the Polyurethane business from ICI Ltd. in the earlier assessment years. For both the aforesaid acquisition, assessee had paid a lumpsum consideration and the portion of purchase consideration, which was in excess of the value of tangible and intangible assets was treated as ‘goodwill’. The DRP noted that assessee had made the claim for depreciation on goodwill in the course of assessment before the Assessing Officer but there was no discussion in the draft assessment order. The DRP also noted that in assessment year 2006-07, the Tribunal in assessee’s own case vide order dated 12/06/2013 had allowed the claim of the assessee and similar position prevailed in assessment year 2009-10,
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wherein the Tribunal allowed the claim vide order dated 31/08/2015(supra). On this basis, the DRP noticed that in view of the precedents ‘goodwill’ forms part of the block of assets of the assessee from assessment year 2006-07 onwards and, therefore, the depreciation on goodwill was to be allowed in the instant assessment year also.
6.2 Before us, it is not disputed by the Ld. CIT-DR that the precedents noted by the DRP continue to hold the field and have not been altered by any higher authority. As a consequence, we, therefore, affirm the direction of the DRP, which is in line with the decision of the Tribunal in assessee’s own case for the earlier assessment years. As a consequence, we find no merit in the said Ground raised by the Revenue.
6.3 In the Grounds of appeal raised by the Revenue a reference has also been made to the direction of the DRP to allow assessee’s claim for deduction under section 43B of the Act with regard to certain liabilities pertaining to the Textile effects division taken over from CIBA Speciality Ltd.
6.4 In this context, the DRP noted that on acquisition of the Textile effects business, in assessment year 2007-08 assessee had acquired certain unpaid liabilities from CIBA Speciality Ltd., which were to be allowed on payment basis in terms of section 43B of the Act . The DRP further noticed that there was discussion in the draft assessment passed by the Assessing Officer despite the claim made by the assessee. It was also noticed that in assessment year 2007-08, the
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Tribunal vide its order dated 31/08/2015(supra) had allowed similar claim of the assessee. Accordingly, following the order of the Tribunal dated 31/08/2015(supra), the DRP directed the Assessing Officer to allow the claim of payment of statutory dues of the Textile effects business taken over from CIBA Speciality Ltd. applying section 43B of the Act after due verification.
6.5 The Revenue has contested the said direction of the DRP in its Grounds of appeal filed before us. Quite clearly, the direction of the DRP is based on the order of the Tribunal for assessment year 2007- 08, which continues to hold the field and, therefore, no fault can be found with the said decision of the DRP. Even otherwise, we find that the said plea of the Revenue is misconceived because in the final assessment order passed by the Assessing Officer no such deduction has been allowed. The Assessing Officer notes in para 14 of the assessment order that no such claim u/s. 43B of the Act has been put forth and, therefore, no deduction was warranted on this issue. In view of the said discussion in the assessment order, it is quite clear that the said Ground is otherwise also misconceived. Be that as it may, the said plea of the Revenue deserves to be dismissed. We hold so.
6.6 In the result, in so far as the appeal of the Revenue is concerned, the same is dismissed.
We may now take up the appeal of the assessee. The first issue in this appeal relates to the transfer pricing adjustment of Rs.6,34,11,803/- made by the Assessing Officer in respect of the
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international transactions on account of corporate service charges paid by the assessee to its associated enterprise. The relevant facts are that assessee had paid corporate services charges amounting to Rs.2,49,34,938/- and Rs.4,29,81,865/- towards service claimed to have been utilized from the associated enterprise, M/s. Huntsman International LLC in the Polyurethane and Textile effects divisions respectively. The said payments were made in terms of an agreement dated 01/07/2008 with Huntsman International LLC, which involved availing of services from the associated enterprise on account of legal services, treasury and credit, purchasing, transportation and logistics, travel co-ordination services, internal audit, human resources services, etc. The assessee had benchmarked the said payment of corporate service charges by using TNM method, whereas the TPO required the assessee to show cause as to why the Comparable Uncontrolled Price(CUP) method should not be applied to benchmark such international transactions. After considering the submissions and evidences furnished by the assessee the TPO deduced man hours of various services rendered by the associated enterprise and determined Rs.45.05 lacs as arm’s length price of such transactions. As a consequence the balance of Rs.6,34,11,803/- was disallowed. The DRP has also affirmed the stand of the TPO, against which assessee is in further appeal before us.
7.1 At the time of hearing, it was brought out that the Tribunal, in assessee’s own case in ITA No.1539/Mum/2014 for assessment year 2009-10 vide order dated 31/08/2015 has remitted the matter back to
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the file of DRP for re-adjudication by passing a speaking and reasoned order. The operating portion of the order of the Tribunal dated 31/08/2015(supra) in this regard is reproduced hereafter:-
“ 4.3.We have gone through the available material.We find that while filing objection before the DRP the assessee had raised various issues.The assessee had requested the DRP to admit additional evidence as per provisions of the DRP Rules.But,the DRP has not mention anything in its order about the issue raised by the assessee and the documents submitted.In our opinion,it was duty of the DRP to reject or accept the additional evidence produced by the assessee once same were filed before it.Secondly,the ground of appeal relating to was not decided.Non-adjudication of a ground raised by an assessee is miscarriage to justice.We would like to reproduce the order of the DRP dealing with TP issue and same reads as under: 5.2.1 The applicant has submitted before the DRP that the entire payment of corporate expenses of Rs.46,299,732/- as an adjustment U/s 92CA. We have considered the submissions filed by the applicant and found that the assessee failed to submit even a single evidence to prove that it had received any services from its AE in lieu of which the payment was made to the AE in spite of being given a number of opportunities by the TPO.Thus the arm's length price of allocation of corporate expenses paid was rightly treated as Rs.Nil by the TPO due to inadequacy of the assessee's argument and the entire payment of allocation of corporate expenses of Rs. 46,299,732 /- was treated as an adjustment U/s 92CA.We agree with the order of the TPO and the addition proposed on this count in the draft order. 5.2.2 The assessee has submitted that TPO has reworked the margin calculation incorrectly as following errors were found in the calculation submitted by the assessee: - In case of Allied Resins, the increase in closing stock was not taken into account while working out the Margin - In Camphor and Jyoti Resins, increase in closing stock was added to turnover instead of reducing it from operating cost If the revised margins are taken into account,the arithmetic mean comes to 5.57% instead of 5.78% as calculated by the TPO. On this issue we direct the AO/TPO to verify the computation of the OP/OR and correctly compute the Arithmetic Mean and accordingly work out the quantum of adjustment. 5.2.3 The assessee has submitted that the TPO has erred in rejecting the TP Study report without appropriate justifications for doing so and has erred in using entity level for the purposes of bench marking international transactions.In this regard,we find that the TPO has correctly pointed out the infirmities in the TP Study report before rejecting it and we are in agreement with his views.The TPO in his order has clearly brought out the
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reasons for making the adjustment at the entity level. Therefore, we are in agreement with the TPO on this issue. 5.2.4 The assessee has submitted that the TPO is entitled only to determine arms length price in relation to the international transaction therefore,the adjustment,if any,based on the arms length operating margin should be worked out only in respect of the revenues in the AE segment.The assessee has submitted that if this is done no adjustment would be necessary.Asssessee states that TPO has erred in taking the PLI margin on the entity basis.We find that the assessee has not maintained separate accounts for the AE and non-AE segments.The segments prepared just for the reason of calculation of PLI are not acceptable as the basis of allocation of expenses and the correctness of allocation are not verifiable.Therefore,these are not reliable.In the absence of the same, and considering the interlinking between AE and non-AE imports, it is not possible to prepare reliable segment-wise accounts.Further,it is noted that the assessee itself has bench -marked its international transactions using entity-level operating margin as the PLI.This would indicate that though making the claim Assessee understands the impossibility of its application. However in so far as the adjustment to be made we find that the judicial precedence suggests that the adjustment should be limited to the AE transactions and not on the entity level turnover. In the facts and circumstances of the case,therefore, while the TPO’s action is sustained,the TPO should recalculate the PLI and limit the adjustment to the AE transaction. 5.2.5 The applicant has also objected to the TPO/s action of considering single year data for the comparable companies selected by him for the year ended 31st March 2009 as against three year data used by the assessee.We have considered the order of the TPO and the submissions filed by the applicant and found that the action of the TPO is as per the provisions of Rule 10B( 4) of the Income Tax Rules, 1962. Thus, we confirm the action of the TPO in this regard. 5.2.6 Regarding claim of standard deduction of 5% from the arm's length price,we are unable to agree with the assessee, in view of the amendments carried out in section 92C by the Finance Acts 2009 and 2012. Further, with due respects to the Hon'ble ITAT, there have been several decisions rendered by different benches of the ITAT holding that the ± 5%)variation is not to be allowed as standard deduction[e.g.DCIT Vs Roche Diagnostics 19 Taxmann.com 192 (Mum) (2012)].This ground of objection taken by the assessee is accordingly rejected. 5.2.7In view of the above discussion we confirm the adjustment carried out by the AO in pursuance of the order of the TPO in principle subject to verification of the computational error' as claimed by the applicant.” A glance at the order of the DRP shows that the order is a non speaking order and it has not given any reasons for arriving at its conclusion.In para no.5.2.1.the DRP talks of failure of the assessee to submit ‘even a single
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evidence’ to prove that it had received any services from its AE in lieu of which the payment was made to the AE ‘in spite of being given a number of opportunities by the TPO’.We find that DRP has not mentioned anything about the documents submitted by the assessee,as stated earlier.In para 5.2.2 the DRP has issued directions but we are not aware as how far same were followed by the officers concerned.The assessee has specifically alleged that the directions of the DRP were not carried out.In next para i.e.para 5.2.3 the DRP mentions that the TPO had rightly rejected the TP Study but reasons have not been given for agreeing with the views of the TPO especially when the assessee had made extensive submissions stating that as how the stand taken by the TPO was flawed.Similar is the position of the next paragraph.The DRP has endorsed the views of the TPO in a very mechanical way without giving any reasoned finding on the arguments taken by the assessee. Therefore,in the interest of justice we are remitting back the matter to the file of the DRP who would adjudicate the issues raised by the assessee in grounds no.2 to 5 of by passing a speaking and reasoned order and after affording a reasonable opportunity of hearing to the assessee.The additional evidences produced by the assessee before the DRP have to be taken in to consideration during fresh adjudication proceedings.Grounds no.2-5 are allowed in favour of the assessee in part.”
7.2 Subsequently, in assessment year 2010-11 also the Tribunal vide order dated 18/12/2015(supra) has remanded the matter back to the file of DRP for fresh adjudication following the earlier precedent, in assessee’s own case for assessment year 2009-10(supra). In the instant year also the facts as well as rival stands are similar to those for the earlier assessment years and, therefore, following the precedents in the assessee’s own case for assessment years 2009- 10(supra) and assessment year 2010-11 (supra), the matter is remanded back to the file of DRP to re-adjudicate the issue relating to the computation of arm’s length price of the international transactions of payment of corporate service charges to the associated enterprise in the light of the earlier directions of the Tribunal dated 31/08/2015(supra). Needless to say, the DRP shall allow the assessee a reasonable opportunity of being heard before passing an order
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afresh as per law. Thus, in so far as the Ground of appeal No.1 is concerned, the same is treated as allowed for statistical purposes.
In so far as the Ground of appeal No.2 is concerned, the same relates to the action of the Assessing Officer in allowing depreciation on intangible assets u/s. 32(1)(ii) of the Act at Rs.3,85,14,551/- as against a claim of Rs.4,34,58,398/- made by the assessee. In the context of the said Ground, assessee has filed an Additional Ground of appeal,which reads as under:-
Additional Grounds of Appeal raised by the assessee:
“1:0 Non-granting of depreciation on closing written down value of intangible assets (viz. material supply contracts, brand usage and distribution network) for Assessment Year 2010-11 : 1.1 The learned AO ("Assessing Officer") erred in not granting depreciation on closing written down value of intangible assets for Assessment Year 2010-11, resulting in allowance of depreciation on intangible assets at Rs. 3,85,14,551 instead of Rs. 4,34,58,398 for the captioned Assessment Year. 1:2 That depreciation of Rs. 49,43,848 (i.e. Rs. 4,34,58,398 less Rs. 3,85,14,551) on intangible assets, inadvertently not granted by the learned AO, be directed to be allowed as deduction in the captioned Assessment Year.” 8.1 At the time of hearing Ld. Representative for the assessee pointed out that the Additional Ground of appeal is nothing but the issue already raised in the Ground of appeal No.2 raised in the Memo of appeal, but it is being raised as abundant caution to clarify the matter.
8.2 At this stage, it would be relevant to recapitulate that at the time of acquisition of the Textile effects business from CIBA Speciality
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Ltd. and Diamond Dyechem Ltd. for a lumpsum consideration, assessee had claimed depreciation in relation to the value of intangibles acquired, namely, distribution net-work and material contract, ‘goodwill’ and the value of the brands. It was pointed out that so far as the cost relating to the acquisition of brand was concerned, an alternate claim was put up that it may be allowed as revenue expenditure because the same involved use of brand for limited period of two years. The Ld. Representative for the assessee explained that in assessment year 2007-08, the Tribunal allowed the claim of assessee for depreciation on intangibles including the value of brand and the alternate plea for allowing cost of brand as revenue expenditure has been dismissed.
8.3 In so far as admission of Additional Ground is concerned, it does not raise any new issue, inasmuch as, it is subsumed in the Ground of appeal No.2 originally raised by the assessee in the Memo of appeal, and is thus admitted. On this aspect, we direct the Assessing Officer to re-work the depreciation allowable on the intangibles following the precedents in the asessee’s own case for the earlier assessment years. Thus, on this aspect, assessee succeeds for statistical purposes.
The last issue raised by the assessee is with regard to a disallowance of Rs.5,95,20,534/- made by the income-tax authorities by invoking the provisions of section 14A of the Act. In this context, brief facts are that assessee was found to have made investment in the equity shares of a subsidiary Baroda Textile Effects Pvt. Ltd. and an associate concern, namely, M/s. Swati Organics. It is also noticed by
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the lower authorities that such investments were made in the previous year relevant to the assessment year 2010-11 and that during the previous year relevant to the assessment year under consideration no investments have been made. The assessee had made suo-muto disallowance u/s. 14A of the Act by identifying 50% of the travel expenses i.e. Rs.45,412/- as expenditure incurred towards earning exempt income from the said investment. However, the Assessing Officer has proceeded to make the disallowance u/s.14A of the Act by applying the formula contained in Rule 8D of the Income Tax Rules,1962. The said aspect has also affirmed by the DRP and hence, in the final assessment order a disallowance of Rs.5,95,20,534/- has been made.
9.1 At the time of hearing, the Ld. Representative for the assessee pointed out that during the year under consideration, no exempt income has been earned or received and, therefore, following the decisions of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT, 317 ITR 86(Del)& Holcim India (Pvt.) Ltd., ITA No.486 of 2014 (Del) the disallowance is totally unwarranted. Apart therefrom, it has been pointed out that similar position prevailed in assessment year 2010-11 also, wherein the Tribunal vide its order dated 18/12/2015(supra) has deleted the disallowance made u/s. 14A of the Act. In this context, the following discussion in the order of the Tribunal dated 18/12/2015 has been adverted to:-
7.3.1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited. The assessee’s submission that it has not earned received any exempt dividend income
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during the year under consideration is not controverted. That the assessee has made investments in its subsidiaries is in the form of strategic investments is also not disputed. The contention of the assessee is that since it has not earned any exempt dividend income during the year, disallowance under section 14A cannot be made. In this regard, the assessee had placed reliance on the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd.(supra). 7.3.2 In this decision, the Hon’ble Delhi High Court referred and followed to its own decision in the case of Holcim India (P) Ltd.(supra) for assessment year 2008- 09, wherein the similar question arose, viz. Whether the Tribunal was justified in deleting the disallowance u/s.14A of the Act, when no exempt income was earned, received or receivable by the assessee in the relevant year. The Hon’ble High Court observes that in the case of Holcim India (P) Ltd.(supra) the Court had referred to the decision in the case of Maxopp Investment Ltd.(supra) and of the ITAT Special Bench in the very same case i.e. Cheminvest Ltd. vs. CIT(2009) 317 ITR 86 and also to the decision of High Courts against Revenue i.e. Lakhani Marketing Incl.(supra), Shivam Motors (P) Ltd. (supra), etc. After considering the various decisions referred to at length, the Hon’ble Court at para 23 of its order held as under:- “ 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” 7.3.3 Following the aforesaid decisions of the Hon’ble Delhi High Court in the cases of Holcim India (P) Ltd.(supra) for assessment year 2008-09 and Cheminvest Ltd. (supra) we hold that since the assessee has not earned any exempt income in the year under consideration, i.e. assessment year 2010-11, no disallowance u/s. 14A of the Act can be made and accordingly delete the disallowance made in this regard by the authorities below. Consequently, Ground No.4(1) raised by the assessee is allowed. Since assessee’s Grievance is addressed, Ground s 4(2) and (3) are now academic in nature and are not being separately adjudicated. 9.2 The Ld. CIT-DR has not disputed the fact-situation that similar aspect has been considered by the Tribunal in assessment year 2010- 11, but reiterated the disallowance made by the lower authorities by applying section 14A of the Act r.w. Rule 8D of the Rules.
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9.3 The factum of the assessee not having earned or received any exempt income during the year under consideration is not in dispute. Therefore, in view of the judgment of the Hon’ble Delhi High Court in the case of Cheminvest (supra) as well as the decision of the Tribunal in assessee’s own case for assessment year 2010-11(supra) no disallowance u/s. 14A is warranted. As a consequence, we set- aside the order of the Assessing Officer with a direction to delete the impugned addition. Thus, on this aspect, assessee succeeds.
Resultantly, whereas the appeal of the assessee is partly allowed, that of Revenue is dismissed.
Order pronounced in the open court on 31/01/2017
Sd/- Sd/- ( AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER Mumbai, Dated 31/01/2017 Vm, Sr. PS Copy of the Order forwarded to : 1. The Appellant , 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai