GOODYEAR SOUTH ASIA TYERS P.LTD,AURANGABAD vs. ASST CIT CIR 1, AURANGABAD

In this appeal, assessee has raised the following Grounds of appeal:-

That on the facts and circumstances of the case, the assessment order passed by the Ld. Assessing Officer ("AO") is bad in law. 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 3. That on the facts and circumstances of the case and in law, the Ld. AO and Ld. TPO have erred in re-determining the arm's length price ("ALP") of international transactions. 4. That on the facts and circumstances of the case and in law, the Ld. Assessing Officer / Ld. TPO and Ld. DRP erred in enhancing the income of the appellant by Rs. 8,94,969 relating to payment on External Commercial Borrowings ("ECB") undertaken by the appellant by holding that the interest on borrowings paid by the appellant (@LIBOR + 3%) to its Associated Enterprise ("AE") is in excess of the limit prescribed by the RBI (i.e. LIBOR + 2%) and in doing so have grossly erred in: 4.1. ignoring that the interest paid to the AE is as per the rate agreed at the time of taking the loan in 2003 and the rate of interest considered by the TPO (i.e. LIBOR + 2%) is as per the subsequent RBI notification. Further, the AO erred in considering the rate provided by RBI notification to determine the arm's length price; 4.2. ignoring that the appellant had negative net worth hence it was impossible for the appellant to obtain a loan from any other financial institution at or below the rate of interest paid by the appellant; 4.3. ignoring that the cost of borrowing in the hands of AE is LIB OR + 4% but they have charged only LIB OR + 3% from the appellant because of the RBI limit prevalent at the time of granting the loan to the appellant; 5. That the Ld. TPO erred in denying the benefit of 5% margin allowed under the proviso to Section 92C(2) of the Act.

That on the facts and circumstances of the case, the Ld. AO erred in disallowing depreciation of Rs. 5,48,900 on certain assets forming part of the block of assets on which depreciation was being claimed by the appellant and while doing so has erred in law in: 6.1. not following the direct judgments on the issue cited by the appellant and by placing reliance on the cases which are not even applicable in the given case. 6.2. in ignoring the settled law on the subject which is to the effect that even if an asset forming part of the block of asset has not been put to use in a year, the depreciation on the same cannot be disallowed, if the asset has been put to use in earlier years. 7. That the Ld. AO has erred in disallowing the unabsorbed depreciation of the appellant pertaining to the Assessment Year ("AY") 1997-98 to 1999-2000 amounting to Rs. 1,11,19,76,984/- and in doing so have grossly erred: 7.1. in law in holding that the unabsorbed depreciation of the appellant for assessment year 1997-98 to 1999-2000 can be carried forward only for a limited period of 8 years in view of section 32(2) of the Act as prevailing during the relevant years; 7.2. in ignoring the decision of the Hon'ble Gujarat High Court in case of General Motors which being the only direct High Court decision on the issue is binding on the Ld. AO; 7.3. in ignoring the direct High Court decision by simply stating that the decision is 'not acceptable' without citing any reasons for bypassing the direct ruling High Court ruling on this point; 7.4. in relying upon the ruling of the Mumbai Special Bench in the case of Times Guaranty which was delivered in a different context pertaining to set-off of unabsorbed depreciation against other heads of income and not ill respect of carry forward of absorbed depreciation. 8. That the Ld. AO erred-in disallowing the unabsorbed depreciation of Rs. 1,11,19,76,984/- in the assessment for the captioned year as the appellant had only carried forward the above amount and had not even claimed the set-off against the taxable income. 9 The Ld. AO has erred on the facts and the circumstances of the case and in law in arbitrarily initiating a penalty proceedings U/S 271(1)(c) against the appellant for furnishing inaccurate particulars of income against each of the additions made by him, without appreciating the fact that even the essential pre-requisites of levy of penalty do not exist in the instant set of facts.

The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture and sale of automotive tyres, tubes, flaps, etc. The assessee company is a wholly owned subsidiary of the Goodyear Tire & Rubber Company, Akron, USA. For the assessment year 2008-09, it filed a return of income declaring ‘Nil’ income after considering the brought forward business loss and unabsorbed depreciation, which was subject to scrutiny assessment whereby, the current year’s income has been assessed at Rs.14,43,869/-, which was also set-off against a part of the brought forward business losses. In the course of assessment proceedings certain additions/disallowances were made which are subject matter of the appeal before the Tribunal in terms of the above stated Grounds of appeal.

In so far as, Ground of appeal No.1 is concerned, it is general in nature and does not require any adjudication.

In so far as Ground of appeal No.2 dealing with the reference made by the Assessing Officer to the Transfer Pricing Officer for computation of arm's length price as per section 92CA(1) of the Act is concerned, the same has not been addressed at the time of hearing and is accordingly dismissed.

Grounds of appeal No.3 & 4 relate to a singular issue regarding adjustment made by the Assessing Officer of Rs.8,94,969/- while computing the arm's length price of the international transaction of payment of interest on External Commercial Borrowings (ECBs) raised by the assessee from its associated enterprise. In this context, brief facts are that in the past vide an agreement dated 12/9/2003 assessee had raised a loan by way of ECBs from its associated enterprise, namely, Goodyear Tyre Tire & Rubber Company, Akron,

On this aspect, the Ld. Representative submitted that the subsequent notifications by RBI for ECBs contained a restriction whereby ECB could not be availed for working capital requirements. In so far as the assessee is concerned, it was pointed out that ECB loan was raised for working capital requirements which was permissible in terms of the then prevailing RBI guidelines at the time of availing of loan in 2003. The Ld. Representative pointed out that before the TPO, assessee vide communication dated 19.02.2009 furnished an agreement for foreign currency cash loan availed by the associated enterprise from M/s J.P. Morgan Chase Bank, wherein the associated enterprise had paid interest @ LIBOR plus 4% i.e. 7.46% (3.46% + 4%) or alternate base rate +3%. In comparison, assessee had paid lower interest on ECB loan which was LIBOR plus 3% i.e. 6.46% (3.46% + 3%) by considering the ceiling prescribed by the RBI at the relevant point of time. In this context, it is sought to be submitted that assessee paid interest rate to the associated enterprise which was even lower than the cost of borrowing of the associated enterprise. In this context, a reference has been made to page 257 to 260 of the Paper Book wherein it was pointed out to the TPO that the rate of interest payable by the associated enterprise on its borrowing to provide ECB to the assessee was LIBOR plus 4% or alternate basis rate +3%. But keeping in mind, the RBI restrictions associated enterprise charged only LIBOR plus 3% from the assessee company. Ld. Representative submitted that this internal benchmark available with the assessee has been disregarded by the TPO.

In our considered opinion, the aforesaid comparable uncontrolled transactions i.e. the transaction between the associated enterprise and M/s J.P. Morgan Chase Bank provides a direct benchmark for the purposes of determining the arm's length price of payment of interest in respect of ECB loans. While applying CUP method, in our view, it is appropriate that the amount charged in an controlled transaction is examined with the amount charged in an uncontrolled transaction. In the present case, the aforesaid transaction brought out by the assessee qualifies the said tests. On this aspect, a gainful reference can also be made to the discussion of the Third Member Bench of the Tribunal in the case of Technimount ICB Pvt. Ltd. vs. ACIT (ITA No.4608 & 5085/Mum/2010 dated 17.07.2012) wherein the context of the clause (i) of rule 10B(e) of the Rules, it has been opined that the said rule itself

In view of the aforesaid, in our view, since the rate of interest paid by the assessee to its associated enterprise in respect of ECB loan is lower than the rate of interest paid by the associated enterprise to M/s J.P. Morgan Chase bank, the transaction of payment of interest on ECB loan raised from the associated enterprise is at an arm's length price. Therefore, the addition on account of interest paid on ECB loan is directed to be deleted.” 6.1 The aforesaid discussion show that a fact-position which emerged was that transaction of loan raised by the associated enterprise from M/s. J.P.Morgan Chase Bank Ltd. was considered as a valid bench mark. The Tribunal had noted that the rate of interest payable by the associated enterprise on the borrowing raised by it in order to provide the ECB loan to the assessee was LIBOR +4% or alternate base rate +3%, whereas the associated enterprise, keeping in view with the restrictions of RBI, charged interest at LIBOR +3% only from the assessee company. The aforesaid transaction between associated enterprise and M/s. J.P. Morgan Chase Bank provides a direct bench mark for the purposes of determining the arm’s length price of payment of interest in respect of the ECB loans under consideration in the instant year before us. In the instant year also, the assessee had brought to the notice of the TPO in its reply dated 12/10/2011, which has been reproduced in the order of the TPO, that the cost of borrowings in the hand of associated enterprise was LIBOR +4%, which is more than the rate at which interest was charged from the assessee company. Considering the similarity of facts, and the rival stands remaining the same, we find that the impugned addition of Rs.8,94,969/- is unsustainable in view of the aforesaid precedent. We hold so. Thus, the assessee succeeds on this issue.

In so far as Ground of appeal no. 5 is concerned, the same was not pressed at the time of hearing, therefore, the same is dismissed as being not pressed.

In so far as Ground of appeal no.6 is concerned, the same relates to a disallowance of depreciation of Rs.5,48,900/- on impaired and retired assets. In this context, the relevant facts are that in the assessment year of 2002-03 assessee company had suspended the production of two-three wheeler tyres. As a result, some plant and machinery forming part of Plant & Machinery having WDV of Rs.1,24,492/- as on 1/4/2002, were put to use only for part of the previous year relevant to assessment year 2002-03. The aforesaid assets were treated as retired and impaired assets and the WDV as per books of account maintained under the Companies Act, 1956 of Rs.5,82,37,212/- was considered as an impaired loss and debited to the P&L Account. However, in the income tax return for assessment year 2002-03, such loss of Rs.5,82,37,212/- was added back and the depreciation claimed in the return of income included depreciation on the WDV of such assets also. The Assessing Officer disallowed the depreciation on such assets in the assessment for assessment year 2002-03. As a consequence, the depreciation claimed on the WDV of such assets relevant to the instant assessment year was also denied by the Assessing Officer in the impugned assessment, which amounted to Rs.5,48,900/-.

We have carefully considered the rival submissions. As the discussion in the earlier paragraphs would show, the controversy revolves around assessee’s claim for depreciation on block of assets comprising of Plant & Machinery, wherein such block contained certain assets which were retired and considered as impaired assets. In the books of account, assessee claimed the impairment loss as a debit to the Profit & Loss Account. However, in the return of income filed assessee computed depreciation with reference to the block of assets, including the aforesaid impaired assets. The claim has been denied by the Assessing Officer primarily for the reason that such impaired assets were not put to use thereafter.

In our considered opinion, the Assessing Officer has not appropriately appreciated the concept of allowance of depreciation in section 32 with the introduction of block of assets w.e.f. 01.04.1988. The depreciation in terms of the block of assets concept is to be allowed on the ‘actual cost’ or WDV of the particular ‘block of assets’, even if it is found that a particular asset comprised in the block of asset has not been put to use. The aforesaid proposition is founded on the concept that depreciation is allowable with respect to the block of assets and not the individual assets. In this context, the CIT(A) has referred to the judgement of the Hon’ble Delhi High Court in the case of Bharat Alluminium Co. Ltd. (supra). In the said case, it was found that certain Plant & Machinery was not put to use in the relevant year and therefore depreciation thereupon was not allowed. The Tribunal taking into consideration the concept of ‘block of assets’ introduced w.e.f. 01.04.1998 held that whether an individual asset is put to use in a particular year or not is of no consequence inasmuch as the requirement of law is to establish the use of concerned block of assets and not use of particular assets individually. The Hon’ble Delhi High Court affirmed the view of the Tribunal and the following discussion is relevant :-

To the similar effect is the judgement of the Hon’ble Delhi High Court in the case of Oswal Chemicals and Fertilizers Ltd., 341 ITR 467 (Del). The Hon’ble Gujarat High Court in the case of Sonal Gum Industries (supra) has also held that in relation to the block of assets, it is not possible to segregate items falling within the block for the purposes of granting depreciation or restricting the claim thereof. According to the Hon’ble High Court, once it is found that the assets are used for business, it is not necessary that all the items falling within the particular block of assets ought to be simultaneously used for being entitled to the allowance of depreciation.

In the case before us, certain items of Plant & Machinery pertaining to the two-three wheeler tyres manufacturing unit were forming part of the block assets and were being put to use till the preceding assessment year 2001-02 and for a part of the year under consideration. However, since then and in the subsequent assessment years, these items of machinery were impaired and not being put to use. It has been explained before us that the production of two-three wheeler tyres was

Before parting, we may also refer to the decisions of the Hon’ble Bombay High Court in the case of Dinesh Kumar Gulabchand Agrawal vs. CIT, 267 ITR 788 and the Hon’ble Karnataka High Court in the case of DCIT vs. Yelama Daseppa Hospital, 290 ITR 253 which were relied upon by the Assessing Officer to deny the claim of the assessee. The CIT(A) has distinguished the above decisions and we do not find any infirmity in such stand of the CIT(A). In so far as the aforesaid decisions are concerned, a perusal thereof reveals that in those cases assets were not at all put to use in the year of acquisition itself, meaning thereby that the assets did not become part of the ‘block of assets’ on which depreciation could be allowed in terms of section 32 of the Act. However, in the case of the present assessee, it is undeniable that the assets in question were already in use and were forming part of the block of assets at the beginning of the year under consideration and on such ‘block of assets’, depreciation was being claimed and allowed in the past. Therefore, the fact that such assets were not in use hereinafter cannot be a reason to deny depreciation on such assets which form part of the block of assets, i.e. Plant & Machinery.

As a result of the aforesaid discussion, we hereby affirm the order of the CIT(A) to the effect that since the impaired assets form part of the block of assets, it shall continue to exist for the purposes of allowance of depreciation under the Act as per section 32 of the Act so long as the relevant block of assets continues to exist. 8.2 Following the aforesaid, precedent, which has been rendered on the same issue, the plea of the assessee is allowed and the Assessing Officer is directed to allow depreciation of Rs.5,48,900/- as claimed by the assessee. Thus, on this aspect assessee succeeds.

In so far as Grounds of appeal No.7 & 8 are concerned, it relates to the action of the Assessing Officer in holding the unabsorbed depreciation pertaining to assessment years 1997-98 to 1999-2000 amounting to Rs.111,19,76,984/- cannot be carry forward beyond a period of eight years in

Prior to the Finance (No. 2) Act of 1996 the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance (No. 2) Act of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of eight

So, the unabsorbed depreciation allowance of the assessment year 1996-97 would be added to the allowance of the assessment year 1997-98 and the limitation of eight years for the carry forward and set off of such unabsorbed depreciation would start from the assessment year 1997-98.

We may now examine the provisions of section 32(2) of the Act before its amendment by the Finance Act, 2001. The section, prior to its amendment by the Finance Act, 2001, read as under :

The aforesaid provision was introduced by the Finance (No.2) Act, 1996, and further amended by the Finance Act, 2000. The provision introduced by the Finance (No. 2) Act was clarified by the Finance Minister to be applicable with prospective effect.

Section 32(2) of the Act was amended by the Finance Act, 2001, and the provision so amended reads as under :

The purpose of this amendment has been clarified by the Central Board of Direct Taxes in Circular No. 14 of 2001 (see [2001] 252 ITR (St.) 65, 90). The relevant portion of the said Circular reads as under :

The Central Board of Direct Taxes Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of eight years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from the assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on the 1st day of April, 2002 (the assessment year 2002-03), will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001, and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depredation; allowance worked out in the assessment year 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by the Finance Act, 2001, it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence, keeping in view the purpose of the amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing the taxing statutes, rule of strict interpretation has to be applied, giving fair and rea- sonable construction to the language of the section without leaning to the side of the assessee or the Revenue. But if the Legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No. 14 of 2001 had clarified that under section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by the Finance Act, 2001, would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000- 01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the assessment year 2002-03

Therefore, it can be said that, current depreciation is deductible in the 40 first place from the income of the business to which it relates. If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on the 1st day of April, 2002 (the assessment year 2002-03), will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001. And once Circular No. 14 of 2001 clarified that the restriction of eight years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from the assessment year 1997-98 up to the assessment year 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by the Finance Act, 2001, and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever.

It may also be relevant to observe that subsequently, Hon’ble Gujarat High Court in the case of CIT v. Gujarat Themis Biosyn Ltd. (2014)44 taxman.com 20(Guj) vide order dated 24/2/2014 has also laid down a similar ratio. In terms of the aforesaid legal position, it is to be held that benefit of set –off of unabsorbed depreciation of assessment year 1997-98 to 1999-2000 could be allowed against the income relating to the assessment year 2008-09, and thereafter. Following the aforesaid judicial pronouncements we find no

In so far as Ground of appeal No.9 is concerned, the same relates to initiation of penalty u/s. 271(10(b) of the Act, which is premature and is liable to be dismissed. We hold so.

In the result, the appeal of the assessee is partly allowed, as above.