GRINDEWELL NORTON LTD,MUMBAI vs. ADDL CIT 1(1), MUMBAI

This appeal by the assessee is directed against the order of CIT(A)-15, Mumbai dated 27.11.2013, pertaining to the Assessment Year 2009-10, which in turn has arisen from the order dated 25.02.2013 passed by the Assessing Officer, Mumbai under section 143(3) r.w.s. 144(c)(3)(a) of the Income Tax Act, 1961 (in short ‘the Act’).

“1. The learned Commissioner of Income-tax (Appeals) erred in holding that the surplus of Rs.41,52,959/- arising on prepayment of deferred sales tax was a revenue receipt liable to tax u/s.28(iv) of the Income- tax Act.

2. The learned Commissioner of Income-tax (Appeals) erred in holding that the appellant obtained a "benefit" in respect of the said pre- payment.

4 Having regard to the facts and circumstances of the case, the Appellant submits that the addition of Rs.41,52,959/- be deleted.

Assets Value (Rs.) Trade Mark 2,00,00,000 Technical Know how 3,50,00,000 MarketingNetwork 3,75,00,000 Non-Compete fees 4,02,50,000 Total 13,27,50,000

6. The learned Commissioner of Income-tax (Appeals) erred in giving several findings which are either irrelevant or incorrect for disallowing depreciation under section 32.

7. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is allowable only on those intangible assets which are protected rights.

8. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is available under section 32 only in respect of a "registered trade mark' or "patented know how".

9. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to allow depreciation under section 32 amounting to Rs.1,96,32,793/- on the intangible assets referred to above.

10. The learned Commissioner of lncome-tax (Appeals) erred in confirming the allocation of interest to the earning of dividend income under section 14A amounting to Rs.4,55,229/-.

11. The learned Commissioner of Income-tax (Appeals) erred in confirming the allocation of expenditure to the tune of Rs.16,57,492/- to the earning of dividend income under section 14A.

12. Having regard to the relevant facts and circumstances of the case and the past record of the appellant, it is submitted that the disallowance under section 14A read with Rule 8D is grossly excessive and requires to be reduced substantially.

3. The appellant before us is a company incorporated under the provisions of Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture of abrasives and refractory products and also deals in ceramics and plastics. For Assessment Year 2009-10, it filed a return of income declaring an income of Rs.65,78,76,093/-, which was subject to scrutiny assessment whereby the total income has been determined at Rs.68,95,40,030/- after making certain additions/disallowances. The assessee carried the matter in appeal before the CIT(A) who has since allowed partial relief. Not being satisfied with the order of CIT(A), assessee is in further appeal before us on the aforestated Grounds of appeal.

4. Insofar as the first issue is concerned, the same relates to surplus resulting to assessee as a consequence of pre-paying deferred Sales Tax incentive on Net Present Value (NPV) basis in terms of Maharashtra 1993 Package Scheme of Incentives. Such gain on pre-mature repayment in terms of the scheme of State Government of Maharashtra came to Rs.41,52,959/- which the Assessing Officer treated as a revenue receipt chargeable to tax u/s 41(1) of the Act. The said action of Assessing Officer has since been affirmed by the CIT(A) also, against which assessee is in further appeal before us.

5. On this issue, it was a common point between the parties that in the past years, the Tribunal has adjudicated the said issue in favour of the assessee. It was pointed out that in Assessment Years 2005-06 and 2006-07, the orders of Tribunal have also been affirmed by the Hon'ble Bombay High Court. In this connection, a copy of the order of Tribunal for Assessment Years 2007-08 and 2008-09 vide and 5800/Mum/2013 dated 27.7.2016 has been placed on record wherein the aforesaid fact-position has been noticed.

“4.7 The perusal of the order of the Hon’ble High Court reveals that in the earlier two years i.e. A.Ys. 2005-06 and 2006-07, it has been held by the Tribunal as affirmed by the Hon’ble Bombay High Court that impugned amount will not be taxable u/s 41(1). While holding so, Hon’ble Bombay High Court has also observed that, in effect, no benefit had accrued to the assessee, since ultimate effect of the transaction is that the assessee paid present value of a future liability. In case the assessee would not have paid this liability, the assessee could have utilized this amount during these years for the purpose of business or for earning of interest income. Instead of doing it like that, the assessee chose to pay it upfront at a discounted value. Under these circumstances, it would be very difficult to say if at all assessee has derived any benefit in financial terms and if yes, then to what extent. Hon’ble High Court has held that in fact no benefit has been derived in any manner. In the case of Sulzer India Ltd. v. JCIT (42 SOT 457) (SB), Hon’ble Special Bench had held that surplus arising on repayment of sales tax liability is on account of difference between payment of net present value against the future liability and it can neither be termed as remissions/session of liability nor it gives rise to any benefit to the assessee. According to Hon’ble Special Bench, it is a simple case of collecting amount at net present value of future liability, which cannot be regarded as giving rise to any kind of benefit to the assessee. The Hon’ble special Bench has discussed law on this issue in detail and this decision was subsequently affirmed by Hon’ble High Court by passing detailed order which has been briefly discussed in our order above. It is further noted by us that Hon’ble High Court has also relied upon and discussed its earlier order in the case of Mahindra and Mahindra Limited 261 ITR 501, wherein it was held that waiver of the principal amount of loan did not give rise to ‘benefit’ as envisaged u/s 28(iv) and therefore it was not taxable u/s 28(iv). It is further brought to our notice by Ld. Counsel of the assessee that the ‘benefit’ as envisaged u/s 28(iv) is something which actually flows to the assessee in monetary terms. In support of his view, he relied upon circular of the Board No. 20D, dated 07.07.1964, relevant part of the circular is reproduced hereunder for the sake of ready reference:

“Assessment of the value of any benefit or perquisite arising from business or exercise of a profession, as income from business or profession.

A new clause (iv) has been inserted in section 28, with effect from 1-4-1964, by section 7 of the Finance Act, 1964, under which the value of any benefit or perquisite (whether convertible in money or not) arising from business or the exercise of a profession will be chargeable to tax under the head "Profits and gains of business or profession". A corresponding amendment has been made to section 2(24), including the value of such benefit or perquisite in the definition of the term "income" vide new sub-clause (va) inserted in section 2(24) by section 4(c)(i) of the Finance Act, 1964. The effect of the above-mentioned amendment is that in respect of an assessment for the assessment year 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g., the value of rent-free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company, will be assessable in the hands of the assessee as his income under the head "Profits and gains of business or profession".

4.8 We have discussed in earlier part of our order also that by making payment of net present value of a future liability it cannot be said if any financial benefit, in real terms, has accrued to the assessee. It is noted that none of the authorities had gone into this aspect and did not quantify, in financial or monetary terms, if any amount could be worked out which could be said to be a ‘benefit’ that had accrued to the assessee. Under these circumstances, we are of this considered opinion that the impugned amount cannot be brought into tax either u/s 41(1) or u/s 28(iv). Hon’ble High Court while giving its decision had analysed all the aspect of this issue and therefore, this issue is not open for reconsideration before us. Thus, respectfully following the order of Hon’ble High Court, we find that no different decision can be taken; therefore, this issue is decided in favour of the assessee. Thus, ground nos. 1 to 4 are allowed.”

“5.7. We have gone through the orders of the lower authorities and judgments relied upon before us. The solitary issue involved here is about the allowability of the depreciation on the amount of intangible assets acquired by the assessee as part of deal of acquisition of Grinding Wheel Business of OAL in terms of the Business Transfer Agreement dated 18.04.2006 entered by the assessee with the said company. It is noted by us that from the perusal of the business agreement enclosed at paper book no. 27 to 87 that assessee acquired Grinding Wheel Business of OAL along with its tangible and intangible assets including Goodwill, intellectual property rights e.g. patents, copyrights, past and present R & D works, brands, trademark, service marks, registered design etc. and all other rights available to prevent the misuse or disclosure of trade secrets. The assessee also submitted valuation report from M/s. Anmol Sekhri and Associates, the Registered Valuers (enclosed at page no. 10 to 192 of the paper book) for ascertaining valuation of the business giving values of each and every fixed assets and other intangible assets acquired by the assessee under the aforesaid deal. It is noted by us that the lower authorities have granted the benefit of depreciation on the amount of fixed assets acquired i.e. plant and machinery etc. Thus, genuineness of transaction has not been doubted, but what has been doubted merely is the ‘valuation’ of intangible assets acquired under the deal. It is to be noted here that factum of acquisition of intangible assets has also not been disputed. Thus, under these circumstances, case made out by the lower authorities is that the amount paid by the assessee for its business is more than the appropriate value of its intangible assets. The assessee has also admitted this position that the assessee has paid an amount which is more than the amount of its tangible assets because of numerous intangible assets acquired by the assessee which were quite valuable in the opinion of the assessee. Under these circumstances, we can say that since the assessee had purchased the Grinding Wheel Business from OAL as a going concern, therefore, amount of consideration paid in excess of value of tangible assets would be accounted for in its books of accounts as ‘Goodwill’. Under these circumstances, no further exercise would be required to make precise valuation of the amount of ‘Goodwill’. There are no doubts about the legal position that as per law, the assessee is eligible to claim depreciation on the amount of Goodwill. It is worth noting that this legal position has been accepted by Ld. CIT(A) in the subsequent year i.e. A.Y. 2008-09 wherein claim of depreciation on Goodwill was accepted and order of CIT(A) has been accepted by the revenue also as no appeal has been filed against the said decision. Our view finds support from the judgment of Hon’ble Delhi High Court in the case of TRIUNE ENERGY SERVICES PRIVATE LIMITED v. DCIT 65 taxmann.com 288(Delhi) wherein identical issue was involved, in similar facts and circumstances. Hon’ble Delhi High Court relied upon the judgment of Apex Court in the case of CIT vs. Smifs Securities Ltd. (348 ITR 302) and held as under:

“Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc. The expression 'goodwill' subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible asset, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. The 'Financial Reporting Standard 10' issued by Accounting Standard Board which is applicable in United Kingdom and by the Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements.

In view of Accounting Standard 10 as issued by the [CAI the assessee's contention was right that the consideration paid by the assessee in excess of value of tangible assets was rightly classified as goodwill.

In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The agreement itself indicates that slump sale included sale of goodwill and the balance sheet specifically recorded goodwill at Rs. 40.58 crore. Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accountinpractice. Thus, a further exercise to value the goodwill is not warranted.”

5.8. In the case before us also the facts are identical. The Grinding Wheel Business has been acquired under a slump sale, under a Business Transfer Agreement with OAL. The said agreement has not been held to be bogus or sham. It can neither be rewritten or nor has been written by the lower authorities. The AO had made direct inquiries with OAL wherein it was confirmed that the assessee had paid sales consideration as per the terms of the agreement and the tangible assets were acquired as stated in the said agreement and accepted by the AO and depreciation was allowed on the same as per facts brought before us. Under these circumstances, any amount of consideration paid over and above the value of tangible assets would be classified as amount of Goodwill on which the assessee would be entitled for depreciation in view of judgment of Hon’ble Supreme Court in the case of CIT vs Smifs Securities Ltd,(supra).Similar view has been taken by Hon’ble Pune Bench in the case of Cosmos Co-op Bank Ltd. v. DCIT (64 SOT 90) and coordinate Bench of Mumbai in the case of DCIT vs. Worldwide Media Pvt Ltd 153 ITD 162. It is further noted by us that Delhi Bench of ITAT in the case of Thyssenkrup Elevator (India) Pvt. Ltd. v. ACIT 167 TTJ 131 also held that where the assessee had acquired business of another company on slump sale basis, excess consideration paid by it over and above the value of net asset acquired, was to be considered as Goodwill u/s 32(1)(ii) which was eligible for depreciation.

5.9. In addition to the above, on facts also, it is noted by us that the assessee brought on record ample evidences in support of its claim to justify the acquisition of various other intangible assets and the justification of their valuation as well as admissibility of depreciation on these assets. It is noted that the Business Transfer Agreement was quite exhaustive having elaborate schedules and annexures containing item wise description of each and every tangible and intangible assets acquired by the assessee. The assessee acquired entire plant and machinery, various trademarks, commercial list of customers and dealers, entire data and information in relation to sales and distribution network, of technical know-how, Goodwill of Grinding Wheel Business, rights of non-competition etc were described in the said agreement. It is further noted that proper break- up and justification for the consideration has been narrated in the said agreement. The said agreement also contains lists of employees of OAL to be taken-over by the assessee company. It also containing the list of trademarks, particulars of goodwill of business of the OAL in the form of business data, customer details, specifications and quality requirement for the products, trade secrets and other confidential information, software process and similar other intangible assets. There was a proper valuation report specifying separate value of each and every asset of tangible or intangible nature. It is also noted that the AO made direct inquiries with OAL in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 to the AO wherein it was inter alia confirmed that the said company transferred its abrasive division situated at Bhiwadi (Rajasthan) to the assessee company for a total consideration of Rs.26.17 crores. It is also brought to our notice that subsequent to the take-over, the assessee company filed petitions with the concerned departments for registration of trademarks in the name of Assessee Company. It is further noted by us from the perusal of the order of Ld. CIT(A) wherein it has been accepted that the assessee had produced before him (i.e. CIT(A)) more than 26 files containing evidences with regard to acquisition of technical know-how. Under these circumstances, we find that there was no basis with the lower authorities to hold that no intangible assets were acquired by the assessee. Thus, viewed from any angle, the assessee is eligible for the claim of depreciation u/s 32(1)(ii) on the amount of intangible assets acquired by it as per Business Transfer Agreement, and thus action of lower authorities was not factually or legally justified while making disallowance of the depreciation on the intangible assets. The AO is directed to grant the benefit of depreciation in terms of section 32(1)(ii) upon the intangible assets acquired by the assessee. Thus, these grounds are allowed in favour of the assessee.”

13. In this context, the relevant facts are that during the year under consideration assessee earned dividend income of Rs.2,30,40,005/-, which was claimed as exempt. In the return of income assessee made a suo motu disallowance of Rs.16,57,492/- u/s 14A of the Act. The Assessing Officer, however, computed the total disallowance at Rs.21,12,722/- and accordingly made an additional disallowance of Rs.4,55,230/-, which is the subject matter of appeal before us. It has been explained that the disallowance of Rs.4,55,230/- in appeal is out of interest expenditure and has been computed by applying Rule 8D(2)(ii) of the Income Tax Rules, 1962 (in short ‘the Rules’). In this context, the limited plea of the assessee is that the Share capital plus Reserves & Surplus available with the assessee is more than enough to cover the investments which have yielded exempt income and, therefore, in terms of the ratio laid down by the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom) a presumption arises that the investments have been made out of such interest-free funds. It is pointed out that the proposition laid down by the Hon'ble Bombay High Court in the case of Reliance Utility (supra) has been also applied in the context of Sec. 14A of the Act by the Hon'ble Bombay High Court in the case of HDFC bank Limited v. DCIT, 383 ITR 529 (Bom). On this basis, it is contended that the disallowance of interest for the purpose of Sec. 14A of the Act is not justified in the instant case.

14. On the other hand, the ld. DR reiterated the stand of Revenue that the applicability of Rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is mandatory.

18. In this regard, the brief facts are that assessee had declared income by way of corporate guarantee fee of Rs.1,57,331/- received from its AE, M/s. Saint-Gobain Ceramic Materials Bhutan Pvt. Ltd. The said AE had availed of a loan facility from Bank of Bhutan Ltd. and assessee had provided the bank a Corporate Guarantee on behalf of its AE. The assessee-company had charged Corporate Guarantee commission @ 1% for the period of three months from January, 2009 to March, 2009 since the AE had raised the loan of Rs.6,29,32,450/- from the bank in the month of January, 2009. The Transfer Pricing Officer (TPO) in the order passed u/s 92CA(3) of the Act did not consider the Guarantee fee charged @ 1% to be at an arm’s length rate. Instead, the TPO held that the arm’s length rate on Guarantee commission was to be taken at 3.35% and accordingly the differential @ 2.35%, i.e., a sum of Rs.1,57,331/- was determined as an adjustment required to be made in order to bring the Guarantee commission income at its arm’s length rate. The TPO determined the arm’s length rate of 3.35% on the basis of credit rating of the assessee as well as the AE. The Assessing Officer noted that credit rating of the assessee was AAA whereas the credit rating of AE was BBB, which was calculated on the basis of the debt- equity ratios. The TPO noted that the difference in the credit rating led to varying cost of interest rates at which the two entities could raise Bonds in the Indian market. In other words, the TPO noted the difference between the credit rating of assessee (and the corresponding interest rate payable to raise Bonds in Indian market) and the credit rating of the AE (and the corresponding interest rate payable for raising Bonds in Indian market) and such difference, according to him, reflected the benefit in the form of Corporate Guarantee given by the assessee. The Assessing Officer accordingly added a sum of Rs.2,12,397/- to the returned income for the purpose of determining the arm’s length rate of the income by way of Guarantee commission. Such an action of the Assessing Officer has since been affirmed by the CIT(A) also.

i) Everest Kanto Cylinder Ltd. v ACIT (34 taxmann.com 19) (Mum Trib) ii) CIT v Everest Kanto Cylinder Ltd. (378 ITR 57) (Bombay HC) iii) Hindalco Industries Ltd. v ACIT (62 taxmann.com 181) (Mum Trib) iv) Thomas Cook (India) Ltd. v ACIT (69 taxmann.com 443) (Mum Trib) v) Godrej Consumer Products Ltd. v ACIT (69 taxmann.com 436) (Mum Trib)

Order pronounced in the open court on 30th September, 2016.