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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI JASON P. BOAZ, AM & SHRI AMIT SHUKLA, JM
आदेश / O R D E R
PER JASON P. BOAZ , A.M. This appeal by the assessee is directed against the final order of assessment dated 27.11.2014 for A.Y. 2010-11 passed under section 143(3) r.w.s. 144C(13) of the Act, in pursuance of the directions of the Dispute Resolution Panel (‘DRP’) -III dated 15.09.2014. 2. The facts of the case, briefly, are as under: - 2.1 The assessee company, a 100% subsidiary of Siemens India Ltd., engaged in the business of distribution of telecommunication systems/
M/s. Unify Enterprise Communications P. Ltd. equipment, filed its return of income for A.Y. 2010-11 on 04.10.2010 declaring income of `8,34,00,657/-, which was subsequently revised on 30.03.2012 declaring total income of `8,29,66,598/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny. A reference under section 92CA of the Act was made to the Transfer Pricing Officer (‘TPO’) for determining the arms length price (‘ALP’) of the international transactions entered into by the assessee with its associated enterprises (‘AE’) in the year under consideration, as reported by the assessee in Form No. 3CEB. The TPO, after examining the matter, passed an order under section 92CA(3) of the Act dated 15.01.2014, wherein a T P adjustment of `4,35,54,765/- was proposed to the ALP of the international transactions entered into by the assessee with its AE’s in the year under consideration. The AO completed the draft assessment under section 143(3) r.w.s. 144C(1) of the Act vide order dated 11.02.2014 wherein the income of the assessee was determined at `12,65,21,360/- due to the T P adjustment of `4,35,54,765/-.
2.2 Aggrieved, the assessee filed its objections to the draft order of assessment for A.Y. 2010-11 dated 11.02.2014 before the DRP. The DRP issued its directions under section 144C(5) of the Act vide order dated 15.09.2014. In pursuance to these directions of the DRP, the final order of assessment was passed wherein the T P adjustment was reworked at NIL and the income of the assessee was determined at `8,29,66,600/-.
Aggrieved by the final order of assessment for A.Y. 2010-11 dated 27.11.2014, the assessee has preferred this appeal, raising the following grounds: -
M/s. Unify Enterprise Communications P. Ltd. “Based on the facts and circumstances of the case and in law, Progility Technologies Private Limited (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income-tax, 8(2)(1), Mumbai [hereinafter referred to as the 'learned AO] under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds , each of which are without prejudice to one another: On the facts and circumstances of the case and in law, the Hon'ble DRP, the learned AO and the Deputy Commissioner of Income Tax (Transfer Pricing) - 11(7) ('learned TPO'): Depreciation on goodwill under section 32 of the Act
1. Erred in not granting depreciation on goodwill as intangible assets under section 32 of the Act. Rejection of comparability analysis of the Appellant
2. Erred in rejecting comparability analysis conducted by the Appellant without recording any reasons to show that the conditions mentioned in clause (a) to (d) of section 92C(3) of the Act were satisfied. Most Appropriate Method
3. Erred in rejecting the Resale Price Method adopted by the Appellant as the most appropriate method for benchmarking the international transactions of Purchase of EBAX & accessories from AEs and Sale of EPBAX & Accessories to AEs and applying Transactional Net Margin Method as the most appropriate method. Computation of the Operating margin of the Appellant
4. Erred in not considering depreciation on goodwill and commercial rights as an extra ordinary/ non-operating expense and thus erred in not excluding the same while computing the operating profit margin of the Appellant. Profit Level Indicator ('PLI') of Profit Before Depreciation, Interest and Taxes ('PBDIT')/Operating Revenue ('OR')
5. Erred in not considering PBDIT/ OR as PLI for margin comparison purposes having regard to the facts of the Appellant.
M/s. Unify Enterprise Communications P. Ltd. Economic adjustment for higher depreciation 6. Erred in not allowing an adjustment on account of excess depreciation claimed by the Appellant vis-à-vis comparables in accordance with Rule 10B of the Rules. Disregarding several operating income items while computing operating margin of the Appellant 7. Erred in considering income from rendering of training services, recovery of training related expenses and provision for doubtful debts written back as non- operating items while computing the operating margin of the Appellant. Incorrect margin computation of Arraycom (India) Limited 8. Erred in not considering entire depreciation while computing the operating margin in case of Arraycom (India) Limited, a comparable company. Working capital adjustment 9. Erred in not granting the working capital adjustment to account for the difference in the working capital levels between the comparable companies and the Appellant.”
Ground No. 1: depreciation on Goodwill under section 32 of the Act 4.1 At the outset, the learned A.R. for the assessee submitted that this ground relating to the issue of grant of depreciation under section 32 of the Act on Goodwill being an intangible asset is covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2008-09 in dated 28.10.2015 wherein the Coordinate Bench followed the decision of the Hon'ble Apex Court in Smifs Securities Ltd. 348 ITR 302 (SC).
4.2.1 We have heard both the learned A.R. for the assessee and the learned D.R. for Revenue on this issue and have perused and carefully considered the material on record. We find that a Coordinate Bench of this Tribunal in its order in dated 28.10.2015 in assessee’s own case for A.Y.
M/s. Unify Enterprise Communications P. Ltd. 2008-09 has considered this issue of depreciation on Goodwill under section 32 of the Act and held in favour of the assessee. The relevant portion of the order of the Coordinate Bench at paras 11 and 12 thereof is extracted hereunder: -
11. Ground nos.11 and 12 raised by the assessee are relates to the Corporate Issues. Ground no.11 relates to the granting of the depreciation u/s 32 of the Act on the goodwill, being an intangible asset. In this regard, at the outset, Ld Representatives of both the parties agreed to the proposition that the said additional ground is legal in nature and the same is required to be adjudicated as per the ratio of Supreme Court laid down in the case of Smifs Securities Limited [348 ITR 302 (SC)] wherein it was held that the Goodwill constitutes an ‘asset’ under Explanation 3(b) to section 32(1) of the Act. Relevant portion from the said Supreme Court judgment reads as under: “8. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income Tax Act, 1961 (“the Act
We quote hereinbelow Explanation 3 to section 32(1) of the Act: “Explanation 3- For the purposes of this sub-section, the expressions ‘asset’ and ‘block of assets’ shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.” Explanation 3 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature”. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
M/s. Unify Enterprise Communications P. Ltd. In the circumstances, we are of the view that “goodwill” is an asset under Explanation 3(b) to section 32(1) of the Act.”
Considering the above settled nature of the issue, we direct the AO to apply the said judgment of the Apex Court to the present case and allow the assessee’s claim and decided the issue accordingly. Thus, the additional ground no.11 being legal in nature is admitted and allowed in favour of the assessee.” 4.2.2 Following the decision of the Hon'ble Apex Court in the case of Smifs Securities Ltd. (supra) and the aforesaid decision of the Coordinate Bench of the Tribunal in assessee’s own case for A.Y. 2008-09 (supra), we direct the AO to allow assessee’s claim by applying the judgement of the Hon'ble Apex Court (supra). It is ordered accordingly. Consequently, ground No. 1 is allowed.
Grounds at S.No. 2 to 9: In the course of hearing, the learned A.R. for the assessee submitted that the grounds raised
at S.Nos. 2 to 9 in this appeal are not being pressed. In view of the grounds at S.Nos. 2 to 9. (supra) not being pressed, they are rendered infructuous and are accordingly dismissed.
In the result, assessee’s appeal for A.Y. 2010-11 is partly allowed as indicated above. प�रणामतः िनधा�रती क� अपील आंिशक �वीकृत क� जाती है । Order pronounced in the open court on 22nd December, 2015. आदेश क� घोषणा खुले �यायालय म� �दनांकः 22.12.2015 को क� गई । Sd/- Sd/- (AMIT SHUKLA) (JASON P. BOAZ) लेखा सद�य/JUDICIAL MEMBER �याियक सद�य/ACCOUNTANT MEMBER मुंबई Mumbai, �दनांक Dated 22nd December, 2015
M/s. Unify Enterprise Communications P. Ltd. आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to :