Income Tax Appellate Tribunal - Mumbai
Huntsman International (India) P.Ltd, ... vs Asst Cit 10(1)(1), Mumbai on 12 September, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "K", MUMBAI
Before Shri Saktijit Dey, Judicial Member &
Shri Manoj Kumar Aggarwal, Accountant Member
ITA No.1099/Mum/2017
Assessment Year : 2012-13
Huntsman International (India) ACIT 10(1)(1),
Private Ltd., Mumbai
Light Hall B-Wing, Vs.
Saki Vihar Road, Andheri (E),
Mumbai 400 072
PAN AAACH9149J
(Appellant) (Respondent)
Appellant By : Shri F V Irani
Respondent By : Shri Rignesh Das
Date of Hearing :04.09.2018 Date of Pronouncement : 12.09.2018
ORDER
Per Saktijit Dey, Judicial Member
This appeal by the assessee is directed against the assessment order dated 17.01.2017 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2012-13, in pursuance to the directions of the Dispute Resolution Panel (1) (DRP), Mumbai.
2. In ground no.1 with its sub grounds, the assessee has challenged the disallowance of corporate service charges paid to Associated Enterprises (AE) amounting to ` 10,54,04,393/-. Briefly, facts are the assessee, an Indian company, is wholly owned subsidiary of Huntsman International LLC. The 2 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
assessee is engaged in the business of manufacturing and trading of chemicals. For the assessment year under dispute the assessee filed its return of income on 30.11.2012, declaring loss of ` 6,37,59,600/-. During the assessment proceedings the Assessing Officer noticing that in the relevant previous year the assessee had entered into international transactions with its AEs made a reference to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) of the international transactions. In the course of proceedings before him, the TPO called for various documents including the Transfer Pricing study report of the assessee in support of the benchmarking of the international transactions made by the assessee. After verifying the documents available before him, the TPO found that assessee has paid service charges amounting to ` 3,91,19,615/- and ` 7,13,84,778/- towards services availed from the AEs in two of its manufacturing divisions. The Assessing Officer also noted that such service charges were paid for the first time in A.Y. 2009-10 and continued in the subsequent assessment years. After verifying the transfer pricing study report the TPO found that as per the agreement dated 1.07.2008 with the holding company, the services availed by the assessee from AEs are relating to various sectors including legal services, purchase, transporting and logistics, travel co-ordination services, treasury and credit, public relations, internal control and internal audit, compliance and ethics, tax administration support services, human resources services etc. After deliberating upon various services availed by the assessee, 3 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
the TPO ultimately concluded that the assessee has to prove that the services were rendered and received by the assessee. Further, he observed that quantification of the extent of services received by the assessee and the actual expenditure relating to such services commensurate with benefit has to be tested in arm's length conditions. Ultimately, the TPO concluded that the assessee has failed to demonstrate that the payment made towards service charges has resulted in any tangible benefit to the assessee. Therefore, according to him the ALP of the payment made towards service charges has to be taken as 'Nil'. Proceeding further and referring to the decision taken by him for A.Y. 2009-10, the TPO observed that by applying Comparable Uncontrolled Price (CUP) method, the ALP of the services on man hour rate basis is to be computed at ` 51,00,000/- as against ` 11,05,04,393/- shown by the assessee. Thus, he made an adjustment of ` 10,54,04,393/-. In terms with the adjustment made by the TPO, the Assessing Officer added the TP adjustment in the draft assessment order.
3. Being aggrieved, the assessee challenged the additions made by filing objections before the DRP. However, the learned DRP following its own decision on identical issue in A.Y. 2011-12, rejected the objections raised by the assessee.
4. Shri F V Irani, learned Senior Counsel, appearing for the assessee, at the outset, submitted that the issue in dispute has been decided by the 4 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
Tribunal in favour of the assessee in A.Y. 2011-12. In this context, he drew our attention to the relevant observations in the order of the Tribunal dated 31.01.2017 in ITA No.5637/Mum/2015. The learned DR relied on the observations of the TPO and DRP.
5. We have considered rival submissions and perused the material on record. As could be seen from the facts emanating from record, payment of service charges to AEs is in pursuance to agreement dated 01.07.2008 and is continuing from A.Y. 2009-10. The TPO himself has stated such facts in his order for the impugned assessment year. In fact, the learned DRP upheld the adjustment made by the TPO simply relying upon its own decision in assessee's case for A.Y. 2011-12. However, the Tribunal while deciding the assessee's appeal against such addition made on account of TP adjustment in A.Y. 2011-12 in ITA No. 5637/Mum/2015, dated 31.01.2017, has restored the issue to the DRP for fresh adjudication. The relevant observations of the Tribunal in this regard are as under:
"7. 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 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, 5 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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 6 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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 7 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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 8 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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."
Facts being identical, respectfully following the decision of the Co-ordinate Bench as referred to above, we restore the issue to the learned DRP for fresh adjudication keeping in view the directions of the Tribunal in the preceding assessment year. Thus, these grounds are allowed for statistical purposes.
6. In ground no.2 with its sub-grounds, assessee has challenged disallowance of depreciation on intangibles such as material supply contracts, distribution network and brand usage. Briefly, facts are during the 9 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
assessment proceedings, the Assessing Officer while verifying assessee's claim of depreciation noticed that the assessee has claimed depreciation on material supply contract and distribution network amounting to ` 70,47,949/- and ` 2,18,37,964/- respectively. Therefore, he called upon the assessee to justify its claim of depreciation. Though, the assessee submitted its explanation justifying its claim of depreciation, however, the Assessing Officer relying upon his decision on identical issue in assessee's own case for A.Y. 2007-08, disallowed assessee's claim of depreciation. Being aggrieved of such disallowances, assessee raised objections before the learned DRP. However, the learned DRP following his own order on identical issue in assessee's case for A.Y. 2011-12, upheld the disallowance. Though, the learned DRP was conscious of the fact that the Tribunal in the preceding assessment year has allowed assessee's claim, however, since the department has no remedy of appeal against the order of DRP, to protect the interest of Revenue, DRP rejected assessee's claim.
7. The learned AR, at the outset, submitted that the issue is covered by the decision of the Tribunal in assessee's own case for the preceding assessment years including A.Y. 2011-12. The learned DR relied upon the observations of the Assessing Officer and DRP.
8. We have considered rival submissions and perused material on record. Pertinently, assessee's claim of depreciation on intangibles such as material 10 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
supply contract, distribution network and brand usage was continuing from A.Y. 2007-08. Though assessee's claim was rejected repeatedly by the department from A.Ys 2007-08 to 2011-12 however, when the dispute reached the Tribunal, the issue was decided in favour of the assessee. In the latest order passed in assessee's own case for A.Y.2011-12 in ITA NO.5637/Mum/2015 dated 31.01.2017, the Tribunal while referring to its earlier decision on the issue has decided as under:
"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 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, 11 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 MSC was 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 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 12 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 consideration, 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 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 13 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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:
14ITA No.1099/Mum/2017
Huntsman International (India) Private Ltd.
...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 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 15 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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, the Tribunal allowed depreciation on the entire amount arrived at on revaluation 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 16 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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, n 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 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, he Tribunal has observed that in case of a slump sale the value adopted by the assessee on the basis of 17 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
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 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.
Respectfully following the aforesaid view of the Co-ordinate Bench in assessee's own case, we allow assessee's claim of depreciation. This ground is allowed.
9. In ground no.3, assessee has challenged disallowance of expenditure u/s. 14A read with Rule 8D amounting to ` 5,94,53,040/-. Briefly, facts are during the assessment proceedings, the Assessing Officer noticing that assessee has made investment in shares of its subsidiary which would give 18 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
rise to exempt income, whereas, it has not disallowed any expenditure u/s. 14A read with Rule 8D, called upon the assessee to explain as to why such disallowance should not be made. Though, the assessee objected to the proposed disallowance by stating that in the relevant previous year it has not earned any exempt income to require disallowance u/s. 14A read with Rule 8D, however, the Assessing Officer rejected the submissions of the assessee and proceeded to work out the disallowance under Rule 8D and quantified such disallowance at ` 5,94,53,040/-. Though, the assessee objected to such disallowance before the DRP, it was unsuccessful.
10. The learned AR reiterating the stand taken before the departmental authorities submitted that in the relevant previous year assessee has not earned any exempt income, hence, question of disallowance u/s. 14A read with Rule 8D does not arise. In support of such contention, he relied upon the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT 376 TR 33 and the decision of Hon'ble Bombay High Court in the case of Principal CIT vs. Ballarpur Industries Ltd. in Income Tax Appeal No.51 of 2016 dated 13.10.2016. The learned DR relied upon the observations of the Assessing Officer and DRP.
11. We have considered the rival submissions and perused material on record. The fact that the assessee has not earned any exempt income by way of dividend or otherwise in the relevant previous year has not been 19 ITA No.1099/Mum/2017 Huntsman International (India) Private Ltd.
controverted either by the Assessing Officer or by the DRP. Therefore, in the absence of any exempt income earned in the relevant previous year, no disallowance u/s. 14A read with Rule 8D could have been made. Thus, in view of the ratio laid down in the decisions cited by the learned counsel for the assessee, we delete the disallowance made by the Assessing Officer u/s. 14A read with Rule 8D. This ground is allowed.
12. Ground nos.4 & 5 are not pressed, hence are dismissed.
13. Ground no.6 being general in nature is not required to be adjudicated.
14. In the result, assessee's appeal is partly allowed. Order pronounced in the open court on this day of 12th September 2018.
Sd/- Sd/-
(Manoj Kumar Aggarwal) (Saktijit Dey)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated : 12th September, 2018.
SA
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(A), Mumbai.
4. The CIT
5. The DR, 'K' Bench, ITAT, Mumbai
BY ORDER,
//True Copy//
(Assistant Registrar)
Income Tax Appellate Tribunal, Mumbai