M/s Volvo India Pvt. Ltd., V. ACIT, Bangalore

ITA 1537/BANG/2012

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6455 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 23-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR BENGALURU
• Assessee Lawyers: TEJASVI JAIN
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Period of limitation; Additional evidence; Question of law; Cost of acquisition; Fair market value; Valuation report; Revised return; Revenue expenditure; Capital expenditure; Set aside
• Section: 143(3); 32; 144; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I T (TP) A NO. 1537/BANG/2012 ASSESSMENT YEAR : 2008 - 09 M/S. VOLVO INDIA PVT. LTD., YELCHENAHALLI VILLAGE, TAVAREKER POST, HOSKOTE, BANGALORE 562 122. PAN: AAACV 6747N VS. THE ASSISTANT COMMISSIONER OF INCOME TAX (LTU), BANGALORE. APP EL L ANT RESPONDENT APPELLANT BY : SHRI AJAY VOHRA, SR. ADVOCATE & MS. TEJASVI JAIN, CA RE SPONDENT BY : S HRI PRADEEP KUMAR, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 30.04 .2019 DATE OF PRONOUNCEMENT : 08. 0 5 . 201 9 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 18.12.2012 OF THE ASSISTANT COMMISSIONER OF INCOME TAX (ACIT), LARGE TAX PAYER UNIT ( LTU), BANGALORE, PASSED U/S.143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (THE ACT) IN RELATION TO ASSE SSMENT YEAR 2008-09. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURE/DEALING IN TRACTORS, TRAILERS, BUS-CHAS SIS AND TRADING IN CONSTRUCTION EQUIPMENTS. THE VARIOUS ISSUES THAT E MANATE FROM THE DRAFT ORDER OF ASSESSMENT AGAINST WHICH THE ASSESSEE FILE D OBJECTIONS BEFORE THE IT(TP)A NO.1537/BANG/2012 PAGE 2 OF 58 DISPUTE RESOLUTION PANEL (DRP), THE ORDER OF DRP AN D THE FINAL ORDER OF ASSESSMENT ARE DISCUSSED WITH REFERENCE TO THE INDI VIDUAL GROUNDS OF APPEAL RAISED BY THE ASSESSEE CHALLENGING VARIOUS A DDITIONS MADE TO THE TOTAL INCOME DECLARED BY THE ASSESSEE IN ITS RETURN OF INCOME. THE ASSESSEE HAS ALSO FILED APPLICATIONS FOR ADMITTING ADDITIONAL GROUNDS OF APPEAL VIDE APPLICATION DATED 14.1.2016 AND ANOTHER ADDITIONAL GROUND OF APPEAL DATED 22.11.2018 FILED IN THE REGISTRY ON 4. 1.2019. 3. BEFORE WE DEAL WITH THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE, WE NEED TO FIRST CONSIDER THE ASSESSEES APPLICATIO N DATED 22.11.2018 FOR ADMISSION OF THE FOLLOWING ADDITIONAL GROUND OF APP EAL BECAUSE IT IS A PRELIMINARY ISSUE CHALLENGING THE IMPUGNED ORDER AS ONE PASSED BEYOND THE PERIOD OF LIMITATION AND THEREFORE NON EST IN LAW:- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE IMPUGNED ORDER PASSED BY THE ASSESSING OFFICER IS B ARRED BY LIMITATION AND THEREFORE, IS LIABLE TO BE QUASHED. 4. THE AFORESAID ADDITIONAL GROUND OF APPEAL RAISES A PURELY LEGAL ISSUE WHICH DOES NOT REQUIRE ANY FRESH INVESTIGATION INTO FACTS; FACTS ALREADY BEING ON RECORDS. THE AFORESAID ADDITIONAL GROUND O F APPEAL IS THEREFORE ADMITTED FOR ADJUDICATED ON MERITS IN VIEW OF THE D ISCRETION CONFERRED ON THE TRIBUNAL UNDER RULE 11 OF THE INCOME-TAX (APPEL LATE TRIBUNAL) RULES, 1963 AND THE DECISION OF THE HONBLE SUPREME COURT DECISION IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS. CIT : [1998] 229 ITR 383 (SC) WHEREIN IT WAS HELD THAT ANY LEGAL GROUND WHICH CAN BE DECIDED ON THE BASIS OF FACTS ALREADY AVAILABLE ON RECORD SHOULD B E ADMITTED FOR ADJUDICATION. FURTHER THE ADDITIONAL GROUND SEEKS T O RAISE PURELY A QUESTION OF LAW VIZ., THAT THE ORDER PASSED BY THE AO IS BEY OND THE PERIOD OF IT(TP)A NO.1537/BANG/2012 PAGE 3 OF 58 LIMITATION. THE AFORESAID ADDITIONAL GROUND IS THE REFORE ADMITTED FOR ADJUDICATION. 5. AS FAR AS THE MERITS OF THE ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE AS AFORESAID IS CONCERNED, THE FOLLOWING L IST OF DATES ARE MATERIAL TO ADJUDICATE THE AFORESAID GROUND OF APPEAL: DATE CHART DATE OF FILING INCOME TAX RETURN DATE OF PASSING THE TPO ORDER DATE OF PASSING THE DRAFT ASSESSMENT ORDER 30.09.2008 31.10.2011 26.12.2011 DATE OF DRP DIRECTIONS 03.09.2012 DATE OF FINAL ASSESSMENT ORDER UNDER SECTION 143(3)/144C(13) DUE DATE FOR PASSING FINAL ASSESSMENT ORDER U/S 153(1) R.W.S 3 RD PROVISO TO THE SAID SECTION. 18.10.2012 31.03.2012 6. TO ADJUDICATE THE ADDITION GROUND, THE RELEVANT STATUTORY PROVISIONS HAVE TO BE SEEN. TIME LIMIT FOR COMPLETION OF ASSESSMENTS AND REASSE SSMENTS. 153. (1) NO ORDER OF ASSESSMENT SHALL BE MADE UNDER SECTION 143 OR SECTION 144 AT ANY TIME AFTER THE EXPIRY OF ( A ) TWO YEARS FROM THE END OF THE ASSESSMENT YEAR I N WHICH THE INCOME WAS FIRST ASSESSABLE ; OR ( B ) ONE YEAR FROM THE END OF THE FINANCIAL YEAR IN WHICH A RETURN OR A REVISED RETURN RELATING TO THE ASSESSME NT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, OR ANY EA RLIER IT(TP)A NO.1537/BANG/2012 PAGE 4 OF 58 ASSESSMENT YEAR, IS FILED UNDER SUB-SECTION (4) OR SUB- SECTION (5) OF SECTION 139 , WHICHEVER IS LATER : PROVIDED THAT IN CASE THE ASSESSMENT YEAR IN WHICH THE INCOME WAS FIRST ASSESSABLE IS THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2004 BUT BEFORE T HE 1ST DAY OF APRIL, 2010 , THE PROVISIONS OF CLAUSE ( A ) SHALL HAVE EFFECT AS IF FOR THE WORDS 'TWO YEARS', THE WORDS ' TWENTY-ONE MONTHS' HAD BEEN SUBSTITUTED : PROVIDED FURTHER THAT IN CASE THE ASSESSMENT YEAR IN WHICH THE INCOME WAS FIRST ASSESSABLE IS THE ASSESS MENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2005 BUT BEFORE T HE 1ST DAY OF APRIL, 2009 AND DURING THE COURSE OF THE PROCEEDING FOR THE ASSESSMENT OF TOTAL INCOME, A REFERENCE UNDER S UB-SECTION (1) OF SECTION 92CA ( I ) WAS MADE BEFORE THE 1ST DAY OF JUNE, 2007 BUT A N ORDER UNDER SUB-SECTION (3) OF THAT SECTION HAS NOT BEEN MADE BEFORE SUCH DATE; OR ( II ) IS MADE ON OR AFTER THE 1ST DAY OF JUNE, 2007, THE PROVISIONS OF CLAUSE ( A ) SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN THE FIRST PROVISO, HAVE EFFECT AS IF F OR THE WORDS 'TWO YEARS', THE WORDS 'THIRTY-THREE MONTHS' HAD BEEN SU BSTITUTED: PROVIDED ALSO THAT IN CASE THE ASSESSMENT YEAR IN WHICH THE INCOME WAS FIRST ASSESSABLE IS THE ASSESSMENT Y EAR COMMENCING ON THE 1ST DAY OF APRIL, 2009 OR ANY SUB SEQUENT ASSESSMENT YEAR AND DURING THE COURSE OF THE PROCEE DING FOR THE ASSESSMENT OF TOTAL INCOME, A REFERENCE UNDER SUB-S ECTION (1) OF SECTION 92CA (I) IS MADE BEFORE THE 1ST DAY OF JULY, 2012, B UT AN ORDER UNDER SUB-SECTION (3) OF THAT SECTION HAS NOT BEEN MADE BEFORE SUCH DATE; OR (II) IS MADE ON OR AFTER THE 1ST DAY OF JULY, 20 12, IT(TP)A NO.1537/BANG/2012 PAGE 5 OF 58 THE PROVISIONS OF CLAUSE (A) SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN THE FIRST PROVISO, HAVE EFFECT AS IF F OR THE WORDS 'TWO YEARS', THE WORDS 'THREE YEARS' HAD BEEN SUBSTITUTE D. REFERENCE TO DISPUTE RESOLUTION PANEL. 144C. (1) THE ASSESSING OFFICER SHALL, NOTWITHSTANDING AN YTHING TO THE CONTRARY CONTAINED IN THIS ACT, IN THE FIRST INSTANCE, FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREAF TER IN THIS SECTION REFERRED TO AS THE DRAFT ORDER) TO THE ELIG IBLE ASSESSEE IF HE PROPOSES TO MAKE, ON OR AFTER THE 1ST DAY OF OCTOBE R, 2009, ANY VARIATION IN THE INCOME OR LOSS RETURNED WHICH IS P REJUDICIAL TO THE INTEREST OF SUCH ASSESSEE. (2) ON RECEIPT OF THE DRAFT ORDER, THE ELIGIBLE ASS ESSEE SHALL, WITHIN THIRTY DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDE R, ( A ) FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE ASSE SSING OFFICER; OR ( B ) FILE HIS OBJECTIONS, IF ANY, TO SUCH VARIATION WITH, ( I ) THE DISPUTE RESOLUTION PANEL; AND ( II ) THE ASSESSING OFFICER. (3) THE ASSESSING OFFICER SHALL COMPLETE THE ASSESS MENT ON THE BASIS OF THE DRAFT ORDER, IF ( A ) THE ASSESSEE INTIMATES TO THE ASSESSING OFFICER THE ACCEPTANCE OF THE VARIATION; OR (B) NO OBJECTIONS ARE RECEIVED WITHIN THE PERIOD SPECIFIED IN SUB-SECTION (2). (4) THE ASSESSING OFFICER SHALL, NOTWITHSTANDING AN YTHING CONTAINED IN SECTION 153 OR SECTION 153B , PASS THE ASSESSMENT ORDER UNDER SUB-SECTION (3) WITHIN ONE MONTH FROM T HE END OF THE MONTH IN WHICH, ( A ) THE ACCEPTANCE IS RECEIVED; OR IT(TP)A NO.1537/BANG/2012 PAGE 6 OF 58 ( B ) THE PERIOD OF FILING OF OBJECTIONS UNDER SUB-SE CTION (2) EXPIRES. (5) THE DISPUTE RESOLUTION PANEL SHALL, IN A CASE W HERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2), ISSUE SUCH DIRECTIONS, AS IT THINKS FIT, FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DI RECTIONS REFERRED TO IN SUB-SECTION (5), AFTER CONSIDERING T HE FOLLOWING, NAMELY: ( A ) DRAFT ORDER; ( B ) OBJECTIONS FILED BY THE ASSESSEE; ( C ) EVIDENCE FURNISHED BY THE ASSESSEE; ( D ) REPORT, IF ANY, OF THE ASSESSING OFFICER, VALUAT ION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; ( E ) RECORDS RELATING TO THE DRAFT ORDER; ( F ) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTE D BY, IT; AND ( G ) RESULT OF ANY ENQUIRY MADE BY, OR CAUSED TO BE MADE BY, IT. (7) THE DISPUTE RESOLUTION PANEL MAY, BEFORE ISSU ING ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5), ( A ) MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; OR ( B ) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCO ME-TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM, REDUC E OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE POWER OF THE DISPUTE RESOLUTION PANEL TO E NHANCE THE IT(TP)A NO.1537/BANG/2012 PAGE 7 OF 58 VARIATION SHALL INCLUDE AND SHALL BE DEEMED ALWAYS TO HAVE INCLUDED THE POWER TO CONSIDER ANY MATTER ARISING O UT OF THE ASSESSMENT PROCEEDINGS RELATING TO THE DRAFT ORDER, NOTWITHSTANDING THAT SUCH MATTER WAS RAISED OR NOT BY THE ELIGIBLE ASSESSEE. (9) IF THE MEMBERS OF THE DISPUTE RESOLUTION PANEL DIFFER IN OPINION ON ANY POINT, THE POINT SHALL BE DECIDED AC CORDING TO THE OPINION OF THE MAJORITY OF THE MEMBERS. (10) EVERY DIRECTION ISSUED BY THE DISPUTE RESOLUTI ON PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. (11) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE IS SUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO THE ASSESSEE AND THE ASSESSING OFFICER ON SUCH DIRECTIONS WHICH ARE PREJ UDICIAL TO THE INTEREST OF THE ASSESSEE OR THE INTEREST OF THE REV ENUE, RESPECTIVELY. (12) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE IS SUED AFTER NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. (13) UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SU B-SECTION (5), THE ASSESSING OFFICER SHALL, IN CONFORMITY WITH THE DIRECTIONS, COMPLETE, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 153 OR SECTION 153B , THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSES SEE, WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIREC TION IS RECEIVED. (14) THE BOARD MAY MAKE RULES FOR THE PURPOSES OF THE EFFICIENT FUNCTIONING OF THE DISPUTE RESOLUTION PANEL AND EXP EDITIOUS DISPOSAL OF THE OBJECTIONS FILED UNDER SUB-SECTION (2) BY THE ELIGIBLE ASSESSEE. THE FOLLOWING SUB-SECTION (14A) SHALL BE INSERTED A FTER SUB- SECTION (14) OF SECTION 144C BY THE FINANCE ACT, 20 12, W.E.F. 1- 4-2013 : (14A) THE PROVISIONS OF THIS SECTION SHALL NOT APPL Y TO ANY ASSESSMENT OR REASSESSMENT ORDER PASSED BY THE ASSE SSING IT(TP)A NO.1537/BANG/2012 PAGE 8 OF 58 OFFICER WITH THE PRIOR APPROVAL OF THE COMMISSIONER UNDER SUB- SECTION (12) OF SECTION 144BA . (15) FOR THE PURPOSES OF THIS SECTION, ( A ) 'DISPUTE RESOLUTION PANEL' MEANS A COLLEGIUM COM PRISING OF THREE COMMISSIONERS OF INCOME-TAX CONSTITUTED BY TH E BOARD 5 FOR THIS PURPOSE; ( B ) 'ELIGIBLE ASSESSEE' MEANS, ( I ) ANY PERSON IN WHOSE CASE THE VARIATION REFERRED TO IN SUB-SECTION (1) ARISES AS A CONSEQUENCE OF THE ORDE R OF THE TRANSFER PRICING OFFICER PASSED UNDER SUB-SECTI ON (3) OF SECTION 92CA ; AND ( II ) ANY FOREIGN COMPANY. 6. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS AN EL IGIBLE ASSESSEE AND THEREFORE THE ASSESSMENT IN THE CASE OF THE ASSESSE E IS TO BE COMPLETED KEEPING IN MIND THE STATUTORY PROVISIONS OF SEC.143 (3), 144C AND SEC.153 OF THE ACT. 7. IN SO FAR AS AN ELIGIBLE ASSESSEE IS CONCERNED, THE THIRD PROVISO TO SEC.153(1) LAYS DOWN THE PERIOD OF LIMITATION AND I T LAYS DOWN A PERIOD OF 3 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR AS THE TIME WITHIN WHICH ASSESSMENT HAS TO BE COMPLETED. AS PER THE TH IRD PROVISO THE PERIOD OF LIMITATION IN THE CASE OF THE ASSESSEE WOULD END ON 31.3.2012 I.E., THREE YEARS FROM THE END OF THE RELEVANT AY, WHICH IS AY 2008-09 IN THIS CASE. THE ORDER OF ASSESSMENT HAS HOWEVER BEEN PASSED IN THIS CASE ONLY ON 18.10.2012. 8. IT IS THE PLEA OF THE REVENUE THAT IN THE CASE O F AN ELIGIBLE ASSESSEE THE PROCEDURE TO BE FOLLOWED IS FIRST TO PASS A DR AFT ASSESSMENT ORDER AS PER THE PROVISIONS OF SEC.144C(1) OF THE A CT WHICH HAS A NON- OBSTANTE CLAUSE. THE ASSESSEE HAS A RIGHT TO FILE OBJECTION TO THE DRAFT IT(TP)A NO.1537/BANG/2012 PAGE 9 OF 58 ASSESSMENT ORDER OR CONVEY HIS ACCEPTANCE TO THE PR OPOSALS IN THE DRAFT ASSESSMENT ORDER AND THE TIME LIMIT FOR DOING SO IS 30 DAYS FROM THE DATE OF RECEIPT OF THE DRAFT ASSESSMENT ORDER . IF THE ASSESSEE CONVEYS HIS ACCEPTANCE TO THE DRAFT ASSESSMENT ORDER OR DOE S NOT FILE OBJECTIONS TO THE DRP WITHIN THE TIME LIMIT SPECIFIED IN SEC.144C (2), THE AO HAS DO PASS FINAL ASSESSMENT ORDER WITHIN ONE MONTH FROM R ECEIPT OF ACCEPTANCE OR EXPIRY OF PERIOD FOR FILLING OBJECTIO N TO DRP AND NO SUCH OBJECTION IS FILED (SEC.144C(3) OF THE ACT). IF OBJECTIONS ARE FILED BEFORE DRP, THE DRP SHALL ISSUE SUCH DIRECTIONS, AS IT THINKS FIT, FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT U/S. 144C(5). IN TERMS OF SEC.144C(12) DIRECTIONS U/S.144C(5) HAS TO BE ISSUED ON OR BEFORE EXPIRY OF NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FO RWARDED TO THE ELIGIBLE ASSESSEE. SEC.144C(13) OF THE ACT LAYS DOWN THE TIME LIMIT FOR THE AO TO PASS AN ORDER GIVING EFFECT TO THE DIRECTIONS OF THE TRIBUNAL AND IT READS THUS:- UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SUB-SE CTION (5), THE ASSESSING OFFICER SHALL, IN CONFORMITY WITH THE DIR ECTIONS, COMPLETE, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 153 OR SECTION 153B , THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSES SEE, WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIREC TION IS RECEIVED. 9. ACCORDING TO THE REVENUE, THE NON-OBSTANTE CLAUS E IN SECTION 144C(13) OF THE ACT, GIVES THE AO, A TIME LIMIT OF ONE MONTH FROM THE END OF THE MONTH IN WHICH DIRECTION IS RECEIVED BY THE AO AND IF THAT BE SO, THE ORDER OF ASSESSMENT PASSED ON 18.10.2012 IS WITHIN THE PERIOD OF LIMITATION AND IS VALID. 10. THE CONTENTION OF THE ASSESSEE ON THE OTHER HAN D IS THAT AN ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER PU RSUANT TO THE IT(TP)A NO.1537/BANG/2012 PAGE 10 OF 58 DIRECTIONS OF THE DRP IS UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE ACT. SUCH AN ORDER CANNOT BE CONSTRUED AS HAVI NG BEEN PASSED INDEPENDENTLY AND ON A STAND-ALONE BASIS UNDER SECT ION 144C(13) OF THE ACT. THE FURTHER CONTENTION OF THE ASSESSEE IS THA T THE TIME LIMIT FOR COMPLETION OF ASSESSMENT IN TERMS OF SECTION 153(1) OF THE ACT IS ORDINARILY 2 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEA R. THE SAID LIMIT WAS ENHANCED TO 3 YEARS IN CASE OF AN ASSESSEE WHEREIN REFERENCE WAS MADE TO THE TPO (I.E., IN THE CASE OF ELIGIBLE ASSESSEE) . IT WAS SUBMITTED THAT THE ENHANCED TIME LIMIT OF 3 YEARS IS PROVIDED IN T HE STATUTE IN ORDER TO TAKE CARE OF THE TIME THAT WOULD BE TAKEN, INTER ALIA, I N THE TPO PASSING THE ORDER, PASSING OF DRAFT ASSESSMENT ORDER, OBJECTION S BEING FILED BEFORE THE DRP, DISPOSAL OF OBJECTIONS BY DRP AND PASSING OF A SSESSMENT ORDER. IT WAS SUBMITTED THAT THE PROVISIONS OF SECTION 144C D O NOT, GIVE A GO BYE TO THE LIMITATION ENSHRINED IN SECTION 153 OF THE ACT AND PROVISIONS OF SECTION 153 ARE NOT MADE SUBJECT TO PROVISIONS OF SECTION 1 44C OF THE ACT NOR DO PROVISIONS OF THE LATTER SECTION OVERRIDE THE FORME R, NOTWITHSTANDING THE NON- OBSTANTE CLAUSE IN SUB-SECTIONS (4) AND (13) THEREO F. IT WAS SUBMITTED THAT THE NON-OBSTANTE CLAUSE IN SEC.144C(1) OF THE ACT, IS ONLY WITH REGARD TO THE PROCEDURE TO BE FOLLOWED IN THE CASE OF ELIGIBL E ASSESSEE REQUIRING PASSING OF A DRAFT ASSESSMENT ORDER IN CASE OF AN E LIGIBLE ASSESSEE AND SHOULD BE READ LIMITED TO THE CONTEXT, I.E., EXCEPT ION TO THE ORDINARY RULE THAT THERE WILL BE ONLY ONE ASSESSMENT ORDER PASSED BY T HE ASSESSING OFFICER ON CULMINATION OF THE ASSESSMENT PROCEEDINGS. 11. IT WAS FURTHER SUBMITTED THAT THE NON-OBSTANTE CLAUSE IN SECTION 144C(4) OF THE ACT CURTAILING THE TIME LIMIT TO PA SS A FINAL ASSESSMENT ORDER WITHIN ONE MONTH, IN CASE WHERE THE ASSESSEE DOES N OT MAKE AN APPLICATION TO THE DRP, NOTWITHSTANDING THE TIME LI MIT PROVIDED IN SECTION 153(1) OF THE ACT IS TO CURTAIL THE LIMITATION THAT WOULD OTHERWISE HAVE BEEN AVAILABLE TO THE ASSESSING OFFICER TO PASS THE FINA L ASSESSMENT ORDER. THE IT(TP)A NO.1537/BANG/2012 PAGE 11 OF 58 TIME LIMIT OF ONE MONTH IN SECTION 144C(4) CANNOT B E READ AS ADDITIONAL TIME PROVIDED TO THE ASSESSING OFFICER, OVER AND AB OVE LIMITATION IN SECTION 153 OF THE ACT TO PASS THE FINAL ASSESSMENT ORDER I N THE CASE OF AN ELIGIBLE ASSESSEE. IT WAS SUBMITTED THAT FOR THE SAME REASO N, THE TIME LIMIT OF ONE MONTH IN SECTION 144C(13) TO PASS THE ASSESSMENT OR DER PURSUANT TO THE DIRECTIONS OF THE DRP CANNOT BE CONSTRUED AS ADDITI ONAL TIME AVAILABLE TO THE ASSESSING OFFICER, OVER AND ABOVE THE NORMAL LI MITATION IN SECTION 153 OF THE ACT TO PASS THE ASSESSMENT ORDER. IT WAS SUBMIT TED THAT THE NON- OBSTANTE CLAUSE(S) IN SECTIONS 144C(1)/144C(4) / 14 4C(13) HAVE TO BE READ IN CONTEXT, LIMITED TO THE PURPOSE FOR WHICH THE SA ME ARE CREATED AND ARE NOT INTENDED TO COMPLETELY BYPASS PROVISIONS OF SEC TION 153 OF THE ACT OR PROVIDE FOR ADDITIONAL TIME OVER AND ABOVE THE LIMI TATION CONTAINED IN THE SAID SECTION. OUR ATTENTION WAS ALSO DRAWN TO THE SCHEME OF SECTION 144C THAT WAS INTRODUCED IN THE STATUTE AND THAT THE DIS PUTE RESOLUTION PANEL WAS CONSTITUTED TO EXPEDITE THE DISPUTE RESOLUTION PROCESS INVOLVING ELIGIBLE ASSESSEES. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO THE MEMORANDUM TO THE FINANCE (NO. 2) BILL, 2009 WHILE INTRODUCING TH E PROVISIONS OF SECTION 144C IN THE STATUTE CLARIFYING THE LEGISLATIVE INTE NT IN THE FOLLOWING TERMS:- THE DISPUTE RESOLUTION MECHANISM PRESENTLY IN PLAC E IS TIME CONSUMING AND FINALITY IN HIGH DEMAND CASES IS ATTA INED ONLY AFTER A LONG DRAWN LITIGATION TILL SUPREME COURT. F LOW OF FOREIGN INVESTMENT IS EXTREMELY SENSITIVE TO PROLONGED UNCE RTAINTY IN TAX RELATED MATTER. THEREFORE, IT IS PROPOSED TO AMEND THE INCOME-TAX ACT TO PROVIDE FOR AN ALTERNATE DISPUTE RESOLUTION MECHANISM WHICH WILL FACILITATE EXPEDITIOUS RESOLUTION OF DIS PUTES IN A FAST TRACK BASIS 12. IT WAS SUBMITTED THAT IF THE NON-OBSTANTE CLAUS E IN SECTIONS 144C(4)/ 144C(13) OF THE ACT IS INTERPRETED AS ALLOWING THE ASSESSING OFFICER ADDITIONAL TIME OVER AND ABOVE THE LIMIT PROVIDED U NDER SECTION 153(1) THIRD IT(TP)A NO.1537/BANG/2012 PAGE 12 OF 58 PROVISO, OF THE ACT, THE SAME WOULD DEFEAT THE ENT IRE PURPOSE OF EXPEDITING THE DISPUTE RESOLUTION PROCESS, BY ENLARGING THE TI ME AVAILABLE FOR COMPLETION OF ASSESSMENT TO ALMOST FIVE YEARS FROM THE END OF THE RELEVANT PREVIOUS YEAR (FOUR YEARS FROM THE END OF THE RELEV ANT ASSESSMENT YEAR). 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED COUNSEL FOR THE ASSESSEE. WE HOWEVER FIND SIMILAR ISSUE HAS ALREAD Y BEEN CONSIDERED AND DECIDED AGAINST THE ASSESSEE BY THE ITAT DELHI BENCH IN THE CASE OF HONDA TRADING CORPORATION VS. CIT : (2015) 61 TAXMA NN.COM 233 WHEREIN IT WAS HELD THAT THE PROVISIONS OF SECTION 144C OVERRIDE THE PROVISIONS OF SECTION 153 OF THE ACT. WHILE REJECTI NG THE ASSESSEES CONTENTION THAT THE LIMITATION IN SECTION 153 REFER RED TO PASSING OF DRAFT ASSESSMENT ORDER, THE TRIBUNAL HELD THAT: (I) SECTION 144C GIVES A COMPLETE GO BYE TO SECTI ON 153; AND (II) THE ACT DOES NOT CONTEMPLATE ANY LIMITATION F OR PASSING OF DRAFT ASSESSMENT ORDER, WHICH CAN BE PASSED WITHIN A REASONABLE TIME. 14. THOUGH ARGUMENTS WERE ADVANCED THAT THE AFORESA ID DECISION DOES NOT LAY DOWN THE CORRECT LAW, WE ARE OF THE VIEW TH AT A CO-ORDINATE BENCH DECISION IS BINDING ON US, AND WE FIND NO REASON FO R NOT FOLLOWING THE SAME. WE THEREFORE REJECT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE ON THE QUESTION OF LIMITATION. 15. WE SHALL NOW TAKE UP THE GROUNDS OF APPEAL RAIS ED BY THE ASSESSEE. GR.NO.1 RAISED BY THE ASSESSEE IN THE GROUNDS OF AP PEAL READS AS FOLLOWS:- 1. THE IMPUGNED ORDER OF THE ASSESSING OFFICER PA SSED CONSEQUENT T THE ORDER OF THE DISPUTE RESOLUTION PA NEL (FOR SHORT DRP) IS NOT SUSTAINABLE IN THE EYES OF LAW AS THE S AME IS PASSED WITHOUT CONSIDERING THE EXPLANATIONS OF THE APPELLA NT IN PROPER IT(TP)A NO.1537/BANG/2012 PAGE 13 OF 58 PROSPECTIVE, THE SAME IS PASSED WITHOUT PROPER APPL ICATION OF MIND. THIS GROUND IS GENERAL IN NATURE AND CALLS FOR NO S PECIFIC ADJUDICATION. 16. GR.NO.2 & 3 RAISED BY THE ASSESSEE IN THE GROU NDS OF APPEAL READS AS FOLLOWS:- 2. THE ASSESSING OFFICER AS WELL AS DRP GROSSLY E RRED IN IGNORING THE PLEA OF THE APPELLANT WITH REGARD TO T HE EXCLUSION OF TELE-COMMUNICATION CHARGES THAT THE PAYMENTS WERE M ADE TO THE SERVICE PROVIDER FOR CONNECTIVITY WITHIN INDIA AND THEREFORE THE EXPENDITURE WAS NOT ATTRIBUTABLE TO THE DELIVERY OF ARTICLE OR THINGS INCURRED IN FOREIGN EXCHANGE. 3. THE ASSESSING OFFICER AS WELL AS THE DRP FURTH ER GROSSLY ERRED IN IGNORING THE ABOVE PLEA AND ALSO THE ALTER NATIVE PLEA OF THE APPELLANT THAT THE ISSUE WAS SQUARELY COVERED B Y THE DECISION OF THE HIGH COURT IN THE CASE OF TATA ELXSI LTD & O THERS IN ITA NO. 70/2009 DT. 30.08.2011 WHICH WAS BINDING ON THE M. 17. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/ S.10A OF THE ACT ON THE PROFITS DERIVED FROM ITS SOFTWARE TECHNOLOGY PA RKS OF INDIA (STPI) REGISTERED UNIT. SEC.10A(4) PROVIDES THE METHODOLO GY OF COMPUTATION OF DEDUCTION U/S.10A OF THE ACT AND IT LAYS DOWN THAT THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE S HALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTA KING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINES S CARRIED ON BY THE UNDERTAKING. EXPORT TURNOVER HAS BEEN DEFINED UNDER EXPLANATION 2 (IV) TO SEC.10A AS:- 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RESPEC T OF EXPORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER S OFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE IT(TP)A NO.1537/BANG/2012 PAGE 14 OF 58 FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3) , BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSUR ANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THI NGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRE D IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSID E INDIA. 18. WHILE COMPUTING THE DEDUCTION U/S.10A OF THE AC T, THE AO NOTICED THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSES SEE HAD INCURRED TELECOMMUNICATION CHARGES AMOUNTING TO RS.9,44,90,7 84 IN RESPECT OF STPI UNIT WHICH WAS NOT REDUCED FROM THE EXPORT TUR NOVER WHILE COMPUTING DEDUCTION OF RS.8,00,47,585 UNDER SECTION 10A OF TH E INCOME TAX ACT, 1961. THE AO THEREFORE EXCLUDED THE AFORESAID SUM FROM THE EXPORT TURNOVER WITHOUT EXCLUDING THEM FROM THE TOTAL TURN OVER. AS A RESULT, THE DEDUCTION CLAIMED U/S.10A OF THE ACT BY THE ASSESSE E WAS ALLOWED AT A LESSER SUM THAN WHAT WAS CLAIMED BY THE ASSESSEE. IT WAS THE PLEA OF THE ASSESSEE IN THE APPEAL AGAINST THE ASSESSMENT ORDER BEFORE THE CIT(A) THAT AT ALL TIMES DURING THE RELEVANT PREVIOUS YEAR , IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERI NG ANY TECHNICAL SERVICES. COMMUNICATION EXPENSES WERE INCURRED NOT FOR EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA AND THEREFORE THE E XCLUSION FROM EXPORT TURNOVER AS DONE BY THE AO WAS NOT CORRECT. WITHOU T PREJUDICE TO ITS CONTENTION THAT THE AFORESAID SUMS SHOULD NOT BE EX CLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE A CT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT AR E REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOT AL TURNOVER AND IN THIS REGARD HAS PLACED RELIANCE ON THE DECISION OF THE H ONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) WHEREIN IT WAS HELD THAT WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. THE CIT(A) HOWEVER UPHELD THE ORDER OF T HE AO. IT(TP)A NO.1537/BANG/2012 PAGE 15 OF 58 19. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS RAISED GR.NO.2 & 3 BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR T HE ASSESSEE SUBMITTED THAT SECTION 10A OF THE ACT SEEKS TO ALLOW DEDUCTIO N IN RESPECT OF THE PROFIT DERIVED BY AN ASSESSEE FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE ETC. IN ACCORDANCE WITH CONDITIONS PROVIDE D THEREIN. FOR THE PURPOSE OF WORKING OUT THE PROFIT FROM EXPORT, A FO RMULA HAS BEEN PROVIDED WHEREBY IF THE BUSINESS IS OF A COMPOSITE NATURE, M EANING THEREBY, IT INCLUDES BOTH EXPORTS AS WELL AS DOMESTIC SALES, TH E PROPORTIONATE PROFIT RELATABLE TO THE EXPORT BUSINESS IS TO BE CALCULATE D BY APPORTIONING THE PROFITS OF THE BUSINESS IN THE SAME PROPORTION AS T HE EXPORT TURNOVER, AS DEFINED UNDER CLAUSE (IV) OF THE EXPLANATION 2 TO S ECTION 10A OF THE ACT, BEARS TO THE TOTAL TURNOVER. EXPORT TURNOVER A S DEFINED IN EXPLANATION 2 TO SECTION 10A MEANS THE CONSIDERATION IN CONVERT IBLE FOREIGN EXCHANGE EXCLUDING FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND EXPENSES INCURRED BY AN ASSESSEE IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. THE TERM TOTAL TURNOVER H AS, HOWEVER, NOT BEEN DEFINED FOR THE PURPOSES OF SECTION 10A OF THE ACT. IN VIEW OF THE AFORESAID DEFINITION, WHAT NEEDS TO BE EXCLUDED FROM THE EXPO RT TURNOVER ARE, INTER- ALIA, THE TELECOMMUNICATION CHARGES ATTRIBUTABLE TO DELIVERY OF SOFTWARE OUTSIDE INDIA. IT WAS SUBMITTED THAT IN THE PRESENT CASE, THE TELECOMMUNICATION CHARGES INCURRED BY THE ASSESSEE RELATES TO PROVIDING CONNECTIVITY WITHIN INDIA FOR ACCESSING INTERNET, I NTRANET, SERVERS LOCATED OUTSIDE INDIA. THE SERVERS ARE LOCATED IN DIFFERENT COUNTRIES AND ARE CONNECTED THROUGH LEASED LINE OF THE RESPECTIVE COU NTRIES. THE DELIVERY OF SOFTWARE TO THE CUSTOMER TAKES PLACE AT TWO STAGES - (I) UPLINKING THE DATA, WHICH OCCURS AT THE SOFTWARE DEVELOPERS PLACE AND; (II) DOWNLINKING OF DATA, WHICH TAKES PLACE AT THE CUSTOMERS PREMISES. THE TE LECOMMUNICATION CHARGES, PERTAIN ONLY TO UPLINKING OF DATA. THE DO WNLINKING CHARGES, ON THE OTHER HAND, ARE BORNE BY THE OVERSEAS ENTITY FOR WH ICH IT HAS TO SUBSCRIBE TO IT(TP)A NO.1537/BANG/2012 PAGE 16 OF 58 THE RESPECTIVE COUNTRYS LEASED LINE. IT WAS THEREF ORE, SUBMITTED THAT THE AFORESAID TELECOMMUNICATION CHARGES ARE INCURRED BY THE ASSESSEE FOR CONNECTIVITY ONLY WITHIN INDIA AND CANNOT BY ANY ST RETCH OF IMAGINATION BE ATTRIBUTABLE TO DELIVERY OF SOFTWARE OUTSIDE INDIA. IT WAS SUBMITTED THAT THE ASSESSEE DID NOT INCUR ANY EXPENDITURE IN FOREIGN C URRENCY FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA SO AS TO EXCLUDE I T FROM THE DEFINITION OF EXPORT TURNOVER. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TAKI NG INTO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT COMMUNICATION CHARGES SHO ULD BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOV ER. WE ARE OF THE VIEW THAT AS OF TODAY, LAW DECLARED BY THE HON'BLE HIGH COURT OF KARNATAKA WHICH IS THE JURISDICTIONAL HIGH COURT IS BINDING O N US. MOREOVER, THE ORDER OF THE HONBLE KARNATAKA HIGH COURT HAS BEEN UPHELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.8489-98490 OF 2013 & ORS. DATED 24.04.201 8 . IN VIEW OF THE ACCEPTANCE OF GR.NO.3, WE ARE OF THE VI EW THAT GR.NO.2 THAT THE EXPENDITURE IN QUESTION OUGHT NOT TO BE EXCLUDE D FROM THE EXPORT TURNOVER IS ACADEMIC AND THEREFORE LEFT OPEN WITHOU T ANY DECISION. 21. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FOL LOWS: 4. THE ASSESSING OFFICER AS WELL AS DRP ERRED IN M AKING THE ADDITION OF SPECIAL ADDITIONAL DUTY OF CUSTOMS AT 4 % TO THE TUNE OF RS.5,74,87,167/- WITHOUT PROPER APPLICATION OF M IND AND WITHOUT APPRECIATING THAT THE SAME HAD NOT ACCRUED DURING THE YEAR TO THE APPELLANT. 22. DURING THE RELEVANT ASSESSMENT YEAR 2008-09, TH E ASSESSEE HAD SHOWN AS INCOME IN THE PROFIT AND LOSS ACCOUNT A SU M OF RS.5,74,87,167/- IT(TP)A NO.1537/BANG/2012 PAGE 17 OF 58 BEING REFUND OF SPECIAL ADDITIONAL DUTY OF CUSTOMS (SAD). HOWEVER IN THE COMPUTATION OF TOTAL INCOME, THE ASSESSEE REDUC ED THE SAID SUM FROM THE TAXABLE INCOME TAKING A STAND THAT THE INCOME I N QUESTION DID NOT ACCRUE OR ARISE TO THE ASSESSEE DURING THE PREVIOUS YEAR AND THEREFORE UNDER THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE, THE SAID INCOME SHOULD NOT BE BROUGHT TO TAX IN THIS YE AR. THE AO REJECTED THE PLEA OF THE ASSESSEE AND BROUGHT THE SAID SUM TO TA X. ON OBJECTION TO THE DRAFT ORDER OF ASSESSMENT MAKING THE AFORESAID ADDI TION, THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE DRP. THE DRP SET A SIDE THE ISSUE FOR EXAMINATION AFRESH BY THE AO. 23. PURSUANT TO THE DIRECTIONS OF THE DRP, THE ASSE SSEE VIDE LETTER DATED 15 TH OCTOBER 2012 , SUBMITTED BEFORE THE ASSESSING OFFI CER THAT THE REFUND OF SAD AMOUNTING TO RS.5,74,87,167 WAS SANCT IONED ONLY IN THE SUBSEQUENT YEARS BY THE CUSTOM AUTHORITIES WHO PASS ED THE NECESSARY ORDERS APPROVING THE CLAIM ON 6.7.2009 , 29.1.2009 AND 5.3.2009 (THE RELEVANT ORDERS ARE AT PAGES 603-604 OF THE PB VO L 1 / PAGES 2817- 2818 OF THE PB VOL 4) , AND THEREFORE AS PER THE LAW LAID DOWN BY THE SUPREME COURT IN THE CASE OF E.D. SASOON :26 ITR 27, SHOORJI VALLABHDAS AND CO. : 46 ITR 144 AND ASHOKBHAI CHIM ANBHAI : 56 ITR 42 , IN ABSENCE OF RIGHT TO RECEIVE SUCH INCOME ON AC COUNT OF SAD DOES NOT ACCRUE IN THE RELEVANT PREVIOUS YEAR. 24. THE ASSESSING OFFICER, HOWEVER, REJECTED THE PL EA OF THE ASSESSEE AND HELD THAT (I) THE ASSESSEE HAD RIGHT TO RECEIV E THE SAID INCOME AND HAD ACCOUNTED THE SAD REFUND AS INCOME IN THE BOOKS OF ACCOUNTS, AND HAS NOT TREATED THIS AS INCOME IN THE INCOME TAX RETURN; AN D (II) BETWEEN CENTRAL EXCISE DEPARTMENT AND THE ASSESSEE THERE WAS DEBTOR CREDITOR RELATIONSHIP, AND THUS INCOME ON ACCOUNT OF SAD REFUND HAD ACCRU ED TO THE APPELLANT DURING THE RELEVANT ASSESSMENT YEAR. AGGRIEVED BY T HE AFORESAID IT(TP)A NO.1537/BANG/2012 PAGE 18 OF 58 OBSERVATIONS OF THE AO IN THE FINAL ORDER OF ASSESS MENT, THE ASSESSEE HAS RAISED GR.NO.4 BEFORE THE TRIBUNAL. 25. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ASSES SEE IS AN IMPORTER OF CERTAIN RAW MATERIALS/COMPONENTS FROM OUTSIDE IN DIA WHICH ARE TO BE UTILIZED IN MANUFACTURING OF FINAL PRODUCTS. THE AF ORESAID IMPORT OF RAW MATERIAL/COMPONENTS, IS INTER ALIA SUBJECT TO, SAD, WHICH IS LEVIED IN LIEU OF VALUE ADDED TAX ON SIMILAR GOODS HAD THE SAME BEEN MANUFACTURED IN INDIA, UNDER SECTION 3(5) OF THE CUSTOMS TARIFF ACT , 1975. PURSUANT THERETO, UPON EXPORT OF FINISHED PRODUCT, THE ASSESSEE WAS E LIGIBLE TO CLAIM REFUND OF SAD PAID AT THE TIME OF IMPORT OF RAW MATERIALS/ COMPONENTS. ACCORDINGLY, IN THE BOOKS OF ACCOUNTS, THE SAD AMOU NT IS REDUCED FROM THE COST OF MATERIALS USED IN THE EXPORT OF FINISHED PR ODUCTS. PROCEDURALLY, UPON EXPORT OF THE GOODS, A REFUND CLAIM IS REQUIRE D TO BE LODGED WITH THE CUSTOMS AUTHORITY FOR REFUND OF SAD. THE CUSTOM AUT HORITIES, AFTER VERIFYING THE CLAIM ON THE BASIS OF DOCUMENTS SO FURNISHED, P ASS AN ORDER FOR REFUND OF THE SAID AMOUNT. AS PER SEC.27 & 27A OF THE CUST OMS ACT, CLAIM FOR REFUND OF SAD IS NOT AUTOMATIC AND IS SUBJECT TO TH E FOLLOWING CONDITIONS VIZ., (A) AN APPLICATION HAS TO BE MADE FOR CLAIM OF REFUND OF EXCESS CUSTOMS DUTY PAID UNDER SECTION 27(1) OF THE CUSTOM S ACT; (B) SUCH APPLICATION HAS TO BE PROCESSED AND AN ASSESSEE WIL L BE ENTITLED TO REFUND ONLY IF AN ORDER IS PASSED UNDER SECTION 27(2). TH OUGH THE ASSESSEE HAD LODGED CLAIM FOR REFUND WITH THE CUSTOM AUTHORITIES , THE SAD REFUND WAS NOT SANCTIONED BY THE AUTHORITIES. THEREFORE THE ASSESS EE HAD NO RIGHT TO RECEIVE REFUND. SINCE THE GRANT OF REFUND IS SUBJEC T TO VERIFICATION AND SATISFACTION OF THE CUSTOM AUTHORITIES, THE RIGHT T O RECEIVE THE SAME IN FUTURE IS CONTINGENT AND DOES NOT CRYSTALLIZE AT THE TIME OF FILING THE APPLICATION FOR REFUND. THEREFORE UNDER THE MERCANTILE SYSTEM OF A CCOUNTING, INCOME CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE. IT WAS SUBMITTED THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL IT(TP)A NO.1537/BANG/2012 PAGE 19 OF 58 INDUSTRIES LTD.: (2013) 358 ITR 295 (SC) SUPPORTS THE PLEA OF THE ASSESSEE. IN THE AFORESAID DECISION, THE ASSESSEE WAS MAINTAINING ITS ACCOUNTS ON MERCANTILE BASIS AND ACCORDINGLY ACCOUN TED FOR THE BENEFIT OF ENTITLEMENT TO MAKE DUTY FREE IMPORTS IN THE YEAR O F EXPORT. HOWEVER, THE AFORESAID AMOUNTS WERE EXCLUDED BY THE ASSESSEE FRO M COMPUTATION OF TOTAL INCOME SINCE THE SAME COULD NOT BE SAID TO HA VE ACCRUED UNTIL IMPORTS WERE MADE AND THE RAW MATERIAL CONSUMED. THE ASSESS ING OFFICER DID NOT ACCEPT THE ASSESSEE'S CLAIM ON THE GROUND THAT THE ASSESSEE HAD ACQUIRED VESTED RIGHT OF IMPORTING RAW MATERIAL DUTY FREE AL ONG WITH AN OBLIGATION OF EXPORT COMMITMENT. ACCORDING TO THE AO, WHEN EXPORT S WERE MADE, THE OBLIGATION OF ASSESSEE WAS FULFILLED AND RIGHT TO R ECEIVE BENEFIT HAD VESTED AND BECOME ABSOLUTE AT THE END OF THE YEAR. THE IS SUE FOR CONSIDERATION BEFORE THE APEX COURT WAS WHETHER BENEFIT OF AN ENT ITLEMENT TO MAKE DUTY FREE IMPORTS OF RAW MATERIALS OBTAINED BY THE ASSES SEE THROUGH ADVANCE LICENCES AND DUTY ENTITLEMENT PASS BOOK ISSUED AGAI NST EXPORT OBLIGATIONS, WAS TO BE RECOGNISED AS INCOME IN THE YEAR IN WHICH THE EXPORTS WERE MADE OR IN THE YEAR IN WHICH THE DUTY FREE IMPORTS WERE MADE. THE SUPREME COURT HELD THAT SUCH BENEFIT COULD NOT BE S AID TO ACCRUE TO THE ASSESSEE UNTIL THE GOODS WERE ACTUALLY IMPORTED AND MADE AVAILABLE FOR CLEARANCE AS ONLY THEN CORRESPONDING LIABILITY WOUL D ARISE ON THE CUSTOMS AUTHORITIES TO PASS ON THE BENEFIT OF DUTY FREE IMP ORTS TO THE ASSESSEE. IT WAS, THUS, HELD THAT UNTIL THE GOODS WERE ACTUALLY IMPORTED, THE BENEFITS WOULD ONLY BE IN THE NATURE OF HYPOTHETICAL INCOME WHICH MAY OR MAY NOT MATERIALISE AND ITS MONEY VALUE, THEREFORE, WOULD N OT BE INCOME OF THE ASSESSEE. 26. IT WAS SUBMITTED THAT THE LAW IS WELL SETTLED T HAT ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE AMBIT OF TA XATION. IF AN ITEM OF INCOME / EXPENDITURE IS TAXABLE / DEDUCTIBLE, THE S AME HAS TO BE TAKEN INTO ACCOUNT AS PER THE PROVISIONS OF THE ACT AND NOT AS PER THE BOOK ENTRIES. IT(TP)A NO.1537/BANG/2012 PAGE 20 OF 58 REFERENCE IN THIS REGARD WAS MADE TO THE DECISION O F THE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING COMPANY V. CIT 82 ITR 363(SC) LAYING DOWN THE AFORESAID PROPOSITION. THE LEARNED DR REITERATED THE STAND OF THE AO THAT WHEN THE ASSESS EE HAS RECOGNIZED ACCRUAL OF INCOME IN THE BOOKS OF ACCOUNTS, THAT BY ITSELF WOULD BE SUFFICIENT TO BRING TO TAX THE SAME. 27. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE A RE OF THE VIEW THAT IN THE LIGHT OF THE STATUTORY PROVISIONS CITED FOR GETTING AN ORDER OF REFUND OF SAD, THE MERE FACT THAT IT WAS RECOGNIZED AS INCOME IN THE BOOKS OF ACCOUNTS BY THE ASSESSEE WOULD NOT BE SUFFICIENT TO BRING THE SAME TO TAX. THE DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD SUPPORTS THE PLEA THAT THERE WOULD BE NO ACCRUAL OF INCOME UNLESS THE AUTHORITIES CONCERNED, PASS AN ORDER SANCTION OF RE FUND AND THAT THE ENTRIES IN THE BOOKS OF ACCOUNTS BY THE ASSESSEE ARE NOT CO NCLUSIVE IN THE MATTER OF DECIDING THE POINT OF TIME AT WHICH INCOME CAN B E SAID TO HAVE ACCRUED TO AN ASSESSEE. APART FROM THAT, WE FIND THAT OUT OF THE TOTAL SAD REFUND AGGREGATING TO RS.5,74,87,167, THE AMOUNT SANCTIONE D BY THE CUSTOM AUTHORITIES AMOUNTED TO RS.5,71,37,509 ONLY. OUT OF TOTAL SANCTIONED AMOUNT, RS.4,27,71,514 WAS OFFERED TO TAX BY THE AS SESSEE IN ASSESSMENT YEAR 2009-10 AND RS.1,43,65,995 WAS OFFERED TO TAX IN ASSESSMENT YEAR 2010-11, AS AND WHEN THE ORDER IN THIS REGARD WAS P ASSED BY THE CUSTOM AUTHORITIES. THE RELEVANT ORDERS OF THE CUSTOMS AU THORITIES ARE AT PAGES 640 AND 670 OF PB-VOL 1 / PAGES 2823 AND 2829 OF PB -VOL 4 RESPECTIVELY ). THE ISSUE IS THEREFORE REVENUE NEUTRAL AND DO NO T AFFECT THE TAX LIABILITY OF THE ASSESSEE LIKELY TO BE COLLECTE D BY THE DEPARTMENT AS A WHOLE: IN THE LIGHT OF THE ABOVE DISCUSSION, WE A RE OF THE VIEW THAT THE ADDITION MADE IS UNSUSTAINABLE AND THE SAME IS DIRE CTED TO BE DELETED. GROUND NO.4 RAISED BY THE ASSESSEE IS ACCORDINGLY A LLOWED. IT(TP)A NO.1537/BANG/2012 PAGE 21 OF 58 28. GROUND NOS.5, 7 TO 8 RAISED BY THE ASSESSEE REA DS AS FOLLOWS:- 5. THE ASSESSING OFFICER GROSSLY ERRED IN DISALLO WING THE DEPRECIATION ON THE COST OF ASSETS INCURRED WHILE T AKING OVER THE ROAD DEVELOPMENT BUSINESS (FOR SHORT RDB) OF M/S. I NGERSOLL RAND (INDIA) LIMITED (IR FOR SHORT) ACQUIRED THROUG H SLUMP SALE AND THE PANEL GROSSLY ERRED IN SUSTAINING THE DISAL LOWANCE WITHOUT ASSIGNING ANY SPECIFIC REASON OF ITS OWN. 7. THE ASSESSING OFFICER FURTHER ERRED IN DISALLOW ING WARRANTY CLAIM OF RS.1,01,00,000/- AS MADE BY THE APPELLANT WHICH WAS RELATABLE TO THE ROAD TRANSPORT DIVISION WHICH WAS INCURRED IN THE YEAR OUT OF THE BUSINESS TAKEN OVER FROM IR, WI THOUT PROVIDING REASONABLE/ADEQUATE OPPORTUNITIES TO THE APPELLANT. 8. THE ASSESSING OFFICER FURTHER ERRED IN DISALLOWI NG NON- COMPETE FEE PAID AS REVENUE EXPENDITURE, WITHOUT CO NSIDERING THE PLEA OF THE APPELLANT, DULY SUPPORTED BY VARIOUS JU DICIAL PRONOUNCEMENTS. 29. WE HAVE ALREADY SEEN THAT THE ASSESSEE HAS FILE D AN APPLICATION SEEKING TO RAISE ADDITIONAL GROUNDS VIDE ITS LETTER DATED 14.1.2016. ADDITIONAL GROUNDS NO.15 & 16 AND 19 TO 23 RAISED T HEREIN ARE LINKED TO THE GROUNDS OF APPEAL (GR.NO.5, 7 TO 8) ALREADY RAISED IN THE ORIGINAL GROUNDS OF APPEAL FILED ALONG WITH FORM NO.36B ALONG WITH THE APPEAL. THE ADDITIONAL GROUNDS RAISED THEREIN ARE THEREFORE ADMITTED FOR A DJUDICATION. THE ADDITIONAL GROUNDS VIZ., GROUND NOS.15 & 16 AND 19 , 21 TO 23, READS AS FOLLOWS: RAISED AS ADDITIONAL GROUND OF APPEAL NO.15 & 16 15. WITHOUT PREJUDICE TO THE GROUND NO.5, THE AO/DR P OUGHT TO HAVE TREATED THE DIFFERENCE BETWEEN, THE VALUE OF T ANGIBLE AND INTANGIBLE ASSETS ASSIGNED AS PER THE VALUATION REP ORT AND THE WRITTEN DOWN VALUE OF THE ASSETS IN THE BOOKS OF IR AS BEING GOODWILL AND ALLOWED DEPRECIATION AS PER THE PROVIS IONS OF THE ACT. IT(TP)A NO.1537/BANG/2012 PAGE 22 OF 58 16. WITHOUT PREJUDICE TO GROUND NO.8, THE AO/DRP OU GHT TO HAVE HELD NON-COMPETE FEE OF RS.5,40,00,000 AS BEIN G A DEPRECIABLE ASSET AND ALLOWED DEPRECIATION AS PER T HE PROVISIONS OF THE ACT. RAISED AS ADDITIONAL GROUND OF APPEAL NO. 19, 21 TO 23 :- 19. AO/DRP OUGHT TO HAVE ALLOWED THE VALUE ASSIGNE D TO LICENSE, PERMITS, CERTIFICATION, ACCREDITATION ETC. , ACQUIRED FROM IR AMOUNTING TO RS.70,00,000 (RUPEES SEVENTY LAKHS) AS REVENUE EXPENSES AND SHOULD THE SAME BE DISALLOWED, THE AO OUGHT TO PROVIDE DEPRECIATION ON THE SAME. 21. AO/DRP OUGHT TO HAVE HELD GOODWILL OF RS.43,4 0,89,871 AS BEING A DEPRECIABLE ASSET AND ALLOWED DEPRECIATI ON AS PER THE PROVISIONS OF THE ACT. 22. THE APPELLANT ALSO CRAVES FOR LEAVE TO CLAIM AN AMOUNT OF RS.13,87,00,000 AS REVENUE EXPENDITURE PAID TOWARDS THE RIGHT TO SUPPLY SPARE PARTS TO CUSTOMERS OF IR. NOTWITHSTAN DING THIS ARGUMENT, IN CASE THIS AMOUNT IS CONSIDERED AS A PA YMENT TOWARDS ACQUIRING A CAPITAL ASSET, THEN THE AO OUGHT TO ALL OW DEPRECIATION ON THE SAME. 23. WITHOUT PREJUDICE TO THE PRINCIPAL GROUNDS AN D THE AFORESAID ADDITIONAL GROUNDS, THE APPELLANT PLEADS THAT THE TOTAL CONSIDERATION PAID TO IR TOWARDS ACQUISITION OF BUS INESS, WITH THE EXCEPTION OF VALUE OF LAND, SHOULD EITHER BE ALLOWE D AS REVENUE EXPENDITURE OR BE ENTITLED TO DEPRECIATION ON THE C APITALISED VALUE. 30. GROUND NOS.5, 7 TO 8 AND ADDITIONAL GROUNDS NO. 15 & 16 AND 19, 21 TO 23 ARISE OUT OF A BUSINESS TRANSFER AGREEMENT ( BTA) DATED 04.05.2007, WHEREBY THE ASSESSEE ACQUIRED THE ROAD MACHINERY DIVISION (RMD) (ALSO KNOWN AS ROAD DEVELOPMENT BUSINESS OR RDB) OF INGERSOLL RAND INDIA LIMITED (IRIL), BY WAY OF SL UMP SALE FOR LUMP SUM CONSIDERATION OF RS.231,82,00,000 (REFER PAGE 118 O F PB VOL 1 / PAGE 2690 OF PB VOL 4). ROAD DEVELOPMENT BUSINESS HAS BEEN DEFINED IN CLAUSE 1.1 OF THE AGREEMENT DEFINES ROAD DEVELOPME NT BUSINESS AS THE IT(TP)A NO.1537/BANG/2012 PAGE 23 OF 58 BUSINESS OF THE SELLER I.E., IRIL RELATING TO THE R OAD DEVELOPMENT PRODUCTS INCLUDING SOIL AND ASPHALT COMPACTORS, SMALL AND LA RGE PAVERS, ROLLERS, SCREEDS AND ROAD WIDENERS AS CONDUCTED ON THE DATE OF THIS AGREEMENT AND COMPRISING OF ACQUIRED ASSETS, ASSUMED LIABILIT IES, TRANSFERRED EMPLOYEES (PAGE 2686 OF PAPER BOOK VOL.4). SCHEDUL E-1 TO THE BTA LISTS THE ITEMS OF ACQUIRED ASSETS (PAGE 2702 & 2703 OF P APER BOOK NO.4). SCHEDULE-2 TO THE BTA LISTS THE ITEMS OF ASSUMED LI ABILITIES (PAGE 2704 & 2705 OF PAPER BOOK NO.4). TRANSFERRED EMPLOYEE IS DEFINED IN CLAUSE 1.1 OF THE BTA AS THE BUSINESS EMPLOYEES WHO CONSENT TO THE TRANSFER OF HIS OR HER EMPLOYMENT TO THE BUYER I.E., THE ASSESSEE. IN TERMS OF CLAUSE 2.4 OF THE BTA (REFER PAGE 117 OF PAPER BOOK VOL 1 / PAG E 2689 OF PB VOL 4), THE LUMP SUM CONSIDERATION REPRESENTS THE UNDIVIDED SALES CONSIDERATION, WITH NO INDEPENDENT VALUES BEING ASSIGNED TO VARIOU S COMPONENTS OF THE RDB. HOWEVER AFTER THE CONCLUSION OF TRANSFER OF TH E RDB, THE ASSESSEE HAS IN ITS BOOKS OF ACCOUNTS RECORDED THE BREAK-UP/ BIFURCATION OF VARIOUS ASSETS AND LIABILITIES ACQUIRED AND THE SAME IS EXP LAINED IN NOTE NO.18 OF SCHEDULE 18 TO THE NOTE TO THE ACCOUNTS (AT PAGE 2 662 OF PAPER BOOK VOL.-4). 31. AS PER SECTION 2(42C) OF THE ACT, SLUMP SALE ME ANS, THE TRANSFER OF ONE OR MORE UNDERTAKINGS AS A RESULT OF THE SALE FO R A LUMP SUM CONSIDERATION WITHOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASSETS AND LIABILITIES IN SUCH SALES. THERE IS NO DISPUTE THA T THE TRANSFER OF RDB BY IRIL TO THE ASSESSEE UNDER THE BTA IS A SLUMP SALE. THE ASSESSEE IS THE TRANSFEREE AND TAXATION OF SLUM SALE IN THE HANDS O F THE TRANSFEROR (IRIL) IS GOVERNED BY SEC.50B OF THE ACT. AS FAR AS ASSESSEE IS CONCERNED, AFTER THE TRANSFER, HE HAS TO RECORD THE INDIVIDUAL ITEMS OF ASSETS THAT WERE TRANSFERRED UNDER THE SLUM SALE IN HIS BOOKS OF ACC OUNTS. SINCE AT THE TIME OF PURCHASE OF BUSINESS, NO VALUES WERE ASSIGN ED FOR INDIVIDUAL ASSETS AND LIABILITIES FORMING PART OF THE UNDERTAKING ACQ UIRED BY WAY OF SLUMP IT(TP)A NO.1537/BANG/2012 PAGE 24 OF 58 SALE, POST-ACQUISITION OF BUSINESS, VARIOUS ASSETS AND LIABILITIES TAKEN OVER WERE RECOGNIZED AND ACCOUNTED FOR INDIVIDUALLY IN T HE BOOKS OF ACCOUNTS OF THE PURCHASER I.E., THE ASSESSEE FOR ACCOUNTING AND TAX PURPOSES ON THE BASIS OF VALUATION REPORT DATED 28.03.2008 OBTAINED FROM H.V KRISHNA SWAMY (REFER PAGES 286-296 OF PB VOL 1 / PAGES 27 30 - 2740 OF PB VOL 4) AND VALUATION REPORT DATED 5.08.2008 OBTAINE D FROM BIZWORTH FOR VALUATION OF TANGIBLE AND INTANGIBLE ASSETS RESPECT IVELY, AS UNDER (REFER PAGES 324-371 OF PB). PARTICULARS AMOUNT (RS. IN LACS) REMARKS TANGIBLE ASSETS (A) VALUATION REPORT FROM H.V. KRISHNA SWAMY, CHARTERED ENGINEER (REFER PAGES 286-296 OF PB - VOL 1 / PAGES 2730 - 2740 OF PB - VOL 4) PLANT AND MACHINERY 1059.80 PATTERNS 27.05 FURNITURES AND FIXTURES 203.74 VEHICLES 11.3 6 COMPUTERS 155.90 TOTAL (A) 1,504.24 CLAIMED DEPRECIATION IN ITR LAND & BUILDING 7,240.00 CLAIMED DEPRECIATION ON BUILDING IN ITR CONSIDERING ACTUAL COST AS THE VALUE DETERMINED AS PER THE REPORT OF E&Y DATED 15.3.2007. CAPITAL WORK IN PROGRESS 28.86 TOTAL (B) 7,268.86 INTANGIBLE ASSETS (C) VALUATION REPORT FROM M/S BIZWORTH INDIA PRIVATE LIMITED (REFER PAGES 324-371 @ 369 OF PB VOL 1 / PAGES 2741-2788 OF PB VOL 4) DESIGN & DRAWING 3,278.00 CLAIMED DEPRECIATION IN ITR MARKETING INTANGIBLES 2,223.00 CLAIMED DEPRECIATION IN ITR ORDER BACKLOG 400.00 CLAIMED DEPRECIATION IN ITR IT(TP)A NO.1537/BANG/2012 PAGE 25 OF 58 SPARE PARTS SUPPLY RIGHTS & BENEFITS 1,387.00 NEITHER CAPITALISED NOR CLAIMED AS REVENUE. DEPRECIATION CLAIM MADE BEFORE AO VIDE LETTER DATED 15.10.2012 (REFER ADDL. GROUND 22) SUPPLIER DATABASE 600.00 CLAIMED DEPRECIATION IN ITR SOFTWARE ACQUIRED 194.00 CLAIMED DEPRECIATION IN ITR SALES PROMOTION MATERIAL 15.00 NEITHER CAPITALISED NOR CLAIMED AS REVENUE EXPENDITURE. DEPRECIATION CLAIM MADE BEFORE AO VIDE LETTER DATED 15.10.2012 NON-COMPETITION AGREEMENT 540.00 CLAIMED AS REVENUE EXPENDITURE. ALTERNATE CLAIM OF DEPRECIATION (REFER ADDL. GROUND 16) LICENSES 70.00 CLAIMED AS REVENUE EXPENDITURE. ALTERNATE CLAIM OF DEPRECIATION (REFER ADDL. GROUND 19) WARRANTIES 101.00 CLAIMED AS REVENUE EXPENDITURE. ALTERNATE CLAIM OF DEPRECIATION TOTAL (C) 8,808.00 TOTAL (A +B + C) 17,581.10 ADD : OTHER CURRENT ASSETS (NET) 1,260.00 TOTAL 18,841.10 ADD: GOODWILL 4,340.90 DEPRECIATION CLAIM MADE BEFORE AO VIDE LETTER DATED 15.10.2012 (ALSO REFER ADDL. GROUND 21 OF THE PRESENT APPEAL) TOTAL CONSIDERATION 23,182.00 32. ACCORDINGLY, THE COST OF ACQUISITION OF INDIVID UAL ASSETS, FORMING PART OF RDB UNDERTAKING ACQUIRED BY WAY OF SLUMP SALE FR OM INGERSOLL RAND INDIA LIMITED (IRIL), FOR CLAIM OF DEPRECIATION I N THE HANDS OF THE ASSESSEE WAS RECORDED AT THE AFORESAID VALUES AND WAS DETERM INED BY INDEPENDENT VALUERS. NOTE 18 TO THE NOTES ON ACCOUNTS AS APPEA RING IN THE FINANCIAL STATEMENTS OF THE ASSESSEE WAS AS FOLLOWS: IT(TP)A NO.1537/BANG/2012 PAGE 26 OF 58 PURSUANT TO A BUSINESS AGREEMENT DATED MAY 4, 2007 BETWEEN INGERSOLL-RAND (INDIA)LTD., (INGERSOLL-RAND), THE C OMPANY HAS DURING THE YEAR ACQUIRED THE FOLLOWING ASSETS AND L IABILITIES OF THE ROAD MACHINERY DIVISION OF INGERSOLL-RAND. FIXED ASSETS (NOTE (A) BELOW) 175,77,55,740 CURRENT ASSETS INVENTORIES 20,17,44,753 SUNDRY DEBTORS 19,83,27,779 CASH AND BANK 1,66,03,937 217,44,32,209 OTHER CURRENT ASSETS LESS: CURRENT LIABILITIES & PROVISIONS LIABILITIES 26,84,64,784 PROVISIONS 2,18,57,296 9,03,22,080 NET ASSETS TAKEN OVER FROM INGERSOLL-RAND 188,41,10,129 THE DIFFERENCE BETWEEN THE PURCHASE CONSIDERATION O F RS.231,82,00,000 AND THE VALUE OF THE NET ASSETS OF RS.188,41,10,129 TAKEN OVER AMOUNTING TO RS.43,40,8 9,871 HAS BEEN ACCOUNTED FOR AS GOODWILL. NOTE (A): THESE ARE BASED ON AN INDEPENDENT VALUAT ION AND INCLUDES INTANGIBLES (COMPRISING OF TECHNICAL KNOW HOW AND MARKETING RIGHTS) AGGREGATING TO RS.88,08,00,000. 33. OUT OF THE AFORESAID ADDITION TO FIXED ASSETS A GGREGATING TO RS.175,77,55,740, THE ASSESSEE CLAIMED DEPRECIATION ON THE FOLLOWING VALUE OF TANGIBLE AND INTANGIBLE ASSETS ACQUIRED AS UNDER: INTANGIBLE ASSETS AMOUNT (RS. IN LACS) DESIGN & DRAWING 3,278.00 MARKETING INTANGIBLES 2,223.00 ORDER B ACKLOG 400.00 SUPPLIER DATABASE 600.00 SOFTWARE ACQUIRED 194.00 TOTAL INTANGIBLE ASSETS ON WHICH DEPRECIATION CLAIMED IN ITR 6695.00 IT(TP)A NO.1537/BANG/2012 PAGE 27 OF 58 TANGIBLE ASSETS AMOUNT (RS. IN LACS) PLANT AND MACHINERY 1,504.24 BUILDING 876.60 TOTAL TANGIBLE ASSETS ON WHICH DEPRECIATION CLAIMED IN ITR 2380.84 34. THE CLAIM FOR DEPRECIATION WAS DISALLOWED BY TH E AO AND SUCH DISALLOWANCE OF CLAIM FOR DEPRECIATION AS PER THE A FORESAID CHART IN THIS PARAGRAPH IS SUBJECT MATTER OF GR.NO.5 RAISED BY TH E ASSESSEE BEFORE THE TRIBUNAL. 35. AS PER THE BTA DATED 4.5.2007 BETWEEN THE ASSE SSEE AND IRIL, THE ASSESSEE ACQUIRED, INTER-ALIA, AS PART OF SLUMP PURCHASE, WARRANTIES AS CONTRACTUALLY AGREED BY THE SUPPLIERS, AMOUNTING TO RS.1,01,00,000 (REFER PAGE 369 OF PB VOL 1 / PAGE 2786 OF PB VOL 4) WHICH WAS CLAIMED AS REVENUE DEDUCTION BY THE APPELLANT IN THE RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR (REFER PAGE 94 OF PB VOL 1 / PAGE 2666 OF PB VOL 4 ). THE ASSESSING OFFICER DISALLOWED THE AFORESAID AMOU NT OF RS.1,01,00,000, ALLEGEDLY HOLDING THAT THE SAME WAS PART OF COST FO R ACQUIRING THE ROAD DEVELOPMENT BUSINESS. IT IS THE PLEA OF THE ASSESSE E THAT CONSISTENT WITH THE FINDING OF THE ASSESSING OFFICER, DEPRECIATION MAY BE DIRECTED TO BE ALLOWED ON THE SAID AMOUNT IN TERMS OF SECTION 32(1 )(II) OF THE ACT. THE CLAIM FOR DEDUCTION AS REVENUE EXPENDITURE IS MADE IN GR.NO.7 AND FOR DEPRECIATION IS MADE IN (ADDITIONAL) GR.NO.23 WHICH IS A GENERAL GROUND FOR ALLOWANCE OF DEPRECIATION ON THE ENTIRE CONSIDERATI ON PAID FOR BUSINESS TRANSFER OF RDB. 36. THE FOLLOWING WERE CLAIMED AS REVENUE EXPENDITU RE IN THE REVISED RETURN OF INCOME:- IT(TP)A NO.1537/BANG/2012 PAGE 28 OF 58 NON - COMPETITION AGREEMENT 540.00 LICENSES 70.00 WARRANTIES 101.00 TOTAL 711.00 37. IN GR.NO.8 THE ASSESSEE HAS SOUGHT DEDUCTION OF NON-COMPETE FEE AS REVENUE EXPENDITURE. WITH PREJUDICE TO THE AFOR ESAID CLAIM, IN (ADDITIONAL) GROUND NO.16 & 19 THE PAYMENT FOR NON- COMPETITION AGREEMENT AND LICENSES IS CLAIMED AS COMMERCIAL RIGHTS/INTANG IBLES ON WHICH THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION AS INTAN GIBLE ASSETS VIZ., COMMERCIAL RIGHTS ON WHICH THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION. 38. THE TOTAL CONSIDERATION PAYABLE TO IRIL FOR SLU MP SALE OF RDB WAS A SUM OF RS.231,82 LACS. AFTER ALLOCATION OF VALUES FOR VARIOUS ASSETS AND INTANGIBLES THERE WAS A DIFFERENCE OF RS.43,40,89,8 70/- WHICH WAS TREATED AS GOODWILL. HOWEVER, NO DEPRECIATION WAS INITIALL Y CLAIMED IN THE RETURN OF INCOME ON GOODWILL AGGREGATING TO RS.43,40,89,870. THE RELIEF IN RESPECT OF DEPRECIATION ON GOODWILL IS SOUGHT BY THE ASSESSEE IN (ADDITIONAL) GROUND NO.15 & 21 SPECIFICALLY. 39. ALSO, CERTAIN BUSINESS AND COMMERCIAL RIGHTS RE LATED TO SPARE PARTS SUPPLY RIGHTS AND BENEFITS AMOUNTING TO RS.13,87,00 ,000 AND SALES PROMOTION MATERIAL AGGREGATING TO RS.15,00,000 WERE NEITHER CAPITALISED NOR CLAIMED AS REVENUE EXPENDITURE. HOWEVER, CLAIM OF DEPRECIATION WAS MADE BEFORE THE ASSESSING OFFICER VIDE LETTER DATED 15.10.2012 ON THE AFORESAID AMOUNTS (REFER PAGES 603-606 OF PB-VOL 1 / PAGES 2817-2820 OF PB VOL 4). THE NON ALLOWANCE OF DEPRECIATION ON C OMMERCIAL RIGHTS RELATED TO SPARE PARTS SUPPLY RIGHTS AND BENEFITS O F RS.13,87,00,000/- IS AGITATED IN (ADDITIONAL) GROUND NO.22. 40. IN GROUND NO.23, THE ASSESSEE HAS SOUGHT TO RAI SE A PLEA THAT TOTAL CONSIDERATION PAID TO IRIL TOWARDS ACQUISITION OF B USINESS SHOULD BE IT(TP)A NO.1537/BANG/2012 PAGE 29 OF 58 ALLOWED AS REVENUE EXPENDITURE OR IF TREATED AS CAP ITAL EXPENDITURE, DEPRECIATION ON THE CAPITALIZED VALUE SHOULD BE ALL OWED. IT CAN THUS BE SEEN THAT ALL THE AFORESAID GROUNDS ARISE OUT OF TH E BTA BY WHICH THE ASSESSEE ACQUIRED RMD BUSINESS OF INGERSOLL RAND IN DIA LTD. WITH THIS BACKGROUND WE SHALL NOW EXAMINE THE CLAIM OF THE AS SESSEE IN EACH OF THE AFORESAID GROUNDS. 41. THE DISPUTE IN GROUND NO.5 IS WITH REGARD TO AL LOWABILITY OF THE CLAIM FOR DEDUCTION ON ACCOUNT OF DEPRECIATION AS SET OUT IN PARAGRAPH-31 OF THIS ORDER ON TANGIBLE ASSETS AND INTANGIBLE ASSETS ACQU IRED ON ACQUISITION OF RBD FROM IRIL. 42. THE ASSESSING OFFICER WHILE COMPLETING THE ASSE SSMENT DID NOT DISPUTE THAT THE TRANSFER OF RBD UNDERTAKING OF ING ERSOLL RAND INDIA LIMITED (IRIL), WAS BY WAY OF SLUMP SALE FOR LUMP SUM CON SIDERATION OF RS.231,82,00,000. THE ASSESSING OFFICER, HOWEVER, WAS OF THE VIEW THAT INFLATED VALUES WERE ASSIGNED TO THE ASSETS ONLY WI TH THE INTENTION OF CLAIMING HIGHER DEPRECIATION. SEC.43 OF THE ACT DEF INES CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS AND GAINS OF BUSINE SS OR PROFESSION: SEC.43(1) DEFINES WHAT IS ACTUAL COST FOR THE PURPO SE OF ALLOWING DEPRECIATION AND IT READS THUS:- 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLE SS THE CONTEXT OTHERWISE REQUIRES (1) 'ACTUAL COST' MEANS THE ACTUAL COST96 OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THERE OF, IF ANY, AS HAS BEEN MET96 DIRECTLY OR INDIRECTLY BY ANY OTH ER PERSON OR AUTHORITY:. EXPLANATION 3.WHERE, BEFORE THE DATE OF ACQUISITIO N BY THE ASSESSEE, THE ASSETS WERE AT ANY TIME USED BY ANY O THER PERSON FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE 3[ASSESSING] OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF THE T RANSFER OF SUCH IT(TP)A NO.1537/BANG/2012 PAGE 30 OF 58 ASSETS, DIRECTLY OR INDIRECTLY TO THE ASSESSEE, WAS THE REDUCTION OF A LIABILITY TO INCOME-TAX (BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST), THE ACTUAL COST TO THE ASSESS EE SHALL BE SUCH AN AMOUNT AS THE ASSESSING OFFICER MAY, WITH THE PR EVIOUS APPROVAL OF THE JOINT COMMISSIONER, DETERMINE HAVIN G REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. 43. THE ASSESSING OFFICER INVOKED EXPLANATION 3 TO SECTION 43(1) OF THE ACT HELD THAT DEPRECIATION WOULD BE ADMISSIBLE ONLY WITH REFERENCE TO THE WDV OF THE ASSETS (AS APPEARING IN THE BOOKS OF IR IL ON BASIS OF FORM 3CEA REPORT) FORMING PART OF THE BUSINESS PURCHASED BY THE APPELLANT AND NOT WITH REFERENCE TO THE VALUES ON THE BASIS OF VA LUERS REPORT. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEPRE CIATION TO THE EXTENT OF RS.18,19,73,312, AS UNDER ASSET COST AS PER VALUATION REPORT WDV AS PER IR AS ON 4.5.2007 RATE OF DEPRE- CIATION DEPRECIATIO N AS PER VALUED COST DEPRECIATION AS PER ADOPTED COST DIFFERENCE DEPRECIATION BUILDINGS 8,76,60,000 3,34,24,359 10 87,66,000 33,42,435 54,235 6 5 FURNITURE & FITTINGS 2,03,74,000 1,12,98,402 10 20,37,400 11,29,840 9,07,560 MACHINER Y & PLANT 11,58,00,000 5,40,10,049 15 1,73,70,000 81,01,507 92,68493 VEHICLES 11,36,000 10,17,277 15 1,70,400 1,52,592 17,808 COMPUTER S AND SOFTWAR E 1,55,90,000 92,05,190 60 93,54,000 55,23,114 38,30886 INTANGIBLE ASSETS 65,01,00,000 0 25 16,25,25,000 0 162525000 TOTAL 89,06,60,000 10,89,55,300 20,02,22,800 1,82,49,488 18,19,73,312 44. IT CAN BE SEEN FROM THE AFORESAID CHART THAT TH E AO ALLOWED DEPRECIATION AS PER THE WRITTEN DOWN VALUE AS APPEA RING IN THE BOOKS OF THE TRANSFEROR FOR ALL ITEMS OF ASSETS EXCEPT INTANGIBL E ASSETS WHICH WAS NOT RECOGNISED BY THE TRANSFEROR IN ITS BOOKS OF ACCOUN TS AND WHICH THE ASSESSEE OUT OF THE LUMP SUM CONSIDERATION PAID FOR ACQUIRING THE IT(TP)A NO.1537/BANG/2012 PAGE 31 OF 58 BUSINESS ATTRIBUTES AS CONSIDERATION FOR INTANGIBLE ASSETS THAT THE ASSESSEE ACQUIRED PURSUANT TO THE BUSINESS TRANSFER AGREEMEN T. THE ADMITTED POSITION IS THAT THERE IS NO PROVISION IN THE ACT P ROVIDING AS TO HOW THE TRANSFEROR OF BUSINESS IN A SLUMP SALE HAS TO RECOR D IN HIS BOOKS AS THE VALUE OF INDIVIDUAL ITEMS OF ASSETS THAT HE ACQUIRE D UNDER SLUM SALE. THEREFORE THE CORRECTNESS OF THE ACTION OF THE ASSE SSEE IN ATTRIBUTING VALUES TO INDIVIDUAL ITEMS OF ASSETS WOULD DEPEND O N THE CORRECTNESS OF THE VALUATION BASED ON WHICH THE ASSESSEE RECORDED ACTU AL COST OF THE INDIVIDUAL ITEMS OF ASSETS THAT HE ACQUIRED IN A SL UMP SALE. ON THE OTHER HAND, IF THE AO WANTS TO DISPUTE THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE HAS TO SUBSTANTIATE THE SAME AND FURTH ER HE HAS ALSO TO ESTABLISH THAT CONDITION PRECEDENT FOR INVOKING EXP LANATION-3 TO SEC,43(1) OF THE ACT EXISTS IN A GIVEN CASE. IT IS THE CASE OF THE ASSESSEE THAT IN THE ABSENCE OF ANY METHOD PROVIDED IN THE ACT, THE COST OF ACQUISITION OF INDIVIDUAL ASSETS, FORMING PART OF UNDERTAKING ACQU IRED BY WAY OF SLUMP SALE, IN THE HANDS OF PURCHASING COMPANY HAS TO BE RECORDED AT THE VALUES DETERMINED BY INDEPENDENT VALUERS, ON A SCIENTIFIC / RATIONAL BASIS. SUCH VALUE OF ASSETS ACQUIRED AS PART OF SLUMP SALE, DET ERMINED BY THE INDEPENDENT VALUERS IS REQUIRED TO BE CONSIDERED AS ACTUAL COST / WRITTEN DOWN VALUE FOR CLAIMING DEPRECIATION UNDER SECTION 32 OF THE ACT, IN THE HANDS OF THE TRANSFEREE. 45. THE AO REJECTED THE CLAIM OF THE ASSESSEE FOR T HE REASONS GIVEN IN PARA 5.7.5 & 5.7.6 OF THE DRAFT ASSESSMENT ORDER DT .26.12.2011. THE REASONS IN SHORT WAS THAT (I) THE VALUERS DID NOT D O AN INDEPENDENT VALUATION BUT RELIED ON THE INFORMATION PROVIDED BY THE ASSESSEE AND ITS EMPLOYEES; (II) DESIGN & DRAWINGS WHICH WERE VALUED AT RS.32,78,00,000/- WAS ON THE BASIS OF ESTIMATE BY THE ASSESSEE THAT T HE DESIGNS WOULD HAVE FURTHER USEFUL LIFE OF 7 YEARS AFTER ACQUISITION BY THE ASSESSEE; (III) THE ASSESSEE HAD CLAIMED BEFORE THE AO THAT THERE WAS A N WORLD WIDE IT(TP)A NO.1537/BANG/2012 PAGE 32 OF 58 ACQUISITION OF INGERSOLL RAND ROAD DEVELOPMENT BUSI NESS OR ROAD MACHINERY DIVISION BY THE PARENT COMPANY OF THE ASS ESSEE AND IN TERMS OF UNDERSTANDING BETWEEN THE PARTIES ON SUCH ACQUISITI ON THAT THE BRAND NAME OF INGERSOLL RAND (IR) WOULD BE USED FOR A PERIOD O F ONE YEAR FROM THE DATE OF ACQUISITION IN INDIA ON ROAD MAKING MACHINERY. THE COPY OF THE SAID UNDERSTANDING WAS NOT FURNISHED. (IV) THE ALLOCATI ON OF VALUE FOR BRAND VALUE WAS MADE ONLY ON THE BASIS OF STATEMENT OF AS SESSEES SALES AND MARKETING TEAM WHICH WAS TO THE EFFECT THAT THE ASS ESSEE WITHOUT THE BRAND NAME OF IR WOULD NOT BE ABLE TO PENETRATE THE MARKET FOR NEXT THREE YEARS. (V) THE VALUATION OF SUPPLIER DATABASE WHIC H WAS ESTIMATED AT RS.3 LACS PER VENDOR WAS NOT BASED ON VISIT OF THE POTEN TIAL SUPPLIER, OBTAINING PROTOTYPES AND SAMPLES AND DUE DILIGENCE EVALUATION . CUSTOMER DATABASE CANNOT BE REGARDED AS A DEPRECIABLE ASSET. 46. THE DRP UPHELD THE CONCLUSIONS OF THE AO BY OBS ERVING AT PARA 10.2 OF ITS DIRECTIONS THAT THE BUSINESS TRANSFER A GREEMENT DID NOT GIVE ANY BREAK UP OF VALUES OF EACH ITEM OF ASSET AND THAT T HE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS CASE. 47. WE HAVE HEARD THE RIVAL SUBMISSIONS. COPY OF T HE VALUATION REPORT DATED 28.3.2008 BY H.V. KRISHNASWAMY FOR VALUATION OF PLANT & MACHINERY ETC., IS AT PAGES 2730 TO 2740 OF PAPER BOOK-4. CO PY OF THE VALUATION REPORT DATED 5.8.2008 BY BIZWORTH FOR VALUATION OF INTANGIBLES IS AT PAGES- 2741 TO 2788 OF PAPER BOOK-4. THE VALUATION OF TAN GIBLE ASSETS HAS BEEN DONE ON THE BASIS OF REPLACEMENT COST FOR SOME ITEM S. IN RESPECT OF SOME ITEMS THE COST OF ACQUISITION HAS BEEN ADJUSTED TO INFLATION FACTOR. VALUATION OF INTANGIBLES HAS BEEN MADE TAKING INTO CONSIDERAT ION THE TERMS OF THE BTA WHEREBY INTANGIBLE RIGHTS THAT VEST IN THE ASSE SSEE HAVE BEEN IDENTIFIED AND VALUED ON ACCEPTED METHODOLOGY OF VA LUATION. FOR EXAMPLE A SUM OF RS.4 CRORES HAS BEEN ESTIMATED AS THE VALU E OF INTANGIBLE ORDER IT(TP)A NO.1537/BANG/2012 PAGE 33 OF 58 BACKLOG. THE ASSESSEE HAD A RIGHT OVER THE ORDERS THAT WERE BOOKED BY IRIL AND THOSE RIGHTS WERE OF THE VALUE OF 4.85 CRO RES. THE EXPECTED PERIOD OF EXECUTION OF THE ORDERS AND REALIZATION O F SALE PROCEEDS AFTER GIVING EFFECT TO TAX IMPLICATIONS HAS BEEN ESTIMATE D AT RS.4 CRORES. EACH ITEM OF INTANGIBLE ASSETS HAVE BEEN IDENTIFIED AND VALUED. THE VALUATION HAS BEEN DONE BY EXPERT IN THE FIELD. SUCH VALUATI ON CANNOT BE BRUSHED ASIDE FOR NO VALID REASON OR BASIS. EXPLANATION 3 TO SECTION 43(1) OF THE ACT, PROVIDES THAT IN CASE THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF TRANSFER OF THE ASSET, INCLUDING SLUMP S ALE OF AN UNDERTAKING, WAS REDUCTION OF LIABILITY TO INCOME TAX BY CLAIMIN G DEPRECIATION ON ENHANCED COST OF ACQUISITION, THE ASSESSING OFFICER CAN SUBSTITUTE THE COST OF SUCH ASSETS IN THE HANDS OF TRANSFEREE WITH FAIR VALUE OF SUCH ASSETS. THE MERE FACT THAT THE SALE IN QUESTION WAS A SLUMP SAL E, DOES NOT EMPOWER THE ASSESSING OFFICER TO TINKER WITH THE SPLIT UP OF TH E LUMP-SUM CONSIDERATION OVER VARIOUS TANGIBLE AND INTANGIBLE ASSETS, ON THE BASIS OF VALUES DETERMINED BY AN INDEPENDENT VALUER ON A RATIONAL A ND SCIENTIFIC BASIS. THE MISCHIEF OF EXPLANATION 3 TO SECTION 43(1) OF T HE ACT CAN BE INVOKED ONLY IF THE ASSESSING OFFICER IS, BASED ON THE MATE RIAL ON RECORD, SATISFIED, THAT THE MAIN PURPOSE OF TRANSFER OF ASSETS (PREVIO USLY USED FOR PURPOSES OF BUSINESS) IS REDUCTION OF TAX LIABILITY BY CLAIMING DEPRECIATION WITH REFERENCE TO ENHANCED COST. THE SATISFACTION TO BE RECORDED B Y THE ASSESSING OFFICER IS NOT BASED ON HIS IPSE DIXIT BUT ON AN OBJECTIVE EVALUATION OF MATERIAL PLACED / TO BE BROUGHT ON RECORD. THE HONBLE GUJAR AT HIGH COURT IN THE CASE OF ASHWIN VANASPATI INDUSTRIES 255 ITR 26 (GUJARAT) WHEREIN THE COURT HELD THAT WHERE THE ASSESSEE MAKES A CLA IM FOR DEPRECIATION ON ENHANCED COST, WHICH IS ACTUAL COST IN ITS HANDS, I T WAS NECESSARY FOR THE AUTHORITY WHO WANTED TO DETERMINE THE ACTUAL COST AS REQUIRED BY EXPLANATION 3 TO SECTION 43(1) TO PLACE SOME EVIDE NCE ON RECORD. THE ITO IS REQUIRED TO DETERMINE ACTUAL COST TO THE ASSESSE E HAVING REGARD TO ALL THE IT(TP)A NO.1537/BANG/2012 PAGE 34 OF 58 CIRCUMSTANCES OF THE CASE AND IF IN HIS OPINION THE WRITTEN DOWN VALUE WAS THE ACTUAL COST, HE OUGHT TO HAVE SUPPORTED THE SAM E BY PLACING SUFFICIENT EVIDENCE SO AS TO DISLODGE THE VALUATION REPORT OF THE REGISTERED VALUER. 48. SIMILARLY IN THE CASE OF UNIMED TECHNOLOGIES LTD. VS. DCIT 73 ITD 150 (AHD.), IT WAS HELD THAT EXPLANATION 3 TO SECTION 43(1) OF THE ACT COULD BE INVOKED ONLY IF THE ASSESSING OFFICER WAS OF THE VIEW THAT FAIR MARKET VALUE OF ASSETS HAD BEEN INFLATED TO CLAIM E XCESS DEPRECIATION; WHERE FAIR MARKET VALUE OF ASSET HAD BEEN CERTIFIED BY REGISTERED VALUER AND THE ASSESSING OFFICER HAD NOT APPOINTED HIS OWN VAL UER FOR VALUATION OF DISPUTED ASSETS AND HAD EVEN NOT THOUGHT IT NECESSA RY TO EXAMINE THE SAID VALUER, THERE BEING NO OTHER EVIDENCE TO SHOW THAT THE REPORT WAS NOT RELIABLE, THE VALUATION REPORT FILED BY THE ASSESSE E COULD NOT BE IGNORED. IN SOUTH ASIA TYRES LTD. VS. DCIT: 107 TTJ 319 (PUNE), SIMILAR PROPOSITION AS LAID DOWN BY THE AHMEDABAD ITAT WAS LAID DOWN 49. THE ASSESSEE HAS FILED AN APPLICATION SEEKING T O FILE THE FOLLOWING TWO AGREEMENTS AS ADDITIONAL EVIDENCE, VIZ., (I) GL OBAL BUSINESS TRANSFER AGREEMENT RELEVANT TO THE PORTION COVERING THE PAYM ENT OF NON-COMPETE FEE TO INGERSOLL RAND (II) TRADEMARK LICENSE AGREEM ENT PROVIDING THE RIGHT TO USE THE INGERSOLL RAND BRAND NAME FOR ONE YEAR. THE EXISTENCE OF THESE AGREEMENTS WERE PLEADED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AND THEIR NON-PRODUCTION HAS LED TO SOME ADVERSE CO NCLUSIONS BEING DRAWN BY THE REVENUE AUTHORITIES. WE ARE OF THE VIEW THA T THESE AGREEMENTS, THE GENUINENESS OF WHICH ARE NOT DISPUTED, ARE NECESSAR Y FOR PROPER ADJUDICATION OF THE DISPUTES IN THE APPEAL AND THER EFORE THEY ARE ADMITTED AS ADDITIONAL EVIDENCE. 50. CLAUSE 5.12 OF THE GLOBAL BUSINESS TRANSFER AGR EEMENT BETWEEN THE ASSESSEES PARENT COMPANY AND INGERSOLL RAND PR OVIDES THAT INGERSOLL IT(TP)A NO.1537/BANG/2012 PAGE 35 OF 58 RAND SHALL NOT CONDUCT ANY BUSINESS ACTIVITY WHICH IS THE SUBJECT MATTER OF TRANSFER I.E., THE ROAD DEVELOPMENT BUSINESS. THER EFORE, THE GENERAL UNDERSTANDING FOR WORLDWIDE ACQUISITION OF ROAD DEV ELOPMENT BUSINESS OF INGERSOLL RAND BY THE ASSESSEES GROUP ENTITIES WOR LDWIDE IS SUBJECT TO THE AFORESAID NON-COMPETE AGREEMENT. THOUGH THIS DOES NOT FIND SPECIFIC MENTION IN THE BTA BETWEEN THE ASSESSEE AND IRIL, T HE OVERALL UNDERSTANDING FOR GLOBAL ACQUISITION OF RDB OF INGE RSOLL RAND CANNOT BE DISPUTED. SO ALSO, THE LICENSE TO USE THE BRAND NA ME IR BY THE ASSESSEE STANDS ESTABLISHED BY THE LICENSE AGREEMENT BETWEEN THE PARENT COMPANY OF THE ASSESSEE AND INGERSOLL RAND. THUS, THE ACQU ISITION OF THESE RIGHTS UNDER THE GLOBAL TAKEOVER OF RDB BY VOLVO ENTITIES WORLDWIDE CANNOT BE DISPUTED. 51. IN THE LIGHT OF THE GLOBAL ACQUISITION OF RDB B Y VOLVO GROUP ENTITIES WORLDWIDE, THERE IS NO BASIS FOR THE AO TO INVOKE E XPLANATION-3 TO SEC.43(1) THAT IS MOTIVE FOR VALUATION OF DEPRECIAB LE ASSETS AT HIGHER VALUE IS TO GET BENEFIT OF HIGHER DEPRECIATION AND AVOID TAX. THE FAIR MARKET VALUE OF THE ASSETS ON WHICH DEPRECIATION HAS BEEN CLAIME D BY THE ASSESSEE, AS ON THE DATE OF TRANSFER, HAS NOT BEEN DISPUTED BY T HE REVENUE AUTHORITIES ON GERMANE GROUNDS. THE REASONS GIVEN BY THE AO FOR I NVOKING EXPLANATION-3 TO SEC.43(1) IN OUR VIEW ARE VERY VAGUE. THE VALUA TION REPORT IS GIVEN BY EXPERTS IN THE RESPECTIVE FIELDS. THEIR CONCLUSION S CANNOT BE BRUSHED ASIDE ON MERE SURMISES AND CONJECTURES. IT IS UNDISPUTED THAT BUT FOR INVOKING EXPLANATION-3 TO SEC.43(1) OF THE ACT, THERE IS NO OTHER BASIS FOR NOT ALLOWING THE CLAIM FOR DEPRECIATION AS MADE BY THE ASSESSEE. ON THE FACTS OF THE CASE, WE ARE CONVINCED THAT THE AO HAS NOT E STABLISHED THE EXISTENCE OF FACTS TO JUSTIFY INVOKING EXPLANATION- 3 TO SEC.43(1) OF THE ACT AND THEREFORE, WE HOLD THAT THE DEPRECIATION ON THE COST OF ACQUISITION OF VARIOUS ASSETS AS CLAIMED BY THE ASSESSEE IN THE RE TURN OF INCOME SHOULD BE ALLOWED. THUS GROUND NO.5 IS ALLOWED. IT(TP)A NO.1537/BANG/2012 PAGE 36 OF 58 52. AS FAR AS GROUND NO.7 IS CONCERNED, THE COMPLAI NT OF THE ASSESSEE IS THAT IT DID NOT HAVE OPPORTUNITY OF BEING HEARD ON THIS ISSUE. NEITHER BEFORE AO NOR BEFORE DRP, THE ASSESSEE HAS PROVIDED DETAILS OF THE WARRANTIES WHICH WERE CLAIMED AS REVENUE EXPENDITUR E. IN THE STATEMENT OF FACTS BEFORE DRP IT IS CLAIMED THAT WARRANTY CLA IMS WERE TAKEN OVER FROM IRIL IN THE SLUM SALE. THE ISSUE REQUIRES EXAMINATI ON AFRESH BY THE AO AND THE ORDER OF DRP/AO IS SET ASIDE, WITH LIBERTY TO A SSESSEE TO ESTABLISH ITS CLAIM WITH EVIDENCE. 53. AS FAR AS GR.NO.8 AND (ADDITIONAL) GR.NO.16 ARE CONCERNED, THE FACTS ARE THAT THE ASSESSEE CLAIMED DEDUCTION OF RS.5,40, 00,000 IN THE RETURN OF INCOME ON ACCOUNT OF NON-COMPETE FEE PAID TO IRIL P URSUANT TO BTA AGREEMENT DATED 4.5.2007 (REFER PAGE 93 OF PB VOL 1 / PAGE 2665 OF PB VOL 4) . THE VALUE OF NON-COMPETE FEES WAS ALLOCATED OUT O F THE VALUE PLACED ON INTANGIBLE ASSETS, ON THE BASIS OF DETERM INATION, BY THE INDEPENDENT VALUER, VIZ., BIZWORTH (REFER PAGES 324-371 @ 369 OF PB VOL 1 / PAGES 2741-2788 OF PB VOL 4). 54. THE ASSESSING OFFICER DISALLOWED THE AFORESAID CLAIM AS REVENUE EXPENDITURE ALLEGEDLY HOLDING THAT (I) NON-COMPETIT ION AGREEMENT WAS NOT ENTERED INTO / PROVIDED BY THE ASSESSEE (II) A PART OF THE CONSIDERATION PAID TO TAKE OVER THE INGERSOLL RAND BUSINESS WAS TREATE D AS NON-COMPETITION FEE BASED ON THE VALUATION REPORT AND (III) THE SAM E BEING A PAYMENT MADE TO TAKE OVER A BUSINESS CREATES A NEW SOURCE OF INC OME AND IS TO BE REGARDED AS CAPITAL EXPENDITURE. THE DRP CONCURRED WITH THE FINDINGS OF THE ASSESSING OFFICER. 55. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE HAVE A LREADY MENTIONED IN THE EARLIER PART OF THIS ORDER THAT THE ASSESSEE HAS FILED APPLICATION DATED 24.07.2015 UNDER RULE 29 OF THE INCOME-TAX (APPELLA TE TRIBUNAL) RULES 1963, PLACING ON RECORD RELEVANT EXTRACT OF THE GL OBAL BUSINESS TRANSFER IT(TP)A NO.1537/BANG/2012 PAGE 37 OF 58 AGREEMENT DATED 27.02.2007 ENTERED INTO BETWEEN IN GERSOLL RAND COMPANY LIMITED (ON BEHALF OF ITSELF AND THE OTHER SELLERS NAMED THEREIN) AND AB VOLVO (PUBL) (ON BEHALF OF ITSELF AND THE OT HER BUYERS NAMED THEREIN) WHICH WAS ALSO REFERRED TO DURING THE COUR SE OF THE ASSESSMENT PROCEEDINGS. THE SAID AGREEMENT IS EQUALLY APPLICAB LE TO THE APPELLANT AND INGERSOLL RAND (INDIA) LTD. AS PER SECTION 5.12 OF THE SAID AGREEMENT PERTAINING TO NON-COMPETITION; SOLICITATION (REFER INTERNAL PAGE 59 OF THE GLOBAL BUSINESS TRANSFER AGREEMENT PLACED ON RECORD VIDE APPLICATION FOR ADDITIONAL EVIDENCE DATED 24.7.2015 ) IT IS PROVIDED AS FOLLOWS:- SECTION 5.12 NON-COMPETITION; SOLICITATION RESTRICTIONS ON COMPETING ACTIVITIES FOLLOWING CLOS ING: EACH OF THE SELLERS AGREES THAT FROM THE CLOSING UN TIL THE FIFTH ANNIVERSARY OF THE CLOSING, THEY WILL NOT, AND THEY WILL ENSURE THAT EACH OF THE SELLERS AFFILIATES (OTHER THAN THE SOLD COMPANIES ) WILL NOT DIRECTLY OR INDIRECTLY ENGAGE OR INVEST IN ANY BUSINESS IN COMPETITION WITH THE BUSINESS AS CO NDUCTED IMMEDIATELY PRIOR TO THE CLOSING. NOTWITHSTANDING THE FOREGOING, THIS SECTION 5.12(A) SHALL NOT PROHIBIT (I) THE SELLERS, DIRECTLY OR THROUGH ANY AFFILIATE, FROM CONDUCTING ANY BUSINESS ACTIVITIES CONDUCTED BY THEM AS OF THE DATE OF THI S AGREEMENT(OTHER THAN THE BUSINESS), INCLUDING THE B USINESS ACTIVITIES OF ALL IR COMPANY STORES RETAINED BY SEL LERS (PROVIDED THAT ANY BUSINESS ACTIVITIES CONDUCTED BY SUCH RETA INED IR COMPANY STORES SHALL ALWAYS BE CONDUCTED IN ACCORDA NCE WITH THE TERMS OF THE IRES SALES & SERVICE AGREEMENTS ), AND THE BUSINESS ACTIVITIES REQUIRED OF THE SELLERS PURSUAN T TO THE CLOSING AGREEMENTS AND PURSUANT TO THIS AGREEMENT;(II)SELLE RS, DIRECTLY OR THROUGH ANY AFFILIATE, FROM INVESTING IN OR HOLD ING NOT MORE THAN 10% OF THE OUTSTANDING CAPITAL STOCK OR OTHER OWNERSHIP INTERESTS OF ANY PERSON; (III) THE SELLERS, DIRECTL Y OR THROUGH ANY AFFILIATE, FROM HEREAFTER ACQUIRING AND CONTINUING TO OWN AND OPERATE ANY ENTITY WHICH HAS OPERATIONS THAT COMPET E WITH THE BUSINESS IF SUCH OPERATIONS ACCOUNT FOR NO MORE THA N 25% OF SUCH IT(TP)A NO.1537/BANG/2012 PAGE 38 OF 58 ACQUIRED ENTITYS CONSOLIDATED REVENUES AT THE TIME OF SUCH ACQUISITION; AND (IV) THE SELLERS, DIRECTLY OR THRO UGH ANY AFFILIATE, FROM SELLING INVENTORY OR OTHER ASSETS THEN OWNED B Y ANY SELLER. (EMPHASIS SUPPLIED) 56. THE AFORESAID CLAUSE IS APPLICABLE TO THE TRANS FER OF RDB BUSINESS BY IRIL TO THE ASSESSEE AS IT WAS PART OF THE GLOBA L AGREEMENT TO TAKE OVER RDB BUSINESS OF IR WORLDWIDE, IN TERMS OF THE SAID CLAUSE(S), INGERSOLL RAND (INDIA) LIMITED AGREED, INTER-ALIA, NOT TO E NGAGE DIRECTLY/INDIRECTLY IN THE BUSINESS SIMILAR TO THE RDB FOR A PERIOD OF FIV E YEARS. FOR THAT REASON, THE COMBINED CONSIDERATION WAS ALLOCATED BY THE VAL UER IN THEIR REPORT TOWARDS NON-COMPETE FEE. IN FACT, AFTER THE ACQUISI TION OF ROAD DEVELOPMENT BUSINESS, IN ORDER TO MAINTAIN SUCH BUS INESSS PROFITABILITY, THE NON-COMPETE FEE WAS PAYABLE MERELY TO PREVENT I NGERSOLL FROM ENGAGING IN COMPETITIVE BUSINESS TO THE DETRIMENT O F THE APPELLANT. THEREFORE, THE NON-COMPETE FEES WAS PAID WHOLLY AND EXCLUSIVELY FOR SMOOTH FUNCTIONING OF BUSINESS OPERATIONS, WHICH DI D NOT RESULT IN ACQUISITION OF ANY CAPITAL ASSET OR BENEFIT OF ENDU RING NATURE SO AS TO CONSTITUTE CAPITAL EXPENDITURE. 57. THE BASIS OF VALUATION OF THE CONSIDERATION ATT RIBUTABLE TO NON- COMPETE CLAUSE FROM AND OUT OF THE LUMP SUM CONSIDE RATION PAID FOR SLUM SALE IS SET OUT IN PARA-16 OF THE VALUATION REPORT OF BIZWORTH (PAGE-2780 OF PAPER BOOK-4). SINCE THE NON-COMPETE CLAUSE WAS VA LID FOR 5 YEARS, THE VALUE OF NON-COMPETE FEE HAS BEEN FIXED AT THE ESTI MATED NET PRESENT VALUE OF FUTURE SALES (FIR 5 YEARS) BASED ON MARKET SHARE OF IRIL AND CONSEQUENT PROFIT AFTER TAX THAT THE ASSESSEE MIGHT EARN. TO OUR MIND THE BASIS OF VALUATION APPEARS TO BE REASONABLE AND NO REASONS F OR NOT ACCEPTING THIS METHOD OF VALUATION HAS BEEN CITED BY THE REVENUE A UTHORITIES. IT(TP)A NO.1537/BANG/2012 PAGE 39 OF 58 58. SEVERAL DECISIONS WERE CITED BEFORE US BY THE L EARNED COUNSEL FOR THE ASSESSEE FOR THE PROPOSITION THAT FEE PAID UNDE R AGREEMENT FOR NOT COMPETING WITH THE BUSINESS. THOSE ARE ALL CASES W HERE THERE WAS SPECIFIC AGREEMENT NOT TO COMPETE AND THE CONSIDERATION WAS FIXED AS PER THE TERMS OF THE AGREEMENT. IN THE PRESENT CASE HOWEVE R, THERE EXISTS NO SUCH AGREEMENT. SINCE THE TRANSFER OF BUSINESS WAS ON A SLUMP SALE BASIS, THE TRANSFEREE HAS SPLIT THE LUMP SUM CONSIDERATION AS ATTRIBUTABLE TO SEVERAL TANGIBLE AND INTANGIBLE ASSETS ACQUIRED CONSEQUENT TO SLUM SALE. THE CONSIDERATION PAID FOR ACQUIRING BUSINESS IS SOUGHT TO BE CHARACTERIZED AS REVENUE EXPENDITURE, WHICH DOES NOT APPEAR TO BE AP PROPRIATE. NEVERTHELESS, THE INTANGIBLE BENEFIT TO THE ASSESSE E AS A RESULT OF EXISTENCE OF AGREEMENT NOT TO COMPETE WITH BUSINESS OF THE ASSESSEE CAN BE SAID TO BE AN INTANGIBLE RIGHT, WHICH CAN BE CHA RACTERIZED AS COMMERCIAL RIGHTS AND THE ASSESSEE SHOULD BE ALLOWED THE BENE FIT OF DEPRECIATION ON THE VALUE AS ESTIMATED BY THE ASSESSEE IN ITS VALUA TION REPORT UNDER SECTION 32(1)(II) OF THE ACT, AS LAID DOWN IN SEVERAL DECIS IONS WHICH WE WILL REFER TO WHILE DEALING WITH CLAIM OF DEPRECIATION ON GOODWIL L. WE HOLD AND DIRECT ACCORDINGLY AND ALLOW GR.NO.16 (ADDITIONAL) AND DIS MISS GR.NO.8 RAISED BY THE ASSESSEE. 59. ADDITIONAL GR.NO.15 & 21 ARE CONCERNED, THE SAM E ARE IN RELATION TO GOODWILL CLAIMED BY THE ASSESSEE AS DEDUCTIBLE REVE NUE EXPENDITURE OR IN THE ALTERNATIVE TREAT IS AS COMMERCIAL RIGHT ON WHI CH THE ASSESSEE SHOULD BE ALLOWED DEPRECIATION. 60. AS WE HAVE ALREADY SEEN, DURING THE RELEVANT AS SESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ACQUIRED THE ROAD MACHINERY BUSINESS OF INGERSOLL RAND ON A SLUMP SALE BASIS FOR A CONSIDERATION OF RS.2,31,82,00,000. FURTHER, POST-ACQUISITION, BASED ON AN INDEPENDENT VALUATION, THE DIFFERENCE BETWEEN THE TOTAL CONSIDE RATION AND THE VALUE IT(TP)A NO.1537/BANG/2012 PAGE 40 OF 58 ALLOCATED TO TANGIBLE AND INTANGIBLE ASSETS AMOUNTE D TO RS.43,40,89,871 WHICH WAS ACCOUNTED AS AN ASSET IN THE BOOKS OF ACC OUNTS FOR THE FINANCIAL YEAR ENDED 31.03.2008 (REFER PAGE 9 OF PB - VOL 1 / PAGE 2646 OF PB VOL 4). THE AFORESAID FACTS WERE DULY STATED IN THE NOT ES TO ACCOUNTS, APPENDED TO THE AUDITED ACCOUNTS (REFER PAGE 25 OF PB - VOL 1 / PAGE 2662 OF PB VOL 4). HOWEVER, DEPRECIATION WAS NOT CLAIM ED BY THE ASSESSEE, IN THE RETURN OF INCOME ON THE VALUE OF GOODWILL AND C ERTAIN OTHER INTANGIBLES. 61. HOWEVER, DURING THE COURSE OF THE ASSESSMENT PR OCEEDINGS, IN VIEW OF DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. SNIFFS SECURITIES LTD.: 348 ITR 302 , THE ASSESSEE VIDE LETTER DATED 15.10.2012, MADE CLAIM OF DEPRECIATION @ 25% AMOUNT ING TO RS.14,35,72,468 ON GOODWILL AND CERTAIN OTHER INTAN GIBLES. THE WORKING OF DEPRECIATION ON GOODWILL WAS ALSO FILED BEFORE THE ASSESSING OFFICER VIDE THE SAID REPLY DATED 15.10.2012 (REFER PAGES 604-606 OF PB VOL 1 / PAGES 2818-2820 OF PB-VOL 4). THE ASSESSING OFFICER IN THE IMPUGNED ORDER, DID NOT, HOWEVER, DEAL WITH THE CLAIM OF DEPRECIATION O N GOODWILL AND OTHER INTANGIBLE ASSETS. THE GROUNDS OF OBJECTION FOR THE CLAIM OF DEPRECIATION ON GOODWILL WAS NOT RAISED BEFORE THE DRP. IN THE ADDI TIONAL GROUNDS, HOWEVER, THE ASSESSEE HAS RAISED A CLAIM FOR ALLOWI NG DEPRECIATION ON GOOD WILL. AS WE HAVE ALREADY OBSERVED, SUCH A CLA IM, WHICH IS BASED ON MATERIAL ALREADY AVAILABLE ON RECORD, CAN BE ENTERT AINED, AS THE PURPOSE OF THE PROCEEDINGS ARE FOR PROPER DETERMINATION OF TAX LIABILITY IN ACCORDANCE WITH LAW. 62. PURSUANT TO THE VALUATION OF TANGIBLES AND INTA NGIBLES UNDERTAKEN BY THE ASSESSEE, THE PURCHASE CONSIDERATION WAS ALLOCA TED OVER TANGIBLE AND INTANGIBLE ASSETS ON THE BASIS OF VALUATION REPORT DATED 28.03.2008 OBTAINED FROM H.V KRISHNA SWAMY (REFER PAGES 286-29 6 OF PB VOL 1 / PAGES 2730 - 2740 OF PB VOL 4) AND VALUATION REPO RT DATED 5.08.2008 IT(TP)A NO.1537/BANG/2012 PAGE 41 OF 58 OBTAINED FROM BIZWORTH AS UNDER (REFER PAGES 324-37 1 OF PB VOL 1 / PAGES 2741-2788 OF PB VOL 4): ASSETS VALUE (RS. IN MILLIONS) TANGIBLE ASSETS LAND AND BUILDING 724 PLANT & MACHINERY 153 NET CURRENT ASSETS 126 TOTAL (A) 1003 INTANGIBLE ASSETS 880 DESIGN & DRAWING 327.8 MARKETING INTANGIBLES 222.3 ORDER BACKLOG 40.0 SPARE PARTS SUPPLY RIGHTS & BENEFITS 138.7 SUPPLIER DATABASE 60.0 SOFTWARE ACQUIRED 19.4 SALES PROMOTION MATERIAL 1.5 NON - COMPETITION AGREEMENT 54.0 LICENSES 7.0 WARRANTIES 10.4 TOTAL (B) 880.80 GOODWILL 434.09 TOTAL (C) 434.09 TOTAL (A) + (B) + (C) 2317.89 63. IT WAS THE PLEA OF THE ASSESSEE THAT THE EXCESS OF PURCHASE CONSIDERATION OVER THE VALUE ASSIGNED TO TANGIBLE A SSETS, WAS ALLOCATED TO INTANGIBLE ASSETS TO THE EXTENT OF RS.88.08 CRORES AND GOODWILL TO THE EXTENT OF RS.43.40 CRORES. SUCH PORTION OF THE PURCHASE CO NSIDERATION (WHICH IS IN EXCESS OF THE VALUE ALLOCATED TO TANGIBLE ASSETS AC QUIRED AS PART OF THE UNDERTAKING), REPRESENTS CONSIDERATION PAID FOR ACQ UISITION OF VARIOUS INTANGIBLE ASSETS IN THE FORM OF LEASES, LICENSES, CUSTOMER/ SUPPLIER DATABASE, BUSINESS CONTRACTS, PATENTS, TRADEMARKS, ETC. THE SAME WAS REFLECTED IN THE ACCOUNTS AS (A) INTANGIBLE ASSETS AND (B)GOODWILL. IRRESPECTIVE OF THE NOMENCLATURE PLACED THEREUPON, THE AMOUNT IS FOR IT(TP)A NO.1537/BANG/2012 PAGE 42 OF 58 ACQUISITION OF INVALUABLE BUSINESS AND COMMERCIAL R IGHTS, ELIGIBLE FOR DEPRECIATION IN TERMS OF SECTION 32(1)(II) OF THE A CT. 64. THE LEARNED COUNSEL FOR THE ASSESSEE INVITED OU R ATTENTION TO THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. SMIFFS SECURITIES LTD.: 348 ITR 302 WHEREIN THE SUPREME COURT WAS CONCERNED WITH CLAIM OF DEPRECIATION ON GOODWILL MADE BY THE AMALG AMATED COMPANY. THE SUPREME COURT REGARDED GOODWILL/ REPUTATIONAL ADVAN TAGE AND ABILITY TO RETAIN THE CLIENTELE, BEING THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID FOR SUCH ASSET, AS BUSINESS/ COMMER CIAL RIGHT ELIGIBLE FOR DEPRECIATION UNDER SECTION 32(1)(II) OF THE ACT, OB SERVING AS UNDER:- THE WORDS `ANY OTHER BUSINESS OR COMMERCIAL RIGHT S OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 TO S. 32 IND ICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION `ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPL E OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCU MSTANCES, WE ARE OF THE VIEW THAT `GOODWILL' IS AN ASSET UNDER E XPLANATION 3(B) TO SECTION 32(1) OF THE ACT. 65. OUR ATTENTION WAS DRAWN TO THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF AREVA T AND D INDIA LTD. V. DCIT: 345 ITR 421 (DEL) . IN THE AFORESAID CASE, THE FACTS WERE THAT THE ASSE SSEE WAS ENGAGED IN THE BUSINESS OF TRANSMISSION AND DISTRIBUTION OF POWER, WHICH WAS ACQUIRED FROM THE PARENT COMPANY PURSUANT TO TRANSFER OF BUS INESS THROUGH SLUMP SALE FOR A TOTAL CONSIDERATION OF RS.44.7 CRORES. I N LIEU OF THE AFORESAID CONSIDERATION, THE ASSESSEE ACQUIRED TANGIBLE ASSET S HAVING VALUE OF RS.28.11 CRORES AND THE BALANCE AMOUNT OF RS.16.58 CRORES WAS CLAIMED AS PAID FOR ACQUISITION OF VARIOUS BUSINESS AND COM MERCIAL RIGHTS, VIZ., BUSINESS CLAIMS, BUSINESS INFORMATION, BUSINESS REC ORDS, CONTRACTS AND KNOW HOW, ETC., CATEGORIZED UNDER THE SEPARATE HEAD VIZ., GOODWILL IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. IN THE RETURN OF INCOME THE ASSESSEE IT(TP)A NO.1537/BANG/2012 PAGE 43 OF 58 CLAIMED DEPRECIATION UNDER SECTION 32(1)(II) OF THE ACT WITH RESPECT TO THE AFORESAID VARIOUS INTANGIBLE ASSETS AGGREGATING TO RS.16.58 CRORES ACQUIRED THROUGH SLUMP SALE AND CATEGORIZED UNDER T HE HEAD GOODWILL. THE ASSESSING OFFICER, CIT(A) AND TRIBUNAL DISALLOW ED THE AFORESAID CLAIM OF DEPRECIATION ON INTANGIBLE ASSETS/GOODWILL. ON FURTHER APPEAL, THE HIGH COURT ALLOWED THE APPEAL OF THE ASSESSEE, HOLDING T HAT NATURE OF INTANGIBLE ASSETS IN THE RESIDUAL CATEGORY OF BUSINESS OR COM MERCIAL RIGHTS COULD NOT BE RESTRICTED TO THE PRECEDING SIX CATEGORY OF ASSE TS WHICH ARE OF DISTINCT KIND AND NATURE. THE HIGH COURT OBSERVED THAT ALL T HE INTANGIBLE ASSETS FALL IN THE SAME GENUS OF ASSETS FORMING PART OF TOOL OF TRADE, FACILITATING SMOOTH CARRYING OF BUSINESS. THE HIGH COURT FURTHER HELD T HAT THE VARIOUS INTANGIBLE ASSETS ACQUIRED BY THE ASSESSEE, VIZ., BUSINESS CLA IMS, BUSINESS INFORMATION, RECORDS, CONTRACTS, ETC., WERE INVALUA BLE COMMERCIAL RIGHTS, WHICH WERE NECESSARY TO CARRY ON THE BUSINESS ACQUI RED THROUGH SLUMP SALE. ACCORDINGLY, THE HIGH COURT HELD THAT THE SAM E WERE IN THE NATURE OF INTANGIBLE ASSETS ELIGIBLE FOR DEPRECIATION UNDER S ECTION 32(1)(II) OF THE ACT IN THE RESIDUAL CATEGORY OF BUSINESS OR COMMERCIAL RIGHTS. THE RELEVANT OBSERVATIONS OF THE HIGH COURT ARE AS UNDER:- 13. IN THE PRESENT CASE, APPLYING THE PRINCIPLE O F EJUSDEM GENERIS, WHICH PROVIDES THAT WHERE THERE ARE GENERA L WORDS FOLLOWING PARTICULAR AND SPECIFIC WORDS, THE MEANIN G OF THE LATTER WORDS SHALL BE CONFINED TO THINGS OF THE SAME KIND, AS SPECIFIED FOR INTERPRETING THE EXPRESSION 'BUSINESS OR COMMER CIAL RIGHTS OF SIMILAR NATURE' SPECIFIED IN SECTION 32(1)(II) OF T HE ACT, IT IS SEEN THAT SUCH RIGHTS NEED NOT ANSWER THE DESCRIPTION OF 'KNOWHOW, PATENTS, TRADEMARKS, LICENSES OR FRANCHISES' BUT MU ST BE OF SIMILAR NATURE AS THE SPECIFIED ASSETS. ON A PERUSAL OF THE MEANING OF THE CATEGORIES OF SPECIFIC INTANGIBLE ASSETS REFERRED I N SECTION 32(1)(II) OF THE ACT PRECEDING THE TERM 'BUSINESS O R COMMERCIAL RIGHTS OF SIMILAR NATURE', IT IS SEEN THAT THE AFOR ESAID INTANGIBLE ASSETS ARE NOT OF THE SAME KIND AND ARE CLEARLY DIS TINCT FROM ONE ANOTHER. THE FACT THAT AFTER THE SPECIFIED INT ANGIBLE ASSETS THE WORDS 'BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NAT URE' HAVE IT(TP)A NO.1537/BANG/2012 PAGE 44 OF 58 BEEN ADDITIONALLY USED, CLEARLY DEMONSTRATES THAT T HE LEGISLATURE DID NOT INTEND TO PROVIDE FOR DEPRECIATION ONLY IN RESPECT OF SPECIFIED INTANGIBLE ASSETS BUT ALSO TO OTHER CATEG ORIES OF INTANGIBLE ASSETS, WHICH WERE NEITHER FEASIBLE NOR POSSIBLE TO EXHAUSTIVELY ENUMERATE. IN THE CIRCUMSTANCES, THE N ATURE OF 'BUSINESS OR COMMERCIAL RIGHTS' CANNOT BE RESTRICTE D TO ONLY THE AFORESAID SIX CATEGORIES OF ASSETS, VIZ., KNOWHOW, PATENTS, TRADEMARKS, COPYRIGHTS, LICENSES OR FRANCHISES. THE NATURE OF 'BUSINESS OR COMMERCIAL RIGHTS' CAN BE OF THE SAME GENUS IN WHICH ALL THE AFORESAID SIX ASSETS FALL. ALL THE AB OVE FALL IN THE GENUS OF INTANGIBLE ASSETS THAT FORM PART OF THE TO OL OF TRADE OF AN ASSESSEE FACILITATING SMOOTH CARRYING ON OF THE BUS INESS. IN THE CIRCUMSTANCES, IT IS OBSERVED THAT IN CASE OF THE A SSESSEE, INTANGIBLE ASSETS, VIZ., BUSINESS CLAIMS; BUSINESS INFORMATION; BUSINESS RECORDS; CONTRACTS; EMPLOYEES; AND KNOWHOW , ARE ALL ASSETS, WHICH ARE INVALUABLE AND RESULT IN CARRYING ON THE TRANSMISSION AND DISTRIBUTION BUSINESS BY THE ASSES SEE, WHICH WAS HITHERTO BEING CARRIED OUT BY THE TRANSFEROR, WITHO UT ANY INTERRUPTION. THE AFORESAID INTANGIBLE ASSETS ARE, THEREFORE, COMPARABLE TO A LICENSE TO CARRY OUT THE EXISTING T RANSMISSION AND DISTRIBUTION BUSINESS OF THE TRANSFEROR. IN THE ABS ENCE OF THE AFORESAID INTANGIBLE ASSETS, THE ASSESSEE WOULD HAV E HAD TO COMMENCE BUSINESS FROM SCRATCH AND GO THROUGH THE G ESTATION PERIOD WHEREAS BY ACQUIRING THE AFORESAID BUSINESS RIGHTS ALONG WITH THE TANGIBLE ASSETS, THE ASSESSEE GOT AN UP AN D RUNNING BUSINESS. THIS VIEW IS FORTIFIED BY THE RATIO OF TH E DECISION OF THE SUPREME COURT IN TECHNO SHARES & STOCKS LTD. (SUPRA ) WHEREIN IT WAS HELD THAT INTANGIBLE ASSETS OWNED BY THE ASS ESSEE AND USED FOR THE BUSINESS PURPOSE WHICH ENABLES THE ASSESSEE TO ACCESS THE MARKET AND HAS AN ECONOMIC AND MONEY VALUE IS A 'LI CENSE' OR 'AKIN TO A LICENSE' WHICH IS ONE OF THE ITEMS FALLI NG IN SECTION 32(1)(II) OF THE ACT. 14. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT THE SPECIFIED INTANGIBLE ASSETS ACQUIRED UNDER SLUMP SA LE AGREEMENT WERE IN THE NATURE OF 'BUSINESS OR COMMERCIAL RIGHT S OF SIMILAR NATURE' SPECIFIED IN SECTION 32(1)(II) OF THE ACT A ND WERE ACCORDINGLY ELIGIBLE FOR DEPRECIATION UNDER THAT SE CTION (EMPHASIS SUPPLIED) IT(TP)A NO.1537/BANG/2012 PAGE 45 OF 58 66. OUR ATTENTION WAS ALSO DRAWN TO A SIMILAR DECIS ION OF HONBLE DELHI HIGH COURT IN THE CASE OF TRIUNE ENERGY SERVICES PRIVATE LIMITED VS. DCIT: 237 TAXMAN 230 , WHEREIN IT WAS HELD THAT GOODWILL IS AN INTANGIBLE ASSET PROVIDING A COMPETITIVE ADVANTAGE TO AN ENTITY WHICH INCLUDES A STRONG BRAND, REPUTATION, A COHESIVE HUM AN RESOURCE, DEALER NETWORK, CUSTOMER BASE, ETC.; THE EXPRESSION 'GOODW ILL' SUBSUMES WITHIN IT A VARIETY OF INTANGIBLE BENEFITS THAT ARE ACQUIRED WH EN A PERSON ACQUIRES A BUSINESS OF ANOTHER AS A GOING CONCERN. THE COURT F URTHER HELD THAT 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 (I.E., ASSETS LESS LIABILITI ES); THE DIFFERENCE IN THE PURCHASE CONSIDERATION AND THE NET VALUE OF ASSETS AND LIABILITIES IS ATTRIBUTABLE TO THE COMMERCIAL BENEFIT THAT IS ACQU IRED BY THE PURCHASER. 67. IN OUR VIEW, THE AFORESAID DECISIONS ARE SQUARE LY APPLICABLE TO THE FACTS OF THE PRESENT CASE SINCE IN THE PRESENT CASE ALSO, THE APPELLANT HAD ACQUIRED THE BUSINESS UNDERTAKING ON A GOING CONCER N BASIS AND THE GOODWILL ACQUIRED UPON ACQUIRING THE BUSINESS WHICH IS NOTHING BUT THE DIFFERENCE BETWEEN THE CONSIDERATION PAID IN EXCESS OF THE BOOK VALUE OF THE ASSETS IS ELIGIBLE FOR DEPRECIATION UNDER SECTI ON 32(1)(II) OF THE ACT. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. MANIPAL UNIVERSAL LEARNING (P.) LTD : 215 TAXMAN 151 (KAR.)(MAG.) , FOLLOWING THE DECISION OF THE SUPREME COURT IN SMIFFS SECURITIES (SUPRA) HELD THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECT ION 32(1) OF THE ACT AND THEREFORE DEPRECIATION IS ALLOWABLE ON GOODWILL. IT(TP)A NO.1537/BANG/2012 PAGE 46 OF 58 68. FOR THE REASONS GIVEN ABOVE, WE HOLD THAT THE P URCHASE CONSIDERATION PAID IN EXCESS OF THE VALUE ASSIGNED TO THE TANGIBLE ASSETS, HAS TO BE REGARDED AS PAYMENT TOWARDS ACQUISITION O F GOODWILL WHICH IS A SPECIE OF BUSINESS AND COMMERCIAL RIGHTS AND DEPREC IATION AS CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED. WE HOLD ACCORDINGL Y AND ALLOW GROUND NO.15 & 21 RAISED BY THE ASSESSEE. 69. AS FAR AS (ADDITIONAL) GR.NO.19 RAISED BY THE A SSESSEE IS CONCERNED, THE FACTS ARE THE ASSESSING OFFICER MADE DISALLOWANCE OF THE VALUE ASSIGNED TO LICENSE, PERMITS, CERTIFICATION, ACCREDITATION ETC. ACQUIRED FROM IR AMOUNTING TO RS. 70,00,000 (RUPEES SEVENTY LAKHS) AS REVENUE EXPENSES ALLEGEDLY ON THE GROUND THAT THE SAME BEIN G A PAYMENT MADE TO TAKE OVER A BUSINESS CREATES A NEW SOURCE OF INCOME AND IS TO BE REGARDED AS CAPITAL EXPENDITURE OF ENDURING BENEFIT. THE CLA IM OF THE ASSESSEE BEFORE US IS THAT IF THE AFORESAID PAYMENT IS HELD TO BE CAPITAL IN NATURE, THEN, DEPRECIATION MAY BE DIRECTED TO BE ALLOWED IN TERMS OF SECTION 32(1)(II) OF THE ACT. THE DETAILS OF THE LICENSES AND PERMITS AND CERTIFICATIONS ARE SET OUT IN PARAGRAPHS 18.1 TO 18 .10 AT PAGES 2783 TO 2785 OF PAPER-4 WHICH IS PART OF THE VALUATION OF INTANG IBLES REPORT OF BIZWORTH. THE BASIS OF VALUATION IS SET OUT IN PARA-18.8 TO 1 8.10 OF THIS REPORT AND IN OUR VIEW, IT IS IN FACT AN INTANGIBLE ACQUIRED BY THE ASSESSEE AND THE BASIS OF ESTIMATION OF ITS VALUE IS REASONABLE AND ACCEPT ABLE. WE THEREFORE DIRECT THAT DEPRECIATION BE ALLOWED ON THIS INTANGIBLE TRE ATING IT AS COMMERCIAL RIGHT U/S.32 OF THE ACT. GR.NO.19 IS THUS ALLOWED. 70. AS FAR AS (ADDITIONAL) GR.NO.22 IS CONCERNED, T HE ASSESSEE CLAIMED DEDUCTION IN RESPECT OF THE AMOUNT OF RS.13.87 CROR ES ALLOCATED OUT OF SLUMP CONSIDERATION TOWARDS THE RIGHTS ACQUIRED FOR SUPPLY OF SPARE PARTS TO CUSTOMERS OF INGERSOLL RAND. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE BASIS THAT THE SAME IS IN THE NATURE OF CAPITAL EXPENDITURE CREATING NEW IT(TP)A NO.1537/BANG/2012 PAGE 47 OF 58 SOURCE OF INCOME. IT IS ALTERNATIVELY SUBMITTED BY THE ASSESSEE THAT IN CASE THE SAID AMOUNT IS HELD TO FORM PART OF THE LUMP SU M CONSIDERATION TOWARDS ACQUISITION OF RDB UNDERTAKING, THEN, DEPRECIATION MAY BE DIRECTED TO BE ALLOWED THEREON IN TERMS OF SECTION 32(1)(II) OF T HE ACT AS ELABORATED SUPRA. WE ARE OF THE VIEW THAT THE ALTERNATIVE CLAIM OF TH E ASSESSEE ALONE NEEDS TO BE CONSIDERED AS THE MAIN CLAIM FOR DEDUCTION HA S RIGHTLY BEEN NEGATIVE BY THE REVENUE AUTHORITIES. ON THE ALTERNATIVE CLA IM FOR DEPRECIATION ON THE VALUE OF RIGHT OF SUPPLY OF SPARE PARTS TO CUSTOMER S OF IR IS CONCERNED, WE HAVE CONSIDERED THE SUBMISSION OF THE ASSESSEE. TH E VALUATION REPORT OF BIZWORTH EXPLAINS THE METHOD OF VALUATION IN PARAGR APH 11 OF ITS REPORT. IT IS EXPLAINED THAT ON ACQUISITION OF IRILS RDB SEVERAL EQUIPMENTS ALREADY MANUFACTURED AND SOLD BY IRIL EXISTED IN THE MARKET AND THE ASSESSEE GETS A RIGHT TO SELL SPARE PARTS FOR SUCH EQUIPMENT S. EXPECTED SALE OF SPARE PARTS AND THE MARGIN LIKELY TO BE EARNED ON SUCH SA LE HAS BEEN ESTIMATED AND VALUE ASSIGNED TO SUCH RIGHT AND ALLOCATED OUT OF THE LUMP SUM CONSIDERATION PAID ON SLUMP SALE. THE CLAIM OF THE ASSESSEE BEFORE US IS THAT IF THE AFORESAID PAYMENT IS HELD TO BE CAPITAL IN NATURE, THEN, DEPRECIATION MAY BE DIRECTED TO BE ALLOWED IN TERMS OF SECTION 32(1)(II) OF THE ACT. THE BASIS OF VALUATION IS SET OUT IN PARA -11 OF THE VALUATION REPORT OF BIZWORTH IN OUR VIEW IS IN FACT AN INTANGIBLE AC QUIRED BY THE ASSESSEE AND THE BASIS OF ESTIMATION OF ITS VALUE IS REASONA BLE AND ACCEPTABLE. WE THEREFORE DIRECT THAT DEPRECIATION BE ALLOWED ON TH IS INTANGIBLE TREATING IT AS COMMERCIAL RIGHT U/S.32 OF THE ACT. GR.NO.22 IS TH US ALLOWED. 71. IN VIEW OF ADJUDICATION OF CONNECTED GROUNDS OF APPEAL SPECIFICALLY, GR.NO.23 (ADDITIONAL GROUND) IS ACADEMIC AND NEEDS NO SEPARATE ADJUDICATION. 72. GROUND NO.6 AND (ADDITIONAL) GR.NO.20 CAN BE AD JUDICATED TOGETHER. THESE GROUNDS READ AS FOLLOWS:- IT(TP)A NO.1537/BANG/2012 PAGE 48 OF 58 GR.NO. 6. THE ASSESSING OFFICER FURTHER ERRED IN DISALLOWING DEDUCTION TOWARDS OBSOLESCENCE OF INVENTORY WITHOUT APPRECIATING THE PLEA AS ALSO DOCUMENTS FILED IN SU PPORT OF THE APPELLANTS CLAIM. RAISED AS ADDITIONAL GROUND NO.20: 20. AO/DRP ERRED IN DENYING DEDUCTION OF RS.36,34, 779 BEING THE AMOUNT UTILIZED FROM THE PROVISION FOR WARRANTY TAKEN OVER FROM IR AS A REVENUE EXPENDITURE. (AS FAR AS GR.NO.20 IS CONCERNED, THE ASSESSEE HAS FILED A LETTER DT.30.4.2019 REQUESTING FOR MODIFICATION OF THE FIG URE OF UTILIZED SUM FROM THE PROVISION OF WARRANTY FROM RS.36,34,77 9 TO RS.96,30,413/- (WHICH IS THE CORRECT FIGURE). THE ERROR IS PURELY TYPOGRAPHICAL ERROR AND THE REQUEST FOR MODIFICATIO N IS ACCEPTED). 73. THE FACTS WITH REGARD TO THE AFORESAID GROUNDS OF APPEAL ARE THAT THE ASSESSEE ACQUIRED RDB FROM IRIL BY WAY OF A SLUMP S ALE. ALL ASSETS AND LIABILITIES OF THE RDB WAS ACQUIRED BY THE ASSESSEE . THE FOLLOWING LIABILITIES ALSO BECAME THE LIABILITY OF THE ASSESS EE:- (A) PROVISION FOR INVENTORY OBSOLESCENCE RS.3,79,30,783 (REFER PAGE 240 OF PB- VOL 1 / 2707 OF PB - VOL 4 ) (B) PROVISION FOR WARRANTY RS.1,16,44,629 (REFER PAGE 271 OF PB VOL 1 / 2715 OF PB - VOL 4) TOTAL RS.4,95,75,412 74. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD PAID/DISCHARGED LIABILITY AGAINST THE AFORESAID PRO VISIONS, TO THE EXTENT OF RS.1,32,65,192 (RS.36,34,779 + RS.96,30,413) AND CL AIMED DEDUCTION THEREOF IN THE RETURN OF INCOME (REFER PAGE 93 OF PB VOL 1 / PAGE 2665 OF PB VOL 4) . THE DETAILS OF UTILIZATION OF AFORESAID PROVISION S BY APPELLANT DURING THE YEAR ARE AS UNDER:- IT(TP)A NO.1537/BANG/2012 PAGE 49 OF 58 (A) PROVISION FOR INVENTORY OBSOLESCENCE - RS. 36,34, 779 (REFER TO SCHEDULE 7 - INVENTORIES IN FINANCIAL STA TEMENTS PAGE 10 OF PB-VOL 1 / 2647 OF PB-VOL 4) PARTICULARS TAKEN OVER FROM IR OTHER THAN IR TOTAL OPENING BALANCE (PG 2647 OF PB - VOL 4) - 6,61,58,750 6,61,58,750 TAKEN OVER FROM IR(PG 2707 OF PB - VOL 4) 3,79,30,783 - 3,79,30,783 PROVISION MADE DURING THE YEAR UTILIZED/REVERSED PROVISION DISALLOWED IN ROI (PG 2707 OF PB- VOL 4) 2,22,18,585 (36,34,779) 1,85,83,806 5,71,57,535 7,57,41,341 AMOUNT WRITTEN BACK (PG 2707 OF PB-VOL 4) (1,68,25,737) (1,68,25,737) CLOSING BALANCE (PG 2647 OF PB-VOL 4) 5,65,14,589 10,64,90,548 16,30,05,137 (B) PROVISION FOR WARRANTY - RS. 96,30,413 (REFER NOTE 16 OF NOTES TO ACCOUNTS TO FINANCIAL ST ATEMENTS PAGE 25 OF PB- VOL 1 / 2662, 2665 & 2715 OF PB-VOL 4) IT(TP)A NO.1537/BANG/2012 PAGE 50 OF 58 PARTICULARS TAKEN OVER FROM IR OTHER THAN IR TOTAL (A) AS PER TAX COMPUTATION (PAGE 2665 OF PB-VOL 4) (B) DIFFERENCE (B)-(A) OPENING BALANCE - 5,16,09,901 5,16,09,901 PROVISION TAKEN OVER FROM IR 1,16,44,629 - 1,16,44,629 PROVISION MADE DURING THE YEAR (DISALLOWED DURING THE YEAR) - 16,39,78,725 16,39,78,725 17,40,99,834 1,01,21,109 UTILIZED/REVERSE D DURING THE YEAR (96,30,413) (5,79,06,886) (6,75,37,299) (7,76,58,408) (1,01,21,109) CLOSING BALANCE 20,14,216 15,76,81,741 15,96,95,956 NIL 75. THE ASSESSING OFFICER DID NOT DISPUTE THE CLAIM OF DEDUCTION OF SIMILAR COSTS ON ACCOUNT OF PROVISION FOR WARRANTY AND OBSOLETE INVENTORY INCURRED FOR THE BUSINESS OTHER THAN ACQUIRED FROM IRIL. THE ASSESSING OFFICER DISALLOWED THE AFORESAID DEDUCTIONS CLAIMED BY THE ASSESSEE ON THE GROUND THAT (I) SINCE THE INCIDENCE OF TAX HAD EARL IER BEEN BORNE BY IRIL/TRANSFEROR, THEREFORE, TRANSFEROR ONLY WOULD B E ELIGIBLE TO CLAIM DEDUCTION OF THE AFORESAID EXPENSES, AND (II) THAT PROVISION FOR INVENTORY OBSOLESCENCE HAD NOT BEEN TAKEN OVER BY THE APPELLA NT DURING THE RELEVANT YEAR. IT IS THE PLEA OF THE ASSESSEE BEFORE US TH AT THE AFORESAID ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE AFORESAID EXPENSES IS UNLAWFUL AND CALLS FOR BEING DELETED. 76. TO ADJUDICATE THE AFORESAID ISSUES, IT IS NECES SARY TO LOOK AT THE VARIOUS TERMS OF THE BTA BY WHICH THE ASSESSEE TOOK OVER THE BUSINESS OF RMD. CLAUSES (VI) AND (X) OF SCHEDULE 2 OF BTA (REFER PAGE 133 OF PB- VOL 1 / PAGE 2705 OF PB VOL 4 ) PROVIDES FOR TAKE-OVER BY THE ASSESSEE ALL THE LIABILITIES ARISING TO CUSTOMERS OF RDB, BA SED ON EXPRESS AND IMPLIED IT(TP)A NO.1537/BANG/2012 PAGE 51 OF 58 WARRANTIES AND ALL LIABILITIES ARISING OUT OF THE A CQUIRED BUSINESS. IN VIEW OF THE AFORESAID, THE AFORESAID PROVISIONS WERE ALSO A CQUIRED AS PART OF SLUMP PURCHASE FROM IRIL. THE ASSESSEE PROVIDES FOR WARRA NTY IN THE BOOKS OF ACCOUNT. THE AMOUNTS ACTUALLY PAID AGAINST WARRANTY CLAIMS ARE ADJUSTED AGAINST THE PROVISION CREATED AND OUTSTANDING IN TH E BOOKS. HOWEVER, FOR TAX PURPOSES, THE ASSESSEE HAS CONSISTENTLY ADDED B ACK THE PROVISION FOR WARRANTY DEBITED TO PROFIT AND LOSS ACCOUNT AND CLA IMED DEDUCTION FOR ACTUAL WARRANTY CLAIM. IN THE REVISED RETURN OF INC OME, THE ASSESSEE HAS ADDED BACK PROVISION FOR WARRANTY DEBITED TO PROFIT AND LOSS ACCOUNT AMOUNTING TO RS.17,40,99,834 AND CLAIMED DEDUCTION FOR THE ACTUAL WARRANTY CLAIMS PAID OUT DURING THE RELEVANT PREVIO US YEAR TO THE EXTENT OF RS.7,76,58,408. THE ASSESSING OFFICER ACCEPTED THE METHOD FOLLOWED BY THE ASSESSEE OF ADDING BACK PROVISION FOR WARRANTY AND CLAIMING DEDUCTION FOR ACTUAL WARRANTY CLAIMS, EXCEPT TO THE EXTENT OF WAR RANTY CLAIM ACTUALLY PAID IN RESPECT OF RDB BUSINESS ACQUIRED FROM INGERSOLL RAND. THE AMOUNT OF RS.96,30,413, BEING ACTUAL PAYMENT OF WARRANTY CLAI MS IN RESPECT OF THE OUTSTANDING WARRANTY FOR PRODUCTS SOLD BY INGERSOLL RAND PRIOR TO THE SLUMP SALE, THE ASSESSEE WAS BOUND TO HONOUR THE SAME. IN THAT VIEW OF THE MATTER, THE SAID AMOUNT HAS TO BE ALLOWED DEDUCTION IN THE HANDS OF THE ASSESSEE AS EXPENSES INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF THE BUSINESS. 77. AS FAR AS DEDUCTION OF RS.36,34,779 AGAINST PRO VISION FOR OBSOLETE INVENTORY, IT IS THE PLEA OF THE ASSESSEE THAT THE SAID SUM REPRESENTS WRITE BACK OF PROVISION TO THE CREDIT OF THE PROFIT AND L OSS ACCOUNT. SINCE NO DEDUCTION WAS CLAIMED IN RESPECT OF PROVISION FOR O BSOLESCENCE BY THE ASSESSEE OR INGERSOLL RAND, THE WRITE BACK WAS REGA RDED AS NOT CONSTITUTING INCOME OF THE APPELLANT UNDER SECTION 41(1) OF THE ACT. IT(TP)A NO.1537/BANG/2012 PAGE 52 OF 58 78. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON THE AFORESAID GROUNDS OF APPEAL. WE ARE OF THE VIEW THAT THE ACTUAL PAYM ENT OF WARRANTY CLAIMS NEEDS TO BE ALLOWED AS DEDUCTION AS IT WAS REVENUE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. AS FAR AS THE ASSESSEE IS CONCERNED, IT IS LIABILITY OF TH E ASSESSEE AND SINCE IT IS IN RELATION TO THE BUSINESS OF THE ASSESSEE, THE SAME DESERVES TO BE ALLOWED. 79. AS FAR AS THE DEDUCTION OF PROVISION FOR OBSOLE TE INVENTORY IS CONCERNED, THE CLAIM OF THE ASSESSEE THAT THE SUM R EVERSED WAS NOT CLAIMED AS DEDUCTION BY IRIL NEEDS TO BE VERIFIED A ND IF FOUND CORRECT, THE SAME SHOULD NOT BE TAXED AS THE CONDITIONS PRECEDEN T FOR INVOKING THE PROVISIONS OF SEC.41(1) OF THE ACT ARE NOT SATISFIE D. GROUND NO.6 AND GROUND NO.(ADDITIONAL) 20 ARE DECIDED ACCORDINGLY. 80. GROUND NO.9 & 10 AND ADDITIONAL GROUNDS NO.17 & 18 RELATE TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPEC T OF AN INTERNATIONAL TRANSACTION OF RENDERING CAPTIVE ENGINEERING DESIGN SERVICES TO ITS ASSOCIATED ENTERPRISE (AE). THESE GROUNDS READ AS FOLLOWS:- 9. THE ASSESSING OFFICER GROSSLY ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS.1,82,98,434/- IN RELATION TO SOFTWARE DEVELOPMENT SERVICES ALLEGING SHORTFALL OF THE PRIC E RECEIVED. 10. THE DRP GROSSLY ERRED IN SUSTAINING TRANSFER PR ICING ADJUSTMENT MADE BY THE ASSESSING OFFICER WITHOUT CO NSIDERING ANY PLEA OF THE APPELLANT AND NOT EVEN REFERRING TO THE ORDERS OF THE TPO FILED BY THE APPELLANT BEFORE RELATING TO T HE EARLIER ASSESSMENT YEARS AND THEREFORE THE ORDER AS PASSED BY THE DRP IS WITHOUT APPLICATION OF MIND. ADDITIONAL GROUND OF APPEAL NO.17 17. THE DRP HAS ERRED IN CONFIRMING THE ADDITION MA DE BY THE AO/ TPO TO THE ARMS LENGTH PRICE RECEIVED IN RESPE CT OF THE TRANSACTION RELATING TO SERVICES TO ITS ASSOCIATED ENTERPRISES BY IT(TP)A NO.1537/BANG/2012 PAGE 53 OF 58 REJECTING THE COMPARABLES ADOPTED BY IT ALLEGING TH E SAME TO BE FUNCTIONALLY DIFFERENT FROM ITS BUSINESS. ADDITIONAL GROUND OF APPEAL NO.18 18. WITHOUT PREJUDICE TO THE ADDITIONAL GROUND NO. 17 ABOVE, THE LEARNED TPO ERRED IN NOT SELECTING COMPARABLES THAT ARE FUNCTIONALLY COMPARABLE TO THE APPELLANT WHICH IS E NGAGED IN THE PROVISION OF ENGINEERING AND DESIGN SERVICES. 81. THE ASSESSEE PROVIDED CAPTIVE ENGINEERING DESIG N SERVICE TO ITS ASSOCIATED ENTERPRISE. IT IS NOT IN DISPUTE THAT TH E SAID TRANSACTION OF PROVIDING CAPTIVE ENGINEERING DESIGN SERVICES BY TH E ASSESSEE TO ITS AE WAS AN INTERNATIONAL TRANSACTION AND INCOME FROM SU CH INTERNATIONAL TRANSACTION HAS TO BE DETERMINED KEEPING IN MIND TH E ARMS LENGTH PRICE AS IS REQUIRED UNDER THE PROVISIONS OF SEC.92 OF TH E ACT. IT IS ALSO NOT IN DISPUTE THAT THE TRANSACTION NET MARGIN METHOD (TNM M) WAS CHOSEN AS THE MOST APPROPRIATE METHOD (MAM) FOR THE PURPOSE O F DETERMINATION OF ALP. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR T HE PURPOSE OF COMPARISON WAS OPERATING PROFIT OF THE ASSESSEE AND THE COMPAR ABLES. THE ASSESSEE HAD CHOSEN A SET OF 6 COMPARABLE COMPANIES WHOSE AV ERAGE OPERATING PROFIT WAS 13.83%. THE OPERATIVE PROFIT EARNED BY THE ASSESSEE WAS 14.74% AND THEREFORE THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. 82. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE AO REFERRED THE QUESTION OF DETERMINING ALP OF THE INTERNATIONAL TR ANSACTION IN TERMS OF SEC.92CA OF THE ACT, TREATED THE SERVICES RENDERED BY THE ASSESSEE AS AKIN TO INFORMATION TECHNOLOGY ENABLED SERVICES (IT ES) AND CHOSE A SET OF 20 COMPARABLE COMPANIES AND THE ARITHMETIC MEAN OF THE OPERATING PROFITS OF THESE 20 COMPANIES WERE 24.75% WITHOUT WORKING C APITAL ADJUSTMENT AND 20.71% AFTER WORKING CAPITAL ADJUSTMENT. BASED ON THE ABOVE, THE IT(TP)A NO.1537/BANG/2012 PAGE 54 OF 58 TPO COMPUTED THE SHORTFALL IN PRICE RECEIVED AT RS. 1,82,98,434 AND THE SAID SUM WAS ADDED TO THE TOTAL INCOME OF THE ASSES SEE, AS FOLLOWS: OPERATING COST RS. 30,65,40,000 ARMS LENGTH MARGIN 20.71% OF OPERATING COST ALP @120.71% OF OPERATING COST RS. 37,00,24,434 PRICE RECEIVED RS. 35,17,26,000 SHO RTFALL BEING ADJUSTMENT RS. 1,82,98,434 83. ON OBJECTIONS BY THE ASSESSEE BEFORE THE DISPUT E RESOLUTION PANEL (DRP) TO THE PROPOSAL OF THE TPO AS ABOVE, WHICH WA S INCORPORATED IN THE DRAFT ORDER OF ASSESSMENT OF THE AO, THE DRP CONFIR MED THE ACTION OF THE AO. HENCE, THE AFORESAID GROUNDS OF APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 84. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IF TWO OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO, VIZ., CORAL HUBS LIMITED AND WIPRO LTD., ARE NOT REGARDED AS COMPARABLE COMPANIE S, THEN THE AVERAGE OPERATING PROFIT MARGIN OF THE ASSESSEE WOULD BE WI THIN THE (+) (-) 5% RANGE OF THE OPERATING PROFIT MARGIN OF THE ASSESSE E AND THEREFORE IN TERMS OF SEC.92C(2) PROVISO TO THE ACT, NO ADJUSTMENT OR ADDITION ON ACCOUNT OF DETERMINATION OF ALP CAN BE MADE. 85. EXCLUSION OF CORAL HUBS LTD. (EARLIER KNOWN AS VISH AL INFORMATION TECHNOLOGIES LTD.): THIS COMPANY IS LISTED AT SL.NO.6 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCERNED, IT IS SEEN THAT THIS COMPANY WAS EARL IER KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD. THE OBJECTION OF THE ASSESSEE FOR INCLUDING THIS COMPANY AS A COMPARABLE COMPANY WAS THAT THE A CTIVITIES OF THE COMPANY IS NOT ONLY FUNCTIONALLY DIFFERENT, BUT THE BUSINESS MODEL OF THE COMPANY IS ALSO DIFFERENT AS IT SUB-CONTRACTS MAJOR ITY OF ITS ITES WORKS TO THIRD PARTY VENDORS AND HAS ALSO MADE SIGNIFICANT P AYMENTS TO THOSE IT(TP)A NO.1537/BANG/2012 PAGE 55 OF 58 VENDORS. THE PAYMENTS MADE TO VENDORS TOWARDS THE D ATA ENTRY CHARGES ALSO SUPPORTS THE FACT THAT THE COMPANY OUTSOURCES ITS WORKS. IN THE CIRCUMSTANCES, IT CANNOT BE TAKEN AS A COMPARABLE T O THE ITES FUNCTIONS PERFORMED BY THE ASSESSEE. SINCE THIS COMPANY IS AC TING AS AGENT ONLY BY OUTSOURCING ITS WORKS TO THE THIRD PARTY VENDORS. 86. THE COMPARABILITY OF THIS COMPANY IN THE CASE O F AN ASSESSEE PROVIDING ITES TO ITS AE SUCH AS THE ASSESSEE WAS C ONSIDERED, IN THE LIGHT OF THE VERY SAME OBJECTION THAT THIS COMPANY OUTSOU RCES MAJOR PORTION OF ITS ACTIVITIES, IN THE FOLLOWING DECISIONS AND IT W AS HELD THAT THIS COMPANY IS NOT COMPARABLE WITH A COMPANY PROVIDING ITES TO ITS AE SUCH AS THE ASSESSEE: (I) THE HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS P. LTD 377 ITR 533 (DEL) HELD THAT THIS COMPANY WAS OUTSOURCING ITS ACTIVITY OF PROVIDING ITES TO ITS AE AND THIS WOULD HAVE A BEARING ON ITS PROFITABILITY AND THEREFORE THIS COMPANY CANNOT BE COMPARED WITH A COMPANY PROVIDING ITES TO ITS AE ON ITS OWN. (II) IN THE CASE OF PR. CIT VS NEW RIVER SOFTWARE SERVICES PVT LTD (ITA NO 924/2016) THE HONBLE DELHI HIGH COURT, RELYING ON THE DECIS ION IN THE CASE OF RAMPGREEN SOLUTIONS (SUPRA) REJECTED THIS COMPANY AS COMPARABLE. (PAGE 1889 OF CL PB 1) (III) IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT LTD (IT (TP) A NO1316/BANG/2012) FOR ASSESSMENT YEAR 2008-09, THE HONBLE BANGALORE BENCH OF THE TRIBUNAL REJECTED THIS COMPA NY AS A COMPARABLE ON THE BASIS THAT THIS COMPANY WAS OUTSO URCING MOST OF ITS WORK. (IV) IN THE CASE OF DCIT VS NOVO NORDISK INDIA PVT LTD (IT (TP) A NO 1222/BANG/2013) FOR ASSESSMENT YEAR 2008-09, THE HONBLE IT(TP)A NO.1537/BANG/2012 PAGE 56 OF 58 BANGALORE BENCH OF THE TRIBUNAL REJECTED THIS COMPA NY AS COMPARABLE. (PAGE 1961-1962 OF CL PB 1) (V) THE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. MAERSK GLOBAL SERVICE CENTRE (INDIA) PVT. LTD. (ITA NO. 37 74/MUM/2011) , DIRECTED EXCLUSION OF THIS COMPANY ON THE VERY SAME GROUND. FOLLOWING THE AFORESAID DECISIONS, WE HOLD THAT THI S COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 87. EXCLUSION OF WIPRO LTD. FROM THE LIST OF COMPARABLE COMPANIES: THE MAIN GROUND ON WHICH THIS COMPANY WAS SOUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES IS THAT IT OWNS SI GNIFICANT INTANGIBLES IN THE FORM OF BRAND, TRADEMARKS, PATENTS AND TECHNICA L KNOW-HOW ETC. AND THEREFORE, THE COMPANY CANNOT BE REGARDED AS COMPAR ABLE FOR THE PURPOSE OF BENCHMARKING ANALYSIS. IT IS FURTHER SUBMITTED T HAT THE COMPANY HAS BEEN GRANTED 40 PATENTS WHICH PROVIDES THE COMPANY WITH A SIGNIFICANT COMPETITIVE ADVANTAGE AND ENABLES IT TO GENERATE HI GH RETURNS. THE LIST OF INTANGIBLES OWNED BY IT HAS BEEN GIVEN BY THE ASSES SEE. 88. THIS COMPANY WAS EXCLUDED FROM THE LIST OF COMP ARABLE COMPANIES IN THE CASE OF COMPANIES PROVIDING ITES SUCH AS THE ASSESSEE ON THE AFORESAID GROUND BY THE HONBLE DELHI HIGH COURT IN THE CASE OF PR. CIT VS ORACLE (OFSS) BPO SERVICES PVT LTD (ITA NO 124/2 018) ON THE BASIS THAT THE COMPANY HAS A SIGNIFICANT BRAND PRESENCE AND BRAND VALUE OF AN ENTITY HAS A SIGNIFICANT ROLE IN THE AB ILITY TO GARNER PROFITS AND NEGOTIATE CONTRACTS. IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT LTD (IT (TP) A NO1316/BANG/2012) FOR ASSE SSMENT YEAR 2008-09 , THE HONBLE BANGALORE BENCH OF THE TRIBUNAL REJEC TED THIS COMPANY AS A COMPARABLE ON THE BASIS THAT IT OWNS I NTANGIBLES. FOLLOWING IT(TP)A NO.1537/BANG/2012 PAGE 57 OF 58 THE AFORESAID DECISIONS, WE HOLD THAT THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 89. THE TPO IS DIRECTED TO COMPUTE THE ALP AFTER EX CLUDING THE AFORESAID TWO COMPANIES FROM THE LIST OF COMPARABLE COMPANIES AND ALSO PROVIDE PERMISSIBLE VARIATION OF (+) (-) 5% MARGIN IN ACCORDANCE WITH THE PROVISIONS OF SEC.92CA OF THE ACT. GROUNDS 9 & 10 A ND ADDITIONAL GROUNDS 17 & 18 ARE DECIDED ACCORDINGLY BY CONSIDERING ONLY EXCLUSION OF THE AFORESAID TWO COMPANIES AND BY HOLDING THAT THE OTH ER GROUNDS RELATING TO TRANSFER PRICING DO NOT REQUIRE ANY ADJUDICATION. 90. GROUND NO.11 IS RELATING TO CHARGING OF INTERES T U/S.234B & 234 C OF THE ACT. IN SO FAR AS IT RELATES TO CHARGING OF IN TEREST U/S.234B OF THE ACT IS CONCERNED, THE SAME IS CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL EFFECT. IN SO FAR AS CHARGING OF INT EREST U/S.234C OF THE ACT IS CONCERNED, THE SAME SHOULD BE ON THE RETURNED IN COME. THUS GR.NO.11 IS DECIDED ACCORDINGLY. 91. GROUND NO.12 TO 14 WERE NOT PRESSED AND THEREFO RE THEY ARE DISMISSED AS NOT PRESSED. 92. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF MAY, 2019. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 8 TH MAY, 2019. / D ESAI S MURTHY / IT(TP)A NO.1537/BANG/2012 PAGE 58 OF 58 COPY TO: 1. THE APP ELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.