HUNTSMAN INTERNATIONAL (I) P.LTD, MUMBAI V. DCUT 10(3), MUMBAI

ITA 3916/MUM/2014

• Counselvise Citation: 391619914 RSA 2014
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 06-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 29-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G M DOSS
• Assessee Lawyers: SAURABH SOPARKAR; BANDISH SOPARKAR
• Keywords: Capital asset; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Fair market value; Valuation report; Non passing of speaking order; Tax effect; Revenue expenditure
• Section: 32; 92C; 43B; 143(3)

Judgement Text

1 , INCOME TAX APPELLATE TRIBUNAL,MUMBAI K BENCH . . , , , BEFORE S/SH. A D JAIN ,JUDICIAL MEMBER & RAJ ENDRA,ACCOUNTANT MEMBER /. ITA NO. 3916 /MUM/201 4 , / ASSESSMENT YEAR - 200 7 - 08 /. ITA NO. 1539 /MUM/201 4 , / ASSESSMENT YEAR - 200 9 - 10 M/S. HUNTSMAN INTERNATIONAL (INDIA) PRIVAT LIMITED , C/O., SUNIL KU KREJA RESEARCH & APPLICATION HOUSE, TEX CENTRE,G - WING, SAKI VILLAGE, CHANDIVALI FARM ROAD,ANDHERI (E) MUMBAI - 400 072. PAN: AAACH 9149 J VS DCIT - 10(3) AAYAKAR BHAVAN MUMBAI - 400 020. ( / APPELLANT ) ( / RESPONDE NT ) /ASSESSEE BY : SHRI SAURABH SOPARKAR AND SHRI BANDISH SOPARKAR / REVENUE BY : SHRI G.M. DOSS - CIT / DATE OF HEARING : 2 7 - 07 - 2015 / DATE OF PRONOUNCEMENT : 31 - 0 8 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER S OF THE ASSESSING OFFICER ( AO) DATED 13.01.2014AND 29.03 . 2014, PASSED BY HIM UNDER SECTION 143(3) R .W.S144C(13) OF THE ACT,INCORPORATING THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL(DRP ) , THE ASSESSEE HAS RAISED FO LLOWING GROUNDS OF APPEAL FOR THE ABOVE MENTIONED TWO AY.S. : ITA NO.3916/M/14 (AY.07 - 08): GROUND NO. 1: DISALLOWANCE OF DEPRECIATION ON INTANGIBLES 1.1THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL HAS ERRED IN DISALLOWING DEPRECIATION OF RS.1 3,73,50,000/ - CLAIMED BY THE APPELLANT O N THE INTANGIBLE ASSETS VIZ., MATERIAL SUPPLY CONTRACTS, DISTRIBUTION NETWORK AND RIGHT TO BRAND USAGE. 1.2. THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL H AS ERRED IN FURTHER OBSERVING THAT THE AFOREMEN TIONED INTANGIBLE ASSETS WERE NOT APPEARIN G IN THE BOOKS OF ACCOUNTS OF CIBA SPECIALITY LTD. AND DIAMOND DYECHEM LTD. AND ALSO ERRED IN CONCLUDING THAT THERE WAS NO TRANSFER OF SUCH AFOREMENTIONED INTANGIBLES BY W AY OF SLUMP SALE. THE LEARNED ASSESSING OF FICERLDISPUTE RESOLUTION PANEL ERRED IN DISALLOW ING DEPRECIATION ON THE BASIS THAT SUCH AFOREMENTIONED INTANGIBLE ASSETS ARE NOT IN EXIS TENCE AND THAT THERE WAS ON EVIDENCE OF TRANSFER OF THESE SELF GENERATED ASSETS TO THE APPELLANT. 1.3. THE LEARN ED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL HAS ERRED IN CONCLUDING THAT THE VALUER'S REPORT IS INCOMPLETE AND INCONCLUSIVE AND CANNOT BE ACCEPTED. 1.4. THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN HOLDING THAT THE AFOREMENTION ED INTANGIBLE ASSETS VIZ. MATERIAL SUPPLY CONTRACTS, DISTRIBUTION NETWORK AND BRAND USAGE RIGHT ARE NOT AKIN TO THE INTANGIBLE ASSETS REFERRED TO IN THE PROVISIONS OF SECTION 32(1 )(II) ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 2 OF THE INCOME - TAX ACT,1961 (HEREINAFTER REFERRED TO AS 'THE ACT') AND HENCE, SUCH AFOREMENTIONED INTANGIBLES ARE NOT ELIGIBLE FOR DEPRECIATION. 1.5. THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT IT IS ENTITLED TO CLAIM DEPRECIATION ON THE IN TANGIBLE ASSETS VIZ., MATERIAL SUPPLY CONTRACTS, DISTRIBUTION NETWORK AND RIGHT TO BRAND USAGE. 1.6 THE APPELLANT SUBMITS THAT THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL BE DIRECTED TO GRANT DEPRECIATION ON THE INTANGIBLE ASSETS VIZ., MATE RIAL SUPPLY CONTRACTS DISTRIBUTION NETWORK AND RIGHT TO BRAND USAGE AND TO RE - COMPUTE ITS TOTAL INCOME ACCORDINGLY. WITHOUT PREJUDICE TO THE FOREGOING: 1.7. THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL HAS ERRED IN NOT CONSIDERING THE PAYMENTS MADE BY THE APPELLANT FOR RIGHT TO BRAND USAGE AS A REVENUE DEDUCTION. GROUND NO. 2: DISALLOWANCE OF SHARE ISSUE EXPENDITURE 2.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN DISALLOWING SHARE ISSUE EXPENDITURE OF RS.24,00 ,1 00/ - (1/5 TH OF RS.1,20, 00 ,5 00/ - ) CLAIMED BY THE APPELLANT UNDER SECTION 35D OF THE ACT. 2.2 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN OBSERVING THAT THE CLAIM SUCH EXPENDITURE WAS MADE DURING THE COURSE OF ASSESSMENT WHEREAS THE CLAIM WAS MADE THE APPELLANT BY WAY OF A NOTE TO THE RETURN OF INCOME. 2.3. THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT IT IS ENTITLED TO A DEDUCTION UNDER SECTION 35D O F THE ACT ON THE SHARE ISSUE EXPENDITURE INCURRED BY IT. 2.4. THE APPELLANT SUBMITS THAT THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL BE DIRECTED TO GRANT DUE DEDUCTION UNDER SECTION 35D OF THE ACT FOR THE SHARE ISSUE EXPENDITURE INCURR ED BY THE APPELLANT. GROUND NO. 3: DISALLOWANCE OF EXPENDITURE ON PAYMENT BASIS UNDER SECTION 43B OF THE ACT 3.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN NOT ALLOWING DEDUCTION FOR PAYMENT TOWARDS LEAVE ENCASHMENT, INCENT IVE, BONUS AND SPECIAL PAYMENT TOTALING TO RS.55,81,862/ - MADE BY THE APPELLANT IN CONNECTION WITH LIABILITIES OF CIBA SPECIALITY LTD. TAKEN OVER BY THE APPELLANT BY WAY OF SLUMP SALE. 3.2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCU MSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT IT IS ENTITLED TO CLAIM A DEDUCTION UNDER SECTION 43B OF THE ACT FOR PAYMENTS OF STATUTORY AND OTHER LIABILITIES OF CIBA SPECIALITY LTD. WHICH WERE ACQUIRED BY IT PURSUANT TO THE SLUMP SALE. 3.3 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN OBSERVING THAT THE CLAIM SUCH EXPENDITURE WAS MADE DURING THE COURSE OF ASSESSMENT WHEREAS THE CLAIM WAS MADE BY THE APPELLANT BY WAY OF A NOTE TO THE RETURN OF INCOME. 3.4. THE AP PELLANT SUBMITS THAT THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL BE DIRECTED TO GRANT DUE DEDUCTION TO IT UNDER SECTION 43B OF THE ACT AND TO RECOMPUTE ITS TOTAL INCOME ACCORDINGLY. GROUND NO. 4: GENERAL 4.1 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR SUBSTITUTE ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 4.2 EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE ABOVE. ITA NO.1539/M/2014(AY . 2009 - 10) : THE APPEL LANT OBJECTS TO THE ORDER UNDER SECTION 143(3) R.W.S 144C (13) OF THE INCOME TAX ACT, 1961 ('THE ACT') DATED 13 JANUARY 2014 (RECEIVED ON 1 FEBRUARY 2014) PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX (' AO') INCORPORATING THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL ('DRP') FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING GROUNDS: 1. ERRONEOUS IN NOT FOLLOWING THE DIRECTION ISSUED BY THE DRP ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 3 1.1 THE AO ERRED BY NOT FOLLOWING THE DIRECTIONS ISSUED BY THE DRP U/S 144C(5) OF THE ACT. 2. ERRONEOUS DISALLOWANCE OF THE CORPORATE SERVICE CHARGES 2.1 THE LEARNED AO/DRP ERRED IN UPHOLDING THE TPO'S CONTENTION FOR THE DISALLOWANCE OF MANAGEMENT SERVICE CHARGES PAID BY THE APPELLANT TO ITS AES AMOUNTING TO INR 46,299,732/ - BY FAILING TO APPRECIATE THE FACTS OF THE CASE, INCLUDING THE SUBMISSIONS MADE BY THE APPELLANT, IN A CORRECT PERSPECTIVE THEREBY HOLDING THE ARM'S LENGTH PRICE ('ALP') OF THE SERVICES AS NIL. 2.2 THE DRP IN UPHOLDING THE ACTIONS OF THE AO/TPO, ER RED IN HOLDING THAT THE APPELLANT FAILED TO PRODUCE EVIDENCE TO PROVE RECEIPT OF SERVICES WITHOUT APPRECIATING THE FACTS AND THE ADDITIONAL EVIDENCES SUBMITTED BEFORE THE DRP IN A CORRECT PERSPECTIVE. 3. ERRONEOUS APPROACH ADOPTED BY THE TPO IN COMPUTING THE ADJUSTMENT FOR THE POLYURETHANES ('PU') DIVISION 3.1 THE AO/TPO ERRED IN & THE DRP ERRED IN UPHOLDING THE ACTION OF AO/TPO IN REJECTING THE APPROACH FOLLOWED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT WITHOUT APPRECIATIN G THAT THIS APPROACH WAS CONSISTENTLY FOLLOWED BY THE APPELLANT IN THE PAST ASSESSMENT YEARS. 3.2 THE AO/TPO ERRED & THE DRP ERRED IN UPHOLDING THE ACTION OF AO/TPO IN BENCHMARKING THE MANUFACTURING AND TRADING SEGMENT SEPARATELY INSTEAD OF CON SIDERING THE PU SYSTEM HOUSE APPROACH (COMBINING RESULTS OF MANUFACTURING AND TRADING), WITHOUT APPRECIATING THE BUSINESS FACTS AND REASONS OF THE APPELLANT. 4. ERRED IN REJECTING SEGMENTAL COMPUTATION AS SUBMITTED BY THE APPELLANT 4.1 THE AO/TPO ERRED IN & THE DRP ERRED IN UPHOLDING THE ACTION OF AO/TPO IN REJECTING THE SEGMENTAL COMPUTATION PROVIDED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT WITHOUT APPRECIATING THE FACT OF THE CASE AND ALLOCATION KEYS ADOPTED BY THE APPE LLANT. 5. APPLICATION OF (+1 - 5%) IN COMPUTATION OF ADJUSTMENT 5.1 THE APPELLANT CRAVES THAT IN COMPUTING THE AMOUNT OF TRANSFER PRICING ADJUSTMENT IF ANY, THE BENEFIT OF +1 - 5% RANGE BE GRANTED TO THE APPELLANT. 6. DISALLOWANCE OF DEPRECIA TION ON INTANGIBLES 6.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL HAS ERRED IN DISALLOWING DEPRECIATION OF RS.6,84,70,313/ - CLAIMED BY THE APPELLANT ON THE INTANGIBLE ASSETS VIZ., MATERIAL SUPPLY CONTRACTS AND DISTRIBUTION NETWORK. 6.2 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN DISALLOWING DEPRECIATION ON THE BASIS THAT SUCH AFOREMENTIONED INTANGIBLE ASSETS ARE NOT IN EXISTENCE. 6.3 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN HOLDING THAT THE AFOREMENTIONED INTANGIBLE ASSETS VIZ. MATERIAL SUPPLY CONTRACTS AND DISTRIBUTION NETWORK ARE NOT AKIN TO THE INTANGIBLE ASSETS REFERRED TO IN THE PROVISIONS OF SECTION 32(1 )(II) OF THE INCOME - TAX ACT,1961 (HEREINAFTER REFERRED TO AS 'THE ACT') AND HENCE, SUCH AFOREMENTIONED INTANGIBLES ARE NOT ELIGIBLE FOR DEPRECIATION. 7. DISALLOWANCE OF DEPRECIATION ON GOODWILL CLAIMED UNDER SECTION 32(1)(II) OF THE ACT 7.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN DISALLOWING DEPRECIATION ON GOODWILL OF RS.6,38,78,278/ - AS CLAIMED UNDER SECTION 32(1)(II) OF THE ACT BY IT. 8. DISALLOWANCE OF SHARE ISSUE EXPENDITURE 8.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN DISALLOWING SHARE ISSUE EXPENDITURE OF RS.24,00,100/ - (1/5TH OF RS.1,20,00,500/ - ) CLAIMED BY THE APPELLANT UNDER SECTION 35D OF THE ACT. 8.2 FURTHER, THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL, WHILE COMPUTING THE TOTAL INCOME OF THE APPELLANT, ERRON EOUSLY MADE THE ADDITION OF RS.24,00,100/ - ON ACCOUNT OF DISALLOWED UNDER SECTION 35D OF THE ACT EVEN THOUGH THE APPELLANT HAD NOT CLAIMED THE AFORESAID EXPENSE IN THE RETURN OF INCOME/COMPUTATION OF INCOME FOR THE ASSESSMENT YEAR 2009 - 10 LEADING TO A DOUBLE DISALLOWANCE. 9. DISALLOWANCE OF EXPENDITURE ON PAYMENT BASIS UNDER SECTION 43B OF THE ACT ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 4 9.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN NOT ALLOWING DEDUCTION FOR PAYMENT MADE BY THE APPELLANT IN CONNECTION WITH LIABIL ITIES OF CIBA SPECIALITY LTD. TAKEN OVER BY THE APPELLANT BY WAY OF SLUMP SALE. 10. DISALLOWANCE OF UNPAID SERVICE TAX AND WORKS CONTRACT TAX - HARYANA UNDER SECTION 43B OF THE ACT 10.1 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ER RED IN DISALLOWING UNPAID SERVICE TAX OF RS.41,324/ - AND WORKS CONTRACT TAX - HARYANA OF RS.1,166/ - UNDER SECTION 43B OF THE ACT. 10.2 THE LEARNED ASSESSING OFFICER/DISPUTE RESOLUTION PANEL ERRED IN NOT APPRECIATING THE FACT THAT THE APPELLANT HAS NEITHER INCLUDED THE SERVICE TAX IN ITS TURNOVER NOR HAS THE SAME BEEN DEBITED TO THE PROFIT & ACCOUNT AND ALSO THE SAME HAS NOT BEEN CLAIMED IN THE RETURN OF INCOME. 11. THE LEARNED AO ERRED IN INITIATING PENALTY PROCEEDING U/S 271 (1)(C) REA D WITH EXPLANATION 7 OF THE ACT. 12. THE APPELLANT SUBMITS THAT EACH GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO ONE ANOTHER. 13. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, AMEND, SUBSTITUTE AND / OR MODIFY IN ANY MANNER WHATSOEVER ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)DID NOT PRESS GROUND NO.2 FOR THE AY.2007 - 08.HENCE SAME STAND DISMISSED.SIMILARY,GROUND S NO 8 - 10 FOR THE AY. 2009 - 10 WERE ALSO NOT PRESSED.IT WAS STATED THAT GROUND S NO.9 &10 WAS NOT PRESSED CONSIDERING THE SMALLNESS OF TAX EFFECT. WE ARE DISMISSING GROUND NO. 8 - 10 FOR THE AY. 2009 - 10, AS NOT PRESSED. 2. ASSESSEE - COMPANY,ENGAGED IN THE BUSINESS OF MANUFACT URING OF CHEMICALS .DETAILS OF DATES OF FILING OF RETURNS,INCOMES RETURNED,DATES OF ASSESSMENT,ASSESSED INCOMES, DATES OF ORDERS OF THE DRP CAN BE SUMMARISED AS UNDER : AY. RETURN FILED ON RETURNED INCOME ASSESSMENT DT. ASSESSED INCOME DT. OF ORDERS OF DRP 2007 - 08 31.12.2008 RS.14,77,25,342/ - 27.12.2010 RS.21,84,75,151/ - 25.3.2014 2009 - 10 26.09.2009 RS.53,97,90,433/ - 13.01.2014 RS,72,51,75,838/ - 24.12.2013 ITA/3916/MUM/ AY.2007 - 08 : 2.1. BRIEF FACTS OF THE CASE ARE THAT I N THIS MATTER ORIGINAL ORDER PASSE D BY THE AO, IN PURSUANCE OF THE DIRE CTIONS ISSUED BY DRP - II MUMBAI, WAS CHALLENGED BEFORE THE TRIBUNAL .IT WAS ARGUED BEFORE THE TRIBUNAL STATING THAT THE CONSTITUTION OF DRP WAS CONTRARY TO THE PRINCIPLES OF NATURAL JUSTICE ON ACCOUNT OF ONE OF THE MEMBERS BEING THE JURISDICTION COMMISSIONER OF THE A SSESSEE . VIDE ITS ORDER DT.13.4.2012,THET RIBUNAL SET ASIDE THE ORDER PASSED BY THE AO AND REMITTED BACK THE MATTER TO THE FILE OF DRP/AO FOR FRESH ADJUDICATION. IN PURSUANCE OF THE DIRECTION OF THE TRIBUNAL, DRP - MU MBAI, VIDE ITS ORDER D A T ED,27.3.2014, GAVE DIRECTION S TO THE AO WHO COMPLETED THE ASSESSMENT ON 29.3.2013. 2.2 . F IRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF DEPRECIATION ON INTANGIBLES, AMOUNTING TO RS.13. 73 CRORES.DURING THE AS SESSMENT PROCEEDINGS, THE AO FO UND THAT THE ASSESSEE - COMPANY HAD CLAIMED DEPRECIATION OF RS.12.07 CRORES UNDER THE HEAD DEPRECIAT ION ON MATERIAL SUPPLY CONTRACT (MSC)AND ON DISTRIBUTION NETWORK(DN) AND RS.6.25 CRORES UND ER THE HEAD BRAND USES EXPENSES (BUE). HE DIRECTED THE ASSESSEE TO EX PLAIN AS TO W HY THE ABOVE REFERRED CLAIM SHOULD BE ALLOWED AS REVENUE EXPENDITURE . THE ASSESSEE IN ITS REPLY STATED THAT HUNTSMAN GROUP TOOK GLOBAL ACQUISITION OF THE TEXTILE EFFECTS OF CIBA SPECIALITY CHEMICAL GROUP, THAT THE GROUP OPERATED IN INDIA THROUG H ITS INDIAN COMPANIES NAMELY CIBA SPE CIALITY CHEMICALS (I) LTD. CIBA - INDIA, AN D DIAMOND DYE - CHEM LTD. (DDCL), THAT ASSESSEE ENTE RED INTO AN AGREEMENT WITH CIBA - INDIA AND ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 5 DDCL FOR ACQUIRING THE TEXTILE BUSINESS EFFECT ASSETS ON A SLUMP SALE BASIS, THAT THE ASSESSEE ALSO ENTERED INTO TOLL MANUFACTURING AGREEMENT (MATE RIAL SUPPLY AGREEMENT WITH CIBA - INDIA AND DDCL) , THAT IT HAD RECORDED THE FIXED ASSETS AND INTANGIBLE ASSETS AT FAIR VALUE AS DETER MINED BY AN INDEPENDENT VALUER, THAT AS PER THE AGREEMENT IT WAS G RANTED NON EXCLUSIVE IRREVOCABLE AND R OYALTY FEE LICENCE TO USE TRADEMARKS, DOMAIN NAME FOR A PERIOD OF 24 MONTHS, THAT BASED ON VALUATION REPORT OF INDEPENDENT VALUER IT HAD VALUED THE AFORESAID RIGHT (TO USE BRANDS), AS REVENUE EXPENDITURE, THAT THE PAYMENT MADE BY THE ASSESSEE WAS NOT FOR ACQUISITION OF BRAND NAME ITSELF ,THAT IT DID NOT ACQUIRE OWNERSHIP OF CIBA BRAND ,THAT IT DID NOT HAVE EXCLUSIV E RIGHT OVER THE USE OF BRANDS, THAT PAYMENT WAS MADE FOR USING THE BRAND FOR ONLY A SHORT PERIOD, THAT BENEFIT AC CRUING TO THE ASSESSEE FROM SUCH PAYMENT FOR USE OF BRAND WAS TRANSIT IN NATURE, THAT THE ASSESSEE DID NOT DERIVE ANY ENDURING BENEFIT OR ANY PERMANENT ADVANTAGE.THE ASSESSE E REFERRED TO THE CASE OF CIBA - INDIA LTD.(69 ITR 692), IAEC PUMPS LTD. (232 ITR 3 16) .WITHOUT PREJUDICE TO THE ABOVE, IT WAS CONTENDED THAT IF THE PAYMENTS MADE FOR BRAND USE WAS TREATED AS CAPITAL ASSET THEN DEPRECI ATION@ 25% AS PER THE PROVISIONS OF SECTION 32(1)(II) OF THE ACT SHOULD BE ALLOWED. WITH REGARD TO MSC, IT WAS STATED THAT ON ACQUISITION OF TEXTILE EFFECT BUSINESS THE MANUFACTURING FACILITIES OF DDCL WERE NOT TRANSFERRED TO THE ASSESSEE , THAT IN ORDER TO PROTECT ITS BUSINESS INTEREST IT ENTERED INTO AN MSC WITH DDCL TO ENSURE CONSISTENCY IN QUALITY AND QUANTITY OF THE TEXTILE CH EMICALS , THAT THE MSC WAS A BUSINESS/COMMERCIAL RIGHT AND WAS SIMILAR TO KNOW HOW, PATENTS, COPY RIGHTS, TRADE MARKS LICENCES AND FRANCHISEES , THAT THE AGREEMENT SECURED SUPPLY OF CERTAIN PRODUCTS FOR A PERIOD OF FIVE YEARS, THAT THE SUPPLY OF MINIMUM QUANTITY WAS TO BE AT COST OF MANUFACTURING, THAT OWING TO THE AGREEMENT THE ASSESSEE DID NOT CARRY THE RISK ATTACHED WITH THE MANUFACTURING OF THE PRODUCTS, THAT IT WAS GRANTED DISCOUNTS SUCH AS VOLUME DISCOUNT OF 3% AND A FURTHER DISCOUNT OF 4.5% ON INVOICE VALUE IF THE PAYMENT WAS MADE WITHIN FIVE DAYS, THAT MSC WAS AN INTANGIBLE ASSET IN TERMS OF S.32(1)(II) AND WAS E LIGIBLE FOR DEPRECIATION @ 25%. THE ASSESSEE RELIED UPON THE CASE S OF SKYLINE CATERERS LTD.(306 ITR - AT - 369)KOTAK FOREX BROKERAGE LTD. AND COCA COLA BE V ERAGE P LTD. ABOUT THE DN, IT WAS CON TENDED THAT OVER THE YEARS CIBA - INDIA AND DDCL HAD CREATED STRONG DISTRIBUTION NETW ORK FOR SELLING THEIR PRODUCTS,THAT THROUGH THE DN AGREEMENT THE ASSESSEE GOT ACCESS TO THE BUYERS, THAT DN WAS AN INTANGIBLE ASSET AND WAS ELIGIBLE FOR DEPRECIATION U/ S. 32(1)(II) OF THE ACT, THAT THE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIG HTS OF SIMILAR NATURE USED IN SECTION 32 OF THE ACT HAD NOT BEEN DEFINED OR EXPLAINED IN THE ACT, THAT THE AGREEMENT WAS MADE FOR A PERIOD OF FI VE YEARS, THAT THE DISTRIB UTION NETWORK DEVELOPED BY CIBA - INDIA WAS CRUCIAL TO ACHIEVE THE SALES TARGET. IT WAS FURTHER STATE D THAT THE ASSESSEE HAD ACQUIRED THE POLY URETHANE BUSINESS FROM ICI LTD.I N THE AY 2002 - 03 AS A GOING CONCERN IN ACCORDANCE WITH BUS INESS TRANSFER AGREEMENT (BTA), THAT IT HAD ACQUIRED THE FIXED ASSETS, INTELLECTUAL PROPERTIES, INTANGIBLES AND THE NET CURRENT ASSETS, THAT THE ACTUAL COST OF THE FIXED ASSETS FOR THE ASSESSEE WAS THE CONSIDERATIO N WHICH IT HAD PAID TO ICI LTD., THAT A SIMIL AR DISALLOWANCE HAD BEEN MADE BY THE AO IN THE EARLIER A.Y.S, THAT THE TRIBUNAL HAD DELETED THE ADDITION FOR THE A.Y .S 2002 - 03, 2003 - 04 AND 2004 - 05. WITH REGARD TO TEXTILE EFFECT DIVISION (TED) IT WAS CONTENDED SIMILAR ARGUMENTS WERE MADE. THE ASSESSEE FURT HER STATED THAT WHEN UNIT WAS ACQUIRED AT SLUMP PRICE AS GOING CONCERN, NO SEPARATE PRICE WAS ASSIGNED TO EACH INDIVIDUAL ASSET, THAT IT WAS NECESSARY FOR THE ASSESSEE TO CARRYOUT VALUATION OF EACH ASSET FOR WHICH A CONSOLIDATED PRICE WAS PAID, THAT IT HAD OBTAINED THE VALUATION REPORT FOR ITS OWN SPECIFIC PURPOSE I.E. TO RECORD THE INDIVIDUAL VALUE OF THE ASSETS ACQUIRED ON PAYMENT OF SLUMP SALE CONSI - DERA TION, THAT IT WAS NOT A CASE OF REVALUATION OF THE ASSETS.THE ASSESSEE REFERRED TO THE CASE OF ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 6 ASHWIN VANASPATI (255 ITR 26) IN ITS SUPPORT. IN ITS SUPPORT THE ASSESSEE FURNISHED VALUATION REPORT D T.19.1.2007 PREPARED BY M.M. RAVJI & CO. CA. TO ENQUIRE INTO THE GENUINENES S OF THE CLAIM OF THE ASSESSEE, THE AO CALLED FOR INFORMATION FROM DDCL AND CIBA INDIA UNDER SEC.131 OF THE ACT. HE DIRECTED THEM TO FURNISH DETA ILS OF WRITTEN DOWN VALUE (WDV) OF ALL THE BLOCKS OF ASSETS TRANSFERRED TO THE ASSESSEE AND ALSO A COPY OF THE REPORT PREPARED BY AN ACCOUNTANT IN ACCORDANCE WITH THE PROVISIONS OF SEC.50B OF THE AC T. ON PERUSAL OF THE SAME, HE FOUND THAT NO INTANGIBLE ASSETS WERE TRANSFERRED TO THE ASSESSEE ON ACCOUNT OF SLUMP SALE. THEREFORE, A SHOW CAUSE NOTICE WAS ISSUED ON 9.12.2012 TO THE ASSESSEE CALLING FOR EXPLANATION/JUSTIFICATION FOR CLAIM OF RS.18.42 CRORES (DEPRECIATION ON MSC RS.2.97 CRORES + DEPRECIAT ION OF DN RS.9.20 CRORES + BUE - RS.6.25 CRORES). O N 20.12.2010 ,T HE ASSESSEE FILED ITS EXPLANATION IN THAT REGARD .AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, HE HELD THAT THE ASSESSEE HAD NOT INCURRED ANY EX PENSE ON BRAND USE, THAT THE NOTIONAL VALUE ASCRIBED BY THE VALUER WAS ON THE BASIS OF FUTURE ESTIMATED SALES, THAT THERE WAS NO EXISTENCE OF ANY BRAND USES RIGHT AT THE TIME OF TRANSFER, THAT THE TRANSFEROR HAD ADMITTED THAT THE ASSET AS A BRAND USES WAS N OT IN EXISTENCE AT THE TIME OF TRANSFER, THAT THE CLAIM OF THE ASSESSEE THAT AN AMOUNT OF RS.6.25 CRORES SHOULD BE ALLOWED AS REVENUE EXPENDITURE WAS LEGALLY UNTENABLE, THAT THE ALTERNATIVE CLAIM OF THE ASSESSEE TO ALLOW DEPRECIATION U/S.32(1)(II) OF THE ACT WAS NOT ACCEPTABLE, THAT EVE N IF THERE WERE ASSET LIKE MSC, DN AND BRAND USES RIGHT AS AN INTANGIBLE ASSET THE ASSESSEE WAS NOT ELIGIBLE FOR CLAIM OF DEPRECIATION AS THE SAME WERE NOT AKIN TO THE ASSETS DEFINED IN THE PROVISION LIKE KNO W - HOW, PATENTS, C OPYRIGHTS ETC.FINALLY, HE REJECTED THE CLAIM OF DEPRECIATION ON MSC, DN AND RIGHT TO USE BRAND. 2. 3. BEFORE US,THE AR CONTENDED THAT AS PER THE TOLL MANUFACTURING AGREEMENT (TMA) THE ASSESSEE WAS TO GET THE THINGS MANUFACTURED FOR A PERIOD OF 5 YEARS AT NO PR OFIT /LOSS BASIS, THAT THE INDEPENDENT VALUER HAD VALUED THE BENEFIT OCCURRING TO THE ASSESSEE , THAT ALL THE THREE INTANGIBLES WERE ENTITLED FOR DEPR ECIATION U/S. 32(1) OF THE ACT, THAT THERE WAS TRANSFER OF IN TANGIBLES BY WAY OF SLUMP SALE, THAT THE VALUERS RE PORT WAS COMPLETE AND CONCLUSIVE IN ALL REGARD, THAT IN ABSENCE OF ASSIGNMENT OF SOME VALUE TO THE INTANGIBLES IN THE BALANCE SHEET OF THE TRANSFERORS WAS NOT THE DECISIVE FACTOR.HE RELIED UPON THE CASES OF SMIFS SECURITIES LTD. (248 ITR 302),B. RAVINDRAN PI LLAI (332 ITR 531), AREVA T&D INDIA LTD.(345ITR 421),T ECHNO SHARES AND STOCKS LTD.(327ITR 323), BIRLA GLOBAL ASS ET FIN.CO. LTD.(221TAXMANN 176) , MAN IPAL UNIVERSAL LEARNING P. LTD.( 359 ITR369),SKS MICRO FINANCE LTD. (145ITD111), GUR UJI ENTERTAINMENTS NETWORK LTD.(1 08TTJ 180), ONGC VIDESH LTD(37SOT97),WEIZMANN FOREX LTD.(51 SOT 535), SA RABHAI ZYDUS ANIMAL HEALTH LTD. (ITA /26/DEL./2005 ) AND DRILL BITS INTERNATIONAL PVT. LTD. (ITA/ 1361/ PUN/ 2010). HE REFERRED TO PAGE NO.42, 309 - 311, OF THE PAPER BOOK.DEPARTMENTAL REPRESE NTATIVE (DR) ARGUED THAT THE TRANSACTION WAS A SLUMP PURCHASE,THAT VALUATION OF EACH UNIT WAS NOT MADE,THAT BUSINESS AS A SINGLE UNIT WAS SOLD BY CIBA AND DYE CHEM,THAT BOTH THOSE ENTITIES HAD NOT MENTIONED ANYTHING ABOUT THE SO - CALLED INTANGIBLE ASSETS IN THEIR BALANCE SHEETS,THAT ONLY GOOD WILL WAS TO BE VALUED,THAT THE VALUATION WAS BASED ON FUTURE PROJECTION AND NOT ON PRESENT BENEFITS,THAT VALUATION WAS NOT IMMEDIATELY ON ACQUIRING THE BUSINESS,THAT IN THE MSC NO INTANGIBLE ASSET WERE INVOLVED,THAT THE RE WAS NO PLACE FO R SUCH VALUATION UNDER THE ACT. 2. 4 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. BEFORE PROCEEDING FURTHER, WE WOULD LIKE TO CONSIDER THE CASES DEALING WITH INTANGIBLE ASSETS AND GOOD WILL.IN THE CASE O F SMIFS SECU RITIES LTD.(SUPRA) THE H ONBLE S UPREME C OURT HAS HELD THAT PROVISIONS OF SEC. 31 (2) ARE APPLICABLE TO GOODWILL. IT IS ALSO FOUND THAT BUSINESS RIGH TS,LIST OF CLIENTS, BRAND EQUITY, NON COMPETE FEE ETC. HAVE BEEN HELD TO BE INTANGIBLE AS SETS BY THE HONBLE COUR T/ITAT,WHILE ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 7 DEALING WITH THE ISSUE OF DEPRECIATION. WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION S OF THE JUDGMENTS DEALING WITH THE ISSUE. THE HONBLE SUPREME COURT IN THE CASE OF SMIFS SECURITIES (SUPRA) HAS HELD THAT A READING OF THE WORDS ANY OTHER BUS INESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 TO SECTION 32(1) INDICATES THAT GOODWILL W OULD FALL UNDER THE EXPRESSION. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE EXPRESSION WHICH F INDS PLACE IN EXPLANATION 3(B),THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. IN THE MATTER OF RAVEENDRA PILLAI THE HONBLE KERALA HIGH COURT (SUPRA) HAS DELIBERATED UPON THE FACTS OF THE CASE AND ALLOWABILITY OF DEPRECIATION ON INTANGIBLE ASSETS.IN THAT MATTER T HE ASSESSEE HAD PURCHASED A HOSPITAL IN QUILON WITH ITS LAND, BUILDING, EQUIPMENT, STAFF, NAME, TRADE MARK AND GOODWILL AS A GOING CONCERN UNDER TWO SEPARATE SALE DEEDS. UNDER THE SALE DEED, THE VALUE OF THE GOODWILL WHICH INCLUDED THE NAME OF THE HOSPITAL AND ITS LOGO AND TRADE MARK WAS RS.2 CRORES. THE ASSESSEE WAS ALLOWE D DEPRECIATION ON THE GOODWILL. HOWEVER,IN THE SCRUTINY ASSESSMENT, THE AO HE LD THAT GOODWILL WAS NOT COVERED BY SECTION 32(1)(II). THE APPEALS FILED BY THE ASSESSEE BEF ORE THE FAA ) AND THE TRIBUNAL WERE UNSUCCESSFUL. THE HONBLE HIGH COURT DECIDED THE ISSUE AS FOLLOW: IN FACT, WITHOUT RESORTING TO THE RESIDUARY ENTRY THE ASSESSEE WAS ENTITLED TO CLAIM DEPRECIATION ON THE NAME, TRADE MARK AND LOGO UNDER THE SPECIFIC HEAD PROVIDED UNDER SECTION 32(1)(II) WHICH COVERS TRADE MARK AND FRANCHISE. ADMITTEDLY THE HOSPITAL WAS RUN IN THE SAME BUILDING, IN THE SAME TOWN, IN THE SAME NAME FOR SEVERAL YEARS PRIOR TO PURCHASE BY THE ASSESSEE. BY TRANSFERRING THE RIGHT TO USE THE NAME OF THE HOSPITAL ITSELF, THE PREVIOUS OWNER HAD TRANSFERRED THE GOODWILL TO THE ASSESSEE AND THE BENEFIT DERIVED BY THE ASSESSEE WAS RETENTION OF CONTINUED TRUST OF THE PATIENTS WHO WERE PATIENTS OF THE PREVIOUS OWNERS. WHEN THE GOODWILL PAID WAS FOR ENSUR ING RETENTION AND CONTINUED BUSINESS IN THE HOSPITAL, IT WAS FOR ACQUIRING A BUSINESS AND COMMERCIAL RIGHTS AND IT WAS COMPARABLE WITH TRADE MARK, FRANCHISE, COPYRIGHT ETC., REFERRED TO IN THE FIRST PART OF CLAUSE (II) OF SECTION 32(1) AND SO MUCH SO, GOOD WILL WAS COVERED BY THE ABOVE PROVISION OF THE ACT ENTITLING THE ASSESSEE FOR DEPRECIATIONGOODWILL IS NOT SPECIFICALLY MENTIONED IN SECTION 32(1)(II) OF THE INCOME - TAX ACT, 1961. DEPRECIATION IS ALLOWABLE NOT ONLY ON TANGIBLE ASSETS COVERED BY CLAUSE (I) OF SECTION 32(1), BUT ON THE INTANGIBLE ASSETS SPECIFICALLY ENUMERATED IN CLAUSE (II) AND SUCH OF THE OTHER BUSINESS OR COMMERCIAL RIGHTS SIMILAR TO THE ITEMS SPECIFICALLY COVERED THEREIN. THE HONBLE DELHI HIGH COURT IN THE MATTER OF A REVA T AND D IN DIA LTD . (SUPRA)HAS DISCUSSED THE ISSUE OF DEPRECIATION TO BE GRANTED ON INTANGIBLE ASSETS.IT HAS ALSO DISCUSSED THE FACTS OF THE CASE.FOLLOWING ARE THE FINDING OF THE COURT: THE PRINCIPLE OF EJUSDEM GENERIS PROVIDES THAT WHERE THERE ARE GENERAL WORDS FOLL OWING PARTICULAR AND SPECIFIC WORDS, THE MEANING OF THE LATTER WORDS SHALL BE CONFINED TO THINGS OF THE SAME KIND. FOR INTERPRETING THE EXPRESSION BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE SPECIFIED IN SECTION 32(1)(II) OF THE ACT, SUCH RIGHTS NEED NOT ANSWER THE DESCRIPTION OF KNOW - HOW, PATENTS, TRADE MARKS, LICENCES OR FRANCHISES BUT MUST BE OF SIMILAR NATURE AS THE SPECIFIED ASSETS. ON A PERUSAL OF THE MEANING OF THE CATEGORIES OF SPECIFIC INTANGIBLE ASSETS REFERRED TO IN SECTION 32(1)(II) OF T HE ACT PRECEDING THE TERM BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, IT IS SEEN THAT THE INTANGIBLE ASSETS ARE NOT OF THE SAME KIND AND ARE CLEARLY DISTINCT FROM ONE ANOTHER. THE FACT THAT AFTER THE SPECIFIED INTANGIBLE ASSETS THE WORDS BUSINESS O R COMMERCIAL RIGHTS OF SIMILAR NATURE HAVE BEEN ADDITIONALLY USED, CLEARLY DEMONSTRATES THAT THE LEGISLATURE DID NOT INTEND TO PROVIDE FOR DEPRECIATION ONLY IN RESPECT OF THE SPECIFIED INTANGIBLE ASSETS BUT ALSO TO OTHER CATEGORIES OF INTANGIBLE ASSETS, WH ICH IT IS NEITHER FEASIBLE NOR POSSIBLE TO EXHAUSTIVELY ENUMERATE. IN THE CIRCUMSTANCES, THE NATURE OF BUSINESS OR COMMERCIAL RIGHTS CANNOT BE RESTRICTED ONLY TO THE SIX CATEGORIES OF ASSETS, VIZ., KNOW - HOW, PATENTS,TRADE - MARKS,COPYRIGHTS, LICENCES OR FRA NCHISES. THE NATURE OF BUSINESS OR COMMERCIAL RIGHTS CAN BE OF THE SAME GENUS IN WHICH ALL THESE SIX ASSETS FALL. ALL OF THEM FALL IN THE ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 8 GENUS OF INTANGIBLE ASSETS THAT FORM PART OF THE TOOL OF TRADE OF AN ASSESSEE FACILITATING SMOOTH CARRYING ON OF THE BUSINESS. .IN THE CASE OF THE ASSESSEE, INTANGIBLE ASSETS, VIZ., BUSINESS CLAIMS, BUSINESS INFORMATION, BUSINESS RECORDS, CONTRACTS, SKILLED EMPLOYEES AND KNOW - HOW WERE ALL ASSETS, WHICH WERE INVALUABLE AND RESULTED IN CARRYING ON THE TRANSMISSION AND DISTRIBUTION BUSINESS BY THE ASSESSEE, WHICH WAS HITHERTO BEING CARRIED OUT BY THE TRANSFEROR, WITHOUT ANY INTERRUPTION. THE INTANGIBLE ASSETS WERE, THEREFORE, COMPARABLE TO A LICENCE TO CARRY OUT THE EXISTING TRANSMISSION AND DISTRIBUTION BUSINESS OF THE TRANSFEROR. IN THE ABSENCE OF THE INTANGIBLE ASSETS, THE ASSESSEE WOULD HAVE HAD TO COMMENCE BUSINESS FROM SCRATCH AND GO THROUGH THE GESTATION PERIOD WHEREAS BY ACQUIRING THE BUSINESS RIGHTS ALONG WITH THE TANGIBLE ASSETS, THE ASSESSEE GOT AN UP AND RUNNI NG BUSINESS. THE SPECIFIED INTANGIBLE ASSETS ACQUIRED UNDER THE SLUMP SALE AGREEMENT WERE IN THE NATURE OF BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE SPECIFIED IN SECTION 32(1)(II) OF THE ACT AND WERE ACCORDINGLY ELIGIBLE FOR DEPRECIATION UNDER THAT SECTION.THE COMMERCIAL RIGHTS ACQUIRED TO SELL PRODUCTS UNDER THE TRADE NAME AND THROUGH THE NETWORK CREATED BY THE SELLER FOR SALE IN INDIA WERE ENTITLED TO DEPRECIATION. IN THE CASE OF MANIPAL UNIVERSAL LEARNING PVT.LTD.(SUPRA)THE ASSESSEE HAD AGREED IN THE SALE AGREEMENT TO THE PRICE OF RS. 51.63 CRORES AS THE VALUE OF THE SMU AGENC Y RIGHTS. ON THE VERY NEXT DAY,IT REVALUED SUCH RIGHTS AT RS. 98,73,25,000 AND CLAIMED DEPRE CIATION ON THE REVALUED RIGHTS. THE ASSESSING AUTHORITY HELD THAT THE EXCESS CONSI DERATION PAID OVER THE VALUE OF THE NET ASSETS WAS IN THE NATURE OF GOODWILL PAID FOR THE FUTURE PROFITS OF THE BUSINESS. THEREFORE, HE ALLOWED DEPRECIATION ONLY ON THE VALUE MENT IONED IN THE AGREEMENT. THE FAA AFFIRMED THE ORDER OF THE A O.HOWEVER,THE TRIBUN AL ALLOWED DEPRECIATION ON THE ENTIRE AMOUNT ARRIVED AT ON REVALUA - TION I NCLUDING THE VALUE OF GOODWILL. ON APPEAL TO THE HONBLE KARNATAKA HIGH COURT THE COURT HELD THAT EXPLANATION 3 TO SECTION 32(1) OF THE ACT,DEFINED THE EXPRESSION ASSET TO INCLUDE I NTANGIBLE ASSETS LIKE GOODWILL. GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1 )OF THE ACT ,THAT DEPRECIATION WAS ALLOWABLE EVEN ON THE GOODWILL,THAT THAT THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEPRECIATION IN RESPECT OF AN AMOUNT OF RS.98,73,25 ,000 (INCLUDING GOOD WILL) AND NOT THE AMOUNT OF RS. 51.63 CRORES AS REFLECTED IN THE SALE AGREEMENT FOR PURCHASE OF THE DISTANCE LEARNING DIVISION.IN THE MATTERS OF SKS MICROSOFT FINANCE LTD.AND WEIAMANN FOREX LTD.(SUPRA)IT HAS BEEN HELD THAT ACQUISITION OF CLIENT BASE/CUSTOMERS LIST FORMS PART OF INTANGIBLE ASSETS MENTIONED IN THE SECTION 32(1)OF THE ACT. 2.4.1. WE FIND THAT THE ASSESSEE HAD ACQUIRED TEXTILE EFFECT(TE)BUSINESS FROM CIBA - INDIA AND DDCL AS A GOING CONCERN ON A LUMP SALE BASIS,THAT MANUFACTUR ING FACILITIES OF BOTH THE ENTITIES WERE NOT TRANSFERRED AS PART OF SLUMP SALE,THAT AS A PART OF SLUMP SALE THE ENTIRE DISTRIBUTION CHANNEL WAS HANDED OVER TO THE ASSESSEE I NCLUDING THE CUSTOMER, DEALERS,MARKETING PEOPLE, MARKETING PLANS, LABORATORY,SUPPLY - CHAIN AND THE WAREHOUSES,THAT THE SERVICES OF TEXTILE EFFECTS EMPLOYEES WAS TRANSFERRED TO THE ASSESSEE,THAT IT HAD ENTERED INTO AGREEMENT WITH CIBA - INDIA AND DDCL FOR MATERIAL SUPPLY AND FOR SUPPLY OF CHEMICAL PRODUCTS TO THE NEWLY ACQUIRED TE BUSINESS,T HAT IT REGARDED THE FIXED ASSETS AND INTANGIBLE ASSETS OF ACQUIRED TE BUSINESS AT FAIR MARKET VALUE AS DETERMIN ED BY AN INDEPENDENT VALUER. IN CASE OF A SLUMP SALE, GENERALLY NO SEPARATE VALUE IS ASSIGNED TO EACH AND EVERY ASSET BY THE TRANSFEROR AND THE PA RTY TAKING OVER THE ASSETS ASSIGN SPECIFIC VALUES TO THE ACQUIRE D ASSETS. IN THE CASE BEFORE US, THE ASSESSEE HAD OBTAINED A VALUATION REPORT FROM AN EXPERT AND ON THE BASIS OF THAT REPORT HAD RECORDED THE VALUE OF THE TANGIBLE AND INTANGIBLE ASSETS IN THE B OOKS OF ACCOUNT. WE FIND THAT IN THE VALUATION REPOR T THE VALUER HAD ASSIGNED VALUE TO MSC, DN AND BRAND USES , THAT THE AO/DRP HAS NOT BROUGHT ANYTHING ON RECORD TO DISPROVE THE CORRECTNESS OF THE VALUER. AS FAR AS THE ENTRIES IN THE BALANCE SHEET OF CIBA - I NDIA AND DD CL IS CONCERNED, IN OUR OPINION SAME ARE NOT DECISIVE FACTORS. WHAT HAS TO BE SEEN IN CASE OF A SLUMP SALE IS THE TREATMENT GIVEN ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 9 BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT TO THE ASSETS ACQUIRED AND AS TO WHETHER THE VALUATION IS BASED ON SOME SCIEN TIFIC BASIS.THE ASSESSEE HAD ENTERED INTO AGREEMENTS FOR A PERIOD OF FIVE YEARS WITH CIBA INDIA AND DDCL AND B ECAUSE OF THE AGREEMENTS THE PRODUCTS MANUFACTURED BY BOTH THE ENTITIES WERE MADE AVAILABLE AT COST TO THE ASSESSEE , THE ASSESSEE WAS GRANTED NON - E XCLUSIVE, IRREVOCABLE, ROYALTY FREE LICENSE TO USE TRADE - MARKS, DOMAIN N AMES FOR A PERIOD OF TWO YEARS. NOT ONLY THAT THE ASSESSEE GOT THE DISTRIBUTION NETWORK. IN SHORT, THE ASSESSEE GOT VALUAB LE BUSINESS/COMMERCIAL RIGHTS.THEREFORE, WE ARE OF THE OPINION THA T BY ENTERING INTO MCS A ND GETTING DISTRIBUTION NETWORK, THE ASSESSEE HAD ACQUIRED BUSINESS/COMMERCIAL RIGHTS THAT WERE OF THE SIMILAR NATURE AS MENTIONED IN SEC.3 2 (1)(II) OF THE ACT. SAME IS THE CASE ABOUT USE OF BRAND NAME.T HE ASSESSEE HAD ASSIGNED VALUE TO VARIOUS ASSETS NAMELY FIXED ASSETS(RS.6.68 CRORES), INTANGIBLE ASSETS(RS.54. 94 CRORES),GOODWILL(41.87CRORES).WE ARE OF THE OPINION THAT BY RELYING UPON THE VALUATION REPORT OF AN EXPERT THE ASSESSEE HAD NOT CONTRAVENED ANY OF THE PROVISIONS OF THE ACT. WE HAVE ALREADY HELD THAT BUSINESS RIGHT,DISTRIBUTION NETWORK AND BRAND USAGE FALL IN THE SAME CATEGORY OF COMMERCIAL RIGHTS MENTIONED IN SECTION 32 OF THE ACT.THEREFORE,WE HOLD THAT ASSESSEE WAS ENTITLED TO CLAIM DEPRECIATION ON THE INTANGIBLE ASSETS . HERE,WE WOULD LIKE TO REFER TO THE CASE OF KEC INTERNATIONAL [ (2010) - TIOL 478 - ITAT - MUM ].IN THAT MATTER, THE TRIBUNAL HAS OBSERVED THAT IN CASE OF A SLUMP SALE THE VALUE ADOPTED BY THE ASSESSEE ON THE BASIS OF VALUATION REPORT CAN BE CONSIDER ED FOR DEPRECIAT ION PURPOSE. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ASWIN VANASPATI I NDUSTRIES LTD.(255ITR26) HAS APPROVED THE PRINCIPLE OF VALUATION OF ACQUIRED ASSET BY A VALUER AND HELD THAT IN ABSENCE OF ADEQUATE MATERIAL ON RECORD IN FORM O F DEPARTMENTAL VALUATI ON REPORT AND THE OPINION OF THE TECHNICAL EXPERTS COULD NOT BE IGNORED. IN LIGHT OF THE ABOVE DISCUSSION,GROUND NO.1 IS DECIDED IN FAVOUR OF THE ASSESSEE . 3. GROUND NO. 3, DEALS WITH DISALLOWANCE OF EXPENDITURE ON PAYMENT BASIS U/S.43 B OF THE ACT OF RS.55.8 1 LAKHS.DU RING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD CLAIMED AN EXPENDITURE OF RS.55.81 LACS UNDER THE HEADS LEAVE ENCASHMENT(RS.8.84 LACS),INCENTIVE/ MOTIVATOR (RS.46.58 LAC S),BONUS (RS.29,000/ - ) AND SPECIAL PAYMENT(RS.9,500).AS PER T HE DIRECTIONS OF THE DRP THE AO DID NOT ALLOW THE DEDUCTION HOLDING THAT THE LIABILITIES WERE OF CIBA INDIA LTD. AND NOT OF THE ASSESSEE.HE ALSO HELD THAT THE ASSESSEE HAD MADE THE CLAIM ABOUT THE EXPENDITURE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 3. 1. DURING THE COURSE OF HEARING BEFORE US, THE AR STATED THAT THE ASSESSEE HAD TAKEN OVER THE LIABILITIES OF CIBA INDIA LTD, THAT THESE WERE KNOWN LIABILITIES, THAT AS PER THE AGREEMENT THE ASSESSEE HAD TO INCUR THE EXPENDITURE, THAT THE AO OR DRP HAD NOT DOUB TED THE GENUINENESS OF THE EXPENDITURE INCURRED.HE RELIED UPON THE DECISION OF T.VEERBHADRA RAO (155 ITR 152) IN HIS SUPPORT. 3.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD TAKEN O VER ALL THE LIABIL ITIES OF CIBA - INDIA, INCLUDING THE LEAVE ENCAS HMENT, INCENTIVE/MOTIVATOR ETC. WE HAVE PERUSED THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND CIBA - INDIA (P AGE 198 - 202 OF THE PAPER BOOK). PARA 1.1 XXVII OF THE BTA, DEFINES TE BUSINESS AS FOLLOWS (PG - 203 OF PB). TE BUSINESSMEANS THE DEVELOPMENT, MANUFACTURING AND MARKETING OF DYES AND CHEMICAL PRODUCTS USED IN OR THE BENEFIT OF TEXTILE FRANCHISE IN REPUBLIC OF INDIA AND SHALL INCLUDE THE ASSETS, TRANSFER OF EMPLOYEES / ENCUMBRANCES, PERMITTED LIENS AND LIA BILITIES. IN SUB PARA XIV OF PARA1.1 TERM LIABILITY HAS BEEN DEFINED AS UNDER: LIABILITY MEANS : (A) ALL OBLIGATIONS AND LIABILITIES TO THE EXTENT INCLUDED IN NET WORKING CAPITAL ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 10 (B) ALL OBLIGATIONS AND LIABILITIES ATTRIBUTABLE TO THE TRANSFEREES OWNER SHIP OR USE OF THE ASSETS OR THE CONDUCT OF TE BUSINESS AFTER THE CLOSING DATE TO THE EXTENT ATTRIBUTABLE TO SUCH PERIOD OF TIME (C) ALL OBLIGATIONS AND LIABILITIES UNDER OR IN CONNECTION WITH THE CONTRACTS WHICH ARISE AFTER THE CLOSING DATE TO THE EXTENT ATTRIBUTABLE TO SUCH PERIOD OF TIME IT IS ALSO FOUND THAT THE ASSESSEE HAD MADE THE CLAIM BY WAY OF A NOTE TO THE RETURN OF THE INCOME AND IT HAD NOT CLAIMED THE SAME FOR THE FIRST TIME DURING THE ASSESSMENT PR OCEEDINGS AS ALLEGED BY THE AO. WE ARE OF THE O PINION THAT ONCE ALL THE LIABILITIES WERE TAKEN OVER BY THE ASSESSEE IN PURSUANCE OF THE AGREEMENT, THEN TO MAKE PAYMENT OF THE AGREED SUMS WAS A LEGAL OBLIGATION AND IT WAS HIS DUTY TO FULFILL THAT OBLIGATION .IT IS ALSO A FACT THAT THERE IS NO DOUBT ABOU T THE INCURRING OF EXPENDITURE. IN OUR OPINION. CLAUSES (B) AND (C) OF THE LIABILITY CLAUSE CLEARLY INDICATE THAT THE THE ASSESSEE HAD TAKEN OVER LIABILITIES ATTRIBUTABLE TO THE PRIOR PERIOD . SO , THE A SSESSEE WAS LEGALLY BOUND TO MAKE PAYMENTS THAT WERE TO BE MADE BY TE UNIT OF THE CIBA - INDIA IF IT HAD NOT BEEN ACQUIRED BY THE ASSESSEE . HERE, WE WOULD LIKE TO REFER TO THE C ASE OF T.VEERBHADRARAO (SUPRA). IN THE MATTER THE HONBLE SUPREME COUT HAD HELD AS UNDER : - IF A BUSINESS, ALONG WITH ITS ASSETS AND LIABILIT IES, IS TRANSFERRED BY ONE OWNER TO ANOTHER, A DEBT SO TRANSFERRED WOULD BE ENTITLED TO THE SAME TREATMENT IN THE HANDS OF THE SUCCESSOR. THE RECOVERY OF THE DEBT IS A RIGHT TRANSFERRED ALONG WITH THE NUMEROUS OTHER RIGHTS COMPRISING THE SUBJECT OF THE TRA NSFER. IF THE LAW PERMITS THE TRANSFEROR TO TREAT THE WHOLE OR PART OF THE DEBT AS IRRECOVERABLE AND TO CLAIM A DEDUCTION ON THAT ACCOUNT, THE SAME RIGHT SHOULD BE RECOGNISED IN THE TRANSFEREE. IT IS MERELY AN INCIDENT FLOWING FROM THE TRANSFER OF THE BUSI NESS, TOGETHER WITH ITS ASSETS AND LIABILITIES, FROM THE PREVIOUS OWNER TO THE TRANSFEREE. IT IS A RIGHT WHICH SHOULD, ON A PROPER APPRECIATION OF ALL THAT IS IMPLIED IN THE TRANSFER OF A BUSINESS, BE REGARDED AS BELONGING TO THE NEW OWNER. IN OUR,OPINION ,THE PRINCIPLES LAID DOWN BY THE HONBLE APEX COURT ARE FULLY APPLICABLE TO THE FACTS OF THE CASE. THEREFORE, REVE RSING THE ORDER OF THE AO , WE DECIDE GROUND NO.3 IN FAVOUR OF THE ASSESSEE . ITA/1539/MUM/ / AY.2009 - 10: 4. F IRST EFFECTIVE GROUND OF APPEAL (GROU ND NO.2 - 5) DEAL WITH TRANSFER PRICING ADJUSTMENTS. DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD SHOWN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES (AE . S) .F OR DETERMINING THE A RM S LENGTH P RICE (ALP) OF SUCH TRANSACTIONS,H E MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TPO) .ALONG - WITH THE TP DOCUMENTATION,A COPY OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS AE . S IN RELATION TO THE CORPORATE SERVICE CHARG ES WAS SUBMITTED BEFORE THE TPO.W ITH REFERENCE TO THE DIREC T ION DATED 20/12/2012 OF THE TPO, THE ASSESSEE SUBMITTED THE NATURE OF TYPES OF SERVICE AVAILED FROM ITS AE . S FOR PAYMENT FOR ITS CORPORATE SERVICE CHARGES. THE TPO ASKED THE ASSESSEE AS TO WHY COMPARABLE UNCONTROLLED P RICE (CUP) METHOD SHOULD NOT BE APPLIED TO BENCH MARK THE INTERNATIONAL TRANSACTION. IN ITS REPLY THE ASSESSEE STATED THAT DURING THE YEAR UNDER CONSIDERATION IT HAD NOT ENTERED INTO SIMILAR TRANSACTION WITH T HIRD PARTIES AS THAT OF ITS AE.S, THAT NOR HAD ITS AE . S ENTERED INTO SIMILAR COMPARABLE T RANSACTION WITH THIRD PARTIES DURING THE YEAR, THAT NO INFORMATION ON CUP WAS AVAILABLE FOR COMPARING THE TRANSACTION ENTERED INTO BY THE COMPANY WITH ITS AE . S . IN REPLY TO THE SHOW CAUSE NOTICE, ISSUE D BY THE TPO ON 6.1.2013 ,THE ASSESSEE FILED SAMPLE COPIE S OF INVOICES RAISED BY THE AE ALONG - WITH THE LEDGER ACCOUNT OF MANAGEMENT FEE/INTRA GROUP SERVICES. IT ALSO EXPLAINED THE NATURE OF SERVICES AND CONTENDED THAT THE SERVICES AVAILED BY IT FROM ITS AE . S WERE ESSENTIAL TO THE BUSINESS OF THE COMPANY AND DID NOT CONSTITUTE SHARE HOLDER/STEWARDSHIP ACTIVITIES OF THE AE, THAT THE AE POSSESSED THE REQUISITE SKILL SETS.THE ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 11 ASSESSEE ALSO SUBMITTED THE SEGMENTAL PROFITABILITY OF MANUFACTURING, TRADING AND INDENT BUSINESS OF THE PU DIVISION. HOWEVER, THE TPO PROPOSED T O REJECT THE SEGMENTAL PROFITABILITY STATEMENT AND PROPOSED TO REALLOCATE THE EXPENSES AND TO ADOPT THE REVISED PROFITABILITY FOR THE PURPOSES OF BENCH MARKING. BESIDE S, THE TPO OBJECTED TO THE USE OF MULTIPLE YEAR DATA FOR THE PURPOSES OF COMPARABILITY .O N 14. 0 1.2013 ,THE ASSESSEE EXPLAINED TO THE TPO THAT THE SEGMENTAL PROFITABILITY STATEMENT WAS PREPARED USING SCIENTIFIC BASIS, THAT THE EXPENSES WERE IDENTIFIED T O EACH SEGMENT ON ACTUAL BASIS. IT ALSO OBJECTED TO ADHOC ALLOCATION O F ALL THE EXPENSES BY THE T PO, USING TURNOVER RATIO. WITHOUT PREJUDICE IT WAS SUBMITTED THAT IF ANY TP ADJUSTMENT WAS TO BE PROPOSED SAME SHOULD BE RESTRICTED ONLY TO AE SEGMENT AND NOT TO THE ENTIRE UNIT/ENTITY AS A WHOLE. VIDE HIS ORDER, DT D . 23. 0 1 .13, THE TPO PROPOSED ADJUSTMENT OF R S.11,44,72,502/ - IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE ASSESSEE AND RECOMMENDED UPWARD ADJUSTMENT .THE ADJUSTMENT WERE PROPOSED FOR MANUFACTURING SEGMENT OF POLYURETHENES UNIT (PU) OF RS.6.81 CRORES AND DISALLOWANCE OF CORPORATE SERVI CE CHARGES FOR TEXTILE EFFECT UNIT (TEU) OF RS.4.62 CRORES. 4.1. AGGRIEVED BY THE ORDER OF THE TPO THE ASSESSEE APPROACHED THE DRP.BEFORE IT THE ASSESSEE PRODUCED ADDITIONAL EVIDENCE AND MADE A REQUEST TO ADMIT THE SAME.THE DRP AFTER CONSIDERING THE SUBMISS IONS OF THE ASSESSEE AND THE ORDER OF THE TPO UPHELD HIS ORDER AND ISSUED CERTAIN DIRECTIONS TO THE AO/TPO.WE WILL DISCUSS THE ORDER OF THE DRP AT APPROPRIATE PLACE. 4.2. BEFORE US,THE AR STATED THAT THE DRP HAD NOT ADJUDICATED THE ISSUE,THAT THE ASSESSEE H AD FILED CERTAIN PAPERS BEFORE THE DRP AS ADDITIONAL EVIDENCE,THAT THE DRP DID NOT ADMIT OR REJECT THE SAID PAPERS,THAT NON ADJUDICATION OF THE ISSUE HAD KEPT THE ISSUE ALIVE.HE REFERRED TO THE PG.967 TO 1341 OF THE PAPER BOOK,GROUND NO.3 RAISED IN FORM NO .35A,ANNEXTURE 3 AND PG.27 - 29.DR STATED THAT THE DRP HAD OBSERVED THAT PAPERS WERE NOT PRODUCED BEFORE IT. 4.3. WE HAVE GONE THROUGH THE AVAILABLE MATERIAL.WE FIND THAT WHILE FILING OBJECTION BEFORE THE DRP THE ASSESSEE HAD RAISED VARIOUS ISSUE S . T HE ASSESSE E HAD REQUESTED THE DRP TO ADMIT AD DITIONAL EVIDENCE AS PER PROVISIONS OF THE DRP R ULES.BUT,THE DRP HAS NOT MENTION ANYTHING IN ITS ORDER ABOUT THE ISSUE RAISED BY THE ASSESSEE AND THE DOCUMENTS SUBMITTED.IN OUR OPINION,IT WAS DUTY OF THE DRP TO REJECT OR ACCEPT THE ADDITIONAL EVIDENCE PRODUCED BY THE ASSESSEE ONCE SAME WERE FILED BEFORE IT.SECONDLY,THE GROUND OF APPEAL RELATING T O WAS NOT DECIDED.NON - ADJUDICATION OF A GROUND RAISED BY AN ASSESSEE IS MISCARRIAGE TO JUSTICE. WE WOULD LIKE TO REPRODUCE THE OR DER OF THE DRP DEALING WITH TP ISSUE AND SAME READS AS UNDER: 5.2.1 THE APPLICANT HAS SUBMITTED BEFORE THE DRP THAT THE ENTIRE PAYMENT OF CORPORATE EXPENSES OF RS.46,299,732/ - AS AN ADJUSTMENT U/S 92CA. WE HAVE CONSIDERED THE SUBMISSIONS FILED BY THE APPL ICANT AND FOUND THAT THE ASSESSEE FAILED TO SUBMIT EVEN A SINGLE EVIDENCE TO PROVE THAT IT HAD RECEIVED ANY SERVICES FROM ITS AE IN LIEU OF WHICH THE PAYMENT WAS MADE TO THE AE IN SPITE OF BEING GIVEN A NUMBER OF OPPORTUNITIES BY THE TPO.THUS THE ARM'S LE NGTH PRICE OF ALLOCATION OF CORPORATE EXPENSES PAID WAS RIGHTLY TREATED AS RS.NIL BY THE TPO DUE TO INADEQUACY OF THE ASSESSEE'S ARGUMENT AND THE ENTIRE PAYMENT OF ALLOCATION OF CORPORATE EXPENSES OF RS. 46,299,732 / - WAS TREATED AS AN ADJUSTMENT U/S 92C A.WE AGREE WITH THE ORDER OF THE TPO AND THE ADDITION PROPOSED ON THIS COUNT IN THE DRAFT ORDER. 5.2.2 THE ASSESSEE HAS SUBMITTED THAT TPO HAS REWORKED THE MARGIN CALCULATION INCORRECTLY AS FOLLOWING ERRORS WERE FOUND IN THE CALCULATION SUBMITTED BY THE A SSESSEE: - IN CASE OF ALLIED RESINS, THE INCREASE IN CLOSING STOCK WAS NOT TAKEN INTO ACCOUNT WHILE WORKING OUT THE MARGIN - IN CAMPHOR AND JYOTI RESINS, INCREASE IN CLOSING STOCK WAS ADDED TO TURNOVER INSTEAD OF REDUCING IT FROM OPERATING COST IF T HE REVISED MARGINS ARE TAKEN INTO ACCOUNT,THE ARITHMETIC MEAN COMES TO 5.57% INSTEAD OF 5.78% AS CALCULATED BY THE TPO. ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 12 ON THIS ISSUE WE DIRECT THE AO/TPO TO VERIFY THE COMPUTATION OF THE OP/OR AND CORRECTLY COMPUTE THE ARITHMETIC MEAN AND ACCORDINGLY WORK OUT THE QUANTUM OF ADJUSTMENT. 5.2.3 THE ASSESSEE HAS SUBMITTED THAT THE TPO HAS ERRED IN REJECTING THE TP STUDY REPORT WITHOUT APPROPRIATE JUSTIFICATIONS FOR DOING SO AND HAS ERRED IN USING ENTITY LEVEL FOR THE PURPOSES OF BENCH MARKING INTER NATIONAL TRANSACTIONS.IN THIS REGARD,WE FIND THAT THE TPO HAS CORRECTLY POINTED OUT THE INFIRMITIES IN THE TP STUDY REPORT BEFORE REJECTING IT AND WE ARE IN AGREEMENT WITH HIS VIEWS.THE TPO IN HIS ORDER HAS CLEARLY BROUGHT OUT THE REASONS FOR MAKING THE AD JUSTMENT AT THE ENTITY LEVEL. THEREFORE, WE ARE IN AGREEMENT WITH THE TPO ON THIS ISSUE. 5.2.4 THE ASSESSEE HAS SUBMITTED THAT THE TPO IS ENTITLED ONLY TO DETERMINE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION THEREFORE,THE ADJUSTM ENT,IF ANY,BASED ON THE ARMS LENGTH OPERATING MARGIN SHOULD BE WORKED OUT ONLY IN RESPECT OF THE REVENUES IN THE AE SEGMENT.THE ASSESSEE HAS SUBMITTED THAT IF THIS IS DONE NO ADJUSTMENT WOULD BE NECESSARY.ASSSESSEE STATES THAT TPO HAS ERRED IN TAKING THE P LI MARGIN ON THE ENTITY BASIS.WE FIND THAT THE ASSESSEE HAS NOT MAINTAINED SEPARATE ACCOUNTS FOR THE AE AND NON - AE SEGMENTS.THE SEGMENTS PREPARED JUST FOR THE REASON OF CALCULATION OF PLI ARE NOT ACCEPTABLE AS THE BASIS OF ALLOCATION OF EXPENSES AND TH E CORRECTNESS OF ALLOCATION ARE NOT VERIFIABLE.THEREFORE,THESE ARE NOT RELIABLE.IN THE ABSENCE OF THE SAME, AND CONSIDERING THE INTERLINKING BETWEEN AE AND NON - AE IMPORTS, IT IS NOT POSSIBLE TO PREPARE RELIABLE SEGMENT - WISE ACCOUNTS.FURTHER,IT IS NOTED THA T THE ASSESSEE ITSELF HAS BENCH - MARKED ITS INTERNATIONAL TRANSACTIONS USING ENTITY - LEVEL OPERATING MARGIN AS THE PLI.THIS WOULD INDICATE THAT THOUGH MAKING THE CLAIM ASSESSEE UNDERSTANDS THE IMPOSSIBILITY OF ITS APPLICATION. HOWEVER IN SO FAR AS THE AD JUSTMENT TO BE MADE WE FIND THAT THE JUDICIAL PRECEDENCE SUGGESTS THAT THE ADJUSTMENT SHOULD BE LIMITED TO THE AE TRANSACTIONS AND NOT ON THE ENTITY LEVEL TURNOVER. IN THE FACTS AND CIRCUMSTANCES OF THE CASE,THEREFORE, WHILE THE TPOS ACTION IS SUSTAINED,T HE TPO SHOULD RECALCULATE THE PLI AND LIMIT THE ADJUSTMENT TO THE AE TRANSACTION. 5.2.5 THE APPLICANT HAS ALSO OBJECTED TO THE TPO/S ACTION OF CONSIDERING SINGLE YEAR DATA FOR THE COMPARABLE COMPANIES SELECTED BY HIM FOR THE YEAR ENDED 31 ST MARCH 2009 AS AGAINST THREE YEAR DATA USED BY THE ASSESSEE.WE HAVE CONSIDERED THE ORDER OF THE TPO AND THE SUBMISSIONS FILED BY THE APPLICANT AND FOUND THAT THE ACTION OF THE TPO IS AS PER THE PROVISIONS OF RULE 10B( 4) OF THE INCOME TAX RULES, 1962. THUS, W E CONFIRM THE ACTION OF THE TPO IN THIS REGARD. 5.2.6 REGARDING CLAIM OF STANDARD DEDUCTION OF 5% FROM THE ARM'S LENGTH PRICE,WE ARE UNABLE TO AGREE WITH THE ASSESSEE, IN VIEW OF THE AMENDMENTS CARRIED OUT IN SECTION 92C BY THE FINANCE ACTS 2009 AND 2012. FURTHER, WITH DUE RESPECTS TO THE HON'BLE ITAT, THERE HAVE BEEN SEVERAL DECISIONS RENDERED BY DIFFERENT BENCHES OF THE ITAT HOLDING THAT THE 5%)VARIATION IS NOT TO BE ALLOWED AS STANDARD DEDUCTION[E.G.DCIT VS ROCHE DIAGNOSTICS 19 TAXMANN.COM 1 92 (MUM) (2012)].THIS GROUND OF OBJECTION TAKEN BY THE ASSESSEE IS ACCORDINGLY REJECTED. 5.2.7IN VIEW OF THE ABOVE DISCUSSION WE CONFIRM THE ADJUSTMENT CARRIED OUT BY THE AO IN PURSUANCE OF THE ORDER OF THE TPO IN PRINCIPLE SUBJECT TO VERIFICATIO N OF THE COMPUTATIONAL ERROR' AS CLAIMED BY THE APPLICANT. A GLANCE AT THE ORDER OF THE DRP SHOWS THAT THE ORDER IS A NON SPEAKING ORDER AND IT HAS NOT GIVEN ANY REASONS FOR ARRIVING AT ITS CONCLUSION. IN PARA NO.5.2.1.THE DRP TALKS OF FAILURE OF T HE ASSESSEE TO SUBMIT EVEN A SINGLE EVIDENCE TO PROVE THAT IT HAD RECEIVED ANY SERVICES FROM ITS AE IN LIEU OF WHICH THE PAYMENT WAS MADE TO THE AE IN SPITE OF BEING GIVEN A NUMBER OF OPPORTUNITIES BY THE TP O.WE FIND THAT DRP HAS NOT MENTIONED ANYTHING ABOUT THE DOCUMENTS SUBMITTED BY THE ASSESSEE ,AS STATED EARLIER.IN PARA 5.2.2 THE DRP HAS ISSUED DIRECTIONS BUT WE ARE NOT AWARE AS HOW FAR SAME WERE FOLLOWED BY THE OFFICERS CONCERNED.THE ASSESSEE HAS SPECIFICALLY ALLEGED THAT THE DIRECTIONS OF THE DRP W ERE NOT CARRIED OUT.IN NEXT PARA I.E. PARA 5.2.3 THE DRP MENTIONS THAT THE TPO HAD RIGHTLY REJECTED THE TP STUDY BUT REASONS HAVE NOT BEEN GIVEN FOR AGREEING WITH THE VIEWS OF THE TPO ESPECIALLY WHEN THE ASSESSEE HAD MADE EXTENSIVE SUBMISSIONS STATING THAT AS HOW THE STAND TAKEN BY THE TPO WAS FLAWED. SIMILAR IS THE POSITION OF ITA/ 3916&1539 /MUM/20 ,AY .S . 07 - 08,09 - 10 - HIIPL 13 THE NEXT PARAGRAPH.THE DRP HAS ENDORSED THE VIEWS OF THE TPO IN A VERY MECHANICAL WAY WITHOUT GIVING ANY REASONED FINDING ON THE ARGUMENTS TAKEN BY THE ASSESSEE. THEREFORE,IN THE INTER EST OF JUSTICE WE ARE REMITTING BACK THE MATTER TO THE FILE OF THE DRP WHO WOULD ADJUDICATE THE ISSUE S RAISED BY THE ASSESSEE IN GROUNDS NO.2 TO 5 OF BY PASSING A SPEAKING AND REASONED ORDER AND AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE AS SESSEE . THE ADDITIONAL EVIDENCES PRODUCED BY THE ASSESSEE BEFORE THE DRP HAVE TO BE TAKEN IN TO CONSIDERATION DURING FRESH ADJUDICATION PROCEEDINGS.GROUNDS NO.2 - 5 ARE ALLOWED IN FAVOUR OF THE ASSESSEE IN PART. 5. GROUNDS NO.6 AND 7 DEAL WITH DISALLOWANCE OF DEPRECIATION ON INTANGIBLES AND GOODWILL , AMOUNTING TO RS.6.84 CRORES AND RS.6.38 CRORES RESPECTIVELY.WHILE DECIDING GROUND NO.1 FOR THE AY.2007 - 08,WE HAVE HELD THAT THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION U/S/32(1)(II)OF THE ACT WITH REGARD TO MSC ,DN AND BRAND USAGE. SIMILAR IS THE POSITION ABOUT GOODWILL IN LIGHT OF THE JUDGMENT OF THE HONBLE SUPREME COURT DELIVERED IN THE CASE OF SMIFS SECURITIES (SUPRA). FOLLOWING OUR ORDER FOR THE AY.2007 - 08 AND THE ABOVE MENTIONED JUDGMENT OF THE APEX COURT,WE DECIDE GROUND S NO.6 - 7 IN FAVOUR OF THE ASSESSEE . AS A RESULT,APPEAL S FILED BY THE ASSESSEE FOR BOTH THE AY. STAND PARTLY ALLOWED . . . . ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST ,2015. 31 ST 2015 SD/ - SD/ - ( . . /A.D. JAIN) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 31 .8 .2015 . . . JV. SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.