DCIT Vs Gea Process Engineering (India) Pvt Ltd (ITAT Mumbai)
Held that consideration paid by the assessee in excess of its value of tangible assets was rightly classified as goodwill the same is eligible for depreciation
Facts-
The assessee company a Gea Process Engineering Pvt. Ltd. is a joint venture between L&T Ltd., India and Niro A/s, Denmark. The said joint venture was discontinued and the entire stake of L&T in the assessee company was bought over by Niro. Later the assessee company changed its name to Jewel Process Engineering India Pvt. Ltd. and became a wholly-owned subsidiary of Niro A/s, Denmark. While executing Erection, Procurement and Commissioning (EPC) contracts the assessee company designs the installation, procures the necessary materials, erects the plants as per the agreed design and ensures commissioning of same, which is engaged primarily in the execution of EPC turnkey projects in the food, dairy and chemical and pharma sectors. During the year under assessment assessee company entered into international transactions with its AE.
In its ROI the assessee company claimed a net loss of Rs.23,32,26,686/-. The Transfer Pricing Officer (TPO) called up the assessee to show cause as to why the segmental profit and loss should not be rejected and Transactional Net Margin Method (TNMM) be applied at the entity level.
TPO rejected the segmental profit and loss computed by the assessee company and applied TNMM at the entity level.
Further, assessee’s contention that its expenses to the extent of Rs.20.85 crores were not operating expenses and as such the same ought not to be considered for determining the PLI of the assessee company. It has also brought on record that said expenses primarily consisted of interest of Rs.7.65 crore and depreciation on goodwill amounting to Rs.4.92 crores. Declining the contentions raised by the assessee the Ld. TPO also held that goodwill is the integral part of business, depreciation on goodwill cannot be ignored while determining the Profit Level Indicator (PLI) and thereby determined the PLI of the assessee company.
Being aggrieved by the CIT(A) order, both assessee company as well as the revenue have come up before the Tribunal.
Conclusion-
We are of the considered view that when undisputedly the assessee has acquired food and pharma division of L&T by virtue of agreement dated 26.05.2005 by paying excess consideration of net asset value, the excess was reflected as goodwill in the books of accounts of the assessee under the head “intangibles and as such assessee is entitled for claiming depreciation on the said intangible assets/goodwill.
We have perused the order passed by the Ld. CIT(A) particularly para 9 which is cryptic in nature and fails to lead to the specific conclusions as to why the TP adjustment made by the TPO are being deleted. Merely on the basis of generic observations without going into the functionality of the particular segments/international transactions TP adjustment cannot be deleted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
For the sake of brevity aforesaid cross appeals and cross objections bearing common question of law and facts are being disposed of by way of composite order.
2. Appellant DCIT/ITO, Mumbai (hereinafter referred to as the Revenue) and the appellant/cross objector M/s. Gea Process Engineering (India) Pvt. Ltd. (hereinafter referred to as the assessee) by filing the present appeal and cross objections sought to set aside the impugned order dated 06.04.2015 passed by the Principal Commissioner of Income Tax (OSD) [hereinafter referred to as the PCIT] on the grounds inter alia that:
ITA No.4155/M/2015 (Revenue’s appeal)
“1. On the fact and in circumstances of the case and in law, the Ld. CIT (A) erred in deleting the ALP adjustment amounting to Rs.2,19,74,033/- without appreciating the fact that the segmental account and the net segmental margins filed by the assessee are not reliable as the same is based on proportionate allocation of indirect expenses with the sales .
2. On the fact and in circumstances of the case and in law, the Ld. CIT (A) erred in deleting the ALP adjustment amounting to Rs.2,19,74,033 /- and holding that the benchmarking at entity level using TNMM by the TPO is not correct without appreciating the fact that all transactions are closely linked.
3. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to Rs.2,19,74,033/- without appreciating the fact that different international transactions with the AE are closely linked and overlooked various judicial pronouncement.
4. On the fact and in circumstances of the case and in law, the 1 CIT (A) erred in deleting the disallowance of expenditure incurred on license fees/royalty holding it to be business expenditure without appreciating the fact that the assessee had not justified the basis and purpose of the expenditure without documentary evidence during the course of assessment proceedings.
5. On the fact and in circumstances of the case and in law, the 1 CIT (A) erred in deleting the disallowance u/s.36(1)(va) of the Act of belated payments towards employees’ contribution to EPF holding that the amendment to Section 43B by the Finance Act 2003 is applicable without appreciating the fact that the Employees1 Contribution to EPF is governed by Section 36(1 )(va) and not Section 43B of the Act.
6. On the fact and in circumstances of the case and in law, the 1 CIT (A) erred in deleting the disallowance u/s.36(1)(va) of the Act without appreciating that the Employees’ Contribution to EPF is deemed to be income u/s. 2(24){x) and deduction is allowable u/s. 36(1 )(va) only if payment is made on or before the due date for payment ignoring the decision of the Gujarat High Court in the case of Gujarat State Road Transport Corporation reported in 366 ITR 170.”
ITA No.4338/M/2015 (Assessee’s appeal)
“1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the entire goodwill of the assessee is the excess of the price paid over net asset value of the business unit taken over.
2. Further on the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that purchase cost paid for the entire business unit and is not relatable to any particular assets, intangible or otherwise.
3. Further on the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the disallowance of depreciation on intangible assets (other than Goodwill) amounting to Rs. 5,19,11,719/- claimed by the Appellant.
4. Without prejudice to above grounds, on the facts and circumstances of the case and in laws, the learned CIT(A) has erred in disallowing depreciation on Goodwill amounting to Rs. 1,73,03,906/- as claimed by the Appellant before CIT(A).
5. On facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowances made by the AO for provision for contingencies or onerous expenses amounting Rs.1,26,96,905/-
The Appellant craves leave to add, alter, amend, delete, modify or withdraw all or any ground or grounds of appeal herein and to submit such statements, documents and papers as may be considered necessary either all or before the appeal hearing.”
CO No.148/M/2015 (Assessee’s):
“1. The learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/ Cross-Objector, that the learned TPO has legally erred by denying the Appellant Company an opportunity to justify its treatment of ‘Foreign Exchange fluctuation loss’ and ‘Provision for Credit balances written back’ for the purpose of determining the operating margin while applying Transactional Net Margin Method (‘TNMM’) at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A).
2. Without prejudice to any other ground/objection, on the facts and circumstances of the case, the learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/ Cross-Objector that the learned TPO has factually and legally erred in not excluding ‘Foreign exchange fluctuation loss’ amounting to Rs. 9,58,104 while determining the operating margin for applying TNMM at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A).
3. Without prejudice to any other ground/objection, on the facts and circumstances of the case, the learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/ Cross-Objector that the learned TPO has factually and legally erred in excluding ‘Provision for Credit balances written back’ amounting to Rs. 61,25,707 as Non-Operating income while determining the operating margin for applying TNMM at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A).
4. Without prejudice to any other ground/objection, on the facts and circumstances of the case, the learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent/ Cross-Objector that the learned TPO has factually and legally erred in not excluding ‘Depreciation on Goodwill’ amounting to Rs.4,92,00,000 while determining the operating margin for applying TNMM at the entity level, for the reason that the said ground became academic in nature pursuant to the decision rendered by the learned CIT(A).
The Respondent Company craves leave to alter, add, amend or delete all or any of the grounds/ objection raised hereinabove.”
3. Briefly stated facts necessary for adjudication of the controversy at hand are : the assessee company a Gea Process Engineering Pvt. Ltd. was incorporated in 1992 as a joint venture between L&T Ltd., India and Niro A/s, Denmark. The said joint venture was discontinued and the entire stake of L&T in the assessee company was bought over by Niro. Later on the name of the assessee company was changed to Jewel Process Engineering India Pvt. Ltd. and it became a wholly owned subsidiary of Niro A/s, Denmark. During the year under assessment the assessee company was into the business of undertaking capital intensive projects for erection and commissioning of projects. While executing these Erection, Procurement and Commissioning (EPC) contracts the assessee company designs the installation, procures the necessary materials, erects the plants as per the agreed design and ensures commissioning of same, which is engaged primarily in the execution of EPC turnkey projects in the food, dairy and chemical and pharma sectors. During the year under assessment assessee company entered into international transactions with its Associate Enterprise (AE) as reported in form 3CEB as under:
