IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA no. 3279/Mum./2008 (Assessment Year : 2003-04) Dy. Commissioner of Income Tax Range-10(3), Aayakar Bhavan 101, M.K. Road, Mumbai 400 020.. Appellant v/s M/s. Toyo Engineering India Ltd. Toyo House, L.B.S. Marg Kanjur Marg (W), Mumbai 400 078 PAN AAACT1772H.... Respondent Revenue by : Mr. Ajit Kumar Jain Assessee by : Mr. Firoze B. Andhyarujina Date of Hearing 24.04.2012 Date of Order 25.05.2012 O R D E R PER J. SUDHAKAR REDDY, A.M. The present appeal preferred by the assessee, is directed against the impugned order dated 25 th January 2008, passed by the Commissioner (Appeals) XXXII, Mumbai. 2. Facts in brief:- The assessee, a company, is engaged in the business of providing technical consultancy services and also undertaking engineering construction and erection contracts as well as supply of material for such contracts. For assessment year 2003-04, it had filed its return of income on 1 st December 2003, declaring total income of ` 13,86,98,640. The assessment was completed under section 143(3) of the Income Tax Act,
2 1961 (for short the Act ) on 30 th March 2006, inter-alia, disallowing depreciation claimed on goodwill and making an adjustment under section 92CA(3) of the Act. Certain other additions were also made. 3. The assessee carried the matter before the first appellate authority wherein the Commissioner (Appeals) granted part relief. Aggrieved, the Revenue is in appeal before the Tribunal, on the following grounds:- 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AC. to grant depreciation on goodwill without appreciating that depreciation is not allowable u/s. 36(1)(ii) of the IT. Act since goodwill is not an intangible asset in the nature of know-how, a patents, copyright, trademark, licenses, franchises or any other business or commercial right of similar nature falling within the meaning of Sec. 32(1)(ii) of the IT. Act. 2. On facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AC to give credit for TDS of Rs. 53,97,628/- holding that credit for TDS is allowable in the year of its receipt irrespective of the year in which the corresponding income is offered for taxation. 3a) On the facts and circumstances of the case and in law, the Ld.CIT(A), has erred in relying on the remand report submitted by the Transfer Pricing Officer (TPO) without the reference being made to the AO while deleting adjustment of Rs.1,00,03,336/- suggested by the TPO, deleting the addition made on account of club expenses of Rs. 8,46,532/- ignoring the basis of fact indicating that the club expenses were not incurred for the purpose of business of the assessee. 3b) While doing so, the learned CIT(A) ought to have provided an opportunity to the A.O. on the remand report so furnished by the TPO which is in contravention to the provisions of Rule 46A of the Act. 4. Before us, the learned Departmental Representative, Mr. Ajit Kumar Jain, representing the Revenue, submitted that there are only three issues that arise in this appeal (i) allowability of depreciation on goodwill; (ii) credit for TDS; and (iii) validity of transfer pricing adjustment. 5. On the first issue of goodwill, the learned Departmental Representative submitted that there was an amalgamation with the assessee company of Casablances Gannon Engineering Ltd. (for short CGEL ). As per the order dated 14 th March 2003, passed by the Hon ble High Court, the assets and the liabilities appearing in the books of CGEL were shown as assets and liabilities
3 of the assessee company at the same value as they appear in the books of CGEL and the difference between the value of assets and liabilities taken over from CGEL as appearing in the books and book value investments by the assessee in CGEL was shown as goodwill. He pointed out that the depreciation claimed by the amalgamated company was ` 17,000, whereas the depreciation claimed by the amalgamated company was ` 1,89,00,000. He relied on Explanation 7 to section 43(1). He pointed out that the book value for land and building is ` 4,40,000. He referred to Page-1/Para 2, of the order passed by the Commissioner (Appeals) and submitted that it is stated that the amount in question is goodwill and under those circumstances, no depreciation can be granted. He further contended that the assessee had invested in CGEL and if at all there is a loss, it is loss of capital and can never be goodwill. 6. Learned Departmental Representative, on ground no.2, submitted that the assessee has not disclosed income during the year and, hence, cannot claim tax credit during the year. He relied on Rule 37(BA)(2)(i) of the Act, and argued that once the income relatable to TDS is not shown during the year, the question of granting TDS credit does not arise. 7. On ground no.3, the learned Departmental Representative relied on the order passed by the Assessing Officer. 8. On club expenditure also, he relied on the order passed by the Commissioner (Appeals). 9. The learned Sr. Advocate, Mr. Firoze B. Andhyarujina, representing the assessee, on the other hand, opposed the contention of the learned Departmental Representative and submitted that on the issue of goodwill, the first characteristic is brought out at Para-(iii)/Page-2 of the order passed by the Commissioner (Appeals) which states that the shares of CGEL amounting to ` 7,81,72,000, held by the assessee company was cancelled. The second characteristic, he relied on the provisions of sub-clause (viii)/page-2 of the Commissioner (Appeals), which reads as follows:-
4 (viii) The assessee company has entered into a scheme of amalgamation by which the excess of the assessee company s investment in CGEL over the net value of assets and liabilities of CGEL represents goodwill has been treated in the nature of commercial right and depreciation has been claimed under section 32(1)(ii) of the I.T. Act. 10. He referred to the submissions made by the assessee company before the Assessing Officer which is at Para-2.3 of the Commissioner (Appeals) s order and argued that the goodwill in question has to be treated as in the nature of commercial right being intangible assets following the provisions of section 32(2)(ii) of the Act. 11. After taking us to the contentions of the learned Counsel, he referred to the facts of the case and submitted that the assessee is located at Nariman Point and whereas the Subji Kasaba owned a building at Vikhroli, where all the competitors were located. He submitted that the ground floor was occupied by the Canara Bank and the mortgage was done with a view of having a place at Vikhroli. He relied on the scheme of amalgamation which is a part of the paper book and specifically referred to Page-4 of the High Court order as well as Schedule-A. He took this bench to Paras-2.7 and 2.8 of the order passed by the Commissioner (Appeals) and relied on the same. He relied on the following case laws:- CIT v/s Hindustan Coco Cola Beverages P. Ltd., [2011] 331 ITR 192 (Del.); CIT v/s Chunilal Prabhudas and Co. [1970] 076 ITR 566 (Cal.); Skyline Caterers (P.) Ltd. Vs ITO, [2009] 116 ITD 348 (Mum.); The A.P. Paper Mills Ltd. v/s ACIT, [2010] 128 TTJ 596 (Hyd.). 12. He also relied on AS/14 and submitted that the scheme of mortgage was accounted for under the purchase method where the assets and liabilities of CGEL were recorded at their book value. He also relied on Kotak Forex Brokerage Ltd. v/s ACIT, [2010] 041 DTR (Trib.) 387 (Mum.). He referred to the decision in Chowgule & Co. v/s ACIT, 137 TTJ 596, relied upon by the learned Departmental Representative and submitted that the
5 same is distinguishable on facts as it was subsequent to the mortgage that goodwill was created. He distinguished other cases relied upon by the learned Departmental Representative. 13. On ground no.2, i.e., TDS credit, he relied on assessee s own case for the earlier assessment year reported in Toyo Engg. India Ltd. v/s JCIT, [2006] 100 TTJ 373 (Mum.) and submitted that the issue is covered. He pointed out that the income in question was embedded in the work-inprogress. 14. On ground no.3, he submitted that the Commissioner (Appeals) called for the remand report and accepted the findings of the Assessing Officer that the transactions in question were not with an Associated Enterprises. Thus, he submitted that the Revenue should not have any grievance. On the issue of club expenditure he submitted that the ground is misconceived as the Commissioner (Appeals) had decided the issue against the assessee. 15. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case laws cited before us, we hold as follows:- 16. The facts of the issue are brought at Para-2.2 of the order passed by the Commissioner (Appeals), which is extracted below for ready reference:- 2.2 The facts pertaining to this issue are as under:- (i) Casablancas Gannon Engineering Ltd. (CGEL) was wholly owned subsidiary of the assessee company which got amalgamated with the appellant during the year. (ii) The investment of the assessee company in CGEL as at 31.3.2002 amounted to ` 7,81,72,000. (iii) As per the terms of the scheme of Amalgamation, the shares of CGEL amounting to ` 7,81,72,000 held by the assessee company were cancelled and the difference between the value of assets and liabilities equal to ` 7,56,22,000 taken over from CGEL has been transferred as goodwill of the assessee company and depreciation of ` 1,89,18,000 has been claimed (iv) In the tax audit report, the nature of business of CGEL has been given as Providing technical consultancy services and letting out
property on hire. However, CGEL was having income only from letting out its properties to the appellant which clearly shows that CGEL had no intangible assets. (v) The primary assets of CGEL was land measuring 9559.9 sq.mtr. on which Toyo House is situated. (vi) For F.Y. 2001-02, the assessee company had paid rent of ` 1,20,00,000 to CGEL. (vii) In F.Y. 2001-02, CGEL had claimed depreciation of ` 17,000 on its building. (vii) The assessee company has entered into a scheme of amalgamation by which the excess of the assessee company s investment in CGEL over the net value of assets and liabilities of CGEL represents goodwill. Goodwill has been treated in the nature of commercial rights and depreciation has been claimed under section 32(1)(iii) of the Act. 6 17. The additional facts we need to state is that the assessee has, prior to the year 1995, invested an amount of ` 4,72,15,000, for purchase of 1,500 equity at a face value of ` 1,000 each. In other words, the assessee company purchased share of a total face value of 15,000 shares @ ` 31,476 each share and declared them as investments in its balance sheet. It was holding 60% of the share capital. Thereafter, in the financial year 2000-01, it purchased another 1,000 shares by investing further amount of ` 3,09,57,000. The cost of share paid was ` 30,957 each for a total face value of ` 10,00,000. This 1,000 equity shares was the remaining 40% of the share holding and the CGEL became 100% subsidiary of the assessee company. Thus, it is clear that the assessee is having investment in the CGEL, which shares were valued above ` 30,000 per share. 18. Now we would consider the order dated 14 th October 2003 of the Hon'ble Jurisdictional High Court which approved the scheme of amalgamation of Casablances Gannon Engineering Ltd. with the assessee company. The assessee relies on the following passage:-. DOTH FURTHER ORDER that upon the Scheme becoming effective no shares of the petitioner company shall be allotted in respect of the holding of the petitioner company in the transferor company and the share capital of the transferor company shall stand cancelled as the Transferor Company is wholly owned subsidiary of the
petitioner company AND THIS COURT DOTH FURTHER ORDER that on and from the Effective Date as defined in the Scheme, the assets and liabilities appearing in the books of transferor company as on the Appointed Date shall become and be shown as assets and liabilities of the Transferee Company at the same value as they appeared in the books of the Transferor Company and that the difference, if any, between the values of the assets and liabilities taken over from the transferor company shall be transferred to the goodwill of the transferee company. [emphasis own] 7 19. The assessee states that the scheme of arrangement was accounted for under the Purchase method in terms of AS/14. AS/14 reads as follows: Methods of Accounting for Amalgamations 7. There are two main methods of accounting for amalgamations: (a) the pooling of interests method; and (b) the purchase method. The Purchase Method 12. Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. 13. Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company. For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs. Consideration 14. The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value of the consideration, an assessment is made of the fair value of its elements. A variety of techniques is applied in arriving at fair value. For example, when the consideration includes securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up. Where the market value of the assets given up
cannot be reliably assessed, such assets may be valued at their respective net book values. 15. Many amalgamations recognise that adjustments may have to be made to the consideration in the light of one or more future events. When the additional payment is probable and can reasonably be estimated at the date of amalgamation, it is included in the calculation of the consideration. In all other cases, the adjustment is recognised as soon as the amount is determinable [see Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date]. Treatment of Goodwill Arising on Amalgamation 19. Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be justified. 20. Factors which may be considered in estimating the useful life of goodwill arising on amalgamation include: (a) the foreseeable life of the business or industry; (b) the effects of product obsolescence, changes in demand and other economic factors; (c) the service life expectancies of key individuals or groups of employees; (d) expected actions by competitors or potential competitors; and (e) legal, regulatory or contractual provisions affecting the useful life. 8 20. A perusal of the same does not support the contentions of the assessee that as the assets and liabilities are to be taken over from CGEL at book value the difference between the investment in shares by the assessee is CGEL and the book value of asset in CGEL should be treated as goodwill. CGEL had certain land and buildings which the assessee has taken over at book value. The market value of this asset was not considered. In our opinion, unless the valuation has been done of each and every asset of the company and, thereafter, goodwill, if any, is also valued and investment is earmarked as having been incurred towards the purchase of goodwill, the
9 question of apportioning of certain amount towards purchase of goodwill does not arise. 21. Under the Purchase method, two alternatives are suggested in AS/14. The first is incorporating the assets and liabilities at the existing carrying amounts and the second method is allocating the consideration to identified individual assets and liabilities at their fair re values. In the case on hand, the assets and liabilities have not been valued. The consideration in the form of cancellation of investments, cannot be said to have been made for purchase of assets at book value, when the fair value of each asset and liability is much higher. As already stated, the primary asset of CGEL was land admeasuring 5559.90 sq.mtrs. and a building thereon, on which Toyo House is situated. The market value of this asset should have been considered. If the assessee had paid more than the fair market value of assets minus the fair market value of liabilities, then the company would have a case to claim that certain amounts were incurred for goodwill. In the absence of such an exercise, we are of the considered opinion that there is no goodwill in the nature of commercial rights purchase by the assessee. This is only a book entry and it is only another way of disclosing the intrinsic value of the fixed asset of the company. 22. Coming to the claim that the scheme has been approved by the High Court, we find that this issue was never before the High Court and, hence, this argument does not come to the help of the assessee. 23. Coming to the decision relied upon by the assessee i.e., the judgment of Hon'ble Delhi High Court in Hindustan Coco Cola Beverages P. Ltd., decision of Hyderabad Bench of the Tribunal in The A.P. Paper Mills Ltd. (supra) and other case laws, they do not help the case of the assessee, as that was a case where there was purchase of goodwill which is in the nature of a commercial right. In the case on hand, the very purchase of goodwill is not proved by the assessee. Consequently, ground no.1 of the Revenue appeal is allowed.
10 24. Coming to ground no.2, the issue of grant of TDS credit is squarely covered in favour of the assessee and against the Revenue by a decision of Mumbai Bench of the Tribunal in assessee s own case reported as 100 TTJ 373. Respectfully following the same, we dismiss this ground of the Revenue. 25. Ground no.3(a) and 3(b), are misconceived. The Commissioner (Appeals) has accepted the remand report of the Assessing Officer and granted relief to the assessee. We do not understand as to how the Assessing Officer can file an appeal against his own findings. The transactions in question are not with the A.E. but with third parties. Hence, the ground raised by the Revenue is dismissed. 26. In the result, Revenue s appeal is partly allowed. Order pronounced in the open Court on 25 th May 2012 Sd/- B.R. MITTAL JUDICIAL MEMBER Sd/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 25 th May 2012 Copy to: (1) The Assessee; (2) The Respondent; (3) The CIT(A), Mumbai, concerned; (4) The CIT, Mumbai City concerned; (5) The DR, L Bench, ITAT, Mumbai. TRUE COPY BY ORDER Pradeep J. Chowdhury Sr. Private Secretary ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI