ITAT Mumbai Ruling: Limiting TP Adjustments to AE Transactions and Depreciation on Slump Sale Intangibles

In a significant judicial development concerning international taxation and corporate restructuring, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has delivered a comprehensive order in the case of Thermo Fisher Scientific India Pvt. Ltd. Vs DCIT. This ruling addresses critical aspects of the Income Tax Act, 1961, specifically focusing on the scope of Transfer Pricing (TP) adjustments in the absence of segmental accounts and the eligibility of depreciation on intangible assets acquired through slump sales.

The Tribunal's decision reinforces the principle that tax adjustments cannot be arbitrary and must be strictly confined to international transactions involving Associated Enterprises (AEs). Furthermore, it clarifies the tax treatment of commercial rights and goodwill arising from business acquisitions.

The Context of the Appeal

The assessee, Thermo Fisher Scientific India Pvt. Ltd., approached the Tribunal challenging the final assessment order passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961. This order was a consequence of directions issued by the Dispute Resolution Panel (DRP) – 2, Mumbai, under Section 144C(5). The grievances raised by the assessee spanned multiple assessment years, specifically 2011-12, 2012-13, 2013-14, and 2014-15.

The core disputes revolved around two primary thematic areas:

  1. Corporate Tax Matters: Specifically, the denial of depreciation on various contracts (manufacturing, supply, and maintenance) acquired during the purchase of business divisions from Glaxosmithkline Pharmaceuticals Ltd (GSK) and Chemito Technologies Private Limited (CTPL).
  2. Transfer Pricing Matters: Issues related to the benchmarking of finished goods, the rejection of comparable companies, and the scope of adjustments when entity-level data is used.

Dispute Over Depreciation on Intangible Assets

The Nature of the Acquisition

The assessee had engaged in strategic expansion through the acquisition of specific business divisions. In the Assessment Year 2008-09, the assessee acquired the "Qualigens Fine Chemical Division" from GSK Pharma Ltd. Subsequently, in the Assessment Year 2009-10, it acquired the "Analytical Technologies and Environmental Instrumentation Division" from CTPL. Both transactions were structured as slump sales.

As part of these acquisitions, the assessee claimed ownership of various business and commercial rights, categorized as:

  • Manufacturing contracts.
  • Supply contracts.
  • Maintenance contracts.

For the year under consideration, the assessee claimed depreciation amounting to Rs. 9,36,45,101 on manufacturing contracts and Rs. 36,61,868 on supply/maintenance contracts. The assessee treated these rights as intangible assets eligible for depreciation under Section 32(1) read with Section 2(11) of the Income Tax Act, 1961.