M/S. INCAP CONTRACT MANUFACTURING SERVICES PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

The assessee has filed an appeal against the order of Commissioner of Income Tax (Appeals) passed under Section 143(3) r.w.s. 147 and 250 of the Income Tax Act, 1961 ('the Act').

At the time of hearing, the learned Authorised Representative submitted that the Ground of appeal No.2 on validity of reassessment proceedings is not pressed Ground of appeal Nos.1, 3 & 4 which are as under : Ground No.1 – General Ground : 1.1 The order of the learned CIT(A) is based on incorrect interpretation of law and facts and therefore is erroneous and bad in law.

We found that in the earlier order of the Tribunal in ITA Nos.1469 to 1471/Bang/2014 for the assessment year 2009-10 to 2011-12 dated 9/3/2016 held as under at para.6 pages 7 to 11 of the order which reads as under: “6. We have heard the rival submissions as well as considered the relevant material on record. The transaction of purchase of contract manufacturing service division of TVS Electronics Ltd. by the assessee vide BTA dt.31.5.2007 is slump sale as the consideration was agreed and paid in lump sum without assigning any value to specific assets. Therefore as per the agreement the consideration was paid lump sum without giving any details of payment for any specific assets. The business was purchased by the assessee and it .was transferred by the TVS Electronics as an on going business/division. However, in its books of accounts the assessee has (in Rs. Million) Land 29.013 Building 15.286 Plant and Machinery 39.230 Other Fixed Assets 14.076 Inventory  Raw material 92.062 - Finished and semi-finished goods 23.368 Debtors 97.793 Loans and Advances 45.410 Total Assets 356.238 Current Liabilities and Proivsions 79.571 Net Assets taken over 276.667 Advance for building 53.614 Customer Relationships 67.491 Goodwill 25.563 Total value of assets taken over (Net) 423.335 Thus it is clear that the excess amount paid by the assessee over and above the value assigned to the various assets had been assigned to two intangibles namely “customer relationship” and “goodwill”. The assessee did not claim any depreciation on the value of Rs.2.55 Crores assigned to the goodwill and therefore the same was not an issue before the authorities below. The assessee claimed depreciation in respect of the amount of Rs.6.74 Crores which was assigned to customer relationship (intangible). The assessee took a plea that this amount was paid as non- compete fees as the seller has expressed, agreed and undertook not to participate or engage in any jurisdiction as a owner or partner or as shareholder or in any capacity in the business of contract manufacturing services which was transferred to the assessee. Thus the learned Authorized Representative has referred to the Article 11 of BTA in support of his contention that the payment was made for non-compete fees. However, in the absence of any agreement between the parties for any consideration on account of non-compete fees as well as in the absence of any such value assigned to the non-compete fees in the books of accounts, we do not find any substance in the contention of the learned Authorized Representative that the said payment is made as non-compete fees. The assessee in its books of accounts has allocated sum to the intangible being customer relationship. Therefore, though the seller has agreed not to engage in any business for a period of three years or participate or engage as owner, partner shareholder, consultant, advisor or any other capacity solicit the employees of the CMS Business however in the absence of any intention of parties to pay consideration for such restrictive covenants in the agreement the payment in question cannot be regarded as non- compete fees. Therefore, the decision of the Hon'ble jurisdictional High Court in the case of Ingersoll Rand International India Ltd. (supra) will not help the case of the assessee. As regards the nature of payment in question, as treated by the assessee in the books of accounts being customer relationship, the issue is clearly decided against the assessee by the decision of the Hon'ble Delhi High Court in the case of Sharp Business System (supra). However, this can be looked from another angle because the Assessing Officer while denying the claim of depreciation has taken a view that the customer relationship rights are in the nature of goodwill as under : “The submissions made by company are considered. The assessee has relied upon section 32(1)(ii) of the Income Tax Act, stating that the wordings äny other business or commercial rights of similar nature” gives scope to many such business or commercial rights including customer relationship rights which are as per assessee almost in nature of goodwill. Hence there is no dispute that customer relationship rights are in nature of goodwill.” Therefore the claim of the assessee is required to be considered by treating the said payment as goodwill. The learned Authorised Representative of the assessee has relied upon the judgment of Hon'ble Supreme Court in the case of CIT Vs. Smsifs Securities Ltd. 348 ITR 302 and submitted that in view of the said judgment of the Hon'ble Supreme Court, goodwill eligible for depreciation as per the Section 31(1)(ii) of the Act. Since the assessee did not claim depreciation on goodwill in the return of income and even not made any claim before the CIT (Appeals). Therefore, the issue of allowing depreciation on goodwill has not been examined by the authorities below.” We found that the co-ordinate bench of the Tribunal based on the findings of the AO, in the above paragraph of the decision, has observed that the claim of the assessee is required to be considered by treating the said payment as goodwill. We found strength in the submissions of the learned AR on the claim of depreciation on Customer Relationship Rights supported with observations of the Co-ordinate bench and following the judicial discipline, we set aside the order of the CIT(A) and direct the AO to grant depreciation on Customer Relationship Rights treating the same as ‘Goodwill” and allow the grounds of appeal