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Income Tax Appellate Tribunal, BANGALORE BENCH “ B ”
Before: SHRI ABRAHAM P GEORGE & SHRI VIJAY PAL RAO
order of Commissioner of Income Tax (Appeals) dt.16.7.2014 for the Assessment Year 2009-10 to 2011-12.
The assessee has raised common grounds in these appeals. The grounds raised for the Assessment Year 2009-10 are as under :
“ 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. Grounds relating to corporate tax matters 2 The learned CIT(A) has erred in law and in facts, by disallowing depreciation on customer relationship rights (non-compete fees) which was considered as an intangible asset by the Appellant. This asset was acquired by the Appellant as a part of business transfer agreement with MIS TVS Electronics Ltd. 3 The learned CIT(A) has erred in law and in facts, by failing to appreciate that the expression "any other business or commercial right of similar nature" would include such "Customer Relationship Rights (Non-compete fees)", which is essential to carry on the business after the business transfer. 4 The learned CIT(A) has erred in law and in facts, by not giving the Appellant the advantage of ruling held in the following cases: i) by The Honourable Karnataka High Court in CIT vs. Ingersoll Rand International Ind.Ltd. ii) by the ITAT Chennai Bench in ITO Vs Medicorp Technologies India Ltd (2009) 30 SOT 506
5 The learned CIT(A) has erred in law and in facts, by differentiating the Customer relationship rights (non-compete fees) from any other business or commercial rights. The Appellant has claimed depreciation on Customer Rights on the understanding that the consideration was paid to TVS Electronics Ltd to acquire certain commercial rights, including these customer relationship right, which are in the nature of intangible capital assets and essential for carrying on the business. Thus these rights qualify to be a part of "any other business or commercial rights" as mentioned under Section 32(1 )(ii) of the Income-tax Act, 1961 and hence eligible for depreciation. On acquiring the business from TVS Electronics Ltd for a slump price on a going concern basis a part of the consideration was bonafide allocated towards "Customer Rights" in the Appellants books of accounts. The price was paid for marketing and trading reputation, trading style, territory know-how, customer database, distribution network, contracts, refraining the seller from entering the same business and eventually soliciting Appellants customers and other commercial rights. The finding of the learned CIT(A) that these customer relationship rights are different from "any other business or commercial rights" and hence not eligible for depreciation is erroneous and contrary to law. Further, the Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at the time of, hearing of the appeal. On the above grounds and such other grounds that may be urged at the time of hearing, the appellant prays that the appeal may be allowed in full.” comprehensive contract manufacture services to the leading equipment manufacturers and development of renewable energy like solar energy. The assessee entered into a Business Transfer Agreement (BTA) with TVS Electronics (Seller) on 31.5.2007 to purchase the business of Contract Manufacturing Services (‘CMS’) Division as a going concern. The CMS was purchased by the assessee for a total consideration of Rs.42.33 Crores. The assessee in its return of income claimed a sum of Rs.1,26,54,563 as depreciation on customer right taking it as being on par with goodwill or non- compete rights. The Assessing Officer was of the view that the customer relationship right does not fall under the expression of similar nature used in Section 32(1)(ii) of the Act to the term patent, copy right, trade mark, business and franchise. Thus the Assessing Officer held that applying the Doctrine of ejusdem generis the expression ‘customer relationship right’ cannot be considered as another business or commercial rights of similar nature of patent, copy right, trade mark businesses and franchise as used in Section 32(1)(ii) of the Act. Thus the Assessing Officer held that the payment made in respect of customer relationship right is only in the nature of goodwill for which benefit of depreciation on the amount paid in respect of customer relationship right and brought to tax the said amount for all the assessment years under consideration. The assessee challenged the action of the Assessing Officer before the CIT (Appeals). The CIT (Appeals) confirmed the action of the Assessing Officer in disallowing depreciation on the said amount by following the judgment of Hon'ble Delhi High Court in the case of Sharp Business System Vs. CIT (2013) 211 Taxman 576.
Before us, the learned Authorise Representative of the assessee has submitted that as per Article 11 of the Business Transfer Agreement (BTA), the seller agreed and undertook that it was not directly or indirectly for a period of three years (i) participate or engage in any jurisdiction or in any capacity in Contract Manufacturing Services (CMS) business and contract manufacturing related to medical and power electronics and (ii) Solicit / entics the employee of the CMS business of buyer of the assessee (buyer). Thus the payment made by the assessee is for getting a vested right, which can be enforced under law and without that other business man could compete with the assessee. The learned Authorised Representative has submitted that the payment of non- or indirectly participating in the business similar to the assessee as acquired or directly or indirectly soliciting the claim or customers of the existing business.
Thus the learned Authorised Representative has submitted that the payment has been made for acquiring a commercial / business right is a valuable right.
The learned Authorised Representative has also referred the notes to accounts and submitted that the contract manufacturing service division has been purchased as a going concern and it was transferred to the assessee for a purchase consideration of Rs.42.33 Crores. Thereafter the company engaged external consultants to undertake fair valuation of fixed asset and intangibles taken over from TVS Electronics Limited. Accordingly, as per the consultant, the purchase price has been allocated to various assets including intangibles.
As per the share valuation a sum of Rs.6.7491 Crores has been allocated to customer relationship right and a sum of Rs.2.55 Crores has been allocated to goodwill. The learned Authorised Representative has pointed out that since it was lumpsum sale for transfer of on going concern therefore no value was assigned to the specific assets in the agreement but the purchase consideration was agreed between parties on lumpsum basis. The learned A.R. has contended in the Sharp Business System (supra) whereas the jurisdictional High Court in the subsequent judgment in the case of CIT Vs. Ingersoll Rand International India Ltd. 48 taxmann.com 349 (Kar) has decided this issue of depreciation on non-compete fees in favour of the assessee. He learned Authorised Representative has pointed out that Hon'ble High Court after considering the judgment of Hon'ble Delhi High Court in the case of Sharp Business System (supra) has decided this issue. Therefore, in view of the judgment of Hon'ble jurisdictional High Court, the issue is now covered in favour of the assessee.
He has also relied upon the judgment of Hon'ble Delhi High Court in the case of Areva T & D India Ltd. V DCIT (2012) 345 ITR 421 and submitted that in an identical case there was a lump sum sale, the Hon'ble Delhi High Court has held that the intangible assets in the nature of business information, business record, contract, employees and know-how fall in the genus of intangible assets that form part of the tool of trade of assessee facilitating smooth carrying on the business and therefore eligible for depreciation under Section 31(1)(ii) of the Act. submitted that neither anything mentioned in the BTA nor in the arrangement between parties which can indicate that there was any transfer of intangible asset in the transaction of contract manufacture service division of TVS Electronics Ltd.. Further, the term ‘customer relationship right’ does not find place in Section 32(1)(ii) and this term also not similar to the terms of know how, patent, copy right, trade mark, business or franchise. Therefore, in view of the judgment of Hon'ble Delhi High Court in the case of Sharp Business System (supra), the payments made by the assessee on account of business relationship right or non-compete fees is not eligible for depreciation.
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, as per the valuation made by the consultants as under :
(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 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 Authorised 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 Authorised 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 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
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.
The assessee has also raised additional ground in respect of depreciation on goodwill as under :
“ The learned CIT(A) has failed to appreciate that the customer relationship rights (non-compete fees) are akin to any other business or commercial rights and therefore eligible for depreciation under the provisions of Section 32(1)(ii) of the Act. Additional Ground of Appeal
No 1. Without prejudice to the Appellant’s contention that depreciation should be allowed on the non-compete fees, the learned Assessing Officer / Commissioner of Income-tax (Appeals) have erred in law and facts in not allowing the non-compete fees paid by the Appellant as revenue expenditure since the same has been incurred wholly and exclusively for the purpose of the business. Additional Ground of Appeal No 2. The learned Assessing Officer has erred in law, and in facts, in not allowing depreciation on goodwill as per Section 32(1)(ii) of the Act, amounting to Rs.5,992,765 i.e 25% of the written down value of the total goodwill amounting to Rs 31,961,412, which arose on account of acquisition of the Contract Manufacturing Services division of TVS Electronics Limited under a slump sale arrangement by executing a Business Transfer Agreement.”
8. We have heard the rival submissions as well as considered the relevant material on record. The issue of ‘depreciation’ on goodwill is a legal issue and does not require any further investigation of fact as the Assessing Officer has the books of accounts to the fixed assets and intangibles including goodwill.
Therefore in the facts and circumstances of the case and in the interest of justice, we admit the additional ground raised by the assessee. Since this issue has been raised for the first time by the assessee before us, therefore we set aside this issue to the record of the Assessing Officer for deciding the same as
per law.
In the result, the appeal of the assessee is allowed for statistical purpose. Order pronounced in the open court on the 9th day of March,2016.