HUNTSMAN INTERNATIONAL (INDIA) P.LTD,MUMBAI vs. ADDL CIT RG 10(3), MUMBAI

Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JM: 1. This appeal by the assessee filed u/s 253 of the Income-tax Act (‘Act’) is directed against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –24, Mumbai dated 15.01.2015 for Assessment Year (AY) 2008-09. The assessee has raised the following grounds of appeal: GROUND NO. 1: Disallowance of depreciation on intangibles 1.1 The learned CIT(A) erred in disallowing depreciation of Rs.9,12,93,750/- claimed by the Appellant on the intangible assets viz., material supply contracts and distribution network under section 32(1)(ii) of the Act. 1.2 The learned CIT(A) erred in holding that the aforementioned intangible assets viz. material supply contracts and distribution network are not akin to the intangible assets referred to in the provisions of section 32(1)(ii) of the Act and hence erred in holding that such aforementioned intangibles are not eligible for depreciation. GROUND NO. 2: SERVICE TAX 2.1 The learned CIT(A) erred in disallowing unpaid service tax of Rs.14,742/- under section 43B of the Act. GROUND No.3: DISALLOW A CE OF FOREIG EXCHANGE LOSSES 3.1 The learned CIT(A) erred in disallowing the foreign exchange losses in the nature of mark to market losses on the ground that such losses are contingent and notional in nature.

2 M/s. Huntsman International (India) Pvt. Ltd. 3.2 The learned CIT(A) has erred in not appreciating the principles laid down by the Supreme Court in the decisions of CIT v. Woodward Governor India P. Ltd (312 ITR 254) and Honda Siel Power Products Ltd (295 ITR 466). 3.3 The learned CIT(A) erred in concluding that the appellant did not originally claim the aforesaid foreign exchange loss in its return of income and accordingly, erred in applying the ratio of the decision of Goetz India Ltd vs CIT (284 ITR 323). GROUND NO. 4: Disallowance of share issue expenditure 4.1 The learned CIT(A) erred in disallowing share issue expenditure of Rs.24,00,100/- (l/5th of Rs.1,20,00,500/-) claimed by the appellant under section 35D of the Act. GROUND NO. 5: General 5.1 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 5.2 Each one of the above grounds of appeal is without prejudice to the above.

relates to the disallowance of depreciation of Rs. 9,12,93,750/- on account of intangible assets. The ld. Authorized Representative (AR) for assessee argued that this ground of appeal is covered in his favour by the decision of assessee’s own case for AY 2007-08, AY 2009-10 & AY 2011-12. The ld. Departmental Representative (DR) for Revenue not disputed the factual and legal position submitted before us.

3. We have considered the rival contention of the parties and seen that the similar issue came up for consideration before this Tribunal in assessee’s own case for AY 2007- 08 vide and in AY 2010-11 vide ITA No. 980/Mum/2015. We have noticed that the co-ordinate bench of this Tribunal while considering the identical grounds of appeal in assessee’s own case for AY 2010-11 in ITA No. 980/Mum/2015, considering the decision of assessee’s case for AY 2007-08 passed the following order: “6.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. We find that the very same issue of allowability of the assesee's claim of depreciation on intangible assets viz. Material supply contracts, brand usage and distribution networks was considered at length by a co-ordinate bench of this Tribunal in ITA Nos. 3916 & 1539/Mum/2014 in the assessee's own case for A.Vs. 2007-08 and 2009-10, wherein it has been held that the assessee is entitled to claim depreciation on intangible assets. The operative part of the order of the co-ordinate Bench for A.Y- 2007-08 at paras 2.4 and 2.4.1 wherein the Tribunals findings have been rendered is extracted hereunder: " 2.4. We have heard the rival submissions and perused the material before us. Before proceeding further, we would like to consider the cases dealing with intangible assets and Gaodwill. In the case of Smifs Securities Ltd.(supra)the Hon'ble Supreme Court has held that provisions of sec. 31(2)are applicable to goodwill. It is also found that business rights,list of clients, brand equity, non compete fee etc. have been held to be intangible assets by the Hon'ble Court/ITA T, 3 M/s. Huntsman International (India) Pvt. Ltd. while dealing with the issue of depreciation. We would like to reproduce the relevant portions of the judgments dealing with the issue. The Hon'ble Supreme Court in the case of Smifs Securities (supra) has held that a reading of the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 to section 32(1)indicates that goodwill would fall under the expression. The principle of ejusdem generis would strictly apply while interpreting the expression which finds place in Explanation 3(b),that Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. In the matter of Raveendro Pillai the Hon'ble Kerala High Court(supra)has deliberated upon the facts of the case and allowability of depreciation on intangible assets.ln that matter the assessee had purchased a hospital in Quilon with its land, building, equipment, staff, name, trade mark and goodwill as a going concern under two separate sale deeds. Under the sale deed, the value of the goodwill which included the name of the hospital and its logo and trade mark was Rs.2 crores. The assessee was allowed depreciation on the goodwill. However, in the scrutiny assessment, the AO held that goodwill was not covered by section 32(1)(ii). The appeals filed by the assessee before the FAA) and the Tribunal were unsuccessful. The Hon'ble High Court decided the issue as follow: ... in fact, without resorting to the residuary entry the assessee was entitled to claim depreciation on the name, trade mark and logo under the specific head provided under section 32(1){ii} which covers trade mark and franchise. Admittedly the hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who were patients of the previous owners. When the goodwill paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial rights and it was comparable with trade mark, franchise, copyright ete., referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation Goodwill is not specifically mentioned in section 32(1){ii} of the Income-tax Act, 1961. Depreciation is allowable not only on tangible assets covered by clause (i) of section 32(1), but on the intangible assets specifically enumerated in clause (ii) and such of the other business or commercial rights similar to the items specifically covered therein." The Hon'ble Delhi High Court in the matter of Areva T and D India Ltd.(supra}has discussed the issue of depreciation to be granted on intangible assets.lt has also discussed the facts of the case. Following are the finding of the court: The principle of ejusdem generis provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind. For interpreting the expression "business or commercial rights of similar nature" specified in section 32(1}{ii) of the Act, such rights need not answer the description of "know-how, patents, trade marks, licences or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred to in section 32(1){ii} of the Act preceding the term "business or commercial rights of similar nature", it is seen that the intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets, which it is neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted only to the six categories of assets, viz., know-how, 4 M/s. Huntsman International (India) Pvt. Ltd. patents, trade-marks, copyrights, licences or franchises. The nature of "business or commercial rights" can be of the same genus in which all these six assets fall. All of them fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. ..... in the case of the assessee, intangible assets, viz., business claims, business information, business records, contracts, skilled employees and know-how were all assets, which were invaluable and resulted in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The intangible assets were, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the business rights along with the tangible assets, the assessee got an up and running business. The specified intangible assets acquired under the slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in section 32(1){ii} of the Act and were accordingly eligible for depreciation under that section .... the commercial rights acquired to sell products under the trade name and through the network created by the seller for sale in India were entitled to depreciation. In the case of Manipal Universal Learning Pvt. Ltd.{supra}the assessee had agreed in the sale agreement to the price of Rs. 51.63 crores as the value of the SMU agency rights. On the very next day,it revalued such rights at Rs.98,73,25,000 and claimed depreciation on the revalued rights. The assessing authority held that the excess consideration paid over the value of the net assets was in the nature of goodwill paid for the future profits of the business. Therefore, he allowed depreciation only on the value mentioned in the agreement. The FAA affirmed the order of the AO. However, the Tribunal allowed depreciation on the entire amount arrived at on revaluation including the value of goodwill. On appeal to the Hon'ble Karnataka High Court the court held that Explanation 3 to section 32{1} of the Act, defined the expression "asset" to include intangible assets like goodwill. Goodwill is an asset under Explanation 3{b} to section 32{1}of the Act, that depreciation was allowable even on the goodwill, that that the assessee would be entitled to claim depreciation in respect of an amount of Rs.98, 73,25,000{including goodwill} and not the amount of Rs.51.63 crores as reflected in the sale agreement for purchase of the distance learning division. In the matters of SKS Microsoft finance Ltd. and Weiamann Forex Ltd.(supra}it has been held that acquisition of client base/customers' list forms part of intangible assets mentioned in the section 32{1}of the Act. 2.4.1. We find that the assessee had acquired Textile Effect(TE) Business from CIBA-India and DDCL as a going concern on a lump sale basis, that manufacturing facilities of both the entities were not transferred as part of slump sale, that as a part of slump sale the entire distribution channel was handed over to the assessee including the customer, dealers, marketing people, marketing plans, laboratory, supply-chain and the warehouses, that the services of textile effects employees was transferred to the assessee, that it had entered into agreement with CIBA-India and DDCL for material supply and for supply of chemical products to the newly acquired TE business, that it regarded the fixed assets and intangible assets of acquired TE business at fair market value as determined by an independent valuer. In case of a slump sale, generally no separate value is assigned to each and every asset by the transferor and the party taking over the assets assign specific values to the acquired assets. In the case before us. the assessee had obtained a valuation report from an expert and on the basis of that report had recorded the value of the tangible and intangible assets in the books of account. We find that in the valuation 5 M/s. Huntsman International (India) Pvt. Ltd. report the valuer had assigned value to MSC,DN and Brand uses, that the AO/DRP has not brought anything on record to disprove the correctness of the valuer. As far as the entries in the balance sheet of CIBA-India and DDCL is concerned in our opinion same are not decisive factors. What has to be seen in case of a slump sale is the treatment given by the assessee in its books of account to the assets acquired and as to whether the valuation is based on some scientific basis. The assessee had entered into agreements for a period of five years with CIBA India and DDCL and because of the agreements the products manufactured by both the entities were made available at cost to the assessee.the assessee was granted non-exclusive, irrevocable, royalty free license to use trade-marks domain names for a period of two years. Not only that the assessee got the distribution network. In short the assessee got valuable business/commercial rights. Therefore, we are of the opinion that by entering into MCS and getting distribution network, the assessee had acquired business/commercial rights that were of the similar nature as mentioned in sec.32(l)(ii) of the Act. Same is the case about use of brand name. The assessee had assigned value to various assets namely Fixed assets(Rs. 6. 68 crores), Intangible assets (Rs.54.94 crores), Goodwill(41.87crores). We are of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisions of the Act. We have already held that business right, distribution network and brand usage fall in the same category of commercial rights mentioned in Section 32 of the Act. Therefore, we hold that assessee was entitled to claim depreciation on the intangible assets. Here, we would like to refer to the case of KEC International [(2010)- TIOL 478- ITAT-Mum]. In that matter, the Tribunal has observed that in case of a slump sale the value adopted by the assessee on the basis of valuation report can be considered for depreciation purpose. The Hon'ble Gujarat High Court in the case of Aswin Vanaspati Industries Ltd. (2551TR26) has approved the principle of valuation of acquired asset by a valuer and held that in absence of adequate material on record in form of departmental valuation report and the opinion of the technical experts could not be ignored. In light of the above discussion, ground no.1 is decided in favour of the assessee."

This decision has been followed in the decision of the Co-ordinate bench for A.Y. 2009-10 also (supra). 6.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the assessee's own case for A.Y. 2007-08 and 2009-10 (supra), we hold that since brand usage, distribution networks and business rights fall in the same category of commercial rights mentioned in section 32 of the Act, the assessee is entitled to claim depreciation on the aforesaid intangible assets. Consequently, ground no.3 is decided in favour of the assessee.”

Thus, respectfully following the decision of co-ordinate bench in assessee’s own case for AY 2007-08 and 2010-11, the assessee is entitled to claim the depreciation on intangible assets, hence, this ground of appeal is allowed in favour of assessee.

4. Ground No.2 relates to disallowance of unpaid service tax of Rs. 14,742/-. The ld. AR of the assessee submitted that he is not pressing this Ground raised in the present appeal. The ld. DR for the revenue has no objection. Considering the contention of ld. AR of the assessee, the Ground No.2 raised in the present appeal is dismissed.

6 M/s. Huntsman International (India) Pvt. Ltd. 5. Ground No.3 relates to disallowance of foreign exchange losses. The ld. AR of the assessee argued that this Ground of Appeal is also covered in his favour by the decision of Mumbai Tribunal in Inventors Knowledge Services Pvt. Ltd. Vs. ITO (2016) 65 Taxman.com

92. The Ld. DR for the Revenue relied upon the order of authorities below. We have considered the rival contention of the parties and gone through the order of authorities below. The AO while making assessment observed that the assessee has not filed revised return of income before making this additional claim and not allowed the claim of loss on account Foreign Exchange loss. The ld. CIT(A) while considering this ground of appeal hold that the assessee had not originally claimed the said losses in the return of income. The claim was made only by filing a letter during the assessment proceeding and the same was correctly not entertained by AO and dismissed the same. We have seen the ld CIT(A) has not correctly appreciated the Ratio decidendi by the Hon’ble Apex Court in case of Goetz India Ltd. vs. CIT 284 ITR 323. As per the decision of Hon’ble Apex Court in Gotez India ltd (supra) the ld CIT(A) was empowered to admit the additional ground which was originally raised by the assessee. Considering the facts of the case, we admit this ground of appeal raised by assessee and restore the case to the file of ld CIT(A) to consider the claim of assessee on merit. Needless to say that ld. CIT(A) shall give adequate opportunity to the assessee while deciding the claim of assessee in accordance with law. Thus, this Ground of appeal is allowed for statistical purpose.

6. Ground No.4 raised before us relates to disallowance of share issue expenditure. The ld. AR of assessee submits that he is not pressing the Ground No.4 raised in the present appeal. The ld. DR for Revenue has no objection. Considering the submission of ld. AR of assessee this Ground of appeal is dismissed as not pressed.

7. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on this 5th December, 2016. Sd/- Sd/- (D.KARUNAKARA RAO) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 05/12/2016 S.K.PS