ACIT, NEW DELHI vs. M/S. CARYAIRE AIR SYSTEM COMPONENTS (P) LTD., NEW DELHI

Briefly sated, the facts of this case are: during the processing of return of income filed by the assessee qua the Assessment Year 2008-09, declaring a loss of Rs.1,25,40,533/-, the case was subjected to scrutiny and consequently, notices U/S 143(2) and 142(1) along with questionnaire, were served upon the assessee and in response thereto, Mrs. Vandana Gopal Sharda, CA/ AR appeared on behalf of the assessee, filed necessary details.

The assessee company is into the business of manufacturing and fabrication of various accessories of steel and other metal used in HV AC and other industries. Scrutiny of depreciation chart transpires that the assessee company has claimed depreciation @ 25% on 'goodwill' to the extent of Rs. 1,73,50,0001-, whereas under the Income tax Act, 1961 and I.T. Rules, 1962, 'goodwill' cannot be treated as intangible asset and hence, depreciation cannot be claimed on the same. Assessee was called upon to explain as to why the said depreciation on goodwill be not disallowed, who has taken shelter U/S 32 of the Act read with Rule 5 of Appendix I Part B as per sub-section (ii) of sub-section (1) of Section 32, and claimed the depreciation on goodwill. Finding the explanation not tenable, the Assessing Officer disallowed the same and consequently, made addition of Rs.l ,37,50,000/- to the total income of the assessee. 4. Scrutiny of P & L account transpires that assessee has paid royalty of Rs.58,15,200/- to Ruskin Co. (Ruskin) and the entire amount has been debited in P & L account under the head 'Admn. & other expenses'. The assessee filed submissions to the query raised during assessment proceedings and assessee relied upon Articles 4 & 5 of the agreement. Finding the explanation of the assessee not tenable, Assessing Officer made addition of Rs.58,15,200/- to the total income of the assessee. The total taxable income of the assessee was assessed at Rs.1,06,24,670/-. 5. We have heard Ld. Authorized representatives of both the parties, gone through the material placed on record in the light of facts and circumstances of the case and orders of authorities below.

Ld. D.R. challenging the impugned order contended inter alia that Ld. CIT(A) has erred in deleting the addition of Rs.1,73,50,000/- on account of depreciation on goodwill and deleting the addition of Rs.58,15,200/- on account of royalty paid; that since the assessee was having enduring benefit of goodwill and the claim was made for non compete fee, the assessee was benefited so, the Assessing Officer has rightly disallowed the depreciation on 'goodwill. Ld. D.R. relied on the order passed by Assessing Officer. Ld. D.R. relied on the decision of Hon'ble Supreme Court in the case entitled Southern Switch Gear Ltd. Vs CIT 232 ITR 359.

On the other hand, Ld. A.R. to repel the arguments addressed by Ld. D.R. relied on the order passed by Income tax Appellate Tribunal Delhi Bench 'E', New Delhi in case entitled DCIT Vs Nitrex Chemicals India Ltd. in LT.A. No.3388/Del/2009 order dated 03.08.2015 contended that the issue in controversy in the present appeal is squarely covered by the aforesaid order.

Ground No.1: The Assessing Officer by relying upon the provisions contained U/S 2(11) and Section 32(1), disallowed the claim of the assessee on the ground that since goodwill is not included in the intangible assets the depreciation on the same is not allowable. However, on the other hand, Ld. CIT(A) took the opposite view.

Undisputedly, as per business transfer agreement, assessee has taken over the ADP business of CEIPL from 00.00 hours on 03.05.2007. By virtue of clause 5 of the business transfer agreement dated 28th June 2007, the assessee company acquired the right to use the brand name 'CARYAIR' for CEIPL on non assignable licence to use the brand name "CARY AIR" in conjunction with manufacturing, advertising, promotion and provision of sale of ADP products. CEIPL also transferred the list of customers, suppliers, technical knowhow and other formulae etc. to the manufacture and sale of ADP products to the assessee at the value of Rs.6.94 crores. So, from para 5 of the business transfer agreement, it has become apparently clear that the assessee company has paid an amount of Rs.6.94 crores for the purchase of right to use the brand name 'CARYAIR' on the basis of non assignable licence. 10. Now the first question arises for determination in this case is, "as to whether the consideration of Rs.6.94 crores paid by the assessee for purchase of 'goodwill' is in the nature of intangible asset falling in the classification of assets as per Section 32(1 )(ii) of the Act for the use of trade mark 'CARYAIR'." 10.1 Similar issue arose before Income tax Appellate Tribunal, Delhi Bench 'E', New Delhi in the case cited as DCIT Vs Nitrex Chemicals India Ltd. in (supra) and has decided the issue in favour of the assessee by holding that 'goodwill' is eligible for depreciation u/s 32 of the Act. Operative portion (para 32 & 33) of the order (supra) is reproduced as under:

In view of the above, we hold that the non-compete fee amounting to Rs. 6.80 crores paid by the assessee was capital in nature and goodwill, It was eligible for depreciation u/s 32 of the Act. "

Since, the issue in controversy has already been decided by the Coordinate Bench in the case of Nitrex Chemical India Ltd. (supra) by relying upon the judgement delivered by Hon'ble Supreme Court in case of CIT Vs SMIF Securities Ltd. in SLP (Civil) No.35600 of 2009 to the effect that "the goodwill is an asset under Explanation (3 b) to Section 32(1) of the Act" and as such, is intangible asset, being know how, patent, copyright, trade mark licence, franchise and other business or commercial right of similar nature, the same is eligible for depreciation u/s 32 of the Act as claimed by the assessee. Since Ld. D.R. has failed to bring on record if the order passed by Coordinate Bench in in case of DCIT Vs Nitrex Chemical India Ltd. (supra) has been challenged or any contrary order has been passed on the question of law decided by the Hon'ble Supreme Court, we are of the considered view that there is no illegality or perversity in the findings returned by Ld. CIT(A) hence, ground No.1 is determined against the Revenue.

Ground No.2: The assessee has debited an amount of Rs.58,15,2001- in the P & L account under the head "administrative and other expenses' on the gourd that the same has been paid on account of 'royalty' as per the technical services and licence agreement between and CEIPL under Articles 4 and 6 of the agreement. However, Assessing Officer disallowed the claim of assessee by relying upon the judgement cited as Southern Switch Gear Ltd. V s CIT, 232 ITR 359 by holding that the right to manufacture certain goods exclusively in India should be taken to be an independent right, secured by the assessee from the foreign co., which was of an enduring nature.

Undisputedly, the amount of 'royalty' of Rs.58,15,2001- was paid by the assessee on the basis of turnover @ 3% of the net selling price of the licenced product as per Article 6 of the Agreement. However, in the case of Southern Switch Gear Ltd. (supra), the amount of royalty was paid on lump sum basis. In the judgement of Hon'ble Supreme Court in the case entitled Southern Switch G ear Ltd. (supra), it is held as under: "CAPITAL ON REVENUE EXPENDITURE-COLLABORAITON AGSAREEMENT-GRANT OF TECHNICAL AID FOR SETING UP FACTORY AND RIGHT TO SELL PRODUCTS-FOREIGN COMPANY AGREEING NOT TO MANUFACUTRE SIMILAR PRODUCSS IN INDIA OR GIVE RIGHSTS FOR MANUFACUTRRE TO OTHERS- EXCLUSIVE AND ENDURING ADVANTAGE- PORTION OF TECHNICAL AID FEES AND ROYALTY DISALLOWED-DISALLOWANCE JUSTIFIED. "

The ratio of judgement (supra) is that in case the foreign company agreeing not to manufacture similar product in India or give right for manufacture to others, it amounts to exclusive and enduring advantage and subsequently payment of technical aid or fee or royalty is to be disallowed. But the judgment (supra) is not applicable to the facts and circumstances of the present case for the sole reason that in the instant case, benefit of enduring nature has to be transferred to the assessee company as is evident from Article 6 of the Agreement. Transfree company i.e. CEIPL would get 3% of the net selling price of the licensed products manufactured by the licensee, calculated as per Article 6 of the agreement, meaning thereby, transferee company (CEIPL) was having complete lien on the technical know-how, assisting skills and other expertise as per Article 4 of the agreement. So, finding no illegality or perversity in the findings returned by Ld. CIT(A), ground No.2 is also determined against the Revenue.

As a sequel to the discussion made in the preceding paragraphs, we hereby dismiss the present appeal filed by the Revenue. 16. Order pronounced in the open court on 06 Jan., 2015.