ACIT, New Delhi V. M/s. Caryaire Air System Components (P) Ltd., New Delhi

ITA 147/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7414 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 23-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 10-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KESANG Y SHIRPA
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 142(1); 32

Judgement Text

1 I.T.A. NO. 147/DEL/ 2012 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B, NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER I.T.A. NO.147/DE/\L/2012 (ASSESSMENT YEAR2008-09) ACIT, CIRCLE 3(1), VS. M/S. CARYAIR AIR SYSTEM COM PONENTS NEW DELHI LIMITED, SHOP NO.2F, LSC BLOCK G, KONDLI GHAROLI, MAYUR VIHAR, PHASE III, DELHI-110 096 GIR / PAN :AADCC0463B (APPELLANT) (RESPONDENT) APPELLANT BY : MS. KESANG Y SHIRPA, SR. DR RESPONDENT BY :MS. LALITHA KRISHNAMURTHY, CA MS. VIDHI AGARWAL, CA DATE OF HEARING: 28.10.2015 DATE OF PRONOUNCEMENT: 06.01.2016 ORDER PER KULDIP SINGH, JM: THE APPELLANT, ACIT, CIRCLE 3(1) NEW DELHI (HEREINA FTER REFERRED TO AS 'THE REVENUE') BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 24 . 10.2011 PASSED BY LD. CIT(A) VI, NEW DELHI QUA THE ASSESSMENT YEAR 2008-09 ON THE GROUNDS INTE R ALIA THAT: ' 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DEL EING ADDITION OF RS.1 , 73,50,000 / - ON ACCOUNT OF DEPRECIATION ON GOODWILL. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS.58, 15 , 200 / - ON ACCOUNT OF ROYALTY PAID . ' 2 I.T.A. NO. 147/DEL/ 2012 2. BRIEFLY SATED, THE FACTS OF THIS CASE ARE: DURI NG 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, M RS . VANDANA GOPAL SHARDA, CA/ AR APPEARED ON BEHALF OF THE ASSESSEE, FILED NECESS ARY DETAILS. 3. THE ASSESSEE COMPANY IS INTO THE BUSINESS OF MA NUFACTURING AND FABRICATION OF VARIOUS ACCESSORIES OF STEEL AND OTH ER METAL USED IN HV AC AND OTHER INDUSTRIES. SCRUTINY OF DEPRECIATION CHAR T 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 INTANG IBLE ASSET AND HENCE, DEPRECIATION CANNOT BE CLAIMED ON THE SAME. ASSESSE E 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 N OT TENABLE, THE ASSESSING OFFICER DISALLOWED THE SAME AND CONSEQUEN TLY, 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 BE EN DEBITED IN P & L ACCOUNT UNDER THE HEAD 'ADMN. & OTHER EXPENSES'. THE ASSESSEE FILED SUBMISSIONS TO THE QUERY RAISED DURI NG ASSESSMENT PROCEEDINGS AND ASSESSEE RELIED UPON ARTICLES 4 & 5 OF THE AGREEMENT . FINDING THE EXPLANATION OF THE ASSESSEE NOT TENABLE , ASSESSING OFFICER MADE 3 I.T.A. NO. 147/DEL/ 2012 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 L IGHT OF FACTS AND CIRCUMSTANCES OF THE CASE AND ORDERS OF AUTHORITIES BELOW. 6. LD. D.R. CHALLENGING THE IMPUGNED ORDER CONTEND ED 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 R S.58,15,200/- ON ACCOUNT OF ROYALTY PAID; THAT SINCE THE ASSESSEE WA S HAVING ENDURING BENEFIT OF GOODWILL AND THE CLAIM WAS MADE FOR NON COMPETE FEE, THE ASSESSEE WAS BENEFITED SO, THE ASSESSING OFFICER HAS RIGHTLY DIS ALLOWED THE DEPRECIATION ON 'GOODWILL . LD. D.R. RELIED ON THE ORDER PASSED BY ASSESSING OF FICER. LD. D.R. RELIED ON THE DECISION OF HON'BLE SUPREME COUR T IN THE CASE ENTITLED SOUTHERN SWITCH GEAR LTD. VS CIT 232 ITR 359. 7. ON THE OTHER HAND, LD. A.R. TO REPEL THE ARGUME NTS ADDRESSED BY LD. D . R. RELIED ON THE ORDER PASSED BY INCOME TAX APPELLA TE 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 SQUAR ELY COVERED BY THE AFORESAID ORDER. 8. GROUND NO.1: THE ASSESSING OFFICER BY RELYING UPON THE PROVISION S CONTAINED U/S 2(11) AND SECTION 32(1), DISALLOWED THE CLAIM OF THE ASSE SSEE ON THE GROUND THAT SINCE GOODWILL IS NOT INCLUDED IN THE INTANGIBLE AS SETS THE DEPRECIATION 4 I.T.A. NO. 147/DEL/ 2012 ON THE SAME IS NOT ALLOWABLE. HOWEVER, ON THE OTHER HAND, LD. CIT(A) TOOK THE OPPOSITE VIEW. 9. UNDISPUTEDLY, AS PER BUSINESS TRANSFER AGREEMEN T, 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 AGREEME NT DATED 28 T H JUNE 200 7, TH E ASSESSEE COMPANY ACQUIRED THE RIGHT TO USE THE BR AND NAME 'CARYAIR' FOR CEIPL ON NON ASSIGNABLE LICENCE TO USE THE BRAN D NAME 'CARY AIR' IN CONJUNCTION WITH MANUFACTURING, ADVERTISING, PRO MOTION 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 VAL UE 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 'CARYAI R' ON THE BASIS OF NON ASSIGNABLE LICENCE. 10. NOW THE FIRST QUESTION ARISES FOR DETER MINATION 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 INTANGIB LE 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 I.T.A. NO. 3388IDELF2009 (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: 5 I.T.A. NO. 147/DEL/ 2012 '32. WE, THEREFORE, BY CONSIDERING THE TOTALITY OF THE FACTS AND DISCUSSED HEREINABOVE SET ASIDE THE FINDINGS OF THE LD . CIT(A) ON THIS ISSUE AND UPHELD THE VIEW TAKEN BY THE ASSESSI NG OFFICER THAT THE NON- COMPETE FEE OF RS.6.80 CRORES WAS NOTHING BUT GOODWILL OF THE BUSINESS AND A CAPITAL EXPENDITURE. NOW QUESTION AR ISES AS TO WHETHER THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION O N THE GOODWILL. IN THIS REGARD, IT IS RELEVANT TO POINT OUT THAT THE H ON'BLE SUPREME COURT IN THE CASE OF CIT, KOLKATA VS SMIF SECURITIE S LTD. IN SLP (CIVIL)NO. 35600 OF 2009 (SUPRA) HELD THAT THE GOOD WILL IS ELIGIBLE FOR DEPRECIATION U / S 32 OF THE ACT AND THEIR LORDSHIPS IN THE SAID CASE OBSERVED AS UNDER: 'IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES PVT. LTD. (AMALGAMATING COMPANY) SHOULD BE CONSIDERED AS GOODWILL ARISING ON AMALGAMATION. IT WAS CLAIMED TH AT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTING CLIENTELE. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT , 1961 ( ' ACT ', FOR SHORT). WE QUOTE HERE IN BELOW EXPLANATION 3 TO SECTION 32 (1) OF THE ACT: ' EXPLANATION 3: FOR THE PURPOSES OF THIS SUB- SECTION, THE EXPRESSIONS ' ASSETS ' AND ' BLOCK OF ASSETS' SHALL MEAN; (A) TANGIBLE ASSETS , BEING BUILDINGS , MACHINERY, PLANT OR FURNITURE; (B) INTANGIBLE ASSETS , BEING KNOW-HOW , PATENTS, COPYRIGHTS, TRADEMARKS , LICENCES , FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. ' 6 I.T.A. NO. 147/DEL/ 2012 EXPLANATION 3 STATES THAT THE EXPRESSION ' ASSET ' SHALL MEAN AN INTANGIBLE ASSET , BEING KNOW-HOW, PATENTS , COPYRIGHTS, TRADEMARKS , LICENCES , F RANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING THE WORDS ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION (ANY OTHER BUSINESS OR CO MMERCIAL RIGHT OF A SIMILAR NATURE ' . THE PRINCIPLE OF EJUSDEM GENERIS COULD STRICTLY APPLY WHILE INTERPRETING THE SAID EX PRESSION WHICH FINDS PLACE IN EXPLANATION 3 (B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT (GOOD WILL' IS AN ASSET UNDER EXPLANATION 3 (B) TO SECTION 32 (1) OF THE ACT. ' 33. 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 DEPRECIATI ON U/S 32 OF THE ACT. ' 11. SINCE, THE ISSUE IN CONTROVERSY HAS ALREADY BE EN DECIDED BY THE COORDINATE BENCH IN THE CASE OF NITREX CHEMICAL IND IA LTD. (SUPRA) BY RELYING UPON THE JUDGEMENT DELIVERED BY HON'BLE SUP REME 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 EXP LANATION (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 D EPRECIATION 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 I.T.A. NO. 3388/DEL/2009 IN CASE OF DCIT VS NITREX CHEMICAL IN DIA LTD. (SUPRA) HAS BEEN CHALLENGED OR ANY CONTRARY ORDER HAS BEEN PASSED ON THE QUESTION 7 I.T.A. NO. 147/DEL/ 2012 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 B Y LD. CIT(A) HENCE, GROUND NO.1 IS DETERMINED AGAINST THE REVENUE. 12. 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 EX PENSES' ON THE GOURD THAT THE SAME HAS BEEN PAID ON ACCOUNT OF 'ROYALTY' AS PER THE TECHNICAL SERVICES AND LICENCE AGREEMENT BETWEEN AND CEIPL UN DER 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. 13. 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 RO YALTY WAS PAID ON LUMP SUM BASIS. IN THE JUDGEMENT OF HON'BLE SUPREME COUR T IN THE CASE ENTITLED SOUTHERN SWITCH G EAR LTD. (SUPRA), IT IS HELD AS U NDER: ' 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. ' 8 I.T.A. NO. 147/DEL/ 2012 14. THE RATIO OF JUDGEMENT (SUPRA) IS THAT IN CASE THE FOREIGN COMPANY AGREEING NOT TO MANUFACTURE SIMILAR PRODUCT IN INDI A OR GIVE RIGHT FOR MANUFACTURE TO OTHERS, IT AMOUNTS TO EXCLUSIVE AND ENDURING ADVANTAGE AND SUBSEQUENTLY PAYMENT OF TECHNICAL AID OR FEE OR ROY ALTY IS TO BE DISALLOWED. BUT THE JUDGMENT (SUPRA) IS NOT APPLICABLE TO THE F ACTS AND CIRCUMSTANCES OF THE PRESENT CASE FOR THE SOLE REASON THAT IN THE IN STANT CASE, BENEFIT OF ENDURING NATURE HAS TO BE TRANSFERRED TO THE ASSESS EE 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 PRODUCT S MANUFACTURED BY THE LICENSEE, CALCULATED AS PER ARTICLE 6 OF THE AGREEM ENT, MEANING THEREBY, TRANSFEREE COMPANY (CEIPL) WAS HAVING COMPLETE LIEN ON THE TECHNICAL KNOW-HOW, ASSISTING SKILLS AND OTHER EXPERTISE AS P ER ARTICLE 4 OF THE AGREEMENT . SO, FINDING NO ILLEGALITY OR PERVERSITY IN THE FIND INGS RETURNED BY LD. CIT(A), GROUND NO.2 IS ALSO DETERMINED AGAINST THE REVENUE. 15. AS A SEQUEL TO THE DISCUSSION MADE IN THE PREC EDING PARAGRAPHS, WE HEREBY DISMISS THE PRESENT APPEAL FILED BY THE REVE NUE. 16. ORDER PRONOUNCED IN THE OPEN COURT ON 06 JAN., 2015. SD./- SD./- (N. K. SAINI) (KULDIP S INGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 06.01. 2015 SP. 9 I.T.A. NO. 147/DEL/ 2012 COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 15,15,16/12 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER