M/s. Incap Contract manufacturing Services Private Limited, Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 32/BANG/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 9689 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 11 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 12-12-2019
• Assessment Year: 2008-2009
• Appeal Filed On: 05-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R PREMI
• Keywords: Depreciation; Reason to believe; Reassessment proceedings; Set aside
• Section: 143(3); 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES C BENCH: BANGALORE BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA. NO. 32/BANG/2017 (ASSESSMENT YEAR: 20 0 8 - 0 9) M/S. INCAP CONTRACT MANUFACTURING SERVICES PVT. LTD., SUFIYA ELITE, 3 RD FLOOR, NO.18, CUNNINGHAM ROAD, BENGALURU - 560 053 .APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. RESPONDENT. ASSESSEE BY: SHRI CHAVALI NARAYAN, C.A. REVENUE BY: S MT. R. PREMI, JCIT (D.R) DATE OF HEARING : 12.12. 2019 DATE OF PRONOUNCEMENT : 03 .01.2020 O R D E R PER SHRI PAVAN KUMAR GADALE, JM : 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'). 2. AT THE TIME OF HEARING, THE LEARNED AUTHORISED REPRESENTATIVE S UBMITTED THAT THE GROUND OF APPEAL NO.2 ON VALIDITY OF REASSESSMENT PROCEEDINGS IS NOT PRESSED 2 ITA NO.32/BANG/2017 AND MADE ENDORSEMENT AND HENCE TREATED AS NOT PRESSED AND WITHDRAWN AND EFFECTIVE GROUND OF APPEAL NOS.1, 3 & 4 WHICH ARE AS UNDER : GROUND NO.1 GENERAL GROUND : 1.1 THE ORDER OF THE LEARNED CIT(A) IS BASED ON INCORRECT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. 3 ITA NO.32/BANG/2017 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING UPS, INVENTORY AND PCDA ASSEMBLY ELECTRONIC EQUIPMENT, SUB - SYSTEMS ETC. AND FILED THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008 - 09 ON 29.09.2008 WITH NET LOSS OF RS.9,14,74,483 . S UBSEQ UENTLY THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT DT.1 9.11.2010 WITH TOTAL LOSS OF RS.8,43,93,076 WHEREAS THE A SSESSING OFFICER HAS REASON TO BELIEVE THAT THE ASSESSMENT HAS ESCAPED ASSESSMENT WHERE THE ASSESSEE COMPANY HAS CLAIMED AN AMOUNT OF RS.1,68,72,750 AS DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS, THE LD. ASSESSING OFFICER HAS DISTINGUISHED WITH KNOW HOW AND COPY RIGHT AND IS OF THE OPINION THAT THE PAYMENTS FOR CUSTOMER RELATIONSHIP RIGHTS IS A VALUE WHICH IS IN THE NATURE OF GOODWILL AND DEPRECIATION IS NOT ALLOWED. IN RESPONSE THE LEARNED AUTHO RISED REPRESENTATIVE OF THE ASSESSEE APPEARED AND FILED THE DETAILS AND A L S O LETTER WAS FILED ON 17.10.2014 TO TREAT THE RETURN OF INCOME FILED EARLIER AS COMPLIANCE. FURTHER THE ASSESSEE COMPANY FILED A LETTER ON 20.10.2014 EXPLAINING THE BASIS FOR CLAIM OF DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS BUT A . O . IS OF THE OPINION THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEPRECIATION AND DEALT AT PARAS 6 TO 12 OF THE ASSESSMENT ORDER AND DISALLOWED THE DEPRECIATION ON CUSTOMER RELATIONSHIP AND ASSESSED THE TOTAL LOSS O F RS.6,75,20,326 AND PASS E D THE ORDER UNDER SECTION 143(3) R.W.S. 147 OF THE ACT. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FILED AN APPEAL WITH THE CIT(APPEALS) WHEREAS THE CIT(APPEALS) CONSIDERED 4 ITA NO.32/BANG/2017 THE GROUNDS OF APPEAL, FINDINGS OF THE ASSESSING OFFICER A ND SUBM ISSIONS ON THE ISSUE OF DEPRECIATION ON CUSTOMER RELATIONSHIP BUT CONCURRED WITH THE ACTION OF THE ASSESSING OFFICER AND DISMISSED THE APPEAL. AGGRIEVED BY THE CIT(APPEALS) ORDER, THE ASSESSEE HAS FILED AN APPEAL WITH THE TRIBUNAL. 4. AT THE TIME OF HEARING, THE LEARNED AUTHORISED REPRESENTATIVE ARGUED THAT THE DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS IS IN THE NATURE OF A NON - COMPETE FEES AND ELIGIBLE FOR DEPRECIATION AND SUCH RIGHTS ARE ALSO AKIN TO BUSINESS AND COMMERCIAL RIGHTS. T HE LD. AR SUPPORTED THE STAND RELYING ON ASSESSEE'S OWN CASE FOR THE ASST. YEAR 2009 - 10 TO 2011 - 12 WHERE THE DEPRECIATION ON CUSTOMER RELATIONSHIP HAS ALLOWED AND PLACED A COPY OF THE ORDER AND PRAYED FOR ALLOWING THE APPEAL. 5. ON THE SECOND IS SUE, THE LEARNED AUTHORISED REPRESENTATIVE MADE SUBMISSIONS ON GROUND OF APEPAL NO.4 WHERE THE ASSESSING OFFICER AND CIT (APPEALS) HAS NOT ALLOWED DEPRECIATION ON GOODWILL AND RELIED ON THE TRIBUNAL ORDER. CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF CIT(APPEALS). 6. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE LEARNED AUTHORISED REPRESENTATIVE HAS ARGUED ON THE DISALLOWANCE OF DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS WHICH IS IN THE NATURE OF NON - COMPETE FEES. FURTHER T HE LEARNED AUTHORISED REPRESENTATIVE SUB MITTED THAT IN ASSESSEE'S OWN CASE, THE 5 ITA NO.32/BANG/2017 CO - ORDINATE BENCH OF TRIBUNAL FOR THE ASSESSMENT YEAR 2009 - 10 HAS DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS TREATING AS GOODWILL. WE FOUND THE CO - ORDINATE BENCH OF TRIBUNAL IN ITA NO.2214 TO 2216/BANG/2018 FOR THE ASSESSMENT YEARS 2009 - 10 TO 2011 - 12 DT.30.4.2019 HAS HELD AT PAGE 6 PARAS 8 TO 11 WHI CH ARE READ AS UNDER : 8. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE SOLE DISPUTED ISSUE RAISED BY THE ASSESSEE IN RESPECT OF GRANTING OF DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS WHICH IS IN THE NATURE OF NON - COMPETE FEE. THE LEARNED ARS CONTENTION THAT THE TRIBUNAL HAS DIRECTED THE AO BY ORDER DATED 18/4/2017 IN MP WITH DIRECTIONS AS UNDER: 5. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS CAREFUL PERUSAL OF THE RECORD, WE FIND THAT WHILE DECIDING THE ISSUE IN PARA 6 OF THE IMPUGNED ORDER, THE TRIBUNAL HAS DULY GIVEN THE REFERENCE OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SMSIFS SECURITIES LTD. THEREFORE, WHILE SETTING ASIDE THE ISSUE TO THE RECORD OF THE AO ON THE ADDITIONAL GROUND OF CLAIM OF DEPRECIATION ON INTANGIBLES INCLUDING GOODWILL, IT WAS DIRECTED THAT THE AO DECIDE THE SAME AS PER LAW WHICH INCLUDES THE DECISION OF HONBLE SUPREME COURT ON THIS POINT. ACCORDINGLY, WE MAY CLARIFY THAT THE AO WHILE DECIDING THE ISSUE SHALL CONS IDER THE JUDGMENT OF HONBE SUPREME COURT IN THE CASE OF CIT VS. SMSIFS SECURITIES LTD. 9. 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 P ARA.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 TH E 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 6 ITA NO.32/BANG/2017 VALUED THE FIXED ASSET AND INTANGIBLES 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 VALU E 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 AS SESSEE 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 MANUF ACTURING 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 7 ITA NO.32/BANG/2017 REPRESE NTATIVE 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 YE ARS 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 AG REEMENT 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 N ATURE 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). H OWEVER, 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 CONSIDE RED. THE ASSESSEE HAS RELIED UPON SECTION 32(1)(II) OF THE INCOME TAX ACT, STATING THAT THE WORDINGS NY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE GIVES SCOPE TO MANY SUCH BUSINESS OR COMMERCIAL RIGHTS INCLUDING CUSTOMER RELATIONSHIP RIGHTS WH ICH 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 LEA RNED 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 F OR 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 N OT 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 TH E SAID PAYMENT AS GOODWILL. WE FOUND STRENGTH IN THE SUBMISSIONS OF THE LEARNED AR ON THE CLAIM OF DEPRECIATION ON 8 ITA NO.32/BANG/2017 CUSTOMER RELATIONSHIP RIGHTS SUPPORTED WITH OBSERVATIONS OF THE CO - ORDINATE BENCH AND FOLLOWING THE JUDICIAL DISCIPLINE, WE SET ASIDE THE ORD ER 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 OF THE ASSESSEE. 11. FOR THE ASSESSMENT YEARS 2010 - 11 AND 2011 - 12 SIMILAR GROUNDS OF APPEAL ARE RAI SED. FOR THE PARITY OF REASONS GIVEN BY US WHILE DEALING WITH ITA NO.2214/BANG/2018 FOR ASSESSMENT YEAR 2009 - 10, THE GROUNDS OF APPEAL RAISED IN THE APPEALS FOR ASSESSMENT YEARS 2010 - 11 AND 2011 - 12 IN ITA NOS.2215 & 2216/BANG/2018 ARE ALLOWED. ACCORDINGLY, WE FOUND TH E FACTS OF THE PRESENT CASE ARE SIMILAR AND FOLLOWS THE PRECEDENCE AND DIRECT THE ASSESSING OFFICER TO GRANT DEPRECIATION ON CUSTOMER RELATIONSHIP RIGHTS AND ALLOW TH IS GROUND OF APPEAL OF ASSESSEE. 7. ON THE SECOND DISPUTED IS SUE, THE LEARNED AUTHORISED REPRESENTATIVE MADE SUBMISSIONS THAT THE DEPRECIATION ON GOODWILL WAS DISALLOWED BY THE ASSESSING OFFICER AND CONFIRMED BY CIT(APPEALS). WE, ON PERUSAL OF THE ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 147 OF THE ACT DT.10.11.2014 FIND THERE IS NO DISALLOWANCE BY THE ASSESSING OFFICER IN THE REASSESSMENT PROCEEDINGS ON THE ISSUE OF DEPRECIATION ON GOODWILL AND FURTHER THIS DISPUTED ISSUE DOES NOT EMANATE S FROM THE ORDER OF CIT(APPEALS) . T HE BENEFIT OF SECTION 147 OF THE ACT LIES WITH THE REVENUE AND THE ASSESSEE CANNOT TAKE BENEFIT OF MAKING NEW CLAIMS IN REASSESSMENT PROCEEDINGS. WE SUPPORT OUR VIEW RELYING ON HON'BLE SUPREME COURT DECISIO N IN THE CASE OF CIT VS. SUN ENGINEERING WORKS (P) LTD. (1992) 198 ITR 297 (SC) W H E R E I N HON'BLE SUPREME COURT HAS OBSERVED THAT SINCE THE PROCEEDINGS UNDER 9 ITA NO.32/BANG/2017 SECTION 147 ARE FOR THE BENEFIT OF THE REVENUE AND NOT AN ASSESSEE, AND ARE AIMED AT GATHERING THE ESCAPED INCOME OF AN ASSESS EE, THE SAME CANNOT BE ALLOWED TO BE CONVERTED AS REVISIONAL OR REVIEW PROCEEDINGS AT THE INSTANCE OF THE ASSESSEE, THEREBY MAKING THE MACHINERY UNWORKABLE. ACCORDINGLY WE DISMISS THIS GROUND OF APPEAL OF THE ASSESSEE. 8. IN THE RESULT, THE ASSE SSEE'S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 R D JAN., 2020 . S D / - S D / - ( B.R. B ASKARAN ) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 0 3 .01.2020. *REDDY GP COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT (A) 4. PR. CIT 5. DR, ITAT, BANGALORE. 6. GUARD FILE ] BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE