Incap Contract Manufacturing Services P Ltd, Bangalore V. Deputy Commissioner of Income tax, Bangalore

MA 30/BANG/2017

• Counselvise Citation: [2017] 124 COUNSELVISE.COM (IT) 5518 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 19 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 18-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 29-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y KAMALADHAR
• Keywords: Depreciation
• Section: 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER [ M P NO S . 132/BANG/2016 & 30 - 31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] (ASSESSMENT YEAR S : 20 11 - 12, 200 9 - 10, 2010 - 11 ) M / S. INCAP CONTRACT MANUFACTURING PRIVATE LIMITED, (INCAP INDIA OR THE COMPANY OR THE APPELLANT) SUFIYA ELITE, 3 RD FLOOR, NO. 18, CUNNIGHAM ROAD, BENGALURU-560052. PAN:AABCI 6651H APPELLANT VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -11(4), BENGALURU. RESPONDENT APP ELLANT BY : SHRI. CHAVALI NARAYAN , CA RESPONDENT BY : SHRI. Y. KAMALADHAR , STANDING COUNSEL DATE OF HEARING : 1 7 /0 3 /2017 DATE OF PRONOUNCEMENT : 18 /0 4 /2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER BY WAY OF THESE THREE MISCELLANEOUSS PETITIONS, THE ASSESSEE IS SEEKING RECTIFICATION IN THE ORDER OF T HIS TRIBUNAL DATED 09.03.2016, WHEREBY THE THREE APPEALS OF THE ASSESS EE WERE DISPOSED OFF BY COMPOSITE ORDER. THE FIRST MISTAKE HAS BEEN ALLEGED BY THE ASSESSEE IS REGARDING THE FINDING OF THIS TRIBUNAL IN MP NOS. 132/BANG/2016 & 30-31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] PAGE 2 OF 7 PARA 6 OF THE IMPUGNED ORDER REGARDING THE CLAIM OF NON-COMPETE FEES. THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE PRODUCED THE BUSINESS AGREEMENT IN SUPPORT OF ITS CLAIM WHEREIN AS PER ARTICLE 11, IT IS AGREED BY THE SELL ER THAT HE WILL NOT DIRECTLY OR INDIRECTLY, FOR A PERIOD OF THREE YEARS , PARTICIPATE OR ENGAGE IN ANY JURISDICTION AS A OWNER / PARTNER / SHAREHOLDER / ADVISOR OR IN ANY OTHER CAPACITY IN THE CMS/BUSINES S AND THE CONTRACT MANUFACTURING RELATED TO MEDICAL AND POWER ELECTRONICS, ETC. THUS THE PAYMENT IN QUESTION IS ONLY IN CONSI DERATION OF THE SAID UNDERTAKING BY THE SELLER AND IN THE NATURE OF NON-COMPETE FEE. THUS THE LEARNED AR HAS SUBMITTED THAT THE TR IBUNAL HAS COMMITTED A MISTAKE IN HOLDING THAT THE SAID PAYMEN T IS NOT OF NON-COMPETE FEE, BUT IT IS ONLY TOWARDS CUSTOMER RE LATIONSHIP INTANGIBLE. ON THE OTHER HAND, THE LEARNED DR HAS SUBMITTED THAT THE TRIBUNAL HAS DULY CONSIDERED THE BUSINESS TRANS FER AGREEMENT AS WELL AS THE ARTICLE 11 OF THE SAID AGREEMENT WHI LE ADJUDICATING THIS ISSUE AND THEREFORE ONCE THE TRIBUNAL HAS GIVE N FINDINGS ON MERIT ON THE BASIS OF THE EVIDENCE AVAILABLE ON REC ORD, THEN THERE IS NO MISTAKE APPARENT FROM RECORD WHICH CAN BE REC TIFIED UNDER SECTION 254(2) OF THE IT ACT. MP NOS. 132/BANG/2016 & 30-31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] PAGE 3 OF 7 2. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL HAS A DJUDICATED THIS ISSUE IN PARA 6 OF THE IMPUGNED ORDER 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 L TD. BY THE ASSESSEE VIDE BTA DT.31.5.2007 IS SLUMP SALE AS THE CONSIDER ATION WAS AGREED AND PAID IN LUMP SUM WITHOUT ASSIGNING ANY VALUE TO SPECIFIC ASSETS. THEREFORE AS PER THE AGREEMENT THE CONSIDERATION WA S PAID LUMP SUM WITHOUT GIVING ANY DETAILS OF PAYMENT FOR ANY SPECI FIC ASSETS. THE BUSINESS WAS PURCHASED BY THE ASSESSEE AND IT WAS T RANSFERRED BY THE TVS ELECTRONICS AS AN ON GOING BUSINESS/DIVISION. H OWEVER, IN ITS BOOKS OF ACCOUNTS THE ASSESSEE HAS 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 A ND 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 DEPRECI ATION IN RESPECT OF THE AMOUNT OF RS.6.74 CRORES WHICH WAS ASSIGNED TO CUSTOMER RELATIONSHIP (INTANGIBLE). THE ASSESSEE TOOK A PLEA THAT THIS AMOUNT WAS PAID AS NON-COMPETE FEES AS THE SELLER HAS EXPRESSE D, AGREED AND UNDERTOOK NOT TO PARTICIPATE OR ENGAGE IN ANY JURIS DICTION 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 MP NOS. 132/BANG/2016 & 30-31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] PAGE 4 OF 7 LEARNED AUTHORISED REPRESENTATIVE HAS REFERRED TO T HE ARTICLE 11 OF BTA IN SUPPORT OF HIS CONTENTION THAT THE PAYMENT WAS M ADE FOR NON- COMPETE FEES. HOWEVER, IN THE ABSENCE OF ANY AGREEM ENT BETWEEN THE PARTIES FOR ANY CONSIDERATION ON ACCOUNT OF NON-COM PETE FEES AS WELL AS IN THE ABSENCE OF ANY SUCH VALUE ASSIGNED TO THE NO N-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 ACCO UNTS 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 SH AREHOLDER, CONSULTANT, ADVISOR OR ANY OTHER CAPACITY SOLICIT T HE EMPLOYEES OF THE CMS BUSINESS HOWEVER IN THE ABSENCE OF ANY INTENTIO N OF PARTIES TO PAY CONSIDERATION FOR SUCH RESTRICTIVE COVENANTS IN THE AGREEMENT THE PAYMENT IN QUESTION CANNOT BE REGARDED AS NON-COMPE TE FEES. THEREFORE, THE DECISION OF THE HON'BLE JURISDICTION AL HIGH COURT IN THE CASE OF INGERSOLL RAND INTERNATIONAL INDIA LTD. (SU PRA) WILL NOT HELP THE CASE OF THE ASSESSEE. AS REGARDS THE NATURE OF PAYM ENT IN QUESTION, AS TREATED BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS BE ING CUSTOMER RELATIONSHIP, THE ISSUE IS CLEARLY DECIDED AGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF SHARP BUSINESS SYSTEM(SUPRA). HOWEVER, THIS CAN BE LOOKED FROM ANO THER ANGLE BECAUSE THE ASSESSING OFFICER WHILE DENYING THE CLA IM OF DEPRECIATION HAS TAKEN A VIEW THAT THE CUSTOMER RELATIONSHIP RIG HTS ARE IN THE NATURE OF GOODWILL AS UNDER : THE SUBMISSIONS MADE BY COMPANY ARE CONSIDERED. TH E ASSESSEE HAS RELIED UPON SECTION 32(1)(II) OF THE I NCOME TAX ACT, STATING THAT THE WORDINGS ANY OTHER BUSINESS O R COMMERCIAL RIGHTS OF SIMILAR NATURE GIVES SCOPE TO MANY SUCH BUSINESS OR COMMERCIAL RIGHTS INCLUDING CUSTOMER RELATIONSHIP R IGHTS WHICH ARE AS PER SSESSEE ALMOST IN NATURE OF GOODWILL. HE NCE 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 H AS RELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE C ASE OF CIT VS. SMSIFS SECURITIES LTD.348 ITR 302 AND SUBMITTED THAT IN VIEW OF THE SAID JUDGMENT OF THE HON'BLE SUPREME CO URT, GOODWILL ELIGIBLE FOR DEPRECIATION AS PER THE SECTI ON 31(1)(II) OF THE ACT. SINCE THE ASSESSEE DID NOT CLAIM DEPRECIAT ION ON GOODWILL IN THE RETURN OF INCOME AND EVEN NOT MADE ANY CLAIM BEFORE THE CIT (APPEALS). THEREFORE, THE ISSUE OF A LLOWING DEPRECIATION ON GOODWILL HAS NOT BEEN EXAMINED BY T HE AUTHORITIES BELOW. MP NOS. 132/BANG/2016 & 30-31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] PAGE 5 OF 7 3. IT IS CLEAR FROM THE FINDINGS OF THE TRIBUNAL(SU PRA) THAT THE BUSINESS TRANSFER AGREEMENT DATED 31.05.2007 WAS DU LY CONSIDERED AND THE TERMS OF THE AGREEMENT HAS BEEN EVALUATED AND DISCUSSED WHILE ARRIVING AT THE CONCLUSION THAT THE PAYMENT IN QUESTION CANNOT BE HELD AS MADE FOR NON-COMPETE FE ES. ONCE THE TRIBUNAL HAS GIVEN THE FINDING ON THE BASIS OF THE EVALUATION OF THE MATERIAL ON RECORD, THE FINDINGS ON MERITS OF THE ISSUE CANNOT BE REVIEWED BY INVOKING THE PROVISIONS OF SE CTION 254(2) OF THE ACT. IT IS A SETTLED PROPOSITION OF LAW THA T THE SCOPE AND POWER OF THE TRIBUNAL UNDER SECTION 254(2) IS VERY LIMITED AND CIRCUMSCRIBED ONLY TO THE EXTENT OF RECTIFICATION O F MISTAKE APPARENT FROM RECORD WHICH DOES NOT REQUIRE ANY LON G DRAWN REASONING. THEREFORE, ONCE THE ISSUE HAS BEEN DECI DED ON MERITS AFTER CONSIDERING ALL RELEVANT FACTS AS WELL AS EVI DENCE, THEN IN THE ABSENCE OF ANY ALLEGATION THAT THE TRIBUNAL WHILE D ECIDING THIS ISSUE HAS IGNORED ANY CRUCIAL FACTS OR RELEVANT EVI DENCES THEN THE SAME CANNOT BE REVIEWED OR REVISED IN THE PROCEEDIN GS UNDER SECTION 254(2). HENCE, WE DO NOT FIND ANY MERIT OR SUBSTANCE IN THE FIRST OBJECTION RAISED BY THE ASSESSEE IN THE M ISCELLANEOUS PETITION. 4. THE NEXT MISTAKE HAS BEEN ALLEGED BY THE ASSESSE E IS REGARDING THE FINDINGS OF THE TRIBUNAL IN PARA 8 OF THE IMPUGNED MP NOS. 132/BANG/2016 & 30-31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] PAGE 6 OF 7 ORDER. THE LEARNED AR OF THE ASSESSEE HAS SUBMITTE D THAT THOUGH THE TRIBUNAL HAS ADMITTED THE ADDITIONAL GROUNDS RA ISED BY THE ASSESSEE REGARDING DEPRECIATION AND GOODWILL BEING A COVERED ISSUE AND WAS REMITTED TO THE RECORD OF THE AO FOR ADJUDICATION OF THE SAME AS PER LAW HOWEVER, THE TRIBUNAL HAS NOT D IRECTED THE AO TO CONSIDER THE DECISION OF HONBLE SURPEME COUR T IN CASE OF CIT VS. SMSIFS SECURITIES LTD., 348 ITR 302. THUS THE LEARNED AR SUBMITTED THAT THE LIMITED GRIEVANCES OF THE ASSESS EE IS THAT THE AO SHOULD HAVE BEEN DIRECTED TO CONSIDER THE ISSUE OF DEPRECIATION ON INTANGIBLE ASSETS IN THE LIGHT OF T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SMSIFS SECURITIES LTD., (SUPRA). HENCE, THE LEARNED AR HAS PLEADED T HAT SUITABLE DIRECTION MAY BE ISSUED TO THE AO IN THIS REGARD. ON THE OTHER HAND, THE LEARNED DR HAS OPPOSED TO THE MISCELLANEO US PETITION OF THE ASSESSEE AND SUBMITTED THAT WHEN THE TRIBUNA L HAS REMANDED THE MATTER TO THE AO FOR DECIDING THE SAME AS PER LAW, THEN NO SPECIFIC DIRECTION IS REQUIRED IN THIS REGA RD. 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 GIVE N THE REFERENCE OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SMSIFS SECURITIES LTD. THEREFORE, WHILE SETTING ASIDE MP NOS. 132/BANG/2016 & 30-31/BANG/2017 (IN ITA NOS.1471/BANG/2016 & 1469-1470/BANG/2014)] PAGE 7 OF 7 THE ISSUE TO THE RECORD OF THE AO ON THE ADDITIONAL GROUND OF CLAIM OF DEPRECIATION ON INTANGIBLES INCLUDING GOOD WILL, IT WAS DIRECTED THAT THE AO DECIDE THE SAME AS PER LAW WHI CH INCLUDES THE DECISION OF HONBLE SUPREME COURT ON THIS POINT . ACCORDINGLY, WE MAY CLARIFY THAT THE AO WHILE DECIDING THE ISSUE SHALL CONSIDER THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE O F CIT VS. SMSIFS SECURITIES LTD. 6. IN THE RESULT, THE MISCELLANEOUS PETITION FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH APRIL, 2017. SD/- (S. JAYARAMAN) SD/- (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBE R PLACE : BANGALORE DATED : 18/4/2017 /NSHYLU/ COPY TO : 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME- TAX APPELLATE TRIBUNAL BANGALORE