2016 (2) TMI 84 - AT - Income Tax

Court upholds depreciation on goodwill; royalty payment legitimate under Income Tax Act

The appeal filed by the Revenue challenging the disallowance of depreciation on goodwill and royalty paid was dismissed. The court held that goodwill ... Addition on account of depreciation on goodwill - CIT(A) deleted the disallwoance - Held that:- The issue in controversy has already been decided by the Coordinate Bench in the case of Nitrex Chemical India Ltd. (2015 (11) TMI 340 - ITAT DELHI ) by relying upon the judgement delivered by Hon'ble Supreme Court in case of CIT Vs SMIF Securities Ltd. in SLP (2012 (8) TMI 713 - SUPREME COURT) 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 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 is determined against the Revenue. Addition on account of royalty paid - revenue v/s capital - CIT(A) deleted the addition - Held that:- Held 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 is also determined against the Revenue. Issues Involved:1. Disallowance of depreciation on goodwill2. Disallowance of royalty paidAnalysis:Issue 1: Disallowance of Depreciation on GoodwillThe appellant, ACIT, sought to set aside the impugned order regarding the deletion of the addition of depreciation on goodwill. The Assessing Officer disallowed the depreciation claimed on goodwill by the assessee company, as goodwill is not considered an intangible asset under the Income Tax Act. However, the Ld. CIT(A) took a different view, allowing the depreciation. The business transfer agreement showed that the assessee paid for the right to use the brand name 'CARYAIR,' indicating the purchase of goodwill. The issue was whether this payment for goodwill qualifies as an intangible asset under Section 32(1)(ii) of the Act.A similar issue was addressed by the Income Tax Appellate Tribunal, Delhi Bench 'E,' in a previous case, where it was held that goodwill is eligible for depreciation under Section 32 of the Act. Citing the judgment of the Hon'ble Supreme Court in the case of CIT Vs SMIF Securities Ltd., it was established that goodwill falls under intangible assets like trademarks, licenses, and franchises. As the issue was already decided in favor of the assessee in a previous case, the current appeal's ground regarding depreciation on goodwill was determined against the Revenue.Issue 2: Disallowance of Royalty PaidThe assessee debited an amount as royalty paid under administrative and other expenses, based on a technical services and license agreement. The Assessing Officer disallowed this claim, referring to a previous judgment where exclusive and enduring advantages led to disallowance of technical aid fees or royalty. However, in the current case, the agreement indicated that the benefit was of an enduring nature transferred to the assessee. The agreement specified royalty payment based on turnover, not a lump sum amount, distinguishing it from the case cited by the Assessing Officer.The judgment cited by the Assessing Officer was not applicable to the present case's facts and circumstances, as the benefit transferred to the assessee was not exclusive and enduring in the same manner. The Ld. CIT(A) found no illegality or perversity in the findings and determined this issue against the Revenue as well.In conclusion, the appeal filed by the Revenue was dismissed, and the order was pronounced in open court on 06 Jan., 2015.