TaxTMI 
TaxTMI 
2011 (4) TMI 1177
X X X X Extracts X X X X
X X X X Extracts X X X X
....een carried on by Best & Crompton Engineering Ltd. from the year 1975. On 30-6-2001, relevant to assessment year 2002-03, Best & Crompton Engineering Ltd. transferred the Electrical & Projects Contracting Division along with its fixed assets, current assets and current liabilities to its wholly owned subsidiary company, Best & Crompton Engineering Projects Ltd. This transfer took place vide Agreement dated 13-11-2000 followed by other supplemental agreements executed on various other dates. This transfer took place on the basis of business-valuation-report obtained from M/s. Ernst & Young (P.) Ltd., a reputed Chartered Accountants company, according to which, the business of the Electrical & Projects Contracting Division of Best & Crompton Engineering Ltd. as on 30-6-2001 was valued at Rs. 34.85 crores with reference to the supplemental agreement dated 31-10-2001. However, this value was originally fixed at Rs. 45.78 crores on the basis of original agreement. Thus, the business value of Rs. 34.85 crores was fixed as the purchase consideration for the transfer of the Electrical Projects and Contracting Division, the break-up of which is given as under : (a) Towards written down va....
X X X X Extracts X X X X
X X X X Extracts X X X X
....estimated and that the parties have agreed to consider this amount as a value for transfer. The assessee further substantiated its claim by stating that M/s. Best & Crompton Engineering Ltd. was having vast experience, and also track record of Electrical and Projects Contracting Division, and the transfer took place was along with the skilled employees besides the entitlement to quote for any tender by virtue of the technical expertise they had gathered over the years. It was further contended that the pre-qualification right is a commercial right acquired from M/s. Best & Crompton Engineering Ltd. which could not be equated with 'goodwill', at all. It was submitted that sections 32 and 55 clearly distinguish between a goodwill and commercial rights, brand value and tenancy rights. To further clarify its claim the assessee stated that any goodwill which Best & Crompton Engineering Ltd. could be stated to have, it was submitted that this company was making losses in contract business and hence, there could be no goodwill for the Electrical & Projects Contracting Division which was transferred to the assessee. It was contended that the experience of Best & Crompton Engineering Ltd. f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee and the Department, he has given a finding that the assessee is entitled to depreciation on both the items. Now, the Revenue is in appeal and we extract below the grounds taken by the Revenue for assessment year 2002-03, which would also reflect the grounds taken in other years: "1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2.1 The learned CIT(A) erred in directing the Assessing Officer to allow depreciation on pre-qualification rights and technical know-how. 2.2 The learned CIT(A) failed to note that there is no basis for the valuation of the above assets by M/s. Ernst & Young (P.) Ltd. Except for the diversion of Rs. 9.31 crore received from M/s. Springs Investments Ltd., there is virtually no actual payment to the holding company. The balance amount has been partly adjusted against the value of equity share allotted to the holding company and partly by treating the same as loan to the assessee-company. 2.3 The learned CIT(A) ought to have seen that the above transaction was only a financial transaction and the entire transaction was a paper transaction in order to avail depre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s for such rights are software/manufacturing process, patents, trademarks etc. It is the exclusive property of a person who is entitled to enjoy or to transfer at its will, it cannot be seen or in other words, is not tangible but its value for a particular business may be indispensable. On the contrary, a 'goodwill' of a business is a reputation which a company enjoys with its customers in its chosen field of activity. A goodwill enables the company to give more business and profits than its competitor. Thus, it is an intangible asset of a subjective nature which is exclusively available to that particular entity. The common examples of goodwill are locational advantage, image of the proprietor/directors etc. It is true that both commercial rights as well as goodwill can be classified as 'intangible asset'. But the distinguishable feature of the two is that the commercial rights whether the business runs profitably or not, it never diminishes or gets distinguished; but in case of goodwill, the business gets diminished or even gets distinguished in proportionate to the existing status of the 'goodwill'. In the given case, the holding company has been incurring losses for a number of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re numerous methods for valuation of business and the one such method which has been adopted by M/s. Ernst & Young Pvt. Ltd. and it is evident in the report itself, which has dealt the issues extensively to arrive at the business valuation. We cannot attach much importance to the routine disclaimer appended to the report in question because normally every valuation report, being an estimation, contains such a disclaimer to avoid future litigation. A business valuation is definitely different from an audit report. The hiving off of the projects division was done with an intention to carry on the business of projects division in a better and efficient manner. Seemingly because the manufacturing units of Best & Crompton Engineering Ltd. was not profitable and there were major problems which could affect the operations of the projects division, in our considered opinion, Explanation 2 and 2A appended to section 43(6) of the Act is not applicable in the given case as the pre-qualification rights and technical proprietary information were not forming part of the block of assets of the holding company namely Best & Crompton Engineering Ltd. No need to mention that hiving off of the Projec....