TaxTMI 
TaxTMI 
2019 (1) TMI 1594
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....XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs. 18,11,46,000/- made in respect of depreciation on intangible assets namely Design and Technical knowhow, vendor & customer net work relationships. 2) a. The Ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance made in respect of depreciation amounting to Rs. 117.31 Millions on amount of goodwill of Rs. 469 Millions, which was neither claimed in the Return of Income, nor during the course of assessment proceedings. 2) b. The Ld. CIT(A)-XIV, Ahmedabad has erred in law and on facts in set-aside the matter & directing the Assessing Officer to examine the matter regarding claim of depreciation on Goodwill, which is not permitted under provision of Section 251(1)(a) of the Act as amended w.e.f. 01/10/1998. 3) The Ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs. 1,21,74,000/- made on account of provision of obsolete inventory without basis of such valuation. 4) On the facts and in the circumstances of the case, the Ld CIT(A)-XIV, Ahmedabad ought to have upheld the order of the AO. 5) It is therefore, prayed that the order ....
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....concern of the assessee mainly Arvind Mills Ltd. Therefore the case of the assessee does not fall under the Explanation-4 to Section 32 of the income tax Act. As per the AO, know-how is industrial information or technique likely to assist in the manufacturing or processing of goods. As the assessee is not engaged in any manufacturing activity, therefore, it is not entitled to depreciation as claimed by it on the design and technical know-how. It is a fact on record that the factory of AFL was not transferred to the assessee. As such, AFL under the agreement with the assessee was under obligation to act as a job worker on behalf of the assessee. Therefore the AO was of the view that there was no transfer of any design and technical knowhow to the assessee for which there was no need to make any payment to AFL. It was also agreed between the assessee and AFL that in case there is underutilization of the capacity of the assessee then AFL would be free to undertake the activity of garment production on behalf of other parties. The depreciation is allowed when the capital assets are used for the purpose of the business. In the instant case, there was no utilization of intangible ass....
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....t the activity as per the designs and technical know-how of the assessee. Thus it is clear that the technical know-how acquired by the assessee was being used by it. Had these not been acquired by it from AFL then it would not have been getting the job done from the outside parties. The assessee in support of its claim also filed the list of the job workers. iv. The assessee has acquired the business activity of AFL after making the agreed payment. The payment to AFL was not limited to the business activities, but it also covered the intangible assets acquired by the assessee. Thus the assessee is entitled to depreciation on the cost incurred by it on the purchase of intangible assets along with the business assets acquired from AFL. v. As regards the vendor network relationship, the assessee submitted that it was paid to AFL for utilizing the network which was build up by AFL over a period of time. These vendors' have been trained over a period of time by AFL and became capable of generating the quality products as per the specifications of the assessee. The assessee was able to save substantial time in developing the network of such vendors. vi. There were 87 job workers....
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....facts mentioned above, I am of the opinion that the A.O. wasnot justified in holding that term "any other business or commercial rights ofsimilar nature" used in section 32 should be having same meaning of earlierwords viz knowhow, patents, copy rights, trade mark, licences and franchises. The appellant has correctly referred to various decisions which held that the appellant was entitled to depreciation on the assets skill and knowhow, business f information, trading reputation, marketing and distribution, territorial knowhow. Such decisions have held that any right which is obtained for carrying on business effectively is likely to fall within the meaning of intangible assets. It is brought to my notice that Delhi Tribunal in the case of Sarabhai Animal Health Ltd. has held that marketing rights acquired by the company were intangible right eligible for depreciation. Similarly ITAT, Ahmedabad in the case of Arvind Brand has accepted the claim of the assessee in respect of depreciation on intangible assets consisting of brand name, knowhow, licenses and marketing distribution net work which is a case similar that of the appellant. In this case of Arvind Brand Ltd. the assessee had....
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....firm, according to which business of Electrical & Projects contracting Division was valued , at Rs. 34.85 crores - Said business value of Rs. 34.85 crores was fixed as I purchase consideration for transfer of Electrical Projects and Contracting f Division - Project consideration included cost of technical proprietary information and value of commercial/pre-qualification right - Assessee claimed depreciation on two items of intangible assets, viz., technical proprietary information and pre-qualification rights under section 32(l)(ii) Assessing Officer disallowed said claim on ground that those intangible assets would partake character of goodwill which was not eligible for depreciation under section 32(1 )(ii) - Assessing Officer also held that entire transaction was paper transactions in order to avail benefit of depreciation - However, on appeal, Commissioner (Appeals) allowed assessee's claim and set aside order of Assessing Officer - Whether pre-qualification rights and technical proprietary information could not be treated as 'goodwill1 - Held, yes - Whether transfer of pre-qualification rights and technical proprietary information by 'B' Ltd. was on account of ....
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.... facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz. claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares & Stocks Ltd. ( supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" whic....
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....chedules to BPA comprising of the above said list of Stockiest Agreements, Distribution Agreements, Lease Agreements and also Distribution and Marketing Agreements, alongwith list of licenses and Permissions and List of various products, the name license and also the manufacturing know-how etc., along with list of employees are assets, Which are invaluable and instrumental in carrying on the business of Animal Health Care and Diagnostics Business Divisions acquired by the assessee from M/s. Ranbaxy Laboratories Ltd. as per the BPA. The acquisition of the above said items is a bundle of rights acquired by the assessee for which a lump sum price was fixed and no break up in the value of price was determined either by the assessee or by the auditors but the same constituted bundle of rights akin to a license or comparable to a license to carry on the (acquired) business .... The above said assets acquired by the assessee were the "business or commercial rights or license acquired" in order to carry on new business acquired by the assessee including list of employees and also various licenses owned by Ranbaxy Laboratories Ltd." Thus having regard to the ratio laid down in the above ....
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....en by the statutory auditor of the company. The statutory auditor of the company has commented on the allowability of the depreciation claim made by the assessee in respect of intangible assets. Accordingly, the AO has referred in his assessment order regarding the comment given by the statutory auditor of the company. However on perusal of the comment of the statutory auditor of the company we find that claim of the assessee has not been denied for the depreciation on the intangible assets. The auditor has mentioned that they are unable to comment on the claim of the assessee on the depreciation of intangible assets. The expression used by the statutory auditor of the company cannot be construed as if the depreciation claimed by the assessee was denied. The comment of the statutory auditor of the company reads as under: "As per information and explanation given to us and based on the opinion obtained from the company's tax consultants, Company reckoned and claimed depreciation on the intangible assets acquired at the time of acquisition of business undertaking of Arvind Fashions Limited comprising of Design and Technical knowhow, vendor Relationship etc. The company is of the o....
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....ndia. It is a fact that amounts are paid abroad and the services are rendered abroad. Those companies who received the amounts have no permanent establishment in India or even the business connection in India. Therefore, the payments made to them abroad can not be brought to tax in India as the jurisdiction of IT Act extends only to territory of India where the payments have been made from India (sic), then it can be verified whether amounts can be brought to tax as per the provisions of I.T Act or whether Double T axation A voidance Agreement (DT AA) can be invoked so as to claim benefit. However, since the amounts are paid outside India to persons outside Indian territory , who does not have any tax liability as far as I.T . Act, 1961 is concerned, the amounts paid abroad cannot be considered as 'sums chargeable' under the provisions of this Act. Even though Explanation-2 clarifies the position that whether or not a non-resident person has a residence or place of business or business connection in India or any other persons in any other manner whatsoever in India, the Explanation cannot override the main provision of section 195 about 'sum chargeable' under the pr....
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....rmation or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto)." 8.6 We note that depreciation on the intangible assets was brought under the statute by the Finance Act 1998 for the purposes as mentioned under: "Depreciation to be allowed on intangible assets under the existing provisions, depreciation is allowable when building, plant, machinery or furniture is used by the assessee for the purposes of his business or profession. It is proposed to widen the scope of this section so as to provide that depreciation will also be allowed where intangible assets are owned wholly or partly by the assessee and are used by such assessee for the purposes of his business or profession. Intangible assets, such as know-how, patent rights, copyrights, trade marks, licences, franchises or any other business or commercial rights of the assessee will form a separate block of assets. As and when any capital expenditure is incurred by an assessee on acquiring such intangible assets the amount of such expenditu....
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....e basis of explanation 4 to section 32 of the Act. 8.11 The purpose for the depreciation on the intangible assets has been explained in the memorandum of the finance Act to 1998, and there was no such limitation provided for the allowability of the depreciation on technical know-how. Therefore we are not inclined to uphold the finding of the AO that the depreciation on the technical know-how is available only in relation to the industrial undertaking. 9. The 2nd question framed by the AO was that whether the assessee has acquired any design and technical know-how from AFL. In this regard, we find that the assessee claimed to have acquired designs and technical know-how from AFL as detailed under: "6.1 Design and Technical Know-How (TKH) Design refers to the. visual image that would be executed on a piece of cloth with the required technical know-how. Design &: TKH has been valued together as they are complementary assets and together provide a better logic for the value arrived. The process of design is fairly elaborate and extends from conceptualization of the product to providing the protocol for commercial production and could include the following: 1. Understandi....
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....h will be executed under its supervision. The relevant clauses of the agreement are reproduced as under: AGREEMENT TO MANUFACTURE PRODUCTS This Agreement is entered into on the 1st day of September, 2006 By and Between 1. Arvind Fashions Limited, a company incorporated under the laws of India having its registered office at The Arvind Mills Naroda Road, Railwaypura Post Ahmedabad 380 025 India hereinafter referred sto as "AFL'' (which term means and includes its successors and assigns) and 2. VF Arvind Brands Pvt. Ltd. a company incorporated under the laws of India and having its registered office at Arvind Mills Premises, Naroda Road, Ahmedabad 380025 hereinafter referred to as ''VFABPL'' (which means and includes its successors and assigns). Whereas 1. AFL is in the business of manufacturing and marketing apparel in India and other countries and for this purpose has a manufacturing set up consisting of land, building and machinery more fully decribed in Annexure 1 attached hereto. 2. VFABPL is a joint venture company involved in the marketing of apparel in India and other countries and requires a committed manufacturing facility for the purpose of manufactur....
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....ch has been made available to and signed by AFL. 5.2 AFL shall make every effort to ensure that the Products manufactured are of the quality required by VFABPL. Further, AFL shall deliver all orders to such place as notified/ communicated by VFABPL to AFL. 5.3 AFL shall give first priority to Orders received from VFABPL and shall take on orders from third parties subject to the same. 5.4 AFL shall provide all direct and indirect labour for the operation of the Factory and shall take direction for VFABPL as to increasing or decreasing direct and indirect labour at the Factory necessary to fulfill VFABPL's production requirements. All such labour shall be employed by AFL and VFABPL shall have no obligation to any such employees as an employer or otherwise. AFL shall indemnity VFABPL from an against any and all claims by any such employee." 10.1 From the above agreement it is transpired that AFL possessed the rich experience in the field of stitching of the garments. As a result of the agreement as discussed above the factory of AFL was working exclusively for the assessee. Thus it is implied that the assessee will use all the benefits held by the factory of AFL. Thus we ar....
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....er to the relationship with the existing set of v valuation. The key vendors considered for the purpose of valuation are. 6.2.1 Job Workers network I Job workers network is an integral component of garments business. They provide the service of making garments usually based on the design provided by the customers and are compensated on a per garment basis. Of all the vendors, Job workers are of high importance as described in the subsequent paragraphs. Vendor No of Vendors (as transferred) Job workers 87 6.2.2 Fabric & trims suppliers: They constitute the raw material suppliers that would include fabric and accessories and are usually empanelled based on the nature of requirement, quality parameters and timeliness of usual delivery. Vendor No's of Vendors (as transferred) Fabrics 58 Rims 77 6.2.3 Advertisement Vendors: Provide the service of advertising and promoting the products. Vendor No's of Vendors (as transferred) Advertisement 232 6.2.4 Of the above vendors, job workers hold a prominent position due to the nature of their involvement. In, many instances job-workers are dedicated to the parent company and conduct no other b....
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....tly, when the company decided to transact through die distributors. Today VFABPL has 18 distributors who manage the network of the entire MBO system. Sales Channel No. of stores % contribution to sales MBO's 325 26% (For the year 2005-05) 6.3.2 Exclusive Brand Outlets (EBOs): EBO's are shops or outlets, whether leased or owned, that are created, run and operated, by AFL. EBO's are retail stores that exclusively sell products of VFABPL. It may be pertinent to mention that these EBOs were not transferred as part of business, but would act as franchisees of VFABPL in die future. Sales Channel No. of stores % contribution to sales EBO's 3 9 20% (For the year 2005-06) 6.3.3 Exclusive Outlet on Purchase (EOF): EOP's are franchisee's belonging to AFL that has been transferred as part of the business. These franchisees are exclusive to VFABL products & brands. Sales Channel No. of stores % contribution to sales EOP's 51 16% (For the year 2005-06) 6.3.4 Key Accounts (KA): KA is a larger version of an MBO and form a major part in the retail segment of the organized market. Typically these represent the large format retail chains....
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....ate that the amount of Rs. 16,58,76,000/- shown as goodwill in the books of accounts was in fact a payment made towards acquiring of "certain business and commercial rights" and therefore eligible for depreciation in tax as per Section 32(1)(ii) of the Act. Judgment 16. In these appeals, the ITAT, relying upon the decision in assessee's own case ITA No.336/Del/08 dated 6th July, 2009 pertaining to assessment year 2005- 06, held:- "5. On careful consideration of rival submission, we are of view that learned CIT(Appeals) has rightly allowed relief to the assessee after considering relevant facts and circumstances of the case. The assessee has not claimed depreciation on goodwill it acquired commercial rights to sell products under the trade name and paid consideration in dispute for acquiring marketing and territorial rights to sell through dealers and distributors i.e. the network created by the seller for sale in India. Under the agreement. It become entitled to use of infrastructure developed by the seller. Rights were acquired since 1.4.1998 and these rights have all along been treated as an asset entitled to depreciation and depreciation was actually allowed in the ....
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....ough the said section, it is very much clear that this section includes know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets. The Revenue is not disputing that the assessee has acquired these two intangible assets in question under an agreement. The items mentioned in Section 32(1)(ii) are wide enough so as to include these types of intangible assets under consideration. Therefore, in our considered view, the learned CIT(A) has rightly allowed the depreciation claimed by the assessee and as such, it needs no interference." 10.6 In addition to the above, we note that there is no dispute with regard to the acquisition of AFL by the assessee company as discussed above. Accordingly, the consideration was paid by the assessee to AFL which has also not been disputed by the authorities below. Thus it is apparent that the assessee has incurred expenditures in the connection of its business. It is settled law that the expenses incurred by the assessee for the purpose of the business are eligible for deduction under different provisions of the Act. These deductions have been specified under se....
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.... Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co.Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC). 20. At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the mann....
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....#39;any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increase....
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.... assets". The Assessing Officer allowed the claim for that assessment year by an order under Section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under Section 143(3) for the assessment year 2003- 2004 continues to operate and no proceedings under the Act were initiated to disturb the same." 12.3 We also note that the Ld. DR have not brought anything on records suggesting that any action against the assessee was taken under section 147 of the Act on account of escapement of income. 12.4 In view of above there remains no ambiguity that the assessee is eligible for the depreciation in respect of the intangible assets as discussed above. Accordingly, we do not find any reason to interfere in the order of Ld. CIT(A). 12.5. Thus the ground of appeal of the Revenue is dismissed. 13. The next issue raised by the Revenue in ....
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.... in its CO against the direction of Ld. CIT(A) that he has not allowed the claim of the depreciation on goodwill. Both the parties before us relied on the order of authorities below as favorable to them. 16. We have heard the rival contentions and perused the materials available on record. It is the undisputed fact that the assessee did not claim the depreciation on goodwill in its income tax return as well as before the AO during assessment proceeding u/s 143(3) of the Act. The reason given by the assessee is that there was a lot of litigation on the issue of depreciation on goodwill. To avoid such litigation assessee not claimed depreciation on goodwill. However at the time of hearing before the Ld. CIT(A) the assessee found that the Hon'ble Supreme Court has settled the issue of depreciation on the goodwill in the case of CIT Vs. smifs securities Ltd. reported in 348 ITR 302. Therefore the assessee 1st time claimed the deduction before the Ld. CIT(A). 16.1 Now the issue before us arises whether the assessee can claim the deduction before the Ld. CIT(A) which was not claimed in the income tax return as well as before the AO. In this regard, we note that the issue of depreci....
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....sed by the ITO. There may be several factors justifying raising of such new plea in appeal, and each case has to be considered on its own facts. If the AAC is satisfied he would be acting within his jurisdiction in considering the question so raised in all its aspects. Of course, while permitting the assessee to raise an additional ground, the AAC should exercise his discretion in accordance with law and reason. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The satisfaction of the AAC depends upon the facts and circumstances of each case and no rigid principles or any hard and fast rule can be laid down for this purpose. In the present case, the assessee did not claim any deduction of its liability to pay purchase tax under the provisions of the Bengal Raw Jute Taxation Act, 1941, as the assessee entertained a belief that it was not liable to pay purchase tax under the aforesaid Act. But later on it was assessed to purchase tax and the assessee disputed the demand and filed an appeal before the appellate authority and obtained stay order. The assessee thereafter claimed deduction for the said amou....
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....rdering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding. 7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee." 17.1 In view of above we hold that the assessee is entitled for the claim of depreciation on the goodwill. Ther....
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.... the non-moving and sale moving material are provided for reduction in value. Thus it is a systematic way of valuing inventory for which details are furnished. As such it is not correct to say that it is contingent liability provided by the appellant. The appellant's claim is supported by the Supreme Court decision in the case of Hindustan Zinc Ltd. (supra). The CIT(A)-VIII, Ahmedabad In the case Hitachi Home and Life Solution India Ltd. for A.Y. 2007-08 vide appellate order dated 23-6-201 is on similar issue and has been seen. Apart from this it is also seen that the appellant had taken over the business of Arvind Fashions Ltd. in the last year and that it consists of stock acquired from them. Therefore, it is not correct for the A.O. to observe that this being second year of operation company was to be questioned about provisions made for diminution in value of inventory. In view of facts of the case and Supreme Court decision in the case of Hindustan Zink Ltd., the claim of appellant is reasonable. A.O. is directed to allow the deduction accordingly. This ground of appeal is accordingly allowed." Being aggrieved by the order of Ld. CIT(A) Revenue is in appeal before us. ....
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....sion others [Schedule 19, Note 20] 10,179 58,756 Exchange Loss [Net] 1,809 1,789 Miscellaneous* 33,155 15,338 1,096,888 509,227 23.1 We also note that such provision was not shown as liability in the balance sheet. Thus there remains no doubt that the provision have actually been written off by the assessee in its books of accounts. Thus the provision is not representing the unascertained liability of the assessee as alleged by the AO. We also note that the assessee in its financial statement has reduced the provision from the inventory shown in its financial statement. The relevant extract of the inventory shown in the financial statement by the assessee stands as under: SCHEDULE 7 INVENTORIES [Schedule 19, Note 1(v)] Raw Materials, Packing Materials and Accessories [Including in-transit: Rs. 7,340 (2007:Rs. 2,054] 95,619 78,736 Work-in-Process 23,468 19,191 Finished Goods 45,773 155,589 Traded Items 316,918 105,804 481,778 359,320 13,874 1,700 Less: Provision for Obsolescence 4,67,904 357,620 23.2 Once the provision has been written off by the assessee in its books of accounts than in our considered view th....
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....me of the assessee. 29. Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that the registration charges were incurred in respect of the buildings which were acquired on lease. As such these expenses do not represent any capital expenditure. Therefore the same should be allowed as revenue in nature. 29.1 The Ld. CIT-A after considering the submission of the assessee confirmed the addition made by the AO by observing as under: "I have considered the assessment order and the above contentions. The registration charges though relate to property, the same are for registration of lease deed. However, the same having relation with the property acquired by the appellant on lease, the assessee is entitled to depreciation. Therefore disallowance is confirmed and the ground of appeal is dismissed." Being aggrieved by the order of Ld. CIT(A) assessee is in CO before us. 30. The learned DR before us vehemently supported the order of authorities below whereas the learned AR before us submitted that the lease expense does not pertain to the acquisition of any property. Therefore the same should be treated as revenue nature. 31. We ....