AI Drafter 
TaxTMI 
TaxTMI 
2021 (3) TMI 919
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct') without appreciating all relevant facts available on record and relying upon decisions which are distinguishable on facts. 3. That on facts and in circumstances of the case and in law, Ld. CIT(A) and Ld. AO has erred in disregarding material placed on record, submissions including various agreements and proceeded to deny Appellant' s legitimate claims on mere suspicions, conjectures and surmises. 4. That Ld. CIT(A) erred in dismissing appeal without considering various intangible assets acquired by Appellant under Business Transfer Agreement ("BTA") and their apparent financial benefits to Appellant in early years of its operations. 5. That Ld. CIT(A) has erred in not appreciating that gain arising to transferor company under BTA amounting to Rs. 107 .82 crores has already been offered to tax and amount of Rs. 24 .43 crores has already been discharged as tax liability for AY 2015 - 16 by transferor company, which fact has not also been disputed by either of lower authorities. 6. That on facts and in circumstances of the case and in law, Ld. CIT(A) and Ld. AO has erred in not following decisions of Hon' ble Courts and granting relief as praye....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O held that apart from the above, the assessee has not purchased/ got anything except the storage tank which the assessee is legally bounded to pay the consideration. 8. Before the AO, the assessee filed, the "Business purchase agreement" dated 24 .09.2014 as executed between M/s Tide water oil Company (India) Limited, assessee company and M/s JX Nippon Oil & Energy corporation (JX NOE). After perusal of the business transfer agreement, the AO noted the following points: a. Under the business transfer agreement the assessee, M/ s Tide water oil Company (India) Limited and M/ s JX Nippon Oil & Energy corporation (Japan) are the parties to the agreement. b. M/s Tide water oil Company (India) Limited is being a transferor and assessee company is the transferee company to the contract pursuant to which the transferor intend to sell the business undertaking on a slump sale under section 2 (42C) of the act to reorganize the SF oils Business at the total consideration for the amount of Rs. 108 crore. c. The agreement further stated that the assessee shall enter into the technical assistance agreement with JX NOE pursuant to which the JX NOE shall grant to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the consideration had been paid for any commercial or business rights. 12. The Assessing Officer referred to the franchisee agreement between the appellant and "TWO" and pointed out the following facts in the agreement: i. The assessee shall have the exclusive right to supply the lubricant oils for automobile, agricultural machine and construction machinery within India to Japanese and Korean OEMs listed in annexure of the JV agreement. ii. The assessee is responsible for defining the strategy with respect to the SF oils Business within this arrangement. iii. The transferor desired to use the technology, trademarks and trade names and intellectual property and avail itself of the strategic services and marketing and sales support function in conducting the SF oils business in the territory and assessee is willing to grant the franchisee to the transferor to conduct the SF oils business using the aforesaid intellectual property. iv. The franchisee agreement contain the non-exclusive sublicense grants clause under which the assessee company grants transferor company a non-exclusive and non- transferable license to service the customers in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e intellectual property support be in the nature of knowhow, trademarks, patents, technology to manufacturing the SF or FF lubricant oils. 14. The Assessing Officer pointed out that under the business agreement, the "Two" had transferred business segment namely "Eneos Business Segment (EBS) to the assessee and observed that the Eneos brand was in fact owned by JX NOE, Japan since its incorporation. The Assessing Officer also referred to the valuation report provided by the assessee and pointed out that the valuation report did not contain any analogy regarding the commercial rights which "Two" who was having. The Assessing Officer pointed out that the assessee did not purchase or acquire any rights under the agreement and in fact the agreement between the assessee and Two would cease to exist once JX NOE cancels the license of intellectual property in terms of Eneos as in that case "Two" would not be able to manufacture and market the product. The Assessing Officer observed that the assessee did not bring any cogent material apart from the business purchase agreement to show that any intangible benefit on account of this agreement. The Assessing Officer referred to the valuation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the business undertaking pertaining to "sale" of FF oil to the OEMC while the other two divisions of "TWO" namely Videol and manufacturing of FF oil continues with and marketing of SF oil of Enios continues to be with "TWO Ltd." While coming to such conclusion, the ld. CIT (A) relied upon the various clauses of business transfer agreement which are as under: • TWO shall transfer the Business undertaking relating to sale of FF and SF oil to OEMs namely 'Eneos business segment' by way of 'Slump sale' (as defined u/s 2 (42C) of the Act) for consideration of INR 108 crores. • TWO shall transfer to the assessee all its business relationships with the OEMs as mentioned above relating to supply of FF oils to such OEMs. Also, TWO and the assessee would enter into a separate agreement namely "Manufacturing Agreement" whereby TWO has agreed to act as a toll manufacturer of FF oils. TWO shall have no responsibility to provide any services or assume any liability in relation to the supply of FF Oils to OEMs. • TWO shall transfer to Assessee certain assets exclusively used for the "Eneos business segment'. These assets only includes storage tank installe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on it manufactures industrial oils, greases, and specialty products like metal working fluids, quenching oils, and heat transfer oils. b) JX Nippon Oil & Energy Corporation (('JX NOE') JXNOE (Now renamed JXTG Nippon Oil and Energy Corporation) is a fully integrated petroleum products company, headquartered in Tokyo, Japan and is a part of JXTG Group. JXTG Holdings Inc. a company listed on Tokyo Stock Exchange. JXTG group offers petroleum products and services throughout the world. Through partnerships with world class customers, JX NOE produces technologically advanced motor oils and transmission fluids that reduce carbon emissions, improve fuel economy and reduce wear on critical components. ENEOS is the brand name for products manufactured and sold by JX NOE, the largest oil company in Japan. ENEOS products are the high quality lubricants available in the marketplace today. 19. Over the period, TWO entered into agreements with various two wheelers automobile companies as well as certain non-automotive clients (OEMs). Pursuant to these agreements, OEMs have granted to TWO, right and license to use certain trademarks and other related intellec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ms. Also, TWO and Assessee would enter into a separate agreement namely "Manufacturing Agreement" whereby TWO has agreed to act as a toll manufacturer of FF oils. TWO shall have no responsibility to provide any services or assume any liability in relation to the supply of FF Oils to OEMs. * TWO shall transfer to Assessee certain assets exclusively used for the "Eneos business segment'. These assets only includes storage tank installed at Honda car premises. * As a part of BTA, TWO and the Assessee entered into a "Franchise Agreement" whereby TWO has agreed to be appointed as industrial franchisee of the Assessee in respect of the SF Oils Business Thus, TWO will be manufacturing SF Oils and provide warehouse & logistics, sales, invoicing, accounting & collection for the SF Oils business. * TWO shall also distribute and sell such SF Oils using its sales and distribution network and sales and distribution network of OEMs. Assessee would undertake the marketing activities relating to SF oils and provide TWO with certain strategic support and services in relation to undertaking of the SFs Oils Business. * Thus, by virtue of the above agreements assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es has been duly offered to tax by the recipient "TWO" and long term capital gain of Rs. 24 .43 crores has been paid. Further, it was argued that since the goodwill is classified as an intangible assets within the meaning of Section 32 (1)(ii) of the Act, the depreciation has been rightly claimed. 27. Heard the arguments of both the parties and perused the material available on record. 28. On going through the entire facts and circumstances, the issue to be decided before us as determined is "whether the payment made by the assessee of Rs. 108 crores for Business Transfer Agreement (BTA) to Tide Water Oil Company (India) Ltd. (a listed company) is excess and if so whether the goodwill raised by the assessee in the books of accounts over and above the value of the net asset obtained out of such agreement is correct as per the accounting standard and if so whether such goodwill raised is eligible for depreciation u/s 32(1)(ii) of the I.T. Act" 29. With regard to the amount paid by the assessee for BTA, we have gone through the valuation report. Valuation of the TWO-EBS: 30. We have gone through the report of the PWC dated 14.07.2014 which went through the value anal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not be disputed, the issue to be examined is whether the action of the assessee to raise goodwill of Rs. 107.75 crores on account of BTA being the difference in the payment of consideration of Rs. 108 crores and in the net book value of the assets of Rs. 25 .75 lacs transferred to the assessee. 33. Business goodwill is an intangible asset owned by and associated with the operation of a company. Goodwill is the premium that is paid when a business is acquired. If a business is acquired for more than its book value, it can be said that the acquiring business is paying for intangible items such as intellectual property, brand recognition, and customer loyalty. Business goodwill is an intangible asset that adds value to a company. Factors such as proprietary or intellectual property and brand recognition are reflected in goodwill. While goodwill is not easily quantifiable, it is calculated by subtracting the difference between the fair market value of a company's assets and liabilities from its purchase price. Companies must record the value of goodwill on their financial statements and record any impairment. 34. The presence of goodwill implies that a company's value is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble for Depreciation On Goodwill Resulting From Acquisition Of Business Unit Of Lee & Muirhead Pvt. Ltd. in A.Y. 2008-09". 40. From the perusal of the above, it is evident that the intangible assets characterized 'goodwill' and acquired under, the Business Transfer Agreement are towards MIS, Internal Control systems, Procedure & Manual, Cresa brand logo, copyrights, client acquisition cost, certain corporate service and non-compete fee. The AO has taken the view that these would not constitute goodwill for the reasons (a) that there could not have been any good in micro finance business related to unorganized sector (b) both the entities are under same control & management (c) not shown in the balance sheet of the society (d) not falling within the purview of Sec.32 . 41. In this regard, it is relevant to understand what constitutes goodwill. The Hon' ble High Court of Delhi in the case of Areva T& D India Ltd. &Ors. Vs. DCIT (345 ITR 421) has discussed the nature of goodwill and the relevant discussion is extracted as under: 42. In this regard, it would not be out of place to refer to the decision in CIT Vs B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) wherein the concept ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be termed as 'goodwill' 44. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill. In Eric Koblers: A dictionary for Accountants, the term Goodwill has been defined as: "The current value of expected future income in excess of a normal return on the investment in net tangible assets not as a recorded or reported amount unless paid for. The excess of the price paid for a business as a while over its book value or over the computed or agreed value of all tangible net assets purchased." 45. The next issue arises whether the impugned intangible rights acquired under the Business Transfer Agreement would be eligible for depreciation under section 32 (1)(ii). In this regard, it is relevant to refer to the discussion of the Hon'ble Apex Court on the issue whether goodwill is an asset within the meaning of Sec. 32 of the I.T. Act. The Hon'ble Apex Court in the case of CIT Vs. Smifs Securities 348 ITR 302 discussed as under: Question No. [b] "Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961 and whether depreciation on "goodwill" is allowable under the said Section:" Answer:....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 authorized representatives had filed copies of the Orders of the of the High Court ordering amalgamation of the above two Companies; that the assets and l iabilities 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. We see no reason to interfere with the factual finding". 50. In the instant case ,the revenue has taken the view that the impugned intangible rights do not fall within the purview of any of the clauses of Sec.32(1) and is not in the 'nature of commercial or business right' so as to be eligible to claim deprec....