THE issue before the Bench is - Whether when the assessee pays a lumpsum amount to the transferor of a marketing network, depreciation cannot be denied on the alleged ground that it was an arrangement for right to use such a network. YES is the answer.
Facts of the case
The assessee is a telecom company. It had acquired shares of M/s Siemens Telecom Ltd. ('STL'), for which consideration paid by the assessee, included the sum of Rs.9 Crores for the "marketing, customer support, distribution and associate setups" of STL. It was a conceded fact that for the previous AYs, i.e., 2002-03, 2003-04 and 2004-05, the depreciation claim of the assessee was allowed and had acquired finality. Thus, when the returns for AY 2006-07 were considered by AO, he re-examined the agreement between STL and the assessee in the light of the depreciation claim made. The AO rejected the depreciation claim and held that a marketing set up can be created by any other party including the assessee itself without being impeded by such marketing network of any other party. It was held that what had been acquired was not the ownership right but an arrangement for use of such network. Thus, no depreciation was allowed on such payment which had been termed as goodwill. The claim of the assessee company regarding depreciation on 'goodwill' was, therefore, rejected and an amount of Rs.53,39,356 was added back to the income. On appeal, CIT(A) had allowed the assessee's appeal on the basis of the previous years' reasoning which had accepted the depreciation claims. The CIT (A) also considered the relevant statutory provisions and the decision of HC in CIT v. Hindustan Coca Cola Beverages Pvt. Ltd., 2011-TIOL-33-HC-DEL-IT. The ITAT by the impugned order affirmed the findings of the CIT (A).
Held that,
++ in Hindustan Coca Cola Beverages, HC had an occasion to consider Explanation 3 (b) in the specific context of claim for depreciation of goodwill. The Division Bench noticed the various decisions of the SC including Nat Steel Equipment Pvt. Ltd. vs. CCE, AIR 1988 SC 631 in the context of what is meant by the term 'similar'. The Court also recollected the SC's ruling in CIT v. B.C. Srinivasa Setty, 2002-TIOL-587-SC-IT-LB in the specific context of what is meant by goodwill. In Smifs, the Court was pointedly answering the questions as to whether goodwill would be within the meaning of Section 32. After quoting Explanation (3) to Section 32 (1), SC held that 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 CIT(A) had concluded that the authorised representatives had filed copies of the Orders of HC 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 in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the Assessee stood increased. This finding has also been upheld by ITAT. We see no reason to interfere with the factual finding. 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 u/s 32. In the circumstances, before HC, the Revenue did not file an appeal on the finding of fact referred to hereinabove. For the afore-stated reasons, we answer Question No. [b] also in favour of the Assessee;
++ from the above discussion, it is apparent that the question as to whether the claim for depreciation confirms to one or the other description u/s 32, especially Explanation 3 has to be examined with reference to what is put forward by the assessee in the given facts of each case. The structure of the definition, or rather expanded definition, which by Explanation 3 spells out what are intangible assets (know-how, patents, copyrights, trademarks, licences, franchises etc.), being of a peculiar nature, the claim which the Court would necessarily have to consider is whether the item claimed to be eligible for depreciation confirms to "other business or commercial rights of similar nature". In the facts of the present case, a reading of the agreement between STL and the assessee clarifies that a specific amount, i.e., Rs.9 Crores was paid by the assessee to the transferor who owned commercial rights towards the network and the facilities. The consideration was a specific value but for which the network would not have been otherwise transferred. In that sense, it constituted business or commercial rights which were similar to the enumerated intangible assets. In so concluding, however, this Court does not lay down the general or particular principle that every such claim has to be necessarily allowed as was apparently understood by the ITAT. The circumstance that the declaration of law in Smifs Securities envisions inclusion of goodwill as an asset and, therefore, entitled to depreciation, in other words does not necessarily mean that in every case the goodwill claim has to be allowed. In the present case, though termed as goodwill, what was actually parted with by STL was a commercial right, i.e., exclusivity to the network which would not have been otherwise available but for the terms of the arrangement. So viewed, this Court is satisfied that the conclusions arrived at by the CIT (A) and the ITAT cannot be faulted. No substantial question of law arises; the appeal is consequently dismissed.
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