THE issue before the Bench is - Whether distribution network and brand usage fall within the category of 'commercial rights', so as to entitle the assessee claim depreciation on them u/s 32(1)(ii). YES is the answer.
Facts of the case
A) The assessee company is engaged in the business of manufacturing of chemicals. It had filed the returns for A.Ys 2007-08 and 2009-10 at Rs. 14,77,25,342/- and Rs. 53,97,90,433/- respectively. During assessment, the AO found that the assessee had claimed Rs.12.07 crores under the head depreciation on Material Supply Contract (MSC) and on Distribution Network (DN) and Rs. 6.25 crores under the head Brand Uses Expenses (BUE). He directed the assessee to explain as to why the above referred claim should be allowed as revenue expenditure. The assessee in its reply stated that Huntsman Group took global acquisition of the textile effects of CIBA Speciality Chemical Group, that the group operated in India through its Indian companies namely CIBA Speciality Chemicals (I) Ltd. CIBA-India, and Diamond Dye-chem Ltd. (DDCL), and that the assessee entered into an agreement with CIBA-India and DDCL for acquiring the textile business effect assets on a slump sale basis. The assessee also entered into toll manufacturing agreement and had recorded fixed assets and intangible assets at fair value as determined by an independent valuer. As per the agreement, the assessee was granted non exclusive irrevocable and royalty fee licence to use trademarks, domain name for a period of 24 months. The assessee however contended that payment was made for using the brand for only a short period and the benefit accruing to the assessee from such payment for use of brand was transit in nature. With regard to MSC, it was stated that on acquisition of textile effect business the manufacturing facilities of DDCL were not transferred to the assessee, and that in order to protect its business interest it entered into an MSC with DDCL to ensure consistency in quality and quantity of the textile chemicals, that the MSC was a business/commercial right and was similar to know how, patents, copy rights, trade marks licences and franchisees. the assessee contended that MSC was an intangible asset in terms of section 32(1)(ii) and was eligible for depreciation @ 25%.
To enquire into the genuineness of the claim of the assessee, the AO called for information from DDCL and CIBA India u/s 131 and directed them to furnish details of written down value (WDV) of all the blocks of assets transferred to the assessee and also a copy of the report prepared by an accountant in accordance with the provisions of section 50B. On perusal of the same, he found that no intangible assets were transferred to the assessee on account of slump sale. Therefore, a show cause notice was issued to the assessee calling for explanation/justification for claim of Rs.18.42 crores as depreciation. After considering the submission of assessee, the AO held that the assessee had not incurred any expense on brand use, that the notional value ascribed by the valuer was on the basis of future estimated sales, and that there was no existence of any brand uses right at the time of transfer, that the transferor had admitted that the asset as a brand uses was not in existence at the time of transfer, that the claim of the assessee that an amount of Rs.6.25 crores should be allowed as revenue expenditure was legally untenable. The AO was also of the opinion that the alternative claim of the assessee to allow depreciation u/s.32(1)(ii) was not acceptable, as even if there were asset like MSC, DN and brand uses right as an intangible asset the assessee was not eligible for claim of depreciation as the same were not akin to the assets defined in the provision like knowhow, patents and copyrights.
B) The AO during the assessment found that the assessee had shown international transactions with its AEs and accordingly made a reference to the TPO for determining ALP of such transactions. With reference to the direction of the TPO, the assessee submitted the nature of types of service availed from its AEs for payment for its corporate service charges. The TPO asked the assessee as to why CUP method should not be applied to benchmark the international transaction. In its reply the assessee stated that during the year under consideration it had not entered into similar transaction with third parties as that of its AE.s, that nor had its AE.s entered into similar comparable transaction with third parties during the year, that no information on CUP was available for comparing the transaction entered into by the company with its AE.s. It also explained the nature of services and contended that the services availed by it from its AE.s were essential to the business of the company and did not constitute share holder/stewardship activities of the AE, that the AE possessed the requisite skill sets. The assessee also submitted the segmental profitability of manufacturing, trading and indent business of the PU division. However, the TPO proposed to reject the segmental profitability statement and proposed to reallocate the expenses and to adopt the revised profitability for the purposes of bench marking. Besides, the TPO objected to the use of multiple year data for the purposes of comparability and proposed an adjustment of Rs.11,44,72,502/-. These adjustment were proposed for manufacturing segment of Polyurethenes Unit (PU) of Rs.6.81 crores and disallowance of corporate service charges for Textile Effect Unit (TEU) of Rs.4.62 crores. On appeal, the DRP upheld the order of TPO.
Having heard the parties, the Tribunal held that,
Depreciation vis-a-vis slump sale
++ it is seen that the Supreme Court in the case of Smifs Securities has held that a reading of the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 to section 32(1) indicates that goodwill would fall under the expression. The principle of ejusdem generis would strictly apply while interpreting the expression which finds place in Explanation 3(b), that Goodwill is an asset under Explanation 3(b) to section 32(1). In the matter of Raveendra Pillai the Kerala High Court has deliberated upon the facts of the case and allowability of depreciation on intangible assets. The High Court therein has held that depreciation is allowable not only on tangible assets covered by clause (i) of section 32(1), but on the intangible assets specifically enumerated in clause (ii) and such of the other business or commercial rights similar to the items specifically covered therein. It is found that the present assessee had acquired Textile Effect (TE) Business from CIBA-India and DDCL as a going concern on a slump sale basis, and that manufacturing facilities of both the entities were not transferred as part of slump sale. Further, as a part of slump sale the entire distribution channel was handed over to the assessee including the customer, dealers, marketing people, marketing plans, laboratory, supply-chain and the warehouses, and that the services of textile effects employees was transferred to the assessee. It is further noted that it had entered into agreement with CIBA-India and DDCL for material supply and for supply of chemical products to the newly acquired TE business;
++ in case of a slump sale, generally no separate value is assigned to each and every asset by the transferor and the party taking over the assets assign specific values to the acquired assets. In the case before us, the assessee had obtained a valuation report from an expert and on the basis of that report had recorded the value of the tangible and intangible assets in the books of account. We find that in the valuation report the valuer had assigned value to MSC, DN and Brand uses, that the AO/DRP has not brought anything on record to disprove the correctness of the valuer. As far as the entries in the balance sheet of CIBA-India and DDCL is concerned, in our opinion same are not decisive factors. What has to be seen in case of a slump sale is the treatment given by the assessee in its books of account to the assets acquired and as to whether the valuation is based on some scientific basis.The assessee had entered into agreements for a period of five years with CIBA India and DDCL and because of the agreements the products manufactured by both the entities were made available at cost to the assessee, the assessee was granted nonexclusive, irrevocable, royalty free license to use trade-marks, domain names for a period of two years. Not only that the assessee got the distribution network, it has got valuable business/commercial rights. Therefore, we are of the opinion that by entering into MCS and getting distribution network,the assessee had acquired business/commercial rights that were of the similar nature as mentioned u/s 32(1)(ii). Same is the case about use of brand name. We are therefore of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisions of the Act. We have already held that business right, distribution network and brand usage fall in the same category of commercial rights mentioned u/s 32. Therefore, we hold that assessee was entitled to claim depreciation on the intangible assets;
++ it is found that while filing objection before the DRP the assessee had raised various issues. The assessee had requested the DRP to admit additional evidence as per provisions of the DRP Rules. But, the DRP has not mentioned anything in its order about the issue raised by the assessee and the documents submitted. In our opinion, it was duty of the DRP to reject or accept the additional evidence produced by the assessee once same were filed before it. Secondly, the grounds of appeal relating to TP adjustment was not decided. A glance at the order of the DRP shows that the order is a non speaking order and it has not given any reasons for arriving at its conclusion. It is noted that the DRP talks of failure of the assessee to submit 'even a single evidence' to prove that it had received any services from its AE in lieu of which the payment was made to the AE 'in spite of being given a number of opportunities by the TPO'. We find that DRP has not mentioned anything about the documents submitted by the assessee. The assessee has specifically alleged that the directions of the DRP were also not carried out. The DRP also mentions that the TPO had rightly rejected the TP Study but reasons have not been given for agreeing with the views of the TPO especially when the assessee had made extensive submissions stating that as how the stand taken by the TPO was flawed. The DRP has also endorsed the views of the TPO in a very mechanical way without giving any reasoned finding on the arguments taken by the assessee. Therefore, the matter is remitted back to the file of the DRP to adjudicate the issues raised by the assessee by passing a speaking and reasoned order