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2011 (4) TMI 1177 - AT - Income TaxValue of pre-qualification rights - Depreciation u/s 32(1) - Intangible assets - Goodwill - Held that - 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 . The transfer of pre-qualification rights and technical proprietary information by the holding company was on account of genuine commercial considerations done at arms length based on the business valuation report given by a reputed firm of Chartered Accountants and without which the assessee would not have been in a position to carry on the business and also to secure further business. - This transaction cannot tantamount to only a paper transaction or sham transaction as there is no such evidence on record. - Depreciation allowed.
Issues Involved:
1. Depreciation on intangible assets (Technical Proprietary Information and Pre-qualification Rights). 2. Characterization of intangible assets as 'goodwill'. 3. Validity of business valuation report by M/s. Ernst & Young Pvt. Ltd. 4. Nature of the transaction (genuine commercial transaction vs. paper transaction). Issue-wise Detailed Analysis: 1. Depreciation on Intangible Assets: The assessee-company, M/s. Best & Crompton Engineering Projects Ltd., claimed depreciation on two intangible assets, namely Technical Proprietary Information and Pre-qualification Rights, at the rate of 25% under section 32(1)(ii) of the Income Tax Act for assessment years 2002-03 to 2005-06. The Assessing Officer disallowed this claim, reasoning that the intangible assets would partake the character of 'goodwill', which is not eligible for depreciation under section 32(1)(ii) of the Act. The CIT(A) reversed this decision, allowing the depreciation claim, and the Revenue appealed against this order. 2. Characterization of Intangible Assets as 'Goodwill': The Assessing Officer treated the consideration amounts as having been paid for 'goodwill' rather than for intangible assets. The assessee contended that the transfer of business was based on a business-valuation-report by M/s. Ernst & Young Pvt. Ltd., which valued the pre-qualification rights and technical proprietary information separately. The assessee argued that pre-qualification rights and technical proprietary information are commercial rights and not 'goodwill'. The Tribunal agreed with the assessee, stating that pre-qualification rights and technical proprietary information should be treated as 'intangible assets' and not 'goodwill'. 3. Validity of Business Valuation Report: The Assessing Officer questioned the basis of the valuation report by M/s. Ernst & Young Pvt. Ltd., suggesting that the transaction was merely a financial maneuver to avail depreciation benefits. The Tribunal, however, held that the valuation report by a reputed Chartered Accountant firm could not be lightly dismissed. The Tribunal noted that the valuation method adopted was one of the recognized methods for business valuation and that the report extensively dealt with the issues to arrive at the business valuation. 4. Nature of the Transaction: The Revenue argued that the transaction was a paper transaction intended to avail depreciation benefits. The Tribunal found that the transfer of pre-qualification rights and technical proprietary information was done at arm's length, based on a business valuation report, and was necessary for the assessee to carry on its business and secure further business. The Tribunal concluded that the transaction was genuine and not a sham. Conclusion: The Tribunal upheld the CIT(A)'s order, allowing the depreciation on pre-qualification rights and technical proprietary information. The Tribunal found that these intangible assets were not 'goodwill' and that the valuation report by M/s. Ernst & Young Pvt. Ltd. was valid. The Tribunal dismissed the Revenue's appeals, confirming that the transaction was genuine and based on commercial considerations. Result: All the appeals filed by the Revenue were dismissed.
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