2015 (5) TMI 85 - HC - Income Tax

Depreciation on goodwill - whether nature of the marketing rights were such that there was no similarity or identity with the enumerated rights set out in Explanation 3 (b) and having regard to these facts, unless the assessee demonstrated and proved that such rights were akin to the intangible assets mentioned, it could not claim depreciation? - CIT(A) allowed claim also confirmed by ITAT - Held that - 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., ₹ 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 (2012 (8) TMI 713 - SUPREME COURT) 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 - Decided in favour of assessee.

Summary

Issues:
1. Depreciation claim for AY 2006-07 by the assessee.
2. Interpretation of Section 32 of the Income Tax Act regarding intangible assets and depreciation claims.
3. Comparison of marketing rights with enumerated intangible assets for depreciation purposes.
4. Applicability of previous judgments on goodwill depreciation claims.

Analysis:
1. The case involved the Revenue's appeal against the ITAT's order affirming the Appellate Commissioner's decision on the depreciation claim for AY 2006-07 by the assessee. The dispute arose from the acquisition of shares in M/s Siemens Telecom Ltd. by the assessee and the subsequent depreciation claim, which was rejected by the AO. The AO contended that the payment made for marketing rights did not constitute ownership rights or goodwill eligible for depreciation.

2. The crux of the matter was the interpretation of Section 32 of the Income Tax Act, specifically the definition of assets under Section 32(1)(ii) which allows depreciation for intangible assets like know-how, patents, copyrights, trademarks, licenses, franchises, or other business or commercial rights of a similar nature. The argument revolved around whether the marketing rights acquired by the assessee qualified as intangible assets akin to those specifically listed in the provision.

3. The appellant's counsel argued that the nature of the marketing rights acquired did not align with the enumerated intangible assets in Section 32(1)(ii), emphasizing the need for similarity or identity with the listed assets to claim depreciation. On the contrary, the respondent's counsel relied on previous judgments, including the ruling in Hindustan Coca Cola Beverages and CIT v. M/s Smifs Securities Limited, to support the admissibility of goodwill depreciation claims.

4. The court extensively analyzed the precedents cited, particularly the Hindustan Coca Cola Beverages case, which addressed the claim for depreciation of goodwill. The court emphasized the need to evaluate each case based on the specific facts presented by the assessee. In the present case, the court concluded that the marketing rights acquired were akin to intangible assets and qualified for depreciation, dismissing the appeal and upholding the decisions of the CIT (A) and ITAT.

In conclusion, the judgment clarified the application of Section 32 of the Income Tax Act to depreciation claims for intangible assets, emphasizing the need for a case-specific assessment to determine eligibility. The court's decision highlighted the importance of aligning acquired rights with the listed intangible assets for depreciation purposes, based on the facts and nature of the transaction.