9911796707
TMI Blog2018 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... of it i.e. 27.53 acres, which admittedly, was to be transferred to the assessee. The said land was under lease with Kanpur Development Authority, for which necessary permission was required before the land could be transferred. Hence, the conclusion of CIT(A) in this regard that the land at Panki was transferred and its value as per valuation done by KDA works out to 174.36 crores is without any basis. In the absence of any land at Panki being transferred under the BTA, there is no merit in findings of CIT(A) in this regard. Ultimately after the slump price has been attributed first to the value of tangible assets, then the balance is to be attributed to intangible assets and once the same is done and whether it is under the umbrella of know-how, trademarks, patents or goodwill, it makes no difference since all these are covered under the umbrella of intangible assets, which are eligible for claim of depreciation under section 32(1)(ii) of the Act. The goodwill is also an intangible asset eligible for said depreciation as held by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT). In view thereof, we find no merit in the stand of learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing depreciation amounting to ₹ 27,14,07,414 (which included enhancement of ₹ 23,83,55,826) claimed by the Appellant on the values of following tangible and intangible assets determined as per the valuation report obtained from an independent valuer by holding that depreciation is not allowable in respect of assets acquired under slump sale arrangement since the Appellant has acquired an undertaking and not individual assets per-se Sr. No. Nature of Assets Depreciation (Rs.) Total Depreciation(Rs.) 1 Plant and Machinery 1,76,03,091 2 Building 6,12,797 3 Furniture, Fixtures and Equipments 2,09,144 4 Computers 9,96,222 5 Trade-marks, Patents and knowhow 21,89,34,572 Total (A) 23,83,55,826 6 Non compete 81,45,129 7 Goodwill 2,49,06,459 Total ( B) 3,30,51,588 Total (A+B) 27,14,07,414 Power of enhancement 2. Erred in enhancing the income of the Appellant by ₹ 23,83,55,826 by disallowing the depreciation on the assets (stated at serial number 1 to 5 above) acquired under slump sale arrangement without appreciating the fact that the depreciation on the said assets is not disputed by the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of land. Depreciation on Non compete 10. Without prejudice to Ground No.1 above, erred in upholding the disallowance of depreciation amounting to ₹ 81,45,129 on non-compete payment on the contention that non-compete payment is not in the nature of "any other business or commercial rights of similar nature" as stated in the definition of intangible assets under Section 32(1) (ii) of the Act. Depreciation on Goodwill 11. Without prejudice to Ground 1 above, erred in upholding the disallowance of depreciation on goodwill amounting to ₹ 2,49,06,459 on the contention that goodwill is not in the nature of "any other business or commercial rights of similar nature" as stated in the definition of intangible assets under Section 32(1) (ii) of the Act. Expenses pertaining to increase in share capital 12. Erred in upholding the disallowance of ₹ 603,900 being the expenditure, on filing fees and stamp duty paid to the Registrar of companies, claimed by the Appellant under section 35D of the Act. 13. Without prejudice to the above, erred in not allowing deduction under section 37(1) of the Act on expenditure on filing fees and stamp duty paid to the Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ening WDV was not considered by the Assessing Officer. 5. The CIT(A) after considering the reply of assessee noted that the assessee had purchased catalysts business from I.C.I. India Ltd. as going concern vide Business Transfer Agreement (hereinafter referred to as 'BTA') dated 02.12.2002, wherein the agreement did not specify any value for individual assets. Further, the agreement also does not mention about any payment made for acquisition of goodwill. The CIT(A) observed that when entire business was taken over by the assessee as going concern with all the assets and liabilities, there would remain no competition from the seller i.e. I.C.I. India Ltd. Thus, the payment of non-compete fees at ₹ 3.51 crores was nothing but part of composite price paid for acquisition of entire business of I.C.I. India Ltd. and the same needed to be clubbed with total slump price of ₹ 153.18 crores. It was further observed that without any explicit payment for goodwill as per BTA and payment towards non-compete fees, which had no business expediency, where the concern was acquired as a whole, clearly indicated the motive of assessee to evade tax, which was not permissible under law. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 17,18,28,318/- for assessment year 2005-06 were claimed as depreciation on know-how, trademark and patents and the claim was allowed by the Assessing Officer. The CIT(A) observed that know-how in question was not owned by the assessee in as much as the same was not purchased as per BTA between the assessee and I.C.I. India Ltd. Further, there was no material available on record to show that the said know-how had been used for the purpose of assessee's business. The CIT(A) also found that the actual cost of intangible assets was not correctly shown in as much as no value to the land at Panki and Taloja had been allocated out of purchase consideration paid as per BTA. Furthermore, allocation of 90% of total value of intangibles to know-how was done without any justifiable reasons. The CIT(A) thus, was of the view that depreciation on know-how was wrongly allowed and he intended to enhance the assessment of income for assessment years 2004-05 and 2005-06 and the assessee was asked to make submissions. 7. The assessee explained that for the year under appeal, the assessee had calculated depreciation on WDV as on 01.04.2003 in accordance with provisions of section 32(1)(ii) r.w.s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee accordingly, claimed depreciation in assessment year 2003-04 on the value of goodwill and non-compete fees @ 25% for both Syngas and PCEO Division, on the value as assigned by the Valuer to the said assets. The CIT(A) further noted that with regard to tangible assets of Syngas Division, which was valued at ₹ 17.08 crores, the amount was categorized as value of right to purchase Panki assets on nominal value and no depreciation was claimed. The claim of depreciation on non-compete fees and goodwill was rejected by the Assessing Officer and with regard to other assets including ₹ 94.34 crores being value assigned to trademark, patents and know-how, the depreciation was allowed by the Assessing Officer. For the year under appeal, sum of ₹ 21,93,02,947/- was allowed as depreciation on trademark, patents and know-how. The CIT(A) was of the view that depreciation under section 32 of the Act is to be allowed if the capital asset is owned by the assessee and further that the same has been used for the purpose of business of assessee. Only on satisfaction of two conditions, depreciation is to be allowed on the amount of actual cost of capital asset and at the rate speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph (a) above; loans to employees; stocks of consumables, stores and spare parts. 6.4.3 It is, thus further clear that all assets of Indian business were not sold by the ICI to the appellant. As per terms of the BTA all assets of Syngas division i.e. Panki such as all plant and machinery; land, contracts, employees including manufacturing activity were specifically excluded from sale and hence were not transferred. Moreover, there is nothing mentioned in the BTA even to suggest that "knowhow" of Syngas division (PANKI) was segregated from the category of 'Excluded Assets' as defined in the BTA and then that "knowhow" was separately sold by the ICI to the appellant. Therefore, it is evident from the terms of the BTA that Panki business along with all its assets and manufacturing activities was not purchased by the appellant. Interestingly, the appellant itself has relied upon the above referred clauses of the BTA in support of its claim that accordingly the Panki leasehold land was not transferred to it and hence, no valuation of the land was required to be done. Consequently the appellant cannot be said to have purchased know-how of Panki business without purchasing Panki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,09,40,489 (Bldg. ₹ 2,69,23,388/-, plant and machinery 13,88,60,034/-, Furniture & Fixture 31,66,867/-, Data processing equipment 1,99,220/-). The amount of ₹ 17,09,40,489/- has been shown by the appellant as the value of right to purchase Panki assets. Since these assets have been not yet been purchased, the appellant itself has not claimed depreciation on this amount of ₹ 17,09,40,489/- for the reason that these assets are not owned by it. The material available on record also reveals that the appellant has submitted time and again that the depreciation on the tangibles assets worth ₹ 17.09 Cr. of Syngas division (Panki) has not been claimed because such assets are not owned by the appellant. Tangible and intangible assets are integral and inseparable parts of any business, particularly when the business is purchased as a going concern like in the present case. When the appellant itself admits that tangible assets of Syngas division (Panki) have not been purchased and are not owned by it, then how it can be claimed that intangible assets of the same business being know-how, patents etc. have been purchased and are owned by the appellant, particularly when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CI India Ltd. and accordingly, no know-how, patents, trademark, etc. of ICI India Ltd. were used by the assessee for the purpose of its business, was the conclusion of the CIT(A). Reference was made to clauses 14 and 15 of the agreement titled as 'Technology License' and the CIT(A) noted that the products at Panki site were being manufactured by ICI India Ltd. for the assessee using technical information, know-how and brand name owned by the assessee and not by using the same purchased or acquired from ICI India Ltd. The explanation of assessee that know-how license to ICI India Ltd. as per the TCA was first purchased from ICI India Ltd. and then given back to ICI India Ltd. for the purpose of manufacturing of its products, was not accepted by the CIT(A). It was reiterated by the CIT(A) that the assets of Syngas Division, Panki were excluded from the purview of BTA and hence, were neither sold by ICI India Ltd. nor purchased by the assessee. Further, there was nothing mentioned in BTA to suggest that intangible assets were segregated and were not part of excluded assets as defined in BTA. Further, there was nothing to indicate that know-how, etc. was separately sold by ICI India Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angible assets were sold by the HLL to ICI in 2001, value of identifiable assets sold by HLL to ICI in 2001 could not have been more than ₹ 8 cr. Whereas the business was purchased by the ICI from HLL for ₹ 21 crores. It is thus clear that excess amount of ₹ 13 crores was paid by ICI to HLL over and above the value of tangible assets on account of value of lease rights of Taloja land. In lieu of consideration paid for land, name of ICI was included in the records of MIDC as sub-tenant of the land in Taloja as is evident from para (g) of Deed of Assignment dt. 09.01.2009. In the meanwhile, before lease rights of Taloja land could be assigned in favour of the ICI by the owner of the land MIDC, the business was sold by ICI to the appellant in December, 2002 and now the name of the appellant was included as sub-tenant of the land area of 23,956 sq. mtrs. covered by the catalyst business in Taloja. If no consideration had been received by HLL from ICI and by ICI from the assessee for land, the HLL and subsequently ICI, would not have agreed for inclusion of the name of the appellant as sub-tenant of land……Eventually rights of this land were assigned in fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as not tenable. He agreed that no doubt Panki land was excluded from sale as per the BTA, apparently, however, it was also a fact that purchase price of ₹ 153.18 crores paid by the assessee to ICI India Ltd., as per BTA includes the consideration for Panki assets including leasehold rights of Panki land. He was of the view that as per agreement, it was mentioned that right to purchase all Panki assets including Panki land by paying nominal price of ₹ 1 lakh only at a later date was not correct. He was of the view that purchase price of ₹ 153.18 crores paid by the assessee also included consideration for all the assets of Panki business including the rights in land, in lieu of which the assessee was given a right to purchase Panki assets by paying only ₹ 1 lakh. He further noted that tangible assets of Panki division such as building and plant & machinery and computers valued at ₹ 17.09 crores had been excluded from sale as per the BTA. However, out of purchase consideration of ₹ 153.18 crores, sum of ₹ 17.09 crores was allocated to the value of tangible assets of Panki business and shown in the accounts as value of right to acquire Panki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w was not justified. Referring to the Valuer's report in this regard, he noted that 90% of total value of intangibles was assigned by the Valuer to the know-how only on the suggestion of management, that know-how of the business acquired was very unique. He again referred to the assessee being global leader in the business of manufacture of various catalysts and reiterated that it was not purchased by the assessee from ICI India Ltd. because know-how of the business of ICI India Ltd. was not unique, but for the fact that ICI India Ltd. wanted to divest its global catalyst business and the assessee's principal company wanted to increase its market share. He further observed that there was nothing to show any know-how or patent acquired by the assessee was registered in the name of ICI India Ltd. and further, there was no non-compete agreement. Referring to global figures of acquisition of business and allocation to the assessee's business and CIT(A) compared the same and was of the view that allocation of sum of ₹ 93.32 crores i.e. 61% of total price out of purchase consideration to the know-how was extremely arbitrary and unjustified. He further observed that the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electric Co. Ltd. Vs. CIT reported in 194 ITR 294 (SC). The CIT(A) further relied on various other decisions including the decision of Apex Court in the case of Radhasoami Satsang reported in 193 ITR 321 (SC) and held that the figure of actual cost accepted in earlier year was not sacrosanct and could be modified in subsequent year if it was found that the same had been wrongly accepted in earlier years. He further held that since from the detailed discussion it was clear that the claim of depreciation on know-how, etc. in the present case, was not legally tenable and had been wrongly allowed by the Assessing Officer while completing assessment. The CIT(A) held to be a fit case for enhancement of assessment for correctly determining the actual cost for the purpose of depreciation. In view thereof, he held that depreciation claimed by the assessee on know-how, trademark and patents at ₹ 21.93 crores was not admissible and he enhanced the assessment by ₹ 21.93 crores and also initiated penalty proceedings. Thereafter, the CIT(A) dealt with another enhancement of assessment notice under section 251(2) of the Act dated 15.02.2012. The CIT(A) issued another notice under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that when the assessee could prove with documentary proof that slump price was determined on the basis of value of individual items of assets sold, then composite sale consideration could be bifurcated. He also made reference to the latest decision of Vodafone International Holdings B.V. Vs. Union of India & Anr. (2012) 66 DTR 265 (SC), wherein it was held that sale may take various forms, accordingly, tax consequence would vary. The CIT(A) thus, held that slump purchase price in the case of assessee paid for going concern consisting of various assets, liabilities, clientele, marketing network, market share, etc. could not be split for the purpose of claiming depreciation in the absence of any specific provisions in the Act and in view of various decisions. Reliance on AS-10 by the assessee was also held to be misplaced as the entire business which was over and above the fixed assets and also included other items i.e. employees, debtors, liabilities, benefits of certain business contracts, stock-in-trade, market network as had been mentioned in BTA. He further noted that it was clear from the terms of BTA that no specific cost was paid by the assessee for purchase of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The grounds of appeal thereafter i.e. grounds of appeal No.6 and 7 are on disallowance of depreciation on trademark, patents and know-how on the premise that the value of land at Panki division was ₹ 174.36 crores and the value of land at Taloji of ₹ 13 crores, for which ground of appeal No.8 has been separately raised. Further, vide ground of appeal No.9, the assessee is aggrieved by the orders of authorities below in ignoring the valuation of trademark, patents and know-how undertaken by the independent Valuer, which was adopted by the assessee. Vide ground of appeal No.10, without prejudice to ground of appeal No.1, the assessee has raised the issue of disallowance of depreciation amounting to ₹ 81,45,129/- on non-compete payment. Further, vide ground of appeal No.11, the assessee on without prejudice to ground of appeal No.1 has raised the issue of disallowance of depreciation on goodwill amounting to ₹ 2.49 crores. The assessee vide grounds of appeal No.12 and 13 has raised another issue of disallowance of ₹ 6,03,900/- being the expenditure incurred on filing fees and stamp duty paid to the Registrar of Companies. 19. The learned Authorized Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets and further, he disallowed depreciation on all the assets and also what was disallowed by the Assessing Officer. He pointed out that the issue which needs to be adjudicated in the present set of facts are as under:- i) Whether the CIT(A) had the jurisdiction to disallow depreciation on all assets, once they form part of block of assets and depreciation allowed in earlier years? ii) Whether on merits, the CIT(A) was justified to do enhancement, since the business purchased was going concern and the assessee not entitled to depreciation on individual assets? iii) Whether depreciation on technical know-how could be disallowed on the ground that the assessee has not acquired any know-how and the same has not been used by the assessee? iv) Whether if no know-how was acquired, then additional amount is whether goodwill and whether depreciation on goodwill was allowable? v) Whether the CIT(A) was justified in holding that the assessee has not allocated any value to land, hence method of allocation was wrong? vi) Whether the CIT(A) was correct in passing order of enhancement? 20. He further made reference to section 32(1)(ii) of the Act and pointed out that it talks of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rib) c) DE Nora India Ltd. Vs. CIT (2015) 57 taxmann.com 32 (Delhi) 23. The learned Authorized Representative for the assessee pointed out that the above said decisions have laid down the proposition that where lump sum payments have been received for all rights transferred including the assets transferred, then the consideration can be allocated amongst the said assets. Referring to the order of CIT(A), the learned Authorized Representative for the assessee pointed out that he had not allowed the claim of assessee in turn, relying on the decision in the case of sellers of business, where it was held not to allow the value over allocation of assets. He stressed that this may be true for the sellers' business, but in the case of purchasers, the accounting standards mandates that the amount is to be allocated as cost to assets acquired as part of slump sale. He further referred to AS-10 and filed copy which is available on record and referred to para 15.3 of the said accounting principle. He further stated that there was no bar in Income Tax to get depreciation on assets acquired under the slump sale. He referred to the ratio laid down in the Rangoon High Court in the case of CIT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive for the assessee then referred to page 215, part-II, which related to Taloja site, wherein it was clarified that the land at Taloja belonged to HLL, who in turn, had entered into leave and license agreement with ICI India Ltd. and that leave and license agreement was novated to the assessee. He concluded by saying that pursuant to this agreement, it is clear that ownership of both the lands in question did not pass on to the assessee. 25. The learned Authorized Representative for the assessee referred to the terms of Toll Agreement, copy of which is placed at 285 onwards of the Paper Book. After taking us through the background mentioned in the said Toll Agreement, he pointed out that under the said agreement technical information was transferred to the assessee by ICI India Ltd. but for Toll Agreement, it was transferred back to ICI India Ltd. He further referred to the payment clause, reference to technical license and termination clause. He also made reference to options available to the assessee, which were referred in agreement at pages 292 to 295 of the Paper Book. He further referred to the Schedule 8 next to the agreement, which talked about three options i.e. site opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reference to the Paper Book-2 at pages 178 and 184 in this regard. He also pointed out that for the transfer of technical know-how, various documents were available but the same were not produced for the reason of secrecy of business. He stressed that all the evidences were available with the assessee and the same were not produced. However, the assessee produced before us carton full of documents and pointed out that these were confidential reports of transfer of know-how. In this regard, application was filed by the assessee along with an affidavit. He stressed that in view of the evidences available, there was no justification in the order of CIT(A) in saying that no know-how was acquired. He also pointed out that certain documents were filed before the CIT(A). He never asked for more documents but went on to disallow depreciation. 27. In respect of land value at Taloja, referring to observations of CIT(A) in paras 6.7.4 to 6.7.6 and Paper Book-2 at page 382, it was pointed out that ICI India Ltd. had leave and license of HLL i.e. in respect of Taloja land. He further referred to novation in favour of assessee, which is placed at pages 393 and 394 of the Paper Book. It was ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dholding of ICI India Ltd. was 270.9667 acres, out of which ICI India Ltd. had sub-leased 27.528 acres and had retained 241.7726 acres. The learned Authorized Representative for the assessee in this regard pointed out that the CIT(A) said that ₹ 174 crores was for 279.30 acres i.e. total landholding. However, if the same rate is applied to 27.52 acres at best the value of land would be ₹ 17 crores approximately. He fairly admitted, that at highest, value of land could be taken at ₹ 17 crores and the balance value to be reduced i.e. Panki assets at ₹ 17 crores. 29. Coming to the next aspect of goodwill decided by the CIT(A), the learned Authorized Representative for the assessee pointed out that the assessee had allocated value both to goodwill and know-how. However, the CIT(A) vide para 6.9.1 observed that excess amount was goodwill. He referred to the valuation report placed at pages 233 onwards of the Paper Book and pointed out that there was bifurcation of net consideration. He also referred to the methodology adopted by the Valuer for each class of assets, which was placed at pages 262 and 265 of the Paper Book. He stressed that the Valuer had adopted s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the third was enhancement of income by the CIT(A), which, according to the learned Authorized Representative for the assessee, was new source of income. 33. The next issue was whether WDV was sacrosanct. In this regard, he placed reliance on the ratio laid down by the Hon'ble High Court of Kerala in B. Raveendran Pillai Vs. CIT (supra) and he stressed that the decision of the Delhi Bench of Tribunal in Osram India (P) Ltd. Vs. DCIT (2012) 20 taxmann.com 271 (Delhi) was not applicable. He was of the view that there could be circumstances, where WDV can be changed and in the present case, he noted that there was allocation, which was different from actual cost and therefore, section 43(6) of the Act had to be read in tandem i.e. harmonious construction should be given to the provisions of said section. Referring to the said section, it was pointed out that section refers to the cost of block of assets and then clause (b) of section 43(6) of the Act has relevance and the same could not be ignored and actual cost for entire block could be examined, in next year, if there were circumstances necessitating such change. With respect of reliance of the learned Authorized Representative fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that know-how was not ascertainable. Referring to the definition of slump sale in section 2(42C) of the Act, where the cost of assets were not known, then the steps to be taken. He also referred to the definition of excluded assets which does not include know-how. Referring to para 6.4.5 of CIT(A)'s order, the learned Authorized Representative for the assessee pointed out that business was taken over by the assessee and not the plant & machinery and plot of land at Panki; hence the know-how had to be taken, otherwise, how the business would go on. In para 6.4.7, the CIT(A) refers to the Toll Agreement and license to be given to ICI India Ltd. to manufacture on assessee's behalf. The assessee became the owner of know-how under the BTA and that is how it could give same to ICI India Ltd. under Toll Agreement. 36. The learned Authorized Representative for the assessee distinguished the reliance placed upon by the learned Departmental Representative for the Revenue. He further pointed out that for period of four years after perusing the details given by the assessee, the Assessing Officer was satisfied and no addition was made. In the fourth year, the Commissioner exercised jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emain no competition from the seller and hence, so-called payment of non-compete fees at ₹ 3.51 crores was nothing but part of composite price paid for acquisition of entire business of ICI India Ltd., which had to be clubbed with total slump sale price of ₹ 153.18 crores. The second observations of the CIT(A) was that there was no explicit payment for goodwill as per the BTA and/or the payment towards non-compete fees, hence the assessee was not eligible to claim depreciation on goodwill; since it was not specifically mentioned in the list of intangible assets under section 32(1)(ii) of the Act, which talked about know-how, patents, copyrights, trademarks, license, franchise, etc. Further goodwill was also not covered by the expression 'any other business or commercial rights' of similar nature. The CIT(A) thus, denied the depreciation on goodwill and non-compete fees. Further, during the appellate proceedings, the CIT(A) issued enhancement notice to the assessee under section 251 of the Act vis-à-vis claim of depreciation on know-how, trademark and patents, which was allowed by the Assessing Officer. The objection of CIT(A) was that two-fold that it was neither ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no segregation of assets both tangible and intangible in the same. His main plank of decision was the value of assets i.e. lands at Panki and Taloja. After deliberations, he was of the view that the purchase price of ₹ 153.18 crores paid by the assessee included consideration paid for the rights in land and hence, after working out the market value of identifiable tangible assets, he was of the view that where the market value of said tangible assets worked out to ₹ 231.85 crores as against slump price of ₹ 153.18 crores, then no balance amount was left to be allocated to intangible assets. He was of the view that the assessee had not acquired any intangible assets in consolidated slump price of ₹ 153.18 crores. Accordingly, he did not accept the working of asset vis-à-vis value allocated to intangible assets including know-how, patents, trademarks, etc. and rejecting the report of the Valuer who was assigned this job of bifurcating value of tangible and intangible assets, the CIT(A) held that the assessee was not eligible for any depreciation on know-how, trademarks and patents. Accordingly, he made enhancement of ₹ 21.93 crores. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and know-how and goodwill; f) Basis for exercise of power of enhancement by the CIT(A); g) Disallowance of depreciation once the assets had entered into block of assets, in view of section 43(6) of the Act; h) Corporate issue of expenses pertaining to increase in share capital. 39. In order to adjudicate the issues raised in the present appeal, first reference is to be made to sequence of events relating to transaction of acquisition of Synetix division of ICI India Ltd. by Johnson Matheys Pvt. Ltd. The BTA between the two parties i.e. ICI India Ltd. and Johnson Matheys PLC is dated 02.10.2002 and placed at pages 127 to 288 of the Paper Book, Vol-II for assessment year 2003-04. Under the agreement, ICI India Ltd. had agreed to sell and transfer certain assets comprising of Indian business as going concern and the purchaser had agreed to purchase the same and had also assumed the liabilities and other obligations of Indian business. Various terms were defined and agreed upon, under which business was defined to mean the business carried on by ICI India Ltd. under the name of Synetix and/or Tracerco. The term 'business goodwill' was defined as all the goodwill of ICI Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volved in the manufacture of products (as defined in TCA) pursuant to the TCA. 'Panki assets' meant the following assets of ICI India Ltd.:- (a) all plant, machinery, equipment, computer and communications hardware, loose tools, fixtures, fittings, furniture and vehicles located at the Panki Site; (b) the leasehold and licensed properties comprising the Panki Site, together with all buildings thereon; (c) the Retained Permits; (d) the Contracts in respect of the Panki Site relating to the supply of utilities, the supply of consumables (including stores and spare parts) and the maintenance of the items referred to in paragraph (a) above; (e) loans to employees; (f) stocks of consumables, stores and spare parts. 42. 'Panki site' meant all the land owned by ICI India Ltd. using the catalysts manufacturing facility at Panki Works, Udyog Nagar, Pank Industrial Area, Kanpur, U.P. The term 'Technical Information' was also defined to mean all technical data, know-how, methodologies, techniques, trade secrets, confidential information, drawings (including design and engineering drawings and plans), formulations, samples and composition of raw materials, of intermediaries and / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Panki activities until completion and the trading payment. The balance terms and conditions are not relevant for deciding the issue before us. However, clauses 18.5 to 18.7 i.e. relating to allocation of technical information and its transfer needs reference to adjudicate the issues, whether the assessee had received any technical information. The relevant paras read as under:- "18.5 Allocation of Technical Information (a) ICI India and the Purchaser shall : (i) Within one month following completion, ensure that their respective representatives (who shall each be suitably qualified, in the sense of having knowledge of the relevant technologies) enter into discussions in good faith with a view to completing the task of allocating all records ( in whatever from or medium, including paper, electronically stored data, magnetic media, film and microfilm) containing Technical Information owned by, or in the possession or control of , ICI India, into the categories set out in Clause 18.5(b) (Allocation of Technical Information) below ; and (ii) Use their respective best endeavours to ensure that the task of allocating records is completed by their respective representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall provide it with a complete and accurate copy of each record ( or all relevant parts of the record) containing Available Technical Information at the Purchaser's reasonable cost. The Purchaser's rights to use this will then be as set out in the IP Agreement in relation to the "Shared Unregistered IP"). (c) Where ICI India is obliged under this Clause 18.5 (Allocation of Technical Information) to provide the original or a copy of any record or part of any record to the Purchaser, it shall provide the same to the Purchaser, or to any member of the Purchaser's Group, as directed by the Purchaser, within 15 Business Days of the parties' agreement upon the allocation of that record into a category set out in Clause 18.5(b). 18.6 Uncategorised Technical Information Where, at any time and from time to time during the period expiring 12 months after Completion, the Purchaser notifies ICI India in writing that the parties neither addressed nor agreed upon under Clause 18.5 (Allocation of Technical Information) a particular record containing Technical Information which the Purchaser reasonably considers constitutes Business Technical Information or Shared Technical Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haser that, from the warranty date until the transfer time, it has and will continue to carry on the Indian business and the Panki activities in the same manner that Indian business has been carried on prior to the warranty date. Various other terms were agreed upon between ICI India Ltd. and the purchaser i.e. Johnson Matheys PLC for various acts to be undertaken in relation to the Indian business and Panki activities or any part thereof. It was also agreed that risk in Indian business shall pass to the purchaser with effect from completion. As per Schedule 2, the completion condition was the occurrence of ROW completion and ICI India Ltd. shareholders' approval of the transactions contemplated by transaction documents. On such completion i.e. on ROW completion date, the net asset statements, it was agreed to be prepared by the purchaser as soon as practicable following the completion of the said formality as set out in part 2. The said basis of preparation of net assets statement is enlisted under Schedule III to the agreement. The general conditions of business property are provided under part I of property matter and under part 2, special conditions are provided. 46. Clause 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with relevant specifications. Further, ICI India Ltd. shall not use plant and equipment for any purpose other than manufacturing and supplying the products for and to JM India and further, it was also agreed that ICI India Ltd. shall not use technical information, assessees' branding or any other intellectual property licensed to it under the agreement for any purpose other than manufacturing the products for assessee. As per clause 3.2, it was agreed upon that ICI India Ltd. shall manufacture the products using technical information licensed to it pursuant to clause 4.2. As per clause 5, enlisting the obligations of assessee in addition to other obligations to be fulfilled, it was agreed that the assessee would provide ICI India Ltd. with proper and precise specifications, operating process and instructions required by ICI India Ltd. to manufacture the products. The payment was to be made at the end of calendar month, wherein ICI India Ltd. had calculated operating cost incurred, analysed by category of cost and on itemized basis as per clause 11.1. Under clause 14, the assessee grants to ICI India Ltd. non-exclusively, non-transferable royalty free license to use technical inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in paras hereinabove, Indian business was defined and understood between the parties, was catalyst business carried on by ICI India Ltd. under the name and style Synetix. The same included business plant & machinery, business properties, employees, debtors, all the rights and liabilities of ICI India Ltd. in or to the business IP, the business goodwill and primary and secondary books and records. However, the term 'Indian business' did not talk about Panki activities and also excluding the 'Excluded assets'. We have already referred to the list of 'Excluded assets', which clearly excludes among others Panki sites, employees and Panki assets along with excluded IP. All these excluded assets are enlisted in Part I of Schedule 10 to the BTA. The Panki activities were the manufacture of items of products which were covered as per Toll Conversion Agreement i.e. in respect of manufacturing activities carried on at Panki site. Another important term which needs to be taken note of is that Panki assets which clearly have not been taken over and it is part of excluded assets i.e. assets which were not been taken over and the terms of BTA talks of leasehold and licensed properti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion was required before the land could be transferred. Hence, the conclusion of CIT(A) in this regard that the land at Panki was transferred and its value as per valuation done by KDA works out to ₹ 174.36 crores is without any basis. In the absence of any land at Panki being transferred under the BTA, there is no merit in findings of CIT(A) in this regard. 49. Now, coming to the second piece of land on which catalyst business of ICI India Ltd. was being carried on i.e. at Taloja. As per understanding between the parties with special reference to Schedule 4, which defined the business property in Part II, clause 12, it is provided that at completion, ICI India Ltd. and the purchaser i.e. assessee shall enter into Leave and License Novation Agreement in accordance with their respective obligations pursuant to Schedule 5. In part III, while enlisting the business properties in respect of said property at Taloja, the tenure is mentioned to be license - ICI India Ltd. In other words, the business at Taloja site was run by ICI India Ltd. on land which was leased from HLL, ICI India Ltd. was not the owner of said piece of land and hence, was not in position to pass on the owners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be attributed to the cost of said land. 52. Before parting, we may also refer to Deed of Novation dated 15.11.2002, which is executed between ICI India Ltd. and Johnson Matheys PLC and the assessee before us, under which it is very clearly provided that by the Business Transfer Agreement dated 02.10.2002, ICI India Ltd. had agreed with the purchaser i.e. Johnson Matheys PLC to sell and transfer its catalyst business as going concern on the terms and conditions contained therein. By Sale and Purchase Agreement (MSPA) (Global Agreement) dated 23.09.2002, ICI India Ltd. had agreed that purchaser to sell or transfer certain assets comprising its Synetix business to the purchaser. Pursuant to clause 2.6 of BTA, purchaser had procured the incorporation of Indian purchaser as a company in India i.e. the assessee and obtained requisite approvals to enable the assessee to assume the business together with all benefits, rights, obligations, duties and consequences arising under the BTA. Consequently, Johnson Matheys PLC by virtue of said Deed, sought to novate all the benefits, rights, obligations, duties and consequences under BTA to the Indian purchaser i.e. assessee, subject to the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was required from KDA before it could be so transferred and in the absence of the same, nothing was transferred to assessee. Another aspect of non-transfer of site and plant & machinery is the Toll Agreement, which was entered into between the parties. ICI India Ltd. in the first instance, transferred all the rights to carry on the business including Business IP, trademarks, rights and intellectuals as is clear from the terms of said Toll Agreement entered into between ICI India Ltd. and assessee. Till the receipt of permission from requisite authority for transfer of land, though the catalyst business has been transferred by ICI India Ltd. but it undertook to carry on said business for and on behalf of assessee. The Panki assets and Panki activities were to be carried on by ICI India Ltd. using trademarks and intellectual property rights, which it had originally assigned to the assessee, who in turn, as per the terms of Toll Agreement allowed ICI India Ltd. to use the same. In case we read the terms of BTA and the Toll Agreement, then it becomes very clear that as per BTA, the assessee had acquired the aforesaid rights including intellectual rights in the catalyst business carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence of documents in connection with acquisition of technical know-how by the assessee which are placed at pages 1 to 21 of the Paper Book. The assessee has also furnished Novation of Agency Agreement, Customer Contracts and Distribution of Customer list which are placed at pages 22 to 42 of the Paper Book. We have already considered the claim of assessee in this regard and in view of additional evidence which is in continuation with terms of BTA entered into, we find merit in the plea of assessee and hold that the assessee has acquired the said know-how, trademarks and patents from ICI India Ltd. 55. The learned Departmental Representative for the Revenue again and again stressed that Business IP was not transferred as per BTA. He tried to place reliance on different agreements by way of additional evidence. However, while in the final arguments, he stated that the said additional evidence may not be admitted. 56. The learned Authorized Representative for the assessee on the other hand, admitted that the Business IP of international business of ICI India Ltd. was not acquired by the assessee and it was only the Business IP of Indian business, ICI India Ltd., which was first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal is based on no material or is totally perverse and irrational. Such is not the case in the present appeal." 58. Similar proposition has been laid down by the Pune Bench of Tribunal in Drilbits International (P) Ltd. Vs. DCIT (2011) 142 TTJ 0086 (Pune-Trib). 59. The Hon'ble High Court of Delhi in DE Nora India Ltd. Vs. CIT (2015) 370 ITR 391 (Del) on similar facts as in the case of assessee, where the assets and liabilities and obligations were taken from as going concern with no value specified in the agreement for the assets i.e. tangible and intangible assets after considering reliance placed on the judgment of the Hon'ble Supreme Court in Challapalli Sugars Ltd. Vs. CIT (1975) 98 ITR 167 (SC) held as under:- "12. It is evident that what was purchased by the appellant-assessee was an undertaking there being slump sale and the entire business including assets and liabilities were transferred for a lump sum amount. There was no break-up or division of the said amount in the agreement itself. The amount paid would be the sale consideration paid after taking into account the value of the plant, machinery, dead stock as well as work-in-progress, stock-in-trade, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be claimed and allowed, i.e., the actual cost paid by the assessee for the depreciable assets acquired from Wimco Ltd. For computing the value of the said assets, the appellant-assessee and Wimco Ltd. had both relied upon the surveyor's report dated January 16, 1990, and March 6, 1990. The said surveyor had valued all buildings, boundary wall and other plant and equipment. The aforesaid valuation report is detailed and elaborates and is also the basis on which Wimco Ltd. had paid tax on the resultant transfer." 60. The Hon'ble High Court thus, held that in the case of slump sale wherein both the parties had relied on Surveyor's report in determining the consideration paid in lump sum, then depreciation was to be allowed on cost of fixed assets as per Surveyor's report. 61. Further, the Hon'ble High Court of Delhi in Triune Energy Services (P.) Ltd. Vs. DCIT (supra) while considering the case of slump sale referred to the AS-10 and upheld the bifurcation of value of slump price over cost of tangibles and intangibles. The relevant findings are as under:- "15. From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets of company - YSN shares and Securities (P.) Ltd. were transferred to Smifs Securities Ltd. under a scheme of amalgamation. And, the excess consideration paid by the Assessee therein over the value of net assets of YSN Shares and Securities (P.) Ltd. acquired by the Assessee, was accounted as goodwill. 19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill. 20. In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd Sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer, which has not been disturbed in the preceding year. However, the depreciation claimed on goodwill was not allowed to the assessee, which was allowed by the Tribunal in turn, following the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). 64. The learned Departmental Representative for the Revenue placed heavy reliance on the ratio laid down by the Delhi Bench of Tribunal in Osram India (P) Ltd. Vs. DCIT (supra), wherein the issue decided was on depreciation on goodwill. The Tribunal held that the said depreciation would not be allowed unless and until it is shown that the value of such goodwill is in fact value of intangible assets such as know-how, patents, copyrights, trademarks or any other business or commercial rights of similar nature being intangible assets. However, the said proposition now stands reversed by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). The second aspect of the said decision was that wherein it has been held that the view taken by the Assessing Officer i.e. allowing depreciation on the whole amount of goodwill without any bifurcation if it was in accordance with law could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same, we find no merit in the plea of learned Departmental Representative for the Revenue. Further, the learned Authorized Representative for the assessee has also objected to its admission. However, we are rejecting the same. In any case, the treatment of receipt in the books of account of seller would not decide the issue vis-à-vis the treatment of said assets in the hands of assessee. 69. Before parting, we may also point out that as per the Toll Conversion Agreement, the value of Panki assets was taken at ₹ 1 lakh. However, the CIT(A) had worked out the cost of 279.30 acres i.e. total landholding of ICI India Ltd. at ₹ 174 crores; in case the same rate is applied to 27.52 acres, which was the portion of land on which catalyst business was carried on, then the same would work to ₹ 17.37 crores. The learned Authorized Representative for the assessee fairly admitted that the value of ₹ 17.37 crores be attributed to Panki assets. However, revised allocation value of land at Panki would be ₹ 13 crores, out of total slump price of ₹ 153 crores. Accordingly, we direct the Assessing Officer to re-compute the value of both tangible and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He thus, emphasized that when an error had been made by Assessing Officer while working the value of assets under clause (b), then the same can be looked into afresh while deciding the case of allowability of depreciation in succeeding year. We find no merit in the stand of Revenue since after insertion by the Taxation Law (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 01.04.1988, the concept of 'block of assets' had been brought on Statute. The said section very clearly provides that aggregate of WDV of all assets falling within the 'block of assets' at the beginning of previous year and adjusted, could be increased by the cost of any asset acquired during the previous year and could be reduced by the money payable in respect of any asset, which is falling under 'block of assets', which has been sold or discarded, and on the balance, the assessee is entitled to claim depreciation. In view of the amendment to the Act and in view of the concept of 'block of assets' what has to be seen is the aggregate WDV of assets which are falling within the same block at the beginning of previous year, that is the first step. Thereafter, in case any new asset is acquired, then the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot carry the case of the revenue in this matter any further. What comes within the purview of Section 32(1)(ii) of the Income Tax Act, 1961 and whether the department was right when it allowed the depreciation on the basis or foundation for the earlier assessment years need not be gone into in this Appeal. Question as posed and termed as substantial question of law can be determined and decided in an appropriate case. Leaving open all contentions in that behalf, we dismiss this appeal." 72. Further, the Hon'ble Bombay High Court in the case of CIT Vs. G.R. Shipping Ltd. in Income Tax Appeal No.598 of 2009, vide judgment dated 28.07.2009 had dismissed the appeal of Revenue on the question of depreciation to be allowed under section 32 of the Act. The Tribunal while deciding the said issue in ITA No.822/Mum/2005, relating to assessment year 2001-02, vide order dated 17.07.2008 had placed reliance on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. G.N. Agrawal (1996) 217 ITR 250 (Bom) for the proposition that after the amended scheme of depreciation of 'block of assets', the individual assets lose its identity and the depreciation should be allowed in respect of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
