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TMI Blog2017 (1) TMI 1692X X X X Extracts X X X X X X X X Extracts X X X X ..... fective ground of appeal is about rejecting the claim of depreciation of Rs. 16.37 crores in respect of intangibles. During the assessment proceedings, the Assessing Officer (AO) found that in the year under consideration the assessee had purchased A& R business of the sister concern namely, Merck Ltd. (ML), for a total consideration of Rs. 81.67 crores, that it had merged the current assets and liabilities of the erstwhile business with its accounts and had shown an addition to the block of intangible assets amounting to Rs. 65.50 crores, that it had also shown addition of Rs. 3.18 crores with regard to other fixed assets, that depreciation at the rate of 25 per cent. was claimed on intangibles, that depreciation on the other fixed assets was claimed as per the respective applicable rates. He took into consideration the schedule of fixed assets of the transferor company. He directed the assessee to submit the details of assets and liabilities acquired by it on purchase of the business from its sister concern along with the copy of business purchase agreement. After considering the same, he observed that the agreement showed that the assessee had merely acquired certain assets, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn to evade tax by claiming exemption in the hands of the transferor company and claim depreciation on the fictitious assets in the hands of the assessee, that both the companies were subsidiaries of the same parent company, that the transaction was not at the arm's length and was manufactured by two concerns related to each other to benefit both of them, that there was no rationale behind capitalisation of the excess consideration paid by the assessee for the intangibles over and above the value as per the valuation report stating it to be goodwill, that the assessee had not termed the transaction as slump sale for the goodwill to arise and to be considered, that it was a simple case of purchase of certain asset at an amount higher than the value of the assets, that the entire consideration should have been capitalised as the respective assets which were purportedly acquired, that the cases relied upon by the assessee had different facts and were not applicable, that no assets were actually transferred to the assessee. Finally, depreciation claimed by the assessee, amounting to Rs. 16.37 crores was disallowed. 2.1. Aggrieved by the order of the Assessing Officer, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch assets was allowable on payment made to acquire the same, that ordinarily an assessee was entitled to claim depreciation on the actual cost of the assets acquired by it, that the law permitted the Assessing Officer under the provisions of Explanation 3 to section 43(1) to substitute for the actual cost claimed by the assessee to the cost as may be worked out by him, that in the agreement signed between the assessee and its sister concern regarding the sale of A & R business intangible assets find no mention, that if the assessee had acquired the intangible assets along with the tangible assets of the transferee company the claim of depreciation had to be allowed, that intangible assets had not been made part of the deal for purchase, that under section 32 depreciation allowances would be allowed in respect of specified assets, that if the assessee was not suffering any depreciation by way of decreasing the value of the property through wear and tear it could not claim the same, that mere existence of a capital asset was not sufficient to claim depreciation, that the intangible assets claimed to have been purchased/taken over by the assessee had no existence in the fixed schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill stood transferred from the sister concern to the assessee for a price, that the assessee had claimed that it had paid excess amount in respect of the intangible assets purchased and had tried to justify the same by stating that the amount represented the goodwill, that the very basis of valuation of the said goodwill had not been submitted and explained, that it was not able to explain as to how the goodwill so purchased by it had helped its business, that the allowability of depreciation to intangibles would also apply to the question of claim of depreciation made on goodwill, that the assessee was not entitled for depreciation on goodwill. 2.2. During the course of hearing before us, the authorised representative (AR) contended that the assessee had paid Rs. 81.66 crores to its sister concern, that the treatment given by the sister concern in its books of account could not be basis for rejecting the claim made by the assessee, that it had valued the assets purchased from ML, that the valuation report was filed before the Assessing Officer, that Rs. 15 crores were treated as goodwill, that in the case of the transferor the income was assessed as business income, that the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the block of intangible assets amounting to Rs. 65.50 crores, that it had also shown addition of Rs. 3.18 crores with regard to other fixed assets, that it had obtained a valuation report of the intangibles, that as per the valuation report value of the intangibles was Rs. 50 crores (app.), that it assigned Rs. 15 crores to goodwill, that depreciation at the rate of 25 per cent. was claimed on intangibles, that the Assessing Officer rejected the claim made by it under the head depreciation, that he invoked the provisions of section 43(6) of the Act that the first appellate authority upheld the order of the Assessing Officer. We further find that issue of assigning value to intangibles had arisen the case of the Merck Limited v. Asst. CIT also, though the issue was about the head under which the amount received from the assessee by the sister concern, was to be taxed. The matter had travelled up to the Tribunal and it decided the issue on August 2, 2013 (I. T. A. No. 8120/Mum/2011, the assessment year 2007-08). We would like to refer the relevant portion of the said order and it reads as under : Ground No. 1.4 of the appeal taken by the assessee reads as under : "1.4. Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale agreement dated April 17, 2006, there is no reference of the valuation report on the basis of which the assessee has stated to have transferred intangibles assets to MSPL for Rs. 65,50,00,000. He submitted that there is no document placed on record that the asses see has transferred any technical know-how. . . . 20. We have carefully considered the orders of the Assessing Officer/Dispute Resolution Panel along with the submissions of the learned representatives of the parties. We have also carefully considered the relevant articles of the agreement for sale entered into between the assessee and MSPL and also decisions cited before us (supra). It is a fact that the assessee as well as the purchaser of A&R business viz. MSPL, both are sister concerns and their parent company is M/s. Merck KGaA, Germany. We also observed that the trade mark 'MERCK' belongs to German parent company and assessee has been admittedly paying royalty to the parent company with regard to it. Therefore, the said 'trade mark', for which the assessee has valued Rs. 24.77 crores actually belongs to German parent company and not to the assessee. Further, we also observe that if 'MER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... light of the explanation, we are of the considered view that the condition as provided in the case of 'slump sale' for considering the consideration received on sale of an assets is not satisfied to consider it as a capital gain under section 50B of the Act. Further, we also find merits in the contention of the learned Departmental representative that no basis of breakup of the capital asset has been stated in the agreement and/or in the valuation report on which the assessee has placed reliance before us. Besides, we also observe that article 9.2 of the sale agreement provides that the assessee undertakes for a period of 7 years after the execution of this agreement not to engage in/or carry out any business anywhere, which would compete with A&R business except to the extent permitted under this agreement. On consideration of article 9.2 of the sale agreement, it shows that the assessee has entered into a non-compete covenant with the transferee. . . . Considering the facts, however, we do agree with the learned authorised representative that section 28(iv) is applicable where benefit/perquisites are received in kind and is not applicable where money is involved. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. He is directed to decide the issue afresh after affording a reasonable opportunity of hearing to the assessee. The first ground of appeal is decided in favour of the assessee, in part. 3. The second ground deals with disallowing an amount of Rs. 77.47 lakhs under section 145A of the Act. During the assessment proceedings, the Assessing Officer found that the assessee was following an exclusive method of accounting with regard to relation of stock, that it was not including cenvat credit. He held that the assessee had violated the provisions of section 145A of the Act. Accordingly, he computed the value of stock of the assessee. He also relied upon the judgment of the honourable Bombay High Court delivered in the case of CIT v. Mahalaxmi Glass Works Private Ltd. [2009] 318 ITR 116 (Bom). He added some of Rs. 77,47,950 to the total income of the assessee, after giving credit to the opening balance of the cenvat credit available. 3.1. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the first appellate authority. After considering the available material, he held that the action of the Assessing Officer had to be confirmed, that as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, that the assessee itself had argued that disallowance should be restricted to proportionate salary of one of the employees amounting to Rs. 1.20 lakhs, that the Assessing Officer had worked out the disallowance strictly as per the provisions of rule 8D. Finally, he upheld the order of the Assessing Officer. 5.2. The learned authorised representative argued that the assessee had not incurred any expenditure against the exempt income, that even then it had offered proportionate disallowance with regard to salary of one of the employees. The Departmental representative supported the order of the first appellate authority. 5.3. We find that the Assessing Officer had applied the provisions of rule 8D of the Rules. In our opinion he was not justified to invoke the said section. The assessee had not claimed any expenditure in relation to the exempt income and therefore no disallowance should have been made. Considering the offer made by the assessee, we hold that, to meet the ends of justice, disallowance should be restricted to Rs. 25,000. First ground of appeal (GOA) is partly allowed. 6. The next ground deals with the disallowance of depreciation of Rs. 12.15 crores in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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