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TMI Blog2021 (3) TMI 919X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as license. or business or commercial, right of similar nature and relied on the decision of the Hon ble Bombay High Court in the case of CIT Vs. Techno Shares Stocks Ltd [ 2009 (9) TMI 18 - BOMBAY HIGH COURT ] The Hon ble Tribunal following the decision of the Hon ble Delhi High Court in the case of Areva T D India Ltd. Others [ 2012 (4) TMI 79 - DELHI HIGH COURT ] and the Apex Court decision in the case of Smifs Securities Ltd [ 2012 (8) TMI 713 - SUPREME COURT ] held that the client acquisition cost would fall within the category of business or commercial rights referred in clause (ii) of Sec. 32 (1) and would be eligible for depreciation. Depreciation could not be denied to the Taxpayer merely for the reason that the assets were classified as goodwill in the books of account without appreciating the true nature of the assets if they can fall under the scope of any other business or commercial rights of similar nature . We are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of business or commercial rights of similar nature specified in section 32(1)(ii) of the Act and were accordingly eligible for depreciation under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 .43 crores has already been discharged as tax liability for AY 2015 - 16 by transferor company, which fact has not also been disputed by either of lower authorities. 6. That on facts and in circumstances of the case and in law, Ld. CIT(A) and Ld. AO has erred in not following decisions of Hon ble Courts and granting relief as prayed. 7. The Ld. AO has erred on facts and in law in proposing to levy interest under section 234 A, 234B and234C of the Act. 8. The Ld. AO has erred, in facts and in law, by initiating penalty proceedings under section 271(1)(c) of the Act. Antecedents of the assessee: 3. The assessee company, JX Nippon Two Lubricants India Private Limited (JX Nippon) was incorporated in India as a 50:50 joint venture between Tide Water Oil Company (India) Limited (TWO) and JX Nippon Oil and Energy Corporation, Japan (JXNOE) in order to transfer the Eneos Business segment (EBS) which includes business undertaking relating to Factory Fill (FF) oils business and Service Fill (SF) Oils) from TWO to JX Nippon. The company is engaged in the business of marketing, distributing, selling, manufacturing (including through toll manufacturing of lubricating oil. 4. The assessee duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F oils Business at the total consideration for the amount of ₹ 108 crore. c. The agreement further stated that the assessee shall enter into the technical assistance agreement with JX NOE pursuant to which the JX NOE shall grant to the transferee a royalty bearing the right and license to use JX NOE technology, knowhow and trademarks to manufacturing) including though toll manufacturing by the transferor). Market, distribution and/or sell the licensed products with a right to sub license the use of technical information, knowhow and trademarks to the transferor and the other authorized sub licenses approved by JX NOLI (Reliance is placed on Para 2 .4 (b) of the business transfer agreement). d. Vide Para 2 .4(h) of the. Business transfer agreement, it is inferred that the transferor and transferee enter into the franchisee agreement for reorganization and conduct of the SF oils business pursuant to which the transferee shall appoint the transferor as its industrial franchisee of the SF oils Business and. grant to the transferor a franchisee fee bearing right and sub license to use JX NOE technology and knowhow (and trademark for the SF oils branded with JX NOE trademarks) to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain the non-exclusive sublicense grants clause under which the assessee company grants transferor company a non-exclusive and non- transferable license to service the customers in relation to the SF oils business in the territory. 13. The Assessing Officer referred to the business transfer agreement and the franchisee agreement and drew the following conclusions: a. The assessee company, being Joint venture, was incorporated as on 08/08/2014. The incorporation of the assessee was made with the prior arrangement which was being executed between M/s Two Water oil company (India) Limited (herein after TWO) and JX Nippon oil energy corporation Japan (herein after JXNOE). b. The assessee was incorporated with the intent that there is 50:50 percent interest in the joint venture as executed between TWO and JX NOE. The assessee company at the time of incorporation subscribed with the ₹ 10000/- share capital which is 5000 share to each party at the face value of ₹ 10 /- each. c. Further, the facts from the perusal of the financial statement revealed that the both TWO and JX NOE contribute the following amount which is as follows: S.no Name No of shares Facevalue Security Premium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report filed by the assessee and pointed out that there was no reference with regard to the determination intangible asset in the valuation report. There was no material to support any valuation of intangibles acquired by the assessee. The Assessing Officer referred to the decision of the Co-ordinate Bench of the Tribunal in the case of Chowgule Co. Pvt. Ltd. Vs Asstt. CIT, Margao (2011) 10 taxman.com 224 (Panaji) and observed that the Tribunal had held that goodwill was not eligible for depreciation in that case. 15. After considering all the facts of the case, the Assessing Officer held as under: The assessee grossly failed to provide the any cogent and reliable material on the basis of which, the claim of depreciation was allowed to it. The agreement when read into contextual manner then it leads to only one irretrievable conclusion that the whole exercise was carried out by the assessee, JX NOE and TWO to provide the franchisee to the assessee and create the huge amount of goodwill in the books of the assessee on which the depreciation could be claim whereby income of the concerned assessment year or thereafter would get reduce by virtue of such goodwill As I have already been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k installed at Honda car premises. As a part of BTA, TWO and the Assessee entered into a Franchise Agreement whereby TWO has agreed to be appointed as industrial franchisee of the Assessee in respect of the SF Oils Business. Thus, TWO will be manufacturing SF Oils and provide warehouse logistics, sales, invoicing, accounting collection for the SF Oils business. TWO shall also distribute and sell such SF Oils using its sales and distribution network and sales and distribution network of OEMs. Assessee would undertake the marketing activities relating to SF oils and provide TWO with certain strategic support and services in relation to undertaking of the SFs Oils Business. 18. Before us during the argument, the ld. AR reiterated the submission filed before the ld. CIT (A). 1) the Assessee is engaged in the business of marketing, distributing, selling, manufacturing through granting sub licenses or toll manufacturing of factory fill and service fill lubricating oils for automobiles, motorcycles and construction machinery and industrial equipment to be fed into the original machinery or equipment (OEMs) at customer s factories or distributed into the retail market through distributors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited Hero Moto Corp Limited Honda Siel Power Products Limited India Yamaha Motor Private Limited Honda Siel Cars India Limited Kobelco Construction Equipment India Private Limited Kobelco Cranes India Private Limited Honda Motor India Private Limited Kubota Agricultural Machinery India Private Limited Isuzu Motors India Private Limited Nissan Motor India Private Limited Toyota Kirloskar Motor Private Limited Mitsubishi Motor Corporation SML Isuzu Limited Hyundai Motor India Limited Hyundai Construction Equipment India Private Limited Maruti Suzuki India Limited Tata Hitachi Construction Machinery Company Limited George Maijo Industries Private Limited (Yamalube products) 20. excerpts of Business Transfer Agreement (BTA) - In view of expanding lubricant market in India and increase of Japanese automobile manufacturers in India, JXNOE established a joint venture alongwith TWO to transfer the business segment related to Eneos range of products i. e. the OEM business segment, Considering the same, the assessee company was incorporated and OEM business segment namely Eneos business segment was acquired by the assessee company from TWO for a consideration of ₹ 108 crores vide Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing and distribution plans prepared by the Assessee in consultation with TWO, Assessee shall assume the risk of the SF Oil business including the risk of any unsold inventory manufactured by TWO in accordance with Franchise Agreement. 21. With regard to the Business Valuation, it was submitted that the value based on detailed business valuation carried out by a reputed firm of Chartered Accountants. 22. Owing to Business Transfer Agreement all existing customer relationships with OEMs with regard to Eneos Business segment (SF FF) were transferred to the Assessee. 23. It was argued that the business valuation was carried out on the basis of Income Approach i.e. Discounted Cash Flow (DCF) Method, taking into consideration the future revenues expected to be generated out of the said business segment from the customers of TWO who will become customers of JV i.e. the appellant. 24. It was argued that the profit estimated at the time of valuation, has been actually achieved by the assessed which shows the accuracy of estimation and valuation. It was argued that the assessed has also acquired Intangible Assets by way of Business Transfer Agreement such as transfer of existing OEM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss India. The brand was established in 2001 and owned by JX and OE which are sold by the company TWO to OEMs. The growth rate of the Eneos Segment has been 32 to 44% from the financial years 2010 to 2012 with compound growth rate of 37%. The market share of factory fields increased from 28 to 39% historically, pre- agreement. The operative margins ranging from 8.7 to 11% over a period 3 years after considering various approaches namely income approach, market multiple approach, net asset value approach. The assessee accepted the income approach otherwise called as discounted cash flow method for valuation of the EBS. Based on that the specified business, financial performance has been projected at with EBITDA margin varying from 6.6 to 7.1 %. Based on the forecast, the operating income, post tax was estimated at ₹ 98 to 184 millions per year over a period of 5 years. According to market multiple approach, the value range was determined at ₹ 987 to 1062 millions. The valuation report has also taken into consideration, the guidelines companies such as Gulf Oil Corporation Ltd. and Castrol India Ltd. 31. The taxable income of the TWO was ₹ 214 Crores for the A.Y. 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies that a company is earning additional income due to the presence of its goodwill. 3. The overall value further increases when expectations for economic growth are added to the equation. 35. While goodwill and intangible assets are sometimes used interchangeably, there are significant differences between the two in the accounting world. 36. Goodwill is a premium paid over the fair value of assets during the purchase of a company. Hence, it is tagged to a company or business and cannot be sold or purchased independently, whereas other intangible assets like l icenses, patents, etc. can be sold and purchased independently. 37. The Assessing Officer has resorted to Explanation 3 to Section 32(1) and held that the expression asset shall mean an intangible asset being know-how, patents, copyrights, trademarks, licenses, franchises and any other business or commercial rights of similar nature. The AO rejected the claim on the basis that goodwill was not an intangible asset . 38. On going through the judgment of the Hon ble Apex Court in the case of CIT Vs. Smifs Securities, we hereby hold that goodwill would fall under the expression any other business or commercial right of a simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other matter carrying with it the benefit of the business . In Trego v. Hunt [1896] AC 7 (HL.) Lord Herschel] described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried or and may be augmented with the passage of time. Lawson in his Introduction to the Law of Property describes it as property of a highly peculiar kind. In CIT v. Chunilal Prabhudas Co. [1970] 76 ITR 566 the Calcutta High Court reviewed the different approaches to the concept (pp.577, 578) To quote the Hon ble court: Though immaterial, it is materially valued. Physically and psychologically, it is a habit and sociologically it is a custom . Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 [ HL] as the sap and life of the business. Architecturally, it has been described as the cement binding together the business and its assets as a whole and a going and developing concern . 43. Goodwill is commonly understood as future ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 47. The Assessing Officer held that the goodwill was not an asset falling under Explanation 3 to Section 32 (1) of the Income Tax Act, 1961 [ Act for short]. 48. We quote herein below Explanation 3 to Section 32(1) of the Act: Explanation 3 For the purposes of this sub-section, the expressions assets and block of assets shall mean [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. Explanation 3 states that the expression asset shall mean an intangible asset, being know-how, patents, copyrights; trademarks, licenses, franchises or any other business or commercial rights of similar nature. A reading the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights. The Ld. CIT(A) in that case took the view that the customer base acquired by the assessee cannot be termed as know-how, patent, copyright or trademark or franchise; and it cannot be considered as license. or business or commercial, right of similar nature and relied on the decision of the Hon ble Bombay High Court in the case of CIT Vs. Techno Shares Stocks Ltd (225 CTR 337). The Hon ble Tribunal following the decision of the Hon ble Delhi High Court in the case of Areva T D India Ltd. Others (345 ITR 421) and the Apex Court decision in the case of Smifs Securities Ltd held that the client acquisition cost would fall within the category of business or commercial rights referred in clause (ii) of Sec. 32 (1) and would be eligible for depreciation. 53. Depreciation could not be denied to the Taxpayer merely for the reason that the assets were classified as goodwill in the books of account without appreciating the true nature of the assets if they can fall under the scope of any other business or commercial rights of similar nature . We are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of business or commercial rights of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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