TMI Blog2018 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 Departmental Representative for the Revenue and the same is rejected. The stand of learned Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Erred in disallowing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased any knowhow from ICI India Limited and has not used any knowhow for the purpose of its business. 7. Without prejudice to Ground No.1, 2, 3, 4 and 5 above, erred in concluding that the allocation of ₹ 94.35 Crores to trade-marks, patents and know-how out of the purchase consideration of ₹ 153.18 crores has not been done in a fair and reasonable manner. Value of land at Taloja and Panki 8. Without prejudice to the above, erred in holding that the value of land at Panki division is ₹ 174.36 crores and the value of land at Taloja is ₹ 13 crores. Value of trade-marks, patents and know-how 9. Erred in ignoring the fact that the valuation of trade-marks, patents and know-how has been undertaken by an independent valuer in a fair and reasonable manner and that the value of trade-marks, patents and know-how would not be affected by the value 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of ₹ 81,45,129/- both @ 25%. The Assessing Officer show caused the assessee as to why depreciation on goodwill and non-compete fees should not be disallowed for the year under consideration. The reply of the assessee is reproduced under para 3.3 at page 2 of the assessment order. The assessee sought comparison of goodwill with trademark, patents, copyrights, license and franchise. The Assessing Officer rejected the same and held that goodwill was notional asset, which had no wear and tear. Accordingly, the Assessing Officer worked out the disallowance on the same i.e. depreciation on goodwill at ₹ 1,49,06,459/- and deprecation on non-compete at ₹ 81,45,129/-, totaling ₹ 2,30,51,588/-. Further, the Assessing Officer also noted variation in the opening WDV of both goodwill and non-compete. However, since the depreciation was neither allowed in earlier year nor in the year under consideration, variation of opening 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat goodwill was not an intangible asset within the meaning of section 32(1)(ii) of the Act and hence, depreciation thereon was not allowable. In respect of non-compete fees, it was observed by the CIT(A) that the same was not capital expenditure and hence, no spread over was permissible. 6. The CIT(A) further issued notice of enhancement to the assessee under section 251 of the Act. The CIT(A) was of the view that the claim of depreciation on know-how, trademark and patents was incorrectly made by the assessee and was allowed by the Assessing Officer since it was neither owned nor used by the assessee and cost of acquisition of intangible assets was also incorrectly taken for the purpose of depreciation. The CIT(A) issued show cause notice to the assessee in this regard, which is reproduced under para 5.1 at page 23 of the appellate order. The CIT(A) show caused that sum of ₹ 21,93,02,947/- for assessment year 2004-05 and ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The said business was purchased as going concern in slump sale transaction without assigning any value to the individual items of assets. He referred to the valuation report of M/s. Mehta and Padamsey Surveyors Pvt. Ltd., who were asked to determine the value of tangible assets of business purchased. In their report, the Valuer valued the tangible assets of PCEO Division (Taloja) at ₹ 27.49 crores i.e. ₹ 18.91 crores as working capital and ₹ 8.55 crores as value of fixed assets. The balance amount of ₹ 125.68 crores out of ₹ 153 crores paid to ICI India Ltd. was considered as value of intangible assets. The CIT(A) noted that the assessee then appointed another Valuer Ernst Young Pvt. Ltd. and asked them to determine and allocate sum of ₹ 125.68 crores towards cost of various intangibles purchased. The tabulated details are reproduced at page 29 of the appellate order. The CIT(A) noted that the assessee 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion of the CIT(A) was that the assessee had purchased certain assets of Indian business of ICI India Ltd. as per the said terms and conditions of BTA other than Panki activities and excluded assets. The CIT(A) further observed as under:- 6.4.2 Panki activities is defined as those activities involved in the manufacture of products in Panki and excluded assets are defined as Excluded contracts, Panki site, Panki employees and Panki assets. Panki assets means all plant, machinery, equipment, computer and communications hardware, loose tools, fixtures, fittings, furniture and vehicles located at the Panki site; the leasehold and licensed properties comprising the Panki site, together with all buildings thereon; the Retailed permits; 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; 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 divisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old rights in the Panki land at a nominal price of ₹ 1,00,000/- only a later date as and when option to purchase these assets is exercised by the appellant as provided in the TCA. These terms and conditions of TCA between the appellant and ICI thus clearly establish the fact that the appellant has not purchased Panki assets. It has only acquired a right to purchase Panki business along with its assets and that these assets will be purchased by the appellant only when option to purchase these assets is exercised by the appellant as provided in TCA. Since option to purchase Panki business as mentioned in TCA has not yet been exercised by the appellant, it can be said that Panki assets have not been yet been purchased by the appellant and thus the appellant cannot be regarded as the owner of any of the Panki assets including the know-how. 6.4.7 It is also seen that tangibles assets of Syngas division at Panki have been valued at ₹ 17,09,40,489 (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 righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis) 11. The second aspect which was considered by the CIT(A) under para 6.5 was that the assessee has failed to file any evidence to show that know-how, patents, trademark, etc. had been used for the purpose of business. The case of CIT(A) in this regard was that since the assessee was not new in the line of business of manufacturing of catalyst, wherein the parent company of the assessee was a speciality chemical company with its core focus on precious metal, catalyst and fine chemicals. The CIT(A) noted that Johnson Matthey had operation in 34 countries and its turnover for the year ending 31.03.2002 was 4830 million pounds, wherein it was global leader in this line of business and controlled major market share of global catalyst business. The CIT(A) was of the view that the business was acquired by the group globally primarily with a view to increase its market share and not for the purpose of acquiring any know-how, patents, trademark, etc. from ICI 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been deducted from purchase price of ₹ 153.18 crores. The contention of assessee that leasehold rights for the land at Taloja had been purchased directly from HLL for ₹ 6.73 crores and not from ICI India Ltd. and hence, no part of purchase consideration of ₹ 153.18 crores was required to be allocated towards the value of Taloja land, as per the CIT(A), was found to be not correct. The CIT(A) further observed as under:- 6.7.4 ..I find that the catalyst business in Taloja was earlier carried on by another company Hindustan Level Ltd. and was called as nickel catalyst business of HLL. This business was sold by HLL to ICI in December 2001 for a consideration of ₹ 21 crores. The same business was later sold by ICI to appellant in December, 2002 and it was renamed as PCEO division by the appellant. The total value of tangible assets of PCEO division was estimated at about ₹ 8 crores in December, 02. Since same tangible 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002 when the same business was sold by ICI India Ltd. to the assessee. The CIT(A) thus, held that the assessee had paid land cost of Taloja business at ₹ 19.71 crores i.e. ₹ 13 crores to ICI India Ltd. and ₹ 6.71 crores to HLL, the previous owner of leasehold rights. Therefore, submissions of assessee in this regard were rejected. The related contention of assessee that leasehold rights for Taloja land were agreed to be purchased in the year 2006 and therefore, price prevailing and stamp duty value in the year 2009 could not be used for comparison, was rejected in the absence of any agreement or any other material being brought on record. 13. In respect of Panki land, it was submitted that as per terms of BTA, Panki land was specifically excluded from the sale and therefore, no value was required to be assigned to the said land out of purchase price of ₹ 153.18 crores. The CIT(A) found the contention of assessee 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 231.85 cr 14. The CIT(A) was of the view that where the market value of identifiable tangible assets was ₹ 231.85 crores as against the slump price of ₹ 153.18 crores and where the purchase price had to be allocated firstly to identifiable tangible assets of the business and balance amount, if any, to be considered for intangible; he held that considering the market value of land at Panki and Taloja, which was over ₹ 187 crores, virtually nothing remains for intangible assets. He thus, held that it goes to prove that the assessee had not acquired any intangible assets in the consolidated slump price of ₹ 153.18 crores. Thus, the value of ₹ 125.68 crores considered by the assessee as the total value of intangible assets of business does not really represent the correct value of intangible assets. He thus, rejected the plea of assessee and held that the value allocated to intangible assets including know-how could not be accepted as actual cost for the purpose of allowing depreciation. He further held that allocation of 90% of total value to know-how was not justified. Referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on goodwill too. 16. The next issue which was dealt in with by the CIT(A) was the objection of assessee that once depreciation has been allowed by the Assessing Officer, the actual cost / WDV could not be disturbed in subsequent year, since there was no change in facts and law. The CIT(A) held that depreciation in case of block of assets as per section 32(1)(ii) of the Act, was calculated on its written down value, which is defined in section 43(6) of the Act, that first step was to determine the written down value of any asset for any year and it was for the Assessing Officer to determine its actual cost and then reduce the depreciation actually allowed. He further held that since the principles of res judicata were not applicable to the Income-tax proceedings, it was the duty of Assessing Officer to ascertain truth and facts stated in the return and where wrong valuation has been accepted as actual cost of asset in earlier years, where the mistake is detected in later years, then the Assessing Officer is duty bound to rectify the mistakes. In this regard, reliance was placed on the ratio laid down by the Hon'ble Supreme Court in Saharanpur Electric Co. Ltd. Vs. CIT re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kings which itself were capital assets and the same were required to be accounted for as separate capital assets in the accounts of assessee. He further pointed out that depreciation is to be allowed on WDV at the rates specified in IT Rules and the said rules did not provide any rate of depreciation for an undertaking. Thus, no depreciation was to be allowed to the assessee in respect of capital assets being an undertaking. The appropriation of total slump price by the assessee towards various tangible and intangible assets and including goodwill and non-compete fees and claim of depreciation in respect of said assets was on the basis of valuation report obtained subsequently, since no value had been assigned item-wise to the individual assets in the purchase agreement. He was of the view that assignment of cost to the individual assets after purchasing the undertaking was mere guess work and the value so assigned would remain estimate and could not be considered as actual cost. He referred to the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Artex Manufacturing Co. (1997) 227 ITR 260 (SC) and other decisions of Apex Court, wherein it was held that when the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores and on non-compete at ₹ 81,45,129/- was already disallowed by the Assessing Officer, the CIT(A) enhanced the assessment by ₹ 24.83 crores on this count. However, since the income was already enhanced by ₹ 21.93 crores vide para 6.12 of his order by disallowing depreciation on know-how, patents and trademark. Further, enhancement of assessment was restricted to ₹ 2.90 crores. 17. The assessee is in appeal against the order of CIT(A). 18. The first issue which is raised by the assessee is against non-allowance of depreciation on various assets purchased for lump sum consideration. The second objection is against the power of enhancement exercised by the CIT(A) by disallowing depreciation on assets which were acquired under slump sale agreement. The connected issue vide ground of appeal No.3 is against enhancement of income by the CIT(A) by disallowing depreciation on intangible assets and other assets amounting to ₹ 23.83 crores. The connected issues further are in grounds of appeal No.4 and 5, wherein the assessee is aggrieved by the disallowance of depreciation on assets which are entered in block of assets. The grounds of appeal thereaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther stated that the consideration was allocated for conveyance which was restrictive not to compete with assessee. He further pointed out that the Tribunal in assessee s own case in ITA No.1317/PN/2010 and ITA No.7547/PN/2010 relating to assessment year 2003-04 vide order dated 01.01.2016 allowed depreciation on both the counts. For the year under appeal i.e. assessment year 2004-05, he pointed out that the Assessing Officer disallowed depreciation both on goodwill and non-compete fees. Our attention was drawn to pages 13 and 14 of the order of CIT(A) and it was pointed out that the issue now stands covered in favour of assessee. Then, coming to the enhancement notice issued by the CIT(A) dated 03.08.2011, which is placed at page 172 of the Paper Book, the learned Authorized Representative for the assessee pointed out that the CIT(A) wanted to withdraw depreciation allowed by Assessing Officer on know-how, patents, trademark. In respect of second notice of enhancement issued on 15.02.2012, which is placed at page 173 of the Paper Book, the learned Authorized Representative for the assessee stated that the CIT(A) wanted to disallow depreciation on all assets and further, he disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.1557/Mum/2009, relating to assessment year 2004-05, order dated 26.06.2013; d) M/s. Western Precicast Pvt. Ltd. Vs. JCIT in ITA No.814/PN/2011, relating to assessment year 2007-08, vide consolidated order dated 07.09.2015; and e) Saharanpur Electric Supply Co. Ltd. Vs. CIT (supra) 21. The learned Authorized Representative for the assessee stressed that earlier law on allowing depreciation was different from the present day law of block of assets with additions and deletions. 22. Referring to merits of the claim, the learned Authorized Representative for the assessee elaborately referred to different paras of the order of CIT(A) and pointed out that the CIT(A) holds that where the assessee acquired business as a whole, then it was different from assets and the assessee is not entitled to depreciation on such business. In order to controvert the findings of the CIT(A) in paras 8.1 and 8.2 at pages 67 to 70 of the appellate order, the learned Authorized Representative for the assessee referred to the following decisions:- a) Shreyans Industries Ltd. Vs. JCIT (2005) 277 ITR 443 (P H) b) Drilbits International (P) Ltd. Vs. DCIT (2011) 142 TTJ 0086 (Pune-Trib) c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to the Deed of Restricted Convenants at page 136 of the Paper Book and referred to excluded assets at page 132 of the Paper Book and list of part-I of Schedule 10 at page 255 of the Paper Book, Volume-II. He then referred to the definition of Panki assets at page 141 and Panki site at page 142 of the Paper Book. He then explained that intention of assessee was to acquire Panki site but ICI India Ltd. had larger land and land on which catalyst business was established could not be bifurcated, hence part of excluded assets. He further referred to the transfer of technology information vide Toll Conversion Agreement, which is placed at page 146 onwards of the Paper Book, wherein as per terms of the agreement, what was sold and consideration paid was noted. Further, it was agreed that ICI India Ltd. would conduct business for assessee till actual transfer of the business. He referred to clause 18.5 at page 177 of the Paper Book and pointed out that know-how was part of transfer agreement. He further referred to the understanding for transfer of going concern and for retaining business, which was clear from page 178 of the Paper Book. The learned Authorized Representative fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be provided by the assessee to ICI India Ltd. So, the finding of CIT(A) in this regard was not correct. The learned Authorized Representative for the assessee stressed that the CIT(A) erred in its inclusion at para 6.4.7. 26. The next point raised by the learned Authorized Representative for the assessee was that in case Panki site for some reason could not be acquired but the assessee would definitely like to acquire the know-how and carry on the business from another site. He also referred to the report of the Valuer under which ₹ 153 crores was allocated to assets and know-how, etc. Our attention was drawn to page 29 of the Paper Book-I, which lists the assets and allocation of ₹ 134 crores, wherein the balance was allocated to current assets for both Panki and Taloja units, under clause (iv), cost which associated for transfer was not booked. He again reiterated that option was for Panki assets and the leasehold rights in land were valued at ₹ 1 lakh. He further referred to the observations of CIT(A) at page 40 in para 6.4.8 and para 6.5.2 and pointed out that evidences were filed and reply was also filed that know-how had been transferred. He made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the evidence of HLL selling the portion of land to Shanti at ₹ 96,782/- per sq.mtr. as against which the assessee had purchased the said land at ₹ 28,596/- per sq.mtr. The balance of 24,781 sq.mtrs. had been retained by HLL, so there was no question of attributing any value to the land in December, 2002. So, no part of consideration of ₹ 153 crores was allocated to Taloja land. 28. In respect of Panki land, referring to the order of CIT(A) at page 56 under para 6.7.8, it was pointed out by the learned Authorized Representative for the assessee that the CIT(A) re-works the allocation of value to assets. He further stressed that the assessee had allocated ₹ 1 lakh to Panki land to be acquired, against which the CIT(A) says whole piece of land of 279.30 acres was acquired by the assessee for ₹ 174.36 crores. He further referred to the BTA and Paper Book for assessment year 2003-04 at page 148 and pointed out that Panki site covered all that land using catalysts manufacturing facilities which were only on 27 acres. He referred to page 431 of the Paper Book, wherein in a communication, Kanpur Development Authority has pointed out that total l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e seen in the first year. Reliance in this regard was placed on the ratio laid down by the Full Bench of the Hon ble High Court of Delhi in CIT Vs. Sardarilal and Co. (2001) 251 ITR 864 (Del), the Hon ble Bombay High Court in CIT Vs. Western Outdoor Interactive P. Ltd. (2012) 349 ITR 309 (Bom) and Direct Information Pvt. Ltd. Vs. ITO and Others (2012) 349 ITR 150 (Bom) and he stressed that there was no merit in enhancement notice issued by the CIT(A). 32. The learned Departmental Representative for the Revenue pointed out that various issues need to be looked into. The first was the information received from Kanpur Development Authority on 04.03.2011 that ICI India Ltd. had total landholding of 279 acres, which was sold at ₹ 173 crores only. Referring to the decision of Hon ble High Court of Kerala in B. Raveendran Pillai Vs. CIT (2011) 332 ITR 531 (Kerala), he pointed out that claim of depreciation could be changed in later years. In this regard, he stressed that there was no evidence of know-how of Panki division having been acquired. The second issue raised by the assessee, was referred to by the learned Departmental Representative for the Revenue i.e. WDV cannot be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in rejoinder pointed out that the learned Departmental Representative for the Revenue was wrong in stating that IP was not transferred as per BTA. However, what is transferred by ICI India Ltd. is IP in India. Our attention was drawn to page 179 under para 18.6 of the document in the Paper Book for assessment year 2003-04, wherein the parties were contracted to transfer the know-how and whatever was left, was transferred for one year. The next aspect pointed out by him was that Johnson Matheys PLC and the assessee had joined hands and under clause 2.6 at page 150 of the Paper Book for assessment year 2003-04, there was clause of novation in favour of assessee i.e. Indian purchaser. The novation agreement dated 15.11.2002 which is between HLL, ICI India Ltd. and the assessee, as per clause 2.1, it talks of the transfer time under which actual date of transfer was 02.12.2002 and the IP was transferred, which is also referred in the Toll Agreement dated 02.12.2002. 35. Coming to the next stand of the learned Departmental Representative for the Revenue that know-how was owned by ICI India Ltd. and could not be transferred. He pointed out that the CIT(A) in para 6.4.1 at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of catalysts. The worldwide catalysts business of ICI India Ltd. was purchased by Johnson Matheys, consequent to which Business Transfer Agreement (BTA) was entered into on 02.12.2002 for the purchase of catalysts business from ICI India Ltd. as going concern. The assessee claimed that it had acquired goodwill of ₹ 10.73 crores from ICI India Ltd. Further, the assessee had also entered into non-compete agreement with ICI India Ltd., under which sum of ₹ 3.51 crores was paid. The assessee had claimed depreciation on both the said items on the ground that the same were capital assets. The first such claim was made in assessment year 2003-04. The Assessing Officer denied depreciation claimed on both goodwill and non-compete fees. However, the Tribunal (supra) allowed the claim of assessee. The Assessing Officer following his earlier order denied depreciation on goodwill claimed at ₹ 1.49 crores and depreciation on non-compete fees at ₹ 81,45,129/- totaling ₹ 2.30 crores. The CIT(A) while deciding the appeal for instant assessment year observed that where the entire business was taken over by the assessee as going concern, with all assets and liabilities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee at best would take care of the value of the land at Taloja and Panki and hence, no part of it could be attributed to any other asset. Another linked aspect which was taken note of by the CIT(A) was the failure of assessee to file evidences to show that know-how, patents and trademarks, etc. were used for the purpose of business. In this regard, the first plank of observation of CIT(A) was that where the assessee was not new in the line of business of manufacturing catalysts and also where the parent company of assessee was speciality chemical company with its core focus on precious metal, catalyst and fine chemicals, there was no merit in the plea that the purpose for acquiring ICI India Ltd. s business was to acquire know-how, patents and trademarks, etc. He was of the view that acquisition was primarily with a view to increase its market share i.e. of Johnson Matheys. Another linked observation of the CIT(A) was that as per Toll Conversion Agreement (TCA), the business 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 acceptable. Referring to the terms of BTA, the CIT(A) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this account. However, since the income was already enhanced by ₹ 21.93 crores by disallowing depreciation on know-how, patents and trademarks, further enhancement of assessment was restricted to ₹ 2.90 crores. 38. The assessee is in appeal against the order of CIT(A). The issues which arise in the present appeal before us are manifold and overlapping. Elaborate submissions have been made by both the learned Authorized Representatives for and against the orders of authorities below with special emphasis on enhancement made by the CIT(A) and we proceed to decide the same after referring to various facts and aspects of the case. First of all, the issues which need adjudication are as under:- a) Claim of depreciation on tangible assets and intangible assets i.e. non-compete fee and goodwill; b) Bifurcation of slump price into the value of tangible assets and intangible assets; c) Determination of value of land at Taloja and Panki for its value to be attributed from slump price; d) Allocation of value to trademarks, patents and know-how and goodwill, out of purchase consideration of ₹ 153.18 crores; e) Claim of depreciation on such trademarks, pate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issues raised is Excluded assets which means each of those assets which are listed in part I of Schedule 10, copy of which is placed at page 255 of the Paper Book. Referring to the same, we find that the said list of excluded assets talks of the following:- 1. the Excluded IP; 2. the Shared Assets; 3. the Shared Contract; 4. the Excluded Contracts; 5. the Panki Site; 6. the Panki Employees; 7. the Panki Assets; and 8. the servers located at the Gurgaon site 40. Similarly, Excluded IP was also defined. Another term was the Indian business which defined the business which was carried on by ICI India Ltd. under the name of Synetix other than Panki activities together with (a) the Employees; (b) the Business Plant Machinery; (c) the Business properties; (d) the Debtors; (e) the benefits of Business Contracts; (f) all right and title of ICI India in or to the Business IP; (g) the Business Goodwill; (h) the Business Stock; and (i) the Primary Books and Records and the Secondary Books and Records; but for the avoidance of doubt excluding the Excluded Assets. (underline provided by us for emphasis) 41. Panki activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its rights, benefits, interest and obligations under this agreement prior to completion. It was reiterated that each party undertakes to enter into Deed of Novation with Indian purchaser on the novation date. Further, clause 2.6 provided that upon execution of Deed of Novation, the purchaser s obligations under the agreement shall cease and the Indian purchaser shall assume obligations of the purchaser. It may be mentioned that the Novation agreement was entered into between ICI India Ltd. and Johnson Matheys PLC and the assessee on 15.11.2002. 44. Under clause 3, consideration was calculated for sale and purchase of Indian business. The same was equal to business cash consideration as adjusted by net asset adjustment. Various other terms and conditions were agreed upon between ICI India Ltd. and Johnson Matheys PLC for takeover of the business as going concern. Under clause 7, it was agreed that ICI India Ltd. shall from warranty date comply with and from that date until the transfer time, the non-fulfillment of conditions by the Long Stop Date or termination of this agreement pursuant to clause 6.5, whichever shall be the first to occur, comply with, the provisions of Schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mprises Excluded IP) (any such Technical Information being Business Technical Information ) ICI India shall provide the Purchaser with a complete and accurate copy of each record (or all relevant parts of each record) containing Shared Technical Information. The Purchaser s rights to use this are as set out in the IP Agreement in relation to the Shared Unregistered IP . Records containing Technical Information which is neither Business Technical Information nor Shared Technical Information, and which ICI India is either unable to make available to the Purchaser for legal reasons or which it regards as proprietary and so is not willing to make available ( any such Technical Information being Excluded Technical Information ) ICI India may retain all records containing Excluded Technical Information and the Purchaser shall have no right to use or have access to the same. Records containing Technical Information which is not used in the Indian Business but which relates to catalysts and has been identified by the Business prior to the Warranty Date as being of interest to it, but does not constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by ICI India only once during such period), provide ICI India with access to any records ( in whatever form or medium) containing Technical Information and which are in the possession or control of the Purchaser s Group as a result of the transactions contemplated by this Agreement. The access provided to ICI India under this Clause shall : (i) take place at reasonable times stipulated by the Purchaser (ii) not disrupt the Indian Business or any business of the Purchaser s Group (iii) be at the cost of ICI India ( but the Purchaser shall not charge for access); (iv) be subject to Clause-21 ( Confidentiality) ; and (v) be subject to ICI India complying with all reasonable directions of and having regard to the Purchaser s, or any member of the Purchaser s Group s , security and safety policies. (b) ICI India may have access under Clause 18.7 (a) ( ICI India s access to verify Technical Information) for the following purposes only; (i) to verify that no record which contains Excluded Technical Information is in the possession or control of the Purchaser s Group; (ii) to extract and retain any record to the extent that it contains Exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the patents are listed. Under part 2, ICI Roundel is provided and under part 3, ICI Group standards are provided. Further, under part 4, Uniqema Excluded Technology is provided. Under Schedule 8, warranties are listed along with list of business IP contracts. The business properties are provided under clause 13. The next schedule which is connected to the issue raised is Schedule 10 i.e. list of Excluded Assets and Excluded Contracts. We are concerned with part 1 which talks of Excluded Assets, copy of which is placed at page 255 of the Paper Book and the same includes under-mentioned assets:- 1. the Excluded IP; 2. the Shared Assets; 3. the Shared Contracts; 4. the Excluded Contracts; 5. the Panki site; 6. the Panki Employees; 7. the Panki Assets; and 8. the servers located at the Gurgaon site. 47. The Toll Conversion Agreement between ICI India Ltd. and the assessee company was entered into on 02.12.2002 and the copy of the same is placed at pages 282 to 331 of the Paper Book. Under the said Toll agreement, the assessee has agreed with ICI India Ltd. to manufacture the products for it on the agreed terms and conditions. During the contract term and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and site assets (as the case may be) pursuant to any of the site option, the plant option or put option (as applicable). In the definition clause, the plant option, put option and site option are defined in Schedule 8. Another aspect is that plant price means ₹ 1 lakh. Schedule 8 under site option, ICI India Ltd. grants to assessee the right to purchase ICI India Ltd. s leasehold interest in the site and all plant and equipment and subject to employees prior consent transfer all or any of the employees for the site price on giving the site option notice. Under the plant option, ICI India Ltd. grants to the assessee the right to purchase from ICI India Ltd. and / or part of plant and equipment for the plant price on giving the plant option notice. The third option was the put option, under which the assessee grants to ICI India Ltd. the right to sell the site assets, subject to employees prior consent to transfer any or all of the employees to assessee, for the site price on giving the put option. The time to exercise the said options is also provided under Schedule 8. The perusal of the same, thus reflect that under site option and the put option, there is transfer of leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using technical information licensed to it pursuant to clause 4.2. In other words, as per the terms of BTA, ICI India Ltd. had already transferred business carried on under the name of Synetix including the business IP to the assessee but since Panki activities and Panki assets were excluded from the said takeover of business by the assessee from ICI India Ltd., the said assets i.e. land and building including the plant machinery remained to be transferred. However, under the Toll Agreement, the said assets and site were to be used by ICI India Ltd. in order to manufacture the products for and on behalf of the assessee i.e. till the date Panki site and the assets were transferred, the manufacturing activities had to be carried on by ICI India Ltd. for and on behalf of assessee. Though under the Toll Agreement, it was decided that the said Panki site would be transferred at the value of ₹ 1 lakh, which we shall consider in the paras hereinafter; but the parties did agree to understanding to carry on the business in a particular manner. On analysis of the terms of BTA and Toll agreements, it transpires that the value of land at Panki was not part of slump price since the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se basis from HLL and was not the owner of said land and has no authority to transfer to the assessee under BTA agreement. 50. Before parting, we may also refer to Leave and License Agreement between HLL and ICI India Ltd., which is placed at pages 382 to 392 of the Paper Book Vol-2. This is with regard to land at Taloja, under which ICI India Ltd. was given the right to use the said land. On 02.12.2002 Leave and License Novation Agreement was signed between HLL, ICI India Ltd. and the assessee for use of land at Taloja, copy of which is placed at pages 393 to 397 of the Paper Book, Vol-II. 51. Another point to be noted in respect of Taloja land is that HLL sold its business to ICI India Ltd. in 2001 and Leave and License was given to ICI India Ltd. for the said land. However, ICI India Ltd. sold its business to the assessee in 2002 and hence, the Novation between HLL, ICI India Ltd. and the assessee. Another document which needs reference is the Memorandum of Understanding dated 02.04.2008, copy of which is placed at pages 332 onwards of the Paper Book between HLL and the assessee, wherein the said land was agreed to be sold by HLL to the assessee for ₹ 6.93 crores. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amsey Surveyors Pvt. Ltd., dated 11.02.2003 is placed at pages 110, 112 and 113 of the Paper Book. Further, valuation report of Ernst Young Pvt. Ltd. i.e. valuation of intangible assets, dated 25.04.2003 is placed at pages 231 to 280 of Paper Book, Vol-2. 53. Now, coming to the terms and conditions of BTA, which the parties have agreed upon, under which the catalyst business of ICI India Ltd. has been taken over by the assessee, then the next step to be deliberated upon is spreading over of the value of slump price over the fixed assets acquired and balance over the goodwill and also know-how, patents and trademarks. The assessee had obtained valuation report/s from an independent Valuer under which it had identified the cost of fixed assets acquired and also the value of know-how, patents and trademarks and the balance was attributed to goodwill. The CIT(A) had disallowed the claim of assessee on the ground that the most important asset acquired by the assessee was the land at Panki and Taloja sites and since the Valuer had not attributed any cost to the same, working of the Valuer was not correct. We have already in the paras hereinabove held that no cost was to be attribute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was owned by ICI India Ltd. and which has been used exclusively in, or exclusively relates to, the business excluding the Excluded IP and all intellectual property licensed to the purchaser under the IP Agreement. Then, even business technical information has been defined; in addition the disclosed information and environmental terms were also handed over to the assessee. However, all these were with benchmark that the Excluded IP as defined would not be transferred. Similarly, Excluded assets would not be transferred on the transfer of Indian business. The Excluded assets also talked about Excluded IP, Excluded Contracts along with Panki site, Panki employees and Panki assets. In case, we look at the definition of the term Indian Business , it also talked about in addition to the business plant machinery, business properties, employees and debtors, benefits of business contracts, all right title of ICI India Ltd. in or to the business IP and business goodwill. In other words, it was not only the business but the right to carry on business along with intellectual rights being business IP, goodwill of business were also acquired by the assessee under BTA. Once the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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. (supra). In view thereof, we find no merit in the stand of learned Departmental Representative for the Revenue and the same is rejected. 57. The next issue is whether slump price can be bifurcated between value of tangible and intangible assets. The Hon ble Punjab Haryana High Court in Shreyans Industries Ltd. Vs. JCIT (2005) 277 ITR 443 (P H) has laid down the proposition that in case slump payments have been received for all the rights transferred including the assets transferred, then consideration has to be allocated amongst the said assets. The relevant findings are as under:- 9. We are in agreement with the finding recorded by the Tribunal. Admittedly, the amount of ₹ 14.75 crores was the consideration for the entire unit as a going concern. The assessee has placed no material to give bifurcation of costs towards various assets. Under such circumstances, the same had to be estimated. The Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 15. In Challapalli Sugars Ltd. (supra), the Supreme Court has held that the expression cost is not synonyms with price and would include the actual cost paid by the assessee, to acquire the asset in question and other expenses such as freight, warehouse charges or insurance and interest to bring the asset into existence and put them into working condition. Interest on monies borrowed for purchase of fixed asset prior to asset coming into production, i.e., till the erection stage should be capitalised. It was held as under (page 175 of 98 ITR) : It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expen diture necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expen diture. The above rule of accountancy should, in our view, be adopted for determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer s own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements . 16. The abovementioned Financial Reporting Standard 10 also provides for accounting of purchased goodwill as the difference between the cost of an acquired entity and the aggregate of the fair values of that entity s identifiable assets and liabilities. Positive goodwill arises when the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities. Negative goodwill arises when the aggregate fair values of the identifiable assets and liabilities of the entity exceed the acquisition cost. 17. At this stage, it is also relevant to refer to Accounting Standard 10 as issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under:- 16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Saharanpur Electric Co. Ltd. Vs. CIT (supra), wherein the proposition was laid down in case of seller of business and it was held that there was no merit in allocating slump price over the value of assets. First of all, the said ratio is in respect of assessment year prior to amendment and in the case of seller of business. Further, AS-10 of Accounting Principles also provide for the working of value of tangible and intangible assets and once the same is so allocated, the assessee is entitled to the claim of depreciation on such assets. The total consideration exchanged between the parties was ₹ 153.18 crores. The assessee has allocated sum of ₹ 27.49 crores to the value of assets including plant machinery which has been taken over by the assessee. Further, the assessee had allocated sum of ₹ 125.68 crores to the value of know-how, patents and trademarks, and goodwill. The said exercise was carried out in a systematic manner by the Valuer and in the absence of findings of any fallacy in the said distribution, there is no merit in rejecting the values adopted by the assessee. So, sum of ₹ 153.18 crores in the first instance is to be allocated to cost of tan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, which had been obtained from public domain. However, the learned Departmental Representative for the Revenue has not referred to any of the aspects of the said and the same is thus, not admitted. 66. In respect of third additional evidence i.e. Copy of Company News service London Stock Exchange, the learned Departmental Representative for the Revenue fairly pointed out that the same may be ignored and hence, the same is ignored. In respect of fourth additional evidence i.e. valuation report of tangible assets of the assessee, which has been filed by the assessee also and already considered by the CIT(A) and hence, there is no merit in the claim of learned Departmental Representative for the Revenue that the same being additional evidence. 67. Further, the learned Departmental Representative for the Revenue filed Paper Book Vol-3, which is again additional evidence. However, the learned Departmental Representative for the Revenue after going through the said documents at serial No.1 to 3 pointed out that the same are to be ignored for deciding the issue and hence, the same are dismissed. 68. Another additional evidence by way of Paper Book Vol-4 filed, in which the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, depreciation is claimed on the WDV of the said assets as on the start of financial year, then can the authorities disturb the same?. The claim of assessee vis- -vis depreciation on tangible assets, know-how, patents and trademarks, goodwill and non-compete fee have either been allowed by the Assessing Officer or by the Tribunal in assessee s own case in assessment year 2003-04. The value of the said assets and allocation of price amongst tangible and intangible assets had been accepted in preceding year and depreciation has been claimed and allowed in the hands of assessee. Once the assets had entered into block of assets and have already been allowed, the depreciation and the WDV of the said assets had been determined in the preceding year, which is brought forward at the start of financial year, then the assessee is entitled to claim the depreciation on the said WDV or not, was the next issue which was elaborately argued before us. 71. Both the learned Authorized Representatives referred to different parts of section 43(6) of the Act. The learned Authorized Representative for the assessee referred to clause (c) of section 43(6) of the Act, which talks of block of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order was passed on 15th June, 2011. The Tribunal has essentially based its conclusion on the consistent stand of the assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-04. The assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head intangible assets . The Assessing Officer allowed the claim for that assessment year by an order under section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under section 143(3) for assessment year 2003-04 continues to operate and no proceedings under the Act were initiated to disturb the same. 10. In these circumstances and without any material being placed on record to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n judgment dated 28.07.2009 (supra). We find support from the aforesaid ratio laid down by the Hon ble Bombay High Court. 73. The learned Departmental Representative for the Revenue in this regard placed reliance on the decision of Hon ble High Court of Kerala in B. Raveendran Pillai Vs. CIT (supra). However, in view of the decision of the jurisdictional High Court on the issue in hand, we find no merit in the reliance placed upon by the learned Departmental Representative for the Revenue. The stand of learned Departmental Representative for the Revenue that there could be instances where WDV can be changed and since in the present case there was allocation which was different from the actual cost, then harmonious construction was to be given to the provisions of said section does not stand. We find no merit in the stand of learned Departmental Representative for the Revenue that actual cost for entire block could be examined in the succeeding year if there were circumstances necessitating such change. We find no merit on the same and the same is rejected. Since we have decided the issue both on merits and also on preliminary issue of whether the WDV of assets could be disturbed ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
