FOUR WAY LANING OF THE NATIONAL HIGHWAY ON ‘BUILD, OPERATE AND TRANSFER’ BASIS – INTANGIBLE ASSET AND ELIGIBLE FOR DEPRECIATION?

[Mr. M. GOVINDARAJAN]

Depreciation

Section 32(1) of the Income Tax Act, 1961 (‘Act’ for short) provides that In respect of depreciation of-

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.

The explanation 3 to this section defines the expression ‘intangible asset’ as-

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

In ‘Assistant Commissioner of Income Tax V. Progressive Construction Limited’ – 2017 (3) TMI 1167 - ITAT HYDERABAD the assessee is a company engaged in executing civil contract work.   The Government of India, being desirous of   implementing a project involving construction, operation and maintenance of four lane Pune-Hyderabad section NH 9, with private sector participation of BOT invited tender from interested parties.  The assessee is the successful tenderor. On 22.12.2005 the assessee entered into a concessional agreement with the Government of India.  The said agreement provides for-

• The right, title and ownership of the project site vests absolutely with the Government of India and it has full powers to hold,dispose of and deal with the same;
• The Government of India has handed over physical possession of the project site to the concessionaire for executing/implementing the project and operating the same during the concession period;
• Concessionaire shall have exclusive right to use the project site for executing/implementing the project in terms of the concession agreement;
• Concessionaire shall, at its own costs and expenses, execute/implement the entire project and operate and maintain the same during the concession period; and
• The concessionaire shall have the right to levy/demand and collect fee as approved by the Government of India towards user of the project facilities by vehicles and persons.

As per the agreement the assessee was to complete the work at its own cost and maintain the same for a period of 11 years and after conclusion of the said period the road was to be handed over on ‘as is where is’ basis to the National Highways Authority of India.  The assessee is entitled to collect toll from vehicles using the road during the concession period.

The assessee filed its return on 30.09.2011 declaring an income at NIL under the normal provisions of the Act.  Subsequently the assessee on 26.03.2012 filed a revised return declaring a total income of ₹ 19.76 crores and book profit of ₹ 25.24 crores under section 115JB of the Act.  The Assessing Officer noticed that the assessee has claimed depreciation of ₹ 40.08 crores @ 25% on the opening written down value BOT Bridge at ₹ 160.31 crores.  The Assessing Officer formed an opinion that the assessee has no right on the road, except for maintaining the road and receiving toll collection during the concession period.  The entire rights on the road are with the National Highways Authority of India, including collection of toll, the asset on which the assessee had claimed depreciation is neither a building nor a plant and machinery.

The Assessing Officer issued notice to the assessee to justify the claim of depreciation.  The assessee submitted that the investment made by it in constructing the road and acquiring the right to operate the road and receive toll charges is a valuable commercial or business right in the nature of intangible asset and eligible for depreciation under section 32(1)(ii) of the Act.  The Assessing Officer rejected the contention of the assessee and held that the assessee is not the owner of the asset.  The roads within the factory premises linking various buildings and approach roads are eligible for depreciation.  The Assessing Officer disallowed the claims of the assessee.

Being aggrieved against the order of Assessing Officer, the assessee filed an appeal before Commissioner (Appeals).  The Commissioner (Appeals) allowed the appeal filed by the assessee.  The Revenue filed appeal before the Tribunal.  The Revenue contended the following-

• In the assessment year 2009-10 the assessee had claimed depreciation by treating it as building;
• But in the assessment years 2010-11 and 2011-12 the assessee had claimed depreciation on BOT bridge at a higher rate treating it as intangible asset;
• As per the agreement the owner of the asset is the Central Government and not the assessee and therefore the assessee is not entitled to claim depreciation under section 32 of the Act;
• Right to claim depreciation by two different persons on an asset created out of the very same expenditure is incomprehensible and incongruous in law;
• For an asset to be considered as an intangible asset under section 32(1)(ii) of the Act, it should be know-how, patents, copy rights, trade marks, licences, franchisees or any other business or commercial rights of similar nature;
• The concession agreement entered into by the assessee with the Government is neither an intangible asset nor a licence.
• The concession agreement has not given rise to any intangible asset for the assessee;
• The right created under the concession agreement for the assessee is a right to collect toll for a period of 11 years and seven months;
• Therefore the investment of ₹ 214 crores made by the assessee has created an intangible asset for them in untenable;
• The assessee may a claim in terms of the Board circular No. 09/2014 for consideration by the Assessing Officer.

The assessee submitted the following before the Tribunal-

• The assessee for constructing the road and bridge has invested a huge amount of ₹ 214 crores;
• The terms and conditions of the agreement did not provide for reimbursing the expenses incurred by the assessee;
• The only way the assessee can recover the cost of investment along with profit is by way of operating the bridge and collecting toll charges for user of the bridge by vehicles during the concession period of 11 years and 7 months;
• Even though the assessee is not the owner of the assets, the assessee by virtue of concessional agreement has created an intangible asset in form of right to operate the road and collect the toll charges;
• The concession granted by the government amounts to grant of licence.
• It certainly falls within the category of ‘any other business or commercial right’;
• The assessee was not given any other benefit under the agreement;

The Tribunal considered the submissions of both sides.

The Tribunal found that the assessee has incurred expenses of ₹ 214 crores.  As per the agreement the Government of India is not obliged/required to reimburse the cost incurred by the assessee to execute/implement the project facilities.  The only benefit allowed to the assessee is to operate the project facilities during the concession period of 11 years and seven months and to collect toll charges from vehicles/persons using the project/project facilities.  The assessee has taken up the project as a business venture with a profit motive and certainly not as a work of charity.  Therefore the Tribunal is of the view that the right acquired by the assessee for operating the project facility and collecting toll charges is an intangible asset created by the assessee by incurring the expenses of ₹ 214 crores.

The Tribunal held that from the very inception of the project, the assessee was aware of the fact, it has to recoup the cost incurred in implementing the project along with the profit from operating the road and collecting toll charges during the concession period.  Therefore the assessee has capitalized the cost incurred on the BOT project on which it is has claimed depreciation.  Therefore, the Tribunal was of the view that the expenditure incurred by the assessee of ₹ 214 crores creating the project or project facilities has created an intangible asset in the form of right to operate the project facility and collect toll charges. 

The Revenue contended that if at all any right is created under the concession agreement for collecting toll, such right accrued to the assessee on the date of execution of the agreement i.e., 22^nd December, 2005 and therefore the expenditure incurred by such date should be the value of intangible asset which can alone be considered for depreciation under section 32(1)(ii) of the Act.  The Tribunal did not accept this argument of the Revenue on the ground that the assessee can start operating and collecting the toll charges only when the project facility is ready for use. 

The Tribunal next considered the issue whether such intangible asset comes within the scope and ambit of section 32(1)(ii) of the Act.  The Tribunal analyzed the provisions of the said section. The Tribunal found that the plain reading of the said section would indicate that certain kind of assets being know-how, patents, copy rights, trade marks, licence, franchises or any other business or commercial rights of similar nature are to be treated as intangible asset and would be eligible for depreciation at the specified rate.