TMI Blog2011 (4) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... paper transaction or sham transaction as there is no such evidence on record. - Depreciation allowed. - 1675 TO 1678 (MAD.) OF 2008 - - - Dated:- 20-4-2011 - HARI OM MARATHA, ABRAHAM P. GEORGE, JJ. K.E.B. Rengarajan for the Appellant. S. Subramaniam for the Respondent. ORDER 1. The above four appeals filed by the Revenue, for assessment years 2002-03 to 2005-06, are directed against the common order dated 27-5-2008 passed by the ld. CIT(A)-VIII, Chennai. In all these appeals almost identical issues are involved, therefore, for the sake of convenience and brevity, we are deciding them by a common order. 2. For ready reference, we are narrating the facts of I.T.A. No. 1675/Mds/2008 pertaining to assessment year 2002-03. The assessee-company, namely M/s. Best Crompton Engineering Projects Ltd., is a wholly owned subsidiary of M/s. Best Crompton Engineering Ltd., which is doing the business of Electrical Projects Contracting, like, erection of High Voltage Substations, Transmission Lines, Railway Electrification both in India and outside India; and these activities have been carried on by Best Crompton Engineering Ltd. from the year 1975. On 30-6-2001, rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) of the Act for this year, as well as for the other years under appeal. The following table would depict the details of the depreciation claimed in these years: A.Y Nature of Intangible asset Depreciation claim (Rs.) 2002-03 Technical Proprietary information 2,50,00,000 2002-03 Pre-qualification rights 3,16,35,736 2003-04 Technical Proprietary information 1,87,50,000 2003-04 Pre-qualification rights 2,37,26,802 2004-05 Technical Proprietary information 1,40,62,500 2004-05 Pre-qualification rights 1,77,95,102 2005-06 Technical Proprietary information 1,05,46,875 2005-06 Pre-qualification rights 1,33,46,326 4. But the Assessing Officer disallowed this claim, for all the four assessment years under appeal, on the reasoning that the intangible assets would partake the character of 'goodwill' which is not eligible for depreciation under section 32(1)(ii) of the Act. The Assessing Officer treated the consideration amounts as having been paid for 'goodwill' as against claimed as a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Ltd., over the years, which are owned by them on the date of transfer relating to projects division. As per the assessee, above information was taken over in the form of books, manuals, technical drawings and designs, presentations, old tender documents and other related materials and therefore, depreciation was eligible as these information would amount to technical information. In the alternative, it was pleaded that, at worst, the assessee was entitled to deduction on account of technical know-how @ 1/6 every year as per section 35AB of the Act. From the records, the Assessing Officer found that except for the diversion of Rs. 9,13,00,000 by M/s. May Springs Investments Ltd., there was no actual payment to the holding company as the balance amount was partly adjusted against the value of equity shares to be allotted to the holding company and partly by treating it as a loan to the assessee company. By treating both the entities as separate for income-tax purposes, the Assessing Officer examined only the nature of payment and finally he concluded that this payment was towards goodwill only. He, therefore, disallowed depreciation on pre-qualification rights as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT(A) which has been extracted in his order verbatim as well as he has submitted oral submissions controverting the allegation of the Assessing Officer. We have examined the entire details including the written submission filed before the ld. CIT(A) which is apart of the appellate order as well as the paper book filed before us. The sole question involved is as to whether the pre-qualification rights and technical proprietary information could be treated as intangible assets eligible for depreciation under section 32 or these tantamount to 'goodwill' which will not admit any depreciation under the Income-tax Act, 1961. In our considered opinion, after going through the business transfer agreements entered into between the parties clause by clause, we can safely conclude that by no stretch of imagination, the pre-qualification rights and technical proprietary information can be treated as 'goodwill'. These have to be treated as 'intangible assets'. The valuation report given by the reputed Chartered Accountant's firm, a copy of which was placed before the Assessing Officer, cannot be lightly brushed aside and in our opinion, the Assessing Officer has erred in observing that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation report of M/s. Ernst Young Pvt. Ltd. which was submitted before the Assessing Officer along with letter dated 21-1-2005; (iv) The assessee adopted the same value as per the valuation report given by M/s. Ernst Young Pvt. Ltd. in respect of technical proprietory information and pre-qualification rights; (v) As per the business transfer agreement, the pre-qualification rights and technical proprietary information are defined and further the same were transferred to the assessee; (vi) The pre-qualification rights include skills and expertise of the employees, transfer of the commercial rights or eligibility entitlement to quote for tender in the areas of business by virtue of having executed the works of similar nature and capacity; (vii) The pre-qualification right was valued on the basis of 5 per cent of the total sale value for the last five years of the project division of Best Crompton Engineering Ltd. on the total sales (contract); (viii)As per section 32(1)(ii) introduced by the Finance Act, 1998 depreciation is allowable on intangible assets like know-how, patents, copyrights, trademarks, licence or franchise or any other business or commercial r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and loan funds - Schedule 2 of the audited accounts as on 31-3-2002. The mode of discharge for purchase consideration and the details of amount discharged were submitted by the assessee vide letter dated 21-3-2005 as under: Rs. Rs. ( a ) Equity shares allotted to holding company Best Crompton Engineering Ltd. 20,00,00,000 ( b ) Unsecured loan from the holding company Best Crompton Engineering Ltd. 14,85,00,000 14,85,00,000 Less: Repayment of loan from proceeds from preference share issue 9,31,00,000 Total 34,85,00,000 5,44,00,000 7. Therefore, the cumulative effect from these facts is that the transfer of pre-qualification rights and technical proprietary information by the holding company was on account of genuine commercial considerations done, at arms length, based on the business valuation report, given by a reputed firm of Chartered Accountants and without which the assessee would not have been in a position to carry on the business and also to secure further business. In our opinion, this transaction cannot tantam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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