TMI Blog2021 (3) TMI 919X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that section. Owing to the entire facts and circumstances of the case Viz., the value paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered to tax and amount of ₹ 24 .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 (includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the agreement. b. M/s Tide water oil Company (India) Limited is being a transferor and assessee company is the transferee company to the contract pursuant to which the transferor intend to sell the business undertaking on a slump sale under section 2 (42C) of the act to reorganize the SF 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 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellectual property and avail itself of the strategic services and marketing and sales support function in conducting the SF oils business in the territory and assessee is willing to grant the franchisee to the transferor to conduct the SF oils business using the aforesaid intellectual property. iv. The franchisee agreement contain 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and observed that the Eneos brand was in fact owned by JX NOE, Japan since its incorporation. The Assessing Officer also referred to the valuation report provided by the assessee and pointed out that the valuation report did not contain any analogy regarding the commercial rights which Two who was having. The Assessing Officer pointed out that the assessee did not purchase or acquire any rights under the agreement and in fact the agreement between the assessee and Two would cease to exist once JX NOE cancels the license of intellectual property in terms of Eneos as in that case Two would not be able to manufacture and market the product. The Assessing Officer observed that the assessee did not bring any cogent material apart from the business purchase agreement to show that any intangible benefit on account of this agreement. The Assessing Officer referred to the valuation 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-ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various clauses of business transfer agreement which are as under: TWO shall transfer the Business undertaking relating to sale of FF and SF oil to OEMs namely Eneos business segment by way of Slump sale (as defined u/s 2 (42C) of the Act) for consideration of INR 108 crores. TWO shall transfer to the assessee all its business relationships with the OEMs as mentioned above relating to supply of FF oils to such OEMs. Also, TWO and the assessee would enter into a separate agreement namely Manufacturing Agreement whereby TWO has agreed to act as a toll manufacturer of FF oils. TWO shall have no responsibility to provide any services or assume any liability in relation to the supply of FF Oils to OEMs. TWO shall transfer to Assessee certain assets exclusively used for the Eneos business segment . These assets only includes storage tank installed at Honda car premises. Thus the only asset transferred was a Storage tank 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany listed on Tokyo Stock Exchange. JXTG group offers petroleum products and services throughout the world. Through partnerships with world class customers, JX NOE produces technologically advanced motor oils and transmission fluids that reduce carbon emissions, improve fuel economy and reduce wear on critical components. ENEOS is the brand name for products manufactured and sold by JX NOE, the largest oil company in Japan. ENEOS products are the high quality lubricants available in the marketplace today. 19. Over the period, TWO entered into agreements with various two wheelers automobile companies as well as certain non-automotive clients (OEMs). Pursuant to these agreements, OEMs have granted to TWO, right and license to use certain trademarks and other related intellectual property of such OEMs in connection with the manufacturing, marketing, distributing and/or selling the Eneas Oil. The lists of clients being served by TWO were as under: Honda Motorcycle Scooter India Private Limited Hero Moto Corp Limited Honda Siel Power Products Limited India Yamaha Motor Private Limited Honda Siel Cars India Limited Kobelco Construction Equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus, by virtue of the above agreements assessee has been able to take care of the manufacturing as well marketing activities as part of the BTA. Had TWO not agreed for the above functions it was impossible for the assessee to earn profit from day one. In a competitive market the assessee would have incurred losses for first few years to make an entry into a new segment, develop its reputation and brand. Thus, the assessee has got a huge benefit in terms of theBTA. TWO shall doing the same on a risk neutral basis in accordance with manufacturing and distribution plans prepared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. 28. On going through the entire facts and circumstances, the issue to be decided before us as determined is whether the payment made by the assessee of ₹ 108 crores for Business Transfer Agreement (BTA) to Tide Water Oil Company (India) Ltd. (a listed company) is excess and if so whether the goodwill raised by the assessee in the books of accounts over and above the value of the net asset obtained out of such agreement is correct as per the accounting standard and if so whether such goodwill raised is eligible for depreciation u/s 32(1)(ii) of the I.T. Act 29. With regard to the amount paid by the assessee for BTA, we have gone through the valuation report. Valuation of the TWO-EBS: 30. We have gone through the report of the PWC dated 14.07.2014 which went through the value analysis by taking into consideration where average cost of the capital and financial performance of the EBS. The TWO holding structure consists of 26 % of the company Andrew Yule Co. Ltd. as promoter, institutional public share holding at 14% and non- institutional public shareholding of the remaining 60%. The company is l isted in BSE and NSE and for the purpose of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset owned by and associated with the operation of a company. Goodwill is the premium that is paid when a business is acquired. If a business is acquired for more than its book value, it can be said that the acquiring business is paying for intangible items such as intellectual property, brand recognition, and customer loyalty. Business goodwill is an intangible asset that adds value to a company. Factors such as proprietary or intellectual property and brand recognition are reflected in goodwill. While goodwill is not easily quantifiable, it is calculated by subtracting the difference between the fair market value of a company's assets and liabilities from its purchase price. Companies must record the value of goodwill on their financial statements and record any impairment. 34. The presence of goodwill implies that a company's value is greater than its combined raw assets. The effect of goodwill on a company's value is better understood by learning the factors that create business goodwill. The three factors in the creation of a company's goodwill include its going concern value, excess business income, and the expectation of future economic benefits. 1. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go, copyrights, client acquisition cost, certain corporate service and non-compete fee. The AO has taken the view that these would not constitute goodwill for the reasons (a) that there could not have been any good in micro finance business related to unorganized sector (b) both the entities are under same control management (c) not shown in the balance sheet of the society (d) not falling within the purview of Sec.32 . 41. In this regard, it is relevant to understand what constitutes goodwill. The Hon ble High Court of Delhi in the case of Areva T D India Ltd. Ors. Vs. DCIT (345 ITR 421) has discussed the nature of goodwill and the relevant discussion is extracted as under: 42. In this regard, it would not be out of place to refer to the decision in CIT Vs B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) wherein the concept of goodwill has been understood in the following terms: Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill was nothing more than the probability that the old customers would resort to the old places was expanded by Wood V.C. in Churton v. Dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for. The excess of the price paid for a business as a while over its book value or over the computed or agreed value of all tangible net assets purchased. 45. The next issue arises whether the impugned intangible rights acquired under the Business Transfer Agreement would be eligible for depreciation under section 32 (1)(ii). In this regard, it is relevant to refer to the discussion of the Hon ble Apex Court on the issue whether goodwill is an asset within the meaning of Sec. 32 of the I.T. Act. The Hon ble Apex Court in the case of CIT Vs. Smifs Securities 348 ITR 302 discussed as under: Question No. [b] Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961 and whether depreciation on goodwill is allowable under the said Section: Answer: In the present case, the assesse had claimed the deduction of ₹ 54 ,85 ,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under: In accordance with Scheme of Amalgamation of YSN Shares Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon ble High Courts of Bombay and Calcutta) with retrospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities of M/ s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal. We see no reason to interfere with the factual finding . 50. In the instant case ,the revenue has taken the view that the impugned intangible rights do not fall within the purview of any of the clauses of Sec.32(1) and is not in the nature of commercial or business right so as to be eligible to claim deprecation u/s 32. 51. In this regard, it is relevant to refer to the decision of the Hon ble ITAT, Hyderabad bench in the case of M/ s SKS Micro Finance Ltd. 52. The facts in that case are that the assessee company acquired the micro finance business from the society Swayamkrishisangam and has paid ₹ 3 .97 crores towards customer costs, one time reimbursement of ₹ 82 lakh towards cost of Internal control s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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