Commissioner of Income-tax, Delhi-II v. M/s. Motherson Auto P. Ltd
[Citation -2015-LL-0413-12]

Citation 2015-LL-0413-12
Appellant Name Commissioner of Income-tax, Delhi-II
Respondent Name M/s. Motherson Auto P. Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 13/04/2015
Judgment View Judgment
Keyword Tags collaboration agreement • product manufactured • official liquidator • value of goodwill • capital employed • going concern • trade mark
Bot Summary: Clause 7 of the Collaboration Agreement provided that the consideration of the unit as a going concern ITA 178/2001 Page 1 could be adjusted against the goodwill of the assessee. During assessment proceedings for AY 1987-88, the assessee claimed the value of goodwill transferred to be 51,30,338/-. Mr. Harkauli, learned counsel for the revenue argued that the ITAT fell into error in setting aside the findings of the AO and the CIT. Both those authorities had furnished good and valid reasons for rejecting the valuation of goodwill put forth by the assessee. The revenue contended that to say that the goodwill could be valued at such high rate as was done in the present case, the assessee had to furnish a scientific basis. A reading of the ITAT s order would reveal that the basis for valuation of goodwill in this case was three fold: the assessee, though established in 1984 in a sense was continually engaged in business since 1975, when Sehgal Cables started functioning; the assessee had unexecuted orders worth 4.87 crores in hand, when the collaboration agreement was signed; its profit for one year offset the loss for the previous year; the assessee held a manufacturing monopoly over one product, i.e wireless harness. The weight attached by the ITAT to the monopoly enjoyed by the assessee in respect of the product manufactured, the continuous functioning - since the business of Sehgal Cables had been taken over by the assessee; the large volume of orders at hand when the collaboration transaction took place, were sufficient basis for valuation. In the circumstances, it cannot be held that the valuation of goodwill made by the assessee was unreasonable or untenable in law.


IN HIGH COURT OF DELHI AT NEW DELHI Decided on: 13.04.2015 ITA 178/2001 COMMISSIONER OF INCOME TAX DELHI-II Appellant Through: Sh. Arjun Harkauli with Sh. Satyawan Shekhawat, Advocates. Versus M/S. MOTHERSON AUTO P. LTD. ..Respondent Through: None. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. revenue is aggrieved by order of Income Tax Appellate Tribunal (ITAT) dated 12-04-2001 in ITA No. 8036/Del/92. question of law which arises for determination in this case is: Whether Tribunal was justified in law in holding that sum of ` 51,30,338/- was received by company from its collaborators on account of goodwill and, therefore, not exigible to tax ? 2. facts are that assessee was taken over by new company (M/s Motherson Sumi Systems Pvt. Ltd) in terms of collaboration agreement dated 03-12-1986. new company was promoted by assessee and two Japanese companies. Clause 7 (1) of Collaboration Agreement provided that consideration of unit as going concern ITA 178/2001 Page 1 could be adjusted against goodwill of assessee. valuation of goodwill was to be based on assumptions and projections approved by investing/purchasing Japanese Companies, and evaluated by chartered accountant nominated with concurrence of Japanese companies. This agreement was approved by Central Government. total consideration (including goodwill) agreed upon by parties was ` 60.90 lakhs. 3. During assessment proceedings for AY 1987-88, assessee claimed value of goodwill transferred to be ` 51,30,338/-. This was not accepted, and was disallowed by AO, who was of opinion that valuation of goodwill was not based on any established or known principle and that assessee had not acquired expertise of such order as to claim to possess such goodwill. It was also concluded that assessee had incurred loss during previous year and further goodwill claimed was founded on expertise drawn from collaborating company/investors, after which M/s Maruti Udyog Ltd. had recognized assessee. These findings were approved by Commissioner (Appeals) who rejected assessee s claims and confirmed AO s corresponding addition. 4. ITAT, in its impugned order noticed that report of chartered accountant, i.e M/s R.K. Khanna & Co. supported assessee s stand. It was also held that though assessee was incorporated in 1984, it had taken over business of existing firm, Sehgal Cables. Furthermore, it was noticed that though assessee incurred losses during first year of its operation, those losses were wiped out during next year; moreover, assessee had orders worth ` 4.87 crores in its hand when takeover transaction had taken place and that it had manufacturing monopoly over ITA 178/2001 Page 2 product, i.e wireless harness. Consequently, ITAT allowed assessee s appeal. 5. Mr. Harkauli, learned counsel for revenue argued that ITAT fell into error in setting aside findings of AO and CIT (A). Both those authorities had furnished good and valid reasons for rejecting valuation of goodwill put forth by assessee. revenue contended that to say that goodwill could be valued at such high rate as was done in present case, assessee had to furnish scientific basis. Counsel emphasized that mere existence of huge or substantial order could not have meant that such orders would have necessarily resulted in profit and basis for ITAT s order was unsustainable. 6. In S. C. Cambatta and Co. Private Limited v. Commissioner of Excess Profits Tax, Bombay (41 I.T.R. 500), Supreme Court relied on Federal Commissioner of Taxation v. Williamson (1943)67 C.L.R. 56(7), where it was held that: "Hence to determine nature of goodwill in any case, it is necessary to consider type of business and type of customer which such business is inherently likely to attract as well as surrounding circumstances...... goodwill of business is composite being referable in part to its locality, in part to way in which it is conducted and personality of those who conduct it, and in part to likelihood of competition, many customers, being no doubt actuated by mixed motives in conferring their custom" Supreme Court in S.C. Cambatta also relied upon Jowitt's "Dictionary of English Law"; "goodwill" was defined there as follows: ITA 178/2001 Page 3 "The goodwill of business is benefit which arises from its having been carried on for some time in particular house, or by particular person or firm, or from use of particular trade mark or trade name." Supreme Court then held that: "It will thus be seen that goodwill of business depends upon variety of circumstances or combination of them. location, service, standing of business, honesty of those who run it, and lack of competition and many other factors go individually or together to make up goodwill, though locality always plays considerable part. Shift locality, and goodwill may be lost. At same time, locality is not everything. power to attract custom depends on one or more of other factors as well. In case of theatre or restaurant, what is catered, how service is run and what competition is, contribute also to goodwill. From above, it is manifest that matter of goodwill needs to be considered in much broader way than what Tribunal had done. question of law did arise in case, and in our opinion, High Court should have directed Tribunal to state case upon it." 7. reading of ITAT s order would reveal that basis for valuation of goodwill in this case was three fold: (a) assessee, though established in 1984 in sense was continually engaged in business since 1975, when Sehgal Cables started functioning (that concern s business was assimilated by assessee); (b) assessee had unexecuted orders worth ` 4.87 crores in hand, when collaboration agreement was signed; its profit for one year offset loss for previous year; (c) assessee held manufacturing monopoly over one product, i.e wireless harness. As is ITA 178/2001 Page 4 evident from Supreme Court s ruling in S. C. Cambatta, there is no stipulated matrix of factors which are to be taken into consideration. Whilst length of time for which business might operate, its profitability, etc. are relevant, equally whether, and to what extent it has competition in respect of business activities it undertakes, market acceptability and demand for product or services in question, capital employed, unique expertise developed, etc. too are all relevant. ITAT s view therefore has some basis in law. It is worthwhile to recollect that Supreme Court, in Commissioiner of Income Tax v. Srinivasa Setty [1981] 128 ITR 294, held that since goodwill is self-generating asset, its transfer would not give rise to capital gain. court observed that: "Goodwill denotes benefit arising from connection and reputation. original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335, that goodwill was nothing more than 'the probability that old customers would resort to old places' was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage 'that has been acquired by old firm in carrying on its business, whether connected with premises in which business was previously carried on or with name of old firm, or with any other matter carrying with it benefit of business'. In Trego v. Hunt [1896] AC 7 (HL) Lord Herschell described goodwill as connection which tended to become permanent because of habit or otherwise. benefit to business varies with nature of business and also from one business to another. No business commenced for first time possesses goodwill from start. It is generated as business is carried on and may be augmented with passage of time. " Likewise, in Commissioner of Income Tax v. Official Liquidator 151 ITR 781, Madras High Court held that [t]he other circumstances, such as, ITA 178/2001 Page 5 personality and business rectitude of owners, nature and character of business, its name and reputation, its location, its impact on contemporary market, etc., are all matters to be considered while evaluating goodwill. 8. weight attached by ITAT to monopoly enjoyed by assessee in respect of product manufactured, continuous functioning - since business of Sehgal Cables had been taken over by assessee (thus probability that old customers would resort to old places adverted to in Srinivasa Setty [supra]); large volume of orders at hand when collaboration transaction took place, were sufficient basis for valuation. This Court also notices that AO and CIT (A) did not advert to report of M/s R. K. Khanna nor cared to call that firm. In circumstances, it cannot be held that valuation of goodwill made by assessee was unreasonable or untenable in law. 9. For foregoing reasons, question of law framed in this case is answered against revenue and in favour of assessee. appeal accordingly fails and is dismissed. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) APRIL13, 2015 ITA 178/2001 Page 6 Commissioner of Income-tax, Delhi-II v. M/s. Motherson Auto P. Ltd
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