IN HIGH COURT OF DELHI AT NEW DELHI DECIDED ON: 15.04.2015 ITA 496/2014 COMMISSIONER OF INCOME TAX, DELHI-I Appellant Through: Mr. Kamal Sawhney, Sr. Standing Counsel with Mr. Sanjay Kumar, Jr. Standing Counsel and Mr. Mukul Mathur, Advocates. versus MIS BHARTI TELETECH LTD. Respondent Through: Mr. Kaanan Kapur with Mr. Bhushan Kapur, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA S.RAVINDRA BHAT, J. (OPEN COURT) 1. This matter is taken up today as 14.04.2015 was declared holiday on account of Ambedkar Jayanti . 2. Revenue is aggrieved by order of Income Tax Appellate Tribunal ( ITAT ) dated 07.03.2014 whereby it affirmed Appellate Commissioner s order on depreciation claim for AY 2006-07 by assessee for sum of Rs.53,39,256/-. 3. facts necessary to decide present appeal are that on 29.09.2000, assessee acquired shares of M/s Siemens Telecom Ltd. ( STL ). consideration paid by assessee, inter alia, ITA496-14 Page 1 included sum of Rs.9 Crores for marketing, customer support, distribution and associate setups of STL. It is conceded fact that for previous assessment years, i.e., 2002-03, 2003-04 and 2004-05, depreciation claim of assessee was allowed and had acquired finality. In these circumstances when returns for AY 2006-07 were considered by Assessing Officer ( AO ), he re-examined agreement between STL and assessee in light of depreciation claim made. AO rejected depreciation claim, inter alia, holding as follows: - 3.6 marketing set up can be created by any other party including assessee itself without being impeded by such marketing network of any other party. 3.7 It is unfathomable to understand any ownership rights resulting on account of purported acquisition. Neither can effective user of such acquisition be gauged from agreement. It would be pertinent to note that one of stipulated conditions of aforesaid agreement is non disclosure of this agreement to any third party without prior written consent. 3.8 From totality of events and circumstances, it IS axiomatically held that what has been acquired is not ownership right but arrangement for use of such network. In view of this, no depreciation can be allowed on such payment which has euphemistically been termed as goodwill. On different note, it can always be said that goodwill never depreciates; on contrary, it only appreciates. claim of assessee company regarding depreciation on 'goodwill' is, therefore, rejected and amount of Rs.53,39,356 is added back to income. 4. assessee s appeal was allowed by Commissioner ITA496-14 Page 2 (Appeals) (hereafter referred to as CIT (A) ) on basis of previous years reasoning which had accepted depreciation claims. CIT (A) also considered relevant statutory provisions and decision of this Court in CIT v. Hindustan Coca Cola Beverages Pvt. Ltd., (2011) 331 ITR 192. ITAT by impugned order affirmed findings of CIT (A). 5. It is urged by Mr. Kamal Sawhney, Sr. Standing Counsel that given nature of definition of asset under Section 32 (1), Explanation 3 (b), only intangible assets which are akin to those enumerated, i.e., know-how, patents, copyrights, trademarks, licences, franchises etc. can claim depreciation. It was urged that this is apparent from reading of expression any other business or commercial rights of similar nature . 6. Learned counsel submitted, therefore, that nature of marketing rights were such that there was no similarity or identity with enumerated rights set out in Explanation 3 (b) and having regard to these facts, unless assessee demonstrated and proved that such rights were akin to intangible assets mentioned, it could not claim depreciation. 7. Mr. Kaanan Kapur, learned counsel for assessee, on other hand, relied upon ruling in Hindustan Coca Cola Beverages (supra) and also pointed out that Supreme Court s ruling in CIT v. M/s Smifs Securities Limited, (2012) 348 ITR 302 ( SC) has held that claim for depreciation of goodwill is admissible. 8. relevant provision, i.e., definition of assets in Section 32 which enables assessee to claim depreciation reads as follows:- ITA496-14 Page 3 32. (1) [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 1st day of April, 1998, owned, wholly or partly, by assessee and used for purposes of business or profession, following deductions shall be allowed. XXX XXX XXX Explanation 3. - For purposes of this sub-section, [the expression assets shall mean - (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. 9. In Hindustan Coca Cola Beverages (supra), this Court had occasion to consider Explanation 3 (b) in specific context of claim for depreciation of goodwill. Division Bench noticed various decisions of Supreme Court including Nat Steel Equipment Pvt. Ltd. v. Commissioner of Central Excise, AIR 1988 SC 631 in context of what is meant by term similar . Court also recollected Supreme Court s ruling in CIT v. B.C. Srinivasa Setty, (1981) 128 ITR 294 (SC) in specific context of what is meant by goodwill and thereafter preceded to held as follows: - 22. Regard being had to concept of "goodwill" and statutory scheme, claim of Assessee and delineation thereon by tribunal are to be scanned and appreciated. claim of Assessee-Respondent, as is ITA496-14 Page 4 discernible, is that assessing officer had treated transactions keeping in view concept of business or commercial rights of similar nature and put it in compartment of intangible assets. To effectively understand what would constitute intangible asset, certain aspects, like nature of goodwill involved, how goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset it represents, namely, trademark, right, patent, etc. and further whether it would come within clause, namely, "any other business or commercial rights which are of similar nature" are to be borne in mind. 23. On scrutiny of order passed by tribunal, it is clear as crystal that depreciation was claimed on goodwill by Assessee on account of payment made for marketing and trading reputation, trade style and name, marketing and distribution, territorial know-how, including information or consumption patterns and habits of consumers in territory and difference between consideration paid for business and value of tangible assets. tribunal has treated same to be valuable commercial asset similar to other intangibles mentioned in definition of block of assets and, hence, eligible to depreciation. It has also been noted by tribunal that said facts were stated by Assessee in audit report and assessing officer had examined audit report and also made queries and accepted explanation proffered by Assessee. acceptance of claim of Assessee by assessing officer would come in compartment of taking plausible view inasmuch as basically intangible assets are identifiable non-monetary assets that cannot be seen or touched or physical measures which are created through time and / or effort and that are identifiable as separate asset. They can be in form of copyrights, patents, trademarks, goodwill, trade secrets, customer lists, marketing rights, franchises, etc. which either arise on acquisition or are internally generated. ITA496-14 Page 5 24. It is worth noting that meaning of business or commercial rights of similar nature has to be understood in backdrop of Section 32(1)(ii) of Act. Commercial rights are such rights which are obtained for effectively carrying on business and commerce, and commerce, as is understood, is wider term which encompasses in its fold many facet. Studied in this background, any right which is obtained for carrying on business with effectiveness is likely to fall or come within sweep of meaning of intangible asset. dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in commercial world as they represent particular benefit or advantage or reputation built over certain span of time and customers associate with such assets. Goodwill, when appositely understood, does convey positive reputation built by person / company / business concern over period of time. Regard being had to wider expansion of definition after amendment of Section 32 by Finance Act (2) 1998 and auditor's report and explanation offered before assessing officer, we are of considered opinion that tribunal is justified in holding that if two views were possible and when assessing officer had accepted one view which is plausible one, it was not appropriate on part of Commissioner to exercise his power under Section 263 solely on ground that in books of accounts it was mentioned as "goodwill" and nothing else. As has been held by Apex Court in Malabar Industrial Co. Ltd. (supra), Max India Ltd. (supra) and Commissioner of Income Tax v. Vimgi Investment P.Ltd. [2007] 290 ITR 505 (Delhi) once plausible view is taken, it is not open to Commissioner to exercise power under Section 263 of Act. ITA496-14 Page 6 10. In Smifs (supra), Court was pointedly answering questions as to whether goodwill would be within meaning of Section 32. After quoting Explanation (3) to Section 32 (1), Supreme Court held as follows: - 10. One more aspect needs to be highlighted. In present case, Assessing Officer, as matter of fact, came to conclusion that no amount was actually paid on account of goodwill. This is factual finding. Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to conclusion that authorised representatives had filed copies of Orders of High Court ordering amalgamation of above two Companies; that assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to Assessee for consideration; that difference between cost of asset and amount paid constituted goodwill and that Assessee-Company in process of amalgamation had acquired capital right in form of goodwill because of which market worth of Assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [`ITAT', for short]. We see no reason to interfere with factual finding. 11. One more aspect which needs to be mentioned is that, against decision of ITAT, Revenue had preferred appeal to High Court in which it had raised only question as to whether goodwill is asset under Section 32 of Act. In circumstances, before High Court, Revenue did not file appeal on finding of fact referred to hereinabove. 12. For afore-stated reasons, we answer Question No. [b] also in favour of Assessee. From above discussion, it is apparent that question as to ITA496-14 Page 7 whether claim for depreciation confirms to one or other description under Section 32, especially Explanation 3 has to be examined with reference to what is put forward by assessee in given facts of each case. structure of definition, or rather expanded definition, which by Explanation 3 spells out what are intangible assets (know-how, patents, copyrights, trademarks, licences, franchises etc.), being of peculiar nature, claim which Court would necessarily have to consider is whether item claimed to be eligible for depreciation confirms to other business or commercial rights of similar nature . In facts of present case, reading of agreement between STL and assessee clarifies that specific amount, i.e., Rs.9 Crores was paid by assessee to transferor who owned commercial rights towards network and facilities. consideration was specific value but for which network would not have been otherwise transferred. In that sense, it constituted business or commercial rights which were similar to enumerated intangible assets. In so concluding, however, this Court does not lay down general or particular principle that every such claim has to be necessarily allowed as was apparently understood by ITAT. circumstance that declaration of law in Smifs Securities (supra) envisions inclusion of goodwill as asset and, therefore, entitled to depreciation, in other words does not necessarily mean that in every case goodwill claim has to be allowed. In present case, though termed as goodwill, what was actually parted with by STL was commercial right, i.e., exclusivity to network which would not have been otherwise available but for ITA496-14 Page 8 terms of arrangement. So viewed, this Court is satisfied that conclusions arrived at by CIT (A) and ITAT cannot be faulted. No substantial question of law arises; appeal is consequently dismissed. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) APRIL 15, 2015 /vikas/ ITA496-14 Page 9 Commissioner of Income-tax, Delhi-I v. Mis Bharti Teletech Ltd