By TIOL News Service

PUNE, MAR 09, 2015: THE issue before the Bench is - Whether "customer base" acquired by an assessee on account of transfer of business ownership of a company, is eligible for the benefit of depreciation u/s 32(1)(ii). YES is the answer of the Tribunal.

Facts of the case

The assessee company is engaged in the business of trading in two wheeler brake systems and components. For the year under consideration, the assessee had furnished the return declaring total income at Nil, after claiming depreciation. The AO while examining the claim of assessee on account of depreciation on intangible assets amounting to Rs.2,26,62,278/-, requisitioned the assessee to justify such claim. In reply, the assessee claimed that it had entered into an agreement to assets sale and transfer with M/s. Bosch Chassis Systems India Ltd. (BCSIL), under which, the intangible assets were specified which included Customer Base, Material Suppliers, Low Cost Process Know-how, Technical Man Power, Technology and Patents. The plea of the assessee was that depreciation on intangible assets acquired after 31st Mar, 1998 were entitled to depreciation @ 25%. The AO noted that the claim of the assessee was that it had purchased the entire business from BCSIL vide agreement. As per the assessee, all the assets acquired satisfied the conditions prescribed u/s 32, and where the assessee had paid price to acquire the said assets, it was eligible for claim of depreciation on the same.

The AO noted that the assessee was a joint venture company between BCSIL and Brembo Spa, Italy and was engaged in the trading of two wheeler brake systems. The AO observed that the assessee had acquired the business of M/s. BCSIL for a total consideration of Rs.28.70 crores and the fixed assets and the inventory had been valued and acquired at cost from M/s. BCSIL. The remaining amount paid by the assessee as the purchase consideration to M/s. BCSIL was allocated to the assets named as intangible assets. Accordingly, the AO came to the conclusion that M/s. BCSIL was not in possession of any recognised intangible assets that it could have transferred to the assessee, in view of the sale/purchase agreement. On the perusal of the valuation report, the AO noted that the cost of the fixed assets were allocated as per the valuation report and the consideration paid over and above the same, was towards value of intangible assets. As per the AO, the basis for determining the value of goods grouped together under the head intangible assets had not been substantiated by the assessee nor, it was clear from the agreement. The AO, then deliberated upon the meaning of the word depreciation and considered the eligibility of each and every asset claimed by the assessee as an intangible asset and was of the view that the issue in the present case was not whether the depreciation is admissible on intangible assets or not, but the issue was whether the assets claimed by the assessee were depreciable or not. Since section 32 grants depreciation in respect of specified assets, the intangible assets in possession of the assessee did not qualify for the basic characteristics of depreciable assets that happens due to wear and tear and efflux of time. On appeal, the DRP upheld the proposal made by AO and consequently, the AO passed the order u/s 143(3) r.w.s. 144C(13), disallowing the depreciation on the intangible assets claimed at Rs.2,26,62,278/-.

Having heard the parties, the Tribunal held that,

++ the perusal of the agreement reflects that the intention of the parties i.e. M/s. BCSIL desired to sell and transfer and the purchaser i.e. the assessee desired to purchase and acquire from the seller the RBIC assets in accordance with the terms and conditions of the agreement. The parties to the agreement had also got the valuation report prepared for the tangible assets and also for the intangible assets. The perusal of the said valuation report reflects the valuer to have conducted the exercise of identification of intangible assets. The valuer commented that any intangible asset could have three stages i.e.(i) the asset which may or may not have any future economic benefits such as inventions, patents; or (ii) asset which can have future economic benefits subject to happening of certain events (unpredictable) and (iii) assets which have shown past and present economic benefit which may or may not have measured but has an assured future economic benefit. It was reported by the valuer that the case of the assessee fell within the last stage of identification. Then the valuer has identified the various parameters and facts based on which, the identification of intangible assets had been made under different heads. In the said background, the assessee claimed depreciation on intangible assets. Therefore, in order to adjudicate the issue, the nature of assets claimed to be intangible assets acquired by the assessee, is required to be considered;

++ as regards Customer base, on the perusal of the record and the agreement entered into between the parties, it is apparent that the assessee had acquired the entire business along with Technical Know-how of two wheeler braking system from M/s. BCSIL. On such acquisition, the assessee had acquired the Customer base developed by M/s. BCSIL along with which orders in hand and long term contracts with the customers, were transferred to the assessee. Such acquisition by the assessee was for the purpose of running its business and as the characteristic of being an intangible asset was fulfilled as such, the assessee was entitled to the claim of depreciation u/s 32(1)(ii). As regards the suppliers which had been developed for supply of two wheeler braking components, it is seen that the said acquisition by the assessee is akin to the acquisition of Customer base and following the same parity of reasoning, this Tribunal holds that the assessee is entitled to claim depreciation u/s 32(1)(ii) on the same. The AO had treated the same to be in the nature of goodwill developed by the M/s. BCSIL which has been acquired by the assessee and following the ratio laid down by the Supreme Court in CIT Vs. Smifs Securities Limited, the assessee is entitled to the claim of depreciation u/s 32(1)(ii);

++ as regards Knowhow process, it is seen that the issue of allowability of depreciation on the nature of intangible assets eligible for depreciation u/s 32(1)(ii) arose before the Delhi High Court in the case of Areva T&D India Ltd. Vs. DCIT, wherein, it was observed that where, on the acquisition of business, the assessee acquires certain information which is invaluable and would result in carrying out the business in continuity, which was earlier being carried on by the transferor, then the said intangible assets were comparable to the licenses to carry out the existing business of the transferor, in the absence of which, the assessee would have to commence its business from scratch and go through gestation period. Considering the said aspect, it is seen that the assessee had acquired the entire business along with Industrial and Technical Know-how in relation to the business of two wheeler braking system being carried out in India. Where the assessee acquired the Customer base, the list of Material suppliers, Process Know-how, then the said acquisitions were the licenses for assessee to carry on the business of two wheeler braking system in India on its acquisition from M/s. BCSIL. In line with the ratio laid down by the Delhi High Court in Areva T & D India Ltd. Vs. DCIT, the said assets are the intangible assets acquired by the assessee and are eligible for deduction u/s 32(1)(ii). Similarly, the assessee had acquired technical man power, wherein the entire team of Engineers, Supervisors and skilled operators were offered to the assessee and the said officers/technicians brought in their knowledge and experience for carrying on the business by the assessee. The drawings and designs with respect to local adaptation in the products manufactured for Indian application i.e. technology involved in operating the business was also handed over to the assessee and such acquisition is clearly for strengthening the carrying on the business by the assessee and is comparable to a License to carry on the business and thus, is an intangible asset acquired by the assessee. The patents which were internally developed technology for manufacturing of two wheeler brakes retrofits were also the acquisition of license to carry on the business, even when the registration for the Patents was in process. In any case, the Patents are directly covered within the purview of the term 'intangible asset';

++ there is no merit in the plea of the AO that the said assets were not depreciable assets as the same were not subject to wear and tear due to diminish in value with use and efflux of time. In the case of intangible asset being commercial/business rights diminution in value or physical wear and tear is not an essential condition for admissibility for depreciation u/s 32, if the assets used as a business tool for earning the income, was the proposition laid down by Mumbai Bench of the Tribunal in DCIT Vs. Weizmann Forex Ltd. Following the same, there seems no merit in the plea of AO in denying the claim of depreciation u/s 32(1)(ii). Further, there is no merit in the observations of AO that the Seller did not possess any intangible assets as the same were not reflected in its Balance Sheet. The assets acquired by assessee were self generated assets of Seller and hence no value reflected in its Balance Sheet. There is no merit in the observations of AO in this regard and the same is dismissed. The next observation of AO that no separate costs had been attributed to individual assets acquired by assessee have no relevance and the same is dismissed. Accordingly, the AO is directed to allow depreciation on the WDV of intangible assets acquired in the preceding year and brought forward in the year under consideration.

(See 2015-TIOL-240-ITAT-PUNE)