Brief: In this case the ITAT has held that the agreements entered into by the assessee, viewed together in their entirety, pertain to a single transaction of purchase of assets. Accordingly, the amount paid for non-compete fees was considered to be for acquisition of a business and capital in nature. The ITAT has also observed that each case would need to be decided in the background of its peculiar facts and circumstances. Thus, if the facts in another case are different (e.g. in the case of a continuing business) it may be possible to distinguish the ruling of the ITAT.
Citation : KEC International Ltd. Vs. Addl. CIT (ITA No. 4420/ Mum./ 2009)
Court : ITAT Mumbai
· As per section 32(1 )(ii) of the Income Tax Act, 1961 (ITA), a taxpayer is eligible to claim depreciation on know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets.
· In this regard, recently the Mumbai Tribunal has examined the issue of whether depreciation can be claimed on ‘brand’ under the aforesaid provisions of the ITA.
· The taxpayer had taken over, by way of ?slump sale?, the power business of a related concern in a composite scheme sanctioned by the Bombay High Court under the relevant provisions of the Companies Act, 1956.
· During the assessment proceedings, the Revenue authorities inter alia observed that in the books of the related concern (transferor), intangible assets such as brand name and goodwill did not exist. However, the taxpayer had valued brand (INR 240 crores) and goodwill (INR 3.63 crores) in its books and claimed depreciation on the same.
· The Revenue authorities disallowed the depreciation on brand and goodwill on the ground that these were not covered by provisions of section 32(1)(ii) of the ITA.
· The first appellate authortity [CIT (A)], on appeal by the taxpayer, upheld the disallowance of depriciation on intangible assets (including brand).
Issue before Income Tax Appellate Tribunal (‘the Tribunal’)
· Whether ‘brand’ falls within the ambit of section 32(1 )(ii) of the ITA and hence eligible for depreciation?
Contentions of the taxpayer
· Brand is nothing but a trademark. As per section 2(zb) and 2(m) of the Trademarks Act, 1999, trademark includes mark and mark includes brand. Alternatively, brand can be considered as “any other business or commercial rights of similar nature” included in the definition of intangible assets under section 32(1 )(ii) of ITA.
· The Hon’ble Bombay High Court in the case of CIT v. Techno Shares and Stocks Ltd. understood the term brand as an intellectual property right and has equated it with ‘trademark’.
· The Finance Bill which introduced section 32(1)(ii) of the ITA provided that goodwill was treated differently
from brand name and the intention of the legislature was to equate the trademark with brand name.
· Thus, ‘brand’ falls within the ambit of section 32(1 )(ii) of the ITA and should be eligible for depreciation.
Contentions of the Revenue
· Brand is nothing but goodwill and relying on the Mumbai Tribunal decision in the case of R.G.Keswani v. ACIT2 no depreciation can be claimed on goodwill as the same is not covered under section 32(1 )(ii) of the ITA.
· Thus, the depreciation claimed by the taxpayer on brand should be disallowed.
Observations and Ruling of the Tribunal
· Agreeing to the view of the jurisdictional High Court in CIT v. Techno Shares and Stocks Ltd. (supra) that brand name is an intellectual property similar to knowhow, patents and trademark etc, the Tribunal observed that trademark includes brand.
· The Tribunal also observed that section 55(2)(a) of the ITA was amended (by the same Finance Act, which amended section 32(1)(ii)) to incorporate cost of acquisition in relation to trademark or brand name associated with the business. Accordingly, trademark or brand name have been used in conjunction and as an alternative to each other and thus the intent of legislature also was that brand name or trademark are similar intellectual properties.
· In view of the above observations, brand falls within the ambit of intangible assets as per section 32(1 )(ii) of the ITA; thus is eligible for depreciation.