CIT Vs. Mis Bharti Teletech Ltd. (Delhi High Court), I.T.A. No. 496/Delhi/2014, Date of Order: 15.04.2015

The facts necessary to decide the present appeal are that on 29.09.2000, the assessee acquired the shares of M/s Siemens Telecom Ltd. (STL). The consideration paid by the assessee, inter alia, included the sum of Rs.9 Crores for the “marketing, customer support, distribution and associate setups” of STL. It is a conceded fact that for the previous assessment years, i.e., 2002-03, 2003-04 and 2004-05, the depreciation claim of the assessee was allowed and had acquired finality. In these circumstances when the returns for AY 2006-07 were considered by the Assessing Officer (AO), he re-examined the agreement between STL and the assessee in the light of the depreciation claim made. The AO rejected the depreciation claim, inter alia, holding as follows: –

“3.6 A marketing set up can be created by any other party including the 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 the purported acquisition. Neither can the effective user of such acquisition be gauged from the agreement. It would be pertinent to note that one of the stipulated conditions of the aforesaid agreement is non disclosure of this agreement to any third party without prior written consent.

3.8 From the totality of events and circumstances, it IS axiomatically held that what has been acquired is not the ownership right but an 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 a different note, it can always be said that goodwill never depreciates; on the contrary, it only appreciates. The claim of the assessee company regarding depreciation on ‘goodwill’ is, therefore, rejected and an amount of Rs.53,39,356 is added back to the income.”

The assessees appeal was allowed by the Commissioner (Appeals) (hereafter referred to as CIT (A)) on the basis of the previous years reasoning which had accepted the depreciation claims. The CIT (A) also considered the relevant statutory provisions and the decision of this Court in CIT v. Hindustan Coca Cola Beverages Pvt. Ltd., (2011) 331 ITR 192. The ITAT by the impugned order affirmed the findings of the CIT (A).

Explanation 3 to section 32 spells out what are intangible assets (know-how, patents, copyrights, trademarks, licences, franchises etc.), being of a peculiar nature, the claim which the Court would necessarily have to consider is whether the item claimed to be eligible for depreciation confirms to “other business or commercial rights of similar nature”. In the facts of the present case, a reading of the agreement between STL and the assessee clarifies that a specific amount, i.e., Rs.9 Crores was paid by the assessee to the transferor who owned commercial rights towards the network and the facilities. The consideration was a specific value but for which the network would not have been otherwise transferred. In that sense, it constituted business or commercial rights which were similar to the enumerated intangible assets. In so concluding, however, this Court does not lay down the general or particular principle that every such claim has to be necessarily allowed as was apparently understood by the ITAT. The circumstance that the declaration of law in Smifs Securities (supra) envisions inclusion of goodwill as an asset and, therefore, entitled to depreciation, in other words does not necessarily mean that in every case the goodwill claim has to be allowed. In the present case, though termed as goodwill, what was actually parted with by STL was a commercial right, i.e., exclusivity to the network which would not have been otherwise available but for the terms of the arrangement. So viewed, this Court is satisfied that the conclusions arrived at by the CIT (A) and the ITAT cannot be faulted. No substantial question of law arises; the appeal is consequently dismissed.

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