Depreciation allowable on payments to acquire skill and know-how of incoming employees as ‘business information’ classified as other intangiblle Asset

Court: Bangalore bench of the Income-tax Appellate Tribunal

Citation: Bosch Ltd. Vs. CIT [2009-TIOL-736-ITAT-BANG]

Brief :Bangalore bench of the Income Tax Appellate Tribunal (the Tribunal) in the case of Bosch Ltd. Vs. CIT [2009-TIOL-736-ITAT-BANG] held that the taxpayer company was entitled to claim depreciation on the skill and the know-how brought by the employees of the transferee company classified as ‘business information’ under the category of ‘other identifiable intangibles’ (goodwill) under section 32(ii) of the Income Tax Act, 1961 (the Act).

Facts of the case

• The taxpayer acquired business from Phillips (India). In addition to the specified tangible and intangible assets, ten employees of the transferee company were also absorbed and the skill and the know-how brought by these employees were classified as ‘business information’. In the valuer’s report, it was valued at INR 14 million being the ‘business information’ under the category of ‘other identifiable intangibles’ (goodwill).
• In its return of income the taxpayer claimed INR 3 million as depreciation on ‘payment for goodwill’. The Assessing Officer (AO) allowed the claim of the taxpayer. However, the Commissioner of Income-tax (CIT) from the information available on record observed that though the taxpayer claimed depreciation as ‘goodwill’, the said amount was in fact ‘business information’.
• The CIT held that the taxpayer had claimed incorrect and excess depreciation on ‘business information’ and therefore, the assessment order passed by the AO was erroneous and prejudicial to the interest of revenue.

Contentions of the taxpayer

• The business information brought in by the ten employees of Philips (India) would be available to the taxpayer and the know-how developed by them during their service with their earlier company was one of the important components of the assets bought over by the taxpayer.
• The business information i.e. know-how brought in by them had helped the taxpayer to achieve increased sales in Financial Year 2002-03 (3 months) and 2003-04 respectively, resulting in increase in overall profits. In this context, know-how was business skills, market knowledge, knowledge of suppliers, customers and their preferences, behaviours and, thus, it was an intangible asset. Accordingly, the ‘business information (know-how)’ was entitled to depreciation under section 32 of the Act at the rate of 25 percent.

Tax department’s contentions:- The tax department contended that the AO had neither discussed nor considered in detail the issue and also failed to examine it in depth. Thus, the order of the AO was erroneous which had resulted in the invoking of the provisions of section 263 of the Act.

Tribunal’s ruling

• The Tribunal analyzed the decision of the Mumbai Tribunal in the case of Skyline Caterers (P) Ltd. where it was held by the Mumbai Tribunal that the expression ‘any other business or commercial rights of similar nature’ would include rights acquired by the taxpayer under the catering contract which can be used as a tool to carry on the business. Further, since catering business at client’s canteen could be carried on only with the help of such rights under the contract, the taxpayer was entitled to depreciation.
• The Tribunal after relying on the above decision, held that the taxpayer was entitled to claim depreciation on ‘business information’ amounting to INR 14 million under the category of ‘other identifiable intangibles’ (goodwill).

Our Comments

Allow ability of depreciation on Goodwill and related intangibles has been a subject matter of debate before various bench of Tribunal. The Bangalore Tribunal, after considering various judgments on the matter, has ruled in favor of the taxpayer that the depreciation is available on the amount paid to acquire skill and know-how of the incoming employees as business information under section 32(1)(ii) of the Act.

This is a welcome decision to the extent that it has allowed depreciation on such a unique intangible asset being skill and know-how of incoming employees as ‘business information’ classified under other identifiable intangibles (Goodwill).

We would like to bring to your attention that various bench of Tribunal have dealt with several types of rights (intangible assets) for the allow ability of depreciation. Some of the key decisions are given below:

In the above cases the Tribunal has examined the meaning of various intangible assets mentioned in section 32 of the Act. Further it has also dealt with the ambit of the term ‘any other business or commercial rights of a similar nature’ and allowed depreciation on various different rights (intangible assets).

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