HINDUSTAN COCA COLA BEVERAGES PVT. LTD. (ITA Nos. 1391/2010, 1394/2010 & 1396/2010 dated 14 January 2011- Del HC)
• The taxpayer is engaged in the business of manufacturing and trading non-alcoholic beverages.
• The taxpayer claimed depreciation on the amount classified as goodwill which represented the following:
– Payment made to bottlers at the time of acquisition of their business, representing consideration for marketing and trading reputation, trading style and name, marketing and distribution territorial know how and information of the territory;
– Amount paid for certain contracts, rights etc. owned by the bottlers; and
– Industrial information like database of the territory relating to consumer preferences of different flavors, season curves, distribution network, population related statistics, etc. which helps the taxpayer in the manufacture of its product, and plan its manufacturing schedules.
•This claim was allowed by the Assessing Officer (AO).
Contention of the Revenue
• The Commissioner of Income-tax (CIT), exercising his revisionary powers, held that the taxpayer is not eligible to claim depreciation on the aforesaid amounts on the basis that goodwill is not covered within the meaning of “intangible assets” which mean only know-how, patent, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.
Ruling of the Tribunal
• The finding of the CIT that depreciation on goodwill is inadmissible was solely based on the entry in the books of accounts, and the Tribunal upheld that nomenclature used in the books of accounts is not relevant for ascertaining the real nature of the transaction.
• In respect of whether the matter was within the revisionary jurisdiction of the CIT, the Tribunal held that: – When an AO takes a plausible view, which is sustainable in law, on merits of the case, his order cannot be subject to review merely because another view is possible.
– If the AO accepted a claim made by the taxpayer, after having an opportunity to peruse the submissions, his stand cannot imply that there was no application of mind.
• On merits, the Tribunal observed that it is not that goodwill is specifically excluded from the intangible assets eligible for depreciation, and therefore, even if an asset is described as goodwill but it fits into the description of “intangible assets” under section 32(1 )(ii) of the Income-tax Act, 1961 (ITA), the taxpayer is eligible to claim depreciation.
Ruling of the High Court
• In respect of what would constitute „goodwill?, the High Court observed that that to effectively understand what would constitute an intangible asset, certain aspects like the nature of goodwill involved, how the 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 whether it would come within the clause “any other business or commercial rights of similar nature” would need to be kept in mind.
– Assets which are included in the definition of “intangible assets” includes, among other things, any other business or commercial rights of similar nature.
– Commercial rights are rights which are obtained for effectively carrying on the business and commerce. Commerce being a term of wider connotation, any right which is obtained for carrying on business effectively is likely to fall within the ambit of “intangible asset”.
– However, the business or commercial right should be if similar nature as know-how, patents, copyrights,
trademarks, licenses, franchises etc., which are brought into existence by experience and reputation.
– The term “goodwill” also conveys a positive reputation built by a person/ company/ business concern over a period of time.
• In the circumstances, the High Court regarded the definition of intangible assets as having a wider expanse and based on the submissions made by the taxpayer, concurred with the Tribunal?s decision that where two views were possible, it was not appropriate on the part of the CIT to exercise his revisionary powers in disallowing the depreciation of the amount classified in the books as goodwill.
• Though the High Court was dealing with a contention that the depreciation on goodwill could be a possible view and agreed with that view, the decision highlights that it may be possible to claim depreciation on goodwill where the facts demonstrate that it represents underlying benefits in the nature of know-how, trademark, brands, or such rights which could be considered as any other business or commercial rights of similar nature, etc. which per se are eligible for depreciation
• This ruling seems to reiterate the view expressed by the Kerala High Court that depreciation would be allowable on goodwill where a business is purchased on a going concern basis, leading credence to the claim that depreciation on goodwill may be allowable based on the facts of the case.
• The High Court has also reiterated the settled law that tax treatment should follow from the real nature of the transaction, and not from the accounting treatment adopted.