Amount paid to acquire commercial rights of marketing was Goodwill and thus depreciable

 

Amount paid to acquire commercial right for marketing, customer support, distribution and associate setups shall be allowed depreciation on the same. Though termed as goodwill, what was actually parted with by company was a commercial right, i.e., exclusivity to market/customer network. Hence, depreciation was to be allowed.

Case: Commissioner of Income Tax vs. MIS Bharti Teletech Ltd.

 

Facts:

The assessee acquired the shares of M/s Siemens Telecom Ltd. (STL). The consideration paid by for the same included the sum of Rs.9 crores for the “marketing, customer support, distribution and associate setups” of STL.

 

The assessee claimed depreciation on the amount paid for marketing, customer support, distribution and associate setups. The same was allowed in the preceding assessment years.

 

During the assessment proceedings of the current year, the AO disallowed claim of depreciation stating that:

• such marketing setups could be created by any other party including the assessee itself without being impeded by such marketing network of any other party;
• that no ownership rights resulted 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 was non-disclosure of this agreement to any third party without prior written consent, and
• that what had been acquired was not the ownership right but an arrangement for use of such network and said payment was euphemistically termed as goodwill.

 

Aggrieved by the order, assessee made an appeal. On this, the CIT(A) and the Tribunal allowed the claim of depreciation on the amount paid for marketing, customer support, distribution and associate setups.

 

Thus, revenue appealed to the High Court.

 

Held:

Definition of assets in Section 32 reads as follows:

In respect of depreciation of-

(i)     buildings, machinery, plant or furniture, being tangible assets;

(ii)   know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed.

Explanation 3 – For the purposes of this sub-section, the expression “assets” shall mean —

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. ”

 

In the present case, when the agreement between STL and the assessee was read, it clarified 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 numerated intangible assets.

In addition, though the amount paid for marketing, customer support, distribution and associate setups was 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.

 

In the light of the above, the Court allowed the depreciation claimed by the assessee on marketing, customer support, distribution and associate setups. Amount paid to acquire commercial rights of marketing was goodwill and thus depreciable.

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