Income Tax Appellate Tribunal - Delhi
Pitney Bowes India Pvt. Ltd.,, New Delhi vs Acit, New Delhi on 30 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: "F", NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
&
SHRI O.P. KANT, ACCOUNTANT MEMBER
ITA No.- 6119/Del/2016,
(Assessment Year: 2011-12)
&
ITA Nos.- 5157, 5158 & 5546/Del/2017
(Assessment Years: 2012-13, 2013-14 & 2014-15)
Pitney Bowes India Private Assistant Commissioner of
Limited. Vs. Income Tax,
D--7/3, Okhla Industrial Estate Circle 20(1),
Phase-II New Delhi.
New Delhi.
PAN No: AADCP3417C
APPELLANT RESPONDENT
Assessee by : Sh. Manonit Dalal (Adv .)
Revenue by : Sh. Atiq Ahmed (Sr. DR)
Date of Hearing : 22.05.2018.
Date of Pronouncement : 30/05/2018.
ORDER
PER BENCH:
These appeals by the assessee are preferred against separate orders passed by the Ld. Commissioner of Income-tax (Appeals)-7, New Delhi [in short 2 ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
the Ld. CIT(A), order dated 06/09/2016 for assessment year 2011-12, order dated 31/05/2017 for assessment year 2012-13; order dated 31/05/2017 for assessment year 2013-14; order dated 30/06/2017 for assessment year 2014-15 respectively. In all these appeals, identical issues have been raised except change of amount of additions, therefore these appeals were heard together and disposed of by way of this consolidated order for convenience and brevity. The grounds in all the years being almost identical, we are reproducing grounds of appeal raised in ITA No. 6119/Del/2016 qua assessment year 2011-12 as under:
" 1. That on the facts and in the circumstances of the case and in law, the order passed under section 250(6) of the Act by the Hon'ble CIT(A) is erroneous and bad in law as well as in facts in respect of the grounds of appeal mentioned below.
2. That the Ld. CIT(A) has erred in law and on facts in upholding the disallowance made by the Learned Assessing Officer ('Ld. AO') on account of depreciation on goodwill under section 32 of the Act amounting to INR 2,959,092/-
3. That the Ld. CIT(A) has erred in law and on fats in upholding the disallowance made by the Ld. AO on account of depreciation on non-complete fee under section 32 of the Act amounting to INR 3,085,933. That the above grounds of appeal are without prejudice to each other. That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal."
2. Briefly stated facts of the case are that the assessee filed return of income for assessment year 2011-12 on 23/11/2011 declaring total income of Rs.
3ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
5,19,57,687/-; for assessment year 2012-13 on 28/12/2013 declaring total income of Rs. 5,84,50,930/-; for assessment year 2013-14 on 28/11/2013 declaring loss of Rs. 2,21,71,329/-; for assessment year 2014-15 on 28/11/2014 declaring loss of Rs. 1,25,76,660/. The cases in all these assessment years were selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961(in short the 'Act') were issued and complied with. The assessments under section 143(3) of the Act were completed after making various addition/disallowances in all these assessment years involved. In assessment year 2011-12, the appeal has been partly allowed by the Ld. CIT(A), whereas for assessment years 2012-13 to assessment year 2014-15, the appeals filed by the assessee have been dismissed by the Ld. CIT(A). Consequent to the order of the Ld. CIT(A), the assessee has challenged following additions/ disallowances before the Tribunal:
AY/Additions Depreciation on Depreciation on Total noncompete fee goodwill(Rs.) (Rs.) 2011-12 30,85,933 29,59,092 2012-13 23,14,449 22,19,319 2013-14 17,35,837 16,64,489 2014-15 13,01,878 12,48,367
3. In assessment year 2011-12, the Assessing Officer disallowed the claim of depreciation on the goodwill observing as under:
4ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
"In view of the above findings, the assessee has not provided sufficient documentary evidence/justification on valuation of Goodwill. The Depreciation on Goodwill is claimed by the assessee company first time during the financial year, and in lack of supporting documents & its justification on valuation of goodwill, value of goodwill could not be ascertained, the depreciation on goodwill claimed of Rs. 29,59,092/- is not allowed to the assessee company and added back to the total income of the assessee during the year.
4. Similarly, the Assessing Officer disallowed the claim of depreciation on non- compete fee in assessment year 2011-12 observing as under:
" In view of the above findings, the assessee could not provided the proper justification on valuation of non compete fees. Since the Depreciation on non- compete Fees is claimed by the assessee company first time during the financial year and in lack of proper justification & valuation of Non-Compete Fees, valuation of non-compete fees could not be ascertained. Further non compete fees of Rs. 5,94,47,290/- is not an intangible assets as per section 32(1) of the income tax act, the assessee has not claimed the depreciation in any of the preceding financial years and claimed the same as deferred revenue expenditure which also has been disallowed in earlier financial years, the depreciation on non-compete fees could not be allowed to the assessee during the year. Hence an amount of Rs. 30,85,933/- is disallowed and added back to the total income of the assessee during the year."
5. In assessment year 2012-13, the Assessing Officer disallowed the depreciation both on the goodwill as well as on the non-compete fee observing as under:
" 3.4 During the course of the assessment proceedings the assessee vide letter dated 29.02.2016 requested for allowance of depreciation of Rs. 23,14,449/-on Non-Compete fee and Rs. 22,19,319/- on Goodwill. At the outset, it is observed that such claim amounts to revisions of return and such revision is not permissible in view of the decision of the Hon'ble Supreme Court in the case of Goezte India Ltd. v CIT 284 ITR 323 SC, as per which any new claim or any change in the original return can only be made by way of filing a revised return as per the provisions of section 139(5) of the I.T.Act, 1961 and not by way of making a claim by way of filing a plain letter before 5 ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
the Assessing Officer. The claim of the assessee is also not acceptable in view of the detailed orders passed in AY 2011-12 and earlier years in which the said amounts were not allowed and were added to the income of the assessee. Since, the facts and the circumstances for this year are also similar; the claim of the assessee not made in the return of income is not allowable on merits as well."
6. Disallowances in assessment years 2013-14 and 2014-15 have been made after making similar observations as made in assessment year 2012-13.
7. In all the assessment years from 2011-12 to 2014-15, the Ld. CIT(A) followed finding of his predecessor in assessment year 2009-10 and upheld both the disallowances.
8. Before us, the Ld. Counsel of the assessee submitted that both the issues in dispute of depreciation on goodwill as well as depreciation on non-compete fee are covered by the order of the Tribunal in ITA No. 289 to 293/Del/2013 for assessment year 2005-06 to assessment year 2009-10 respectively. The Ld. Counsel submitted that the issue of depreciation of goodwill is covered in favour of the assessee whereas the issue of depreciation on non-compete fee is covered against assessee.
9. The Ld. DR also could not controvert above statement of the Ld. Counsel, and submitted that issue in dispute in present appeals may be decided accordingly.
6ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
10. We have heard the rival submissions and perused the relevant material on record. The assessee company is subsidiary of M/s Pitney Bowes International Holding Inc., USA. The assessee company took over mailing business of M/s Kilburn office automation Ltd (KOAL) on slum sale basis vide business transfer agreement (BTA) executed on 15/10/2004. Under the BTA, the assessee claimed to have paid for non-compete fee and goodwill. Accordingly, the assessee claimed depreciation on goodwill and non-compete fee in various years, including in the years involved before us in appeals.
11. The Tribunal in ITA numbers 289 to 293/Del/2013 for assessment years 2005-06 to 2009-10, adjudicated, the issue of depreciation on non-compete fee against assessee observing as under:
" 6.6 We have heard the rival submission and perused the relevant material on record. The issue in dispute is whether non-compete fee is in the nature of intangible assets eligible for depreciation under section 32(1)(ii) of the Act. This issue has been decided by the Hon'ble High Court of Delhi in the case of Sharp Business System (supra) as under:
"Q. Nos. 2 and 3 In Tangible Asset -
11. This question arose as a direct sequel to the appellant's alternative submission that if the expenditure is treated as a conferring capital advantage, necessarily they are depreciable. The appellant claims for depreciation of "know-how", "patents", "copyrights", "trademarks", "licenses", "franchises" or other business or commercial rights of similar nature being intangible assets acquired pm pr after 1st day of April 1998. Arguing by analogy, learned counsel for the appellant relied upon the judgment of the Supreme Court in Techno Shares & Stocks Ltd. (supra) where the issue was whether the contention of the 7 ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
assessee that it could claim depreciation on the Bombay Stock Exchange Membership Card held by it on the plea that it was a license or "business commercial right of similar nature" was upheld. The appellant also relied upon the decision of this Court in Hindustan Coco Cola Beverages P. Ltd. (supra) and the judgment of the Kerala High Court in B. Ravindran Pillai v. CIT 332 ITR 531 (Ker). As would be evident from Section 32(1 )(ii), depreciation can allowed in respect of intangible assets. Parliament has spelt-out the nature such assets by express reference to "know-how", "patents", "copyrights", "trademarks", "licenses" and franchises". So far as patents, copyright trademarks, licenses and franchise are concerned, though they are intangible assets, the law recognizes through various enactments that specific intellectual property rights flow from them. Licenses are derivative and often are the means of conferring such intellectual property rights. The enjoyment of such intellectual property right implies exclusion of others, who do not own or have license to such rights from using them in any manner whatsoever. Similarly, in the matter of franchises and know-how, the primary brand or intellectual process owner owns the exclusive right to produce retail and distribute the products and the advantages following from such brand or intellectual process owner, but for the grant of such know-bow rights or franchises. In other words, out of these species of intellectual property like rights or advantages lead to the definitive assertion of a right in rem. The decision of this Court in Hindustan Coco Cola Beverages P. Ltd.
ITA-492-72 Page 11 (supra) and that of the Kerala High Court in B. Ravindran Pillai (supra) underlined that goodwill is also a species of depreciable right which can claim the benefit of Section 32. Those decision were based on the ruling of the Supreme Court in CIT v. B.C. Srinivasa Setty 1981 (128) ITR 294 (SC) and subsequent cases which have ruled that goodwill is a depreciable capital asset. So far as the decision in Techno Shares & Stocks Ltd. (supra) is concerned, the Supreme Court clearly limited its holding that the right to membership of Stock Exchange is in the nature of "any other business or commercial right" which was an intangible asset as is evident from the following observations:
"Before concluding we wish to clarify that our present judgment is strictly confirmed to the right to membership conferred upon the membership under the BSE Membership Card during the relevant assessment years. We hold that the said right to membership is "business or commercial activity" which gives a non-defaulting 8 ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
continuing membership and right to access Exchange and to participate therein and in that sense it is a license or akin to a license, in terms of Section 32(1)(ii)......."
12. It is, therefore, apparent that the ruling in Techno Shares & Stocks Ltd. (supra) was concerned with an extremely limited controversy, i.e. depreciability of stock exchange membership exchange. This Court observes that such nature was held to be akin to a license because it enable the member, for the duration of the membership, to access the Stock Exchange. Undoubtedly, if conferred a business advantage and was an intangible asset. The question here, however, is whether a non- compete right of the kind acquired by the assessee against L&T for seven years amounts to depreciable tangible asset. As discussed earlier, each of the species of rights spelt-out in Section 32(1 )(ii), i.e. know-how, patent, copyright, trademark, or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be 'intangible asset". The nature of these rights mentioned clearly spell-out an element of exclusivity which ensures to the assessee as a sequel to the ownership. In other words, but for the ownership of the intellectual property or know-how or license or franchise, it would be Hon'ble to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance "in rem". However, in the case of a non-competition agreement or covenant, the advantage is a restricted one, in point of time. It does not necessarily - and not in the facts of this case, confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right "in personam". Indeed, the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in Section 21 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. Another way of looking at the issue is whether such rights can be treated or transferred - a proposition fully supported by the controlling object clause, i.e. intangible asset. Every species of right spelt- out expressly by the Statute - i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the Revenue."
9ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
12. Further, the Tribunal (Supra) in principle allowed the depreciation on goodwill following the decision of the Hon'ble Supreme Court in the case of Smith securities Ltd (2012) 348 ITR 302 (SC) and other decisions. The relevant extract of the order of the Tribunal (Supra) is reproduced as under:
7.4 We have heard the rival submission and perused the relevant material on record. We find that in the case of Smifs Securities Ltd. (supra), the Hon'ble Supreme Court has decided a question of law raised as under:
Question No.[b]:
"Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said Section?"
Answer:
In the present case, the assessee had claimed deduction of Rs.54,85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under:
"In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company."
It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.
The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['Act', for short].
We quote herein below Explanation 3 to Section 32(1) of the Act: "Explanation 3.-
- For the purposes of this sub-section, the expressions "assets' and "block of assets' shall mean--
[a] tangible assets, being buildings, machinery, plant or furniture;10
ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
[b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature."
Explanation 3 states that the expression "asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words "any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
In the circumstances, we are of the view that "Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.
7.4.1 In the case of Avera T & D India Ltd (supra), Hon'ble jurisdictional High Court, held the business information, business records, contracts, skilled employee, know-how etc as business and commercial rights eligible for depreciation under section 32(1)(ii) of the Act , however the issue of eligibility of goodwill for depreciation was not decided. Regarding goodwill, the Hon'ble court observed as under:
"15. In view of the above, it is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation under Section 32(1)(ii) of the Act. In the circumstances, the substantial question of law is decided in the affirmative and this appeal is allowed in favour of the assessee and against the Revenue and the impugned order is set aside."
7.4.2 In the case of Triune Energy Services Private Limited (supra), the Tribunal held that no credible material had been brought in the valuation report submitted by the assessee on the basis of which a specific valuation could be ascribed to any specific intangible assets and therefore held that the AO and the CIT-(A) were justified in holding that the assessee was not entitled to depreciation on technical knowhow, valuation of business and non-compete fee mentioned in the report. In respect of the alternative claim of the assessee that the entire sum of Rs.40,58,75,529/-paid towards intangible be considered as goodwill and the Tribunal following the decision of the Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (supra) upheld that assessee's contention the depreciation could be claimed of the goodwill, but remanded the matter for purpose of the valuation of the goodwill. The Hon'ble High Court after considering the arguments of the rival parties upheld the eligibility of goodwill for depreciation which is allowable under section 32(1)(ii) of the Act in view of the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra). The Hon'ble High Court further observed that in the "business identification schedule" appended to business transfer agreement apart from the tangible assets also included contracts, business records and know-how, employees and goodwill of the transferor company and the goodwill included the goodwill in relation to the name associated to the business. Regarding the "goodwill", the Hon'ble High Court held as under:
11ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
"13. Goodwill is intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resources, dealer network, customer base etc. The expression "goodwill" subsume within it a variety intangible benefits that are required when a person acquires a business of another is a going concern."
7.4.3 In the light of above facts and circumstances, the Hon'ble High Court accepted the contention advanced on behalf of the assessee that the consideration paid by the assessee in excess of its value of tangible assets was rightly classified as goodwill.
7.4.4 In the light of above decisions, when we look at the facts of the instant case we find that in this case, in the business transfer agreement (BTA) there is no mention of goodwill. Further, the unit of M/s KOAL, which was acting as a agent for sale of electronic franking machines etc of M/s Pitney Bowes Inc, USA, in India and Nepal has been transferred to the assessee. It was the machines of M/s Pitney Bowes Inc., USA which are approved by the Department of post due to their technical competency. All the intellectual property rights in those machines were lied with M/s Pitney Bowes Inc. USA. Thus, it was the brand name of the "Pitney Bowes" on which M/s KOAL was floating. In the business transfer agreement (BTA) which is available on pages 1-48 of the volume 1A of the paper book, on page 12 , a list of transferred assets is mentioned which included real property leased, tangible assets like furniture equipments machinery etc, contract license agreements etc, inventories of the seller in existence, government authorizations, computer hardware and proprietary software, customer and vendor list, business know-how, rights of the seller under sales and purchase orders, transferred employee and transferred retailers, all advances received by the seller from its customers, all earnest money deposits etc. The assessee has got valuation of Government Authorizations and non-compete fee from M/s "Deloitte Haskins and sells". Said valuation report is available on page 431 to 451 of the volume 1B of paper book. The valuer has assigned value to Government Authorizations at Rs.3.63 crores and value to non-compete agreements at rupees 4.83 crores, however, no value was assigned to other intangible assets.
7.4.5 In view of the decision cited above, we are of the view that list of transferred asset included business know-how, customer and vendor list etc which are business or commercial rights of similar nature as specified in 32(1)(ii) of the Act, which constitute part of the "goodwill" of the business, transferred as going concern to the assessee. Since in the case tangible assets alongwith other business/commercial rights, have been transferred to the assessee, the value of "Goodwill" should be computed by reducing the value of all liabilities, the tangible assets , Government Authorizations valued by the valuer and non-compete fee valued by the valuer, out of the slump sale consideration and then depreciation should be allowed at the rate prescribed for the intangible assets under section32(1)(ii) of the Act."
12ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
13. The depreciation on goodwill in assessment years 2005-06 and 2006-07 was however not allowed in view of the claim made in return filed in response to notice under section 148 of the Act. The said claim was however allowed with the direction to the Assessing Officer for computation of such depreciation in assessment years 2007-08 to 2009-10 observing as under:
"16. The ground No. 3 raised in the above appeals has also been decided in ITA No. 289/Del/2013 for assessment year 2005-06. In the said appeal, though the depreciation on goodwill is allowed in principle with the direction to compute the amount of goodwill, however, the claim of depreciation on goodwill in the assessment year 2005-06 was made in first appellate proceedings arising out of reassessment proceeding, thus, denial of claim by the Ld. CIT-(A) was upheld. The assessment years involved in present appeals are from assessment year 2007-08 to assessment year 2009-10 and no reassessment proceedings are involved in these assessment years, and therefore, the depreciation on goodwill is allowed to the assessee subject to our findings in ITA No. 289/Del/2013. Accordingly, the grounds of appeal are allowed for statistical purpose."
14. In the present appeals filed before us, assessment was completed under section 143(3) of the Act and therefore issue in dispute of depreciation on goodwill in present appeals is covered by the decision of the Tribunal in assessment years 2007-08 to 2009-10. Since in the appeals before us only above two issues of depreciation on non-compete fee and depreciation on goodwill have been raised by the assessee, thus respectfully following the decision of the coordinate bench of the Tribunal (supra), all the grounds raised in appeals are also decided mutatis mutandis.
13ITA No-6119/Del/2016 & 3 others.
Pitney Bowes India Pvt. Ltd., New Delhi.
16. In result, all the appeals of the assessee are partly allowed for statistical purposes Order pronounced in the open court on 30/5/2018.
Sd/- Sd/-
AMIT SHUKLA O.P.KANT
(JUDICIAL MEMBER) (ACCOUNTANT MEMBER)
Dated: 30.05.2018
Pooja/-
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
14
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Pitney Bowes India Pvt. Ltd., New Delhi.