Income Tax Appellate Tribunal - Chennai
Shriram Epc Ltd., , Chennai vs Assessee on 16 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER
I.T.A. Nos. 737, 738 739 & 740/Mds/2012
(Assessment Years : 2005-06 to 2008-09)
M/s Shriram EPC Ltd., The Income Tax Officer,
18/03, Rukmani Lakshmipathy Rd., Company Ward VI(1), &
4th floor Sigappi Achi Building, v. The Assistant Commissioner of
Egmore, Chennai - 600 008. Income Tax,
Company Circle VI(2)
PAN : AAFCS1410C Chennai - 600 034.
(Appellant) (Respondent)
Appellant by : Shri R. Sivaraman, Advocate
Respondent by : Shri Guru Bashyam
Date of Hearing : 16.10.2012
Date of Pronouncement : 08.11.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In these appeals filed by the assessee, sole grievance raised is that its claim of depreciation on cost of ` 500 lakhs for an intangible asset which, as per the assessee, was technical knowhow received from Shriram Engineering Construction Company Limited, was denied and this was confirmed by the ld. CIT(Appeals). Assessment year 2005-06 is the first year of the claim of such depreciation and for subsequent years, the claims were made on Written Down Value.
2 I.T.A. Nos.737 to 740Mds/12
2. Facts apropos are that a company named Shriram Engineering Construction Company Limited (SECCL) amalgamated with assessee-company during the relevant previous year. Assessee claimed depreciation on a sum of ` 5 Crores which, according to it, was the cost of technical knowhow acquired from the amalgamating company. Assessee was required to give explanation for such claim. Submission of the assessee was that M/s SECCL, the amalgamating company was executing contracts with Government bodies and Municipal Corporations and in the process, had acquired technical skill and had trained staff with them. As per the assessee, in order to pre- qualify for bidding with Government and Municipal Corporation, it was necessary to satisfy certain pre-qualification criteria. For the assessee to tender for such contracts, it became necessary to get the pre- qualification and the amalgamating company's technical skill and knowhow in the nature of pre-qualification was obtained through the amalgamation. As per the assessee, because of the amalgamation, it could enhance its ability to bid for contracts and obtained a potential business expertise. Such rights were valued at ` 500 lakhs. This value was capitalized by the assessee in its books since, for the purpose of valuing the amalgamating company, such amount was considered by the approved valuer while determining the swap ratio between the 3 I.T.A. Nos.737 to 740Mds/12 shares of amalgamating company and the shares of the amalgamated company. Argument of the assessee was that in view of Explanation 4 to Section 32 of Income-tax Act, 1961 (in short 'the Act'), knowhow would include any industrial information or technique which was likely to assist the business of the assessee.
3. However, the Assessing Officer was not impressed with the above reply of the assessee. According to him, depreciation claimed by the assessee did not fit into the definition of "knowhow" under Explanation 4 to Section 32 of the Act. As per the Assessing Officer, assessee had not paid anything for acquiring such intangible asset, but, what was received was the result of a merger of M/s SECCL with assessee. Valuation of M/s SECCL revealed that it had a negative networth of ` 42.55 lakhs. But, for a sum of ` 500 lakhs considered as value of the technical knowhow available with the amalgamating company, the networth of the amalgamating company would have remained in the negative. In the report of the so-called valuer, it was specifically stated that the technical knowhow was estimated by the management at ` 500 lakhs and such internally developed technical knowhow was not reflected in the books. Therefore, as per the Assessing Officer, assessee could not establish existence of technical knowhow nor show that it was an user of such 4 I.T.A. Nos.737 to 740Mds/12 technical knowhow. Value of the so-called technical knowhow was only an estimate. There was no such intangible asset at all and even if there existed any intangible asset, it did not fall within the definition given in Explanation 4 to Section 32 at all. He was thus of the opinion that the assessee could not be allowed the claim of depreciation on such amount of ` 500 lakhs and the claim was denied.
4. In its appeal before CIT(Appeals), argument of the assessee was that the amalgamating company M/s SECCL was in the business of executing contracts for Government bodies and Municipal Corporation for construction of water treatment plants, sewage treatment plants, etc. In long period of its existence and during the course of its business, it had acquired technical knowhow and developed goodwill in the field of their activities. They had adequate pre-qualification for executing larger value projects. Though the technical knowhow developed internally was intangible and not specifically shown in the books of the amalgamating company, the knowhow was very much existing and its existence could not be denied. As per the assessee, such knowhow satisfied the definition given in Explanation 4 to Section 32 of the Act. By virtue of such amalgamation, assessee being the amalgamated company, could get the pre-qualification rights available to the amalgamating company. This enabled it to participate in tenders for carrying out similar works, 5 I.T.A. Nos.737 to 740Mds/12 which were earlier done by the amalgamated company. Again, as per the assessee, on account of amalgamation and based on the pre- qualification eligibility of the amalgamating company, it could get many major orders like Boarsad Water Supply Scheme, Gujarat. Rajula Water Supply Scheme, Gujarat, AUDA Water Treatment Plant, AMC Sewage Treatment Plant, TWAD Kuzhithurai Water Treatment Plant, etc. As per the assessee, it had also secured a huge order from Gujarat Water Supply and Sewage Board valued at ` 600 millions for water supply distribution scheme of Tharad and Banaskantha. Thus, as per the assessee, it could use the experience, expertise and technical ability of the amalgamating company in its existing projects. As for the value of ` 500 lakhs given to such technical knowhow, submission of the assessee was that such valuation was done by one M/s N.S. Prabakar & Co., Chartered Accountants, Chennai, who were having the expertise to do such valuation. As per the assessee, the asset value of amalgamated company came to ` 457.45 lakhs and this value was considered for arriving at share exchange ratio of 1:10, viz. one of the amalgamated company for every ten shares of amalgamating company.
5. However, CIT(Appeals) was not impressed. According to him, assessee could not give any explanation how the value of ` 5 Crores was arrived at for the alleged technical knowhow. It was only an 6 I.T.A. Nos.737 to 740Mds/12 estimated figure. Assessee itself could not explain the nature of alleged intangible asset and it had never paid for acquisition of such asset. Such value came into the books only because of merger of amalgamating company with assessee and it was estimated by the management itself. If the sum of ` 500 lakhs considered for technical knowhow was excluded, the networth of amalgamating company would be negative figure of ` 42.55 lakhs. Further, such technical knowhow was not reflected in the books of the amalgamating company at all. Ld. CIT(Appeals) noted that the valuer M/s N.S. Prabhakar & Co. had specifically mentioned that the technical knowhow was estimated by the management. Assessee never furnished the details as to how the technical knowhow was valued at ` 500 lakhs. As per CIT(Appeals), it was just a figure of imagination and not backed by any empirical data. Experience or expertise of the amalgamating company which made it eligible for participating in tenders, could not be termed as technical knowhow coming within the ambit of Explanation 4 to Section 32 of the Act. In this view of the matter, he confirmed the order of Assessing Officer denying the claim for depreciation on such amount.
6. Now, before us, learned A.R. strongly assailing the orders of authorities below, submitted that in the first place, amalgamation between M/s SECCL and assessee was based on a scheme of 7 I.T.A. Nos.737 to 740Mds/12 amalgamation which had approval of jurisdictional High Court. Placing on record an order dated 22nd July, 2005 of Hon'ble jurisdictional High Court in Comp. Petn.No.108 and 109/2005, learned A.R. submitted that once the competent Court had given approval for the scheme, it was not permissible for any authorities below to question the valuation of the amalgamating company. Admittedly, value of the amalgamating company was fixed after considering the value of ` 500 lakhs for the technical knowhow. The ratio of 1:10 shares given to the shareholders of amalgamating company was decided based on such value. A competent valuer had given the valuation. Hon'ble High Court had given approval for such amalgamation after considering the scheme. If the scheme was not considered fair, Hon'ble jurisdictional High Court would not have given its stamp of approval for such scheme. Therefore, according to him, once amalgamation was approved by a competent authority, it was not proper for the Revenue to say that the valuation of amalgamating company which inter alia included technical knowhow was a farce or sham arrangement. Assessee as well as amalgamating company are having technically skilled personnel. Explanation 4 to Section 32(1) clearly says that industrial information or technique likely to assist manufacturing and processing would also come within the ambit of knowhow. Amalgamating company admittedly was in the business of constructing water treatment plants of a large scale since 8 I.T.A. Nos.737 to 740Mds/12 very many years and had acquired in the process sufficient knowhow, technical expertise and skilled manpower. By virtue of amalgamation, assessee received all these and to say that there was no value whatsoever for such intangible assets would be inappropriate. According to him, even if the intangible asset did not fit strictly within the definition of "knowhow" given in Explanation 4 to Section 32(1) of the Act, it was very much in the nature of a business or commercial right of similar nature. By virtue of decision of Hon'ble Delhi High Court in the case of Areva T&D India Ltd. v. DCIT (250 CTR 151), assessee could not be denied depreciation on the value of such commercial rights.
7. Per contra, learned D.R. submitted that the amalgamating company was having only a negative networth. There was no basis for arriving at value of ` 500 lakhs for the so-called technical knowhow. The value was simply based on a management estimate without back up of any empirical data. Experience of amalgamating company was only with regard to pre-qualification for tenders and such pre-qualification criteria that assessee received, on account of amalgamation, could not be valued simply based on estimates. It did not fit into the definition of "intangible asset" as given in Section 32(1)(ii) of the Act. The case of Areva T&D India Ltd. (supra) of Hon'ble Delhi High Court, relied on by the learned A.R. was on slump sale where amount paid was more than 9 I.T.A. Nos.737 to 740Mds/12 the value of assets. There was no amalgamation in the said case. Therefore, according to him, to consider that assessee had received technical knowhow of ` 500 lakhs on which it could claim depreciation, was not proper considering the factual situation of the case. Lower authorities were justified in denying the claim of the assessee.
8. Ad libitum, submission of the learned A.R. was that Explanation 7 to Section 43 of the Act clearly mentioned that in a scheme of amalgamation, capital asset transferred to amalgamated company by the amalgamating company was to be valued at the cost shown by the amalgamating company. Therefore, according to him, claim of the assessee was unjustly denied. On a question by the Bench as to whether both, the amalgamating company and amalgamated company were under the same management, learned A.R. mentioned that some of the shareholders were common, but, directors were not common. Nevertheless, he fairly admitted that he was not aware about the actual shareholding and whether control of both the companies were with same group.
9. We have perused the orders and heard the rival submissions. In the first place, what we notice is that amalgamating company, namely M/s SECCL had a negative worth of ` 42.5 lakhs just before it was amalgamated with the assessee-company. Report of M/s N.S. 10 I.T.A. Nos.737 to 740Mds/12 Prabhakar & Co., relied on by the assessee for justifying the value of ` 500 lakhs for the alleged technical knowhow itself mentions that this is an estimate. Thus, though the claim is that a technical knowhow was there with the amalgamating company on account of its experience in executing contract works relating to water treatment plants and sewage plants, including laying of pipelines for various Municipal Corporations, Government bodies, it remains a fact that valuation was a simple estimate. This is clearly mentioned in the said valuation report reproduced by the Assessing Officer at page 3 of his assessment order, which reads as under:-
"The internally developed technical knowhow has not been reflected in the books and hence, is not included in the above figure of ` 1722 lakhs. It has been estimated by the management that the technical knowhow has a realizable value of ` 500 lakhs on date."
10. One more aspect, which comes out from the comment of M/s N.S. Prabhakar & Co. reproduced above, is that such internally developed ability to do contract work of the nature mentioned was not reflected in the books. There is nothing whatsoever available on record which would throw light as to the relevance of the figure of ` 500 lakhs in the valuation of the amalgamating company for fixing the swap ratio of the shares. Argument of the assessee is that for every ten shares of amalgamating company, one share of amalgamated company was given in lieu, and this ratio was arrived at considering a networth of ` 457.45 11 I.T.A. Nos.737 to 740Mds/12 lakhs for the amalgamating company. Though at the first blush this appears to be attractive, the fact is that the valuation itself is not backed by any empirical data. There is nothing on record to show how the sum of ` 457.45 lakhs got transformed into a share swap ratio of 1:10. There is nothing on record to show what entries were passed by amalgamated company, i.e. the assessee when one share was issued in lieu of ten shares to the shareholders of amalgamating company. In other words, the entries which resulted in the technical knowhow of ` 500 lakhs coming into the books of the assessee, are not available either in the assessment order nor in the CIT(Appeals)'s order. Admittedly both, amalgamated company and amalgamating company had atleast some common shareholders. If the control of both companies vested in same group, then the valuation of technical knowhow at ` 500 lakhs, could only be considered as a colourable device to evade tax and not as a part of tax planning. These aspects were also not verified by any of the authorities below. When an attempt is made by a company to evade tax, it is the bounden duty of the court to lift the corporate veil. Hon'ble jurisdictional High Court in the case of Indo Tech Electric Co. v. DCIT [TC(A) Nos. 2209 & 2210 of 2006 dated 16.12.2010], has clearly held that what is permissible is tax planning and not evasion. If the attempt is to evade tax by showing a value for an intangible asset, much higher than what it would really have, thereby trying to take advantage of higher 12 I.T.A. Nos.737 to 740Mds/12 availability of depreciation on an intangible asset, it is, in our opinion, nothing but an attempt to evade tax. In such case, as held by the Hon'ble jurisdictional High Court it is the bounden duty of the authorities to lift the corporate veil and find the real intention. When ingenuity is employed to avoid tax, it is necessary to get behind the smoke screen and discover to true statement of affairs.
11. Now to consider the argument of the assessee that since the scheme of amalgamation had the approval of Hon'ble jurisdictional High Court, none of the authorities could go into aspect of valuation. No doubt, learned A.R. has filed a copy of the order of Hon'ble jurisdictional High Court in Comp. Petn.No. 108 & 109/2005, approving the scheme of amalgamation. But, the question is whether such an approval can be deemed to be a certificate for the value fixed by the parties in respect of their respective networth. Hon'ble Apex Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1996) 87 Com Cases 792 (AIR 1997 SC 506) in relation to an arrangement made under 391 and 394 of the Companies Act, 1956 held that it was commercial wisdom of the parties to the scheme who had taken an informed decision about the usefulness and propriety of the scheme, by supporting it with the requisite majority vote and this was what was kept in view by the court. Their Lordship held that a court certainly would not act as a Court of Appeal and sit in judgment over the informed view of the concerned parties to a 13 I.T.A. Nos.737 to 740Mds/12 compromise, as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors of the company who had ratified the scheme by the requisite majority. Consequently, the Company court's jurisdiction is peripheral and supervisory and not appellate. The court acts like an umpire in a game of cricket, who has to see that both the teams play the game according to the rules. How best the game is to be played is left to the players and not to the umpire. In the case of Hindustan Lever Employees' Union v. Hindustan Lever Ltd. (1995) 83 Com Cases 30 (AIR 1995 SC 470), Hon'ble Apex Court accepted an exchange ratio of shares in an amalgamation on a finding that there was no objection to the valuation done by one of the directors, who was also a member of a leading Chartered Accountant's firm. Hon'ble Apex Court in this decision enumerated all possible methods of valuation such as market price, book value, yield method and pointed out that a company could employ all or some of the methods according to the circumstances of a particular case. In the case before us, can we say any such laid down methodologies were adopted in valuing the rights? Obviously, the answer is 'no'. There is no backing of scientific data as to how the pre- qualification eligibility right received by the assessee by virtue of amalgamation was valued. It is not based on the yield of amalgamating 14 I.T.A. Nos.737 to 740Mds/12 company nor the value of the contracts received by amalgamating company. If yield method was taken, obviously the valuation would have been only negative. It was simply an estimate. In such a situation, in our opinion, the lower authorities should have done a detailed study in finding what was the intention behind the valuation of so-called technical knowhow. At the same time, it has to be mentioned if any pre- qualification eligibility right was received by the assessee, on account of amalgamation, and if it has any value when a valuation is done based on any approved methods, then Section 32(1)(ii) entitles the assessee to claim depreciation thereon. Any other business or commercial rights of similar nature, mentioned therein would include such right also by virtue of Hon'ble Delhi High Court judgment in the case of Areva T&D India Ltd. (supra), and judgment of Hon'ble Apex Court in the case of Techno Shares & Stock Ltd. (327 ITR 323). No doubt, Hon'ble Delhi High Court in the case of Areva T&D India Ltd. (supra) did hold that amount paid by a company to a transferor company in excess of the value of the assets could be termed as "goodwill" and such goodwill was eligible for depreciation considering it as a business of commercial right mentioned in Section 32(1)(ii) of the Act. All these aspects have not been looked into by the lower authorities. No verification has been done as to the claim of the assessee that it could participate in number of tenders of the Government only because of the pre-qualification eligibility received by 15 I.T.A. Nos.737 to 740Mds/12 virtue of amalgamation. In the fitness of the things, we are of the opinion that the matter requires a re-visit by the A.O. to consider these aspects of the transaction and to decide whether any intangible asset was received by the assessee, if it was received, whether any value could be given to it on a proper valuation, whether there was any cost incurred by the assessee, and whether the transaction was only with the intention of evading tax and whether the transaction was within the four corners of law. We, therefore, set aside the orders of authorities below and remit the issue back to the file of the A.O. for consideration in accordance with law.
12. In the result, all the appeals filed by the assessee are treated as allowed for statistical purposes.
The order was pronounced in the Court on Thursday, the Eighth of November, 2012, at Chennai.
sd/- sd/-
(Vikas Awasthy) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 8th November, 2012.
Kri.
Copy to: Appellant/Respondent/CIT(A)-V, Chennai-34/ CIT, Chennai-III, Chennai/D.R./Guard file