As per sec 32(1)(ii) depreciation is allowed on intangible asset acquired on or after 1st April 1998 and expenditure on acquiring database cannot claim as revenue expenditure

IN THE INCOME TAX APPELLATE TRIBUNAL,

“A” BENCH, MUMBAI.

Before Shri B.R.Mittal, Judicial Member and

Shri Pramod Kumar, Accountant Member

I.T.A No.4106/ Mum/2007

Assessment year: 2002-03

ACIT 2(1) ….. Appellant

R.No.575, 5th floor, Aayakar Bhavan,

M.k. Road, Mumbai-20

Vs

American Express Services India Ltd. .…. Respondent

Jiji House, 2nd floor, Damodar Sukhadwala Marg,

Mumbai-01

PA No.AABCT 0555 D

C.O.No.202/Mum/2009

(arising out of ITA No.4106/M/2007)

Assessment year: 2002-03

American Express Services India Ltd. .…. Cross objector

Jiji House, 2nd floor, Damodar Sukhadwala Marg,

Mumbai-01

PA No.AABCT 0555 D

Vs

ACIT 2(1) ….. Respondent

R.No.575, 5th floor, Aayakar Bhavan,

M.k. Road, Mumbai-20

Appearances:

Usha Nair, for the revenue

R.R.Vora and Nikhil Tiwari, for the assessee

Date of Hearing:12.1.2012

Date of pronouncement: 03 .2.2012

O R D E R

Per Pramod Kumar:

1. This set of appeal filed by the Assessing Officer and the cross objection filed by the assessee, are directed against the order dated 1st March, 2007 passed by the  learned CIT(A), in the matter of assessment under section 143(3) of the Income tax Act, 1961, for the assessment year 2002-03. The grievances raised in the appeal and the cross objection are somewhat interconnected, and, are required to be disposed of together.

2. The revenue in its ground raised the following grievance:

“The learned CIT(A) erred in directing the AO to treat the data base as plant and allow depreciation on it accordingly.

3. The assessee in its cross objection raised the following grievances:

“1. On the facts and in the circumstances of the case, the ld ACIT erred in objecting the order of the CIT(A) on the ground that the business database of American Express Services India Ltd., is not a plant through which the business is carried on by the respondent, without Appreciating the facts and circumstances of the case.

2. Without prejudice to above, should have appreciated that in case the same is not considered as an tangible asset i.e. plant, the same would constitute an ‘intangible asset’ eligible for depreciation under section 32 of the I.T.Act.

3. Without prejudice to ground No.1 to 2, should have appreciated that the amount paid towards acquisition of database is revenue expenditure allowable under section 37(1) of the Act.

4. On the facts and circusmtanes of the case, the CIT(A) erred in confirming the action of the AO in attributing the value to business database at Rs.3 crores as against the business valuation of Rs.12 crores, on adhoc basis without any justification or support for such valuation without appreciating the facts of the case.

5. Without prejudice to above, should have directed the AO to consider the alleged excess valuation (to the extent of Rs.9 crores) as amount paid towards goodwill of the business and accordingly depreciation should have been granted on the same.

6. The CIT(A) erred in confirming the action of the AO in holding that there exists no goodwill in the business acquired and accordingly I.T.A No.4106/ Mum/2007 ignoring the value of goodwill being amount paid by the respondent i.e. Rs.8 crores without appreciating the facts of the case.

7. The CIT(A) erred in confirming the action of the AO, by holding that goodwill purchased for the purpose of the business is not an intangible asset eligible for depreciation under section 32 of the Act.”

4. Briefly stated, the material facts are like this. The assessee is a joint venture between Tata Finance Ltd and American Express International. It is engaged in the business of money changing, foreign exchange and other related services as permitted by Reserve Bank of India, in the capacity of a full fledged money changer. On 1st September, 2001, the assessee purchased 4 foreign exchange service locations of American Express-TRS (legal entity: AEB India) for a consideration of Rs.26.77 crores. The above consideration had the following composition:-

Acquired business Data Base : Rs.12 crores

Net current assets : Rs. 5 crores

Miscellaneous assets : Rs.1.77 crores

Balance –Goodwill : Rs.8 crores

5. What was termed as ‘Acquired Business Database’ was a database of customers developed by AEB-India based on its long standing relationship with various travel agencies and corporation, and all other information relating to the customers of the acquired business undertaking.

6. In the course of the assessment proceedings, the Assessing Officer took note of the above facts and opined that “Definitely it is advantageous on the part of the assessee to have this valuable database in it’s possession, but so far as payment an exorbitant sum of Rs.12 crores for this database, I do not agree with the contention of the assessee that it will garner sufficient benefit, and hence this payment has been made”. He was of the view that “by no stretch of imagination, can this huge payment be justified”. He proceeded to disallow only 25% of payment i.e. Rs.3 crores, and declined the depreciation in respect of the same on the ground that it cannot be treated as ‘plant and machinery’. The payment of Rs.8 crores towards goodwill was stated to be disallowed “in the absence of the justification”. Aggrieved, assessee  carried the matter in appeal before the CIT(A) but without complete success. While CIT(A) upheld AO’s adopting the value of database at Rs.3 crores, he directed the AO to allow depreciation on the database at that value. The CIT(A) also upheld AO’s declining depreciation as goodwill. None of the party is satisfied. While assessee is mainly aggrieved that the CIT(A) ought to have held that depreciation is admissible in respect of full amount paid by it for Acquired Business Database, and that he ought to have upheld admissibility of depreciation on goodwill as well, the Assessing Officer is aggrieved that the CIT(A) ought to have declined depreciation entirely in respect of Acquired Business Database. The assessee has raised a further alternative plea that entire payment for acquiring database should be allowed as revenue deduction, but learned counsel did not really press the same.

7. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

8. We find that it is not in dispute that the transaction between the assessee and American Express Bank, inter alia, including for purchase of Acquired Business Database were subjected to transfer pricing scrutiny and, the Transfer Pricing Officer vide order dated 15.2.2005 has accepted the transaction without making any adjustment to the arms length price. In this view of the matter and as held by Hon’ble Delhi High Court in the case of CIT vs. Oracle India Pvt Ltd (243 CTR 103), when the price fixed is acceptable as arms length price by Transfer Pricing Officer (TPO) under section 92 of the Act, it cannot be open to the Assessing Officer to disturb that price so paid as unreasonable. We have also noted that the Assessing Officer has doubted the appropriateness of the consideration of Rs.12 crores without any cogent material to come to the conclusion that this is excessive or unreasonable, but then the TPO whose duty is it to examine whether or not the price paid in intra associate enterprises transactions are at arms length price or not has accepted the transaction without making any arms length price adjustment. There is no material whatsoever to establish or even indicate that the price of Rs.12 crores paid for the Acquired Business Database is excessive or unreasonable and only the basis of Assessing Officer’s coming to the conclusion about his subjective judgment. When the valuation of Acquired Business Database has been examined by TPO while concluding that the database price adjustment for the said year and no adverse inferences have been recorded in respect of the same, there could be no good reason for the AO to deviate from the stand of the TPO and substitute his own opinion as to what should be the correct price at which Acquired Business Database should have been purchased. In this view of the matter and in the light of the judgment of Hon’ble Delhi High Court in the case of Oracle India P. Ltd (supra), we are of the considered view that the CIT(A) was indeed in error in restricting the value of Acquired Business Database at Rs.3 crores as against Rs.12 crores paid by the assessee. To this extent, we vacate the order of the CIT(A). We further find that so far as the question about admissibility of depreciation of Acquired Business Database is concerned, this issue is covered in favour of the assessee by the judgment of Hon’ble Delhi High Court in the case of CIT vs. Hindustan Coca Cola Beverages Pvt Ltd (331 ITR 192), wherein, Their Lordships, inter alia, have observed that “It is worth noting, the scope of section 32 has been widened by the Finance (No. 2) Act, 1998 whereby depreciation is now allowed on intangible assets acquired on or after 1st April, 1998. As per section 32(1)(ii), depreciation is allowable in respect of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.” In view of these discussions as also bearing in mind the entirety of the case, we are of the considered opinion that the CIT(A) ought to have allowed the depreciation on the entire payment of Rs.12 crores towards Acquired Business Database. We, therefore, reject the appeal filed by the Assessing Officer against partial relief granted by the CIT(A) and uphold the grievance of the assessee in this regard.

9. As regards the question of claiming payment towards acquiring database as revenue expenditure, learned counsel for the assessee did not press the same. Accordingly, the grievance is dismissed as not pressed.

10. There is one more issue to be decided i.e. depreciation on goodwill. Although the assessee himself taken the ground, no specific arguments were advanced before us. In any case, once the assessee has himself accepted this payment as goodwill simplicitor, there cannot be any good reason to uphold the admissibility of depreciation thereon. We, therefore, reject this grievance of the assessee as well.

11. To sum up, while the grievance of the Assessing Officer is dismissed the grievances of the assessee are partly allowed as indicated above. In the result, appeal filed by the revenue is dismissed and cross objection filed by the assessee is partly allowed in the terms indicated above.

Pronounced in the open court on 3rd February, 2012

                                Sd/-                                Sd/-

                         (B.R.Mittal)                  (Pramod Kumar)

                       Judicial Member           Accountant Member

Mumbai, Dated 3rd February, 2012

Parida

Copy to:

1. The appellant

2. The respondent

3. Commissioner of Income Tax (Appeals),XXXIII, Mumbai

4. Commissioner of Income Tax, 2 , Mumbai

5. Departmental Representative, Bench ‘A’ Mumbai

//TRUE COPY//

BY ORDER

ASSTT. REGISTRAR, ITAT, MUMBAI