The Pr. Commissioner Of Income Tax-3 v. Esys Information Technologies Ltd

$~15*IN THE HIGH COURT OF DELHI AT NEW DELHI %Date of Decision :08.10.2024 +ITA 898/2018 THE PR. COMMISSIONER OF INCOME TAX-3....AppellantThrough:Mr.VipulAgrawal,Sr.StandingCounsel with Mr. Gibran Naushadand Ms. Sakshi Shairwal, Jr. StandingCounsels.Through:Mr.VipulAgrawal,Sr.StandingCounsel with Mr. Gibran Naushadand Ms. Sakshi Shairwal, Jr. StandingCounsels. versus ESYS INFORMATION TECHNOLOGIES LTD.....Respondent Through:Ms. Prem Lata Bansal, Sr. AdvocatewithMr.SumitBatraandMr.Shivang Bansal, AdvocateswithMr.SumitBatraandMr.Shivang Bansal, Advocates CORAM:HON'BLE MR. JUSTICE VIBHU BAKHRUHON'BLE MS. JUSTICE SWARANA KANTA SHARMA VIBHU BAKHRU, J. (ORAL) 1.The Revenue has filed the present appeal impugning an order dated09.03.2018 (hereafter the impugned order) passed by the learned IncomeTax Appellate Tribunal (hereafter the Tribunal) in ITA No. 3378/Del/2010,captioned DCIT, Circle-11(1), New Delhi v. eSys Information TechnologiesLtd. in respect of assessment year (hereafter AY) 2004-05. It is relevant tonote that the impugned order is a common order passed by the Tribunal intwo appeals (ITA No. 3378/Del/2010 and ITA No. 3514/Del/2010) inrespect of AYs 2004-05 and 2005-06. The present appeal relates to the Revenue’s appeal in respect of AY 2004-05. 2.The controversy in the present appeal is twofold. The first relates tothe disallowance of the amount of ₹34,63,450/- on account of goodwill that was written off by the assessee during the relevant previous year. And, thesecond is regarding the addition made on account of arm’s length price(hereafter ALP) with related enterprises. The Revenue’s grievance regardingthe calculation of ALP is confined to an associated enterprise “eSysSingapore” (hereafter the Foreign AE), as one of the tested parties. 3.In view of the above, this Court had framed the following questionsfor consideration: “(i) Whether the Income ‘Tax Appellate Tribunal ["ITAT"] wascorrect in upholding the order of Commissioner of Income Tax(Appeals)["CIT(A)"]intreatmentofForeignAssociateEnterprise ["Foreign AE"] as tested party without giving anyconcrete finding and without considering the fact that thefinancials and functions of the Foreign AE were more complexas compared to the assessee company? (ii) Whether the ITAT was correct in upholding the order ofCIT(A) in treatment of excess payment over and above thepurchase of goods as goodwill?” 4.As far as the first question is concerned, it is premised on the basisthat the Foreign AE – which is admittedly one of the associated enterprises –was treated as one of the tested parties. According to the Revenue, it was notapposite to use the said entity as a tested party, considering that thefinancials and functions of the Foreign AE was more complex as comparedto the assessee. However, it is conceded that the said question does not arisein the given facts. This is so because, in fact, the Foreign AE was not included as one of the tested parties for determining the ALP. Although theassessee had proposed the same, it was rejected by the Transfer PricingOfficer and therefore, the addition made on account of the ALP adjustmentwas not on account of inclusion of the Foreign AE as a tested party. 5.Since, concededly, the Foreign AE was not included as one of thetested parties, the question projected by the Revenue does not arise. included as one of the tested parties for determining the ALP. Although theassessee had proposed the same, it was rejected by the Transfer PricingOfficer and therefore, the addition made on account of the ALP adjustmentwas not on account of inclusion of the Foreign AE as a tested party. 5.Since, concededly, the Foreign AE was not included as one of thetested parties, the question projected by the Revenue does not arise. 6.The second question to be addressed is with regard to thedisallowance of ₹34,63,450/-, which was written off by the assessee as goodwill. The undisputed facts are that the assessee had paid a sum of₹47,00,000/- to M/s Nebula Technologies Pvt. Ltd. (hereafter Nebula) forpurchasing certain assets, which were located in different places in India.The said assets were valued at ₹12,37,450/- and there is no dispute regarding this valuation of the said assets. Consequently, the assessee had treated thebalance amount of ₹34,63,450/- paid to Nebula as goodwill. The assessee claimed that it had not acquired any benefit against the said amount and had,accordingly, written off the said goodwill in its books of accounts. TheAssessing Officer (hereafter the AO) rejected the said claim and added asum of ₹34,63,450/- as income chargeable to tax. He reasoned that the same was not wholly and exclusively expended for the purposes of business;therefore, was not allowable under Section 37(1) of the Income Tax Act,1961. 7.TheassesseeappealedthesaiddecisionbeforethelearnedCommissioner of Income Tax (Appeals) [hereafter the CIT(A)]. The CIT(A)held that there was no dispute that the amount of ₹47,00,000/- was spent towards acquisition of assets, which were acquired for business purposes.Accordingly, the CIT(A) held that the assessee was entitled to chargedepreciation on the said asset for the reason that even intangible assets couldbe treated as depreciable assets. In the present case, since the expenditurewas incurred towards depreciable assets, the CIT(A) allowed 25% of thesaid amount as depreciation. 8.The Tribunal declined to interfere with the decision of the CIT(A) byfollowing the decision of the Supreme Court in Commissioner of IncomeTax, Kolkata v. Smifs Securities Ltd.: (2012) 348 ITR 302 whereby theSupreme Court had held that the goodwill could be considered as anintangible asset eligible for depreciation. The Revenue does not dispute theproposition that in a given case, intangible assets may also be eligible fordepreciation. 9.As noted above, the AO had disallowed the amount of goodwillwritten off entirely, on the ground that it was not wholly and exclusively forthe purposes of business. However, there is no dispute that the assessee hadpaid a sum of ₹47,00,000/- for acquisition of assets of Nebula as claimed. There is also no suggestion that the said amount was paid for any otherconsideration or purpose. It would, thus, follow that the entire amount of₹47,00,000/- is required to be treated as expenditure for acquisition of assets or attendant to the said acquisition. Since the assets acquired have beenvalued at ₹12,37,450/-, there is no infirmity in treating the balance amount as pan intangible asset, and the decision of the CIT(A) to allow deprecationon such intangibles cannot be faulted. 10.In view of the above, the second question as framed, is answeredagainst the Revenue and in favour of the assessee. 11.The present appeal is disposed of in the aforesaid terms. VIBHU BAKHRU, J OCTOBER 08, 2024zp SWARANA KANTA SHARMA, J Click here to check corrigendum, if any