No Depreciation allowable in respect of Govt approvals: ITAT Delhi [Read Order]

In M/s. Pitney Bowes India (P) Ltd v. DCIT, the Delhi ITAT held that no depreciation can be claimed in respect of Government approvals /authorizations since they are neither license nor the rights of business or commercial nature which could be transferred. While disposing a group of appeals, the division bench held that the government authorizations/approvals are not any kind of intangible asset.

In the instant case, the parent-Company of the assessee authorized M/s KOAL to sell various models of franking machines to customers in India and Nepal which included Postal Department of government, Banks and others. For this purpose, M/s KOAL was granted approvals from the regulatory authorities. After formation of the assessee-Company, the business of sale of franking machine was transferred from M/s KOAL to the assessee company through a Business Transfer Agreement (BTA) on a slump sale transaction, where in no specific value was assigned to individual asset at the time of slump sale.

For the year under consideration, assessee claimed depreciation in respect of Government Approvals on ground that they are assets in the nature of license/commercial rights which it had acquired from M/s KOAL and, thus, eligible for depreciation being intangible assets. However, AO denied the same by finding that no value was assigned by the assessee in the ‘BTA’ while acquiring the mailing business from M/s KOAL and no payment was made towards acquiring these approvals. According to the Assessing Officer, M/s KOAL had not paid any sum to regulatory authorities to acquire such authorization/ approvals and therefore it had not assigned any monetary value in its financial statement and therefore it was not an asset in the books of transferor, when the assessee acquired the business.

On behalf of the Department, it was contended that Government Authorization do not qualify as an intangible asset under section 32(1)(ii) of the Act as the rights mentioned in the said section are in the nature of intellectual property rights and thus the general word of similar nature, ought to be confined to the category of similarly placed assets and not Government Authorization/Approvals. They further contended that M/s KOAL, had no know-how, patents, copyrights, trademarks etc in respect of machines manufactured by “Pitney Bowes Inc, USA” and was therefore in no position to transfer any intellectual property right. All such intellectual property rights lied with “Pitney Bowes Inc USA” itself, to which the assessee is a subsidiary, already had access.

As per provisions of section 32 of the Income Tax Act, depreciation is allowable on intangible assets of the nature mentioned in the provision, which are acquired on or after 01/04/1998 and then owned and used for the purpose of business, then depreciation shall be allowed at the rate prescribed under Rule 5 and Appendix- I of Income Tax Rules, 1962.

After hearing arguments from both sides and perusing a letter issued by the Department of Post on the request of the assessee, the bench opined that issuing the letter of approval of machines of “Pitney Bowes Inc, USA” to M/s KOAL if any, cannot create any rights in favour of M/s KOAL. “The letter, if any issued communicating approvals of machines of Piteny Bowes to M/s KOAL, was not because of any kind of eligibility criteria of said company. The letter issued to M/s KOAL would be in its agent status and compliance of which was dependent on supply of machines by the Pitney Bowes Inc, USA to M/s KOAL. The moment, the Pitney Bowes Inc USA, terminates the agreement of distribution of its machines, the letter issued by the Department of post in the name of M/s KOAL also loses its sanction. The KOAL has not got any rights to sale in favour due to letter issued by the Department of Post. M/s KOAL got letter for sale of machines of M/ s Pitney Bowes Inc , USA because it was distributor of said company and thus it got right to sale of those machines in India because of its distribution rights .”

Dismissing the appeal, the bench held that the above letter communicating government authorization/ approval, was neither a license or business or commercial rights in the hands of M/s KOAL nor it was having any right to transfer those Approvals to any person of its choice. Further, it is the Department of post, who was having authority to approve Electronic franking Machines in India and approval of machines of Pitney Bowes Inc USA, has not created any kind of rights in the hands of M/s KOAL , which could be transferred to any third party. On the contrary, in view of the approval of Machines by Department of post, certain obligations of maintaining records and ensuring of no tampering, have been imposed on the assessee. The right to sale those franking machine India was as a result of distribution rights granted by M/s Pitney Bowes Inc , USA, and not due to Government Approvals.

Read the full text of the Order below.

taxscan-loader