Acquisition of marketing rights is depreciable asset - Interest paid on loan taken for acquisition to be added to cost of capital asset - Front-end fee paid to bank not allowable but depreciation cannot be denied : ITAT
July, 16th 2007
The larger question here is how to treat the expenditure incurred for acquisition of marketing? Whether intangible assets are depreciable or not? And if yes, then interest paid on loan taken for acquisition of such assets is to be treated as revenue expenditure or capital expenditure ? These were the questions which came up before the Tribunal in this case and the ITAT held that acquisition of distribution rights is in nature of commercial rights and thus depreciable and secondly intangile assets are capital assets and thus depreciable. Also interest on loan taken for acquisition of such assets will be added to cost of capital asset if the asset is not put to use before payment of interest and not otherwise.
Brief Facts :
The Assessee is a incorporated Co. formed as joint venture between Ambalal Sarabhai Enterprises (ASL) and Cadilla Healthcare Ltd. (CHL) for manufacture and selling of animal and health care products. Assessee in its first year of production claimed deduction of Rs.2 cr representing distribution franchise (marketing rights) fee paid to ASL and approximately Rs.59lacs as front end fee (interest) paid on loan taken for acquisition of intangible assets. A.O. asked the assessee to justify the expenditure in first case i.e.Rs.2cr to which it explained that it was made to ASL for acquiring exclusive use of marketing rights held by them in India and Nepal for products manufactured by one ABIC Ltd. of Israel. A.O. being not satisfied by the explaination disallowed the same. With respect to deduction in second case, A.O. held that loan was taken for acquisition of intangible assets which were not put to use before payment of interest, thus interest is to be treated as capital expenditure and not revenue expenditure and in light of this held that depreciation is not allowable on intangible capital assets. Thus A.O. disallowed deduction on both the counts.
In appeal CIT(A) went with the reasoning of A.O. thereby upholding his order.
Finally matter was taken to Tribunal which decided the issue after deliberating on following issues :
a) Whether assessee is right in claiming the above mentioned deduction as revenue expenditure,
b) If the claim is to be disallowed then is assessee's alternative claim for treating the same as capital expenditure and thus allowing depreciation u/s 32(1) justified ?
The Tribunal held that With respect to expenditure on account of acquisition of exclusive marketing rights from ASL, Tribunal came to a finding that it wasn't a sham transaction but was acted upon. Secondly marketing rights are intangible rights in the nature of commercial rights mentioned in Sec.32(1)(ii) and thus depreciable u/s 32. Thus it held that assessee could claim depreciation on the said amount u/s 32(1) being a capital expenditure.
Coming to the second expenditure, Tribunal held that it was done on account of interest paid on loan used for acquisition of capital assets which were not put to use before payment of interest, therefore interest is to be added to cost of capital assets and treated as capital expenditure. It held that depreciation is allowable u/s 32(1) in respect of intangible capital assets and since assessee has made capital expenditure to acquire intangible capital asset, it is to be allowed depreciation u/s 32(1).
Thus Tribunal partly allowed the appeal of assessee by allowing depreciation u/s 32(1), expenditures being in the nature of capital expenditure for acquisition of intangible capital assets.