Tax Insights
from India Tax & Regulatory Services
Separate purchase of brand
followed by merger of seller
company with purchaser held not
to be a colourable device –
depreciation allowed on brand
November 4, 2016
In brief
In a recent decision1, the Chennai Bench of the Income-tax Appellate Tribunal (Tribunal) held that
when a taxpayer acquired the brand for an agreed consideration from an associate company, it could
not be denied depreciation on such brand only because such associate company was subsequently
merged with the taxpayer through a Scheme of Amalgamation (Scheme).
In detail
Facts:
 The taxpayer-company1 was
engaged in the business of
manufacturing and sale of
gold and diamond
jewellery.
 The taxpayer acquired
brand ‘A’ from A Ltd, which
was an associate company
of the taxpayer, for a
consideration of INR 83.8
million.
 A Ltd was merged with the
taxpayer with effect from 31
December, 2009 through a
Scheme, post purchase of
the brand ‘A’ by the
taxpayer.
 The taxpayer claimed
depreciation on the cost of
brand ‘A’.
 In the assessment for
assessment year (AY) 201112, the tax officer (TO) held
that the purchase of the
brand and subsequent
merger was colourable
device for the purpose of
reducing tax by claiming
depreciation on the brand
value, and therefore
disallowed depreciation on
the brand cost.
 Similar disallowance was
made in AY 2010-11 as well;
however, the taxpayer did
not appeal against it.
 The Commissioner of
Income-tax (Appeals)
[CIT(A)] confirmed the
TO’s order.
Issue before Tribunal
Was the taxpayer eligible to
claim depreciation on the
acquired brand ‘A’ under
section 32 of the Act?
Tax authorities’
contentions
 The taxpayer’s claim for
depreciation on a brand
with same facts had been
disallowed in A.Y. 2010-11,
and the taxpayer did not file
appeal against the same.
The factual situation being
similar, the taxpayer’s claim
for the year under
consideration should also
be disallowed.
1
TS-573-ITAT-2016 (ChennaiTribunal)
www.pwc.in
Tax Insights
 A Ltd was amalgamated with
the taxpayer w.e.f. 31
December, 2009. As per the
Scheme, the entire intangible
asset was transferred to the
taxpayer. Therefore, the
taxpayer was not required to
purchase the brand separately
before the Scheme.
 The taxpayer also claimed setoff of losses of A Ltd to the
extent of INR 99.4 million.
Simultaneously, the taxpayer
was also claiming depreciation
on the brand. Therefore, the
claim of depreciation was a
colourable device.
Taxpayer’s contentions
 Merely because the TO’s order
for AY 2010-11 was not
challenged, it did not mean
that the order for the AY under
consideration could not be
challenged. The principle of
res juducata was not
applicable2.
 Each AY was separate and
distinct, and the TO should
examine the same and decide
the matter on merit. The TO’s
order for AY 2010-11 could not
bar the taxpayer from claiming
depreciation for the year under
consideration. The Tribunal
could not reject the claim on
that ground.
 The taxpayer submitted that
the brand ‘A’ was acquired
before the Scheme, and
payment for it, of INR 83.8
million, was made through
banking channels before 31
December, 2009. Therefore,
purchase of the brand before
amalgamation could not be
considered as colourable
device.
2
Maharana Mills (Private) Ltd. v. ITO
[1959] 36 ITR 350 (SC), CIT v. Enron
Expat Services Inc. [2010] 327 ITR 626
PwC
 The brand was one of the
intangible assets that was
eligible for depreciation.
Tribunal’s ruling
 The taxpayer and A Ltd,
though associate companies,
were separate and
independent entities.
 It was undisputed that the
taxpayer had paid INR 83.8
million for purchase of brand
‘A’ from A Ltd.
 A Ltd was amalgamated with
the taxpayer, and the taxpayer
claimed set-off losses of A Ltd
against the profit earned by it.
 Merely because set-off of loss
suffered had been claimed by
A Ltd could not be a reason to
disallow the taxpayer’ s claim
for depreciation.
 Section 32 of the Income-tax
Act, 1961 specifically provided
that brand name was an asset
eligible for depreciation.
Further, payment for the cost
of the brand was not disputed
by the Revenue. Regarding the
taxpayer’s claim that the brand
was acquired outside the
Scheme and the payment had
also been made, it was held
that such claim could not be
doubted, especially when the
fact of payment was not in
dispute.
 A Ltd had several intangible
assets apart from the brand
name that might have been
transferred through the
Scheme. Subsequent
amalgamation could not be
construed as a colourable
device as the taxpayer had not
acquired any brand before
that.
 When the brand was acquired
on payment of consideration
before amalgamation, the
taxpayer was eligible to claim
depreciation.
 The Tribunal could study the
merit of the claim irrespective
of the TO’s order for the earlier
AY that was not challenged by
the taxpayer. The fact that the
taxpayer had not challenged
the earlier order could not be a
reason for the Tribunal to
reject the taxpayer’s claim in
the subsequent year.
 Therefore, the taxpayer was
eligible for depreciation on the
brand acquired on payment of
the consideration.
The takeaways
This is an important ruling
stating that two separate and
completed transactions, which
are not otherwise disputed,
cannot be considered to be a
colourable device and treated as a
single transaction.
The Tribunal also reiterated the
non-applicability of the principle
of res judicta to assessments,
meaning that not challenging the
assessment for one year cannot be
a bar on challenging assessment
made on the same grounds in any
other year.
Let’s talk
For a deeper discussion of how
this issue might affect your
business, please contact your
local PwC advisor.
(Uttarakhand HC), HCL Technologies v.
ACIT [2015] 377 ITR 483 (Delhi HC)
Page 2
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