By TIOL News Service

HYDERABAD, JUNE 06, 2016: THE issue is - Whether film software library is intangible asset in nature and depreciation is allowable on it at the rate allowable on other such assets. YES is the answer.

Facts of the case

The assessee company was formed as a result of demerger of 'U' company which was in the business of producing and telecasting entertainment/news/information programmes under the trade name of "ETV". ‘U’ company has demerged its television business into three companies and the scheme of arrangement was approved by the  High Court. Therefore, the assessee company was the resultant company of the demerger. In the scheme of demerger, intangible asset by name non-compete fee whose WDV was Rs.329,76,56,250 was distributed among the three demerged companies. In the scheme of demerger, the assessee had acquired the intangible asset of non- compete fees, whose WDV value is Rs.212,33,75,625 and the assessee claimed depreciation thereon at Rs.53,08,43,906.25. In the A.Y. 2007.08, the parent company had entered into a non-compete fee agreement with ‘U’ Television and M/s. ‘U’ company Movies  for non-competing in the business directly or indirectly for a period of five years from the date of agreement and in lieu thereof, the assessee company, paid an amount of Rs.670 crores towards non-compete fee, during the relevant financial year, ‘U’ had claimed depreciation of Rs.109,92,18,756. The AO examined the nature of the non-compete fee and the necessity for payment of such non-compete fee and held that both the payer and the payee of the non-compete fee are the same persons and therefore, the method adopted for valuation of the non-compete fee needs to be examined. Thereafter, he proceeded to examine the valuation of the non-compete fee and ultimately held that the valuation adopted by the assessee company is not sustainable. The AO had held that assessee’s claim for substantial depreciation is nothing short of a colourable device in the name of non- compete fee when there is no case of competing and rejected the assessee’s claim of depreciation.  

Having heard the parties, the Tribunal held that,

Non-compete fee/Colourable device

++ in the A.Y. 2009-2010 Tribunal had held that on demerger of the parent company, the assessee has succeeded to the issue of the depreciation on non-compete fee as well. AO cannot treat the transaction as a colourable device adopted by the parties merely on presumptions and surmises without proving the fact that either the promoters of both the companies are same or M/s Equator Trading Enterprises Pvt. Ltd. is a front company of either the assessee or the Ramoji Rao group. In these circumstances, the inference drawn on mere assumptions and presumptions that the agreement is a colourable device to reduce the tax burden cannot be accepted. Therefore, without examining the impact of investment made in equity shares to the extent of 39% by the domestic investor and condition imposed by it, the conclusion drawn by the CIT(A) that there is no necessity of payment of non-compete fee as the same person is controlling the assessee company as well as UKT and UKM, in our view, is without proper appreciation of facts and evidences brought on record, hence, cannot be sustained. The facts were not examined either by the AO or by CIT(A), which certainly have a crucial bearing on the issue as to whether the payment of non-compete fee is genuine and necessary, we are inclined to remit the matter back to the file of AO for deciding afresh;

Valuation of the film software library

++ it is found  that this issue has been dealt with by this Tribunal  and after considering the issue at length, it is held that the film software library is in the nature of an intangible asset and the depreciation thereon is allowable at the rate allowable on an intangible asset. However, as regards the valuation of the asset, this Tribunal has pointed out that certain circumstances leading to the valuation of the asset have not been considered by the authorities below and hence, has set aside the same for re-valuation. Respectfully following the same, we deem it fit and proper to remand this issue also to the file of the AO with similar directions and direct the AO to allow depreciation as is allowable on an intangible asset.

(See 2016-TIOL-948-ITAT-HYD)