By TIOL News Service

NEW DELHI, AUG 20, 2018: THE ISSUE IS - Once trademark aquired by an entity is used for selling its products, then its eligibility to depreciation cannot be questioned, simply because such IPR was not put to use for manufacturing activities. YES IS THE VERDICT.

Facts of the case:

During the year under consideration, the assessee had claimed depreciation of Rs.34.37 Crores on account of acquisition of intellectual property rights to the existing block of assets. During the course of assessment, the AO was however of the view that assessee had only purchased finished products from M/s Monsanto USA in bulk and had sold them in India in convenient packagings. Thus, as per AO, the assessee had not used its assets towards manufacturing activities. Under these facts & circumstances, the deprecation claimed on account of fixed assets in the category of IPR for Rs.3,44,37,935/- was disallowed and added back to the total income of assessee.

On appea, the CIT(A) deleted the disallowance and allowed depreciation observing that the assessee was engaged in manufacturing job work and trading in agro-chemical. The intellectual property rights acquired were in respect of (a) product registration (b) right to reference and use of registration data in support of the product registration (c) benefits of continuing business contracts (d) business information (e) business intellectual property rights (f) trademarks and (g) all the seller's rights against third parties, including rights and warranties, conditions, guarantees or indemnities relating to such assets. The CIT(A) opined that Section 32 did not make any distinction between trading business or manufacturing business. As long as the IPRs were used for purpose of business, condition of Section 32 that the asset should be used for business would be satisfied.

High Court held that,

++ in the present case, the purchase of intellectual property rights by the assesse are not disputed, neither the payment of consideration. The nature and character of the intellectual property rights, as noticed in the order passed by the CIT(A) are also accepted. Now, the intellectual property rights purchased by assessee included trademarks "Lasso", "Machete" and "Fast Mix", rights to reference and use of registration data in support of product registration, benefits of business contracts, business information, business intellectual property right, trademarks and rights against third parties. It is an admitted position that the products sold by assessee had borne the trademarks "Lasso", "Machete" and "Fast Mix". Substantial advertisement and sales promotion expenditure was also incurred. Use of intellectual property rights for sales and marketing was not questioned and commented upon in the assessment order. Therefore, depreciation was disallowed only because the asset had not been put to use for manufacturing activities. This cannot be a ground to hold that the assessee had not "put to use" the intellectual property rights in the year in question. Mere purchase of the products, from third party or the fact that assessee was not engaged in manufacturing activity, would not make any difference.

(See 2018-TIOL-1643-HC-DEL-IT)