2024 (1) TMI 1495 - HC - Income Tax

Goodwill is 'asset' under Explanation 3(b) to Section 32(1); depreciation allowed; donations deductible under Section 37(1); steam qualifies under 80IA(4)

The Principal Commissioner Of Income Tax 1, Vadodara Versus M/s Gujarat Narmada Valley Fertilizers And Chemicals Ltd.

HC held that goodwill qualifies as an 'asset' under Explanation 3(b) to Section 32(1) and depreciation on goodwill arising from the merger is allowable to ... Depreciation on goodwill - no goodwill was created on account of merger of Narmada Chematur Petrochemicals Limited (NPCL) particularly when assessee itself was the promoter of NPCL? - HELD THAT:- Explanation 3 states that the expression ‘asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words ‘any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression ‘any other business or commercial right of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that ‘Goodwill’ is an asset under Explanation 3(b) to Section 32(1) of the Act. Decided in favour of assessee. Deduction u/s 37(1) on account of donation made to voluntary organisation allowed. Deduction 80IA(4) - SDT on transfer of power from captive power plant to manufacturing unit - The word “Power” used in Section 80IA(4) has not been defined under the Income Tax Act. The word “Power” should be understood in common parlance as “Energy”. “Energy” can be in any form being mechanical, electricity, wind or thermal. In such circumstances, the “steam” produced by the assessee can be termed as power and would qualify for the benefits available under Section 80IA(4) of the Act. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation on goodwill arising on amalgamation is an allowable deduction under Section 32 where goodwill was accounted on merger and the assessee was a promoter/party to the merged entity. 2. Whether expenditures characterised as Corporate Social Responsibility (donations/contributions to educational/rural development societies) are allowable under Section 37(1) as business expenditure (commercial expediency) or are to be disallowed / restricted to Section 80G treatment. 3. Whether the Transfer Pricing Officer's downward adjustments to profits (inter-unit transfer of power/steam) and the approach adopted for determining market value (including use of rates charged by distribution companies) were correct under Section 80IA(8), Explanation/Rule provisions and allied transfer pricing provisions. 4. Whether it was permissible to treat a non-eligible unit as the tested party and to adopt distribution-company charges as market rate for arm's length valuation (impugned reliance on statutory / regulatory tariffs and transfer-pricing rules). 5. Whether profits from transfer of steam (generated by captive steam/power unit and used for captive consumption) qualify for deduction under Section 80IA when such a claim was not specifically asserted in the original return but was raised/modified during assessment/appellate proceedings. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Depreciation on Goodwill arising on Amalgamation Legal framework: Section 32 (depreciation) and the Explanation(s) thereto defining 'intangible assets' and 'assets' for depreciation purposes; principles governing claims raised first before appellate authorities. Precedent treatment: Followed binding precedents of the Supreme Court and the High Court holding goodwill to be an intangible asset falling within the Explanation and that depreciation on goodwill is allowable; appellate authorities have entertained additional claims raised before them where facts necessary to examine the claim were on record. Interpretation and reasoning: Tribunal analysed scheme of amalgamation and accounting entries (cancellation of investment against equity) and accepted that the accounting treatment did not negate the existence of goodwill as an acquired intangible right; it applied consistency with earlier decisions in the assessee's own case and authoritative pronouncements that goodwill qualifies as an asset under Section 32. The Tribunal also held that an amendment to disallow goodwill depreciation effected prospectively does not affect the assessment year under consideration. Ratio vs. Obiter: Ratio - goodwill is an intangible asset within Section 32 and depreciation thereon is allowable where factual matrix supports acquisition of goodwill on amalgamation; appellate authorities may entertain such claims first raised on appeal if facts are on record. Observations about treasury stock / alternative mechanics were explanatory. Conclusion: Depreciation on goodwill claimed on amalgamation was allowable; Revenue's disallowance was rejected and the order in favour of the assessee was affirmed. Issue 2 - Deductibility of CSR-type Contributions under Section 37(1) Legal framework: Section 37(1) (business expenditure), Explanation introduced to Section 37(1) (prospective effect noted), Section 80G(5) (partial allowance under 80G), and principles of 'commercial expediency' established by higher courts. Precedent treatment: Tribunal and High Court decisions were applied which treat donations made at the instance of or in close relation with government/major shareholder, or which promote the business/brand and goodwill in the relevant community, as deductible under Section 37(1) where they are shown to have commercial expediency. Earlier consistent decisions in the assessee's own case were followed. Interpretation and reasoning: Tribunal examined purpose and nexus: contributions served business objectives (community goodwill, brand-building among agrarian consumers, alignment with the company's business and regional development), were historically made, and in some instances mandated/endorsed by the State - hence were held to be commercially motivated rather than purely charitable. The Explanation to Section 37(1) introduced later was held to be prospective and not to affect the year under consideration. Ratio vs. Obiter: Ratio - where contributions have a direct or proximate commercial nexus and serve business expediency, they may be deductible under Section 37(1); mere qualification as CSR or payment to approved institutions does not automatically render them non-deductible for business purposes. Observations regarding publicity measures and details of implementation were factual supports. Conclusion: Deductions under Section 37(1) for the CSR-type payments were allowable on the facts; the Assessing Officer's disallowance was set aside. Issue 3 - Computation of Market Value for Inter-unit Transfer of Power (Section 80IA(8) and allied transfer-pricing principles) Legal framework: Section 80IA(8) (substitution of market value where intra-group transfer consideration does not correspond to market value), definition of 'market value' (price which goods would ordinarily fetch in open market), statutory provisions governing electricity supply/contractual tariffs and limitations under the then-applicable electricity statute; transfer pricing principles as applicable to valuation of intra-group transfers. Precedent treatment: Tribunal followed a line of High Court and Supreme Court reasoning (as applied in prior decisions) that market value for electricity supplied to the assessee's manufacturing units should be the rate charged by the distribution company to consumers (open-market consumer rate), not the contracted price at which surplus power was sold to the State Electricity Board, because the latter was a contracted price determined under statutory regime and not representative of open market competitive pricing. Interpretation and reasoning: The Tribunal adopted the view that the rate fixed under a power-purchase contract with the State Electricity Board for sale of surplus power was not established in an open, competitive market (given statutory constraints, mandatory sale, and lack of negotiation), and hence could not be equated with 'market value' for purposes of Section 80IA(8). Conversely, the tariff charged by the distribution licensee to consumers reflected the price available to an industrial consumer in the open market and thus represented the appropriate benchmark for arm's length substitution under Section 80IA(8). The Tribunal relied on statutory context and prior judicial exposition of 'open market' and 'market value.' Ratio vs. Obiter: Ratio - for computing profits under Section 80IA(8) the market value of power supplied for captive consumption is to be measured by reference to the rate at which distribution companies supply power to consumers (open-market consumer tariff), not by reference to contracted sale price to a supplier under statutory constraints. Observations on market definitions and statutory scheme constitute core ratio. Conclusion: The Tribunal's approach to value captive transfers at distribution-company consumer rates was upheld; downward adjustments by Revenue based on contracted sale price to the Board were rejected. Issue 4 - Use of Non-eligible Unit as Tested Party and Adoption of Distribution Company Rates (Transfer-pricing/Rule 10B/Section 92F considerations) Legal framework: Transfer pricing provisions and relevant statutory explanations; Section 80IA(8) market-value substitution; principles for selecting comparables and tested parties in inter-unit valuation. Precedent treatment: Tribunal aligned with earlier judicial authorities endorsing valuation by reference to market rates available to consumers; analogous precedents permitted comparing inter-unit transfer prices to publicly available distribution tariffs where the statutory and factual matrix made those rates the functional market benchmark. Interpretation and reasoning: The Tribunal held that taking a non-eligible unit as a tested party and comparing rates with distribution-company tariffs was appropriate given the statutory definition of market value and the absence of an open-market sale alternative for surplus electricity. The Tribunal found the Revenue's reliance on certain technical explanations and rules to be inapposite on the facts and in light of established jurisprudence that the consumer tariff reflects the market price for captive consumption valuation under Section 80IA(8). Ratio vs. Obiter: Ratio - selection of tested parties and comparables must reflect the reality of the open market for the good or service; where statutory or market constraints prevent free trade, distribution-company charges to consumers can be an appropriate market benchmark. Ancillary observations about specific rules were explanatory. Conclusion: Tribunal's choice of tested party and reliance on distribution-company consumer rates for market valuation was justified; Revenue's contrary adjustments were not sustained. Issue 5 - Eligibility for Section 80IA Deduction on Profits from Transfer of Steam (claim raised/modified during proceedings) Legal framework: Section 80IA(4) (deduction in respect of profits of certain infrastructure undertakings including generation of power), meaning of 'power' for the provision; procedural principles on raising/modifying claims before appellate authorities. Precedent treatment: Tribunal followed High Court and other authoritative decisions holding that 'power' in Sec. 80IA(4) is to be understood in common parlance as 'energy' and may include steam (thermal energy) for the purpose of the deduction; appellate authorities are permitted to entertain additional or modified claims where facts necessary to adjudicate are on record and the matter raises questions of law or mixed fact-law. Interpretation and reasoning: The Tribunal accepted that steam can constitute 'power'/energy; the claim (though not strictly in original return) was a modification admissible on appeal where the factual matrix was available, and the assessing officer was directed to examine the claim on merits. The Tribunal distinguished strict procedural bars by applying the principle that appellate authorities may admit new claims that do not require travel beyond materials on record. Ratio vs. Obiter: Ratio - steam generated for captive use can qualify as 'power' for Section 80IA(4) subject to factual entitlement; appellate consideration of modified claims is permissible when supporting facts are already on record. Observations distinguishing prior authorities were explanatory. Conclusion: The Tribunal's acceptance of the revised claim that steam-derived profits could be eligible for Section 80IA deduction (and direction to the assessing officer to examine it) was affirmed.