TaxTMI 
TaxTMI 
2024 (11) TMI 1301
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.... 2016-17 is taken up as a lead case and the decision rendered therein shall be applicable mutatis mutandis to the appeal for the assessment year 2018-19. ITA No. 3772/Mum./2023 Assessee's appeal - A.Y. 2016-17 3. In this appeal, the assessee has raised the following grounds: - "Based on the facts and circumstances of the case, the Appellant respectfully craves to prefer an appeal against the order dated 25 September 2023 passed under section 250 of the Income Tax Act, 1961 (the Act'), by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi ['CIT(A)] in the appeal filed against the assessment order dated 26 December 2019 passed under section 143(3) r.w.s 144B of the Act, on the following grounds, each of which are without prejudice to one another. 1. Disallowance of depreciation of INR 16,88,16,789 on goodwill 1.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 16,88,16,789 on goodwill. 1.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 16,88, 16,789 on goodwill made....
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....the profit and loss account filed by the assessee for the year under consideration, it was observed that the assessee has claimed depreciation of Rs. 27,76,60,023 (Rs.16,80,16,789 @25% on goodwill value of Rs. 67,52,67,147, Rs. 99,03,534 @ 25% on the distribution network of Rs. 3,96,14,137, Rs. 9,89,39,700 @25% on customer relations of Rs. 39,57,58,800). The assessee submitted that pursuant to the order dated 22/01/2016 passed by the Hon'ble Bombay High Court approving the Scheme of Amalgamation of Rohm and Hass (India) Private Ltd (hereinafter referred to as "the amalgamating company") with the assessee (i.e. the amalgamated company) with the appointed date being 01/04/2015, the assessee paid consideration for the amalgamation in the form of its equity shares at a swap ratio of 1:336, which was determined by the independent merchant banker. As per the assessee, the amalgamation was recorded as per the "Purchase Method" prescribed under Accounting Standard-14. Accordingly, the difference between the fair value of assets taken over including the identified assets and the consideration was recognised as intangibles in the books of the assessee. As a result, the intangible assets such....
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....opment rights, which have come into existence solely on account of purchase consideration being more than the value of net assets." 6. In response, the assessee submitted that the intangible assets in the form of goodwill, distribution network and customer relations are not fictitious but real assets which were recognised by the amalgamated company. The assessee further submitted that the fact that these are the real assets is also substantiated by the fact that out of the total consideration paid by the assessee for taking over the business of the amalgamating company, these assets have been paid for by the assessee and the valuation of such assets is backed by the report of an independent valuer. Further, the assessee submitted that it has greatly benefited from these assets in its future business activities. The assessee by referring to the Accounting Standard-14 submitted that it has allocated the consideration to the identified individual assets and liabilities at the fair values. In support of the submission that the intangible assets that have been recognised in the course of amalgamation are depreciable assets, which squarely fall under the last phrase of Explanation 3 to ....
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....f tangible and intangible assets for allowability of depreciation. In terms of allowability of depreciation on intangible assets, section 32 states intangible assets are "knowhow, patents, copy rights, trademarks, licenses, franchises or whether business or commercial rights of similar nature" but not the word goodwill. 2. No credible evidence or material has been produced by the assessee to show that it has incurred any cost for acquiring goodwill in the scheme of demerger. 3. From the reply of the assessee, it is clear that the difference of assets and liabilities has been treated as goodwill. This means that the assessee made accounting the goodwill account the scheme of demerger became effective and not on account of making any payment for goodwill (intangible assets) specifically. As per standard accounting practices, in the cases of demerger, if the assets side is greater than the liability side then the difference is credited to the capital reserve account and in a case where the liability side is greater than the asset side then the difference is accounted as 'Goodwill' account in the hands of the demerged company. This practice is followed to balance the asset ....
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....ad been found only a fictitious asset in the hands of the assessee and also the claim of depreciation is neither bona fide nor tenable." 7. Accordingly, the AO held that the assessee has failed to substantiate the nature and elements of "goodwill" that it has acquired from the amalgamating company upon amalgamation. Therefore, depreciation of Rs. 16,80,16,789 @25% on goodwill value of Rs. 67,52,67,147 claimed by the assessee under section 32(1)(ii) of the Act was disallowed by the AO. 8. The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and held that there is no evidence on record nor any evidence being adduced by the assessee to even suggest that under the Scheme of Amalgamation approved by the Hon'ble High Court, there was any whisper of transfer of any goodwill from the amalgamating company to the assessee in exchange of shares. The learned CIT(A) further held that the differential amount which the assessee has sought to term as "goodwill" was actually accounted as a balancing factor while merging the accounts of the amalgamating company into the accounts of the assessee. It was held that there was no determination of any goodwi....
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....guarantees, bank guarantees, engagements, arrangements, brands, logos, patents, trade names, trademarks, copy rights, all other intellectual property rights, other intangibles of the Transferor Company whether registered or unregistered or any variation thereof as a part of its name or in a style of business otherwise, other industrial rights and licenses in respect thereof, lease, tenancy rights, flats, telephones, telexes, facsimile connections, e-mail connections, internet connections, websites, installations and utilities, benefits of agreements and arrangements, powers, authorities, permits, allotments, approvals, permissions, sanctions, consents, privileges, liberties, casements,. other assets, special status and other benefits that have accrued or which may accrue to the Transferor Company on and from the Appointed Date and prior to the Effective Date in connection with or in relation to the operation of the undertaking and all the rights, titles, interests, benefits, facilities and advantages of whatsoever nature and where ever situated belonging to or in the possession of or granted in favour of or enjoyed by the Transferor Company as on the Appointed Date and prior to the....
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....ferred to or be deemed to be transferred to the Transferee Company so as to become as and from the Appointed Date, the debts, liabilities duties and obligations of the Transferee Company on the same terms and conditions as were applicable to the Transferor Company and further that it shall not be necessary to obtain the consent of any third party or other person who is a party to the contract or arrangement by virtue of which such debts, liabilities, duties and obligations have arisen, in order to give effect to the provisions of this clause. 5.4 It is clarified that all debts, loans and liabilities, duties and obligations of the Transferor Company as on the. Appointed Date and all other liabilities which may accrue or arise after the Appointed Date but which relate to the period on or upto the day of the Appointed Date shall be the debts, loans and liabilities, duties and obligations of the Transferee Company including any encumbrance on the assets of the Transferor Company or on any income earned form those assets. 5.5 With effect from the Appointed Date all debts, liabilities, dues, duties and obligations including all income tax, wealth tax, central sales tax, value added t....
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....m the perusal of the Scheme of Amalgamation approved by the Hon'ble High Court, forming part of the paper book from pages 136-165, we find that as a consideration for the aforesaid transfer and vesting of the undertaking of the amalgamating company in the assessee, the assessee agrees to allot one equity share of Rs. 10 each to the shareholders of the amalgamating company for 336 equity shares of the face value of Rs. 10 each held by the shareholders of the amalgamating company. We find that the aforesaid consideration was paid on the basis of the valuation report dated 27/08/2015, which forms part of the paper book from pages 246-264. For the aforesaid valuation, the valuer considered the Discounted Cash Flow ("DCF") and Net Asset Value ("NAV") method and assigned 80% weight to DCF and 20% weight to NAV for the valuation of the assessee and the amalgamating company. Accordingly, the equity value of the assessee and the amalgamating company was estimated at Rs. 13827.0 million and Rs. 5376.7 million, respectively. Accordingly, the value of the assessee was arrived at Rs. 5545.6 per equity share of Rs. 10 each fully paid-up and the value of the amalgamating company was arrived at Rs....
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.... by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. 13. Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company. For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs. ................. 17. If the amalgamation is an 'amalgamation in the nature of purchase', the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from the valu....
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.... purchase price allocation exercise as at 31/03/2015, i.e. the valuation date. Further, the excess amount of consideration over the value of net assets of the amalgamating company acquired by the assessee was recognised in assessee's financial statements as goodwill. Therefore, as per Accounting Standard-14 issued by The Institute of Chartered Accountants of India, the assets and liabilities transferred were recorded at fair value, as determined by an independent valuer, as follows: - Particulars Amount in Rs. Fair value of assets and liabilities acquired: Assets Fixed assets (net) - Tangible assets 2,130,969,046 - Intangible assets 435,781,962 2,566,751,008 Capital work-in progress 45,145,664 Long Term loans and advances 128,692,174 Net current assets 1,980,320,516 Long term provisions (17,155,252) Sub Total 4703754110 Less: Fair value of shares issues 5,379,021,267 Goodwill 675,267,157 13. Thus, the difference between the fair value of assets taken over and consideration was recognised as goodwill along with other intangibles in the books of the assessee as follows: - * Goodwill - Rs. 67,52,67,157 * Distribution netwo....
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....l was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.-- For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean-- [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 4. 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). 5. In the circumstances, we are of the view that &....
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....esaid finding of the learned CIT(A) was upheld by the Tribunal and in further appeal, the Revenue restricted its challenge only qua the question as to whether the goodwill is an asset under section 32 of the Act and whether depreciation on "goodwill" is allowable under the said section. Therefore, it is evident from the record that the method of calculation of goodwill on which depreciation was claimed in Smifs Securities Ltd. (supra), i.e. the difference between the value of net assets acquired and consideration paid, is similar to the instant case. Thus, at the outset, we are of the considered view that the Revenue having once accepted the computation of goodwill in one case and not challenged its correctness, it will not be opened to the Revenue to challenge its correctness in the case of the other assessee without just cause. In support of the aforesaid conclusion, gainful reference can be made to the decision of the Hon'ble Supreme Court in Berger Paints India Ltd. v/s CIT, reported in (2004) 266 ITR 99 (SC). 19. As regards the submission of the Revenue that the amount of Rs. 67,52,67,157 is merely the difference between the purchase consideration and the net assets acquired ....
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....sent goodwill and be treated as such in the assessee's financial statement prepared consequent upon such amalgamation. Thus, once goodwill has been recognised by the assessee in its financial statement, pursuant to the amalgamation, we are of the considered view that it is entitled to claim depreciation on the same under section 32(1)(ii) of the Act in light of the decision of the Hon'ble Supreme Court in Smifs Securities Ltd. (supra). 20. As regards the anticipated advantages/benefits/profitability to its business which is attributable to the goodwill, the assessee vide submission dated 15/04/2024 placed on record the sales and profitability of the assessee, pre-amalgamation and post-amalgamation, along with relevant extracts of the balance sheet and profit and loss account for the relevant period, which are summarised as follows: - Sales & Profitability of DCIPL pre-merger is as under: Assessment Year Sales (Rs. in mn) EBITDA (Rs. in mn) 2015-16 19,564.80 1,820.79 2014-15 18,845.05 1,623.57 2013-14 16,430.82 1,439.92 Sales & Profitability of DCIPL (amalgamated entity) post-merges is as under: Assessment Year Sales (Rs. in mn) EBITDA (Rs. in mn) 2018....
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....algamating company to the amalgamated company, the actual cost of the transferred capital asset in the hands of the amalgamated company is to be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business. Further, reliance has also been placed upon the provisions of Explanation 2(b) to section 43(6) of the Act, which lays down a similar principle as Explanation 7 to section 43(1) of the Act and provides that actual cost of the block of assets in the case of amalgamated company shall be the Written Down Value of the block of assets in the case of amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. Thus, from the careful perusal of the aforesaid provisions, it is evident that the same pre-supposes either the existence of a block or the value of goodwill forming part of such block or the asset has actual cost to the amalgamating company. However, in the instant case, as noted above, the goodwill arising on account of amalgamation was neither reflected as an asset nor was part of t....
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....will as claimed by the assessee represents the difference between the purchase consideration and the NAV acquired by it. The purchase consideration paid by the assessee was based on the valuation report as discussed above after considering the various factors. Thus the assessee has not acquired any goodwill from the amalgamating/transferor company as alleged, accordingly the provisions of the Act i.e. 6 proviso to section 32, explanation 7 to section 43(1), explanation 2 to section 43(6)(c) of the Act cannot be applied to the case on hand." 24. Therefore, respectfully following the aforesaid decision of the coordinate bench of the Tribunal in Urmin Marketing (P.) Ltd. (supra), we are of the considered view that provisions of the sixth proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) of the Act have no applicability to the facts of the present case. 25. As regards the reliance placed by the Revenue on the provisions of section 49(1)(iii)(e) and section 55(2)(a)(ii) of the Act, it is pertinent to note that these provisions form part of the Chapter dealing with "Capital Gains" and section 47 of the Act specifically excludes transfer of c....
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....the books of the amalgamating company was only Rs. 7.45 crore which has been shown by the taxpayer at Rs. 62.30 crore and accordingly, it was held that the taxpayer has failed to justify the valuation of goodwill at Rs. 62.30 crore. However, there is no dispute regarding the value of goodwill in the present case. We find that for a similar reason the coordinate bench of the Tribunal in Aricent Technologies (Holdings) Ltd. v/s DCIT, in ITA No.90/Del/2013 distinguished the aforesaid decision in United Breweries Ltd. (supra). Thus, we are of the considered view that the reliance placed on the aforesaid decision is misplaced. 27. Further, the reference in the impugned order to the amendment made vide Finance Act, 2021 is also of no help to the Revenue as the said amendment in relation to the allowance of depreciation on goodwill is effective from 01/04/2021 and would accordingly apply to the assessment year 2021-22 and subsequent assessment years. This aspect is evident from page 71 of the Memorandum Explaining the Provisions in the Finance Bill, 2021. Even the decision of the coordinate bench of the Tribunal in I&B Seeds (P) Ltd v/s DCIT, reported in [2022] 142 taxmann.com 274 (Bang-....
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....tionships with the distributors in the form of yearly renewable and mutually terminable contracts and these contracts were in existence over a fairly long period of time. 32. As noted above, following the provisions of the Accounting Standard- 14 pertaining to the "Purchase Method", the assessee sought a valuation report dated 04/07/2016 to estimate, inter-alia, the fair value of identified intangible assets, i.e. Dealer Network and Customer Relationships as per the Indian Accounting Standards for the purpose of purchase price allocation exercise as at 31/03/2015, i.e. the valuation date. From the perusal of the valuation report dated 04/07/2016, forming part of the paper book from pages 169-245, we find that the independent valuer also noted the fact that the amalgamating company has 6 main dealers for coating business and 5 main dealers for AFM business spread across the country. Further, these agreements with the dealers are of an exclusive nature and are valid for a period of 2-3 years, which are renewed thereafter and have been in existence for a substantial period of time. The valuer further acknowledged the fact that it may not be very difficult to establish a dealer networ....
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....he independent valuer vide valuation report dated 04/07/2016. 34. We find that while explaining the meaning of the phrase "any other business or commercial rights of similar nature" in section 32(1)(ii) of the Act, the Hon'ble Delhi High Court in Areva T & D India Ltd. v/s DCIT, reported in (2012) 345 ITR 421 (Del.), observed as follows: - "13. ...............The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating sm....
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....ded the cost of acquisition of the existing customer base of SKS Society. It is also a fact that, the customer base acquired by the assessee has provided an impetus to the business of the assessee as the customers acquired are with proven track record since they have already been trained, motivated, credit checked and risk filtered. They are source of assured economic benefit to the assessee and certainly are tools of the trade which facilitates the assessee to carry on the business smoothly and effectively. Therefore, by acquiring the customer base the assessee has acquired business and commercial rights of similar nature. ........... 14. ........Therefore, the facts of the case considered in the light of the ratio laid down by various judicial precedents referred to hereinabove, in our view, the client acquisition cost paid by the assessee is towards acquiring an intangible asset and therefore eligible for depreciation u/s 32(1)(ii) of the Act." 36. Therefore, in view of the facts and circumstances of the present case and judicial pronouncements as noted above, we find merit in the claim of the assessee and accordingly we direct the AO to grant the depreciation on "customer ....
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....n law, the CIT(A) erred in upholding the disallowance of depreciation of INR 9,49,59,444 on goodwill made by the Assessing Officer holding that goodwill does not fall within the "any other business or commercial rights of similar nature* used in section 32 of the Act contrary to the decision of Supreme Court in the case of Smifs Securities Ltd (2012) (348 ITR 302) 3.3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assessing Officer that the Appellant has not incurred any cost for acquiring goodwill in the scheme of merger. 4. Disallowance of depreciation of INR 55,70,738 on distribution network 4.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 55,70,738 on distributed network. 4.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assessing Officer that the Appellant has not incurred any cost for acquiring distribution network in the scheme of merger. 5. Disallowance of depreciation of INR 5,56,53,581 on customer relations 5.1. On the facts and in the cir....
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....ngapore Holding Private Limited, a non-resident shareholder ought to be charged at the rate of 15% prescribed under Article 10 of the DTAA between India and Singapore as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution. 9.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Rohm and Haas India Investments Aps, a non-resident shareholder ought to be charged at the rate of 15% prescribed under Article 11 of the DTAA between India and Denmark as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution." 39. The learned Authorised Representative ("learned AR") at the outset wishes not to press grounds no.1 and 2 raised in assessee's appeal. Accordingly, these grounds are dismissed as not pressed. 40. The issue arising in grounds no.3, 4 and 5, raised in assessee's appeal, pertains to the denial of depreciation claimed on goodwill, distribution network and customer relations. I....