TaxTMI 
TaxTMI 
2024 (11) TMI 1301
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....r. With the consent of the parties, the assessee's appeal for the assessment year 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....
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.... scrutiny and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, from the perusal of 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 va....
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....he case may be, in the ratio of the number of days for which the assets were used by them." In view of the above proviso, the assessee would not be eligible for depreciation on the value of Goodwill/business development 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 ....
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.... the AO rejected the submissions of the assessee, inter-alia, for the following reasons: - "1. The claim of the assessee is untenable as section 32 dealing with allowability of depreciation specifically consists of 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 capita....
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....g in the scheme of demerger nor any actual cost having been incurred by the demerging company as well as by demerged company, the claim made by the assessee in the return of income for the year under consideration with regard to goodwill (intangible asset) which had 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 ....
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...., claims and powers, authorities, allotments, approvals and consents, reserves, provisions, permits, ownerships rights, lease, tenancy rights, occupancy rights, incentives, clains, rehabilitation schemes, funds, quota rights, import quotas, licenses, registrations, contracts, 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 o....
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.... changes. 5.3 With effect from the Appointed Date, all the debts, unsecured debts, liabilities, duties and obligations of every kind, nature and description of the Transferor Company shall also under the provision of Sections 391 to 394 of the Act, without any further act or deed be transferred 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 obligat....
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....habilitation Schemes, special-status and other benefits or privileges enjoyed, granted by any Government body, local authority or by any other person, or availed of by the Transferor Company, are concerned, the same shall vest with and be available to the Transferee Company on the same terms and conditions." 10. Further from 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 c....
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....the amalgamation agreed that the assessee shall account for the amalgamation in its books in accordance with the "Purchase Method", the relevant provisions of the Accounting Standard-14 pertaining to the "Purchase Method" are reproduced as follows: - "12. Under the purchase method, the transferee company accounts for the amalgamation either 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 ....
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.... the Accounting Standard-14 pertaining to the "Purchase Method", the assessee sought another valuation report dated 04/07/2016 to estimate the fair value of identified intangible assets, i.e. Dealer Network and Customer Relationships ("Identified Intangible Assets") and major tangible fixed assets i.e. land, buildings and plant and machinery ("Specified Tangible Fixed Assets") as per the Indian Accounting Standards for the purpose of 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 wor....
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....on in favour of the assessee, the Hon'ble Supreme Court in Smifs Securities Ltd. (supra), observed as follows: - "2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3. The Assessing Officer held that goodwill 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&#....
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.... of net assets acquired of the amalgamating company was considered as goodwill arising on account of amalgamation. It is further evident that the AO in the aforesaid decision concluded that no amount was actually paid on account of goodwill. However, in further appeal, the learned CIT(A) concluded that the difference between the cost of an asset and the amount paid constituted goodwill and the taxpayer in the process of amalgamation has acquired a capital right in the form of goodwill because of which the market worth of the taxpayer stood increased. It is evident from the perusal of the aforesaid decision that the aforesaid 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 out....
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....cquisition by the assessee and the goodwill was not already recorded in the books of the amalgamating company which was valued by the independent merchant banker, it is pertinent to note that the value of the goodwill arose in light of the principles of Accounting Standard-14 followed by the assessee to account for the amalgamation in its accounts. Further, it is reiterated that in the Scheme of Amalgamation, approved by the Hon'ble High Court, both parties agreed that any excess of the fair value of shares issued by the assessee company as consideration over the value of net assets of the amalgamating company shall represent 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 asse....
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....ded in its books of accounts or as part of a block of depreciable assets, prior to amalgamation, therefore the question of claim of depreciation on goodwill by the amalgamating company does not arise in the instant case. Accordingly, we are of the considered view that the provisions of the sixth proviso to section 32(1) of the Act are not applicable to the facts of the present case since the goodwill did not exist in the books of the amalgamating company but has arisen in the process of amalgamation. 23. Further, the Revenue has placed reliance upon the provisions of Explanation 7 to section 43(1) of the Act which provides that when a capital asset is transferred by an amalgamating 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 th....
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....e that all the relevant provisions of the Act as discussed above deal with respect to the assets available/recorded in the books of the transferor/amalgamating company. In other words, the assets which have been acquired by the assessee in the scheme of amalgamation would continue at the book value in the books of the amalgamated company. The question arises whether the goodwill shown by the assessee as discussed above was acquired in the scheme of amalgamation from the amalgamating company. The answer stands in negative. It is because there was no entry in the books of accounts of the amalgamating/transferor company reflecting the value of the goodwill. As such, the amount of goodwill 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 can....
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....cope for the purchase of goodwill by excess payment of purchase consideration. Thus, it is clearly evident that the facts of the aforesaid case are completely different from the facts under consideration before us. (d) The decision in the case of Dosti Reality Ltd., in ITA No. 2043/Mum/2022, dated 13/04/2023, is also distinguishable on facts as the "pooling of interest" method was followed to account for the amalgamation in the books of the amalgamated entity as compared to "Purchase Method" adopted in the present case. (e) Lastly, the decision in the case of United Breweries Ltd. v/s Addl. CIT, reported in [2016] 76 taxmann.com 103 (Bang.), relied upon by the lower authorities, the value of goodwill in 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 distinguish....
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....ible assets on which depreciation is being claimed by the assessee are actually the balancing figures while merging the accounts of the amalgamating company. Accordingly, the learned CIT(A) upheld the denial of depreciation claimed on "customer relationship" and "distribution network". 31. As per the assessee, the amalgamating company had a strong distribution network and had established relationships with the distributors who had a nationwide presence. The distributor network is critical to ensure the widespread geographical presence of products and access to retailers and end customers, without whom the assessee could not have established a direct relationship. As per the assessee, the amalgamating company has contractual relationships 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 Relationsh....
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....that the identifiable assets and liabilities may include assets and liabilities not recorded in the financial statement of the transferor company. Thus, similar to our findings rendered in respect of the claim of depreciation on goodwill, we find no merits in the findings of the lower authorities that no separate asset under the head of assets by the name of "customer relationship" or "distribution network" was existing in the books of the amalgamating company. Further, we also do not find any merits in the findings of the learned CIT(A) that the aforementioned two intangible assets are actually the balancing figures while merging the accounts of the amalgamating company, as the fair value of these assets was specifically computed by the 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 commer....
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....KS Micro Finance Ltd. v/s DCIT, reported in [2013] 37 taxmann.com 192 (Hyd. - Trib.) held that where the taxpayer was engaged in the business of micro-financial lending services and it had acquired entire microfinance business of another company 'S', which included the acquisition of rights over more than 1.10 lakhs existing clients of 'S', the amount paid by the taxpayer to 'S' for acquisition of its aforesaid clients was for an intangible asset eligible for depreciation. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: - "11. ..... It is not disputed that the assessee has acquired the entire business and commercial asset of SKS on payment of lumpsum consideration which included 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 trad....
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....er invalid in light of the provisions of section 292B of the Act contrary to the decision of the Delhi High Court in case of Gurgaon Realtech Limited W.P.(C) 5849/20211. 2. Denial of natural justice On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that the Assessing Officer passed an assessment order without providing reasonable and adequate opportunity to furnish detailed submission against show cause notice dated 01 April 2021, thereby, violating the principles of natural justice 3. Disallowance of depreciation of INR 9,49,59,444 on goodwill 3.1. 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 9,49,59,444 on goodwill. 3.2. 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 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 Se....
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....n under section 143(1) in the case of Appellant, even though the said ground was not raised in the appeal against intimation under section 143(1) of the Act. 9. Refund of excess Dividend Distribution Tax ('DDT') paid 9.1 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 Dow Chemical Pacific Singapore Private Limited, a non-resident shareholder ought to be charged at the rate of 10% prescribed under Article 10 of the Double Taxation Avoidance Agreement ('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. 9.2. 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 Dow Chemical Singapore 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 1....