Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Tribunal upholds allowance of
depreciation on goodwill acquired and non-compete fee paid on
purchase of business
December 10, 2019
In brief
The Chennai bench of the Income-tax Appellate Tribunal (Tribunal)1 upheld a claim for depreciation on goodwill on the acquisition of two businesses through a slump sale agreement and the non-compete fee paid thereunder. The Tribunal upheld the difference between the consideration paid and the net v alue of assets representing goodwill, which was eligible for depreciation. The Tribunal, relying on the decision of the Madras High Court2, upheld the allowance of depreciation on the non-compete fees paid on the acquisition of these businesses.
In detail
Facts
• The taxpayer is engaged in the business of
manufacturing and wholesale trading of automatic door operators, controllers and
accessories.
• The taxpayer acquired the distribution segment of its business partners, as a going concern, through the execution of business transfer agreements (BTA) for an agreed
consideration.
• Assets acquired under the BTA consisted of business assets (computers, hardware, printers, office equipment, etc.), business
1 ITA Nos. 1664 to 1666/Chny/2019
2 Pentasoft Technologies Limited v. DCIT [2014] 264 CTR 187 (Madras)
contracts, key employees, installation employees, etc.
• The taxpayer recorded the tangible assets and liabilities appearing in the sellers’ books and acquired them under the BTA at their existing book values.
The difference between the consideration paid and the v alue at which the assets were recorded in the books was recorded as goodwill.
• The taxpayer neither claimed depreciation on goodwill in the original return of income nor filed a rev ised return of income to claim depreciation.
However, the taxpayer made a claim during the assessment proceedings.
• The Tax Officer (TO) disallowed the claim for
depreciation on goodwill which was subsequently allowed by the
Commissioner of Income- tax (Appeals).
Issue before the Tribunal Whether depreciation is allowable on goodwill, recorded as excess
consideration paid over net assets acquired on business acquisition through slump sale?
Revenue’s contentions
• The taxpayer has not claimed depreciation on goodwill in its return of income but has claimed it in the course of assessment proceedings; therefore, the claim is not acceptable.
• As per the BTA, excess
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consideration paid over the net assets acquired under slump sale is in the nature of non-compete fees and not goodwill.
• The cases, in support of the claim of depreciation relied upon, have not achieved finality and hence cannot be relied upon.
• In v iew of the Mumbai bench of the Tribunal’s ruling3, depreciation on goodwill is to be disallowed on the
contention that the taxpayer had considered the book v alue of the assets and not the fair market values. If the taxpayer had restated the v alue of the incoming assets, there would not be any amount allocated to goodwill.
Hence, it could not be said that the taxpayer had paid for goodwill.
• Perusal of BTA reveals that the difference, if any, between consideration and the net assets received on business acquisition should be considered as non-compete fees and not goodwill.
Taxpayer’s contentions
• The assets were v alued, and employees were taken over along with tangible assets.
Thus, the excess paid was towards goodwill.
• The benefit of the coordinate bench ruling, allowing depreciation, cannot be denied merely because an appeal is pending before a higher authority.
• In v iew of explanation 5 to section 32(1) of the Income- tax Act, 1961 (Act)
depreciation is a statutory
3 DCIT v. Toyo Engineering India Limited [2012] 18 ITR (T) 159 (Mumbai Tribunal)
4 CIT v. Smif Securities Limited [2012] 348 ITR 302 (Supreme Court)
deduction, to be allowed even if the same is not claimed.
• The Supreme Court decision in the case of Smifs Securities Limited4 and the Delhi High Court decisions in the cases of Areva T &D India Limited5 and Hindustan Coca Cola Bev erages (P) Limited6 support the claim of depreciation on goodwill.
Tribunal’s ruling
• On perusal of the respective BTAs, it is an undisputed fact that the two BTAs are
composite agreements for acquiring the trading business along with related installation services on a going concern basis.
• The taxpayer has acquired the trading business of the sellers and not the entities running those business. The TO erred in considering all the assets of the selling entity in
computation of assets acquired.
• It is undisputed that the assets recorded in the accounts were acquired and that no other tangible assets were acquired.
• The non-compete clauses are supportive in nature, since the taxpayer acquired the businesses as a going concern through a composite
agreement to run the trading business along with its employees.
• In v iew of the undisputed fact that the taxpayer had not acquired any immovable property, applying the ruling of Mumbai bench of the Tribunal3 relied by the TO was untenable.
5 Areva T&D India Limited v. DCIT [2012]
345 ITR 421 (Delhi)
6 CIT v. Hindustan Coca Cola Beverages Private Limited [2011] 331 ITR 192 (Delhi)
• The mere fact that tangible business assets were recorded at book value that reflected their market value does not disentitle the taxpayer from claiming depreciation on the excess consideration paid ov er and above the book v alue of the tangible assets.
• The taxpayer has discharged its onus, stating that the book v alue is equal to the market v alue. It is now upto the Rev enue to rebut such contention with documentary support. In the absence of such rebuttal, the taxpayer’s contention was accepted and that of the Revenue was rejected.
• The excess consideration paid is towards intangibles
acquired by the taxpayer in the form of business contracts, customer orders, customer business
information, non-compete, etc.
• Consolidated payments made ov er and above the net assets acquired under BTA are towards goodwill and non- compete agreement.
Depreciation is allowable on both goodwill and non- compete fee. The depreciation claim though not made in the return and made in the course of assessment proceedings, ought to be allowed.
The takeaways
The Tribunal held that intangibles in the form of goodwill acquired and non-compete fee paid under a BTA are eligible for claim of deprecation.
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