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2023 (5) TMI 1209 - AT - Income TaxDepreciation on goodwill - goodwill as acquired during business acquisition - Company has entered into a business acquisition agreement to acquire the business of four Soft Limited ('Four Soft'), as a going concern on slump sale basis - consideration paid in excess of the book value of the assets acquired inter alia consists of the attributes of goodwill. HELD THAT - We find merit in the argument of assessee that the purchase consideration was attributed to the business acquired from Four Soft which is a bundle of the components and described in Clause 6.2.2. of the BTA. Details furnished by assessee in the paper book that with the above benefits accrued on transfer of business, the business of the assessee has increased substantially from financial year. As the transfer of IP from Blujay India to Blujay UK cannot question the benefits accrued from the bundle of assets transferred in the course of acquisition as IP was just a part of the assets acquired from Four Soft. Therefore, argument of the Revenue that the underlying asset consisting goodwill is transferred cannot be accepted as IP in entirety did not result in creation of goodwill and the goodwill is a sum paid for acquisition of all the assets and rights i.e. the Business Commercial Rights acquired from Four Soft. As find from the details furnished by the assessee that post transfer of IP to Blujay UK, IP platform licence access was provided back to Blujay India which is in turn providing software development support distribution services in India to domestic third parties. 50% of such income has also been offered to tax in India. From the details furnished by the assessee, we find it is only the ownership of the IP that is transferred to Blujay UK and Blujay India is still benefitting out of the other assets acquired namely business contracts, employees, business permits, policies, readymade business etc. - Transfer of IP to UK was on back-to-back basis without any capital gains and the assessee has not claimed any depreciation on the IP transferred during the year. We find merit in the argument of assessee that the net balance of purchase consideration paid, and the value of net assets acquired is Goodwill and the transfer of IP to BluJay UK cannot affect the value of goodwill as the Goodwill is rightly attributed to all the assets acquired from Four Soft and benefits accrued to BluJay India. Once the existence of Goodwill is established, Depreciation on such goodwill cannot be questioned further. As following the decision of Avis Hospitals India Ltd 2022 (7) TMI 268 - ITAT HYDERABAD we are of the considered opinion that the assessee is entitled to claim depreciation on goodwill. Decided against revenue.
Issues Involved:
1. Determination of Goodwill and its Valuation. 2. Eligibility for Depreciation on Goodwill. 3. Validity of Reliance on Supreme Court Decision in CIT vs. Smifs Securities Ltd. 4. Impact of Transfer of Intellectual Property on Goodwill. Summary of Judgment: 1. Determination of Goodwill and its Valuation: The assessee, a company engaged in software development and distribution, acquired the business of Four Soft Limited on a slump sale basis for Rs.113,53,42,477/-. The excess of purchase consideration over the fair value of net assets acquired was recognized as Goodwill amounting to Rs.43,01,32,709/-. The assessee claimed depreciation on this goodwill, which was initially disallowed by the Assessing Officer on the grounds that no valuation report was provided, and the underlying assets constituting goodwill were transferred, leaving no asset in the books except the balance figure of goodwill. 2. Eligibility for Depreciation on Goodwill: The assessee argued that the excess consideration paid over the book value of assets acquired represents additional benefits such as technical knowledge, designs, and business advantages, thus constituting goodwill eligible for depreciation under section 32. The CIT (A) agreed with the assessee, relying on the decision of the Coordinate Bench of the Tribunal in Dr. Reddy's Laboratories, which held that goodwill is an intangible asset eligible for depreciation. 3. Validity of Reliance on Supreme Court Decision in CIT vs. Smifs Securities Ltd: The Assessing Officer rejected the reliance on the Supreme Court's decision in CIT vs. Smifs Securities Ltd, stating that the Supreme Court did not discuss whether the difference between the cost of an asset and the amount paid in the process of amalgamation constituted goodwill eligible for depreciation. However, the Tribunal found that the purchase consideration attributed to the business acquired from Four Soft, which included various components like business assets, contracts, employees, and intellectual property, justified the recognition of goodwill. 4. Impact of Transfer of Intellectual Property on Goodwill: The Revenue argued that since the valuable intangible assets (eProducts) were transferred to the holding company, the existence of goodwill in the assessee's books was questionable. The Tribunal, however, noted that the transfer of intellectual property to the holding company did not negate the benefits accrued from the bundle of assets acquired, which included business contracts, employees, and other business rights. The Tribunal concluded that the net balance of purchase consideration and the value of net assets acquired constituted goodwill, and its existence justified the claim for depreciation. Conclusion: The Tribunal upheld the order of the CIT (A) allowing the claim of depreciation on goodwill, dismissing the Revenue's appeal. The judgment emphasized that the transfer of intellectual property did not affect the value of goodwill, which was rightly attributed to all the assets and rights acquired from Four Soft. The existence of goodwill was established, and depreciation on such goodwill was deemed allowable.
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