2024 (10) TMI 933 - HC - Income Tax

Disallowance of goodwill amount as written off - AO had disallowed the amount as it was not wholly and exclusively for the purposes of business - HELD THAT - There is no dispute that the assessee had paid a sum for acquisition of assets of Nebula as claimed. There is also no suggestion that the said amount was paid for any other consideration or purpose. It would, thus, follow that the entire amount is required to be treated as expenditure for acquisition of assets or attendant to the said acquisition. Since the assets acquired have been valued at Rs. 12,37,450/-, there is no infirmity in treating the balance amount as pan intangible asset, and the decision of the CIT(A) to allow deprecation on such intangibles cannot be faulted. Decided in favour of assessee. TP Adjustment - addition made on account of ALP with related enterprises - Revenue s grievance regarding the calculation of ALP is confined to an associated enterprise eSys Singapore (the Foreign AE), as one of the tested parties - HELD THAT - It is premised on the basis that the Foreign AE which is admittedly one of the associated enterprises was treated as one of the tested parties. According to the Revenue, it was not apposite to use the said entity as a tested party, considering that the financials and functions of the Foreign AE was more complex as compared to the assessee. However, it is conceded that the said question does not arise in the given facts. This is so because, in fact, the Foreign AE was not included as one of the tested parties for determining the ALP. Although the assessee had proposed the same, it was rejected by the Transfer Pricing Officer and therefore, the addition made on account of the ALP adjustment was not on account of inclusion of the Foreign AE as a tested party. Since, concededly, the Foreign AE was not included as one of the tested parties, the question projected by the Revenue does not arise.

Summary

Issues:
1. Disallowance of goodwill amount
2. Addition made on account of arm's length price with related enterprises

Analysis:
1. The High Court addressed the first issue concerning the disallowance of Rs. 34,63,450/- on account of goodwill written off by the assessee. The assessee had paid a total of Rs. 47,00,000/- to acquire assets from Nebula Technologies Pvt. Ltd., valuing at Rs. 12,37,450/-. The remaining amount was treated as goodwill by the assessee. The Assessing Officer disallowed this claim, stating it was not wholly and exclusively for business purposes. However, the CIT(A) allowed 25% of the amount as depreciation, considering goodwill as an intangible depreciable asset. The Tribunal upheld this decision based on a Supreme Court ruling that goodwill can be considered an intangible asset eligible for depreciation. The High Court agreed that the entire amount paid for asset acquisition should be treated as business expenditure, and the decision to allow depreciation on goodwill was upheld.

2. The second issue involved the addition made on account of arm's length price (ALP) with related enterprises, specifically focusing on the Foreign AE as a tested party. The Revenue contended that the financials and functions of the Foreign AE were more complex compared to the assessee, questioning its treatment as a tested party. However, it was revealed that the Foreign AE was not included as a tested party for determining ALP, as proposed by the assessee but rejected by the Transfer Pricing Officer. Since the Foreign AE was not considered a tested party, the Revenue's argument was deemed irrelevant. Therefore, the High Court ruled in favor of the assessee on this issue.

In conclusion, the High Court dismissed the Revenue's appeal against the order passed by the Income Tax Appellate Tribunal, upholding the treatment of goodwill as depreciable intangible assets and rejecting the contention regarding the arm's length price adjustment with related enterprises.