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TMI Blog2025 (1) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... st paid to AE on CCD, in view of fact that interest rate of comparables was ranging between 11% to 12%, 11.30% interest paid by assessee to its AE was very much within arm's length rate. Accordingly, the Hon ble High Court deleted the impugned addition. In the instant case, the coupon rate of 11% paid by the assessee was well within the arm s length range based on the benchmarking conducted by the assessee and hence the same is at ALP. Therefore, the action of the TPO / DRP in treating that CCDs as in the nature of equity is not permissible since CCDs remain as debt until they are converted. Bench had asked the ld.AR regarding the applicability of section 94B of the Act. The ld.AR by referring to the audit report at page 49 of the paper-book submitted that no disallowance is called for u/s. 94B of the Act (since interest payment on CCD s did not exceed 30% of EBITDA). However, this aspect needs to be examined if need be, by the AO. In the result, the Grounds are allowed. Disallowance of depreciation on goodwill on slump sale - assessee had entered into a Business Transfer Agreement ( BTA ) on 20.09.2017 pertaining to assessment year 2018-19 to acquire the marketing and sales di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng total income of Rs. 17,18,84,540/-. The assessment was selected for complete scrutiny under CASS and notice u/s. 143(2) of the Act was issued and duly served on the assessee on 29.06.2021. During the course of assessment proceedings, the case was referred to the TPO to determine the Arms Length Price (ALP) of international transactions undertaken by the assessee with its AE s. The TPO vide his order dated 22.06.2023 passed u/s. 92CA(3) of the Act proposed the following TP adjustment:- 1 Upward adjustment on account of interest on receivables 11,88,635/- 2 Upward adjustment on account of margin adjustment 56,71,137/- 3 Downward adjustment on account of Interest on CCDs 9,58,98,001/- 3. Subsequent to the TPO s order, the AO passed draft assessment order dated 28.09.2023 u/s. 144C(1) of the Act incorporating the aforesaid TP adjustments proposed by the TPO. Apart from the TP adjustment proposed by the TPO, the AO has also made corporate tax disallowance of depreciation on goodwill amounting to Rs. 15,98,76,563/-. 4. Aggrieved by the draft assessment order, assessee filed objections before the DRP on 27.10.2023. DRP vide its directions dated 18.06.2024 disposed off the objections of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of depreciation on goodwill on slump sale 5.1. On the facts and circumstances of the case and in law, the lower authorities erred in disallowing depreciation of INR 15.98,76,563 claimed by the Appellant under section 32 of the Act, on goodwill arising on account of slump sale. 5.2. The lower authorities erred in disallowing the claim of depreciation on goodwill for the impugned AY merely based on disallowance made in the assessment order for AY 2018-19. Further the lower authorities failed to appreciate that the characterization of goodwill as an intangible asset under section 32 of the Act was not challenged in the assessment order for AY 2018-19. 5.3. On the facts and circumstances of the case and in law, the lower authorities erred in concluding that depreciation on goodwill is not allowable as under the provisions of the Act. 6. We shall adjudicate the two issues raised in the above grounds as under:- TP adjustment towards interest on Compulsory Convertible Debentures ( CCDs ) [Ground Nos.4.1 to 4.4]:- 7. Brief facts in relation to above issue are as follows:- 7.1 The assessee company on 25.04.2014, issued 76,88,412 CCDs of Rs. 190 to its AE, Stahl Netherlands BV ( Stahl N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its immediate or subsequent utilisation for different purpose, and examined, that even if a loan is raised for purchasing raw material, and after raising the loan the company finds it un-necessary to bye raw material and spends the amount on capital asset, still it cannot be said to be capital expenditure, as it was held, that purpose for which the new loan was required was irrelevant to the question as to whether the expenditure for obtaining loan was revenue or capital expenditure. We are told, that relying on this judgment, many of the High Courts of the country have consistently taken the view, that the expenditure incurred in issuing any debentures, and raising loan on debentures, is admissible, obviously because the debenture is also a loan. 9. At this stage it was contended by the learned counsel for the Revenue, that a distinction should be drawn between the convertible, and non convertible debentures, inasmuch as if the debenture is converted into shares, then it partakes the character of capital, and in that event, the expenditure would not be revenue expenditure, and would be capital expenditure. Learned counsel for the assessee informs, that though it has not come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... splaced. Since in the case of fully convertible debentures, there is no future repayment obligation, the same was considered as equity for the purpose of FDI policy. This definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future repayment obligations in convertible foreign currency. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during reconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. This was also upheld by the Bangalore Bench of the Tribunal in the case of CAE Flight Training (India) Pvt. Ltd., (supra). 7.8. The assessee company in order to justify the arm's length price of the interest due on CCD s had selected in its TP study Comparable Uncontrolled Price method as the most appropriate method and performed a detailed benchmarking analysis arriving at a list of 57 comparable issuance of CCD s. Based on such analysis, the assessee arrived at an arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dwill amounting to Rs. 115,22,91,027/-. The assessee company also paid certain retrenchment costs of Rs. 2,45,46,664/- in respect of few employees of BASF unit that it did not take into its employment, pursuant to the slump sale. Since this cost was also discharged by the assessee company as a part of slump sale, the same was added to the goodwill, which was accordingly determined to be Rs. 117,68,37,691/-. The AO for assessment year 2018-19, based on the PPA held that consideration of Rs. 113,69,00,000/- represents excess consideration which was treated as unexplained investment under section 69 of the Act. The AO also disallowed the depreciation claimed on the said excess consideration amounting to Rs. 28,42,25,000/-. The assessee company challenged the assessment order for AY 2018-19 by way of Writ Petition ( WP ) before the Hon ble Madras High Court. The WP for AY 2018-19 was disposed off by the Hon ble Madras High Court on 21.06.2024, wherein the Hon ble High Court rejected the invocation of section 69 and thereafter remitted the case back to the AO to pass a fresh assessment order within three months. 8.2 Considering the disallowance made by the AO for AY 2018-19, similar dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.4 As regards the invocation of Explanation 7 to section 43(1) of the Act by the DRP, the ld.AR submitted that said Explanation is relevant only in cases of amalgamation and not in a case of slump sale as in this case. Further, it was submitted in the present case, goodwill came into existence for the first time pursuant to slump sale. Thus, in absence of asset already recorded in the hands of the predecessor company, the provisions of Explanation 7 to section 43(1) of the Act will have no application. Lastly, it was contended by the ld.AR that the amendment by Finance Act, 2021 is only prospective in nature and applies for and from assessment year 2021-22 onwards and not the relevant assessment year namely 2020-21. 8.5 The ld.DR relied on the findings of the AO and the DRP. 8.6 We have heard rival submissions and perused the materials on record. As per section 32 of the Act, depreciation would be available in respect of the assets owned, wholly or partly, by the assessee company and used for the purposes of the business or profession. Explanation 3 to section 32(1) of the Act, defines intangible assets to include know-how, patents, copyrights, trademarks, licenses, franchises or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Delhi High Court in the case of Triune Energy Services (P.) Ltd., reported in 65 taxmann.com 288 iii) Chennai Bench of the Tribunal in the case of Dorma India Pvt. Ltd., reported in TS-735-ITAT-2019 iv) Delhi Bench of the Tribunal in the case of Cyber India Online Ltd., reported in 64 SOT 1 8.9 The DRP had relied upon the sixth proviso to Section 32(1) of the Act. The sixth proviso is applicable, only in case of assets already existing in the books of predecessor company and it is not applicable on assets recognized only by successor company. The legislative intent as per the memorandum of Finance Bill, 1996, was to curb the practice of claiming depreciation on the same assets by both the predecessor company and the successor company. The Ahmedabad bench of the Tribunal in the case of Urmin Marketing Pvt. Ltd.(supra), rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger and no goodwill from the books of the transferor is recorded by the transferee. The DRP relied on the order of Bangalore Bench of the Tribunal in the case of United Breweries Ltd. reported in 76 taxmann.com 103, for invoking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 and 1065/ Bang/ 2014. Once again the DR is not appreciating the facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamated, goodwill came into existence being the difference between the consideration paid by amalgamated company over and above the net asset value of the amalgamating companies. The reliance placed on the judgment of coordinate bench is misplaced in as much as in that case the value of the goodwill in the books of amalgamating company was only Rs. 7.45 crores which has been shown by the assessee at Rs. 62.30 crores and on this it was held by the appellate authority that the assessee has failed to justify the valuation of goodwill at Rs. 62.30 crores. The facts of the case in hand clearly show the valuation of goodwill as per the valuation report and there is no quarrel in so far as the net asset value of the amalgamating companies is concerned. The same has the sanction of the Hon ble High Court. 8.11 The DRP had also stated that the assessee s claim of depreciation is not in accordance with Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing (supra), wherein it observed that the assessee has not recorded any goodwill from the books of account of the amalgamating company and it was therefore held that the provisions of Explanation 7 to section 43(1) of the Act cannot be applied. 8.13 Before concluding it is to be mentioned that the Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from 01.04.2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. Further, amendments were made in section 55 of the Act, in relation to the meaning of cost of acquisition etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to 1.04.2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. Therefore, it is evident from the above, that the intention of the legislature, that depreciation on goodwill is allowable prior to the said Amend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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