Facts of the Case

The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order dated 09.03.2018 passed by the Income Tax Appellate Tribunal for Assessment Year 2004-05. The Tribunal had upheld the order of the Commissioner of Income Tax (Appeals) in relation to (i) depreciation allowed on goodwill written off by the assessee and (ii) transfer pricing adjustments relating to associated enterprises.

 

Issues Involved

  1. Whether the ITAT erred in upholding the treatment of a foreign associated enterprise as a tested party for determining arm’s length price.
  2. Whether excess payment over the value of acquired assets could be treated as goodwill eligible for depreciation.
  3. Whether the disallowance of goodwill written off under Section 37(1) was justified.
  4. Whether any substantial question of law arose for consideration under Section 260A.

 

Petitioner’s (Revenue’s) Arguments

  • The foreign associated enterprise had more complex financials and functions and ought not to have been considered as a tested party.
  • The excess payment over the value of tangible assets could not be treated as goodwill.
  • The amount written off as goodwill was not wholly and exclusively incurred for business purposes and was therefore not allowable.

 

Respondent’s (Assessee’s) Arguments

  • The foreign associated enterprise was not ultimately used as a tested party for transfer pricing analysis.
  • The assessee had paid ₹47,00,000/- for acquisition of assets from Nebula Technologies Pvt. Ltd., of which ₹12,37,450/- represented the value of tangible assets.
  • The balance amount constituted goodwill, which is an intangible asset eligible for depreciation.
  • The issue was squarely covered by the Supreme Court decision in CIT v. Smifs Securities Ltd.

 

Court Order / Findings

  • The High Court observed that the foreign associated enterprise was not included as a tested party by the Transfer Pricing Officer; hence, the Revenue’s grievance on this issue did not arise.
  • It was undisputed that the entire consideration of ₹47,00,000/- was paid for acquisition of business assets.
  • Since the tangible assets were valued at ₹12,37,450/-, the balance amount was rightly treated as goodwill.
  • Following Smifs Securities Ltd., the Court held that goodwill qualifies as an intangible asset eligible for depreciation.
  • The findings of the CIT(A) and ITAT were found to be legally sound and free from perversity.

 

Important Clarification

The Court clarified that where consideration is paid for acquisition of business assets and the excess over the value of tangible assets is attributable to goodwill, such goodwill constitutes an intangible asset on which depreciation is allowable under the Income Tax Act.

 

Final Outcome

The appeal filed by the Revenue was disposed of against the Revenue. The Delhi High Court upheld the allowance of depreciation on goodwill and rejected the transfer pricing challenge, holding that no substantial question of law arose for consideration under Section 260A of the Income Tax Act, 1961.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770115436_THEPR.COMMISSIONEROFINCOMETAX3VsESYSINFORMATIONTECHNOLOGIESLTD2.pdf 

 

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