Income Tax Act, 1961 – Sections 32, 36(1)(va), 55(2)(a)(ii), 143(3), 144B and 144C - The appellant, filed its income return for the Assessment Year 2020-21, which was selected for scrutiny. The Transfer Pricing Officer (TPO) made adjustments regarding intra-group services and trade receivables. The Assessing Officer (AO) made further additions for delayed provident fund (PF) deposits and disallowed depreciation on goodwill created post-demerger. The Dispute Resolution Panel (DRP) confirmed most adjustments except the intra-group services adjustment. The final assessment order retained contentious disallowances - Whether the disallowance of employees’ contribution to PF for an alleged delayed deposit is justified despite evidence of timely payment - Whether depreciation on goodwill arising from a demerger qualifies as an intangible asset eligible under Section 32 - Whether TDS and TCS credit claimed by the assessee was properly considered – HELD - The Tribunal observed evidence (bank statements and challans) indicating timely payment of employees’ PF contributions, despite an erroneous audit report entry. The AO was directed to verify and allow the deduction if payments were within statutory deadlines - The Tribunal held that goodwill arising from demerger qualifies as an intangible asset under Section 32, as supported by the Supreme Court’s decision in Smifs Securities Ltd. Goodwill constituted a bundle of business rights acquired by the appellant, justifying depreciation. The invocation of the sixth proviso to Section 32(1) was deemed misplaced as it applies to pre-existing assets, not those arising post-demerger. Furthermore, the demerger was genuine, with commercial rationale validated by the National Company Law Tribunal (NCLT) - The AO was instructed to verify and grant the correct TDS and TCS credits as per records - The appeal was partly allowed. Adjustments regarding PF contributions and depreciation on goodwill were directed to be reassessed favorably. TDS/TCS credit discrepancies were ordered to be corrected

 

2024-VIL-1759-ITAT-CHE

 

IN THE INCOME TAX APPELLATE TRIBUNAL

‘D’ BENCH CHENNAI

 

IT(TP)A No. 37/CHNY/2024

Assessment Year: 2020-21

 

Date of Hearing: 03.12.2024

Date of Pronouncement: 04.12.2024

 

TAKRAF INDIA PVT LTD

 

Vs

 

THE ASSISTANT COMMISSIONER OF INCOME TAX

 

Appellant by: Shri Ashik Shah, CA

Respondent by: Shri A. Sasikumar, CIT

 

BEFORE

SHRI GEORGE GEORGE K, VICE PRESIDENT

SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER

 

ORDER

 

PER GEORGE GEORGE K, VICE PRESIDENT:

 

This appeal at the instance of the assessee is directed against the final assessment order dated 26.06.2024 passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2020-21.

 

2. Brief facts of the case are as follows:

 

The assessee is a private limited company. It is a subsidiary of Tenova S.P.A. The assessee operates out of two business verticals namely Engineering, procurement and contracts (EPC) and rendering Engineering Design Services (EDS). For the assessment year 2020-21, the return of income was filed on 18.01.2021 declaring a total income of Rs.32,46,68,600/-. The assessment was selected for scrutiny and notice u/s.143(2) of the Act was issued on 29.06.2021. During the course of assessment proceedings, the case was referred to the TPO to determine the Arm’s Length Price of international transaction undertaken by the assessee with its AE’s. The TPO passed an order u/s.92CA(3) of the Act on 13.07.2023 proposing the following TP adjustments: -

 

 

3. Pursuant to the TPO’s order, the AO passed draft assessment order u/s.144C(1) of the Act on 11.09.2023 incorporating the aforementioned TP adjustments proposed. Apart from TP adjustment, the AO had made the following corporate tax additions / disallowances: -

 

i) Addition on account of delay in depositing Employee’s contribution towards PF	: Rs.18,89,623/-
ii) Disallowance of depreciation on Goodwill	: Rs.2,06,15,628/-

 

4. Aggrieved by the draft assessment order, assessee filed objections before the DRP on 10.10.2023. The DRP disposed off the assessee’s objections vide its directions dated 18.06.2024. The DRP insofar as the TP adjustment is concerned on downward adjustment of inter-group services amounting to Rs.6,55,18,746/- directed the AO / TPO to allow the same in the final assessment order. As regards to interest on overdue receivables, the objections of the assessee were rejected. The objection of the assessee company on additions/disallowance of corporate tax issues were also rejected by DRP.

 

5. Pursuant to the DRP directions, the impugned final assessment order was passed on 26.06.2024. The additions / disallowances, the TP adjustments that are sustained in the final assessment order are as under: -

 

 

6. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The assessee has raised six grounds and various sub-grounds. Ground No.I and its sub-ground is general in nature and no specific adjudication is called for, hence, the same is dismissed. As regards to Ground No.II, the ld.AR did not press the same during the course of hearing. Hence, the same is dismissed. As regards to Ground No.V and its sub-grounds, the ld.AR submitted the tax impact on the same is not material and did not press those grounds. Therefore, Ground No.V and its subgrounds namely 5.1 to 5.4 are dismissed. Grounds 6.1, 6.2 and 6.3 are consequential, hence, same are dismissed. The surviving grounds namely Ground Nos.III, IV and 6.4 read as follows: -

 

III. Disallowance of alleged belated employee contribution towards PF 3.1 The lower authorities erred in facts and circumstances of the assessee and in law by disallowing the alleged belated contribution towards PF of INR 18,89,623 without appreciating the fact that there was no delay in deposit of the contribution.

 

IV. Disallowance of depreciation on goodwill arising on demerger

 

4.1 On the facts and circumstances of the case and in law, the lower authorities erred in disallowing depreciation on goodwill arising on demerger amounting to INR 2,06,15,628 under section 32 of the Act.

 

4.2 The lower authorities erred in holding that goodwill was self-generated and artificially created to claim depreciation.

 

4.3 The lower authorities erroneously held that the Appellant formulated a colourable device for claiming goodwill without appreciating that such scheme was approved by National Company Law Tribunal and no specific objections were raised by the Ld.AO.

 

6.4 The Ld.AO erred in granting TDS credit and TCS credit of only INR 3,07,95,761 and INR 31,200 respectively, as against the TDS credit and TCS credit of INR 3,07,97,061 and INR 38,200 respectively claimed in the return of income.

 

7. The assessee has filed two sets of paper-book one enclosing therein the case laws relied on and in another, documents pertaining to assessment proceedings, the DRP proceedings, audited financials for the relevant assessment year, etc. We shall adjudicate the above three issues as under: -

 

8. Disallowance of alleged belated employee contribution towards PF (Ground No.3.1): -

 

Brief facts in relation to the above ground is that a sum of Rs.18,89,623/- pertaining to the employees contribution to PF for the month January, 2020 was due on 15.02.2020. According to the assessee, the same was paid on 14.02.2020. However, the date of payment was in advertently disclosed in the tax audit report as 24.02.2020.

 

8.1 The AO stated the challan is in the name of Tenova India Pvt. Ltd., instead of the current name of the assessee i.e., Takraf India Pvt. Ltd. Accordingly, disallowed the employees contribution to PF u/s.36(1)(va) of the Act, based on the reporting in the audit report. The view taken by the AO was confirmed by the DRP.

 

8.2 The ld.AR had placed on record at page 198 of the paper-book, the challan evidencing the employees contribution payment to PF account within the due date i.e., on 14.02.2020. The payment in the audit report (refer page 61 of PB) had stated the payment inadvertently as 24.02.2020. The assessee had submitted additional evidence before the DRP stating the name of Tenova India Pvt. Ltd., has been changed to the name of the current assessee namely Takraf India Pvt. Ltd. However, the objections of the assessee was rejected by the DRP solely for the reason, the date of payment mentioned in the tax audit report is 24.02.2020. On perusal of the bank statement which had debited a sum of Rs.18,89,623/- and the challan receipt which is generated had clearly evidences that payments were made on 14.02.2020 well within the due date prescribed under the respective PF Act i.e., 15.02.2020. The AO is directed to verify whether payment of employees’ contribution of PF account for the month January, 2020 was paid within the due date. If it is found the payment has been made within the due date, the same may be allowed as deduction u/s.36(1)(va) of the Act. It is ordered accordingly. In the result, the ground No.3.1 is allowed for statistical purposes.

 

9. Disallowance of depreciation on goodwill (Grounds 4.1 to 4.3)

 

Brief facts of the case in relation to above grounds are as follows:- The assessee company and Tenova Technologies Private Limited (TTPL) were part of the Tenova group. The group decided to demerge the 'Turnkey Projects' division of TTPL with the assessee company to focus on mining and minerals industry activities. The demerger was sanctioned by the National Company Law Tribunal (NCLT) on 07.11.2017, with effect from 01.04.2016, as the appointed date. The assessee company issued 9,33,075 equity shares to TTPL as consideration, amounting to Rs.93,30,750/-. The assessee company recorded all assets and liabilities of the Turnkey Projects undertaking at their respective book values as per the approved scheme of demerger. The excess consideration over the net assets was recognized as goodwill amounting to Rs.19,54,66,697/-. The assessee company claimed depreciation at 25% on this goodwill.

 

9.1 The AO disallowed the depreciation claim of Rs.2.06 crores, stating that the cost of acquisition of such goodwill is NIL under Section 55(2)(a)(ii) of the Act and termed the creation of goodwill through demerger as a colorable device. The DRP confirmed the disallowance made by the AO.

 

9.2 Aggrieved by the disallowance of depreciation on goodwill, assessee has raised this issue before the Tribunal. The ld.AR submitted that goodwill is to be considered as an intangible asset under Explanation 3 to Section 32 of the Act. It was submitted by the ld.AR that this issue is no longer res-integra and is covered by the judgment of the Hon’ble Apex Court in the case of Smifs Securities reported in 348 ITR 302 (SC), wherein it was categorically held that goodwill constitutes an intangible asset u/s.32 of the Act. It was submitted that the above judgment of the Hon’ble Supreme Court was followed by the Hon’ble Gujarat High Court judgment in the case of Aculife Healthcare Pvt. Ltd., reported in 155 taxmann.com 283 and the Chennai Bench of the Tribunal in the case of MTANDT Rentals Ltd., in ITA No.2410/CHNY/2017 (order dated 30.05.2018). It was further submitted by the ld.AR that the demerger was driven by genuine business reasons and the claim of depreciation cannot be a basis for considered the same as a colorable device. It was contended by ld.AR that goodwill was recorded based on an independent valuation report and the demerger was approved by the NCLT. As regards the AO’s invocation of sixth proviso to section 32(1) of the Act, it was submitted by the ld.AR that the sixth proviso to section 32(1) of the Act applies only to assets existing before demerger and not to assets recognized by the resulting company. In this context, the ld.AR relied on the Chennai Bench order of the Tribunal in the case of Trivitron Healthcare (P.) Ltd., vs. PCIT reported in (2013) 146 taxmann.com 130. Lastly, it was contended that the Amendment by the Finance Act, 2021 is only prospective in nature and applies for and from assessment year 2021-22 onwards, and not relevant assessment year, namely assessment year 2020-21.

 

9.3 The ld.DR relied on the findings of the AO and the DRP.

 

9.4 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 any other business or commercial rights of similar nature. The issue regarding whether goodwill constitutes a business or commercial right of similar nature is no longer res integra. The Hon’ble Apex Court in the case of Smifs Securities reported in 348 ITR 302, had held that goodwill constitutes an intangible asset as envisaged under section 32 of the Act. The relevant finding of the Hon’ble Apex Court reads as follows: -

 

"Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. A reading the words ‘any other business or commercial rights of similar nature' in clause (b)of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b)"

 

9.5 Following the above judgment of the Hon’ble Apex Court, many Courts and Tribunals have held that goodwill qualifies as an intangible asset eligible for depreciation under section 32 of the Act. In the instant case, goodwill represents a bundle of rights such as licenses, permits, statutory approvals, reputation, trained employee base etc. pertaining to the Turnkey Projects Division acquired from TTPL. The excess consideration paid by the assessee company was towards the reputation which the demerged company was enjoying in order to retain its existing clientele. The bundle of intangibles acquired by the assessee company under the said scheme of demerger significantly impacts the assessee’s capacity to earn future economic benefits and drive sales growth by rendering quality services. These intangibles provide leverage and impetus to the business of the assessee company. This bundle of intangibles acquired by the assessee company owing to the scheme of demerger under the name ‘goodwill’ constitutes a business or commercial right of similar nature and accordingly can be classified as an intangible asset under clause (b) of Explanation 3 to section32 of the Act and hence is entitled to depreciation under section 32 of the Act. It is not disputed by the Revenue that the assessee company paid consideration in excess of the fair value of assets taken over, and further that the Goodwill recorded by it arose only pursuant to the scheme of Demerger. In view of the above, the goodwill recorded by the assessee company is entitled to depreciation as per the provisions of section 32 of the Act, and the disallowance of the said claim by the lower authorities is without any basis. The ITAT, Chennai Bench, in the case of MTANDT Rentals Ltd. in ITA No. 2410/CHNY/2017 (order dated 30.05.2018), allowed the claim of depreciation on Goodwill arising on demerger under similar facts and circumstances. The relevant finding of ITAT is reproduced below:

 

“Thus, in our opinion goodwill which came into the books of the assessee on account of rounding off of the decimal in share swap ratio was not an artificial one. Issue of equity shares by the assessee to M/s. Mtandt Ltd was not artificial but real. Even in the case of Smifs Securities Ltd (supra) considered by Hon’ble Apex Court, goodwill was result of a scheme of amalgamation which is not much different from a scheme of demerger. In the circumstances, we are of the opinion that the lower authorities fell in error in disallowing the claim of depreciation. Orders of the lower authorities are set aside. Depreciation claimed by the assessee stands allowed.”

 

9.6 The Hon’ble Gujarat High Court in the case of Aculife Healthcare P. Ltd. reported in 155 taxmann.com 283, held that the goodwill arising on account of the excess consideration paid over and above the net assets on account of demerger was held to be an intangible asset as per Explanation 3(b) to Section 32(1) of the Act and is eligible for the claim of depreciation.

 

9.7 The AO had alleged that the goodwill arising out of the demerger is a colourable device for reducing the assessee’s tax liability without demonstrating or recording any reasons or basis for such allegation. The AO while concluding that the scheme of demerger failed to note that the goodwill was recorded as the excess of consideration over the net assets and the said consideration was based on the valuation report issued by an independent chartered accountant (valuation report is placed on record at Page 165 of PB). Further, it is also pertinent to note that the goodwill and the consequential claim of depreciation is on account of demerger which was approved by the Hon’ble NCLT, (NCLT order is placed on record at Page 122 of the PB filed by the assessee) after looking into the business rationale and following the due process laid down under the Companies Act 2013. The AO had clarified that the scheme of demerger is not questioned by the Department. It may also be relevant to note that the AO had also agreed that the demerger was carried out for strategic reasons at Page 28 of the final assessment order which is reproduced below:

 

“It is also worthwhile to mention that, as recorded by NCLT, the integration of Turnkey Projects into TIPL will lead to improve focus, efficient promotional efforts, and thus leading to improved performance.”

 

9.8 The AO’s conclusion that the scheme of demerger is a colourable device merely because goodwill arose on account of demerger and depreciation was consequently claimed, does not take away the fact that the demerger was carried out for commercial and non-tax reasons. Further, there is no restriction that an intangible asset cannot arise in an intra group restructuring especially when the resulting company has acquired bundle of rights on demerger which is represented as goodwill.

 

9.9 The rationale for demerger was submitted before the NCLT in Form NCLT-1. (Application in Form I is placed on record at Page 127 of the PB submitted by the assessee). The Ministry of Corporate Affairs (‘MCA’) vide Circular No 1/2014 (F.No 2/1/2014) dated 15 January, 2014, issued a circular directing the Regional Director to invite specific comments from the Income Tax Department within 15 days from the receipt of the notice before filing his response to the Court. If no response is received, it is presumed that the department has no objections. In continuation of the above, the Income Tax Department issued a Circular vide circular F.No.279/MISC/M- 171/2013-ITJ dated 11 April. 2014, bringing the attention of the Commissioners / Income-tax authorities to the afore-said circular issued by the MCA and emphasising that in interest of the Revenue a response to the Court must be filed if a Scheme is found prejudicial to the interest of the Revenue as this is the only opportunity for the department to object, if any. Section 230 of the Companies Act, 2013 incorporated the above requirements as part of the statutory provisions. Sub-section (5) of Section 230 specifically requires that a notice by the National Company Law Tribunal (‘NCLT’)must be sent to the Income-tax department along with all the scheme related documents disclosing the details of the compromise or arrangement, a copy of the valuation report, etc, for representations, if any. The Income Department must revert with reservations within 30 days from the receipt of such notice. If no response is received, it is presumed that there are no objections. Correspondingly, Rule 8 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 for the purpose of Section 230(5) provides that a notice in Form No CAA 3 shall be sent to the Income-tax authorities in all cases. In the present case, the Income-tax authorities have not placed any objection to the Scheme or the valuation report. The same is evident from para 11 of the NCLT order dated 07.11.2017 wherein it is stated that none of the regulators have placed any objection and accordingly the scheme is approved.

 

9.10 It is evident from the scheme that the demerger was carried out as a fall out of global decision to exit from a particular business segment except in India and Israel and inability to continue to use the brand ‘Bateman’. On demerger, the resulting company, i.e., the assessee company acquired a bundle of rights which were developed and built over a period of time by the demerged company in respect of the business demerged that was valued and compensated by the resulting company, i.e., the assessee company to the demerged company which was represented as goodwill in the books of the assessee company. Thus, it is evident that the demerger was necessitated by genuine business and commercial reasons and not driven by tax reasons. Therefore the demerger cannot be treated as a colourable device without providing any valid reasons. In other words, the depreciation on goodwill is only a consequential benefit which arose to the assessee company as per the provisions of the Act and the claim of depreciation cannot be a basis to conclude that the scheme of demerger is a colourable device.

 

9.11 The invocation of the sixth proviso to Section 32(1) of the Act by the AO, in the present case, is totally misplaced and not justified.The sixth proviso is applicable, only in case of assets already existing in the books of demerged company on which demerged company was claiming depreciation before the demerger, and it is not applicable on assets recognized only by the resulting company pursuant to such demerger. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming depreciation on the ‘same assets’ by both the predecessor company, i.e., the demerging company and the successor company, i.e., the resulting company. The Memorandum to the Finance Bill, 1996 explains the legislative intent of introducing the fifth proviso (now sixth proviso) to section 32(1) of the Act which is reproduced as below:

 

“In the cases of succession in business and amalgamation of companies, the predecessor in business and the successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on the same assets, which in aggregate exceeds the depreciation allowance admissible for a previous year at the prescribed rates. It is proposed to restrict the aggregate deduction for this allowance in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of the number of days for which the assets were used by them.”

 

9.12 Based on the above, it is evident that the fifth proviso (now sixth proviso) to section 32(1) of the Act covers only those assets which were in the block of assets of the amalgamating/ demerged company on which depreciation was claimed and which are transferred pursuant to the amalgamation/ demerger. In this context, we place reliance on the Chennai Bench order of the Tribunal in the case of Trivitron Healthcare (P.) Ltd. Vs PCIT reported in [2023] 146 taxmann.com 130, wherein it was held that fifth proviso (now sixth proviso) to section 32 of the Act is not applicable for assets acquired after or during the course of amalgamation. The relevant findings of Tribunal read as follows :

 

“In other words, in a scheme of amalgamation where existing assets of amalgamating company are acquired by amalgamated company, then while claiming depreciation after amalgamation, amalgamated company can claim depreciation only on the basis of number of days a particular asset were used by them therefore, said proviso only determines amount of depreciation to be claimed in the hands of predecessor/amalgamating company and in hands of successor or amalgamated company only in year of amalgamation based on date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5th proviso to section 32(1), that effectively, scope of the said proviso is narrow as could be culled out for the purpose for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to section 32(1) with regard to depreciation on goodwill is restricted to assets which belongs to amalgamating company and its application cannot be extended to the assets which arise in the course of amalgamation to the amalgamated company.”

 

9.13 The above dictum has also been held in the following judicial pronouncements:

 

i) Altimetrik India (P.) Ltd (137 taxmann.com 9 (Bangalore - Trib.))

ii) Disney Broadcasting (India) (P.) Ltd. (163 taxmann.com 40 (Mumbai – Trib.))

iii) I&B Seeds P. Ltd. (142 taxmann.com 274 (Bangalore - Trib.))

iv) Thermo Fisher Scientific India (P.) Ltd. (155 taxmann.com 346 (Mumbai – Trib.))

 

9.14 Based on the above, we are of the view that the 6th proviso to Section 32 of the Act is not applicable to goodwill arising on demerger. Further. it may also be noted that the scheme of demerger which was approved by NCLT was effective from April 01, 2016 (i.e., for the entire previous year of demerger) and therefore the question of apportionment of depreciation during the year of demerger would not apply to the facts of instant case. Further, the invoking of the Explanation to Section 43(1) of the Act, Explanation 2B to Section 43(6) of the Act, Section 55(2)(a)(ii) of the Act is misplaced and not justifiable. The said provisions are applicable only to those assets which were at any time used by the predecessor company and ‘goodwill’ in the assessee company’s case arises on demerger and therefore, the said provisions are not applicable to the facts of the case.

 

9.15 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 Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be avoided.

 

9.16 In light of aforesaid reasoning and judicial pronouncements cited supra, we hold that the depreciation on goodwill arising out of the demerger is to be allowed under Section 32 of the Act for the concerned assessment year. It is ordered accordingly. Therefore, Grounds 4.1 to 4.3 are allowed.

 

10. TDS credit and TCS credit (Ground No.6.4)

 

By raising the above ground, the ld.AR submits that the assessee was not given the due TDS credit and TCS credit to the extent of Rs.3,07,97,061/- and Rs.38,200/- respectively claimed in the return of income. The AO is directed to verify the same and give due credit of TDS and TCS as per law. It is ordered accordingly.

 

11. In the result, the appeal filed by the assessee is partly-allowed.

 

Order pronounced in the open court on 4th December, 2024 at Chennai.

 

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