Brief of the Case
Delhi High Court held In the case of Triune Energy Services Pvt. Ltd. vs. DCIT that if ITAT have no doubt on slump sale agreement and do not thinks that it is a colourable device than the agreement between the parties must be accepted in its totality. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at Rs.40,58,75,529.40/-. As Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted.
Facts of the Case
The Assessee Company (formerly known as “Saijem Triune Energy Pvt. Ltd.) was incorporated during the financial year 2006-07. Fifty percent (50%) of the issued and subscribed share capital of the Assessee Company are held by M/s Saipem, Italy and a balance 50% are held by one Mr Binoy Jacob. The Assessee is a Design Engineering and Consultancy Company servicing industries engaged in Oil and Gas production and processing (offshore and onshore), Petroleum Refining, Petroleum Storage and Transportation, Chemicals and Petrochemicals.
Mr Binoy Jacob was also, at the material time, one of the principal shareholders/promoters of the company Triune Projects Pvt. Ltd. (TPPL) and held 76.42% of the issued and subscribed share capital of TPPL. TPPL was also a company, inter alia, engaged in providing engineering and design services to the oil and gas industry. On 22nd September, 2006, the Assessee entered into a “slump sale/business transfer agreement” in terms of which TPPL sold its business, as a going concern to the Assessee for a consideration of Rs.45,85,00,000/-.The Assessee took over the assets, liabilities and the business of TPPL with effect from the closing date, i.e., 22nd September, 2006. The balance sheet drawn up by the Assessee as on 22nd September, 2006 indicated that the Assessee had taken over the block of fixed assets at a depreciated value of Rs.2,56,24,470.60/- and net current assets at Rs.2,71,00,000/-. The balance consideration paid to TPPL, Rs.40,58,75,529.40/-, was capitalized as goodwill.
The AO noticed that the Assessee had not only acquired the designs knowhow and other physical assets of TPPL but also its business as a going concern including manpower and other live assignments/lease/deeds. According to the AO, this was in the nature of succession, which was covered under Section 170. The AO reasoned that in terms of the fifth proviso to Section 32, the claim of the Assessee for depreciation was restricted to the opening Written Down Value of assets at the beginning of the Previous Year, in the hands of TPPL. Thus, the AO did not admit the Assessee’s claim for depreciation on goodwill, which was value at the slump sale consideration less the value of net tangible assets. The AO further held the slump sale agreement was a colourable device to minimise the tax liability in the hands of TPPL and to maximise the claim of depreciation in the hands of the Assessee.
The AO also did not accept the valuation report that was submitted during the course of proceedings whereby the value of goodwill had been bifurcated into (a) technical knowhow at Rs.26.18 crores; (b) valuation for the business on hand as on 22nd September, 2006 at Rs.12.5 crores; (c) and non compete fees of Rs.1.86 crores. In view of his findings, the AO disallowed the Assessee’s depreciation claim of Rs.10,14,68,882/- and added the same to the taxable income of the Assessee.
Contention of the Assessee
The ld counsel of the assessee submitted at the outset, that the trifurcation of goodwill into separate components viz. technical know-how, ‘brand name’ and ‘non-compete’, were done by the Assessee after the conclusion of the slump sale and, thus, should be ignored; according to him, the entire amount of Rs.40.58 crores should be considered as a goodwill. Mr Sabharwal referred to the slump sale agreement and the balance sheet of the Assessee prepared as on 22nd September, 2006, which clearly reflected Rs.40,58,75,529/- as goodwill. He referred to the decision of the Supreme Court in Smifs Securities Ltd. 348 ITR 302 (SC) in support of his contention that the depreciation was allowable on goodwill. He submitted that the scope of Section 32 had been widened by Finance Act (2) Act, 1988 and depreciation was now allowable on intangible assets acquired on or after 1st April, 1998.
He further submitted that the consideration paid by the Assessee in excess of the value of tangible assets was attributable to the corporate name, the business set up, various licenses and commercial rights acquired by the Assessee as a part of the going concern of TPPL. Mr Sabharwal also referred to Accounting Standard 10 in support of his contention that the excess amount payable was to be accounted as goodwill.
Contention of Revenue
The ld counsel of the revenue did not dispute that the depreciation was allowable on goodwill and he without prejudice to the Revenue’s contention in ITA 189/2015, supported the ITAT’s conclusion to remand the matter for valuation of goodwill. They further submitted that the ITAT had erred in holding that Rs.40.58 crores was paid towards acquisition of goodwill. She contended that no consideration could be attributed to goodwill as the slump sale agreement was silent on this aspect.
Held by CIT (A)
The CIT (A) held that the consideration paid by the Assessee was excessive and on the said basis made an addition of Rs.30,44,06,647/- under Section 40A. The CIT (A) further upheld the AO’s view that the Agreement was a colourable device entered into only for the purposes of obtaining an undue tax advantage. The CIT (A) also did not accept the valuation report whereby the value of goodwill had been bifurcated into different components. The CIT (A) rejected the Assessee’s claim that it had acquired any knowhow from TPPL and in any event found that the valuation of Rs.26.20 was exaggerated. Similarly, the CIT (A) did not accept the valuation of business at hand of Rs.12.50 crores as well as payment for non-compete at Rs.1.88 crores. The CIT (A) also did not accept the alternate claim of the Assessee that the consideration paid by the Assessee less the value of tangible assets be considered as goodwill and depreciation be allowed on the same.
Held by ITAT
The ITAT held that the addition of Rs.30,44,06,647/- made by the CIT(A) to the income of the Assessee was not sustainable as the same was not claimed as an allowance or a deduction and, therefore, any addition under Section 40A was not sustainable. The ITAT further held that the conclusion of CIT(A) and the AO that the scheme of slump sale (i.e. the Agreement) was a colourable device was also unsustainable. Accordingly the ITAT set aside the said conclusion.
Insofar as the claim of depreciation is concerned, the ITAT held that no credible material had been brought out in the valuation report submitted by the Assessee on the basis of which a specific valuation could be ascribed to any specific intangible asset and, therefore, held that the AO and CIT(A) were justified in holding that the Assessee was not entitled to depreciation on technical knowhow, valuation of business and non-compete fee mentioned in the report. In respect of the alternative claim of the Assessee that the entire sum of Rs.40,58,75,529/- paid towards intangibles be considered as a goodwill, the ITAT – following the decision of Supreme Court in CIT v. Smifs Securities Ltd.: 348 ITR 302 (SC) – upheld the Assessee’s contention that depreciation could be claimed on goodwill; but, remanded the matter for the purposes of valuation of goodwill.
Held by High Court
The issue whether depreciation is allowable on goodwill is no longer res integra. In Smifs Securities Ltd. 348 ITR 302 (SC), the Supreme Court had answered the question “Whether goodwill is an asset within the meaning of section 32, and whether depreciation on ‘goodwill’ is allowable under the said section” in favour of the Assessee.
Further goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression “goodwill” subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. In CIT v. B.C. Srinivasa Setty: (1981) 128 ITR 294 (SC), the Supreme Court had explained that:- “Goodwill denotes the benefit arising from connection and reputation.
From an accounting perspective, it is well established that ‘goodwill’ is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts.
It is also relevant to refer to Accounting Standard 10 as issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under:- “16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money’s worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess id termed as ‘goodwill’. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise.” In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill.
In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at Rs.40,58,75,529.40/-. As indicated hereinbefore Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted.
Accordingly appeal of the assessee allowed.