$~4 & 5
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 40/2015
TRIUNE ENERGY SERVICES PRIVATE
LIMITED ..... Appellant
Through: Mr Sanjeev Sabharwal, Senior
Advocate alongwith Mr Gautam Chopra and Mr
Deepak Sharma, Advocates.
versus
DEPUTY COMMISSIONER OF INCOME TAX ..... Respondent
Through: Mr Rohit Madan and Mr Akash
Vajpai, Advocates.
AND
+ ITA 189/2015
COMMISSIONER OF INCOME TAX-9 ..... Appellant
Through: Ms Suruchi Aggarwal, Senior
Standing Counsel with Ms Lakshmi Gurung,
Junior Standing Counsel and Ms Radhika Gupta,
Advocate.
versus
SAIPEM TRIUNE ENGINEERING PVT. LTD. ..... Respondent
Through: Mr Sanjeev Sabharwal, Senior
Advocate alongwith Mr Gautam Chopra and Mr
Deepak Sharma, Advocates.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
ORDER
% 19.11.2015
ITA 40/2015 & 189/2015 Page 1 of 18
VIBHU BAKHRU, J
1. These appeals are directed against an order dated 25 th July, 2015
passed by the Income Tax Appellate Tribunal (hereafter `ITAT') in ITA No.
5239/Del/2012. The said appeal was preferred by the Assessee against an
order dated 17th August, 2012 passed by the Commissioner of Income Tax
(Appeals) [hereafter `CIT(A)'] rejecting the Assessee's appeal against the
assessment order dated 29th December, 2009 pertaining to Assessment Year
(AY) 2007-08. Whereas the ITA No. 40/2015 has been filed by the
Assessee, ITA 189/2015 has been filed by the Revenue.
2. The Assessee's appeal, ITA 40/2015, was admitted on 19 th January,
2015 and the following question of law was framed:-
"Whether under the circumstances of the case the ITAT
was justified in directing a remand to the assessing officer on
the issue of calculation of the intangible given that it upset the
findings of the lower authorities as to the genuineness and
admissibility of such claim under Section 32(1b)?"
3. The principal grievance of the Assessee is that the ITAT has remitted
the matter to the Assessing Officer (hereafter `AO') to consider the question
whether the valuation of goodwill of Rs.40.58 crore is appropriate.
According to the Assessee, the value of Rs.40.58 crore has been arrived at
ITA 40/2015 & 189/2015 Page 2 of 18
by reducing the value of fixed assets of Rs.2.56 crores and net current assets
of Rs.2.71 crores aggregating Rs.5.27 crores as reflected in the balance
sheet as on 22nd September, 2006 from the slump sale consideration of
Rs.45.85 crores. The said consideration had been paid pursuant to an
agreement dated 22nd September, 2006 which was accepted by the ITAT.
The Assessee contends that the said agreement having been accepted, the
question of imputing any other value to goodwill does not arise.
4. The aforesaid controversy arises in the backdrop from the following
facts:-
4.1 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.
4.2 Mr Binoy Jacob was also, at the material time, one of the principal
ITA 40/2015 & 189/2015 Page 3 of 18
shareholders/promoters of the company Triune Projects Pvt. Ltd. (hereafter
`TPPL') and held 76.42% of the issued and subscribed share capital of
TPPL.
4.3 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 company entered into a "slump sale/business
transfer agreement" (hereafter also referred to as `the 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 also took over the service
contracts of the employees as on the closing date, which was specified as
22nd September, 2006 (unless otherwise agreed between TPPL and the
Assessee). It is relevant to note that that TPPL also agreed to provide the
balance sheet as on closing date and it was agreed that the same would be
treated as a part of the Agreement and as an annexure thereto.
4.4 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
ITA 40/2015 & 189/2015 Page 4 of 18
balance consideration paid to TPPL, Rs.40,58,75,529.40/-, was capitalised
as goodwill.
4.5 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 of the Act. The AO reasoned that in terms of the
fifth proviso to Section 32 of the Act, 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.
4.6 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
ITA 40/2015 & 189/2015 Page 5 of 18
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.
4.7 Aggrieved by the decision of the AO, the Assessee preferred an
appeal before CIT(A). The CIT(A) observed that Mr Binoy Jacob was a
principal promoter of TPPL and also held 50% shares in the Assessee
Company. He also observed that while Mr Binoy Jacob had acquired 50%
shares of the Assessee at Rs.10 per share, the other investor, M/s Saipem,
Italy had acquired the balance 50% shares at a premium of Rs.45,840/- per
share of Rs.10/- each. Further, almost the entire sum collected from M/s
Saipem, Italy had been paid to TPPL. On the aforesaid basis, CIT(A)
concluded that the provisions of Section 40A of the Act were applicable and
the purchase price paid by the Assessee to TPPL was excessive and
unreasonable. 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
ITA 40/2015 & 189/2015 Page 6 of 18
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.
4.8 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 of the Act. 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.
4.9 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)
ITA 40/2015 & 189/2015 Page 7 of 18
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.
5. Mr Sabharwal, learned Senior Advocate appearing for 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 22 nd
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.
(supra) in support of his contention that the depreciation was allowable on
goodwill. He submitted that the scope of Section 32 had been widened by
ITA 40/2015 & 189/2015 Page 8 of 18
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.
6. Mr Rohit Madan 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.
7. Ms Suruchi Aggarwal, learned senior standing counsel appearing for
the Revenue in ITA 189/2015 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.
8. Countering the aforesaid arguments, Mr Sabharwal referred to the
ITA 40/2015 & 189/2015 Page 9 of 18
Agreement, which expressly interprets goodwill for the purposes of the
Agreement as "includes the goodwill in relation to the name, associated to
the business of the seller." He also referred to the balance sheet of the
Assessee prepared as on 22nd September, 2006 which is based on the balance
sheet of TPPL as on the said date. The said balance sheet included the value
of goodwill at Rs.40,58,75,529.40/-.
9. We have heard the learned counsel for the parties.
10. The issue whether depreciation is allowable on goodwill is no longer
res integra. In Smifs Securities Ltd. (supra), the Supreme Court had
answered the question "Whether goodwill is an asset within the meaning of
section 32 of the Income-tax Act, 1961, and whether depreciation on
'goodwill' is allowable under the said section" in favour of the Assessee.
11. The Supreme Court had further held as under:-
"We quote hereinbelow Explanation 3 to section 32(1) of
the Act:
"Explanation 3.--For the purposes of this sub-section,
the expressions 'assets' and 'block of assets' shall mean--
(a) tangible assets, being buildings, machinery, plant or
furniture ;
ITA 40/2015 & 189/2015 Page 10 of 18
(b) intangible assets, being know-how, patents, copyrights,
trademarks, licences, franchises or any other business or
commercial rights of similar nature :"
10. Explanation 3 states that the expression "asset" shall
mean an intangible asset, being know-how, patents, copyrights,
trademarks, licences, 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).
11. In the circumstances, we are of the view that
"goodwill" is an asset under Explanation 3(b) to section 32(1)
of the Act."
12. In the present case the `Business Identification Schedule' appended to
the Agreement specified the business of TPPL, which was sold to the
Assessee. Apart from the tangible assets the said Schedule also included the
following:-
"3) TPPL Contracts:
The benefits and liabilities of TPPL's ongoing contracts as well
as any other letters of intent/contracts/orders related to the
Business up to the 22nd September 2006 and any revenue to be
still received on 22nd September 2006.
The ongoing TPPL contracts are listed in Appendix 4 to this
Schedule. A copy of each of the contracts listed in Appendix 4
as well as any other letters of intent/contracts/orders related
ITA 40/2015 & 189/2015 Page 11 of 18
the business upto 22nd September 2006 shall be provided within
22nd September 2006.
4) TPPL Business Records and Know How:
Know how, expertise, capabilities, references, track records
related to clients and/or suppliers, agents, distributors,
business and production plans, forecast, correspondence,
orders, inquiries, proprietary information, patent, data,
archives, design specification, manuals, research data,
instructions, all past and present information and whatever can
be directly or indirectly referred to the Business etc, including
the books, records and material embodying the above.
5) TPPL Employees:
All the Employees of TPPL as on 22.09.2006 as listed in
Appendix 5B to this Schedule. Any modification in the number
or substitution of any employees as well as any modification to
their respective employment contacts between as on 31.03.2006
as listed in Appendix 5A shall be subject the previous written
approval of Saipem, BJ and TPPL. A copy of each of the
employment contracts for the employees listed in Appendix 5B
shall be available by 22nd September, 2006.
xxxx xxxx xxxx xxxx xxxx
9) Goodwill:
Goodwill includes the goodwill in relation to the name
associated to the Business."
13. 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
ITA 40/2015 & 189/2015 Page 12 of 18
person acquires a business of another as a going concern.
14. 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. The original definition by Lord Eldon in Cruttwell
v. Lye [1810] 17 Ves 335 that goodwill was nothing more
than 'the probability that the old customers would resort to
the old places' was expanded by Wood V. C. in Churton v.
Douglas [1859] John 174 to encompass every positive
advantage ' that has been acquired by the old firm in carrying
on its business, whether connected with the premises in which
the business was previously carried on or with the name of the
old firm, or with any other matter carrying with it the benefit
of the business."
The Court had further explained that:
"A variety of elements goes into its making, and its
composition varies in different trades and in different
businesses in the same trade, and while one element may
preponderate in one business, another may dominate in
another business. And yet, because of its intangible nature, it
remains insubstantial in form and nebulous in character.
Those features prompted Lord Macnaghten to remark in IRC
v. Muller and Co.'s Margarine Limited [1901] AC 217 (HL)
that although goodwill was easy to describe, it was
nonetheless difficult to define. In a progressing business
goodwill tends to show progressive increase. And in a failing
business it may begin to wane. Its value may fluctuate from
one moment to another depending on changes in the
reputation of the business. It is affected by everything relating
to the business, the personality and business rectitude of the
owners, the nature and character of the business, its name
ITA 40/2015 & 189/2015 Page 13 of 18
and reputation, its location, its impact on the contemporary
market, the prevailing socio economic ecology, introduction
to old customers and agreed absence of competition. There
can be no account in value of the factors producing it. It is
also impossible to predicate the moment of its birth. It comes
silently into the world, unheralded and unproclaimed and its
impact may not be visibly felt for an undefined period.
Imperceptible at birth it exists enwrapped in a concept,
growing or fluctuating with the numerous imponderables
pouring into, and affecting, the business."
15. 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. The `Financ ial Reporting
Standard 10' issued by Accounting Standard Board which is applicable in
United Kingdom and by Institute of Chartered Accountants of Ireland in
respect of its application in the Republic of Ireland, explains that "the
accounting requirements for goodwill reflect the view that goodwill arising
on an acquisition is neither an asset like other assets nor an immediate loss
ITA 40/2015 & 189/2015 Page 14 of 18
in value. Rather, it forms the bridge between the cost of an investment
shown as an asset in the acquirer's own financial statements and the values
attributed to the acquired assets and liabilities in the consolidated financial
statements".
16. The abovementioned Financial Reporting Standard 10 also provides
for accounting of purchased goodwill as "the difference between the cost of
an acquired entity and the aggregate of the fair values of that entit y's
identifiable assets and liabilities. Positive goodwill arises when the
acquisition cost exceeds the aggregate fair values of the identifiable assets
and liabilities. Negative goodwill arises when the aggregate fair values of
the identifiable assets and liabilities of the entity exceed the acquisition
cost."
17. At this stage, 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
ITA 40/2015 & 189/2015 Page 15 of 18
connections, trade name or reputation of an enterprise or from
other intangible benefits enjoyed by an enterprise."
18. It is also relevant to note that Smifs Securities Ltd. (supra) was a case
where assets of company YSN shares and Securities (P.) Ltd. were
transferred to Smifs Securities Ltd. under a scheme of amalgamation. And,
the excess consideration paid by the Assessee therein over the value of net
assets of YSN Shares and Securities (P.) Ltd. acquired by the Assessee, was
accounted as goodwill.
19. 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.
20. 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
ITA 40/2015 & 189/2015 Page 16 of 18
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.
21. In view of the aforesaid, the question framed is answered in the
negative, that is, in favour of the Assessee and against the Revenue. The
Assessee's appeal (ITA 40/2015) is, accordingly, allowed.
22. The Revenue has projected the following questions of law in its
appeal (ITA 189/2015):-
"i WHETHER on the facts and in the circumstances of the
case, the ITAT is correct in holding that the residual
amount of Rs.40.58 Crores is towards acquisition of
goodwill when the slump sale agreement is silent on this
issue?
ii. WHETHER on the facts and circumstances of the case,
findings of the ITAT are perverse?"
ITA 40/2015 & 189/2015 Page 17 of 18
23. Insofar as the first question is concerned, the same does not arise, in
the facts and circumstances of the case as the `Business Identification
Schedule' appended to the Agreement expressly includes transfer of
goodwill.
24. Ms Suruchi Aggarwal, learned counsel for the Revenue also did not
canvass any ground, which could remotely indicate the order of ITAT to be
perverse. In our view, no substantial questions of law arise in the Revenue's
appeal (ITA 189/2015). Accordingly, the said appeal is dismissed.
25. Parties are left to bear their own costs.
VIBHU BAKHRU, J
S. MURALIDHAR, J
NOVEMBER 19, 2015
RK
ITA 40/2015 & 189/2015 Page 18 of 18
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