ACIT - 14(2) (2), MUMBAI vs. PFIZER LTD, MUMBAI
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI RAHUL CHAUDHARY, JM
PER PRASHANT MAHARISHI, AM: 01. These are the cross appeals for assessment year 2014 – 15 filed by the assessee and the learned Assessing Officer as well as one [1] cross objection filed by the assessee for the same assessment year against the appellate order passed by The Commissioner Of Income Tax (Appeals) – 22, Mumbai [The Ld CIT (A)]
ITA number 2132/M/2018 is filed by Pfizer Ltd (The Assessee/Appellant) raising following grounds of appeal.
Addition of alleged unreconciled transactions appearing in the end information return (AIR) – 338,302
1) on the facts and in the circumstances of the case and in law, the learned Commissioner of
2) on the facts and in the circumstances of the case and in law, the learned CIT – A 14 ignoring that the reconciliation of transactions reported in the AI are statement could not be accomplished by the appellant in absence of details and information from the third parties
DEPRECIATION ON GOODWILL ARISING ON AMALGAMATION OF ERSTWHILE WYETH LTD WYETH ₹ 271, 63, 00,000
3) on the facts and in the circumstances of the case and in law, the learned CIT (A) erred in disallowing the claim of depreciation on goodwill arising on amalgamation of Wyeth amounting to ₹ 2,716,300,000
4) on the facts and in the circumstances of the case and in law, the learned CIT (A) order in not following the decision of the honourable Supreme Court in the case of CIT V Smif securities Ltd (2012) 348 ITR 302
5) without prejudice to the above grounds of appeal and in the alternative, the learned CIT (A) order in disallowing the aforesaid claim of
DEDUCTION UNDER SECTION 35DD OF THE ACT IN RESPECT OF AMALGAMATION EXPENSES: ₹ 290,372/–
6) on the facts and in the circumstances of the case and in law, the learned CIT (A) order in holding that deduction claimed under section 35DD of the act amounting to ₹ 290,372/– being 1/5 of the amalgamation expenses of ₹ 1,51,862 is not allowable as the appellant was not able to produce copies of bill/invoices vouchers for the said amount which constituted only 1.12% of the total amalgamation expenses of ₹ 128,699,915/–
ITA number 2108/M/2018 is filed by The Assistant Commissioner Of Income Tax – 14 (2) (2), Mumbai (The Learned AO) raising following grounds of appeal:-
1) Whether on facts and circumstances of the case and in law, the learned CIT (A) erred in a ruling that points (a) and (b) listed below:-
2) whether on the facts and in the circumstances of the case and in law, the learned CIT (A) order in not appreciating the fact that the prohibited practice of medical practitioners accepting material gifts/benefits cannot be conducted without assessee is complete consent/involvement, and overlooks judgment supporting the illegality and 90 public policy nature of the practice of providing such material gifts/benefits to medical practitioners, as held in the case of CIT versus KAP scan and diagnostic Centre (2012) 344 ITR 467 (P& H ) 3) whether on facts and circumstances of the case and in law, the learned CIT (A) order by misconstruing the decision of honourable
4) whether on the facts and circumstances of the case and in law, the learned CIT (A) erred in allowing write-off of bad debts without granting AO an opportunity to consider fresh submissions made by assessee during appellate proceedings
Cross objection number 110/M/19 is filed by assessee raising following grounds of appeal:-
“Disallowance of payments made to Drs in alleged violation of Indian medical Council (professional conduct, adequate and ethics) regulations, 2002 (IMC regulations) – ₹ 11,60,34,713/–
if it is held that IMC regulations and the CBDT circular number 5 of 2012 are applicable to the assessee, as prayed by the Department in ground number 1 of the appeal bearing ITA number 2108/M/2018, then:-
on the facts and in the circumstances of the case and in law, the expenditure on brand reminders on purchase of medical books and journals to not fall within the scope of the IMC regulations and ought to be allowed as a business expenditure
Brief facts of the case shows that assessee is a company engaged in the business of manufacturing, sale of pharmaceutical including over-the-counter [OTC] pharmaceuticals, cosmetics and allied consumer products and trading of pharmaceuticals. It filed its return of income [ ROI] on 30/11/2014 declaring total income of Rs. 3,422,546,530/–. Assessee revised it on 30/11/2015 declaring a total income of Rs.1,939,382,340/–. Ld AO picked up ROI for complete scrutiny.
During the course of assessment proceedings, the learned assessing Officer made following three additions [3] to the total income of the assessee.
i. The learned assessing officer found that there is an un-reconciled amount as per individual transaction statement and details furnished by the assessee with respect to nine parties of Rs. 544,579. Books of account did not show amount mentioned in the ITS. Assessee submitted that it has written a letter to the concerned parties asking the nature and other supporting evidence in respect of the transaction, however, Assessee did not receive any reply. The learned assessing officer found that it is for the assessee to prove that the
Accordingly assessment order under section 143 (3) of The Act was passed on 31/12/2016 determining total income at Rs. 4,949,621,342/- against the returned income as per the revised return of income of Rs. 1,939,382,340/-.
Assessee aggrieved with assessment Order, preferred appeal before the learned CIT –( A), who passed an appellate order on 24/1/2018.
The learned CIT – A dealt with all the issues as under: –
i. For addition of Rs.544,579/- after obtaining the remand report, he deleted the addition of Rs. 206,277 that were accepted by the learned assessing
iv. Further on the difference of income of 2 companies, the learned CIT – A also asked that there is a bad debts written off out of the provision for doubtful debts, inadvertently not claimed in the original return of income filed but same was claimed in the revised return of income filed of ₹ 151,101,570/–. The learned CIT – A after obtaining the explanation of the assessee and the remand report of the learned assessing officer along with the rejoinder, considered this issue in paragraph number 8.3 of Appellate Order and held that assessee has produced a statement showing party wise details of Baghdad‟s return of amounting to ₹ 151,101,570 along with the
v. Another issue was raised before the learned CIT – A about deduction under section 35 (DD) of the act in respect of amalgamation expenditure amounting to ₹ 25,739890/–. The learned CIT – A asked for the remand report of the learned assessing officer wherein it was stated that assessee has not been able to completely justify the entire expenditure of Rs.286,99,915/- in addition, many invoices and bills referred to the „project Echo‟ /‟Project Echo 1‟. It is unclear that whether this project has any relation to the amalgamation expenses. The ld. CIT – A held that if the expenditure is related to the amalgamation than 1/5 of deduction under section
vi. There were certain other issues, but those are not contested before us and hence are not required to be discussed.
Accordingly appellate order was passed on 24/1/2018 with which the AO and the assessee both are aggrieved are in appeal and in CO before us.
“on the facts and in the circumstances of the case and law, the Dividend Distribution Tax (DDT) paid by the appellant on dividend distribution to its non- resident shareholders ought to have been charged at the rate prescribed under the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the respective non-resident shareholders as against the rate as per the provisions of section 115O of The Income Tax Act 1961, i.e. at the rate of 16.995%.”
In the application of the assessee, it has stated that
i. additional ground of appeal raised are purely legal issues,
ii. facts are already on record and does not need any verification of facts and
iii. it was only during the course of discussion, assessee was advised to raise the additional grounds of appeal, therefore failure to do so originally was neither deliberate nor contumacious.
v. Relied upon the decision of the honourable Supreme Court in case of National Thermal Power Co Ltd [229 ITR 383], Jute Corporation Of India Ltd [187 ITR 688] and of the Honourable Bombay High Court in Ahmedabad Electricity Co Ltd [199 ITR 351].
Arguing for the admission of this additional ground assessee submitted that
i. Assessee has paid an interim and final dividend, which is available and properly disclosed in the financial statements of the assessee.
ii. Similar dividends declared by the amalgamating company are also disclosed in schedule of Dividend Distribution Tax and in the financial statement.
iii. Shareholders are non-resident entities are properly disclosed in Notes to the share capital wherein the details of shareholders are mentioned and further in related party transaction disclosures are made.
iv. In case of Pfizer Ltd Pfizer investments, Netherlands BV is holding 29.52% and in case of Wyeth Ltd John Wyeth brothers, Ltd of United Kingdom holds 5.55% of the equity.
v. details of dividend paid to the aforesaid shareholders along with the corresponding dividend distribution tax liability is disclosed in the return of income
vii. This is purely a legal issue and therefore it deserves to be admitted.
viii. Identically in case of several assesses the coordinate benches have admitted identical grounds.
ix. Thus, this ground may be admitted.
The learned departmental representative vehemently contested that the
i. Facts are not available on record to adjudicate this ground and therefore it deserves not to be admitted.
ii. There is no evidence that shareholders are resident of UK and Netherlands, address of those parties are not available.
iii. Nothing is showed how those are resident of those countries.
iv. No reference of DTAA is made before lower authorities.
v. In the report of DDT and ROI, assessee claimed it as tax on company.
In the rejoinder the learned authorized representative pointed out decision of the coordinate bench in case of GE BE private limited versus The Deputy Commissioner Of Income Tax (IT(TP)A number 2615/Bangalore/2019) for assessment year 2015 – 16 dated 17/05/2022 wherein the above decision of the Bangalore tribunal of Texas instruments India private limited was considered and it has been held in paragraph number 12.8 that the coordinate bench failed to consider the decision of Robert Bosch engineering and business solutions private limited in IT (TP) A number 608 and 445/Bangalore/2016 dated 2/2/ 2022 wherein the identical ground is admitted. Therefore, the decision cited by the learned departmental representative has been held by the coordinate bench as per incuriam. Thus, now that judgment cannot be relied upon. In the and it was submitted that the coordinate bench in case of above judgment followed the decision of the honourable Supreme Court in case of CIT versus vegetable products Ltd 88 ITR 192 and thereby admitted the additional ground of appeal on identical facts and
We have carefully considered the rival contention and perused the available records. We find that assessee has disclosed the details of declaration of dividend (final as well as interim) in its financial statements along with the provision for Dividend Distribution Tax. In the return of income filed by the assessee the details of dividend distribution tax, the applicable rate under section 115O of the act, the date of declaration of the dividend, date of payment of dividend distributed and tax thereon are disclosed. In the share capital schedule in financial statements, it is evident that there are non-resident shareholders. However, whether those shareholders are eligible to claim the benefit of double taxation avoidance agreement between the country of their residence and country of the residence of the assessee is not clear, however, for the purpose of adjudication of the ground, enough details are available on record. Assessee has submitted several judicial precedents wherein identical additional ground is admitted. We have also carefully perused the decisions of various coordinate benches in favour of the assessee where these grounds were admitted and solitary decision of coordinate bench where the ground was not admitted. We find that there is no provision of appeal against the determination of tax under section 115O of the act. Admittedly, assessee himself has computed the tax as per the provisions of the act. The assessee has not challenged it before the lower
Coming to the merits of the ground of appeal, the learned authorized representative submitted that
ii. Netherlands, the Double Taxation Avoidance Agreement entered into by India has Most Favoured Nation [MFN] clause. iii. India Netherlands DTAA Protocol where in it is provided for Articles 10, 11 and 12 that :- “2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. iv. India has entered into a Double Taxation Avoidance Agreement with Hungary wherein in article 2 (3) provides that „dividend tax‟ has been included in taxes covered.
v. Further, as per article 10 dividends can be taxed in source country; such dividend tax cannot exceed 10% of the gross amount of dividends.
vi. Protocol further provides that when the company paying the dividends is a resident of India, the tax on
vii. The dividend distribution tax paid by the assessee on distribution of dividend to non-resident shareholders of Pfizer Ltd has also attracted the tax as provided under section 115O of the act , which is more than 10 %.
viii. Therefore, if dividend distribution tax is considered as a tax on the income of the shareholders, then such tax cannot exceed 10%. The balance tax is required to be refunded to the assessee.
ix. However, special bench of ITAT in case of TOTAL OIL LTD has held that such tax is tax on the undistributed profits of the company and not tax on the income of the shareholders.
x. However, to keep the issue alive, this ground of appeal is pressed.
The learned authorized representative to support his contention relied upon the following judicial precedents:-
i. concentrix services Netherlands BV versus income tax officer (TDS) WP C9051/2020 dated 22/04/2021 Honourable Delhi High Court
ii. Giesecke & Diverient India private limited versus ACIT (120 taxmann.com 338
iv. Union of India versus Tata tea Ltd (CN number 9178 of 2012) (SC)
v. Indian oil petronas private limited ITA number 188 /KOL/2019
The learned departmental representative vehemently opposed the above argument. It was stated that:-
i. Special bench of tribunal has categorically held that dividend distribution tax under section 115O of the act is a tax under distributed profits of the assessee company. Therefore, there is no reason to hold that it is a tax on income of the shareholder.
ii. Here non-resident taxpayer have not challenged levy of the tax under section 115O of the act before the tribunal. Assessee is a resident, therefore assessee cannot invoke the provisions of Double Taxation Avoidance Agreement.
iii. He submits that as India Netherlands DTAA the claim is barred by limitation as such claim needs to have been raised within three years before competent authorities and not before ITAT by the shareholders and not by the Indian company like assessee. He referred to Protocol where in it is provided that :-
Articles 10, 11 and 12
Even otherwise, if for any reason it is held that the v. tax under section 115 O should have been 10% as per the Double Taxation Avoidance Agreement coupled with most-favoured-nation clause of Netherlands Treaty importing Hungary Double Taxation Avoidance Agreement in case of Netherlands resident shareholder, then, the situation may arise that if an Indian resident, earning dividend income from Pfizer, has income below the taxable limits, no tax should have been deducted by Pfizer. However, such a resident shareholder is paying tax at the rate prescribed under section 115O of the act
vi. With reference to application of DTAA, the ld. DR submits that tax u/s 115-O of the Act is a tax on the company and not on the shareholder. Hence, its levy does not give any rise to double taxation. He submitted that invariably in all the DTAAs the words used are "dividends paid by a company". The treaty has to be interpreted as a whole and no clause of it should be read and/or interpreted in isolation.
vii. The impugned assessment year is 2014 – 15, even presumably if the refund is allowed to the assessee, it was be an unjust enrichment in the hands of the assessee. Therefore, also this ground deserves to be rejected.
viii. There is no evidence placed on record by the assessee that those Netherlands shareholders have not claimed any tax benefit of India Hungary double
ix. Under the scheme of section 115O, the provisions of international tax laws are not attracted. x. As per India Hungary DTAA, if tax resident of that country receives dividend from an Indian company, then dividend distribution tax paid in India would be deemed to be tax paid in the hands of the shareholder. Therefore, the only alternative is that non-resident shareholder resident of Hungary can only claim tax credit in the return of income filed by it in Hungary. There is no tax consequence in India. This applies to Netherland shareholder also.
xi. The learned departmental representative vehemently relied upon the paragraph number [7] of the decision of the coordinate bench in [2021] 127 taxmann.com 774 (Mumbai - Trib.) In case of TOTAL OIL LTD wherein reference was made to the special bench. It was stated that those arguments raised by the learned departmental representative therein are also relevant herein. He submitted that before the Total Oil, the issue was with respect to India France double taxation avoidance agreement and there was no reference to Hungary India double taxation avoidance agreement and therefore now the issue of
We have carefully considered the rival contention and find that the coordinate bench in case of Deputy Commissioner of Income Tax Vs The TOTAL OIL India LTD ITA NO.6997/MUM/2019 (A.Y.2016-17) dated 20/04/2023 (SB) ( MUMBAI) has categorically held that dividend distribution tax is a tax on the under distributed profits of the company and it is not a tax on the income of the shareholder. The payment of dividend distribution tax under section 115 O does not discharge the tax liability of the shareholders. It is a liability of the company and discharged by the company. Whatever be the conceptual foundation of such a tax, it is not a tax paid by, or on behalf of, the shareholder.
“82. We are of the view that the above exposition of law is correct and we agree with the same. Therefore, the DTAA does not get triggered at all when a domestic company pays DDT u/s.115O of the Act.”
For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec.115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115 O of the Act and not at the rate of tax applicable to the non- resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly.”
In view of the above discussion, respectfully following the decision of the special bench and various observations made with respect to the applicability of double taxation avoidance agreement, we dismiss the additional ground raised by the assessee.
Coming to the appeal of the learned assessing officer wherein the solitary issue is with respect to payment made for customer gifts etc. to Drs, the learned departmental representative submitted that that assessee has debited a sum of ₹ 482,612,000 as advertisement expenses in the
The learned authorized representative vehemently submitted that the decision of the honourable Supreme Court does not apply to the facts of the case for the reason that assessee has merely given brand reminder and customer gifts and purchase of medical books and journals. It was submitted that nominal value of the such gifts are very low and therefore those expenditure amounting to ₹ 87,953,773 does not violate the guidelines of Indian medical Council. With respect to the purchase of medical books and journals it was submitted that these are provided to the Drs with a view to disseminate knowledge and education and does not fall within the prohibited expenditure. It was further submitted that in the case of Apex Laboratories (P) Ltd [2022) 442 ITR I (SC), the Hon'ble Supreme Court proceeded with the admission of both parties to the said decision that 'there was violation of MCI regulations and the Board Circular' and the entire decision of the Hon'ble Supreme Court is based on this very admission Nowhere in that decision there appears any reference to the violation of law of IMC Regulations' to be in dispute The only dispute the Hon'ble Supreme Court was called upon to decide was whether IMC Regulations are applicable to pharmaceutical companies or not even prior to CBDT Circular i.e. from the date of amended IMC Regulations. 026. We have carefully considered the rival contention and perused the orders of the lower authorities. We do not find
Ground number 4 of the appeal is with respect to allowance of write-off of bad debts. The only grievance of the learned AO is that the deduction is allowed to the
In the result ITA number 2108/M/2018 filed by the learned AO is partly allowed.
Coming to the cross objection filed by the assessee in CO number 110, we find that in view of our decision in ground number 1 – 3 of the appeal of the learned AO, the cross objection of the assessee deserves to be dismissed as it also argues the same thing which has been decided in those grounds.
Accordingly CO number 110/M/2019 filed by the assessee is dismissed.
Now we come to the appeal of assessee in ITA 2132/M/2018.
Ground number 1 and 2 of the appeal of the assessee are with respect to the addition of unreconciled transactions appearing in the annual information return of ₹ 338,302 confirmed by the learned CIT – A. The facts of the case shows that there are nine parties which appeared in ITS details pertaining to the assessee wherein it was found that all those nine parties have deducted tax at source of the assessee for income amounting to ₹ 544,579. In this list of 9 parties, most of them are banks. Before the assessing officer, the assessee tried to contact all nine parties however, no response was received. The learned assessing officer also issued notices under section 133 (6) of the act to those nine parties, however no response was received. Therefore, the AO made an addition of the above amount. Before the CIT – A1 of the parties ICICI bank admitted that it had inadvertently reported the transaction in the annual information return of the assessee amounting to ₹ 206,227. The learned CIT – A deleting the same. Therefore, the assessee is in appeal before us.
The learned authorized representative explained the relevant extracts of AI are statement of the assessee placed at page number 99 – 123 of the paper book as well as the copies of the letter is dated 20 December 2016, 21 December 2016 and 22 December 2016 return to all those nine parties which are placed at page number 124 – 134
The learned departmental representative vehemently supported the orders of the lower authorities and submitted that where the ITS data is populated though by the others but it pertains to the permanent account number of the assessee and therefore it is for assessee to show that there is no transaction with those parties. As assessee has failed to obtain any confirmation from those
We have carefully considered the rival contention and perused the orders of the lower authorities. We find that there is a difference between the AIR data of the assessee and the income shown by the assessee in its books of accounts. It is not denied that AIR data is populated by others if they have transaction with the assessee. The AR data is populated based on permanent account number. Therefore, there are chances that certain times when AR data is populated by others, the permanent account number of the assessee may be punched wrongly. The assessee has attempted to contact those parties but none of them replied. Even the notices issued by the learned AO under section 133 (6) are also not responded by those nine parties except ICICI bank before the first appellate authority. No doubt, difference between AIR data and books of account triggers the examination by the learned AO. However, when the assessee is helpless and unable to obtain confirmation from those parties, it is the duty of the assessing officer to issue notices under section 133 (6) of the act to those parties, which the assessing officer has done in this case also, but unless the information is received contrary to what assessee has stated, the addition cannot be made in the hence of the assessee. In view of this we set-aside ground number 1 of the appeal to the file of the learned assessing officer to examine if the response to those 133 (6) notices are showing any evidence contrary to what assessee has stated, assessee
Ground number 3 – 5 of the appeal is with respect to the disallowance of the claim of depreciation on goodwill arising on amalgamation of Wyeth laboratories Ltd with the assessee. The fact shows that there was a scheme approved by the honourable High Court of amalgamation between the assessee company Pfizer Ltd and Wyeth Ltd having an appointed date of 1 April 2013 whereby all the assets and liabilities of Wyeth Ltd were transferred and vested in the Pfizer Ltd at the fair value is from the appointed date. The above scheme received the approval of the honourable Bombay High Court on 31 October 2014. The fair valuation of the assets of Wyeth Ltd were derived at ₹ 83,780 lakhs and total liabilities were determined at 61,053 lakhs therefore the net assets taken over by the Pfizer Ltd of Wyeth Ltd were Rs. 22,727 lakhs. As per paragraph number 6 of the scheme the exchange ratio was determined wherein the assessee allotted seven equity shares of ₹ 10 each fully paid up in it is capital in respect of every 10 equity shares of ₹ 10 each fully paid up in the equity share capital of Wyeth Ltd. Undoubtedly this exchange ratio was determined by the recommendation of fair equity share exchange ratio report By S R Batliboi & CO LLP and Deloitte Haskins and Sells as per the report dated 23 November 2013. The accounting treatment was passed by the assessee in terms
i. In paragraph number five of the remand report dated 6/12/2017 submitted by the learned assessing officer wherein it was stated that that there was not sufficient material available on record for the quantification of goodwill.
ii. Further proviso 6 to section 32 (1) of the act prohibits the deduction.
iii. The decision of the coordinate bench in ITA number 722/Bangalore/2014 (United breweries versus ACIT) on identical facts and circumstances covers the issue against the assessee. The learned CIT – A tabulated the similarities between the decision of United breweries Ltd and the case of the assessee and found that there is no material difference.
iv. The decision of the honourable Supreme Court in case of Smiffs securities Ltd has been considered by the coordinate bench in case of united breweries Ltd.
The learned authorized representative explained the facts of the case he referred to the copy of the scheme of amalgamation approved by the honourable Bombay High Court placed at page number 135 – 153 of the paper book. He also explained that how goodwill has arise in India books of the assessee company on amalgamation as assessee has paid higher price than the fair value of the assets acquired from Wyeth Ltd. He referred to the
He further supported his claim by relying on several judicial precedents:-
i. M/s Toyo engineering India private limited ITA number 3279/M/2008 dated 13/10/2014
ii. Cosmos cooperative bank Ltd 64 SOT 90
iii. Shri Krishna drugs limited ITA number 198/Hyderabad/2011
iv. AP paper Mills Ltd 33 DTR 148
v. Mylan laboratories Ltd 180 ITD 558
vi. Arricent technologies Holdings Ltd ITA number 19/del/2013
vii. Urmin marketing private limited ITA number 1806/Ahmedabad /2019
viii. JX Nippon lubricants private limited 4985/Del/ 2019
x. ACIT versus Lafarge aggregates and concrete India private limited ITA number 4476/M/2018
xi. DHL Logistics private limited versus DCIT ITA number 1030/M/2015
On the issue of claim of depreciation on goodwill arising out of the amalgamation, the learned departmental representative submitted as under:-
“Depreciation on goodwill created during amalgamation is not allowable.
1.1 Strategic acquisition of a target, by an acquirer paying more than its book net worth, is common in merger and acquisition deals. The acquisition price is generally based on the fair market value of business. The excess price is paid on account of various factors such as brand, clientele, combined synergies, etc., which may not be recorded in the books of account by the target. Such excess price, i.e., purchase price that exceeds the value of net assets, is recorded as 'goodwill' in the books of account of the acquirer. However depreciation on such recorded goodwill is not allowable.
1.2 Let us start by taking an example. P Co is the parent company and S Co is its subsidiary. Both are Indian companies. S Co gets merged with P Co. The
1.3 Taxpayers claim that they are eligible for depreciation under section 32(1)(1) of the Act is not acceptable. The relevant portion of the section 32 of the Act reads as under:
Depreciation
(1) In respect of depreciation of
(i) Buildings, machinery, plant or furniture, being tangible assets;
(ii) Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1 day of April 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed....."
1.5 As per section 32(1) of the Act 'depreciation', in the case of any block of assets, is to be computed on the written down value. According to Explanation 2 of section 32(1) "written down value of the block of assets" shall have the same meaning as in section 43 (6) (c). This section lays down the meaning of the term "written down value", as under:
43(6) "written down value" means-
(a) in the case of assets acquired in the previous year, the actual cost to the assessee;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued
Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub- clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi);
(c) in the case of any block of assets,-
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,-
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;
(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction
(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced-
(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and
(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets,
so, however, that the amount of such decrease does not exceed the written down value;
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).
Explanation 7.-Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.
1.7 In the case before us, goodwill was transferred by the amalgamating company (S Co) to amalgamated company (P Co). According to this explanation, the 'actual cost' of goodwill to the amalgamated company (P Co) shall be same as it would have been if the amalgamating company (S Co) had continued to hold the capital asset for the purpose of its own business.
1.8 To clarify further, Explanation 2 to clause 43(6)(c) reads as under
Explanation 2.-Where in any previous year, any block of assets is transferred,-
(a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (lv) or, as the case may be, of clause (v) of section 47 are satisfied; or
(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company,
then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.
1.10 Hence, the above provisions of law make it clear that the cost of goodwill in the hand of amalgamated company (P co) shall be zero for the purpose of depreciation.
1.11 Without prejudice to above argument, where it has been demonstrated that under the Act, cost of goodwill acquired during amalgamation shall be zero, I would like to bring to highlight the provisions of 6th proviso (5th proviso before Finance Act 2015) to section 32(1), which reads as under:
Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xill), clause (xilib) and clause (xiv) of section 47 or section 170 or to
1.12 Thus even if the intangible block of asset has some value (which is denied as it has been explained above that it has zero value) the depreciation under this proviso is to be restricted to the value considering that amalgamation has not taken place. Since in the hand of the amalgamating company the depreciation would have been zero, there cannot be depreciation in the hand of the amalgamated company. This issue was also dealt by ITAT Bangalore vide its order dated 30 Sept 2016, in the case of United Breweries Limited in I.T. A. No.722, 801 & 1065/Bang/2014. The relevant discussion in the ITAT order is produced below:
Before us, the Id. AR of the assessee has submitted that issue of depreciation on goodwill is concerned; the same is covered by the judgment of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. 252 CTR 233 (SC). He has further submitted that valuation of goodwill is nothing but the differential figure between the consideration and the FMV of the
On the other hand, the Id. DR has submitted that the Assessing Officer has clearly brought on record that there is no justification of the valuation of the goodwill when the assessee has not acquired any intangible asset from the KBDL and further the alleged license. He has further contended that even otherwise the claim of depreciation cannot be allowed in the hand of the assessee more than the depreciation which would have been allowed in the hand of KBDL as per the 5th proviso to Section 32(1) of the IT Act. He has referred to the assessment order and submitted that the Assessing Officer has considered the said proviso while disallowing the claim of depreciation. The CIT (Appeals) has confirmed the action of the Assessing Officer and therefore the claim of depreciation is not allowable as per the 5th proviso to Section 13(2)(1) of the Act. The Id. DR has also referred to the Expln. 3 to Section 43(1) and submitted that the Assessing Officer has the power to examine the valuation of the assets acquired by the assessee if these assets were already in use for business purpose and if the Assessing Officer is satisfied that the main purpose of transfer of such assets was the
the authorities below.
13.1 In a rejoinder the Id. AR of the assessee has submitted that when the assets are introduced in the books of the assessee being the balancing figure of excess consideration over the value of the tangible assets then 5th proviso to Section 32(1) is not applicable. He has further submitted that in all the cases before the Hon'ble Supreme Court as well as Hon'ble High Courts, the revenue has not raised this objection of restricting the claim of depreciation by applying 5th proviso to Section 32(1) of the Act. Therefore the revenue cannot raise this objection when it was not raised in the other cases before the Hon'ble Supreme Court and Hon'ble High Courts.
We have considered the rival submissions as well as the relevant material on record. During the year under consideration the assessee inter alia amalgamated its wholly owned subsidiary KBDL. The assessee acquired the entire shareholding of the
“43 (1)..... Explanation 1-…. Explanation 2... Explanation 3.-Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case."
"Section 32. (1) In respect of depreciation of (1) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquisition by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-(1) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (i) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided
"5.7 As highlighted above, the company paid Rs.180.52 Crores in the preceding year as consideration for acquiring shares of KBDL from original owners and thereby
However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. It is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(i) then the valuation issue become irrelevant. The CIT (Appeals) has also concurred with the view of
5.4 It is also highlighted both in the assessment order and remand report that no depreciation on goodwill was claimed by KBDL before amalgamation. Therefore, as per the 5th proviso to Section 32(1)(i), the appellant is not entitled to depreciation. This is a valid and relevant argument and appellant has not offered any rebuttal to this contention of the A.0."
It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore by virtue of 5th proviso to Section 32(1), the depreciation on the hands of the assessee is allowable only to the extent if such succession has not taken place. Therefore the assessee being amalgamated company cannot claim or be allowed depreciation on the assets acquired in the scheme of amalgamation more than the depreciation is allowable to the amalgamating company. As regards the decision of Hon'ble Supreme Court in the case of CIT Vs. Smiff Securities Ltd. (2012) 348 ITR 302, the said ruling of the Hon'ble Supreme Court is only on the point whether the goodwill falls in the category of intangible assets or any other business or commercial rights of similar
1.13 Thus Hon'ble ITAT did consider the decision of Hon'ble SC in the case of CIT Vs. Smiff Securities Ltd and held that Hon'ble SC only ruled on the issue as to whether goodwill falls in the category of Intangible assets or any other business or commercial rights of similar nature. Hence, it was held that due to operation of 5th proviso (now 6th proviso) to Section 32(1) of the Act, the depreciation on goodwill to assessee is allowable only to the extent if such amalgamation had not taken place. Thus no depreciation was allowed on the goodwill. This decision of the ITAT is not in conflict with Hon'ble SC
Reliance placed by the assessee on the decision of Hon'ble SC in case of Smiff Securities Ltd.,348 ITR 302 (2012) is not correct due to the reasons given in the trailing paragraphs.
2.1. In this case the assessee, 'Smiffs Securities Ltd., entered into the scheme of amalgamation with YSN Shares & Securities P Ltd. ('Amalgamating company'). The scheme was duly sanctioned by High courts with retrospective effect from April, 1st 1998. The assets and liabilities of amalgamating company were transferred and vested in the assessee. The assessee treated the difference between the consideration and the net value of assets of the amalgamating company, as "goodwill" and claimed depreciation on it. The depreciation on goodwill was claimed treating the same as an intangible asset u/s 32 of the IT Act. Explanation 3 to Sec 32(1) 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. The AO rejected the claim on the basis that "goodwill" was not an "intangible asset" as defined in Explanation 3 to Sec 32(1) and the assessee had not paid anything for the same.
2.2.It may be highlighted that there were two questions of law before Hon'ble SC. The first was whether stock exchange membership cards are assets eligible for depreciation. This
2.3. In this regard we would like to quote from Earl of Halsbury LC in the case of Quinn v. Leather [1901] AC 495 (HL), wherein it was held that
2.4. This decision of House of Lords was quoted with approval by the Constitution Bench of Supreme Court in the case of State of Orissa v. Sudhansu Sekhar Misra, (1968) 2 SCR 154(SC) wherein It stated that a decision is only an authority for what it actually decides. Thus we must appreciate that Hon'ble SC in Smiff Securities only decided that goodwill is depreciable. Whether other sections of the Act restrict depreciation in case of goodwill acquired during amalgamation, was not an issue before Hon'ble SC and therefore the decision of Hon'ble SC should not be extended to such issues which it never decided.
2.5. Further, it is submitted that in the case of Rameshwar Lal Sanwarmal v. CIT 122 ITR1(SC), Hon'ble SC had held that it is open to reconsidering its earlier decision if new arguments or facts are brought before it. The SC held that:
"It would be staining logic to an absurd limit to say that though this contention
2.6. Thus, it is respectfully submitted that the decision of Hon'ble SC is restricted to the interpretation that goodwill is a capital asset under the category of intangibles and that depreciation is allowable to it under section 32(1). There was no occasion for Hon'ble SC to adjudicate as to whether the actual cost of goodwill acquired by the amalgamated company is to be taken as zero in view of provisions of explanation 7 to section 43(1) and explanation 2 to section 43(6)(c) or that no depreciation is allowable due to provision of sixth proviso (earlier fifth proviso) to section 32(1), as these issues were not agitated before Hon'ble SC. The same observation was also made by ITAT Bangalore in the case of United Breweries cited above.
Conclusion: It has been clearly established above that the issue before Hon'ble SC in Smiff Securities was only that whether goodwill is an intangible asset and hence eligible for depreciation under section 32(1) of the Act. Hon'ble SC has correctly laid down
3.1. Ld. CIT(A) has dealt with this issue in detail vide paras 7.1 to 7.6 of order. In view of the above submission it is humbly submitted that the appeal of the assessee on this ground may be dismissed.”
The learned departmental representative vehementally submitted that there is no question of granting depreciation to the assessee over and above the assets acquired by the assessee from the target company. He
It was further stated that goodwill is merely an accounting entry, assessee has failed to justify that it acquired any assets by paying the goodwill of ₹ 11180 million. It was further submitted that valuation report of the assessee itself shows at page number 277 of the paper book that valuation of goodwill is only INR 690 8 million. He further submitted that even INR 690 8 million stated is merely a balancing figure because the valuation that are including workforce, synergies, customer relationship, distribution network, vendor relationships, contract et cetera are not available. He submitted that only intangibles identified by the assessee are of ₹ 4272 million. He further submitted that quantification of goodwill is the issue raised by the assessing officer in the first remand report and therefore complete facts are not available before the lower authorities. He further stated that merely because assessee has recorded goodwill in its books of account,
The learned authorized representative vehemently objected the submission of the learned that departmental representative stating that he does not have any authority to improve upon the case of the revenue. Therefore there is no reason learned departmental representative to add further arguments what has not been the case of the lower authorities.
We have carefully considered the rival contention and perused the orders of the lower authorities. The facts stated above are undisputed that Wyeth Ltd amalgamated with Pfizer Ltd in terms of scheme of amalgamation approved by the honourable High Court. Accordingly, Wyeth Ltd shareholders were compensated by issue of 7 shares of Pfizer Ltd in exchange of 10 shares of Wyeth Ltd. The appointed date was 1 April 2013 on which date all the assets and liabilities of Wyeth Ltd were transferred and vested in the assessee company recording them at the fair value after eliminating the transactions and balances of the two entities. Accordingly total assets of Rs. 83,780 crores and the liability of Rs. 61,053 crores were taken resulting into the net assets taken over of ₹ 22,727 crores. Assessee accounted the amalgamation under the purchase accounting method as per accounting standard 14 – accounting for amalgamation issued by ICAI. The
“9. Thus, it is evident that 5th proviso to section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. Accordingly, the third substantial question of law is answered in favour of the assessee and against the revenue.”
Further that proviso applies in the case of the appointed date being in between the previous year. When on the first day of previous year, the assets are transferred, then in such case fifth proviso to section 32 cannot apply because
However the learned CIT DR has categorically stated that the claim of depreciation was not before the AO, in the remand report the AO has questioned the quantification and has relied upon the decision of United breweries Ltd. The decision of United breweries Ltd was not only with respect to proviso 5 of section 32, there was a consideration of the decision of the honourable Supreme Court, as well as the cost of acquisition of goodwill under section 43 (1) of the act. He submitted that in the present case also the provisions of explanation 2 to section 43 of the income tax act clearly applies. As we already noted that the learned assessing officer has categorically stated that subject to the quantification of depreciation on goodwill, at the threshold itself it cannot be allowed by invoking proviso 5 of section 32 of the act, we find that the learned CIT DR is not improving the case of the AO but merely saying that the provisions of the law i.e. the income tax act cannot be ignored.
We find that assessee has recorded in its books of account goodwill of ₹ 6908 crores. Obviously honourable Supreme Court has categorically held that it is an intangible asset on which depreciation can be allowed under the provisions of section 32 (1) (ii) of the act. The exclusion of goodwill as been inserted by the finance act 2021 with effect from
Ground number 6 of the appeal of the assessee is with respect to the claim of deduction under section 3 5DD of the act, assessee has incurred amalgamation expenditure of Rs. 257,39,983/- being 1/5 of the expenditure on amalgamation incurred amounting to ₹ 128,699,915/-. Though in the original proceedings the learned assessing officer did not call about the expenditure details, this is for
The learned authorized submitted that assessee has failed to produce only minuscule percentage of the total expenditure and therefore the deduction on non- production of invoices/vouchers cannot result into denial of deductions.
The learned CIT DR supported the order of the lower authorities and submitted that when the assessee has failed to produce the invoices/cultures of the expenditure allegedly incurred for amalgamation, there is no reason that assessee should be granted 1/5 of such expenditure as deduction under section 35DD of the act.
We have carefully considered the rival contention and perused the orders of the lower authorities. Assessee has been granted deduction under section 35DD of the act with respect to all the expenditure which assessee supported by producing evidences in the form of invoices/vouchers/men that letter et cetera. However when the assessee has failed to produce the evidence of incurring the expenditure as well as the purpose for which
In the result, appeal filed by the assessee is partly allowed.
Thus appeal filed by the AO and assessee is partly allowed whereas the cross objection filed by the assessee are dismissed.
Order pronounced in the open court on 22.09 .2023.
Sd/- Sd/- (RAHUL CHAUDHARY) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 22.09.2023 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT DR, ITAT, Mumbai 4. 5. Guard file. BY ORDER, True Copy//
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai
