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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the assessee challenging the impugned order dated 14/02/2023, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2017–18.
In its appeal, the assessee has raised the following grounds:–
“1. Disallowance of depreciation of INR 12,66,12,592 on goodwill
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 1.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 12,66,12,592 on goodwill. 1.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 12,66,12,592 on goodwill made by the Assessing Officer holding that goodwill does not fall within "any other business or commercial rights of similar nature" used in section 32 of the Act contrary to the decision of Supreme Court in the case of Smifs Securities Ltd (2012) (348 ITR 302). 1.3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assessing Officer that the Appellant has not incurred any cost for acquiring goodwill in the scheme of merger. 2. Disallowance of depreciation of INR 74,27,651 on distribution network 2.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 74,27,651 on distribution network. 2.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assessing Officer that the Appellant has not incurred any cost for acquiring distribution network in the scheme of merger. 3. Disallowance of depreciation of INR 7,42,04,775 on customer relations 3.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 7,42,04,775 on customer relations. 3.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assessing Officer that the Appellant has not incurred any cost for acquiring customer relations in the scheme of merger. 4. Upholding the adjustments made under section 143(1) of the Act On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding that the addition of INR 6,960 made under section 36(1)(va) of the Act by the Centralized Processing Center, Bangalore ('CPC') in the intimation under section 143(1) of the Act, which was considered by the AO while assessing the total income of the Appellant, is not beyond the scope of adjustments permitted under section 143(1)(a) of the Act 5. Addition of INR 6,960 under section 36(1)(va) of the Act On the facts and in the circumstances of the case and in law, the addition of INR 6,960 under section 36(1)(va) of the Act should not have been made. 6. Refund of excess Dividend Distribution Tax ('DDT") paid 6.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Dow Chemical Pacific Singapore Private Limited, a non-resident shareholder ought to be charged at the rate of 10% prescribed under Article 10 of the Double Taxation Avoidance Agreement ('DTAA') between India and Page | 2
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 Singapore as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution. 6.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Dow Chemical Singapore Holding Private Limited, a non-resident shareholder ought to be charged at the rate of 15% prescribed under Article 10 of the DTAA between India and Singapore as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution. 6.3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Rohm and Haas India Investments Aps, a non-resident shareholder ought to be charged at the rate of 15% prescribed under Article 11 of the DTAA between India and Denmark as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution. The Appellant craves to add, alter, amend, delete or withdraw any or all of the grounds of appeal at or before hearing of the appeal so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law.”
The issue arising in grounds no.1-3, raised in assessee‟s appeal, is pertaining to the disallowance of depreciation claimed on goodwill, distribution network, and customer relations.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a private company incorporated in India and is engaged in the business of manufacturing and trading in diversified chemicals offering a broad range of products and services in various segments such as water, food, and pharmaceuticals to paints, packaging, and personal care products. For the year under consideration, the assessee filed its return of income on 29/11/2017 declaring a total income of Rs. 286,62,42,450, and a revised return of income was filed on 30/08/2018 declaring the same income. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 served on the assessee. During the assessment proceedings, on perusal of profit and loss account of the assessee, it was observed that the assessee has claimed depreciation of Rs. 20,82,45,018 (Rs. 12,66,12,592 @ 25% on goodwill value of Rs. 50,64,50,368, Rs. 74,27,651 @25% on distribution network of Rs. 2,97,10,603, Rs. 7,42,04,775 @25% on customer relations of Rs. 29,68,19,100). Accordingly, the assessee was asked to furnish a note on eligibility for claiming depreciation on the value of such intangible assets along with supporting documents. In response thereto, the assessee submitted that pursuant to the amalgamation of Rohm and Hass (India) Private Ltd (“RHIPL”) with the assessee, all the assets and liabilities of RHIPL were transferred to the assessee. The difference between the fair value of assets transferred and consideration paid by the assessee was recognised as intangibles (namely goodwill, distributed network, and customer relations) in the books of the assessee. Accordingly, the assessee submitted that it has claimed depreciation on the aforesaid intangibles at the prescribed rate under section 32 of the Act.
The Assessing Officer (“AO”) vide order dated 17/08/2021 passed under section 143(3) read with section 144B of the Act did not agree with the submissions of the assessee and held that what was transferred pursuant to the amalgamation was net assets, which consist of existing tangible assets as well as other existing intangible assets. However, no intangible asset in the form of goodwill, distributor network, or customer relationships is shown in the books of accounts of the transferor company. The AO further held that the amalgamating company was not claiming any goodwill as an asset eligible for depreciation and if the amalgamation is not considered, there would not be any deduction of depreciation on goodwill. Thus, under the provisions of 6th Page | 4
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 proviso to section 32(1)(ii) of the Act the assessee is not eligible for depreciation on the goodwill. The AO also held that no credible evidence or material was produced by the assessee to show that it has incurred any cost for acquiring goodwill in the scheme of amalgamation and merely by accounting entries the assessee cannot claim depreciation on goodwill contrary to the provisions of the law. The AO held the intangible assets created in the books of the assessee as fictitious and disallowed the depreciation of Rs. 20,82,45,018 claim by the assessee under section 32(1)(ii) of the Act.
The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that there was no determination of any goodwill that could have been held by the amalgamating company prior to the amalgamation and the consideration for the amalgamation did not relate to payment of any kind for acquiring any license, business or commercial rights. The learned CIT(A) upheld the findings of the AO that the assessee is not entitled to claim depreciation on goodwill under section 32(1) of the Act. Similarly, the learned CIT(A) also upheld the disallowance of depreciation on customer relations and distribution network. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. In the present case, Rohm and Hass Company, USA along with all its subsidiaries were acquired by the Dow Chemical Company, USA. As part of the global legal entity rationalisation project of the Dow group, to rationalise the number of legal entities and to drive synergies in operation, it was proposed to merge RHIPL, the Indian subsidiary of Rohm and
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 Hass Company, USA, with the assessee. Accordingly, the scheme of amalgamation under sections 391 to 394 and other applicable provisions of the Companies Act, 1956 and Companies Act, 2013 was approved from the appointed date, i.e. 01/04/2015, by the Hon‟ble Bombay High Court vide order dated 22/02/2016. Pursuant to the amalgamation, all the assets and liabilities of RHIPL (i.e. Transferor Company) were transferred to the assessee. The assessee recorded the amalgamation as per „Purchase Method‟ prescribed under Accounting Standard-14. Accordingly, the assets and liabilities transferred have been recorded at their fair value, as determined by an independent valuer and taken on record by the Board of Directors of the assessee. The difference between the fair value of assets transferred pursuant to the amalgamation and consideration paid by the assessee was recognised as the following intangibles in the books of the assessee:- Goodwill Distributor network Customer relationships 8. Accordingly, all the above intangible assets were regarded as intangible assets in terms of Explanation-3(b) to section 32(1) of the Act, and the assessee claimed depreciation thereon at the prescribed rate. As per the assessee, RHIPL had a strong distributor network and had established relationships with distributors who had a nationwide presence, which is critical to ensure widespread geography presence with whom the assessee could not have established direct relationship. Accordingly, the distribution network was recognised by the assessee as a business and commercial right under section 32(1)(ii) of the Act, and depreciation of 25% was claimed. Further, out of the total sales of RHIPL, the majority of the sales were directly made to some
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 specific customers and these customers were repeated customers with whom RHIPL had long-term relations. Therefore, the assessee recognised the customer relationships as business/commercial right and claimed depreciation under section 32 of the Act on the goodwill represented by reputation built on account of clientele relationships. As is evident from the record, both the AO as well as the learned CIT(A) rejected the claim of the assessee as these intangible assets were not shown in the books of accounts of the transferor company and mere accounting treatment by the assessee does not entitle the assessee to claim depreciation in its books. Since no credible evidence or material was produced by the assessee to show that it had incurred any cost for acquiring the goodwill in the scheme of amalgamation, the depreciation as claimed by the assessee was disallowed.
It is pertinent to note that the scheme of amalgamation was approved by the Hon‟ble High Court with the appointed date being 01/04/2015, therefore it is necessary to see how this aspect was examined in the first year itself, which is the assessment year 2016-17. During the hearing, it was submitted that the assessee claimed depreciation on the aforesaid intangible assets in the first year after the amalgamation. However, its appeal against the assessment order for the assessment year 2016-17 is currently pending before the learned CIT(A). Therefore, in view of the above, we are of the considered opinion that it becomes relevant to examine whether any intangible asset arises in the hands of the assessee pursuant to the amalgamation and whether on that intangible asset depreciation is allowable under section 32 of the Act. Since the appeal of the assessee against the disallowance of depreciation on aforesaid alleged intangible assets in the first year itself is Page | 7
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 currently pending before the learned CIT(A), we deem it appropriate to restore this issue to the file of learned CIT(A) for de novo adjudication after examination of the aspects as highlighted above. Accordingly, the impugned order passed by the learned CIT(A) on this issue is set aside, and grounds no. 1-3, raised in assessee‟s appeal are allowed for statistical purposes.
Grounds No. 4-5 was not pressed during the hearing. Accordingly, these grounds are dismissed as not pressed.
The issue arising in ground No. 6, raised in assessee‟s appeal, is pertaining to the refund of excess Dividend Distribution Tax (“DDT”) paid by the assessee.
In appellate proceedings before the learned CIT(A), the assessee raised this issue by way of additional ground and submitted that the beneficial rate on dividends as provided in Double Taxation Avoidance Agreement (“DTAA”) is to be applied for the purpose of DDT, as the DTAA override the provisions of the Act. Before the learned CIT(A), the assessee further submitted that the tax paid on dividends paid/distributed over and above the rate provided in the DTAA should be refunded to the assessee. The learned CIT(A), vide impugned order, in view of the order dated 23/06/2021 passed by the coordinate bench of the Tribunal in Total Oil India Private Ltd v/s DCIT, in ITA No. 6997/Mum/2019, dismissed the additional ground raised by the assessee and rejected the claim of the assessee that it is entitled to refund of DDT based on the beneficial rates as available in DTAA. During the hearing, the learned Representative appearing for the parties fairly agreed that this issue is now covered in favour of the Revenue by the decision of the Special Bench of the Page | 8
Dow Chemical International Pvt. Ltd. ITA no.1201/Mum./2023 Tribunal in DCIT v/s Total Oil India Private Ltd, [2023] 149 taxmann.com 332 (Mumbai - Trib.) (SB). Accordingly, respectfully following the aforesaid decision of the Special Bench of the Tribunal, ground no.6 raised in assessee‟s appeal is dismissed.
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 11/09/2023
Sd/- Sd/- PRASHANT MAHARISHI SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 11/09/2023 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai