IQVIA CONSULTING AND INFORMATION SERVICES INDIA PVT LTD,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX 2(1)(1), MUMBAI

The assessee is a private limited company incorporated on 01.10.2003 and is engaged in providing information and technology services to clients in the healthcare industry. During the year under consideration, the assessee acquired business/assets from M/s Nielsen (India) Private Limited and the business of M/s GCI Healthcare Private Limited. The assessee filed its return of income on 28.11.2018 declaring total income at Nil. The case was selected for complete scrutiny and notices under sections 143(2) and 142(1) of the Act, followed by show- cause notices, were issued. During the assessment proceedings, the assessee furnished the relevant agreements and valuation reports in support of the acquisitions and the goodwill arising there from.

In respect of the acquisition from M/s Nielsen (India) Private Limited, the assessee entered into an Asset Purchase Agreement dated 29.09.2017 for a purchase consideration of Rs.49,90,96,287/-. The business of Nielsen was engaged in supplying customer sales information relating to certain over-the-counter products from retailers in India. The assessee allocated the purchase consideration amongst the identifiable business/commercial rights and the balance amount was recorded as goodwill. The working is reproduced below:

In respect of M/s GCI Healthcare Private Limited, the assessee acquired its business of providing outsourced services for software development and services in patient billing and revenue cycle management. A Business Transfer Agreement dated 23.12.2017 was entered into, under which the business was transferred to the assessee as a going concern on slump-sale basis for a lump-sum consideration of Rs.2,49,46,065/-. As per the valuation report furnished by the assessee, the tangible fixed assets were valued at Rs.4,09,610/- and intangible assets at Rs.4,67,822/-, aggregating to net assets of Rs.8,77,432/-. The balance consideration of Rs.2,40,68,633/- was recorded as goodwill. The working is as under:

The aggregate goodwill arising from the two acquisitions was thus Rs.29,49,10,800/-. The depreciation claimed thereon and disallowed by the Assessing Officer is summarised below:

The Assessing Officer, in substance, rejected the claim on the ground that goodwill was neither specifically included in the definition of “block of assets” under section 2(11) nor specifically enumerated as an intangible asset in section 32(1)(ii) of the Act. According to the Assessing Officer, goodwill was not a tangible asset and, unlike know- how, patents, copyrights, trademarks, licences and franchises, was not specifically mentioned in the statutory provision. The Assessing Officer further observed that, under the general accounting principles, goodwill could appreciate or depreciate depending upon the manner in which a business was carried on and, therefore, it could not be treated as a depreciable asset merely because it was recognised in the books of the assessee. The Assessing Officer also referred to the recognition principles contained in Ind AS-38 and observed that no allocable cost was actually incurred for “creating” the goodwill.

The Assessing Officer further relied upon the proviso to section 32(1) dealing with succession, amalgamation, merger and demerger and took the view that the depreciation available to a successor could not exceed what would have been allowable had the reorganisation not taken place. According to the Assessing Officer, since the goodwill was not appearing in the books of the original entities and depreciation had not been claimed by them, the assessee could not, by recording goodwill in its own books, claim depreciation which was never available to the transferors. The Assessing Officer also considered the judgment of the Hon'ble Supreme Court in CIT v. Smifs Securities Ltd., 348 ITR 302 (SC), but held that the said judgment only decided the question whether goodwill could fall within the category of intangible assets and did not override the other restrictions contained in section 32. Reliance was also placed upon the Coordinate bench decision in United Breweries Ltd., ITA No.722, 801 & 1065 /Bang/2014 to contend that goodwill arising in a business reorganisation could not result in an enhanced claim of depreciation.

The Assessing Officer further referred to the amendments made by the Finance Act, 2021 whereby goodwill was excluded from the depreciable block of intangible assets with effect from 01.04.2021. According to the Assessing Officer, the amendment was clarificatory of the position which had always prevailed and, therefore, had retrospective effect. The Assessing Officer also took the view that the amendment was applicable to restructuring transactions, including slump-sale transactions, and that since the year under consideration was the first year in which the assessee had claimed depreciation on goodwill, the claim was not allowable. On the aforesaid reasoning, the depreciation of Rs.7,37,27,800/- was disallowed.

The learned CIT(A), while disposing of the appeal, upheld the disallowance. The learned CIT(A) noted that the assessee had furnished the Business Transfer Agreements and valuation reports, but observed that the agreements mentioned only the total purchase consideration and did not separately specify any consideration towards goodwill. It was further observed that the assessee had not furnished a valuation report determining the value of the entire business by adopting, according to the learned CIT(A), a DCF or NAV method. On this basis, the learned CIT(A) concluded that the assessee had not demonstrated that any amount was paid over and above the business value of the undertakings towards acquisition of goodwill.

The learned CIT(A) further observed that goodwill was not appearing in the balance sheets of the transferors and had been recorded for the first time in the books of the assessee. According to the learned CIT(A), the goodwill was therefore a self-generated intangible asset and, there being no specific cost paid for acquisition of goodwill, depreciation could not be allowed. The learned CIT(A) also distinguished the judicial decisions relied upon by the assessee on the ground that those decisions concerned excess consideration over the net asset value in the context of amalgamation, whereas in the present case one undertaking was acquired through outright sale and the other through slump sale. The appeal on this issue was accordingly dismissed.

Before us, the learned Authorised Representative (ld.AR) submitted that the conclusion of the lower authorities proceeds on an incorrect understanding of the manner in which goodwill arises on acquisition of a business. It was submitted that the assessee had acquired existing businesses/assets from independent third parties for consideration and had furnished the relevant agreements and valuation reports before the Assessing Officer as well as the first appellate authority. In the case of Nielsen, the consideration paid was allocated to identifiable business/commercial rights, namely customer contract and non-compete rights, and the balance was recorded as goodwill. In the case of GCI, the tangible and intangible assets were valued and the excess of the purchase consideration over the net assets acquired was recorded as goodwill. It was therefore contended that the goodwill was acquired for consideration and was not self-generated goodwill.

The ld.AR relied upon the decision of the Coordinate Bench of this Tribunal in Thermo Fisher Scientific India Private Limited, reported in 155 taxmann.com 346, wherein depreciation on goodwill arising in the course of acquisition of a business on-going-concern/slump-sale basis was held to be allowable. Reliance was also placed upon the judgment of the Hon'ble Supreme Court in Smifs Securities Ltd., 348 ITR 302 (SC), the decision of the Coordinate Bench in I & B Seeds (P.) Ltd., 142 taxmann.com 274, and the judgment of the Hon'ble Bombay High Court in Asian Paints Ltd., Writ Petition No.1683 of 2022, dated 15.06.2026. It was submitted that the amendment made by the Finance Act, 2021 excluding goodwill from the depreciable intangible assets operates prospectively from assessment year 2021-22 and, therefore, has no application to the year under appeal.

The learned Departmental Representative (ld.DR) relied upon the orders of the Assessing Officer and the learned CIT(A).

We have considered the rival submissions and perused the material on record. The issue before us essentially turns upon whether the goodwill recorded by the assessee represents an asset acquired in the course of acquisition of the respective businesses for consideration, and whether such goodwill was eligible for depreciation under section 32(1)(ii) of the Act as it stood in the assessment year under consideration.

At the outset, we find it necessary to examine the basic working of the goodwill in the two transactions. In the case of Nielsen, the assessee paid a total consideration of Rs.49,90,96,287/-. The consideration attributable to the customer contract was identified at Rs.3,83,65,323/- and that attributable to the non-compete clause at Rs.18,98,88,797/-. After reducing these identifiable components from the total consideration, the balance of Rs.27,08,42,167/- was recorded as goodwill. The goodwill, therefore, is directly relatable to the consideration paid for acquiring the business and is not an amount independently created by the assessee after acquisition. The working is a simple allocation of the consideration paid for acquisition of the business amongst the identifiable rights and the residual business/commercial value acquired along with the business.

The same principle is even more clearly evident in the case of GCI Healthcare Private Limited. The assessee paid Rs.2,49,46,065/- for acquisition of the business as a going concern on slump-sale basis. The valuation report identified tangible fixed assets of Rs.4,09,610/- and intangible assets of Rs.4,67,822/-, aggregating to net assets of Rs.8,77,432/-. The excess of the consideration paid over the net assets, amounting to Rs.2,40,68,633/-, was recorded as goodwill. Thus, the goodwill in this case is also directly referable to the consideration paid for acquiring the existing business and represents the balance value of the business/commercial rights acquired by the assessee.

In our view, the fact that goodwill is arrived at as a balancing figure does not, by itself, make it self-generated goodwill. Goodwill arising on acquisition of an existing business necessarily represents the value attributable to the advantages, reputation, business relationships, commercial rights and other benefits attached to the business which are acquired along with the identifiable assets. Once an assessee pays consideration for acquiring an existing business and, after attributing value to the identifiable assets and rights, the remaining consideration represents the value of the other business/commercial rights acquired with the business, such residual amount cannot merely on account of the manner of computation be treated as goodwill generated by the assessee itself.

We are also unable to accept the reasoning of the learned CIT(A) that the absence of a separate stipulation in the Business Transfer Agreements specifying a particular amount as consideration for goodwill establishes that no cost was paid for acquiring goodwill. A purchaser acquiring an existing business pays consideration for the business as a whole. It is not necessary that every component of the business and every business or commercial right forming part of the undertaking must be separately assigned a consideration in the agreement itself. The relevant question is whether consideration was paid for acquiring the business and whether the goodwill has arisen from that acquisition. In the present case, the consideration is undisputed and the valuation/allocation of the acquired assets and rights is also on record.

The judgment of the Hon'ble Supreme Court in Smifs Securities Ltd. (supra) settles the legal position that goodwill falls within the expression “any other business or commercial rights of similar nature” occurring in section 32(1)(ii) of the Act. Therefore, the fundamental proposition adopted by the Assessing Officer that goodwill cannot constitute an intangible asset for the purposes of section 32(1)(ii) cannot be accepted. The question thereafter is whether the goodwill in the present case was acquired for consideration. On the facts before us, as discussed above, the answer is clearly in the affirmative.

The reliance placed by the Assessing Officer on the proviso to section 32(1) dealing with succession, amalgamation, merger and demerger and the decision in the case of United Breweries (supra) involving amalgamation is also misplaced. The said provision is intended to regulate the aggregate depreciation in cases of the specific forms of business reorganisation contemplated therein. The acquisitions before us are not amalgamations, mergers or demergers. The assessee acquired the relevant business/assets under an ’Asset Purchase and Transition Services Agreement’ and a ‘Business Transfer Agreement’, including acquisition of the GCI business as a going concern on slump- sale basis. Therefore, the restriction applicable to the specific cases of succession, amalgamation, merger or demerger cannot be invoked to deny depreciation in the present transactions.

The decision of the Coordinate Bench of the Mumbai Tribunal in Thermo Fisher Scientific India Private Limited (supra) also supports the assessee’s case. In the said decision, it was held that where a business is acquired from a third party by way of slump sale as a going concern, and goodwill arises in the hands of the purchaser on account of the excess of consideration over the value of the identifiable assets and rights acquired, the proviso to section 32(1), which regulates the allocation of depreciation between the predecessor and successor in specified modes of succession, cannot be invoked merely on the ground that the predecessor had not claimed depreciation on such goodwill.

We also do not agree with the Assessing Officer that the Finance Act, 2021 amendment excluding goodwill from the depreciable block is merely clarificatory and, therefore, retrospective. The amendment was brought into effect from 01.04.2021. The Coordinate Bench in I & B Seeds (P.) Ltd. (supra) has held that the amendment operates prospectively from assessment year 2021-22. The decision of the Hon'ble Bombay High Court in Asian Paints Ltd. (supra), relied upon by the assessee, has also been placed before us in support of the prospective application of the amendment. Accordingly, the amended law cannot be applied to assessment year 2018-19.

On a consideration of the entire matter, we find that the goodwill in both transactions arose on account of acquisition of existing businesses for consideration. In the Nielsen transaction, the goodwill of Rs.27,08,42,167/- represents the balance consideration after accounting for the identified customer contract and non-compete rights. In the GCI transaction, the goodwill of Rs.2,40,68,633/- represents the excess of the consideration paid over the net assets of the business acquired. In neither case can the goodwill be characterised as goodwill generated by the assessee in the course of carrying on its own business. The mere fact that the goodwill is determined as a balancing figure does not alter its character as an asset acquired as part of the business transaction.

Accordingly, for the assessment year 2018-19, we hold that the goodwill acquired by the assessee falls within the expression “any other business or commercial rights of similar nature” under section 32(1)(ii) of the Act and is eligible for depreciation. The subsequent amendment introduced by the Finance Act, 2021 excluding goodwill from the depreciable intangible assets has no application to the assessment year under consideration.

In view of the above, the assessee is entitled to depreciation on goodwill of Rs.27,08,42,167/- arising from the acquisition from Nielsen (India) Private Limited and Rs.2,40,68,633/- arising from the acquisition of the business of GCI Healthcare Private Limited. Consequently, the disallowance of depreciation of Rs.6,77,10,542/- and Rs.60,17,158/- respectively, aggregating to Rs.7,37,27,800/-, is directed to be deleted. The grounds raised by the assessee on this issue are accordingly allowed.

In the result, the appeal of the assessee is allowed.