L & T TECHNOLOGIES SERVICES LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(2)(1), MUMBAI

Tersely, we advert the fact of the case that the assessee had acquired the Product Engineering Service (in short PES) division businessfrom L&T Infotech Ltd (in short LTIL) during Assessment Year 2014-15 & 2015-16by way of slump sale on a going concern basis as the physical assets, manpower and other live assignments/lease/deeds. The assessee filed its revised return of income for the year under consideration on 29/03/2017. Therein, its inter-alia claimed deduction of depreciation on goodwill of Rs.85,40,73,133/- while computing its income as per the regular provisions of the Act.The ROI was selected for scrutiny and assessment order was passed under section 143(3) of the Act. During theassessment proceedingthe Ld. AO held that since under a slump sale, the buyer acquires an undertaking as defined u/s 2(19AA) of the Act, the buyer becomes a successor of the business and hence the transaction cannot be treated as a slump sale.The Ld. AO observed that the transfer of PES business is covered by the provision of Section 170 of the Act which deals with succession and the sump sales is not regarded as a transfer for the purpose of capital gains and no capital gains is chargeable to tax in the hands of the seller. So, it was held that the 5th Proviso to section 32(1) of the Act would be applied and restrict the claim of depreciation on same set of assets which it received owing to succession. The assessee reiterates that the acquisition of the PES business unit of the seller as a going concern under a slump sale arrangement. The assessee objected that the Ld. AO has re-characterised this transaction without bringing on record any cogent reason to do so. The assessee submitted that the same transaction has been offered to tax by LTIL wherein capital gains of Rs. 377.50 Cr. was declared in their return of income.Pursuant to acquisition of PES business, the goodwill has been determined at Rs. 389.09 Cr. which represents the difference between purchase consideration and value of net assets taken over and the same was accounted in accordance with accounting standards followed by the assesssee. The assessee claimed the depreciation on goodwill amount to Rs. 85,40,73,133/-. The Ld. AO respectfully noted the order of the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities348 ITR 302but rejected the claim depreciation on the ground that the acquisition of any goodwill as entire scheme of arrangement was a demerger as per provision of Section 2(19AA) of the Act and the same is not regarded as transfer under the meaning of Section 47(vib) r.w.s. 45(1) of the Act. So, the addition was confirmed amount to Rs.85,40,73,133/-. Aggrieved assessee filed as appeal before the Ld. CIT(A) but the appeal was rejected. Being aggrieved on appeal order the assessee filed an appeal before us.

In acquisition of PES business, the goodwill has been determined at Rs.389.09Cr. which represents the difference between purchase consideration and value of net assets taken over and the same was accounted in accordance with accounting standards followed by the assesssee. The Ld. AR relied on the decision of Hon’ble Delhi High Court in the case of Triune EnergyServices (P.) Ltd. v. DCIT (2016) 65 taxmann.com 288 wherein under similar circumstances, depreciation on goodwill from slump sale was allowed under Section 32 of the Act.

The Ld. AR further stated that the slump sale cannot be treated as succession. The Ld. AO held that the transfer of PES business is covered by the provisions of section 170 of the Act which deals with succession to business otherwise than on death. The Ld. AO considered that a slump sale is not regarded as a transfer for the purpose of capital gains and hence no capital gains is chargeable to tax in the hands of the seller.Accordingly, it was held that the 5th proviso to sec. 32(1) of the Act would apply as it would restrict the claim of the assessee on claiming excessive depreciation on same set of assets which it received owing to succession. He argued that the Ld. AO has erred in invoking Section 170 of the Act (forming part of Chapter XV) which deals with succession to business or profession. These provisions are not applicable in assessee’s case since pursuant to acquisition of PES undertaking, the transferor i.e. LTIL did not cease to exist. At the time of transfer of PES undertaking LTIL had 3 Business Segments viz. Services Cluster, Industrials Cluster and Telecom. LTIL operates in the same field of business in respect of all these Business Segments le. software development & allied services. Thus, it cannot be said that the appellant succeeded the whole business of LTIL as it continued to operate its business in Services and Industrial Cluster.The Ld. AO has relied on the decision of the Hon'ble Supreme Court in the case of CIT v. KH Chambers 55 ITR 674 wherein according to the Ld. AO, it has been stated that if one of the businesses has been substantially transferred, without transfer of all assets and liabilities, it would still be considered as succession.The Ld. AR respectfully considered the said decision and stated that theruling of the Hon’ble Supreme Court held as Section 170 of the Income-tax Act, 1961 [Corresponding to section 25(4) of the Indian Income-tax Act, 1922] - Succession of business other than on death - Assessment year 1948-49 - Export business carried on by father was transferred to son - Identity of business was preserved and continued by son - However, some assets were retained by father for purpose of discharging debts so that son could run business more effectively - Ultimately business carried on by son was transferred to a limited company during relevant accounting year and he claimed benefit under section 25(4) of 1922 Act - Whether on facts it could be said that there was a succession within meaning of section 25(4) of 1922 Act and assessee was entitled to benefit.

The Ld. ARrespectfully relied on the decision of the Hon’ble Gujarat High Court in the case of Premji Khimraj Shah v. ITO (1979) 118 ITR 216, wherein the Hon’ble High Court, after considering the decision of KH Chambers (supra) has held as the expression "succession to business" connotes the taking over the whole or substantially the whole business of the predecessor by the successor and continuing the same. Disintegration and division of whole into parts would not permit the parts to be treated as a whole and a successor to a part could not be treated as a successor to the original business carried on as one integral unit.

It is mentioned during argument that slump sale and demerger are different. The Ld. AO has referred to the definition of demerger u/s. 2(19AA) and held that transaction fulfills all conditions laid down u/s. 2(19AA) of the Act. But the transaction is not regarded as transfer u/s 47 of the Act in the hands of the seller, LTIL. Since the transaction is not a transfer, any payment made in lieu of such transfer cannot be regarded as a genuine business transaction incurred wholly and exclusively for the purpose of business. The Ld. AO observed that the transaction is a colorable device adopted by the assessee to drain the ex-chequer by claiming fictitious goodwill to the extent of Rs. 398.48 Cr. and claiming depreciation thereon of Rs. 85.41 Cr. which is not admissible. The Ld. AR stated that once the transaction is held to be a slump sale, the question of it being treated as a demerger does not arise. A transaction to be treated as a demerger u/s. 2(19AA), all conditions laid down therein need to be fulfilled. He stated that the following key conditions which have not been fulfilled in assessee’s case which are as follows: - i. Transaction is not pursuant to a scheme of arrangement u/s. 391-394 of the Companies Act, 1956. ii. Resulting company i.e. the assessee has not issued any shares inconsideration of the demerger. It is worth noting that consideration has beenactually discharged by way of payment to LTIL for acquisition of theundertaking.

The Ld. AR argued that goodwill acquired by the assessee is eligible for depreciation. The Ld. AO on the ground that the transaction is a demerger, has held that no payment was made for acquiring goodwill and hence depreciation on goodwill cannot be claimed. In argument it is placed that the Ld. AO has incorrectly mentioned the amount of goodwill as Rs. 398.48Cr whereas the correct value is Rs. 389.09 Cr. The Ld.AO has disregarded the fact that payment for acquiring PES business from LTIL has been made through banking channel. The difference between purchase consideration and value of net assets taken over was accounted as goodwill. The computation of goodwill was disclosed in the Notes to Accounts of the appellant for the preceding year i.e. AY 2014-15, relevant extract of which is enclosed, in Annexure 7, Page 63 to 64. The Ld. AR stated that acquired goodwill is an intangible asset eligible for depreciation u/s 32(1) of the Act. This issue stands settled in the context of the Hon'ble Supreme Court decision in case of CIT v. Smifs Securities, 348 ITR 302 wherein the Hon’ble Apex Court has held as under: "2. It was further explained that excess consideration paid by the assesses over the value of net assets acquired of YSN Shares and Securities Private Limited[Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3.…………….

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).

In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act."

During the argument, the Ld.AR narrated the fact that the previous yearrelevant to assessment year 2014-15 the assessee had accounted for goodwill arising on acquisition of the Indian PES business of LTIL of Rs.379,69,67,332/-. In its computation of income filed for the AY 2014-15, out of total depreciation of Rs, 51,07,25,862, depreciation of Rs.47,46,20,917 was claimed in respect of the said goodwill. In the course of assessment proceedings for the AY 2014-15, notice dated 18.10.2016 was issued by the Ld. AO under section 142(1) of the Act, wherein, the assessee was inter-alia asked to explain introduction/addition of intangible assets during the year. The assessee responded to the same by its letter dated 15.12.2016, wherein, in paragraph 20 it explained that it had acquired PES business unit from L&T Infotech Limited. The excess of consideration paid over the net value of assets represented goodwill.

Pursuant thereto, an assessment order dated 20.12.2016 has been passed under section 143(3) of the Act for the said year, accepting the income a per the return of income. Therefore, the existence of intangible assets which has been referred to a: Goodwill and quantum thereof with respect to acquisition of Indian Product Engineering Services business of L&T Infotech Ltd. stands accepted by the Ld. AO in the assessment proceedings for the AY 2014-15. In the absence of any revision or reassessment proceedings was initiated to change such position, it is submitted that, depreciation on asset which forms part of the block of assets cannot be denied in a later year. During the year under consideration, an Addendum dated 31.03.2014 was executed to the Business Transfer Agreement clarifying that the product engineering services business is carried out by Larsen & Toubro Infotech GmbH. That the parties expected the German business to be operational during the quarter of April - June 2014 and, consequently, the said transfer would get executed during the said period. The consideration of the said transfer was fixed at Rs.12.92 crore. Excess of consideration paid over the net value of the said assets was Rs.9,39,46,117 which has been reflected as addition to goodwill in the audited Financial Statements for the year under.

During the hearing, the Ld.DR argued vehemently and relied on the order of the revenue authorities. The Ld.DR invited our attention to para 4.2.9 of the impugned appeal order which is reproduced as below:-

We heard the rival submissions and considered the documents available in the record. The issue was agitated, whether the transaction of the assessee with the PES is a slump sale or the revenue has treated it as a demerger. The present is alleged to be a case of succession of business and, hence, the present sixth proviso to section 32(1) of the Act shall be applicable. In such a scenario, since goodwill did not appear as an asset in the hands of the LTIL, no depreciation can be allowed it respect of the same in the assessee's hands as a transferee thereto. The said proviso would inter alia apply to a case of succession which is not the position in the present case. Further, it overlooks that the said proviso would apply only to such assets which were earlier held by the transferor entity and upon transfer have been acquired by the transferee. It cannot apply to assets like goodwill in the present case, which has come into existence as a result of the slump sale. Lastly, this proviso applies only to the year of transfer and its purpose is to proportionately allocate depreciation for the year of transfer between the transferor and the transferee. It will not apply to the component of goodwill arising in respect of Indian business as the said business already stood acquired in the earlier year and goodwill forms part of its block of assets. With respect to the goodwill relatable to acquisition of German business, which is during the year under consideration, the said proviso would not apply as the German entity is not claiming any depreciation under the Act and, hence, there is no requirement to proportionately allocate the same between the transferor and the transferee entity. 14.1. The Ld. AO thereafter treated the slump sale to be in the nature of a 'demerger' which would be exempt from charging of capital gains tax in hands of the transferor as per section 47(vib) of the Act. This again is with a view to apply the sixth proviso below section 32(1) of the Act and that depreciation claim should be restricted to an amount as if such transfer had not taken place. We find that the Ld. AO has interchangeably used the concept of slump sale, succession and demerger. The action of the Ld. AO in taking contrary stands is unjustified.

Additional Grounds: The assessee filed the additional ground with the submission. The issues are first time agitated before the Bench. The Ld. AR argued and prayed for remanding the matter to the file of the Ld. AO. The submission of the assessee is reproduced as below: - “Further foreign tax credit in respect of the income pertaining to SEZ units eligible for deductions under section 10A/10AA and allowance of such excess tax paid as an expenditure under section 37 for which tax credit has not been allowed under section 90/91 of the Act. g. For further foreign tax in respect of the income pertaining to SEZ units eligible for deductions U/s 10A/10AA, please refer the Karnataka High Court order in case of Wipro Limited v. DCIT (2016) 382 ITR 179 (see paragrapfer34 to 66 at pages 13 to 23 of Legal paper book "Part B") and the Mumbai Bench of the Tribunal in the case of Tata Consultancy Services Ltd. v. Asst. CIT by its Order dated 30.10.2019 in (see paragraphs 39 at pages 79 to 81 of Legal paper book "Part B") have held that, considering the phraseology used in the DTAA entered into between India and other countries, India would grant such foreign tax credit also in respect of tax as relatable to deduction claimed under section 10A/10AA of the Act, though no tax would be paid in respect of such income. Based thereon, as per the working separately handed over at the time of hearing, the Appellant would be entitled to a further foreign tax credit of Rs. 8,92, 8 1,034. It is submitted that, if the Tribunal accepts this proposition in principle, then, it may direct the AO to allow the foreign tax credit after necessary verification. Based on the said judgments only, it is clarified that the Appellant would not be entitled to foreign tax credit in respect of such income for tax paid in the Canada, UK and Italy because the treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Please find attached relevant clauses of treaties for US, Singapore, Denmark, Canada, Japan, Belgium, Netherlands, Norway, Germany, Italy, Sweden for ready reference purpose.

We consider the submission of the Ld. AR. The Ld. DR has not made any strong objection against the submission of the Ld. AR. In our considered view we remand the Additional ground to the file of the Ld. AO. We refrain from expressing any views on the merits of the case to avoid prejudicing the reassessment proceedings. Both parties have agreed to remand the matter to the file of the Ld. AO. It is imperative that the Ld. AO provides the assessee with a fair and adequate opportunity of being heard during the proceeding. Any evidence or explanation submitted by the assessee in its defence must be admitted and considered by the Ld. AO, who shall adjudicate the matter on its merits in accordance with the law. Similarly, the assessee is expected to act diligently and cooperate fully during the reassessment proceedings.

In the result, the additional grounds of the assessee are allowed for statistical purposes.