MYLAN LABORATOREIS LIMITED ,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD

Brief facts of the case are that the assessee is a company incorporated under the Companies Act, 1956 and is engaged in the business of manufacturing active pharmaceutical ingredients, finished dosage formulations and high-quality generic injectable products. For the assessment year 2015-16, they have filed their return of income on 25/11/2015 declaring a total loss of Rs. 6 63, 21, 33, 012/-under the normal provisions of the Income Tax Act, 1961 (for short “the Act”) and book profit of Rs. 57, 63, 26, 317/-under section 115 JB of the Act. Since the assessee entered into international transactions with Associated Enterprises (AEs), reference was made to the Learned Transfer Pricing Officer (TPO) and pursuant to his order dated 30/10/2018, a draft assessment order was passed on 31/12/2018 making several adjustments/additions including the addition on account of disallowance of depreciation claimed on goodwill arising out of amalgamation under section 32 of the Act with which we are concerned in this appeal.

Assessee filed objections before the learned Dispute Resolution Panel (learned DRP). Pursuant to the directions issued by the learned DRP final assessment order was passed on 31/10/2019 making various additions, which includes the issue relating to the disallowance of depreciation claimed on goodwill arising out of amalgamation under section 32 of the Act. Assessee is, therefore, filed this appeal on as many as nine grounds, but at the time of arguments gave up all the grounds except ground No. 3 which relates to the depreciation on goodwill arising on amalgamation. Recording the same, all the grounds except ground No. 3 are dismissed.

On this aspect, the facts are that during the financial year 2013-14, the assessee acquired a Agila Specialties Ltd. along with its wholly owned subsidiary Onco Therapies Ltd. from Strides Arcolab Ltd. being the shareholder of Agila and Onco under a share purchase agreement on 5/12/2013 for a consideration of Rs. 5, 978.60 crores being the enterprise value for which an approval was obtained from the Foreign Investment

During the assessment year 2014-15 the depreciation was claimed for the second half of the financial year at the rate of 12.5% Rs. 561.6 crores and for the assessment year 2015-16 it was claimed at 25% on the brought forward goodwill of Rs. 3931 crores. For both the years such claims for depreciation was denied. According to the learned Assessing Officer, the depreciation cannot be allowed on goodwill arising on account of amalgamation and the allowance of depreciation under sixth proviso to section 32 (1) of the Act to the successor/amalgamated company in the year of amalgamation would be on the written down value of the assessee in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company and since no goodwill was shown in the Balance Sheet of the amalgamated company, the value of such non-existing goodwill should be taken as nil. On this premise, learned Assessing Officer held that the goodwill was not valued and is not shown in the asset side of the balance sheet of the amalgamating company, and therefore, the amalgamating company has not capitalised any expenditure in development of goodwill and consequently the value of goodwill claimed to have existed in the form of intangible, should be treated as nil and that is the reason for denying the depreciation on the goodwill. The learned Assessing Officer while placing on the above analogy and the orders of his predecessor for the assessment year 2014-15 rejected the claim of the assessee for depreciation on the good will.

Learned DRP after considering the contentions of the assessee in the light of the decision of the Bangalore Bench of the Tribunal in the case

Learned DR does not dispute this factual and legal position but urges that the issue may be restored to the file of the Learned Assessing Officer for verification. 9. We have gone through the record in the light of the submissions made on either side. It is an undisputed fact that the merger took place in the financial year 2013-14 relevant for the assessment year 2014-15 in which year, the assessee claimed depreciation of goodwill and was denied. It is also not in dispute that in such initial year, the assessee challenged the denial of goodwill before the Tribunal and a Co-ordinate Bench of this Tribunal dealt with this issue in extenso and found that the decision of the Hon'ble Apex Court in the case of Smifs Securities Ltd., (supra), is applicable to the facts of the case on hand on all fours. While following the binding precedent, the Tribunal held the issue in favour of the assessee and allowed the depreciation on goodwill.

It could further seen from the order dated 31/01/2022 of the Hon'ble High Court in the case of ITTA No. 117/2021, the Hon'ble High Court upheld the findings of the Tribunal stating that the decision of the Hon'ble Apex Court in the case of Smifs Securities Ltd., (supra), and since the Tribunal followed a binding precedent, the Hon'ble High Court declined to admit any question on this aspect.

Since the issue is settled finally, we do not find any reason to restore the same to the file of the learned Assessing Officer because, no verification is required on the question of law forming the basis for denial of the claim. While respectfully following the binding precedent in the case of Smifs Securities Ltd., (supra), followed by the Co-ordinate Bench and also the Hon'ble High Court, we allow the ground of appeal and direct the learned Assessing Officer to allow the depreciation on goodwill. Ground is answered accordingly.

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