Once The Existence Of Goodwill Is Established, Depreciation On Goodwill Cannot Be Questioned: ITAT

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that once the existence of goodwill is established, depreciation on goodwill cannot be questioned.The bench of K. Narasimha Chary (Judicial Member) and R.K. Panda (Accountant Member) has observed that the transfer of IP from Blujay India to Blujay UK cannot question the benefits accrued from the bundle of assets transferred in the course of acquisition as IP was just a part of the assets acquired from Four Soft.The assessee is in the business of providing software development services and distribution of parent company software products. It filed its return of income, admitting a loss. The return was processed, and a refund was issued. Subsequently, the case was selected for scrutiny through CASS, and statutory notices were issued and served on the assessee, to which the assessee appeared before the Assessing Officer from time to time and filed the requisite details.The AO noted that the assessee has claimed depreciation of 25% on goodwill. He, therefore, asked the assessee to furnish details as to how goodwill has been determined.The assessee contended that the intangible property for sale consideration was mutually agreed upon between the parties based on the valuation report obtained from an independent valuer. Accordingly, the value of goodwill was determined as the excess of purchase consideration over the fair value of net assets.The AO observed that intangibles are not eligible for depreciation. He noted that in any business concern, the value or reputation built in the organization represents the goodwill of the business.In appeal, the CIT (A) deleted the disallowance made by the Assessing Officer on the ground that the assessee company acquired Four Soft Limited's business pursuant to a business transfer agreement. The consideration paid in excess of the book value of the assets acquired represents the additional benefits accrued to Kewill India in the form of technical knowledge, designs, and other information available with Four Soft Limited, the right to documents and business correspondence of the business taken over, and the right to enjoy all the advantages of the established business of Four Soft Limited.The assessee contended that the business valuation is dependent on the overall going concern and readymade business capability with the customer contracts, a turnover of about Rs. 20.00 crore, 346 employees set up and building altogether, and not IP alone. The assessee, which is the captive service provider, will still have all access to such intellectual property through the group. In respect of the distribution of parent company software products and user licenses that are sold to external customers in India by the assessee, the assessee has earned a distribution margin and paid appropriate taxes on the same.The tribunal has held that the net balance of purchase consideration paid and the value of net assets acquired is goodwill, and the transfer of IP to BluJay UK cannot affect the value of goodwill as the goodwill is rightly attributed to all the assets acquired from Four Soft and benefits accrued to BluJay India.Case Title: Dy. Commissioner of Income Tax, Circle 2 Versus Blujay Solutions (India) Private LimitedCase No.: ITA No. 1148/Hyd/2018Date: 16/05/2023Counsel For Appellant: Mithilesh SaiCounsel For Respondent: KPRR MurthyClick Here To Read The Order

Once The Existence Of Goodwill Is Established, Depreciation On Goodwill Cannot Be Questioned: ITAT

Mariya Paliwala

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