The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) has held that depreciation on goodwill could not be questioned once the existence of goodwill had been established.
The assessee, Blujay Solutions (India) Private Limited was a company engaged in the business of provision of software development services and distribution of parent company software products and the case was selected for scrutiny.
During the course of assessment proceedings, the Assessing Officer noted that Kewill India Pvt. Ltd (hereinafter referred to as Kewill India) formerly known as Transport IT Solutions Pvt. Ltd. (IPL) was incorporated as a wholly owned subsidiary of Kewill Limited headquartered in the UK and ultimately owned by francisco partners, a US based private equity. Kewill India was primarily engaged in the provision of software development services and distribution of software products of the parent company.
The excess of purchase consideration over the fair value of net assets acquired had been recognized as Goodwill. The acquisition of tangible assets and liabilities was done on a book value basis. As regards the intangible property, sale consideration was mutually agreed between parties based on valuation report obtained from independent valuer.
He noted that the assessee had claimed depreciation @ half of 25% on goodwill. He, therefore, asked the assessee to furnish the details as to how goodwill had been determined.
Mithilesh Sai, on behalf of the assessee referring to the Business Transfer Agreement submitted that goodwill was not dependent on the Intellectual Property that was purchased by appellant from Seller and sold to its Parent entity. Goodwill was excess of consideration paid and negotiation by the appellant with the Seller for acquiring its business which had awarded the assessee.
Referring to the decision in Avis Hospitals India Ltd vs. ACIT, he further submitted that the Tribunal under identical circumstances had allowed the claim of depreciation on goodwill
KPRR Murthy, on behalf of the revenue submitted that the transfer of IP from Blujay India to Blujay UK could not be questioned as the benefits accrued from the above bundle of assets transferred in the course of acquisition as IP was just a part of the assets acquired from Four Soft.
The two-member Bench of R.K. Panda, (Accountant Member) AND K. Narasimha Chary, (Judicial Member) observed that the net balance of purchase consideration paid, and the value of net assets acquired was goodwill and the transfer of IP to BluJay UK could not affect the value of goodwill as the Goodwill was rightly attributed to all the assets acquired from Four Soft and benefits accrued to BluJay India
The Income Tax Appellate Tribunal Bench allowed the appeal, holding that once the existence of Goodwill has been established, Depreciation on such goodwill could not be questioned further.
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