Depreciation on Goodwill in Slump Sale Acquisitions: Analysis of ITAT Mumbai Decision in Thermo Fisher Scientific India Vs DCIT

1. Background of the Dispute

The Mumbai Bench “E” of the Income Tax Appellate Tribunal dealt with a key issue relating to depreciation on goodwill arising from slump-sale acquisitions in the case of Thermo Fisher Scientific India Vs DCIT (ITAT Mumbai) for Assessment Year 2009-10.

The assessee, Thermo Fisher Scientific India Pvt. Ltd., had acquired two business divisions as going concerns through slump-sale arrangements and recorded goodwill in its books on the basis of independent valuation. It then claimed depreciation on such goodwill under Section 32(1)(ii) of the Income Tax Act 1961.

The central controversy was whether depreciation was admissible on the goodwill that emerged from these slump-sale transactions, and whether certain statutory provisions relating to amalgamations, demergers, and related party transfers could be invoked to deny such depreciation.

2. Transaction Structure and Goodwill Recognition

2.1 Qualigens Fine Chemicals Division (GSK)

  • The assessee entered into a Business Transfer Agreement dated 26 July 2007 with Glaxo Smith Kline Pharmaceuticals Limited (GSK).
  • Under this agreement, the assessee purchased the Qualigens Fine Chemicals Division of GSK as a going concern by way of slump sale.
  • The consideration agreed for this acquisition was Rs. 234.20 crores.
  • Independent valuers were engaged to allocate this lump sum consideration among various tangible and intangible assets of the undertaking.
  • The excess of the purchase consideration over the net value of identified assets and liabilities was accounted for as goodwill in the assessee’s books.

2.2 Analytical Technologies and Environmental Instrumentation Division (CTPL)

  • The assessee also acquired the Analytical Technologies and Environmental Instrumentation Division from Chemito Technologies Private Limited (CTPL).
  • This acquisition was carried out through a Business Transfer Agreement dated 27 May 2008.
  • The purchase consideration for this business division was Rs. 67.18 crores.
  • Here too, independent valuation reports formed the basis for allocating the consideration among the underlying assets, with the residual amount treated as goodwill.

In both acquisitions, the assessee treated the goodwill so recognized as an intangible asset eligible for depreciation under Section 32(1)(ii) and accordingly claimed depreciation in its return of income.

3. Depreciation Claim and Assessment Proceedings

3.1 Claim for AY 2009-10

For Assessment Year 2009-10, the assessee claimed:

  • Depreciation on goodwill amounting to Rs. 21,28,26,691.

This depreciation pertained to the goodwill recorded on account of the above two slump-sale acquisitions.

In earlier proceedings, the matter of depreciation on goodwill was influenced by the subsequent decision of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC). In that judgment, the Supreme Court recognised that goodwill qualifies as an intangible asset falling within the scope of Section 32(1)(ii), rendering it eligible for depreciation.

3.3 Stand of the Assessing Officer in Second Round

In the second round of proceedings relevant to this appeal:

  • The Assessing Officer (AO) accepted, in principle, that goodwill constitutes a depreciable asset in line with CIT v. Smifs Securities Ltd.
  • However, the AO refused depreciation on the goodwill arising in these transactions, not on the nature of goodwill, but on:
    • Alleged valuation related issues, and
    • Interpretation of statutory provisions dealing with specific transfer situations.

The AO principally relied upon:

  • The decision in United Breweries Ltd. v. ACIT [2016] 76 taxmann.com 103 (Bangalore-Trib.); and
  • Certain provisions in the Income Tax Act 1961, namely:
    • Explanation 7 to section 43(1)
    • Explanation 2 to section 43(6)
    • The **fifth proviso (now sixth proviso) to section 32(1)(ii)`

According to the AO, these provisions constrained or denied depreciation in the manner claimed by the assessee.

The Tribunal had to determine:

  1. Whether the transfers under the Business Transfer Agreements were slump sales or in substance amalgamations / demergers / related-party transfers / successions; and
  2. Whether the above explanations and provisos under section 43 and section 32 applied to the assessee’s case so as to restrict or deny depreciation on the goodwill recognised on acquisition of the two business undertakings.

The answer to these questions would decide the admissibility of the depreciation claimed on goodwill for AY 2009-10.