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India: Tax amortisation of goodwill

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In India, intangibles that qualify for depreciation under the Income-tax Act, 1961 (Act) are defined to include "know-how, patents, copyrights, trademarks, licenses, franchises and any other business or commercial rights of similar nature". Since "goodwill" does not expressly find a mention in the list of intangible assets that qualify for depreciation, claims of depreciation on goodwill have been a matter of debate for a considerable time with decisions on both sides of the spectrum.

Dharawat
Gangadharan

Rakesh Dharawat

Hari Gangadharan

The Supreme Court (SC), in a landmark decision in 2012 in the case of Smifs Securities Limited (CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC)) put this debate to rest and held that that "goodwill" is an intangible asset in the nature of business or commercial right akin to other intangibles mentioned in the Act and that it should be eligible for depreciation. Following this decision, several subordinate courts and the Income-tax Appellate Tribunal (Tribunal) have allowed depreciation on goodwill, including in cases of mergers and acquisitions.

Recently, the Bangalore bench of the Tribunal, in the case of United Breweries Limited (United Breweries Ltd. v. ACIT [ITA No. 722/Bang/2014 AY 2007-08]-Taxsutra.com) dealt with the claim of depreciation on goodwill in the context of a merger. It denied depreciation by applying the rule that the depreciation available to the surviving company upon a merger could not exceed depreciation that would have been allowable in the hands of the merging company had the merger not taken place. In arriving at this conclusion, the Tribunal did not accept the distinction between goodwill that was historically recorded in the books of the merging company and the goodwill that arose as a result of the merger. The Tribunal further stated that the SC's decision in the case of Smifs Securities (though rendered in the context of a merger) was limited to the point whether goodwill is an intangible asset eligible for depreciation and could not be extended to this case.

Although there are several High Court decisions that have granted depreciation on goodwill arising pursuant to mergers, this decision could muddy the waters in some cases, particularly where some amount of goodwill is already recorded in the books of the merging company.

In any event, this matter is likely to be litigated further, and one could see more cases on this issue in the months ahead.

Delay in revision of India's tax treaty with Singapore

From the time India's tax treaty with Mauritius was revised to pave the way for expansion of India's source-based taxing rights over capital gains, there have been reports that India's tax treaty with Singapore will also undergo a similar revision.

It was expected that the Singapore tax treaty would be revised before April 2017, i.e. when the revised tax treaty with Mauritius will come into effect, but recent press reports suggest that this process might be delayed as Singapore is seeking more time to revise its treaty with India because its investors need more time to shift to source-based taxation.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hari Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000/1900

Website: www.dhruvaadvisors.com

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