Depreciation on Goodwill Arising from Amalgamation Allowable; Transfer Pricing Adjustment on Notional Interest Deleted – ITAT Delhi

Case Overview

LNW India Solutions Pvt. Ltd. Vs ACIT/TPO (ITAT Delhi)

The Income Tax Appellate Tribunal, Delhi Bench, issued a consolidated ruling partly allowing the assessee's appeals for Assessment Years 2017-18 and 2018-19. The two central issues adjudicated were: (i) whether depreciation on goodwill arising from an amalgamation is permissible under the Income Tax Act, 1961, and (ii) whether a transfer pricing adjustment imputing notional interest on outstanding receivables from Associated Enterprises (AEs) was legally sustainable. The Tribunal ruled decisively in favour of the assessee on both counts.

Background and Nature of the Assessee

The assessee, LNW India Solutions Pvt. Ltd., was incorporated in 2005 as a wholly owned subsidiary of Bally Technologies Inc., USA / SG Gaming Inc. (presently operating as LNW Gaming Inc.). Since inception, the assessee has been engaged in providing captive software development services to its group entities. Its registered office is located in Chennai, with operational centres functioning from both Chennai and Bangalore.

For AY 2017-18, the assessee filed its return declaring income of Rs. 36,16,73,020/-, and for AY 2018-19, the declared income stood at Rs. 42,50,52,540/-. Both cases were selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism, and statutory notices were issued accordingly.

Issue 1 – Depreciation on Goodwill Arising from Amalgamation

Factual Matrix

The assessee acquired 32,35,187 equity shares of WMS Gaming Solutions India Private Ltd. from Bally Gaming Inc., USA, for a total cash consideration of Rs. 33.97 crores on 24.03.2016. Following this acquisition, WMS Gaming Solutions India Private Ltd. (WMS India) was amalgamated with the assessee pursuant to a scheme of amalgamation sanctioned by the Hon'ble Madras High Court vide order dated 16.12.2016.

For accounting purposes, the assessee adopted the pooling of interest method, under which the assets and liabilities of WMS India were recognised at book value. As disclosed under Note 26 of the financial statements for the year ended 31.03.2017, the net book value of WMS India was Rs. 3.24 crores. Given that the original acquisition cost was Rs. 33.97 crores, the resulting difference was recorded as goodwill and written off against the surplus in the Statement of Profit and Loss. However, for income tax computation purposes, the assessee claimed depreciation on this goodwill at the rate of 25% under Section 32(1)(ii) of the Income Tax Act, 1961.

Disallowance by the Assessing Officer and CIT(A)

The Assessing Officer (AO) disallowed the depreciation claim on goodwill. On appeal, the Commissioner of Income Tax (Appeals) sustained the disallowance on the following grounds:

  • Goodwill did not form part of the block of assets of WMS India as envisaged under Explanation 7 to Section 43(1) and Explanation 2 to Section 43(6)(c)
  • Section 49(1)(iii)(e) mandates that the cost of an asset acquired in amalgamation must be taken as the cost in the hands of the previous owner, and since WMS India had recorded no such cost, no cost could be claimed by the assessee
  • Section 55(2)(a)(iii), as introduced by the Finance Act, 2021, bars ascribing any cost to goodwill
  • The 6th Proviso to Section 32(1) prevents recognition of goodwill created on amalgamation
  • The scheme of amalgamation was silent on the treatment of goodwill
  • The valuation report submitted by the assessee was considered an afterthought, as it arrived at a valuation higher than the amount actually recorded
  • Earlier judicial decisions relied upon by the assessee were held to be distinguishable on the basis that the relevant statutory provisions had not been considered in those cases

Contentions Before the Tribunal