ITAT Ahmedabad Allows Depreciation on Goodwill & Brands and Rejects Nil Valuation of Steam in TP Adjustment

1. Background of the Dispute

The Ahmedabad Bench of the Income Tax Appellate Tribunal in DCIT Vs Nirma Limited (ITAT Ahmedabad) (ITA No. 1569 & 1570/AHD/2026, order dated 21/08/2026) dealt with two Revenue appeals concerning:

  • Depreciation on goodwill created on amalgamation of Saurashtra Chemicals Ltd.
  • Depreciation on brands and trade names received on demerger from Nirma Industries Ltd.
  • Transfer pricing (TP) and Section 80-IA issues in respect of inter-unit transfer of electricity generated by captive power plants.
  • A large TP adjustment (Rs. 106.55 crore) on the premise that steam transferred between units, being a by-product, had no cost and therefore an arm’s-length price (ALP) of nil.

The appeals related to Assessment Years (AY) 2018-19 and 2020-21, and challenged orders of the CIT(A), Ahmedabad-13 passed under Section 250 of the Income Tax Act 1961. Since both appeals raised substantially overlapping issues, the Tribunal decided them through a common order.

The Tribunal ultimately affirmed the relief granted by the CIT(A) on all four clusters of issues and dismissed both Revenue appeals in their entirety.

2. Issues Raised by the Revenue

2.1 AY 2018-19 – Key Grounds in ITA No. 1569/AHD/2026

For AY 2018-19, the Revenue primarily contested:

  1. Disallowance of depreciation on goodwill of Rs. 4,09,94,465 arising out of amalgamation of Saurashtra Chemicals Ltd., which the AO treated as a mere accounting entry with no real asset behind it.
  2. Disallowance of depreciation on brands and trade names of Rs. 1,73,64,618 acquired from the demerged unit of Nirma Industries Ltd., alleging inadequate details and excessive claim vis-à-vis opening WDV accepted in earlier proceedings.
  3. Alleged inconsistency of the CIT(A) in allowing depreciation in the current year while earlier having confirmed disallowance for AY 2016-17.
  4. Transfer pricing adjustment of Rs. 1,17,72,05,188 relating to inter-unit transfer of electricity, where the Revenue argued that the ALP should be computed at a lower rate (Rs. 3.67/kWh) based on prices at which generating companies sell power to distribution licensees.
  5. Objections to the rejection of TPO’s comparables and the acceptance of the assessee’s comparables for electricity benchmarking under the CUP method.
  6. Alleged non-compliance with transfer pricing guidelines as interpreted by the Supreme Court in Sap Labs India Pvt. Ltd. vs. ITO.

2.2 AY 2020-21 – Key Grounds in ITA No. 1570/AHD/2026

For AY 2020-21, the Revenue raised similar grounds and one additional major controversy:

  1. Depreciation on brands and trademarks of Rs. 97,67,598 claimed on intangible assets obtained via demerger, which the Department maintained were still under dispute before the Hon’ble Gujarat High Court.
  2. Depreciation on goodwill of Rs. 2,30,59,386 on the amalgamation of Saurashtra Chemicals Ltd., again challenged on the basis that the amalgamating company was a sick unit with negative net worth and allegedly no real goodwill.
  3. Inter-unit electricity transfer – TP adjustment of Rs. 20,17,23,105 by substituting the assessee’s transfer price with an ALP of Rs. 3.58/kWh.
  4. Disagreement with the rejection of the TPO’s chosen comparables and acceptance of the assessee’s benchmarking for captive power.
  5. Valuation of steam – a TP adjustment of Rs. 1,06,55,75,141 by treating steam as a by-product with zero cost and hence ALP of nil, for inter-unit transfer between eligible and non-eligible units.
  6. Alleged violation of statutory guidelines on ALP determination and the ratio in Sap Labs India Pvt. Ltd. vs. ITO.

3. Depreciation on Goodwill from Amalgamation

3.1 Revenue’s Position

The Assessing Officer and the Revenue argued that:

  • Saurashtra Chemicals Ltd. was a sick industrial company referred to BIFR, suffering from heavy accumulated losses and negative net worth.
  • According to them, such a company could not possess any “genuine goodwill” capable of depreciation.
  • The goodwill recorded in the books of Nirma Limited was alleged to be nothing but a balancing figure, artificially created for accounting convenience rather than an asset acquired at a cost.
  • Consequently, depreciation under Section 32 on such goodwill was asserted to be inadmissible.

3.2 CIT(A)’s Findings

The CIT(A) examined the matter in light of earlier years’ orders and noted that:

The exact same controversy had already been adjudicated in favour of the assessee by the Ahmedabad ITAT in Nirma Limited’s own cases for AYs 2012-13, 2013-14, 2014-15, 2015-16 and 2016-17, inter alia in:

  • ITA Nos. 2007 & 2008/Ahd/2017
  • ITA No. 516/Ahd/2018
  • `ITA Nos.