Depreciation on Amalgamation Goodwill and Internal CUP-Based

Depreciation on Amalgamation Goodwill and Internal CUP-Based Power Benchmarking Allowed Following Past Precedents

Issue

Issue I: Whether goodwill arising from a court-approved amalgamation scheme constitutes an intangible asset representing commercial rights eligible for depreciation under Section 32(1)(ii).
Issue II: Whether the internal Comparable Uncontrolled Price (CUP) method, based on the rate at which non-eligible units purchase electricity from a state distribution company, is the correct benchmark for inter-unit transfer pricing of power to claim a Section 80IA deduction.

Facts

Company Status: The assessee-company is engaged in the manufacturing and trading of chemical fertilizers and industrial products.
Goodwill Claim: For the Assessment Year 2016-17, the assessee claimed depreciation of approximately ₹31.70 lakhs on goodwill that arose from the amalgamation of Narmada Chematur Petrochemicals Ltd. with itself under a scheme approved by the Gujarat High Court.
Power Unit Claim: The assessee also claimed a deduction under Section 80IA on the profits of its Captive Power Generation Unit (CPSU). For inter-unit power transfers, it applied the internal CUP method using the electricity purchase rate from Dakshin Gujarat Vij Company Ltd. (DGVCL).
AO/TPO Actions:
- The Assessing Officer (AO) disallowed the depreciation on goodwill, ruling it ineligible under Section 32(1)(ii).
- The Transfer Pricing Officer (TPO) rejected the internal CUP method, stating that a captive unit cannot be compared to a distribution utility, and used a regulatory tariff of ₹3.06 per kWh to make a downward adjustment of ₹146.16 crores, reducing the Section 80IA deduction.
First Appeal: The Commissioner (Appeals) reversed both actions by deleting the transfer pricing adjustment—treating electricity as a homogeneous commodity correctly benchmarked via internal CUP—and allowing the depreciation on goodwill based on consistent treatments in prior years.

Decision

Held, yes: The depreciation on amalgamation goodwill is legally permissible because it represents the acquisition of a running business with a profit-earning apparatus and commercial rights under Section 32(1)(ii).
Held, yes: The revenue cannot disrupt the rule of consistency when the depreciation claim on the exact same goodwill has been allowed consistently in preceding assessment years without changes to the law or facts.
Held, yes: The internal CUP method based on the local grid (DGVCL) rate is a valid benchmark for inter-unit power transfers, making the regulatory tariff rates applied by the TPO unsuitable.
Final Result: Since the Commissioner (Appeals) followed binding judicial precedents to delete the ₹146.16 crore adjustment and allow the goodwill depreciation, the order contains no infirmity and is decided entirely in favor of the assessee.

Key Takeaways

Goodwill as a Commercial Right: Goodwill generated through corporate restructuring (amalgamation) represents an intangible commercial asset that qualifies for statutory depreciation benefits.
Rule of Consistency Applies: Once an item like goodwill depreciation is verified and consistently accepted by the tax department in earlier years, it cannot be arbitrarily disallowed in a subsequent year unless new facts surface.
Electricity is a Homogeneous Commodity: For Section 80IA captive power benchmarking, the market rate at which an assessee buys power from a state utility for its other units serves as an appropriate internal CUP benchmark rather than artificial regulatory tariffs.

IN THE ITAT AHMEDABAD BENCH ‘D’

Deputy Commissioner of Income-tax

Gujarat Narmada Valley Fertilizers & Chemicals Ltd.^*

Siddhartha Nautiyal, Judicial Member
and Smt. Annapurna Gupta, Accountant Member

IT Appeal No. 971 (Ahd) of 2025
[Assessment year 2016-17]

APRIL 23, 2026

Vishal Kalra, AR for the Appellant. Sher Singh, CIT-DR for the Respondent.

ORDER

Siddhartha Nautiyal, Judicial Member.- This appeal has been filed by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), Ahmedabad-13 vide order dated 25.02.2025 passed for A.Y. 2016-17.

2. The Department has raised the following grounds of appeal:

” 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.31,70,425/- on account of depreciation on goodwill when in het no goodwill was created on account of merger of Narmada Chematur Petrochemicals Limited (NCPL) particularly when assessee itself was the promoter of NCPL.

2 .(i) The Ld. CIT(A) erred in deleting the addition of Rs.109,56,03,138/- accepting the assessee ‘s benchmarking for inter unit sale of electricity instead of adopting the ALP of Rs 3.06/kWh

2(ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the comparable adopted by TPO without appreciating that the same is identical transaction with the transaction entered by the assessee in View of the FAR (Functions performed, Assets used & Risks undertaken) analysis as per the provision laid down under Rule 10B(2)(b) of the I.T. Rules, 1962.

2(iii) Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) was justified in allowing the comparable adopted by assessee without appreciating that the same has different FAR (Functions performed, Assets used & Risks undertaken) analysis as per the provision laid down under Rule 108(2)(b) of the I.T. Rules, 1962 and hence the same is not a comparable transaction under CUP method.

2(iv) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the appeal of the assessee on the basis of the decision of the Hon’ble ITAT for AY 2013-14 and 2014-15 in assessee’s own case for the adjustment of Rs. 19,85,24,372/- related to transaction of sale of steam without appreciating the fact that the said issue was involved in the AY 2013-14 and AY 2014-15.

2(v) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the adjustment of Rs. 10,85,24,372/- transaction of sale of steam without adjudicating the same related to transaction of sale of steam without adjudicating the same.

2(vi) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting the ALP of the assessee determined by ignoring the guidelines laid down under the I.T. Act and Rules and thereby violating the ration laid down by the Hon’ble Supreme Court in the case of Sap Labs India Pvt. Ltd. v. ITO.

3 . The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of or before, the hearing of appeal. “

3. The brief facts of the case are that the assessee is a company engaged in the business of manufacturing and trading of chemical fertilizers and industrial products and had filed its return of income for A.Y. 2016-17 declaring total income as Nil under the normal provisions after claiming deduction under Chapter VI-A under section 80IA of the Act. During the course of assessment proceedings, firstly, the Assessing Officer disallowed depreciation on goodwill amounting to Rs. 31,70,425Z- on the ground that the claim was not allowable. The assessee contended that such goodwill arose on amalgamation pursuant to a scheme approved by the Hon’ble High Court and represented commercial rights eligible for depreciation. However, the Assessing Officer did not accept the contention and denied the claim. Secondly, the Assessing Officer made a disallowance under section 80IA of the Act in respect of profits derived from the captive power generation unit (CPSU). The Transfer Pricing Officer (TPO) examined the pricing of electricity transferred from the captive power unit to other manufacturing units of the assessee and rejected the benchmarking adopted by the assessee under the Comparable Uncontrolled Price (CUP) method. The assessee had used the rate at which electricity was purchased from Dakshin Gujarat Vij Company Ltd. (DGVCL) as an internal CUP. However, the TPO rejected this approach on the ground that the functional profile of the captive power unit was not comparable with that of an external power distribution company. Instead, the TPO adopted a much lower rate based on tariff determined by regulatory authorities, particularly Rs. 3.06 per unit, and consequently made a substantial downward adjustment in the value of electricity transferred. This resulted in a disallowance of deduction claimed under section 80IA of the Act to the extent of Rs. 146,16,52,346/-. The Assessing Officer accepted the findings of the TPO and incorporated the same in the final assessment order, thereby significantly increasing the assessed income.

4. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

5. On the issue of depreciation on goodwill, the CIT(Appeals) has held that the goodwill in question arose pursuant to amalgamation of Narmada Chematur Petrochemicals Ltd. with the assessee under a scheme approved by the Hon’ble Gujarat High Court and denotes consideration paid for acquisition of a running business along with its commercial rights, business advantages and profit-earning apparatus. The CIT(Appeals) held that such goodwill squarely falls within the ambit of “intangible assets” as contemplated under section 32(1)(ii) of the Act and is therefore eligible for depreciation. The CIT(Appeals) further held that this issue is no longer res integra in the assessee’s own case, as depreciation on such goodwill has been consistently allowed in earlier assessment years by the Tribunal and affirmed by the Hon’ble jurisdictional High Court, and therefore following the rule of consistency and judicial discipline, the disallowance made by the Assessing Officer is liable to be deleted.

6. On the issue relating to transfer pricing adjustment affecting deduction under section 80IA, the CIT(Appeals) held that the assessee has correctly applied the internal Comparable Uncontrolled Price (CUP) method by adopting the rate at which electricity is supplied by Dakshin Gujarat Vij Company Ltd. to its consumers as the benchmark for determining the arm’s length price of electricity transferred from the captive power unit to the manufacturing units. The CIT(Appeals) held that electricity being a homogeneous commodity, the rate charged by the distribution company constitutes a reliable and appropriate benchmark. The CIT(Appeals) further held that the approach adopted by the Transfer Pricing Officer in substituting the benchmark with regulatory tariff rates, such as Rs. 3.06 per unit, is not justified as such rates are influenced by regulatory considerations and do not reflect actual market value. The CIT(Appeals) has also taken note of the fact that identical transfer pricing adjustments in the assessee’s own case for earlier years have been deleted by the Tribunal and such findings have been upheld by the Hon’ble Gujarat High Court, and therefore following the binding precedents, the adjustment made by the TPO has been directed to be deleted. The CIT(Appeals) has thus held that the deduction under section 80IA of the Act is to be allowed based on the profits computed by adopting the appropriate CUP as determined by the assessee.

7. The Department is in appeal before us against the order passed by CIT(Appeals) allowing the appeal of the assessee.

8. We have heard the rival contentions and perused the material on record. The issues arising in the present appeal filed by the Revenue relate to (i) disallowance of depreciation on goodwill and (ii) transfer pricing adjustment affecting deduction under section 80IA of the Act. At the outset, we note that the learned counsel for the assessee has submitted that both the issues are squarely covered in favour of the assessee by decisions of the Tribunal as well as the Hon’ble jurisdictional High Court in the assessee’s own case in earlier years. The learned Departmental Representative has not been able to point out any distinguishing feature in facts or law for the year under consideration.

9. On the issue of depreciation on goodwill, we find that the learned CIT(Appeals) has allowed the claim by holding that the goodwill arose on amalgamation of a running business pursuant to a scheme approved by the Hon’ble Gujarat High Court and it constituted the commercial rights eligible for depreciation under section 32(1)(ii) of the Act. We find that this issue has been consistently decided in favour of the assessee in earlier assessment years. The Ahmedabad Bench of the Tribunal in the assessee’s own case for A.Y. 2015-16 in Dy. CIT v. Gujarat Narmada Valley Fertilizer & Chemicals Ltd. [IT Appeal No. 970 (Ahd) of 2025, dated 3-9-2025] has upheld the order of the CIT(Appeals) by following earlier years’ decisions, observing as under:

“Ld. Counsel for the assessee pointed out that the assessee had acquired through merger, the going concern of Narmada Chematur Petrochemicals Limited (Amalgamated Company / ‘NCPL) under the scheme approved by the Hon ‘ble Gujarat High Court. The amalgamated company was engaged in the business of manufacturing and sale of industrial chemicals since last 14 years. The tangible assets of the going concern were taken over at book value and against the net value assets as per books of Rs. 6160.27 lakhs, a consideration of Rs. 7849.26 lakhs was paid in the form of fully paid equity shares of the assessee company. The difference was in the nature of goodwill and the said calculation was also approved under the scheme of amalgamation by the Hon ‘ble Gujarat High Court.

Ld. Counsel further pointed out that in the assessee’s own case for earlier assessment years, the Ld. CIT(A) had allowed the claim of depreciation on goodwill and the same has been upheld by the Tribunal as well as the Hon’ble jurisdictional High Court.

We find that the Ld. CIT(A) has allowed the claim of the assessee following the decisions of the Tribunal in earlier years and also taking note of the fact that the issue stands settled in favour of the assessee by the Hon’ble High Court. The Revenue has not been able to point out any distinguishing facts in the year under consideration. Therefore, we see no reason to interfere in the order of the Ld. CIT(A) allowing depreciation on goodwill. “

10. In absence of any change in facts or law, we find no infirmity in the order of the learned CIT(Appeals) in allowing depreciation on goodwill.

11. Coming to the issue of transfer pricing adjustment affecting deduction under section 80IA of the Act, we find that the learned CIT(Appeals) has allowed the claim of the assessee by accepting the benchmarking under the internal CUP method based on the rate at which electricity is supplied by Dakshin Gujarat Vij Company Ltd. (DGVCL). The learned CIT(Appeals) has held that electricity is a homogeneous commodity and the rate charged by the distribution company represented a reliable benchmark. We find that this issue is also squarely covered in favour of the assessee by the decision of the Tribunal in the assessee’s own case for earlier years, which has been affirmed by the Hon’ble Gujarat High Court. In ITA No. 970/Ahd/2025 (supra), the Tribunal has held as under:

“With respect to the issue of claim of deduction u/s. 80IA of the Act, Ld. Counsel for the assessee pointed out that the assessee had calculated deduction u/s. 80IA(4)(iv)(a) of the Act on the profits of its Co-generation Power and Steam Unit (‘CPSU’) by benchmarking the inter-unit transfer of electricity using internal CUP, i.e., the rate at which electricity was purchased by the non-eligible units from Dakshin Gujarat Vij Company Ltd. (DGVCL).

The TPO, however, rejected the benchmarking adopted by the assessee and proceeded to determine the arm ‘s length price by adopting external CUP based on tariff rates determined by regulatory authorities, thereby making substantial adjustment to the value of electricity transferred and consequently reducing the deduction claimed under section 80IA.

The Ld. CIT(A), however, noted that this issue stood squarely covered in favour of the assessee by the decisions of the Tribunal in assessee’s own case for A.Ys. 201314 & 2014-15, wherein it was held that the profits and gains derived from generation of power for captive consumption are eligible for deduction under section 80IA and that the same are to be computed by adopting the rate at which electricity is supplied by the Electricity Board to its consumers.

The Ld. CIT(A) further noted that even the Hon ‘ble High Court had not admitted the Department’s appeal against the Tribunal’s order on this issue, thereby lending finality to the position in law.

Before us, the Ld. DR was unable to controvert the findings of the Ld. CIT(A) or point out any distinguishing feature in the facts of the case for the year under consideration as compared to earlier years.

In view of the above, we find no infirmity in the order of the Ld. CIT(A) in allowing the deduction u/s. 80IA of the Act by accepting the benchmarking adopted by the assessee. Respectfully following the consistent view taken by the Tribunal in earlier years in the assessee’s own case, which has also attained finality at the level of the Hon’ble High Court, we uphold the order of the Ld. CIT(A) and dismiss the grounds raised by the Revenue. “

12. We are of the considered view that the learned CIT(Appeals) has followed binding judicial precedents and applied the correct legal position. The issues involved are recurring in nature and have been consistently decided in favour of the assessee. The Revenue has not brought any material on record to justify a different view in the year under consideration.

13. Accordingly, we find no infirmity in the order of Ld. CIT (Appeals) so as to call for any interference. The Revenue has not been able to demonstrate any perversity or error in the findings recorded by the learned CIT(Appeals).

14. In view of the above discussion, the grounds raised by the Revenue are dismissed.

15. In the result, the appeal filed by the Revenue is dismissed.