[Opinion] Intangible Assets [IA] Acquired Through Business Combination | Tax Implications

Anil Chachra – [2024] 161 taxmann.com 340 (Article)

1. Background

Where a company wants to acquire the business of another company by way of amalgamation or demerger the assets or liabilities can be acquired either at fair value or at book value depending upon the applicability of Indian Accounting Standards [Ind AS] or accounting standards. At the time of business acquisition Intangible assets can be acquired or recognised in three ways:

a) by way of acquisition of Intangible assets.

b) by way of recognizing other Intangible assets which was not there in the books of transferor company

c) by way of recognizing goodwill which means that the amount of residual goodwill be recorded after recognizing such previously unrecognised intangibles.

Other Intangible assets can be acquired at the fair value by way of acquisition which were existing in the books of the acquirer. An acquirer can recognise the unrecognised intangible assets on fulfilling the assets recognition criteria at the time of business acquisition if the same intangible assets were not there in the books of the transferor company as per Ind AS 103- [Business Combinations]. Goodwill is recognised by way of payment of excess consideration over the fair market value of the assets acquired as a residual amount after recognizing such previously unrecognised intangible assets.

Goodwill acquired in the business combination will not be amortised in the books of accounts rather it will be tested for impairment on annual basis. The intangible assets acquired in the business combination will be amortised in the books of accounts as per the economic useful life. Big question would be what would be the tax treatment of other Intangible assets recognised in the books of acquirer which was not there in the books of the transferor company. Income tax play crucial role in taking the strategic decisions as far the business restructuring by way of amalgamation/ demerger is concerned and further what would be tax implications of goodwill and other intangible assets in the books of acquirer. In this article we will discuss the income tax implications on the acquisitions of intangible assets by way of business combination.

2. Indian Accounting Standards [Ind AS]

2.1 Recognition of Intangible assets

Ind AS 103- Business Combination states that consideration in excess of the fair market value of the assets acquired will be recognised as goodwill. An acquirer recognises, separately from goodwill, the identifiable intangible assets acquired in a business combination. This is irrespective of that fact that those intangible assets were not recognized in the financial statements of acquiree. Meaning thereby that the amount of residual goodwill be recorded after recognizing such previously unrecognised intangibles.

An intangible asset is identifiable if it meets either the separability criterion or the contractual legal criteria. For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognised as assets in the financial statements because it developed them internally and charged the related cost to expense.

2.2 Amortisation of Intangible Assets

Goodwill acquired under business combination will not be amortised in the books, the same will be tested for impairment on annual basis as per Ind AS 36. Other Intangible assets having finite life acquired under the business combination will be amortised according the economic useful life of the asset. Other Intangible assets with having an indefinite life are not amortised and same will be tested for impairment on annual basis.