TaxTMI 
TaxTMI 
2024 (9) TMI 1439
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....nt order after making due enquiries and verification of records and the said order is not erroneous and/or pre-judicial to the interest of the revenue. 2. On the facts and in the circumstances of the case and in law, the Ld. PCIT has erred in invoking the provisions under section 263 of the Act without looking into all the records of the assessment proceedings wherein the appellant has furnished the relevant documents/explanation as and when sought by the Ld.AO. 3. On the facts and in the circumstances of the case and in law, the Ld. PCIT has erred in setting aside the assessment order passed by the Ld.AO with a direction to redo the assessment without appreciating the fact that the assessment order of Ld.AO is not erroneous and/or prejudicial to the interest of the revenue. 4. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. PCIT erred in disallowing the amount of Rs. 340.45 Crores paid to Pfizer Inc. on termination of agreement considering it as capital expenditure. (Tax effect Rs. 115.78 Crores) 5. Without prejudice to the above, on the facts and in the circumstances of the case and in law, ....
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....Fresenius'). ASPL latter on terminated the said L&D agreement with Fresenius and was liable to pay liquidated damages of USD 1 Mn(Rs.6.19 crores) to Fresenius. The liquidated damages of USD 1 Mn (Rs.6.19 crores) was claimed as revenue expenditure by ASPL and had been disclosed in the audited financial statements of ASPL for the period ended on 5.12.2013 as part of "Cost of termination of licensing contracts". 3.4 The assessee filed its Return of Income on 29.11.2014 for the A.Y. 2014-15 declaring a total loss of Rs. 265,72,22,548/-. In the said return the termination charges of Rs. 340.45 crores paid to Pfizer and the liquidated damages of Rs. 6.19 crores paid to Fresenius, had been claimed as an expenditure by the assessee under the head " cost of termination of licensing contracts". The case of the assessee was completed u/s. 143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 ("the Act") by the Learned Assessing Officer ("Ld. AO") making an addition of Rs. 17,86,68,869/- vide his order dated 31.01.2018. Later on, Ld. PCIT called for the record for examination u/s. 263 of the Act. After perusal of the record, Ld. PCIT held that the amount of Rs. 340.45 Crores paid to Pfizer ....
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....the nature of penalty, since it paid as liquidated damages since this amount is not allowable as deduction u/s 37 of IT Act." 4. Feeling aggrieved by the order of Ld. PCIT the assessee is in appeal before us on as many as 5 grounds. Ground no. 1 to 3 relates to challenging the invocation of section 263 by the Ld. PCIT, ground no. 4 related to disallowance of termination charges of Rs. 340.45 crores paid to Pfizer and ground no. 5 relates to disallowance of the liquidated damages of Rs. 6.19 crores paid to Fresenius. 5. Coming first to Ground Nos. 1 to 3, the Ld. AR made detail submission with regards to their objection towards the invocation of section 263 by the Ld. PCIT. The relevant portion of submission made by Ld. AR dated 29/09/2023 in this regards is reproduced as under : "III. Legal arguments on jurisdiction under Section 263: 3.1 The Appellant wishes to submit that the revision proceedings under section 263 of the Act is bad in law for the following reasons: A. No revision if inquiries were made by the AO: 3.2 The learned AO/ TPO during the assessment proceedings made adequate inquiries by calling for details to examine the nature ....
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....law that, while exercising revisional jurisdiction under section 263 of the Act, the principles of natural justice do not permit the decision of a revisionary authority to be influenced by any other authority. 3.8 In the present case, the revisionary action and order under section 263 of the Act, both emerge from the audit objection communicated by the Office of the Director General of Audit (Central), Hyderabad ('Revenue audit'). The fact that the revisionary action is based on audit objection is evidenced from the order sheet of the Assessing Officer. In reply to this audit objection the AO states as under: "On this being brought to notice, it was replied that based on detailed verification of documents and information furnished by the assessee during the course of the assessment proceeding and fact, summarized above, it is clear that payment made by ASPL to Pfizer has been made in the regular course of business and does not result in the transferred / creation of new revenue generating asset, as such product always continued to remain under the ownership of ASPL even before the termination of this agreement with the Pfizer and even after subsequent assi....
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..... CIT [2000] 243 ITR 83 (SC) [Para 9]: 3.13 In the instant case, the learned AO after duly examining the facts adopted a plausible view that the expenditure pertaining to 'cost of termination of licensing contracts' is revenue in nature. Case laws yielding that such compensation is revenue in nature are detailed at para 3.18 of the synopsis and at sl. no. 34 to 38 of the case law compilation and other material -II. The learned PCIT is not justified in invoking the revisionary merely on the basis that a different view was possible and the learned AO has not adopted that view." 6. Per contra the Ld. DR opposed to the submission made by the Ld. AR and requested the Bench to uphold the order of Ld. PCIT. The Ld. DR also made a written submission before us on 28/05/2024 . The relevant portion of submission made by Ld. DR on 28/05/2024 in this regards is reproduced as under : "Arguments by DR 9. The assessee challenged the review under Section 263 by relying on the decision of Supreme Court in Malabar Industrial Co. Limited 243 ITR 83. The assessee argued that in light of the above decision, an order can be reviewed under Section 263 only if it satis....
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....TR 83(SC), he also submitted that, if two views are possible, and the AO has adopted one of those views, the order of assessment cannot be prejudicial to the interests of the Revenue. The Ld. AR also submitted that even if there are some lac of enquiry on the part of the Ld. in pursuance to the provisions covered under the explanation 2 to section 263 of the Act, the same is not applicable to the their case, as explanation 2 to section 263 of the Act are inserted w.e.f.01/06/2015 and are prospective in nature i.e. will not be applicable to the A.Y.2014-15 in consideration. For this he rely upon the decisions in the case of Amira Pure Foods Pvt. Ltd. v Pr. CIT (ITA No. 3205/DEL/2017) (Delhi Trib.),Narayan Tate Ranu v ITO 70 taxmann.com 227 (Mumbai Trib.) and Torrent Pharmaceuticals Ltd. v DCIT (ITA No. 164/Ahd/2018) (Ahmedabad Trib.) . Hence the Ld. AR prayed before the bench that the invocation of section 263 by the Ld. PCIT is bad in law and is required to be quashed. 6.1 As per the submission of the Ld. DR the Ld. AO has not passed the order by taking into consideration various factors for determining whether the said expenditure is capital or revenue, who should claim the sai....
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....nder section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person." 6.4 On going through the explanation 2 to section 263, which has been inserted w.e.f. 01/06/2015, it is abundantly clear that, if the Ld. AO failed to make proper inquiries or verification, then it shall be deemed that the order passed by the Ld. AO is erroneous so far as it is prejudicial to the interest of the revenue. Hence under such circumstances section 263 can be invoked. 6.5 Now coming to the argument of the Ld. AR, who relying upon the decisions in the case of Amira Pure Foods Pvt. Ltd. v Pr. CIT (ITA No. 3205/DEL/2017) (Delhi Trib.),Narayan Tate Ranu v ITO 70 taxmann.com 227 (Mumbai Trib.) and Torrent Pharmaceuticals Ltd. v DCIT (ITA No. 164/Ahd/2018) (Ahmedabad Trib.) submitted that the explanation has been inserted with effect from 01/06/2015 and hence not applicable for A.Y.2014-15. However when we go through the said judgements and ask the Ld. AR to point of the relevant para where it has been specifically so mentioned, the....
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....is of such agreement and charges paid for the same can be claimed as revenue expenditure . He also submitted that after the " Asset Purchase Agreement" dated 31/10/2013, the assessee had simultaneously entered into a D&S Agreement with Mylan Ireland on 31.10.2013 for marketing and distribution rights (same rights as terminated by Pfizer) for a consideration of Rs. 340.45 crores. Without acquiring any right/assets, how any right had been transferred to Mylan Ireland on 31.10.2013. Hence the Ld. DR reiterated that the expenditure incurred by ASPL towards termination charges of Rs. 340.45 crores was in the nature of capital expenditure and should not be allowed as revenue expenditure. 7.2 We have heard the rival contention and also gone through the record in the light of the submissions made on either side. We are convinced with the submission of the Ld. DR that the termination of the L & S agreement dated 31/10/2013 had been titled as " Asset Purchase Agreement ", then how any right obtained on the basis of such agreement and charges paid for the same can be claimed as revenue expenditure . He also submitted that after the " Asset Purchase Agreement" dated 31/10/2013, the ASPL had....
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....tories Limited and Onco Therapies Limited entered into that certain Amended and Restated License and Supply Agreement dated February 27, 2013 (the "License Agreement"), pursuant to which Seller is granted licenses to Promote the Licensed Products in the Territory; WHEREAS, an Affiliate of Buyer supplies to Seller, and Seller, directly or indirectly through its Affiliates, Promotes the Transferred Products and Licensed Products in the Territory pursuant to that certain Amended and Restated Supply Agreement by and between Pfizer Asia Manufacturing PTE. LTD ("Pfizer Asia") and Agila Specialties Private Limited, dated February 27, 2013 (the "Supply Agreement", and the License Agreement, respectively; WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase, Seller's rights to the Transferred Products in the Territory and certain related assets, all upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, Seller, Pfizer Asia, Buyer, Agila India, OTL and OLL desire that Seller and Pfizer Asia shall cede their rights and obligations under the License Agreement and the Supply Agreement to the Buyer pursuant to the terms ....
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....ments. (a) Purchase Price. Subject to the terms and conditions contained in this Agreement, in consideration of the sale and transfer of the Transferred Assets and the ceding of rights and obligations of the Seller and Pfizer Asia under the License Agreement and the Supply Agreement pursuant to this Agreement, Buyer, Agila India and OLL, jointly and severally, agree Page no. 118 of the P.B. : commercial sale and marketing of the Transferred Products and the Licensed Products, consistent with past practice; and provide sales reports to Buyer, within ten (10) Business Days after the end of each calendar month commencing from execution of this Agreement, of commercial sales of the Transferred Products and the Licensed Products. Section 3.2. Pharmacovigilance Agreement. Buyer may designate a pharmacovigilance representative with respect to the Transferred Products, the Licensed Products and the Vancomycin Products. Following the Vancomycin Closing Date, Buyer or its designee, as applicable, shall be solely responsible for conducting all pharmacovigilance activities relating to the Vancomycin Products in the Territo....
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....nee) shall reasonably cooperate with each other in good" On perusal of the above pages of Assets Purchase Agreement, it is observed that at page number 105, at the top of the page, the title of agreement itself shows that it is an assets purchase agreement. On the same page, in last para, it has been mentioned that " the seller shall cede their rights and obligations under the licence agreement and the supply agreement to the buyer pursuant to the terms of this agreement". Whereas Section 2.1 at page number 114 talks about purchase of "all the right, title and interest of seller" by the buyer. Section 2.5 at page 114 and 115 talks about the purchase price to be paid in lieu of this assets purchase agreement. Section 3.3 at page number 118 talks about the transfer of assets in the agreement. Hence on the basis of such observation, it is abundantly clear that it was an agreement for purchase of assets and the amount paid under this agreement was on account of the purchase price of the said assets and was not in the nature of termination charges/fees . Hence, we are of the considered opinion that the charges of Rs. 340.45 crores paid by the ASPL to Pfizer are in the nature of capit....