TaxTMI 
TaxTMI 
2022 (5) TMI 1673
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.... to Teknoserve (Jersey) Ltd. 2. The Ld. CIT(A) has erred by allowing Festival allowance, Misc. Expenses, Telephone Expenses, Vehicle expenses without appreciating the findings of the assessing officer in the assessment order. 3. The Ld. CIT(A) has erred by allowing Adhoc disallowance of 5% out of selling expenses, Festival allowance, Misc. Expenses, Telephone Expenses, Vehicle expenses without appreciating the findings of the assessing officer in the assessment order. 4. The Ld. CIT(A) has erred in deleting the addition made by the AO being rent payment of Packart Press Unit and insurance of machinery of Packart Press Unit without considering the fact that the Packart Press Unit was closed and there was no business activities in this unit and also the assessee already got the order of labour commissioner for closure of such unit. 5. The Ld. CIT(A) has erred in deleting the addition made by the AO u/s. 40A(9) of the Act, previous year's expenses and foreign travel expenses. 6. The Ld. CIT(A) has erred in deleting the addition made by the AO on Transfer of Trademark and Marketing Rights. 7. The appellant craves leave to add to, am....
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....or veterinary products of various foreign principals is revenue receipt taxable as business income u/s.28(ii)(c) of the Income Tax Act. 7.3 Ld. CIT (A) ought to have allowed the appeal of the Appellant holding that the consideration received against transfer of trademarks and marketing rights are not taxable." 3. The assessee Company is mainly engaged in the manufacture of drugs & pharmaceuticals, it also provides marketing and consultancy activities in respect of drugs and pharmaceuticals, fine chemicals, industrial glass containers, packing materials, electronic tests and measuring instruments, consumer electronic and industrial research. There are 15 divisions including service units catering to the needs of other units of corporate body. The assessee Company filed return of income on 31.10.2001 declaring income from house property Rs. 9,036/-, income from other sources Rs. 1,25,40,914/- and business loss of Rs. 10,26,63,568/-. The Assessing Officer made addition in respect of buying commission to Teknoserve (Jersey) Limited amounting to Rs. 19,27,498/- as per the provision of Section 40(a)(i) of the Act. The Assessing Officer also disallowed interest on bonds issued....
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.... case for A.Y. 1985-86 (in ITA No. 2231/Ahd/1990 dated 17-11-2004), and confirmed the disallowance of interest on the bonds issued to the shareholders of the Standard Pharmaceuticals Ltd. (SPL) on its amalgamation with the assesse-company. The Ld. A.R. has very fairly conceded to this position of the matter, so that the same admits of no difference of opinion. Respectfully following the orders of the Tribunal in the assessee's case for the earlier years, we uphold the impugned disallowance for the current year as well. We decide accordingly." In the present assessment year as well the Ld. AR submitted that the factual aspect is identical to the earlier assessment years which is decided against the assessee. Therefore, Ground No. 1 of the assessee's appeal is dismissed. 8. As regards to ground No. 2 relating to disallowance under Section 43B(b) amounting to Rs. 9,14,094/- as employer's contribution to PF/ESIC, the Ld. A.R. submitted that the assessee has made suo moto disallowance of Rs. 2,06,56,172/-. 9. The Ld. D.R. submitted that though the assessee made suo moto disallowance of Rs. 2,06,56,172/- in relation to employer's contribution to PF/ ESIC etc. but the same was no....
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....th the assessee placing reliance on the decision by the Apex Court in the case of, amongst others, Swadeshi Cotton Mills Co. Ltd. vs. CIT, 233 ITR 199 (SC), wherein it stands held that where a composite levy includes both an element of compensation as also penalty, it shall be open for the Authority to allow the proportion which in its estimation is towards compensation, as a deductible business expenditure. Consequently, he determined 60% of the levy as penal in nature, so that the balance 40%, i.e. Rs. 4,73,244/-, was direct by him to be allowed. Aggrieved, Revenue is in appeal. 18. Before us, like contentions stood raised by either side, each relying on the Order of the authority below as favourable to it. 19. We have heard the parties, and perused the material on record, including the cited case law. We find that the Apex Court has clarified the issue, and the Tribunal in the case of ITO vs. Havero Industries Ltd., 36 ITD 611 (Mum.), applying the law in the matter found 40% of the amount paid as damages u/s 14B of the EPF & MP Act, 1952, as being allowable, being in the nature of compensation. We, therefore, do not find any infirmity in the Order of the Ld. CI....
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.... 49.2 In so far as the closure of the assessee's said Unit is concerned, the same does not, to our mind, represent a separate or distinct line of business being pursued by the assessee; the said Unit only manufacturing, admittedly, packaging material, viz., cartons, labels, grey board boxes, for supply to other Units, for the packaging of their goods. As such, the closure of the said Unit for the current year, or the absence of the manufacturing operations as inferred by the Revenue, would be of no consequence in-so-far as the application of section 72(1) of the Act is concerned. This, however, would be subject to the actual user of the plant and machinery or other capital assets of the said Unit for business purposes, i.e., in-so-far as the claim for depreciation is concerned, which would not be allowable otherwise. 49.3 As regards the balance expenditure, we find there to be no doubt as to its having been incurred, except for Rs. 31.76 lacs for which no provision stands made in accounts, even as the same is claimed in the return of income. Clearly, the answer to the same would, even as explained by the assessee itself, while arguing its case before the Ld. CIT(A), de....
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....pinion that only the expenses as stands incurred, or in relation to which the liability has, in terms of underlying contract, stands accrued, shall be allowed as an expenditure in the assessment for the current year, and set aside the matter back to the file of the A.O. to decide the same after proper examination of the relevant facts, giving reasonable opportunity to the assessee to present its case before him, and decide as per law." The facts of the present assessment year are identical to that of earlier assessment years. Thus, we are also of the opinion that only the expenses which were incurred or has liability in terms of underlying contract, stands accrued, shall be allowed as an expenditure in the present assessment year as well. Thus, we remand back this issue to the file of the Assessing Officer for verification of the relevant facts and proper adjudication. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 4 of the assessee's appeal is partly allowed for statistical purpose. 17. As regards to ground No. 5 regarding confirming the allowance of Rs. 1,37,30,530/- (1/5th of Rs. 6,86,52,649/-) instead o....
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....submitted and therefore, the CIT(A) did not find any basis to treat the amounts of Rs. 2,08,65,672/- independent of the voluntary retirement scheme being the same terminal benefits. The CIT(A) further observed that Section 43B(f) was inserted after clause (e) of section 43B by the Finance Act, 2001 with effect from 01/04/2002. Thus, this section 43B(f) will be applicable only from assessment year 2003-04 onwards whereas the year under consideration in the case of the assessee is 2001-02. Therefore, the CIT(A) held that the entire payments of Rs. 6,86,52,649/- comprising leave salary, gratuity and compensation under the scheme have been made by the assessee to the employees under the voluntary retirement scheme as announced by it and therefore 1/5th of this amount of Rs. 6,86,52,649/- which comes to Rs. 1,37,30,530/- is only required to be allowed for the year under consideration and confirmed the deduction of Rs. 1,37,30,530/- only u/s 35DDA of the Act. The segregation done by the assessee that the entire leave salary and gratuity be allowed cannot be accepted as it is clearly a part of voluntary scheme of retirement as it is incidental to the retirement of employee. Thus, the CIT(....
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....ide accordingly." Though the issue is related to sundry creditors in this assessment year as well, this is an issue which is factual centric as per each years sundry creditors, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for adjudicating it afresh after looking into the evidences. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose. 23. As regards to ground No. 7 relating to transfer of trademark, marketing rights, the Ld. A.R. submitted that the CIT(A) erred in holding consideration received for transfer of trademark as revenue receipt instead of capital receipt. The Ld. A.R. further submitted that the Revenue Authorities arbitrarily allocated total consideration into goodwill and right to manufacture of veterinary products. In regard to the second aspect of transfer of marketing rights, the Ld. A.R. submitted that Revenue Authorities erred in confirming consideration received for transfer of marketing/distribution rights for veterinary products as revenue receipt. The Ld. A.R. submitted that the joint venture has g....
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....sferred without the transfer of the business undertaking. The facts of the assessee's case are identical as there is no transfer of the business undertaking to the JV what is transferred is only trademarks. If the transfer of such trademark was transfer of goodwill, then there was no need to legislate S. 55 (2)(a) with effect from 01.04.2002 to include transfer of trademark too as held in case of CIT vs. Associated Electronics and Electrical Industries (Banglore)P. Ltd. by the Hon'ble Karnataka High Court (2016) 65 taxmann.com 253. 24. As regards to consideration received against assignment of marketing rights, the Ld. AR submitted that the assessee and JV are separate legal entities where JV has 50% share owned by a third party. So far as the assessee is concerned, its income earning apparatus is destroyed. Only because the assessee has 50% share in JV that would mean that the assessee has retained its income earning apparatus. After the transfer of marketing rights, the assessee would not earn income out of such business. Although what is material is the destruction of the income earning apparatus and not its impact, the assessee has nonetheless suffered significant loss of re....
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....er submitted that the agreement itself does not show separate values for each trademark. In fact, the assessee had not shown these trademarks in its balance sheet. Ld. D.R. further submitted that agreement is a composite agreement for not only assignment of trademark but also for relinquishment of right to manufacture as well as transfer of goodwill. Therefore, the Ld. D.R. submitted that even if transfer of trademark is not taxable under Section 55(2), the transfer of goodwill and relinquishment of right to manufacture are taxable. Out of Rs. 25 Crores of consideration Rs. 7 Crores would estimate as consideration against trademark and remaining is for the relinquishment of right to manufacture and transfer of goodwill. The Ld. D.R. submitted that the case laws relied by the CIT(A) in the case of relied Blue Star, 13 SOT 25 is distinguishable and does not apply in assessee's case. The Ld. D.R. submitted that the case law reported by the CIT(A) is very much identical to assessee's case as there is no destruction of income earning apparatus because the assessee has 50% share in JV and there was no significant reduction in the income of the assessee even after the assignment of market....
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....hat the substance of the entire scheme deserves to be examined. 2. Transfer of Trademark & Goodwill of the Business: 2.1 Admittedly, a total of 46 trademarks have been transferred as a part of the business rearrangement. It is also not in dispute that 6 trademarks were registered and 40 were unregistered. The core controversy has two aspects to it: i. Basis of valuation of the Trademarks ii. Assignment of Goodwill of the business & Manufacturing Rights along with the Trademark 2.2 On the question of valuation of the Trademarks, the appellant has not been able to demonstrate any objective basis for valuation. As is manifest, out of the total consideration of Rs 73....crore, a sum of Rs 25 Crores has been arbitrarily allocated to the transfer of the 46 Trademarks, without indicating the basis of valuation as a class or whether and how differential valuation of registered vs. unregistered Trademarks has been done. There is no sincere effort on the part of the appellant either before the lower authorities or before this Hon'ble Court to establish in a concrete manner the basis of valuation of such trademarks. 2.3 As already stated, ....
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....not sustainable in light of the unequivocal terms of the agreement and the express provisions of Trademarks Act. It is clear that in the case of the appellant, who has been carrying out a number of business activities, one of the business ventures namely animal healthcare products has been transferred along with its goodwill. This is corroborated by the conscious use of the phrase "along with the goodwill of the business concerned". Goodwill being a generic concept denoting reputation of a particular business house has, in the present case, continued to reflect itself in the very name of the new Joint Venture (SZ= Sarabhai Zydus). Accordingly, goodwill of the business concerned has manifestly been transferred to the JV. 2.8 The assignment of the goodwill, therefore, has to be viewed in the specific context of the composite agreement. In this regard, the appellant has placed reliance on the case of Associated Electronics & Electrical Industries (IT(SS) No. 9/Bang/2000) [decision dated 06.02.2009] for the proposition that since the business itself has not been transferred, it is not possible to say that goodwill of the business has been transferred. The reasoning behind such....
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....g apparatus. In addition, the appellant also continues to effectively act as the contract manufacturer of the Joint Venture for the products under assignment and, hence, continues to the beneficiary of the profits of the business activity. This undisputed fact conclusively demonstrates that it is not a case of loss of source of income but merely a case of modification of the manner of deriving profit from the source that continues to subsist. 3. Issue of Reassignment of Marketing Rights 3.1 The appellant has shown receipt of Rs 20 Crore in lieu of transfer/reassignment of marketing rights of ABIC Ltd, Israel, Bomac Laboratories Ltd., New Zealand and rights of the permitted use of brands owned by Bristol-Myer Squibb Inc.,USA, to the Joint Venture. It is argued by the appellant that this transfer of Marketing Rights has resulted into a loss of the very source of income and, hence, the resultant receipts in lieu of such transfer are capital in nature. 3.2 It is pertinent to note that even in respect of the transfer/assignment of the aforementioned rights, the basis of valuation has not been explained either before the lower authorities or before the Hon'ble ....
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....the position that the appellant on its volition decided to extinguish its own source of income; ix. In the result, therefore, the only inescapable rational conclusion is that the impugned scheme of reorganisation reflects appellant's conscious exercise of free will just to rearrange the different stages of income generation process. What has been forgone by the appellant is not the profit making apparatus per se but just profit making methodology; 3.5 It, thus, emerges as a matter of fact that the impugned scheme is one of voluntary rearrangement of the manner of exploiting the source of income. It is not a case of reassignment or transfer under business compulsion or survival strategy. Rather, the scheme under question is a premeditated commercial stratagem which symbolises appellant's voluntary election as to the manner in which benefits are to be derived from the source that still subsists with the appellant. 3.6 It is respectfully submitted that on the same reasoning of this being an exercise of conscious and premeditated mind, the case laws cited by the Ld AR shall not rescue the appellant's case. This is so because in the cases so relied upon, the o....
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....y establish the motive behind the impugned stratagem, a succinct portrayal of the signalling attributes of the entire scheme is attempted as under: 4.2 The transaction doesn't stand the test of ordinary prudence and human probabilities. Any genuine reassignment of Trademarks/ Goodwill/ Marketing Rights would not be undertaken voluntarily to the detriment of the very existence of the profit making apparatus. And such, the claim of loss of source of income as purported by the appellant doesn't stand the test of prudence. 4.3 The impugned scheme is essentially a case of composite agreement. Any real world transaction of reassignment shall invariably require an itemised valuation of each class of rights being transferred. It is only upon having satisfied with the correctness of valuation that any prudent assignee would agree to pay the consideration so demanded. In absence of specific and differential valuation of distinct items such as Trademarks/Goodwill/Marketing Rights, the very bona fides of the scheme become questionable falling under a strong shadow of colourability. 4.4 Considering the entirety of the transactions and manner in which they have been ex....
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....n additional consideration of Rs. 2 Crores was also due and payable to the assessee by Sarabhai Zydus Animal Health Limited in respect of marketing rights of ABIC products. Accordingly, a sum of Rs. 2 crores was due and payable and the same was received by the assessee during the year. This further consideration of Rs. 2 Crores was due and payable every year for a period of 5 years subject to condition that in the event of agreement between assessee and ABIC is terminated or comes to an end for whatever reasons during the period of 5 years with Sarabhai Zydus Animal Health Limited i.e. the joint venture company shall not be required to make any further payments thereafter except that for the year in which agreement is terminated. Sarabhai Zydus Animal Health Limited shall pay sum equivalent to prorata amount for period during which marketing agreement was in force during that year. The contentions of the Ld. A.R. was that these are capital receipts and, therefore, are not coming under the purview of taxation and thus the Assessing Officer as well as the CIT(A) treating the same as revenue receipt are totally uncalled for. The contentions of the Ld. A.R. was also taken cognisance of....
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....tion with JV. In the present case, the gist of decision of Blue Star and its ratio is applicable as the assessee along with Cadila Healthcare Ltd. has formed joint venture. Cadila Healthcare Ltd.is not third party as projected by the assessee but is a second party to the Joint Venture. Projection of Cadila being third party is on superficial basis. The assessee while submitting its contentions stated that the assessee has suffered significant loss of revenue after the transfer of trademarks and marketing rights appears to be superficial. During the hearing before us as well as during the assessment proceedings and the appellate proceedings before the CIT(A) the assessee at no point of time submitted that the joint venture between the assessee and Cadila Healthcare Limited has totally taken over the trademark assignment as well as assignment of marketing rights exclusively from the assessee. In fact, there are clauses in those assignment agreements which established that the assessee has made business arrangement for the benefit of its manufacturing activities and for the generation of revenue to the joint venture entered between the assessee and Cadila Healthcare Limited. The obser....
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....ed 14-11-2003. The issue thus is repetitive, with no change in the facts being reported; even the Assessing Officer (A.O.) placing reference to the assessment order, including the reasons stated therein, for earlier years, in justification of the impugned disallowance. We therefore, respectfully following the said Orders for the preceding years; the issue arising from year to year, allow the assessee's claim, so that the Order of the Ld. CIT(A) is upheld on this ground." In the present assessment year as well, no distinguishing facts were submitted by the revenue before us. Therefore, we are following the earlier years orders as decided by the Tribunal as facts are identical to the earlier assessment years. Thus, Ground No. 1 of Revenue's appeal is dismissed. 30. As regards to Ground No. 2 of Revenue's appeal relating to festival allowance, Misc. expenses, Telephone expenses, Vehicle expenses, the Ld. DR submitted that the CIT(A) erred in allowing these expenses. 31. The Ld. AR submitted that this issue is covered in favour of the Assessee for A.Y. 1998-99 being ITA No. 1956/Ahd/2001 order dated 29.08.2008 and A.Y. 19992000 being ITA No. 933 & 1313/Ahd/2016 order dated 17.....
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....ion of the rival submissions and the facts and circumstances of the case, we are of the opinion that the Revenue having not brought to our notice any decision contrary to the aforesaid decision of Tribunal in assessee's case, the issue raised by the Revenue in this ground is decided in favour of the Assessee and against the Revenue, after following the order of the Tribunal in assessee's case for Asstt. Year 1996-97 (supra). Revenue's this ground is rejected." The facts in the present assessment year is also identical to these disallowance related to festival allowance under section 43B of the Act. No distinguishing facts were submitted by the Ld. DR in the present assessment year. Hence, festival allowance is properly allowed by the CIT(A). Now as regards to Misc. expenses, Telephone expenses, Vehicle expenses, the Tribunal observed as under: "24. Ground No. 8:- So far as issue involved in ground No. 8 is concerned, the same has been decided by the CIT(Appeals) as per his findings contained in paragraph No. 7.5 of the appellate order, which are in the following terms: "7.5 After hearing the learned counsel for thee appellant and after going through the materia....
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....s case for Asstt. Year 1995-96(supra). Revenue's this ground is rejected." The facts in the present assessment year is also identical to these disallowance related to Misc. expenses, Telephone expenses and Vehicle expenses. No distinguishing facts were submitted by the Ld. DR in the present assessment year. Hence, Misc. expenses, Telephone expenses and Vehicle expenses are properly allowed by the CIT(A). Ground No. 2 of Revenue's appeal is dismissed. 33. As regards to Ground No. 3 of the Revenue's appeal relating to adhoc disallowance of 5% out of selling expenses, the Ld. DR submitted that the CIT(A) erred in allowing these expenses and relied upon the Assessment Order. 34. The Ld. AR submitted that this issue is covered in favour of the Assessee for A.Y. 1995-96 being ITA No. 1086/Ahd/2001 order dated 14.12.2007, A.Y. 1997-98 being ITA No. 1462/Ahd/2001 order dated 30.06.2008 & 1998-99 being ITA No. 1956/Ahd/2001 order dated 29.08.2008. 35. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 1995-96 held as under: "20. The Revenue's ninth ground relates to disallowance in the sum of Rs. 5,93,641/- eff....
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.... We, therefore, find no reason to interfere with his findings and, consequently, his order, which gets upheld as a result of this ground." The facts are identical in the present assessment year as well and the Ld. DR could not controvert the same. Hence, Ground No. 3 of Revenue's appeal is dismissed. 36. As regards to Ground No. 4 of the Revenue's appeal relating to deletion of addition of rent and insurance payment of Packart Press unit without considering the unit was closed and there was no business activities, the Ld. DR relied upon the Assessment Order. 37. The Ld. AR submitted that this issue was set aside in the previous assessment years to the file of the Assessing Officer. The said issue was decided in A.Y. 1996-97 being ITA No. 1462/Ahd/2001 order dated 14.12.2007, A.Y. 1997-98 being ITA No. 1462/Ahd/2001 order dated 30.06.2008 & 1998-99 being ITA No. 1965/Ahd/2001 order dated 29.08.2008. 38. We have heard both the parties and perused all the relevant material available on record. This issue was already decided in A.Y. 1996-97, 1997-98 and 1998-99 and the Tribunal's directions are mentioned hereinabove in respect of A.Y. 1996-97 while deciding Ground No. 4 ....