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Income Tax Appellate Tribunal, MUMBAI ‘D’ BENCH, MUMBAI.
Before: Shri B.R. Baskaran (AM) & Shri Narender Kumar Choudhry (JM)
PER BENCH:-
The cross appeals filed by the parties and the cross objections filed by the assessee are directed against the orders passed by Ld CIT(A), NFAC, Delhi and they relate to the assessment years 2015-16 and 2016-17. Since issues urged in these appeals are identical in nature, they were heard
2 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 together and are being disposed of by this common order, for the sake of convenience.
The assessee is a supplier of chemical and other pharmaceutical products.
We shall take up the appeals filed by the assessee for both the years. The only issue contested in both these appeals relate to disallowance of Sales promotion expenses, which has been confirmed by Ld CIT(A).
The Ld A.R submitted that the assessing officer has disallowed claim of sales promotion expenses under the erroneous impression that they have been incurred entirely on providing gifts to Doctors, which is in violation of Regulations issued by Medical council of India. The Ld A.R submitted that the Ld CIT(A) also confirmed the said disallowance. It is the contention of Ld A.R that most of the sales promotion expenses incurred by the assessee are distinct and general expenses relating to sales promotion and not related to the payment of doctors. Hence the Regulations of Medical Council of India would not apply to those type of expenses. The Ld A.R submitted that the assessee could not furnish break up details relating to Sales promotion expenses in both the year before the tax authorities. She submitted that the assessee is now furnishing the details as additional evidences in both the years. The Ld A.R, accordingly, prayed that these additional evidences be admitted in the interest of natural justice and the issue may be decided by considering those additional evidences.
The Ld D.R, however, submitted that these additional evidences have not been examined by assessing officer.
We have heard rival contentions on this issue and perused the record. It is the case of Ld A.R that most of the sales promotion expenses are not hit by the Medical council regulations and hence the allowability of the same
3 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 has to be examined in terms of the provisions of the Act. The assessee has furnished relevant details by way of additional evidences. Since the purpose of assessment is to arrive at correct total income, we are of the view that the correct total income of the assessee for these two years could be computed only, if the additional evidences furnished by the assessee are considered. Accordingly, we admit the additional evidences. As rightly pointed out by Ld D.R, all these additional evidences require examination at the end of AO, meaning thereby, this issue requires fresh examination. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in both the years under consideration and restore the same to the file of the AO for examining it afresh by duly considering the additional evidences furnished/that may be furnished by the assessee in both the years. After providing adequate opportunity of being heard, the AO may take appropriate decision in accordance with the law.
We shall now take up the appeals filed by the revenue. Two identical issues are being agitated by the revenue in both the years. The first issue relates to the disallowance of depreciation on alleged fictitious assets.
This is a recurring issue. The facts are that the assessee purchased A & R business from its sister concern named M/s Merck Ltd in the year relevant to AY 2007-08 for a total consideration of Rs.81.67 crores. From the break-up details of assets purchased, the AO noticed that the assessee has paid a sum of Rs.65.50 crores towards purchase of intangible assets like Trade mark, Brands, Contracts with toll manufacturers, Authorised dealer value chain, Technical knowhow, Employees contracts, Customer Data, ISO certificate and good will. The assessee had also paid a sum of RS.3.18 crores for purchase of other assets. The AO noticed that the transferor M/s Merc Ltd has reduced the fixed assets by a sum of Rs.3.18 crores only. Hence the AO took the view that the assessee did not actually acquire any visible assets and the intangible assets appear to be a matter of perception only. The AO took the view that there was no necessity for the
4 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 assessee to pay any amount towards intangible in excess of the value of Good will. The AO further noticed that the assessee has claimed depreciation on the intangible value of Rs.65.50 crores. Since no visible asset has been transferred by the transferor company upon giving above said amount, the AO took the view that depreciation cannot be allowed. Accordingly, he disallowed depreciation claimed on the above said value of Rs.65.50 crores in AY 2007-08 and the said disallowance are being continued year after year including the two years under consideration. The ld CIT(A), however, deleted the disallowance on the reasoning that the sales of the assessee has increased due to acquisition of A & R business. The revenue is aggrieved.
We notice that the impugned issue of disallowance was examined by the co-ordinate bench in the assessee’s own case in AY 2007-08. The co- ordinate bench noticed that the issue of assigning value to various assets has been examined by the Tribunal in the hands of the Transferor M/s Merck Ltd and the ITAT, vide its order dated 02-08-2013 passed in ITA No.8120/Mum/2011 relating to AY 2007-08), has restored the matter to the file of AO for examining it afresh. Since the issue has been restored to the file of AO in the hands of transferor company, the co-ordinate bench thought it fit to restore this issue for examining it afresh to the file of Ld CIT(A).
The Ld A.R brought to our notice to the decision dated 14-10-2022 passed by another co-ordinate bench in the assessee’s own case in Asst.Year 2011-12 (IT(TP)A No.2056/Mum/2016), wherein also identical issue was considered. Though the Tribunal followed the decision rendered in AY 2007-08 on the identical issue, yet the bench restored the matter to the file of AO.
We heard the parties on this issue and perused the record. We notice that the disallowance of depreciation claimed on the intangible assets made
5 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 in these two years is consequential to the disallowance made originally in AY 2007-08. We notice that the Tribunal has restored the said matter to the file of Ld CIT(A) in AY 2007-08. However, in AY 2011-12, an identical issue has been restored to the file of AO. On a perusal of the order passed by the Tribunal in AY 2007-08, we notice that the Tribunal chose to restore the matter back to the file of tax authorities on the basis of decision taken by the Tribunal in the hands of Transferor Company named M/s Merck Ltd. We notice that, in the hands of the transferor company, the Tribunal has restored the issue to the file of AO. Since the decision taken by the assessing officer in the case of transferor company will have implication in this case, we are of the view it would be desirable to restore this issue to the file of AO, as done by the co-ordinate bench in AY 2011-12. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in both the years and restore the same to the file of AO for examining it afresh by duly considering the decision taken in the hands of transferor company.
The next issue contested by the revenue in both the years relates to the disallowance of depreciation claimed on Good will. The facts relating to this issue are that, during the financial year relevant to AY 2011-12, the assessee had amalgamated its wholly owned subsidiary company named M/s Bangalore Genei (India) P Ltd as per the Scheme of Amalgamation approved by Hon’ble High Court. Pursuant to the amalgamation, the assessee treated the excess of cost of investment over the net asset value of assets amounting to Rs.21.99 crores as good will. The assessee claimed depreciation on the above said amount. The AO disallowed the above said claim in AY 2011-12 and the Tribunal has allowed the claim as per its order, referred supra. The relevant discussions made by the Tribunal in AY 2011- 12 are extracted below:-
“23. During the course of hearing, learned AR submitted that pursuant to the amalgamation, tangible and intangible assets acquired from the amalgamating subsidiary company were revaluated in the books of the assessee. The learned AR further submitted that there was no goodwill in the books of amalgamating subsidiary company and the excess cost of investment over the net value of assets
6 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 acquired upon amalgamation has been debited to the goodwill account of the assessee and depreciation on same was claimed by the assessee during the course of assessment proceedings. Learned AR also submitted that the AO has allowed depreciation on intangible assets acquired by way of amalgamation @25%. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities. 24. We have considered the rival submissions and perused the material available on record. In the present case, the wholly owned subsidiary company of assessee i.e. Bangalore Genei (India) Private Ltd was amalgamated with the assessee in terms of the Scheme of Amalgamation as approved by the Hon'ble jurisdictional High Court vide order dated 16/04/2010, as per provisions of section 391 to 394 and other applicable provisions of the Companies Act, 1965 from the appointed date i.e. 01/04/2010. In accordance with the said scheme, all assets and liabilities of the amalgamating subsidiary company were transferred to and invested with the assessee company with effect from 01/04/2010 and have been recorded at their fair values in accordance with the scheme. As per the assessee, while recording the assets and liabilities upon amalgamation, purchase method of accounting as per Accounting Standard-14 and generally accepted accounting principles in India was followed. While recording the accounting entries upon amalgamation, the inter-company balances were cancelled and the investments of the assessee in shares of the subsidiary company were also cancelled against the assets acquired upon amalgamation. From the perusal of financials of Bangalore Genei (India) Private Ltd, forming part of the paper book from page 102 - 151, we find that the value of fixed assets was at Rs. 3,02,41,601 and intangible assets were at Nil. Pursuant to the amalgamation, the tangible and intangible assets acquired from the amalgamating company were revalued in the books of the assessee and the excess cost of investment over net value of assets, amounting to Rs. 21,99,51,156, was debited to the goodwill account. Accordingly, assessee made a fresh claim for depreciation in respect of goodwill during the course of assessment proceedings. The AO denied the said claim of the assessee by placing reliance upon decision of Hon'ble Supreme Court in Goetze (India) Ltd. (supra). The learned DRP, inter-alia, upheld the conclusion of the AO. 25. As per the assessee, goodwill arose upon amalgamation representing the excess consideration discharged by the assessee company over the net worth of the amalgamating company and thus the same is eligible for depreciation. Reliance has been placed on the addition of Hon'ble Supreme Court in CIT v. Smifs Securities Ltd., 348 ITR 302 (SC). During the course of hearing, assessee placed on record audited accounts of assessee as well as order of Hon'ble jurisdictional High Court approving the scheme of amalgamation. Further, reference was also made to balance sheet of amalgamating subsidiary company as well as other documents forming part of the paper book in support of its claim. From the record it is evident that none of these documents were examined by the lower authorities and assessee's claim was rejected at the threshold by placing reliance upon Hon'ble Supreme Court decision in Goetze (India) Pvt. Ltd. (supra). Vide our interim order dated 02/06/2022, remand report of the AO was sought in
7 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 respect of the documents on which reliance was placed by the assessee in support of its claim of depreciation on goodwill. Further, the assessee was also directed to appear before the AO along with all the documents in support of its claim. The AO vide its remand report dated 07/07/2022, inter-alia, raised doubts on the valuation report submitted by the assessee. The AO also agreed that the opportunity is being given in remand proceedings to verify the case on merits, however, prayed that matter be remanded to the AO to decide the case on merits, as it cannot disallow the goodwill during the remand proceedings. 26. At this stage, it is also relevant to note that assessee in its revised return of income made claim of depreciation on certain assets viz. intangibles acquired upon amalgamation of Bangalore Genei (India) Private Ltd with the assessee. The details of intangible assets are as under:
(i) Trademark Rs. 1,07,74,700 (ii) Technical know-how Rs. 2,55,83,700 (iii) Brands Rs. 46,77,300 (iv) Customers data Rs. 1,70,25,800
As noted above, in the books of Bangalore Genei (India) Private Ltd, the intangible assets were at nil for the year ending 31/03/2010 and the aforesaid intangibles were acquired only upon amalgamation of subsidiary company with the assessee and thereafter same were revalued. We find that the AO vide final assessment order accepted the claim made by the assessee in its revised return of income and granted depreciation @25% on intangible assets. It is only in respect of depreciation claimed on goodwill, the AO did not grant the relief to the assessee. 28. We find that Hon'ble Delhi High Court in Triune Energy Services Private Limited vs DCIT: [2016] 237 Taxmann 230 (Delhi), by referring to Accounting Standard 10, held that consideration paid in excess of value of tangible assets is classifiable as goodwill eligible for depreciation. We further find that the coordinate bench of the Tribunal in Altimetrik India (P) Ltd vs DCIT, [2022] 194 ITD 124 (Bangalore-Trib.) held that consideration paid by the amalgamated company over and above the net assets of the amalgamating company should be considered as goodwill arising on amalgamation. 29. Thus, once the AO has allowed the claim of depreciation on intangible assets acquired by the assessee upon amalgamation of subsidiary company, which were also revalued subsequent to the amalgamation, we are of the considered view that there is no basis to reject the claim of the assessee in respect of depreciation on goodwill. Particularly, when all the intangibles including the goodwill were nil in the books of the amalgamating subsidiary company for the year ending 31/03/2010. During the course of hearing, learned DR placed reliance upon decision of Hon'ble Supreme Court in Techno- Shares and Stocks Ltd vs CIT,
8 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 [2010] 193 Taxmann 248 (SC) and submitted that assessee has to establish that goodwill as licensed/franchise. We find that in the aforesaid decision the Hon'ble Supreme Court was dealing with the issue of depreciation on BSE membership card under section 32(1)(ii) of the Act. Therefore, same is not applicable to the facts of the present case. Before concluding, it is relevant to note that the Hon'ble Supreme Court in Smifs Securities Ltd. (supra) has held that goodwill will fall under the expression 'or any other business or commercial rights of similar nature' and, hence, qualifies for depreciation under section 32(1) of the Act. In the present case, the AO as well as learned DRP did not entertain the claim of the assessee in view of decision of Hon'ble Supreme Court in Goetze (India) Ltd. (supra), however, it is now well settled that there is no bar on the appellate authority to entertain a fresh claim of the assessee, if the relevant fact for deciding such issue are available on record. Further, it is pertinent to note that on one hand in the remand proceedings, the AO for the first time raised doubts about the valuation report, however, on the other hand AO has allowed depreciation on intangible assets @ 25%, which were also acquired by the assessee and were also revalued in the books of the assessee upon amalgamation. Therefore, in view of the above, we find merit in the claim of the assessee and accordingly we direct the AO to grant depreciation on goodwill arising on account of amalgamation of subsidiary company with the assessee. As a result, ground No. 4 raised in assessee's appeal is allowed.”
The decision taken by AO to disallow depreciation claimed on good will is based upon the decision taken by him in AY 2011-12. The Ld CIT(A), however, allowed the claim following certain legal decisions. Hence the revenue is aggrieved.
However, we noticed that the co-ordinate bench has allowed the claim of the assessee in AY 2011-12, i.e., in the year of amalgamation. Accordingly, following the same, we uphold the decision rendered by Ld CIT(A) on this issue.
The assessee has filed cross objections in both the years. The Ld A.R submitted that they are in support of the decisions rendered by Ld CIT(A) in granting reliefs. Accordingly, the cross objections filed by the assessee in both the years do not require adjudication.
9 Merck Specialities Pvt. Ltd. ITA Nos. 3197, 3198, 3260 & 3261/Mum/2022 CO Nos. 18 & 19/Mum/2023 16. In the result, (a) both the appeals of the assessee are treated as allowed for statistical purposes (b) both the cross objections filed by the assessee are dismissed and (c) both the appeals of the revenue are treated as partly allowed for statistical purposes.
Pronounced in the open court on 30/10/2023.
Sd/- Sd/- (NARENDER KUMAR CHOUDHRY) (B.R. BASKARAN) Judicial Member Accountant Member Mumbai; Dated : 30/10/2023
SSL Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(Judicial) 4. PCIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai