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Income Tax Appellate Tribunal, -SURAT-BENCH-SURAT
Before: SHRI AMARJIT SINGH & SHRI O.P. MEENA, ACCOUTANT MEMBER
Bayer Vapi Pvt. Ltd. Formerly Bilag Industries v. Addl. CIT – R- Vapi/I.T.A.No.2912/AHD/2015/A.Y. 10-11 1
आयकर अपीलीय अिधकरण,सुरत �यायपीठ, सुरत IN THE INCOME TAX APPELLATE TRIBUNAL-SURAT-BENCH-SURAT BEFORE SHRI AMARJIT SINGH, JUDICIAL MEMBER & SHRI O.P. MEENA, ACCOUTANT MEMBER आ.अ.सं/.I.T.A No.2912/AHD/2015 िनधा�रण वष�/Assessment Year:2010-11 बनाम M/s. Bayer Vapi Private Limited) Addl. CIT Range- (formerly M/s. Bilag Industries Vs. Vapi, Range Vapi Pvt. Ltd.), 306/3,Phase-II, Shivam Commercial Complex GIDC-1, Vapi Gujarat. National Highway No 8 Vapi PAN: AABCB 2100 L अपीलाथ� Appellant ��यथ�/Respondent
Shri A. Gopalakrishnan Aiyer - CA िनधा�रती क� ओर से /Assessee by Shri Prasenjit Singh - CIT(D.R.) राज�व क� ओर से /Revenue by 22.10.2019 सुनवाई क� तारीख/ Date of hearing: 24.10.2019 उ�ोषणा क� तारीख/Pronouncement on आदेश /O R D E R PER O. P. MEENA, AM: 1. This appeal by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)-Valsad (in short “the CIT (A)”) dated 07.08.2015 pertaining to Assessment Year 2010-11, which in turn has arisen from the assessment order passed under section 143 (3) dtd. 24.02.2014 of Income Tax Act,1961 (in short ‘the Act’) by the Additional Commissioner of Income-Tax- Range-Vapi(in short “the AO”).
Ground Nos.1 & 2 are general in nature and do not require adjudication.
Ground No. 3 is against the confirmation of disallowance of depreciation claim of Rs.1,88,45,949/- on intangible assets.
Bayer Vapi Pvt. Ltd. Formerly Bilag Industries v. Addl. CIT – R- Vapi/I.T.A.No.2912/AHD/2015/A.Y. 10-11 2
Briefly stated the facts of the case are that the assessee company had purchased Imidachlorpid business on slump sale basis from Mitsu Industries for Rs.27,50,38,000/- during the year under consideration which inter-alia included land cost at Rs.1,82,05,643/-, building value at Rs.7,50,36,771/-, manufacturing and process know how Rs.16,18,00,600/- , Registration and commercial rights of Rs.1,83,14,986/- and others of Rs.16,80,000/-. As against this the value in books was at Rs.7,19,85,974/- . Therefore, the assessee company was asked to explain the basis for ascribing to each of the assets acquired by it since the value of assets in the books of Mitsu Industries was only Rs.7,19,85,974/-. It was explained that the Mitsu industries is not related party under section 40A(2)(b) of the Act and the assessee has acquired profit earning apparatus from Mitsu Industries Ltd. which cannot be based on book value of tangible assets debited in the books of seller. The assessee company has acquired international product registration as well as domestic registration approval and license and manufacturing and process of know-how, intellectual properties and other intangible assets such as commercial rights, registration and license for which composite consideration has been paid on mutual discussion and consent from both parties which in turn based on so many factors such as market value and tangible and intangible assets acquired from Mitsu Industries Ltd. From the above explanation, the AO observed that the assessee is just rhetoric without giving any cogent reason or explanation as to why business worth Rs.7.19
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crores were purchased for Rs.27.50 crores. The assessee company has repeated repeatedly that most of the payments are for intangible assets of the manufacturing process of expertise and Registration and Commercial rights. A question then arises if the business sold by Mitsu Ltd. has such a good prospect, then why it did sell the business in the first place. Further, the contention of the assessee that Mitsu Ltd. is not a related company under section 40A (2) (b) is also not convincing because until the recent past, both companies had common promoters. Even in the year under assessment, few of the shareholders are common. Neither could the assessee company justified why it paid Rs.27.50 crores for what was essentially just land & building as per the books of Mitsu Ltd. Therefore, depreciation claimed of Rs.1,88,45,949/- on above intangible assets was disallowed and added back to total income which was also confirmed by the DRP.
Being, aggrieved the assessee filed this appeal before the Tribunal. The ld.Counsel for the assessee submitted that similar ground was allowed in favour of the assessee the by this Tribunal for A.Y. 2004-05 [ITA No.2446 & 2584/Ahd/2007 dated 28.06.2018 para 46 to 52 ] and in A.Y. 2005-06 [I.T.A.No. 1486 & 1366/AHD/2010dtd 27.08.2019] (PB-98), further the Departmental appeal in this regard for A.Y. 2004-05 has been dismissed by the Hon’ble Gujarat High Court in Tax Appeal No.166 of 2019 dated 22.04.2019[PB 60 to 66].
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Per contra, Ld. D.R. relied on DRP.
We have heard the rival submissions and perused the material available on record. We find that the same issue arisen in A.Y. 2004-05 wherein this Tribunal in ITA No.2446 & 2584/Ahd/2007 has allowed the appeal of the assessee of which relevant para 115 to 118 are reproduced as under : “115. We have heard the rival submissions and perused the relevant material on record. We find that the assessee company had purchased Imidachlorpid business on slump sale basis from Mitsu Industries for Rs.27,50,38,000/- during the year under consideration. As per the Business Transfer Agreement, the assets following part included: Particulars Book value in Imidacloprid Mitsu Ltd. Business Value 1. Land 56,78,283 1,82,05,643 2. Building 6,38,80,263 7,50,36,771 3. Architects Fees 22,69,000 4. Manufacturing and 16,18,00,600 process Know How 5. Registration and 1,83,14,986 commercial rights. 6. Others 1,58,428 16,80,000 Total 7,19,85,974 27,50,38,000 116. The assessee company was asked to explain the basis for ascribing to each of the assets acquired by it since the value of assets in the books of Mitsu Industries was only Rs. 7,19,85,974. It was explained that the Mitsu industries are not a related party under section 40A(2)(b) of the Act and the assessee has acquired profit earning apparatus from Mitsu Industries Ltd. which cannot be based on book value of tangible assets debited in the books of seller. The assessee company has acquired international product registration as well as domestic registration approval and license and manufacturing and process of know-how, intellectual properties and other intangible assets such as commercial rights, registration and license for which composite consideration has been paid on mutual discussion and consent from both parties which in turn based on so many factors such as market value and tangible and intangible assets acquired from Mitsu Industries Ltd. The assessee company has repeated again and again that most of the payments are for intangible assets of manufacturing process of know-how and Registration and Commercial rights. We further find that Mitsu Ltd. is not related company under section 40A(2)(b). The assessee has acquired the
Bayer Vapi Pvt. Ltd. Formerly Bilag Industries v. Addl. CIT – R- Vapi/I.T.A.No.2912/AHD/2015/A.Y. 10-11 5
Lmidachloropid business of Mitsu Limited as slump sale basis for a total consideration of Rs.27.50 crores as a going concern basis. M/s. Mitsu Industries Ltd. has been carrying on its business from last 15 years and Lmidachloropid was one of the pesticides for which necessary process, technical knowhow, knowledge and idea of business, commercial rights, marketing rights etc. Apart from above, the assessee company also purchased marketing rights of aforesaid products from Mitsu Ltd. at a cost of Rs. 18.34 crores which was capitalized as capital asset in the books of accounts. The seller company M/s. Mitsu Ltd. has also obtained registration, permission for government and concerned authorities and same was transferred to Bilag Industries Pvt. Ltd. pursuant to Business Transfer Agreement (PB-75 to 89). The assessee has acquired the license like CIB registration dtd. 13.08.1999 from Central Insecticides Board, Permission received from Gujarat Pollution Board on 05.01.2004 along with permission from Ministry of Environment and Forest and that Mitsu Ltd. has capacity to manufacture lmidachloropid. The certificate from registration of insecticides dtd. 31.08.1999 u/s. 9(3) of Insecticides Act 1968, which stipulates recipe being chemical composition in respect of lmidachloropid and approval from director plant Protection Quarantine and storage. It is pertinent to note that the assessee company cannot manufacture the lmidachloropid without using technical knowledge and know-how/ license / registration in respect of lmidchloprid products. These products are having associated with their own goodwill. We have perused the relevant clause of agreement of Business Transfer Agreement entered into between the parties. M/s. Mitsu Limited and the assessee company, which is reproduced hereunder: “IMIDACLOPRID Business means the Manufacturing rights, Marketing Rights, other commercial rights, Intellectual properties and Assets of the sellers relating to development, manufacture, registration, use, sale marketing and distribution of the product”. 117. Thus, we are of the view that the lump-sum consideration was for all rights such as manufacturing rights, marketing rights, other commercial rights, intellectual properties and other assets of the seller relating to development, manufacturing process, registration, use, sale marketing and distribution of products apart from tangible assets such as Land, Building and other assets. We further note that M/s. Mitsu Limited was not a related concerns as per the provision of Section 40(A)(2)(b) of the Income-tax Act, 1961 as the point of sales. The learned counsel submitted that assets acquired under slump sale were capitalized in books of account as per generally accepted accounting principles in a slump sale several assets are purchased for a consolidated price and price is paid for the entire business as a whole. Hence, value to individual assets cannot be assigned directly. The valuation of intangible assets and marketing rights have been done in accordance with the Accounting Standard-10 (AS-10) issued by the Institute of Chartered Accountants of India (ICAI) the company has assigned the values to the various assets on a fair basis. The payments made for acquisition of lmidachloropid products business pursuant to transfer of Business Transfer Agreement
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and intangible assets was allocated on the basis of valuation report from independent Valuer M/s. Bansi S. Mehta & Co. who had assigned the value of individual assets in accordance with AS-10. This valuation of items are placed at Paper Book Page No. 105 to 111. We are of the view that depreciation on intangible assets is allowable as per Section 32 of the Act. We also note that that Ahmedabad Tribunal in the case of M/s. Mitsu Ltd. , the seller company, in I.T.A. No. 1672/Ahd/2007 A.Y. 2004-05(PB- 31-70) vide order dated 01.08.2008 has considered the sale of business to the assessee as slump sales and observed that the assessee has transferred machinery and infrastructure including licenses and right to manufacture products for the year 1999 onwards and even on date of sale. This fact is not disputed by the Revenue authorities. The assessee has sold a business which includes the necessary rights and technology. The value of technology and rights are determined the parties to the transaction on commercial consideration and after mutual negotiations. Accordingly, we feel that this transaction is nothing but slump sales exigible to long-term capital gain. Accordingly, this issue of appeal of the assessee is allowed. Thus, it is clear that when the slump sale with consideration of Rs. 27.50 crores as long-term capital gain has been accepted in the case of seller company, then it cannot be said that the assessee company has not paid the consideration as mentioned in Business Transfer Agreement. Once the sale is recognized and transaction has been upheld by the ITAT also then purchases have to be recognized as true. The learned counsel for the assessee also placed reliance in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) held that goodwill is an asset under Explanation 3(b) to section 32(1) and, thus, it is eligible for depreciation. In the case of CIT v. Techno Shares &v. Stok Ltd. [2010] 193 Taxman 248(SC)The Hon`ble Supreme Court held that right of membership to BSE was a ‘business or commercial right’ which gave a non defaulting containing and continuing member a right to access the exchange and to participate therein ns in that sense it was a license or akin to a license in terms of section 32(1)(ii). Such right vested in the exchange only on default /demise in terms of Rules and Bye Laws of the BSE, as they stood at the relevant time. However, it should not be understood to mean that every ‘business or commercial right’ would constitute a license or a franchise in terms of section 32(1)(ii)of the Act. Further reliance is placed in the case of M/s. Trio Elevators Company (India ) Ltd. v. ACIT Circle 8 Ahmedabad [2016] 67 taxmann.com 348 (Ahmedabad –Trib) wherein it was held that admissibility of depreciation of trademark is not contingent upon its registration in the name of the assessee inasmuch as description of intangible assets is Part –B of depreciation schedule describe the same merely of ‘know-how’ ‘patents’ copyright , trademark licenses franchises or any other business or commercial rights of similar nature. Further the Hon`ble Jurisdictional High Court of Gujarat in the case of Pr. CIT v. Swastik Industries [2016] 68 taxmann.com 329 (Gujarat) held that payment of compensation made by the assessee-firm to retiring partner was to be treated as goodwill and , since , goodwill is an asset under Explanation 3 (b) to section 32 (1), assessee`s claim for depreciation on said payment was to be allowed.
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We further observed that the Seller company has sold and transferred various assets under a Business Transfer Agreement for which valuable consideration has been paid by the appellant company. The AO has not given any factual finding as regards her observation that the assessee company could not justify in any logical and convincing way the basis on which such huge payment was made to acquire what the appellant company terms ‘intangible assets’ based on which inference the assessment order has been framed. The assessee company has purchased intangible assets in the form of marketing rights, right to carry on business, right to manufacture and technical of know-how for carrying on Imidacloprid Business. The Seller company is also engaged in manufacturing pesticides for the last 15 years and the assessee company is also manufacturing pesticides for the last 3 years. This very facts means that the seller company was having better experience in terms of marketing of know-how as it was more experienced as compare to assessee who was in the market of pesticides for last 3 years only. Further reliance is placed on the judgement of Hon`ble Delhi High Court in the case of Areva T & D India Ltd. v. DCIT [2012] 20 taxmann.com 29 (Delhi) held that specified intangible assets , viz business claims, business information , business records , contracts , employees and of know-how acquired by assessee under slump sale agreement are in the nature of ‘business or commercial right’ of similar nature specified in section 32(1)(ii) and are accordingly eligible for depreciation. Considering the above facts we are of the view that the assessee company has acquired lmidicaholopid business for total consideration of Rs. 27.50 crores which inter-alia included intangible assets of worth Rs. 18.34 crores on which depreciation has been claimed at Rs. 2,25,14,448 besides marketing rights on which depreciation has been claimed at Rs. of Rs. 2,29,30,000 on which depreciation is very much allowable under section 32(1)(ii) of the Act. In the light of above backdrop, and facts of the case and considering the same in totality, we are inclined to agree with the assessee that the AO and Ld. CIT (A) were not justified is disallowing depreciation claimed by the appellant company to the tune of Rs.2,25,14,448 on intangible assets and Rs. 2,29,30,000 on marketing rights purchased by the assessee company. The AO is, therefore, directed to allow depreciation on intangible assets ns marketing rights as claimed by the assessee. In view of these facts and circumstances, the grounds of appeal no. 16 to 19 of the appeal are, therefore, allowed.” 8. In view of the above, we find that the issue is covered in favour of the assesse by order of this bench as mentioned above, which has also been upheld by the Hon’ble Gujarat High Court in Tax Appeal No.166 of 2019 dated 22.04.2019, therefore respectfully following the decision of
Bayer Vapi Pvt. Ltd. Formerly Bilag Industries v. Addl. CIT – R- Vapi/I.T.A.No.2912/AHD/2015/A.Y. 10-11 8
the Hon’ble High Court the above ground is allowed in favour of the assessee.
Ground No.4 is against confirming the action of the A.O. in reallocating the personal expenses of Rs.1,46,40,623/- foreign travelling expenses of Rs.8,74,176/-, staff welfare expenses of Rs.81,14,448/-, Oil and Petrol expenses of Rs.15,73,169/- and other common expenses of Rs.37,34,274/-between Bilag unit and BEOU in the turnover ratio.
Short facts of above issues are that the assessee company was having two units viz. Bilag and BEOU. BEOU unit is 100% export oriented Unit whereas, Bilag has normal undertaking which also undertaken export. The assessee company has allocated less expenses in BEOU being 100% export oriented unit as the whole profit being earned from this unit is exempted from tax. The assessee company has filed unit wise profit and loss account for the year from which it is noticed that the common expenses which could not be directly identify with any of the unit for the assessee company was allocated on the basis of certain numbers determined. The assessee has debited personal expenses of Rs.10,41,89,943/- out of which Rs.2,27,58,335/- were allocated to BEOU unit which comes to about 17.96%. However, the AO was of the view that the allocation of personal expenses on the above is not justified and sufficient. Proportion of sales of Bilag and BEOU of the total sales of the company is 64.11% and 35.89%
Bayer Vapi Pvt. Ltd. Formerly Bilag Industries v. Addl. CIT – R- Vapi/I.T.A.No.2912/AHD/2015/A.Y. 10-11 9
respectively. The AO therefore, allocated the personal expenses in the ratio of turnover at 35.89% which resulted in disallowance of expenses of Rs.1,46,40,623/-. Similarly the assessee has allocated Rs.3,57,607/- foreign travelling expenses as against foreign travelling expenses of Rs.34,31,632/-. However, the AO has allocated foreign travelling expenses in the turnover ratio of 35.89%, which resulted in the addition of Rs.8,74,176/-. Similarly staff welfare expenses of Rs.2,79,30,321/-were claimed out of which the assessee has allocated Rs.19,11,135/-, whereas the AO adopted figure at Rs.81,14,448/- in the turnover ratio of 35.89%, accordingly, differential amounts of Rs.81,14,448/- was added to total income. With regard to oil and petrol expenses of Rs.49,86,223/- as against which the assessee has allocated 2,16,635/- whereas the AO has allocated the same at the ratio of turnover and made addition of Rs.15,73,169/-. With regard to other common expenses of Rs.8,77,62,912/-, the assessee has allocated at Rs.94,30,163/- whereas the AO has allocated 15% and made addition of Rs.37,34,274/- and thus, total addition of Rs.2,89,36,690/- was made under this head.
Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). The CIT (A) has confirmed the allocation in respect of personal expenses, foreign travelling expenses, staff welfare expenses, Oil and Petrol expenses, and other common expenses.
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Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that in respect of personal expenses, foreign travelling expenses, staff welfare, oil petrol expenses and other common expenses the tribunal has restricted the allocation to 10% and considered as fair in I.T.A.No. 2446&2584/AHD/2007 for the assessment year 2004-05 dated 28.06.2018 and in A.Y. 2005-06 in ITA No.1486 & 1366/Ahd/2010 dated 27.08.2019. However, the Assessee itself has allocated expenses to 17.96% in respect of personal, foreign travel, staff welfare and oil petrol expenses, hence the addition may be deleted. With regard to other common expenses the Assessing Officer may be directed to restrict the allocation to 10% as per finding of the Tribunal in earlier year.
We have heard the rival submissions and perused the relevant material on record. We find that turnover ratio of BEOU is 35.89% as compared to Bilag unit at 64.11%. However, the tribunal in the case of the assessee has restricted the allocation to 10% in assessment year 2004-05 in ITA No.2446 & 2584/Ahd/2007 and in A.Y.2005-06. Therefore, following the consistency in approach, the ratio of allocation applied by the Tribunal is found to be correct. However, the assessee has itself allocated 17.96% in personal expenses, foreign travelling expenses, staff welfare, and oil & petrol expenses, hence, the disallowance made on this account is deleted. With regard to other common expenses allocated @15%, the AO is directed
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to allocate 10% to BEOU, therefore, this issue is partly allowed. In view of these facts and circumstances, this grounds of appeal is partly allowed.
Ground 5 is against the exclusion of interest on others of Rs.33,437/- and liability no longer required to be written back of Rs.41,258/- while granting deduction under section 10B of the Act.
The Assessing Officer noticed that the assessee has credited the other income in form of interest of others of Rs.33,437/-, scrap sales of Rs.2,46,253/- and liabilities no longer required to be written back of Rs.41,258/- to claim the relief u/s.10B of the Act. The Assessing Officer was of the view that these income does not have immediate nexus with the manufacturing activity, therefore same are required to be excluded from the deduction claimed for the purpose of section 10B of the Act.
Being aggrieved, the assessee carried the matter before the ld.CIT(A) wherein it was claimed that the interest was earned on loans given to the employees and liabilities no longer required to be written back were infact the expenses which has been allowed in the previous assessment years and the scrap sale was generated during the manufacturing process, therefore these items have immediate nexus with the manufacturing activities. However, the ld.CIT(A) observed that the scrap sale is allowable has deduction, in the light of decision of Ahmedabad ITAT in the case of Micro Inks Ltd., in ITA No.699/Ahd/2009 dated 15.05.2015, hence the same was allowed, however, the income from
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interest of loans given to employees and liabilities credited to the Profit and Loss Account. Therefore, the ld.CIT(A) found the action of the Assessing Officer as correct.
Being aggrieved, the assessee filed this appeal before this Tribunal. The ld.Counsel submitted that the interest received pertains to loans given to employees and therefore this income has the direct and immediate nexus with the operating activity of the company. Further, the liabilities no longer required were written back mainly pertains to expenses that have been allowed in the previous assessment year. However, the during the current year these expenses are no longer payable and therefore have written back and offered as income. Therefore, since the income has arisen from the normal operative activities of the units, it has been included in the profits eligible have deduction u/s.10B of the Act. The learned counsel for the assessee submitted that Ahmedabad tribunal in the case of Lubrizol Advanced Materials (India) Pvt. Ltd. 42 taxmann.com 263 (Ahmedabad-Trib) wherein it was held that once an income form part of business of undertaking, same would be included in profits of business of undertaking and will be eligible for deduction under section 10B of the Act. It was further submitted that Section 10B is pari materia to section 80HHC of the Act.
Per contra, Ld. D.R. relied on DRP /AO.
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We have heard the rival submissions and perused the relevant material on record. We find that the issue on exclusion of interest income stands covered in favour of the assessee by the decision of tribunal in the case of Lubrizol Advanced Materials (India) Pvt. Ltd. 42 taxmann.com 263 (Ahmedabad-Trib) wherein it was held that once an income form part of business of undertaking, same would be included in profits of business of undertaking and will be eligible for deduction under section 10B of the Act. With regard to liabilities no longer written back, we find that the same pertains to expenses that have been allowed in the previous assessment years as business expenditure, therefore the same represents income from business, hence we are of the considered opinion same is allowable to be included for the purpose of deduction u/s.10B of the Act. In view of these facts, we allow this grounds of appeal in favour of the assessee.
In the result, the appeal of the assessee is partly allowed.
The order pronounced in the open Court on 24.10.2019.
Sd/- Sd/- (AMARJIT SINGH) (O.P.MEENA) (�याियक सद�यतथा/JUDICIAL MEMBER) (लेखा सद�यकेसम� /ACCOUNTANT MEMBER) सुरत/ Surat, �दनांक Dated: 24th October, 2019/S.Gangadhara Rao, Sr.PS Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat