THE DCIT, BARODA CIRCLE-1,, BARODA vs. AMBALAL SARABHAI ENTERPRISES LIMITED,, BARODA

PER SUCHITRA KAMBLE, JUDICIAL MEMBER :

These are cross appeals filed by the Revenue and assessee against the order dated 12.03.2015 passed by the CIT(A)-1, Vadodara for the Assessment Year 2001- 02.

ITA No.1762/Ahd/2015 for A.Y. 2001-02 by the Revenue

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition/disallowance made by the AO on account of Buying commission to Teknoserv (Jersey) Ltd. without appreciating the findings of the assessing Officer in the assessment order and also the fact that the

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 2 of 34 buying commission payable abroad is merely a provision and has not been remitted to Teknoserve (Jersey) Ltd.

Relief Claimed in appeal

It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored.”

ITA No.1771/Ahd/2015 for A.Y. 2001-02 by the assessee

Concise Grounds of Appeal

“Appellant craves leave to submit the following concise grounds of appeal before the Hon'ble ITAT:

2.1 Ld. CIT (A) erred in law and on facts in confirming disallowance u/s 43B(b) in respect of contribution to PF paid on or before due date for filing return of income by observing that no evidences of payment made are produced for verification.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 3 of 34 2.2 Ld. CIT (A) erred in law and on facts in not allowing the alternative claim of the appellant to not disallow u/s 43(b) the contribution which is made on or before the due date of filing return of income.

7.1 Ld. CIT (A) erred in law and on facts in arbitrarily holding that out of total consideration received of Rs.25 crores for transfer of veterinary trademarks, consideration of 18 crores is attributable to transfer of goodwill and balance Rs.7 crores is attributable to transfer of veterinary trademarks.

7.2 Ld. CIT (A) erred in law and on facts in holding that consideration of Rs.20 Crore and additional consideration of Rs.2 Crore received for transfer of marketing/distribution rights for 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.”

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 4 of 34 Standard Pharmaceuticals Limited amounting to Rs.1,38,840/- as well as depreciation amounting to Rs.2,36,83,086/-. The Assessing Officer further made disallowance for provisions of Festival allowance, Miscellaneous expenses, PF/FPF not paid within due dates, PF damages, Selling expenses, Salary/Wages and other expenses of Packart Press Unit. The Assessing Officer also made disallowance under Section 40A(9) amounting to Rs.2,40,000/- as well as Voluntary Retirement Scheme which was claimed by the assessee amounting to Rs.5,49,22,119/-, previous year’s expenses, debit balances written off in miscellaneous expenses, foreign travel expenses, disallowance out of donation made, receipt of Rs.73 crores from joint venture Company as well as other income. Thus, the Assessing Officer assessed the total income at Rs.42,97,20,946/-

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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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 6 of 34 date of filing the return or not. There is no need to interfere with the finding of the CIT(A). Ground No. 2 of the assessee’s appeal is dismissed.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 7 of 34 18. Before us, like contentions stood raised by either side, each relying on the Order of the authority below as favourable to it.

In the present assessment year as well the facts are identical to that the earlier assessment years, yet the excess disallowance needs to be verified and the alternative contentions of the assessee as to 40% of the amount paid as damages may be allowed as compensatory. Ground No. 3 is partly allowed.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 8 of 34 16. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this issue is set aside to the file of the Assessing Officer for proper verification and adjudication in A.Y. 1996-97, 1997-98 & 1998-99 as well as in A.Y. 1999-2000. The Tribunal in A.Y. 1996-97 held as under: “49. We have heard the parties, and perused the material on record. 49.1 We find that the Revenue’s case in this matter rests on two limbs. Firstly, that the said Unit is not under operation during the relevant year, so that the relevant business being closed, the claim for its expenditure would not be allowable. Secondly, of the total claim, the expenditure to the extent of Rs. 31.76 lacs does not find a reflection in the assessee’s account, so that in its absence the same has no basis for allowability. We shall look into each of the two limbs separately.

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), depend upon whether the liability in its respect had, in fact, accrued during the relevant year and outstands as it its end, i.e., 31-03-1996, for if so, no adverse inference of the non-booking of the relevant expenditure can be drawn. The nature of the expenditure, other than toward salary and wages, is not clear from the Order of

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 9 of 34 the authorities below. Also, even in respect of the salary and wages, even though their Orders do not clarify as to the identity of the employees, it appears that the same would only be in respect of the ex-employees of the said Unit. The assessee-company has, apparently, settled the dues of its employees, for otherwise the permission from the Labour Commissioner to close its Unit would not be forthcoming. However, as the same stands contested by the Labour Union before the Tribunal, the assessee, as it appears, has provided for the claim for the said liability, even as the same stands not provided in its books, and which fact the assessee’s claims to be immaterial. We do not consider so, though, by itself, that cannot be conclusive of the matter (refer: Pullangode Rubber Produce Co. Ltd. vs. State of Kerala and Others, 91 ITR 18 (SC)). As such, what would need to be seen for the purpose is whether the assessee is contractually obliged to pay the salary/wages to the (ex)employees of its said Unit, employment of whom it claims stands terminated. The same would warrant an examination of the relevant facts and the underlying contractual arrangement. The fact that the matter is sub-judice would not make a liability which has otherwise not accrued, to arise, even as the assessee may have in the facts of a particular case provided for the relevant amount in its books of account, and which is not the case in the present instance. In fact, the assessee has itself, while arguing its case qua ground # 13 of the present appeal, asserted that the liability would stand to be allowed in the year in which it gets crystallized, implying settlement or the resolution of the underlying dispute, referring to the decision by the jurisdictional High Court in the case of Saurashtra Cement & Chemicals Industries Ltd. vs. CIT (supra) for the purpose, so that the fact that the matter is sub-judice would rather suggest a postponement of the allowability to the year of the resolution of the dispute.

49.4 In view of the foregoing, we are of the clear opinion 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.”

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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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 11 of 34 The contention of the Ld. AR that the gratuity and leave encashment are terminal benefits paid by the assesse and are not any segregation of the total compensation paid pursuant to scheme offered by the assesse. The Ld. AR further submitted that Section 35DDA deals with the amortization of expenditure incurred under voluntary retirement scheme. It provides for the deduction of one-fifth of any expenditure by way of payment of any sim to an employee at the time of his voluntary retirement in computing the profits and gains of the business for that previous year and the balance in equal instalments for each of the four immediate succeeding previous years. The CIT(A) held that no copy of any agreement or contract between the assessee and the employees were 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 assesse 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(A) has rightly allowed the deduction of Rs. 1,37,30,530/- under Section 35DDA and confirmed the other aspects. The CIT(A) has given a detailed finding and there is no need to interfere with the same. Hence Ground No. 5 of assessee’s appeal is dismissed.

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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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 13 of 34 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 given the trademark as per the agreement and there was no transfer of trademark relating to goodwill of the business. The agreement itself shows that date of application of registration and the application of 40 trademarks were pending for registration. The Trademarks Act itself recognizes the transfer of unregistered trademark as per Section 39 of the Act. Also even the user of unregistered trademark gets the right in the trademark and can file suit for passing off. The assessee has assigned all of their 46 trademarks in a lumpsum manner for total consideration of Rs.25 crores. These being self-generated and not purchased trademarks, there is no question of showing them in balance sheet. The assessee has not relinquished its right to manufacture. In fact, the assesse has continued to manufacture for JV because once the trademarks are transferred, the assessee cannot sell the products and only the JV can. Thus, what is lost for the assesse is right to market and not right to manufacture. Section 38 of the Trademarks Act envisages only two kinds of assignment. Assignment of trademark with the goodwill of the business concerned or without the goodwill of the business concerned. The agreement between the assessee and JV is to the effect that JV can market, sell and distribute the said trademarked pharmaceuticals preparations. Therefore, very assignment of trademarks would necessarily have to take place “with the goodwill of the business concerned” only. If the assignment of the trademarks is made without the goodwill of the business, then the JV would own the trademarks but could not market, sell and distribute the said trademarked pharmaceuticals preparations and the very purpose of the agreement would be futile. The agreement between assessee and JV is therefore correctly termed along with the goodwill of the business concerned in the goods for which the said trademarks are registered. Such narration in the agreement does not give rise to transfer of goodwill in the business of the assesse taxable u/s 55(2) of the Act as explained in the various decisions. The Ld. AR submitted that what is transferred is

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 14 of 34 only trademark and not goodwill of the business as such as held in decision of Associated Electronics and Electrical Industries (Banglore)P. Ltd. vs. DCIT IT(SS)A No. 9/Bang/2000 order dated 06.02.2009. Goodwill of the business cannot be independently transferred 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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 15 of 34 crores plus additional compensation of Rs.10 crores for marketing rights of ABIC products. As relates to the agreement dated 15.06.2000, the same is related to Rs.20 crores for assignment of marketing rights which were claimed capital receipt not taxable, Rs.25 crores for assignment of trade mark which were claimed capital receipt and not taxable as well as Rs.28 crores for transfer of knowhow which was return of income as Revenue income. Ld. D.R. further submitted that as per agreement dated 19.05.2001 which was for changing due date of payment of additional Rs.2 crores on yearly basis. The Ld. D.R. further submitted that the Assessing Officer sought to tax consideration received against assignment of trademarks for the reason that only 6 out of 46 trademarks are registered and the balance are unregistered. In fact, unregistered trademarks do not give the owner any rights. As regards to tax consideration received against assignment of marketing rights because even after assignment there is no substantial reduction in the turnover of the assessee. The Ld. D.R. submitted that there is nothing to show that 40 trademarks were pending registration and, therefore, the Assessing Officer has only granted those trademarks which were registered. Ld. D.R. further 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 marketing rights. The Ld. DR has given written submissions which are reproduced as follows: “As permitted by this Hon’ble Court, in continuation of the oral submissions made during the course of hearing, the following written submissions in respect of the Ground No. 7 involving the issue of transfer of Trademark, Goodwill of

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 16 of 34 the business and Marketing Rights in respect of certain veterinary products are made as under: Transfer of Trademark/Goodwill/Marketing Rights 1. Background of the Issue

1.1 The issues under dispute trace their origin to the formation of a Joint Venture (JV) by the appellant company in collaboration with Zydus Cadila. It is not disputed such rearrangement is a product of appellant’s own volition and mutual agreement. It is not a case of a compulsion such as termination etc of contract. A summary of the issues involved in Ground No.7 is as under: Treatment Amount Result Of 1st Sr Issue By Remarks No Involved Appeal Appellant Technical Revenue -- No Dispute 1 28 Cr Know-how Receipt Trademark Rs 18 Cr As Assessee as & Goodwill Capital Capital Gains; well as 2 25 Cr of the Receipt Rs 7 Cr as Revenue in business Capital Receipt appeal. Marketing Treated As Assessee is Capital 3 Rights 20 Cr Revenue in appeal. Receipt Receipt

1.3 The business rearrangement has been so that after the formation of the JV, certain products whose trademark/marketing rights were with the appellant stood transferred to the JV. The appellant, however, continues to exercise its right to manufacture the products for the JV and will, accordingly, be entitled to the profits through the JV. 1.4 It is also pertinent to note that the agreement effecting the aforementioned scheme of business rearrangement is a composite one inasmuch as there is no value based delineation of various components being reassigned. For instance, it is not palpable from the agreement as to what objective basis has been adopted for the valuation of trademark vis-à-vis that of marketing rights or, for that matter, valuation of registered trademark vs unregistered trademark and so on. There has been a composite payment of Rs 73 Crore under the transaction and breakup of this sum has no rational basis to justify value determination. 1.5 It is against this backdrop that the substance of the entire scheme deserves to be examined. 2. Transfer of Trademark & Goodwill of the Business:

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 17 of 34 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, it is an admitted position of facts that the impugned transfer of Trademarks was not a consequence of a compulsion but of volition. It is not a case where Trademarks had to be surrendered as a result of a legal contest or settlement. That being the case, the appellant is under a much heavier onus to justify the valuation and tax treatment of the amount received in lieu of transfer of the Trademarks. 2.4 On a specific note, since the appellant has failed to put forward any basis of valuation at all, it goes without saying that it has also failed to show as to whether and how registered and unregistered Trademarks were differently valued. Accordingly, the appellant has also not been able to justify as to why the transferee JV has chosen not to distinguish between registered and unregistered trademarks while determining the consideration to be paid in lieu thereof. Notwithstanding that the Trademarks are being claimed to be self-generated assets, specific valuation to determine their price is a sine qua non for any genuine transfer. 2.5 The second aspect is the transfer of goodwill of the business and right to manufacture along with the Trademarks. The relevant clause of the agreement on assignment of trademark dated 15/06/2000 reads as under: “….. AND WHEREAS the Assignee is a 50-50 Joint Venture Company established by the Assignor and Cadila Healthcare Limited for the purpose of engaging in the marketing, selling and distribution of various veterinary pharmaceutical preparations and desires to acquire the said Trade Marks of the

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 18 of 34 Assignor along with the goodwill of the business concerned in the goods for which the said Trade Marks are registered and/or being used by the Assignor..” 2.6 As can be seen, there is a specific and unambiguous clause relating to the transfer of goodwill of the business also along with the Trademarks. In. fact, during the course of hearing, Ld AR himself had fairly pointed out that the relevant statute viz Trademarks Act also has an express provision to the effect that assignment of Trademarks is possible in two ways – with or without Goodwill which further supports that assignment of trademark along with goodwill of the business has been done in the present case. 2.7 The argument of the Ld AR that goodwill could not have been assigned without transferring the entire business is 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 contention is that goodwill cannot be transferred without the transfer of the entire business itself. This generalisation of the appellant is contrary to the facts of the case. It is submitted that appellant’s own terms of agreement (supra), the Trademark has been assigned along with the goodwill of the business concerned. On these facts, it is respectfully submitted that the ratio laid down in case cited by the appellant will not be applicable in the present case because the terms of agreement in the cited case are materially different from those in the impugned agreement. In the cited case the terms of clause were: Relating to and in trademark ‘sharp’ In the present case, however, the unambiguous terms used are: “….Trade Marks of the Assignor along with the goodwill of the business concerned...”

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 19 of 34 This is a material distinction inasmuch as the nature of goodwill under transfer is manifestly different in the two instances. Therefore, the ratio of the decision cited by the Ld AR will not be applicable to the special factual and circumstantial matrix of the present case. 2.9 Ld CIT(A) has dealt with this issue elaborately in Para 15.8 to 15.11 (Page 86 to 91) of his order. Revenue supports the Ld CIT(A)’s reasoning in principle to the limited extent of rationally bifurcating the composite payment into its logical ingredients. In absence of anything to the contrary presented by the appellant, Ld CIT(A)’s action of bifurcation and allocation is an exercise based on objective reasoning. 2.10 At the same time, however, it is submitted that the Ld CIT(A) ought to have treated the entire sum of Rs 25 Crore as revenue receipt in light of the preceding submissions rather than treating Rs 18 Crore out of Rs 25 Crore, as capital gains. On this limited point, the Revenue is challenging the action of the Ld CIT(A) in the present appeal. It is clear that the entire agreement is composite in nature and the bifurcation of the consideration of Rs 73 Crore has been arbitrarily done by the appellant. Therefore, the entire receipts are required to be treated as revenue in nature since they represent a sum paid for compensating the appellant for the profits forgone and not loss of source of profit. It is an admitted fact that the appellant holds 50% stake in the Joint Venture and as such continues to hold a stake in the profit generating 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 Bench. 3.3 Without prejudice to and in addition to the above, as regards the character of income, it is necessary to appreciate that in this composite scheme of reassignment of rights, what essentially has happened is a mere modification of the income generating apparatus and not the total loss thereof. The income generating environment consists of two major elements:

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 20 of 34 i. Source of Income ii. Manner of Exploitation of the Source It is trite law that matters pertaining to the very existence of the source of income fall in the capital field. At the same time, however, this is also settled law that as long as the source is intact and only the manner of its exploitation is altered or modified, the advantages arising therefrom shall be in the revenue field. 3.4 Against this backdrop, if one examines the facts of the case, the following picture emerges as a matter of fact: i. Before the impugned reassignment, the entire income generating process was within the exclusive domain of the appellant;

ii. The appellant held both the manufacturing and marketing rights in a seamless chain of production and sale;

iii. After the impugned reassignment, the appellant parted with just the marketing and manufacturing rights without extinguishing its inherent right to manufacture, albeit on behalf of the JV;

iv. Thus, what was a single seamless process has now been rearranged in two distinct yet integral steps whereby manufacturing is done by the appellant and marketing by the Joint Venture;

v. The appellant is, therefore, very much a role player in the entire process by continuing to be the manufacturer/purchaser of the products on behalf of the JV;

vi. It is not at all the case of the appellant that as a consequence of the impugned reassignment, the JV has pushed the appellant out of business resulting into the destruction of the profit making apparatus;

vii. Even otherwise, such an argument will anyways not be available to the appellant since the entire scheme is appellant’s own well-thought-out and voluntary venture;

viii. The very fact that this entire rearrangement is a voluntary exercise, leaves no doubt that the appellant has undertaken this scheme in the furtherance of its business interests. In such case,

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 21 of 34 it is counter-logical for the appellant to canvass 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 other party had terminated asssessee’s dominion over the profit making apparatus and, hence, the receipts in lieu of such termination was claimed to be capital receipt. In contrast, the present case involves a voluntary assignment of the rights to a third party and it is the third party that has made the impugned payment to the appellant in order to compensate it for the loss of profits. It is, thus, not even nearly a case where the assessee has been compensated for termination of contract etc.by the owners of the rights. 3.7 the compensatory payment has been made by the Joint Venture of the appellant and not by ABIC Ltd, Israel, Bomac Laboratories Ltd., New Zealand and Bristol-Myer Squibb Inc., USA, who were the actual right owners. This finding of fact is material not just to distinguish the case laws cited by the appellant but also to conclusively establish that the payments received are not in the nature of capital receipts coming from the owners of the rights. Once this position of facts is admitted, the question of compensation for loss of source of income shall not arise. 3.8 Ld AR has attempted to distinguish the decision of Blue Star Limited Vs DCIT 13 SOT 25 (Mum), stating that in that case there was termination of agency whereas in the present case there is no such termination of agency. It is respectfully submitted that this contention actually goes to strengthen Revenue’s case. In Blue Star case (supra), despite there being a case of termination of agency, the receipts were treated to be revenue in nature by the

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 22 of 34 Hon’ble Court. By contrast, in the present case, there is a mere rearrangement of transactions by appellant’s own design and not even termination of any kind by the actual owners of the rights. Therefore, by simple reasoning, this is a much better case for treating the receipts as revenue in character. The sum and substance of Revenue’s case is that the appellant has, on paper, forgone just the ‘kind of ‘income’ (and not the source) for which the appellant has been compensated at once. In support of this proposition, Revenue also seeks to place reliance on the findings recorded by the Ld CIT(A) in Para 15.12 to 15.24 of his order. 4. Conclusion : Substance Over Form 4.1 It may be noted that, these being civil and quasi-judicial proceedings, even as it is not incumbent upon Revenue to conclusively 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 executed, it emerges as an objective inference that the scheme has been hatched with a view to evading tax in the hands of not only the transferor but also the transferee. The theory of ‘loss of the profit making apparatus’ is attractive as it holds twin advantages - on one hand the transferor payee (the appellant) doesn’t suffer any taxation treating the same as capital receipt and on the other hand, the transferee payer (the joint Venture) gets to claim depreciation on the sum so paid in lieu of the reassignment. 4.5 A holistic examination of the nature of the scheme and the motive behind it readily betrays the real considerations underlying the apparent. It is respectfully submitted that facts and circumstances of the present case crave for invocation of the doctrine of substance over form so as to distil the real from the apparent. 5. In view of the facts & circumstances of the present case and the position of law as brought out in this submission, it is clear that the entire sum

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 23 of 34 of Rs 73 Crore (and not just Rs 28 Cr offered suo moto by the appellant) received by the appellant in lieu of the transfer of the technical know-how, trademarks and goodwill of the bushiness concerned and marketing rights of certain veterinary products, is liable to be treated as revenue in character. It is prayed before the Hon’ble Bench that these submissions may kindly be taken on record and be considered while adjudicating upon the appeals please.”

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 24 of 34 Limited cannot be termed that the assessee itself is involved after the assignment of trademarks and marketing rights to the joint venture company. It is correct to say that the joint venture company always has separate legal entity as per Indian Law. It is an admitted fact that the assessee is not involved in sale and purchase of trademarks. The assessee has self established the trademark as per their contentions, but from the perusal of records it can be seen that the assessee in certain trademark as well as marketing rights has taken the same from M/s ABIC, Israel, M/s. Bomac Laboratories Limited, New Zealand as well as Brand owned by Bristol-Myers Squibb Inc., USA. Thus, the contentions of the assessee that the trademarks were self established and there is no expenses incurred by the assessee, appears to be not correct in totality. From the perusal of the assignment agreement related to trademarks and marketing rights as well as the understanding between the joint venture and the assessee, it can be seen that though as per the agreement, the consideration was paid to the assessee, the assessee retains the right of manufacturing the products. The assessee is not having any right over the trademark as well as marketing the product. But the joint venture has not clearly set out that the assessee will totally bequeath its right relating to marketing operations as well as relating to trademarks. In the taxation parlance capital receipts are the income generated from investments, financial activities and business and it decreases or increases the value of liability. The assessee’s source of income was not solely depended upon the trademarks or the marketing rights but overall the generation of revenue from the operation of veterinary and human pharmaceutical products effectively establishing in the market in its own name and identity as well as manufacturing the same and marketing in its own name. The assessee fails to establish that the element of revenue generation does not come in the picture as contemplated by the Tax Authorities. The assessee submitted that the decision of Blue Star is completely different as the joint venture company formed by Blue Star and HP was for manufacture and marketing of the products and HP paid Blue Star to avoid competition 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 assesse 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

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 25 of 34 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 observation of the CIT(A) appears to be correct and thus there is no need to interfere with the same. As relates to the case laws submitted by the assessee, the same are harping factual centric transfer of trade mark/assignment of trademark and in many of the cases there was no peculiarity of joint venture coming in the picture wherein the assessee and the other parties are involved. The joint venture though shown as separate legal entity has not defined the separate operations from the activities of the assessee and it has participated in the activities of the assessee which was carried out earlier. Therefore, ground no.7 of assessee’s appeal is dismissed.

“5. The second ground of the Revenue’s appeal was also claimed by the assessee to be covered in its favour by the order of the Tribunal in its case for A.Y. 1990-91 (supra) (refer para # 16) as well as that for A.Y. 1991-92 (in ITA No. 1988/Ahd/1999 and 1869/Ahd/1999) dated 16-09-2005 (refer para # 10 and 12); reference to the relevant paragraphs of which stood also made by him

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 26 of 34 while arguing the assessee’s case on the said ground. The Ld. D.R. was again unable to show any difference in the facts of the case from that of the years for which the assessee’s claim stood accepted by the Tribunal. We find that the disallowance of Rs. 6,45,895/- stood effected in respect of buying commission allowed to M/s Teknoservy (Jersey) Ltd. in the assessment for A.Y. 1990-91. The Tribunal following its earlier order for A.Y. 1989-90 dated 18-11-2003 allowed the assessee’s claim, observing no change in the facts from the preceding year, i.e. AY 1984-85, for which the assessee’s case stood upheld by the Tribunal vide its Order in Appeal No. ITA 2392/Ahd/1990 and ITA No. 2230/Ahd/1990 dated 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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 27 of 34 “9. Ground No. 3:- So far as issue involved in ground No. 3 is concerned, the same has been decided by the CIT(appeals) as per his findings contained in paragraph No. 6.2. of the appellate order, which are in the following terms:-

“6.2 After hearing the appellant’s counsel and on verification it is found that the addition made on account of similar disallowance has been deleted by me in the appellant’s own case for the assessment year 1996-97 in Appeal No. CAB/I-127/98-99 and, therefore, following the said order the addition of Rs. 5,56,982/- on account of disallowance of Festival Allowance is deleted and the appellant gets relief of Rs. 5,56,982/- ”.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 28 of 34

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 material on record, I find considerable force in the appellant’s arguments and after taking into consideration the Tribunal decisions relied upon by the appellant referred to above I restrict the disallowance to 5% of miscellaneous expenses of Rs. 45,38,660/- amounting to Rs. 2,26,933/- as done in earlier years and delete the disallowance of Rs. 2,81,435/- made on adhoc basis out of Rs. 5,08,368/-. Thus the appellant gets relief of Rs. 2,81,435/-. As regards the disallowance out of telephone and vehicle expense, the same are deleted relying on the above mentioned decisions of Hon’ble ITAT, Ahmedabad.”

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 29 of 34 in ITA No. 1461/Ahd/2001 for Asstt. Year 1996-97(Revenue’s appeal), dated 14/12/2007, wherein the Tribunal has decided the issue in assesse’s favour as per its findings contained in paragraph No. 42, which read as under:

“42. We have heard the parties, and perused the material on record. The A.O. has, we find, adopted a global approach, in the matter and not brought about the instances where the assesse was unable to substantiate its claim of the relevant expenditure being incurred only and exclusively for business purposes. No presumption, it is trite, can hold, and it is only on a determination of the discrepancies in the assessee’s claim can he proceed to estimate the same by applying a percentage that he considers justified, also delineating the reason for the same, so that the appellate authority would, while adjudicating on quantum, i.e., where required to do so, be aware of the same, and consider it on merits. Under the circumstances, we find no infirmity in the Order of the Ld. CIT(A), and uphold the same on this ground.”

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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 30 of 34

i) Gifts expenses 1,74,031 ii) Entertainment expenses 7,257 iii) Conference expenses 6,26,648 iv) Exhibition expenses 1,31,043 v) Other sales promotion expenses 2,54,802 vi) Expenses on deals 9,64,512 vii) Liaison work expenses 8,09,916 29,68,209

As the assessee gave only the broad details in respect of these expenses, but not the complete details, the A.O. inferred an element of non-business expenditure therein, which he estimated by applying a rate of 5% of the total expenditure. Before the Ld. CIT(A) the assesse explained the nature of each of the stated expenditure along with the modus operandi and the manner of its incurring, pleading that the same to be only genuine business expenditure, so that no part thereof merits to be disallowed, and that the A.O. had only adopted a summary approach in the matter and, accordingly, stood allowed relief by it. Aggrieved, the Revenue is in appeal.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 31 of 34

“16.3 I have considered the above referred submissions of the appellant and I am of the view that the entire selling expenses referred to above amounting to Rs. 29,68,209/- are incurred wholly and exclusively for the purposes of the business and, therefore, are of allowable nature. Moreover, the Assessing Officer has also not any adverse cogent material on record to prove that some of these expenses are of disallowable nature. On the other hand, the appellant itself has disallowed the expenses wherever the same were of disallowable nature. In view of this fact, hold that the ad hoc disallowance of 5% out of the said selling expenses amounting to Rs. 5,93,641/- is not justified and the same stands deleted.”

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.

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 32 of 34

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 33 of 34 assessment years by the Tribunal as well. Hence, the CIT(A) has rightly allowed the previous period expenses. As regards to foreign travel expenses, the assessee placed on record all the details that the expenses were incurred for business purpose only and the same evidence was before the Assessing Officer. Thus, the CIT(A) has rightly allowed foreign travel expenses. Therefore, Ground No. 5 of Revenue’s appeal is dismissed.

Order pronounced in the open Court on this 25th day of May, 2022.

Sd/- Sd/- (WASEEM AHMED) (SUCHITRA KAMBLE) Accountant Member Judicial Member Ahmedabad, the 25th day of May, 2022 PBN/*

Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A)

ITA Nos.1762 & 1771/Ahd/2015 A.Y. 2001-02 Page 34 of 34 (5) Departmental Representative (6) Guard File By order UE COPY

Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad