DCIT10(3)(2), MUMBAI vs. PARLE PRODUCTS LTD, MUMBAI

Date of Hearing – 14.05.2019 Date of Order – 09.08.2019 2 Parle Products Ltd. O R D E R PER SAKTIJIT DEY. J.M.

Captioned cross appeals arise out of order dated 29th December 2017, passed by the learned Commissioner of Income Tax (Appeals)– 17, Mumbai, pertaining to the assessment year 1997–98.

./2018 Revenue’s Appeal

3. In ground no.1, the Revenue has challenged the deletion of addition of ` 8,78,18,200, made by the Assessing Officer on account of suppression of production of biscuits in Mumbai Unit, resulting in suppression of sales.

3 Parle Products Ltd. on 28th November 1997, declaring total income of ` 35,32,52,912. During the assessment proceedings, the Assessing Officer after calling for various information and materials from the assessee and verifying them, found that the normal yield of biscuits as per the standard formula is 92.59%. Further, assessee’s CMUs have given average yield of 90.26%. Whereas, the assessee has shown the yield of biscuits at its own unit at Mumbai @ 82.92%. Thus, the Assessing Officer was of the view that the yield shown by the assessee is comparatively lower than the average yield of CMUs. Thus, he concluded that the assessee has suppressed the production of biscuits which resulted in suppression of sales. Accordingly, considering the average yield of CMUs @ 90.26% as the benchmark, the Assessing Officer worked out the suppression of sales due to suppression in production of biscuits at Mumbai Unit at ` 8,78,18,200, and added back to the income of the assessee. The assessee challenged the aforesaid addition before the first appellate authority.

4 Parle Products Ltd.

“51. We have heard rival contentions and perused the material available on record. On a perusal of the order of the Departmental Authorities as well as factual aspect of the issue, it is very much clear that the issue in dispute is purely a factual one and has to be decided after

5 Parle Products Ltd. considering the facts brought on record. As could be seen, the Assessing Officer inferred suppression of sales by the assessee primarily taking into account the percentage of yield of biscuits of the assessee compared to the percentage of yield of the contract manufacturing units. The allegation of the Assessing Officer is, as per the tax audit report the percentage of yield works out to 92.55%, whereas, as per the statement and revised statement showing consumption of different raw material and manufacture furnished by the assessee, the yield works out to 84%. He has also referred to the information obtained from contract manufacturing units to conclude that the average yield of contract manufacturing units work out to 91.55%. In this context, the Assessing Officer has also referred to the standard formula applicable and the physical enquiry conducted by him at the factory premises, wherein, it was found that the manufacturing of products at Mumbai unit is through sophisticated machinery. In the course of assessment proceedings, the assessee has explained comparative lesser yield qua contract manufacturing units due to the following reasons:– i) Variety of biscuits manufactured at Mumbai unit compared to little variety of biscuits manufactured in contract manufacturing units; ii) In case of contract manufacturing units, due to similar size of production and type of machinery used biscuit fall on the belt and tray which are manually picked up and sorted and identified for re–use or waste. Whereas, in case of Mumbai unit production being faster it is difficult to have such control and also costs for employing labour to pick and sort out biscuit fallen on the belt and tray is much higher; iii) Due to different products lines at Mumbai unit, the average give away is much higher as compared to contract manufacturing units; iv) Mumbai unit has a much higher production capacity as compared to contract manufacturing

6 Parle Products Ltd. units and due to sheer volume wastages are higher in Mumbai unit; v) Since, the contract manufacturing units are receiving processing charges which in turn is directly proportionate to production they exercise a better control over the labour, machine and the processing methods; vi) Mumbai unit has a trade union and employees being of permanent nature there is always labour problem. Whereas, contract manufacturing units have small work force, hence, were able to supervise efficiently; vii) The assessee being the mother unit effort is put on new formulas and research and development; viii) Part of biscuit produced are consumed by the employees, therefore, cannot be reflected in the accounts; and ix) Waste before production takes place on account of wheat flour remaining in jute bags, grinding loss sweepage, etc., compared to the loss suffered by contract manufacturing units.

7 Parle Products Ltd. proceedings, it is a fact that the quantity of coco vita oil has been shown at 1059 MTs instead of 1860 MTs shown in the audit report. However, in the revised statement, the quantity of coco vita oil has been shown at the correct figure of 1859 MTs. Therefore, the assessee’s explanation that the figure of 1059 MTs shown in the original statement was due to a mistake is believable. As far as the allegation of the Assessing Officer that the raw material “others” were not shown in the audit report, we are of the view that non–mentioning of the said item in the Annexure to the audit report may be for the reason that as per Form no.3CD, only primary raw materials are required to be shown. Therefore, non–mentioning of raw material “others” in the Annexure to the audit report cannot be considered to be very serious lapse so as to infer suppression of sales and unreliability of books of account. It is a matter of record that the goods produced by the assessee are excisable goods and subject to scrutiny and regulatory measures of Central Excise authorities. It is also a fact on record that the assessee has maintained all Central Excise registers with regard to consumption of raw materials, production of biscuits and confectionary which have been verified by the Central Excise authorities periodically and the authenticity of the entries made in the said registers have not been questioned by them. It is also a fact on record that the Central Excise registers were produced before the Assessing Officer as well as the learned Commissioner (Appeals).

8 Parle Products Ltd. materials and production filed by the assessee in the course of assessment proceedings as well as the information obtained from contract manufacturing units. Further, the Assessing Officer has worked out the yield by applying the standard formula as mentioned by him in the assessment order. It is relevant to observe, in the impugned assessment year, the dispute is with regard to the manufacture of finished products in assessee’s own unit at Mumbai. In the preceding assessment year, while dealing with similar addition made by the Assessing Officer, the Tribunal in assessee’s own case in ITA no.5320/Mum./2006 and other dated 31st August 2010, held that no addition by applying the standard formula can be made. Facts are no different in the impugned assessment year as well. The Assessing Officer has not found a single instance of sale made by the assessee outside the books. At least, no adverse material to indicate out of book sales has been brought on record by the Assessing Officer. In these circumstances, making addition on estimate basis by rejecting the books of account in the absence of any adverse material brought on record cannot stand legal scrutiny. It is also a fact on record that as per the information obtained from the contract manufacturing units, the yield varies between 87% to 100%. Therefore, average yield cannot be standardized to a particular percentage. Moreover, the yield of Mumbai unit for preceding assessment years has been shown by the assessee as under:–

A.Y. Percentage 1992–93 83.11% 1993–94 83.32% 1994–95 82.27% 1995–96 81.65%

9 Parle Products Ltd. suppression of sale is not in accordance with law. Therefore, even a part of addition made by the Assessing Officer cannot be sustained. Accordingly, we delete the addition made by the Assessing Officer fully. Ground no.8 of the Department is dismissed and grounds no.4 & 5 raised by the assessee are allowed.”

suppressed sales at ` 6.33 crore and added back to the income of the assessee. While deciding assessee’s appeal, learned Commissioner (Appeals) followed the decision of the Tribunal in assessee’s own case for the assessment year 1996–97 and deleted the addition made by the Assessing Officer.

11 Parle Products Ltd. decision deleted the addition. Facts being identical, respectfully following the decisions of the Tribunal, as referred to above, we uphold the order of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.

decided in favour of the assessee by the Tribunal in assessment year 1996–97.

find any infirmity in the decision of learned Commissioner (Appeals) on the issue. Accordingly, ground raised is dismissed.

14 Parle Products Ltd. fee, etc., the assessee has actually transferred the goodwill of the business. Thus, referring to the provisions of section 45 r/w section 55(2) of the Act, the Assessing Officer treated the amount of ` 5,09,97,000, as capital gain and added back to the income of the assessee. The assessee challenged the aforesaid addition before the first appellate authority.

claimed to be towards trademark and non–compete fee, however, in reality, it was towards goodwill of the business since the entire business relating to Oral Care was transferred by the assessee. Therefore, when nothing relating to the said business remains with the assessee, the payment received has to be attributed towards goodwill.

i) GuzdarKajora Coal Mines Ltd. v/s cit, [2972] 85 ITR 599 (SC); ii) S.C. Cambatta& Co. Pvt. Ltd. v/s Commissioner of Excess Profits Tax, [1961] 41 ITR 500 (SC); and iii) Desu Venkata Subba Rao v/s WTO, [1983] 6 ITD 341 (Hyd.).

regard, the assessee also received certain consideration towards non– compete fee. He submitted, in the assessment completed for the very same assessment year in case of Parle Biscuits Pvt. Ltd., the Assessing Officer treated the amount received towards trademark and non– compete fee as revenue receipt. However, learned Commissioner (Appeals) deleted the addition by accepting assessee’s claim that the amount received is capital in nature. He submitted, the aforesaid decision of the first appellate authority was accepted by the Department as they did not raise the issue in appeal filed before the Tribunal. Thus, he submitted, the Department cannot take a different view in case of the present assessee. Without prejudice, the learned Authorised Representative taking us through the agreement submitted, the terms of the agreement would make it clear that the amount in dispute was received by the assessee towards trademark and non–compete fee, hence, cannot be treated as goodwill. He submitted, since the assessee lost its source of income while transferring oral care business, by negative covenant, the amount received is a capital receipt, hence, not taxable. Further, he submitted, income from transfer of trademark and non–compete fee cannot be treated as goodwill as they are distinct and different. Contesting the observations of the Assessing Officer and the contention of the learned Departmental Representative that trademark and non–compete fee are 17 Parle Products Ltd. part of goodwill. The learned Authorised Representative submitted, had it been the case, there was no need for the legislature to amend the provision of section 55(2)(a) of the Act by specifically including trademark, brand name, right to manufacture, produce or carry on business in the definition of cost of acquisition. He submitted, the aforesaid amendment clearly indicates that trademark, non–compete fee, etc., were never considered to be part of goodwill. That being the case, since there is no cost of acquisition of trade mark which is self– generated and also in respect of non–compete fee, the computation mechanism provided under section 48 of the Act would fail. Hence, capital gain cannot be computed in the absence of cost of acquisition. Thus, he submitted, the addition made cannot be sustained under any circumstances. Further, he submitted, while deciding identical issue in case of assessee’s subsidiary Parle Biscuits Pvt. Ltd., learned Commissioner (Appeals) has deleted the addition which was accepted by the Department. Since, assessee’s case stands on the same footing, learned Commissioner (Appeals)’s decision on the issue has to be upheld. In support of such contention, he relied upon the following decisions:– i) Voltas Ltd. v/s DCIT, [1998] 64 ITR 233 (Mum.); ii) Kwality Biscuits Pvt. Ltd. v/s ACIT, [2012] 19 taxmann.com 106 (Bang.)(TM); and 18 Parle Products Ltd. iii) CIT v/s Fernhill Laboratories and Industrial Establishment, [2013] 33 taxmann.com 533 (Bom.);

19 Parle Products Ltd. received towards trademark and non–compete fee as part of goodwill has subjected it to capital gain tax. Therefore, the issue which requires consideration is, whether the amount received by the assessee towards trademark and non–compete fee can be treated as goodwill. On going through the terms of the agreement placed in the paper book, it is noticed that it is very specifically mentioned that the amount received by the assessee is towards trademark and non– compete fee. That being the case, the conclusion drawn by the Assessing Officer that they are in the nature of goodwill is unsustainable. Undisputedly, the Assessing Officer himself has treated the amount received by the assessee towards trademark and non– compete fee to be towards sale of capital asset viz. goodwill and resorting to the provisions of section 55(2)(a) of the Act has held that the cost of acquisition of the asset has to be taken as nil for the purpose of computing capital gain. However, on reading of section 55(2)(a) of the Act, it becomes clear that goodwill as a capital asset is distinct and separate from trademark, brand name or any other right to carry on any business. This is evident from the amendment brought to section 55(2)(a) of the Act inserting trademark, brand name, right to carry on any business, etc. Thus, from the amendments brought to section 55(2)(a) of the Act, it becomes clear that the legislature never intended that the expression goodwill also includes trademark, brand

20 Parle Products Ltd. name, non–compete fee, etc. Further, the aforesaid amendment made to section 55(2)(a) of the Act by including trademark, brand name, etc., are not applicable to the impugned assessment year. Therefore, the ratio laid down in the decision of the Hon'ble Supreme Court in B.C. Srinivasa Setty (supra) would apply to the facts of the present case. Even, the amount received by the assessee towards trademark, non–compete fee, etc., cannot be treated as business receipt since section 28(va) of the Act was inserted to the statute by Finance Act, 2002, w.e.f. 1st April 2003. In fact, in case of Guffic Chem Pvt. Ltd. (supra), the Hon'ble Supreme Court has held that the payment received towards non–compete fee under a negative covenant is to be treated as capital receipt till the assessment year 2003–04 wherein after section28(va) of the Act came to the statute. In other decisions cited by the learned Authorised Representative it has been held that the amendment brought to section 55(2)(a) of the Act by including the term “trademark”, “brand name”, “right to carry on business”, etc., would apply prospectively from the assessment year 2002–03. This view has been expressed by the Tribunal in case of Quality Biscuits Ltd. (supra). The Hon'ble Jurisdictional High Court in Fernhill Laboratories and Industrial Establishment (supra), has held that sale of self-generated trademark is not chargeable to capital gain tax prior to 1st April 2002. It is further relevant to observe, while deciding

21 Parle Products Ltd. identical issue in case of Parle Biscuits Pvt. Ltd. for the very same assessment year, learned Commissioner (Appeals), vide order dated 30th March 2015, has held that the amount received towards non– compete fee and trade mark cannot be treated as income either under section 28(va) of the Act or subjected to capital gain tax. Pertinently, the Revenue has accepted the aforesaid decision of learned Commissioner (Appeals). Thus, on overall consideration of facts and material on record, we are of the view that the amount received by the assessee towards trademark and non–compete fee being a capital receipt is not taxable. Therefore, the decision of learned Commissioner (Appeals) on the issue is sustained, though, on the basis of our independent reasoning. Ground raised is dismissed. ./2018 Assessee’s Appeal

assessee unacceptable, he added back the amount of ` 1.24 crore towards suppression of sale of biscuits and` 21,51,345, towards suppression of sales in confectionery.

the assessee. Though, the assessee has tried to explain the difference by attributing it to inter–depot transfer and destruction of goods, however, fact remains that the assessee has not been able to reconcile the difference with supporting evidence. In these circumstances, the decision of learned Commissioner (Appeals) in sustaining the addition to the extent of 0.05% of the total turnover is reasonable, hence, it does not require interference from this forum. This ground is dismissed.

the assessment year 2006–07, however, in assessment year 1997–98, the Tribunal has restored the issue to the Assessing Officer. Thus, he submitted, the issue may be restored back to the Assessing Officer so that the assessee can furnish all supporting evidences to prove the genuineness of the expenditure.

being heard to the assessee. This ground is allowed for statistical purposes.