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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER Rajendra A.M.- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the orders of the CIT(A)-12,Mumbai the assessee has filed the appeals for the above-mentioned Assessment Years(AY.s).Assessee-company, is engaged in the business of manufacturing trading and marketing of fine chemicals and pharmaceutical specialties. The details of the dates of filing of returns,returned incomes,assessed incomes etc.can be summarised as under: AY. ROI filed on Returned income Asstt.Dt. Assessed Income CIT(A)order 2007-08 29.10.2007 Rs.5.64,95,162/- 31.12.2010 Rs.22,79,96,485/- 28/03/2013 2008-09 30.09.2008 Rs.24,35,52,117/-/- 26.12.2011 Rs.37,61,06,040/- 18/03/2013 ITA/3943/Mum/2013,AY.-2007-08: 2.First effective ground of appeal is about rejecting the claim of depreciation of Rs.16.37 crores in respect of intangibles.During the assessment proceedings, the Assessing Officer (AO)found that in the year under consideration the assessee had purchased A& R business of the sister concern namely,Merck Ltd.(ML),for a total consideration of Rs.81.67 crores,that it had merged the current assets and liabilities of the erstwhile business with its accounts and had shown an addition to the block of intangible assets amounting to Rs. 65.50 crores,that it had also shown addition of Rs.3.18crores with regard to other fixed assets,that depreciation at the rate of 25% was claimed on intangibles,that depreciation on the other fixed assets was claimed as per the respective applicable rates.He took into consideration the schedule of fixed assets of the transferor company.He directed the assessee to submit the details of assets and liabilities
3943-44/M/13(07-08&08-09) Merck Specialities acquired by it on purchase of the business from its sister concern along with the copy of business purchase agreement.After considering the same,he observed that the agreement showed that assessee had merely acquired certain assets,that the agreement provided the schedule/details of assets transferred amounting to Rs. 3.18 crores only,that it did not give the details of other intangible assets as claimed by the assessee which were claimed to have been allegedly transferred,that as per the agreement no identifiable assets other than certain plant and machinery were acquired.He directed the assessee to submit the details of the assets actually acquired. In response to the direction of the AO,the assessee furnished the valuation report stating that the assets mentioned in the report were intangibles that were also acquired in pursuance of the agreement,that the assets valued as per the valuation report were as follow: Name of Asset Amount in Rs. Trademark 24,77,30,000 Brands 5,09,40,000 Contracts with toll manufacturers 10,45,40,000 Authorised dealer value chain 5,37,70,000 Technical know-how 3,75,70,000 Employees contracts 66,20,000 Customer data 13,10,000 ISO certificate 10,90,000 TOTAL 50,35,90,000 It was further stated that it had capitalised the amount of Rs.15.14 crores as Goodwill being the difference between the valuation of the intangible assets stated above and the consideration of Rs.65.50 crores paid by it, that accordingly it had claimed depreciation @ of 25% on the above intangible assets as the amount was capitalised as goodwill.
After considering the explanation,the AO observed that the description of the above assets proved that the assessee had not acquired any visible assets, that the assets mentioned above appeared to be only matter of perception of the assessee,that the valuation report did not figure in the sale agreement. He asked the assessee to explain as to why the entire value of intangible asset should not be ignored for the purpose of depreciation as per the provisions of Explanation 3 to section 43(1)of the Act.He also took into notice the findings of the AO,who had assessed the income of the sister concern.In its response to the query raised by the AO,the assessee relied on the provisions of section 32(1)(ii) of the Act and various judicial pronouncements.However,the AO did not find it tenable. He held that entire transaction,including the creation of assets in support of the transaction,had been designed by the assessee and its sister concern to evade tax by claiming exemption in the hand of the transferor company and claim depreciation on the 2
3943-44/M/13(07-08&08-09) Merck Specialities fictitious assets in the hands of the assessee, that both the companies were subsidiaries of the same parent company,that the transaction was not at arm’s length and was manufactured by two concerns related to each other to benefit both of them,that there was no rationale behind capitalisation of the excess consideration paid by the assessee for the intangibles over and above the value as per the valuation report stating it to be goodwill,that the assessee had not termed the transaction as slump sale for the goodwill to arise and to be considered,that it was a simple case of purchase of certain asset at an amount higher than the value of the assets,that the entire consideration should have been capitalised as the respective assets which were purportedly acquired,that the cases relied upon by the assessee had different facts and were not applicable, that no assets were actually transferred to the assessee.Finally,depreciation claimed by the assessee, amounting to Rs.16.37 crores,was disallowed. 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).The assessee raised five additional grounds before him.Elaborate submissions were made before him by the assessee with regard to the additional and the original grounds. After considering the submissions of the assessee, assessment order, remand report and the reply to the remand report by the assessee, the FAA held that the assessee had purchased the A &R business from its sister concern for an amount of Rs.81.67 crores, that it had merged the current assets and liabilities of the said business with its accounts and had shown an addition to the block of assets as intangible assets amounting to Rs.65.50 crores and other fixed assets of Rs.3.19 crores, that as per the agreement signed between the assessee and its sister concern the assessee had acquired tangible assets of Rs.3.19 crores in the form plant and machinery, that the agreement did not mention any transfer of intangibles in the form of trademark,brands,contracts with toll manufacturers,authorised dealer valuation, technical know-how,employees contract, customer-data,ISO certificate to the assessee from the sister concern at a value of Rs.65.50 crores,that from the valuation report,submitted by the assessee,it transpired that value of the intangibles was fixed at Rs.50.35 crores,that the assessee had claimed that an amount of Rs.15.14 crores represented the goodwill purchased, that identifiable long-term assets of the company having no physical existence were shown intangible assets,that same included goodwill, patents, copyrights, that intangible assets would either be acquired or would develop internally, that in case of acquisition of a business such assets would be recorded at their fair market value,that in case of internally generated intangible assets same would be recorded at the cost incurred in 3943-44/M/13(07-08&08-09) Merck Specialities development phase,that in relation to development of internally generated intangible assets there were two phases namely research phase and development phase that the scope of section 32 (1) was widened by the Act 1998 from the AY.1999-2000 so that depreciation was made allowable in respect of intangible assets owned by an assessee and used for the purpose of its business / profession,that the intangible assets would form a separate block of assets, that depreciation on such assets was allowable on payment made to acquire the same, that ordinarily an assessee was entitled to claim depreciation on the actual cost of the assets acquired by it,that the law permitted the AO under the provisions of Explanation 3 to section 43(1)to substitute for the actual cost claimed by the assessee to the cost as may be worked out by him, that in the agreement signed between the assessee and its sister concern regarding the sale of A & R business intangible assets find no mention, that if the assessee had acquired the intangible assets along with the tangible assets of the transferree company the claim of depreciation had to be allowed,that intangible assets had not been made part of the deal for purchase,that under section 32 depreciation allowances would be allowed in respect of specified assets,that if the assessee was not suffering any depreciation by way of decreasing value of the property through wear and tear it could not claim the same,that mere existence of a capital asset was not sufficient to claim depreciation,that the intangible assets claimed to have been purchased /taken over by the assessee had no existence in the fixed schedule of the assets of ML,that same had also not been mentioned as assets in the fixed assets schedule of the transferor,that at the time of assessment proceedings the assessee had stated that concerned assets were self generated assets having nil value,that the sister concern had not relinquished the rights over the same,that sister concern was very much in possession of its business and was carrying out the same under the name and brand it always used,that it was not as if the whole business of the sister concern had been taken over by the assessee,that it was only a part of the business concern that had been purchased by the assessee, that there was no slump sale declared,that the sister concern continued to exist and do business as always,that it was not as if it had parted with its intangible assets for good and close the business, that the assessee itself was carrying out business activities for a number of years,that it would had itself generated the intangible assets said to have been purchased from sister concern,that the business of the assessee was similar to the business of the sister concern,that it would obviously be in possession of similar intangible assets like trademark, brands, contract names of authorised dealers,that the assessee also enjoyed goodwill of its own, that assessee was not a new entity that 3943-44/M/13(07-08&08-09) Merck Specialities would require the intangible assets to be made available by the sister concern for survival and expansion of its business, that the part of business taken over by the assessee from its sister concern and it had not own independent intangible assets,that value of trademark,copyright and know-how could not be capitalised for grant of depreciation,that no assets in form of intangibles existed,that same were not actually transferred,that purchase of intangible assets by the assessee from the sister concern was a pure paper transaction and the assessee was not entitled for claiming depreciation under the law,that the AO had rightly rejected the ground of depreciation at the rate of 25%.With regard to grant of depreciation on goodwill,the FAA observed that valuation report of the registered valuers submitted by the assessee to establish the value of intangibles did not mention the value of goodwill at all, that as per the assessee’s own papers no goodwill stood transferred from the sister concern to the assessee for a price, that the assessee had claimed that it had paid excess amount in respect of the intangible assets purchased and had tried to justify the same by stating that amount represented the goodwill,that the very basis of valuation of the said goodwill had not been submitted and explained,that it was not able to explain as to how the goodwill so purchased by it had helped its business,that the allowability of depreciation to intangibles would also apply to the question of claim of depreciation made on goodwill,that the assessee was not entitled for depreciation on goodwill. 2.2.During the course of hearing before us,the Authorised Representative(AR) contended that the assessee had paid Rs.81.66 crores to its sister concern, that the treatment given by the sister concern in its books of accounts could not be basis for rejecting the claim made by the assessee, that it had valued the assets purchased from ML,that the valuation report was filed before the AO,that Rs.15 crores were treated as good will,that in case of the transferor the income was assessed as business income,that the FAA had not dealt with the alternate claim made by the assessee for allowing the expenditure for allowing it as revenue expenditure,that the assessee had paid a lumpsum amount for the business purchased,that allocation of business assets was made later on, that allocation of purchase price was made as per the valuation report, that provisions of Explanation 3 to section 43(1) were not applicable,that there was no avoidance of tax,that section 43 could be invoked only if fictitious payments were made, that the cases relied upon by the FAA were distinguishable on facts. He referred to pages 14,33 and 43 of the paper book and also made a reference to Article1(i),1(vii),1(11),2,Recital 5 of the agreement.He relied upon the 3943-44/M/13(07-08&08-09) Merck Specialities cases of Worldwide Media (153 ITD 162), Break India(P.)Ltd.(68 SOT 263)Simf Securities (348 ITR 302); The Departmental Representative(DR) argued that details of intangible assets were not furnished before any of the revenue authorities,that the purchase agreement did not give any bifurcation or basis of calculation made by the assessee,that it had appointed the valuer subsequent to purchase- agreement,that summary of the valuation of assets did not mention value of goodwill,that it was a transaction between group concerns,that it was important to consider the treatment given to transaction by seller in its books,that claim made by assessee was fictitious and it was a skill to avoid taxes,that there was no justification to allow expenditure u/s.37(1) of the Act,that the expenditure was not incurred for business purposes,that the AO had correctly invoked the provisions of Explanation 3 to Section 43(1).He referred to cases of Jitendra kumar Gupta (154 ITD 389) and Southern Ferro Steels Ltd.(69taxmann.com169).
2.3.We have heard the rival submissions and perused the material on record.We find that the assessee had purchased A&R business from its sister concern for Rs.81.67 crores,that it had merged the assets and liabilities of the erstwhile business with the newly acquired assets and liabilities,that it had shown an addition to the block of intangible assets amounting to Rs. 65.50 crores,that it had also shown addition of Rs.3.18 crores with regard to other fixed assets,that it had obtained a valuation report of the intangibles,that as per the valuation report value of the intangibles was Rs.50 crores(app.),that it assigned Rs.15 crores to Goodwill,that depreciation at the rate of 25% was claimed on intangibles,that the AO rejected the claim made by it under the head depreciation,that he invoked the provisions of section 43(6)of the Act ,that the FAA upheld the order of the AO . We further find that issue of assigning value to intangibles had arisen the case of the Merck Limited also,though the issue was about the head under which the amount,received from the assessee by the sister concern,was to be taxed.The matter had travelled up to the Tribunal and it decided the issue on 02.08.2013 (ITA/8120/ Mum/ 2011, AY.2007-08.)We would like to refer the relevant portion of the said order and it reads as under: 13. Ground No.1.4 of the appeal taken by the assessee reads as under : "1.4.Taxing the long term capital gain of Rs.65,50,00,000/- realized and received by the appellant upon sale of A&R Business during the impugned assessment year as "business profits" u/s 28(iv) of the Act instead and in place of long term capital gain as computed by the appellant u/s 45 of the Act and the exemption claimed in respect thereof u/s 54EC of the Act".
3943-44/M/13(07-08&08-09) Merck Specialities XXXXX 18.At the time of hearing, ld. AR, besides reiterating the submissions made before the authorities below referred agreement dated 17.4.2006, copy placed at pages 21 to 41 of the paper book and submitted that the assessee transferred it's A &R Business as a going concern to MSPL for Rs.81.67 crores. Ld. AR referred Article 4 of the said agreement and submitted that net book value of current assets and current liabilities as on 31.3.2006 as per books of account of the assessee was Rs.16,16,46,433/- and Rs.65,50.00,000/- being the value of intangibles relating to the A&R Business. Ld. AR submitted that the fixed assets relating to A&R Business are specifically listed in "Ex-A" to the said agreement and referred pages 32 to 39 of the paper book. Ld. AR submitted that the AO/DRP have held that there is no intangible assets of the assessee which have been transferred and the amount received of Rs.65,50,00,000/- have been assessed u/s 28(iv) of the Act. XXXXX Ld.AR further referred pages 86 to 110 of the paper book and submitted that the assessee also obtained valuation reports from two valuers for transfer of the said assets. Ld. AR submitted that the department has no right to re-write the agreement and to consider that the consideration of Rs.65,50,00,000/- received by the assessee is on account of non- compete fee. XXXXX Ld.AR submitted that the consideration of Rs.65,50,00,000/- received by the assessee is on account of transfer of intangible assets. Therefore it is a capital receipts which cannot be taxed u/s 28 of the Act.
Ld. DR referred the valuation report and submitted that in the said valuation report and also in the sale agreement dated 17.4.2006, there is no reference of the valuation report on the basis of which the assessee has stated to have transferred intangibles assets to MSPL for Rs.65,50,00,000//- . He submitted that there is no document placed on record that the assessee has transferred any technical know-how. XXXXX 20.We have carefully considered the orders of the AO/DRP along with the submissions of ld. Representatives of the parties. We have also carefully considered relevant Articles of the agreement for sale entered into between the assessee and MSPL and also decisions cited before us (supra). It is a fact that the assessee as well as the purchaser of A&R Business viz MSPL, both are sister concern and there parent company is M/s Merck KGaA, Germany. We also observe that the trade mark "MERCK" belongs to German Parent Company and assessee has been admittedly paying royalty to the parent company with regard to it. Therefore, the said "trade mark", for which the assessee has valued Rs.24.77 crores actually belongs to German Parent Company and not to the assessee. Further, we also observe that if "MERCK" is the brand and is transferred, it is also a brand name of the parent company and not of the assessee company. We also observe that the assessee has also bifurcated sum of Rs.65,50,00,000/- towards contract,that related to contracts with toll manufacturers and earmarked Rs.10,45,40,000 towards its valuation. However, we observe that no documentary evidence is on record to support the existence of the said assets, therefore what AO has stated in para 7.1.2 (c ) has merits and the same cannot be ignored. Similar is the case in respect of the valuation "earmarked" by the assessee for the technical know-how Rs.3,75,90,000, no documentary evidence is on record to establish that any secrete formulae for the production process etc has been transferred by the assessee to MSPL. We also observe that AO in para 7.1.2 (e) has also considered the fact that the assessee "earmarked" Rs.5,37,70,000/- towards dealer value chain and the AO has stated that many of the customers, toll manufacturers are common to both the transferor as well transferee. The AO has also stated that same set of dealers were also working for the transferee company prior to the transfer of the business by the assessee to MSPL. At the time of hearing, ld. AR has not been able to controvert the said fact. In respect of valuation "earmarked" at Rs.10,90,000/- towards ISO certificate, the AO has stated that the expenses for the same have actually been claimed by the assessee as revenue expenses in the earlier years and if it is so we agree with the ld.DR that if any consideration is received on transfer 7
3943-44/M/13(07-08&08-09) Merck Specialities of that benefit i.e. ISO certificate, it cannot be considered as capital receipt on transfer of the business. Not only this, we observe from "EX-A", the annexure to the sale agreement, (copy placed at pages 30 to 39 of the paper book No.2) the assessee has given individual value of the assets and whereas in the case of "slum sell", as per section 2(42C), the term "slump sale" has been defined as the transfer of one or more undertakings as a result of sale for a lumpsum consideration without valuation being assigned to the individual asset and liability of such sales. Considering the said facts in the light of explanation, we are of the considered view that the condition as provided in the case of "slum sale" for considering the consideration received on sale of an assets is not satisfied to consider it as a capital gain u/s 50B of the Act. Further, we also find merits in the contention of ld. DR that no basis of break up of the capital asset has been stated in the agreement and/or in the valuation report on which the assessee has placed reliance before us. Besides, we also observe that Article 9.2 of the sale agreement provides that the assessee undertakes for a period of 7 years after the execution of this agreement not to engage in/or carry out any business anywhere, which would compete with A&R Business except to the extent permitted under this agreement. On consideration of Article 9.2 of the sale agreement, it shows that the assessee has entered into a non- compete covenant with the transferee….. Considering the facts, however, we do agree with ld. AR that section 28(iv) is applicable where benefit/perquisites are received in kind and is not applicable where money is involved. Therefore, reliance placed by ld. AR on the decision of Hon'ble Bombay High Court in the case of Mahindra And Mahindra Ltd (supra) has substance. We also agree with the ld. AR that it is not for the revenue to rewrite the terms of agreement but at the same time, the AO is entitled to consider the nature of the receipt and the circumstances in which the amount has been received by the assessee under the agreement entered into. XXXXX 21. Considering the facts of the case, and the reasons stated hereinabove that the assessee has not been able to place any material on record on the basis of which the assessee has valued intangible assets and whether the amount of Rs.65,50,00,000/- may be considered as the amount received towards not compete fee or for other consideration, we are of the considered view that the said issue be restored to AO to consider nature of receipt in the light of evidence afresh. Therefore, we restore to AO to decide the issue afresh in the light of the observations made by us hereinabove and consider such material as may be placed before him by a reasoned order. Hence, Ground No.1.4 is allowed for statistical purposes by restoring the matter to AO for fresh consideration.” The Tribunal has observed that the assessee had argued in the case of Merck Ltd that the transferor company had obtained valuation reports from two valuers.We are not aware as to what is the details bifurcation of the intangibles is given in those reports.In case there is difference in the values appearing in the valuation reports of the assessee and Merck,provisions of section 43 (6)may be applicable in deciding the issue.All these developments have taken place after the the FAA decided the appeal.In our opinion,these facts will be some bearing on the final outcome of the appeal. We further find that the alternate ground raised by the assessee about allowing the entire expenditure as revenue expenditure has not been adjudicated upon by the FAA,though a specific ground was raised before him. Considering the above,we are of the opinion that in the interest of justice matter should be restored back to the file of the FAA for fresh adjudication.He is directed to decide the issue
3943-44/M/13(07-08&08-09) Merck Specialities afresh after affording a reasonable opportunity of hearing to the assessee.First ground of appeal is decided in favour of the assessee,in part.
3.Second ground deals with disallowing an amount of Rs. 77.47 lakhs u/s.145A of the Act. During the assessment proceedings,the AO found that assessee was following an exclusive method of accounting with regard to relation of stock, that it was not including cenvat credit.He held that assessee had violated the provisions of section 145A of the Act. Accordingly,he computed the value of stock of the assessee.He also relied upon the judgment of the honorable Bombay High Court delivered in the case of Mahalakshmi Glassworks Private Ltd (318 ITR 116).He added some of Rs.77,47,950/-to the total income of the assessee,after giving credit to the opening balance of the cenvat credit available. 3.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA.After considering the available material, he held that the action of the AO had to be confirmed,that as per the provisions of section 145A of the Act the assessee had to follow an inclusive method of accounting,that the assessee itself had admitted that it had followed the exclusive method.He directed the AO to value the closing stock of the assessee strictly as per the provisions of the section 145A and partly allowed the ground raised by the assessee. 3.2.Before us,the AR and the DR stated that the issue needs further verification at the level of AO and matter should be restored back to his file for fresh adjudication.Accordingly,we are remitting back the matter to the file of AO who will decide the issue after affording a reasonable opportunity of hearing to the assessee.Ground No.2 is allowed in favour of the assessee,in part.
4.Third ground is about directing the AO to grant credit of Rs.78,112/-.It was stated that the FAA had not directed the AO to grant the credit for the said amount though the tax was deducted at source.The AO is directed to give the credit for the tax deducted after verification.Ground number three is allowed in favour of the assessee,in part.
ITA/3944/Mum/2013,AY 2008-09: 5.First ground of appeal is about disallowance of Rs.1.49 lakhs under section 14A of the Act read with Rule 8D of the Income Tax Rules,1962 (Rules).During the assessment proceedings, the AO found that the assessee had declared dividend income of Rs.16.78 lakhs and claimed it as exempt u/s.10(35) of the Act. He directed the assessee to furnish details of expenditure incurred
3943-44/M/13(07-08&08-09) Merck Specialities or attributable for earning exempt income and to show cause as to why disallowance u/s.14A r.w.r.8D of the Rules should not be made.The assessee argued that it had not incurred any expenditure to earn tax free income, that even if disallowance was to be made it had to be restricted to the proportionate salary paid to one of the employees of the company.However, the AO made a disallowance of Rs.1.49 lakhs invoking provisions of Section 14A. 5.1.During the appellate proceedings the FAA held that the assessee had earned exempt income during the year under appeal for which no expenditure had been incurred,that assessee itself had argued that disallowance should be restricted to proportionate salary of one of the employee amounting to Rs.1.20 lakhs,that the AO had worked out disallowance strictly as per provisions of Rule 8D.Finally,he upheld the order of the AO. 5.2.The AR argued that the assessee had not incurred any expenditure against the exempt inocme,that even then it had offered proportionate disallowance with regard to salary of one of the employees.The DR supported the order of the FAA. 5.3.We find that the AO had applied the provisions of rule 8D of the Rules.In our opinion he was not justified to invoke the said section.The assessee had not claimed any expenditure in relation to the exempt income and therefore no disallowance should have been made.Considering the offer made by the assessee,we hold that,to meet the ends of justice,disallowance should be restricted to Rs.25,000/-.First Ground of appeal (GOA) is partly allowed.
6.Next ground deals with disallowance of depreciation of Rs.12.15 crores in respect of the intangible assets.While deciding the appeal for the earlier year, we have restored back the issue to the file of the FAA.Following the same,ground number two is partly allowed and matter is set aside to FAA for fresh adjudication.
7.Third ground is about disallowance of Rs.77.50 lakhs under section 145 A of the Act.We have decided the identical ground of appeal at paragraph 3 of our order.Following the same,matter is restored back to the file of the AO for fresh adjudication.Third ground stands partly allowed.
8.Next Ground is about not accepting the contention of the assessee that Rs. 30.90 lakhs,being the actuarial salary provided during the year,was allowable as deduction notwithstanding section 43B(f) of the Act.The AO held that the amount in dispute was provision for leave salary on the ground that the Hon’ble Apex Court had admitted the SLP filed by the Department against the 3943-44/M/13(07-08&08-09) Merck Specialities order of Calcutta High Court in the case of Exide India Limited.(292 ITR470).In the appellate proceedings the FAA upheld the order of the AO. He directed the AO to take necessary consequential action on receipt of the decision of the Hon’ble Supreme Court on the SLP filed before it in the case of Exide India Ltd. (supra).
We find that the assessee had claimed the deduction relying upon the case of Exide India Ltd.(supra), that the FAA has directed the AO to take necessary consequential action in pursuance of final outcome of the SLP filed before the Hon’ble supreme Court.Thus, the interest of the assessee have been taken into consideration by the FAA. We do not want to interfere with his order. AO would take necessary action after pronouncement of judgment by the Hon’ble Supreme Court. Fourth Ground of appeal is decided in favour of the assessee in part.
9.Next effective ground is about charging of interest under section 234B and 234D of the Act.In our opinion,the ground is consequential in nature and hence is not being adjudicated.