MYLAN LABORATORIES LIMITED,HYDERABAD vs. DEPUTY COMMISSIONER INCOME TAX , CIRCLE-5 (1) , HYDERABAD

आदेश/ORDER PER SHRI MADHUSUDAN SAWDIA, A.M: This appeal relates to Agila Specialties Private Limited(“ASPL”) which has been merged with the M/s. Mylan Laboratories Limited (“MLL” or “the assessee”), filed by the assessee, feeling aggrieved by the order passed by the Learned PCIT, Hyderabad-4 (“Ld. PCIT”), dated 31.03.2021 for the AY 2014-15.

3. On the facts and in the circumstances of the case and in law, the Ld. PCIT has erred in setting aside the assessment order passed by the Ld.AO with a direction to redo the assessment without appreciating the fact that the assessment order of Ld.AO is not erroneous and/or prejudicial to the interest of the revenue.

4. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. PCIT erred in disallowing the amount of Rs.340.45 Crores paid to Pfizer Inc. on termination of agreement considering it as capital expenditure. (Tax effect Rs.115.78 Crores) 5. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. PCIT erred in disallowing the amount of Rs.6.19 Crores paid to Frensenius Kabi USA, LLC on termination of License and supply agreement considering it as liquidated damage / penalty in nature and thereby disallowing the same under section 37 of the Act (Tax effect Rs.2.10 Crores).”

3.1 On 31/10/2013 ASPL and its affiliates entered into an agreement with Pfizer, to terminate the licensing, distribution and supply rights granted earlier under the L&S agreement to Pfizer in exchange of an agreed consideration of USD 55 Mn.(Rs.340.45 crores) to be payable by ASPL to Pfizer. ASPL and its affiliates had simultaneously entered into a Distribution & Supply Agreement (“D&S agreement”) with Mylan Ireland on the same day i.e. 31.10.2013 for marketing and distribution rights (same rights as terminated by Pfizer). The consideration receivable on entering into the D&S agreement was equal to the consideration payable by ASPL to Pfizer for termination of L&S Agreement i.e., USD 55 Mn. (Rs. 340.45 crores). Pursuant to such a contract, an amount of USD 44 Mn. (Rs. 273,05,47,600) was received by ASPL during the period ended on 5.12.2013 and the remaining USD 11 Mn. (Rs. 67,39,50,000) was received by the MLL during the period from 6.12.2013 to 31.03.2014.

3.3 In addition to above, in December 2012, ASPL entered into a Product Licensing and Distribution Agreement (“L&D agreement”) with a third-party i.e., Fresenius Kabi USA, LLC ('Fresenius'). ASPL latter on terminated the said L&D agreement with Fresenius and was liable to pay liquidated damages of USD 1 Mn(Rs.6.19 crores) to Fresenius. The liquidated damages of USD 1 Mn (Rs.6.19 crores) was claimed as revenue expenditure by ASPL and had been disclosed in the audited financial statements of ASPL for the period ended on 5.12.2013 as part of "Cost of termination of licensing contracts".

3.4 The assessee filed its Return of Income on 29.11.2014 for the A.Y. 2014-15 declaring a total loss of Rs.265,72,22,548/-. In the said return the termination charges of Rs.340.45 crores paid to Pfizer and the liquidated damages of Rs. 6.19 crores paid to Fresenius, had been claimed as an expenditure by the assessee under the head “ cost of termination of licensing contracts”. The case of the assessee was completed u/s. 143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (“the Act”) by the Learned Assessing Officer (“Ld. AO”) making an addition of Rs.17,86,68,869/- vide his order dated 31.01.2018. Later on, Ld. PCIT called for the record for examination u/s. 263 of the Act. After perusal of the record, Ld. PCIT held that the amount of Rs.340.45 Crores paid to Pfizer is a capital expenditure and is not for the business expediency of ASPL. On the aspect of the liquidated damages of Rs. 6.19 crores paid to Fresenius, the Ld. PCIT held that it is in business interest of Mylan Inc.,USA and also is in the nature of penalty. Therefore, the said sum is not allowable as deduction under section 37 of the Act . Accordingly, Ld. PCIT held that the said total expenditures of Rs.364.64 Crores claimed under the head “ cost of termination of licensing contracts” cannot be allowed to the assessee as revenue expenditure. The relevant portions of the order of the Ld. PCIT are reproduced as under :

“9.The AO during the assessment proceedings has not examined the allowability of the expenditure debited in the light of the above facts and provisions of the statute.Now where in the agreements it is mentioned that on termination of agreements the assessee has to pay compensation or liquidated damages to Pfizer or Frensenius Kabi USA,,LLC. Hence the above expenditure could not be treated as expenditure incurred during the course of assessee's business. The above amounts were paid for the business interest of Mylan Inc and cannot be held as expenditure with relation to assessee's business. Therefore, the order passed by the AO is erroneous and is prejudicial to the interests of the Revenue, since an expenditure which is not deductible, was allowed as revenue expenditure. Therefore, the assessment order passed by the AO is set-aside as per provisions of Sec. 263 of IT Act 1961, with a direction to redo the assessment as follows: i) by disallowing the sum of Rs.340.45 Crores paid to Pfizer Inc, for termination of the agreement with the assessee company, as a capital expenditure in the light of the above facts and circumstances, since the assessee company has entered into an Asset purchase agreement with Pfizer Inc, to reacquire the Marketing rights given by it, to Pfizer. ii) by disallowing the claim of the amount of Rs 6,19,00,000/-, debited by the assessee company with respect to the termination of License and Supply Agreement of the assessee company with Frensenius Kabi USA,,LLC, which has been paid by the assessee company, as liquidated damages for termination of L&S contract to Frensenius Kabi USA,,LLC, since the termination of the contract, is in the business interest of Mylan and the payment made is in the nature of penalty, since it paid as liquidated damages since this amount is not allowable as deduction u/s 37 of IT Act.”

“ III. Legal arguments on jurisdiction under Section 263: 3.1 The Appellant wishes to submit that the revision proceedings under section 263 of the Act is bad in law for the following reasons: A. No revision if inquiries were made by the AO:

3.2 The learned AO/ TPO during the assessment proceedings made adequate inquiries by calling for details to examine the nature of expenditure pertaining to 'Cost of termination of licensing contracts' amounting to Rs. 346,64,00,000. The Appellant furnished all the requisite facts and documents including all the relevant agreements, valuation reports, Form 3CEB, bank statements, etc. in support of its contention that the expenditure is revenue in nature. 3.3. Details of documents filed before the assessing authorities is as follows:

Document Description Filed with Asset Purchase Agreement between M/s. Agila & M/s. Pfizer Inc dated 31.10.2013 AO/PCIT Extract of Form 3CEB of M/s. Agila Specialities Private Limited disclosng receivable from Mylan Ireland Holdings AO/PCIT Extract of Form 3CEB of M/s. Mylan India disclosing receivable from Mylan Ireland Holdings AO/PCIT License & Suply Agreement between M/s. Pfizer Inc and M/s. Strides Arcolab Limited dated 30.04.2010 AO/PCIT Novation Agreement dated 14.11.2011 AO/PCIT Distribution & Supply Agreement dated 31.10.2013 AO/PCIT Assignment and Assumption Agreement dated 06.03.2014 AO/PCIT

3.4 On perusal of all requisite facts and documents, the learned AO after extensive deliberation accepted the explanation of the Appellant that the expenditure arising on account of licensing of marketing rights is revenue in nature. Thus, learned AO accepted the fact that the Appellant has provided the correct tax treatment on such transaction. Having regard to the same, the order of the AO cannot be held as erroneous. 3.5 In CIT v. Development Credit Bank Ltd. [2010] 323 ITR 206 (Bom.) it was held that assessment cannot be revised under section 263 when the Assessing Officer has passed the order after considering all the details called for and furnished by the assessee. 3.6 The case laws relied by the Appellant are as follows: • Mylan Pharmaceuticals Private Limited v. ITO in dated 26.12.2022  Shri Harish Kumar Muralidhar Harwani v. ITO in dated 28.04.2023  Balaji Developers Hyderabad v. ACIT in ITA no. 281/Hyd/2022 dated 21.06.2023  PCIT v. Deccan Jewellera (P.) Ltd [2021] 438 ITR 131 (Andhra Pradesh)  Brahma Centre Development Pvt Ltd v. PCIT in ITA No. 4341 & 4342/Del/ 2019 dated 18.12.2019. B. No revision on the basis of an audit objection:

3.7 It is trite law that, while exercising revisional jurisdiction under section 263 of the Act, the principles of natural justice do not permit the decision of a revisionary authority to be influenced by any other authority. 3.8 In the present case, the revisionary action and order under section 263 of the Act, both emerge from the audit objection communicated by the Office of the Director General of Audit (Central), Hyderabad ('Revenue audit'). The fact that the revisionary action is based on audit objection is evidenced from the order sheet of the Assessing Officer. In reply to this audit objection the AO states as under: "On this being brought to notice, it was replied that based on detailed verification of documents and information furnished by the assessee during the course of the assessment proceeding and fact, summarized above, it is clear that payment made by ASPL to Pfizer has been made in the regular course of business and does not result in the transferred / creation of new revenue generating asset, as such product always continued to remain under the ownership of ASPL even before the termination of this agreement with the Pfizer and even after subsequent assignment of such marketing and distribution license to Mylan Ireland. The termination cost associated with the transaction did not result in any short of ending or long-term benefit to ASPL. Neither was any capital asset brought into existence due to the termination of the contract with Pfizer. Accordingly, the termination payment by assessee has rightly been treated as revenue expenditure deductible under the provisions of section 37 of the Act." [Copy of the order noting sheet and revenue audit objection – Page 1095 and 1102 respectively of PB] 3.9 In CIT v. Sohana Wollen Mills [2008] 296 ITR 238 (P&H), it was held that a mere audit objection cannot lead to an inference that the order of the Assessing Officer was erroneous or prejudicial to the interest of the Revenue, where there was no indication that the Commissioner notes was himself satisfied about it prior to issue of notice, so that his order in pursuance of a notice based on an audit objection would be bad in law. The High Court therefore upheld the order of the Tribunal on its findings on the facts, that the order of the Commissioner was prompted solely by the audit objections. [Refer page 1159-1160 of case law compilation & other material – III] 3.10 The case laws relied by the Appellant are as follows: - Prachi Agriculture & Properties Pvt Ltd v. CIT in dated 21.04.2022 - Lotus Energy (India) Ltd. v. CIT [2017] 53 ITR(T) 227 (Mumbai) - Bharti Axa Life Insurance Co. Ltd. v. DCIT [2020] 116 taxmann.com 933 (Mumbai - Trib.) C. Where AO has adopted one of the plausible views - revision under section 263 is not possible: 3.11 Without prejudice to the above submissions, it is also submitted that a mere possibility of a different interpretation does not justify assumption of revisional jurisdiction merely because the Commissioner does not agree with the inference of AO that the claim is genuine. 3.12 Where the AO takes one of the two views permissible in law and which the Commissioner does not agree with and which results in a loss of revenue, it cannot be treated as erroneous order prejudicial to the interest of revenue, unless the view taken by the AO is completely unsustainable in law. This proposition is forthcoming from the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC) [Para 9]: 3.13 In the instant case, the learned AO after duly examining the facts adopted a plausible view that the expenditure pertaining to 'cost of termination of licensing contracts' is revenue in nature. Case laws yielding that such compensation is revenue in nature are detailed at para 3.18 of the synopsis and at sl. no. 34 to 38 of the case law compilation and other material -II. The learned PCIT is not justified in invoking the revisionary merely on the basis that a different view was possible and the learned AO has not adopted that view.”

6. Per contra the Ld. DR opposed to the submission made by the Ld. AR and requested the Bench to uphold the order of Ld. PCIT. The Ld. DR also made a written submission before us on 28/05/2024 . The relevant portion of submission made by Ld. DR on 28/05/2024 in this regards is reproduced as under :

“Arguments by DR

9. The assessee challenged the review under Section 263 by relying on the decision of Supreme Court in Malabar Industrial Co. Limited 243 ITR 83. The assessee argued that in light of the above decision, an order can be reviewed under Section 263 only if it satisfies the tuin conditions, that is, the order should be erroneous and prejudicial to the interest of revenue.

“Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 3[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”

6.4 On going through the explanation 2 to section 263, which has been inserted w.e.f. 01/06/2015, it is abundantly clear that, if the Ld. AO failed to make proper inquiries or verification, then it shall be deemed that the order passed by the Ld. AO is erroneous so far as it is prejudicial to the interest of the revenue. Hence under such circumstances section 263 can be invoked.

6.5 Now coming to the argument of the Ld. AR, who relying upon the decisions in the case of Amira Pure Foods Pvt. Ltd. v Pr. CIT (ITA No. 3205/DEL/2017) (Delhi Trib.),Narayan Tate Ranu v ITO 70 taxmann.com 227 (Mumbai Trib.) and Torrent Pharmaceuticals Ltd. v DCIT (ITA No. 164/Ahd/2018) (Ahmedabad Trib.) submitted that the explanation has been inserted with effect from 01/06/2015 and hence not applicable for A.Y.2014-15. However when we go through the said judgements and ask the Ld. AR to point of the relevant para where it has been specifically so mentioned, the Ld. AR failed to point out the same. Hence the argument of the Ld. AR in this regarding is not acceptable. In our opinion, since the explanation has been made effective from a specific date , it will be applicable to the every order of Ld. AO, which has been passed by him w.e.f. 01/06/2015. As the impugned order of the Ld. AO has been passed on 31/01/2018, which is much latter than 01/06/2015, hence the explanation 2 to section 263 of the Act will be applicable on the order passed by the Ld. AO in the case of the assessee.

6.6 Once the explanation 2 to section 263 of the Act being applicable on the order passed by the Ld. AO and there is lack of inquiry on the part of the Ld. AO(as discussed above), in our opinion the invocation of section 263 by the Ld. PCIT is justified and the claim of the assessee is not correct. Hence we dismiss these grounds of the Assessee.

6.7 In the result, the ground nos. 1 to 3 of the assessee are dismissed.

Now coming to ground no. 4, related to disallowance of termination 7. charges of Rs.340.45 crores paid to Pfizer, the Ld. AR submitted that the compensation / termination fee paid by ASPL to Pfizer is only towards termination of marketing and distribution rights granted to Pfizer. The termination of such an agreement does not provide any new rights to ASPL, which can be regarded as a capital asset. ASPL continued to be owner or holder of the intellectual property / product of the products which were being distributed by Pfizer. No asset was transferred by ASPL to Pfizer, vide the L&S agreement. Only permission for distribution for ASPL's products in a specific territory was granted. Hence, the termination of such contract did not result in the transfer of an asset or creation of a new asset in the hands of ASPL. Therefore the Ld. AR prayed before the bench to consider the termination charges of Rs.340.45 crores paid to Pfizer as revenue expenditure.

7.1 Per contra the Ld. DR heavily relying on the decision of Ld. PCIT, further submitted that the ASPL had paid termination charges of Rs.340.45 crores to Pfizer. However no such termination fees was to be payable as per the L&S agreement which was novated by SAL in favour of ASPL on 14.11.2011. He further submitted that the termination of the L & S agreement dated 31/10/2013 had been titled as “ Asset Purchase Agreement “, then how any right obtained on the basis of such agreement and charges paid for the same can be claimed as revenue expenditure . He also submitted that after the “ Asset Purchase Agreement” dated 31/10/2013, the assessee had simultaneously entered into a D&S Agreement with Mylan Ireland on 31.10.2013 for marketing and distribution rights (same rights as terminated by Pfizer) for a consideration of Rs.340.45 crores. Without acquiring any right/assets, how any right had been transferred to Mylan Ireland on 31.10.2013. Hence the Ld. DR reiterated that the expenditure incurred by ASPL towards termination charges of Rs.340.45 crores was in the nature of capital expenditure and should not be allowed as revenue expenditure. 7.2 We have heard the rival contention and also gone through the record in the light of the submissions made on either side. We are convinced with the submission of the Ld. DR that the termination of the L & S agreement dated 31/10/2013 had been titled as “ Asset Purchase Agreement “, then how any right obtained on the basis of such agreement and charges paid for the same can be claimed as revenue expenditure . He also submitted that after the “ Asset Purchase Agreement” dated 31/10/2013, the ASPL had simultaneously entered into a D&S Agreement with Mylan Ireland on 31.10.2013 for marketing and distribution rights (same rights as terminated by Pfizer) for a consideration of Rs.340.45 crores. Without acquiring any right/assets, how any right had been transferred to Mylan Ireland on 31.10.2013. It is relevant to reproduce some pages of Assets Purchase Agreement (page no. 105,114 & 118 of P.B.), which are to the following effect :

“ Page no. 105 of the P.B. : ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement") is made and entered into as of October 31, 2013 (the "Execution Date"), by and between: (i) Agila Specialties Global Pte Limited, a company organized under the laws of Singapore ("Buyer"); (ii) Pfizer Inc, a Delaware corporation ("Seller"); (iii) solely for the purposes of Section 4.1, Section 4.3 and Section 4.4, Pfizer Asia Manufacturing PTE. LTD, a company organized under the laws of Singapore; (iv) solely for the purposes of the Purchase Price Obligations (as defined below), Section 4.1, Section 4.2 and Section 4.3, Agila Specialties Private Limited, a company organized under the laws of India ("Agila India"); (v) solely for the purposes of the Purchase Price Obligations, Section 4.2 and Section 4.3, Onco Laboratories Limited, a company organized under the laws of Cyprus ("OLL" and, together with Buyer and Agila India, the "Payor Parties"); (vi) solely for the purposes of Section 4.2, Section 4.3 and Section 4.4, Onco Therapies Limited, a company organized under the laws of India ("OTL"); and (vii) solely for the purposes of Section 4.4, Agila Specialties Polska Sp. z.O.0, a company organized under the laws of Poland. Each of Seller and Buyer is sometimes referred to herein, individually, as a "Party" and, collectively as the "Parties." All capitalized terms used herein shall have the meanings specified in ARTICLE I below or elsewhere in this Agreement, as applicable. WITNESSETH: WHEREAS, Seller and an Affiliate of Buyer entered into that certain Asset Purchase Agreement by and between Seller and Akorn-Strides, LLC, Akorn, Inc. and Strides Arcolab Limited, dated December 29, 2010 (the "Purchase Agreement"), pursuant to which Seller acquired, among other rights, rights to the Transferred Products in the Territory; WHEREAS, Seller, Agila Specialties Private Limited, Onco Laboratories Limited and Onco Therapies Limited entered into that certain Amended and Restated License and Supply Agreement dated February 27, 2013 (the "License Agreement"), pursuant to which Seller is granted licenses to Promote the Licensed Products in the Territory; WHEREAS, an Affiliate of Buyer supplies to Seller, and Seller, directly or indirectly through its Affiliates, Promotes the Transferred Products and Licensed Products in the Territory pursuant to that certain Amended and Restated Supply Agreement by and between Pfizer Asia Manufacturing PTE. LTD ("Pfizer Asia") and Agila Specialties Private Limited, dated February 27, 2013 (the "Supply Agreement", and the License Agreement, respectively; WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase, Seller's rights to the Transferred Products in the Territory and certain related assets, all upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, Seller, Pfizer Asia, Buyer, Agila India, OTL and OLL desire that Seller and Pfizer Asia shall cede their rights and obligations under the License Agreement and the Supply Agreement to the Buyer pursuant to the terms of this Agreement and, pursuant to such ceding of rights and obligations to the Buyer, the parties to License Agreement and the Supply Agreement intend to terminate the License Agreement and the Supply Agreement pursuant and subject to the terms of this Agreement.

Page no. 114 of the P.B. : ARTICLE II PURCHASE AND SALE Section 2.1. Transferred Assets. Subject to the terms and conditions set forth herein, at the closing See sha selle deye gen, id and i te Burst, ad Bors hall rurchase, following assets in the Territory (collectively, the "Transferred Assets"): (a) the Product Approvals; and (b) the Transferred Know-How. Section 2.2. Excluded Assets. Buyer and Seller agree and acknowledge that Buyer will, at the Closing, acquire only the Transferred Assets and will not acquire any right, title or interest in, to or under any Excluded Assets. Section 2.3. Assumed Liabilities. Effective as of the Closing, Buyer shall assume only the following Liabilities of Seller (collectively, the "Assumed Liabilities"): (a) all Liabilities arising under the Transferred Know-How, to the extent such Liabilities arise out of, or result from, the ownership and use of the Transferred Know-How by Buyer from and after the Closing; (b) all Liabilities imposed on the holder of the Product Approvals, to the extent such Liabilities arise out of, or result from, the ownership by Buyer of the Product Approvals from and after the Closing; (c) all Liabilities to the extent arising out of, or resulting from, the use, ownership, possession or commercial sale of any of the Transferred Assets by Buyer from and after the Closing; and (d) all Liabilities to the extent arising out of, or resulting from, claims by Third Parties for money or other compensation in respect of injury or other Loss allegedly arising out of, or resulting from, the use of any Transferred Product or Licensed Product sold or distributed by Buyer from and after the Closing, including warranty obligations, and irrespective of the legal theory asserted. Section 2.4. Excluded Liabilities. Buyer and Seller agree and acknowledge that Buyer will, effective as of the Closing, assume only the Assumed Liabilities and will not assume any Excluded Liabilities. Section 2.5. Purchase Price; Other Payments.

(a) Purchase Price. Subject to the terms and conditions contained in this Agreement, in consideration of the sale and transfer of the Transferred Assets and the ceding of rights and obligations of the Seller and Pfizer Asia under the License Agreement and the Supply Agreement pursuant to this Agreement, Buyer, Agila India and OLL, jointly and severally, agree

Page no. 118 of the P.B. : commercial sale and marketing of the Transferred Products and the Licensed Products, consistent with past practice; and provide sales reports to Buyer, within ten (10) Business Days after the end of each calendar month commencing from execution of this Agreement, of commercial sales of the Transferred Products and the Licensed Products.

Section 3.2. Pharmacovigilance Agreement. Buyer may designate a pharmacovigilance representative with respect to the Transferred Products, the Licensed Products and the Vancomycin Products. Following the Vancomycin Closing Date, Buyer or its designee, as applicable, shall be solely responsible for conducting all pharmacovigilance activities relating to the Vancomycin Products in the Territory and complying with applicable Laws in the conduct of such activities, including any local regulatory requirements. During the time period beginning on the Vancomycin Closing Date and ending on February 14, 2014, Seller agrees to provide transitional pharmacovigilance services to Buyer or its designee, as applicable, relating to the Vancomycin Products in the Territory, such services to be provided pursuant to the terms set forth in Exhibit B and to include the transfer of any safety database in Seller's possession relating to the Vancomycin Products in the Territory.

(c) Following the Closing Date, Buyer or its designee, as applicable, shall be solely responsible for conducting all pharmacovigilance activities relating to the Transferred Products and the Licensed Products in the Territory and complying with applicable Laws in the conduct of such activities, including any local regulatory requirements. During the time period beginning on the Closing Date and ending on February 14, 2014, Seller agrees to provide transitional pharmacovigilance services to Buyer or its designee, as applicable, relating to the Transferred Products and the Licensed Products in the Territory, such services to be provided pursuant to the terms set forth in Exhibit C and to include the transfer of any safety database in Seller's possession relating to the Transferred Products and the Licensed Products in the Territory.

(d) This Section 3.2 shall supersede and replace any pharmacovigilance arrangement previously in place between the Parties or their Affiliates with respect to the Transferred Products, the Licensed Products and the Vancomycin Products in the Territory.

Section 3.3. Transfer of Assets; Inventory Selloff; Notification of Customers. (a) Promptly after the Closing, the Parties shall coordinate and oversee the transfer of any Transferred Assets that were not transferred to Buyer at Closing, such activities to include the provision of support reasonably necessary to consummate the transfer of such Transferred Assets to Buyer.

(b) Exhibit D sets forth the form of notification that will be delivered to relevant customers, including GPOs, regarding the sale of the Transferred Assets to Buyer and the termination of the Supply Agreement and the License Agreement. Prior to and after the Closing, Seller and Buyer (or its designee) shall reasonably cooperate with each other in good”

On perusal of the above pages of Assets Purchase Agreement, it is observed that at page number 105, at the top of the page, the title of agreement itself shows that it is an assets purchase agreement. On the same page, in last para, it has been mentioned that “ the seller shall cede their rights and obligations under the licence agreement and the supply agreement to the buyer pursuant to the terms of this agreement”. Whereas Section 2.1 at page number 114 talks about purchase of “all the right, title and interest of seller” by the buyer.

Section 2.5 at page 114 and 115 talks about the purchase price to be paid in lieu of this assets purchase agreement. Section 3.3 at page number 118 talks about the transfer of assets in the agreement. Hence on the basis of such observation, it is abundantly clear that it was an agreement for purchase of assets and the amount paid under this agreement was on account of the purchase price of the said assets and was not in the nature of termination charges/fees . Hence, we are of the considered opinion that the charges of Rs.340.45 crores paid by the ASPL to Pfizer are in the nature of capital expenditure and not in the nature of revenue expenditure. Hence we dismiss the ground no. 4 of the assessee. 7.3 In the result, ground no. 4 of the assessee is dismissed.

Now coming to ground no. 5 related to disallowance of liquidated 8. damages of Rs. 6.19 crores paid by the ASPL to Fresenius, which had been claimed by the assessee as revenue expenditure, the Ld. AR submitted that as per the terms of L&D agreement with Fresenius, ASPL was liable to pay liquidated damages of Rs. 6.19 crores to Fresenius. He also submitted that no benefit of enduring nature had been obtained by the assessee on such payment and therefore the same had been claimed as revenue expenditure.

8.1 Per contra the Ld. DR heavily relying on the decision of Ld. PCIT, further submitted that it was MLL, who was not interested to continue the agreement with Fresenius and it was for the business interest of MLL that the L&D agreement was terminated and as a result of which ASPL paid liquidated damages of Rs. 6.19 crores to Fresenius. Therefore the Ld. DR prayed before the bench that the expenditure claimed by the assessee, by no means relates to the benefits of business of the assessee. Therefore the expenses claimed by the assessee on this account is required to be disallowed.

We have heard the rival contention and also gone through the record 8.2 in the light of the submissions made on either side. There is no dispute about the facts that MLL was not interested to continue the L&D agreement with Fresenius and as per the business need of MLL, the assessee terminated the L&D agreement with Fresenius and was liable to pay the liquidated damages of Rs. 6.19 crores. In this regards it is important to reproduce as under the relevant para of the submission made by the assessee in pursuance of hearing fixed on 03/10/2023 :

“B. Expenditure of INR 6,19,00,000 incurred towards liquidated damages for termination of licensing and supply contract: 1.9. In December 2012, ASPL entered into a Product Licensing and Distribution Agreement ('licensing and distribution agreement) with a third-party i.e., Fresenius Kabi USA, LLC ('Fresenius'). 1.10. Pursuant to the acquisition of ASPL, MLL did not want to continue with the licensing and distribution agreement with another US entity i.e., Fresenius. Thus, ASPL was required to terminate its business relationship with Fresenius.”

It is also clear from the aforesaid portion of submission of the assessee, MLL was not interested to continue the L&D agreement with Fresenius and the ASPL had paid the liquidity damages of Rs. 6.19 crores to Fresenius to protect the business interest of MLL. The payment of liquidated damages made by the ASPL by no means related to the business needs of the assessee. As per section 37 of the Act, the expenditure which is incurred wholly and exclusively for the purpose of business, can only be allowed as business expenditure. Hence we are of the concerned opinion that the liquidated damages of Rs. 6.19 crores paid by the ASPL to Fresenius were not incurred wholly and exclusively for the purpose of business of the assessee and therefore can not be allowed as expenditure to the assessee u/s 37 of the Act . Hence we dismiss the ground no.5 of the assessee.

8.3 In the result, the ground no. 5 of the assessee is dismissed.

Order pronounced in the open Court on 12th Aug., 2024.