AKORN INDIA PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

Asst Year 2012-13 – Assessee Appeal – Asst Year 2012-13 – Revenue Appeal 2. The assessee has raised the following additional ground of appeal before us:-

We have heard the rival submissions and perused the materials available on record. We find that the additional ground raised by the assessee is purely legal in nature and goes to the root of the issue in dispute before us. Hence the same is hereby admitted and taken up along with the other original grounds raised by the assessee as well as by the revenue.

We have heard the rival submissions and perused the materials available on record. The assessee company was incorporated on 29-08-2011 and this is the first year of its operation ]. The assessee is primarily engaged in the business of manufacturing all kinds of drugs, medicines, pharmaceutical and medicinal preparations such as sterile injectables, biologicals and antibiotics preparations through a newly acquired undertaking under slump purchase from Kilitch Drugs India Limited on 29-02-2012. The original return of income was filed by the assessee company on 29-09-2012 declaring loss of Rs 22,80,64,929/- . During the course of scrutiny assessment proceedings, the assessee vide its letter dated 9-2-2015 made an additional claim of depreciation by furnishing a revised computation of income, wherein the depreciation as per Income Tax Act has been increased to Rs 23,27,18,461/- in place of the original figure of depreciation shown at Rs 23,21,46,947/-. The Learned AO observed that the revised computation filed during the course of assessment proceeding cannot be accepted, since the same is not supported by a revised return filed under Section 139(5) of the Act. The Learned AO accordingly vide order sheet entry dated 3-3-2015 showcaused the assessee as to why the additional claim of depreciation made by the assessee which is not supported by a revised return of income under Section 139(5) of the Act be ignored. The assessee vide its submission dated 10-3-2015 stated that during the physical verification of the tangible assets conducted by the assessee in the month of September 2013, certain assets which were there in the Fixed Assets Register were not found to be present. Further, certain additional assets which were not mentioned in the Fixed Assets Register were found during the physical verification. Since these assets were related to the business acquired by the assessee in financial year 2011-12 relevant to assessment year 2012-13, the corresponding adjustments were made by assessee in the income tax depreciation schedule for the year under consideration and for subsequent years. In the light of the above, the additional depreciation of Rs. 5,71,514/- was claimed by the assessee in its revised computation of income. Since the assessee is not in a position to statutorily revise its return for the year under consideration given the time limitation prescribed under Section 139(5) of the Act, it had filed the revised computation of income claiming the additional claim of depreciation thereon. The Learned AO also observed that the schedule of fixed assets also includes Goodwill and Non Compete Fees opening value of which has been shown at Rs 144,09,13,533/- and Rs 20,00,00,000/-. The Learned AO observed that in the income tax depreciation schedule attached with Annexure to Form 3CD by the assessee, there is no block of intangible assets which include the value of goodwill or amount paid as non-compete fee.

The assessee submitted that it had acquired certain business of Kilitch Drug (India) Limited (KDIL) from 28-2-2012 at a net purchase consideration of Rs 281,28,95,923/-. The Book value of assets acquired was Rs 137,19,82,389/-. Hence the excess amount paid of Rs 144,09,13,534/- over and above the book value of assets was attributed towards Goodwill by the assessee. Apart from this, the assessee also entered into a Non-Compete Agreement dated 6-10-2011 whereby the promoters of KDIL agreed to certain restrictive covenants for a consideration of Rs 20,00,00,000/- to not to compete with the assessee company. It was submitted that the assessee is of the view that these payments for goodwill and non-compete fee represent price paid towards bundle of business or/and commercial rights obtained by the assessee for carrying on its business more effectively and profitably and strengthening its position in the market. Acquisition of these assets is of great significance to the assessee company as it represents acquisition of benefits / advantages / reputation built over a period of time. Accordingly, the assessee believes that the goodwill and non-compete fee is of similar nature as know- how, patents, copyrights, trademark, licenses, franchise, all of which are brought into existence by experience and reputation and are not built overnight. Accordingly, the assessee by placing reliance on the various decisions on the impugned issue believed that acquisition of goodwill of Rs 144,09,13,533/- and non-compete fee of Rs 20,00,00,000/- represent business or commercial rights in accordance with the provisions of section 32(1)(ii) of the Act. The assessee clearly mentioned the aforesaid facts in the notes to financial statements and also in Form 3CD by stating that it reserves its right to claim of depreciation on goodwill and non-compete fees.

The Learned AO observed that the statutory auditor of the assessee company apparently has not found the amount of Rs 144.09 crores paid towards goodwill qualifying as an intangible asset eligible for claim of depreciation as per the Income Tax Act which is evident from the fact that the income tax depreciation schedule under the Act does not contain any block of intangible assets. Accordingly, the Learned AO concluded that the payment of Rs 144.09 crores made by the assessee company to KDIL has not been found apparently representing any asset or recognized as an intangible asset by the statutory and tax auditor. This shows the dissent the auditor apparently had with the assessee company due to which he himself has not recognized both the payments towards creation of intangible assets and accordingly had not mentioned the claim of assessee. Accordingly, the recognition of the excess amount paid by the assessee company over and above the book value of assets to KDIL of Rs 144.09 crores towards goodwill as intangible asset was not accepted by the Learned AO. The assessee also placed reliance on the decision of the Hon’ble Supreme Court in the case of Smifs Securities Ltd reported in 348 ITR 302 (SC). The Learned AO observed tha the assessee has to prove that the goodwill is actually existing or obtained from the transaction. Thus primarily, for claiming depreciation on goodwill, the onus is on the assessee to substantiate that the payment made as slump purchase consideration also include value paid for goodwill and also prove the benefit it expects to get from such transaction other than or in addition to the assets acquired. Thus, there must be a difference in the value of asset acquired with the purchase consideration paid. In the instant case, the valuation of goodwill itself is disputed at the first stage by the auditor who has not recognized the difference between the amount paid as net purchase consideration with the net book value. The Learned AO noted that the assessee company during the year under consideration had entered into a Business Transfer Agreement (BTA) on 6-10-2011 with Kilitch Drugs India Limited (KDIL) to acquire the business of research, development, manufacturing, marketing, importing and exporting of generic pharmaceutical formulation products at its manufacturing facilities located at Village, Nihalgarh, Tehsil Paonta Sahib, Himachal Pradesh, India.

The assessee submitted that in respect of acquisition of the assets on slump sale basis, the assessee company carried out a purchase price allocation , which was based on fair valuation of fixed assets conducted by independent valuers. Further, the net current assets were valued at respective book values agreed upon by the concerned parties. As a result, the following assets are taken in the books of the assessee company:-

The assessee submitted the Accounting Treatment given for acquisition of the aforesaid assets in the books of accounts as under:-

The Learned AO by referring to Clause 2.1.17 of Business Transfer Agreement observed that the goodwill of the seller associated with the business and the transferred undertaking is also included in the list of transferred asset and liability. However, no specific valuation of the goodwill is mentioned in the Business Transfer Agreement or the valuation report of the Protocol Surveyors & Engineers Pvt Ltd. The assessee however furnished a final valuation report dated 19-9-2012 prepared by Price Waterhouse & Co which is an additional valuation report. As per this report, the goodwill valuation has been done at Rs 108,03,60,481/-. The assessee further furnished a reconciliation of this valuation to prove the valuation of goodwill at Rs 144,09,13,533/- as shown in the financial statement. The assessee in its letter dated 18-03-2015 explained the difference as the financial statement of the assessee are prepared on the basis of Indian Generally Accepted Accounting Principles (IGAAP) whereas, the value of goodwill reported in the valuation report is after considering US GAAP adjustment. The learned AO observed that this does not answer the basic question of the basis of valuation and also as to what the goodwill represent in the instant case. Accordingly he concluded that the valuation of intangible asset is not proved and as such the difference of Rs 144,09,13,534/- attributed to the goodwill is to be rejected. With regard to the valuation of tangible asset, reference was invited to Note No.21 of financial statements as per which the value of land acquired under the Business Transfer Agreement was taken at Rs 18,93,99,464/-. This value has been taken into account by the assessee company as value of land in its books of accounts. As per the copy of valuation report prepared by Protocol Survey & Engineers Private Limited with regard to the valuation of fixed assets such as land , building and plant and machinery, the gross book value pertaining to the land (unit 1 and unit 2 / building / plant and machinery/ electrical equipment / vehicles / furniture and fixture / computer / lab equipment / office equipment / mobile and CWIP as at 29-2-2012 has been reported at Rs 124,03,41,226/-. The net book value of the assets has been mentioned at Rs 99,60,37,973/-. The fair value of all these assets has been mentioned at Rs 124,14,13,118/-. As per Business Transfer Agreement, the total cash consideration for the transferred undertaking 1 and 2 is Rs 188,00,00,000/-. As against this, the assessee has taken value of land (unit 1 and unit 2 / building / plant and machinery / electrical equipment / vehicles / furniture and fixture / computer / lab equipment / office equipment / mobile and CWIP as at 29-2-2012 at Rs 137,19,82,389/-. Thus the apparent difference can be seen among the valuation of assets and agreed cash consideration of unit 1 and 2 with the value taken by the assessee company in its books of accounts. The Learned AO noted that the value of land taken by Protocol Surveyors & Engineers Pvt Ltd in their valuation report at Rs 12,69,00,000/- comprising of 57661 sq.mtr @ Rs 2200 per sq.mtr. A Google Search was carried out by the Learned AO to find out the value notified for the purpose of circle rate. As per the notification dated 30-3-2012, the rate of land at Revenue village Nihalgarh has been mentioned at Rs 20,00,000/- per Bigha on the National Highway. As there is no other rate mentioned in other columns, the rate of Rs 20,00,000/- per Bigha should be the applicable rate in respect of the Unit 1 & 2 transferred through the Business Transfer Agreement. With this rate, the Learned AO noted that the value of land would be Rs 71,27,47,621/-, as against the assessee’s value of land considered at 10 Rs 18,93,99,464/- . The Learned AO also noted that eventhough the aforesaid rate prescribed in the notification is applicable for the period 1-4- 2012 to 31-3-2013, it atleast gives the real picture of the transaction. The Learned AO observed that similar thing cannot be ruled out in respect of buildings.

Further the Learned AO observed that the AIR information filed by the Tehsildar, Paonta Sahib for transaction of immovable property of land and building carried out by the assessee was reflecting the value of Rs 110,98,65,626/- for unit 1 & 2. This is the value for which sale deed has been registered with Sub-Registrar 1 , Tehsil Paonta Sahib, Sirmaur, Himachal Pradesh. The Learned AO observed that this value denotes the fair market value of the land and building in accordance with the provisions of section 50C of the Act.

The assessee vide letter dated 24-03-2015 filed before the Learned AO stated that the value of land as per the valuation report submitted by the assessee was calculated at the rate of Rs 2200 per square meter on the basis of research of the local market and verbal price quotes from various real estate brokers as the circle rates were not available during the said period. It was submitted that the circle rates were notified only from April 2012 onwards and prior to that, the circle rates were estimated / decided by local revenue officer on a case to case basis which was usually based on recent transactions that included residential, commercial and industrial land parcels. It was also submitted that the circle rates notified from April 2012 onwards which worked out at Rs 2372 per square meter was for the National Highway, whereas the subject mentioned land of the assessee is on the State Highway. Accordingly it was stated that there is no under valuation of land in the valuation report or in the books of accounts of the assessee during the 11 year under consideration. The Learned AO observed that assessee in its books of accounts had taken the value of land at Rs 18,93,99,464/- and value of building at Rs 21,56,57,936/- the total of both comes to Rs 40,50,57,400/- as against the registered sale deed value of Rs 110,98,65,626 for the same land and building . The Learned AO with regard to the valuation report prepared by Protocol Surveyors & Engineers Private Limited and Price Waterhouse & Co observed that there is no difference between the valuation of land and building in the valuation report prepared by both the valuers and both are ditto same. Both the valuers had considered the value of land and building at Rs 20,05,60,000/- and Rs 12,69,00,000/- respectively totaling to Rs 32,74,60,000/-. Because of the substitution of the value of land and building, the Learned AO correspondingly reduced the value attributable to Goodwill portion as against the value adopted by the assessee at Rs 144,09,13,534/- for Goodwill. The Learned AO however agreed to the fact that the assessee had indeed paid purchase consideration of Rs 281,28,95,923/- to Kilitch Drug India Ltd. The Learned AO concluded that no additional benefit in the shape of intangible assets has been received by the assessee company on this slump purchase as the customer relationship/ export/ trademark/ product registration/ contract manufacturing agreement/ other customer contract/ order backlog/ other supplier contract relationship/ intellectual property etc. has not been found worth valuation for the reasons mentioned in the valuation report. It would be further relevant to mention that the items / medicines produced by the assessee company are not marketed under its own brand. The Learned AO on verification of the assessee submission dated 10-3-2015 observed that assessee has furnished a list of products which the assessee company has manufactured and sold to the companies who are further marketing the drug in their name. This shows that assessee has manufactured various injectables for the leading brands / 12 pharmaceutical companies who are selling this product under their brand such as Baxter (India) Private Limited , Cipla Limited , Elder Pharmaceuticals Limited , Emcure Pharmaceuticals Limited , IPCA Laboratories Limited, Microlabs Limited, Ranbaxy Laboratories Limited and Wanbury Limited. Hence, assessee has not made any sale of injectables or drugs under the brand of AKORN. Hence, the Learned AO concluded that by purchasing the manufacturing facility of Kilitch Drug India Limited , the assessee has not obtained or added any specific brand value in its fold , value of which can be attributable towards any asset other than the assets of business purchased through Business Transfer Agreement. Hence, no value could be attributed towards goodwill in this regard as there was no intangible asset that has come into existence for the assessee. With these observations, the Learned AO disallowed the claim of depreciation on goodwill of Rs 18,01,14,192/- and completed the assessment.

The Learned AO observed that Annexure to Form 3CD containing Income Tax Depreciation Schedule revealed that the assessee company has also entered into a Non-Compete agreement dated 6-10-2011 whereby the promoters of KDIL agreed to certain restrictive covenants for a consideration of Rs 20 crores to not to compete with the assessee company. However, no amount of depreciation on the amount of Rs 20 crores paid in consideration of the restrictive covenants has been mentioned in this Annexure to Form 3CD. The Learned AO observed that the statutory auditor apparently had not found the amount of Rs 20 crores paid towards restrictive covenants qualifying as an intangible asset eligible for claim of depreciation under the Income Tax Act. Further, the Learned AO observed that the non-compete fees is not covered in the definition of intangible assets and as such the claim of depreciation on the same is not allowable. Vide order sheet entry dated 3- 3-2015, the assessee was showcaused as to why the depreciation of Rs 2.50 crores claimed on non-compete fees may not be disallowed. The assessee replied vide letter dated 10-3-2015 stating that the tenure of the non- compete agreement is for a period of four years which can be sufficient period to give enduring benefit to the assessee. Further given the fact that the non- compete fees paid at the time of acquisition of business and expenditure is incurred to protect the newly set up business, the same would be in the nature of capital expenditure. The assessee placed reliance on the following decisions in support of its contentions:- a) Decision of Pune Tribunal in the case of Serum Institute of India Limited in /PN/200 reported in 136 ITD 69 (Pune) b) Decision of Chennai Tribunal in the case of Real Image Tech Pvt. Ltd. reported in 120 TTJ 983 (Chen). c) Decision of Chennai Tribunal in the case of Medicorp Technologies India Limited reported in 30 SOT 506 (Chen) d) Decision of Hon’ble Madras High Court in the case of Pentasoft Technologies Limited reported in TS-578-HC-2013-MAD. e) Decision of Hon’ble Karnataka High Court in the case of Ingersoll Rand International Industries Limited in of 2013 reported in 48 taxmann.com 349 (Kar HC)

The Learned AO, however, placed reliance on the decision of Hon’ble Jurisdictional Delhi High Court in the case of Sharp Business Systems v. CIT reported in 27 taxmann.com 50 ( Del HC) wherein it was held that since in the case of non-competition agreement , advantage is a restricted one in point of time and it does not confer any exclusive right to carry on primary business activity, amount paid as non-compete fee does not qualify for depreciation under section 32(1)(ii) of the Act. By placing reliance on this decision, the Learned AO held that non-compete fees does not fall within the definition 14 of intangible assets under section 32(1)(ii) of the Act and accordingly the claim of the assessee on account of depreciation on non-compete fees in the sum of Rs 2.50 crores was sought to be rejected by the Learned AO.

The Learned CITA practically upheld the decision of the Learned AO wherein it was concluded that the assessee had indeed undervalued the cost of land and building to the extent of Rs 78.25 crores and had correspondingly increased the value of goodwill to that extent and claimed higher amount of depreciation on goodwill thereon. Having held so, the Learned CITA observed that assessee had indeed made payment of Rs 281.28 crores as purchase consideration to Kilitch Drug India Ltd. Hence, the remaining portion of assets taken over to the extent of Rs 65.80 crores should be attributed as amount paid towards goodwill and on which depreciation is indeed eligible to the assessee. Accordingly, the Learned CITA by placing reliance on the decision of Hon’ble Supreme Court in the case of Smifs Securities Ltd. reported in 348 ITR 302 (SC) wherein it was held that the excess consideration paid by the assessee over the value of net assets should be considered as goodwill arising on amalgamation. Similarly, the Learned CITA also placed reliance on the decision of Hon’ble Jurisdictional Delhi High Court in the case of Triune Energy Services Pvt. Ltd. reported in 65 taxmann.com 288 (Del HC) which also endorsed the aforesaid view of the Hon’ble Supreme Court. Accordingly, the Learned CITA though in principle agreed with the views of the Learned AO, finally, directed the Learned AO to grant depreciation on goodwill of Rs 65.80 crores at the applicable rates. Aggrieved by this direction, both assessee as well as the revenue are in appeal before us.

With regard to claim of depreciation on non-compete fees of the assessee, the Learned CITA upheld the action of the Learned AO in view of 15 the fact that the Learned AO had relied on the decision of Hon’ble Jurisdictional Delhi High Court. Aggrieved, the assessee is in appeal before us.

It is not in dispute that the assessee had indeed paid purchase consideration of Rs 281.28 crores on slump sale basis to Kilitch Drug India Ltd and had acquired various assets from them. It is a fact that the purchase consideration paid by the assessee is in excess of net assets acquired by the assessee from Kilitch Drug India Ltd. Hence obviously the differential portion need to be attributed towards the value of Goodwill. Hence we are in complete agreement with the view taken by the Learned CITA in this regard and dismiss the ground of the revenue. Now the short point that arises for our consideration is as to whether the value attributed by the assessee towards the land and building acquired through slump purchase could be accepted and correspondingly the remaining portion attributed towards Goodwill could be accepted or not. It is a fact that the assessee had attributed the value of land and building based on the valuation report obtained from Protocol Surveyors & Engineers Pvt Ltd and Price Waterhouse & Co. which is practically the same. The approved valuers had given some value for land and building as detailed supra in the narration of facts and observations of the Learned AO supra. The Valuation report of Protocol Surveyors & Engineers Pvt Ltd is enclosed in Pages 113 to 163 of the Paper Book. The Valuation report of Price Waterhouse & Co is enclosed in Pages 168 to 302 of the Paper Book. The workings given by the assessee before the Learned AO duly reconciling the value of goodwill as per the valuation report with the value as per the financial statements are enclosed in Page 303 of the Paper Book. It is not in dispute that the circle rate for the subject mentioned land and buildings acquired by the assessee under slump sale were notified only with effect from April 2012 onwards. The year under consideration before us is financial year 2011-12 relevant to Assessment Year 2012-13. The date of notification of circle rates by the State Government is falling in Assessment Year 2013-14. Hence the circle rate adopted therein cannot be made applicable for the transactions carried out by the assessee herein in Assessment Year 2012-13. The Business Transfer Agreement for slump sale entered into by the assessee which also contains the clause for non- compete fees is enclosed in Pages 412 to 653 of the Paper Book. The Non- compete agreement entered into by the assessee is enclosed in Pages 695 to 787 of the Paper Book.

In our considered opinion, the provisions of section 50C of the Act per se cannot be made applicable in the instant case as assessee is only the buyer of capital assets and not the seller. At best, the provisions of section 56(2)(vii)(b) of the Act could be made applicable, which is applicable in the hands of the buyer. Hence the Learned AO applying the provisions of section 50C of the Act by adopting the circle rates for land and building acquired by the assessee under slump sale is patently wrong in view of the fact that acquisition of assets under slump sale is governed by the provisions of section 50 B of the Act. It is pertinent to note that provisions of section 50C creates a deeming fiction in the hands of the seller that the value determined by the stamp valuation authorities for the purpose of stamp duty shall be deemed to be the full value of consideration received by the seller if the value mentioned in the registered sale deed is less than the value determined by the stamp valuation authorities. The provisions of section 50C of the Act as stated earlier is applicable only to the seller, which creates a deeming fiction. The additional ground raised by the assessee is challenging the applicability of provisions of section 50C of the Act to the impugned transactions of the assessee carried out through slump sale agreement. We have already held that assessee being a buyer of the assets under slump sale, the provisions of section 50C of the Act cannot be made applicable to it. However, the provisions of section 56(2)(vii)(b) of the Act shall be applicable, which apparently does not contain any deeming fiction. Hence, the argument advanced by the Learned AR before us that the deeming fiction created by the statute had to be interpreted very strictly and had to be applied only for the section in which such deeming fiction is created and the same cannot be extended to other sections, meaning thereby - the deeming fiction created in section 50C of the Act cannot be extended to slump sale cases which are governed by provisions of section 50B of the Act, is to be rejected. Once the provisions of section 56(2)(vii)(b) of the Act are made applicable, what is to be seen is if the value at which assets were acquired by the assessee at a price lesser than the value determined by the stamp valuation authorities for the purpose of levy of stamp duty, then the acquisition price of the assets shall be substituted with the value determined by the stamp valuation authorities for the purpose of stamp duty. The differential amount shall be treated as inadequate consideration and brought to tax under section 56(2)(vii)(b) of the Act. But it is pertinent to note that the same provisions of section 56(2)(vii)(b) of the Act contains a proviso which says that if there is any dispute with regard to the value between the assessee and the value determined by the stamp valuation authorities, then the proper recourse to the revenue would be to refer the valuation of the land and buildings to the Learned Departmental Valuation Officer and thereafter the valuation of assets need to be governed by the mandate provided in section 50C(2) of the Act. Admittedly, in the instant case, the Learned AO had not resorted to refer the matter to Learned Departmental Valuation Officer. Hence in the interest of justice and fairplay, we deem it fit and appropriate to restore this issue to the file of Learned AO with the following directions:-

The Ground No. 3 raised by the assessee is challenging the disallowance of interest paid on late payment of customs duty. We find that this issue is not emanating from the orders of the lower authorities for the year under consideration. Hence Ground No. 3 raised by the assessee is hereby dismissed as not maintainable.

In the result, the appeal of the assessee for Assessment Year 2012-13 in Assessment Year 2012-13 in is dismissed. 20

Both the parties mutually agreed that the issues in dispute in Assessment Years 2013-14 and 2014-15 are exactly identical to Assessment Year 2012- 13. Accordingly, the decision rendered by us hereinabove for Assessment Year 2012-13 shall apply mutatis mutandis to Assessment Years 2013-14 and 2014-15 , in view of identical facts, except with variance in figures.

In the result, the appeals of the assessee for Assessment Year 2013-14 in and for Assessment Year 2014-15 in are partly allowed for statistical purposes and appeals of the revenue for Assessment Year 2013-14 in ITA No. 6837/Del/2018 and for Assessment Year 2014-15 in ITA No. 6838/Del/2018 are dismissed.

The only issue raised by the assessee is with regard to the claim of depreciation on Goodwill. We find that this issue has been elaborately discussed by us in Asst Year 2012-13 supra. Hence the decision rendered in Asst Year 2012-13 on claim of depreciation would be squarely applicable for this Asst Year 2016-17 also, except with variance in figures. Moreover, this is consequential in nature pursuant to disposal of grounds of Asst Year 2012-13 and onwards.

In the result, the appeal of the assessee for Asst Year 2016-17 is partly allowed for statistical purposes.

To sum up, the appeals of the assessee are partly allowed for statistical purposes and appeals of the revenue are dismissed.