DCIT RG 9(1), MUMBAI vs. GHARDA CHEMICALS LTD, MUMBAI

आदेश / O R D E R Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 22/07/2013 of the Ld. First Appellate Authority, Mumbai.

“18.Ground No.8 pertains to second TP adjustment and it is about depreciation of registration rights amounting to Rs.5,76,55,986/-and registration rights, valued at Rs.67,99,06,271/-.During the TP proceedings, the TPO found that the assessee had acquired the registration rights for total amount of Rs.67.99 crores based on assets revalued in the books of G-USA, as on 1.10.2004 which on 30/09/2004 before the valuation was equivalent to Rs. 44.92 crores. He held adjustment of the 23.06 crores will have to be made, that the adjustment would result in reworking of capital loss on liquidation of assets and the same time the claim of depreciation on intangible assets being registration rights would have to be reduced. On a querry by the AO in that regard, the assessee stated that in the event the TP adjustment proposed by the TPO were to be accepted capital loss on liquidation of investment held by the assessee in G-USA had to be recomputed, that after disallowance of revaluation of registration rights there would be a loss of Rs. 23.06 crores, that the loss should be allowed to be carried forward and set off in the subsequent assessment years. After considering submission of the assessee, the AO held that the assessee had computed long term capital loss on shares of G-USA on liquidation of investment, the AE was hundred percent subsidiary company of the assessee, that it had taken over the 100% subsidiary company and all the assets and liabilities were taken over, that as per the provisions of section 47(iv)/ (v) transactions from the holding company to subsidiary company or vice versa were not regarded transfer, that provisions of section 45 of the Act were not applicable, that the computation of capital gains could not be carried out in respect of transactions with the AE, that adjustment of Rs.23.06 crores would result in reworking of capital loss,that the value of registration had to be reduced to Rs.44.92 crores,that there was a loss of capital to the assessee. He further held that the adjustment was not called for computation of income under the head capital gains in view of the provision of section 47 of the Act, that assessee was not entitled to carry forward of long-term capital loss and the claim made by it in that regard had to be rejected. He held that depreciation was to be allowed in respect of registration right taking the value before the revaluation of Rs.44.92 crores. He worked out the depreciation @ 25%(Rs11.23 crores) is against the assessee’s claim of Rs.16.99 crores. He disallowed the claim of access depreciation of Rs.5.76 crores and added the same to the total no of the assessee. Finally the WDV of registration was revised at Rs.33.69 crores as on 31.03/2005.

18.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him, it was argued that the assessee had wholly owned subsidiary in USA,that it had registration right in CFS and Diacamba ,that the registration rights were restated in its books of accounts by the AE as on 30/09/2004 on the basis of valuation analysis carried out by an independent expert, that the AE was dissolved on the last day of September, 2004, that upon dissolution all the assets and liability of the AE were distributed to the assessee at book value, that post liquidation the assessee continued the business in USA through its branches, that the assets were taken over by the assessee included intangible assets-being to registration rights of CFS and Diacamba, that the book value of the registration was Rs.67.99 crores, that the pesticide market of US was a very mature market with the strong regulatory requirements, that pesticide registration was a pre-requisite for any operation, that as per the prevalent laws of USA assessees were required to obtain a registration from the US environmental protection agencies, that for a registration the applicant would be required to submit a Dossier,that the AE had obtained registration, that the product registration was reviewed on a periodic basis for safety to human beings, animals and the environment, that fees were payable annually to maintain the registrations, that the AE had incurred significant registration cost for the production registration amounting to USD 1, 28, 6,995.33,that the above value was duly reflected as gross block in the books of the AE,that the valuer had considered the actual expenditure incurred on acquisition of registration rights as above while valuing the registration rights, that the AE had membership of three professional task force agencies formed under federal insecticide, fungicide, and rodenticide Act, that the membership of the above agencies was essential to maintain the registration of CPF and Diacamba, that the eligibility to sell the products by the assessee in USA depended solely on the ownership of the registration rights of the products as required by the law of that country, that the AO/TPO had made an adjustment of Rs. 23.06 crores by rejecting the valuation of registration rights by an independent expert value, that the TPO had not read the valuation report in proper perspective, that the assessee had requested the valuer to further clarify the valuation report, that the valuer had reported that accurate determination of actually study costs paid by the that order was key in preparing the basis for valuing the total negotiated settlement paid by the fellow on registration, that the assessee had incurred cost of USD1,28,16,995 and further sum of USD30,62,311 was also spent, that AE had incurred expenditure of USD 1,58,79,306 and not USD 97,33,679 as adopted by the TPO, that the business of the assessee was growing from year to year. During the appellate proceedings, the assessee made an application for admission of additional evidences under rule 46Aof the income tax rules, 1962.After admitting the additional evidences, the FAA forwarded a copy of the documents to the TPO for his comments. The TPO filed his comments in that regard.

After considering the available material, the FAA held that the assessee had a wholly owned subsidy in USA, that the AE held registration rights in two products, that the rights were revalued in the books of the AE as on 1.1.2004 based on valuer’s report, that the registration rights were revalued from Rs. 44.29 crores to Rs. 67.99 crores, that the AE was dissolved on 30/09/2004, that upon dissolution all the assets and the liabilities of the AE were taken by the assessee at the book will you which included value of registration rights are to be 67.99 crores, that the TPO had made an adjustment of Rs. 23.06 crores to the consideration paid by the assessee on acquisition of the assets and liabilities of the AE by ignoring the revaluation of the registration rights, that a sum of USD30,62,311was spent on membership fees and incidental expenses, that those expenses were incurred much prior to the year 2004, that there was inflation and risk premium factor attached to it, that same had to be factored in, that the TPO in his remand report had not disputed the actual expenditure incurred by the AE, that he had also not disputed the contents of the various clarifications provided by the valuer, that the AE was in a position to transfer or assign the registration to its successor or to any third party which acquired respective registrations, that the observations made by the TPO about non-transferability of the registration and restriction on sale of registration data were not in accordance with the facts on record, that the AE was dissolved and by operation of law licenses for the two products devolved on the assessee and they were not acquired by it, the book value of registration rights taken over by the it as USD1,47,30,136,that it was much lower value compared to the valuation made by the valuer at USD15.6 million, that the book value was also lower compared to the actual expenditure incurred of USD1,58,79,306 on the registration of those products, that the TPO had merely rejected the valuation done by the valuer on the surmise without considering the evidences on record, that the adjustment made by the TPO by rejecting the revaluation of the registration right was not proper. Finally,he held that the consideration for registration rights, as adopted by the assessee as per the book value of Rs.67.99 crores in the books of the AE, had to be accepted.

18.2.Before us, the DR relied upon the order of the TPO. The AR made the same submissions that were made before the FAA and supported his order. We have heard the rival submissions and perused the material before us. We find that the wholly owned subsidy of the assessee held registration rights in two products, that it had paid registration charges for selling those products in the US markets, that it had also paid other fees as required by the US laws, that it had incurred total expenditure of USD 1,58,79,306 under the head registration charges, that the AE got the assets revalued as on 01.01.2204,that registration rights were revalued from Rs. 44.29 crores to Rs. 67.99 crores by the independent valuer, that on 30.09.2004 the AE was dissolved, that the assessee took over the assets and liabilities of the AE at the revalued price, that the payment for registration rights and other fees were paid much before the revaluation, that it adopted lesser value of the rights as compared to the value determined by the valuer, that further clarification were called from the valuer, that in the remand report the TPO agreed that payment was made by the AE for the rights in earlier years, that there was no discrepancy in the method of valuation, that the TPO pointed out element of non transferability in the valuation report for supporting the adjustment, that the FAA has given a categorical finding of fact that the TPO was factually incorrect in arriving at the conclusion of non transferability, that the AE had right to transfer the rights to others also. Considering the above facts, we are of the opinion, that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming his order, we decide ground no.8 against the Assessing Officer”.

2.2. In the present appeal, the ld. Assessing Officer, on the basis of assessment order for Assessment year 2005-06, after considering the order of TPO dated 23/10/2008, the WDV as on 31/03/2005 was determined at Rs.33,69,61,748/- in respect of intangible asset (registration rights). The ld. Addl. Commissioner disallowed depreciation of Rs.1,36,82,036/- holding that excess claim of depreciation on intangible asset has been claimed. On appeal, before the Ld. Commissioner of Income Tax (Appeal), the relevant discussion was made in para-7 and 7.1 following the order of Assessment year 2005-06, the addition was deleted. The appeal of the Revenue was dismissed by the Tribunal. Thus, following the aforesaid order of the Tribunal, we find no merit in the appeal of the Revenue, consequently, dismissed.

Finally, the appeal of the Revenue is dismissed.

This order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 12/05/2016.

Sd/- Sd/- (Ramit Kochar) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य /JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 12/05/2016 f{x~{tÜ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file.