Matrix Laboratories Limited, Secunderabad V. ACIT, Hyderabad

ITA 1616/HYD/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87228 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 20-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO; RAJEEV BENJWAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction; Additional evidence; Advance ruling; Cost of acquisition; Wholly owned subsidiary; Capital receipt; Revenue expenditure
• Section: 143(3); 244A; 2(14); 80HHC; 14A; 115JB; 10B; 32; 54; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1616/HYD/2010 ASSESSMENT YEAR: 2006-07 MYLAN LABORATORIES LTD., HYDERABAD ( FORMERLY KNOWN AS MATRIX LABORATORIES LTD.) PAN AADCM3491M VS. ASST. COMMISSIONER OF INCOME- TAX, CIRCLE - 16(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAGHUNATHAN SAMPATH REVENUE BY : SHRI D. SUDHAKAR RAO & SHRI RAJEEV BENJWAL DATE OF HEARING 20-11-2014 DATE OF PRONOUNCEMENT 16-01-2015 O R D E R PER SAKTIJIT DEY, J.M.: AFORESAID APPEAL OF ASSESSEE IS DIRECTED AGAINST A SSESSMENT ORDER DATED 18/10/2010 PASSED U/S 143(3) READ WITH SECTION 92CA AND 144C OF THE IT ACT IN PURSUANCE TO THE DIRECTIO NS OF THE DISPUTE RESOLUTION PANEL (DRP) PERTAINING TO THE AY 2006-07 . 2. ASSESSEE IN TOTAL HAS RAISED 11 GROUNDS. GROUND NO. 11 BEING GENERAL IN NATURE DOES NOT REQUIRE ANY SPECIFIC ADJ UDICATION. AT THE OUTSET LD. AR SUBMITTED THAT AS PER THE INSTRUCTION OF ASSESSEE, HE DOES NOT WANT TO PRESS GROUND NO. 8. ACCORDINGLY, G ROUND NO. 8 IS DISMISSED AS NOT PRESSED. 2 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 3. GROUND NO.1 READS AS UNDER: THE DISPUTE RESOLUTION PANE ERRED IN DIRECTING THE AO TO MAKE AN ADJUSTMENT OF RS. 8,180.307 TO THE INTEREST CHAR GED BY THE ASSESSEE COMPANY IN RESPECT OF SHORT TERM FACILITY GRANTED TO ITS SUBSIDIARY MATRIX LABORATORIES NV, BELGIUM, (ASSOCI ATED ENTERPRISE) BY ADOPTING INTEREST RATE OF 7.2476% AS AGAINST INTEREST RATE OF 3.3336% PER EUROPEAN MONEY MARKETS ADOPTED. 4. BRIEFLY THE FACTS RELATING TO THE AFORESAID GROU ND ARE, ASSESSEE A COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURI NG AND SALE OF PHARMACEUTICAL DRUGS. FOR THE AY UNDER CONSIDERATIO N, ASSESSEE FILED ITS RETURN OF INCOME ON 29/11/2006 DECLARING LOSS O F RS. 24,36,51,137 UNDER NORMAL PROVISIONS AND BOOK PROFIT OF RS. 124, 70,16,779 U/S 115JB OF THE ACT. HOWEVER, DURING THE ASSESSMENT PR OCEEDING, ASSESSEE FILED A REVISED COMPUTATION BY DECLARING L OSS AT RS. 23,86,10,109 UNDER NORMAL PROVISIONS AND BOOK PROFI T OF RS. 141,72,00,425 U/S 115JB. IN COURSE OF THE ASSESSME NT PROCEEDING, AO NOTICED THAT ASSESSEE HAS ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS AE BY ADVANCING A LOAN OF EUR O 1,46,10,390 FOR FOUR MONTHS DURING THE YEAR TO ITS 100% SUBSIDIARY MATRIX LABORATORIES NV IN BELGIUM AGAINST WHICH ASSESSEE H AS CHARGED INTEREST AT EURIBOR + 75 BASIS POINTS WHICH WORKED OUT TO 3.3336% PER ANNUM. TO FIND OUT WHETHER THE INTEREST CHARGED BY ASSESSEE ON THE LOAN ADVANCED IS AT ARMS LENGTH, AO MADE A REF ERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH RATE OF INTEREST. THE TPO, HOWEVER, DID NOT AGREE TO THE RA TE OF INTEREST CHARGED BY ASSESSEE ON THE LOANS ADVANCED TO THE SU BSIDIARY. THE TPO WAS OF THE VIEW THAT AS PER THE PREVAILING MARK ET RATE OF LOAN ADVANCED IN INDIA, THE RATE OF INTEREST SHOULD BE B ENCHMARKED AT 14%. ACCORDINGLY, TPO DETERMINED ARMS LENGTH RATE OF INTEREST AT 14% PER ANNUM ON THE AMOUNT ADVANCED, WHICH WORKED OUT TO RS. 2,99,44,024 RESULTING IN TRANSFER PRICING ADJUSTMEN T OF RS. 2,27,25,240. ACCORDINGLY, IN THE DRAFT ASSESSMENT O RDER, AO PROPOSED ADDITION OF RS. 2,27,25,240 ON ACCOUNT OF TP ADJUST MENT. BEING 3 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. AGGRIEVED OF THE ADDITION PROPOSED, ASSESSEE MADE O BJECTIONS BEFORE THE DRP. 5. WHILE A SINGLE MEMBER OF THE DRP UPHELD CHARGING OF INTEREST AT 14%, TWO OTHER MEMBERS OF THE PANEL WERE OF THE VIEW THAT RATE OF INTEREST REQUIRED TO BE ADOPTED IS LIBOR + 2%, WHIC H WORKS OUT TO RS. 7.2476% PER ANNUM AND, ACCORDINGLY, THEY DIRECT ED THE AO TO COMPUTE INTEREST APPLYING THE SAID RATE. 6. LD. AR SUBMITTED BEFORE US THAT ASSESSEE HAD MAD E EURO DENOMINATED SHORT TERM ADVANCE TO ITS SUBSIDIARY IN BELGIUM, THEREFORE, AS PER THE NORMAL PRACTICE THE INTEREST RATE TO BE APPLIED DEPENDS ON THE CURRENCY OF THE BORROWING AND RELEVA NT JURISDICTION OF BORROWING. THE RATE OF INTEREST ALSO FURTHER VARIES DEPENDING ON THE TENURE OF THE LOAN. THUS, KEEPING IN VIEW ALL THESE FACTORS, ASSESSEE HAS CHARGED INTEREST AT EURIBOR + 75 BASIS POINTS O N SUCH ADVANCE. LD. AR SUBMITTED THAT IN THE GIVEN CIRCUMSTANCES AD OPTION OF EITHER LIBOR OR PLR RATE OF INTEREST IS NOT RELEVANT. LD. AR SUBMITTED THAT DURING THE SAME PERIOD, ASSESSEES AE BORROWED A ON E YEAR TENURED SYNDICATED LOAN OF EURO 165 MIO FROM ABN AMRO BANK FOR WHICH THE BANK CHARGED INTEREST AT EURIBOR + 62.5 TO 72.5 BAS IS POINTS. HENCE, THE RATE OF INTEREST CHARGED BY THIRD PARTY I.E. ABN AMRO BANK WOULD CONSTITUTE ARMS LENGTH INTEREST RATE. AS THE INTEREST CHARGED BY ASSESSEE TO ITS AE BEING HIGHER THAN THE ALP NO ADJ USTMENT IS REQUIRED TO BE MADE. IN SUPPORT OF SUCH CONTENTION, LD. AR RELIED UPON A DECISION OF THE ITAT, MUMBAI BENCH IN CASE OF TAT A AUTOCOMP SYSTEMS LTD. VS. ACIT, 2012(5) TMI 45. 7. THE LD. DR ON THE OTHER HAND JUSTIFIED THE ORDER OF DRP. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESS EE AND PERUSED THE ORDERS OF DEPARTMENTAL AUTHORITIES AS W ELL AS OTHER MATERIALS ON RECORD. WE ARE OF THE VIEW THAT AS THE ASSESSEE HAS ADVANCED THE LOAN IN FOREIGN CURRENCY PLR RATE OF I NTEREST WILL NOT BE APPLICABLE. MOREOVER, SINCE THE AE IS SITUATED AT B ELGIUM EURIBOR 4 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. RATES WOULD BE MORE APPROPRIATE. CONSIDERING SIMILA R NATURE OF LOAN TRANSACTION, THE ITAT, MUMBAI BENCH IN CASE OF TATA AUTOCOMP SYSTEMS LTD. VS. ACIT (SUPRA), HELD AS UNDER: 19. IN THE PRESENT CASE THE AE IS A GERMAN COMPANY . EUROBIOR RATES ARE BASED ON THE AVERAGE INTEREST RATES AT WH ICH A PANEL OF MORE THAN 50 EUROPEAN BANKS BORROW FUNDS FROM ON E ANOTHER. THERE ARE DIFFERENT MATURITIES, RANGING FR OM ONE WEEK TO ONE YEAR. THESE RATES ARE CONSIDERED TO BE THE M OST IMPORTANT RATE IN THE EUROPEAN MONEY MARKET. THE IN TEREST RATES DO PROVIDE THE BASIS FOR THE PRICE AND INTERE ST RATES OF ALL KINDS OF FINANCIAL PRODUCTS LIKE INTEREST RATE SWAP S, INTEREST RATE FUTURES, SAVING ACCOUNT AND MORTGAGES. WE FIND THAT THE RBI IN RESPECT OF EXPORT CREDIT TO EXPORTERS AT INTERNATIO NALLY COMPETITIVE RATES UNDER THE SCHEME OF PRESHIPMENT C REDIT IN FOREIGN CURRENCY (PCFC) AND REDISCOUNTING OF EXPORT BILLS ABROAD (EBR), HAS PERMITTED BANKS TO FIX THE RATES OF INTEREST WITH REFERENCE TO RULING LIBOR, EURO LIBOR OR EURIB OR, WHEREVER APPLICABLE AND THERETO APPROPRIATE PERCENT AGE RANGING FROM 1% TO 2%. THE REFERENCE TO THE SAID CIRCULAR I S AT PAGE -80 OF THE ASSESSEES PAPER BOOK. IN OUR VIEW THE CLAIM OF THE ASSESSEE TO ADOPT EURIBOR RATE AS STATED BEFORE THE TPO IS REASONABLE AND DESERVES TO BE ACCEPTED. FOLLOWING T HE RULING OF THE TRIBUNAL IN THE AFORESAID CASES, WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE IN THIS REGARD HAS TO BE ACCEPTED. THE AO IS DIRECTED TO WORK OUT THE TP ADJUSTMENT AC CORDINGLY. GR.NO.1 TO 4 ARE THUS PARTLY ALLOWED. 9. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH, WE DIRECT THE AO TO ACCEPT EURIBOR RATE AT W HICH THE INTEREST HAS BEEN CHARGED BY ASSESSEE. ACCORDINGLY, WE DELETE THE ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT TO THE AR MS LENGTH RATE OF INTEREST. 10. GROUND NO.2 READS AS UNDER : 2 A) THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTIN G THE AO TO DISALLOW THE CLAIM OF THE ASSESSEE THAT THE AMOUNT OF RS. 978,967,500 RECEIVED ON THE TRANSFER OF KNOW-HOW TO ASTRIX LABORATORIES LTD. CONSTITUTED CAPITAL RECEIPTS AND OR GAINS EXEMPT IN THE HANDS OF THE ASSESSEE. 2 B) IT FURTHER ERRED IN DIRECTING THE AO TO TREAT THE AMOUNT OF RS. 978,967,500 RECEIVED ON TRANSFER OF KNOW-HOW AS AMOUNT RECEIVED FOR IMPARTING OF SPECIAL KNOWLEDGE AND EXP ERIENCE IN THE FIELD OF MANUFACTURING, MARKETING, SELLING AND DISTRIBUTION OF 5 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. THE ARVS AND HENCE A BUSINESS INCOME RECEIVED IN T HE COURSE OF BUSINESS ACTIVITY OF THE ASSESSEE. 11. BRIEFLY THE FACTS RELATING TO THIS ISSUE ARE TH E ASSESSEE IS BASICALLY ENGAGED IN THE BUSINESS OF MANUFACTURE OF ACTIVE PHARMACEUTICAL INGREDIENTS (API), WHICH ARE COMMONL Y KNOWN AS BULK DRUGS AND INTERMEDIATES FOR BULK DRUGS. FOR THIS PU RPOSE, THE ASSESSEE HAS SET UP TWO OPERATING UNITS IN INDIA (H EREINAFTER REFERRED TO AS UNIT-I AND UNIT-II). UNIT-1 WAS IN EXISTENC E OVER A PERIOD OF 5 YEARS AND UNIT-II WAS IN EXISTENCE OVER A PERIOD OF 1 YEAR. AS CLAIMED BY ASSESSEE IT HAS DEVELOPED IN HOUSE TECHN OLOGY AND KNOWHOW. THE ASSESSEE FOR THE PURPOSE OF EXPANDING ITS BUSINESS MADE INVESTMENTS IN A JOINT VENTURE WITH A SOUTH AF RICAN COMPANY BY NAME ASPEN PHARMA CARE HOLDING LTD., (ASPEN-SA) BY PURCHASING 50% SHARE IN ITS OPERATING WHOLLY OWNED SUBSIDIARY (WOS) SITUATED IN SOUTH AFRICA. IN THIS REGARD, A SHARE HOLDERS AG REEMENT HAS BEEN ENTERED INTO BETWEEN THE PARTIES ON 22 ND SEPTEMBER, 2005. ASPENSA ALSO MADE 50% INVESTMENT IN SHARES OF ONE OF THE WO S OF THE ASSESSEE VIZ., ASTRIX LABORATORIES LTD., (ASTRIX I NDIA) BY ENTERING INTO ANOTHER SHARE HOLDER AGREEMENT ON 22 ND SEPTEMBER, 2005. IN TERMS WITH THE AFORESAID SHAREHOLDERS AGREEMENT, THE ASSE SSEE TRANSFERRED CERTAIN ASSETS TO AND IN FAVOUR OF AN INDIAN COMPAN Y AS THE JOINT VENTURE COMPANY KNOWN AS ASTRIX LABORATORIES LTD., . THE DETAILS OF ASSETS TRANSFERRED UNDER DIFFERENT AGREEMENTS ARE A S UNDER : AGREEMENT ASSETS TRANSFERRED AGREEMENT FOR TRANSFER OF FACILITY DATED 20 DECEMBER 2005 ASSETS OF MANUFACTURING FACILITY OF UNIT II AND OTHER ASSETS. AGREEMENT FOR TRANSFER OF KNOW-HOW DATED 20 DECEMBER, 2005 TRANSFER OF KNOW-HOW DEVELOPED BY MATRIX INDIA AGREEMENT FOR DEVELOPMENT AND TRANSFER OF KNOW-HOW DEVELOPMENT AND TRANSFER OF KNOW-HOW TO BE DEVELOPED BY MATRIX INDIA AGREEMENT FOR TRANSFER OF PRODUCT DMFS DATED 20 DECEMBER 2005 TRANSFER OF FUTURE DMFS TO BE DEVELOPED AND REGISTERED IN RESPECT OF THE PRODUCTS BY MATRIX INDIA 6 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. AGREEMENT FOR TRANSFER OF PATENT APPLICATION RIGHTS DATED 20 DECEMBER LICENSING OF PATENT APPLICATION RIGHTS AND PATENTS GRANTED, IF ANY SALE DEED DATED 2 JANUARY, 2006 TRANSFER OF LAND AND BUILDING SITUATED AT SY. NO. 42, ALL NAGAR, H/O SALE DEED DATED 2 JANUARY 2006 TRANSFER OF LAND AND BUILDING SITUATED AT SY. NO. 10, GADDAPOTTVERARN 12. IN TERMS WITH THE AGREEMENT, THE ASSESSEE SOLD FIXED ASSETS OF ITS UNIT-II ALONG WITH CAPITAL ASSETS OF ITS R & D UNIT TO ASTRIX. ASSESSEE ALSO JOINED WITH ASPEN PHARMA CARE SOUTH A FRICA AS A JV PARTNER IN ASTRIX WHICH WAS EVIDENCED BY A TRIPARTI TE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE ASTRIX AND ASPIN PHARMA CARE SOUTH AFRICA. IN TERMS WITH THE AFORESAID AGREEMENT S ASSESSEE CLAIMED TO HAVE SOLD ITS TECHNICAL KNOWHOW RELATING TO FOUR ANTI RETRO VIRAL (ARV) PRODUCTS VIZ., LIMIPUDINE, NEVIRAPINE, STAVUDINE AND ZIDOBUDINE TO ASTRIX FOR A CONSIDERATION OF RS.97.8 9 CRORES. IT ALSO TRANSFERRED DRUG MASTER FILES (DMF) RELATING TO THE SE FOUR PRODUCTS FOR AN ADDITIONAL CONSIDERATION OF RS.3.15 CRORES. IN TERMS WITH THE AGREEMENT, ASSESSEE ALSO AGREED TO DEVELOP KNOWHOW AS WELL AS DMF FOR THREE MORE PRODUCTS VIZ., DIDANOSINE, RITON AVIR AND LOPINAVIR. THE ASSESSEE AND ASTRIX ENTERED INTO AGR EEMENTS INTER ALIA FOR (A) TRANSFER OF TECHNICAL KNOWHOW (B) TRANSFER OF DMF (C) FOR SALE OF LAND AND BUILDINGS AT KAZIPALLI (D) AGREEMENT FO R LICENSING OF PATENT APPLICATION RIGHTS (E) AGREEMENT FOR DEVELOPMENT AN D TRANSFER OF KNOWHOW (F) AGREEMENT FOR DEVELOPMENT AND TRANSFER OF DMF. ASSESSEE ALSO APPOINTED A THIRD PARTY EXPERT TO VAL UE THE TECHNICAL KNOWHOW. FURTHER, IN TERMS WITH SHARE HOLDERS AGREE MENT, THE ASSESSEE WAS REQUIRED TO SIGN A BINDING AGREEMENT F OR SALE OF KNOW HOW BEFORE 31 ST DECEMBER, 2005 FOR SEVEN PRODUCTS. SINCE MATRIX WA S IN POSSESSION OF KNOWHOW ONLY IN RESPECT OF FOUR OF THE SEVEN PRODUCTS, IT ENTERED INTO A SEPARATE AGREEMENT FOR DEVELOPMENT AND TRANSFER OF FUTURE KNOWHOW AND SUBSEQUENTLY ALSO KN OWHOW FOR THOSE 7 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. THREE PRODUCTS WERE DEVELOPED AND TRANSFERRED TO AS TRIX WHICH WERE INVOICED SUBSEQUENTLY. WHILE SUBMITTING THE RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE TREATED THE TRANSACTION RELATING TO TRANSFER OF ALL THE ASSETS INCLUDING K NOWHOW TO ASTRIX AS TRANSFER OF CAPITAL ASSET, OUT OF WHICH, THE CONSID ERATION RECEIVED TOWARDS KNOWHOW WAS RS.97.89 CRORES. HOWEVER, THE A SSESSEE DID NOT OFFER ANY CAPITAL GAIN ON THE CONSIDERATION REC EIVED ON KNOW-HOW BY CLAIMING THAT SINCE THE ASSESSEE DID NOT INCUR A NY COST IN ACQUIRING THE KNOWHOW THERE IS NO COST OF ACQUISITION FOR THE CAPITAL ASSET AND ACCORDINGLY, IN ABSENCE OF COST OF ACQUISITION CAPI TAL GAIN CANNOT BE COMPUTED. IN COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HAS RECEIVED A C ONSIDERATION OF RS.97.89 CRORES TOWARDS SALE OF TECHNICAL KNOWHOW R ELATING TO FOUR ARVS TO ASTRIX AND HAS NOT OFFERED ANY INCOME, CALL ED UPON THE ASSESSEE TO JUSTIFY ITS CLAIM. IN RESPONSE TO THE Q UERY MADE BY THE A.O. IT WAS SUBMITTED BY THE ASSESSEE AS UNDER : MATRIX LABORATORIES LTD IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF ACTIVE PHARMACEUTICAL INGREDIENTS AND INTERMEDIARIES SINCE 1984. ASTRIX LABORATORIES LIMITED IS SUBSIDIARY JOINT VENTURE CO MPANY OF MATRIX FORMED DURING THE FINANCIAL YEAR 2005-06, DURING THE SAID FINANCIAL YEAR, MATRIX ENTERED INTO AN AGREEMENT DATED LOM 2005 WITH ASTRIX FOR TRANSFER OF TECHNICAL KNOW-HOW RELATING TO FOUR OF ITS ARV PRODUCTS I.E. LAMIVUDINE, ZIDOVUDINE, STAVUDINE AND NEVIRAPINE- FOR A TOTAL CONSIDERATION OF RS.97,89.67.500. KNOW-HOW IS DEFINED IN THE AGREEMENT TO MEAN EVELYTHING KNOWN BY MATRIX NECESSARY FOR THE MANUFACTURE , MARKETING SELLING AND DISTRIBUTION OF PRODUCTS EXCLUDING MATRIX IPR'S AND DMF'S BUT INCLUDING THE BODY OF THE- TECHNICAL INFORMATION COMPRISING THE FORMULA AND THE SPECIFIC MANUFACTURING AND PACKAGING PROCESSES(INCLUDING BUT NOT LIMITED TO RAW MATERIAL PROCUREMENT, PACKAGING, PRODUCTION INFORMATION, FORMULATIONS, PROCESSES SPECIFICATIONS , TECHNIQUES AND METHODS OF QUALITY CONTROL} USED AS AT T' JANUARY 2006 TO MANUFACTURE AND/OR PACKAGE THE PRODUCTS. AS PER SECTION 45 OF THE INCOME TAX ACT 'ANY PROFIT S OR GAINS ARISING FROM THE TRANSFER ALA CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR SHALL, SAVE AS OTHERWISE PROVIDED IN SECTIONS 53 AND 54, BE CHARGEABLE TO INCOME-TAX UNDER TILE HEAD' CAPITAL GAINS ', AND SHALL BE DEEMED TO BE THE INCOME 8 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLA CE. SECTION 2(14) OF TTIE ACT DEFINES 'CAPITAL ASSET' T O MEAN 'PROPERTY OF ANY KIND HE'D BY AN ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION, BUT DOES NOT INCLUDE- I) ANY STOCK-IN-TRADE, CONSUMABLE STORES OR RAW MAT ERIALS HELD FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION ; II) PERSONAL EFFECTS, THAT IS TO SAY, MOVABLE PROPE RTY (INCLUDING WEARING APPAREL, JEWELLERY AND FURNITURE ) HELD FOR PERSONAL USE BY THE ASSESSEE OR ANY MEMBER OF HIS F AMILY DEPENDENT ON HIM; IT IS SEEN THAT CAPITAL ASSET WOULD MEAN PROPERTY OF ANY KIND HELD BY AN ASSESSEE WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. HOWEVER, THE TERM 'PROPERTY' HAS NOT BE EN DEFINED IN THE ACT. THE BOMBAY HIGH COCRT IN THE CASE O] COMMISSIONER OF INCOME- TAX VS. TAW SERVICES LTD. (122 FTR 594) HELD THAT THE W ORD 'PROPERTY' USED IN SECTION 2(14) OF THE ACT IS A WORD OF THE WIDEST AMPIITUDE AND THE DEFINITION HAS RE-EMPHASIZED THIS BY THE USE OF THE WORDS OF ANY KIND', ANY RIGHT WHICH CAN BE CALLED PROPERTY WILL BE INCLUDED IN THE DEFINITION OF 'CAPITAL ASSE T' AUTHORITY FOR ADVANCE RULING IN THE CASE OF FOSTER'S AUSTRALIA LTD (302 ITR 289) HELD THAT 'PROPERTY OF ANY KIND' UNDOUBTEDLY INCLUDES INTELLECTUAL PROPERTY WHICH IS BUT SPECIES OF INTANGIBLE PROPERTY. TRADE MARK. BRAND, GOODWILL, TECHNICAL KN OW-HOW RELATING TO THE MANUFACTURE OF GOODS WOULD ALL QUALIFY TO BE TREATED AS CAPITAL ASSETS WITHIN THE MEANING OF SECTION 2(14) OF THE ACT. SECTION 55(2)' WHICH DEALS WITH THE COST OF ACQUISITION OF A CAPIT AL ASSET, MAKES IT CLEAR THAT GOODWILL TRADE MARK. OR BRAND FLAME ASSOCIATED WITH A BUSINESS AND OTHER INCORPOREAL RIGHTS MENTIONED THEREIN, ARE TREATED AS CAPITAL ASSETS UNDER THE ACT FOR THE PURPOSE OF CAPITA! GAINS. ' FURTHER, FOR THE PURPOSES OF ALLOWING DEPRECIATION, SECTION 32(1)(II) OF THE AD CONSIDERS KNOW-HOW TO BE AN INTANGIBLE ASSET. EXPLANATION TO THE SUB-SECTION 1 OF SECTION 32 DEFINES KNOW-HOW TO MEAN ANY INDUSTRIAL INFORMATION OR TECHNIQUE UK. ELY TO ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR IN THE WORKING OF A MINE, OIL-WELL OR OTHER SOURCES OF MINERAL DEPOSITS (INCLUDING SEARCHING FOR DISCOVERY OR TESTING OF DEPOSITS FOR THE WINNING OF ACCESS THERETO. THEREFORE, IN VIEW OF THE ABOVE DECISIONS, IT IS SUBMITTED THAT KNOW- HOW TRANSFERRED BY MATRIX IS A CAPITAL ASSET AND AN Y INCOME ARISING FROM TRANSFER OF THE SAME WOULD BE CHARGED UNDER TILE HEAD 'CAPITAL GAINS' IN TERMS OF SECTION 48 OF THE ACT, 'THE INCOME CHAR GEABLE UNDER 9 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. THE HEAD 'CAPITAL GAINS' SHALL BE COMPUTED. BY DEDUCTING FROM THE TUU VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS, NAMELY: -- ' I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONN ECTION WITH SUCH TRANSFER; II) THE COST OF ACQUISITION OF THE ASSET AND THE COST OF ANY IMPROVEMENT THERETO. ACCORDINGLY, CAPITAL GAINS HAVE TO BE ARRIVED AT BY DEDUCTING THE COST OF ACQUISITION OF THE KNOW-HOW FOR THE CONSIDE RATION RS.97,89,67500/- RECEIVED ON TRANSFER OF SUCH KNOW-HOW. HOWEVER, AS MENTIONED ABOVE, THE KNOW-HOW TRANSFERRED BY MAUIX IS DEVELOPED BY IT IS INCIDENTAL TO THE MANUF ACTURING ACTIVITY OVER A PERIOD OF TIME AND THEREFORE DOES N OT HAVE ANY COST OF ACQUISITION. AS PER SECTION 55(2) (A) OF THE ACT FOR THE PURPOSE S OF SECTIONS 48 AND 49 'COST OF ACQUISITION', IN RELATION TO A C APITAL ASSET, BEING GOODWILL OF A BUSINESS, 'OR A TRADE MARK OR BRAND NAME ASSOCIATED WITH A BUSINESS OR A RIGHT TO MANUFACTURE. PRODUCE OR PROCESS ANY ARTICLE OR THING ''OR RIGHT TO CARRY O N ANY BUSINESS, TENANCY RIGHTS, STAGE CARRIAGE PERMITS OR LOOM HOUR S. - I) IN THE CASE OF ACQUISITION OF SUCH ASSET BY THE ASSESSEE BY PURCHASE FROM A PREVIOUS OWNER, MEANS THE AMOUNT OF THE PURCHASE PRICE; AND II) IN ANY OTHER CASE NOT BEING A CASE FALLING UNDER SUB-CLAUSES (I) TO (IV) OF SUB-SECTION (1) OF SECTION 49, SHALL BE TAKEN TO BE NIL FROM THE ABOVE, IT IS EVIDENT THAT COST OF ACQUISITION HAS TO BE TAKEN AS 'NIL' ONLY IN RESPECT OF THE ASSETS SPECIF IED THEREIN. IT IS NOT SPECIFICALLY PROVIDED FOR IN SECTION 55(2) (A) THAT TILE COST OF ACQUISITION OF KNOW-HOW IS TO BE TAKEN AS 'NIL', FU RTHER, KNOW- HOW DOES NOT FALL IN ANY OF THE CATEGORIES OF SETT- GENERATED ASSETS SPECIFIED THEREIN. IT IS TO BE NOTED THAT THOUGH SECTION 45 OF THE ACT PROVIDES FOR CHARGING TO INCOME TO ANY PROFIT AND GAINS ARISING FROM TRANSFER OF CAPITA ASSET GAINS THEREOF HAVE TO BE COMPUTED I N ACCORDANCE WITH THE MODE OF COMPUTATION AS PROVIDED IN SECTION 48 OF THE ACT. THE CHARGING SECTION AND THE COMPUTATION PROVI SIONS TOGETHER CONSTITUTE AN INTEGRATED CODE AND THE LIAB ILITY TO TAX WOULD ARISE ONLY WHEN EFFECT CAN BE GIVEN TO BOTH. IT IS TO BE NOTED THAT IN THE PRESENT CASE, EVEN THOUGH THE KNO W-HOW IS A SELF GENERATED ASSET, THE COST OF ACQUISITION THERE OF FOR THE PURPOSES OF COMPUTING CAPITAL GAINS CHARGEABLE TO T AX CANNOT BE TAKEN AS NIL', THIS IS SO SINCE THE ACT SPECIFICALLY PROVIDES THE CLASS OF ASSETS WHERE THE COST OF ACQUISITION CAN B E TO EN AS 'NIL', ACCORDINGLY, SINCE THERE IS NO COST OF ACQUISITION OF THE KNOW- HOW, CAPITAL GAINS ON TRANSFER OF THE SAME CANNOT BE COMPUTED PER THE PROVISIONS OF SECTION 48 OF THE ACE ONCE THE QUANTUM OF CAPITAL GAINS IS NOT ASCERTAINABLE OR CANNOT BE COM PUTED UNDER 10 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. SECTION 48 OF THE ACT, THE PROVISIONS OF SECTION 45 OF THE ACT CANNOT BE INVOKED. RELIANCE IS PLACED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS . B.C. SRINIVASA SHETTY (128 ITR 294), WHEREIN THE HON'BLE COURT WHILE DECIDING THE QUESTION OF WHETHE R TRANSFER OF SELF GENERATED GOODWILL GIVES RISE TO CAPITAL GAINS HAS OBSERVED THAT: SECTION 45 IS A CHARGING SECTION. FOR THE PURPOSE OF IMPOSING THE CHARGE, PARLIAMENT HAS ENACTED DETAILED PROVISI ONS IN ORDER TO COMPUTE THE PROFITS OR GAINS UNDER THAT HEAD. NA EXISTING PRINCIPLE OR PROVISION ET VARIANCE WITH THEM CAN BE APPLIED FOR DETERMINING TILE CHARGEABLE PROFITS AND GAINS. ALL TRANSACTIONS ENCOMPASSED BY S . 45 MUST FALL UNDER THE GOVERNANCE OF ITS COMPUTATION PROVISIONS. . A TRANSACTION TO WHICH THOSE PROVISIONS CANNOT BE APPLIED MUST BE REGARDED AS NEVER INTENDED BY S. 45 TO BE THE SUBJECT OF THE CHARGE. THIS INFERENCE FLOWS FRO M THE GENERAL ARRANGEMENT OF THE PROVISIONS IN THE I. T. ACT WHER E UNDER EACH HEAD OF INCOME THE CHARGING PROVISION IS ACCOMPANIED BY A SET OF PROVISIONS FOR COMPUTING THE INCOME SUBJECT TO THAT CHARGE. THE CHARACTER OF THE COMPUTATION PROVISIONS IN EACH CAS E BEARS A RELATIONSHIP TO THE NATURE OF THE CHARGE. THUS, THE CHARGING SECTION AND THE COMPUTATION PROVISIONS TOGETHER CON STITUTE AN INTEGRATED CODE. WHEN THERE IS A CASE TO WHICH THE COMPUTATION PROVISIONS CANNOT APPLY AT ALL, IT I S EVIDENT THAT SUCH A CASE WAS NOT INTENDED TO FALL WITHIN THE, HORSING SECTION. O THERWISE, ONE WOULD BE DRIVEN TO CONCLUDE THAT WHILE A CERTAIN IN COME SEEMS TO FALL WITHIN THE CHARGING SECTION THERE IS NO SCHEME OF COMPUTATION FOR QUANTIFYING IT. THE LEGISLATIVE PATTERN DISCERN IBLE IN THE ACT IS AGAINST SUCH A CONCLUSION. IT MUST BE BORNE IN MIND THAT THE LEGISLATIVE INTENT IS PRESUMED TO RUN UNIFORMLY THR OUGH THE ENTIRE CONSPECTUS OF PROVISIONS PERTAINING TO EACH HEAD 0/ INCOME. NO DOUBT THERE IS QUALITATIVE DIFF ERENCE BETWEEN THE CHARGING PROVISION AND A COMPUTATION PROVISION. AND ORDINARI LY THE OPERATION OF THE CHARGING PROVISION CANNOT BE AFFEC TED BY THE CONSTRUCTION OF A PARTICULAR COMPUTATION PROVISION. BUT THE QUESTION HERE IS WHETHER IT IS POSSIBLE TO APPLY THE COMPUTATION PROVISION AT ALL IF A CERTAIN INTERPRETATION IS PRE SSED AN THE CHARGING PROVISION. THAT PERTAINS TO THE FUNDAMENTA L INTEGRALITY OF THE STATUTORY SCHEME PROVIDED FOR EACH HEAD', HAVING OBSERVED AS ABOVE. THE HON'BLE APEX COURT PR OCEEDED TO DECIDE WHETHER IF THE EXPRESSION ' ASSET IN S. 45 IS CONSTRUED AS INCLUDING THE GOODWILL OF A NEW BUSINESS, IT IS POS SIBLE TO APPLY THE COMPUTATION SECTIONS FOR QUANTIFYING THE PROFIT S AND GAINS ON ITS TRANSFER. WHILE REFERRING TO THE PROVISIONS OF SECTION 48. IT WAS FURTHER OBSERVED THAT: 'WHAT IS CONTEMPLATED IS AN ASSET IN THE ACQUISITION OF WHICH IT IS POSSIBLE TO ENVISAGE A COST. THE INTENT GOES TO THE NATURE AND CHARACTER OF THE ASSET THAT IT IS AN ASSET WHICH PO SSESSES THE INHERENT QUALITY OF BEING AVAILABLE ON THE EXPENDIT URE OF MONEY TO 11 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. A PERSON SEEKING TO ACQUIRE IT. IT IS IMMATERIAL THAT ALTHOUGH THE ASSET BELONGS TO SUCH A CLASS. IT MAY, ON THE FACT S OF A CERTAIN CASE, BE ACQUIRED WITHOUT TILE PAYMENT OF MONEY. TH AT KIND OF CASE IS COVERED BY S.49 AND ITS COST, FOR THE PURPO SE OF S. 48, IS DETERMINED IN ACCORDANCE WITH THOSE PROVISIONS. THE RE ARE OTHER PROVISIONS WHICH INDICATE THAT S, 48 IS CONCERNED WITH AN ASSET CAPABLE O{ ACQUISITION AT A COST. SECTION 50 IS ONE SUCH PROVISION. SO ALSO IS SUB-SO (2) OF 5. 55. NONE OF THE PROVISIONS PERTAINING TO THE HEAD 'CAPITAL GAINS' SUGGESTS THAT THEY INCLUDE AN ASSET IN THE OCQUISITFCJI1 OF WHICH NO COST AT ALL CAN BE CONCEIVED. YET THERE ARE ASSETS WHICH ARE ACQUIRED BY WAY OF PRODUCTION IN WHICH NO COST ELEMENT CAN BE IDENTIFI ED OR ENVISAGED. FROM WHAT HAS GONE BEFORE. IT IS APPARENT THAT THE GOODWILL GENERATED IN A NEW BUSIN ESS HAS BEEN SO REGARDED. THE ELEMENTS WHICH CREATE IT HAVE ALREADY BEEN DETAILED. IN SUCH A CASE, WHEN THE ASSET IS SOLD AN D THE CONSIDERATION IS BROUGHT TO TAX, WHAT IS CHARGED IS THE CAPITAL VALUE OF THE ASSET AND NOT ALLY PROFIT OR GAIN . THE GUJARAT HIGH COURT IN THE CASE OF CLT V. MANOHARSINHJI P. JADEJA (281 ITR 19 APPLIED THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE CASE OF B. C. SRINIVASA SHETTY( SUPRA) AND HELD ('HAT 'THOUGH SECTION 45 OF THE INCOME-TAX ACT, 1961, IS A CHARGING SECTION THE LEGISLATURE HAS ENACTED DETAILED PROVISIONS IN ORDER TO COMPUTE THE PROFITS OR GAINS UNDER THAT HEAD AND NO PROVISION AT VARIANCE WITH SUCH COMPUTATION PROVISI ONS CAN BE APPLIED FOR DETERMINING THE CHARGEABLE PROFITS AND GAINS. THE ASSET REFERRED TO IN SECTION 45 OF THE ACT HAS TO BE ONE: (I) IN THE ACQUISITION OF WHICH IT IS POSSIBLE TO ENVISAGE A COST (II) IN THE ACQUISITION WHEREOF THE ASSESSEE HAD INCURRED A COS T, AND THE ONUS OF SHOWING THAT THE ASSESSEE HAD INCURRED COST IS EN THE REVENUE. IF THE REVENUE FAILS TO SHOW THAT THE ASSESSEE HAD INCURRED A COST, IT WOULD BE IMPOSSIBLE TO COMPUTE THE INCOME CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAINS'. B Y THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1988, THE AMEN DMENT TO SECTION 55 OF THE ACT ONLY ROPES IN TAXABILITY OF G OODWILL ON TRANSFER OF THE SAME EVEN IF THERE IS NO COST OF ACQUISITION. SIMILARLY, SECTION 55 HAS BEEN AMENDED FROM TIME TO TIME TO ENABLE THE TAXATION OF OTHER ASSETS WHEREIN NO COST OF ACQUISITION IS ENVISAGED. THEREFORE, EVEN IF THE AMENDMENT IS T AKEN INTO CONSIDERATION SECTION 55 CAN BE INVOKED IN CASES OF NIL COST OF ACQUISITION FOR THE PURPOSE OF BRINGING TO TAX THE ENTIRE SALE CONSIDERATION ONLY IN RELATION TO THE SPECIFIED ASSETS. THE PUNJAB & HARYANA COURT IN THE CASE OF COMMISSIO NER OF INCOME TAX VS. . AMRIK SINGH (299 ITR 14) WHILE DECIDING THE ISSUE OF TAXABILITY UNDER THE HEAD CAPITAL GAINS OF INCOME ARISING ON TRANSFER OF TENANCY RIGHTS RELIED UPON OF COURT IN THE CASE OF B. C. STITLIVASA SHETTY AND HELD THAT 'THE ASSESSEE BECAME THE OWNER OI THE LAND IN RESPECT OF WHICH HE HAD EARLIE R ACQUIRED ONLY TENANCY RIGHT'S. THUS, THE ASSESSEE HAD ACQUIRED TH E OWNERSHIP RIGHTS IN THE LAND BY OPERATION OF LAW AND (LOT BY PURCHASE OR INHERITANCE. THERE WAS NO RECORD OF ANY PAYMENT MAD E FOR THE 12 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. ACQUISITION OF THE LAND IN QUESTION EITHER BY THE ASSESSEE OR HIS PREDECESSOR-IN-INTEREST. THEREFORE, THE ASSESSEE WA S NOT LIABLE TO PAY ANY CAPITAL GAINS TAX.' IN VIEW OF THE ABOVE DECISIONS, IT CAN BE CONCLUDED THAT SINCE THE COST OF ACQUISITION OF SELF-GENERATED KNOW-HOW IS N OT SPECIFIED IN THE ACT' THE CAPITAL GAINS ARISING ON THE TRANSFER OF THE SAME TO SSTN CANNOT BE COMPUTED. THEREFORE, THE CHARGEABILITY SECTION FAILS AND THE CONSIDERATION RECEIVED FOR TRANSFER OF KNOW-HOW IS EXEMPT FROM TAX. THE ABOVE NOTE FURNISHED BY THE ASSESSEE HAS BEEN CONSIDERED CAREFULLY WITH A VIEW TO APPRECIATE THE ASSESSEE'S CLAIM FOR EXEMPTION OF THE CAPITAL GAIN ARISING FROM THE 'TRA NSFER OF KNOW- HOW' TO ASTRIX. 13. THE ASSESSING OFFICER AFTER CONSIDERING THE EXP LANATION OF THE ASSESSEE AND EXAMINING DIFFERENT AGREEMENTS ENTERED INTO BETWEEN THE PARTIES, THOUGH, AGREED THAT KNOWHOW IS A CAPIT AL ASSET BUT HE WAS OF THE VIEW THAT TO TREAT THE CONSIDERATION REC EIVED TO BE CHARGEABLE UNDER THE HEAD CAPITAL GAIN THERE SHOU LD BE A TRANSFER IN TERMS WITH SECTION 2(47) OF THE ACT. THE A.O. AF TER ANALYZING DIFFERENT CLAUSES OF SECTION 2(47) NOTED THAT THE D EFINITION OF TRANSFER CLEARLY CONTEMPLATES THE EXTINGUISHMENT OF A RIGHT IN A CAPITAL ASSET DISTINCT AND INDEPENDENT OF SUCH EXTI NGUISHMENT CONSEQUENT UPON THE TRANSFER THEREOF. KEEPING THE A FORESAID LEGAL POSITION IN VIEW, THE A.O. AFTER EXAMINING TERMS O F THE SHAREHOLDERS AGREEMENT AS WELL AS SHARE ISSUE AGREEMENT, OPINED THAT KNOWHOW CAN BE EXPLOITED BY ITS OWNER BY USING IT HIMSELF I N THE PROCESS OF HIS OWN TRADE/MANUFACTURE OR BY USING IT HIMSELF IN MAK ING FURTHER DEVELOPMENT/IMPROVEMENT INCLUDING MODIFICATIONS I.E ., RESEARCH AND DEVELOPMENT OR BY COMMUNICATING IT TO OTHERS (SUPPL Y OF KNOWHOW) BY WAY OF OUTRIGHT SALE OR IMPARTING IT TO SOME OTHER PARTY WHILE RETAINING THE RIGHT TO USE IT IN HIS OWN BUSINESS OR TO SHARE IT WITH OTHER. THE A.O. REFERRING TO THE PRESS RELEASE DATED 8 TH APRIL, 2005 AS AVAILABLE IN THE WEBSITE OF THE ASSESSEE NOTED THAT AS PER TH E SAID PRESS RELEASE AND SUBSEQUENT AGREEMENTS, ASSESSEE WILL TR ANSFER ONE OF ITS API MANUFACTURING FACILITIES, TECHNOLOGY AND INTELL ECTUAL PROPERTY (IP) 13 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. RELATED TO THE MANUFACTURE OF CERTAIN API ASTRIX LA BORATORIES FOR A TOTAL CONSIDERATION OF $36 MILLION. THE A.O. ON GOI NG THROUGH THE SHARE ISSUE AGREEMENT AND SALE OF KNOW-HOW AGREEMEN T FOUND THE FOLLOWING FACTS : MATRIX HAS DEVELOPED AND IS IN POSSESSION OF KNOW- HOW IN RESPECT O F CERTAIN ACTIVE PHARMACEUTICAL INGREDIENTS (APLS), ANTIRETROVIRAL PRODUCTS (ARVS) LAMIVUDINE, N EVIRAPINE, ZIDOVUDINE AND STAVUDINE. MATRIX ALSO HAS DMFS (DRUG MASTER FILES) IN RESPECT OF THE ABOVE ARVS, FILED WITH USFDA, BY WHICH MATRIX COULD MARKET ITS ARVS IN THE INTENDED MARKETS. MATRIX HAS BEEN MANUFACTURING THE ABOVE ARVS. MATRIX AND ASPEN ENTERED INTO AGREEMENT TO FORM A JOINT- VENTURE COMPANY NAMED ASTRIX LABORATORIES LTD. TO MANUFACTURE, MARKET, SELL AND DISTRIBUTE THE ABOVE ARVS . ON BEING INCORPORATED IN PURSUANT TO THE JOINT VENTURE AGREEMENT, ASTRIX CAME INTO EXISTENCE W.E. F. 30 TH DECEMBER, 2005 AND COMMENCED PRODUCTION OF ARVS FROM THE PLANT LOCATED AT SURVEY NO.1O,GADDAPOTHARAM, KAZIPALLY INDUSTRIAL AREA, JINNARAM MA NDAL, MEDAK DISTRICT, ANDHRA PRADESH, WHICH WAS PART OF MATNX EARLIER, AN D TRANSFERRED TO ASTRIX. THE ABOVE MANUFACTURING FACILITY/UNIT WAS TRANSFERRED TO ASTRIX BY MEANS OF ITEMISED SALE OF ITS ASSETS VIZ., LAND, BUILDING, PLANT AND MACHINERY, FURNITURE AND FIXTURES, ETC., INCLUDING THE KNOW-HOW AND DMFS IN RESPECT OF THE ARVS. MATRIX ALSO UNDERTOOK DEVELOPMENT OF KNOW-HOW IN RESPECT OF THE FOLLOWING ARV, APIS-DIDANOSINE, RITONAVIR AND LOPINAVIR FOR ASTRIX MATRIX ALSO AGREED TO TRANSFER FUTURE DMFS IN RESPECT OF THE FOLLOWING ARV APIS-DIDANOSINE RITONAVIR AND LOPINAVIR FOR ASTRIX, A CAREFUL READING OF THE PROVISIONS OF THE ABOVE MENTIONED AGREEMENTS IEADS TO THE CONCLUSION THAT 14 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. I) MATRIX RESERVES THE RIGHT TO USE THE KNOW-HOW AND THE INTELLECTUAL PROPERTIES ASSOCIATED WITH THE ARVS , SUBSEQUENT TO THE 'TRANSFER/SALE' (AS CLAIMED/TERMED BY MATRIX OR BY THE PARTIES IN THE AGREEMENTS) II) MATRIX HAS THE RIGHT TO MAKE IMPROVEMENT ON THE KNOW- HOW ASSOCIATED WITH THE ARVS, SUBSEQUENT TO THE 'TRANSFER/SALE (AS CLAIMED/TERMED BY MATRIX OR BY THE PARTIES IN THE AGREEMENTS). III) MATRIX RETAINS JOINT OWNERSHIP OF THE DMFS, SUBSEQUENT THE TRANSFER/SALE (AS CLAIMED/TERMED BY MATRIX OR TO THE AGREEMENTS). AS PER THE INFORMATION AVAILABLE ON WWW.FDA.GOV .THE ABOVE MENTIONED DMFS (LAMIVUDINE, NEVIRAP INE, ZIDOVUDINE AND STAVUDINE) ARE HELD ONLY I N THE NAME OF MATRIX LABORATORIES LTD AS ON THE DATE OF HIS ORDER. IV) EVEN THE DMFS RELATING TO THE NEW ARVS (DIDANOSINE, RITONAVIR AND LOPINAVIR) FOR WHICH THE KNOW-HOW HAS BEEN DEVELOPED BY MATRIX FOR ASTRIX, IS HELD IN THE NAME OF MATRIX V) MATRIX ALSO HAS THE RIGHT TO MANUFACTURE AND SELL THE ARVS SUBSEQUENT TO THE 'TRANSFER/SALE' (AS CLAIMED/TERMED BY MATRIX OR IN THE AGREEMENTS) USING THE KNOW-HOW AND DMF'S. 14. FROM THE AFORESAID FACTS, THE A.O. CONCLUDED TH AT ASSESSEE HAS NOT DIVESTED ITSELF COMPLETELY OF ANY FURTHER INTER EST IN THE KNOWHOW AND DMF AND AS SUCH THE TRANSFER/SALE OF KNOWHOW CA NNOT BE A CASE OF DISPOSITION OF THE CAPITAL ASSET. HE OBSERVED TH E RIGHT OVER THE PROPERTY IN THE KNOWHOW STILL REMAIN WITH THE ASSES SEE. FURTHER THE A.O. OBSERVED THAT THE TRANSFER/SALE OF KNOWHOW IS DISTINGUISHABLE FROM THE TRANSFER/SALE OF TANGIBLE ASSET LIKE LAND, BUILDING, PLANT AND MACHINERY, FURNITURE AND FIXTURES ETC., WHEREIN THE ASSESSEE COMPLETELY DIVESTED ITSELF OF ANY FURTHER INTEREST IN THOSE ASSETS AND AS SUCH, PROPERTY IN THOSE ASSETS WERE TRANSFERRED FROM ASSESSEE TO ASTRIX. THE A.O. THEREFORE, HELD THAT THE CLAIM OF TRANSFER/SALE OF KNOWHOW CANNOT BE CONSIDERED AS A TRANSFER IN TERMS WITH SECTION 15 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 2(47) OF THE ACT AS THE TRANSACTION INVOLVING TRANS FER OF KNOWHOW IS NOT A TRANSFER OF SALE OR EXCHANGE AS THE PROPERTY IN THE PRODUCT/GOOD REMAINS WITH THE SELLER. HE OBSERVED, TRANSACTION ALSO CANNOT BE TREATED AS RELINQUISHMENT OF THE ASSET AS THE OWNER HAS NOT SURRENDERED THE PROPERTY AND ABANDONED ITS RIGHT TH ERETO. HE ALSO OBSERVED THAT THE TRANSACTION IS NOT A TRANSACTION OF EXTINGUISHMENT OF ANY RIGHT THEREIN BECAUSE ASSESSEE HAS NOT EXTINGUI SHED ANY RIGHTS IN RESPECT OF THE KNOW-HOW. THE A.O. OBSERVED THAT ASSESSEE THROUGH THE TRANSFER OF KNOW-HOW IN RESPECT OF THE ARVS MER ELY IMPARTED ITS SPECIAL KNOWLEDGE AND EXPERIENCE IN THE FIELD OF MA NUFACTURING, MARKETING, SELLING AND DISTRIBUTION OF ARVS TO ASTR IX. THE KNOWHOW AND RELATED DMFS ARE SUPPLIED TO ASTRIX WITH A VIEW TO ENABLE ASTRIX TO USE THE KNOWHOW TO MANUFACTURE AND SELL THE ARVS . THE PROPERTY IN THE KNOWHOW REMAIN WITH THE ASSESSEE WHO RETAINE D THE RIGHT TO USE THE KNOWHOW TO MANUFACTURE AND SALE THE ARVS. T HEREFORE, THE CONSIDERATION RECEIVED ON TRANSFER OF THE KNOWHOW C ANNOT BE TREATED AS CAPITAL GAIN, ON ALIENATION OF THE PROPERTY/RIGH TS IN THE KNOWHOW BUT AMOUNTS TO CONSIDERATION RECEIVED FOR IMPARTING OF SPECIAL KNOWLEDGE AND EXPERIENCE IN THE FIELD OF MANUFACTUR ING, MARKETING, SELLING AND DISTRIBUTION OF ARVS. HENCE, THE AMOUNT RECEIVED BY THE ASSESSEE ON TRANSFER OF KNOWHOW IS A BUSINESS INCOM E RECEIVED IN COURSE OF ASSESSEES BUSINESS ACTIVITY. THOUGH, THE ASSESSEE OBJECTED TO SUCH VIEW OF THE A.O., THE A.O. HOWEVER , REJECTED ALL CONTENTIONS OF THE ASSESSEE. THE A.O. OBSERVED THAT AS PER CLAUSE 5.4 OF THE SHARE ISSUE AGREEMENT BETWEEN THE PARTIE S NOTWITHSTANDING THE SALE/TRANSFER OF KNOWHOW AS CONTEMPLATED IN THE AGREEMENT OR AS AGREED BETWEEN THE PARTIES ASSESSEE SHALL AT ALL TI MES WILL HAVE THE RIGHT TO USE THE KNOWHOW AND TO PRODUCE THE PRODUCT S. HE OBSERVED THAT THE SAID CLAUSE DOES NOT PROVIDE FOR ANY CONDI TION/LIMITATION ON MATRIX AS TO FOR WHAT PURPOSES IT CAN USE THE KNOWH OW SUBSEQUENT TO THE TRANSFER/SALE OF THE KNOWHOW TO ASTRIX. THUS, A SSESSEE HAS UNLIMITED RIGHTS IN THE KNOWHOW AND HAS NOT ABANDON ED ANY OF ITS 16 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. RIGHTS WITH RESPECT TO THE KNOWHOW INCLUDING THE RI GHT TO MANUFACTURE THE ARVS USING THE KNOWHOW. 15. REBUTTING THE ARGUMENT OF THE ASSESSEE TO THE E FFECT THAT IF IT USES THE TECHNICAL KNOWHOW EXCEPT IN TERMS OF CLAUS E-12 OF SHAREHOLDERS AGREEMENT, IT IS REQUIRED TO MAKE GOOD TO ASTRIX THE PROFIT ACTUALLY MADE, THE A.O. OBSERVED THAT SUCH A RGUMENT IS NOT PLAUSIBLE IN THE ABSENCE OF ANY EXPLICIT AND UNAMBI GUOUS TERMS AND CONDITIONS TO THAT EFFECT IN THE AGREEMENT. THE A.O . OBSERVED THAT THE ENTIRE ARGUMENT OF THE ASSESSEE IS BASED ON THE PRE SUMPTION THAT KNOWHOW CAN BE USED ONLY TO MANUFACTURE THE PRODUCT AND ASSESSEE CANNOT MANUFACTURE THE PRODUCT UNLESS ASTRIX PLACES AN ORDER FOR CONTRACT MANUFACTURING IN TERMS OF CLAUSE-12 OF THE SHAREHOLDERS AGREEMENT. HOWEVER, IT WAS OBSERVED BY THE A.O. THA T KNOWHOW IS A BODY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCI AL AND SCIENTIFIC IMPORTANCE WHICH REMAINS UNREVEALED TO THE GENERAL PUBLIC. HE OBSERVED THAT ASSESSEE MAY NOT BE ABLE TO USE THE K NOWHOW TO MANUFACTURE THE PRODUCTS/ARV AND TO MAKE PROFIT GIV EN THE CONDITIONS OF THE AGREEMENT. EVEN THE MATRIX MAY NOT BE HAVING THE NECESSITY TO PRODUCE THE PRODUCTS/ARV IN QUESTION AND MAKE PROFI T THEREON AS IT HAS BEEN COMPENSATED SUITABLY FOR THE PROFIT THAT I T MIGHT HAVE MADE IN FUTURE BY USING THE KNOWHOW IN TERMS OF THE LUMP SUM CONSIDERATION PAID TO IT. BUT, THE ASSESSEE HAS THE RIGHT TO USE THE KNOWHOW IN RESPECT OF THOSE PRODUCTS IN ITS R & D TO MAKE ANY MODIFICATIONS/IMPROVEMENTS THEREON. IT HAS ALSO THE RIGHT TO USE THE KNOWHOW TO DEVELOP NEW PRODUCTS/PROCESSES/DERIVATIV ES FROM THE EXISTING PRODUCTS/PROCESSES. THE A.O. UNDERTAKING A COMPARATIVE ANALYSIS OF DIFFERENT CLAUSES OF AGREEMENT FOR TRAN SFER OF KNOWHOW DATED 20.12.2005 AND AGREEMENT FOR DEVELOPMENT AND TRANSFER OF KNOWHOW DATED 20.12.2005 BETWEEN THE PARTIES NOTED THAT THE PROVISIONS RELATING TO TRANSFER OF KNOWHOW VIS--VI S THE DEVELOPMENT OF TRANSFER OF KNOWHOW CLEARLY SPELL OUT THE TERMS AND CONDITIONS RELATING TO THE TRUE NATURE OF CONTRACTS. WHILE THE TRANSFER OF KNOWHOW 17 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. IS A CONTRACT FOR SUPPLY OF KNOWHOW, THE DEVELOPMEN T AND TRANSFER OF KNOWHOW IS A CONTRACT FOR TECHNICAL SERVICE. HE OBS ERVED THAT UNDER THE CONTRACT FOR DEVELOPMENT AND TRANSFER OF KNOWHO W ASSESSEE HAS UNDERTAKEN THE DEVELOPMENT OF KNOWHOW RELATING TO T HREE ARVS NAMELY DIDANOSINE, RITONAVIR AND LOPINAVIR AND AGRE ED TO TRANSFER THE OWNERSHIP TO ASTRIX. HOWEVER, UNDER THE CONTRAC T OF SUPPLY OF KNOWHOW ASSESSEE AGREED TO SUPPLY THE KNOWHOW RELAT ING TO FOUR PRODUCTS I.E., LAMIVUDINE, NEVIRAPINE, ZIDUVUDINE A ND STAVUDINE OF WHICH ASSESSEE IS THE LEGAL AND BENEFICIAL OWNER TO ENABLE ASTRIX TO USE THE KNOWHOW AND MANUFACTURE THE PRODUCTS. THE A .O. OBSERVED THAT THE TERMS OF AGREEMENT MAKE IT CLEAR THAT ASSE SSEE DID NOT TRANSFER ITS OWNERSHIP IN RESPECT OF KNOWHOW RELATI NG TO THE AFORESAID FOUR PRODUCTS. ON THE OTHER HAND, THE OWNERSHIP OF THE KNOWHOW TO BE DEVELOPED IS VESTED WITH ASTRIX. ON THE BASIS OF TH E AFORESAID FACTS, THE A.O. FINALLY CONCLUDED THAT ASSESSEE THROUGH TH E TRANSFER OF KNOWHOW AND DMFS IN RESPECT OF THE ARVS MERELY IMPA RTED ITS SPECIAL KNOWLEDGE AND EXPERIENCE IN THE FIELD OF MA NUFACTURING, MARKETING, SELLING AND DISTRIBUTION OF THE ARVS TO ASTRIX. THE KNOWHOW AND RELATED DMFS ARE SUPPLIED TO ASTRIX WIT H A VIEW TO ENABLE ASTRIX TO USE THE KNOWHOW AND DMFS TO MANUFA CTURE AND SELL THE ARVS. THE PROPERTY IN THE KNOW HOW REMAINED WIT H MATRIX WHO RETAINED THE RIGHT TO USE THE KNOWHOW TO MANUFACTUR E AND SELL THE ARVS. HENCE, THE CONSIDERATION RECEIVED ON TRANSFER OF KNOWHOW IS NOT A CAPITAL GAIN FROM ALIENATION OF THE PROPERTY AND RIGHTS IN THE KNOWHOW BUT AMOUNTS TO CONSIDERATION FOR IMPARTING OF SPECIAL KNOWLEDGE AND EXPERIENCE IN THE FIELD OF MANUFACTUR ING, MARKETING, SELLING AND DISTRIBUTION OF ARVS. ACCORDINGLY, HE T REATED THE AMOUNT OF RS.97,89,67,500 AS BUSINESS INCOME OF THE ASSESS EE FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE CHALLENGED THE DE CISION OF THE A.O. BY RAISING OBJECTIONS BEFORE THE DRP. 18 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 16. IN COURSE OF HEARING BEFORE DRP, ASSESSEE APART FROM REITERATING THE SUBMISSIONS MADE BEFORE THE A.O. FU RNISHED SOME MORE DOCUMENTS BY WAY OF ADDITIONAL EVIDENCE WHICH ARE AS UNDER : I. SUPPLEMENTARY AGREEMENT BETWEEN MATRIX LABORATOR IES LTD. AND ASTRIX LABORATORIES LTD. DATED 01/01/2010. II. AUDITORS CERTIFICATE DATED 02/02/2010 III. R&D HEADS CERTIFICATE DATED 28/01/2010. 17. REFERRING TO THESE DOCUMENTS, IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAS NOT TRANSFERRED THROUGH SALE OR OUTRIGH T LICENSING ANY TECHNICAL KNOWHOW IN RELATION FROM PRODUCTS NAMELY LAMIVUDINE, NEVIRAPINE, ZIDUVUDINE AND STAVUDINE TO ANY OTHER C OMPANY, FIRM, PERSON OR PARTIES DURING THE PERIOD FROM APRIL 1, 2 005 TO 30 TH SEPTEMBER, 2009 EXCEPT THE TRANSFER EFFECTED TO AST RIX. IT WAS SUBMITTED BY THE ASSESSEE THAT THE AGREEMENTS READ AS A WHOLE WOULD CLEARLY ESTABLISH THE INTENTION OF THE PARTIE S THAT THERE IS ABSOLUTE TRANSFER OF RIGHTS OVER THE KNOWHOW TO AST RIX BY THE ASSESSEE. THE DRP, HOWEVER, DID NOT AGREE WITH ANY OF THE CONTENTION OF THE ASSESSEE AND ACCEPTED THE VIEW OF THE A.O. THAT THE ASSESSEE RETAINED THE RIGHT OVER THE KNOWHOW. HENCE , THERE IS NO TRANSFER IN TERMS WITH SECTION 2(47) OF THE ACT. TH E DRP OBSERVED THAT THE ADDITIONAL EVIDENCES PRODUCED BY THE ASSESSEE C ANNOT ALTER THE FACTUAL POSITION. ACCORDINGLY, THE DRP CONFIRMED TH E VIEW OF THE A.O. THAT THE CONSIDERATION RECEIVED OF RS.97,89,67,500 SHOULD BE TREATED AS BUSINESS INCOME. HOWEVER, WITHOUT PREJUDICE TO T HE AFORESAID FINDING, THE DRP ALSO REJECTED ASSESSEES CONTENTIO N THAT CAPITAL GAIN CANNOT BE COMPUTED IN ABSENCE OF COST OF ACQUISITIO N. THE DRP HELD THAT THE RATIO LAID DOWN IN CASE OF CIT VS. B.C. SR INIVAS SHETTY 128 ITR 294 (S.C.) WILL NOT APPLY AS THERE WAS SUBSEQUE NT AMENDMENT TO THE ACT IN SECTION 55 AS PER WHICH THE COST OF ACQU ISITION IN SUCH CASES IS TO BE CONSIDERED AS NIL. THUS, THE DRP REJ ECTED ASSESSEES CLAIM. IN PURSUANCE TO THE ORDER PASSED BY THE DRP, A.O. MADE THE DRAFT ASSESSMENT ORDER FINAL BY MAKING ADDITION OF RS.97,89,67,500. 19 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. BEING AGGRIEVED OF THE ADDITION MADE AS ABOVE, THE ASSESSEE IS IN APPEAL BEFORE US. 18. THE LEARNED A.R. APART FROM MAKING ORAL SUBMISS IONS AT THE TIME OF HEARING HAS FILED ELABORATE WRITTEN SUBMISS IONS. THE CONTENTIONS RAISED BY THE LEARNED A.R. CAN BE SUMM ARIZED AS UNDER. ALONG WITH MOVABLE AND IMMOVABLE ASSETS ASSESSEE A LSO SOLD TECHNICAL KNOWHOW RELATING TO FOUR ARV PRODUCT S FOR A CONSIDERATION OF RS.97.89 CRORES. FURTHER ASSESSEE ALSO TRANSFERRED DMFS RELATING TO THESE FOUR PRODUCTS FO R AN ADDITIONAL CONSIDERATION OF RS.3.15 CRORE. IN ADDITION, ASSESSEE ALSO AGREED TO DEVELOP KNOWH OW AS WELL AS DMF FOR THREE ADDITIONAL PRODUCTS AND TRANS FER THE SAME TO ASTRIX. AS REGARDS FOUR ARV PRODUCTS FOR WHICH TECHNICAL K NOWHOW IS ALREADY OWNED AND IN POSSESSION OF THE ASSESSEE, IT IS REQUIRED TO MAKE AN UNCONDITIONAL SALE OF KNOWHOW T O ASTRIX, SUBJECT TO CONDITIONS STIPULATED IN SUCH KNOWHOW AG REEMENT. AS PER THE TERMS OF KNOWHOW AGREEMENT, KNOWHOW WIL L MEAN EVERYTHING KNOWN BY THE MATRIX INDIA NECESSARY FOR THE MANUFACTURE, MARKETING, SELLING AND DISTRIBUTION OF THE PRODUCTS EXCLUDING MATRIX INDIAS IPR AND DMFS BUT INCLUDING THE BODY OF TECHNICAL INFORMATION COMPRIS ING FORMULA AND THE SPECIFIC MANUFACTURING AND PACKAGIN G PROCESSES (INCLUDING BUT NOT LIMITED TO RAW MATERIA L PROCUREMENT, PACKAGING, PRODUCTION INFORMATION, FORMULATIONS, PROCESSES, SPECIFICATIONS, TECHNIQUES AND METHODS OF QUALITY CONTROL) USED AT 1 ST JANUARY, 2006 TO MANUFACTURE AND/OR PACKAGE THE PRODUCTS. AS PER THE KNOWHOW AGREEMENT, ASSESSEE HAD MADE AN ABSOLUTE SA LE OF KNOWHOW TO ASTRIX AND ASTRIX HAS PURCHASED THE S AME. THE SALE OF KNOWHOW BY THE ASSESSEE TO ASTRIX IS UNCONDITIONAL AND EXCEPT FOR THE FULFILLMENT OF ANY CONDITIONS CONTAINED IN THE AGREEMENT. CLAUSE 10.2 OF SHAREHOLDERS AGREEMENT AND 5.4 OF S HARE ISSUE AGREEMENT HAVE BEEN PROVIDED TO RETAIN A MINI MAL RIGHT TO MATRIX ONLY WITH RESPECT TO ONE OF THE FOU R ARVS VIZ., STAVUDINE FORM-1 IN VIEW OF THE PECULIAR SITUATION THAT THE PRODUCT AT THE TIME OF KNOWHOW SALE HAS CROSSED A P URE KNOWHOW STAGE AND AN APPLICATION FOR GRANT OF THE P ATENT WAS PENDING BEFORE PATENT AUTHORITIES. ONCE THE APP LICATION IS PRESENTED, THE DEFENCE WITH REGARD TO THE PROCES S LIES WITH THE APPLICANT I.E., MATRIX ONLY. THEREFORE, TO PROT ECT THE APPLICATION TO GO THROUGH THE FINAL APPROVAL STAGE, THE KNOWHOW IN RESPECT OF PROCESS FOR THE PREPARATION O F 20 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. STAVUDINE FORM-1 WAS RETAINED. HOWEVER, THIS COULD NOT INVALIDATE AND TERM THE SALE RELATING TO KNOWHOW OF ALL THE FOUR ARVS. FURTHER, THESE CLAUSES HAVE BEEN INSERTE D WITH A VIEW TO FACILITATE THE OBLIGATION CASTE ON MATRIX I N TERMS OF CLAUSE-12 OF THE SHAREHOLDERS AGREEMENT UNDER WHICH , MATRIX IS BOUND AND REQUIRED TO CONTRACT MANUFACTUR E FOR ASTRIX AT COST PRICE AND WITHOUT ANY PROFIT ELEMENT IN CASE ASTRIX MANUFACTURING CAPACITIES ARE FULLY UTILIZED IN A GIVEN PERIOD. WITHOUT RIGHT TO USE KNOWHOW MATRIX WILL NO T BE ABLE TO COMPLETE ITS OBLIGATION OF CONTRACT MANUFACTURE AS PER CLAUSE-12. THE PERMISSION TO USE THE KNOWHOW THEREF ORE, SHOULD BE SEEN IN THAT PERSPECTIVE. IF MATRIX USES THE TECHNICAL KNOWHOW SOLD TO ASTRIX EXCEPT IN TERMS OF CLAUSE 12, IT IS REQUIRED TO MAKE GOOD TO ASTRIX THE PROFI T ACTUALLY MADE BY MATRIX ON THE SAID SUPPLIES. THE WORDINGS O F CLAUSE 10.2 OF SHAREHOLDERS AGREEMENT AND 5.4 OF SHARE ISS UE AGREEMENT MERELY PERMIT THE USAGE OF KNOWHOW BY MAT RIX BUT MATRIX HAS NOT BEEN BESTOWED WITH ANY OWNERSHIP RIGHTS ON THE KNOWHOW. THUS, MATRIX HAS MADE AN OUTRIGHT S ALE OF TECHNICAL KNOWHOW OWNED BY IT TO ASTRIX FOR A VALUA BLE CONSIDERATION AND PERMISSION TO MERELY USE THE SAID KNOWHOW FOR THE BENEFIT OF THE ASTRIX COULD NOT MAK E MATRIX A BENEFICIAL OWNER OF THE TECHNICAL KNOWHOW. IT IS AS TRIX ALONE WHICH IS THE OWNER OF THE TECHNICAL KNOWHOW AND IT ALONE CAN EXPLOIT IT. IN TERMS OF CLAUSE 10.3 OF SHAREHOLDERS AGREEMENT AND CLAUSE 5.1.3 OF SHARE ISSUE AGREEMENT MATRIX WAS RE QUIRED TO TRANSFER OWNERSHIP OF THE DMFS OF THE PRODUCTS TO A STRIX BEFORE 31.12.2005 AS MATRIX WAS IN POSSESSION OF DM FS FOR FOUR PRODUCTS ONLY IT ENTERED INTO AGREEMENT FOR TR ANSFER OF DMF ON 20.12.2005 UNDER WHICH, DMF FOR FOUR PRODUCT S WERE TRANSFERRED FOR A CONSIDERATION OF RS.3.15 CRORES. PURSUANT TO SUCH TRANSFER AND IN TERMS OF SUCH AGREEMENT, ASTRI X ACQUIRED AN UNRESTRICTED JOINT OWNERSHIP OVER THE S AID PRODUCT DMFS. NEITHER MATRIX NOR ASTRIX SHALL BE EN TITLED TO CEDE, ASSIGN, OR OTHERWISE PART WITH ITS JOINT OWNE RSHIP RIGHTS IN THE PRODUCT DMFS. THE DMF WOULD HOWEVER, BE MAINTAINED IN THE NAME OF MATRIX AND IT SHALL BEAR ALL THE COSTS AND EXPENSES IN THIS BEHALF. THE DMF CAN BE S OLD OR DISPOSED OF ONLY WITH THE PRIOR CONSENT OF ASTRIX A ND IN CASE OF SUCH A SALE, THE ENTIRE SALE PROCEEDS FROM THE S ALE OR OTHER DISPOSAL OF THE PRODUCT DMFS SHALL BE PAID OV ER TO ASTRIX IF COLLECTED BY MATRIX. ASTRIX HAS THE RIGHT TO OBTAIN SOLE OWNERSHIP OF THE PRODUCT DMFS AND IN SUCH AN E VENT, MATRIX SHALL TAKE NECESSARY STEPS TO EFFECT THE SAM E WITHOUT ANY FURTHER SALE CONSIDERATION. THUS, IN TERMS WITH THE AGREEMENT DATED 20.12.2005 ASTRIX IS THE BENEFICIAL OWNER OF THE DMFS AND MATRIX IS THE JOINT OWNER FOR MERE 21 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. CONVENIENCE. MATRIX BEING A JOINT OWNER, THE RIGHTS OF ASTRIX AS THE BENEFICIAL OWNER OF DMF ARE NOT EFFECTED IN ANY WAY. THE ASSESSING OFFICER SELECTIVELY RELIED ON CERTAI N CLAUSES OF THE AGREEMENT TO COME TO HIS CONCLUSION WHILE IGNOR ING THE OTHER CLAUSES OF THE AGREEMENT AS WELL AS COPIES OF SALE INVOICES RAISED BY MATRIX. THE ASSESSING OFFICER AS WELL AS DRP IGNORED THE C ERTIFICATE OBTAINED FROM THE CHARTERED ACCOUNTANT CERTIFYING T HAT ASSESSEE HAS NEITHER SOLD THE TECHNICAL KNOWHOW NOR GRANTED OUTRIGHT LICENSING IN RESPECT OF THESE FOUR PRODUCTS TO ANY THIRD PARTY IN THE LAST FIVE YEARS. FURTHER THE SUPPLEMENTARY AGREEMENT ENTERED INTO BETWEEN MATRIX AND ASTRIX CLARIFYING THAT ASTRIX WAS THE EXCLUSIVE OWN ER OF THE KNOWHOW WAS ALSO IGNORED. DRP GROSSLY MISUNDERSTOOD THE SHAREHOLDERS AGREEME NT WHILE CONCLUDING THAT ASSESSEE HAS GRANTED TO ASTRI X A ROYALTY FREE LICENCE TO UNRESTRICTED USE AND ENJOYM ENT OF ASSESSEES INTELLECTUAL PROPERTY AND THEREFORE, THE CONSIDERATION RECEIVED PARTAKES THE CHARACTER OF RO YALTY LICENSE FEE WHICH ARE REVENUE RECEIPTS IN THE COURS E OF BUSINESS FOR SHARING KNOWHOW EXPERIENCE. REFERRING TO THE DEFINITION OF INTELLECTUAL PROPE RTY AS PER CLAUSE 1.2.2.23 OF SHAREHOLDERS AGREEMENT, IT WAS S UBMITTED INTELLECTUAL PROPERTY IS THE BODY OF TECHNICAL INFO RMATION AND KNOWHOW IN RESPECT OF AND/OR RELATING TO THE PROCES S FOR THE PREPARATION OF STAVUDINE FORM-1 AS IS MORE FULLY SE T OUT IN PATENT APPLICATION NO.1352/CHU/2004 FILED WITH THE GOVERNMENT OF INDIA, PATENT OFFICE BRANCH. REFERRING TO COMMENTARIES IN SOME BOOKS AND THE DE CISION OF THE HONBLE DELHI HIGH COURT IN CIT VS. VRV BREW ERIES AND BOTTLING ITA.NO.594/2005, 646/2005 AND 559/2006 DATED 19 TH AUGUST, 2011, IT WAS SUBMITTED, WHERE A PERSON CA N USE THE TECHNICAL KNOWLEDGE OBTAINED DURING THE TENURE OF LICENCE FOR THE PURPOSES OF ITS BUSINESS AFTER THE AGREEMENT HAS EXPIRED AND IN THAT SENSE RESULTING IN AN ENDUR ING ADVANTAGE WOULD BY ITSELF CANNOT BE DECISIVE TO HOL D THAT IT IS NOT A SALE BUT ROYALTY LICENCE FEE BECAUSE KNOWLEDG E BY ITSELF MAY LAST FOR A LONG PERIOD EVEN THOUGH DUE T O RAPID CHANGE OF TECHNOLOGY AND HUGE STRIDES MADE IN THE F IELD OF SCIENCE, THE KNOWLEDGE MAY WITH PASSAGE OF TIME BEC OME OBSOLETE. IN THESE CIRCUMSTANCES, THE TRANSFER OF T ECHNICAL KNOW-HOW CANNOT BE CONSIDERED TO BE A LICENCE. THE LD. AR ALSO REFERRED TO A THIRD MEMBER DECISION OF ITAT, H YDERABAD BENCH IN CASE OF NEERAJ PETROCHEMICALS LTD. VS. ITO , 73 ITD 11 WHEREIN IT IS HELD THAT WHEN THERE IS NO RESTRIC TION REGARDING THE DURATION OF LICENCE AND THE PERSON WH O ACQUIRES IT AND POSSESS IT AND OWNS EVEN AFTER THE DURATION OF THE AGREEMENT PERIOD AND WHERE IT IS NOT BOUND T O RETURN IT BACK TO THE SELLER OR LICENCOR AFTER THE DURATION O F THE 22 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. AGREEMENT PERIOD, THEN, IT IS A TRANSFER OF TECHNIC AL KNOW- HOW. IT WAS SUBMITTED THAT AS IN ASSESSEES CASE AL SO, TRANSFER OF KNOW-HOW IS WITHOUT ANY RESTRICTION, IT CANNOT BE CONSIDERED AS A MERE LICENCE. AO HAVING ACCEPTED ASSESSEES STAND THAT KNOW-HOW IS A CAPITAL ASSET, THE CONSIDERATION RECEIVED FROM TRAN SFER OF SUCH ASSET HAS TO BE TREATED AS CAPITAL GAIN. AS ASSESSEE HAS NOT INCURRED ANY COST OF ACQUISITI ON FOR ACQUIRING THE KNOW-HOW WHICH WAS DEVELOPED IN-HOUSE , THERE IS NO COST OF ACQUISITION TO ASSESSEE. IN ABS ENCE OF COST OF ACQUISITION CAPITAL GAIN CANNOT BE COMPUTED IN TERMS WITH SECTION 48. IN THIS CONTEXT, LD. AR RELIED ON A DECISION OF THE HONBLE SUPREME COURT IN CASE OF CIT VS. B.C. S RINIVAS SHETTY, 128 ITR 294. THE COST OF ACQUISITION OF THE TECHNICAL KNOW-HOW CANNOT ALSO BE CONSIDERED TO BE THE VALUE AT WHICH THE PRE VIOUS OWNER ACQUIRED IT AS ASSESSEES CASE DOES NOT FALL WITHIN SECTION 49(1)(4). SIMILARLY TECHNICAL KNOW-HOW BEIN G A DISTINCT AND SEPARATE ASSET INDEPENDENT OF THE ASSE TS PROVIDED U/S 55, THE COST OF ACQUISITION ALSO CANNO T BE TAKEN AS NIL. LD. AR IN SUPPORT OF HIS CONTENTIONS, RELIED ON TH E FOLLOWING DECISIONS: 1. CIT VS. MRS. GRACE COLLIS (248 ITR 323) (SC) 2. CIT VS. RALLIWOLF LTD., (143 ITR 720) (BOM.) 19. LD. DR, ON THE OTHER HAND, STRONGLY SUPPORTING THE OBSERVATIONS MADE BY THE DRP AND AO, SUBMITTED THAT AS ASSESSEE DID NOT PART ITS OWNERSHIP RIGHTS IN TECHNICAL KNOW-HOW IN RELATION TO THE FOUR ARVS, THERE CANNOT BE A TRANSFER AS PER SECTION 2(47) OF THE IT ACT. LD. DR REFERRING TO THE CLAUSES RELIED UPON BY AO SUBMITTE D THAT THESE CLAUSES MAKE IT CLEAR THAT ASSESSEE RETAINS ITS RIG HT OVER THE TECHNICAL KNOW-HOW AND HAS MERELY GIVEN A LICENCE TO ASTRIX FOR A CONSIDERATION TO MANUFACTURE THE FOUR ARVS BY USING THE TECHNICAL KNOW-HOW DEVELOPED BY ASSESSEE. LD. DR SUBMITTED THAT WHEN THE CLAUSES REFERRED TO BY AO ARE EXPLICIT, THERE IS NO REASON WHY ASSESSEE SHOULD RELY ON SUBSEQUENT DOCUMENTS I.E. C ERTIFICATE FROM 23 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. CA AND THE SUPPLEMENTARY AGREEMENT WHICH ARE ONLY S ELF-SERVING DOCUMENTS. THUS, LD. DR SUBMITTED THAT AO AS WELL AS DRP WERE CORRECT IN TREATING THE RECEIPTS FROM ASTRIX TOWARD S TRANSFER OF TECHNICAL KNOW-HOW AS BUSINESS INCOME. 20. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS MATERI ALS PLACED ON RECORD. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECISIONS RELIED UPON BY LD. AR. AS CAN BE SEEN FROM THE DISC USSIONS MADE HEREINBEFORE, TWO ISSUES ARISE FOR CONSIDERATION BE FORE US, WHICH ARE I) WHETHER THERE IS A TRANSFER OF TECHNICAL KNOW- HOW IN TERMS WITH SECTION 2(47) OF THE ACT AND II) IF IT IS A TRANSFE R IN TERMS OF SECTION 2(47) WHETHER CAPITAL GAIN CAN BE COMPUTED ON THE C ONSIDERATION RECEIVED FROM SUCH TRANSFER. THE SECOND ISSUE WILL ONLY ARISE IF IT WILL BE HELD THAT THERE IS A TRANSFER OF TECHNICAL KNO W-HOW U/S 2(47) OF THE ACT. THEREFORE, AT THE FIRST INSTANCE, WE HAVE TO DECIDE WHETHER THERE IS A TRANSFER OF TECHNICAL KNOW-HOW IN TERM S WITH SECTION 2(47) OF THE ACT. THE TERM TRANSFER AS DEFINED U/S 2(4 7) OF THE ACT, READS AS UNDER: (47) ['TRANSFER', IN RELATION TO A CAPITAL ASSET, INCLUDES, (I) THE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASS ET ; OR (II) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN ; OR (III) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW ; OR (IV) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN-TRADE OF A BUSINESS CARRIED ON BY HIM, SUCH CONVERSION OR TREATMENT ;] [OR] [(IVA) THE MATURITY OR REDEMPTION OF A ZERO COUPON BOND; OR] [(V) ANY TRANSACTION INVOLVING THE ALLOWING OF THE POSSESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED IN PART PERFORMANC E OF A CONTRACT OF THE NATURE REFERRED TO IN SECTION 53A 54 OF THE TRANSFER OF PROPERTY ACT, 1882 (4 OF 1882) ; OR (VI) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEMBER OF, OR ACQUIRING SHARES IN, A CO-OPERATIVE SOCIETY, COMPANY OR OTHER ASSOCIATION OF PERSONS OR BY WAY OF ANY AGREEMENT OR ANY ARRANGEMENT OR IN ANY O THER MANNER WHATSOEVER) WHICH HAS THE EFFECT OF TRANSFERRING, OR ENABLING T HE ENJOYMENT OF, ANY IMMOV-ABLE PROPERTY. 24 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 21. ON A PLAIN READING OF THE AFORESAID PROVISION I T WILL BE CLEAR THAT THE NATURE OF TRANSACTION AT HAND CAN ONLY FIT IN E ITHER UNDER CLAUSE (I) OR CLAUSE (II). FROM READING OF THE DIFFERENT AGRE EMENTS ENTERED INTO BETWEEN THE PARTIES, IT IS TO BE SEEN THAT THOUGH A SSESSEE CLAIMS THAT THERE IS OUTRIGHT SALE OF THE TECHNICAL KNOW-HOW BY ASSESSEE TO ASTRIX BUT IN REALITY IT APPEARS NOT TO BE SO. CLAUSE 5.4 OF THE SHARE ISSUE AGREEMENT READS AS UNDER: FOR THE AVOIDANCE OF DOUBT, IT IS RECORDED THAT MAT RIX SHALL AT ALL TIMES BE ENTITLED TO USE THE KNOW-HOW AND THE I NTELLECTUAL PROPERTY AND TO MANUFACTURE THE PRODUCTS. 22. ON READING OF THE AFORESAID CLAUSE, IT IS ABSOL UTELY CLEAR THAT ASSESSEE RETAINS ITS RIGHT TO USE THE KNOW-HOW AND THE INTELLECTUAL PROPERTY OVER THE FOUR ARVS AND MANUFACTURE THE PRO DUCTS. FURTHER, CLAUSE 6.1 OF AGREEMENT FOR TRANSFER OF KNOW-HOW DT . 20/12/2005 MAKES IT CLEAR THAT ANY IMPROVEMENTS MADE TO THE KN OW-HOW SUBSEQUENT TO THE EFFECTIVE DATE WOULD BE OWNED BY THE PARTY THAT CARRIES OUT SUCH IMPROVEMENT. THE AO HAS ALSO VERY SUCCINCTLY BROUGHT OUT THE MATERIAL DIFFERENCE BETWEEN AGREEME NT FOR TRANSFER OF KNOW-HOW AND AGREEMENT FOR DEVELOPMENT AND TRANSFER OF KNOW-HOW. WHILE AGREEMENT FOR DEVELOPMENT AND TRANSFER OF KNO W-HOW RELATING TO THREE ARVS TO BE DEVELOPED BY ASSESSEE IN FUTURE SPECIFICALLY PROVDES FOR ASTRIX HAVING OWNERSHIP OF KNOW-HOW, WH EREAS THERE IS NO SUCH VESTING OF OWNERSHIP OF KNOW-HOW ON ASTRIX REL ATING TO FOUR ARVS ALREADY DEVELOPED, AS PER AGREEMENT FOR TRANSF ER OF KNOW-HOW. THEREFORE, IT CANNOT BE SAID THAT BY ENTERING INTO THE AGREEMENTS AND ALLOWING ASTRIX TO USE THE KNOW-HOW FOR MANUFACTURI NG THE FOUR ARVS, ASSESSEE HAS COMPLETELY DIVESTED ITSELF OF ITS OWNE RSHIP RIGHTS OVER THE TECHNICAL KNOW-HOW RELATING TO THE FOUR ARVS. T HEREFORE, NEITHER THERE IS RELINQUISHMENT OF ASSESSEES RIGHT OVER TH E ASSET NOR EXTINGUISHMENT OF ANY RIGHTS THEREIN. THERE IS NO D OUBT THAT TECHNICAL KNOW-HOW IS AN INTANGIBLE ASSET, THEREFORE, POSSESS ION OF THE PROPERTY CANNOT BE TRANSFERRED PHYSICALLY. THEREFORE, EXAMIN ING THE TERMS OF THE AGREEMENTS IT CAN BE ASCERTAINED AS TO WHETHER ASSESSEE HAS 25 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. TRANSFERRED ITS RIGHT OVER THE PROPERTY OR STILL RE TAINS ITS RIGHT. IN THE PRESENT CASE, ON READING OF DIFFERENT AGREEMENTS TH E FACTUAL POSITION WHICH EMERGES IS, THOUGH FOR A CONSIDERATION ASSESS EE MAY HAVE ALLOWED ASTRIX TO USE TECHNICAL KNOW-HOW RELATING T O THE FOUR ARVS, NAMELY, LAMIVUDINE, NEVIRAPINE, ZIDUVUDINE AND STAV UDINE AND PRODUCE THEM IN THE FACILITY SOLD TO THEM BY ASSESS EE BUT FACT REMAINS ASSESSEE ALSO SIMULTANEOUSLY RETAINS ITS RIGHT TO U SE THE KNOW-HOW AND THE INTELLECTUAL PROPERTY RELATING TO THE FOUR ARVS AND ALSO ITS RIGHT TO MANUFACTURE THE PRODUCTS. 23. THOUGH CLAUSE 11.3 OF THE SHAREHOLDERS AGREEMEN T PROVIDES THAT IN CASE ASSESSEE SELLS THESE PRODUCTS TO EXIST ING CUSTOMERS WHICH COULD HAVE BEEN SOLD TO THEM BY ASTRIX, THEN, MATRIX SHALL COMPENSATE ASTRIX TO THE EXTENT OF PROFITS ACTUALLY MADE BY MATRIX OR ITS AFFILIATES AS A CONSEQUENCE OF SUPPLYING THE PR ODUCTS WHICH COULD HAVE BEEN SUPPLIED BY ASTRIX. HOWEVER, AS CAN BE SE EN, THE RESTRICTION PUT UNDER CLAUSE 11.3 IS CONFINED TO EX ISTING CUSTOMERS ONLY. THERE IS NO RESTRICTION ON MATRIX IF IT SELL S SUCH PRODUCTS TO PARTIES OTHER THAN EXISTING CUSTOMERS. ON A CAREFU L READING OF VARIOUS AGREEMENTS PLACED BEFORE US, WE DO NOT FIND ANY CON DITION THAT MATRIX HAS GIVEN UP ITS RIGHT COMPLETELY/ABSOLUTELY OVER THE TECHNICAL KNOW- HOW OF THE ARVS IN FAVOUR OF ASTRIX AND ASTRIX HAS BECOME OWNER OF THE TECHNICAL KNOW-HOW IN EXCLUSION OF ALL OTHERS I NCLUDING MATRIX. SIMILARLY, THERE IS NO RESTRICTION IMPOSED IN THE A GREEMENTS ON ASSESSEE EITHER WITH REGARD TO SHARING OF TECHNICAL KNOW-HOW WITH THIRD PARTIES OR FOR USE BY ASSESSEE ITSELF IN RELA TION TO THE FOUR ARVS. THERE IS NOTHING IN THE AGREEMENT TO SUGGEST THAT T HERE IS ABSOLUTE SALE OF TECHNICAL KNOW-HOW BY ASSESSEE TO ASTRIX BY VIRTUE OF WHICH ASTRIX BECAME OWNER OF TECHNICAL KNOW-HOW THEREBY D IVESTING ASSESSEE FROM ALL RIGHTS OVER THE TECHNICAL KNOW-HO W. THOUGH AS PER CLAUSE 12 OF THE SHAREHOLDERS AGREEMENT ASSESSEE IS REQUIRED TO CONTRACT MANUFACTURE THE FOUR ARVS ON BEHALF OF AST RIX BUT THAT DOES NOT MEAN THAT THE RIGHT TO USE THE TECHNICAL KNOW-H OW AND INTELLECTUAL 26 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. PROPERTY BY ASSESSEE IS ONLY RESTRICTED TO SUCH CON TRACT MANUFACTURE ACTIVITY ALONE. EVEN CLAUSE 6.1 OF THE AGREEMENT FO R TRANSFER OF KNOW- HOW WHICH PROVIDES FOR OWNERSHIP OF ANY IMPROVEMENT MADE TO THE KNOW-HOW SUBSEQUENT TO THE EFFECTIVE DATE BY THE PA RTY WHO CARRIES OUT SUCH IMPROVEMENT WOULD MAKE IT CLEAR THAT ASTRI X DOES NOT POSSESS EXCLUSIVE OWNERSHIP OVER THE TECHNICAL KNOW -HOW RELATING TO THE FOUR ARVS AS CLAIMED BY ASSESSEE. RATHER THE AG REEMENTS READ AS A WHOLE WOULD CLEARLY SUGGEST THAT WHAT THE PART IES HAVE INTENDED IS THE RIGHT TO USE OF TECHNICAL KNOW-HOW BY ASTRIX FOR MANUFACTURING OF FOUR ARVS FOR A CONSIDERATION BUT THAT BY ITSELF DOES NOT MEAN THAT ASSESSEE HAS ABSOLUTELY TRANSFERRED ITS OWNERSHIP R IGHTS OVER THE TECHNICAL KNOW-HOW. THERE IS ALSO NO RESTRICTION TH AT ASSESSEE CANNOT EXTEND SIMILAR RIGHT TO USE THE TECHNICAL KNOW-HOW TO ANY OTHER PARTY EXCEPT ASTRIX. OF COURSE, IT IS ANOTHER MATTER THE ASSESSEE MAY NOT HAVE DONE SO. THEREFORE, CONSIDERING THE TOTALITY O F FACTS AND CIRCUMSTANCES, IT CAN BE CONCLUDED THAT THERE IS NO TRANSFER OF TECHNICAL KNOW-HOW RELATING TO FOUR ARVS IN TERMS O F SECTION 2(47) OF THE ACT, SO AS TO TREAT THE RECEIPTS THEREFROM AS CAPITAL GAIN. THOUGH, THERE CANNOT BE ANY DISPUTE OR DOUBT THAT TECHNICAL KNOW-HOW IS A CAPITAL ASSET BUT IT DOES NOT NECESSARILY FOLLOW TH AT ALL RECEIPTS FROM EXPLOITATION OF SUCH ASSET ARE TO BE TREATED AS CAP ITAL RECEIPTS. REVENUE RECEIPTS CAN ALSO BE GENERATED BY EXPLOITIN G CAPITAL ASSETS. 24. AT THIS STAGE, IT IS NECESSARY TO EXAMINE THE D ECISIONS RELIED UPON BY THE LD. AR AND TO WHAT EXTENT THEY CAN BE H ELPFUL TO ASSESSEE. HOWEVER, ONE HAS TO BEAR IN MIND A DECISI ON IS MADE ON THE BASIS OF FACTS INVOLVED THEREIN. UNLESS, THERE ARE SIMILARITY OF FACTS, RATIO LAID DOWN IN A DECISION CANNOT BE APPL IED UNIFORMLY. MOREOVER, WHETHER THERE IS TRANSFER IN A PARTICULAR CASE WILL DEPEND UPON FACTS INVOLVED IN THAT CASE. 27 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 25. IN CASE OF CIT VS. MRS. GRACE COLLIS (SUPRA), T HE HONBLE SUPREME COURT WHILE INTERPRETING THE EXPRESSION EX TINGUISHMENT OF ANY RIGHTS THERE IN, HELD AS UNDER: WE HAVE GIVEN CAREFUL THOUGHT TO THE DEFINITION OF TRANSFER IN SECTION 2(47) AND TO THE DECISION OF THIS COURT IN VANIA SILK MILLS PVT. LTDS CASE [1991] 191 ITR 647. IN OUR VI EW, THE DEFINITION CLEARLY CONTEMPLATES THE EXTINGUISHMENT OF RIGHTS IN A CAPITAL ASSET DISTINCT AND INDEPENDENT OF SUCH EXTI NGUISHMENT CONSEQUENT UPON THE TRANSFER THEREOF. WE DO NOT APP ROVE, RESPECTFULLY, OF THE LIMITATION OF THE EXPRESSION EXTINGUISHMENT OF ANY RIGHTS THEREIN TO SUCH EXTINGUISHMENT ON AC COUNT OF TRANSFERS OR TO THE VIEW THAT THE EXPRESSION EXTIN GUISHMENT OF ANY RIGHTS THEREIN CANNOT BE EXTENDED TO MEAN THE EXTINGUISHMENT OF RIGHTS INDEPENDENT OF OR OTHERWIS E THAN ON ACCOUNT OF TRANSFER. TO SO READ THE EXPRESSION IS T O RENDER IT INEFFECTIVE AND ITS USE MEANINGLESS. AS WE READ IT, THEREFORE, THE EXPRESSION DOES INCLUDE THE EXTINGUISHMENT OF R IGHTS IN A CAPITAL ASSET INDEPENDENT OF AND OTHERWISE THAN ON ACCOUNT OF TRANSFER. 26. THE RATIO LAID DOWN IN THE AFORESAID DECISION C ANNOT BE APPLIED TO ASSESSEES CASE AS THERE IS NO EXTINGUISHMENT OF RIGHTS OVER THE TECHNICAL KNOW-HOW. AS REITERATED EARLIER, ASSESSEE IN TERMS WITH CLAUSE 5.4 OF SHARE ISSUE AGREEMENT RETAINS ITS RIG HT TO USE THE TECHNICAL KNOW-HOW AND MANUFACTURE THE PRODUCTS. 27. CIT VS. RALLYWOLF LTD(SUPRA) THIS DECISION WI LL ALSO IN NOWAY HELP THE CASE OF ASSESSEE AS IN THE PRESENT CASE TH ERE IS NO ABSOLUTE TRANSFER OF TECHNICAL KNOW-HOW TO ASTRIX. 28. THE OTHER DECISIONS ALSO ARE FACTUALLY DISTINGU ISHABLE AS THERE IS NOTHING IN THOSE DECISIONS TO INDICATE THAT THER E IS ANY CLAUSE AKIN TO CLAUSE 5.4 OF SHAREISSUE AGREEMENT ALLOWING THE OWNER TO RETAIN ITS RIGHTS TO USE TECHNICAL KNOW-HOW AND MANUFACTURE TH E PRODUCTS. 29. IT WILL BE PERTINENT TO MENTION HERE THAT LD. A R TO STRENGTHEN HIS ARGUMENT PLACED RELIANCE UPON A CERTIFICATE ISSUED BY THE CHARTERED ACCOUNTANT AND A SUPPLEMENTARY AGREEMENT ENTERED IN TO BETWEEN ASSESSEE AND ASTRIX ON 1 ST JANUARY, 2010. ON A PERUSAL OF THE AUDITORS CERTIFICATE DATED 2 ND FEBRUARY, 2010, IT IS TO BE NOTICED THAT 28 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. THE AUDITOR HAS MERELY CERTIFIED THAT ASSESSEE HAS NOT TRANSFERRED THROUGH SALE OR OUTRIGHT LICENCING ANY TECHNICAL KN OW-HOW IN RELATION TO FOUR ARVS TO ANY OTHER THIRD PARTY DURING THE PE RIOD FROM 1 ST APRIL, 2005 TO 30 TH SEPTEMBER, 2009. HOWEVER, SUCH NON-TRANSFER OF TECHNICAL KNOW-HOW BY ASSESSEE TO ANY OTHER PARTY I N NO WAY PROVES THE FACT THAT TECHNICAL KNOW-HOW RELATING TO THE FO UR PRODUCTS WAS ABSOLUTELY TRANSFERRED TO ASTRIX BY ASSESSEE WITHOU T RETAINING ANY RIGHT THEREOF. IN FACT THE CERTIFICATE SUPPORTS TH E FACT THAT THE ASSESSEE HAS RIGHTS ON THE KNOW-HOW, BUT HAS NOT TR ANSFERRED TO ANY OTHER PARTY. AS FAR AS SUPPLEMENTARY AGREEMENT DATE D 01/01/2010 IS CONCERNED, A PERUSAL OF THE SAME BRINGS OUT SOME IN TERESTING FACTS. AS CAN BE SEEN FROM THE AGREEMENT, THE SHAREHOLDERS AGREEMENT BETWEEN ASSESSEE AND ASPENSA WAS TERMINATED ON 09/1 0/08 AS A RESULT OF WHICH ASTRIX HAS CEASED TO BE A JOINT VEN TURE BETWEEN MATRIX AND ASPENSA. EVEN THOUGH SUCH EVENT OCCURRED IN OCT OBER, 2008, BUT ON PERUSAL OF DRAFT ASSESSMENT ORDER AS WELL AS OTH ER MATERIALS ON RECORD, IT APPEARS, THIS FACT WAS NOT BROUGHT TO TH E NOTICE OF AO. FURTHERMORE, ASSESSEE AND ASTRIX NEVER THOUGHT IT E XPEDIENT OR NECESSARY TO ENTER INTO A SUPPLEMENTARY AGREEMENT I MMEDIATELY UPON TERMINATION OF JOINT VENTURE, BUT, WAITED FOR MORE THAN A YEAR TO ENTER INTO SUCH AGREEMENT. THEREFORE, THE SUPPLEMENTARY A GREEMENT ENTERED INTO BETWEEN THE PARTIES IN 2010 AFTER THE DRAFT ASSESSMENT ORDER WAS PASSED, APPEARS TO BE AN AFTERTHOUGHT NOT ONLY TO GET OVER THE HURDLE CREATED BY THE ORIGINAL AGREEMENTS EXECU TED IN 2005 AND TO DILUTE THE VIEW TAKEN BY THE AO BUT AN ATTEMPT M ADE FOR ESTABLISHING THE FACT THAT ASTRIX SHALL BE TREATED AS THE EXCLUSIVE OWNER OF KNOW-HOW IN RESPECT OF THE FOUR ARVS. SEEN IN THE AFORESAID PERSPECTIVE, THE SUPPLEMENTARY AGREEMENT BEING A SE LF-SERVING DOCUMENT TO HELP ASSESSEE GET OVER THE ADDITION MAD E BY AO, CANNOT BE GIVEN MUCH IMPORTANCE. IN THE AFORESAID VIEW OF THE MATTER, WE HOLD THAT THERE BEING NO TRANSFER IN TERMS OF SEC TION 2(47) OF THE ACT, THE AMOUNT RECEIVED TOWARDS ALLOWING ASTRIX TO USE THE TECHNICAL KNOW-HOW HAS TO BE TREATED AS BUSINESS INCOME. IN VIEW OF OUR 29 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. AFORESAID FINDING, THE SECOND ISSUE AS TO WHETHER C APITAL GAIN CAN BE COMPUTED IN ABSENCE OF COST OF ACQUISITION BECOM ES REDUNDANT, HENCE, NOT REQUIRED TO BE ADJUDICATED. THIS GROUND IS DISMISSED. 30. GROUND NO. 3 READS AS UNDER: THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING TH E ORDER OF THE AO IN DISALLOWING THE SUPERANNUATION CONTRIBUTI ON OF RS. 32,40,000 PAID TO LIC IN RESPECT OF THE WORKING DIR ECTORS OF THE COMPANY. 31. BRIEFLY THE FACTS RELATING TO THIS ISSUE ARE, D URING THE ASSESSMENT PROCEEDING, AO NOTICED THAT ASSESSEE HAS CLAIMED DEDUCTION FOR AN AMOUNT OF RS. 32,40,000 ON ACCOUNT OF CONTRIBUTION MADE TO SUPERANNUATION FUND OF SPECIFIED DIRECTORS. IN THE NOTE SUBMITTED TO THE RETURN OF INCOME, ASSESSEE STATED THAT THE CONTRIBUTION MADE WAS SUBJECTED TO TDS BY INCLUDING THE SAME AS PART OF SALARY OF THE SPECIFIED DIRECTORS. IT WAS S UBMITTED, THE EXPENDITURE INCURRED BEING WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF BUSINESS, IT IS TO BE ALLOWED U/S 37 OF THE ACT. IN SUPPORT OF SUCH CONTENTION, ASSESSEE RELIED ON THE FOLLOWING DECISI ONS: 1. CIT VS. WESTERN INDIA PAPER AND BOARD MILLS PVT. LTD., 189 ITR 309 (BOM.) 2. CIT VS. PUNJAB FINANCIAL CORPORATION LTD., 295 I TR 510 (P&H) 32. AO HOWEVER DID NOT ACCEPT THE CONTENTION OF ASS ESSEE. HE WAS OF THE VIEW THAT CONTRIBUTION TO SUPERANNUATION FUN D CAN ONLY BE CLAIMED AS DEDUCTION AS PER THE PROVISIONS OF SECTI ON 36(1)(IV) AND NOT U/S 37, WHICH IS A RESIDUARY PROVISION. ACCORDI NGLY, HE DISALLOWED THE CLAIM OF DEDUCTION. THOUGH THE ASSESSEE OBJECTE D TO SUCH DISALLOWANCE BEFORE DRP, BUT, THE DRP ALSO CONFIRME D THE DISALLOWANCE. 33. THE LD. AR SUBMITTED BEFORE US THAT THE COMPANY HAS INCURRED THE EXPENDITURE OF CONTRIBUTION MADE TO SUPERANNUAT ION FUND OF ITS DIRECTORS, WHO HOLD MORE THAN 5% SHARE IN THE COMPA NY. WHILE 30 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. MAKING THE CONTRIBUTION, ASSESSEE HAS ALSO DEDUCTED TAX AT SOURCE AND HAS REMITTED THE SAME TO THE GOVERNMENT. THEREF ORE, THE CONTRIBUTION MADE BEING IN THE NATURE OF EXPENDITUR E INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSIN ESS IS COVERED BY THE PROVISIONS OF SECTION 37. IT WAS SUBMITTED THAT AS THE ASSESSEE HAS TREATED THE CONTRIBUTION AS PART OF THE SALARY OF THE SPECIFIED DIRECTORS AND HAS ALSO DEDUCTED TAX ON THE SAID AMO UNT, IT CEASES TO BE IN THE NATURE OF CONTRIBUTION TO A SUPERANNUATIO N FUND AND ACCORDINGLY IT IS ALLOWABLE AS EXPENDITURE U/S 37. IN SUPPORT OF SUCH CLAIM, HE RELIED UPON A DECISION OF THE HONBLE GUJ ARAT HIGH COURT IN CASE OF CIT VS. KARAMCHAND PREMCHAND PVT. LTD. 200 ITR 281. THE LD. AR SUBMITTED THAT UNLESS THERE IS EXPRESS OR IM PLIED PROHIBITION UNDER OTHER PROVISIONS OF THE ACT, ANY EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS CAN BE CLAI MED AS DEDUCTION U/S 37. FOR THIS PURPOSE, HE RELIED UPON A DECISION OF THE HONBLE P&H HIGH COURT IN CASE OF CIT VS. PUNJAB FINANCIAL CORP ORATION LTD., 295 ITR 510. 34. THE LD. DR RELIED UPON THE DECISION OF THE AO A ND DRP. 35. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE ORDERS OF DEPARTMENTAL AUTHORITIES AS W ELL AS OTHER MATERIALS ON RECORD. FROM THE FACTS AND MATERIALS O N RECORD, IT IS EVIDENT THAT THE INCURRING OF EXPENDITURE HAS NOT B EEN DOUBTED OR DISPUTED BY AO. THE ONLY REASON FOR WHICH THE AO DI SALLOWED THE EXPENDITURE IS SINCE CONTRIBUTION TO SUPERANNUATION FUND IS COVERED U/S 36(1)(IV) THE SAME CANNOT BE ALLOWED U/S 37. TH E DRP HAS CONFIRMED THE DISALLOWANCE SOLELY FOR THE REASON TH AT SIMILAR DISALLOWANCE WAS UPHELD BY CIT(A) FOR THE AY 2005-0 6. HOWEVER, ON GOING THROUGH THE FACTS AND MATERIALS ON RECORD, WE ARE OF THE VIEW THAT THE EXPENDITURE INCURRED IS ALLOWABLE AS DEDUC TION IF NOT U/S 36(1)(IV) BUT U/S 37 OF THE ACT AS IT IS EXCLUSIVEL Y INCURRED FOR THE PURPOSE OF BUSINESS. MOREOVER, IT IS NOT DISPUTED T HAT ASSESSEE HAS DEDUCTED TAX AT THE TIME OF MAKING CONTRIBUTION TO THE SUPERANNUATION 31 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. FUND AND HAS TREATED IT AS PART OF SALARY OF THE CO NCERNED DIRECTORS. THAT BEING THE CASE, THE EXPENDITURE INCURRED SHOUL D BE ALLOWED AS A DEDUCTION. IN THIS REGARD, WE RELY ON CIT VS. PUNJA B FINANCIAL CORPORATION LTD.(SUPRA). ACCORDINGLY, WE DELETE THE ADDITION MADE BY THE AO. 36. THE COMMON ISSUE IN GROUND NOS. 4 & 5 RELATES T O REDUCTION FROM TAXABLE INCOME THE AMOUNTS OF INTEREST GRANTE D U/S 244A AND SUBSEQUENTLY WITHDRAWN. 37. BRIEFLY THE FACTS RELATING TO THE AFORESAID ISS UE ARE, DURING THE ASSESSMENT PROCEEDING, AO NOTICED THAT ASSESSEE HAS REDUCED FROM THE TAXABLE INCOME AN AMOUNT OF RS. 76,15,608 BEING THE INTEREST GRANTED U/S 244A FOR AY 2005-06, WHICH WAS SUBSEQUE NTLY WITHDRAWN IN PURSUANCE TO ASSESSMENT ORDER PASSED U/S 143(3). SIMILARLY, ASSESSEE ALSO HAD REDUCED AN AMOUNT OF RS. 75,59,58 0 BEING INTEREST GRANTED U/S 244A AND SUBSEQUENTLY WITHDRAWN BY AO B Y ORDER PASSED U/S 143(3) FOR THE AY 2004-05. WHEN THE AO CALLED U PON ASSESSEE TO JUSTIFY ITS CLAIM, IT WAS SUBMITTED BY ASSESSEE THA T IT RECEIVED AN AMOUNT OF RS. 76,15,608 AS INTEREST U/S 244A OF THE ACT ON THE AMOUNT OF REFUND DUE AS PER INTIMATION U/S 143(1) F OR AY 2005-06. THE INTEREST GRANTED WAS SHOWN AS OTHER INCOME IN T HE P&L ACCOUNT AND OFFERED TO TAX. HOWEVER, ASSESSMENT FOR THE SAI D AY WAS COMPLETED SUBSEQUENTLY U/S 143(3) VIDE ORDER DATED 28/12/07 AS PER WHICH NO INTEREST U/S 244A WAS ALLOWED TO ASSESSEE. ACCORDINGLY, INTEREST GRANTED U/S 244A WAS DEMANDED BY THE DEPAR TMENT AND WAS ALSO PAID BY ASSESSEE. THEREFORE, NO INTEREST U/S 2 44A ACCRUES TO ASSESSEE. AS THE ASSESSEE HAS ALREADY SHOWN THAT IN TEREST AS INCOME, THE SAME IS REQUIRED TO BE REDUCED FROM THE TAXABLE PROFIT FOR THE AY 2006-07. SIMILARLY, FOR THE AY 2004-05 ALSO, ASSESSEE RECEIVED INTEREST OF RS. 75,59,580 AT THE TIME OF P ROCESSING OF RETURN U/S 143(1), WHICH WAS SHOWN AS INCOME IN THE AY 200 5-06. SUBSEQUENTLY, HOWEVER, ASSESSMENT FOR AY 2004-05 WA S COMPLETED U/S 143(3) BY WITHDRAWING THE INTEREST GRANTED U/S 244A, WHICH WAS ALSO PAID BACK TO THE DEPARTMENT BY ASSESSEE. HENCE , THE SAME IS 32 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. REQUIRED TO BE REDUCED FROM THE TAXABLE PROFITS OF AY 2006-07. AO, HOWEVER, DID NOT ACCEPT THE CONTENTION OF ASSESSEE. AO OBSERVED THAT REFUND U/S 143(1) WAS ISSUED ON THE BASIS OF INCOME ADMITTED BY THE ASSESSEE. THE SUBSEQUENT EVENT OF ADDITIONS IN THE SCRUTINY ASSESSMENT AND RELIEF IN FURTHER APPEALS ARE CONTIN GENT IN NATURE TILL THE MATTER ATTAINS FINALITY. HENCE, ASSESSEES CLAI M THAT INTEREST U/S 244A HAS NOT ACCRUED CANNOT BE ACCEPTED UNTIL THE M ATTER ATTAINS FINALITY. ON THE AFORESAID BASIS, AO REJECTED ASSES SEES CLAIM OF REDUCTION. 38. THE DRP AFTER CONSIDERING THE SUBMISSIONS OF AS SESSEE HELD THAT IN CASE THE ASSESSEE HAS PAID THE DEMAND IT WI LL BE ENTITLED TO REDUCE THE INCOME ADMITTED BY WAY OF RECEIPT OF INT EREST. LD. DRP DIRECTED THE AO TO VERIFY AND ALLOW ASSESSEES CLAI M IF IT IS FOUND TO BE CORRECT. AO HOWEVER WHILE COMPLETING THE ASSESSM ENT FINALLY AGAIN REJECTED ASSESSEES CLAIM ON THE PRETEXT THAT ASSES SEES APPEALS FOR AYS 2004-05 AND 2005-06 ARE STILL PENDING. 39. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF THE DEPARTMENTAL AUTHORITIES AS WELL AS PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN FROM THE FACTS AND MATERIALS ON RECORD, INTEREST ON REFUND GRANTED TO ASSESSEE AT T HE TIME OF PROCESSING OF RETURN FOR AYS 2004-05 AND 2005-06 WE RE OFFERED AS INCOME BY ASSESSEE. IT IS ALSO NOT DISPUTED THAT WH EN ASSESSMENT ORDERS UNDER SECTION 143(3) OF THE ACT WERE PASSED FOR THESE ASSESSMENT YEARS RESULTING IN DEMAND, THE INTEREST GRANTED UNDER SECTION 244A WAS WITHDRAWN AND THE ASSESSEE WAS ASK ED TO PAY BACK THE INTEREST AMOUNT TO THE DEPARTMENT, WHICH THE AS SESSEE HAS ALSO COMPLIED. THEREFORE, WHEN THE ASSESSEE HAS SHOWN TH E INCOME WHICH WAS SUBSEQUENTLY WITHDRAWN BY THE DEPARTMENT EFFECT IVELY NO INCOME ON ACCOUNT OF INTEREST GRANTED UNDER SECTION 244A A CCRUES TO THE ASSESSEE. THEREFORE, THE INCOME ALREADY SHOWN BY TH E ASSESSEE BY TAKING INTO ACCOUNT THE INTEREST GRANTED EARLIER UN DER SECTION 244A REQUIRES TO BE REDUCED FROM THE TAXABLE PROFIT FOR ASSESSMENT YEAR 33 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 2006-07. IN FACT, THIS IS THE PRECISE DIRECTION OF THE DRP TO THE ASSESSING OFFICER. HOWEVER, THE A.O. HAS EXCEEDED H IS BRIEF BY NOT COMPLYING TO THE DIRECTIONS OF THE DRP BY OBSERVING THAT ASSESSEES APPEAL FOR THE RELEVANT A.Y. ARE STILL PENDING. THE ACTION OF THE A.O. CANNOT BE APPRECIATED. WE, THEREFORE, DIRECT THE A. O. TO ALLOW ASSESSEES CLAIM AFTER VERIFYING THE FACT AS TO WHE THER THE ASSESSEE HAS SHOWN THE INTEREST INCOME WHICH WAS SUBSEQUENTL Y WITHDRAWN BY THE DEPARTMENT. 40. GROUND NO.6 READS AS UNDER : THE DISPUTE RESOLUTION PANEL ERRED IN UPHOLDING THE ORDER OF THE AO AS REGARDS DISALLOWANCE OF RS. 5,72,19,461 B EING AMOUNT DEBITED TO PROFIT & LOSS ACCOUNT IN RESPECT OF EMPLOYEE STOCK OPTION SCHEME. 41. BRIEFLY THE FACTS RELATING TO THE AFORESAID ISS UE ARE, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.5,72,19,461 TO THE P & L ACCOUNT ON ACCOUNT OF ESOP SCHEME WHICH WAS CLAIMED AS PART OF THE EMPLOYEE COST. THE A.O. HOWEVER, WAS OF THE OPI NION THAT THE EXPENDITURE INCURRED IS NOT REVENUE EXPENDITURE AND IS ALSO CONTINGENT AND NOTIONAL IN NATURE. ACCORDINGLY, HE DISALLOWED THE DEDUCTION CLAIMED OF RS.5,72,19,461 AND ADDED IT TO THE INCOME OF THE YEAR. ASSESSEE HAS OBJECTED TO SUCH ADDITION BE FORE DRP. THE DRP TAKING NOTE OF THE FACT THAT THE CIT(A) IN ASSE SSEES OWN CASE FOR THE A.Y. 2005-06 HAS DISALLOWED SUCH CLAIM UPHE LD THE ADDITION MADE BY THE A.O. 42. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDER S OF THE AUTHORITIES AND MATERIAL PLACED ON RECORD. IT IS TH E CONTENTION OF THE LEARNED A.R. THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR A.Y.2008-09. IN THIS CONTEXT, HE RELIED UPON THE DECISION OF THE COORDINATE BENCH IN ITA.NO.66/HYD/ 2013 DATED 10.01.2014. 34 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 43. THE LEARNED D.R. HAS NOT DISPUTED THE CONTENTIO NS OF THE LEARNED A.R. 44. ON PERUSAL OF ORDER DATED 10.01.2014 PASSED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE IN ITA.NO.66/HYD/2013 FOR A.Y. 2008- 09 IT IS SEEN THAT WHILE DEALING WITH IDENTICAL ISS UE OF DEDUCTION CLAIMED ON ACCOUNT OF EXPENDITURE INCURRED TOWARDS ESOP SCHEME, THE COORDINATE BENCH TAKING NOTE OF THE DECISION OF THE ITAT, BANGALORE SPECIAL BENCH IN CASE OF M/S. BIOCON LTD. , VS. DCIT ITA.NO.368 TO 371/BANG/2010 DATED 16.07.2013 REMITT ED THE ISSUE BACK TO THE FILE OF A.O. WITH A DIRECTION TO EXAMIN E THE CLAIM AFRESH IN THE LIGHT OF THE DECISION OF THE ITAT, BANGALORE SP ECIAL BENCH. AS THE ISSUE RAISED IS MATERIALLY SAME, RESPECTFULLY FOLLO WING THE AFORESAID DECISION OF THE COORDINATE BENCH, WE ALSO REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFICER FOR CONSIDERING AFRES H KEEPING IN VIEW THE DECISION OF THE ITAT BANGALORE SPECIAL BENCH IN THE CASE OF M/S. BIOCON LTD., (SUPRA). GROUND NO.6 IS ALLOWED FOR ST ATISTICAL PURPOSES. 45. GROUND NO.7 READS AS UNDER : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING TH E ASSESSING OFFICERS ACTION IN REJECTING THE BASIS A DOPTED BY THE ASSESSEE FOR APPORTIONMENT OF COMMON CORPORATE OVER HEAD EXPENSE TO ALL THE UNITS OF THE COMPANY INCLUDING 1 00% EXPORT ORIENTED UNDERTAKINGS ELIGIBLE FOR DEDUCTION U/S 10 B OF THE ACT AND IN THE PROCESS REDUCING THE BENEFIT U/S 10B BY RS. 1,83,63,751. 46. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PRO CEEDING, THE A.O. NOTICED THAT THE ASSESSEE HAS CLAIMED EXPENDIT URE ON CORPORATE OVERHEADS AT RS.27,12,64,135/- WHICH HAS BEEN APPO RTIONED TO THE EOU UNITS IN THE FOLLOWING MANNER : UNIT 3.2 JEEDIMETLA UNIT 7 PASHAMYLARAM MANUFACTURING EXPENSES 9,72,252 27,00,494 PERSONAL COSTS 1,18,60,886 1,80,46,011 ADMINISTRATIVBE & SELLING 1,02,10,493 2,32,97,781 TOTAL 2,30,43,631 4,40,44,286 35 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 47. IT WAS FURTHER EXPLAINED BY THE ASSESSEE THAT M ANUFACTURING EXPENSES WERE DISTRIBUTED OVER OPERATING DIVISIONS ON THE BASIS OF GROSS MATERIAL COST. PERSONAL COST IS DISTRIBUTED O VER OPERATING DIVISIONS ON THE BASIS OF STAFF STRENGTH IN OPERATI NG DIVISION, WHEREAS, ADMINISTRATIVE COST IS DISTRIBUTED OVER OPERATING D IVISION ON THE BASIS OF SALES EFFECTED. THE A.O. HOWEVER, WAS NOT CONVIN CED WITH THE EXPLANATION OF THE ASSESSEE. ACCORDING TO THE A.O. THE CORRECT PROCEDURE TO BE FOLLOWED IS TO ALLOCATE THE EXPENDI TURE IN PROPORTION TO THE TURNOVER OF THE UNIT VIS--VIS THE TOTAL TUR NOVER OF THE COMPANY. ACCORDINGLY, THE A.O. PROCEEDED TO APPORTION THE EX PENDITURE AND COMPUTE THE PROFIT UNDER SECTION 10B OF THE ACT, AS A RESULT OF WHICH, THE DEDUCTION CLAIMED UNDER SECTION 10B WAS REDUCED BY AN AMOUNT OF RS.1,83,63,751/-. THOUGH THE ASSESSEE OBJECTED T O THE DEDUCTION COMPUTED UNDER SECTION 10B BY THE A.O. IN THE DRAFT ASSESSMENT ORDER, BUT THE SAME DID NOT FIND FAVOUR WITH THE DR P. 48. WE HAVE HEARD THE PARTIES AND PERUSED THE ARGUM ENTS OF THE LEARNED D.R. AND LEARNED A.R. ON THE ISSUE. 49. THE LEARNED A.R. SUBMITTED BEFORE US THAT THE I SSUE IN DISPUTE STANDS SQUARELY COVERED BY THE DECISION OF THE ITAT , HYDERABAD BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 20 08-09 IN ITA.NO.66/H/2013 DATED 10.01.2014. LEARNED D.R. HAS NOT DISPUTED THIS FACT. ON A PERUSAL OF THE ORDER DATED 10.01.20 14 PASSED IN ITA.NO.66/H/2013, IT IS SEEN THAT WHILE CONSIDERING SIMILAR ISSUE IN ASSESSMENT YEAR 2008-09, TRIBUNAL HAS HELD AS UNDER : 45. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS. EVEN THOUGH THE ISSUE WAS PENDING IN EARLIER YEAR, WE ARE OF THE OPINION THAT ISSUE CAN BE DECIDED INDEPENDENTL Y IN THIS YEAR. AFTER CONSIDERING THE FACTS AS STATED IN THE OBJECTIONS BEFORE THE DRP AND ALSO BEFORE US, WE ARE OF THE OP INION THAT ASSESSEE HAS ALLOCATED THE CORPORATE OVERHEADS ON A RATIONAL BASIS BASED ON THE MATERIAL COST OF PURCHASE AND NU MBER OF PEOPLE WORKED FOR THE UNIT AND ALSO ON THE BASIS OF HEAD ACCOUNT WHICH IS REASONABLE. ADOPTING SALES TURNOVE R AS THE BASIS MAY RESULT IN SKEWED ALLOCATION. FOR EXAMPLE, IF A PARTICULAR UNIT IS PRODUCING ONLY HIGH COST/ HIGH P RICE PRODUCT, 36 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. THE EFFORT AND SERVICE COST FOR THAT UNIT WILL BE L ESS WHEREAS, THE PROFIT MARGIN WILL BE MORE. IF THE UNIT IS NOT PROD UCING MUCH IN THE YEAR AND HAS LESSER SALES, ALLOCATION OF AMOUNT ON THE BASIS OF TURNOVER MAY RESULT IN UNDER ALLOCATION OF SERVI CE COST. EVEN IN THE CASE WHERE THE UNIT STARTS PRODUCTION ONLY A T THE FAG END OF THE YEAR COST OF WORKING ON THAT UNIT THROUGHOUT THE YEAR FOR ESTABLISHING/ STARTING PRODUCTION MAY NOT RESULT IN ALLOCATION OF ACTUAL EXPENDITURE IF TURN OVER IS CONSIDERED. IN V IEW OF THIS, SINCE ASSESSING OFFICER HAS NOT GIVEN ANY RATIONALE IN ADOPTING THE TURNOVER AS THE BASIS, IGNORING THE ASSESSEES METHOD, WE ARE OF THE OPINION THAT ALLOCATION OF EXPENDITURE A S WAS DONE BY THE MYLAN LABORATORIES LTD. (FORMERLY MATRIX LABORA TORIES LTD.) ASSESSEE IS MORE RATIONALE AND IS IN TUNE WITH THE PRINCIPLES LAID DOWN BY THE INSTITUTE OF COST ACCOUNTANTS AND ALSO FOR THE PURPOSE OF COMPANY LAW. THEREFORE, CONSIDERING THE DETAILED OBJECTIONS RAISED BY THE ASSESSEE AS PLACED IN THE OBJECTIONS TO THE DRP, WE ARE OF THE OPINION THAT THE ALLOCATION BY THE ASSESSEE IS TO BE UPHELD. ASSESSING OFFICER IS DIRE CTED TO ACCEPT THE ASSESSEES ALLOCATION OF CORPORATE OVERH EADS. ACCORDINGLY, GROUND NO. 14 IS ALLOWED. RESPECTFULLY FOLLOWING THE PRINCIPLES DECIDED IN TH E AFORESAID DECISION OF THE COORDINATE BENCH WE HOLD THAT THE ALLOCATION OF EXPENDITURE BY THE ASSESSEE BETWEEN THE EOU UNITS IS REQUIRED TO B E UPHELD. ACCORDINGLY, WE ALLOW THE GROUND RAISED BY THE ASSE SSEE. 50. GROUND NO. 9 READS AS UNDER : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING TH E VIEW OF THE AO THAT AT THE TIME OF CONSIDERING ALLOWANCE OF WEIGHTED DEDUCTION U/S 35(2AB), THE R&D EXPENDITURE RELATING TO THE UNITS CLAIMING DEDUCTION U/S 10B WILL HAVE TO BE RE VOKED BY GIVING CREDENCE TO THE WEIGHTED DEDUCTION ALLOWED O N R&D EXPENDITURE. 51. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PRO CEEDING, THE A.O. NOTICED THAT THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCTION UNDER SECTION 35(2AB) ON THE R & D FACILITIES. HOWEVER, T HE DEDUCTION CLAIMED IS NOT SUPPORTED BY REPORT IN FORM NO.3CL A ND THE ASSESSEE HAS ONLY CLAIMED THE DEDUCTION ON THE BASIS OF AUDI TORS CERTIFICATION. WHEN THE A.O. CALLED UPON THE ASSESSEE TO FURNISH T HE CERTIFICATES IN FORM NO.3CL, THE ASSESSEE STATED THAT THEY WILL BE IN A POSITION TO FURNISH THE SAME WITHIN A SHORT PERIOD. HOWEVER, IN ABSENCE OF 37 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. CERTIFICATE IN FORM NO.3CL, THE A.O. DID NOT ALLOW THE WEIGHTED DEDUCTION CLAIMED BY THE ASSESSEE. AO ALSO OBSERVED , AT THE TIME OF CONSIDERING ALLOWANCE OF WEIGHTED DEDUCTIONS, R&D E XPENDITURE RELATING TO THE UNITS CLAIMING DEDUCTION U/S 10B IS ALSO TO BE WORKED OUT BY TAKING INTO ACCOUNT WEIGHTED DEDUCTION ALLOW ED ON R&D. THE DRP ALSO CONFIRMED THE DISALLOWANCE. 52. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. THE LEARNED A.R. FAIRLY SUBMITTED BEFORE US THAT THE ISSUE IN DISPUTE STANDS DECIDED AGAINST THE ASSESSEE BY AN O RDER OF THE ITAT, BANGALORE BENCH IN CASE OF DCIT VS. M/S. BIOCON LTD ., IN ITA.NO.248/BANG/2010 DATED 30.04.2014. ON A PERUSAL OF THE AFORESAID ORDER OF THE COORDINATE BENCH, IT IS SEEN THAT WHILE DEALING WITH THE SPECIFIC ISSUE HAS HELD AS UNDER : 24. THUS, WHEN THE PROVISIONS OF SECTION 10A/10B O F THE ACT ARE HELD TO BE EXEMPTION PROVISIONS, THE PROVISIONS OF SECTION 35(2AB) OF THE ACT WHICH ARE CONTAINED IN CHAPTER I V OF THE ACT WILL NOT BE APPLICABLE. RESULTANTLY, THE WEIGHTED D EDUCTION AT 150% U/S. 35(2AB) OF THE ACT WILL NOT BE ALLOWED WH ILE COMPUTING INCOME OF SECTION 10A/10B UNIT. THE 10A/1 0B UNIT WILL GET ONLY 100% DEDUCTION OF REVENUE EXPENDITURE . THE EXCESS 50% ALLOWED AS DEDUCTION U/S. 35(2AB) OF THE ACT HAS TO BE WITHDRAWN AS IT WILL PULL DOWN THE PROFITS OF TH E NON-10A/10B UNIT WHICH IS TAXABLE. THEREFORE, THE WITHDRAWAL OF 50% DEDUCTION ALLOWED U/S. 35(2AB) OF THE ACT WHILE COM PUTING INCOME OF NON-10A/10B UNIT HAS TO BE UPHELD BOTH ON GENERAL PRINCIPLES AS WELL AS BY RELYING ON THE PROVISIONS OF SECTION 14A OF THE ACT. AS CAN BE SEEN THE RATIO LAID DOWN IN THE AFORESAID DECISION IS TO THE EFFECT THAT WHEN A PARTICULAR ASSESSEE IS CLAIMING DEDUCTION UNDER SECTION 10A/10B, IT CANNOT CLAIM WEIGHTED DEDUCTION UNDER SECTION 35(2AB). AS IN THE PRESENT CASE, THE ASSESSEE HAS C LAIMED DEDUCTION UNDER SECTION 10B, NO DEDUCTION UNDER SECTION 35(2A B) CAN BE ALLOWED TO THE ASSESSEE. ACCORDINGLY, GROUND NO.9 I S DISMISSED. 38 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. 53. GROUND NO.10 READS AS UNDER: THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING TH E ORDER OF THE AO BY REFUSING TO FOLLOW THE ANALOGY LAID DOWN BY THE HON. SUPREME COURT AS REGARDS DEDUCTION FOR EXPORT PROFI TS UNDER CLAUSE (IV) OF EXPLANATION TO SECTION 115JB IN THE CASE OF AJANTA PHARMA LTD. VS. CIT (RENDERED ON 09/09/2010) AND RE STRICTING THE DEDUCTION UNDER CLAUSE (II) OF EXPLANATION TO S ECTION 115JB TO THE AMOUNT ARRIVED AT UNDER NORMAL COMPUTATION I NSTEAD OF BASING IT ON BOOK PROFITS AND IN THE PROCESS INCREA SING THE BOOK PROFITS BY RS. 26,65,07,410. 54. WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 1 15JB,THE A.O. RESTRICTED THE DEDUCTION UNDER SECTION 10B TO THE A MOUNT ARRIVED AT UNDER NORMAL COMPUTATION ON THE REASONING THAT FOR THE PURPOSE OF ARRIVING AT BOOK PROFIT THE DEDUCTION AS WORKED OUT UNDER NORMAL COMPUTATION SHOULD ONLY BE CONSIDERED AND NOT THE A MOUNT COMPUTED WITH REFERENCE TO BOOK PROFIT, AS A RESULT OF WHICH , THE BOOK PROFIT WAS INCREASED TO RS.26,65,07,410/-. THE DRP ALSO CONFIR MED THE ACTION OF THE ASSESSING OFFICER. BEING AGGRIEVED, THE ASSESSE E IS BEFORE US. 55. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDER S OF THE REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON R ECORD. 56. BOTH THE LEARNED COUNSELS APPEARING FOR THE ASS ESSEE AND THE DEPARTMENT HAVE AGREED THAT THE ISSUE IS SQUARELY C OVERED BY THE DECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE IN ITA.NO.835 TO 837/HYD/2005 DATED 02.07.2012 FOR A.Y S. 2001-02 TO 2002-03 AND 2003-04. AS CAN BE SEEN THE COORDINATE BENCH WHILE CONSIDERING IDENTICAL NATURE OF DISPUTE, HELD AS UN DER : 10. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THIS ISSUE IS COMMON IN ALL THESE APPEALS. WHILE THE ASSESSEE CON TESTS THE CIT (A)'S ORDER FOR NOT ALLOWING DEDUCTION UNDER CL AUSE (IV) OF' EXPLANATION ON THE ENTIRE AMOUNT OF EXPORT PROFITS COMPUTED FROM THE BASE OF BOOK PROFITS BUT INSTEAD RESTRICTI NG THE DEDUCTION IN TERMS OF THE PHASING OUT PER SUB-SECTI ON (1B), THE DEPARTMENT IS DISPUTING THE ORDER OF THE CIT(A) FOR COMPUTING THE DEDUCTION BASED ON BOOK PROFITS INSTEAD OF THE AMOUNT AS COMPUTED UNDER SECTION 80HHC BASED ON PROFITS OF TH E BUSINESS UNDER CLAUSE (BAA). THE ASSESSEE RELIES ON THE RECENT DECISION OF THE SUPREME COURT IN THE CASE OF AJANTA PHARMA LTD 39 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. V CIT (2010) (327 ITR 305). THE ASSESSEE SUBMITTED THAT THE APEX COURT HAS APPROVED THE SPECIAL BENCH DECISION OF ITAT IN DCIT V SYNCOM FORMULATIONS (I) LTD. (2007) (106 ITD 193). 11. THE DR FAIRLY CONCEDED THAT THE DECISION OF THE SUPREME COURT IN THE CASE OF AJANTA PHARMA (SUPRA) IS AGAIN ST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. THE APEX COURT LAID DOWN THE LAW THAT FOR PURPOSES OF COMPUTING BOOK PR OFIT, THE DEDUCTION TO BE ALLOWED UNDER CLAUSE (IV) OF EXPLAN ATION IS THE EXPORT PROFITS AS COMPUTED WITH REFERENCE TO BOOK P ROFITS. SEC. 115JB IS A SEPARATE CODE FOR COMPANY ASSESSEES' FOR COMPUTING MINIMUM TAX PAYABLE IN THE ABSENCE / INAD EQUACY OF NORMAL TAXABLE INCOME FALLING UNDER THE 5 HEADS OF INCOME. THE MINIMUM TAX IS TO BE COMPUTED WITH REFERENCE TO BOO K PROFITS AS PER THE AUDITED ACCOUNTS OF THE COMPANY. CONSEQUENT LY THE EXPORT PROFITS COMPUTED UNDER THE PROVISIONS OF SEC . 80HHC BASED ON 'PROFITS OF BUSINESS OR PROFESSION' CANNOT BE SUBSTITUTED INTO THE COMPUTATION SCHEME AS PRESCRIB ED IN SEC. 115JB WHICH IS AN ALTERNATIVE COMPUTATION TO THE NO RMAL COMPUTATION OF INCOME. THE COURT ALSO HELD THAT THE DEDUCTION UNDER CLAUSE (IV) OF EXPLANATION FOR THE EXPORT PRO FITS SHOULD NOT BE PHASED OUT AS PROVIDED IN SUB-SECTION (1B) OF SE C. 80HHC BECAUSE, 115JB IS AN INDEPENDENT CODE AND IT COVERS FULL EXPORT PROFITS AS THE ELIGIBLE PROFITS FOR THE PURPOSES OF BOOK PROFITS TAX AND NO PHASING IS REQUIRED TO BE CARRIED OUT. THIS VIEW HAS BEEN REITERATED BY THE APEX COURT IN THE RECENT CAS E OF CIT V BHARI INFORMATION TECH. SYS. P. LTD IN CIVIL APPEAL NO. 33750/2009 RENDERED ON 20.10.2011. THUS, THIS GROUN D IN ASSESSEES APPEALS ITA NOS. 835 TO 837/HYD/05 IS AL LOWED AND RELATED GROUND IN REVENUE APPEALS IN ITA NOS. 930 T O 932/HYD/05 IS DISMISSED. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF TH E COORDINATE BENCH, WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE BOOK PROFIT UNDER SECTION 115JB ACCORDINGLY. GROUND NO.10 IS CONSIDER ED AS ALLOWED. 57. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. PRONOUNCED IN THE OPEN COURT ON 16/01/2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 16 TH JANUARY, 2015 40 ITA NO. 1616/HYD/2010 MYLAN LABORATORIES LTD. KV COPY TO:- 1) MYLAN LABORATORIES LTD., 1-1-151/1, 4 TH FLOOR, SAIRAM TOWERS, ALEXANDER ROAD, SECUNDERABAD 500 003 2) ACI, CIRCLE 16(2), AAYAKAR BHAVAN, HYDERABAD. 3)DRP, HYDERABAD 4) DIT (INTERNATIONAL TAXATION), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.