BHARAT SERUMS AND VACCINES LTD, MUMBAI V. ADDL CIT RG 3(1), MUMBAI

ITA 3091/MUM/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8170 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-05-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAURABH KUMAR RAIDR
• Assessee Lawyers: VIPUL MODY
• Keywords: Capital asset; Business income; Earning of tax free income; Question of law; Capital receipt
• Section: 14A; 115JB

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -BBENCH MUMBAI , , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND AMARJIT SINGH,JUDICIAL MEMBER ./I.T.A./3091/MUM/2012, / ASSESSMENT YEAR: 2008-09 M/S. BHARAT SERUMS & VACCINES LTD. 27 TH FLOOR, HOECHST HOUSE, NARIMAN POINT MUMBAI-21. PAN:AAACB 2431 M VS. ACIT, RANGE-3(1) AAYAKAR BHAVAN, M.K. MARG MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT) ./I.T.A./3375/MUM/2012, / ASSESSMENT YEAR: 2008-09 ACIT-6(1) AAYAKAR BHAVAN, MK ROAD MUMBAI-20. VS. M/S. BHARAT SERUMS & VACCINES LTD BKT MUMBAI-400 021. ( /APPELLANT ) ( / RESPONDENT) / REVENUE BY: SHRI SAURABH KUMAR RAI-DR /ASSESSEE BY:S/ SHRI NITESH JOSHI & VIPUL MODY -AR / DATE OF HEARING: 01.12.2016 / DATE OF PRONOUNCEMENT: 15.02.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE ORDER,DATED 15/02/2012,OF THE CIT ( A)-5,MUMBAI THE ASSESSEE AND THE ASSESSING OFFICER(AO) HAVE FILED CROSS APPEALS FOR THE YEAR UNDER CONSIDERATION.THE ASSESSEE AND THE AO HAVE ALSO FILED ADDITIONAL GROUNDS OF AP PEAL. 2. DURING THE COURSE OF HEARING BEFORE US,IT WAS STATE D THAT ADDITIONAL GROUNDS WERE LEGAL IN NATURE AND DID NOT REQUIRE CLARIFICATION/VERIFICATI ON OF ANY FACTS.WE HAVE GONE THROUGH THE ADDITIONAL GROUNDS AND FIND THAT THEY ARE OF PURE L EGAL NATURE AND ARISING OUT OF THE ORDER OF THE FIRST APPELLATE AUTHORITY(FAA),SO,WE ADMIT THE SAME. 2.1. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MANUFAC TURING AND TRADING OF PHARMACEU - TICALS FILED ITS RETURN OF INCOME ON 27/09/2008 DEC LARING LOSS OF RS.27.97 CRORES UNDER THE NORMAL PROVISIONS AND BOOK PROFIT OF RS.7.5 CRORES U/S.115JB OF THE ACT.THE AO COMPLETED THE ASSESSMENT U/S. 143(3), ON 20.12.2010,DETERMINI NG ITS INCOME AT RS.(-) 20.47 CRORES UNDER NORMAL PROVISIONS AND AT RS.13.25 CRORES UNDER SECT ION 115JB OF THE ACT. ITA/3091/MUM/2012: 3. FIRST GROUND OF APPEAL RAISED BY ASSESSEE IS ABOUT HOLDING DISALLOWANCE OF RS.1.25 CRORES R.W.R.8D OF THE INCOME TAX RULES, 1962(RULES).DURIN G THE ASSESSMENT PROCEEDINGS THE AO 3091&3375-BHARAT SERUMS 2 FOUND THAT THE ASSESSEE HAD MADE INVESTMENT IN SHAR ES OF VARIOUS COMPANIES AND UNITS OF MUTUAL FUNDS,THAT THE LONG TERM INVESTMENT MADE BY IT AMOUNTED TO RS.14.38 CRORES. HE OBSERVED THAT INVESTMENTS WOULD GIVE RISE TO EXEMPT INCOME, THAT THE ASSESSEE HAD NOT MADE ANY DISALLOWANCE U/S.14A.HE DIRECTED THE ASSESSEE TO FILE DETAILS OF EXPENSES INCURRED FOR EARNING EXEMPT INCOME AND TO SHOW CAUSE AS TO WHY T HE EXPENSES INCURRED AND CLAIMED IN RESPECT OF EXEMPT INCOME SHOULD NOT BE DISALLOWED.T HE ASSESSEE STATED THAT IT HAD NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME. REFERRING TO THE CASE OF GODREJ AND BOYCE MFG. LTD. OF THE HON'BLE BOMBAY HIGH COURT HE MADE A DISALLOWANCE OF RS.1,25, 21, 298/-.THE SAME AMOUNT WAS ALSO ADDED TO THE BOOK PR OFIT WHILE COMPUTING INCOME U/S. 115 JB OF THE ACT. 3.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA), BEFORE WHOM IT MADE ELAB ORATE SUBMISSIONS. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT O RDER HE REFERRED TO THE CASE OF DAGA CAPITAL MANAGEMENT (P.) LTD. (117 ITD169),CHEMINVES T LTD.(124TTJ577); WALFORT SHARES AND STOCK BROKERS LTD.(310ITR421) AND HELD THAT THE AO WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT AO COULD FOLLOW A REASONABLE MET HOD OF APPORTIONMENT OF EXPENDITURE, THAT HE HAD RIGHTLY APPLIED SECTION 14A R.W.R.8D OF THE RULES. 3.2. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE (AR)CONTENDED THAT ASSESSEE HAD NOT CLAIMED ANY EXEMPT INCOME IN THE R ETURN OF INCOME, THAT IN ABSENCE OF CLAIM OF TAX FREE INCOME NO DISALLOWANCE COULD BE MADE U/ .S14A.HE REFERRED TO THE CASE OF CHEMINVEST(378ITR33).THE DEPARTMENTAL REPRESENTATIV E(DR)SUPPORTED THE ORDER OF THE FAA. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD NOT CLAIMED ANY EXEMPT INCOME IN ITS RETURN.HOWEVER HE MADE DISALLOWANCE OF RS.1.25 CRORES(RS.1.19 CRORES INTEREST EXPENDITURE + RS.6.89 LAKHS ADMINISTRATIVE EXPENSES) AND SAME WAS UPHELD BY THE FAA.THE PRE-REQUISITE TO INVOKE THE PROVISIONS OF SECTION 14A R.W.R.8D OF THE RULES IS THAT THE ASSESSEE SHOULD H AVE CLAIMED SOME EXPENDITURE AGAINST EXEMPT INCOME.IN THE CASE UNDER CONSIDERATION,NO EX EMPT INCOME WAS SHOWN BY THE ASSESSEE IN ITS RETURN,SO,THERE WAS NO JUSTIFICATION FOR MAK ING DISALLOWANCE OF ANY KIND.THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST (SUPRA) HAS HELD AS UNDER :- THE EXPRESSIONDOES NOT FORM PART OF THE TOTAL INC OME IN SECTION 14A OF THE INCOME-TAX ACT,1961,ENVISAGES THAT THERE SHOULD BE AN ACTUAL R ECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING T HE RELEVANT PREVIOUS YEAR. 3091&3375-BHARAT SERUMS 3 RESPECTFULLY,FOLLOWING THE ABOVE WE ALLOW FIRST GRO UND OF APPEAL. 4. SECOND GROUND DEALS WITH UPHOLDING THE DISALLOWANCE OF RS.4.74 CRORES BEING LOSS INCURRED DUE TO REVALUATION OF OPEN FORWARD EXCHANGE CONTRAC T.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO DERIVAT IVE AGREEMENT TO SWAP TERM LOANS TAKEN IN RUPEES AGAINST FOREIGN CURRENCY,THAT IT HAD DEBITED MARKED TO MARKET LOSSES OF RS.4,74, 24,891/- TO THE P&L A/C.STATING THAT THE SAID LIABI LITY HAD CRYSTALLIED OWING TO THE REVALUATION. THE AO CALLED FOR DETAILS ABOUT THE TRANSACTION. AF TER CONSIDERING THE SAME HE HELD THAT IT HAD ENTERED INTO DERIVATIVE TRANSACTION BY SWAPPING THE LOAN, THAT THE LIABILITY WAS PAID IN THE SUBSEQUENT YEAR,THAT THE NOTIONAL LOSS OF RS.4.74 C RORES COULD NOT BE ALLOWED. HE REFERRED TO INSTRUCTION OF CBDT DT.23/3/2010 AND ADDED THE DISP UTED AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE. HE FURTHER HELD THAT IT WAS PROVISION AN D NOT AN ASCERTAINED LIABILITY, AS SPECIFIED IN EXPLANATION 1 TO CLAUSE (C) TO THE PROVISIONS OF SE CTION 115JB. THEREFORE, HE ADDED RS.4.74 CRORES TO THE BOOK PROFIT OF THE ASSESSEE. 4.1. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, T HE FAA HELD THAT THE ASSESSEE HAD BORROWED FUNDS IN FOREIGN CURRENCY, THAT IN ORDER T O HEDGE AGAINST THE EXCHANGE FLUCTUATION IT HAD ENTERED INTO FOREIGN CURRENCY SWAP AGREEMENTS, THAT THE CONTRACTS WERE OF ONE YEAR, THAT THE LOSS CLAIMED BY THE ASSESSEE COULD NOT BE ALLO WED FOR THE YEAR UNDER CONSIDERATION, THAT IT WAS A NOTIONAL /CONTINGENT LOSS, THAT IT WAS ALLOWE D IN THE NEXT ASSESSMENT YEAR. 4.2. BEFORE US,THE AR RELIED UPON THE CASE OF M/S. D.CH ETAN & CO.(INCOME TAX APPEAL NO. 278 OF 2014 DT.1/10/2016); WOODWARD GOVERNOR INDIA PVT. LTD.(312ITR254); OIL AND NATURAL GAS CORPORATION LTD.(322ITR18).THE DR SUPPORTED THE ORDER OF THE FAA. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THE AVAILABLE MATERIAL. WE FIND THAT IN THE CASE OF M/S.D.CHETAN & CO. THE HON'BLE BOMBA Y HIGH COURT HAD CONSIDERED THE FOLLOWING QUESTION OF LAW: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN DELETING THE ADDITION OF MAR TO MARKETLOSS OF RS. 78.10,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF LOSS ON FOREIGN EXCHANGE FORWARD CONTRACT LOSS AND NOT APPRECIATING THE FAC T THAT THE SAID LOSS WAS A NOTIONAL LOSS AND HENCE CA NNOT BE ALLOWED? IT WAS HELD BY THE HON'BLE BOMBAY HIGH COURT THAT Q UESTION FORMULATED BY THE DEPARTMENT DID NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LA W. CONSIDERING THE ABOVE,WE DECIDE SECOND GROUND OF AP PEAL IN FAVOUR OF THE ASSESSEE. 5. GROUND NO.3 IS ABOUT UPHOLDING THE ADDITION OF RS.1 .25 CRORES,MADE U/S.14A R.W.R 8D OF THE RULES FOR COMPUTING THE BOOK PROFIT.WHILE DECID ING THE GROUND NO.1 WE HAVE HELD THAT NO ADDITION SHOULD HAVE BEEN MADE U/S.14A FOR THE Y EAR UNDER CONSIDERATION. FOLLOWING THE 3091&3375-BHARAT SERUMS 4 SAME,WE HOLD THAT ADDITION CONFIRMED BY THE FAA FOR COMPUTING THE BOOK PROFIT U/S.115JB HAS TO BE DELETED.THIRD GROUND OF APPEAL IS ALLOWED . 6.NEXT GROUND IS ALSO ABOUT COMPUTING BOOK PROFIT W ITH REGARD TO DISALLOWANCE OF RS.4.74 CRORES. WE HAVE ALLOWED GROUND NO.2 FILED BY THE AS SESSEE. FOLLOWING THE SAME,WE HOLD THAT THERE WAS NO JUSTIFICATION IN MAKING ADDITION OF RS .4.74 CRORES TO THE BOOK PROFIT COMPUTED U/S.115JB OF THE ACT.FOURTH GROUND STANDS ALLOWED. 7. LAST GROUND OF APPEAL IS ABOUT CONSIDERATION RECEIV ED ON ASSIGNMENT OF PATENT,AMOUNTING TO RS.1.5CRORES AND APPLICABILITY OF PROVISIONS OF SECTION 55(2)OF THE ACT.DURING THE ASSESS - MENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD SOLD A PATEN NAMELY PROFAFAL FOR 1.5 CRORES,THAT IT HAD CLAIMED THAT NO EXPENDITURE WAS INCURRED FOR ACQUIRING THE PATENT, THAT THE PATENT WAS A CAPITAL ASSET,THAT THE ENTIRE RECEIPT ON ASSIGNMENT OF PATENT WERE NOT TAXABLE.THE ASSESSEE SUBMITTED EXPLANATION IN THIS REGARD,VIDE ITS LETTER DT.23.11.10,IN RESPONSE TO THE DIRECTIONS OF THE AO.THE AO HELD THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF RESEARCH DEVELOPMENT,MANUFACTURING, WHOLESALE TRADING AND LI CENSING OF BIO-PHARMACEUTICALS,BIO- TECHNOLOGY PRODUCTS,SERUMS AND PROCESS RELATED TECH NOLOGY FOR HUMAN THERAPEUTIC,THAT IT HAD MANUFACTURING FACILITY AND STATE-OF-ART RESEARCH FA CILITIES,THAT DEVELOPING A PROCESS,A TECHNO - LOGY WAS PART OF THE BUSINESS OF THE ASSESSEE, THAT IT WAS NOT POSSIBLE TO DEVELOP A PROCESS / PATENT WITHOUT INPUT FROM SPECIALISED/SKILLED PERSO NNEL IN A STATE-OF-ART RESEARCH FACILITY,THAT PROCESS OF DEVELOPING A PATENT WAS A PART OF A BUSI NESS OF THE ASSESSEE,THAT IT HAD CLAIMED ALL THE EXPENSES FOR SKILLED PERSONNEL AND RESEARCH FAC ILITY IN THE P&L ACCOUNT,THAT THE CLAIM MADE BY IT IN NOT INCURRING ANY COST FOR DEVELOPING THE PATENT WAS NOT ACCEPTABLE. FINALLY,HE HELD THAT RECEIPT FROM SALE OF PATENT WAS A REVENUE RECIEPT.HE ADDED RS.1.50 CRORES TO THE TOTAL INCOME OF THE ASSESSEE. 7.2. DURING THE APPELLATE PROCEEDINGS,BEFORE THE FAA, TH E ASSESSEE ARGUED THAT IT HAD AN IN- HOUSE RESEARCH LABORATORY, THAT OVER A PERIOD OF TI ME IT HAD DEVELOPED SEVERAL PRODUCTS, THAT PRODUCT RESEARCH AND DEVELOPMENT WAS HIGHLY UNCERTA IN MATTER REQUIRING SUBSTANTIAL RESEARCH WORK, THAT IT HAD DEVELOPED SEVERAL PATENTS, THAT O NE OF THE PRODUCTS DEVELOPED BY IT WAS PROFOFAL, THAT IN ORDER TO CONTINUE FURTHER DEVEL OPMENT IT ASSIGNED THE KNOW-HOW OF PROFOFAL FOR A CONSIDERATION OF RS.1.50 CRORES, T HAT THE PATENTS ARE LEGAL RIGHTS CREATED TO PROTECT THE KNOW-HOW WHICH WAS A SELF GENERATED ASS ET,THAT IT COULD NOT BE EQUATED WITH A COMMERCIAL ASSET/ INVENTORY HELD FOR BUSINESS,THAT KNOW-HOW OR PATENT WAS AN INTELLECTUAL PROPRIETARY RIGHT (IPR),THAT IT HAD PERSONAL ATTACH MENT TO THE DEVELOPERS,THAT THE KNOW-HOW 3091&3375-BHARAT SERUMS 5 WAS UNIQUE AND COULD NOT BE GENERALISED,THAT THE AP PELLANT PERCEIVED ITS IPR HOLDINGS TO BE A TOOL OF ITS TRADE AND NOT AN INVENTORY HELD FOR SAL E/DISPOSAL,THAT THE TRANSACTION WAS ON CAPITAL ACCOUNT, THAT SURPLUS COULD NOT BE SUBJECTED TO TAX UNDER THE HEAD BUSINESS INCOME.IT REFERRED TO MATTER OF SRINIVASA SHETTY(128ITR294),THAT KNOW -HOW WAS OUTSIDE THE NET OF SECTION 55 AND WAS REGARDED AS A NO COST ASSET,THAT SALE OF PA TENT KNOW-HOW WAS A CAPITAL RECEIPT AND NOT CHARGEABLE. THE FAA REFERRED TO VARIOUS PARAGRAPHS OF THE PATEN T ASSIGNMENT AGREEMENT(PAA)DT.28/03/ 2008 AND HELD THAT THE ASSESSEE HAD DEVELOPED AN IN VENTION WHICH WAS PATENTED IN INDIA AND INTERNATIONAL MARKET,THAT IT WAS FOR THE PURPOSE OF COMMERCIAL EXPLOITATION, THAT THE SAME WAS TRANSFERRED AND ASSIGNED TO THE ASSIGNEE,THUS THE A SSESSEE HAD COMMERCIALLY EXPLOITED IT. REFERRING TO THE PROVISIONS OF SECTION 55(2)(A) OF THE ACT, THE FAA HELD THAT THE SAID SECTION COVERS A RIGHT TO MANUFACTURE/PRODUCE/PROCESS ANY A RTICLE OR THING, THAT THE FACTS OF PRESENT CASE WERE SQUARELY COVERED BY THE PROVISIONS OF SEC TION 55 OF THE ACT, THAT THE RECEIPT HAD TO BE TAXED AS CAPITAL GAINS. 7.3. DURING THE COURSE OF HEARING,THE AR ARGUED THAT THE ASSESSEE HAD TRANSFERRED KNOW HOW AND PATENT,THAT SECTION 55(2) DID NOT TALK OF ASSET S IN QUESTION,THAT EVEN IF EXPENDITURE WAS INCURRED FOR DEVELOPING THE PATENT NO COST WAS ASCE RTAINABLE.HE REFERRED TO THE CASE OF KWALITY BISCUIT (P.) LTD.(135ITD35) AND FERNHILL LA BORATORIES AND INDUSTRIAL ESTABLISHMENT (348ITR1).THE DR CONTENDED THAT THE SOLE OBJECT WAS TO EARN PROFIT, THAT THE ASSESSEE HAD INCURRED HUGE EXPENDITURE, THAT IT WAS WRONG TO CLA IM THAT NO EXPENDITURE WAS INCURRED, THAT THE RECEIPT IN QUESTION WAS TRADE RECEIPT, THAT THE CASES RELIED UPON BY THE AR WERE OF NO HELP. 7.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD ASSIGNED PATENT OF PROFOFAL FOR A C ONSIDERATION OF RS.1.5 CRORES,THAT IT HAD CLAIMED THAT SAME IS NOT TAXABLE,THAT THE FAA HELD THAT PROVISIONS OF SECTION 55(2) WERE APPLICABLE TO THE FACTS OF THE CASE AND THE AMOUNT RECEIVED BY IT WAS TAXABLE UNDER THE HEAD CAPITAL GAINS. 7.4.1. BEFORE PROCEEDING FURTHER ,IT WOULD BE USEFUL TO DI SCUSS THE CONCEPT OF PATENT AND TO TAKE NOTICE OF THE HISTORY OF PATENTS.PATENT IS A L ONG-TERM PROCESS OF VISUALISING AN IDEA, EXPERIMENTING,REACHING AT CERTAIN CONCLUSIONS AND T ESTING OF SUCH CONCLUSIONS,SO THAT THE FRUIT OF THE LABOUR ARE ENJOYED BY THE PERSON WHO TIRELES SLY PURSUES A GOAL FOR YEARS TOGETHER.IT IS A CULMINATION OF EXTENSIVE RESEARCH WORK AND LOGICAL ANALYSIS.PATENT IS A LEGAL DOCUMENT THAT IS 3091&3375-BHARAT SERUMS 6 GRANTED BY THE SOVEREIGN AND GIVES AN INVENTOR EXCL USIVE RIGHT TO MAKE/USE/SALE AN INVENTION FOR A SPECIFIED NUMBER OF YEARS.PREVIOUSLY INVENTED ITEMS CAN ALSO BE SUBJECT MATTER OF PATENTS, PROVIDED THEY DEMONSTRATE SIGNIFICANT IMPR OVEMENT. PATENT PREVENTS ALL OTHERS,NOT ONLY THE IMITATORS,B UT EVEN THE INDEPENDENT ENTREPRENEURS, HAVING THE SAME IDEA BUT NOT IMPLEMENTED TILL THAT DATE,FROM USING THE INVENTION FOR A SPECIFIED PERIOD.IT MAY POSE SERIOUS DIFFICULTY FOR THE COMPETITORS,BUT THE PROVERBIAL EARLY- BIRDS ARE ALWAYS REWARDED.THOUGH A PATENT COULD AFF ECT A LARGE NUMBER OF PEOPLE,PATENTS ARE NOT FREELY AVAILABLE FOR ALL IMPROVEMENTS.ONLY PATE NTABLE INVENTIONS ARE RECOGNISED BY THE AUTHORITIES CONCERNED.A PATENTABLE INVENTION MUST P ASS THREE BASIC TESTS NAMELY IT MUST BE NOVEL,IT MUST BE NON-OBVIOUS AND IT MUST BE USEFUL. IN OTHER WORDS,INVENTION SHOULD NOT PREVIOUSLY EXIST AND IT SHOULD BE A SIGNIFICANT IMP ROVEMENT TO THE EXISTING TECHNOLOGY. BESIDES,PATENTS CANNOT BE GRANTED FOR INVENTION THA T WOULD ONLY BE USED FOR AN ILLEGAL OR IMMORAL PURPOSE.NO PATENT CAN BE GRANTED ON A LAW O F NATURE OR SCIENTIFIC PRINCIPLES EVEN IF A PERSON DISCOVERS IT FOR THE FIRST TIME.IT IS SAID T HAT THE GOAL FOR RESISTING THE PATENTS IS TO ENCOURAGE PEOPLE TO BRING QUALITATIVE AND FAR-REACH ING CHANGES IN THE TECHNOLOGY SO THAT IT COULD BENEFIT THE SOCIETY AT LARGE. 7.4.2. AS PER THE AVAILABLE RECORDS,CITY OF VENICE PASSED THE FIRST PATENTED LAW IN THE YEAR 1474. IN THE YEAR 1624 STATUTE OF MONOPOLIES WAS EN ACTED IN ENGLAND.THE 1883 PARIS CONVENTION PROVIDED A GUARANTEE OF EQUAL TREATMENT FOR PATENT APPLICANTS IN ALL ITS MEMBER STATES.TWENTY COUNTRIES ADOPTED IT INITIALLY AND LA TER ON OTHER COUNTRIES FOLLOWED THE SUIT. MORE THAN 120 COUNTRIES HAVE SIGNED AGREEMENT ON TR ADE RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS(TRIPS),IN 1994.THIS TREATY HAS STRE NGTHENED THE LEGAL PROTECTION FOR PATENTS ALL OVER THE GLOBE. INDIAN PATENT LAW REQUIRES AN INVENTION TO BE NEW A ND USEFUL FOR THE PURPOSE OF REGISTRATION. THE INVENTION SHOULD RELATE TO MACHINE/ARTICLE/SUBS TANCE PRODUCED BY MANUFACTURER/PROCESS OF MANUFACTURER OF AN ARTICLE.PATENTING PROCESS WAS GOVERNED BY INDIAN PATENTS AND DESIGN ACT, 1911.IT WAS REPLACED BY PATENTS ACT, 1970 THAT CAME INTO FORCE FROM 20/04/1972.INDIA HAS BECOME A MEMBER OF PARIS CONVENTION WITH EFFECT FROM 07/12/1998 AND BY VIRTUE OF THIS,THE HEAD OFFICE OF PATENT OFFICE AND ITS BRANC HES HAVE BECOME RECEIVING OFFICE FOR PURPOSE OF INTERNATIONAL APPLICATION FOR PATENTS.AS PER THE PATENT RULES,1972 APPLICATIONS FOR INTERNATIONAL PATENTS CAN BE FILED AT HO/ BRANCH OF FICES WITH EFFECT FROM 17/11/1999. 3091&3375-BHARAT SERUMS 7 7.5. HERE,WE WOULD ALSO LIKE TO MENTION TWO IMPORTANT TH INGS.FIRSTLY,IT IS NECESSARY TO MAKE A DISTINCTION BETWEEN CASES WHERE CONSIDERATION IS PA ID TO ACQUIRE THE RIGHT TO USE A PATENT OR A COPYRIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIR E PATENTED OR A COPYRIGHTED PRODUCT OR MATERIAL.IN CASES WHERE PAYMENTS ARE MADE TO ACQUIR E PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED,THE CONSIDERATION PAID WOULD HAVE TO BE TREATED AS A PAYMENT FOR PURCHASE OF THE PRODUCT RATHER THAN CONSIDERATION FOR USE OF THE PA TENT OR COPYRIGHT. 7.6. SECONDLY,A TRADE MARK FUNDAMENTALLY DIFFERS FROM A PATENT.IN THE CASE OF THE FORMER THE PROPERTY AND THE RIGHT TO PROTECTION ARE IN THE DEV ICE OR SYMBOL ADOPTED TO DESIGNATE THE GOODS SOLD, AND NOT IN THE ARTICLE WHICH IS MANUFAC TURED AND SOLD. THAT ARTICLE IS OPEN TO THE WHOLE WORLD TO MANUFACTURE AND SELL; AND ALL THAT T HE OWNER OF THE TRADE MARK IS ENTITLED TO PREVENT IS THE USE OF HIS TRADE MARK BY OTHER TRADE RS.ON THE OTHER HAND, A PATENT RIGHT PROTECTS THE SUBSTANCE OF THE ARTICLE,I.E.,THE STOCK-IN-TRAD E AND ANY UNAUTHORISED MANUFACTURE IS PROHIBITED. 7.7. NOW,WE WOULD LIKE TO DISCUSS ABOUT THE PATENTED MED ICINE.PROFOFAL,MARKETED AS DIPRIVAN AMONG OTHERS,WAS DISCOVERED IN 1977.IT IS AVAILABLE AS A GENERIC MEDICATION.IT IS ON THE WORLD HEALTH ORGANIZATION'S LIST OF ESSENTIAL M EDICINES.IT IS NOT A PAIN MEDICATION.IT HAS BEEN REFERRED TO AS MILK OF AMNESIABECAUSE OF THE MILK-LIKE APPEARANCE OF THE INTRAVENOUS PREPARATION.IT IS A SHORT-ACTING MEDICATION THAT RE SULTS IN A DECREASED LEVEL OF CONSCIOUSNESS AND LACK OF MEMORY FOR EVENTS.ITS USES INCLUDE THE STARTING AND MAINTENANCE OF GENERAL ANESTHESIA,SEDATION FOR MECHANICALLY VENTILATED ADU LTS AND PROCEDURAL SEDATION.IT IS ALSO USED FOR STATUS EPILEPTICUS IF OTHER MEDICATIONS HAVE NO T WORKED.COMMON SIDE EFFECTS INCLUDE AN IRREGULAR HEART RATE, LOW BLOOD PRESSURE, BURNIN G SENSATION AT THE SITE OF INJECTION,AND THE STOPPING OF BREATHING.OTHER SERIOUS SIDE EFFECT S MAY INCLUDE SEIZURES INFECTIONS WITH IMPROPER USE, ADDICTION AND PROPOFOL INFUSION SYNDR OME WITH LONG-TERM USE. MEDICAL PATENTS REQUIRE CLINICAL TESTS AND ADMINIST ERING DRUGS TO THE PATIENTS.CLINICAL TESTS HAVE TO BE PERFORMED UNDER CONTROLLED CONDITIONS.FO R UNDERSTANDING THE EFFECTIVE MASS AND THE SIDE-EFFECTS OF THE MEDICINE LARGE SAMPLE SURVE Y SPREAD OVER A REASONABLE TIME SPAN IS A MUST.CONSIDERING THE SIDE-EFFECTS OF PROFOFAL,AS NARRATED EARLIER,THE RESEARCH WORK IS TO BE DONE WITH CARE.IN SHORT,BEFORE GETTING A PATENT OF MEDICINE LIKE THE ITEM UNDER CONSIDERATION, THE ASSESSEE HAS TO CARRY OUT A LOT OF RESEARCH ANA LYSIS AND EXPERIMENTATION.NATURALLY IT WOULD REQUIRE INCURRING OF EXPENDITURE FOR BOTH THE ACTIV ITIES.SUCH A TEDIOUS AND CUMBERSOME 3091&3375-BHARAT SERUMS 8 PROCESS WAS ADOPTED BY THE ASSESSEE TO HAVE A RIGHT TO MANUFACTURE/PRODUCE/PROCESS PROFOFAL. WHILE DIFFERENTIATING THE TRADE MARK AND PATENT,WE HAVE MENTIONED THAT IT PROTECTS SUBSTANCE OF ARTICLE.WE WOULD LIKE TO MENTION THE RELEVANT TE RMS OF THE ASSIGNMENT AGREEMENT THAT WOULD LEAD TO THE CONCLUSION THAT IT WAS HELD FOR C OMMERCIAL EXPLOITATION.FOLLOWING ARE SOME OF THE TERMS OF THE AGREEMENT: WHEREAS A. THE ASSIGNOR MANUFACTURES AND MARKETS BIOLOGICAL , PHARMACEUTICAL AND BIOTECNOLOGICAL PRODUCTS AND HAS A RANGE OF PRODUCTS BASED ON STRON G RESEARCH AND DEVELOPMETN INITIATIVES AND EFFORTS. B.XX XXX C.THE ASSIGNEE IS DESIROUS OF ACQUIRING THE PATENT AND HAS REQUESTED THE ASSIGNOR TO TRANSFER AND ASSIGN ALL ITS RIGHTS,TITLE AND INTERE ST IN THE PATENT TO THE ASSIGNEE FOR THE PURPOSE OF COMMERCIAL EXPLOITATION OF THE SAME IN I NDIA AND IN THE REST OF INTERNATIONAL MARKET ..... FROM ABOVE IS CLEAR THAT THE PATENT WAS FOR THE PUR POSE TO HAVE RIGHT TO MANUFACTURE /PRODUCE/ PROCESS SOME ARTICLE/THING.THE PATENT WAS REGISTERE D FOR COMMERCIAL EXPLOITATION OF THE SAME IN INDIA AS WELL AS IN THE INTERNATIONAL MARKET.IT WAS TRANSFERRED TO THE ASSIGNEE FOR EXPLOITING IT COMMERCIALLY. SECTION 55(2)(A) TALKS OF RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING.THEREFORE,AS PER THE AMENDED PROVISIONS,TH E RIGHT TO MANUFACTURE/ PRODUCE/ PROCESS WOULD BE TAXABLE UNDER THE HEAD CAPITAL GAINS AND C OST HAS TO BE TAKEN AT RS. NIL.IN THESE CIRCUMSTANCES,IN OUR OPINION THE FAA HAS RIGHTLY IN VOKED THE PROVISIONS OF SECTION 55 AND TAXED THE DISPUTED AMOUNT UNDER THE HEAD CAPITAL GA IN. 7.8. WE ARE ALSO OF THE OPINION THAT THE CASES RELIED UP ON BY THE ASSESSEE, ARE OF NO HELP TO IT.IN THE CASE OF KWALITY BISCUITS PVT.LTD. (SUPRA) ,THE ISSUE BEFORE THE TRIBUNAL WAS DIFFERENT. IN THAT CASE,THE TRIBUNAL HAS DEALT WITH TRADE MARK AND BRAND NAME.IN THE EARLIER PART OF OUR ORDER,WE HAVE BROUGHT OUT THE DISTINCTION BETWEEN P ATENT AND TRADE-MARK.IT IS ALSO FOUND THAT IN THAT MATTER THE ASSESSEE CONTINUED TO CARRY OUT MANUFACTURING AND TRADING BUSINESS OF BISCUITS.CONSIDERING THOSE FACTS,IT WAS HELD BY THE TRIBUNAL THAT THE ASSESSEE HAD NOT TRANSFERR -ED RIGHT TO MANUFACTURE, PRODUCE OR PROCESS BISCUI TS.SIMILARLY,IN THE CASE OF FERNHILL LABORATORIES AND INDUSTRIAL ESTABLISHMENT(SUPRA),TH E HONBLE BOMBAY HIGH COURT WAS DECIDING THE ISSUE OF APPLICABILITY OF THE AMENDMEN TS FROM A PARTICULAR DATE.WE HOLD THE FACTS UNDER CONSIDERATION ARE TOTALLY DIFFERENT FROM THAT CASE. CONSIDERING THE ABOVE ,WE DECIDE LAST GROUND AGAINST THE ASSESSEE. I.T.A./3375/MUM/2012: 3091&3375-BHARAT SERUMS 9 8. EFFECTIVE GROUND OF APPEAL RAISED BY THE AO IS ABOU T TREATING THE SUM OF RS.1.5CRORES, RECEIVED ON SALE OF PROFOFAL AS CAPITAL RECEIPT INSTEAD OF A TRADING RECEIPT. WHILE DISCUSSING THE LAST GROUND OF APPEAL,RAISED BY THE ASSESSEE,WE HAVE NARRATED THE FACTS ABOUT SALE OF PATENT BY THE ASSESSEE.AS STATED EARLIER,THE AO HAD HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE HAD TO BE ASSESSED UNDER THE HEAD BUSINESS INCOME AND THE FAA HELD THAT IT WAS TO BE TAXED AS CAPITAL GAINS. 8.1. BEFORE US,THE DR RELIED UPON THE ORDER OF THE AO AN D STATED THAT PROCESS OF DEVELOPING PATENT WAS PART OF THE REGULAR BUSINESS ACTIVITY OF THE ASSESSEE. THE AR STATED THAT THE AO WAS NOT JUSTIFIED IN TREATING THE TRANSACTION AS A TRADING-TRANSACTION. AFTER HEARING THE RIVAL SUBMISSIONS,WE ARE OF THE O PINION THAT THE FAA HAD RIGHTLY TREATED THE DISPUTED AMOUNT AS CAPITAL RECEIPT AND HAD TAXED IT AS CAPITAL GAIN U/S.55 (2) OF THE ACT. THE ASSESSEE WAS NOT IN THE BUSINESS OF PURCHASE AND SA LE OF PATENTS,SO THE SALE PROCEED OF THE ASSIGNMENT AGREEMENT COULD NOT BE TREATED A REVENUE RECEIPT. 9. ADDITIONAL GROUNDS RAISED BY THE AO WITH REGARD TO RE-OPENING ARE NOT BEING ADJUDICATED AS WE HAVE DECIDED THE APPEALS FILED BY THE ASSESSEE A ND AO ON MERITS. AS A RESULT,APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND APPEAL OF THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH FEBRUARY, 2017. 15 , 2017 SD/- SD/- ( / AMARJIT SINGH ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 15.02.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR B BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.