FRANCO INDIAN PHARMACEUTICALS P.LTD, MUMBAI V. ADDL CIT RG 6(2), MUMBAI

ITA 3404/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93211 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2009-2010
• Appeal Filed On: 02-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PAWAN KU MAR BEERLA
• Assessee Lawyers: B V JHAVERI
• Keywords: Business expenditure; Revenue expenditure
• Section: 37(1); 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI . . , , , BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND SHRI N.K . BILLAIYA, A CCOUNTANT M EMBER / I .T.A. NO . 3404/MUM/2013 ( / ASSESSMENT YEAR : 2009 - 10 M/S. FRANCO - INDIAN PHARMACEUTICALS PVT. LTD., 20,DR. E. MOSES ROAD , MUMBAI - 400 011 / VS. THE ACIT, RANGE 6(2), AAYAKAR BHAVAN, MUMBAI - 400 020 ./ ./ PAN/GIR NO. : AAACF 1794M ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI B.V. JHAVERI / RESPONDENT BY : SHRI PAWAN KUMAR BEERLA / DATE OF HEARING : 09 . 0 7 .2015 / DATE OF PRONOUNCEMENT : 17 .0 7 .2015 / O R D E R PER N.K. BILLAIYA, AM: T HIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) - 1 2 , MUMBAI DT. 1.2.2013 PERTAINING TO ASSESSMENT YEAR 200 9 - 1 0. 2. THE SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 75 LAKHS PAID BY THE ASSESSEE AS COMPENSATION. ITA. NO. 3404/M/2013 2 3. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING AND MARKETING OF BULK DRUGS AND FORMULATION OF PHARMACEUTICAL PREPARATIONS. THE RETURN FOR THE YEAR UNDER CONSIDERATION WAS SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE A SSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DEBITED RS. 75 LAKHS TOWARDS COMPENSATION FOR TERMINATION OF ROYALTY AGREEMENT. THE ASSESSEE WAS ASKED TO PRODUCE THE AGREEMENT AND OTHER DOCUMENTS RELATING TO THE TERMINATION OF THIS AGREEMENT. THE ASSESSEE WAS ALSO ASKED TO JUSTIFY THE CLAIM OF EXPENDITURE AS REVENUE EXPENDITURE. THE ASSESSEE EXPLAINED THE SEQUENCE OF EVENTS AS UNDER: 1. ON 28.3.2001, ETHYPHARMA PVT. LTD (EPL) ENTERED INTO AS LICENCE AND TECHNICAL ASSISTANCE WITH LABORATORIES GRIFFON PVT. LTD (GPL). AS PER THIS AGREEMENT, EPL GRANTED GPL THE RIGHT TO USE AND SELL THE PRODUCT (METOFRMIN 850MG & 500 MG) UNDER THE LICENSED KNOW - HOW. (IT MAY BE STATED HERE THAT GPL IS AN ASSOCIATE COMPANY OF ASSESSEE AS CLARIFIE D BY ASSESSEE IN ITS LETTER FILED ON 13/12/2011. MR. E J DE'SOUZA & MR. L B YADAV ARE THE COMMON DIRECTORS OF GPL AND ASSESSEE COMPANY). (2) ON 02/04/2001 - GPL ENTERED INTO A 'DEED OF ASSIGNMENT' WITH ASSESSEE. AS PER THIS ASSIGNMENT, GPL AGREED TO TR ANSFER ITS RIGHTS AND LIABILITIES ARISING OUT OF THE LICENSE AGREEMENT WITH EPL, TO THE ASSESSEE WITHOUT CONSIDERATION, INCLUDING A NON - TRANSFERABLE LICENSE OF TECHNICAL KNOW - HOW, TO MANUFACTURE, MARKET, PROMOTE AND DISTRIBUTE THE PRODUCT. (3) ON 30/04/2002 ASSESSEE ENTERED INTO A 'MANUFACTURING AGREEMENT' WITH EPL. AS PER THIS AGREEMENT, EPL WILL MANUFACTURE AND SELL THE PRODUCT (GLYCIPHAGE 850 MG & 500 MG.) TO ASSESSEE. (IT MAY BE CLARIFIED HERE THAT GLYCIPHAGE IS THE TRADEMARK FOR THE SAME PRODU CT METFORMIN AS GATHERED FROM THE LETTER OF EPL DATED 24/07/2008, ADDRESSED TO THE ASSESSEE.) (4) ON 30/10/2008, ASSESSEE ENTERED INTO A 'TERMINATION AGREEMENT' WITH EPL. AS PER THIS AGREEMENT, BOTH THE PARTIES WAIVED ALL THEIR RIGHTS AND CLAIMS AGAINST EACH ITA. NO. 3404/M/2013 3 OTHER FROM THEIR RESPECTIVE OBLIGATIONS UNDER THE AGREEMENTS. 3.1. IT WAS EXPLAINED THAT THE AMOUNT HAS BEEN PAID IN LIEU OF ROYALTY WHICH THE ASSESSEE WAS OTHERWISE REQUIRED TO PAY. AFTER GOING THROUGH THE DOCUMENTS AND THE SUBMISSIONS OF THE ASSESSEE, THE AO FOUND THAT THE MANUFACTURING AGREEMENT HAS EXPIRED THROUGH THE EFFLUX OF TIME THEREFORE THERE WAS NO NECESS ITY OF ENTERING INTO A SPECIFIC TERMINATION AGREEMENT. THE AO FURTHER OBSERVED THAT THE ASSESSEE WAS NOT A PARTY TO THE PAYMENT FOR TERMINATION OF LICENCE AND TECHNICAL ASSISTANCE AGREEMENT. THE AO FURTHER OBSERVED THAT EVEN ASSUMING THAT THE ASSESSEE HA S DISCHARGED THE LIABILITY OF ANOTHER PERSON EVEN THEN THE SAME CANNOT BE ALLOWED U/S. 37 OF THE ACT. THE AO WAS CONVINCED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SPECIFY THE BASIS OF ARRIVING AT THE FIGURE OF RS. 75 LAKHS. THE AO FINALLY DISALLOWED THE C LAIM OF PAYMENT OF RS. 75 LAKHS. 4. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND REITERATED WHAT HAS BEEN STATED DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE LD. CI T(A) OBSERVED THAT THE PAYMENT HAS BEEN MADE TO COMPENSATE M/S. ETHYPHARMA PVT. LTD. (EPL) FOR THE ROYALTY LOSS CANNOT BE ACCEPTED AS IT IS SEEN THAT UNDER THE SAID CONTRACT SIGNED, THERE WAS NO QUESTION OF ANY LIABILITY CAST ON ANY OF THE PARTIES INVOLVE D FOR LOSS OF ANTICIPATED SALE. THE LD. CIT(A) FURTHER OBSERVED THAT COMPENSATION PAYMENT MADE FOR CANCELLATION OF AGREEMENT CAN BE CONSIDERED AS REVENUE ONLY WHEN IT DOES NOT AFFECT THE TRADING PROFIT EARNING STRUCTURE OF A BUSINESS. THE LD. CIT(A) WAS OF THE OPINION THAT IN THIS CASE, THE TERMINATION AGREEMENT HAD AN IMPACT ON THE PROFIT EARNING STRUCTURE OF THE BUSINESS OF THE ASSESSEE AS A NEW ADVANTAGE OF ENDURING NATURE WAS ACQUIRED BY THE ASSESSEE REGARDING ITS RIGHT TO MANUFACTURE AND SELL GLYCIP HAGE. ITA. NO. 3404/M/2013 4 ACCORDING TO THE LD. CIT(A), AT THE MOST SUCH PAYMENT COULD BE CONSIDERED AS CAPITAL IN NATURE. THE LD. CIT(A) CONFIRMED THE ADDITION MADE BY THE AO. 5. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE ADVANCED THE VERY SAME ARGUMENTS WHICH WERE BEFORE THE LOWER AUTHORITIES. 7. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. IT IS AN UNDI SPUTED FACT THAT ON 28 TH MARCH, 2001, M/S. ETHYPHARMA PVT. LTD. (EPL) ENTERED INTO LICENCE AND TECHNICAL ASSISTANCE AGREEM EN T WITH M/S. L ABORATORIES GRIFFON PVT. LTD. (GPL) . IT IS ALSO AN ADMITTED FACT THAT BY THE DEED OF ASSIGNMENT DT. 2 ND APRIL, 2001 M/S. LABORATORIES GRIFFON PVT. LTD. ASSIGNED THE RIGHTS TO THE ASSESSEE. IN PURSUANCE WHICH THE ASSESSEE ENTERED INTO MANUFACTURING AGREEMENT WITH EPL BY WHICH IT WAS AGREED THAT EPL SHALL MANUFACTURE THE PRODUCT AS REQUIRED BY THE ASSESSEE F ROM TIME TO TIME. IT IS ALSO AN UNDISPUTED FACT THAT THE LICENCE AND TECHNICAL ASSISTANCE AGREEMENT DT. 28.3.2001 EXECUTED BETWEEN EPL AND M /S. LABORATORIES GRIFFON PVT. LTD. WERE SUBSEQUENTLY ASSIGNED TO THE ASSESSEE ON 2.54.2001 BY WAY OF A DEED OF AS SIGNMENT. ON THE BASIS OF THESE EVENTS, EPL MANUFACTURED THE PRODUCT GLYCIPHAGE WHICH WAS MARKETED BY THE ASSESSEE. IT IS ALSO AN UNDISPUTED FACT THAT ON THE SALE OF GLYCIPHAGE, ASSESSEE HAS PAID ROYALTY TO EPL AS UNDER : ASSESSMENT YEAR ROYALTY P AID (RS.) 2003 - 04 64,38,569/ - 2004 - 05 20,01,252/ - 2005 - 06 41,44,621/ - ITA. NO. 3404/M/2013 5 2006 - 07 8,40,949/ - 2007 - 08 14,95,767/ - 2008 - 09 17,06,298/ - 2009 - 10 9,36,016/ - 8.1. IT IS SEEN THAT THE AFOREMENTIONED PAYMENTS MADE BY THE ASSESSEE TO EPL HAS BEEN ALLOWED IN ALL THE YEARS. 8.2. IF THE SALE OF GLYCIPHAGE IN SUBSEQUENT YEARS IS TAKEN INTO CONSIDERATION, WE FIND FROM THE RECORD IN PARTICULAR PAGE - 81 OF THE PAPER BOOK, T HE SALES OF GLYCIPHAGE DURING THE PERIOD FROM SEPTEMBER 2008 UPTO 30.9.2012, THE SALES IS AT RS. 73,64,59,680/ - ON WHICH THE ASSESSEE HAD TO PAY ROYALTY AT RS. 3,68,22.984/ - . IF THIS FIGURE IS TAKEN INTO CONSIDERATION, THEN BY PAYING RS. 75 LAKHS FOR THE TERMINATION OF THE AGREEMENT, THE ASSESSEE HAS SAVED LIABILITY OF ROYALTY OF RS. 3.68 CRORES. THIS IN ITSELF WOULD JUSTIFY THE CLAIM OF THE PAYMENT OF RS. 75 LAKHS AS REVENUE EXPENDITURE INCURRED SOLELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IN OUR CONSIDERED OPINION AND IN PARTICULAR, CONSIDERING THE FACTS MENTIONED HEREINABOVE, WE HAVE NO HESITATION TO HOLD THAT THE PAYMENT OF RS. 75 LAKHS IS TO BE ALLOWED AS BUSINESS EXPENDITURE INCURRED SOLELY FOR THE PURPOSE OF BUSINESS U/S. 37(1) OF THE AC T. WE, ACCORDINGLY, SET ASIDE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE AO TO DELETE THE IMPUGNED ADDITION OF RS. 75 LAKHS. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. OR DER PRONOUNCED IN THE OPEN COURT ON 17 TH JU LY , 2015 SD/ - SD/ - ( A.D. JAIN ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 17 TH JU LY , 2015 . . ./ RJ , SR. PS ITA. NO. 3404/M/2013 6 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI