Appeal details
Counselvise Citation
[2020] 111 COUNSELVISE.COM (IT) 7424 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 11 month(s) 6 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
06-01-2020
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
K
Assessment Year
2011-2012
Appeal Filed On
31-01-2018
Judgement Text
T HE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA ( A M) & SHRI PAWAN SINGH (JM) I.T.A. NO. 570/MUM/2018 (ASSESSMENT YEAR 2011 - 12) M/S. ABBOTT HEALTHCARE PVT. LTD. UNIT - 4, CORPORATE PARK SION TROMBAY ROAD CHEMBUR, MUMBAI - 400 071. V S . DCIT - 2(1)(1) ROOM NO. 561 AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) I.T.A. NO. 711 /MUM/ 201 8 (ASSESSMENT YEAR 20 11 - 1 2 ) DCIT - 2(1)(1) ROOM NO. 561 AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. V S . M/S. ABBOTT HEALTHCARE P VT. LTD. UNIT - 4, CORPORATE PARK SION TROMBAY ROAD CHEMBUR, MUMBAI - 400 071. ( APPELLANT ) ( RESPONDENT ) PAN : AAACK3935D ASSESSEE BY S/SHRI MADHUR AGARWAL, VIKAS SRIVASTAVA & SAKSHAM SINGH DEPARTMENT BY SHRI A NAND MOHAN DATE OF HEARING 17 . 1 0 . 201 9 DATE OF PRONOUNCEMENT 06.01.2020 O R D E R PER SHAMIM YAHYA (AM) : - T HESE ARE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARISING OUT OF THE ORDER OF LEARNED CIT(A) DATED 8.11.2017 AND PERTAINS TO A.Y. 2011 - 12. 2. GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS UNDER : 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID.CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE NON - COMPETE FEES AS DEFERRED REVENUE EXPENDITURE FOR A PERIOD OF EIGHT YEARS WHILE THE BENEFIT ACCRUED WAS I N CAPITAL FIELD FOR A SUBSTANTIAL PERIOD OF TIME. ' M/S. ABBOTT HEALTHCARE PVT. LTD. 2 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN HOLDING THAT THE PROVISIONS OF SECTION 43A DOES NOT APPLY IN THE ASSESSEE'S CASE AND THEREBY ALLOWING THE DEPRECI ATION CLAIM OF RS. 76,63,80,975 / - DISALLOWED BY THE AO.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN HOLDING THAT THE FOREIGN EXCHANGE GAIN OF CAPITAL NATURE IS NOT TO BE REDUCED FROM THE WDV OF THE CAPITAL AS SET NOTWITHSTANDING THE APPLICABILITY OF SECTION 43A OF THE IT ACT.' 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO BE RESTORED. 3. GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)/ASSESSING OFFICER HAS: TRANSFER PRICING GROUNDS 1. ERRED IN UPHOLDING THE ARM'S LENGTH PRICE DETERMINATION OF THE LEARNED TRANSFER PRICING OFFICE R ('TPO') IN RELATION TO THE INTERNATIONAL TRANSACTION OF PAYMENT CENTRAL SERVICE CHARGES OF RS.3,87,44,898/ - TO RS. 84,79,431/ - , THUS MAKING AN ADJUSTMENT OF RS.3,02,65,467/ - ; 2. ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT WHICH WAS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES FOR ESTABLISHING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS AND ARBITRARILY SELECTING COMPARABLE UNCONTROLLED PRICE METHOD AS THE 'MOST APPROPRIATE METHOD' TO BENCHMA RK THE INTERNATIONAL TRANSACTION; 3. ERRED IN NOT ACCEPTING THE COMBINED TRANSACTION/ BUNDLED APPROACH OF BENCHMARKING ADOPTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION AND PROCEEDING TO DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRA NSACTIONS ON A STANDALONE BASIS BY REJECTING TRANSACTION NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD AND THEREBY DISREGARDING THE FACT THAT THE APPELLANT HAD RECEIVED THE SERVICES FOR THE PURPOSES OF ITS DISTRIBUTION BUSINESS; 4. ERRED IN DETERMIN ING ARM'S LENGTH PRICE FOR 'MARKETING AND STRATEGIC SALES SUPPORT' AND TRAINING AND PRODUCT SUPPORT SERVICES' AS 'NIL' WITHOUT UNDERTAKING ANY COMPARABILITY ANALYSIS IN ACCORDANCE WITH THE ACT READ WITH THE RULES; 5. ERRED IN QUESTIONING THE COMMERCIAL RATIONALE/ BUSINESS NEED OF THE LEGITIMATE BUSINESS EXPENSES INCURRED BY THE APPELLANT AND NOT RESTRICTING THE SCOPE OF ASSESSMENT UNDER SECTION 92CA FOR DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY ADOPTING ONE OF THE PRESCRIBED METHODS ONLY; M/S. ABBOTT HEALTHCARE PVT. LTD. 3 6. ERRED IN DISREGARDING THE DOCUMENTARY EVIDENCE SUBMITTED, SUBSTANTIATING THE BENEFITS RECEIVED BY THE APPELLANT FROM RECEIPT OF SUCH SERVICES FROM ITS AES WITHOUT PROVIDING ANY REASONS TO SUPPORT SUCH REJECTION . ASSESSEES APPEAL : 4 . M/S. ABBOTT HEALTHCARE PRIVATE LIMITED (IN SHORT AHPL) IS A DOWNSTREAM SUBSIDIARY OF M/S. ABBOTT LABORATORIES, USA . IT IS ENGAGED IN DISTRIBUTION OF HEALTHCARE PRODUCTS. 99.99% OF AHPL SHAREHOLDING IS HELD BY ABBOTT ASIA HOLDINGS LTD., WHICH IN TURN IS A 100% SUBSIDIARY OF ABBOTT LABORATORIES, USA. ON THE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO), THE TPO NOTED THAT AHPL HAS ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS AES. AHPL SUBMITTED A TRANSFER PRICING STUDY REPORT, WHICH DEALS WI TH THE NATURE AND TERMS OF INTERNATIONAL TRANSACTIONS AND ALSO THE FUNCTIONAL AND ECONOMIC ANALYSIS OF SUCH TRANSACTIONS. THE DETAILS OF INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE ARE AS FOLLOWS: SR. NO. INTERNATIONAL TRANSACTIONS AMOUNT IN (IN R S.) METHOD 1) IMPORT OF SPARES 13,855,754 TNMM 2) IMPORT OF FINISHED GOODS 3,159,506,638 TNMM 3) PURCHASE RETURN 127,440 TNMM 4 ) SALE OF GOODS 2,573,613 TNMM 5) IMPORT OF DIAGNOSTIC EQUIPMENTS 197,689,297 TNMM 6) EXPORT OF DIAGNOSTIC EQUIPMENTS 2,819 ,969 TNMM 7) CENTRAL SERVICE CHARGES - COST ALLOCATION 38,744,898 TNMM 8) PROVISION OF BUSINESS/ MARKET SUPPORT SERVICES 110,376,221 TNMM 9) REIMBURSEMENT OF EXPENSES (RECEIPTS) 7,990,110 CUP 10) REIMBURSEMENT OF EXPENSES (PAYMENTS) 32,124,472 CUP CE NTRAL SERVICE CHARGES - COST ALLOCATION RS.38,744,898 / - : 5. DURING THE YEAR THE ASSESSEE HAS MADE PAYMENT OF RS.38,744,898/ - TO ABBOTT GMBH& CO. KG (AE) AS THE ASSESSEE HAD ENTERED INTO SERVICE CENTER AGREEMENT DATED 09.11.2005 ( SUPPLEMENTARY AGREEMENT TO THE MAI N AGREEMENT DATED 01.12,1988) W ITH THE AE. IT WAS SUBMITTED VIDE LETTER DATED 19.01.2015 THAT DURING THE YEAR, THE ASSESSEE HAS BEEN ALLOCATED THE FOLLOWING SUMS RELATING TO 'PAYMENT FOR CENTRAL SERVICE CHARGES' VIZ. : - M/S. ABBOTT HEALTHCARE PVT. LTD. 4 N ATURE OF THE SERVICE AMOU NT IN EURO AMOUNT IN INDIAN RUPEES MARKETING AND STRATEGIC SALES SUPPORT 376,667 22,910,414 PERSONNEL SUPPORT 11,551 702,549 TRAINING ARID PRODUCT SUPPORT 121,071 7,364,053 ACCOUNTING, FINANCE AND MIS SUPPORT 127,711 7,776,882 TOTAL 637,000 38,744 ,898 6 . DURING TINE COURSE OF ASSESSMENT PROCEEDINGS AND VIDE NOTE SHEET ENTRY DATED 14 - 01 - 2015, THE AR OF THE ASSESSEE WAS ASKED TO FURNISH DETAILS REGARDING THE CENTRAL SERVICE CHARGES PAID. HE WAS ALSO ASKED TO FURNISH THE EXPLANATION REGARDING EXPECT ED / A CTUAL BENEFITS, JUSTIFICATION REGARDING SUCH PAYMENTS BEING MADE IN AN ARM'S LENGTH SITUATION ALONG WITH THE DOCUMENTARY EVIDENCE TO SUPPORT THE STAND. ASSESSEE IN RESPONSE JUSTIFIED THE PAYMENT OF CENTRAL SERVICES CHARGES ON THE GROUND THE SAID TRANSA CTION IS BENCHMARKED BY TNMM BY COMPARING THE OPERATING RESULTS OF THE ASSESSEES DISTRIBUTION SEGMENTS WITH FUNCTIONALLY UNCONTROLLED TRANSACTIONS. THE ASSESSING OFFICER WAS NOT CONVINCED. HE MADE TRANSFER PRICING ADJUSTMENT OF RS. 30,265,476/ - BY CONCLUD ING AS UNDER : - ON THE BASIS OF ANALYSIS ABOVE, IT CAN BE CONCLUDED THAT FOR ESTABLISHING THAT THE SERVICES ARE ACTUALLY RENDERED, THE ASSESSEE IS REQUIRED TO MAINTAIN AND SUBMIT DOCUMENTATION AND EVIDENCE. THE SECOND ASPECT OF INTRA GROUP SERVICES IS THE QUANTIFICATION OF SUCH SERVICES IN TERMS OF ACTUAL EXPENDITURE INCURRED AND COMMENSURATE BENEFITS DERIVED THERE FROM IS THE SUBJECT MATTER OF TRANSFER PRICING. THE EXPECTED BENEFIT MUST SUFFICIENTLY DIRECT TANGIBLE AND SUBSTANTIAL WHICH WAS NOT PRODUCED B Y THE ASSESSEE. A COMPARABLE INDEPENDENT SERVICE RECIPIENT, UNDER COMPARABLE CIRCUMSTANCES, WOULD NOT BE WILLING TO PAY FOR THAT SERVICE. IF THE HAS RECEIVED THE SERVICE, ASSESSEE HAS TO MAINTAIN PROPER DOCUMENTATION. IN ITS LETTER DATED 19 - 01 - 2015, THE ON LY EXPLANATION AS REGARDS QUANTIFICATION OF THE BENEFITS IN RESPECT OF PERSONNEL SUPPORT SERVICES WAS THAT THE SALARY COST OF ONE HUMAN RESOURCE MANAGER AND ONE HUMAN RESOURCE OFFICER IS NOT INCURRED BY THE LOCAL AFFILIATE, WHICH BASED ON THE UNDERSTANDING MADE AVAILABLE COULD BE AROUND RS.25 TO 30 LAKHS AS TODAY'S COST AS DISCUSSED IN PARA 5.7 ABOVE AND THE VALUE OF INTERNATIONAL RE PACKAGES FOR ACCOUNTING, FINANCE AND MIS SOFTWARE THAT WAS MADE AVAILABLE AND CUSTOMIZED TO ASSESSEE'S REQUIREMENTS BY ABBOTT GMBH COULD BE ANYWHERE MORE THAN RS. 1 CRORE AS PER TODAY'S COST. ACCORDINGLY, THE ARM'S LENGTH VALUE OF PAYMENT MADE TOWARDS CENTRAL SERVICE CHARGES (PERSONNEL SUPPORT AND ACCOUNTING, FINANCE AND MIS SUPPORT)IS CONSIDERED AS RS. 8,479,431 / - AND THEREFOR E ADJUSTMENT OF RS. 30,265,467 / - TO THE TOTAL INCOME OF THE ASSESSEE IS PROPOSED. M/S. ABBOTT HEALTHCARE PVT. LTD. 5 7 . UPON ASSESSEES APPEAL LEARNED CIT(A) CONFIRMED THE TPOS ACTION. HE HELD AS UNDER : - AS PER THE TPO DURING THE YEAR THE APPELLANT HAS ALLOCATED FOLLOWING SUMS RELATI NG TO 'PAYMENT FOR CENTRAL SERVICE CHARGE' NATURE OF THE SERVICE AMOUNT IN EURO AMOUNT IN RS. MARKETING AND STRATEGIC SALES SUPPORT 376,667 22,910,414 PERSONNEL SUPPORT 11,551 702,549 TRAINING AND PRODUCT SUPPORT 121,071 7,364,053 ACCOUNTING FINANCE A ND MIS SUPPORT 127,711 7,776,882 TOTAL 637,000 38,744,898 THE ASSESSEE HAD SUBMITTED THAT PAYMENT OF CENTRAL SERVICE CHARGES HAVE BEEN BENCHMARKED BY TNMM BY COMPARING THE OPERATING RESULTS OF ASSESSEE'S DISTRIBUTION SEGMENTS WITH FUNCTIONALLY UNCONTROL LED TRANSACTIONS. THE TPO WAS OF THE VIEW THAT THE ACT DOES NOT SAY THAT TNMM IS TO BE APPLIED AT THE ENTERPRISE LEVEL AND ONCE TNMM IS APPLIED, ALL THE INTERNATIONAL TRANSACTION ARE AT ARM'S LENGTH. SO JUST BECAUSE TNMM IS APPLIED AT THE ENTERPRISE LEVEL, IT DOES NOT AUTOMATICALLY FOLLOW THAT EACH CLASS OF TRANSACTION INCLUDING CENTRAL SERVICE CHARGES ARE AT ARM'S LENGTH. THE TPO HAS ANALYSIS THE CENTRAL SERVICE CHARGE UNDER THE CUP METHOD. RELIANCE WAS PLACED IN THE CASE OF STAR INDIA PVT. LTD. VS AC I T (2 008 - TIOL - 426 - ITAT - MUMBAI) WHEREIN IT WAS HELD THAT DISTINCTIVE ACTIVITIES ARE TO BE ANALYZED SEPARATELY. THE TPO ALSO PLACED RELIANCE IN THE CASE OF UCB INDIA PVT. LTD ( 317 ITR 292 (AT)(MUM) IT IS SEEN THAT THE APPELLANT HAS TWO PRODUCT LINES. ONE IS PHA RMACEUTICALS PRODUCTS AND THE SECOND IS MEDICAL HEALTHCARE PRODUCTS. THE TRANSACTION WHICH IS PRESENTLY UNDER DISCUSSION IS THE MEDICAL/HEALTHCARE BUSINESS. THE APPELLANT IS MERELY A DISTRIBUTOR IN THE ABOVE FURNISHED GOOD. THE TPO HAS ELABORATELY DISCUSSE D IN HIS ORDER THAT IN THE THIRD PARTY SITUATION AN ASSESSEE WHO IS ENGAGED IN DISTRIBUTION FUNCTION WILL NEVER AGREE TO MAKE SUCH PAYMENTS AS FOR PREPARING STRATEGIC PLANS, FINANCIAL ANALYSIS AND FINANCIAL FORECASTING, MARKETING RESEARCH AND TRAINING SUPP ORT. THE SECOND QUESTION TO CONSIDER WAS WHETHER ASSSSEEE HAS BEEN ABLE TO LAY ANY EVIDENCE TO SHOW THAT THESE SERVICES WERE IN FACT RENDERED BY THE AE AND AVAILED BY THE ASSESSEE. IT WAS SUBMITTED THAT M..... EVIDENCES WERE SUBMITTED FOR THE FIRST TIME DU RING THE COURSE OF ASSESSMENT PROCEEDINGS FOR AY 2011 - 12. THE TPO HAS SUBMITTED THAT ASSESSEE HAS BEEN ABLE TO SUBSTA N TIATE TO AN EXTENT THE RECEIPTS OF SERVICES TOWARDS PERSONNEL SUPPORT SERVICES AND ACCOUNTING, FINANCE AND MIS SUPPORT SERVICES BASED ON T HE DOCUMENTARY EVIDENCE PROVIDED BUT HAS FAILED TO L E VY ANY EVIDENCE TO SHOW THAT THE WIDE NO OF SERVICES IN RELATIONS TO MARKETING AND STRATEGIC SALES. THIS CANNOT BE CHARGED ON THE DISTRIBUTOR WHO IS MERELY DISTRIBUTING THE PRODUCTS. T HE TPO FURTHER CONT ENDED THAT COMPARABLE INDEPENDENT SERVICES RECIPIENTS, UNDER COMPARABLE CIRCUMSTANCE WOULD NOT BE WILLING TO PAY FOR THAT SERVICES. M/S. ABBOTT HEALTHCARE PVT. LTD. 6 I HAVE GONE THROUGH THE APPELLANT'S CONTENTIONS AND HAVE DISCUSSED TPO'S FINDING ALSO. IT IS PERTINENT TO BRING TO THE RECO RD THAT IN AY 2007 - 08, 2008 - 09 AND 2009 - 10 THE DRP HAS REJECTED THE APPELLANT S CONTENTIONS AND APPROVED THE AO'S ORDER IN TOTO. DURING THE CURRENT YEAR THE APPELLANT HAS MAINTAINED THAT IT HAS MAINTAINED DOCUMENTS THAT SERVICES WERE PROVIDED BUT I AM OF THE OPINION THAT STILL THE PROPER DOCUMENTATION IS NOT UP TO MARK. IN THE LIGHT OF THE ABOVE DISCUSSION THE ARM'S LENGTH NATURE OF PAYMENT MADE T OWARDS CENTRAL SERVICES CHARGES ( PERSONNEL SUPPORT AND ACCOUNTING, FINANCE AND MIS SUPPORT ) CONSIDER AT RS. 84, 79,431/ - AND THEREFORE ADJUSTMENT OF RS 30,265,467/ - TO THE TOTAL INCOME OF THE APPELLANT IS CONFIRMED. 8 . AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL BEFORE US. 9 . WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LEARNED COUNSEL SUBMITTED THAT I DENTICAL TRANSFER PRICING ADJUSTMENT WAS ALSO DONE IN EARLIER YEARS. HE SUBMITTED THAT THE MATTER HAS TRAVELLED TO THE ITAT IN ITA NO. 535, & 7595/MUM/2012, 1320/MUM/2014 & 1797/MUM/2015 VIDE COMMON ORDER DATED 30.1.2019 AND THE ITAT HAD DELETED THE TRANSF ER PRICING ADJUSTM E NT. 1 0 . PER CONTRA, LEARNED DEPARTMENTAL REPRESENTATIVE DID NOT DISPUTE THE ABOVE PROPOSITION. 12 . UPON CAREFUL CONSIDERATION, WE FIND THAT THE IDENTICAL ISSUE WAS CONSIDERED BY THE ITAT IN ASSESSEES OWN CASE IN EARLIER YEAR REFERRED ABOVE. TH E CONCLUSION OF THE TRIBUNAL IS GAINFULLY REFERRED AS UNDER : - 14. WE HAVE HEARD THE RIVAL SUBMISSIONS. AT THE OUTSET, WE FIND THAT THE ASSESSEE PURSUANT TO THE SERVICE CENTRE AGREEMENT HAD SHARED THE COST TOWARDS CENTRAL SERVICES CHARGES IN RESP ECT OF SALES AND MARKETING EXPENSES; ACCOUNTING; FINANCE AND MIS SUPPORT SERVICES; TRAINING AND PRODUCT SUPPORT SERVICES; AND PERSONNEL SUPPORT SERVICES. THE ASSESSEE BEING PARTICIPANT TO THE SERVICE CENTRE AGREEMENT ENTERED INTO BY ABBOTT GMBH WITH VARIOU S ABBOTT AFFILIATES HAD TO ABSORB CERTAIN COSTS THAT WERE ALLOCATED BY THE GROUP TO VARIOUS PARTICIPANTS INCLUDING THE ASSESSEE - COMPANY. IN OTHER WORDS, CERTAIN SERVICES AS DETAILED IN THE SERVICE CENTRE AGREEMENT, WHICH ARE ALREADY REPRODUCED HEREINABOVE , WERE TO BE RENDERED AT ABBOTT GMBH GERMANY AND THE COST INCURRED THEREON WOULD HAVE TO BE SHARED BY ALL THE PARTICIPANT COUNTRIES INCLUDING THE ASSESSEE - COMPANY IN THE RATIO OF TURNOVER. THESE SERVICES ARE IN THE NATURE OF SHARED SERVICES AND ARE THEREFO RE CUSTOMIZED FOR THE ABBOTT GROUP. WE FIND THAT ABBOTT GMBH ALLOCATED THE PORTION OF THE BUDGETED EXPENSES ON QUARTERLY BASIS, BASED ON M/S. ABBOTT HEALTHCARE PVT. LTD. 7 SALES TO EACH AES TO WHOM THE CENTRAL SERVICES WERE RENDERED. AT THE END OF THE YEAR, THE ACTUAL AMOUNT WAS DETERMINED BASED ON WHICH THE FINAL ALLOCATION FOR THE YEAR GOT CRYSTALLIZED. THE TOTAL COST OF SERVICES RENDERED BY ABBOTT GMBH IN THE SUM WAS 33135000 EUROS AND THE ASSESSEE'S SHARE OUT OF THAT WERE 239000 EUROS COMPRISING OF COSTS INCURRED TOWARDS STRATEGIC SALES AND MARKETING SUPPORT SERVICES; TRAINING AND PRODUCT SUPPORT SERVICES; ACCOUNTING AND FINANCE AND MIS SUPPORT SERVICES AND PERSONNEL SUPPORT SERVICES. WE FIND THAT THE ASSESSEE HAD EXPLAINED THE NATURE OF THESE INDIVIDUAL SERVICES AS UNDER: - '3.2.1. STRATE GIC SALES AND MARKETING SUPPORT ABBOTT GMBH INVITES MARKETING MANAGER FOR UPGRADING THEIR SELLING SKILLS. THIS MEETINGS ARE GENERALLY FORUMS USED TO INTERACT WITH GERMANY AND OTHER 'COUNTRIES MARKETING MANAGER AND SHARE THEIR EXPERIENCE OF SELLING WHICH CA N BE REPLICATED IN INDIA. THIS BECOMES MORE IMPORTANT WHEN AHPL IS LAUNCHING NEW PRODUCTS. 'THE BENEFITS OF PRODUCTS AS WELL AS POSITIONING ARE SHARED WITH THE MARKETING MANAGERS. THESE ACQUIRED SKILLS ARE USED IN INDIA FOR THE BENEFIT OF EXISTING CUSTOME R OR POTENTIAL CUSTOMER. 3.2.2. TRAINING AND PRODUCT SUPPORT SERVICES : IN THIS CASE, SERVICE ENGINEERS ARE INVITED FOR TRAINING DURING THE LAUNCH OF NEW INSTRUMENTS AS WELL AS FOR UPGRADATION OF EXISTING SKILLS. THE SERVICE ENGINEER IS BEING FAMILIARIZED WITH THE PRODUCT IN TECHNICAL' TERMS LIKE HOW THE INSTRUMENTS 'FUNCTION, HOW IS THE PREVENTIVE MAINTENANCE DONE, HOW THE INSTRUMENTS IS INSTALLED AT CUSTOMER LOCATION, WHAT ARE THE PRECAUTIONS TAKEN FOR INSTALLATION ETC. AND OTHER FINER POINTS OF THE INST RUMENTS ARE EXPLAINED IN DETAILS. THIS TRAINING IS OF IMMENSE HELP WHEN THE INSTRUMENT IS LAUNCHED IN INDIA. 3.2.3. ACCOUNTING FINANCE AND MIS SUPPORT SERVICES: ITS (INSTRUMENT TRACKING SYSTEM), SEAS (SERVICE EQUIPMENT ACCOUNTING SYSTEM), DFAIFLEX ARE FEW PACKAGE INSTALLED IN AHPL. WHICH ARE BEING MAINTAINED BY ABBOTT GMBH, GERMANY. ITS SYSTEM IS USED TO TRACK INSTRUMENT LOCATION IN INDIA WHEREAS SEAS IS USED TO CALCULATE SERVICE EQUIPMENT AMORTIZATION AND DFAIFLEX IS USED TO GENERATE REPORTS BY PGN FOR AN ALYSIS, CONTROL AND IF NECESSARY TAKE CORRECTIVE ACTION. IT IS ALSO A PLANNING TOOL USED TO FORECAST AND IS ALSO USED FOR MIS. INDIA ALSO USES ADOC (ORDER ENTRY) AND FMS (MARGIN TRACKING) SYSTEMS. 3.2.4. PERSONNEL SUPPORT SERVICES: HR FUNCTIONING IN GERMA NY COMES UP WITH INCENTIVE SCHEME FOR SALES MANAGER AND THEN THEY ALSO APPROVE THE SAME.' 15. THE LD.TPO DETERMINED THE ARM'S LENGTH PRICE OF SALES AND MARKETING SUPPORT SERVICES TO THE TUNE OF 133000 EUROS EQUIVALENT TO RS.79,04,690 AT RS. NIL AND MADE AD JUSTMENT TO THE SAME IN TRANSFER PRICING ORDER U/S 92CA(2) OF THE ACT. WE FIND THAT THE ASSESSEE HAD JUSTIFIED THE SAME IN THE FOLLOWING MANNER: - M/S. ABBOTT HEALTHCARE PVT. LTD. 8 (A) THE ASSESSEE GETS CHARACTERIZED AS A NORMAL RISK DISTRIBUTOR, WHICH HAS BEEN ACCEPTED BY THE LD.TPO IN HIS ORDER. (B) FROM THE RISK PROFILE OF THE ASSESSEE, WHICH IS NOT DISPUTED, INVENTORY RISK LIES WITH THE ASSESSEE. (C) SINCE THE ASSESSEE IS BOUND TO SELL THE IMPORTED PRODUCTS FROM AE IN THE LOCAL MARKET IN INDIA, THE ENTIRE DISTRIBUTION RISKS ALSO VESTS WITH THE ASSESSEE. (D) THE EXPENDITURE THAT HAS BEEN ABSORBED BY THE ASSESSEE BY WAY OF REIMBURSEMENT TO AE, BASED ON GROSS COST ALLOCATION ON SHARED SERVICES, WERE INCURRED IN ORDER TO MAINTAIN THE COMMON METHODOLOGY, MANNER OF PRESENTATION OF FINANCIAL STATEMENTS, COMMON ACCOUNTING POLICIES AND PROCEDURES IN RESPECT OF VARIOUS TRANSACTIONS OF THE GROUP, WHICH WOULD ENABLE SMOOTH CONSOLIDATION OF FINANCIAL STATEMENTS AT GLOBAL LEVEL; MIS REPORTING SYSTEM, COMMON INCENTIVE SCHEMES TO ALL THE EMPLOYEES OF T HE GROUP IN THE RESPECTIVE CARTER, PROPER TRAINING GIVEN TO THE RESPECTIVE EMPLOYEES OF THE RESPECTIVE PARTICIPANTS FOR MARKETING THE PRODUCTS OF THE ASSESSEE. 16. IN VIEW OF THE ABOVE, WE HOLD THAT THE ASSESSEE OBVIOUSLY HAD TO INCUR CERTAIN ADVERTISEMENT AND MARKETING EXPENSES FOR DISTRIBUTION OF ITS PRODUCTS. IN ANY CASE, WE ALSO HOLD THAT THE LD.TPO CANNOT LOOK INTO THE PROPRIETY OF INCURRENCE OF EXPENSES BY THE ASSESSEE. THE ROLE OF LD.TPO IS TO SEE WHETHER ALL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS AES FALL WITHIN THE AMBIT AND MEANING OF INTERNATIONAL TRANSACTION U/S 92B OF THE ACT AND THAT WHETHER THE SAME WAS TRANSACTED AT ARM'S LENGTH PRICE, FOR WHICH PURPOSE THE DETERMINATION OF PRICE SHOULD BE MADE IN ACCORDANCE WITH ANY OF THE METHODS PRESCRIBED IN THE STATUTE U/S 92C OF THE ACT. FROM THE TRANSFER PRICING STUDY REPORT, THE FUNCTIONS PERFORMED BY SUPPLYING AES AND FUNCTIONS PERFORMED BY THE ASSESSEE ARE ENUMERATED IN DETAIL. ONE SUCH FUNCTIONS PERFORMED BY THE AE TO ALL THE PARTICIPANTS COMPANIES INCLUDING THE ASSESSEE - COMPANY WAS MARKETING SUPPORT SERVICES, WHICH ADMITTEDLY INCLUDE NEW PRODUCT PRE - MARKETING ACTIVITIES AND TRAINING GIVEN TO THE PRODUCT MANAGEMENT TEAM BY ABBOTT GROUP AT GLOBAL LEVEL. THE TRAINING IS IMPARTED ON THE LATES T TECHNIQUES AND PRACTICES IN MARKETING, THE FOCUS AND EMPHASIS IS ON DELIVERING QUALITY PRODUCTS TO CUSTOMERS AND REGULAR SERVICES TO THEM IN TERMS OF MEDICAL, PRODUCT LITERATURE. APART FROM THIS, MARKETING SUPPORT SERVICES RENDERED BY AES ALSO INCLUDES S CIENTIFIC PROMOTION OF THE PRODUCTS THROUGH PARTICIPATION IN MEDICAL MEETINGS, BOTH IN INDIA AND ABROAD. OBVIOUSLY, THE AES AT GLOBAL LEVEL HAD TO INCUR EXPENSES FOR RENDERING THESE SERVICES, WHICH ARE MEANT FOR ALL PARTICIPATING COUNTRIES ACROSS THE GLOBE . HENCE, THOSE COSTS OUGHT TO BE SHARED BY ALL THE PARTICIPATING COMPANIES. IT IS NOT DISPUTED THAT THE TOTAL COST INCURRED BY THE GROUP AND THE COST ALLOCATION MADE TO ASSESSEE - COMPANY UNDER EACH HEAD WAS DULY CERTIFIED BY AN INDEPENDENT ACCOUNTANT, WHO W AS APPOINTED FOR THIS SPECIFIC PURPOSE IN ACCORDANCE WITH THE CONDITIONS LAID OUT IN THE SERVICE CENTRE AGREEMENT. WHEN SUCH COSTS THAT HAD BEEN ALLOCATED TO THE ASSESSEE - COMPANY HAD BEEN ABSORBED BY MAKING THE PAYMENT TO AES FOR THE SERVICES RENDERED BY A ES (WHICH IS NOT DISPUTED BY THE REVENUE BEFORE US), THEN THE M/S. ABBOTT HEALTHCARE PVT. LTD. 9 ACTION OF THE LOWER AUTHORITIES IN DETERMINING THE ARM'S LENGTH PRICE OF SUCH SERVICES AT RS.NIL IS UNWARRANTED. 17. WE ALSO FIND FROM ONE OF THE FUNCTIONS PERFORMED BY THE ASSESSEE - COMPANY IS TOWARDS 'MARKET RESEARCH AND STRATEGIC MARKETING'. UNDER THIS CATEGORY, THE ASSESSEE CARRIES OUT MARKETING FUNCTIONS IN RESPECT OF THE PRODUCT IMPORTED FROM ITS AES. APART FROM CARRYING OUT MARKET STUDY AND ANALYSIS, THE ASSESSEE CARRIES OUT COMPETITOR ANA LYSIS, ASCERTAINS PRICE DATA OF SIMILAR PRODUCTS, MARKET TRENDS ETC. IN ADDITION, THE ASSESSEE'S FIELD FORCE OF MARKETING REPRESENTATIVES PAY FIELD VISITS TO DOCTORS AND PARTICIPATE IN MEDICAL CONFERENCES. AS REGARDS IMPORTS OF REAGENTS AND DIAGNOSTIC EQUI PMENTS, THE ASSESSEE LEVERAGES ON THE PROMOTIONAL, SCIENTIFIC AND TECHNICAL MATERIAL DEVELOPED BY ABBOTT GERMANY. ADDITIONALLY, ABBOTT GERMANY PROVIDES THE ASSESSEE, SERVICE ENGINEERS WITH SCIENTIFIC AND TECHNICAL PRODUCT TRAINING AND OTHER NECESSARY SUPPO RT TO ENABLE THE ASSESSEE'S EMPLOYEES MARKET THE SAME EFFECTIVELY IN INDIA. 18. APART FROM RENDERING STRATEGIC MARKETING FUNCTIONS, THE ASSESSEE ALSO CARRIES OUT WAREHOUSING AND INVENTORY MANAGEMENT FUNCTIONS AND DISTRIBUTION FUNCTIONS IN INDIA. HENCE, THE ASSESSEE CARRIES SIGNIFICANT RISKS AS A DISTRIBUTOR IN THIS NORMAL COURSE OF DISTRIBUTION PROCESS. WE FIND FROM THE RISK PROFILE OF THE ASSESSEE THAT THE ASSESSEE IS EXPOSED TO SIGNIFICANT MARKET RISKS AND LO SS, IF ANY, ON ACCOUNT OF LOWER /NO DEMAND FOR P RODUCT DUE TO THE CHANGE IN THE MARKET STRUCTURE AND CUSTOMER NEEDS WOULD HAVE TO BE BORNE BY THE ASSESSEE. THIS RISK IS REDUCED SUBSTANTIALLY BECAUSE OF THE PRESENCE OF DYNAMIC RESEARCH PROGRAMME OF ABBOTT GERMANY, WHICH PROVIDES THE ASSESSEE WITH A LARGE SUITE OF NEW PRODUCTS TO CHOOSE AND INTRODUCE IN INDIA, IN LINE WITH CUSTOMER REQUIREMENTS. THE ASSESSEE ALSO HAS TO MAINTAIN SUFFICIENT INVENTORY OF TRADED GOODS SO THAT THE SALES ARE NOT REDUCED FOR WANT OF STOCK. HENCE, SIGNIFICANT INVENTORY RISKS COUP LED WITH THE CARRYING COST OF INTEREST ALSO LIES WITH THE ASSESSEE. THIS IS MITIGATED BY TIMELY SUPPLY OF QUALITY GOODS BY THE ASSESSEE TO THE AES SO THAT THE ASSESSEE DOES NOT GET INTO THE SITUATION OF STOCK OUT. THE ENTIRE GROUP RISK ARISING AS A RESULT OF SALES TO INDIAN CUSTOMERS IS BORNE BY THE ASSESSEE. HENCE, THE ASSESSEE HAD TO MANDATORILY LEVERAGE AND MITIGATE THOSE RISKS BY PROVIDING QUALITY PRODUCTS AND FOLLOWING CONSISTENT PRACTICE AT PAR WITH THE GLOBAL PRACTICES FOR WHICH THE SHARED COSTS WERE REIMBURSED TO AES. 1 2 . THEREAFTER THE TRIBUNAL REFERRED TO THE DECISION OF THE ITAT IN THE CASE OF FIRMENICH AROMATICS INDIA PVT. LTD. VS. ACIT (ITA NO. 2590/MUM/2017 FOR A.Y. 2012 - 13 VIDE ORDER DATED 23.4.2018) AND THE ITAT ORDER IN THE CASE OF DRESSER R AND INDIA PVT. LTD. (53 SOT 173). THE TRIBUNAL FURTHER CONCLUDED AS UNDER : - 21. IN VIEW OF THE ABOVE, WE HOLD THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN DETERMINING THE ARM'S LENGTH PRICE IN RESPECT OF MARKETING EXPENSES AT RS. NIL AS AGAINST THE CL AIM OF RS.79,04,690. M/S. ABBOTT HEALTHCARE PVT. LTD. 10 22. WITH REGARD TO THE REMAINING EXPENSES LIKE - (I) PERSONNEL EXPENSES 8,000 EUROS (II) TRAINING EXPENSES 48,000 EUROS (III) ACCOUNT AND MISCELLANEOUS 51,000 EUROS. THE LD.TPO HAD MADE ADHOC DISALLOWANCE OF 25% AND HELD THAT 75% OF THE SAID EXPENDITURE WERE AT ARM'S LENGTH PRICE. WE HOLD THAT THERE IS NO BASIS FOR THE LD.TPO TO ARRIVE AT THIS CONCLUSION WHEN THE ENTIRE COST ALLOCATION SHEET DULY CERTIFIED BY AN INDEPENDENT ACCOUNTANT WAS VERY MUCH PLACED BEFORE HIM FOR HIS EXAMINATION. IN ANY CASE, THE LD.TPO CANNOT MAKE ANY ADHOC DISALLOWANCE WHILE DETERMINING THE ALP OF INTERNATIONAL TRANSACTION. HIS DUTY IS TO DETERMINE THE ALP BY FOLLOWING ANY OF THE FIVE METHODS PRESCRIBED IN SECTION 92C OF THE ACT R.W.S. 10B OF THE I.T. RULES. IN THIS REGARD, WE FIND THAT THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. JOHNSON & JOH NSON REPORTED IN ITA NO.1030 OF 2014 DATED 07.03.2017 HAD HELD AS UNDER: - '(D) WE FIND THAT THE IMPUGNED ORDER OF THE TRIBUNAL UPHOLDING THE ORDER OF THE CIT(A) IN THE PRESENT FACTS CANNOT BE FOUND FAULT WITH. THE TPO IS MANDATED BY LAW TO DETERMINE THE A LP BY FOLLOWING ONE OF THE METHODS PRESCRIBED IN SECTION 92C OF THE ACT READ WITH RULE 10B OF THE INCOME TAX RULES. HOWEVER, THE AFORESAID EXERCISE OF DETERMINING THE ALP IN RESPECT OF THE ROYALTY PAYABLE FOR TECHNICAL KNOWHOW HAS NOT BEEN CARRIED OUT AS R EQUIRED UNDER THE ACT. FURTHER, AS HELD BY THE CIT(A) AND UPHELD BY THE IMPUGNED ORDER OF THE TRIBUNAL, THE TPO HAS GIVEN NO REASONS JUSTIFYING THE TECHNICAL KNOWHOW ROYALTY PAID BY THE ASSESSING OFFICER TO ITS ASSOCIATED ENTERPRISES BEING RESTRICTED TO 1% INSTEAD OF 2%, AS CLAIMED BY THE RESPONDENT ASSESSEE. THIS DETERMINATION OF ALP OF TECHNICAL KNOWHOW ROYALTY BY THE TPO WAS AD - HOC AND ARBITRARY AS HELD BY THE CIT(A) AND THE TRIBUNAL. (E) IN THE ABOVE VIEW, THE QUESTION AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT ENTERTAINED.' 23. IN VIEW OF THE AFORESAID FACTUAL OBSERVATIONS IN THE LIGHT OF EVIDENCES AVAILABLE ON RECORD AND RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF JOHNSO N & JOHNSON (SUPRA), WE HOLD THAT THE ACTION OF THE REVENUE IN ACCEPTING ONLY 75% OF THE EXPENSES TO BE AT ARM'S LENGTH IS NOT CORRECT. ACCORDINGLY, WE DIRECT THE LD.TPO TO CONSIDER THE ENTIRE 1,07,000 EURO (8,000 + 48,000 + 51,000) IN RESPECT OF THREE EXP ENSES AS STATED SUPRA, AS THE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND WHICH IS DETERMINED TO BE AT ARM'S LENGTH AND ACCORDINGLY NO ADJUSTMENT IN THAT REGARD IS CALLED FOR. 24. WE ALSO FIND THAT THIS ISSUE IS COMMON IN OTHER APP EALS ALSO FOR ASSESSMENT YEARS 2007 - 2008, 2008 - 2009, 2009 - 2010 AND 2010 - 2011 WITH THE FOLLOWING MINOR VARIANCE, WHICH ARE TABULATED HEREIN BELOW: - M/S. ABBOTT HEALTHCARE PVT. LTD. 11 A SSESSMENT YEAR MARKETING STRATEGIC SALES SUPPORT PERSONNEL SUPPORT TRAINING AND PRODUCT SUPPORT ACCOUNTING, FINANCE AND MAM SUPPORT 2008 - 2009 ALP AT NIL 2009 - 2010 ALP AT NIL 2010 - 2011 ALP WAS DETERMINED AT RS. 25 LAKHS ON ADHOC BASIS 25. OUR FINDINGS GIVEN IN ASSESSMENT YEAR 2007 - 2008 WOULD HOLD GOOD FOR OTHER ASSESSMENT YEARS ALSO, WHICH ARE IN APPE AL BEFORE US. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE WITH REGARD TO TRANSFER PRICING ADJUSTMENT IN RESPECT OF THESE CENTRAL SERVICES CHARGES ARE ALLOWED FOR ALL THE ASSESSMENT YEARS. 1 3 . WE FIND THAT SINCE IN ASSESSEES OWN CASE FOR EARLIER YEARS IDENTICAL TRANSFER PRICING ADJUSTMENT HAS BEEN DELETED BY THE ITAT. IT IS NOT THE CASE THAT THE FACTS IN THE PRESENT YEAR ARE DIFFERENT. IT IS ALSO NOT THE CASE THAT HON'BLE JURISDICTIONAL HIGH COURT HAS REVERSED THE DECISION OF THE ITAT. HENCE, FOLLOWING THE PRECEDENT AS ABOVE, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 14. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. REVENUES APPEAL : APROPOS ISSUE OF DEPRECIATION OF NON - COMPETE FEES . 15. THE ASSE SSING OFFICER IN THIS CASE IT IS NOTED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION @ 25% OF NON - COMPETE FEES OF RS. 5,13,54,60,000/ - PAID AS PART OF SLUMP SALE AGREEMENT. ON ENQUIRY IN THIS REGARD, T HE ASSESSEE RESPONDED AS UNDER : - I. A NON - COMPETE IS A N EGATIVE RIGHT RESTRAINING ANOTHER PERSON FROM COMPETING. AS A PART OF CONTRACTUAL OBLIGATIONS, IF A BUYER SECURES SUCH A RIGHT IT IS CLEAR TH A T HE HAS IN FACT SECURED AN INVALUABLE RIGHT. I I. NO N - COMPETE RIGHT IS A 'BUSINESS OR COMMERCIAL RIGHT'. THE FEE IS IN LIEU OF WHICH THE ASSESSEE HAS SECURED RIGHT TO CARRY ON BUSINESS WITHOUT ANY COMPETITION FROM PIRAMAL (POST - ACQUISITION FOR 8 YEARS), III. SUCH BUSINESS RIGHT IS OF 'SIMILAR NATURE' TO KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES A ND FRANCHISES, IV. RELIANCE IS PLACED ON M/S. ABBOTT HEALTHCARE PVT. LTD. 12 A. CIT VS INGERSOLL RAND INTERNATIONAL IND. LTD. [2014] 48 TAXMANN.COM 349 (KARNATAKA HIGH COURT) B . PENTASOFT TECHNOLO GIES LTD VS. DCIT [2014] 41 T AXMANN.COM 120(MADRAS HIGH COURT) C. INDGLOBAL C ORPORATE FINANCE (P.) LTD VS. ITO [2012] 19 ITR (T) 483 (MUMBAI - TRIB.) D. SCHOTT GLASS INDIA PVT. LTD. V. DCIT (ITA NO. 1698/MUM/2013) E. DCIT VS. OWENS CORNING INDUSTRIES (INDIA) P .LTD. [2014] 51 1 TAXMANN.COM 276 (ITAT HYDERABAD) F. ITO VS. MED ICORP TECHNOLOGIES INDIA LTD. (2009) 122 TTJ 394 (ITAT CHENNAI) G. ACIT VS. REAL IMAGE TECH. (P.) LTD (2009) 177 TAXMANN 80 (ITAT CHENNAI) H. SERUM INSTITUTE OF INDIA LTD. VS. ACIT [2012] 147 TTJ 594 (PUNE) 16. HOWEVER, THE ASSESSI NG OFFICER WAS NOT CONVINCED. HE HELD THAT HON'BLE DELHI HIGH COURT IN THE CASE OF SHARP BUSINESS SYSTEM VS. CIT (I TA NO. 492/2012) HELD THAT THE NON - COMPETE FEES PAID BY THE TAXPAYER WOULD NOT BE ALLOWED AS REVENUE EXPENDITURE SINCE THE BENEFIT ACCRUED WA S IN CAPITAL FIELD FOR A SUBSTANTIAL PERIOD OF TIME. FURTHER, THE NON - COMPETE FEES ARE NOT ELIGIBLE FOR DEPRECIATION UNDER SECTION 32(1)(II) OF THE INCOME TAX ACT, 1961 BECAUSE ONLY INTANGIBLE RIGHTS ENFORCEABLE AGAINST THE WOR L D AT LARGE WOULD QUALIFY FOR DEPRECIATION. IN VIEW OF THE ABOVE, THE ASSESSEE IS NOT ENTITLED TO CLAIM DEPRECIATION ON NON - COMPETE FEES PAID. ACC ORDINGLY, THE DEPRECIATION OF RS. 128,38,65,000/ - ON NON - COMPETE FEES IS HEREBY DISALLOWED. 17. UPON ASSESSEES APPEAL LEARNED CIT(A) REPR ODUCED THE ASSESSEES SUBMISSION. THEREAFTER LEARNED CIT(A) NOTED THE FOLLOWING SUBMISSION OF THE ASSESSEE AND MADE THE SAME GROUND FOR ALLOWING ASSESSEES APPEAL BY OBSERVING AS UNDER : - DURING THE COURSE OF APPELLATE PROCEEDINGS THE APPELLANT SUBMITTED THAT IT HAD ENTERED INTO A BUSINESS TRANSFER AGREEMENT ( BTA) DATED MAY 21, 2010 WITH PIRAMAL HEALTHCARE LTD (PIRAMAL) IN ORDER TO ACQUIRE PIRAMAL'S BASE DOMESTIC FORMULATIONS BUSINESS ON A SLUMP SALE BASIS. IT WAS FURTHER M/S. ABBOTT HEALTHCARE PVT. LTD. 13 SUBMITTED THAT IN THIS CASE THE SE LLER I.E. PIRA M AL HAS AGREED NOT TO ENGAGE IN COMPETING ACTIVITIES FOR A PERIOD OF EIGHT YEARS IN INDIA OR OTHER EMERGING MARKETS, TO ENSURE THAT THE APPELLANT CAN OPERATE THE ACQUIRED BUSINESS SMOOTHLY, WITHOUT THE THREAT OF ANY DIRECT OR INDIRECT COMPETI TIONS FROM THE SELLER. THE APPELLANT FURTHER CONTENDED THAT SECTION 32(1) (II) SPECIFICALLY MENTIONS CERTAIN TYPES OF INTANGIBLE ASSETS( NAMELY KNOWHOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSE AND FRANCHISES) IT ALSO HAS A RESIDUARY CLAUSE COVERING ' ANY O THER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' SO ACCORDING TO APPELLANT RON COMPETE FEES FALLS UNDE R THE RESIDUARY CLAUSE RELIANCE WAS PLACED ON FOLLOWING CASE LAWS 1. CIT VS. INGERSOLL RAND INTERNATIONAL INDIA LTD (2014) 227 TAXMAN 176 ( KARNAT AKA HIGH COURT) 2. PENTASOFT TECHNOLOGIES LTD. VS DCIT (2014)222 TAXMAN 209 (MADRAS HIGH COURT) . THE APPELLANT SUBMITTED THAT WITHOUT PREJUDICE IF YOU ARE NOT IN AGREEMENT WITH THE APPELLANT'S CONTENTION THAT IN ALTERNATIVE PAYMENTS MADE TOWARDS NON CO MPETE FEES MAY BE TREATED A REVENUE EXPENSES LAID OUT FOR PURPOSE OF THE BUSINESS, AND ALLOWABLE IN THE YEAR IN WHICH THE EXPENSES WAS INCURRED (F.Y. 2010 - 11). IT FURTHER SUBMITTED THAT EXPENSES MAY BE ALLOWED PROPORTIONALITY AS DEFERRED REVENUE EXPENSES A LLOWABLE OVER A PERIOD OF EIGHT YEARS. FROM THE ABOVE ANALYSIS IT IS SEEN THAT THE APPELLANT'S EXPENDITURE OR NON COMPETE FEES CAN BE CLAIMED AS DEDUCTION U/S 37(1) OF THE IT ACT. THERE ARE MANY JUDGEMENTS WHICH DO NOT CONSIDER NON COMPETE TEES AS CAPITAL EXPENDITURE. RELYING ON THE FOLLOWING CASE LAWS I AM OF THE CONSIDERED OPINION THAT THE APPELLANT CAN BE GIVEN DEDUCTION U/S 37(1) AS DEFERRED REVENUE EXPENDITURE ALLOWABLE FOR A PERIOD OF EIGHT YEARS( THE RELEVANT PERIOD OF NON COMPETE) . RELIANCE IS PLA CED ON FOLLOWING CASE LAWS - DECISION OF HON BLE MUMBAI TRIBUNAL IN PREMIER OPTICAL (P) LTD VS ACIT (2008) 120 TAXMAN 167 (MUMBAI)(MAG) WHEREIN HON'BLE TRIBUNAL HELD THAT NON COMPETE FEES INCURRED FOR RESTRAINING THE RECIPIENTS FOR A SHORT OR LIMITED PERIO D TO INCREASE PROFITABILITY OF THE ASSESSEE IS NOT A CAPITAL EXPENDITURE. THE TRIBUNAL FURTHER HELD THAT SINCE THE EXPENDITURE WAS INCURRED FOR FIVE YEARS, THE SAME SHOULD BE ALLOWED OVER A PERIOD OF FIVE YEARS. THE DECISION HAS BEEN FOLLOWED IN A HIDELBER G CEMENT INDIA LTD VS ACIT (2014) 31 ITR(T)582( MUMBAI TRIBUNAL). ORCHID CHEMICALS & PHARM ACEUTICALS LTD VS ACIT (2011) 7 ITR (T) 601 (CHENNAI). THE TRIBUNAL RELIED ON THE PRINCIPLES LAID DOWN IN THE DECISION OF THE APEX COURT I IN MADRAS INDUSTRIAL INVES TMENT CORPORATE LTD VS ACIT (1997) 225 ITR 802 (SC) IN THE CONTEXT OF ALLOWANCE OF DEFERRED REVENUE EXPENDITURE BEING DISCOUNT ON DEBENTURES, THE HON'BLE TRIBUNAL HELD THAT THE NON COMPETE FEE PAID SECURING AN ADVANTAGE OVER A PERIOD OF YEARS SHOULD BE ALL OWED AS DEFERRED REVENUE EXPENDITURE OVER A PERIOD OF AGREEMENT. M/S. ABBOTT HEALTHCARE PVT. LTD. 14 HENCE RELYING ON THE ABOVE DISCUSSIONS I DIRECT THE AO TO TREAT THE NON COMPETE FEES AS DEFERRED REVENUE EXPENDITURE FOR A PERIOD OF EIGHT YEARS. THE GROUND OF APPEAL IS ALLOWED. 18. AGAI NST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 19. AGAINST THIS ORDER REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE COUN SE L AND PERUSED THE RECORDS. WE FIND THAT THE ISSUE IN DISPUTE IS THE DEPRECIATION/AMORTISATION OF THE NON - COMPETE FE E PAID. THE ASSESSING OFFICER HAS RELIED UPON HONOURABLE DELHI HIGH COURT DECISION IN THE CASE OF SHARP BUSINESS SYSTEM (SUPRA) AND DISALLOWED THE CLAIM OF THE DEPRECIATION ON THE GROUND THAT THE NON - COMPETE FEE PAID WAS IN CAPITAL FIELD. 20. AS AGAINST T HE ABOVE WE NOTE THAT LEARNED CIT(A)HAS RE L I ED UPON CASE LAWS FROM HONOURABLE KARNA TAKA HIGH COURT AND HONOURABLE M ADRAS HIGH COURT AS UNDER : - 1. CIT VS INGERSOLL RAND INTERNATIONAL ( 227 TAXMANN176 ) KARNATAKA HC 2. PENTASOFT TECHNOLOGIES VS DCI T ( 222 TAXMAN 2 09 ) M ADRAS HC 21. I N THESE CASE LAWS DEPRECIATION/AMORTISATION OF THE NON - COMPETE FEE WAS HELD TO BE ALLOWABLE ON THE GRO UND THAT AS HELD BY HONOURABLE M ADRAS HIGH COURT IT STRENGTHENS THE TRANSFER OF IPR AND AS HELD BY HONOURABLE KARNATAKA HIGH COURT IT FEL L INTO THE REALM OF DEFINITION UNDER SECTION 32 . N O DECISION FROM HONOURABLE JURISDICTIONAL HIGH COURT HAS BEEN CITED BEFORE US. IN THIS VIEW OF THE MATTER HONOURABLE APEX C OURT DECISION IN THE CASE OF VEGETABLE P RODUCTS LTD. (88 ITR 192) HAS TO BE FOLL OWED. IN THE SAID CASE LAW HONOURABLE COURT HAD EXPOUNDED THAT IF TWO CONSTRUCTIONS ARE POSSIBLE THE ONE IN FAVOUR OF ASSESSEE SHOULD BE ADOPTED. SINCE THE DECISION OF THE LEARNED CIT (A) IS IN ACCORDANCE WITH THE RATIO ARISING FROM THE DECISION OF HONOUR ABLE KARNATAKA HIGH COURT AND HONOURABLE M ADRAS HIGH COURT AS ABOVE WE DO NOT FIND ANY INFIRMITY IN THE SAME IN ABSENCE OF ANY DIRECT JURISDICTIONAL HIGH COURT DECISION ON THE SUBJECT. HENCE WE UPHOLD THE ORDER OF LD CIT (A) ON THIS ISSUE M/S. ABBOTT HEALTHCARE PVT. LTD. 15 APROPOS ISSUE OF APPLICABILITY OF PROVISION OF SECTION 43A : 22 . ON THIS ISSUE THE ASSESSING OFFICER OBSERVED THAT D URING THE ASSESSMENT YEAR UNDER CONSIDERATION, FOREIGN EXCHANGE GAIN OF RS. 308,16,00, 000 / - ON RE STATEMENT OF PURCHASE CONSIDERATION PAYABLE BY ASSESSE E TO PIRAMAL IS CREDITED TO THE PROFIT AND LOSS ACCOUNT IN COMPLIANCE WITH THE ACCOUNTING STANDARD 11 - THE EFFECTS OF CHANGE IN FOREIGN EXCHANGE RATE' - WHICH PROVIDES FOR ACCOUNTING FOR A FOREIGN CURRENCY TRANSACTION DENOMINATED IN FOREIGN CURRENCY. THE ASSE SSEE HAS BIFURCATED THE FOREIGN EXCHANGE GAIN RS. 308,16,00,000 / - INTO (A) GAIN ON CAPITAL ACCOUNT RS. 306,55,23,898/ - (FIXED ASSETS & INTANGIBLE ASSETS, GOODWILL) AN D (B) GAIN ON CURRENT ACCOUNT RS. 1,60,76,102/ - (I.E., INVENTORY, ACCOUNTS RECEIVABLE AND LOANS AND ADVANCES). THE ASSESSEE HAS OFFERED RS. 1,60,76,102/ - AS REVENUE RECEIPT AND OFFERED FOR TAXATION. HOWEVER, AMOUNT OF RS. 306,55,23,898/ - HAS BEEN TREATED AS CAPITAL RECEIPT NOT CHARGEABLE TO TAX. THE ASSESSING OFFICER ASKED THE ASSESSEE TO JUSTI FY WHY THE SAME IS NOT A REVENUE RECEIPT AND ALTERNATIVELY THE SAME SHOULD NOT BE REDUCED FROM THE CAPITAL COST OF ASSET CONCERNED. THE ASSESSEES RESPONSE WAS NOTED BY THE ASSESSING OFFICER AS UNDER : - IN RESPONSE, THE ASSESSEE VIDE LETTER DATED 14.01.2 015 SUBMITTED THAT WHETHER A GAIN ACCRUING TO AN ASSESSEE IS A REVENUE RECEIPT OR A CAPITAL RECEIPT DEPENDS UPON WHETHER THE GAIN IS IN RESPECT OF A TRADING ASSET OR A CAPITAL ASSET. THE AMOUNT IN FOREIGN CURRENCY IS UTILIZED OR INTENDED TO BE UTILIZED IN THE COURSE OR FOR A TRADING PURPOSE!, ANY GAIN OR LOSS ARISING FROM FLUCTUATION IN ITS VALUE ON ACCOUNT OF ALTERATION IN THE RATE OF EXCHANGE WOULD BE A TRADING GAIN OR LOSS. HOWEVER, WHERE THE UNDERLYING IS OF CAPITAL NATURE, THE GAIN OR LOSS ARISING FROM THE FOREIGN CURRENCY FLUCTUATION WILL BE A CAPITAL RECEIPT OR LOSS. ACCORDINGLY, THE NOTIONAL GAIN ON RE INSTATEMENT OF THE LIABILITY TO THE EXTENT RS. 306,55,23,898/ - IS CAPITAL IN NATURE, IS NOT TAXABLE. WITH REGARD TO WHY THE FOREIGN EXCHANGE GAIN O N RE - INSTATEMENT OF 'DEFERRED PURCHASE CONSIDERATION PAYABLE' SHOULD NOT BE REDUCED FROM CAPITAL COST OF ASSET IS CONCERNED, THE ASSESSEE STATED THAT ADJUSTMENT VIS - A - VIS FOREIGN EXCHANGE GAIN/(LOSS) IS GOVERNED BY THE PROVISIONS OF SECTION 43A. FOR SECTIO N 43A TO BE APPLICABLE THE ASSESSEE S HOULD ACQUIRE THE ASSET FROM A COUNTRY OUTSIDE INDIA. THIS ESSENTIAL CONDITION IS N O T MET IN THIS CASE AS THE ACQUISITION OF 'BASE DOMESTIC FORMULATION BUSINESS' BY SLUMP SALE, IS A DOMESTIC TRANSACTION INVOLVING ACQUIS ITION OF ASSETS IN INDIA. THEREFORE PROVISIONS OF SECTION 43A WILL NOT BE APPLICABLE . M/S. ABBOTT HEALTHCARE PVT. LTD. 16 2 3 . HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED. HE REFERRED TO THE PROVISIONS OF SECTION 43A. HE NOTED THAT THE ASSESSEE HAS ACQUIRED BASE DOMESTIC FORMULATION BU SINESS. HE REFERRED TO THE BUSINESS TRANSFER AGREEMENT ENTERED FOLLOWING SOME IMPORTANT DEFINITION AS UNDER : - ' BUSINESS ' MEANS THE BUSINESS OF RESEARCHING, DEVELOPING, FORMULATING, MANUFACTURING, SELLING, MARKETING, DISTRIBUTING, IMPORTING OR EXPORTING G ENERIC PHARMACEUTICALS PRODUCTS IN FINISHED FORM (INCLUDING THE PRODUCTS AND THE R&D PRODUCTS) AND RELATED SERVICES OF THE BASE: DOMESTIC FORMULATION AND MASS MARKET BRANDED FORMULATION (TRUECARE) BUSINESSES OF SELLER AND PHL PHARMA PRIVATE LIMITED (INCLU DING THE DIVISIONS SET FORTH ON EXHIBIT E) AND SUCH BUSINESSES ARE CONDUCTED IN INDIA AND ANY EMERGING MARKET BY SELLER AND PHL PHARMA PRIVATE LIMITED IMMEDIATELY PRIOR TO THE DATE OF THIS AGREEMENT (SUBJECT TO CHANGES PRIOR TO CLOSING PERMITTED IN ACCORDA NCE WITH SECTION 7.2), BUT SPECIFICALLY EXCLUDING OTHER BUSINESSES. IT IS AGREED AND UNDERSTOOD THAT THE BUSINESS DOES NOT INCLUDE ANY EXCLUDED ASSETS OR EXCLUDED LIABILITIES; 'INTELLECTUAL PROPERTY' MEANS ALL OF THE FOLLOWING ANYWHERE IN THE WORLD AND AL L LEGAL RIGHTS, TITLE OR INTEREST IN, UNDER OR IN RESPECT OF THE FOLLOWING ARISING UNDER APPLICABLE LAW, WHETHER OR NOT FILED, APPLIED FOR, PERFECTED, REGISTERED OR RECORDED AND WHETHER NOW OR LATER EXISTING, FILED, ISSUED OR ACQUIRED, INCLUDING ALL RENEWA LS: (A) ALL PATENTS (B) ALL COPYRIGHTS, INCLUDING COPYRIGHTS IN SOFTWARE, COPYRIGHT REGISTRATIONS AND COPYRIGHT APPLICATIONS, COPYRIGHTABLE WORKS; (C) ALL MASK W ORKS, MASK WORK REGISTRATIONS AND MASK WORK APPLICATIONS; (D) ALL TRADEMARKS; (E) ALL INTERNET ADDRESSES AND DOMAIN NAMES AND WEB PAGE CONTENT RELATING TO THE FOREGOING; (F) ALL INVENTIONS (WHETHER PATENTABLE, PATENTED OR UNPA T EN T ABLE AND WHETHER OR NOT REDUCED TO PRACTICE); (G) ALL KNOW - HOW THAT IS PROPRIETARY AND CONFIDENTIAL AND WHICH IS NOT KNOW N WITHIN THE WIDER PHARMACEUTICAL INDUSTRY, INCLUDING TECHNICAL KNOW - HOW, PROCESS KNOW - HOW, TECHNOLOGY, TECHNICAL DATA, TRADE SECRETS, CONFIDENTIAL BUSINESS INFORMATION, MANUFACTURING AND PRODUCTION PROCESSES AND TECHNIQU ES, REGULATORY REQUIREMENTS AND INF ORMATION, CLINICAL DATA AND PROTOCOLS, RESEARCH AND DEVELOPMENT INFORMATION ...' 'PATENTS' MEANS ALL NATIONAL, REGIONAL AND INTERNATIONAL PATENTS, PATENT APPLICATIONS, PATENT DISCLOSURES, UTILITY MODELS, UTILITY MODEL APPLICATIONS, PETTY PATENTS, DESIGN P ATENTS AND CERTIFICATES OF INVENTIONS, AND ALL RELATED RE - ISSUES, RE - EXAMINATIONS, DIVISIONS, REVISIONS, RESTORATIONS, RENEWALS, EXTENSIONS, PROVISIONALS, CONTINUATIONS AND CONTINUATIONS IN PART, AND ALL REGISTRATIONS AND APPLICATIONS FOR REGISTRATION OF A NY OF THE FOREGOING; 'REGISTRATIONS' MEANS THE AUTHORIZATIONS, APPROVALS, LICENSES, PERMITS, CERTIFICATES, OR EXEMPTIONS ISSUED BY A GOVERNMENTAL AUTHORITY IN INDIA, SRI LANKA OR NEPAL (INCLUDING: PRODUCT CERTIFICATIONS AND REC TI F I CATIONS; MANUFACTURING A PPROVALS, AUTHORIZATIONS AND LICENSES; PRICING AND REIMBURSEMENT APPROVALS; AND LABELING APPROVALS) HELD BY SELLER OR ITS. AFFILIATES IMMEDIATELY PRIOR TO THE CLOSING THAT ARE REQUIRED FOR THE RESEARCH, DEVELOPMENT, FORMULATION, MANUFACTURE, SALE, MARKETIN G, DISTRIBUTION, M/S. ABBOTT HEALTHCARE PVT. LTD. 17 IMPORTATION OR EXPORTATION OF THE PRODUCTS OF THE BUSINESS IN INDIA, SRI LANKA AND NEPAL . 2 4 . THEREAFTER THE ASSESSING OFFICER REFERRED TO CERTAIN PORTION OF THE AGR E EMENT AS UNDER : - ARTICLE 2 DEALS WITH AGREEMENT TO SELL AND PURCHASE IN WHICH SECTION 2.1 DEFINES THE TERM 'TRANSFERRED ASSETS'. AS PER CLAUSE (D) TO THE SAME IT IS STATED: (D) THE CONTRACTS, REGISTRATIONS, INTELLECTUAL PROPERTY RIGHTS AND ALL OTHER ASSETS, RIGHTS AND PROPERTIES WHICH SELLER ACQUIRED FROM HOECHST MARION ROUSSEL LIMITED RELATED TO THE RESEARCH, DEVELOPMENT, FORMULATION, MANUFACTURE, SALE, MARKETING AND DISTRIBUTION OF HAEMACCEL SOLELY WITHIN INDIA, NEPAL AND SRI LANKA. CLAUSE (C) TO SECTION 2.5 FURTHER STATES WITH REGARD TO INTELLECTUAL PROPERTY: (C ) EFFECTIVE AS OF THE CLOSING, SELLER, ON BEHALF OF ITSELF AND ITS AFFILIATES, SHALL GRANT TO PURCHASER AND ITS AFFILIATES FOR A FIXED - TERM OF EIGHT (8) YEARS, AN IRREVOCABLE, EXCLUSIVE (EVEN WITH RESPECT TO SELLER AND ITS AFFILIATES) AND ROYALTY - FREE RIGH T AND LICENSE (WITH THE RIGHT TO GRANT SUBLICENSES TO DISTRIBUTORS, AGENTS AND WHOLESALERS (BUT ONLY TO THE EXTENT NECESSARY TO DISTRIBUTE PHARMACEUTICAL PRODUCTS ON BEHALF OF PURCHASER), AND TO THIRD PARTY MANUFACTURERS (BUT ONLY TO THE EXTENT NECESSARY T O MANUFACTURE ON BEHALF OF PURCHASER)) TO USE THE SELLER CORPORATE NAMEJBR PURPOSES OF MAKING, LUWING MADE, USING, SELLING, OFFERING TO SELL, IMPORTING OR EXPORTING GENERIC PHARMACEUTICAL PRODUCTS IN FINISHED FORM IN INDIA, NEPAL AND SRI LANKA; PROVIDED, H OWEVER, THAT THE PRESENT LICENSE SHALL NOT BE CONSTRUED TO LIMIT THE RIGHT OF SELLER AND ITS AFFILIATES TO USE THE SELLER CORPORATE NAME IN THE OTHER BUSINESSES. SELLER HEREBY ACKNOWLEDGES AND AGREES THAT PURCHASER SHALL HAVE THE RIGHT TO BECOME THE REGIST ERED USER OF THE SELLER CORPORATE NAME WITHIN INDIA, NEPAL AND SRI LANKA AND ACCORDINGLY THE PARTIES LIERETO SHALL MAKE THE NECESSARY APPLICATIONS TO THE REGISTRAR OF TRADEMARKS UNDER THE (INDIAN) TRADE MARKS ACT, 1999 AND SIMILAR APPLICABLE LAWS IN NEPAL AND SRI LANKA FOR AND TO THE INTENT THAT PURCHASER SHALL BE REGISTERED AS REGISTERED USER IN RESPECT OF THE SELLER CORPORATE NAME FOR THE PURPOSES CONTEMPLATED BY THIS SECTION 2.5(C). ANY USE BY PURCHASER OR ITS AFFILIATES OF THE SELLER CORPORATE NAME IS S UBJECT TO THEIR USE OF THE SELLER CORPORATE NAME WITH THE STANDARDS OF QUALITY IN EFFECT FOR THE SELLER CORPORATE NAME AS OF THE CL OSING DATE. ANY GOODWILL FROM TH E USE OF T H E SELLER CORPORATE NAME BY PURCHASER AND ITS AFFILIATES SHALL INURE SOLELY TO THE BENEFIT OF SELLER. PUR CHA SER AND ITS AFFILIATES SHALL INDEMNIFY AND HOLD HARMLESS SETTER AND ITS AFFILIATES FOR ANY LOSSES ARISING FROM OR RE LAT ING TO THE USE BY PUR CH ASER O R ANY OF ITS AFFILIATES OF THE S ELLER CORPORATE NAME. SECTION 10.6 ON NON - COMPETIT ION; NON - SOLICITATION STATES AS BELOW: (A) IN VIEW OF ABOVE TRANSACTIONS CONTEMPLATED BY THE TERMS OF THIS AGREEMENT AND THE ACQUISITION BY PURCHASER OF THE GOODWILL, DURING THE M/S. ABBOTT HEALTHCARE PVT. LTD. 18 PERIOD COMMENCING ON THE CLOSING DATE AND ENDING ON THE EIGHT (8 TH ) ANNIVERSA RY OF THE CLOSING DATE (OR, IF NOT ENFORCEABLE FOR SUCH PERIOD IN ANY COUNTRY UNDER THE COMPETITION/INVESTMENT LAWS OF SUCH COUNTRY, FOR SUCH SHORTER PERIOD AS SHALL BE ENFORCEABLE OF SUCH COUNTRY) (THE 'RESTRICTED PERIOD'), NEITHER PROMOTER GROUP NOR SELL ER SHALL, AND PROMOTER GROUP AND SELLER SHALL CAUSE THEIR RESPECTIVE AFFILIATES (AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS (WHETHER BY OPERATION OF LAW OR OTHERWISE)), OTHER THAN, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED BELOW IN SECTION 10.6(B), A COMPETI NG ACQUIRING PERSON, NOT TO, DIRECTLY OR INDIRECTLY: (I) ENGAGE IN ANY BUSINESS THAT CONDUCTS ANY PURCHASER COMPETING ACTIVITIES IN INDIA AND/OR ANY EMERGING MARKET; OR (II) OWN AN INTEREST IN MANAGE, OPERATE, JOIN, CONTROL, LEND MONEY OR RENDER FINANCIAL OR OTHER ASSISTANCE TO OR PARTICIPATE IN, AS A PARTNER, STOCKHOLDER, CO - VENTURER, CONSULTANT, OR OTHERWISE, ANY PERSON THAT IS ENGAGED IN THE BUSINESS OF CONDUCTING ANY PURCHASER COMPETING ACTIVITIES IN INDIA AND/OR ANY EMERGING MARKET; ...' 2 5 . REFERRING TO THE ABOVE THE ASSESSING OFFICER HELD AS UNDER : - 8.5. FROM THE READING OF ABOVE DEFINITIONS AND SECTIONS, IT CAN BE SAID THAT THE CAPITAL ASSETS ACQUIRED BY THE ASSESSEE RELATES TO BUSINESS IN INDIA, NEPAL, SRI LANKA AND EMERGING MARKETS. THE GOODWI LL ACQUIRED BY THE ASSESSEE IS CLEARLY NOT AN INDIA SPECIFIC RIGHT BUT IT IS FROM COUNTRY OUTSIDE INDIA AS WELL. THE BRAND NAME OF PIRAMAL HEALTHCARE GOES BEYOND INDIA. THE INTELLECTUAL PROPERTY RIGHTS ARE DEFINED AS WORLDWIDE RIGHTS/TITLE/INTEREST. THE NO N - COMPETE RELATES TO INDIA AND EMERGING MARKETS. THERE ARE MANY OTHER CLAUSES WHICH REINFORCE THE ARGUMENT. AS PER T HE PROVISIONS OF SECTION 43 A, IF ANY PAYMENT IS MADE TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSET, THEN THE INCREASE/DECREASE IN F OREIGN EXCHANGE, THE SAME HA S TO BE REDUCED FROM THE COST OF THE ASSET. THE PROVISIONS OF THE SECTION APPLIES TO THE ASSESSEE. THE COPYRIGHTS, TRADEMARKS, INTELLECTUAL PROPERTY, NON - COMPETE FEES, ETC. ARE THE CAPITAL ASSETS WHICH ARE ACQUIRED FROM A COUNTR Y OUTSIDE INDIA. 8.6. IN VIEW OF ABOVE, THE AMOUNT OF RS. 306,55,23,898/ - IS REDUCED FROM THE COST OF THE ASSET ON WHICH 25% DEPRECIATION HAS BEEN CLAIMED. THEREFORE, THE EFFECTIVE CLAIM OF DE PRECIATION REDUCES BY RS. 76,63,80,975 / - AND THE SAME IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 26 . AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPEAL BEFORE LEARNED CIT(A). LEARNED CIT(A) REPRODUCED THE SUBMISSION OF THE ASSESSEE. THEREAFTER REFERRING TO CERTAIN PORTION OF THE ASSESSEES SUBMISSION AND HELD THAT GROUND OF APPEAL IS ALLOWED. LEARNED CIT(A) HELD AS UNDER : - DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT ASSESSEE HAS BIFURCATED THE FOREIGN EXCHANGE GAIN OF RS. 308, 16,00,0007 - INTO (A) GAIN ON CAPITA L AMOUNT OF RS 306,55,23,898/ - [ FIXED ASSETS AND INTANGIBLE ASSETS, GOODWILL] AND (B) GAIN ON CURRENT ACCOUNT OF RS. 1,60,76,102/ - (I.E. INVENTORY, ACCOUNTS RECOVERABLE AND LOSSES AND ADVANCES) . M/S. ABBOTT HEALTHCARE PVT. LTD. 19 THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDINGS STATED THAT WHETHER A GAIN ACCRUIN G TO AN ASSESSEE IS A REVENUE RECEIPT OR A CAPITAL RECEIPT DEPENDS UPON WHETHER THE GAIN IS IN RESPECT OF A TRADING ASSETS OR A CAPITAL ASSET. FURTHER THE ADJUSTMENT VIS - A - VIS FOREIGN GAIN/LOSS IS GOVERNED BY THE PROVISIONS OF SECTION 43A, WHICH ARE NOT A PPLICABLE IN THE PRESENT CASE AS THE ASSESSEE HAS NOT ACQUIRED THE ASSET FROM A COUNTRY OUTSIDE INDIA. THE AO HOWEVER RELIED ON THE PROVISIONS OF SECTION 43 A AND CONCLUDED THAT THE CAPITAL ASSETS ACQUIRED BY THE ASSESSEE INSIDE INDIA. DURING THE COURSE O F APPELLATE PROCEEDINGS THE APPELLANT SUBMITTED THAT THE AO HAS ADJUSTED (REDIRECT) THE FOREIGN EXCHANGE GAIN OF RS. 306,55,23,898/ - FROM', THE COST OF ASSET AND HAS ADDED BACK RS. 76,63,80,975/ - TO THE TAXABLE INCOME OF THE APPELLANT BEING THE ALLEGED EXC ESS DEPRECIATION (AT 25%) CLAIMED BY THE APPELLANT OR THE UNADJUSTED COST OF ASSETS: FOR APPLICABILITY OF SECTION 43A THE FOLLOWING CONDITIONS SHOULD BE SATISFIED A. THE ASSETS WAS ACQUIRED BY THE ASSESSEE IN ANY PREVIOUS YEAR FROM A COUNTRY OUTSIDE IN DIA. IN THE CASE OF APPELLANT IT IS SEEN THAT THE FIRST CONDITION IS NOT FULFILLED AS THE APPELLANT IS A TAX RESIDENT OF INDIA AND HAD ACQUIRED THE BUSINESS IN SLUMP SALE BASIS FROM PERSONNEL WHICH IS ALSO AN INDIAN COMPANY. HENCE IN THE LIGHT OF ABOVE DIS CUSSIONS THE GROUND OF APPEAL IS ALLOWED. HOWEVER THE AO IS DIRECTED TO VERIFY WHETHER THE ASSET IS A TRADING ASSET OR A CAPITAL ASSET. 2 7 . AGAINST THE ABOVE ORDER REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT AS PER SECTION 43A RELEVANT PROVIS I ON READ AS UNDER : - 43A. SPECIAL PROVISIONS CONSEQUENTIAL TO CHANGES IN RATE OF EXCHANGE OF CURRENCY . NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, WHERE AN ASSESSEE HAS ACQU IRED ANY ASSET IN ANY PREVIOUS YEAR FROM A COUNTRY OUTSIDE INDIA FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND, IN CONSEQUENCE OF A CHANGE IN THE RATE OF EXCHANGE DURING ANY PREVIOUS YEAR AFTER THE ACQUISITION OF SUCH ASSET, THERE IS AN INCREASE OR RE DUCTION IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIAN CURRENCY (AS COMPARED TO THE LIABILITY EXISTING AT THE TIME OF ACQUISITION OF THE ASSET) AT THE TIME OF MAKING PAYMENT (A) TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSET; OR (B) TOW ARDS REPAYMENT OF THE WHOLE OR A PART OF THE MONEYS BORROWED BY HIM FROM ANY PERSON, DIRECTLY OR INDIRECTLY, IN ANY FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THE ASSET ALONG WITH INTEREST, IF ANY, M/S. ABBOTT HEALTHCARE PVT. LTD. 20 THE AMOUNT BY WHICH THE LIABILITY AS AFO RESAID IS SO INCREASED OR REDUCED DURING SUCH PREVIOUS YEAR AND WHICH IS TAKEN INTO ACCOUNT AT THE TIME OF MAKING THE PAYMENT, IRRESPECTIVE OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE, SHALL BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED FROM (I) THE ACTUAL COST OF THE ASSET AS DEFINED IN CLAUSE (1) OF SECTION 43; OR (II) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUB - SECTION (1) OF SECTION 35; OR (III) (III) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN SECTION 35A; OR (IV) (IV) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IX) OF SUB - SECTION (1) OF SECTION 36; OR (V) THE COST OF ACQUISITION OF A CAPITAL ASSET (NOT BEING A CAPITAL ASSET REFERRED TO IN SECTION 50) FOR THE PURPOSES OF SECTION 48, AND THE AMOUNT ARRIVED AT AFTER SUCH ADDITION OR DEDUCTION SHALL BE TAKEN TO BE THE ACTUAL COST OF THE ASSET OR THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE OR, AS THE CASE MAY BE, THE COST OF ACQUISITION OF THE CAPITAL ASSET AS AFORESAID: PROVIDED THAT WHERE AN ADDITION TO OR DEDUCTION FROM THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION HAS BEEN MADE UNDER THIS SECTION, AS IT STOOD IMMEDIATELY BEFORE ITS SUBSTITUTION BY THE FINANCE ACT, 2002, ON A CCOUNT OF AN INCREASE OR REDUCTION IN THE LIABILIT Y AS AFORESAID, THE AMOUNT TO BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED UNDER THIS SECTION FROM, THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION AT THE TIME OF MAKING THE PAYMENT SHALL BE SO ADJUSTED THAT THE TOTAL AMOUNT ADDED TO, OR, AS THE CAS E MAY BE, DEDUCTED FROM, THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION, IS EQUAL TO THE INCREASE OR REDUCTION IN THE AFORESAID LIABILITY TAKEN INTO ACCOUNT AT THE TIME OF MAKING PAYMENT. 28. FROM THE ABOVE WE NOTE THAT THE ABOVE PROVISION IS SPEC IAL PROVISION CONSEQUENTIAL TO CHANGE IN RATE OF EXCHANGE OF CURRENCY. LEARNED CIT(A) HAS ONLY REFERRED TO ASPECT THAT UNDER SECTION 43A ITS APPLICABILITY DEPEND UPON THE SATISFACTION OF THE CRITERIA THAT THE ASSET WAS ACQUIRED BY THE ASSESSEE FROM A COUNT RY OUTSIDE INDIA. HENCE, LEARNED CIT(A) HELD THAT SINCE THIS CRITERIA IS NOT FULFILLED AS PERSON FROM WHOM BUSINESS IS ACQUIRED IS ALSO AN INDIAN COMPANY H ENCE, HE HAS HELD THAT SECTION 43A IS NOT AT ALL APPLICABLE. IN THIS REGARD WE NOTE THAT LEARNED CIT( A) IN HIS ADJUDICATION HAS NOT CONSIDERED THE FINDING OF THE ASSESSING OFFICER THAT THE ASSET INVOLVED IN SLUMP SALE INCLUDED AREAS OF NEPAL, SRI LANKA AND OTHER. IN THIS VIEW OF THE MATTER LEARNED CIT(A)S FINDING IS NOT AT ALL SUSTAINABLE. SINCE LEARNED CIT(A) HAS NOT CONSIDERED ALL ASPECT OF THE REASONING GIVEN BY THE ASSESSING OFFICER M/S. ABBOTT HEALTHCARE PVT. LTD. 21 FOR MAKING THE ADDITION, WE DEEM IT APPROPRIATE TO REMIT THIS ISSUE TO THE FILE OF LEARNED CIT(A) TO CONSIDER THEM AFRESH AND PASS A SPEAKING ORDER ON THIS ISSUE. NEEDLESS TO ADD THE ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARD. 29. BEFORE PARTING WE MAY ADD THAT THE ASSESSEE IN ITS SUBMISSION HAS REFERRED TO THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CUB PTY LTD. VS. UOI VIDE ORDER DATED 25. 7.2016. LEARNED CIT(A) IN HIS ADJUDICATION HAS NEITHER REFERRED TO THIS DECISION NOR DEALT WITH THE ASPECT OF ASSESSING OFFICERS ORDER THAT THE ASSET ACQUIRED INCLUDED A REFERENCE TO SRI LANKA AND NEPAL. HOWEVER, IN THIS REGARD, WE NOTE THAT THE SAID DECI SION OF HON'BLE DELHI HIGH COURT WAS WITH RESPECT TO SECTION 9(1)(I) OF THE ACT . I T WAS NOT RENDERED IN CONNECTION WITH SECTION 43A OF THE ACT. IT IS SETTLED LAW THAT DECISION HAS TO BE CONSIDERED IN TERMS OF CONTEXT IN WHICH IT IS RENDERED. 30. IN THE R ESULT, THIS APPEAL BY THE REVENUE IS PARTLY ALLOWED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 06 . 1 . 20 20 . SD/ - SD/ - ( PAWAN SINGH ) (SH A MIM YAHYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 06 / 1 / 20 20 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// ( ASSISTANT REGISTRAR ) PS ITAT, MUMBAI
