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

ITA 6007/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3595 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 12-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 10-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B JAYA KUMARDR
• Assessee Lawyers: K K VED
• Keywords: Depreciation; Transfer pricing; Additional evidence; Wholly owned subsidiary; Valuation report

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ITA NO.6007/MUM/2013 ASSESSMENT YEAR: 2010-11 DCIT-9(1), R. NO.223 AAYAKAR BHAVAN M.K.ROAD, MUMBAI-400020 VS M/S GHARDA CHEMICALS LTD. 48, GHARDA HOUSE, HILL ROAD, BANDRA EAST, MUMBAI-400050 ( / REVENUE) ( ! /ASSESSEE) PAN. NO. AAACG1255E ' # $ !% / DATE OF HEARING : 12/05/2016 $ !% / DATE OF ORDER: 12/05/2016 / REVENUE BY SHRI B. JAYA KUMAR-DR ! / ASSESSEE BY SHRI K.K. VED ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATE D 22/07/2013 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI. THE ONLY GROUND RAISED IN THIS APPEAL PERTAINS TO D ELETING THE DISALLOWANCE OF RS.1,36,82,036/-, BEING EXCESS DEPR ECIATION ON INTELLECTUAL PROPERTY RIGHTS (INTANGIBLE ASSETS) CLAIMED BY THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT THE ARMS LENGTH PRICE WOULD BE THE PRICE THAT A THIRD PARTY MIGHT BE BILLING TO PAY FOR PARTICULAR PRODUCT AND THAT THE PARTY SHALL BE BILLING TO ACQUIRE IT AS ASSET ONLY IT HAS ECONO MIC VALUE TO HIM. 2. DURING HEARING OF THIS APPEAL, AT THE OUTSET, S HRI K.K. VED, LD. COUNSEL FOR THE ASSESSEE CLAIMED THAT THE IMPUGNED ISSUE IS COVERED BY THE DECISION FOR ASSES SMENT YEAR 2005-06 (ITA NO.5474, 5348/MUM/2009, AND ITA NO.8376, 8758/MUM/2010) ORDER DATED 29/04/2016. THI S FACTUAL MATRIX WAS CONSENTED TO BE CORRECT BY SHRI B JAYA KUMAR, LD. DR. ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 3 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW O F THE ASSERTION, WE ARE REPRODUCING HEREUNDER THE RELEVAN T PORTION FROM THE AFORESAID ORDER OF THE TRIBUNAL DATED 29/0 4/2016 FOR READY REFERENCE:- 18. GROUND NO.8 PERTAINS TO SECOND TP ADJUSTMENT AND IT IS ABOUT DEPRECIATION OF REGISTRATION RIGHTS AMOUNTING TO RS.5,76,55,986/-AND REGISTRATION RIGHTS, VALUED AT RS.67,99,06,271/-.DURING THE TP PROCEEDINGS, THE TP O FOUND THAT THE ASSESSEE HAD ACQUIRED THE REGISTRATION RIG HTS FOR TOTAL AMOUNT OF RS.67.99 CRORES BASED ON ASSETS REVALUED IN THE BOOKS OF G-USA, AS ON 1.10.2004 WHICH ON 30/09/2004 BEFORE THE VALUATION WAS EQUIVALENT TO RS. 44.92 CRORES. H E HELD ADJUSTMENT OF THE 23.06 CRORES WILL HAVE TO BE MADE , THAT THE ADJUSTMENT WOULD RESULT IN REWORKING OF CAPITAL LOS S ON LIQUIDATION OF ASSETS AND THE SAME TIME THE CLAIM O F DEPRECIATION ON INTANGIBLE ASSETS BEING REGISTRATIO N RIGHTS WOULD HAVE TO BE REDUCED. ON A QUERRY BY THE AO IN THAT REGARD, THE ASSESSEE STATED THAT IN THE EVENT THE TP ADJUSTMENT PROPOSED BY THE TPO WER E TO BE ACCEPTED CAPITAL LOSS ON LIQUIDATION OF INVESTMENT HELD BY THE ASSESSEE IN G-USA HAD TO BE RECOMPUTED, THAT AFTER DISALLOWANCE OF REVALUATION OF REGISTRATION RIGHTS THERE WOULD BE A LOSS OF RS. 23.06 CRORES, THAT THE LOSS SHOULD BE ALLOWED TO ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 4 BE CARRIED FORWARD AND SET OFF IN THE SUBSEQUENT AS SESSMENT YEARS. AFTER CONSIDERING SUBMISSION OF THE ASSESSEE, THE A O HELD THAT THE ASSESSEE HAD COMPUTED LONG TERM CAPITAL LOSS ON SHARES OF G-USA ON LIQUIDATION OF INVESTMENT, THE AE WAS HUND RED PERCENT SUBSIDIARY COMPANY OF THE ASSESSEE, THAT IT HAD TAKEN OVER THE 100% SUBSIDIARY COMPANY AND ALL THE ASSETS AND LIABILITIES WERE TAKEN OVER, THAT AS PER THE PROVIS IONS OF SECTION 47(IV)/ (V) TRANSACTIONS FROM THE HOLDING COMPANY T O SUBSIDIARY COMPANY OR VICE VERSA WERE NOT REGARDED TRANSFER, T HAT PROVISIONS OF SECTION 45 OF THE ACT WERE NOT APPLIC ABLE, THAT THE COMPUTATION OF CAPITAL GAINS COULD NOT BE CARRIED O UT IN RESPECT OF TRANSACTIONS WITH THE AE, THAT ADJUSTMENT OF RS. 23.06 CRORES WOULD RESULT IN REWORKING OF CAPITAL LOSS,THAT THE VALUE OF REGISTRATION HAD TO BE REDUCED TO RS.44.92 CRORES,T HAT THERE WAS A LOSS OF CAPITAL TO THE ASSESSEE. HE FURTHER HELD THAT THE ADJUSTMENT WAS NOT CALLED FOR COMPUTATION OF INCOME UNDER THE HEAD CAPITAL GAINS IN VIEW OF THE PROVISION OF SECT ION 47 OF THE ACT, THAT ASSESSEE WAS NOT ENTITLED TO CARRY FORWAR D OF LONG-TERM CAPITAL LOSS AND THE CLAIM MADE BY IT IN THAT REGAR D HAD TO BE REJECTED. HE HELD THAT DEPRECIATION WAS TO BE ALLOW ED IN RESPECT OF REGISTRATION RIGHT TAKING THE VALUE BEFORE THE R EVALUATION OF RS.44.92 CRORES. HE WORKED OUT THE DEPRECIATION @ 25%(RS11.23 CRORES) IS AGAINST THE ASSESSEES CLAIM OF RS.16.99 CRORES. HE DISALLOWED THE CLAIM OF ACCESS DEPRECIAT ION OF RS.5.76 CRORES AND ADDED THE SAME TO THE TOTAL NO O F THE ASSESSEE. FINALLY THE WDV OF REGISTRATION WAS REVIS ED AT RS.33.69 CRORES AS ON 31.03/2005. ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 5 18.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA) .BEFORE HIM, IT WAS ARGUED THAT THE ASSESSEE HAD WHOLLY OWN ED SUBSIDIARY IN USA,THAT IT HAD REGISTRATION RIGHT IN CFS AND DIACAMBA ,THAT THE REGISTRATION RIGHTS WERE RESTATE D IN ITS BOOKS OF ACCOUNTS BY THE AE AS ON 30/09/2004 ON THE BASIS OF VALUATION ANALYSIS CARRIED OUT BY AN INDEPENDENT EX PERT, THAT THE AE WAS DISSOLVED ON THE LAST DAY OF SEPTEMBER, 2004, THAT UPON DISSOLUTION ALL THE ASSETS AND LIABILITY OF TH E AE WERE DISTRIBUTED TO THE ASSESSEE AT BOOK VALUE, THAT POS T LIQUIDATION THE ASSESSEE CONTINUED THE BUSINESS IN USA THROUGH ITS BRANCHES, THAT THE ASSETS WERE TAKEN OVER BY THE AS SESSEE INCLUDED INTANGIBLE ASSETS-BEING TO REGISTRATION RI GHTS OF CFS AND DIACAMBA, THAT THE BOOK VALUE OF THE REGISTRATI ON WAS RS.67.99 CRORES, THAT THE PESTICIDE MARKET OF US WA S A VERY MATURE MARKET WITH THE STRONG REGULATORY REQUIREMEN TS, THAT PESTICIDE REGISTRATION WAS A PRE-REQUISITE FOR ANY OPERATION, THAT AS PER THE PREVALENT LAWS OF USA ASSESSEES WERE REQ UIRED TO OBTAIN A REGISTRATION FROM THE US ENVIRONMENTAL PRO TECTION AGENCIES, THAT FOR A REGISTRATION THE APPLICANT WOU LD BE REQUIRED TO SUBMIT A DOSSIER,THAT THE AE HAD OBTAINED REGIST RATION, THAT THE PRODUCT REGISTRATION WAS REVIEWED ON A PERIODIC BASIS FOR SAFETY TO HUMAN BEINGS, ANIMALS AND THE ENVIRONMENT , THAT FEES WERE PAYABLE ANNUALLY TO MAINTAIN THE REGISTRATIONS , THAT THE AE HAD INCURRED SIGNIFICANT REGISTRATION COST FOR THE PRODUCTION REGISTRATION AMOUNTING TO USD 1, 28, 6,995.33,THAT THE ABOVE VALUE WAS DULY REFLECTED AS GROSS BLOCK IN THE BOOK S OF THE ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 6 AE,THAT THE VALUER HAD CONSIDERED THE ACTUAL EXPEND ITURE INCURRED ON ACQUISITION OF REGISTRATION RIGHTS AS A BOVE WHILE VALUING THE REGISTRATION RIGHTS, THAT THE AE HAD ME MBERSHIP OF THREE PROFESSIONAL TASK FORCE AGENCIES FORMED UNDER FEDERAL INSECTICIDE, FUNGICIDE, AND RODENTICIDE ACT, THAT T HE MEMBERSHIP OF THE ABOVE AGENCIES WAS ESSENTIAL TO MAINTAIN THE REGISTRATION OF CPF AND DIACAMBA, THAT THE ELIGIBILITY TO SELL T HE PRODUCTS BY THE ASSESSEE IN USA DEPENDED SOLELY ON THE OWNERSHI P OF THE REGISTRATION RIGHTS OF THE PRODUCTS AS REQUIRED BY THE LAW OF THAT COUNTRY, THAT THE AO/TPO HAD MADE AN ADJUSTMENT OF RS. 23.06 CRORES BY REJECTING THE VALUATION OF REGISTRATION R IGHTS BY AN INDEPENDENT EXPERT VALUE, THAT THE TPO HAD NOT READ THE VALUATION REPORT IN PROPER PERSPECTIVE, THAT THE AS SESSEE HAD REQUESTED THE VALUER TO FURTHER CLARIFY THE VALUATI ON REPORT, THAT THE VALUER HAD REPORTED THAT ACCURATE DETERMINATION OF ACTUALLY STUDY COSTS PAID BY THE THAT ORDER WAS KEY IN PREPA RING THE BASIS FOR VALUING THE TOTAL NEGOTIATED SETTLEMENT PAID BY THE FELLOW ON REGISTRATION, THAT THE ASSESSEE HAD INCURRED COST O F USD1,28,16,995 AND FURTHER SUM OF USD30,62,311 WAS ALSO SPENT, THAT AE HAD INCURRED EXPENDITURE OF USD 1,5 8,79,306 AND NOT USD 97,33,679 AS ADOPTED BY THE TPO, THAT T HE BUSINESS OF THE ASSESSEE WAS GROWING FROM YEAR TO Y EAR. DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE MADE AN APP LICATION FOR ADMISSION OF ADDITIONAL EVIDENCES UNDER RULE 46AOF THE INCOME TAX RULES, 1962.AFTER ADMITTING THE ADDITIONAL EVID ENCES, THE FAA FORWARDED A COPY OF THE DOCUMENTS TO THE TPO FO R HIS COMMENTS. THE TPO FILED HIS COMMENTS IN THAT REGARD . ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 7 AFTER CONSIDERING THE AVAILABLE MATERIAL, THE FAA H ELD THAT THE ASSESSEE HAD A WHOLLY OWNED SUBSIDY IN USA, THAT TH E AE HELD REGISTRATION RIGHTS IN TWO PRODUCTS, THAT THE RIGHT S WERE REVALUED IN THE BOOKS OF THE AE AS ON 1.1.2004 BASE D ON VALUERS REPORT, THAT THE REGISTRATION RIGHTS WERE REVALUED FROM RS. 44.29 CRORES TO RS. 67.99 CRORES, THAT THE AE W AS DISSOLVED ON 30/09/2004, THAT UPON DISSOLUTION ALL THE ASSETS AND THE LIABILITIES OF THE AE WERE TAKEN BY THE ASSESSEE AT THE BOOK WILL YOU WHICH INCLUDED VALUE OF REGISTRATION RIGHTS ARE TO BE 67.99 CRORES, THAT THE TPO HAD MADE AN ADJUSTMENT OF RS. 23.06 CRORES TO THE CONSIDERATION PAID BY THE ASSESSEE ON ACQUISITION OF THE ASSETS AND LIABILITIES OF THE AE BY IGNORING THE REVALUATION OF THE REGISTRATION RIGHTS, THAT A SUM OF USD30,62,311WAS SPENT ON MEMBERSHIP FEES AND INCIDE NTAL EXPENSES, THAT THOSE EXPENSES WERE INCURRED MUCH PR IOR TO THE YEAR 2004, THAT THERE WAS INFLATION AND RISK PREMIU M FACTOR ATTACHED TO IT, THAT SAME HAD TO BE FACTORED IN, TH AT THE TPO IN HIS REMAND REPORT HAD NOT DISPUTED THE ACTUAL EXPEN DITURE INCURRED BY THE AE, THAT HE HAD ALSO NOT DISPUTED T HE CONTENTS OF THE VARIOUS CLARIFICATIONS PROVIDED BY THE VALUER, THAT THE AE WAS IN A POSITION TO TRANSFER OR ASSIGN THE REGISTR ATION TO ITS SUCCESSOR OR TO ANY THIRD PARTY WHICH ACQUIRED RESP ECTIVE REGISTRATIONS, THAT THE OBSERVATIONS MADE BY THE TP O ABOUT NON-TRANSFERABILITY OF THE REGISTRATION AND RESTRIC TION ON SALE OF REGISTRATION DATA WERE NOT IN ACCORDANCE WITH THE F ACTS ON RECORD, THAT THE AE WAS DISSOLVED AND BY OPERATION OF LAW LICENSES FOR THE TWO PRODUCTS DEVOLVED ON THE ASSES SEE AND THEY WERE NOT ACQUIRED BY IT, THE BOOK VALUE OF REGISTRA TION RIGHTS ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 8 TAKEN OVER BY THE IT AS USD1,47,30,136,THAT IT WAS MUCH LOWER VALUE COMPARED TO THE VALUATION MADE BY THE VALUER AT USD15.6 MILLION, THAT THE BOOK VALUE WAS ALSO LOWER COMPARE D TO THE ACTUAL EXPENDITURE INCURRED OF USD1,58,79,306 ON TH E REGISTRATION OF THOSE PRODUCTS, THAT THE TPO HAD ME RELY REJECTED THE VALUATION DONE BY THE VALUER ON THE SURMISE WIT HOUT CONSIDERING THE EVIDENCES ON RECORD, THAT THE ADJU STMENT MADE BY THE TPO BY REJECTING THE REVALUATION OF THE REGI STRATION RIGHT WAS NOT PROPER. FINALLY,HE HELD THAT THE CONSIDERAT ION FOR REGISTRATION RIGHTS, AS ADOPTED BY THE ASSESSEE AS PER THE BOOK VALUE OF RS.67.99 CRORES IN THE BOOKS OF THE AE, HA D TO BE ACCEPTED. 18.2. BEFORE US, THE DR RELIED UPON THE ORDER OF THE TPO. THE AR MADE THE SAME SUBMISSIONS THAT WERE MADE BEFORE THE FAA AND SUPPORTED HIS ORDER. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE WHOLLY OWNED SUBSIDY OF THE ASSESSEE HELD REGISTRATION RIGHTS IN TWO PRODUCTS, THAT IT H AD PAID REGISTRATION CHARGES FOR SELLING THOSE PRODUCTS IN THE US MARKETS, THAT IT HAD ALSO PAID OTHER FEES AS REQUIR ED BY THE US LAWS, THAT IT HAD INCURRED TOTAL EXPENDITURE OF USD 1,58,79,306 UNDER THE HEAD REGISTRATION CHARGES, THAT THE AE GO T THE ASSETS REVALUED AS ON 01.01.2204,THAT REGISTRATION RIGHTS WERE REVALUED FROM RS. 44.29 CRORES TO RS. 67.99 CRORES BY THE INDEPENDENT VALUER, THAT ON 30.09.2004 THE AE WAS D ISSOLVED, THAT THE ASSESSEE TOOK OVER THE ASSETS AND LIABILIT IES OF THE AE AT THE REVALUED PRICE, THAT THE PAYMENT FOR REGISTRATI ON RIGHTS AND ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 9 OTHER FEES WERE PAID MUCH BEFORE THE REVALUATION, T HAT IT ADOPTED LESSER VALUE OF THE RIGHTS AS COMPARED TO T HE VALUE DETERMINED BY THE VALUER, THAT FURTHER CLARIFICATIO N WERE CALLED FROM THE VALUER, THAT IN THE REMAND REPORT THE TPO AGREED THAT PAYMENT WAS MADE BY THE AE FOR THE RIGHTS IN EARLIE R YEARS, THAT THERE WAS NO DISCREPANCY IN THE METHOD OF VALUATION , THAT THE TPO POINTED OUT ELEMENT OF NON TRANSFERABILITY IN T HE VALUATION REPORT FOR SUPPORTING THE ADJUSTMENT, THAT THE FAA HAS GIVEN A CATEGORICAL FINDING OF FACT THAT THE TPO WAS FACTUA LLY INCORRECT IN ARRIVING AT THE CONCLUSION OF NON TRANSFERABILIT Y, THAT THE AE HAD RIGHT TO TRANSFER THE RIGHTS TO OTHERS ALSO. CO NSIDERING THE ABOVE FACTS, WE ARE OF THE OPINION, THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY . THEREFORE, CONFIRMING HIS ORDER, WE DECIDE GROUND NO.8 AGAINST THE ASSESSING OFFICER. 2.2. IN THE PRESENT APPEAL, THE LD. ASSESSING OFFI CER, ON THE BASIS OF ASSESSMENT ORDER FOR ASSESSMENT YEAR 2 005-06, AFTER CONSIDERING THE ORDER OF TPO DATED 23/10/2008 , THE WDV AS ON 31/03/2005 WAS DETERMINED AT RS.33,69,61,748/- IN RESPECT OF INTANGIBLE ASSET (R EGISTRATION RIGHTS). THE LD. ADDL. COMMISSIONER DISALLOWED DEPR ECIATION OF RS.1,36,82,036/- HOLDING THAT EXCESS CLAIM OF DE PRECIATION ON INTANGIBLE ASSET HAS BEEN CLAIMED. ON APPEAL, BE FORE THE LD. COMMISSIONER OF INCOME TAX (APPEAL), THE RELEVA NT ITA NO.6007/MUM/2013 M/S GHARDA CHEMICALS LTD. 10 DISCUSSION WAS MADE IN PARA-7 AND 7.1 FOLLOWING THE ORDER OF ASSESSMENT YEAR 2005-06, THE ADDITION WAS DELETED. THE APPEAL OF THE REVENUE WAS DISMISSED BY THE TRIBUNAL . THUS, FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, WE F IND NO MERIT IN THE APPEAL OF THE REVENUE, CONSEQUENTLY, DISMISS ED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN TH E PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 12/05/2016. SD/- SD/- ( RA MIT KOCHAR ) (JOGINDER SINGH) ! ' / ACCOUNTANT MEMBER # ' /JUDICIAL MEMBER ' # MUMBAI; ' DATED : 12/05/2016 F{X~{T? P.S/. . . $#%&'(')% / COPY OF THE ORDER FORWARDED TO : 1. )*+, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. / / ' 0! ( )* ) / THE CIT, MUMBAI. 4. / / ' 0! / CIT(A)- , MUMBAI 5. 23 -! , / )*% )4 , ' # / DR, ITAT, MUMBAI 6. 5 6# / GUARD FILE. / BY ORDER, .2*! -! //TRUE COPY// / (DY./ASSTT. REGISTRAR) , ' # / ITAT, MUMBAI