2014 (12) TMI 1172 - AT - Income Tax

Reduction of operating profits of the tax-payer being the income from settlement of patent infringement suit credited to Profit Loss Account - Held that - As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2008-09, we respectfully follow the decision of the Tribunal for assessment year 2008-09 and uphold the impugned order of the Assessing Officer, whereby he reduced the operating profit of the assessee being the income from the settlement of patent infringement suit to held incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while doing exercise of FAR analysis for comparability purpose. For the reasons stated above, we agree with the Assessing Officer/DRP that this income from settlement of patent infringement cannot be considered as operational income while working out the segmental profits or as total profits of the assessee for the purpose of comparison. At best, it can be considered as another segment of income for which no expenditure was charged, but the same cannot be included in either of the segmental operations of the assessee. - Decided against assessee Claim for weighted deduction under S.35(2AB) in respect of expenditure incurred for registering patents outside India - Held that - When the learned counsel for the assessee was required by the Bench to clarify as to how the claim of the assessee is covered by the above Explanation, he has contended that the expenditure in question is incurred by the assessee for filing application for patent rights under patents Act, 1970. He has also submitted that the assessee is in a position to support and substantiate its claim by filing relevant documentary evidence and has urged that an opportunity may be given to the assessee for this purpose by sending the matter to the Assessing Officer. Since the learned Departmental Representative has not raised any objection in this regard, we restore this issue to the file of the Assessing Officer with a direction to examine the assessee s claim for weighted deduction under S.35(2AB) in respect of expenditure incurred for registering patents outside India - Decided in favour of assessee for statistical purposes Claim of the assessee for deduction under S.35(1)(i) and (iv) at 100% of expenditure in respect of amount not considered by the prescribed authority under S.35(2AB) for weighted deduction is squarely covered in favour of the assessee by the order of the Tribunal in assessee s own case for assessment year 2008-09 wherein held that we do not see any reason in not allowing this amount. We are of the opinion that both Assessing Officer and DRP has not applied their mind to the amounts involved. Since the entire claim of the assessee was rejected summarily without examining the facts, we are of the opinion that this expenditure in respect of R D expenditure is to be considered under section 35(1), if not for the weighted deduction under section 35(2AB). - Decided in favour of assessee Deduction under S.10B in respect of export oriented undertaking situated at Jeedimetla - Held that - A perusal of the relevant portion of the DRP s order reproduced above shows that a direction has been given by the DRP to the Assessing Officer to follow the judgment of the Hon ble Andhra Pradesh High Court in assessee s own case for assessment year 2005-06 as and when it is received on the issue of assessee s claim for deduction under S.10B. It is observed that a similar direction was given by the DRP in assessee s own case for assessment year 2008-09 and the same was upheld by the Tribunal vide its order dated 16.1.2014 cited supra, thereby allowing the relevant ground of the assessee s appeal on this issue for statistical purposes. Respectfully following the decision of the Tribunal on similar issue in assessee s own case for assessment year 2008-09 - Decided in favour of assessee for statistical purposes. Quantification of the deduction under S.10B, by reducing the benefit under S.10B for Unit 3.2 situated at Jeedimetla, is squarely covered in favour of the assessee by the order of the Tribunal dated 16.1.2014 in assessee s own case for assessment year 2008-09 cited supra, wherein a similar issue was considered and decided that assessee has allocated the corporate overheads on a rational basis based on the material cost of purchase and number of people worked for the unit and also on the basis of head account which is reasonable. Adopting sales turnover as the basis may result in skewed allocation. since Assessing Officer has not given any rationale in adopting the turnover as the basis, ignoring the assessee's method, we are of the opinion that allocation of expenditure as was done by the assessee is more rationale and is in tune with the principles laid down by the Institute of Cost Accountants and also for the purpose of Company Law. Therefore, considering the detailed objections raised by the assessee as placed in the objections to the DRP, we are of the opinion that the allocation by the assessee is to be upheld. - Decided in favour of assessee Depreciation @ 25% on brought forward written down value of non-compete fee paid to amalgamating company - Held that - As in assessee s own case for assessment year 2008-09 wherein a similar issue contained corresponding Ground no.15(a) in the appeal for that year, was considered and decided in favour of the Revenue held that the cases against the assessee are more in number and there is a consistent view of the ITAT in not allowing the depreciation on non-compete fee. The non-compete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, know-how, patents, copyrights, trade marks, licences, franchises, etc. Therefore, in view of decision of the hon'ble Delhi High Court in the case of HindustanCoca Cola Beverages P. Ltd. 2011 (1) TMI 138 - Delhi High Court non-compete agreement would not create an asset of intangible nature eligible for depreciation under section 32(1)(ii) of the Act. - Decided against assessee claim of depreciation on brought forward written down value in respect of non-compete fee paid to M/s. Medispan Ltd by Medicorp Technolgoies Ltd. in previous year relevant to assessment year 2002-2003 - Held that - As in assessee s own case for assessment year 2008-09 Even though the assessee's claim was crystallized by the Orders of the ITAT wherein the payment of fee was considered eligible for depreciation, the Assessing Officer did not grant the depreciation on the reason that reference application is pending before the Hon'ble High Court and the issue has not been finalized. This cannot be a reason for denying the depreciation claimed. Since, ITAT has already ordered the depreciation to be allowed in assessment year 2002-2003, consequently, depreciation has to be allowed by the Assessing Officer in this year. He is empowered to take rectification proceedings in case that order was not upheld by the Hon'ble High Court. In view of this, to that extent of claim of depreciation on brought forward written down value, Assessing Officer is directed to allow the depreciation after verifying the WDV figures. - Decided in favour of assessee

Summary

Issues Involved:

1. Deletion of addition on account of ESOP expenditure.
2. Reduction of operating profits by income from settlement of patent infringement suit.
3. Claim for weighted deduction under S.35(2AB) for registering patents outside India.
4. Deduction under S.35(1)(i) & (iv) for expenditure not considered under S.35(2AB).
5. Deduction under S.10B for Export Oriented Undertaking at Jeedimetla.
6. Apportionment of common corporate overhead expense affecting deduction under S.10B.
7. Depreciation on non-compete fees.

Detailed Analysis:

1. Deletion of Addition on Account of ESOP Expenditure:
The Revenue's appeal focused on the deletion of the addition of Rs. 35,61,793 related to ESOP expenditure. Both parties agreed that the issue was previously considered by the Tribunal in the assessee's own case for AY 2008-09, where it was directed to be examined afresh in light of the Special Bench decision in Biocon Ltd. The DRP's direction to allow the ESOP expenditure was found justified, and the Revenue's appeal was dismissed.

2. Reduction of Operating Profits by Income from Settlement of Patent Infringement Suit:
The assessee's appeal contested the reduction of operating profits by Rs. 13.45 crores, being income from a patent infringement settlement. The Tribunal had previously ruled against the assessee on this issue for AY 2008-09. The income from the settlement was deemed not part of operating revenues but as 'other income,' and thus not included in operating profits for transfer pricing purposes. This ground was dismissed.

3. Claim for Weighted Deduction under S.35(2AB) for Registering Patents Outside India:
The assessee claimed weighted deduction for Rs. 1,06,10,707 spent on registering patents outside India. The DRP certified Rs. 73.67 lakhs as eligible. The Tribunal directed the Assessing Officer to re-examine the claim for Rs. 73.67 lakhs, allowing the ground partly for statistical purposes.

4. Deduction under S.35(1)(i) & (iv) for Expenditure Not Considered under S.35(2AB):
The assessee sought 100% deduction for Rs. 2,53,36,687 not considered for weighted deduction under S.35(2AB). The Tribunal had previously ruled in favor of the assessee for AY 2008-09. The Assessing Officer was directed to allow the deduction after examining the relevant expenditure, allowing this ground for statistical purposes.

5. Deduction under S.10B for Export Oriented Undertaking at Jeedimetla:
The assessee's claim for deduction under S.10B for the Jeedimetla unit was pending before the Andhra Pradesh High Court. The DRP had directed the Assessing Officer to follow the High Court's judgment once received. The Tribunal upheld this direction, allowing the ground for statistical purposes.

6. Apportionment of Common Corporate Overhead Expense Affecting Deduction under S.10B:
The dispute involved the allocation of Rs. 85,67,995 in corporate overhead expenses, reducing the benefit under S.10B. The Tribunal had previously ruled in favor of the assessee's allocation method for AY 2008-09. The Tribunal upheld the assessee's method and directed the Assessing Officer to accept it, allowing this ground.

7. Depreciation on Non-Compete Fees:
- Depreciation on Non-Compete Fee Paid to Medispan Ltd.: The Tribunal had previously disallowed depreciation on non-compete fees for AY 2008-09, ruling it was not an intangible asset under S.32(1). This part of the ground was rejected.
- Depreciation on Non-Compete Fee Paid to Sudhir Vaid: The Tribunal had previously allowed depreciation for AY 2008-09. The Tribunal directed the Assessing Officer to allow the depreciation claim of Rs. 6,56,250, allowing this part of the ground.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided detailed directions for re-examination and upheld previous decisions where applicable.