9911796707
TMI Blog2015 (1) TMI 837X X X X Extracts X X X X X X X X Extracts X X X X ..... x Laboratories NV, Belgium, (Associated Enterprise) by adopting interest rate of 7.2476% as against interest rate of 3.3336% per European money markets adopted." 4. Briefly the facts relating to the aforesaid ground are, assessee a company is engaged in the business of manufacturing and sale of pharmaceutical drugs. For the AY under consideration, assessee filed its return of income on 29/11/2006 declaring loss of Rs. 24,36,51,137 under normal provisions and book profit of Rs. 124,70,16,779 u/s 115JB of the Act. However, during the assessment proceeding, assessee filed a revised computation by declaring loss at Rs. 23,86,10,109 under normal provisions and book profit of Rs. 141,72,00,425 u/s 115JB. In course of the assessment proceeding, AO noticed that assessee has entered into certain international transactions with its AE by advancing a loan of Euro 1,46,10,390 for four months during the year to its 100% subsidiary Matrix Laboratories NV in Belgium against which assessee has charged interest at EURIBOR + 75 basis points which worked out to 3.3336% per annum. To find out whether the interest charged by assessee on the loan advanced is at arm's length, AO made a reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls on record. We are of the view that as the assessee has advanced the loan in foreign currency PLR rate of interest will not be applicable. Moreover, since the AE is situated at Belgium EURIBOR rates would be more appropriate. Considering similar nature of loan transaction, the ITAT, Mumbai Bench in case of Tata Autocomp Systems Ltd. Vs. ACIT (supra), held as under: "19. In the present case the AE is a German company. Eurobior rates are based on the average interest rates at which a panel of more than 50 European banks borrow funds from one another. There are different maturities, ranging from one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of preshipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to ruling LIBOR, EURO LI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005. ASPENSA also made 50% investment in shares of one of the WOS of the assessee viz., Astrix Laboratories Ltd., (Astrix India) by entering into another share holder agreement on 22nd September, 2005. In terms with the aforesaid shareholders agreement, the assessee transferred certain assets to and in favour of an Indian company as the joint venture company known as "Astrix Laboratories Ltd.,". The details of assets transferred under different agreements are as under : Agreement Assets Transferred Agreement for transfer of facility dated 20 December 2005 Assets of manufacturing facility of unit II and other assets. Agreement for Transfer of know-how dated 20 December, 2005 Transfer of know-how developed by Matrix India Agreement for Development and transfer of know-how Development and transfer of know-how to be developed by Matrix India Agreement for transfer of product DMFs dated 20 December 2005 Transfer of Future DMFs to be developed and registered in respect of the products by Matrix India Agreement for transfer of patent application rights dated 20 December Licensing of Patent application rights and patents granted, if any Sale Deed dated 2 January, 2006 Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f acquisition for the capital asset and accordingly, in absence of cost of acquisition capital gain cannot be computed. In course of the assessment proceedings, the Assessing Officer noticing that the assessee has received a consideration of Rs. 97.89 crores towards sale of technical knowhow relating to four ARVs to Astrix and has not offered any income, called upon the assessee to justify its claim. In response to the query made by the A.O. it was submitted by the assessee as under : Matrix Laboratories Ltd is a company engaged in the business of manufacture and sale of Active Pharmaceutical Ingredients and Intermediaries since 1984. Astrix Laboratories Limited is subsidiary joint venture company of Matrix formed during the Financial Year 2005-06, During the said financial year, Matrix entered into an agreement dated lOm 2005 with Astrix for transfer of technical know-how relating to four of its ARV products i.e. Lamivudine, Zidovudine, Stavudine and Nevirapine- for a total consideration of Rs. 97,89.67.500. Know-how is defined in the agreement to mean evelything known by Matrix necessary for the manufacture, marketing selling and distribution of products excluding Matrix IPR"S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein, are treated as capital assets under the Act for the purpose of capita! gains. " Further, for the purposes of allowing depreciation, Section 32(1)(ii) of the Ad considers Know-how to be an Intangible asset. Explanation to the Sub-Section 1 of Section 32 defines Know-How to mean any industrial information or technique Uk.ely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto. Therefore, in view of the above decisions, it is submitted that Know-how transferred by Matrix is a capital asset and any income arising from transfer of the same would be charged under tile head 'Capital gains' In terms of Section 48 of the Act, "The income chargeable under the head "Capital gains" shall be computed. by deducting from the tuu value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:-- ' i) expenditure incurred wholly and exclusively in connection with such transfer; ii) the cost of acquisition of the asset and the cost of any improvemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f capital gains is not ascertainable or cannot be computed under Section 48 of the Act, the provisions of Section 45 of the Act cannot be invoked. Reliance is placed on the decision Of the Supreme Court in the case of CIT Vs. B.C. Srinivasa Shetty (128 ITR 294), Wherein the Hon'ble Court while deciding the question of whether transfer of self generated goodwill gives rise to capital gains has observed that: * Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. Na existing principle or provision et variance with them can be applied for determining tile chargeable profits and gains. All transactions encompassed by s. 45 must fall under the governance of its computation provisions. . A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the I. T. Act where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains" suggests that they include an asset in the ocquisitfcJI1 of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before. it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value Of the asset and not ally profit or gain . The Gujarat High Court in the case of ClT V. Manoharsinhji P. Jadeja (281 ITR 19 applied the principles laid down by the Supreme Court in the case Of B. C. Srinivasa Shetty( Supra) and held ('hat "though section 45 of the Income-tax Act, 1961, is a charging section the Legislature has enacted detailed provisions in order to compute the profits or gains under that head and no provision at variance with such computation provisions can be applied for determining the chargeable profits and gains. The asset referred to in section 45 of the Act has to be one: (i) in the acquisition of which it is possible to envisage a cost (ii) in the acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration received to be chargeable under the head "Capital Gain" there should be a transfer in terms with section 2(47) of the Act. The A.O. after analyzing different clauses of section 2(47) noted that the definition of "Transfer" clearly contemplates the extinguishment of a right in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. Keeping the aforesaid legal position in view, the A.O. after examining terms of the shareholders agreement as well as share issue agreement, opined that knowhow can be exploited by its owner by using it himself in the process of his own trade/manufacture or by using it himself in making further development/improvement including modifications i.e., research and development or by communicating it to others (supply of knowhow) by way of outright sale or imparting it to some other party while retaining the right to use it in his own business or to share it with other. The A.O. referring to the press release dated 8th April, 2005 as available in the website of the assessee noted that as per the said press release and subsequent agreements, assessee will transfer one of its API manufacturing facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udine, Nevirapine, Zidovudine and Stavudine) are held only in the name of Matrix Laboratories ltd as on the date of his order. iv) Even the DMFs relating to the new ARVs (Didanosine, Ritonavir and Lopinavir) for which the know-how has been developed by Matrix for Astrix, is held in the name of Matrix v) Matrix also has the right to manufacture and sell the ARVs subsequent to the 'transfer/sale' (as claimed/termed by Matrix or in the agreements) using the know-how and DMF's. 14. From the aforesaid facts, the A.O. concluded that assessee has not divested itself completely of any further interest in the knowhow and DMF and as such the transfer/sale of knowhow cannot be a case of disposition of the capital asset. He observed the right over the property in the knowhow still remain with the assessee. Further the A.O. observed that the transfer/sale of knowhow is distinguishable from the transfer/sale of tangible asset like land, building, plant and machinery, furniture and fixtures etc., wherein the assessee completely divested itself of any further interest in those assets and as such, property in those assets were transferred from assessee to Astrix. The A.O. therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it uses the technical knowhow except in terms of clause-12 of shareholders Agreement, it is required to make good to Astrix the profit actually made, the A.O. observed that such argument is not plausible in the absence of any explicit and unambiguous terms and conditions to that effect in the agreement. The A.O. observed that the entire argument of the assessee is based on the presumption that knowhow can be used only to manufacture the product and assessee cannot manufacture the product unless Astrix places an order for contract manufacturing in terms of clause-12 of the shareholders agreement. However, it was observed by the A.O. that knowhow is a body of information concerning industrial, commercial and scientific importance which remains unrevealed to the general public. He observed that assessee may not be able to use the knowhow to manufacture the products/ARV and to make profit given the conditions of the agreement. Even the Matrix may not be having the necessity to produce the products/ARV in question and make profit thereon as it has been compensated suitably for the profit that it might have made in future by using the knowhow in terms of the lumpsum consideration paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing, marketing, selling and distribution of ARVs. Accordingly, he treated the amount of Rs. 97,89,67,500 as business income of the assessee for the year under consideration. The assessee challenged the decision of the A.O. by raising objections before the DRP. 16. In course of hearing before DRP, assessee apart from reiterating the submissions made before the A.O. furnished some more documents by way of additional evidence which are as under : i. Supplementary agreement between Matrix Laboratories Ltd. and Astrix Laboratories Ltd. dated 01/01/2010. ii. Auditor's certificate dated 02/02/2010 iii. R&D head's certificate dated 28/01/2010. 17. Referring to these documents, it was submitted by the assessee that it has not transferred through sale or outright licensing any technical knowhow in relation from products namely Lamivudine, Nevirapine, Ziduvudine and Stavudine to any other company, firm, person or parties during the period from April 1, 2005 to 30th September, 2009 except the transfer effected to Astrix. It was submitted by the assessee that the agreements read as a whole would clearly establish the intention of the parties that there is absolute transfer of rights o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to raw material procurement, packaging, production information, formulations, processes, specifications, techniques and methods of quality control) used at 1st January, 2006 to manufacture and/or package the products. As per the knowhow agreement, assessee had made an absolute sale of knowhow to Astrix and Astrix has purchased the same. * The sale of knowhow by the assessee to Astrix is unconditional and except for the fulfillment of any conditions contained in the agreement. * Clause 10.2 of shareholders agreement and 5.4 of share issue agreement have been provided to retain a minimal right to Matrix only with respect to one of the four ARVs viz., Stavudine Form-1 in view of the peculiar situation that the product at the time of knowhow sale has crossed a pure knowhow stage and an application for grant of the patent was pending before patent authorities. Once the application is presented, the defence with regard to the process lies with the applicant i.e., Matrix only. Therefore, to protect the application to go through the final approval stage, the knowhow in respect of process for the preparation of Stavudine Form-1 was retained. However, this could not invalidate and term th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the product DMFs and in such an event, Matrix shall take necessary steps to effect the same without any further sale consideration. Thus, in terms with the agreement dated 20.12.2005 Astrix is the beneficial owner of the DMFs and Matrix is the joint owner for mere convenience. Matrix being a joint owner, the rights of Astrix as the beneficial owner of DMF are not effected in any way. * The Assessing Officer selectively relied on certain clauses of the agreement to come to his conclusion while ignoring the other clauses of the agreement as well as copies of sale invoices raised by Matrix. * The Assessing Officer as well as DRP ignored the certificate obtained from the Chartered Accountant certifying that assessee has neither sold the technical knowhow nor granted outright licensing in respect of these four products to any third party in the last five years. Further the supplementary agreement entered into between Matrix and Astrix clarifying that Astrix was the exclusive owner of the knowhow was also ignored. * DRP grossly misunderstood the shareholders agreement while concluding that assessee has granted to Astrix a royalty free licence to unrestricted use and enjoyment of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain cannot be computed in terms with section 48. In this context, ld. AR relied on a decision of the Hon'ble Supreme Court in case of CIT Vs. B.C. Srinivas Shetty, 128 ITR 294. * The cost of acquisition of the technical know-how cannot also be considered to be the value at which the previous owner acquired it as assessee's case does not fall within section 49(1)(4). Similarly technical know-how being a distinct and separate asset independent of the assets provided u/s 55, the cost of acquisition also cannot be taken as nil. * Ld. AR in support of his contentions, relied on the following decisions: 1. CIT Vs. Mrs. Grace Collis (248 ITR 323) (SC) 2. CIT Vs. Ralliwolf Ltd., (143 ITR 720) (Bom.) 19. Ld. DR, on the other hand, strongly supporting the observations made by the DRP and AO, submitted that as assessee did not part its ownership rights in technical know-how in relation to the four ARVs, there cannot be a transfer as per section 2(47) of the IT Act. Ld. DR referring to the clauses relied upon by AO submitted that these clauses make it clear that assessee retains its right over the technical know-how and has merely given a licence to Astrix for a consideration to manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able property." 21. On a plain reading of the aforesaid provision it will be clear that the nature of transaction at hand can only fit in either under clause (i) or clause (ii). From reading of the different agreements entered into between the parties, it is to be seen that though assessee claims that there is outright sale of the technical know-how by assessee to Astrix but in reality it appears not to be so. Clause 5.4 of the share issue agreement reads as under: "For the avoidance of doubt, it is recorded that Matrix shall at all times be entitled to use the know-how and the intellectual property and to manufacture the products." 22. On reading of the aforesaid clause, it is absolutely clear that assessee retains its right to use the know-how and the intellectual property over the four ARVs and manufacture the products. Further, clause 6.1 of agreement for transfer of know-how dt. 20/12/2005 makes it clear that any improvements made to the know-how subsequent to the effective date would be owned by the party that carries out such improvement. The AO has also very succinctly brought out the material difference between agreement for transfer of know-how and agreement for develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all others including Matrix. Similarly, there is no restriction imposed in the agreements on assessee either with regard to sharing of technical know-how with third parties or for use by assessee itself in relation to the four ARVs. There is nothing in the agreement to suggest that there is absolute sale of technical know-how by assessee to Astrix by virtue of which Astrix became owner of technical know-how thereby divesting assessee from all rights over the technical know-how. Though as per clause 12 of the shareholders agreement assessee is required to contract manufacture the four ARVs on behalf of Astrix but that does not mean that the right to use the technical know-how and intellectual property by assessee is only restricted to such contract manufacture activity alone. Even clause 6.1 of the agreement for transfer of knowhow which provides for ownership of any improvement made to the know-how subsequent to the effective date by the party who carries out such improvement would make it clear that Astrix does not possess exclusive ownership over the technical know-how relating to the four ARVs as claimed by assessee. Rather the agreements read as a whole would clearly suggest t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer." 26. The ratio laid down in the aforesaid decision cannot be applied to assessee's case as there is no extinguishment of rights over the technical know-how. As reiterated earlier, assessee in terms with clause 5.4 of share issue agreement retains its right to use the technical know-how and manufacture the products. 27. CIT Vs. Rallywolf Ltd(supra) - this decision will also in noway help the case of assessee as in the present case there is no absolute transfer of technical know-how to Astrix. 28. The other decisions also are factually distinguishable as there is nothing in those decisions to indicate that there is any clause akin to clause 5.4 of shareissue agreement allowing the owner to retain its rights to use technical know-how and manufacture the products. 29. It will be pertinent to mention here that ld. AR to strengthen his argument placed reliance upon a certificate issued by the Chartered Accountant and a supplementary agreement entered into between assessee and Astrix on 1st January, 2010. On a perusal of the auditor's certificate dated 2nd Feb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This ground is dismissed. 30. Ground No. 3 reads as under: "The Dispute Resolution Panel erred in confirming the order of the AO in disallowing the superannuation contribution of Rs. 32,40,000 paid to LIC in respect of the working directors of the company." 31. Briefly the facts relating to this issue are, during the assessment proceeding, AO noticed that assessee has claimed deduction for an amount of Rs. 32,40,000 on account of contribution made to superannuation fund of specified directors. In the note submitted to the return of income, assessee stated that the contribution made was subjected to TDS by including the same as part of salary of the specified directors. It was submitted, the expenditure incurred being wholly and exclusively for the purpose of business, it is to be allowed u/s 37 of the Act. In support of such contention, assessee relied on the following decisions: 1. CIT Vs. Western India Paper and Board Mills Pvt. Ltd., 189 ITR 309 (Bom.) 2. CIT Vs. Punjab Financial Corporation Ltd., 295 ITR 510 (P&H) 32. AO however did not accept the contention of assessee. He was of the view that contribution to superannuation fund can only be claimed as deduction as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not disputed that assessee has deducted tax at the time of making contribution to the superannuation fund and has treated it as part of salary of the concerned directors. That being the case, the expenditure incurred should be allowed as a deduction. In this regard, we rely on CIT Vs. Punjab Financial Corporation Ltd.(supra). Accordingly, we delete the addition made by the AO. 36. The common issue in ground Nos. 4 & 5 relates to reduction from taxable income the amounts of interest granted u/s 244A and subsequently withdrawn. 37. Briefly the facts relating to the aforesaid issue are, during the assessment proceeding, AO noticed that assessee has reduced from the taxable income an amount of Rs. 76,15,608 being the interest granted u/s 244A for AY 2005-06, which was subsequently withdrawn in pursuance to assessment order passed u/s 143(3). Similarly, assessee also had reduced an amount of Rs. 75,59,580 being interest granted u/s 244A and subsequently withdrawn by AO by order passed u/s 143(3) for the AY 2004-05. When the AO called upon assessee to justify its claim, it was submitted by assessee that it received an amount of Rs. 76,15,608 as interest u/s 244A of the Act on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act were passed for these assessment years resulting in demand, the interest granted under section 244A was withdrawn and the assessee was asked to pay back the interest amount to the department, which the assessee has also complied. Therefore, when the assessee has shown the income which was subsequently withdrawn by the department effectively no income on account of interest granted under section 244A accrues to the assessee. Therefore, the income already shown by the assessee by taking into account the interest granted earlier under section 244A requires to be reduced from the taxable profit for assessment year 2006-07. In fact, this is the precise direction of the DRP to the assessing officer. However, the A.O. has exceeded his brief by not complying to the directions of the DRP by observing that assessee's appeal for the relevant A.Y. are still pending. The action of the A.O. cannot be appreciated. We, therefore, direct the A.O. to allow assessee's claim after verifying the fact as to whether the assessee has shown the interest income which was subsequently withdrawn by the department. 40. Ground No.6 reads as under : "The Dispute Resolution Panel erred in upholding the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee for apportionment of common corporate overhead expense to all the units of the company including 100% Export Oriented undertakings eligible for deduction u/s 10B of the Act and in the process reducing the benefit u/s 10B by Rs. 1,83,63,751." 46. Briefly the facts are during the assessment proceeding, the A.O. noticed that the assessee has claimed expenditure on corporate overheads at Rs. 27,12,64,135/- which has been apportioned to the EOU units in the following manner : Unit 3.2 Jeedimetla Unit - 7 Pashamylaram Manufacturing expenses 9,72,252 27,00,494 Personal Costs 1,18,60,886 1,80,46,011 Administrativbe & Selling 1,02,10,493 2,32,97,781 Total 2,30,43,631 4,40,44,286 47. It was further explained by the assessee that manufacturing expenses were distributed over operating divisions on the basis of gross material cost. Personal cost is distributed over operating divisions on the basis of staff strength in operating division, whereas, administrative cost is distributed over operating division on the basis of sales effected. The A.O. however, was not convinced with the explanation of the assessee. According to the A.O. the correct p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the opinion that allocation of expenditure as was done by the Mylan Laboratories Ltd. (Formerly Matrix Laboratories Ltd.) 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. Assessing Officer is directed to accept the assessee's allocation of corporate overheads. Accordingly, ground No. 14 is allowed." Respectfully following the principles decided in the aforesaid decision of the Coordinate Bench we hold that the allocation of expenditure by the assessee between the EOU units is required to be upheld. Accordingly, we allow the ground raised by the assessee. 50. Ground No. 9 reads as under : "The Dispute Resolution Panel erred in confirming the view of the AO that at the time of considering allowance of weighted deduction u/s 35(2AB), the R&D expenditure relating to the units claiming deduction u/s 10B will have to be revoked by giving credence to the weighted deduction allowed on R&D expenditure." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 35(2AB). As in the present case, the assessee has claimed deduction under section 10B, no deduction under section 35(2AB) can be allowed to the assessee. Accordingly, ground No.9 is dismissed. 53. Ground No.10 reads as under: "The Dispute Resolution Panel erred in confirming the order of the AO by refusing to follow the analogy laid down by the Hon. Supreme Court as regards deduction for Export profits under clause (iv) of Explanation to section 115JB in the case of Ajanta Pharma Ltd. Vs. CIT (rendered on 09/09/2010) and restricting the deduction under clause (ii) of Explanation to section 115JB to the amount arrived at under normal computation instead of basing it on book profits and in the process increasing the book profits by Rs. 26,65,07,410." 54. While computing the book profit under section 115JB,the A.O. restricted the deduction under section 10B to the amount arrived at under normal computation on the reasoning that for the purpose of arriving at book profit the deduction as worked out under normal computation should only be considered and not the amount computed with reference to book profit, as a result of which, the book profit was increased to Rs. ..... 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