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TMI Blog2014 (12) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kewed 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g total income of ₹ 110,67,16,290, after claiming deduction under S.10B. In the draft assessment order passed on 26.3.2013, the Assessing Officer disallowing the claim of the assessee for deduction under S.10B and also proposing certain other additions/disallowances, worked out the total income of the assessee, as under- Profit of the business before exemption u/s. 10B : Rs.148,94,82,301 Add: Disallowance of claim on account of ESOP Scheme : ₹ 35,61,793 Add: Disallowance of depreciation on non-compete fee : ₹ 13,23,670 Add; Adjustment u/s. 92CA : ₹ 12,38,95,227 Add: Disallowance of excess claim of weighted deduction : ₹ 2,71,59,649 Add: Interest on Income tax refund : ₹ 76,94,193 ₹ 16,36,34,532 Taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer with a direction to examine the same afresh in the light of the decision of the Hon'ble Special Bench of ITAT in the case of Biocon Limited V/s. DCIT (35.taxmann.com.355). As noted by the Assessing Officer in his impugned order, a similar direction was given by the DRP to the Assessing Officer to examine the claim of the assessee following the principles laid down by the Special Bench in the case of Biocon Ltd. (supra), and accordingly the claim of the assessee for ESOP expenditure of ₹ 35,61,793 was found to be allowable by the Assessing Officer, as per the principles laid down by the Special Bench in the case of Biocon Ltd. (supra). This being the position, we hold that the direction of DRP on account of ESOP expenditure is fully justified and there is no justifiable reason to interfere with the same. We therefore, find no merit in the appeal of the Revenue and dismiss the same accordingly. 7. In its appeal, the assessee has raised the following grounds- (1) The Order of the Assessing Officer u/s. 143(30 r.w.s. 144C r.w.s. 92CA dt.30.01.2014 of the Income Tax Act,1961 is contrary to facts and law. (2) The Dispute Resolution Panel erred in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentatives of both the sides have agreed that the issue involved therein relating to reduction of operating profits of the tax payer by ₹ 13.45 crores, being the income from settlement of Patent Infringement Suit, is squarely covered against the assessee and in favour of the Revenue by the decision of the Tribunal dated 10.1.2014 in assessee s own case for the assessment year 2008-09 (supra), wherein a similar issue was decided against the assessee vide para Nos.15 and 16 thereof, which read as under- 15. We have considered the issue and examined the facts on record and the case law relied upon by the assessee. As per the note given as part of report of Transfer Pricing Report for assessment year 2007- 2008, it can be observed that receipts are in the nature of one time settlement in consideration for costs and liabilities incurred by Matrix as a consequence of ceasing its programme to develop and manufacture 'Perindopril' made using the process. The entire amount of ₹ 97.87 crores was offered as income in assessment year 2005-2006 based on receipt basis. As can be seen the amount of ₹ 26.91 crores credited to the P L account this year is only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its, only those incomes pertains to that segment and cost pertain to that segment are allocated so as to arrive at the operational profits for comparison purposes. This exercise has nothing to do with the principles laid down under section 37(1) or the principles on patent infringement compensation. The simple issue to be examined is, whether the income accounted by the assessee will become operational income for the purpose of arriving at the operational profit. The Assessing Officer has excluded the same stating that the same is nothing but notional revenue. We agree with the finding of the Assessing Officer as held by the DRP that the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two different segments in which assessee is operating and accordingly we agree with the DRP's stand that this income falls under the category of 'other income' and not operating revenue. Not only that the income does not pertain to the relevant financial year nor the costs are incurred in the year under consideration. If without the cost, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 only to the extent of ₹ 73.67 lakhs afresh, after giving assessee proper and sufficient opportunity to establish its case in accordance with Explanation to S.37(2AB). Ground No.3 is accordingly partly allowed for statistical purposes. 13. As regards Ground No.4, the learned representatives of both the sides have agreed that the issue involved therein re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the same was considered and decided by the DRP vide paragraph No.5.10 of its order as under- 5.10 Objection No.16: The AO erred in denying deduction of ₹ 29,98,80,451/- claimed u/s lOB of the Act in respect of Export Oriented Undertaking situated at Jeedimetla. 5.10.1 The assessee company is engaged in manufacture and sale of Active Pharmaceutical Ingredients (API) (also known as bulk drugs) and about to commence the business of formulations. The company has several units situatedat Kazipally, Jeedimetla, Pashamylaram, Vizianagaram and Nasik. Some of the units are approved as 100% export oriented undertakings. Unit situated at Jeedimetla (Unit 3.2) is said to be eligible for claiming deduction under sec.lOB of the Income tax Act, 1961. 5.10.2 In terms of sec. lOB of the Act, the assessee has obtained the necessary certificate in Form No. 56G and also furnished complete details of its export turnovers with copies of bank ad vices as proof for receipt of remittance. A detailed statement was attached computing the eligible income as well as the deduction under sec. lOB. Though the unit made certain deemed exports, the claim was restricted to onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised new grounds for denying the exemption, and the same has been once again disputed by the Assessee before the Hon'ble AP High Court in WP No. 1398/2011 and the same has been admitted by the Hon'ble AP High Court. 5.10.5 As can be seen above, this issue is subject to revision proceedings by the jurisdictional CIT and also writ litigation by the assessee before the Hon ble High Court of AP. As the mater is highly contested legally, we consider it fit not to interfere with the stand of the Department at this juncture. The AO is directed to follow the judgment of the Hon ble High Court of AP as and when it is received as this issue of deduction u/s. 10B applies to a number of years. On the above facts and circumstances, the demand arising on account of disallowance of this deduction shall be kept in abeyance till the decision of the Hon ble High Court is received. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e overheads on the basis of accepted cost accounting principles and also guidance note with reference to company law. It was submitted that the indirect manufacturing expenses are distributed over operating divisions on the basis of gross material cost and personal costs are distributed over operating divisions on the basis of staff strength in each operating division and selling administrative cost distributed over operating divisions on the basis of sales affected. It was contended that this allocation is consistent with the assessee's allocation in earlier years and also in tune with the principles laid down under the cost accounting principles as well as guidance note issued by the Ministry of Company Affairs in the area of indirect tax. A detailed note was also given to the Assessing Officer that out of manufacturing expenses unit relating to purchases were identified at ₹ 2.50 crores and allocated on the basis of salary cost on various employees and production, planning control of ₹ 18.03 lakhs also on the basis of salary cost on employees and likewise commercial unit at ₹ 57.24 lakhs on the same basis after identifying the amount aggregating to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. Assessing Officer is directed to accept the assessee's allocation of corporate overheads. Accordingly, ground No. 14 is allowed. 17. As the issue is covered by the decision of the Tribunal in assessee s own case for preceding year, respectfully following the same, we uphold the allocation of corporate overheads by the assessee, and accordingly direct the Assessing Officer to accept the same and give appropriate relief to the assessee while recomputing the deduction under S.10B of the Act. This ground is accordingly allowed. 18. As regards Ground No.7, there are two issues involved therein. They are- (a) depreciation at 25% amounting to ₹ 6,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer also records the same in his order vide para 8.1 in page 9 of the order wherein it was stated that assessee entered into an investment agreement with Concord Biotech Limited on 10.02.2006 and accordingly, as per the terms of agreement, it paid an amount of ₹ 40 lakhs towards non-compete fee to one of the promoters i.e., Mr. Sudhir Vaid in the present assessment year i.e., 2008- 2009. Since the Assessing Officer has given the finding that amount is capitalized in this year, the assessee's ground i.e., claim of depreciation on the brought forward written down value seems to be not correct. Be that as it may, we have proceeded to examine the issue as if the claim was made in this year only. 49. Before the Assessing Officer and DRP, the assessee relied on the decision of the CIT vs. Medicorp Technologies India Ltd. which was upheld by the ITAT, Chennai Bench (supra). The learned Assessing Officer relying on the decisions of the ITAT, Chennai Bench in the case of AB Mourya Pvt. Ltd. in ITA.No.1293/2006 dated 23.11.2007 and Guruji Entertainment Net Work Ltd. reported in 14 SOT 556 (Del.); M.M. Nissim Co. vs. ACIT (2007) 18 SOT 274 (Mum.) and Motor Surveyors Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible for depreciation under section 32(1)(ii) of the Act. The decision of the Tribunal, Chennai Bench in the case of ITO (OSD) v. Medicorp Technologies India Ltd.[2010] 2 ITR (Trib) 367 (Chennai) was rendered prior to the decision of the hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages P. Ltd. Hence it renders no help to the assessee. Therefore, we are not in agreement with the arguments of the assessee that non-compete fee is an intangible asset to which provisions of section 32(1)(ii) of the Act are applicable. Therefore, in our considered opinion, the depreciation cannot be allowed on amount of noncompete fee . 52. As can be seen from the above, the Tribunal has distinguished the decision in the case of Medicorp relied by the assessee itself, which is reported at (2010) 2 ITR (Trib.) 367 (Chennai). In view of this, we are of the opinion that the depreciation cannot be allowed on an amount of non-compete fee, which was in fact paid to the Managing Director of the Company for not taking any employment. This cannot be considered under section 32(1) as an intangible asset. Accordingly, the claim of depreciation on the item (a) is not allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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