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TMI Blog2024 (9) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... as been titled as Asset Purchase Agreement where as the termination charges paid by the assessee has been claimed as revenue expenditure, c) he also did not enquiry actually who was liable to pay the termination fees, d) he did not make any inquiry, when a total consideration of Rs. 340.45 crores was to be receivable by ASPL from Mylon Ireland on account of L D agreement, why only Rs. 273,05,47,600/- had been accounted for in the books of ASPL etc. Hence there was lacking on the part of the AO to make proper enquiry before allowing the expenditure as revenue. On going through the explanation 2 to section 263, which has been inserted w.e.f. 01/06/2015, it is abundantly clear that, if the AO failed to make proper inquiries or verification, then it shall be deemed that the order passed by the AO is erroneous so far as it is prejudicial to the interest of the revenue. Hence under such circumstances section 263 can be invoked. In our opinion, since the explanation has been made effective from a specific date , it will be applicable to the every order of AO, which has been passed by him w.e.f. 01/06/2015. As the impugned order of the Ld. AO has been passed on 31/01/2018, which is much la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 37 of the Act, the expenditure which is incurred wholly and exclusively for the purpose of business, can only be allowed as business expenditure. Hence we are of the concerned opinion that the liquidated damages of Rs. 6.19 crores paid by the ASPL to Fresenius were not incurred wholly and exclusively for the purpose of business of the assessee and therefore can not be allowed as expenditure to the assessee u/s 37 of the Act. Decided against assessee. - Shri K. Narasimha Chary, Judicial Member And Shri Madhusudan Sawdia, Accountant Member For the Assessee : Shri Padamchand Khincha, C.A. For the Revenue : Shri Kumar Pranav, CIT-DR ORDER PER SHRI MADHUSUDAN SAWDIA, A.M: This appeal relates to Agila Specialties Private Limited( ASPL ) which has been merged with the M/s. Mylan Laboratories Limited ( MLL or the assessee ), filed by the assessee, feeling aggrieved by the order passed by the Learned PCIT, Hyderabad-4 ( Ld. PCIT ), dated 31.03.2021 for the AY 2014-15. 2. The assessee has raised the following grounds : 1. On the facts and in the circumstances of the case and in law, the Learned Principal Commissioner of Income Tax 4, Hyderabad ( Ld. PCIT ) has erred in invoking the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian subsidiary of Mylan Inc.,USA, acquired the shares of ASPL with effect from 4.12.2013. Thereafter, ASPL merged with MLL w.e.f. 6.12.2013. 3.1 On 31/10/2013 ASPL and its affiliates entered into an agreement with Pfizer, to terminate the licensing, distribution and supply rights granted earlier under the L S agreement to Pfizer in exchange of an agreed consideration of USD 55 Mn.(Rs. 340.45 crores) to be payable by ASPL to Pfizer. ASPL and its affiliates had simultaneously entered into a Distribution Supply Agreement ( D S agreement ) with Mylan Ireland on the same day i.e. 31.10.2013 for marketing and distribution rights (same rights as terminated by Pfizer). The consideration receivable on entering into the D S agreement was equal to the consideration payable by ASPL to Pfizer for termination of L S Agreement i.e., USD 55 Mn. (Rs. 340.45 crores). Pursuant to such a contract, an amount of USD 44 Mn. (Rs. 273,05,47,600) was received by ASPL during the period ended on 5.12.2013 and the remaining USD 11 Mn. (Rs. 67,39,50,000) was received by the MLL during the period from 6.12.2013 to 31.03.2014. 3.3 In addition to above, in December 2012, ASPL entered into a Product Licensing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid for the business interest of Mylan Inc and cannot be held as expenditure with relation to assessee's business. Therefore, the order passed by the AO is erroneous and is prejudicial to the interests of the Revenue, since an expenditure which is not deductible, was allowed as revenue expenditure. Therefore, the assessment order passed by the AO is set-aside as per provisions of Sec. 263 of IT Act 1961, with a direction to redo the assessment as follows: i) by disallowing the sum of Rs. 340.45 Crores paid to Pfizer Inc, for termination of the agreement with the assessee company, as a capital expenditure in the light of the above facts and circumstances, since the assessee company has entered into an Asset purchase agreement with Pfizer Inc, to reacquire the Marketing rights given by it, to Pfizer. ii) by disallowing the claim of the amount of Rs 6,19,00,000/-, debited by the assessee company with respect to the termination of License and Supply Agreement of the assessee company with Frensenius Kabi USA,,LLC, which has been paid by the assessee company, as liquidated damages for termination of L S contract to Frensenius Kabi USA,,LLC, since the termination of the contract, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising on account of licensing of marketing rights is revenue in nature. Thus, learned AO accepted the fact that the Appellant has provided the correct tax treatment on such transaction. Having regard to the same, the order of the AO cannot be held as erroneous. 3.5 In CIT v. Development Credit Bank Ltd. [2010] 323 ITR 206 (Bom.) it was held that assessment cannot be revised under section 263 when the Assessing Officer has passed the order after considering all the details called for and furnished by the assessee. 3.6 The case laws relied by the Appellant are as follows: Mylan Pharmaceuticals Private Limited v. ITO in ITA No.122/Hyd/2022 dated 26.12.2022 Shri Harish Kumar Muralidhar Harwani v. ITO in ITA No. 69/Hyd/2022 dated 28.04.2023 Balaji Developers Hyderabad v. ACIT in ITA no. 281/Hyd/2022 dated 21.06.2023 PCIT v. Deccan Jewellera (P.) Ltd [2021] 438 ITR 131 (Andhra Pradesh) Brahma Centre Development Pvt Ltd v. PCIT in ITA No. 4341 4342/Del/ 2019 dated 18.12.2019. B. No revision on the basis of an audit objection: 3.7 It is trite law that, while exercising revisional jurisdiction under section 263 of the Act, the principles of natural justice do not permit the decision of a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otus Energy (India) Ltd. v. CIT [2017] 53 ITR(T) 227 (Mumbai) - Bharti Axa Life Insurance Co. Ltd. v. DCIT [2020] 116 taxmann.com 933 (Mumbai - Trib.) C. Where AO has adopted one of the plausible views - revision under section 263 is not possible: 3.11 Without prejudice to the above submissions, it is also submitted that a mere possibility of a different interpretation does not justify assumption of revisional jurisdiction merely because the Commissioner does not agree with the inference of AO that the claim is genuine. 3.12 Where the AO takes one of the two views permissible in law and which the Commissioner does not agree with and which results in a loss of revenue, it cannot be treated as erroneous order prejudicial to the interest of revenue, unless the view taken by the AO is completely unsustainable in law. This proposition is forthcoming from the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC) [Para 9]: 3.13 In the instant case, the learned AO after duly examining the facts adopted a plausible view that the expenditure pertaining to 'cost of termination of licensing contracts' is revenue in nature. Case laws y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that all the details corresponding to the expenses claimed under the head cost of termination of licensing contracts had been called by the Ld. AO, furnished by the assessee with the Ld.AO and the same had also been verified by the Ld. AO from the relevant informations/documents. For the purpose of demonstrating the same the LD. AR brought our attention to the page no. 91,95,101,105,151,153,171,173,195,343,389,1092,1093,1095, 1099, 1100 and more of paper book submitted by the assessee before us and submitted that all these documents were also available before the Ld. AO also. The Ld. AR further submitted that by going through all the documents, including the various agreements among the parties, the Ld. AO had taken one of the possible view. Hence relying on the decision of Hon ble Supreme Court the case of Malabar Industrial Co. Ltd. vs. CIT[2000] 243 ITR 83(SC), he also submitted that, if two views are possible, and the AO has adopted one of those views, the order of assessment cannot be prejudicial to the interests of the Revenue. The Ld. AR also submitted that even if there are some lac of enquiry on the part of the Ld. in pursuance to the provisions covered under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture as revenue. 6.3 It is crucial to go through the explanation 2 to section 263 which has been inserted w.e.f.01/06/2015, which is reproduced as under : Explanation 2. For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 3[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 6.4 On going through the explanation 2 to section 263, which has been inserted w.e.f. 01/06/2015, it is abundantly clear that, if the Ld. AO fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SPL's products in a specific territory was granted. Hence, the termination of such contract did not result in the transfer of an asset or creation of a new asset in the hands of ASPL. Therefore the Ld. AR prayed before the bench to consider the termination charges of Rs. 340.45 crores paid to Pfizer as revenue expenditure. 7.1 Per contra the Ld. DR heavily relying on the decision of Ld. PCIT, further submitted that the ASPL had paid termination charges of Rs. 340.45 crores to Pfizer. However no such termination fees was to be payable as per the L S agreement which was novated by SAL in favour of ASPL on 14.11.2011. He further submitted that the termination of the L S agreement dated 31/10/2013 had been titled as Asset Purchase Agreement , then how any right obtained on the basis of such agreement and charges paid for the same can be claimed as revenue expenditure . He also submitted that after the Asset Purchase Agreement dated 31/10/2013, the assessee had simultaneously entered into a D S Agreement with Mylan Ireland on 31.10.2013 for marketing and distribution rights (same rights as terminated by Pfizer) for a consideration of Rs. 340.45 crores. Without acquiring any right/as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, a company organized under the laws of Poland. Each of Seller and Buyer is sometimes referred to herein, individually, as a Party and, collectively as the Parties. All capitalized terms used herein shall have the meanings specified in ARTICLE I below or elsewhere in this Agreement, as applicable. WITNESSETH: WHEREAS, Seller and an Affiliate of Buyer entered into that certain Asset Purchase Agreement by and between Seller and Akorn-Strides, LLC, Akorn, Inc. and Strides Arcolab Limited, dated December 29, 2010 (the Purchase Agreement ), pursuant to which Seller acquired, among other rights, rights to the Transferred Products in the Territory; WHEREAS, Seller, Agila Specialties Private Limited, Onco Laboratories Limited and Onco Therapies Limited entered into that certain Amended and Restated License and Supply Agreement dated February 27, 2013 (the License Agreement ), pursuant to which Seller is granted licenses to Promote the Licensed Products in the Territory; WHEREAS, an Affiliate of Buyer supplies to Seller, and Seller, directly or indirectly through its Affiliates, Promotes the Transferred Products and Licensed Products in the Territory pursuant to that certain Amended and Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or money or other compensation in respect of injury or other Loss allegedly arising out of, or resulting from, the use of any Transferred Product or Licensed Product sold or distributed by Buyer from and after the Closing, including warranty obligations, and irrespective of the legal theory asserted. Section 2.4. Excluded Liabilities. Buyer and Seller agree and acknowledge that Buyer will, effective as of the Closing, assume only the Assumed Liabilities and will not assume any Excluded Liabilities. Section 2.5. Purchase Price; Other Payments. (a) Purchase Price. Subject to the terms and conditions contained in this Agreement, in consideration of the sale and transfer of the Transferred Assets and the ceding of rights and obligations of the Seller and Pfizer Asia under the License Agreement and the Supply Agreement pursuant to this Agreement, Buyer, Agila India and OLL, jointly and severally, agree Page no. 118 of the P.B. : commercial sale and marketing of the Transferred Products and the Licensed Products, consistent with past practice; and provide sales reports to Buyer, within ten (10) Business Days after the end of each calendar month commencing from execution of this Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties to include the provision of support reasonably necessary to consummate the transfer of such Transferred Assets to Buyer. (b) Exhibit D sets forth the form of notification that will be delivered to relevant customers, including GPOs, regarding the sale of the Transferred Assets to Buyer and the termination of the Supply Agreement and the License Agreement. Prior to and after the Closing, Seller and Buyer (or its designee) shall reasonably cooperate with each other in good On perusal of the above pages of Assets Purchase Agreement, it is observed that at page number 105, at the top of the page, the title of agreement itself shows that it is an assets purchase agreement. On the same page, in last para, it has been mentioned that the seller shall cede their rights and obligations under the licence agreement and the supply agreement to the buyer pursuant to the terms of this agreement . Whereas Section 2.1 at page number 114 talks about purchase of all the right, title and interest of seller by the buyer. Section 2.5 at page 114 and 115 talks about the purchase price to be paid in lieu of this assets purchase agreement. Section 3.3 at page number 118 talks about the transfer of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct Licensing and Distribution Agreement ('licensing and distribution agreement) with a third-party i.e., Fresenius Kabi USA, LLC ('Fresenius'). 1.10. Pursuant to the acquisition of ASPL, MLL did not want to continue with the licensing and distribution agreement with another US entity i.e., Fresenius. Thus, ASPL was required to terminate its business relationship with Fresenius. It is also clear from the aforesaid portion of submission of the assessee, MLL was not interested to continue the L D agreement with Fresenius and the ASPL had paid the liquidity damages of Rs. 6.19 crores to Fresenius to protect the business interest of MLL. The payment of liquidated damages made by the ASPL by no means related to the business needs of the assessee. As per section 37 of the Act, the expenditure which is incurred wholly and exclusively for the purpose of business, can only be allowed as business expenditure. Hence we are of the concerned opinion that the liquidated damages of Rs. 6.19 crores paid by the ASPL to Fresenius were not incurred wholly and exclusively for the purpose of business of the assessee and therefore can not be allowed as expenditure to the assessee u/s 37 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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