DCIT Vs Ambalal Sarabhai Enterprises Ltd. (ITAT Ahmedabad)
Facts- The assessee Company is mainly engaged in the manufacture of drugs & pharmaceuticals. The assessee Company filed ROI on 31.10.2001 declaring income from house property Rs.9,036/-, income from other sources Rs.1,25,40,914/- and business loss of Rs.10,26,63,568/-. AO made addition in respect of buying commission to Teknoserve (Jersey) Limited amounting to Rs.19,27,498/- as per the provision of Section 40(a)(i) of the Act and also made various disallowances. Thus, the Assessing Officer assessed the total income at Rs.42,97,20,946/-. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
The main issue involved in the matter was that the assessee assigned their own trademarks of veterinary products vide Deed of Assignment of Trademarks made on 15.06.2000 to Sarabhai Zydus Animal Health Limited which is a joint venture of the assessee and Cadila Healthcare Ltd. The assignment of trademark was for a total consideration of Rs.25 Crores.
During the course of assessment, the assessing officer treated the amount as revenue receipt and held that the same is taxable.
Conclusion- From the perusal of the assignment agreement related to trademarks and marketing rights as well as the understanding between the joint venture and the assessee, it can be seen that though as per the agreement, the consideration was paid to the assessee, the assessee retains the right of manufacturing the products. The assessee is not having any right over the trademark as well as marketing the product. But the joint venture has not clearly set out that the assessee will totally bequeath its right relating to marketing operations as well as relating to trademarks. In the taxation parlance capital receipts are the income generated from investments, financial activities and business and it decreases or increases the value of liability. The assessee’s source of income was not solely depended upon the trademarks or the marketing rights but overall the generation of revenue from the operation of veterinary and human pharmaceutical products effectively establishing in the market in its own name and identity as well as manufacturing the same and marketing in its own name. The assessee fails to establish that the element of revenue generation does not come in the picture as contemplated by the Tax Authorities.
In fact, there are clauses in those assignment agreements which established that the assessee has made business arrangement for the benefit of its manufacturing activities and for the generation of revenue to the joint venture entered between the assessee and Cadila Healthcare Limited. The observation of the CIT(A) appears to be correct and thus there is no need to interfere with the same. As relates to the case laws submitted by the assessee, the same are harping factual centric transfer of trade mark/assignment of trademark and in many of the cases there was no peculiarity of joint venture coming in the picture wherein the assessee and the other parties are involved. The joint venture though shown as separate legal entity has not defined the separate operations from the activities of the assessee and it has participated in the activities of the assessee which was carried out earlier.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These are cross appeals filed by the Revenue and assessee against the order dated 12.03.2015 passed by the CIT(A)-1, Vadodara for the Assessment Year 200102.
2. The grounds of appeal are as under :
ITA No.1762/Ahd/2015 for A.Y. 2001-02 by the Revenue
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition/disallowance made by the AO on account of Buying commission to Teknoserv (Jersey) Ltd. without appreciating the findings of the assessing Officer in the assessment order and also the fact that the buying commission payable abroad is merely a provision and has not been remitted to Teknoserve (Jersey) Ltd.
2. The Ld. CIT(A) has erred by allowing Festival allowance, Misc. Expenses, Telephone Expenses, Vehicle expenses without appreciating the findings of the assessing officer in the assessment order.
3. The Ld. CIT(A) has erred by allowing Adhoc disallowance of 5% out of selling expenses, Festival allowance, Misc. Expenses, Telephone Expenses, Vehicle expenses without appreciating the findings of the assessing officer in the assessment order.
4. The Ld. CIT(A) has erred in deleting the addition made by the AO being rent payment of Packart Press Unit and insurance of machinery of Packart Press Unit without considering the fact that the Packart Press Unit was closed and there was no business activities in this unit and also the assessee already got the order of labour commissioner for closure of such unit.
5. The Ld. CIT(A) has erred in deleting the addition made by the AO u/s. 40A(9) of the Act, previous year’s expenses and foreign travel expenses.
6. The Ld. CIT(A) has erred in deleting the addition made by the AO on Transfer of Trademark and Marketing Rights.
7. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
Relief Claimed in appeal
It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored.”
ITA No.1771/Ahd/2015 for A.Y. 2001-02 by the assessee
Concise Grounds of Appeal
“Appellant craves leave to submit the following concise grounds of appeal before the Hon’ble ITAT:
1. Ld. CIT (A) erred in law and on facts in confirming disallowance of Rs.1,38,840/- of interest on bonds issued to the shareholders of erstwhile Standard Pharmaceuticals Ltd. amalgamated with the appellants pursuant to scheme of amalgamation.
2.1 Ld. CIT (A) erred in law and on facts in confirming disallowance u/s 43B(b) in respect of contribution to PF paid on or before due date for filing return of income by observing that no evidences of payment made are produced for verification.
2.2 Ld. CIT (A) erred in law and on facts in not allowing the alternative claim of the appellant to not disallow u/s 43(b) the contribution which is made on or before the due date of filing return of income.
3. CIT (A) erred in law and on facts in confirming disallowance of claim of damages of Rs.87,293/- levied u/s 14B of P.F. Act.
4. CIT (A) erred in law and on facts in confirming salaries and wages of Packart Press Division of Rs. 41,11,000/-
5. CIT (A) erred in law and in facts in confirming disallowance of leave salary of Rs.30,93,624/- and gratuity of Rs. 1,77,62,048/- paid to workers and other employees which do not form part of Voluntary Retirement Scheme (VRS). The same should be allowed u/s.37 of the Act and not be part of amortization u/s. 35DDA of the Act.
6. CIT (A) erred in law and on facts in confirming disallowance of Rs.43,014/- of sundry debit balances written off.
7.1 Ld. CIT (A) erred in law and on facts in arbitrarily holding that out of total consideration received of Rs.25 crores for transfer of veterinary trademarks, consideration of 18 crores is attributable to transfer of goodwill and balance Rs.7 crores is attributable to transfer of veterinary trademarks.
7.2 Ld. CIT (A) erred in law and on facts in holding that consideration of Rs.20 Crore and additional consideration of Rs.2 Crore received for transfer of marketing/distribution rights for veterinary products of various foreign principals is revenue receipt taxable as business income u/s.28(ii)(c) of the Income Tax Act.
7.3 Ld. CIT (A) ought to have allowed the appeal of the Appellant holding that the consideration received against transfer of trademarks and marketing rights are not taxable.”
3. The assessee Company is mainly engaged in the manufacture of drugs & pharmaceuticals, it also provides marketing and consultancy activities in respect of drugs and pharmaceuticals, fine chemicals, industrial glass containers, packing materials, electronic tests and measuring instruments, consumer electronic and industrial research. There are 15 divisions including service units catering to the needs of other units of corporate body. The assessee Company filed return of income on 31.10.2001 declaring income from house property Rs.9,036/-, income from other sources Rs.1,25,40,914/- and business loss of Rs.10,26,63,568/-. The Assessing Officer made addition in respect of buying commission to Teknoserve (Jersey) Limited amounting to Rs.19,27,498/- as per the provision of Section 40(a)(i) of the Act. The Assessing Officer also disallowed interest on bonds issued on amalgamation of Standard Pharmaceuticals Limited amounting to Rs.1,38,840/- as well as depreciation amounting to Rs.2,36,83,086/-. The Assessing Officer further made disallowance for provisions of Festival allowance, Miscellaneous expenses, PF/FPF not paid within due dates, PF damages, Selling expenses, Salary/Wages and other expenses of Packart Press Unit. The Assessing Officer also made disallowance under Section 40A(9) amounting to Rs.2,40,000/- as well as Voluntary Retirement Scheme which was claimed by the assessee amounting to Rs.5,49,22,119/-, previous year’s expenses, debit balances written off in miscellaneous expenses, foreign travel expenses, disallowance out of donation made, receipt of Rs.73 crores from joint venture Company as well as other income. Thus, the Assessing Officer assessed the total income at Rs.42,97,20,946/-
4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
5. As regards ground no.1 relating to disallowance of interest on bonds issued at the time of amalgamation of Standard Pharmaceutical Limited, the Ld. A.R. submitted that the said issue is against the assessee as per the Tribunal’s decision in A.Y. 199596 being ITA No. 1086, 1005, 1461 and 1006/AHD/2001 order dated 14.12.2007, A.Y. 1997-98 being ITA No. 1007, 1462/AHD/2001 order dated 30.06.2008 and A.Y. 199899 being ITA Nos.1956, 1597/Ahd/20001 order dated 29.08.2008 as well as in A.Y. 1999-2000 ITA No. 933, 1313/AHD/2016 order dated 17.01.2019 .
6. The Ld. DR relied upon the Assessment Order, order of the CIT(A) and the orders of the Tribunal.
7. We have heard both the parties and perused all the relevant material available on record. As regards to ground no.1 of assessee’s appeal is decided against the assessee for A.Ys. 1995-96, 1997-98, 1998-99 and 1999-2000. The Tribunal held as under in A.Y. 1995-96 as under:
“29. The first ground of the assessee’s appeal relates to the issue which travels from an earlier year, with the Ld. A.R. fairly stating that the issue stands covered against the assesse by the decision of the Tribunal in its case for A.Y. 1990-91.
30. We have heard the parties, and perused the material on record, including the Tribunal’s order as referred. The Tribunal in that case has followed its earlier decision in the assessee’s case for A.Y. 1985-86 (in ITA No. 2231/Ahd/1990 dated 17-11-2004), and confirmed the disallowance of interest on the bonds issued to the shareholders of the Standard Pharmaceuticals Ltd. (SPL) on its amalgamation with the assesse-company. The Ld. A.R. has very fairly conceded to this position of the matter, so that the same admits of no difference of opinion. Respectfully following the orders of the Tribunal in the assessee’s case for the earlier years, we uphold the impugned disallowance for the current year as well. We decide accordingly.”
In the present assessment year as well the Ld. AR submitted that the factual aspect is identical to the earlier assessment years which is decided against the assessee. Therefore, Ground No. 1 of the assessee’s appeal is dismissed.
8. As regards to ground no.2 relating to disallowance under Section 43B(b) amounting to Rs.9,14,094/- as employer’s contribution to PF/ESIC, the Ld. A.R. submitted that the assessee has made suo moto disallowance of Rs.2,06,56,172/-.
9. The Ld. D.R. submitted that though the assessee made suo moto disallowance of Rs.2,06,56,172/- in relation to employer’s contribution to PF/ ESIC etc. but the same was not being made within 20 days from the actual disbursement of salary/ wages. The CIT(A) has rightly sent back this issue to the file of the Assessing Officer to see whether the payment is made on or before the due date of filing the return and this finding is just and proper.
10. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee made suo moto disallowance of Rs. 2,06,56,172/- but as regards the contribution in respect of employer, the delay whether it is within the statutory limit or not has not been demonstrated by the assessee before the Assessing Officer. Therefore, the CIT(A) has rightly set aside this issue to the file of the Assessing Officer for verifying whether payment was made on or before the due date of filing the return or not. There is no need to interfere with the finding of the CIT(A). Ground No. 2 of the assessee’s appeal is dismissed.
11. As regards to ground no.3 relating to disallowance of damages of Rs.87,293/-levied under Section 14B of the Provident Fund Act, the Ld. A.R. submitted that the same should be set aside to the Assessing Officer but alternatively submitted that if the disallowance is confirmed then the same should be 40% of allowed as compensation as held in A.Ys. 1995-96 being ITA No. 1086/Ahd/2001 order dated 14.12.2007 & A.Y. 1998-99 being ITA No. 1956/Ahd/2001 order dated 29.08.2008.
12. The Ld. D.R. submitted that related penalty and PF damage under Section 14B of the PF Act, 40% of damages levied under Section 14B of the PF Act are compensatory in nature as per various decisions and the same is not allowable expenditure as held by the Tribunal.
13. We have heard both the parties and perused all the relevant material available on record. This issue is decided by the Tribunal in A.Ys. 1995-96, 1998-99. The Tribunal in A.Y. 1995-96 held as under:
“17. The Revenue’s eighth ground of the appeal relates to the disallowance in the sim of Rs. 11,83,110/- paid by way of damages u/s 14B of the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952. The same being only in the nature of fines and penalty the same stood disallowed by the A.O. In appeal, the assessee claim of a part said expenditure as being toward compensation for the delayed payment of the dues under the said Act, found acceptance by the Ld. CIT(A), with the assesse placing reliance on the decision by the Apex Court in the case of, amongst others, Swadeshi Cotton Mills Co. Ltd. vs. CIT, 233 ITR 199 (SC), wherein it stands held that where a composite levy includes both an element of compensation as also penalty, it shall be open for the Authority to allow the proportion which in its estimation is towards compensation, as a deductible business expenditure. Consequently, he determined 60% of the levy as penal in nature, so that the balance 40%, i.e., Rs. 4,73,244/- , was direct by him to be allowed. Aggrieved, Revenue is in appeal.
18. Before us, like contentions stood raised by either side, each relying on the Order of the authority below as favourable to it.
19. We have heard the parties, and perused the material on record, including the cited case law. We find that the Apex Court has clarified the issue, and the Tribunal in the case of ITO vs. Havero Industries Ltd., 36 ITD 611 (Mum.), applying the law in the matter found 40% of the amount paid as damages u/s 14B of the EPF & MP Act, 1952, as being allowable, being in the nature of compensation. We, therefore, do not find any infirmity in the Order of the Ld. CIT(A), or any merit in the Revenue’s (as well as the assessee’s) appeal on this ground, and which stands therefore dismissed. So however, as it appears, the A.O. has omitted to add the said disallowance while computing the assessee’s taxable income for the relevant year (refer page 15 and 16 of the relevant assessment order), so that the A.O. is directed to verify the facts and casue necessary rectification if so found. We state so as in its absence there is no question of any disallowance and resultantly no scope for any adjudication in its respect. We direct accordingly.”
In the present assessment year as well the facts are identical to that the earlier assessment years, yet the excess disallowance needs to be verified and the alternative contentions of the assessee as to 40% of the amount paid as damages may be allowed as compensatory. Ground No. 3 is partly allowed.
14. As regards to Ground No. 4 of the assessee’s appeal relating to disallowance of salary and wages of Rs.41.11 Lakhs to Packart Press Unit employees, the Ld. A.R. submitted that as held in A.Y. 1996-97 being ITA No. 1461/Ahd/2001 order dated 14.12.2007, 1997-98 being ITA No. 1462/Ahd/2001 order dated 30.06.2008 & 199899 being ITA No. 1965/Ahd/2001 order dated 29.08.2008 as well as A.Y. 1999-2000 being ITA No. 933 & 1313/Ahd/2016 order dated 17.01.2019, the same should be set aside to the file of the Assessing Officer.
15. The Ld. D.R. relied upon the decisions of the Tribunal.
16. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this issue is set aside to the file of the Assessing Officer for proper verification and adjudication in A.Y. 1996-97, 1997-98 & 1998-99 as well as in A.Y. 1999-2000. The Tribunal in A.Y. 1996-97 held as under:
“49. We have heard the parties, and perused the material on record.
49.1 We find that the Revenue’s case in this matter rests on two limbs. Firstly, that the said Unit is not under operation during the relevant year, so that the relevant business being closed, the claim for its expenditure would not be allowable. Secondly, of the total claim, the expenditure to the extent of Rs. 31.76 lacs does not find a reflection in the assessee’s account, so that in its absence the same has no basis for allowability. We shall look into each of the two limbs separately.
49.2 In so far as the closure of the assessee’s said Unit is concerned, the same does not, to our mind, represent a separate or distinct line of business being pursued by the assessee; the said Unit only manufacturing, admittedly, packaging material, viz., cartons, labels, grey board boxes, for supply to other Units, for the packaging of their goods. As such, the closure of the said Unit for the current year, or the absence of the manufacturing operations as inferred by the Revenue, would be of no consequence in-so-far as the application of section 72(1) of the Act is concerned. This, however, would be subject to the actual user of the plant and machinery or other capital assets of the said Unit for business purposes, i.e., in-so-far as the claim for depreciation is concerned, which would not be allowable otherwise.
49.3 As regards the balance expenditure, we find there to be no doubt as to its having been incurred, except for Rs. 31.76 lacs for which no provision stands made in accounts, even as the same is claimed in the return of income. Clearly, the answer to the same would, even as explained by the assessee itself, while arguing its case before the Ld. CIT(A), depend upon whether the liability in its respect had, in fact, accrued during the relevant year and outstands as it its end, i.e., 31-03-1996, for if so, no adverse inference of the non-booking of the relevant expenditure can be drawn. The nature of the expenditure, other than toward salary and wages, is not clear from the Order of the authorities below. Also, even in respect of the salary and wages, even though their Orders do not clarify as to the identity of the employees, it appears that the same would only be in respect of the ex-employees of the said Unit. The assessee-company has, apparently, settled the dues of its employees, for otherwise the permission from the Labour Commissioner to close its Unit would not be forthcoming. However, as the same stands contested by the Labour Union before the Tribunal, the assessee, as it appears, has provided for the claim for the said liability, even as the same stands not provided in its books, and which fact the assessee’s claims to be immaterial. We do not consider so, though, by itself, that cannot be conclusive of the matter (refer: Pullangode Rubber Produce Co. Ltd. vs. State of Kerala and Others, 91 ITR 18 (SC)). As such, what would need to be seen for the purpose is whether the assessee is contractually obliged to pay the salary/wages to the (ex)employees of its said Unit, employment of whom it claims stands terminated. The same would warrant an examination of the relevant facts and the underlying contractual arrangement. The fact that the matter is sub-judice would not make a liability which has otherwise not accrued, to arise, even as the assessee may have in the facts of a particular case provided for the relevant amount in its books of account, and which is not the case in the present instance. In fact, the assessee has itself, while arguing its case qua ground # 13 of the present appeal, asserted that the liability would stand to be allowed in the year in which it gets crystallized, implying settlement or the resolution of the underlying dispute, referring to the decision by the jurisdictional High Court in the case of Saurashtra Cement & Chemicals Industries Ltd. vs. CIT (supra) for the purpose, so that the fact that the matter is sub-judice would rather suggest a postponement of the allowability to the year of the resolution of the dispute.
49.4 In view of the foregoing, we are of the clear opinion that only the expenses as stands incurred, or in relation to which the liability has, in terms of underlying contract, stands accrued, shall be allowed as an expenditure in the assessment for the current year, and set aside the matter back to the file of the A.O. to decide the same after proper examination of the relevant facts, giving reasonable opportunity to the assessee to present its case before him, and decide as per law.”
The facts of the present assessment year are identical to that of earlier assessment years. Thus, we are also of the opinion that only the expenses which were incurred or has liability in terms of underlying contract, stands accrued, shall be allowed as an expenditure in the present assessment year as well. Thus, we remand back this issue to the file of the Assessing Officer for verification of the relevant facts and proper adjudication. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground no.4 of the assessee’s appeal is partly allowed for statistical purpose.
17. As regards to ground no.5 regarding confirming the allowance of Rs.1,37,30,530/- (1/5th of Rs.6,86,52,649/-) instead of Rs.4,77,96,977/- under Section 35DDA as claimed by the assessee in respect of terminal benefit under Section 37 as revenue expenditure, the Ld. A.R. submitted that the same should be allowed as Gratuity is statutory liability which is to be paid to any employee on his retirement from service after putting a specified number of years in service. The Ld. A.R. further submitted that the leave salary represent the amount payable to any employee towards unused leave to his credit at the time of his retirement. Whether employee is retiring under VRS scheme or on his own reaching superannuation age the employer is liable to pay such retirement benefit to outgoing employees.
18. The Ld. D.R. submitted that the terms of employment vs. Scheme of Voluntary Retirement has a valid difference as only the expenditure falling in Scheme of Voluntary Retirement can be part of 35DDA amortisation and not the expenditure which are incurred as per terms of employment. Gratuity and leave encashment are not related to the Scheme of Voluntary Retirement even though they are paid alongwith the other benefit related to voluntary retirement.
19. We have heard both the parties and perused all the relevant material available on record. Gratuity has to be paid once an employee retires whether it is under superannuation or voluntary retirement. Its, employee’s mandatory entitlement by rendering service to the employer. The leave encashment is also incidental to the service contract and once the service period comes to an end by superannuation or voluntarily, then the same incentive has to be paid to the employee by the employer.
The contention of the Ld. AR that the gratuity and leave encashment are terminal benefits paid by the assesse and are not any segregation of the total compensation paid pursuant to scheme offered by the assesse. The Ld. AR further submitted that Section 35DDA deals with the amortization of expenditure incurred under voluntary retirement scheme. It provides for the deduction of one-fifth of any expenditure by way of payment of any sim to an employee at the time of his voluntary retirement in computing the profits and gains of the business for that previous year and the balance in equal instalments for each of the four immediate succeeding previous years. The CIT(A) held that no copy of any agreement or contract between the assessee and the employees were submitted and therefore, the CIT(A) did not find any basis to treat the amounts of Rs. 2,08,65,672/- independent of the voluntary retirement scheme being the same terminal benefits. The CIT(A) further observed that Section 43B(f) was inserted after clause (e) of section 43B by the Finance Act, 2001 with effect from 01/04/2002. Thus, this section 43B(f) will be applicable only from assessment year 2003-04 onwards whereas the year under consideration in the case of the assessee is 2001-02. Therefore, the CIT(A) held that the entire payments of Rs. 6,86,52,649/-comprising leave salary, gratuity and compensation under the scheme have been made by the assessee to the employees under the voluntary retirement scheme as announced by it and therefore 1/5th of this amount of Rs. 6,86,52,649/- which comes to Rs. 1,37,30,530/- is only required to be allowed for the year under consideration and confirmed the deduction of Rs. 1,37,30,530/- only u/s 35DDA of the Act. The segregation done by the assesse that the entire leave salary and gratuity be allowed cannot be accepted as it is clearly a part of voluntary scheme of retirement as it is incidental to the retirement of employee. Thus, the CIT(A) has rightly allowed the deduction of Rs. 1,37,30,530/- under Section 35DDA and confirmed the other aspects. The CIT(A) has given a detailed finding and there is no need to interfere with the same. Hence Ground No. 5 of assessee’s appeal is dismissed.
20. As regards to ground no.6 of assessee’s appeal relating to disallowance of Sundry Balances written off, the Ld. A.R. submitted that this issue was decided in favour of the assessee for A.Y. 1995-96 being ITA No. 1086/Ahd/2011 order 14.12.2017 & A.Y. 1998-99 being ITA No. 1956/Ahd/2001 order dated 29.08.2008. Alternatively, the Ld. A.R. submitted that the said Sundry Balances written off should be allowed as business loss.
21. The Ld. D.R. relied upon the order of the CIT(A).
22. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 1995-96 held as under:
“26. The last and eleventh ground of the Revenue’s appeal relates to the disallowance in respect of sundry debit balances written off at Rs. 38,008/-. The assessee has claimed the same to be only in the nature of a business loss, being incurred in the normal course of its business; the said sum representing tender deposit money (Rs.10,000/-) and petty cash at depot (Rs.28,008/-). In appeal, the assessee explained the said amounts to have been paid to customers in terms of tenders issued by them, so that the write-off of the said amount, on it being found not recoverable, is only a nature of business loss. Similarly, the petty cash amount at depot also represents an allowable business loss.
27. We have heard the parties, and perused the material on record. While the facts in relation to tender deposit money (Rs. 10,000/-) is clear; ’the same being paid over the years in the normal course of business, in the process of applying for or procuring orders, so that the same would only represent a trading loss, the position is not clear in respect of petty cash amount held at the Depot; there being no delineation of facts by either of the authorities or the assessee’s explanation with regard to its write-off. As the appeal is being remanded back to the A.O’s file qua a particular ground, we consider it only appropriate that his matter may also be re-examined by him, affording proper opportunity to the assessee to state the facts, and decide the same in accordance with law. We decide accordingly.”
Though the issue is related to sundry creditors in this assessment year as well, this is an issue which is factual centric as per each years sundry creditors, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for adjudicating it afresh after looking into the evidences. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose.
23. As regards to ground no.7 relating to transfer of trademark, marketing rights, the Ld. A.R. submitted that the CIT(A) erred in holding consideration received for transfer of trademark as revenue receipt instead of capital receipt. The Ld. A.R. further submitted that the Revenue Authorities arbitrarily allocated total consideration into goodwill and right to manufacture of veterinary products. In regard to the second aspect of transfer of marketing rights, the Ld. A.R. submitted that Revenue Authorities erred in confirming consideration received for transfer of marketing/distribution rights for veterinary products as revenue receipt. The Ld. A.R. submitted that the joint venture has given the trademark as per the agreement and there was no transfer of trademark relating to goodwill of the business. The agreement itself shows that date of application of registration and the application of 40 trademarks were pending for registration. The Trademarks Act itself recognizes the transfer of unregistered trademark as per Section 39 of the Act. Also even the user of unregistered trademark gets the right in the trademark and can file suit for passing off. The assessee has assigned all of their 46 trademarks in a lumpsum manner for total consideration of Rs.25 crores. These being self-generated and not purchased trademarks, there is no question of showing them in balance sheet. The assessee has not relinquished its right to manufacture. In fact, the assesse has continued to manufacture for JV because once the trademarks are transferred, the assessee cannot sell the products and only the JV can. Thus, what is lost for the assesse is right to market and not right to manufacture. Section 38 of the Trademarks Act envisages only two kinds of assignment. Assignment of trademark with the goodwill of the business concerned or without the goodwill of the business concerned. The agreement between the assessee and JV is to the effect that JV can market, sell and distribute the said trademarked pharmaceuticals preparations. Therefore, very assignment of trademarks would necessarily have to take place “with the goodwill of the business concerned” only. If the assignment of the trademarks is made without the goodwill of the business, then the JV would own the trademarks but could not market, sell and distribute the said trademarked pharmaceuticals preparations and the very purpose of the agreement would be futile. The agreement between assessee and JV is therefore correctly termed along with the goodwill of the business concerned in the goods for which the said trademarks are registered. Such narration in the agreement does not give rise to transfer of goodwill in the business of the assesse taxable u/s 55(2) of the Act as explained in the various decisions. The Ld. AR submitted that what is transferred is only trademark and not goodwill of the business as such as held in decision of Associated Electronics and Electrical Industries (Banglore)P. Ltd. vs. DCIT IT(SS)A No. 9/Bang/2000 order dated 06.02.2009. Goodwill of the business cannot be independently transferred without the transfer of the business undertaking. The facts of the assessee’s case are identical as there is no transfer of the business undertaking to the JV what is transferred is only trademarks. If the transfer of such trademark was transfer of goodwill, then there was no need to legislate S. 55 (2)(a) with effect from 01.04.2002 to include transfer of trademark too as held in case of CIT vs. Associated Electronics and Electrical Industries (Banglore)P. Ltd. by the Hon’ble Karnataka High Court (2016) 65 taxmann.com 253.
24. As regards to consideration received against assignment of marketing rights, the Ld. AR submitted that the assessee and JV are separate legal entities where JV has 50% share owned by a third party. So far as the assesse is concerned, its income earning apparatus is destroyed. Only because the assessee has 50% share in JV that would mean that the assessee has retained its income earning apparatus. After the transfer of marketing rights, the assesse would not earn income out of such business. Although what is material is the destruction of the income earning apparatus and not its impact, the assesse has nonetheless suffered significant loss of revenue after the transfer. The Ld. AR further submitted that the facts of the decision of Blue Star 13 SOT 25 are completely different than the assessee’s case. In the case of blue star, Blue star was exclusive agent of HP’s products in India. Blue Star and HP later formed a JV for manufacture and marketing of the products and HP paid Blue Star to avoid competition with JV. In the present assessee’s case, the assesse has not formed JV with the foreign principles. Instead, JV is formed with a third party Cadila and there is a simplicitor transfer of marketing rights of products of foreign principles. The case of Blue Star is distinguishable on facts in as much as there is no compensation received by the assesse on termination of agency by the principles which was in the case of the Blue Star. Thus, the Ld. AR submitted that on both the accounts the addition may be deleted.
25. The Ld. D.R. submitted that on 29.01.2000 agreement was incorporated between the ASE and Cadila Healthcare Limited was entered into for a 50:50 Joint Venture. The Ld. D.R. further submitted that Joint Venture to pay assessee Rs.73 crores plus additional compensation of Rs.10 crores for marketing rights of ABIC products. As relates to the agreement dated 15.06.2000, the same is related to Rs.20 crores for assignment of marketing rights which were claimed capital receipt not taxable, Rs.25 crores for assignment of trade mark which were claimed capital receipt and not taxable as well as Rs.28 crores for transfer of knowhow which was return of income as Revenue income. Ld. D.R. further submitted that as per agreement dated 19.05.2001 which was for changing due date of payment of additional Rs.2 crores on yearly basis. The Ld. D.R. further submitted that the Assessing Officer sought to tax consideration received against assignment of trademarks for the reason that only 6 out of 46 trademarks are registered and the balance are unregistered. In fact, unregistered trademarks do not give the owner any rights. As regards to tax consideration received against assignment of marketing rights because even after assignment there is no substantial reduction in the turnover of the assessee. The Ld. D.R. submitted that there is nothing to show that 40 trademarks were pending registration and, therefore, the Assessing Officer has only granted those trademarks which were registered. Ld. D.R. further submitted that the agreement itself does not show separate values for each trademark. In fact, the assessee had not shown these trademarks in its balance sheet. Ld. D.R. further submitted that agreement is a composite agreement for not only assignment of trademark but also for relinquishment of right to manufacture as well as transfer of goodwill. Therefore, the Ld. D.R. submitted that even if transfer of trademark is not taxable under Section 55(2), the transfer of goodwill and relinquishment of right to manufacture are taxable. Out of Rs.25 Crores of consideration, Rs.7 Crores would estimate as consideration against trademark and remaining is for the relinquishment of right to manufacture and transfer of goodwill. The Ld. D.R. submitted that the case laws relied by the CIT(A) in the case of relied Blue Star, 13 SOT 25 is distinguishable and does not apply in assessee’s case. The Ld. D.R. submitted that the case law reported by the CIT(A) is very much identical to assessee’s case as there is no destruction of income earning apparatus because the assessee has 50% share in JV and there was no significant reduction in the income of the assessee even after the assignment of marketing rights. The Ld. DR has given written submissions which are reproduced as follows:
“As permitted by this Hon’ble Court, in continuation of the oral submissions made during the course of hearing, the following written submissions in respect of the Ground No. 7 involving the issue of transfer of Trademark, Goodwill of the business and Marketing Rights in respect of certain veterinary products are made as under:
Transfer of Trademark/Goodwill/Marketing Rights
1. Background of the Issue
1.1 The issues under dispute trace their origin to the formation of a Joint Venture (JV) by the appellant company in collaboration with Zydus Cadila. It is not disputed such rearrangement is a product of appellant’s own volition and mutual agreement. It is not a case of a compulsion such as termination etc of contract. A summary of the issues involved in Ground No.7 is as under:
