Piramal Enterprises Limited Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that compensation received by the assessee in out of court settlement for unilaterally terminating certain obligation under the agreement is an income assessed to business income and not an income assessed to capital gains as claimed by the assessee.
Facts- During the year under consideration it has been noticed from the computation of income assessee company that an amount of Rs.92,76,62,688/- received from Roche Diagnostics Gmbh (RDG) of Germany under a settlement agreement towards termination of agency, distribution and manufacturing rights granted to it by RDG vide agreement dated 30.06.1997 which has been offered by the assessee to tax under the head “capital gains” instead of showing the same as business income.
Another issue is that the assessee has collected sales tax from the parties on behalf of the government and was not deposited with the government as per scheme formulated by the Madhya Pradesh Government and was treated as deferred loan to the assessee. Subsequently the same was partly waived on prepayment and consequently the assessee has gained an amount of Rs.8.23 crore which was treated as revenue income by the Ld. CIT(A) instead of capital receipt claimed by the assessee.
Conclusion- Held that compensation received by the assessee from RDG to the tune of Rs.92,76,62,688/- in out of court settlement is a business income and not an income assessed to capital gains as claimed by the assessee and as such provisions contained under section 28(ii)(c) read with section 28(va)(a) of the Act are attracted. Hence, the Ld. CIT(A) has rightly confirmed the addition of Rs.92,76,62,688/- as business income.
Held that where the assessee has made premature payment of deferred sales tax at present value of certain amount against the total liability as in the instant case, and credited balance amount to its capital reserve account, the said credited amount was a capital receipt. In view of the matter the Ld. CIT(A) has erred in treating the receipt as revenue receipt.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
For the sake of brevity aforesaid cross appeals emanated from same impugned order passed by Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] for A.Y. 2005-06 are being taken up for disposal by way of composite order.
2. Appellant M/s. Piramal Enterprises Ltd. (hereinafter referred to as the assessee) and appellant DCIT, Circle-8(2)(1), [Erstwhile DCIT Circle-7(1)], Mumbai (hereinafter referred to as the Revenue) by filing aforesaid cross appeals sought to set aside the impugned order dated 22.02.2010 passed by Ld. CIT(A) on the grounds inter-alia that:
Grounds of Assessee’s Appeal bearing
ITA No.3706/M/2010 for A.Y. 2005-06
“Ground I:
Compensation received on termination of agreement: Rs.92,76,62,688/-
1. On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) – 13, Mumbai (“the CIT (A)”) erred in upholding the action of the Additional Commissioner of Income Tax, Range-7 (1), Mumbai (“the AO”) of taxing the compensation received from Roche Diagnostics Gmbh (” RDG “) of Germany under a settlement agreement as “Business Income” instead of “Long Term Capital Gain” by applying provisions of Section 28(ii) (c) read with section 28 (va) (a) of the Income-tax Act, 1961 (“the Act”).
2. He failed to appreciate and ought to have held that the compensation is paid to the Appellant for settlement due to termination of right to carry on the business of distribution of RDG’s products and the right lost by the Appellant company vide agreement dated 20.10.2004 is a capital asset covered under the head “Capital gains” u/s 45 (1) of the Act.
3. Therefore, the Appellant, prays that the aforesaid receipt of compensation be treated as Capital Gain.
Ground II:
Addition on account of recalculation of capital gain on sale of Flat at Malbar Hill: Rs.2,98,680/-
1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of not allowing the fair market value of the flat as on 1.4.1981, based on the valuation report, wherein the fair market value given is Rs.1,600/-, for arriving at the cost of acquisition for the purpose of computing Long Term Capital Gains on sale of flat at Malbar Hill and thereby confirming an addition of Rs.2,98,680/-.
2. He failed to appreciate and ought to have held that the Appellant had taken into consideration the correct market value of the flat based on valuation report from a registered Valuer.
3. The Appellant, therefore, prays that the aforesaid addition made by the AO be deleted.
Ground III:
Disallowance of payments made to Piramal Enterprises Ltd (PEL) u/s 40 A (2) (b): Rs.1,23,84,303/-
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to allow payments made to PEL for consultancy fees and corporate service charges after verifying and comparing similar payments made by other group companies to PEL.
2. He failed to appreciate and ought to have held that on the basis of documents and submissions made by the Appellant he should have deleted the aforesaid addition.
3. The Appellant, therefore, prays that payments made to PEL be allowed fully.
Ground IV:
Disallowance of legal and professional charges incurred for system development: Rs.8,85,400/-
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO of disallowing legal and professional charges incurred for system development amounting to Rs.8,85,400/- by treating the same as Capital expenditure on the alleged ground that these expenses are incurred on software expenses and has enduring quality and long term benefits.
2. In doing so, he has treated the aforesaid expenditure as expenditure for acquisition of intangible assets.
3. He failed to appreciate and ought to have held that these expenses are related to software support for existing software systems and not for purchase of any new software. It mainly includes support for SAP, Lotus Notes at different locations and customization of Standard SAP reports as per requirements of the Appellant Company.
4. The Appellant, therefore, prays that the aforesaid expenses be allowed as revenue in nature.
Ground V:
Disallowance of advertising and business promotion expenses: Rs.70,90,129/-
1. On the facts and in the circumstances of the Case and in law, the CIT(A) erred in directing the AO to verify the facts and details relating to certain expenses out of advertising and business promotion expenses amounting to Rs.70,90,129/- on the basis of bills and accordingly directed the AO to decide the issue as per law.
2. He failed to appreciate and ought to have held that on the basis of evidences produced before him, he should have deleted the aforesaid addition.
3. The Appellant, therefore, prays that the AO be directed to allow the aforesaid claim for advertising and promotion expenses.
Ground VI:
Disallowance of deduction u / s 35(2AB) and u/s 35(1)(iv) in respect of Chennai unit: Rs.3,19,78,297/-
1. On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of disallowing deduction u / s 35(2AB) and u/s 35(1)(iv) in respect of R &D (Revenue and Capital) expenses related to Chennai unit amounting to Rs.3,19,78,297/- as excess deduction claimed on the alleged ground that appellant can claim the deduction only after date of approval i.e. 23.2.2005.
2. In doing so, the CIT (A) has directed the AO to verify the actual figures and recompute the disallowance.
3. He failed to appreciate and ought to have held that the Appellant was entitled to claim deduction from the starting date of the Chennai Unit in accordance with the period mentioned in the application. Since recognition was accorded till 31.3.2007 as per appellant’s application it is therefore allowed for the period mentioned in the application and the deduction is to be allowed for the relevant financial year.
4. The Appellant prays that the A.O. be directed to allow aforesaid expenses u/s 35 (2AB) /35 (1) (iv) of the Act.
5. Without prejudice, the Appellant prays that the A.O. be directed to allow aforesaid expenses u/s 35/32 / 37 of the Act if not allowable u/s 35(2AB) / 35 (1) (iv) of the Act.
Ground VII:
Disallowance of depreciation on capital expenses of R&D unit: Rs.38,62,993/-
1. On the facts and circumstances of the case and in law, the CIT (A) erred in directing the AO to verify the facts as regard to the claim of depreciation on excess capital expenditure related to Chennai unit and delete the disallowance made if no depreciation was claimed.
2. He failed to appreciate and ought to have held that the appellant has never claimed such depreciation on capital expenditure and hence there is no question of disallowing the same. Further, he should have deleted the disallowance on the basis of submissions made by the Appellant.
3. The Appellant prays that the A.O. be directed to delete aforesaid addition made on account of depreciation.
GROUND VIII:
Disallowance of depreciation on opening WDV of computer software: Rs.26 ,23,012/-
1. On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of disallowing depreciation on opening WDV of computers of Rs. 26 ,23,012/ on the basis of the order of the CIT (A) for A.Y. 2004-05.
2. He failed to appreciate and ought to have held that software was for upgrading the computers and for using computers with latest technology and hence the software was correctly shown under the head computers and depreciation @ 60% was allowable on the same.
3. The Appellant pray that the AO be directed to treat computer and computer software under one block namely computers and after which there will not be any cessation of block and accordingly the depreciation claimed by the Appellant be allowed.
Ground IX:
Disallowance of depreciation on additions to computer software: Rs.2,12,15,269/-
1. On the facts and circumstances of the case and in law, the CTT (A) erred in upholding the action of the AO of recalculating depreciation on computer software @ 25% instead of @ 60% as claimed by the Appellant and thereby disallowing excess depreciation of Rs.2,12,15,269/- on the alleged ground that software purchased separately and independent from computer purchases amounts to “intangible assets”.
2. He failed to appreciate and ought to have held that software purchases are for upgrading the computers and for using computers with latest technology and hence the purchases are wholly and exclusively related to use of the computers and hence are correctly shown as additions under the head computers and depreciation @ 60% is allowable on the same.
3. The Appellant therefore prays that, depreciation on computer software be allowed @ 60% as correctly claimed by the Appellant.
GROUND X:
Addition on account of increase in the value of closing stock: Rs.2,07,14,000/-
1. On the facts and circumstances of the case and in law, the CIT (A) erred in directing the AO as regard to the recomputation of closing stock by not only adding back closing balance of unutilised MODVAT credit but by also including the element of MODVAT credit on purchases and sales.
2. In doing so, the CIT (A) has further erred in holding that no adjustment in the opening stock is possible by relying on the decision in case of Melmould Corporation v. CIT (202 ITR 789) and observing that decision of Mahavir Aluminium (297 ITR 77) shall not apply.
3. He failed to appreciate and ought to have held that he has no powers to set aside the issue to the AO for verification instead he should have deleted the disallowance on the basis of submissions made by the Appellant. Further, irrespective of whether the Appellant follows gross or net method of valuation of stock, the amount of unutilized MODVAT credit has no impact on the profits of the Appellant.
4. The Appellate prays that the aforesaid addition be deleted. GROUND XI:
Addition on account of insurance claim received during the year: Rs.2,75,00,000/-
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO of treating the amount received on account of insurance claim as its income and accordingly adding the same to the total taxable income of the Appellant.
2. He failed to appreciate and ought to have held that the amount received was an ad-hoc payment by the insurance company to the Appellant which is “On account payment” released by them based on initial verification. The claim was only admitted by them, it does not mean that they have accepted the claim and will pay the full claim amount of Rs.1222.05 lacs. The final settlement of the claim was pending.
3. The Appellant, therefore prays that aforesaid addition of Rs.2,75,00,000/- be deleted.
4. Without prejudice to aforesaid, the appellant prays that the amount of claim received is related to assets and hence be reduced from block of assets.
GROUND XII:
Capital Gain on sale of RP House property: Rs.3,49,90,566/-
1. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the A.O of not reducing Long Term Capital Gain of Rs.3,49,90,566/- arising on proportionate sale of Rhone Poulenc (“RP”) House Property being land from the Return of Income on the protective basis.
2. The Appellant prays that A.O be directed to reduce Long term Capital Gain of Rs.3,49,90,566/- from Return of Income.
GROUND XIII:
Depreciation on RP House Property building:
1. On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO of not allowing depreciation on proportionate sale of Building by reducing entire sale proceeds related to Building and thereby reducing the said block to NIL in the previous year 2001-02.
2. The Appellant prays that A.O be directed to allow depreciation on Building by reducing only appropriate portion of sale proceeds from the said block.
GROUND XIV:
Treating Rental Income from RPIL House as “Income from other sources”
1. On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the A.O of treating the Rental Income from RP House as “Income from Other Sources” instead of “Income from House Property” as offered by the Appellant on the alleged ground that the Appellant is not the owner of the property.
2. He failed to appreciate and ought to have held that the Appellant was the owner of the property for the year under consideration.
3. The Appellant, therefore, prays that the A.O be directed to treat the Rental Income from above property as “Income from House Property”
GROUND XV:
Taxability of gain on repayment of Sales Tax Deferral Loan: Rs.8.23 crores
1. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO of not considering the claim for gain on repayment of Sale Tax Deferral Loan as capital receipt on the alleged ground that no fresh claim can be made except by filing a revised return.
2. In doing so, he further erred in holding that the aforesaid amount is a trading receipt/business income relying on the decision of Chowringhee Sales Bureau p. Ltd. (87 ITR 542).
3. He failed to appreciate and ought to have held that as per legal position of law the said gain is not a revenue receipt taxable either u/s 41 (1) or under section 28 (iv) of the Income Tax Act, 1961 (“the Act”) since the original liability to pay Sales tax was deferred and liability was converted into loan.
4. The Appellant prays that the A.O. be directed to treat the aforesaid gain as capital receipt, not chargeable to tax.
GROUND XVI:
The Appellant craves leaves to add to, alter and / or delete the above ground of appeal.”
Grounds of Revenue’s Appeal bearing
ITA No.5091/M/2010 for A.Y. 2005-06
“1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the Assessing Officer that the depreciation not claimed by M/s. Boehirnger Mannhein India Ltd. and M/s. Piramal Holdings Ltd. should not be considered for the purpose of working out the written down value, to allow the depreciation thereon.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deciding that the receipts of rental income from “Centre Point” are not chargeable under the head “income from other sources” but are chargeable under the head “income from house property” and to direct the Assessing Officer to grant deduction u/s.24(a).
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance made by the Assessing Officer in respect of deduction of Rs.24285714/- claimed u/s.35A in respect of the acquisition of the trade mark by M/s.Sarabhai Piramal Pharmaceuticals Ltd. (since merged with the assessee company).
4. While doing so, the Ld.CIT(A)’s failed to appreciate that Section 35A permitted deduction only upto A.Y. 1998-99 and in later years even the part deduction was not allowable.
5. On the facts and in the circumstance of the case and in law, the Ld.CIT(A) erred in deciding that the deduction u/s.80HHC for the purpose of section 115JB is to be worked out on the basis of adjusted book profit following the decision of Mumbai ITAT in the case of Syncom Formulations India Ltd. reported in 108 TTJ 105 (SB) although the ITAT’s decision has been overruled by the Bombay High Court in the case of Ajanta Pharma Ltd. 180 Taxman 494.
6. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the AO restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary.”
3. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee company being into manufacturing and sale of pharmaceuticals deals in both prescription and DTC products as well as bulk drugs, chemicals and skincare products, filed its return of income for the year under consideration which was subjected to scrutiny. The assessee by filing the aforesaid appeal raised multiple grounds numbering 15 challenging the impugned order passed by the Ld. CIT(A). Our findings on the aforesaid grounds are as under:
Assessee’s appeal bearing ITA No.3706/M/2010
Ground No.1
4. During the year under consideration as has been noticed from the computation of income assessee company is shown to have received an amount of Rs.92,76,62,688/- from Roche Diagnostics Gmbh (RDG) of Germany under a settlement agreement towards termination of agency, distribution and manufacturing rights granted to it by RDG vide agreement dated 30.06.1997 which has been offered by the assessee to tax under the head “capital gains” instead of showing the same as business income. However, declining the contentions raised by the assessee the Assessing Officer (AO) proceeded to hold that the proceeds received by the assessee company from RDG on account of termination of agency and distribution of products in India falls under the provisions of section 28(ii)(c) read with section 28(va)(a) of the Income Tax Act, 1961 (for short ‘the Act’). Explanation filed by the assessee to the show cause notice issued by the AO is summarized by the AO in para 6.5 of the order as under:
“(i) The right lost by the assessee company vide agreement dated 20.10.2004 is a capital asset covered under the head ‘Capital Gains’ u/s 45(1) of the 1.T. Act
(ii) The rights under the distribution and marketing agreement was an asset of enduring value and by its cancellation, the trading structure of the assessee is impaired and the assessee has lost its right to carry on a business.
(iii) The assessee was not an agent of RGD and was carrying the distribution activity on its own behalf.
(iv) The assessee has lost a source of income/income earning apparatus which is a capital asset and taxable under the head capital gains u/s 55(2) of the I.T. Act.”
5. Declining the contentions raised by the assessee the AO proceeded to hold that the entire receipt of Rs.92,76,62,688/- by the assessee from Roche Diagnostics Gmbh (RDG) of Germany under settlement agreement is a business income under section 28 of the Act and made addition thereof to the business income of the assessee. The Ld. CIT(A) upheld the addition made by the AO and the assessee is in appeal before the Tribunal.
6. The Ld. A.R. for the assessee challenging the impugned findings returned by the Ld. CIT(A) contended inter-alia that the amount in question received by the assessee from RDG is for transfer of business, which is a capital asset, as such chargeable to tax as capital gains; that the compensation has been received for transfer/extinguishment or termination of business rights under AMDA 1997 and therefore the same have been offered to tax as capital gain; that as per relevant clauses referred to during the course of argument of the settlement agreement the entire business has been transferred and the consideration which has been received is for the transfer of business as a whole and as such the amount received does not fall under section 28(ii)(c) as well as under section 28(va)(a) of the Act as the compensation received is not merely for termination of agency nor the compensation is received for non-compete.
7. Without prejudice to the ground No.1 the assessee has also raised additional ground No.1(a) that “compensation received on termination of agreement to the tune of Rs.92,76,62,688/- is a capital receipt.”
8. Additional ground raised by the assessee is allowed being legal ground which does not require any investigation by the Revenue Authorities as the same can be raised at any stage of the proceedings.
9. However, on the other hand, the Ld. D.R. for the Revenue in order to repel the arguments addressed by the Ld. A.R. for the assessee relied upon the order passed by the Ld. CIT(A) and contended that since the amount received by the assessee is an income from settlement made outside the court in United Kingdom (UK) the Revenue has rightly treated it as business income. It is further contended by the Ld. D.R. for the Revenue that when the assessee company and RDG have entered into an agreement to do business any settlement amount arisen out of it is the business income.
10. Before proceeding further we would like to bring on record some undisputed facts pertaining to the issue in question inter-alia that the assessee, earlier known as Nicholas Piramal India Ltd. (NPIL) had entered into an Agreement for Distribution, Manufacturing and Agency (ADMA 1997) with one Boehringer Mannheim Gmbh (BM Germany) in 1997; that by virtue of the agreement (supra) the assessee acquired right to carry on above business, earlier carried out by BM Germany and its subsidiaries namely BM India Ltd. (BMIL) and BML Laboratories Ltd. (BMK); that by virtue of agreement (supra) the assessee stepped into the shoes of BMIL and acquired its entire business by way of amalgamation of BMIL into NPIL as per article 2.1 of the (ADMA 1997); that in 2004 RDG had acquired BM group all over the world and in the same year RDG unilaterally terminated certain obligations under 1997 agreement, which was challenged by the assessee in UK court as per jurisdiction given by the agreement (supra); that thereafter assessee and RDG entered into agreement out of court settlement by entering into a settlement agreement available on record; that as per settlement agreement the assessee and RDG mutually agreed to terminate the (ADMA 1997) withdrawal of cases in court, thus agreement (supra) stood terminated w.e.f. 01.01.2005 and RDG paid compensation to NPIL amounting to US$20.7 million i.e. Rs.92,76,62,688/-.
11. In the backdrop of the aforesaid undisputed facts the sole question arises for determination in this case is:
“As to whether compensation received by the assessee from RDG to the tune of Rs.92,76,62,688/- in out of court settlement for unilaterally terminating certain obligations under the agreement (supra) by RDG is an income assessed to capital gain or a business income”?
12. The Ld. A.R. for the assessee in order to support its case that the sum received by the assessee company by virtue of out of court settlement agreement is chargeable to capital gain and drew our attention towards the relevant clauses of settlement agreement which provides for transfer of entire business from NPIL to RDG as under:
“- Article 3.1 – NPIL shall transfer its legal title in all instruments placed with its customers to RDG and RDG shall purchase such instruments and purchase price of such instruments shall not exceed 1.3 million USD.
– Article 3.4 (c) – which states that the third tranche of payment of compensation amount shall only be transferred on successful transfer of business. It may be noted that this clause speaks of transitional arrangement and cooperation from Assessee to ensure transfer of business under AMDA 1997 agreement to RDG or its subsidiary, associated or related company. Thus, clearly, reference it to transfer of business.
– Article 3.5 NPIL shall sell its entire stock/inventory as on 01st January 2005 to RDG at landed cost.
– Article 6.1 of the settlement agreement specifies that NPIL shall ensure a smooth transfer of entire business relating to the products of RDG.
– Article 8 – Employees of NPIL to be transferred to RDG.
– Article 6.8- RDG to help assist NPIL to collect outstanding payments due to NPIL from its customers and distributors indicates all future dealings with the customers and distributors would be with RDG.”
13. The Ld. A.R. for the assessee while referring to the aforesaid provisions of settlement agreement contended that since it has transferred entire business and its rights under the agreement (supra) has been terminated thus the amount received in consideration thereof is assessable as capital gain. It is further contended by the Ld. A.R. for the assessee that rights under the agreement are capital assets and relied upon the decision rendered by Hon’ble Bombay High Court in case of CIT vs. Tata Services Ltd. (1979) (1 Taxman 427)
14. However, on the other hand, the Ld. D.R. for the Revenue by relying upon the order passed by the AO as well as the Ld. CIT(A) stated that the assessee company has received the sum in question from RDG of Germany under a settlement agreement towards termination of agency and as such section 28(ii)(c) has been rightly invoked and further contended that the compensation has been paid to the assessee to compensate it for leaving all the prospective future profits from the agency business of products of RDG. In order to decide the issue as to whether the compensation received by the assessee is for termination of agency, we need to advert to the relevant recitals of Agreement for Distribution, Manufacturing and Agency (ADMA), 1997 and settlement agreement as under:
(i) that the title of the ADMA, 1997 entered into between BM Company and assessee, which is a basic document reads as “agreement between BM Germany and Nicholas Piramal India Ltd. (assessee)” for “Agency, Distribution and Manufacturing License Agreement”.
(ii) that as per class 4 of the ADMA, 1997 at page 78 BM India has been acting as commission agent in the territory for biochemical. By virtue of the agreement with BM India dated 24.10.1987 BM has taken over the relating rights and duties of Galenus Mannheim GmbH.
(iii) that the assessee has agreed to undertaken the entire business to BM India inter-alia agency for biochemical product.
(iv) that perusal of article 10.28 at page 35 of ADMA agreement shows that the assessee is a commission agent of BM for biochemicals having limited rights and liabilities for this arrangement.
(v) that article 11 at page No.36 of ADMA, 1997 further shows that the supply prices of all the products charged by BM to NPIL shall be agreed upon by both the parties in marketing committee with reference to the higher and lower limits established by MB in particular for its international pharmaceutical business and the price prevailing in the territory for similar and/or competing products. The local selling price shall be determined by the marketing committee under article 15.3. In determining the local selling price of each product the marketing committee shall in particular take into account the price situation in the territory or similar and/or competitive products.
(vi) that article 11.1.1.3 assures the minimum margin to be earned by NPIL at 40%.
(vii) that as per article 11.1.2.4 commission to be earned by the assessee on various bulk products of biochemical was agreed upon as under:
(viii) that as per article 9.1 of the ADMA agreement (supra) ordering procedure has been laid down containing therein that in order to enable BM to arrange for purchasing, planning and order processing, NPIL shall provide BM with return estimates of the local sales, the purchase requirements and firm orders of product in quantity and value according to BM forecast.
15. It is also agreed upon regarding order procedure for specific products if so requested by BM the parties agree upon specific ordering procedures for specific products with respect to raw materials, the parties agree that the order lead time shall be approximately three months.
16. In article 10.2 delivery of terms as to the delivery of products are agreed upon by stating therein that BM shall affect delivery of products ordered by NPIL in accordance with agreed upon ordering procedures as quickly as reasonably possible.
17. In the backdrop of the aforesaid terms and conditions the first question arises to be determined by the Bench is:
“As to whether compensation received by the assessee from RDG on account of termination of agency and distribution of products of RDG in India and provisions contained under section 28(ii)(c) read with section 28(va) & (a) of the Act are attracted?”
18. The Ld. A.R. for the assessee challenging the findings returned by the AO contended that the compensation received by the assessee is not merely for termination of agency in order to invoke section 28(ii)(c) of the Act because the termination is not just termination of agency rights but also termination of distribution and manufacturing rights.
19. We have perused the impugned order passed by the Ld. CIT(A). In the light of the relevant clauses of Agency, Distribution and Manufacturing, Licence Agreement (ADMLA) between BM and NPIL particularly clause no.3.1, 3.2.1, 3.2.2, 3.2.2.1, 3.2.3, 3.3.1, 3.3.1.1, 3.6, 7.3, 8.1.2, 11.1.2.2, 11.1.2.2.1, 11.1.2.3.1, 11.1.2.3.2, 11.1.2.4.
20. Conjoint reading of the various clauses as extracted above goes to prove that primarily parties to the agreement have agreed upon with each other for the purpose of distribution, marketing and sales of product for sales, sales and manufacturing of products by the assessee in India on the basis of a non transferable, non assignable, exclusive license in the territory under the patent, if any, information and know-how of BM to market distribute and sell in the territory under the trademarks. It is also clear from the agreement at the discretion of BM an information transferable, non assignable exclusive license to manufacture in the territory certain BM products which are pharmaceutical Specialities. To manufacture laboratory diagnostic test kits were also subject of the agreement.
21. Clause 3.3.1.1 categorically suggests that the assessee is appointed as BM’s exclusive commission agent in the territory for biochemical.
22. Furthermore, when we examine clause 3.6 it is also very categoric that the assessee would have no right to use or otherwise deal with BM’s patent, trademark, denomination, products, knowhow and information for the purposes other than those of developing, manufacturing, marketing and selling and distributing the products under trademark and denomination. Not only this, even any further trademarks if developed by the assessee in coordination with BM shall also be owned by BM.
23. For laboratory diagnostics parties to the agreement have also agreed that the assessee shall as a general rule receive a weighted average margin of 40% on the net sales of laboratory diagnostics. Similarly in case of Patient Care Diagnostics parties to the agreement agreed that the assessee shall as a general rule receive a weighted overall margin of 40% on the net sales such diagnostics and BM shall have a weighted average contribution of level (ii) of 40%.
24. It is also agreed upon between the parties as per clause 11.1.2.3.2 as a general rule the assessee shall receive a margin of 25% on instruments of the net sales and the BM shall have a level (ii) contribution of 40%. Terms for bio-chemicals as per clause 11.1.2.4 have also been settled between the parties for making payment of commissions on various bulk products viz. Fine Chemicals, Biocatalyst, Bulk Diagnostics.
25. So in view of the matter, we are of the considered view that when the assessee company by virtue of the agreement (supra) got non transferable, non assignable license to manufacture, market, distribute and sell products otherwise owned by the BM for a satisfied commission as agent of the assessee in the face of the fact that the entire intellectual property qua distribution and manufacturing of the product will remain with BM and the assessee shall not be entitled for any such ownership or title to the same.
26. Furthermore, the Ld. CIT(A) has also referred to the joint press release by the assessee and RDG Germany as per schedule of the agreement dated 20.10.2004 wherein it is mutually agreed to discontinue the agreement vide which the assessee was exclusively distributing diagnostics and Patient Care products of RDG. The assessee has agreed to cease to act as RDG’s distributor w.e.f. 1st January 2005 when Roche Diagnostics takeover the distribution.
27. The Ld. D.R. for the Revenue contended that the assessee being the second largest pharmaceutical sales in India and is ranked in 4th in domestic formulation earned consolidated sales of Rs.13.9 billion and recorded his sales of Rs.726.1 million from the diagnostics and Patient Care product of Roche in India, which is 43.05% only of the total turnover of the assessee. The Ld. D.R. for the Revenue further contended that when the agreement (supra) was discontinued vide settlement agreement dated 20.10.2004 neither capital structure of NPIL has been affected nor it has affected the trading structure of NPIL business rather after settlement agreement the assessee’s sales have been enhanced which is apparent from the sales data of the assessee for A.Y. 2005-06, 2006-07 & 2007-08 which is as under:
