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Interest U/s. 234B & 234C payable on advance tax liability under MAT provisions

Whether on the facts and in the circumstances of the case, the ITAT is correct in law in deleting the interest charged u/s 234B and 234C while computing income u/s115JB without appreciating the facts that the said section specifically state that all provision of the Act shall apply to the assessee being company mentioned in the said section and therefore section 115J of the Act is no more available for the assessee for delaying the payment of advance tax in view of the insertion of section 115JA 115JB in the Act.

HIGH COURT OF BOMBAY

Commissioner of Income-tax

Versus

Glenmark Pharmaceutical Ltd.

IT Appeal NO. 2170 OF 2009

JANUARY 8, 2013

ORDER

M.S. Sanklecha, J.  

This appeal by the Revenue under Section 260A of the Income Tax Act (the Act) challenges the order dated 09.07.2008 of the Income Tax Appellate Tribunal (the Tribunal) relating to the Assessment Year 2001-2002.

2. Being aggrieved by the order dated 09.07.2008, the revenue has formulated the following questions of law for consideration by this court.

(a)  Whether on the facts and in the circumstances of the case, the ITAT is correct in law in upholding the CIT(A) order of deleting the addition of Rs. 17,26,124/- u/s. 14A of the I.T. Act, 1961?

(b)  Whether on the facts and in the circumstances of the case, the ITAT is correct in law in upholding the CIT(A) order in deleting the addition of Rs. 22500000/- on account of the non-compete fees paid by the Assessee by treating the same as Revenue Expenditure?

(c)  Whether on the facts and in the circumstances of the case, the ITAT is correct in law in upholding the CIT(A) order in deleting the addition of Rs. 10,00,00,000/- on account of marketing knowhow claimed by the Assessee?

(d)  Whether on the facts and in the circumstances of the case, the ITAT is correct in law in upholding the CIT(A) order in deleting the addition of Rs. 60,97,585/- being depreciation claimed by the Assessee on account of Royalty payments?

(e)  Whether on the facts and in the circumstances of the case, the ITAT is correct in law in deleting the interest charged u/s 234B and 234C while computing income u/s115JB without appreciating the facts that the said section specifically state that all provision of the Act shall apply to the assessee being company mentioned in the said section and therefore section 115J of the Act is no more available for the assessee for delaying the payment of advance tax in view of the insertion of section 115JA 115JB in the Act.

3. Question (a) is concerned with disallowance of expenditure under Section 14A of the Act. We find that the expenses disallowed by the Assessing Officer under Section 14A of the Act amounting to Rs. 17.26 lacs has been deleted in first appeal by CIT(A) to the extent of Rs. 13.65 lacs. The Tribunal in second appeal has deleted even the amount of Rs. 3.60 lacs disallowed by the CIT(A). Whether or not the particular expenses is incurred for earning exempt income is pure question of fact. The Tribunal has arrived at a finding of fact that no expenditure was incurred for earning the exempt income as the investment were made from its own funds and not borrowed funds. The revenue has not been able to show how the finding of fact arrived at by the Tribunal that no expenses were incurred to earn the dividend income is either arbitrary or perverse. In view of the finding of fact, question (a) does not raise any question of law and is therefore dismissed.

The appeal is admitted on questions (b) to (e). At the instance of the Advocates of the parties to the appeal, the appeal is itself taken up for final disposal.

4. Brief Facts:

(a)  The respondent-assessee is pharmaceutical company engaged in manufacturing and marketing of pharmaceutical products. For the Assessment Year 2001-2002, the respondent-assessee had filed its return of income declaring a loss of Rs. 27.53 crores. In its return of Income, the respondent-assessee had claimed as revenue expenditure non-compete fees of Rs. 2.25 crores, marketing knowhow fee of Rs. 10 crores and depreciation claimed on Royalty paid of Rs. 2.43 crores of Rs. 60.97 lacs incurred while acquiring 3 brands/trademarks from one M/s. Lyka Lab Ltd for an aggregate consideration of Rs.34.20 crores. The Assessing Officer disallowed the non-compete fees and marketing knowhow fees besides disallowing the depreciation on royalty to determine the Income. The Assessing Officer determined book profits at Rs. 18.56 lacs under Section 115JB of Act and also directed charging of interest under Section 234B/234C of the Act.

(b)  In appeal, the CIT(A) by an order dated 22.07.2004 held that non-compete fees of Rs. 2.25 crores was in the nature of a Revenue Expenditure on examination of the agreement. This was particularly so as there is no benefit of enduring nature but incurred on account of commercial expendiency to earn more profit. The royalty payment would be in the nature of a cost incurred for acquiring a brand and therefore the same is to be added to the cost of acquisition of the brand and depreciation on the same under Section 32 would be allowable. The expenditure for marketing knowhow is concerned, is not a revenue expenditure but a capital expenditure as benefit acquired on account of marketing knowhow is of enduring nature and is linked with the acquisition of a brand. However, the alternative claim of the respondent that they be allowed depreciation at 25% on Rs.10 crores expended on acquiring marketing knowhow as applicable to plant was granted. So far as charging of interest on book profit is concerned the order of the Assessing Officer holding that interest is payable under Section 234B & 234C of the Act is concerned, was left undisturbed.

(c)  Being aggrieved by the order of the CIT(A) dated 22.07.2004 both the appellant as well as respondent-assessee preferred appeals to the Tribunal. The Tribunal, in its order dated 09.07.2008 held that the expenditure of Rs. 2.25 crores on non-compete fees was dictated by business necessity and commercial expediency and it related to enhancement of its profitability. Therefore, was revenue in nature. In respect of, marketing knowhow fees of Rs.10 crores, the Tribunal held that the same was in nature of revenue expenditure and for that purpose followed its own decision in the matter of USV Ltd. v. Jt. C.I.T. [2007] 14 SOT 49 (Mum.) (URO) rendered on 18.12.2006 i.e. ITA No. 376/Mum/2001 wherein in almost identical circumstances held that information and data acquired are used to carryout the respondent-assessee business activity. This information or marketing knowhow enables the respondent-assessee to facilitate and augment its profit earning capacity. Therefore, the same is in the nature of revenue expenditure. So far as, royalty payments are concerned, the Tribunal upheld the finding of the Commissioner of Income Tax (Appeals) to hold that the royalty payment are infact in substance a payment made to acquire a brand and therefore, a part of acquisition of brand are entitled to depreciation under Section 32 of the Act. The Tribunal overturned the decision of the CIT (A) and held that no interest can be charged on computation of Income under Section 115JB of the Act.

(d)  Being aggrieved by the order of the Tribunal, the revenue is in appeal before us.

Regarding Question (b)

5. Mr. Jasani, Advocate for the respondent strongly objects to this question being entertained as though the issue was raised, the Tribunal has not dealt with the same in the impugned order. We find that though the impugned order has not independently dealt with the revenue’s appeal from the order of the CIT(A) that non-compete fees are not revenue expenditure. However, it has upheld the finding of the CIT(A) that non-compete fees would be classified as revenue expenditure. At paragraph 12 of the impugned order the Tribunal while dealing with marketing knowhow expenses has also observed that non-compete fee was also dictated by business and commercial expediency and was not an expenses incurred for acquisition of capital assets but only enhanced its profitability. However, there is no discussion on the issue before coming to the above conclusion. Therefore, the issue with regard to the nature of non-compete fees whether revenue or capital has to be remanded to the Tribunal so as to enable it to pass an order with reasons while determining whether non-compete fees was revenue or capital expenditure.

Regarding Question (c)

6. Mr. Suresh Kumar, Counsel for the revenue submits that expenditure incurred for marketing knowhow acquired by the respondent is not a revenue expenditure as the marketing knowhow acquired alongwith the brands is a benefit of enduring nature. Therefore, the expenditure is of a capital nature and the Tribunal ought not to have allowed it as a revenue expenditure. On the other hand, Mr. Jasani, Counsel for the respondent-assessee places reliance upon the reasons given by the Tribunal in the matter of USV Ltd. (Supra) which dealt with a similar agreement to that involved in this case. We find that on an examination of marketing knowhow agreement it is very clear that this agreement would lead to an improvement in its existing business resulting in higher sales and consequently higher profitability. This is so as the amounts spent on marketing knowhow would result in improving the profits of the business on the acquired brands as this knowledge would assist in improving the marketing strategy. The expenses incurred for acquiring this marketing knowhow if incurred by the respondent would be revenue and merely because it is outsourced it does not cease to be revenue expenditure. The expenditure incurred on marketing knowhow, according to the Tribunal would result in higher sales as well as lead to higher profit. Consequently, the amount paid for marketing knowhow is revenue expenditure as correctly held by the Tribunal. Therefore, the question would have to be answered in favour of the respondent-assessee and against the appellant-revenue.

Regarding Question (d)

7. So far as Royalty payment is concerned both the CIT(A) as well as the Tribunal has reached a finding of fact that the royalty payment as paid by the respondent-assessee to M/s. Lyka Labs Ltd was a part of the cost of the acquisition of the brand and therefore, would form a part of the cost of the assets namely the brand. In the result, respondent-assessee was entitled to depreciation on the amount of royalty fees as the same is a part of the consideration paid for acquiring the brand and would be entitled to depreciation under Section 32 of the said Act as a part of the brand. In view of the above, no fault can be found with the order of the Tribunal, therefore the question would have to be answered in favour of the respondent-assessee and against the appellant-revenue.

Regarding Question (e)

8. It is agreed between by Advocates for the appellant as well as respondent that the above question is covered in favour of the Revenue and against the assessee by the decision of the Supreme Court in the matter of Jt. CIT v. Rolta India Ltd. [2011] 330 ITR 470. Therefore, question (e) has to be answered in favour of the revenue and against the assessee.

9. Our answer to the substantial questions of law (b) to (e) admitted for our consideration is as under :

(i)  So far as question (b) is concerned, the impugned order of the Tribunal is set aside to the extent it allows non-compete fees as revenue expenditure and matter is remitted back to the Tribunal to dispose of the issue of non-compete fees afresh with a reasoned order after hearing the parties.

(ii)  So far as questions (c) and (d) are concerned, the same is answered in favour of the respondent-assessee and against the appellant- revenue.

(iii)  So far as question (e) is concerned, the same is answered in favour of the appellant-revenue and against the assessee, in view of the decision of the Apex Court in the matter of Rolta India Ltd. (Supra).

10. The appeal is disposed of in above terms with no order as to costs.

Categories: Income Tax
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