Itxa/4225/2009 Of The Commissioner Of Income Tax - 7 Mumbai v. Nicholas Piramal India Ltd

sas IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.4225 OF 2009 The Commissioner of Income Tax, Central-1 ..Appellant. V/s. Nicholas Piramal India Ltd. ..Respondent. Mr. Suresh Kumar for the appellant. Mr. J.D. Mistri, senior Advocate i/b. A.K. Jasani for the respondent. CORAM : J.P. DEVADHAR AND K.K. TATED, JJ. DATED : 14TH SEPTEMBER, 2011 P.C. :- 1.Six questions of law are raised by the revenue in this appeal which read as under:- (1)Whether on the facts and in the circumstances of the case and in law, the ITAT was right in holding that if the assessee gets its products manufactured from a third party under its direct control and supervision with a particular specification, the assessee is engaged in manufacturing process for the purpose of Section 35AB of the I.T. Act ?law, the ITAT was right in holding that if the assessee gets its products manufactured from a third party under its direct control and supervision with a particular specification, the assessee is engaged in manufacturing process for the purpose of Section 35AB of the I.T. Act ? (2)Whether on the facts and in the circumstances of the case and in law, the ITAT was justified relying upon the decision of Supreme Court in the case of Commissioner of Sales Tax V/s. Dr. Sukhdev (23 STC 385) and in the case of NEO Pharma Pvt. Ltd. (137 ITR law, the ITAT was justified relying upon the decision of Supreme Court in the case of Commissioner of Sales Tax V/s. Dr. Sukhdev (23 STC 385) and in the case of NEO Pharma Pvt. Ltd. (137 ITR 879) allowed deduction U/s. 35AB ? (3)Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that through acquisition of trademark, the assessee has also acquired the patent rights from the ASE and as such, is entitled for deduction u/s. 35A I. T. Act ?the ITAT was justified in holding that through acquisition of trademark, the assessee has also acquired the patent rights from the ASE and as such, is entitled for deduction u/s. 35A I. T. Act ? (4)While deciding the issue of deduction u/s.35A, the ITAT failed to consider the provisions of section 32(1) which provides in respect of depreciation of (i) buildings, machinery, plant or furniture, being tangible assets (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets. In the case clause (ii) above, the words, trademark, patent and copyrights are used separately and independently ?consider the provisions of section 32(1) which provides in respect of depreciation of (i) buildings, machinery, plant or furniture, being tangible assets (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets. In the case clause (ii) above, the words, trademark, patent and copyrights are used separately and independently ? (5)Whether on facts and in the circumstances of the case, the ITAT was justified in holding that the interest of Rs.6.09 crores, prepayment charges of Rs.1.60 and upfront fees of Rs.25 lakhs was paid on the loans utilized for acquisition of capital assets i.e. technical knowhow and trademarks. The technical know-how and trademarks are not used by the assessee exclusively for the purpose of its own business. Section 36(1)(iii) stipulates a deduction of interest paid in respect of capital borrowed for the purpose of assessee's own business or profession. Since the capital assets were not utilized for the assessee's own business, the interest paid was not an allowable deduction ?was justified in holding that the interest of Rs.6.09 crores, prepayment charges of Rs.1.60 and upfront fees of Rs.25 lakhs was paid on the loans utilized for acquisition of capital assets i.e. technical knowhow and trademarks. The technical know-how and trademarks are not used by the assessee exclusively for the purpose of its own business. Section 36(1)(iii) stipulates a deduction of interest paid in respect of capital borrowed for the purpose of assessee's own business or profession. Since the capital assets were not utilized for the assessee's own business, the interest paid was not an allowable deduction ? (6)Whether on the facts and in the circumstances of the case and in law, the ITAT was right in holding that if the assessee gets its products manufactured from a third party under its direct control and supervision with a particular specification, the assessee is engaged in manufacturing process and, therefore, eligible for deduction of Rs.87,162/- towards R & D charges ?law, the ITAT was right in holding that if the assessee gets its products manufactured from a third party under its direct control and supervision with a particular specification, the assessee is engaged in manufacturing process and, therefore, eligible for deduction of Rs.87,162/- towards R & D charges ? 2.The assessment year involved herein is AY 2003-04. 3.As regards the first four questions are concerned, counsel for the parties state that similar questions raised by the revenue in the assessee's own case being Income Tax Appeal No.466 of 2007 has been disposed off by us today i.e. 14th September, 2011. Hence for the reasons stated therein, question Nos.1 to 4 are not entertained. 4.Question No.5 relates to allowing the interest amounting to Rs.6.09 crores, prepayment charges of Rs.1.60 crores and upfront fees amounting Rs.25 lakhs. As regards prepayment charges and upfront fees are concerned, the ITAT has recorded finding of fact in para 12 of its judgment, that the assessee had borrowed funds from ICICI bank for acquiring intangible assets at 14% interest. The assessee had managed to get loan on cheaper rate of interest at 10% and, therefore, the assessee prepaid the earlier loan having higher rate of interest for which a sum of Rs.1.60 crores was paid as prepayment charges. The assessing officer disallowed the claim of the assessee on the ground that the assessee being not a manufacturer neither the repayment of loan nor the prepayment charges / upfront fees paid thereon were allowable. The ITAT has allowed the claim of the assessee. Hence the revenue has come up in appeal. 5. In the assessee's own case being Income Tax Appeal No.466 of 2007, we have held that the manufacture / production activity carried out by the assessee through the third party under its direct supervision and control amounts to carrying on the manufacture / production activity. Therefore, the loan taken for the aforesaid purposes when repaid as also prepayment charges and upfront fees paid would have to be allowed as business expenditure. In this view of the matter, the decision of the ITAT in holding that the prepayment charges and upfront fees were for the purpose of business activity by the assessee cannot be faulted. 5. In the assessee's own case being Income Tax Appeal No.466 of 2007, we have held that the manufacture / production activity carried out by the assessee through the third party under its direct supervision and control amounts to carrying on the manufacture / production activity. Therefore, the loan taken for the aforesaid purposes when repaid as also prepayment charges and upfront fees paid would have to be allowed as business expenditure. In this view of the matter, the decision of the ITAT in holding that the prepayment charges and upfront fees were for the purpose of business activity by the assessee cannot be faulted. 6.As regards the payment of interest of Rs.6.09 crores is concerned, the ITAT has allowed the claim of the assessee by following its decision in the case of the assessee for AY 1998-99 and 2002-03. There is nothing on record to suggest that the revenue has challenged the decision of the ITAT relating to AY 1998-99 and 2002-03. No case is made out to take a contrary view. Hence we see no reason to entertain question No.5. 7.As regards question No.6 is concerned, the assessing officer has disallowed the claim of Rs.87,162/- incurred by the assessee towards research and development expenses of a SpecialityDivision on the ground that the assessee was neither a manufacturer nor it has any in-house research facility. In the assessee's own case being Income Tax Appeal No.466 of 2007, we have held that the assessee is engaged in the activity of manufacturing / processing of articles from a third party under its direct control and supervision. Therefore, in the facts of the present case, the research and development expenses 5 itxa4225-09 would be allowable. In this view of the matter, the decision of the ITAT in allowing the claim of the assessee of Rs.87,162/- cannot be faulted. Accordingly, the appeal is dismissed with no order as to costs. (K.K. TATED, J.) (J.P. DEVADHAR, J.)