Principal Commissioner Of Income Tax v. M/S Bayer Vapi Private Limited

C/TAXAP/166/2019 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 166 of 2019 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX VersusM/S BAYER VAPI PRIVATE LIMITED ========================================================== Appearance: MRS KALPANAK RAVAL(1046) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANIand HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 22/04/2019 ORAL ORDER (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Revenue has preferred this appeal under section 260A of the Income Tax Act, 1961 (“the Act” for short) being aggrieved by an order dated 28.6.2018 passed by the Income Tax Appellate Tribunal, Ahmedabad (“the Tribunal” for short) in ITA No. 2584/Ahd/2007 for the assessment year 2004-2005 raising following questions of law stated to be substantial questions of law :the Income Tax Act, 1961 (“the Act” for short) being aggrieved by an order dated 28.6.2018 passed by the Income Tax Appellate Tribunal, Ahmedabad (“the Tribunal” for short) in ITA No. 2584/Ahd/2007 for the assessment year 2004-2005 raising following questions of law stated to be substantial questions of law : “(A) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT has erred in deleting the disallowance on account of legal & professional fees pertaining to buyback of shares. (B) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT has erred in deleting on account of Membership Fee. (C) Whether manufacturing rights, marketing rights, other commercial rights and other assets relating to development, manufacturing process, registration, use, sale marketing and distribution of product are intangible assets eligible for depreciation? (D) Whether the Hon'ble ITAT erred in deleting the disallowance of depreciation claimed by the assessee to the tune of Rs.2,25,14,448/- on intangible assets purchased by the Appellant company and depreciation claimed by the appellant to the tune of Rs.2,29,30,000/- on marketing rights purchased by the appellant company; without considering the fact that neither any specific detail of the nature of such intangible assets purchased was submitted nor any business benefit was derived from such intangible assets.” 2. Heard Mr. Nikunt Raval, learned senior standing counsel with Ms. Kalpana Raval, learned senior standing counsel for the Revenue. with Ms. Kalpana Raval, learned senior standing counsel for the Revenue. 3. Question No.(A) pertains to deletion of disallowance of legal and professional expenses of Rs.10,25,500/-. and professional expenses of Rs.10,25,500/-. 3.1The assessee has debited legal and professional expenses of Rs.10,25,500/- incurred in relation to buy back of shares of the company from its shareholders which pertains to reduction of shares capital of the company. The Assessing Officer disallowed such expenditure on the ground that the expenditure is incurred for reduction of share capital and capital reduction is not day to day affair of the company nor it is related to business and therefore, it partakes the character of capital expenditure. of Rs.10,25,500/- incurred in relation to buy back of shares of the company from its shareholders which pertains to reduction of shares capital of the company. The Assessing Officer disallowed such expenditure on the ground that the expenditure is incurred for reduction of share capital and capital reduction is not day to day affair of the company nor it is related to business and therefore, it partakes the character of capital expenditure. 3.2The assessee therefore preferred an appeal before the CIT (Appeals) who dismissed the appeal on this ground confirming the findings of the Assessing Officer.(Appeals) who dismissed the appeal on this ground confirming the findings of the Assessing Officer. 3.3The assessee therefore, preferred an appeal before the Tribunal. The Tribunal followed its earlier decisions for Tribunal. The Tribunal followed its earlier decisions for 3.4 3.5 the Assessment Years 2000-2001 and 2002-2003 in ITA No.1670/Ahd/2006 and held that the assessee has claimed deduction in respect of expenditure incurred in connection with carrying out buy back scheme and the buyback of shares would not in any manner enhance the capital structure of the assessee company and there is no increase in capital base of the company and expenses incurred were in connection with existing business of the assessee company. The Tribunal therefore, allowed the same as revenue expenditure and deleted the disallowance made by the Assessing Officer and confirmed by CIT (Appeals). Learned advocate for revenue submitted that expenditure incurred for reduction of share capital for restructuring its capital during the year as per its buy back scheme as per provisions of Companies Act,1956 and therefore such expenditure is capital in nature and assessing officer has rightly disallowed the same and confirmed by CIT (Appeals). From facts stated above, it is clear that expenditure incurred does not include the price paid to share holders for buying back the shares, but it only relates to expenditure incurred for carrying out buyback scheme. Assessee has claimed deduction in respect of expenditureincurredforproceedingof implementation of buyback of shares which would not in any manner enhance the capital structure of the assessee but there is outflow of capital and no deduction is claimed for outflow of capital. Therefore, Tribunal has rightly allowed such expenditure as revenue expenditure. 4. Insofar as question No. (B) is concerned, the assessee company has claimed membership fees of Rs.22,000/- paid to club by the Chairman and the Managing Director for increasing its business and business development.company has claimed membership fees of Rs.22,000/- paid to club by the Chairman and the Managing Director for increasing its business and business development. 4.1Assessing Officer disallowed such expenditure by observing that club membership fees of director is personal in nature. observing that club membership fees of director is personal in nature. 4.2In the appeal, the CIT (Appeals) also upheld such disallowance on the same logic. disallowance on the same logic. 4.3The assessee company therefore, filed appeal before the Tribunal. The Tribunal allowed the said expenditure as customary expenses allowable under section 37 of the Act. the Tribunal. The Tribunal allowed the said expenditure as customary expenses allowable under section 37 of the Act. 4.4 4.1Assessing Officer disallowed such expenditure by observing that club membership fees of director is personal in nature. observing that club membership fees of director is personal in nature. 4.2In the appeal, the CIT (Appeals) also upheld such disallowance on the same logic. disallowance on the same logic. 4.3The assessee company therefore, filed appeal before the Tribunal. The Tribunal allowed the said expenditure as customary expenses allowable under section 37 of the Act. the Tribunal. The Tribunal allowed the said expenditure as customary expenses allowable under section 37 of the Act. 4.4 The Tribunal relied upon the decision of this Court in case of Gujarat State Export Corporation Ltd v. CIT reported in (1994) 209 ITR 649, wherein the payment of fees to the Sports Club of Gujarat Limited has been examined and it was held that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefits of the business, it is properly attributable to capital and is of the nature of capital expenditure. However, if it is made for running the business or working with a view to produce the profits, it is a in case of Gujarat State Export Corporation Ltd v. CIT reported in (1994) 209 ITR 649, wherein the payment of fees to the Sports Club of Gujarat Limited has been examined and it was held that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefits of the business, it is properly attributable to capital and is of the nature of capital expenditure. However, if it is made for running the business or working with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. In view of this test laid down, the court, therefore, held that the payment of entrance fee for becoming a member of the sports club cannot be termed as a capital expenditure. The Tribunal also relied upon the decision of Delhi High Court in case of CIT v. Samtel Color Ltd. reported in (2010) 326 ITR 425, wherein it is held that the expenditure incurred by the assessee by way of admission fee paid to obtain corporate membership of club, entitled it to sponsor specified number of its employees to enjoy the benefits of club for which separate payments had to be made and such membership allowed employees to interact with its customers, it could be said that the expenditure was incurred wholly and exclusively for purpose of business and was to be allowed as business expenditure. The Tribunal also relied upon the decision in case of Commissioner of Income-tax v. Groz Beckert Asia Ltd. reported in (2013) 351 ITR 196 (P&H) FB wherein it is held that subscription fees paid for membership of golf club is revenue expenditure. The Tribunal therefore, came to the conclusion that the expenditure incurred for membership fees of club by CMD and the director of the assessee company is in the nature of revenue expenditure. 4.5In view of above settled legal position, it cannot be said that the Tribunal has committed any error of law in allowing membership fees of Rs.22,000/- paid to club by the Chairman and the Managing Director as revenue expenditure. 5. With regard to questions No.(C) and (D), the same are based upon the following facts:based upon the following facts: 5.1The assessee company had purchased Imidachlorpid business on slump sale from Mitsu Industries Ltd. for Rs.27,50,38,000/-duringtheyearunder consideration.business on slump sale from Mitsu Industries Ltd. for Rs.27,50,38,000/-duringtheyearunder consideration. 4.5In view of above settled legal position, it cannot be said that the Tribunal has committed any error of law in allowing membership fees of Rs.22,000/- paid to club by the Chairman and the Managing Director as revenue expenditure. 5. With regard to questions No.(C) and (D), the same are based upon the following facts:based upon the following facts: 5.1The assessee company had purchased Imidachlorpid business on slump sale from Mitsu Industries Ltd. for Rs.27,50,38,000/-duringtheyearunder consideration.business on slump sale from Mitsu Industries Ltd. for Rs.27,50,38,000/-duringtheyearunder consideration. 5.2The Assessing Officer raised the query and asked the assessee to explain the basis for ascribing value to each of the assets acquired by it since the value of assets in the books of Mitsu Industries Ltd. was only Rs.7,19,85,974/-. The assessee company submitted that Mitsu Industries Ltd. is not a related party as per the provisions of section 40A(2)(b) of the Act and the assessee has acquired the profit earning apparatus from Mitsu Industries Ltd for the consideration for which value cannot be based only on the book value of tangible assets debited in the books of seller as it has acquired various international product registrations as well as domestic registration and other approvals/licenses from various authorities. Moreover, it was submitted by the assessee that it has acquired manufacturing and process know-how and the cost of benefits is embedded in the lump-sum consideration paid by them. It was further submitted that intellectual assessee to explain the basis for ascribing value to each of the assets acquired by it since the value of assets in the books of Mitsu Industries Ltd. was only Rs.7,19,85,974/-. The assessee company submitted that Mitsu Industries Ltd. is not a related party as per the provisions of section 40A(2)(b) of the Act and the assessee has acquired the profit earning apparatus from Mitsu Industries Ltd for the consideration for which value cannot be based only on the book value of tangible assets debited in the books of seller as it has acquired various international product registrations as well as domestic registration and other approvals/licenses from various authorities. Moreover, it was submitted by the assessee that it has acquired manufacturing and process know-how and the cost of benefits is embedded in the lump-sum consideration paid by them. It was further submitted that intellectual properties such as manufacturing and process know how and other intangible assets such as commercial right, registrations and licenses have not been considered as an asset and the amount paid by the assessee was a composite consideration for acquisition of a set of assets which constitutes a separate business in itself. 5.3Assessing Officer brushed aside the submissions made by the assessee and held that the assessee company could not justify in any logical and convincing way the basis on which such a huge payment was made to acquire what the assessee terms 'intangible assets'. The Assessing Officer further held that the assessee company could not justify why it paid Rs.27,50,38,000/- for what was essentially just land and 86 building as per the books of Mitsu. Therefore, the Assessing Officer rejected the payment made by the assessee company and disallowed the depreciation of Rs.22,930,000/- claimed on the intangible assets and added back the same to the income of the assessee company. The Assessing Officer in the same way also disallowed the value of marketing rights of Rs.183,440,000 purchased by the assessee and disallowed depreciation of Rs.2,29,30,000/- claimed by the assessee on the same. 5.4The assessee company therefore, preferred an appeal before the CIT(Appeals) who dismissed the appeal accepting the observations made by the Assessing before the CIT(Appeals) who dismissed the appeal accepting the observations made by the Assessing Officer that the assessee company has not furnished the particulars of assets eligible for depreciation and the justification for claiming depreciation on marketing rights and other intangible assets. 5.5Being aggrieved, the assessee filed appeal before the Tribunal. The Tribunal after considering the facts and evidence on record held as under : “117. Thus, we are of the view that the lump-sum consideration was for all rights such as manufacturing rights, marketing rights, other commercial rights, intellectual properties and other assets of the seller relating to development,manufacturingprocess, registration, use, sale marketing and distribution of products apart from tangible assets such as Land, Building and other assets. We further note that M/s. Mitsu Limited was not a related concerns as per the provision of Section 40(A)(2)(b) of the Income-tax Act, 1961 as the point of sales. The Learned counsel submitted that assets acquired under slump sale were capitalized in books of account as per generally accepted accounting principles in a slump sale several assets are purchased for a consolidated price and price is paid for the entire business as a whole. Hence, value to individual assets cannot be assigned directly. The valuation of Intangible assets and marketing rights have been done in accordance with the Accounting Standard-10 (AS-lO) issued by the Institute of Chartered Accountants of India (ICAI) the company has assigned the values to the various assets on a fair basis. The paymentsmadeforacquisitionof lmidachloropid products business pursuant to transfer of Business Transfer Agreement and intangible assets was allocated on the basis of valuation report from independent valuer M/s. Bansi S. Mehta Et Co. who had assigned the value of individual assets in accordance withAS-lO. This valuation of items are placed at Paper Book Page No. 105 to 111. We are of the view that depreciation on intangible assets is allowable as per Section 32 of the Act. We also note that that Ahmedabad Tribunal in the case of M/s. Mitsu Ltd., the seller company, in ITA. No. 1672/Ahd/2007 A.Y. 2004-05(PB-31-70) vide order dated 01.08.2008 has considered the sale of business to the assessee as slump sales and observed that the assessee has transferred machinery and infrastructure including licenses and right to manufacture products for the year 1999 onwards and even on date of sale. This fact is not disputed by the Revenue authorities. The assessee has sold a business which includes the necessary rights and technology. The value of technology and rights are determined the parties to the transaction on commercial consideration and after mutual negotiations. Accordingly, we feel that this transaction is nothing but slump soles exigible to long-term capital gain. Accordingly, this issue of appeal of the assessee is allowed. Thus, it is clear that when the slump sale with considerationof27.50croresaslong-term capital gain has been accepted in the case of seller company, then it cannot be said that the assessee company has not paid the consideration as mentioned in Business Transfer Agreement. Once the sale is recognized and transaction has been upheld by the ITAT also then purchases have to be reeognized as true. The learned counsel for the assessee also placed reliance in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com222 (SC) held that goodwill is an asset under Explanation 3(b) to section 32(1) and, thus, it is eligible for depreciation. In the case of CIT v. Techno Shares & Stock Ltd. [2010) 193 Taxman 248(SC). The Hon'ble Supreme Court held that right of membership to BSE was a business or commercial right which gave a non defaulting containing and continuing member a right to access the exchange and to participate therein in that sense it was a license or akin to a license in terms of section 32(l)(ii). Such right vested in the exchange only on default /demise in terms of Rules and Bye Laws of the BSE, as they stood at the relevant time. However, it should not be understood to mean that every 'business or commercial right' would constitute a license or a franchise in terms of section 32(l)(ii) of the Act. Further reliance is placed in the case of M/s. Trio Elevators Company (India ) Ltd. v. ACIT Circle 8 Ahmedabad [2016] 67 taxmann.com348 (Ahmedabad Trib) wherein it was held that admissibility of depreciation of trademark is not contingent upon its registration in the name of the assessee inasmuch as description of intangible assets is Part-B of depreciation schedule describe the same merely of ‘know-how' patents’ copyright, trademark licenses franchises or any other business or commercial rights of similar nature. Further the Hon'Me Jurisdictional High Court of Gujarat in the case of Pr. CIT v. Swastik Industries [2016] 68 taxmann.com329 (Gujarat) held that payment of compensation made by the assessee-firm to retiring partner was to be treated as goodwill and since, goodwill is an asset under Explanation(1), assessee’s claim for depreciation on said payment was to be allowed. 118. We further observed that the Seller company has sold and transferred various assets under a Business Transfer Agreement for which valuable consideration has been paid by the appellant company. The AO has not given any factual finding as regards her observation that the assessee-company could not justify in any logical and convincing way, the basis on which such huge payment was made to acquire what the appellant company terms ‘intangible assets' based on which inference the assessment order has been framed. The assessee company has purchased intangible assets in the form of marketing rights, right to carry on business, rightto manufacture and technical of know-how for carrying on lmidacloprid Business. The Seller company is also engaged in manufacturing pesticides for the last 15 years and the assessee company is also manufacturing pesticides for the last 3 years. This very facts means that the seller company was having better experience in terms of marketing of know-how as it was more experienced as compare to assessee who was in the market of pesticides for last 3years only. Further reliance is placed on the judgement of Hon'ble Delhi High Court in the case of Areva T Et D India Ltd. v. DCIT [2012] 20 taxmann.com 29 (Delhi) held that specified intangible assets , viz business claims, business information, business records contracts, 'employees and of know-how acquired by assessee under slump sale agreement are in the nature of “business or‘ commercial right‘ of similar nature specified in section 32(1)(ii) and are accordingly eligible for depreciation. Considering the above facts we are of the view that the assessee company has acquired lmidicaholopid business for total consideration of Rs. 27.50 crores which inter~a1ia included intangible assets of worth Rs. 18.34 crores on which depreciation has been claimed at Rs. 2,25 14 448 besides marketing rights on which depreciation has been, claimed at Rs. of Rs. 2,29,30,000 on which depreciation is very much allowable under section 32(1)(ii) of the Act. In the light of above backdrop, and facts of the case and considering the same in totality, we are inclined to agree with the assessee that the A0 and Ld. CIT(A) were not justified is disallowing depredation claimed by the appellant. company to the tune of Rs.2 25,14,448 on intangible assets and Rs. 2,29,30 000 on marketing rights purchased by the assessee company. The A0 is therefore, directed to allow depreciation on intangible assets as marketing rights as claimed by the assessee. In view of these facts and circumstances, the grounds of appeal no 16 to 19 of the appeal are therefore, allowed.” 5.6In view of the aforesaid findings of fact, arrived at by the Tribunal holding that the assessee having purchased various assets under the business transfer agreement by way of slump sale and further that Mitsu Industries Ltd. was not a related concern as per the provisions of section 40A(2)(b) of the Act at the point of sale, depreciation under section 32 of the Act is allowable to the assessee company both on the intangible assets as well as marketing rights. The Tribunal has therefore, not erred in allowing depreciation both on intangible assets as well as marketing rights under section 32 of the Act. the Tribunal holding that the assessee having purchased various assets under the business transfer agreement by way of slump sale and further that Mitsu Industries Ltd. was not a related concern as per the provisions of section 40A(2)(b) of the Act at the point of sale, depreciation under section 32 of the Act is allowable to the assessee company both on the intangible assets as well as marketing rights. The Tribunal has therefore, not erred in allowing depreciation both on intangible assets as well as marketing rights under section 32 of the Act. 6. In the light of the aforesaid discussion, it is not possible to state the Tribunal has committed any legal error so as to warrant interference. No question of law, as proposed or otherwise, much less, substantial question of law, can be stated to arise out of the impugned order of the Tribunal, The appeal is, accordingly dismissed. state the Tribunal has committed any legal error so as to warrant interference. No question of law, as proposed or otherwise, much less, substantial question of law, can be stated to arise out of the impugned order of the Tribunal, The appeal is, accordingly dismissed. (HARSHA DEVANI, J) RAGHUNATH R NAIR (BHARGAV D. KARIA, J)