SMITHKLINE BEECHAM ASIA LTD. v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2008-LL-0620]

Citation 2008-LL-0620
Appellant Name SMITHKLINE BEECHAM ASIA LTD.
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 20/06/2008
Assessment Year 1997-98
Judgment View Judgment
Keyword Tags 100 per cent subsidiary • acquisition of goodwill • pharmaceutical product • lump sum consideration • intellectual property • procedural in nature • restrictive covenant • right to manufacture • plant and machinery • revenue authorities • processing charges • technical know-how • additional ground • colourable device • company secretary • consignment agent • avoidance of tax • quality control • revenue receipt • capital receipt • capital reserve • capital asset • closing stock • legal entity • sale proceed • tax evasion • excise duty • sale price
Bot Summary: In order to enable assessee company to do so an agreement was entered into between it and Healthcare on 11th Sept., 1996 which was called a loan licence agreement under which Healthcare would continue to manufacture ENO in India but since it was the assessee company which had been given the right to manufacture the same, the assessee company had to pay conversion charges to Healthcare. According to the AO, the liability to pay the amount was thrust upon the assessee by the UK company which was the parent company for the assessee and but for this the assessee was under no obligation whatsoever to pay the same. In his brief reply, the learned counsel for the assessee did not dispute that there were certain unusual features in the case but contended that there was nothing illegal in the manner in which the assessee was carrying on its business and drew our attention to the judgment of the Bombay High Court in CIT vs. Penwalt India Ltd. 96 CTR 20: 196 ITR 813 where deduction under s. 80-I was granted to the assessee; in that case even though it did not own any plant and machinery or undertaking and was outsourcing the production. The preamble narrates that the assessee company had received from the UK company the right to use the trademark Crocin for the purpose of manufacture and sale of the same in India, that the UK company had provided the assessee with marketing and distribution strategy for the launch of Crocin preparations in India, that the assessee company had executed an agreement on 18th Jan., 1996 with DIL which was the prior owner of the trademark and name Crocin in India to procure the existing stocks of Crocin and its formulations and that the assessee company was presently engaged in the setting up of facilities for the manufacture and sale of Crocin in India. In consideration for the above promotion in the status of Healthcare and t h e covenants undertaken by the assessee, Healthcare agreed to pay the assessee company a lump sum consideration of Rs. 3,25,00,000 on such terms and in such manner as may be specified by the assessee company. The argument of the learned counsel for the assessee is that the assessee The argument of the learned counsel for the assessee is that the assessee company received the amount for not entering the market and creating the marketing or distribution network, which would be its capital asset and was therefore not taxable as income. The argument for the assessee turns on the capability of the assessee company to create such a network, so that it could be said that Healthcare paid the sum to the assessee company for not creating such a network which had the potential to compete with it.


R.V. EASWAR, VICE PRESIDENT: This appeal by assessee pertains to asst. yr. 1997-98 for which previous year ended on 31st March, 1997. assessee is public limited company and during relevant previous year it was engaged in manufacture and sale of pharmaceutical products, such as, ENO, Crocin tablets, Aquafresh toothpaste and toothbrush, Tums and Rebena Amla. appeal arises out of assessment order passed under s. 143(3) of IT Act on 10th Jan., 2000. Ground Nos. 1.1 to 1.7 relate to disallowance of payment of Rs. 4.5 crores made by assessee for obtaining right to manufacture and sell and use brand "ENO" in India. facts relating to this controversy are as follows. assessee company is 100 per cent subsidiary of M/s Glaxo Smith Kline Plc., UK, hereinafter referred to as UK company, which is owner of trademark for Horlicks and ENO. UK company also held 39.9 per cent shares in another company by name Glaxo Smith Kline Consumers Healthcare Ltd. (hereinafter referred to as "Healthcare"), which was incorporated in India in 1961 and was manufacturing both Horlicks and ENO in India since incorporation. agreement for this purpose had been entered into between two companies on 28th June, 1979, copy of which has been at pp. 1 to 6 of paper book filed by assessee. UK company terminated licence granted to Healthcare to manufacture ENO in India by letter dt. 30th May, 1996. termination was to take effect from 22nd Sept., 1996. Earlier, there was agreement entered into between UK company and assessee company on 18th Jan., 1996 (p. 8 of paper book) permitting assessee to manufacture Crocin tablets in India. With effect from 30th May, 1996 and simultaneously, termination of right of Healthcare to manufacture ENO in India, assessee company was given right to manufacture in India by UK company. In other words, ENO, which was heitherto manufactured in India by Healthcare, was to be manufactured by assessee company w.e.f. 22nd Sept., 1996. In order to enable assessee company to do so agreement was entered into between it and Healthcare on 11th Sept., 1996 which was called loan licence agreement under which Healthcare would continue to manufacture ENO in India but since it was assessee company which had been given right to manufacture same, assessee company had to pay conversion charges to Healthcare. This agreement is at p. 16 of paper book. In accounts of assessee company, in addition to conversion charges paid by it, there was entry for payment of Rs. 4.5 crores as "expenses for acquiring new brand" under head "Manufacturing and other expenses". Note 5 in Sch. 13 to annual accounts stated that "compensation of Rs. 450 lacs (previous period Rs. nil) has been paid for acquisition of goodwill and receipt of all marketing, advertising and brand related information in respect of ENO brand of products". While completing assessment, AO took view that amount of Rs. 4.5 crores cannot be allowed as deduction. According to him, there was no change in earlier arrangement for manufacture of ENO fruit-salt except that assessee has been introduced in between as licencee by documentation. Whereas earlier licence to manufacture ENO in India remaind with Healthcare, w.e.f. 22nd Sept., 1996, right was transferred and given to assessee company without any change in other factual position that Healthcare would continue to actually produce product on receiving conversion charges from assessee company. AO also noted that amount was paid under agreement between UK company and Healthcare, to which assessee was not party. According to AO, liability to pay amount was thrust upon assessee by UK company which was parent company for assessee and but for this assessee was under no obligation whatsoever to pay same. He observed that assessee paid amount to acquire goodwill which was capital expenditure. He referred to balance sheet of assessee in which amount was shown as goodwill. AO was not inclined to allow payment as deduction on ground that even if amount paid was not refundable since if agreement is terminated prematurely assessee can very well stake its claim for refund from parent company. According to him, merely on anticipation of occurrence of loss (by premature termination) in future, any liability cannot be allowed as it would remain contingent liability. AO also held in alternative that liability, if any, to pay amount was that of parent company, namely, UK company. Further, in hands of recipient company, namely, Healthcare, amount was shown as capital receipt. For all these reasons, AO disallowed payment of Rs. 4.5 crores in assessment. In doing so, AO also referred to several authorities. On appeal, CIT(A) noted that amount was not paid under any of agreements entered into between three companies and that there was nothing to show that Healthcare asked for any compensation from assessee company for parting with right to manufacture ENO in India. CIT(A) also observed that there was nothing on record to show under what conditions valuable right was transferred to assessee company. Even grant of licence to assessee company was done for no consideration. Further, on acquiring right assessee had not made any payment to UK company which was required to be done under agreement; however, it has claimed to have paid sum of Rs. 4.5 crores to Healthcare for which there was no agreement. All above facts, according to CIT(A), proved that agreements were entered into not at arm s length and not for reorganisation of business but with only motive of reducing tax burden by creating another legal entity and diverting portion of sales to said entity on paper to claim such payment which had no legal sanctity. It was further noted by CIT(A) that return on that portion of sales which has been transferred from Healthcare is now loss and had it continued to be shown by Healthcare, it would have returned profit thereon and paid taxes. CIT(A) found it difficult to understand why such payment was made to Healthcare when there was no obligation and concluded that except for reducing assessee s tax liability there could be no other motive. Having said that, CIT(A) further held that what actually happened as result of documentation was that entire business of manufacturing and marketing of ENO fruit-salt was shown to have been transferred from Healthcare to assessee company and this way latter had acquired monopoly rights and thus payment can be said to be for acquiring monopoly right which was capital expenditure. Ultimately however, CIT(A) clarified in para 17 of his order that his conclusion was "not to hold expenditure as of capital in nature but to say that expenditure is bogus and was artificially incurred to reduce tax effect by diverting part of sale proceed and claiming expenditure against that. facts do establish that appellant company had no resources either physical or financial or managerial to manufacture any of these goods". In para 18, which was concluding para for this issue, CIT(A) however held that payment was "not only capital in nature but also that it is not genuine payment and is not incurred for any of legitimate business needs. This entire arrangement is only for purpose to avoid tax". result was that disallowance was confirmed. assessee is in further appeal before Tribunal. contention on his behalf is that payment was to get licence to use trademark of ENO in India and hence was revenue deductible. conclusion of CIT(A) that this is case of tax evasion has been kly assailed. It is contended that from chain of events and inter se relationship between assessee company and UK company, it should be inferred that amount was paid by assessee for acquiring use of brand ENO in India. view of Departmental authorities that assessee undertook liability of UK company is seriously disputed as also their conclusion that payment was for acquiring goodwill or monopoly rights from Healthcare. It is contended in this connection that entries made in assessee s books of account are not conclusive. It is also contended that fact that Healthcare has shown receipt as capital in its return is not relevant and that in any case, even that claim was being disputed by Department. It is submitted that assessee has been assessed independently and not as adjunct of Healthcare and assessee s profits have not been added in assessment of Healthcare. Thus, both companies are independent of each other, recognised as such by IT authorities and, therefore, there is no question of lifting veil of incorporation to treat both entities as one. Both companies were paying their full taxes and have not availed of any tax holiday relief. It is stated that arrangement between them was only way of conducting business. It was alternatively contended on behalf of assessee that information obtained by making payment is in any event to be taken as technical know-how and consequently as plant entitled to depreciation as held by Supreme Court in case of Elecon Engineering [sic-Scientific Engineering House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386: (1986) 157 ITR 86 (SC)]. House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386: (1986) 157 ITR 86 (SC)]. On other hand, learned CIT Departmental Representative, Mr. Durgacharan Das, besides kly adopting line of reasoning followed by Departmental authorities pointed out that facts cumulatively taken reveal scheme to avoid tax under collusive arrangement and this is strengthened by further fact that UK company has full control over two Indian companies (Healthcare and assessee company). He further brought to our attention that assessee company has no employee except statutory company secretary, it has no production or marketing facility which are all outsourced and in these circumstances, it is anybody s guess as to what kind of business it would have carried on during year to claim payment of Rs. 4.5 crores as deduction in computation of its profits. Mr. Das also filed detailed written submissions which were also explained and elaborated by him before us. In his brief reply, learned counsel for assessee did not dispute that there were certain unusual features in case but contended that there was nothing illegal in manner in which assessee was carrying on its business and drew our attention to judgment of Bombay High Court in CIT vs. Penwalt India Ltd. (1991) 96 CTR (Bom) 20: (1992) 196 ITR 813 (Bom) where deduction under s. 80-I was granted to assessee; in that case even though it did not own any plant and machinery or undertaking and was outsourcing production. He submitted that every legal arrangement which was part of company s infrastructure cannot be looked upon as subterfuge or colourable device to avoid or evade payment of tax. On careful consideration of rival contentions and facts, we are unable to say that Departmental authorities took erroneous view of matter. In letter dt. 30th May, 1996 written by UK company to assessee (p. 15 of paper book), all that has been stated is that w.e.f. 22nd Sept., 1996 earlier agreement dt. 18th Jan., 1996 shall be further amended by addition of same rights relating to trademarks ENO and fruit salt. Neither this letter nor letter of same date written by UK company to Healthcare, refers to any payment to be made by assessee company to Healthcare. We may refer to "loan licence agreement" dt. 11th Sept., 1996 between Healthcare and assessee (pp. 16 to 28 of paper book). It refers to fact that Healthcare was already engaged in sale and distribution of pharmaceutical products for human consumption and was having requisite licence under Drugs & Cosmetics Act, 1940, that it was having factory in Andhra Pradesh with spare capacity and requisite qualified and experienced staff to process and pack products and that assessee had requested it to loan (lend) production capacity in said factory to enable assessee to get certain formulations mentioned in Sch. 1 [ENO fruit-salt (regular) and ENO fruit-salt (lemon)] processed and packed on loan licence basis. It was obligation of Healthcare to comply with all requirements of law for obtaining various approvals and permissions (cl. 2). As per cl. 3, it was obligation of assessee to supply all raw materials and packing materials, data and manufacturing instructions, assistance and guidance including supervision etc., and also to keep insured raw materials and packing materials against natural calamities. Under cl. 4, it was duty of Healthcare to take proper care of materials, to keep proper account of same and to generally be responsible for quality control and for adoption of good manufacturing practices to be specified by assessee. Healthcare was also duty-bound to despatch products in name of assessee at cost of assessee to customers of assessee at such places specified by assessee from time- to-time and according to its instructions. assessee was to have right to supervise and inspect production process to ensure maintenance of quality. For aforesaid services, conversion charges were to be paid by assessee under cl. 5. loan licence agreement was to remain in force for period of five years. There were also provisions for termination/expiry of agreement, arbitration, etc. Even this agreement did not provide for any payment by assessee company to Healthcare. In these circumstances, it is not clear as to how proposal that assessee should pay Rs. 4.5 crores to Healthcare was mooted and by whom. If decision had been taken by assessee company itself, obviously assessee being company decision-making process would have been set in motion and it would not be too much to expect proper documentation in form of minutes, resolutions, etc. These are not available to us so that we can consider purpose for which amount was paid, in proper perspective. In accounts, payment is described as "expense for acquiring new brand" vide item 12 "manufacturing and other expenses" (p. 98 of paper book). Note No. 5 under head "Pre-production/pre-launch expenses" (p. 100 of paper book) shows that compensation was paid "for acquisition of goodwill and receipt of all marketing, advertising and brand related information in respect of ENO brand of products". Even if one were to accept argument of assessee that entries in accounts and description therein are not conclusive of allowability of amount as deduction, it still leaves assessee with burden of showing how amount is otherwise allowable as deduction on revenue account. assessee obviously has no production or marketing facilities. It had to depend entirely on Healthcare for manufacture and sale of products even as per agreement. Without any physical acquisition of infrastructure necessary for manufacture and sale of ENO products, by single piece of documentation and as if by magic wand, viz., loan licence agreement, assessee has been made responsible for production and sale of those products. payment of Rs. 4.5 crores appears to us in these circumstances to be closely related or connected to very acquisition of infrastructural facilities for production and sale of ENO products. In this view of matter, it appears to us that IT authorities rightly held that payment was capital in nature, certainly not incurred for purpose of business or in course of carrying on business. We are unable to accept submission of assessee that amount was paid to get licence to use trademark of ENO in India or for use of brand name ENO in India. learned counsel for assessee had referred to number of authorities to support his contention that payment was similar to payment for obtaining use of technical know-how and hence revenue deductible. Our attention was drawn to following authorities: (i) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC); (ii) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1: (1989) 177 ITR 377 (SC); (iii) CIT vs. Indian Oxygen Ltd. (1996) 134 CTR (SC) 372: (1996) 218 ITR 337 (SC); (iv) CIT vs. I.A.E.C. (Pumps) Ltd. (1998) 150 CTR (SC) 126: (1998) 232 ITR 316 (SC); (v) CIT vs. Wavin (India) Ltd. (1999) 155 CTR (SC) 164: (1999) 236 ITR 314 (SC); (vi) Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del); (vii) Triveni Engineering Works Ltd. vs. CIT (1982) 29 CTR (Del) 234: (1982) 136 ITR 340 (Del); (viii) Addl. CIT vs. Shama Engine Valves Ltd. (1983) 32 CTR (Del) 351: (1982) 138 ITR 216 (Del). These were all cases where payments were made for obtaining use of technical know-how relating to manufacture of products and payments were held to be on revenue account. But, facts of present case are different, in fact quite unusual. ENO products were being manufactured by Healthcare Ltd. in India since 1961. In 1996, right to manufacture those products was taken away from Healthcare by UK company and given to assessee company. assessee company had no manufacturing or marketing facilities of its own. All that took place was that assessee company was constituted as de jure manufacturer of ENO products in India though de facto, earlier arrangement that said products would be manufactured by Healthcare continued without any change. hyper-legalistic view cannot be taken of arrangement to hold that even factually it was assessee company which used brand name or licence or technology. It would therefore be far-fetched to hold that payment made by assessee company was for use of brand name or licence to manufacture ENO products. We are thus in agreement with view taken by Departmental authorities that payment of Rs. 4.5 crores is not allowable as deduction. Accordingly, we dismiss first ground. second ground is directed against assessment of sum of Rs. 3.25 crores received by assessee from Healthcare allegedly on account of restrictive covenant, as revenue receipt. contention is that aforesaid amount was received for restrictive covenant of not appointing preferred distributor, other than Healthcare, for distribution of pharmaceutical product called Crocin and was thus capital receipt not liable to tax. It is further contention of assessee that IT authorities were not right in their view that there was no competition between assessee and Healthcare and thus it could not be said that amount was received as compensation for refraining from carrying on competing business. assessee also assails view of IT authorities that amount received was nothing but capitalised value of profits which assessee could have earned had it sold goods itself. facts in brief are that agreement was entered into on 18th Jan., 1996 between company by name Duphar-Interfran Ltd. (hereinafter referred to as DIL) which was incorporated in India and assessee company. It was titled "agreement for sale of stock". Under this agreement, DIL was to sell its entire stock of Crocin held by it to assessee. There are several other clauses to this agreement which are not very relevant for our purpose. On very same day i.e. 18th Jan., 1996, another agreement called "manufacturing agreement" was entered into between DIL and assessee under which from said date DIL w s to manufacture Crocin only for purpose of exclusive sale to assessee or its authorised agents or representatives. manufacture by DIL of Crocin products was under cl. 2.1 of agreement to be one "under trust" and DIL was to hold brand name Crocin and intellectual property rights therein in trust for assessee company. One more agreement was entered into on same day i.e. 18th Jan., 1996 and this was between assessee and Healthcare, copy of which is at pp. 176 to 185 of paper book. According to cl. 2 to this agreement, assessee company appointed Healthcare as its non-exclusive agent to market and sell products (Crocin and its connected formulations). It was duty of Healthcare under this agreement to promote sale of Crocin products in aggressive and diligent manner and submit all proposed advertising, marketing, promotion plans and furnish all information to assessee with relevant information. It was also duty of Healthcare to make reasonable efforts to obtain and maintain all licences and approvals necessary for it to perform duties under agreement. It was also bound to maintain proper records. According to cl. 11, agreement shall come to force from 18th Jan., 1996 for period of ten years unless terminated earlier. Clause 12 provided that in consideration of obligations undertaken by Healthcare under agreement, assessee shall pay commission for services at mutually agreed terms. In addition to commission, assessee was also to reimburse Healthcare all direct expenses incurred in connection with services after raising invoices or debit notes. Clause 14 provided that on expiry or termination of agreement, Healthcare shall cease to market or sell or promote or render any services under agreement. other terms of agreement are not relevant for our purpose. On 25th Jan., 1996, another agreement was entered into between assessee and Healthcare, copy of which is at pp. 29 to 34 of paper book. preamble narrates that assessee company had received from UK company right to use trademark "Crocin" for purpose of manufacture and sale of same in India, that UK company had provided assessee with marketing and distribution strategy for launch of Crocin preparations in India, that assessee company had executed agreement on 18th Jan., 1996 with DIL which was prior owner of trademark and name "Crocin" in India to procure existing stocks of Crocin and its formulations and that assessee company was presently engaged in setting up of facilities for manufacture and sale of Crocin in India. preamble further narrates that assessee had appointed Healthcare as its non-exclusive distributor for medical preparations in India under agreement dt. 18th Jan., 1996 and that Healthcare was desirous of being associated with Crocin in India as preferred distributor on specific commercial terms which were not covered by distributor agreement. preamble further states that pursuant to desire, Healthcare had approached assessee company for being associated with it as preferred distributor for Crocin by undertaking additional covenants and that assessee company had also agreed to proposal. Thereafter, terms and conditions of promotion of Healthcare from mere distributor to status of preferred distributor for Crocin in India are set out in agreement in cl. 2. Under this clause, assessee specifically covenanted with Healthcare as follows: (a) Not to directly distribute Crocin to retailers and wholesalers in India. (a) Not to directly distribute Crocin to retailers and wholesalers in India. (b) To grant Healthcare priority right of refusal to distribute Crocin in markets in India which may be developed by assessee at later date. (c) To grant Healthcare priority right of refusal in distributing line extension of Crocin that may be developed by assessee at later stage. (d) To share with Healthcare enduring benefit of any promotional or market/product development activities that may be carried out by assessee company in future in relation to Crocin. (e) To transfer Crocin to be manufactured by assessee company to Healthcare on preferred distributor basis and to generally deal with Healthcare in relation to Crocin on preferred distributor basis. (f) To issue notice to Healthcare of appointment of additional distributors or preferred vendors in relation to Crocin in India. (g) By way of additional incentives, assessee was also to transfer to Healthcare its rights and obligations under agreement with DIL dt. 18th Jan, 1996 and to share with Healthcare strategies obtained from UK company for launch of Crocin in over-the-counter segment in India. In consideration for above promotion in status of Healthcare and t h e covenants undertaken by assessee, Healthcare agreed to pay assessee company lump sum consideration of Rs. 3,25,00,000 on such terms and in such manner as may be specified by assessee company. other clauses in agreement are routine and are of no special significance. In accounts of assessee company for year ended 31st March, 1997, aforesaid amount was shown as capital reserve (p. 96 of paper book) and in notes to accounts (p. 100 of paper book), note No. 4 stated that "capital reserve of Rs. 325 lakhs represents amount received from consignment agent for giving them right to sell company s products on preferred basis". On aforesaid facts, assessee claimed that amount was not taxable as revenue receipt whereas it is case of IT authorities that same was taxable as revenue receipt for following reasons: (a) UK company controls both assessee and Healthcare. Till 18th Jan., 1996, right to manufacture and sell Crocin in India was given by UK company to Healthcare Ltd., but from said date right was transferred to assessee company. (b) assessee company did not have any infrastructure to produce and market Crocin in India and therefore entrusted these activities to Healthcare which was earlier producing and marketing same. (c) above arrangement did not in substance effect any change in production and marketing set up. All that happened was that assessee came into existence as intermediary though it had no infrastructure to produce or market Crocin. arrangement was internal, confined to three companies which were in same group and management. (d) agreement dt. 25th Jan., 1996 between assessee and Healthcare, under which latter was promoted as preferred distributor does not speak of production for which separate agreement was entered into under which assessee paid processing charges to Healthcare. (e) covenants for which assessee received Rs. 3.25 crores from Healthcare show that amount was received only in respect of marketing arrangements with Healthcare and not on any capital account. said amount was not refundable and assessee has shown same as capital reserve. amount has not been received on account of any obligation of assessee o n capital account. It has been received for permitting Healthcare to use brand name owned by assessee for production and marketing by Healthcare on behalf of assessee. It is, therefore, revenue receipt assessable as income. For above reasons, IT authorities have treated receipt as revenue receipt. argument of learned counsel for assessee is that assessee argument of learned counsel for assessee is that assessee company received amount for not entering market and creating marketing or distribution network, which would be its capital asset and was therefore not taxable as income. He submitted that though such network was y e t to come into existence, there was distinct possibility of assessee creating such network having commenced manufacturing operations through DIL, that it had right to create network which it refrained from and gave to Healthcare in consideration of above sum and thus receipt was capital in nature. It was argued that network need not be in place first and it was sufficient that assessee company had right to create network. Strong reliance was placed on order of Hyderabad Bench of Tribunal in Dy. CIT vs. Sri K.S.N. Enterprises (P) Ltd. (2007) 108 TTJ (Hyd) 940: (2007) 105 ITD 375 (Hyd) as well as orders of Delhi Benches of Tribunal in cases of Gomti Credits (P) Ltd. vs. Dy. CIT (2006) 100 TTJ (Del) 1132 and Sunil Lamba vs. Dy. CIT (2004) 83 TTJ (Del) 174. On basis of these orders, it was submitted that mere capability of assessee company of entering into competition with Healthcare in matter of marketing/distribution in India of Crocin products was sufficient and if in perception of parties to agreement there was such threat which would upset business of Healthcare, amount paid by it to assessee company for not entering marketing/distribution network was capital in nature. Our attention was also drawn to following judgments of Madras High Court: (i) CIT vs. T.I. & M. Sales Ltd. (2003) 181 CTR (Mad) 461: (2003) 259 ITR 116 (Mad); (ii) CIT vs. Ambadi Enterprises Ltd. (2004) 188 CTR (Mad) 179: (2004) 267 ITR 702 (Mad). contention of Department is that there has been avoidance of tax by group firstly by claiming expenditure of Rs. 4.50 crores in hands of assessee and secondly by claiming receipt of Rs. 3.25 crores as capital receipt by arrangements entered into between companies belonging to same group. It was pointed out that assessee under agreement of 25th Jan., 1996 desired to market existing stocks of Crocin acquired from D I L through Healthcare. According to learned CIT-Departmental Representative, there was no competition between assessee and Healthcare and covenants undertaken by assessee company were not restrictive in nature, even though agreement refers to them as restrictive covenants. assessee has monopoly of marketing Crocin and had merely asked Healthcare to market same. Had assessee sold products itself, sale price would have been offered as revenue receipts; amount of Rs. 3.25 crores is in lieu of sale price and was therefore taxable as income. According to learned CIT-Departmental Representative, CIT(A) was right in holding that receipt represented capitalised value of all profits that assessee could have received if it had marketed goods itself. Reliance is placed on judgment of Supreme Court in National Steel Works Ltd. vs. CIT (1962) 46 ITR 646 (SC). It is thus contended that amount received by assessee was taxable as income. We have carefully considered facts and rival submissions. It is not in dispute that assessee company did not have, at time of receipt, marketing or distribution network in place. It certainly could have created such network, in which case it could have exploited same by entering into negative covenant with Healthcare for consideration. This may have amounted to potential threat to Healthcare which was appointed as preferred distributor. It would have been quite reasonable for Healthcare to not only insist that it should be appointed as preferred distributor, but to also insist that assessee company does not compete with it in matter of distribution or marketing of Crocin products in India. But, no such network had been created in first place. argument for assessee turns on capability of assessee company to create such network, so that it could be said that Healthcare paid sum to assessee company for not creating such network which had potential to compete with it. In absence of network in place, question is only about perception of parties to agreement. In perception of Healthcare, assessee company could have posed threat in this field, though network had not been put in place. This is somewhat far-fetched. other problem in this case, apart from fact that distribution/marketing network had not been put in place, is that both companies belong to same group and were in position to put in place arrangement to liking of both without much commercial sense. In order that there should be perception of potential threat, company which is perceived to be threat must have had proven track record of having put in place efficient distribution or marketing network. assessee company has no such track record. As noted earlier while dealing with first ground, it has no infrastructural facilities either for manufacturing or for distribution or marketing products. Both products (ENO and Crocin) were being manufactured by other companies on loan licence basis. When there is absolutely no track record, it is difficult to accept contention of assessee that there could be potential threat that assessee company could put in place efficient and profitable distribution or marketing network. perceived threat has no basis except on theory. Therefore, in our opinion, receipt cannot be related to negative or restrictive covenants undertaken by assessee company under agreement of 25th Jan., 1996. We are aware that we should be able to appreciate things from point of view of businessmen and not to substitute their view of business expediencies by ours, but present case is one where very factual basis of decision of Healthcare to pay sum to assessee was non-existent and Revenue authorities cannot be expected to put on blinkers while considering taxability of sum. We confirm their action and dismiss ground. third ground is directed against disallowance of Rs. 1,70,75,520 being excise duty paid in respect of Crocin stock of finished goods claimed as deduction under s. 43B of Act. This issue is covered in favour of assessee by order of Delhi Bench of Tribunal in Glaxo Smithkline Asia (P) Ltd. vs. Asstt. CIT (2005) 97 TTJ (Del) 108: (2006) 6 SOT 113 (Del), vide paras 21 to 23 of said order. In these paras, identical issue has been discussed and has been held in favour of assessee. This position is not disputed by learned CIT-Departmental Representative. In present year, additional reason given by IT authorities is that s. 145A introduced by Finance (No. 2) Act, 1998 is procedural in nature and therefore applies to all pending proceedings and under this section, closing stock should be valued by including amount of excise duty actually paid or incurred by assessee to bring goods to their location and condition as on last day of accounting year. We are concerned with asst. yr. 1997-98. section was inserted w.e.f. 1st April, 1999 and in para 52 of Circular No. 772, dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9: (1999) 235 ITR (St) 35], CBDT has stated that amendment will take effect from 1st April, 1999 and will accordingly apply in relation to asst. yr. 1999-2000 and subsequent years. In CIT vs. Berger Paints (India) Ltd. (2002) 174 CTR (Cal) 269: (2002) 254 ITR 503 (Cal), Calcutta High Court held that s. 145A applies only from asst. yr. 1999-2000 and has not been given retrospective effect. Accordingly, we accept assessee s ground and direct AO to allow amount as deduction under s. 43B of Act. We now come to additional ground raised by assessee. ground is as under: "That on facts and circumstances of case sum of Rs. 1.76 crores, being share of administrative expenses relating to period 1st Jan., 1997 to 31st March, 1997, determined on basis of report submitted by Price Waterhouse ought to be allowed in relevant previous year." additional ground has been admitted by Tribunal vide order sheet entry dt. 16th July, 2007. Accordingly, arguments were heard on same. I T authorities have disallowed claim of assessee for allowance of its share of administrative expenses for three months period. It is common ground that assessee has no staff of its own and entire administration, establishment, selling and distribution, etc. are being carried out by Healthcare. In asst. yrs. 1998-99 and 1999-2000, similar issue reached Tribunal in ITA Nos. 2099 and 2645/Del/2002 and by order dt. 11th June, 2004, Tribunal deleted disallowance out of administrative expenses for period 1st April, 1997 to 31st March, 1998. In same order, disallowance of assessee s share of administrative expenses for period 1st Jan., 1997 to 31st March, 1997 was upheld by Tribunal with following observations: "However, we find merit in contention of Revenue that expenditure relating to period 1st Jan., 1997 to 31st March, 1997 cannot be allowed as it pertains to asst. yr. 1997-98. Undisputedly, assessee as well as SBCH found t h t arrangement between them under initial agreement was not adequate and, therefore, it was decided that new arrangement as per report of PWC should be implemented w.e.f. 1st Jan., 1997. Therefore, in principle, liability pertaining to this period had accrued and only quantification was postponed. In view of same, we are unable to hold that liability for this period also crystallized in year under consideration. This report had been received in September, 1997 and was approved in December, 1997 and on that basis, assessee could make provisions for liability pertaining to period from 1st Jan., 1997 to 31st March, 1997 in statement of accounts for year ending 31st March, 1997. Even otherwise, such claim could be made by t h e assessee in course of assessment proceedings for that year. Accordingly, it is held that expenditure pertaining to this period cannot be allowed in asst. yr. 1998-99." It was pursuant to above finding that assessee had filed additional ground which had also been admitted by Tribunal as stated above. matter now stands covered by aforesaid order of Tribunal wherein it was held that similar claim made by assessee in asst. yrs. 1998-99 and 1999-2000 should be allowed. argument raised by CIT-Departmental Representative was that assessee has adopted device to avoid tax. learned counsel for assessee has however drawn our attention to affidavit filed by Department through its standing counsel before Hon ble Delhi High Court in Civil Writ Petn. No. 7304 of 2005 pursuant to direction given by High Court on 13th May, 2005, in which it has been stated as follows: "In High Court of Delhi at New Delhi Civil Writ Petn. No. 7304 of 2005 In matter of Additional Commissioner of Income-tax New Delhi. .Petitioner vs. M/s Glaxo Smithkline Asia (P) Ltd. New Delhi & Ors ................Respondents Furnishing of information on behalf of petitioner in pursuance to direction given vide order dt. 13th May, 2005 Most Respectfully Sheweth: That aforesaid matter last came up for hearing on 13th May, 2005, on which date arguments were heard at length and judgment was reserved. However, Hon ble Court directed petitioner to inform us as to whether administrative expenses paid by petitioner to M/s Smithkline Beecham Consumer Health Care Ltd. (SBCH in short) were declared by payee company in its return of income and whether tax was paid on same. That it is submitted that M/s SBCH is being assessed at Chandigarh and t h e information is now received from Dy. CIT, Circle-4(1), Chandigarh. It is informed that during relevant assessment year i.e., asst. yr. 2001-02 M/s SBCH has shown recoveries of Rs. 2,515.43 lacs from M/s Glaxo Smithkline Asia (I) (P) Ltd. i.e., respondent company herein and said recoveries h v e been reduced from expenses made under respective heads. Consequently, income of M/s SBCH has been increased by this amount on which tax has been duly paid. Thus, M/s SBCH has paid tax on aforesaid amount. It is respectfully prayed that aforesaid information may kindly be taken on record. Applicant Filed Through Sd/- (Prem Lata Bansal) Senior standing counsel New Delhi Delhi High Court Dt. 24th May, 2005 New Delhi" In light of aforesaid affidavit, argument of CIT-Departmental Representative that claim amounts to tax evasion cannot be given effect to. On merits, issue is covered in favour of assessee by order of Tribunal cited above. There is no change in facts or legal position for year under appeal. Therefore, respectfully following order of Tribunal, we direct AO to allow aforesaid amount as deduction. additional ground is allowed. In result, appeal of assessee is partly allowed. *** SMITHKLINE BEECHAM ASIA LTD. v. JOINT COMMISSIONER OF INCOME TAX
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