TMI Blog2006 (1) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, without appreciating the fact that the assessee itself is basically a trader and does not have any manufacturing facility/activity and also without appreciating the fact that the liabilities of excise, modvat, sales tax etc., in respect of the production, claimed by the assessee to be its own, were actually being borne by M/s. Ambalal Sarabhai Enterprises Ltd. and not by the assessee; (2)not appreciating the fact that the facts in the cases of Commissioner of Sales-tax v. Dr. Sukhdeo (23 STC 385) and CIT v. Neo Pharma (P.) Ltd. ( 137 ITR 879 ) were distinguishable from the facts of the assessee s own case; (3)directing the Assessing Officer to allow deduction of Rs. 2,42,85,714 under section 35A of the Income-tax Act, 1961, on the ground that the terms trademarks and patents are synonymous, without appreciating the fact that expenditure incurred on acquisition of trademarks/Registered Users License is not covered by the provisions of section 35A of the Income-tax Act, 1961; and (4)directing the Assessing Officer to allow the claim of deduction on account of interest amounting to Rs. 1,00,77,387 under section 36(1)( iii ) of the Income-tax Act, 1961, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing pharmaceutical products. It was rather manufactured by ASE for the assessee. The Assessing Officer has disallowed the claim of the assessee, having relied upon the proposition that acquisition of technical know-how should not only be for the assessee s business, but also assessee himself is involved in manufacturing activities and produce a thing or article, different from its components. The Assessing Officer further observed that since the business of the assessee is merely that of a trader in pharmaceutical products by acquiring marketing rights and is not engaged in the manufacturing or processing of pharmaceutical products, a deduction under section 35AB cannot be allowed to the assessee as the know-how is not used for the purpose of assessee s business. Assessing Officer accordingly disallowed the claim of the assessee and an appeal was preferred before the CIT(A) with the submission that the provisions of section 35AB require that know-how should be used for the purpose of business of the assessee only. 5. The Explanation to section 35AB defines know-how as "any industrial informations or technique likely to assist in the manufacturing or process-ing of good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT(A) are extracted hereunder : "4. I have considered the submissions made by the appellant and also given careful consideration to the reasoning given by the Assessing Officer in the assessment order for disallowing the appellant s claim for deduction under section 35AB. Having regard to the decision of the Supreme Court in the case of CST v. Dr. Sukhdeo [1969] 23 STC 385 as also the decision of the Jurisdictional High Court in the case of Neo Pharma (P.) Ltd. 137 ITR 879, it is held that the appellant was getting goods manufactured by ASE under its own control and supervision and therefore, the appellant has to be regarded as manufacturer and not ASE. The Hon ble Supreme Court in the case of CST v. Dr. Sukhdeo (23 STC 385) has observed that the expression manufacture has in ordinary acceptation a wide connotation: it means making of articles, or material commercially different from the basic components, by physical labour or mechanical process; and a manufacturer is a person by whom or under whose direction and control the articles or materials are made. Further the Hon ble Bombay High Court in the case of CIT v. Neo Pharma (P.) Ltd. 137 ITR 879 has obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or facts, which relate to the assessment of the assessee can be raised before CIT(A). If, for reasons recorded by the Assessing Officer, in respect of a contention raised by the appellant, grant of relief to him on another ground is justified, it would be open to CIT(A) to grant that relief. The right of the appellant to relief is not restricted to the plea raised by him. For this proposition, the appellant relief ( sic ) upon the decision of the Supreme Court in the case of CIT v. Mahalaxmi Textile Mills Ltd. 66 ITR 710 . 7. It is further submitted that the appellant had made claim for deduction of technical know-how fees in the return of income filed for deduction under section 35AB. In the additional ground of appeal, the claim for deduction of said expenditure is made in the alternative under section 32. However, the subject-matter for the appeal remains the same, viz. the allowability of expenditure on technical know-how fees. Therefore, the contention of the Assessing Officer in this regard is not maintainable. It is further submitted that the issue of allowance of deduction of technical know-how fees emanate from the assessment order. The additional plea that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The appellant relies on the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT 157 ITR 86 , wherein the Supreme Court has held that plant was not necessarily confined to an apparatus which was used for mechanical operations or process or was employed in mechanical or industrial business. The test to be applied was did the article fulfil the function of a plant in the assessee s trading activity. Was it a tool of his trade with which he carried on his business? If the answer was in the affirmative, it would be a plant. The Supreme Court in that case has held that drawings, designs, charts, plans, processing data and other literature fell within the definition of plant. The capital asset acquired by the appellant, viz., technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature fell within the definition of plant and was therefore, a depreciable asset. The appellant therefore, submitted that having regard to the decision of the Supreme Court, the technical know-how acquired by the appellant from ASE be held to be plant. 9. I have considered the submissions made by the appellant and has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PEL, both independent and separate companies engaged in the business of manufacturing, marketing and selling pharmaceutical products. The object of the aforesaid agreement has indeed in the preamble of the agreement so that both the companies proposed to effectively utilize their core competence and synergies their operation to further strengthen their presence in related therapeutic groups in the human pharmaceutical market by forming a joint venture. It was also agreed between the promoter companies that the authorized and paid up capital of JVC would be raised from Rs. 1 lakh and Rs. 2,500 to Rs. 30 crores and Rs. 25 crores respectively. Both ASE and PEL subscribed the paid up capitals of the JVC equally. It was also agreed through this share-holder agreement that ASE shall sell and transfer the technology for manufacture of products listed in Annexures 1A and 1B to the agreement at a consideration of Rs. 17 crores and assign the trademarks listed in Annexure 1A and register the trademarks listed in Annexure 1B for a consideration of Rs. 34 crores. It was also agreed that the ASE shall assign the manufacturing and marketing rights of the products and transfer field force of abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y are sold in the market all over India through various branch offices of JVC and that there being no factory premises nor was there any machinery available for the manufacturing of the products for which the technical know-how have claimed to have been purchased by the JVC from ASE, the claim of the assessee cannot be allowed. The Assessing Officer was also of the opinion that in order to claim a deduction under section 35AB, the technical know-how should be used for the purpose of assessee s business and also assist in the manufacturing or processing of goods. 10. During the course of assessment proceedings, in response to show- cause notice dated 31-10-2000, assessee has furnished the detailed reply dated 11-11-2000, a copy of which is placed at pages 80 to 85 of paper book-I, stating therein that provisions contained in section 35AB of the Act does not provide as a pre-condition for deduction to be allowed, that assessee must necessarily possess manufacturing or processing facilities in order to enable it to claim of deduction. The statutory provisions merely require an assessee to use know-how acquired, for the purpose of the business. It was contended that ASE had manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 35AB of the Act has to be liberally construed and rigid interpretation does not deserve to be placed. 11. In other words, in order to attract the rigour of section 35AB, it may not be necessary for the assessee to actually become an absolute owner of the know-how. But if on payment of money consideration, an assessee is able to use the know-how to run his business, then in such event, the requirement of section 35AB stands satisfied. In support of this proposition, Mr. Agarwal relied upon the following judgments : 1. CIT v. Bright Automotives Plastics Ltd. [2005] 273 ITR 59 (MP) 2. CIT v. Drilcos (India) (P.) Ltd. [2004] 266 ITR 12 (Mad.) 3. CIT v. Tamil Nadu Chemical Products Ltd. [2003] 259 ITR 582 (Mad.) 12. Mr. Agarwal has also placed reliance upon the various judgments which are as under in support of his contentions that the manufacturer is a person by whom or under whose direction or control the goods are manufactured : 1. CST v. Dr. Sukhdeo [1969] 23 STC 385 (SC) 2. CIT v. Ajay Printery (P.) Ltd. [1965] 58 ITR 811 (Guj.) 3. Addl. CIT v. A. Mukherjee Co. (P.) Ltd. [1978] 113 ITR 318 (Cal.) 4. Griffon Laboratories (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pearing at pages 173 to 180 of paper book II. It was further contended that in the absence of such technical know how being made available to ASE by JVC no manufacturing of such pharmaceutical products could have been done by ASE. The payment of acquisition of know-how by the JVC was made to enable the JVC to carry on business of manufacturing and marketing of pharmaceutical products. In the absence of acquisition of know-how, the ASE would have been entitled to sell the same product, which it sold to JVC and others also and JVC would not have obtained the profit of margin, which it did by selling the products in the market. It was further contended that the entire manufacturing of ASE was under direct supervision and control of JVC as is evident from the certificate from ASE dated 19-9-2000 appearing at pages 86 to 89 of paper book I, statement of SSN Gupta and copy of Memorandum of Association dated 1-1-1998. 15. It was further contended that JVC got the pharmaceutical products manufactured by ASE in its own name as is evident from the main object and if the entire evidences are properly looked into, only one inference would be drawn that the assessee was engaged in manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sell the stock or exhibit for sale or distribute drugs identified in the certificate. The copies of certificates are appearing at pages 136 and 137 of the paper book II. Through this Shareholder Agreement it has been explicitly clear that both the promoter companies i.e. ASE and PEL were engaged in the business of manufacturing, marketing and selling various pharmaceutical products and in order to utilize their core competence and synergies their operation to further strengthen their presence in related therapeutic groups in the human pharmaceutical market, they form a new joint venture company in the name of SPPL. It was also agreed through this agreement that before the effective dates, i.e. , the date on which both the parties have brought in their equities in the JVC and the loan amount has been disbursed to JVC, a charge to be created on trademark listed in Annexure IA and the relevant registration certificates and/or documents are to be handed over to JVC. The technology for manufacture of products under trademark in Annexure IA are also to be passed on to the JVC. Through this Shareholders Agreement it was also made emphatically clear that the trademark and the technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or in relation to the manufacture and packing of the said products. 7.Notwithstanding, the above, SPPL shall at all time be entitled to have the said products examined, inspected and tested or cause to be obtained, inspected or tested for quality control on its own and to depute a qualified and authorized representative for inspection and examination at all reasonable time when the said products are being manufactured at ASE facilities of the manufacturing operations of the said products. 8.This MOU records only the broad understanding reached for the time being and the parties would in due course enter into a detailed Agreement, until then the relations between the parties for the manufacture and sale by ASE to SPPL and purchase by SPPL from ASE of the said products shall be governed by the terms and conditions herein contained. 18. We have also carefully examined the statements of the employees of the JVC and we find that undisputedly, the assessee did not have the manufacturing facility of the drugs/pharmaceuticals. It was manufac- tured at the premises of ASE but under the direct supervision and control of JVC. The Shareholder Agreements and the Memorandum of Understa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on we are of the view that where the assessee has paid, in any previous year relevant to the assessment year commencing on or before the 1st day of April, 1998 in lump sum consideration for acquiring a know-how for use for the purpose of business, 1/6th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. Sub-section (1) simply says that know-how should be used for the purpose of business. Explanation below this section further clarifies that know-how means any industrial infor- mation or technique likely to assist in the manufacture or processing of goods, meaning thereby the know-how is a technical information or a technique which has to be used in the manufacture or processing of goods. But nowhere it has been said that only that assessee can take the benefit of this provision of section 35AB, who himself is engaged in manufacturing activities. If the assessee is getting the product manufactured through some other agency, under his own control and direct supervision, it is not proper to hold that he i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of 2.5 per cent of the total gross sales value of the goods or 5 per cent of the added value whichever is lower in lump-sum so long as the agreement was in force. The agreement also provided that the use of the brand name and also know-how would be personal to the assessee and is not transferable to any other person by an assessee unless permitted by the sister concern in writing meaning thereby that the assessee did not acquire the absolute ownership right in the know-how. He was mere a licensee to use it and to transfer it to some other persons on certain terms and conditions and in this case, Their Lordships of the High Court has held that the provisions of section 35AB can be invoked and assessee is entitled for deductions. 21. In the case of Drilcos India (P.) Ltd. ( supra ), Their Lordships have held categorically that irrespective of whether it is a capital or revenue expenditure, the expenditure incurred for the purpose of acquiring know-how was required to be treated only in accordance with section 35AB of the I.T. Act and the deduction that was allowable was 1/6th of the amounts paid as lump sum consideration for acquiring the know-how. Their Lordships furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervision or control the assessee can be considered as a company engaged in manufacturing of goods and thus an industrial company. If the assessee used to exercise sufficient control including quality control, etc., while getting the said goods manufactured from third party assessee is called to have been engaged in the business of manufacturing the goods in question. In the case of Neo Pharma (P.) Ltd. ( supra ), Their Lordships of the Bombay High Court have held that though the plant and machinery employed for the purpose of manufacture belonged to third party and the services of certain employees of the third party were also utilized in that process, the manufacturing activities, if done under the direct control and supervision of the assessee was really that of the assessee. Therefore, it could not be said that it was not the assessee but the third party which manufacture the drugs and pharmaceuticals. 23. From a careful reading of the aforesaid judgments, we arrive at a conclusion that there are two conditions precedent before claiming deduction under section 35AB of the Act, i.e. , (1) the assessee should have acquired the know-how against a lump-sum consideration which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of business as such the assessee is entitled for deduction under section 35AB of the I.T. Act. We, therefore, find no infirmity in the order of the CIT(A) and we confirm the same. 26. So far as deduction under section 35A is concerned, the learned counsel for the assessee invited our attention to the fact that the Assessing Officer has held that under section 35A of the Act, deduction can only be allowed if any expenditure of capital nature has been incurred on the acquisition of patent or copyright and used for the purpose of assessee s business. Since the patent rights and trademarks cannot be equated and considered as same, the assessee is not entitled for deduction under section 35A as it has acquired the trademark and not a patent. According to him, patent right is a manufacturing concept conferring the right to make or manufacturer whereas trademark is marketing concept conferring a right to market a particular symbol. The Assessing Officer has also rejected the alternative contention of the assessee that since the expenditure incurred for the purpose of acquisition of capital asset within the meaning of section 32 of the I.T. Act, depreciation should be allowed, afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this deduction under section 35A of the IT Act. The learned counsel for the assessee further invited our attention to the order of the Tribunal in the case of BPL Refrigeration Ltd. v. Asstt. CIT [2004] 91 ITD 203 (Bang.) in which the revenue itself has claimed that deduction under section 35A of the Act should be allowed on trademarks acquired by the assessee, but the Tribunal has allowed the deduction of the same under section 37 of the I.T. Act. Our attention was further invited to the judgment of the Apex Court in the case of Astra Pharmaceuticals (P.) Ltd. v. Collector of Central Excise [1995] 2 SCC 84 in which Their Lordships have observed that under the custom tariff "patent or proprietary medicines" have been defined as any drug or medicinal preparation in whatever form for use in the internal or external treatment of, or for the prevention of ailments in human beings or animals which bears either on itself or on its container or both, a name which is not specified in a monogram in a pharma copoeia formulary or other publications notified in this behalf by the Central Government in the Official Gazette or which is a brand name, i.e. , the name or registered tradem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark was acquired by the assessee for unlimited period for its utilization it resulted into an enduring benefit to the assessee which lies in the capital field. Expenditure on trademark provides the assessee a tool of its trade with which he carried on his business. He placed reliance upon the judgment of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 in support of his above proposition. 31. The learned counsel for the assessee further argued in the alternative that if the aforesaid contention of the assessee that the acquisition of trademark is a capital asset, i.e. , plant and the assessee is entitled for depreciation is not accepted, the expenditure in acquisition of trademarks is a revenue expenditure as it facilitates the trading operation of the JVC. In support of this proposition, Mr. Agarwal has placed reliance upon the judgment of the Apex Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 in which it has been held that the expenditure even if incurred for obtaining an advantage of enduring benefit may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled for deduction of the entire amount as a revenue expenditure under section 37 of the I.T. Act, the learned departmental representative did not raise much argument. He simply relied upon the Assessing Officer s order. 33. Having carefully examined the orders of the lower authorities and documents available on record, in the light of rival submissions we find that admittedly assessee has acquired the trademark against a lump sum payment of Rs. 34 crores to ASE besides acquiring technical know-how. The transaction of acquisition of the trademark from ASE on a total consideration of Rs. 34 crores was not doubted. The revenue has disallowed the claim of the assessee on the ground that assessee is not entitled for deduction under section 35A of the I.T. Act as the trademark does not fall within the definition of "patent rights" on which deduction under section 35A of the Act is available. The alternative arguments of the assessee were not raised before the Assessing Officer as such no view was expressed on this point by him. The CIT(A) accepted the contention of the assessee that the trademark has not been defined under the Income-tax Act and it is to be understood as in common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each other. In a pharmaceutical field, a medicine is known by its name or symbol. The manufacturing formula of a particular medicine cannot be separately identified and does not bear its own name. It always relates to particular name/symbol of the medicines. If we accept the contention of the revenue that the patent is a formula of manufacturing or processing of medicine and trademark is a name or a symbol of a particular medicine under which it is being marketed, in this situation, can a patent right have its own existence independently or can it be sold or transferred in the market without having its own name ? Once you give a name of a particular medicine it immediately relates with the trademark so that the particular name and formula of a medicine cannot be used by any other person if the medicine is registered under trademark and Merchandise Act, meaning thereby the formula of manufacturing or processing of medicine which may be termed as a patent right according to the revenue does not have its own existence independently without making reference to a particular name of the medicine which is the trademark. In the light of these propositions, we are of the considered opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is invariably word or a combination of a word and letter or numeral by which the product is identified and asked for. In respect of all products both the product mark and house mark will appear side by side on all the labels, cartoons etc. In the case of Indo-French Pharmaceutical Co. v. Union of India 1978 ELT J478 the learned Judge of the Madras High Court while construing tariff item 14E, observed that, a close reading of the Explanations however in my view indicates that the marks, symbols, monograms, labels, signatures or of the words which are used in the medicinal preparation or its container should be such as to indicate that the medicine is a special preparation made by the manufacturer. 36. In the case of Sumat Prasad Jain v. Sheojanan Prasad AIR 1972 SC 2488, Their Lordships have held that the function of the trademark is, to give an indication to the purchaser or a possible purchaser as to the manufacture or quality of the goods, to give an indication to his eye of the trade source from which the goods come, or the trade hands through which they pass on their way to the market. They have also examined the definition of the trademark given in the Trademark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard, we have carefully examined the provisions of section 32 of the I.T. Act in which the trade-mark was held to be a capital asset after 1st April, 1998. We have also carefully perused the judgment of the Apex Court in the case of Alembic Chemical Works Co. Ltd. ( supra ) in which the expenditure incurred in acquisition of a trademark was held to be revenue expenditure and was allowable deduction under section 37 of the I.T. Act, meaning thereby, before this amendment in section 32 of the I.T. Act, the expenditure incurred on acquisition of trademark was considered to be revenue expenditure in the light of the judgment of the Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC). If it is not considered to be an acquisition of a patent right in the light of the provisions of section 35A of the I.T. Act, the assessee is entitled either for a deduction of the entire expenditure or a revenue expenditure. If the amendment in section 32 is called to have a retrospective effect the acquisition of a trademark, can be also considered to be acquisition of capital asset and the assessee is entitled for depreciation. In no case, it cannot be held that the assessee is not elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset. It is further submitted that business was set up during the year under appeal and any expenditure incurred after commencement of business is allowable as business expenditure. The interest paid on funds borrowed for acquisition of technical know-how and trademark, pertained to the period after commencement of business and therefore, allowable as deduction under section 36(1)( iii ) of the Income-tax Act. The CIT(A) re-examined the issue and being convinced with it, he allowed the claim of the assessee under section 36(1)( iii ) of the Income-tax Act. 41. Now the revenue has preferred an appeal before the Tribunal, but, could not produce any judicial pronouncements in support of his contention that this type of expenditure cannot be allowed. The learned counsel for the assessee has placed reliance upon the following judgments in support of his prepositions that interest paid on funds borrowed for acquiring the capital asset after commencement of business, would be treated as revenue expenditure and is allowable under section 36(1)( iii ) of the Income-tax Act. Tetron Commercial Ltd. v. CIT [2003] 261 ITR 422 (Cal.) CIT v. Associated Fibre Rubber Indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate guarantee charges is not allowable as a deduction in one assessment year and in upholding the action of the Assessing Officer to spread it over 5 years. He ought to have allowed the entire expenditure as a deduction in one year, namely, in assessment year 1998-99 alone. 2.The cross objector prays for allowance of the entire expenditure in assessment year 1998-99. WITHOUT PREJUDICE TO GROUND I Ground II 1.The CIT(A) ought to have held that the amount to be allowed as a deduction in assessment year 1998-99 should be one-fifth of Rs. 1.50 crores, that is, Rs. 30 lakhs and not Rs. 7,50,000 as erroneously computed by the Assessing Officer. 2.The cross objector prays for appropriate relief. Ground III 1.The CIT(A) in not disposing of on merits, the additional Ground of appeal in respect of the alternative claim for depreciation on the technical know-how fees of Rs. 17 crores. He ought to have held that if the cross objector were to be held as not entitled to deduction under section 35AB in respect of the technical know-how fees, the cross objector should be allowed depreciation on the aforesaid amount of Rs. 17 crores. 2.The cross objector prays that if its cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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