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Monsanto India Limited Versus The DCIT, Range 8 (2) & vice versa

2015 (10) TMI 2473 - ITAT MUMBAI

Non-compete fees received on divesture of 'Leader' business - taxable as "Short Term Capital Gains" OR "Long Term Capital Gains" - Held that:- In the present case, we are dealing with a situation where the non-compete fee has been received by the assessee-company for not carrying on the business of what herbicide manufacturing (i.e. Leader business), which it was hitherto carrying on. Thus, what is transferred is right to carry on business, which is a capital asset. Thus, such sum is to be regar .....

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sdirected himself in considering as to when the “……. Right of not to compete came into existence….”; and, not taking into consideration the fact that the covenant of not to carry on business was (i) attached alongwith the transfer of leader business, which was being carried on by the assessee since 1997; and, (ii) for a period of 10 years, which is a fairly long period. Under these circumstances, the non-compete fee is to be assessed as long term capital gain. - Decided in favour of assessee

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ader business. On transfer of leader business to Sumitumo, all the rights of the assessee company under such contracts/businesses arrangements in relation to leader business were transmitted in favour of Sumitomo as per the Business Transfer agreement. Since the Distribution Network was in the nature of business right existing for more than three years, in our view, the same has been rightly held by the CIT(A) to be taxable as long term capital gain.Regarding “Goodwill”, it was quite clear that .....

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venue

Disallowance u/s. 14A - assessee-company had earned dividend income which was claimed exempt u/s. 10(35) - Held that:- Assessing Officer has not complied with the jurisdictional prescription of section 14A(2) of the Act in as much as there is no objective satisfaction recorded by the Assessing Officer that the claim of the assessee made in the return of income was incorrect. Notably, in the present case assessee had suo-moto disallowed certain expenditure under section 14A of th .....

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8377; 20,39,893/- is reasonable considering that the same was even more than the estimation of 2% of dividend income canvassed by the CIT(A). In this manner, we hereby set aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance under section 14A of the Act to ₹ 20,39,893/- made in the return of income - Decided in favour of assessee

Recomputing value of closing inventory in accordance with the provisions of section 145A - Held that:- Apart from po .....

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derived from growing and selling of Hybrid Seeds - whether is to be considered as agricultural income so as to be eligible for deduction under section 10(1) as held by CIT(A) - Held that:- No merit in the ground raised by the Revenue as no fault can be found with the decision of the CIT(A), which is in consonance with the precedents in assessee’s own case - Decided against revenue - ITA No. 3171/MUM/2012, ITA No. 3743/MUM/2012 - Dated:- 30-10-2015 - SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMI .....

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ppeal raised by the assessee and Revenue read as under: Grounds of Assessee s Appeal:- 1. On the facts and in the ci rcumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that noncompete fees received by the Appellant on divesture of 'Leader' business is taxable as "Short Term Capital Gains" instead of "Long Term Capital Gains" as considered by the appellant in the return of income. 2. On the facts and in the ci rcumstances of t .....

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with the provisions of section 145A of the Act. Grounds of Revenue s Appeal:- 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of RsJ,00,44,000/- made u/s.14A of the Act r .w. Rule 8D to ₹ 18,58,789/- wi thout appreciat ing that in the case of M/s. Godrej and Boyce Manufacturing Co. Ltd. vs DCIT (328 ITR 81) (supra) , thei r Lordships had upheld the content ions of the Union of India that Rule 8D i s reasonable in .....

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was not justified in holding that income of ₹ 45,05,07,984/- derived by the assessee from growing and sale of hybrid seeds is to be treated as agricultural income fal l ing u/ s .2(1) (a) and di rec t ing the AO to al low deduc t ion u/ s .10(1) of the I.T.Act, 1961 ignoring the Hon. Karnataka High Court's decision in the case of CIT vs Namdhari Seeds (P) Ltd. (2011) 203 Taxman 565 (Kar), in which on the same facts and circumstances, the revenue's view and action have been upheld. .....

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ll on sale of Leader Business are not short term capital gains as per provisions of sec.50 of I.T.Act." 6. "Without prejudice to the above, the CIT (A) has erred in holding that gains of the appellant on transfer of distribution network, Registration & Licenses, Copy Rights & Goodwi l l on sale of Leader Bus ines s are not bus ines s income, wi thout appreciating the fact that entire expenditure incurred for generating these assets as deduction u/s. 37(1) of the I.T. Act in ear .....

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ssed at ₹ 66,58,34,410/- after making certain additions/ disallowances. The CIT(A) has allowed certain reliefs to the assessee company, and accordingly the Revenue as well as the assessee company are in appeal before us. 4. The first substantive dispute in the cross-appeals relates to the taxability of profit earned by the assessee company on the sale of its business of trading and manufacture of Selective Wheat herbicide containing the active ingredient known as Sulfosulfuron under the tr .....

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.) Profit (Rs.) (i) Non-compete Fees - 2,00,00,000 2,00,00,000 (ii) Technical Know- 1,06,07,280 4,27,30,755 3,21,23,475 How (iii) Trade mark and Goodwill 1,06,07,280 4,27,30,755 3,21,23,475 (iv) Distribution Network - 3,01,66,336 3,01,66,336 (v) Registration and licenses - 3,49,07,433 3,49,07,433 (vi) Copyrights - 78,97,585 78,97,585 (vii) Goodwill - 31,49,231 31,49,231 (viii) Plant and Machinery - 48,97,905 48,97,905 (ix) Inventory 11,53,90,709 11,48,85,095 -5,05,614 Total 13,66,05,269 30,13,65 .....

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rged to the Profit & loss account. The Assessing Officer disagreed with the assessee-company with respect to the treatment of- (a) Non-Compete fees, which was held to be taxable as business income under section 28(va) of the Act; (b) gain on transfer of Distribution Network, Registration and licenses, Copyright, and Goodwill, which was held to be a Short Term Capital Gain instead of Long term Capital Gain treated by the assessee. 5. On an appeal by the assessee, the CIT(A) accepted the claim .....

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as Long term Capital gain (Ground of appeal No.1 in assessee s appeal), whereas the Revenue contends that such receipt is taxable as business income under section 28(va) of the Act(Ground of appeal No.4 in Revenue s appeal). 6. In the above background, we have heard the rival Counsels. The Ld. Counsel for the assessee defended the treatment made by the assessee in the return of income with respect to the gain on transfer of leader business . It was pointed out that the non-compete fee was recei .....

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k Chemicals Pvt. Ltd.,ITA No.4131/Mum/2008& Others order dated 30/12/2011. (iv) Delhi Bench decision in the case of Mediworld Publications P. Ltd., ITA No.4086/Del/09 dated 2/07/2010. 7. On the otherhand, the Ld. Departmental Representative has defended the action of the Assessing Officer in treating the noncompete fee as business income on account of application of section 28(va) of the Act. 8. On the aspect of taxability of non-compete fee, we have considered the rival submissions. As per .....

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n and Non Solicitation. 13.1 Monsanto India shall not, and shall ensure that its Affiliates do not, for a period of ten(10) years from the Closing Date, directly or indirectly whether through partnership or a distributor or as a shareholder, joint venture partner, collaborator, employee, consultant or agent or in any other manner whatsoever, whether for profit or otherwise: 13.1.1 Engage in or carry on any business which competes directly or indirectly with the whole or any part of the Herbicide .....

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ipt is treated as business income by application of section 28(va) of the Act. Relevant portion of Section 28(va) alongwith the proviso reads as under:- 28 The following income shall be chargeable to income-tax under the head Profits and gains of business or profession : va) any sum, whether received or receivable, in cash or kind, under an agreement for- (a) not carrying out any activity in relation to any business; or (b)........................ (i) any sum, whether received or receivable, in .....

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by application of section 28(va) of the Act, because proviso (i) prescribes an exception to cases where sum is received on account of transfer of the right to manufacture,.......... or right to carry on any business..... , which is taxable under the head capital gains. In the context of the controversy before us, it has to be understood that, given the phraseology of section 28(va) read with proviso (i) thereof, non-compete fee paid to the transferor for giving up the right to carry on business .....

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h he transfers then that would fall for consideration under (category (b) referred to earlier) section 55(2)(a) right to carry on business If the non-compete fee is paid to persons associated with the transferor then the same would fall for consideration only under section 28(va)(a) of the Act are not carrying out any activity in relation to any business , Proviso (i) to section 28(va)(a) provides for exception to cases where such receipts are taxable as capital gain, viz., where any sum is rece .....

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transferor for giving up right to carry on business, it would be regarded as capital gain, the cost of acquisition of right to carry on business being determined in accordance with the provisions of section 55(2)(a) of the Act. If it is compensation paid for not carrying out any activity in relation to any business , which the transferor is not carrying on, the same would be chargeable under section 28(va)(a) of the Act. If a receipt is considered as payment for not carrying on business which t .....

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Act would apply and not the proviso thereto. 8.2 Factually speaking, in the present case, we are dealing with a situation where the non-compete fee has been received by the assessee-company for not carrying on the business of what herbicide manufacturing (i.e. Leader business), which it was hitherto carrying on. Thus, what is transferred is right to carry on business, which is a capital asset. Thus, such sum is to be regarded as Capital gain, the cost of acquisition being determined in accordanc .....

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apital asset as a capital asset held for not more than 36 months immediately preceding the date of transfer. Therefore, the incidence of tax on transfer of a capital asset depends on the period for which the capital asset was held prior to its transfer. While holding that non-compete fee was taxable as capital gain, the CIT(A) further held that the right of non-compete came into existence at the time of divesture of the Leader business and therefore, the period of holding being less than 36 mont .....

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stands on this aspect, in our view, the CIT(A) has erred in treating the non-compete fee as a short term capital gain. In our considered opinion, the CIT(A) misdirected himself in considering as to when the ……. Right of not to compete came into existence…. ; and, not taking into consideration the fact that the covenant of not to carry on business was (i) attached alongwith the transfer of leader business, which was being carried on by the assessee since 1997; and, (ii) for .....

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m capital gain held by the Assessing Officer. Notably, the Business Transfer agreement entailed transfer of Leader business to Sumitomo lock, stock and barrel, which inter-alia, also included the transfer of Distribution Network, Registration and licenses, Copyrights and Goodwill as per the Tabulation in para -4 of this order. The assessee company submitted that the gain on transfer of the aforesaid capital assets was long term capital gain because it has been carrying on the Leader business for .....

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on was not claimed on these assets would not come in the way of applying section 50 of the Act because of the provisions of Explanation-5 to section 32 of the Act, whereby depreciation is deemed to be allowed to the assessee irrespective of the fact whether it had claimed depreciation or not. Thirdly, as per the Assessing Officer, since the assessee company had treated the gain on sale of two intangible assets, namely, Technical know-how and Trademarks as short term capital gain, then the gain o .....

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lowed under the provisions of the Act in order that section 50 comes into play. Now, the AO is of the view that by virtue of Explanation -5, to section 32, even if the appellant has not claimed depreciation the same is deemed to have been allowed . The argument of the AO suffers from the following anomalies. First, Explanation -5 is a legal fiction incorporated in the computation of business income and section 50 is a legal fiction for the purpose of computing capital gains. It is trite law that .....

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Explanation 5, to section 32, therefore, does not arise. 11.2 In the background of the aforesaid findings of the CIT(A), the Ld. Departmental Representative has not made any credible argument except reiterating the stand of the Assessing Officer . In our considered opinion, the aforesaid assets are intangible assets, being Distribution Network, Registration and Permits, copyrights, constitute business right/information and partake the character of asset defined in section 55(2)(a) for which also .....

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ital gains. In this context, the Ld. Representative for the assessee had pointed out that the Technical know-how and Trademark of the leader business was owned by the parent company and the assessee company acquired them during the year under consideration and were capitalized in the books of account at their respective costs of acquisition. Notably, the aforesaid factual matrix has been affirmed by the CIT(A) in para 7.3 of his order and before us the same has not been controverted by the ld. D .....

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urred for obtaining registration and permits were claimed u/s 37(1) of the Act, since the expenses were not incurred for the purpose of appreciating he capital assets but were incurred for the purpose of producing profit in the conduct of business and were attributable to business operations. The expenditure incurred by the assessee-company on a year to year basis was only for renewal of registrations and permits. Since these assets were not acquired for any consideration, but were self-generate .....

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assessee company had entered into contracts/ arrangements with several distributors for sale and distribution of their products covered under Leader business. On transfer of leader business to Sumitumo, all the rights of the assessee company under such contracts/businesses arrangements in relation to leader business were transmitted in favour of Sumitomo as per the Business Transfer agreement. Since the Distribution Network was in the nature of business right existing for more than three years, .....

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ation and licenses and copyrights are concerned, the same have also been rightly treated by the CITA) as long term capital gains. 11.7 In view of the aforesaid discussion, we find no merit in Ground No.5 in the appeal of Revenue, which is hereby dismissed. 12. Ground No.6 in appeal of the Revenue seeks to canvass that the gain on transfer of Distribution Network, Registration and Licenses, copyrights and Goodwill is taxable as business income. The aforesaid ground is misconceived because the sam .....

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mpany had suo-moto disallowed a sum of ₹ 20,39,893/- in the return of income. The Assessing Officer however made a disallowance of ₹ 1,00,44,000/-(interest expenditure-Rs. 9,36,000/- plus administrative expenses ₹ 91,08,000/-). On appeal, the CIT(A) has deleted the disallowance of ₹ 9,36,000/- pertaining to interest expenditure, and the disallowance out of administrative expenses has been restricted to 2% of dividend income over and above the amount of ₹ 20,39,893/- .....

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context, the Learned Representative for the assessee pointed out that the entire interest expenditure of ₹ 24.22 lacs debited in the Profit & Loss Account was paid in relation to the Security Deposits received from the Distributors. The aforesaid factual assertions of the assessee-company have been accepted by the CIT(A) and accordingly the disallowance of ₹ 9,36,000/- out of interest expenditure has been deleted. 15. Before us, the Ld. Departmental Representative has not controv .....

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posal to make the investments. Further, the interest expenditure claimed is with respect to the security deposit obtained from the Distributors, which has a nexus with assessee s non-investment activity and thus cannot be considered for disallowance u/s. 14A of the Act. Considering the fact-situation, we affirm the action of the CIT(A) deleting the disallowance of ₹ 9,36,000/- out of interest expenditure. 16. In so far as the disallowance made by the Assessing Officer of ₹ 91,08,000/ .....

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pplicable for assessment year 2008-09 and onwards as laid down by the Hon ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT, 328 ITR 81(Bom). 17. In the return of income filed, the assessee suo-moto disallowed a sum of ₹ 20,39,893/-, the detailed break-up of which has been placed in the Paper Book at page-245. The detail reveals that a portion of salaries and related employee benefits has been identified. Ld. Representative for the assessee explained t .....

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year, yet the disallowance can be made on a reasonable basis and that the action of the Assessing Officer was justifiable. 19. Having considered the rival stands on this aspect, at the threshold we are satisfied that the Assessing Officer has not complied with the jurisdictional prescription of section 14A(2) of the Act in as much as there is no objective satisfaction recorded by the Assessing Officer that the claim of the assessee made in the return of income was incorrect. Notably, in the pre .....

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Apart therefrom we also find that even otherwise the disallowance estimated by the assessee at ₹ 20,39,893/- is reasonable considering that the same was even more than the estimation of 2% of dividend income canvassed by the CIT(A). In this manner, we hereby set aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance under section 14A of the Act to ₹ 20,39,893/- made in the return of income. Thus, Ground of appeal No.2 of the assessee is allowed and G .....

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alue of closing stock to the tune of ₹ 4,13,28,639/- on account of adjustment under section 145A of the Act. The assessee explained that in the course of assessment proceedings it submitted a working of adjustment under section 145A of the Act based on the stand of the Department of the earlier assessment years, whereby the net effect of the adjustment in opening-stock as well as closing-stock was resulting in reduction of profit by ₹ 1,57,02,765/-. The assessee pointed out that such .....

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145A of the Act in the current year by taking the figure of opening stock as per the closing stock valued by him for the preceding assessment year of 2006-07. 22. Against such decision of the CIT(A), the assessee is in further appeal before us. Apart from pointing out that even after applying the provisions of section 145A r.w. section 43B of the Act there would be no effect on profit, the assessee company has not substantiated the said plea. In any case we find that the direction of the CIT(A) .....

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