I.T.A./3943 and 3944/Mum/2013. Case: Merck Specialities Private Limited Vs The ACIT, Circle-6(3). ITAT (Income Tax Appellate Tribunal)

Case NumberI.T.A./3943 and 3944/Mum/2013
CounselFor Appellant: P.J. Pardiwala and Aarati Visanji, Advs. and For Respondents: B.C.S Naik, CIT-DR
JudgesRajendra, Member (A) and Amarjit Singh, Member (J)
IssueDirect Tax
Judgement DateJanuary 25, 2017
CourtITAT (Income Tax Appellate Tribunal)

Order:

Rajendra, Member (A), (ITAT Mumbai 'I' Bench)

1. Challenging the orders of the CIT(A)-12, Mumbai the assessee has filed the appeals for the above-mentioned Assessment Years (AY.s.). Assessee-company, is engaged in the business of manufacturing trading and marketing of fine chemicals and pharmaceutical specialties. The details of the dates of filing of returns, returned incomes, assessed incomes etc. can be summarised as under:

ITA/3943/Mum/2013, A.Y. 2007-08:

2. First effective ground of appeal is about rejecting the claim of depreciation of Rs. 16.37 crores in respect of intangibles. During the assessment proceedings, the Assessing Officer (AO) found that in the year under consideration the assessee had purchased A & R business of the sister concern namely, Merck Ltd. (ML), for a total consideration of Rs. 81.67 crores, that it had merged the current assets and liabilities of the erstwhile business with its accounts and had shown an addition to the block of intangible assets amounting to Rs. 65.50 crores, that it had also shown addition of Rs. 3.18 crores with regard to other fixed assets, that depreciation at the rate of 25% was claimed on intangibles, that depreciation on the other fixed assets was claimed as per the respective applicable rates. He took into consideration the schedule of fixed assets of the transferor company. He directed the assessee to submit the details of assets and liabilities acquired by it on purchase of the business from its sister concern along with the copy of business purchase agreement. After considering the same, he observed that the agreement showed that assessee had merely acquired certain assets, that the agreement provided the schedule/details of assets transferred amounting to Rs. 3.18 crores only, that it did not give the details of other intangible assets as claimed by the assessee which were claimed to have been allegedly transferred, that as per the agreement no identifiable assets other than certain plant and machinery were acquired. He directed the assessee to submit the details of the assets actually acquired. In response to the direction of the AO, the assessee furnished the valuation report stating that the assets mentioned in the report were intangibles that were also acquired in pursuance of the agreement, that the assets valued as per the valuation report were as follow:

It was further stated that it had capitalised the amount of Rs. 15.14 crores as Goodwill being the difference between the valuation of the intangible assets stated above and the consideration of Rs. 65.50 crores paid by it, that accordingly it had claimed depreciation @ of 25% on the above intangible assets as the amount was capitalised as goodwill.

After considering the explanation, the AO observed that the description of the above assets proved that the assessee had not acquired any visible assets, that the assets mentioned above appeared to be only matter of perception of the assessee, that the valuation report did not figure in the sale agreement. He asked the assessee to explain as to why the entire value of intangible asset should not be ignored for the purpose of depreciation as per the provisions of Explanation 3 to section 43(1) of the Act. He also took into notice the findings of the AO, who had assessed the income of the sister concern. In its response to the query raised by the AO, the assessee relied on the provisions of section 32(1)(ii) of the Act and various judicial pronouncements. However, the AO did not find it tenable. He held that entire transaction, including the creation of assets in support of the transaction, had been designed by the assessee and its sister concern to evade tax by claiming exemption in the hand of the transferor company and claim depreciation on the fictitious assets in the hands of the assessee, that both the companies were subsidiaries of the same parent company, that the transaction was not at arm's length and was manufactured by two concerns related to each other to benefit both of them, that there was no rationale behind capitalisation of the excess consideration paid by the assessee for the intangibles over and above the value as per the valuation report stating it to be goodwill, that the assessee had not termed the transaction as slump sale for the goodwill to arise and to be considered, that it was a simple case of purchase of certain asset at an amount higher than the value of the assets, that the entire consideration should have been capitalised as the respective assets which were purportedly acquired, that the cases relied upon by the assessee had different facts and were not applicable, that no assets were actually transferred to the assessee. Finally, depreciation claimed by the assessee, amounting to Rs. 16.37 crores, was disallowed.

2.1 Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). The assessee raised five additional grounds before him. Elaborate submissions were made before him by the assessee with regard to the additional and the original grounds. After considering the submissions of the assessee, assessment order, remand report and the reply to the remand report by the assessee, the FAA held that the assessee had purchased the A & R business from its sister concern for an amount of Rs. 81.67 crores, that it had merged the current assets and liabilities of the said business with its accounts and had shown an addition to the block of assets as intangible assets amounting to Rs. 65.50 crores and other fixed assets of Rs. 3.19 crores, that as per the agreement signed between the assessee and its sister concern the assessee had acquired tangible assets of Rs. 3.19 crores in the form plant and machinery, that the agreement did not mention any transfer of intangibles in the form of trademark, brands, contracts with toll manufacturers, authorised dealer valuation, technical know-how, employees contract, customer-data, ISO certificate to the assessee from the sister concern at a value of Rs. 65.50 crores, that from the valuation report, submitted by the assessee, it transpired that value of the intangibles was fixed at Rs. 50.35 crores, that the assessee had...

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