Income Tax Appellate Tribunal - Mumbai
Sigma Laboratories, Mumbai vs Department Of Income Tax on 30 January, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'I', MUMBAI
Before Shri N.V. Vasudevan, JM and Shri Rajendra Singh, AM
I.T.A. No. 1932/Mum/2009
Assessment Year : 2005-06
The Income-Tax Officer- M/s. Sigma Laboratories,
17(2)(3), Sigma House, 43, South R.A. Kidwai
R.No. 210, Piramal Chambers, Vs. Road, Wadala,
Mumbai 400 012. Mumbai 400 031.
PAN: AACFS 5124 M
(Appellant) (Respondent)
I.T.A. No. 2209/Mum/2009
Assessment Year : 2005-06
M/s. Sigma Laboratories, The Income-Tax Officer-17(2)(3),
Sigma House, 43, South R.A. R.No. 210, Piramal Chambers,
Kidwai Road, Wadala, Vs. Mumbai 400 012.
Mumbai 400 031.
PAN: AACFS 5124 M
(Appellant) (Respondent)
Assessee by : S/Shri B.K.Khare and D.P. Bapat
Revenue by : Shri Ajay Kumar Srivastava
ORDER
PER N.V. VASUDEVAN, JM:
ITA No. 1932/M/2009 is an appeal by the Revenue while ITA No. 2209/M/2009
is an appeal by the assessee. Both these appeals are directed against the common order dated 30.01.2009 of the Commissioner of Income-tax (Appeals)-XVII, Mumbai, relating to the assessment year 2005-06.
2. The facts and circumstances under which these appeals arise for consideration are as follows:
3. The assessee is a partnership firm. It was originally engaged in the business of manufacture and sale of pharmaceutical products. In the course of its business it became the beneficial owner of pharmaceutical formulations and trade marks or brands associated with such pharmaceutical formulations. On 28th October, 1997, a company, by name, Sigma Laboratories Private Limited (in short 'SLPL') took over the business of 2 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 the assessee. Since the assessee was the registered owner of trade mark and since the assessee wished to continue to own the trade mark in future the Assessee granted a license to SLPL to use the trade mark. For such use SLPL had to pay the assessee 0.25% of its sales as royalty for the use of the trade mark. Thus, SLPL was a licensed user of the trade mark and formulations belonging to the assessee and was paying royalty in respect of its manufacture and sale in the manner as set out in the agreement dated 28.10.1997.
4. By an Agreement dated 11.08.2004 and by another Agreement dated 28.3.2005, the assessee sold various brands (trade marks) owned by it of which either it was owner of the registered trade mark or in respect of which the registration was pending with the Trade Marks Authorities. By an Agreement dated 11.8.2004 the assessee assigned 27 brands or trade marks to one M/s. Maneesh Pharmaceuticals Pvt. Ltd. (in short 'MPPL') for a sale consideration of Rs.19 crores. Similarly, under the Agreement dated 28.03.2005 the assessee assigned brands and brand names (trade marks) in 34 trade marks and brand names. Both these agreements are at pages 5 to 14 of the assessee's paper book. The terms and conditions of the Agreement for Sale of trade marks are identically worded. Clause 1 to 4 of the Agreement dated 11-8-2004 reads as follows:
1. The Seller shall sell and the Purchaser shall purchase, as and from the Seventh (7th) day of July 2004 (hereinafter referred to as the 'effective date') the BRANDS AND THE exclusive right to use the BBRANDS AS LISTED IN THE SCHEDULE OF BRANDS ATTACHED HEREWITH or any variant thereof or any name which includes the said words or any part thereof or any words resembling or derived from the said words or any part thereof and all trademarks, benefits of industrial licences, import licences, quota licences, agreements, contracts and certificates of REGISTRATIONS OF THE BRANDS.
2. Without prejudice to the generality of the foregoing the Purchaser shall take over the following:
(a) full benefits of all pending and executory contracts, engagements and orders in connection with the SAID BRANDS.
(b) Exclusive right IN CONNECTION WITH THE SAID BRNADS, to use all trade names, trade marks slogans and the like of the 3 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 Seller with all appurtenances, rights, titles, interests, advantages and benefits pertaining to or in connection with the business of the Seller doe the said BRANDS.
(c) the exclusive right belonging to the Seller to manufacture and/or market the products made under the label of the said BRANDS.
(d) all quota rights and licences, incentives, subsidies, trade marks, patent rights, rights in respect of tenders and tender applications, rights and properties in the registration of the said BRAND with various Government and Semi Government bodies.
3. The value of the said BRANDS has been agreed at a lump sum price of Rs. 19,00,00,000/- (Rupees Nineteen Crores only). The Seller hereby acknowledges and accepts that any income- tax or other such liability arising on account of this transfer of bonds will be solely borne by the Seller. The Seller shall indemnify the Purchaser and keep the Purchase indemnified from and or against any such liability that the Purchaser may have to pay or incur on account of or as a result of non-
payment by the Seller of any such liability as aforesaid. The Buyer hereby acknowledges and accepts that all expenses after the assignment like stamp duty, registration charges, will be borne solely by the Buyer.
4. The Purchaser has paid to the Seller an Amount of Rs.
4,00,00,000/- (Rs. Four Crore only) as an advance, the receipt whereof the Seller does hereby admit and acknowledge, and the Purchaser shall pay the Balance amount of Rs.15,00,00,000/- (Rs. Fifteen Crore only) on or before 30th April 2005, and upon such payment the Brands and all rights thereto shall stand transferred to the Purchaser."
5. In the agreement dated 28.03.2005 the only change is with regard to the effective date in clause (1) being 15.02.2005 and the Sale consideration being Rs.21,00,0,00/- and an advance of Rs. 5,00,00,000/- having been paid on the date of the agreement and the remaining sum of Rs. 16,00,000/- has been agreed to be paid on or before 30.04.2005. In all other respects the clauses in both the Agreements dated 11.8-2004 and 28-3-2005 are identically worded.
6. We have already seen that the assessee was originally manufacturing pharmaceutical formulations and as early as 28.10.1997 it sold its business retaining only the brand names (trade marks) to SLPL under an agreement dated 28.10.1997. SLPL later on became Sigma Laboratories Ltd. We will, however, refer to this company 4 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 also as SLPL because they are one at the same. SLPL sold its entire business to MPP under an agreement dated 11.08.2004 known as a Transfer of Know-how Agreement. Under this agreement, SLPL sold all its knowledge, information, transferred all its employees etc. to MPPL for a lump sum consideration of Rs.17.5 crores. The effective date of transfer of the business was 01.07.2004 and it was agreed that the transfer under the Agreement will be completed in due course.
7. Further another Agreement dated 7.7.2004 was entered into between MPPL and SLPL whereby SLPL agreed to manufacture and market the products on behalf of MPPL. Under clause-9 of the Agreement it has been provided that the consideration for such manufacture on behalf of MPPL by SLPL shall be such as may be mutually agreed between them.
8. Thus, it can be seen that on the one hand MPPL acquired the entire business of manufacture and sale of pharmaceutical formulations from SLPL and was also appointed SLPL as its agent for manufacturing and marketing of various pharmaceutical formulations. These agreements commenced from 7.7.2004 and 11.8.2004 respectively. On the other hand, the MPPL wanted to acquire the trade marks and the right to the formulations of which the assessee was the owner and which he could not acquire from SLPL who was only licenced user of the formulations and trade marks owned by the assessee.
9. We have already seen that under Agreement for Sale of the brands (trade marks) by the assessee a sum of Rs.19 crores and a sum of Rs. 21 crores was to be received by the assessee. The assessee ultimately received these payments of Rs. 40 crores under two agreements in the following manner:
Agreement dated Amount Date of receipts
11.08.2004 4 crore 09.08.2004
10 crore 25.02.2005
5 crore 31.03.2005
Total (a) 19 crore
5 crore 31.03.2005
16 crore 31.03.2005
Total (b) 21 crore
Grand Total (a + b) 40 crore
5 ITA Nos.1932 & 2209/M/09
A.Y. 2005-06
There is no dispute between the assessee and the Assessing Officer that the sale of the trade marks/brands/formulations by the assessee gave rise to capital gains. The assessee invested the entire sale proceeds received by it on sale of the brands in the bonds issued by Rural Electrification Corporation Ltd., on 30.09.2010. According to the assessee the transfer of the trade marks (brands) by it to MPPL was complete only on 31.3.2005 when the entire payment was received by the assessee from MPPL. Under section 54 EC of the Act, to claim exemption from payment of capital gains tax, the sale consideration has to be invested in specfied bonds within six months from the date of transfer. The assessee invested in specified bonds on 30.9.2010 i.e. six months from 31.3.2005 from the date on which the transfer of the trade mark/brand/formulation was complete. According to the AO the transfer of the trade mark was complete on 7.7.2004 under the Agreement dated 11.8.2004 and on 15.2.2005 under the Agreement dated 28.03.2005. The Assessing Officer, was of the view that since the investment was made beyond the period of six months from the aforesaid date of transfer, the assessee would not be entitled to exemption u/s.54EC of the Act. Thus, the dispute was with regard to the date of transfer of the trade marks/brands/formulations by the assessee to MPPL.
10. According to the A.O. clause 1 in both the agreements dated 11.8.2004 and 28.03.2005 conveyed absolutely the rights of the assessee over the brands to MPPL. Clause-1 in both the agreement dated 11-8-2004 is as follows:
1. The Seller shall sell and the Purchaser shall purchase, as and from the Seventh (7th) day of July 2004 (hereinafter referred to as the 'effective date') the BRANDS AND THE exclusive right to use the BBRANDS AS LISTED IN THE SCHEDULE OF BRANDS ATTACHED HEREWITH or any variant thereof or any name which includes the said words or any part thereof or any words resembling or derived from the said words or any part thereof and all trademarks, benefits of industrial licences, import licences, quota licences, agreements, contracts and certificates of REGISTRATIONS OF THE BRANDS.6 ITA Nos.1932 & 2209/M/09
A.Y. 2005-06 Clause-1 of the Agreement dated 28-3-2005 is also identically worded except for the change in the effective date which was 15-2-2005. According to the AO, the above clause effective conveys the rights to MPPL as and from the effective date and therefore the effective date mentioned in both the agreements was the date of transfer. The A.O. also referred to clause 5 in both the Agreements, the relevant portion of which is as follows:
"5. The seller shall extend full co-operation to the Purchaser and sign and execute all such applications and papers as may be necessary for registration and or recognition of the purchaser with the Government authorities Central, State, Municipal or otherwise or another public body or authority or any any other relevant authority or body and shall do and execute or cause to be done and executed all such acts and deeds as are or may be necessary for transfer of all rights, (including tenancy rights, if any) sanctions, permissions, quota rights, certificates, privileges, benefits, licences (including Import Licences, if any), arrangements and contracts hereby agreed to be assigned as the Purchaser may reasonably require. If and so long as any such rights, sanctions, permissions, quota rights, certificates, privileges, benefits, licences (including Import Licences, if any) arrangements and contracts aforesaid are not transferred to the name of the Purchaser on or before the effective date, then, save and to the extent expressly otherwise provided for in this Agreement, the Seller shall continue to hold such rights, sanctions, permissions, quota rights, certificates, privileges, benefits, licences (including Import Licences, if any) arrangements and contracts aforesaid and shall carry on and be deemed to have been carrying on its said business for and on account of and on behalf of and for the benefit of the purchaser as if the seller were trustees of the Purchaser for the same. The Seller hereby expressly agrees and undertakes that it shall, at the request of the Purchaser execute such writings or documents as may be required by the purchaser to enable the quota rights certificates, privileges, benefits, licences (including Import Licences, if any) arrangements and contracts aforesaid."
11. According to the Assessing Officer the above clause which mentions that what is done on after the effective date will be to the benefit of MPPL was a clear indication that there was a transfer of the trade mark as on the effective date. The A.O. thereafter referred to the definition of 'transfer' as given in section 2(47) of the Act and held that 7 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 clause 5 of the Agreement clearly extinguishes the rights of the assessee over the trade marks from the effective date. In this regard, the AO has also referred to the fact that simultaneously the MPPL had taken over the entire business from SLPL and was also appointed as SLPL as manufacturing and marketing agent under the Agreements dated 11.8.04 and 7.7.04 respectively. On a reading of all these agreements the AO came to the conclusion that MPPL got a complete control over the manufacturing and sale of the brands from 7.7.2004. This was also another factor, which according to the Assessing Officer showed that the transfer of the brands had taken place on the effective date. Finally the A.O. was of the view that for a transfer or ownership for income-tax purposes, there need a full transfer of ownership in the true legal sense by way of execution of a registered Conveyance Deed. He was of the view that the physical control and ability to exercise acts of ownership would be sufficient to hold that there was transfer of ownership by the person who exercises such rights. In this regard, the Assessing Officer referred to the decision of the Hon'ble Supreme Court in the case of CIT v. Podar Cements P.Ld. (226 ITR 625). For all the above reasons the Assessing Officer held that the assessee would not be entitled to exemption under Section 54EC of the Act. Consequently, the entire amount Rs. 40 crores was brought to tax as income from capital gains.
12. On appeal by the assessee, the CIT(A) held as follows:
"4. I have carefully considered the facts of the case, reasoning of the Assessing Officer and the submissions of he ld. Authorized Representative of the appellant. The conclusion arrived at by the Assessing Officer is not tenable for the following reasons. I have also examined the assessments of M/s. Sigma Laboratories Ltd. to verify whether there is transfer of profit as alleged by the Assessing officer. The assessment of M/s. Sigma Laboratories Ltd. does not indicate any such transfer of profit assessed by the Department. Moreover I find that there is no tax evasion not any tax advantage in predating a transaction as assumed by the Assessing officer. The reasons for not accepting the contention of the Assessing officer are as under:8 ITA Nos.1932 & 2209/M/09
A.Y. 2005-06 A) The appellant has received only an advance of Rs. 4 crores against the total consideration of Rs. 19 crores as per agreement dated 11.8.2004. in the case of the first batch of 27 brands. In respect of second agreement the appellant has received Rs. 5 crores on the so called effective date against a total consideration of Rs. 21 crores for 34 brands. After receiving a meager amount of advance which is less than 25% in each case, it cannot be said that the transaction is complete. The transactions were contingent upon the payment of full consideration. It is absurd to say in any purchase and sale agreement that transaction is complete as on the date of advance received it is written in the agreement that the amount given are 'advance'.
B) The agreement clearly stipulates that the brands will only be transferred after the full payment received. The full payment has been received only at the end of March, 2005 in respect of first agreement for sale of 27 brands, the balance payment of Rs. 15 crores has been received on 25.2.2005 and Rs. 5 crores on 31.3.2005 and in respect of second agreement for sale of 34 brands the balance amount of Rs. 16 crores has been received on 31.3.2005. Therefore the transfer cannot precede the fulfillment on the conditions.
C) The income yielding assets, i.e. the ownership of the brands are still in the possession f the appellant till the end of the financial year. This is evidenced by the fact that the appellant is receiving he royalty income from the use of the brand from Sigma Laboratory Ltd. up to the end of the financial year. During the FY 2004-05 appellant has received royalty of Rs. 8,39,123/- from M/s. Sigma Laboratories Ltd, which has been offered for tax and due taxes have been paid. The Department has also assessed the royalty income. In such a state it cannot be said that the brands were already transferred and were owned the buyer from the effective date.
D) The brands are registered trade marks and they need registration in the trade mark office. That formality has been completed only after 31st March, 2005. In fact, even after full payment of consideration the ownership of brands cannot be transferred without completing assignment of brands and registration in trademark records. This has been taken place only on 3.5.2005 by deed of assignment of even date.
E) The confusion relating to 'effective date' is stemming from the marketing agreement between Sigma Laboratory Ltd. and MPPL. From this date the entire marketing operations of the pharmaceutical drugs produced by Sigma Laboratories Ltd. have been taken over by MPPL. It appears that from this date after the payment of advance the buyer group has insisted on certain restrictive convenants. Since the buyer group was in the process of buying out the brands and the entire business activity they have put certain restrictions from the effective date. F) Regarding the argument that there is relinquishment of some right in the capital asset within the meaning of section 2(47) of the I.T.Act it can be seen that the absolute right of ownership still vests with the seller till 31.3.05. had there been an 9 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 eventuality of non-payment of the remaining consideration the brands could not have been transferred at all.
G) The other argument of the appellant also has some strength that without receiving the consideration the appellant can not be asked to do the impossible, that is to deposit the consideration amount in Bonds as per the provisions of section 54EC.
H) The appellant has rebutted the theory of profit transfer by SLL to MPPL. It has been rightly pointed out that SLL was incurring huge losses in financial year 2003-04 and also in FY 2004-05. the annual losses were to the tune of 18 crores to 20 crores. In the financial year 2003-04, preceding the year under consideration, Sigma Laboratories Ltd. posted a net loss of 11,81,54,515 as per the audited profit and loss account. By transferring the operations in the current year they have actually reduced the losses. Therefore, it cannot be said that there was a motive of transfer of profit to the new company. The product wise example given by the AO has not taken into account various factors such as heavy marketing overheads, interest cost attributable to huge working capital, which would ultimately result in a selling price which will be much less than the total cost of operations. Interest cost attributable to working capital itself was claimed at Rs. 8,01,14,708/- in the financial year 2003-04. Therefore the observation of the Assessing Officer that there was an intention to transfer profit is not correct.
I) The appellant has also brought to my notice that the assessment under section 143(3) completed by the Assessing officer in the case of Sigma Laboratories Ltd. for the Assessment Year 2005-
06. I can find that there is no addition relating to the so called 'transfer of profits' in the case of sigma Laboratories Ltd. for that year. Therefore, it can not be said that there was a collusive transfer of profits by the group to the new buyer. The Assessment has been completed by a different Assessing officer and he has not drawn any adverse conclusions relating to so called transfer of profit.
J) The Assessing Officer has argued that the formulae of production of the drugs have been transferred to MPPL by sigma Laboratories Ltd. in a separate agreement dated 11.8.2004. This agreement is captioned transfer of know how. However, I find that the know-how in this agreement relates to various things such as accumulated knowledge, information, expertise acquired by SLL in the course of business. The know how relates to 'non patented knowledge and expertise'. This also relate to various other knowledge such as data on doctors, consignee agents, product development, etc. It includes even a non-complete clause. However, it is import to note that even technical know how remained with sigma Laboratories Ltd till the end of the financial year. Since the company was the actual manufacturer of the products till the end of the financial year MPPL was only marketing the products.
K) It is important to note that the product risk still remained with the manufacturer i.e. Sigma Laboratories Ltd. who kept on manufacturing the products under royalty from the appellant 10 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 firm. Pharmaceutical products being regulated by Government regulations the risk and accountability has to be assumed by the manufacturer. Therefore, SLL remained the manufacturer till the end of the financial year. This is evident by the stipulations in the marketing agreement between SLL and MPPL which says that "the seller shall be solely responsible and liable to any customer or purchaser of the said products regarding the standards, quality, characteristic of the said products manufactured by the seller and the buyer shall not be liable to pay any sum so of money to any person by way of compensation, claim, damages or otherwise"
arising from such breach or defect in the said products. Therefore it is incorrect to conclude that the new buyer has taken over the business including the brand from the so called effective date.
L) The argument of the Assessing Officer that after the effective date the invoice for sale of products have been raised by the MPPL and receivables from the effective date have been received by MPPL has been examined. MPPL has only received payments for the supplies made by it after the effective date as per the marketing agreement. The dues of the SLL have not been taken over by the MPPL.
M) The Assessing Officer has argued that MPPL has taken the products at cost far below the market price and has used the factories of SLL. This appears to be as per the market agreement.
This has helped SLL in reducing its losses. There is neither tax evasion nor transfer of profit.
N) There is certainly an inconsistency in the agreement between various clauses of the brand transfer agreement. However, the agreement in totality stipulates that the brands can only be transferred after the final consideration is paid. Clause 4 provides that brands can only be transferred upon full payment of the balance amount. For the expression that from 'the effective date the seller shall sell and the purchaser shall purchase the brands and the exclusive right to use the brands', it has been explained that the purchaser after paying the advance wanted to ensure that the appellant did not transfer the brands to any other person till the buyer garnered the resources. The buyer wanted to ensure that the exclusive rights to use the brands remained with the MPPL till the full payment is made. This agreement bound both the seller and buyer not to negotiate again with any third party. The agreement provided for the so called effective date only to stipulate the rights and obligations of the appellant and the purchaser of brands pending the transfer of ownership in the brands.
O) The buyer never had the legal title to alienate the brand till 31.3.2005. Without rightful legal title which was assumed by the buyer only after the registration of the brands in its names in the trade mark office it cannot be said that the brands were transferred from the effective date.
4.1 Considering all the facts above, it can be concluded that the brands were not transferred till the final payments were received. 11 ITA Nos.1932 & 2209/M/09
A.Y. 2005-06 The final payments were received only on 31.3.2005. Therefore, after the fulfillment of the conditions as per the agreement the properties in the goods i.e. the brands passed on to the buyers. The limitation for investment u/s.54EC would therefore apply from this date. The conclusion of the Assessing Officer as per para 22 of his order that the dates for investment of sale consideration should have been not later than 31.3.2005 and 31.8.2005, being 7 months from the effective dates is not correct. The Assessing Officer is directed to reckon the period of six months from 31.3.2005 the date on which final payment have been received. As the investments have been made on 30.9.2005 the appellant is eligible for deduction u/s.54EC and benefit under said section cannot be denied. The Assessing Officer is directed to grant deduction u/s.54EC against long term capital gain computed subject to my observations in paragraph below.
13. After having held that assessee was entitled to deduction u/s.54EC of the Act, the CIT(A) however, held that a sum of Rs.1 crore out of capital gains should be brought to tax for the following reasons:
"4.2 If the absolute ownership of the brands was still vesting with the appellant till 31.3.2005 it has to be seen whether there was any material change in the revenue earnings of the appellant. This is found from the fact that the royalty that appellant received for the use of the brands has changed after the effective date of July 2004. The appellant has received royalty at a lesser amount that it was receiving from the use of the brands in the immediately preceding year. In the FY 2003-04 the total royalty received by the firm amounted to Rs. 18,61,756/-. However, in the FY 2004-05 royalty received by the appellant firm amounted to Rs. 8,39,123/- only. After the "effective date" the appellant is receiving royalty only on a lesser amount on the product price. The appellant has foregone royalty on the resale value of the products.
4.3 The appellant has explained that there is change in the royalty received since the royalty agreement is between Sigma Laboratories Ltd. and the appellant firm. The royalty agreement dated 28.10.1997 between SLL and the appellant specified that the appellant firm will receive 0.25% of the sales made by SLL as royalty for the use of the brand/trademarks owned by the appellant firm. The agreement was for 10 years. It has been argued that since the sale value of products by SLL has been at cost plus mark up from the effective date the royalty received has come down. Be that as it may from the effective date the new buyer has been entitled to sell the products at a higher price without paying royalty to the appellant. This right has been transferred for which no separate consideration has been paid. Although, there is an explanation from the appellant it can be seen that after the effective date certain rights relating to resale of products have been 12 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 alienated. Even though this does not amount to either transfer the brands or alienate the brands per se, this financial interest in brands has to be valued. The buyer of the brands, till the end of the financial year, has been selling the products without paying royalty on the difference amount between the purchase price and the MRP. The appellant has explained that there is no violation of royalty agreement and the goods purchased by MPPL is royalty paid. However, the appellant has allowed the new buyer to sell goods at a higher price without paying royalty on the difference amount for whatever reason. This financial right has been given to the buyer for a period up to the date of actual transfer of brands for a few months. Capital value of the financial right has to be valued. In my opinion this can be valued at Rs.1,00,00,000/- (Rupees one crore) considering the fall in royalty amount during the financial year and considering the period for which it has been given. Out of a total consideration of Rs. 40,00,00,000/- Rs. One crore could be the value of right to resale the products without paying royalty on the incremental amount. This right has been transferred as on 7.7.2004 to the new buyer for all the 40 brands. This right vested with the buyer even if the brands were not transferred. This is an offshoot of marketing agreement entered upon by SLL with MPPL. This right was transferred as on the first effective date itself. This is a transfer of capital asset and capital gain was exigible on this amount. Out of total payment of 40 crores one crore could be taken as consideration for value of this right. The rest of the amount of Rs.39 crore is the value of transfer of brands permanently. Capital gain was exigible on this amount on 7/7/04 as the payment has also been received in the form of advance for the brands. Appellant has not deposited any such amount in eligible bonds within the financial year. Therefore the appellant will not be eligible for exemption under section 54EC on this amount of one crore. The rest of the amount of Rs. 39 crore is the value of brands transferred and has been deposited in eligible bonds within the stipulated period of 6 months. Therefore the appellant will get the exemption under section 54EC in respect of this amount. The AO is directed to re-compute capital gain accordingly."
14. Aggrieved by the relief granted by the CIT(A) to the extent of Rs. 39 crores, the revenue is in appeal before the Tribunal. Aggrieved by the order of the CIT(A) in bringing to tax a sum of Rs. 1 crore, being the value of financial rights transferred by the assessee on 07.07.04, the assessee is in appeal before the Tribunal.
15. We have heard the rival submissions. The learned Departmental Representative reiterated the stand of the Assessing Officer as reflected in the order of assessment. The 13 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 learned counsel for the assessee reiterated the contentions as put forth before the CIT(A) and further submitted that the action of the CIT(A) in bringing to tax the sum of Rs. 1 crore as payment towards financial right was without any basis.
16. We have considered the rival submissions. As far as the revenue's appeal is concerned, we are of the view that there is no merit in the appeal filed by the Revenue. As we have already seen that MPPL wanted to takeover the entire business of manufacture of pharmaceutical formulations by the assessee and SLPL. Since the SLPL was running the business of manufacture and marketing of pharmaceutical products, a separate agreement was entered into with SLPL by MPPL. The pharmaceutical formulations in respect of which the business was acquired by MPPL from SLPL had a trade mark which was owned by the assessee. The assessee also owned the formulations in respect of these products listed in the two agreements for sale of the trade marks. Without acquiring the trade marks and the right to use the formulations the purchase of the business would not be complete. It is for these reasons a separate agreement was entered into for purchasing brand names and formulations which was owned by the assessee. We are of the view of the fact that there was an agreement between SLPL and MPPL for manufacture and marketing of the formulations and the fact that MPPL also acquired the entire rights and know-how, etc. of SLPL should not be mixed with the sale by the assessee of the trade marks and formulations. These are two independent transactions.
17. As far as the transfer of trade mark is concerned, that becomes complete only when the entire sale consideration is paid by MPPL to the assessee. This is made very clear in clause 4 of the Agreement for Sale of trade marks. The same is reproduced for the sake of clarity.
"4. The Purchaser has paid to the Seller an Amount of Rs. 4,00,00,000/- (Rs. Four Crore only) as an advance, the receipt whereof the Seller does hereby admit and acknowledge, and 14 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 the Purchaser shall pay the Balance amount of Rs.15,00,00,000/- (Rs. Fifteen Crore only) on or before 30th April 2005, and upon such payment the Brands and all rights thereto shall stand transferred to the Purchaser."
It is clear from the above clause in both the agreements that only upon payment of the entire consideration brands and all rights thereto shall stand transferred to the Purchaser. In the light of this clear clause in the agreement, we do not think that the Assessing Officer was right in concluding that the effective date mentioned in the agreement is the date of transfer. The effective date referred to in clause 1 of the agreement is only to ensure that the assessee does not deal with this trade mark with the third party after the effective date and also to ensure that the use of the formulations and trademarks by MPPL from the effective date to the date of transfer by MPPL is legal and on the basis of a license granted by the Assessee. This was necessary because even before the actual transfer of the trade marks/brands/forumulations, MPPL started manufacture of the formulations along with the trade mark owned by the Assessee. It is for this reason that under clause 5 of the Agreement a license has been given to MPPL, so that, their rights are protected. Moreover clause-1 of the Agreement does not contain any words by which there is any conveyance of any right, title or interest in the bands. Clause-2 of the Agreement lists the associated rights wit the brands. Clause-3 talks about the value of the brand. It is only clause-4 which talks about the time when the right, title and interest of the Assessee over the brand is to be transferred by the Assessee to MPPL. Looked at from any angle it cannot be said that the effective date is the date of transfer of the brands by the Assessee to MPPL. If the transaction is viewed as a whole, it is clear that as a first step, the business was acquired by MPPL from SLPL and thereafter the trade marks were also obtained from the assessee to make the transaction complete. As far as the transfer of trade marks are concerned, that happens only when the entire consideration is paid by MPPL to the assessee. Admittedly, the payment had been made only on 31.03. 2005. Therefore, it is this date, which will be the date of transfer of the trade marks by the assessee to MPPL. 15 ITA Nos.1932 & 2209/M/09
A.Y. 2005-06
18. The Assessing officer has proceeded to frame the assessment by treating the mode of transfer as an extinguishment of right. In this regard it needs to be mentioned that the expression 'extinguishment of any right' used in section 2(47) of the Act will take the colour from the association words and expressions and will have to be restricted to the sense analogous to them. Therefore, it will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent or otherwise than on account of transfer. We are of the view that the AO was not right in his approach in this regard. Further the decision in the case of Podar Cements (supra) will not be of any assistance to the plea of the revenue. Admittedly, the assessee did not receive the full consideration. Further, the assessee was allowing SLPL to manufacture the products using its trade marks and formulations and was getting a royalty from them as per the earlier arrangement with them. This payment of royalty continued to be received by the assessee upto March 2005. MPPL did not have any right to sell the trade mark without making the full payments to the assessee and getting a valid assignment of the trade mark. In fact, it is seen that only on 3.5.2005 a Deed of Assignment of the trade mark was drawn up for being filed for registration under the Trade Marks Act, 1999. Further the taxable event is only when the legal title to the capital asset is transferred. To this rule Sec.2(47)(v) and
(vi) provides exceptions and those exceptions are applicable only in the case of transfer of immovable property. We are, therefore, of the view that the conclusions of the CIT(A) are correct and calls for no interference.
19. As far as the assessee's appeal is concerned, we have already seen that originally the Assessee was engaged in the business of manufacture and sale of pharmaceutical products and that in the course of its business it became the beneficial owner of pharmaceutical formulations and trade marks or brands associated with such pharmaceutical formulations. On 28th October, 1997, a company, by name, Sigma 16 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 Laboratories Private Limited (in short 'SLPL') took over the business of the assessee. Since the assessee was the registered owner of trade mark and since the assessee wished to continue to own the trade mark in future the Assessee granted a license to SLPL to use the trade mark. For such use SLPL had to pay the assessee 0.25% of its sales as royalty for the use of the trade mark. Thus, SLPL was a licensed user of the trade mark and formulations belonging to the assessee and was paying royalty in respect of its manufacture and sale in the manner as set out in the agreement dated 28.10.1997. The payment of such royalty by SLPL to the Assessee for the period from A.Y. 2000-2001 to 2005-2006 is as follows:
A. Y. Royalty received
2000-01 Rs.17,86,176
2001-02 Rs.19,91,870
2002-03 Rs.19,83,607
2003-04 Rs.13,06,560
2004-05 Rs.18,61,756
2005-06 Rs. 8,39,123
We have already seen that the effective date under the agreement dated 11-8-2004 for transfer of trade marks was 7.7.2004. According to CIT(A), if the transfer of the brands had taken place only on 31-3-2005 then there should be no change in the pattern of flow of royalty income in the hands of the Assessee till the date of transfer of brands. He found the royalty income had dwindled to Rs.8,39,123 in FY 04-05 compared to Rs.18,61,756 in FY 03-04. According to the CIT(A), the Assessee has foregone royalty after the effective date. The basis of calculation of royalty income after the effective date was cost plus mark up. In the earlier agreement it was 0.25% of the sale. The CIT(A) found that MPPL was selling the products at a higher price but the Assessee got lesser royalty because of the cost plus mark up basis of payment of royalty to the Assessee after the effective date. According to CIT(A), the Assessee had given up its financial rights to receive a much higher royalty and such right could be valued at Rs.1 crore. This right according to the Assessee was transferred under the agreement dated 17 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 7-7-2004. Such right vested with the buyer as on 7.7.2004 and as on that date there was a transfer of financial rights. According to the AO the right to receive royalty was a capital asset and that was transferred by the Assessee as on 7-7-2004 for Rs.1 Crore. Since the investment of capital gain was made in bonds after 6 months from 7.7.2004, the CIT(A) held that a sum of Rs.1 Crore could be taxed as capital gain.
20. We have heard the submissions of the parties on the issue involved in the Assessee's appeal. We have also seen the documents relevant to the issue. In our view, there is no basis on which the CIT(A) could have concluded that there was a transfer of financial rights in the form of giving up right to receive royalty income by the Assessee in favour of MPPL. In this regard we have already seen the agreements for transfer of brands. Those agreements refer to transfer of trade marks/brands and the fact that a sum of Rs.40 crores is the sale consideration for such transfer. The CIT(A) cannot re-write the agreement between the parties and say that a sum of Rs.1 crore was consideration for giving up any financial rights. The agreement between the parties clearly envisaged the sale consideration of Rs. 40,00,00,000/- for sale of the trade marks. The CIT(A) cannot look beyond this agreement and say that a sum of Rs. 1,00,00,000/- was received by the assessee for giving up certain rights other than sale of trade marks. There is no evidence whatsoever for the CIT(A) to come to such a conclusion. His action is purely based on surmises and presumptions and the same cannot be sustained. Further the Assessee was receiving royalty on sale price whereas after the effective date there was a change in the method of computation of royalty which was on the basis of a mark up on the actual cost. There is bound to be a change in the royalty income because of this change. This change in the methodology of payment of royalty to the Assessee is only on the basis of the contention of the parties before the revenue authorities and there is no clause in any of the agreements for transfer or business or for manufacture and market between MPPL and SLPL or in the 18 ITA Nos.1932 & 2209/M/09 A.Y. 2005-06 agreement for transfer of trade mark. Even the original agreement between the Assessee and SLPL dated 28.10.1997 has not changed. If the parties agree for certain terms between themselves the revenue cannot sit in judgment over the same and draw inferences that the adjustment of rights between the parties is in consideration for giving up certain rights. As far as transfer of trademarks/brands are concerned, the sale consideration is Rs.40 crores and the same has been invested in specified bonds within 6 months from the date of transfer and no part of the capital gain can be brought to tax. We therefore, hold that the action of the CIT(A) bringing to tax a sum of Rs.1,00,00,000/- is not correct and the said addition is directed to be deleted.
21. In the result, the appeal filed by the Revenue is dismissed while the appeal filed by the assessee is allowed.
Order pronounced in the open court on this 2nd day of July, 2010.
Sd. Sd.
(Rajendra Singh) (N.V. Vasudevan)
Accountant Member Judicial Member
Mumbai dated the 2nd June, 2010.
kn
Copy to:
1. The Assessee
2. The Revenue
3. The CIT, City-17, Mumbai
4. The CIT(A)-XVII, Mumbai
5. The DR 'I' Bench, Mumbai By order
/True copy/
Asst. Registrar, ITAT, Mumbai
19 ITA Nos.1932 & 2209/M/09
A.Y. 2005-06