Income Tax Appellate Tribunal - Mumbai
Liva Pharma Ltd., Mumbai vs Department Of Income Tax on 24 March, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" Bench, Mumbai
Before Shri D. Manmohan, Vice President
and Shri B. Ramakotaiah, Accountant Member
ITA No. 4276/Mum/2005
(Assessment Year: 2001-02)
ACIT 8(2) M/s. Liva Health Care Ltd.
Room No. 209, 2nd Floor Vs. Zydees Tower, Opp. ISKCON Temple
Aayakar Bhavan, M.K. Road Satellite Cross Road
Mumbai 400020 Ahmedabad 380015
PAN - AAACL 0709 Q
Appellant Respondent
ITA No. 3904/Mum/2005
(Assessment Year: 2001-02)
M/s. Liva Health Care Ltd. ACIT 8(2)
Zydees Tower, Opp. ISKCON Temple Vs. Room No. 209, 2nd Floor
Satellite Cross Road Aayakar Bhavan, M.K. Road
Ahmedabad 380015 Mumbai 400020
PAN - AAACL 0709 Q
Appellant Respondent
Revenue by: Shri Sumeet Kumar
Assessee by: Shri D.P. Bapat
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by the Revenue and assessee arising out of the order of the CIT(A) VIII, Mumbai dated 24.03.2005. Assessee has intimated the change of name from Liva Pharma Ltd. to Liva Health Care Ltd. and filed revised Form 36 on 24.05,.2005. This appeal was originally dismissed as unadmitted vide order dated 08.01.2008 and was recalled on the basis of the MA vide order dated 18.11.2008. We have heard the rival contentions. The issues in both the appeals are considered and decided as under.
2 ITA Nos. 4276&3904/Mum/2005M/s. Liva Health Care Ltd.
ITA No. 4276/Mum/20052. In this appeal the Revenue has raised two grounds. First ground is as under: -
"i. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the receipt of Rs.4,05,271/- from sale of liquid orals is to be included in the eligible profit for determining the deduction u/s. 80IA of the Act on the ground that the assessee is the manufacturing of pharmaceutical products without appreciating the facts of the case."
3. The issue in the above ground arises out of the action of the A.O. in holding that the assessee is not entitled for deduction under section 80IA in respect of profit derived by it amounting to `4,05,271/- on sale of goods manufactured outside assessee's manufacturing unit under loan licence agreement. Assessee has entered into an agreement with M/s. Labella Pharmaceuticals for production of certain pharmaceutical products and treated the same as its own manufacturing and the corresponding profit was shown in the books of account. Assessee has claimed 80IA deduction. The A.O. was of the opinion that assessee could not have supervised the production activity as the said company was far away in Dahisar and therefore there could not be any direct supervision of the products. Therefore, the assessee is not entitled for deduction under section 80IA in terms of the decision of the jurisdictional High Court in the case of CIT vs. Penwalt India Ltd. 196 ITR 813. He accordingly made the disallowance. Assessee submitted that in terms of loan licence agreement the assessee had with M/s. Labela Pharmaceuticals the entire production was as per its own standard and specifications and in accordance with the manufacturing instructions and quality control procedures laid down from time to time. On considering the loan licence and the submission the CIT(A) held that the Assessing Officer's opinion that the assessee could not have supervised the production is rather erroneous. He, relying of the judgement in the case of CIT v. India Raison & Polymers 235 ITR 5 (Ker), held that assessee is 3 ITA Nos. 4276&3904/Mum/2005 M/s. Liva Health Care Ltd.
entitled for deduction in terms of section 80IA of the Act in respect of the profit arising out of that account. Revenue is aggrieved.
4. After considering the loan licence agreement and the arguments of the rival parties we are of the opinion that there is no need to differ from the findings of the CIT(A). Assessee has specified the standards and specifications and in accordance with the manufacturing instructions and quality control procedures M/s. Labela Pharmaceuticals was manufacturing and providing the goods to the assessee. Therefore, it cannot be stated that assessee has no supervisory control. In view of this order of the CIT(A) in allowing the deduction in terms of section 80IA is upheld. Revenue's ground is rejected.
5. Ground No. 2 pertains to the issue of deleting the disallowance of `13,24,710/- made as an addition by the A.O. invoking the provisions of section 145A. The Assessing Officer's contention was that since the goods were available in finished stock and excise duty was not paid, the amount to that extent was not allowable as deduction. It was submitted that the entire tax liability was `14,08,744/- and the assessee has paid an amount of `13,24,710/- after closure of the year but before the due date for filing the return of income and the balance amount of `84,304/- was also disallowed in the computation. On this, the CIT(A) deleted the disallowance holding that the amount is allowable in terms of section 43B(a) read with first proviso as the amount has been paid before filing the return. Considering the accounting principles of the assessee and the facts on record, we are of the opinion that order of the CIT(A) does not require any modification. Assessee has correctly accounted for the excise duty liability and to the extent it has paid, the same was allowable under section 43B(a) and the balance amount not paid was also disallowed by the assessee in the computation of income itself, the fact of which was also stated by the A.O. in page No. 6 of the assessment order. In view of this the ground is rejected.
6. In view of this Revenue's appeal is dismissed.
4 ITA Nos. 4276&3904/Mum/2005M/s. Liva Health Care Ltd.
ITA No. 3904/Mum/20057. Ground No. 1 of assessee's appeal is as under: -
"1. The learned CIT (Appeal) erred in upholding disallowance of depreciation of Rs.11,24,140."
8. The issue in the above ground is with reference to claim of depreciation of an amount of `11,24,140/-. A perusal of the assessment order reveals that the A.O. has made disallowance on depreciation claimed in respect of new portion of factory building and plant & machinery claimed to have been installed therein in the industrial undertaking located at Sinnar District, Nasik, Maharashtra. Assessee claimed that the new portion of the plant & machinery has come to production on 22.03.2001 and accordingly claimed depreciation at 50% of normal rate as the said assets were utilised for a period less than 180 days. The A.O. did not allow the depreciation on the reason that the occupation certificate in regard to the construction of the building and its use was granted by the competent authority on 17.05.2001 and the electrical contractor's completion and test report was dated 30.04.2001. In the opinion of the A.O. the building construction was completed only in the next accounting year and accordingly the depreciation in respect of building and plant & machinery installed therein are held not to be entitled for depreciation. Assessee submitted various details of purchase of machinery and their installation, test checks with reference to the plant & machinery, furniture and other assets including electrical installations. With reference to the building it was the submission that the assessee has written to the competent authority as early as January 2001 but they gave the certificate in May 2001 but that does not prevent the assessee in claiming depreciation as the building was occupied before the closure of the accounting year and machinery was installed and there was also utilisation. On examining the issue both on facts and on law the CIT(A) gave finding that the details on record no doubt show that during the relevant accounting period activities in regard to 5 ITA Nos. 4276&3904/Mum/2005 M/s. Liva Health Care Ltd.
acquisition of assets and their installation in the respective places took place. However, he did not allow depreciation stating that there is nothing on record to show that these assets were actually used by the assessee company for the purpose of its business during the year.
9. Contesting the above finding of the CIT(A) the learned counsel referred to various details filed before him and how the machinery was installed much before 20.03.2001 and referred to various documents placed on record including the certificates issued by various suppliers of machinery.
10. The learned counsel submitted that the evidence do indicate that the machinery was installed and ready for use as per the findings of the CIT(A) and just because the occupation certificate was issued in later year does not mean that the plant & machinery and building were not used. He relied on the decision of the Hon'ble Karantaka High Court in the case of CIT vs. Chamundeshwari Sugar Ltd. 309 ITR 326 for the proposition that machinery was ready to use and assessee was entitled for depreciation. It was also submitted that within the block concept there is no need for use of individual machinery and relied on the judgement of the ITAT Jabalpur Bench in the case of Packwell Printers 59 ITD 340. With reference to the decision in the case of ACIT vs. Jagdish C. Sheth 101 ITD 360 (Mum) it was submitted that the issue therein was claim of depreciation on two foreign cars which were not otherwise entitled for depreciation unless they are used in the business of hire. The order of the ITAT in that case does not apply to the facts of the present case. It was submitted that the assessee has used the machinery during the year and referred to the annual report and further even if the machinery was otherwise held not used in the year on passive usage basis depreciation can be allowed based on the judgments in the case of CIT vs. Viswanath Bhaskar Sathe 5 ITR 621 (Bom) and Whittle Anderson Ltd. vs. CIT 79 ITR 613 (Bom) wherein even passive usage is also considered as use.
6 ITA Nos. 4276&3904/Mum/2005M/s. Liva Health Care Ltd.
11. The learned D.R., however, relied on the orders of the A.O. and the CIT(A) to submit that there was no evidence that the machinery was used during the year. It was his submission that the assessee could not have legally used the building as the certificate was issued in May 2001 and the documents regarding test check of machinery is mostly with reference to checking of machinery by the suppliers but not with reference to trial run or actual installation of the machinery. The learned D.R. submitted that following the judgment of jurisdictional High Court in the case of B. Malani & Co. vs. CIT 214 ITR 192 depreciation cannot be allowed if the plant & machinery installed were not put to use during the year.
12. We have considered the issue and examined the paper book placed on record. As far as installation of machinery in the building is concerned the CIT(A) has already given a finding that the evidence do indicate that the plant & machinery were installed during the year. The issue is with reference to use of machinery. As seen from these details there is no doubt that assessee has utilized the machinery during the year. As submitted and as placed on record assessee has written for occupancy certificate as early as January 2001. Just because the concerned authority has not given the occupancy certificate it does not mean that the building, which was constructed could not be used by the assessee for the purpose of business and this newly constructed building is nothing but upper floors of the existing building where such facilities were also earlier located. The submission in this respect made to the CIT(A) vide letter dated 15.02.2005 are worth extracting here: -
"A) Which facilities were created on the newly constructed 2nd floor and, where were such facilities earlier located.
1. Space for laboratory occupying 134.04 Sq.Mtrs - the earlier lab was on the Ground floor which had occupied a floor space of 71.57 Sq.Mtrs - The old space ws converted in Cabin for Manager - Tablets and a Packing Hall.
7 ITA Nos. 4276&3904/Mum/2005M/s. Liva Health Care Ltd.
2. Packing materials Stores occupying 230.51 Sq.Mtrs. - extra packing materials space for storing the packing material of Loan licences.
3. Overprinting area of 68.48 Sq.Mtrs - this facility was earlier on the Ground floor occupying 40.70 Sq.Mtrs. - The old area is kept vacant for the time being.
4. General Capsulation area of 28.58 Sq.Mtrs. - shifted from 1st floor to 2nd floor which had earlier a space area of 30.74 Sq.Mtrs.
5. Workers/Staff lunch rook occupying 112.81 Sq.Mtrs - Earlier space was on the Ground floor occupying 40.70 Sq.Mtrs - the vacated area was used for installation of Boiler and providing space for Raw-materials Scrap storage - Boiler installed on 9/1/2001 as per evidence enclosed at page (1) to (2) and used thereafter from 15/1/2001 as per the evidence also enclosed at page (4) being the copy of Daily Log Book.
6. Media Preparation Room - occupying space of 14.83 Sq.Mtrs. -
earlier, this function was performed on the Ground floor occupying an area of 11.20 Sq.Mtrs which is converted into Blister Packing room occupying and extended area of 16.37 Sq.Mtrs.
7. Cabin & Conference Room was newly constructed occupying an area of 27.70 Sq.Mtrs.
Evidence has been filed to indicate that the process of electrification and shifting was started from 16/11/2000 itself. Please see pages 75 to 77, 87 to 95, being the Daily work record of the Contractors' employees. Further evidence is available by way the Contractors' bills at page 72, 73, 74, 79, 80,81, 82, 83, 84, 95 & 86.
B. Where were the new acquisitions of Plant & machinery installed.
1. Sr. No. 2 of Paper Book-II being multi-column Distillation Plant _ This plant occupied an area f 3.90 Sq.Mtrs - It was earlier installed in the Ground floor area of laboratory and shifted on the 2nd floor later.
2. Sr. No. 4 of Paper Book - II - Carton Sealing machine - This equipment occupied a floor area of 0.64 Sq.mtrs. and installed in the existing Tableting area on the Ground floor which was not shifted to 2nd floor.
3. Sr. No. 6 of Paper Book - II - Communiting Mill - This equipment occupied a floor space of 1.39 Sq. Mtrs. This was installed in the 8 ITA Nos. 4276&3904/Mum/2005 M/s. Liva Health Care Ltd.
existing Granulation area of 51.48 Sq.Mtrs. on the Ground floor which was not shifted to the 2nd floor.
4. Sr. No. 8 of Paper Book - II - Ointment manufacturing plant -
This was installed on the 1st floor in the existing Ointment manufacturing area.
5. Sr. No. 10 of Paper Book - II - Boiler - this was installed in the area vacated by the shifting of Workers lunch room - evidence already dealt with at (A) above.
6. Sr. No. 16 of Paper Book - II - Sugar Serum Preparation Tank.
This equipment occupied a floor space area of 1 Sq. Mtr. and installed in the existing Tableting area on the Ground floor which was not shifted.
7. Sr. No. 23 of Paper Book - II - Diesel Generating Set - This equipment occupied an area of 41 Sq.mtrs. and it was installed in the existing Scrap Yard on the Ground floor which had a floor space area of 50.68 Sq.Mtrs. Evidence of user of the Generating set is by way of consumption of diesel for the first time in the year under consideration. This evidence is contained in the Annexure to the Report of the Directors, copy of which is enclosed at pages (5) to (10) [In particular, page No. 8.]
13. Assessee has indicated that some of the machines were installed in the old area and shifted to the second floor or first floor. In fact the Carton Sealing machine, on which depreciation was also disallowed has been installed in the existing Tableting area in the ground floor which was shifted to second floor, a new building. The above evidence placed on record and the explanation given by the assessee do indicate that the machinery was not only installed but also used during the year.
14. The learned counsel withdrew the claim of depreciation to an extent of `27,404/- pertaining to Multi Column Distillation Plant Capacity 50 Ltrs. with ledger code 0101005 and did not press the depreciation on the cost of `2,19,232/- on that asset. Therefore the claim is restricted to disallowance of `10,96,736/- out of the depreciation claimed before the A.O. In view of this the A.O. is directed to allow the depreciation to the extent of `10,96,736/-.
9 ITA Nos. 4276&3904/Mum/2005M/s. Liva Health Care Ltd.
15. Ground No. 2 pertains to the issue of payment to FDA licence of `24,630/-.
16. The A.O. noticed that the assessee company paid an amount of `35,320/- to Food and Drug Administration as licence fees. This included an amount of `24,630/- paid on new product and the balance amount of `10,600/- for renewal of licence of existing products. The A.O. was of the opinion that the expenditure incurred towards payment of licence fees on new product is capital in nature as the company could not have launched the new products without payment of licence fees and therefore the expenditure incurred is treated as capital in nature. The CIT(A), on examination of the same, upheld the contentions of the A.O. that the amount was paid for new products. However, he directed the A.O. to allow depreciation on the above amount admissible to intangible assets.
17. It was the submission of the learned counsel that the amount was paid for renewal of existing licence for another period of 3 years and new products are not involved. With reference to the submission made before the CIT(A) it was stated that the licence is required to be renewed every 3 years and therefore the new registration does not have any enduring advantage and the expenditure is incurred for the same product line and relied on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT 124 ITR 1.
18. We are of the opinion that the licence fees payable to the Food and Drug Authorities is a sort of revenue payment which is paid regularly for every 3 years and does not have any enduring benefit. Just because the amount paid permits the assessee to market products for a period of 3 years, in our view the expenditure does not become capital in nature. Moreover the assessee company is in the pharmaceutical business and the new products are launched as part of the existing business. Therefore, the licence fee paid is revenue in nature. Considering the facts of the case, we allow the ground and direct the A.O. to allow the expenditure as revenue 10 ITA Nos. 4276&3904/Mum/2005 M/s. Liva Health Care Ltd.
expenditure. If any depreciation is allowed consequent to the order of the CIT(A) the same can be withdrawn. Ground is allowed.
19. In the result, appeal of the Revenue is dismissed and appeal of the assessee is allowed.
Order pronounced in the open court on 30th March 2011.
Sd/- Sd/-
(D. Manmohan) (B. Ramakotaiah)
Vice President Accountant Member
Mumbai, Dated: 30th March 2011
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - VIII, Mumbai
4. The CIT- VIII, Mumbai City
5. The DR, "J" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.