Income Tax Appellate Tribunal - Ahmedabad
Nirma Chemical Works Ltd.,, Ahmedabad vs Assessee on 19 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "A" BENCH
(BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
& SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER)
ITA. No: 1706/AHD/2009
(Assessment Year: 2001-02)
Nirma Chemical Works V/S DCIT, Central Circle-1(1),
Pvt. Ltd. (Formerly: Ahmedabad
Nirma Chemical Works
Ltd.) Nirma House
Ashram Road, Ahmedabad
(Appellant) (Respondent)
ITA. No: 1514/AHD/2009 & C.O. No. 123/Ahd/09
(Assessment Year: 2001-02)
DCIT, Central Circle-1(1), V/S Nirma Chemical Works
Ahmedabad Pvt. Ltd. (Formerly: Nirma
Chemical Works Ltd.)
Nirma House Ashram
Road, Ahmedabad
Nirma Chemical Works V/S DCIT, Central Circle-1(1),
Pvt. Ltd. (Formerly: Ahmedabad
Nirma Chemical Works
Ltd.) Nirma House
Ashram Road, Ahmedabad
(Appellant) (Respondent)
PAN: AAACN5353L
Appellant by : Shri S.N. Soparkar, AR
Respondent by : Shri R.I. Patel, CIT/DR
2 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
(आदे श)/ORDER
Date of hearing : 08 -07-2016
Date of Pronouncement : 19 -07-2016
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:
1. ITA Nos. 1706 & 1514/Ahd/2009 are cross appeals by the Assessee and the Revenue preferred against the very same order of the ld. CIT(A)-II, Ahmedabad dated 27.02.2009 pertaining to A.Y. 2001-02 and C.O. No. 123/Ahd/2009 is the cross objection by the Assessee directed against the findings of the ld. CIT(A) questioning the adoption of fair market value of "Nirma" brand as on 01.04.1981 to be taken at Rs. 10 crores.
2. These cross appeals and the cross objection were heard together and are being disposed of by this common order for the sake of convenience.
3. In this case, the assessment was made on 31.03.2004 u/s. 143(3) of the Act by which the declared total income of Rs. 10,45,68,600/- was assessed at Rs. 460,78,46,680/-. The assessee strongly agitated the assessment and the matter travelled up to the Tribunal and the Tribunal vide order dated 16.06.2006 in ITA Nos. 388 & 976/Ahd/2005 restored the contentious issues to the files of the A.O. for fresh assessment with certain directions.
4. Pursuant to the directions of the Tribunal, the A.O. initiated assessment proceedings by issuing and serving statutory notices upon the assessee. In the assessment order made u/s. 143(3) r.w.s. 254(1) of the Act vide order 3 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 dated 31.10.2006, the Assessing Officer completely took a U turn from the earlier findings and observed as under:-
4.2 The valuation done by ld. Commissioner of Income-tax (Appeals) at Rs.10 crores as well as proposed by the Assessing Officer in the remand report during the proceedings before Ld. Commissioner of Wealth-tax (Appeals) at Rs.6 to 8 crores as also the valuation report of Professor Arvind Sahay, MM, Ahmedabad, cannot be accepted because such valuation is based on estimates only. Since the valuation report of Prof. Sahay is not being used for ascertaining cost of acquisition of brands as on 1.4.1981, assessee's request to cross-examine him needs no consideration. It may be pointed out that valuation of 'right to use' brands and trademarks determined in Wealth-tax proceedings of Smt. Shantaben K. Patel has not been considered in either of the above valuations. Had the assessee pointed out value as determined in Wealth-tax proceedings, this controversy would have not arisen. It appears that the assessee had intentionally concealed this vital fact in order to get undue advantage in reducing the capital gains.
5. Having made the above observations, the A.O. proceeded to complete the assessment by making following observations:-
4.4 Relevance of value of 'User Rights' of brands and trademarks determined in Wealth-tax proceedings.
From the Wealth-tax proceedings of Smt. Shantaben K. Patel it is clear that the value of brand names/trademarks as on 1.4.1982 has been finally determined by the Hon'ble ITAT at Rs.4,20,000/-, which is the highest fact finding authority, after considering the assessee's arguments as well as the facts and figures supplied by Smt. Shantaben K. Patel during the course of various proceedings. The figures of compensation received for 'User Rights' of brands and trademarks given by the assessee to the Ld. Commissioner of Wealth-tax (Appeals) during wealth-tax proceedings are as under:-
4 ITA Nos. 1706 & 1514/Ahd/2009& C.O. No. 123/Ahd/2009 . A.Y.2001-02 A.Y. Amount of compensation @ Profit (*) 2.5% of the profit (Royalty) (Rs. in lacs) (Rs. in lacs) 1981-82 1.14 45.60 82-83 2.85 114.00 83-84 4.41 176.40 84-85 5.04 201.60 85-86 0.10 4.00 86-87 0.95 38.00 87-88 1.04 41.60 88-89 0.10 4.00 89-90 0.10 4.00 [(*) These figures have been worked out on the basis that the assessee has shown compensation at 2.25% of the profit] The figures supplied by the assessee before the Ld. Commissioner of Wealth-tax (Appeals) clearly indicate that the profits of the licensee (i.e. NCWL &, its predecessor) were decreasing from A.Y. 1985-86 onwards and by citing such figures, the assessee got beneficial advantage from the Ld. Commissioner of Wealth-tax (Appeals) in reducing the value of 'User Rights' of brands and trademarks. This also clearly proves that the NIRMA brand/trademark was not very popular in 80's and hence they were having very nominal market value. 4.4.1. Another important aspect which has been pleaded by the Ld. Counsel before the Ld. Commissioner of Wealth-tax (Appeals) was that the profits attributable to brand name/trademark of NIRMA were very nominal. This is evident from the submission of Ld. Counsel, re-produced in Para - 10 at Pag-7 by the Ld. Commissioner of Wealth-tax (Appeals) in his order dated 14.3.1990. The 5 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 Ld. Counsel for Smt. Shantaben K. Patel pleaded that as on 1.4.84 selling price of 1 kg. of Surf of Hindustan Lever Ltd. was Rs.22/- and that of Nirma was Rs.6.5. In July, 1986, Surf was Rs.22.80 per kg whereas Nirma Powder was Rs.8 per kg. The price spread, even corrected for very heavy overhead expenses of Hindustan Lever, would show higher profit margin attributable to the brand name of 'Surf'.
From the submission of Ld. Counsel as well as the sale price of Nirma brand, it is clear that in 80's the Nirma brand was able to fetch only the cost price of the material with little profit margin. There was no super profit which could be said to be attributable to the popularity of its brand name/trademark. This aspect also goes to prove that value of 'User Rights' of Nirma brand name/trademark as on 1.4.81 must be very nominal.
6. Dismissing the claim of the assessee that the trade-marks registered after 07.02.1980 are self generated assets and, therefore, outside the purview of capital gains tax, the A.O. observed as under:-
5.2 On perusal of list of trademarks registered before 7.2.1980 and after 7.2.1980, filed before Hon'ble ITAT, it is noticed that brand name 'NIRMA' was the central word in almost all the trademarks. The generic names like detergent powder, detergent cake and soaps have no brand value, but when they are attached to the brand 'NIRMA', carry market value of NIRMA only. Thus various trademarks registered with brand name NIRMA even after 7.2.1980 will not make any difference because they carry Brand equity of Nirma only. It is very important to mention here that the question of separating "trademarks" never occurred between Smt. Shantaben K. Patel and Nirma Chemical Works Ltd. while making the payment of 2.5% royalty on the profit of all products represented by the trademarks. The payment of royalty to Smt. Shantaben K. Patel was never restricted to the turnover of detergent only. In fact the royalty was calculated on the turnover of all trademarks of NIRMA brand. This also proves that the brand name is not affected by addition of any new product using the word 'NIRMA'.
Thus the brand name cannot be divided on account of creation of separate 6 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 associated trademark. At this juncture it is relevant to refer to section 2(1)(c), 2(3), 16 and 44 of Trade Marks Act, 1999, which deal with the definition, registration as well, as the transfer of trademarks and associate trademarks. Section 16 of Trade Marks Act, 1999, makes it very clear that in respect of any goods or services which are identical with another trademark, which is registered in the name of same proprietor or so nearly resembles it as to be likely to be deceive or cause confusion if used by a person other than the proprietor, such trademark shall be registered as associated trademark. Further the trademarks registered in series are also registered as associate trademarks. Therefore, in view of this legal position, even the NIMA detergents and soaps being related to the similar goods and resembles the brand name 'NIRMA', is the associated trademarks of NIRMA brands only and hence have no independent identity and popularity. They are also registered in series. Section 44 of Trade Marks Act, 1999 clearly says that associate trademark cannot be transferred separately from the main trademark. Therefore, for the purposes of Section 45 of IT Act, 1961, where transferability is the most important event, only one asset is transferable in this case, i.e. the brand 'NIRMA' and others .are appended to it. Therefore, even the "NIMA" brand being associate trademark, cannot be separated from main brand "NIRMA". The attempt by the assessee through valuation report of RSM & Co., which itself is full of manipulations, to disassociate the associate trademark from the main brand is in violation of provisions of Trade Marks Act, 1999 and such act on the part of the assessee as well as the valuer is unlawful and hence is not permissible at all.
5.3. In the case of Hindustan Lever Ltd., there are 3 popular brands such as RIN, SURF and LUX. All three brands have different identity and there is no resemblance therein and are equally popular in the market. These brands are capable of being sold separately, but in the case of NIRMA, there is only one main brand, that is NIRMA and all other associated products have the same word NIRMA with some different combination of words. Even the name NIMA also resembles with NIRMA and hence the same also has no potential to be separated from the main brand NIRMA as per Section 16 and 44 of Trade Marks Act, 1999.
7 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
5.4 Even if for the sake of argument, it is presumed that some of the associated trademarks are developed or acquired after 1981, no deduction can be given on account of their value while computing the Long Term Capital Gain because such associated brands are acquired only after incurring huge expenditure on advertisement, publicity and research and development and since such expenditure had been already claimed as revenue expenditure, no further deduction is permissible. The claim of such expenditure by assessee also disproves the assessee's contention that there is no cost of acquisition of such trademarks. Even RSM & Co. in its report dated 6.3.2001 in Para-2.4 has mentioned that the marketing strategy coupled with extensive advertising and media spend had seen the brand gradually capture a hefty 60% share in the low- priced popular segment. Thus it is clear that popularity of a brand is directly proportionate to the advertisement and publicity, which has substantial cost embedded in it.
5.5.. Another important aspect which needs consideration is that one of the trademark known as 'NEELAM' was purchased alongwith "goodwill" by NIRMA Industries Ltd. for Rs.25,000/- in A.Y.2002-03 vide agreement dated 13.06.2001 from Neelam Chemicals & Detergents, a group concern. Thus, brands other than NIRMA have only nominal value. This also proves that associated brands have nominal value, if at all transferred separately from the main brand. For the sake of argument, if it is presumed that "NIMA" brand is also separately transferable, then its value will be even less than Rs.25,000/- because "NIMA" resembles brand name "NIRMA" and is clearly covered u/s.16 & 44 of Trade Marks Act, 1999. Moreover, it is transferred along with "goodwill" which normally constitutes 95% of the value and hence cost of acquisition is required to be taken at NIL as per- provisions of Section 55(2)(a).
7. The A.O. concluded by holding that the assessee company has not acquired any valuable brands after 01.04.1981 and hence, the claim of the assessee in 8 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 this regard is rejected on all accounts. While completing the assessment, the A.O. made the following observations:-
6. The value assessed in the Wealth-tax case for 1982-83 was the value as on 1.4.1982 and hence the value as on 1.4.1981 would be less than Rs.4.2 lakhs. In order to be more fair and logical, it would be reasonable to workout fair market value of the "user rights" of trademark and brand name by adopting Cost Inflation Index. The Cost Inflation Index for F.Y. 1982-83 was 109 and for F.Y.1981-82 it was 100. On the basis of these values, the fair market value of "user rights" of trademarks and brand name as on 1.4.81 works out to be 100 x 420000 / 109 = Rs.3,85,321/-. The sale consideration of the assets being "user rights" of trademarks and brand name as on 26.3.2001 was Rs.450 crores. By applying Cost Index, the indexed cost works out to 385321 x 406 /100 = Rs. 15,64,403/-.
7. In view of the above discussion, the revised total income of the assessee as per the direction of the ITAT's order dated 16.6.2006 is computed as per this order.
The total income of the assessee was assessed at Rs.460,78,46,684/- as per assessment order u/s.143(3) of the Act dated 31.3.2004. This income was revised as per rectification order u/s. 154 dated 17.5.2004 and the same was assessed at Rs.460,90,75,147/-. Thereafter, on giving effect to CIT(A)'s order, the income was revised at Rs.419,26,29,200/-, which included LTCG on sale of trademarks 7 brand name at Rs.409,40,00,000/-. Now as per the order of the Hon'ble ITAT, the same is revised as under:-
1. Business Income as per order u/s. 143(3) 10,45,68,600 Add: Income of A.Y.2001-02 credited in 12,28,463 subsequent year as rectified by order u/s. 154 dated 17.5.2004 Total Business Income 10,57,97,063 II. Long Term Capital Gains 9 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 LTCL as per statement of income (-)17,061 LTCG on the sale of brand/trade name:
Sale consideration 450,00,00,000 Less:
Indexed cost 15,64.403 449,84,35,597 449,84,18,536
As per Para-6
Ill. STCL as per statement (-) 71, 50,846
Revised Total Income: 459,70,64,753
Rounded off to 459,70,64,750
8. Aggrieved by this, the assessee carried the matter before the ld. CIT(A).
9. Before the ld. CIT(A), the assessee strongly contended that the part of the sale consideration pertains to the trade-marks/brand names which were self generated assets and free from any obligation to pay tax. It was brought to the notice of the ld. CIT(A) that out of the sum of Rs. 450 crores realized from transferring its trade-marks in the bunch of trade-marks, the consideration should be divided between trade-marks which were in existence prior to 1981 and which were after 1981 in the ratio of 68.45% and 31.55% and, therefore, the consideration pertaining to the self generated assets cannot be subjected to Income-tax. Strong reliance was placed on the decisions of the Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty 128 ITR 294 and the Hon'ble High Court in the case of Cadell Weaving Mill Co. Pvt. Ltd. 166 CTR 7.
10. Insofar as the fair market value of user rights of trade-mark as on 01.04.1981 for the trade-marks used before 1981 is concerned, the ld. CIT(A) though 10 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 accepted the assessee's contention that the valuation done by the A.O. is not correct and held that the value adopted by the A.O. at Rs. 3,85,321/- on the basis of value of Rs. 4.20 lacs determined on 01.04.1982 in the case of Smt. Shantaben K. Patel in her Wealth tax proceedings is not justified. However, at the same time, the ld. CIT(A) also dismissed the claim of the assessee that the fair market value should be taken at Rs. 90 crores on the basis of the valuation report of M/s. RSM & Co.
11. Drawing support from the valuation report of Prof. Arvind Sahay who has made the valuation of "Nirma" brand at Rs. 8 to 11 crores, the ld. CIT(A) held "it will be reasonable and appropriate to take the fair market value of "Nirma" brand as on 01.04.1981 at Rs. 10 crores. The A.O. is directed to take this value to determine the taxable long term capital gain accordingly.
12. Aggrieved by this, the assessee and the revenue are before us.
13. We have heard the representatives of both sides at length. We have carefully perused the orders in the first round of litigation. We have given a thoughtful consideration to the orders of the authorities below and with the assistance of the ld. Senior Counsel, we have gone through the relevant documentary evidences brought on record and referred to during the course of the proceedings.
14. There are no changes in the facts of the case from the first round of litigation and, therefore, it would be appropriate to extract the facts of the case from the first round of litigation itself and which reads as under:-11
ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02
(i) One Smt.Shantben K.Patel alongwith Shri Ramjibhai Kodidas Patel (in short referred as SKP and RKP respectively) had formed a partnership business styled as M/s.Nirma Chemical Works with effect from 01/02/1972 as per partnership-deed executed on 18/02/1972 for carrying on the business of manufacture of colour chemicals, washing powder, etc.etc. as well as sale and purchase of same. The partnership could, however, carrying on business of manufacture and sale/purchase of other goods with the consent of all the partners. Smt. SKP had 75% shares, whereas Shri Ramjibhai Kodidas Patel at 25% shares - both in profit as loss of the business.
(ii) Thereafter, there had been various changes/Dissolutions in the said partnership whereby various persons joined as partners and or retired. However, Smt.SKP remained continuous partner in the said partnership till the Dissolution of the same brought about with effect from 04/01/1980 by way of a duly deed of Dissolution executed on 07/02/1980.
The details of dates of execution of various partnership-deeds/Dissolution Deed, effective dates of those deeds, name and style of partnership, which of course, remained as Nirma Chemical Works, names of partners at the relevant time, share in profit and loss of the partnership of each one of the partner at the relevant time are as under:
Date of Partnership Name of Name of Partners % share % ,hare App. Remarks Partnership Effective Deed Firm in profit i.. Loss (1) (2) (3) (4) (5) (6) (7) (8) 18.02.72 01.02.72 NCW Ramjibhai K. Patel 25 Partnership constituted Shantaben K. Patel 75 11.04.74 01.04.1972 NCW Ramjibhai K. Patel 15 Three New partners admitted Shantaben K. Patel 35 Rameshchandra U Bariaya 20 A Pushpaben J. Patel 15 A Dayaljibhai Gagajibhai 15 A Patei 12 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 12.11.74 22.09.74 NCW Shantaben K. Patel 25 20 Shri Ramjibhai Khodidas Patel expired on 21.09.74.
Rameshchandra U. Bariaya 20 20
Pushpaben J. Patel 15 20
Dayaljibhai Gagajibhai 15 20
Patel
Khodidas Vandas Patel 10 20 A
Minor Haresh Ramjibhai 15 - A
Patel
26.04.1975 01.04.75 NCW Shantaben K. Patel 25 30 Dayaljibhai retired on
31.03.75.
Rameshchandra U. Bariaya 20 20
Pushpaben J. Patel 15 20
Khodidas Vandas Patel 10 10
Karsanbhai Kachrabhai 15 20 A
Patel
Minor Haresh Ramjibhai 15 "
Patel
20.06.76 01.04.76 NCW Shantaben K. Patel 25 30 Khodidas V Patei retired
w.e.f. 31.03.76.
Rameshchandra U Bariaya 20 20
3
ushpaben J. Patel 15 20
Karsanbhai Kachrabhai 15 20
Patel
ramodbhai K Patel 10 10 A
Minor Haresh Ramjibhai 15 -
Patel
02 04 79 01.04.79 NCW Shantaben K. Patel 25 Pramodbai K Patei &
Haresh Ramjibhai Patel
retired w.e.f 31-03-79.
Rameshchandra U. Bariaya 20
Pushpaben J. Patel 20
Karsanbhai Kachrabhai 20
Patel
S.K. Patel Family Trust 15 A
03.01.80 01.01.80 NCW Shantaben K. Patel 25 By Deed of retirement dated
01, 01. 80. Rameshchandra
U. Bariya. Smt. Pushpaben
J. Patel & Shri Karsanbhai
Kachrabhai Patel Reitired
w.e.f, 31-12-79.
13 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
S.K, Patei Family Trust 65
Nirma Chemical Works 10 A
Pvt.ltd
(NIL)
07.02.80 04.01.80 NCW, a The Firm dissolved and S. K. Patel Family Trust became NCW was entitled to all the
business unit of the sole proprietor of the business in the name of Nirma rights, title and interest in S. K. Patel Chemical Works all the assets of the Firm, Family Trust including Trade Mark.
(iii) The terms and conditions stipulated in the first partnership-deed executed on 18/02/1972 read as under-
"0n Stamp Paper No. 11893 dt. 08.02.1972 of Rs.100/-
PARTNERSHIP DEED Party of the first Part Ramjibhai Khodidas Patel aged about 24 years.
Religion Hindu, occupation business, resident of 17. Amar Park Co-op. Hsg. Society Ltd.. Saraspur. Ahmedabad Party of the Second Part Shantaben Karsanbhai Patel. aged about 24 years.
Religion Hindu, occupation business, resident of 17. Amar Park Co-op. Hsg. Society Ltd.. Saraspur. Ahmedabad
1. We above said parties have started business in the partnership and document executed today IS 272 with the following terms and conditions.
2. The name of our partnership shall be "M/s.Nirma Chemical Works"
Our partnership firm shall cam- business of manufacture of colour chemicals, washing powder etc. and sale -purchase of the same. However, with the consent of all the partners, manufacture and sale - purchase of other goods can be done.
3. The fund require in the aforesaid firm shall be arranged by all the parties with mutual understanding. An interest at the rate of 9 % shall be given on the capital contributed by the partners in the aforesaid firm.
14 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
4. The day-to-day administration and all the matter relating to business shall be carried out together in co-operation and consent of all the partners. For the same, salary of Rs.200/- (Rupees two hundred only) per month shall be paid to Shri Ramjibhai Khodidas Patel
5. The profit-loss sharing ration of the said partnership firm is considered on the basis of 100 paise for Re. 1/ as follows.
Raise Party of the First Part : Ramjibhai Khodidas Patel 25 Pa; A of the second part : Shanlaben Karsanbhai Patel 75
6. The Accounting year of the aforesaid partnership firm shall be financial year i.e. from 1st April to 31st March. However, the first accounting year shall be from 1st February, 1972 to 31st March. 1973 The Balance Sheet shall be prepared on 3 1st March and profit or toss shall be credited or debited in their respective account as per ratio and the Balance Sheet shall be prepares in two copies and signed by-all the partners and one copy shall be given to each partner.
7. The books, files, vouchers, indents etc. shall be kept in the office of the firm and every partner shall have right to inspect the same, and there should not be any objection or obstruction thereto.
8. No partner of the firm shall become the mortgagor or guarantor of am person and no loan should be given or use money for personal use. In spite of this, if any one does the same, then the said partner shall be personally responsible for any loss to the firm and for the said act the firm will not be responsible.
9. Bank account should be opened in the name of the firm and be arranged that the transaction shall be done with the signature of either of partner.
10. The term of this partnership firm is not fixed Any partner can by giving three months notice in writing to other partner and after considering the profit & loss and Receipts and payments, can terminate this partnership firm or can resign from the firm.
11. To do the business of the partnership firm auspiciously, honestly and diligently, and in case of any disagreement, the same should be resolved by appointing a mutual arbitrator.
15 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
Under the above conditions, this Deed of partnership is entered into between all the partners with full knowledge and understanding consciously, out of sweet will and the same is acceptable to all and shall be binding.
Executed at Ahmedabad on this dated 18.02.97, Friday.
1. Ramjibhai Khodidas Patel
2. Shantaben Karsanbhai Patel (The date of execution is 18/2/72, however, in the copy placed in the paper-book it has been typed as 18/2/97 which was stated to be due to typing error) 4.1 (a) The aforesaid partnership suffered first change with effect from 01/04/1974 when three more partners joined the earlier partnership business being carried on under the name and style of M/s.Nirma Chemical works. The Deed is dated 11/04/1974.
(b) As per clause-8 of this partnership-deed executed on 11/04/1974 and made effective from 01/04/1974, Ramjibhai Kodidas Patel & Smt. Shantaben Karshanbahi Patel (hereinafter referred to as "RKP" and "SKP" respectively) were shown as owners of intangible assets, namely; tenancy rights, good-will and trade-marks. Other three parties were not to have any interest, title or right in these intangible assets mentioned in clause. Clause-8 of the Deed which reads as under-
"8. Ramjibhai Khodidas Patel, the party of the ,7,^ ^art, Shantaben Karsanbhai Patel, the party of the second part, shall have only tenancy right, good-will and ownership of trademarks and other parties have no right, title or interest in the same."
(c) As per clause-3 of this deed, the funds required for carrying on the business of the partnership were to be arranged by all the parties with mutual understanding and capital contributed by partners was entitled to payment of interest @ 12% per annum.
4.2 (a) The next change in partnership was brought by partnership-deed executed on 12.11.1974, but with effect from 22/09/74 because of death of partner Shri RKP. As a 16 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 result of this partnership-deed, a minor named Haresh Rajjibhai was admitted to the benefits of partnership.
(b) As per clause-10 of this partnership-deed, Smt. SKP was shown, for the first time, as to be sole owner of tenancy rights, good-will and trade-marks and trade-names and neither the partnership nor other partners were made to have any right or share or interest in these intangible assets.
(c) Capitan for the partnership was, however, again to be contributed by all the parties, though of course, as per mutual understanding and the partners were entitled to get interest @ 12% p.a. on their capital investment.
4.3 (a) The 3rd change in partnership was brought out by partnership-deed executed on 26/04/75, but again made effective from 01/04/75. This time one partner retired and another two partners joined.
(b) As per term and conditions No.9 was this partnership was also, the ownership of tenancy rights, good-will and trade-marks and trade-names was accepted to be that of Smt. SKP and other partners were not to have any interest, right or share in any of these assets.
(c) Capital, as per this partnership-deed also, was to be contributed by all the partners as per mutual consent and was entitled to interest @ 12% p.a. 4.4 (a) The fourth change in partnership was brought out as per partnership-deed executed on 26/05/1976, but made effective from 01/04/1976 when a new partner joined and one old partner retired.
(b) As per clause-9 of this partnership-deed, Smt. SKP was again made to be owner of tenancy rights, good-will trade-marks and trade-names. Other partners were not to have any right, share or interest in the said assets.
4.5 (a) (a) The fifth change in partnership was brought about as per partnership-deed on 02/04/1979 when two partners retired and a new partner named J.M.Patel Family Trust through its Trustee, Smt. SKP joined the partnership. This partnership was made effective from 01/04/1979.
(b) As per clause-10 of this partnership-deed, Smt. SKP was again, made to have ownership of tenancy rights of the Firm's premises, good-will, trade-marks and trade- names. Remaining partners were made to have no claim or share in these assets.
17 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
(c) The capital of the ownership, however, was again, to be contributed by ail the partners with mutual consent and was entitled to interest @ 12% p.a. 4.6 The aforesaid partnership was dissolved as per deed of Resolution dated 05/04/1979 and was made effective on 31/03/1979. As per this Dissolution-deed, Pramodkumar Kanjibhai Patel, retired and other four partners were made to continue the partnership business as it is, which got changed as per partnership-deed dated 02/04/1979. 4.7 The next change in partnership was made as per partnership-deed dated 03/01/1980 and with effect from 01/01/1980 when M/s. Nirma Chemical Works (P) Ltd. joined the partnership and, consequently, Smt. SKP, SKP Family Trust and Nirma Chemical Works (P) Ltd. remained the partners for continuing the business of partnership styled as M/s. Nirma Chemical Works (copy of this deed is placed at page No.84 of Assessee's paper- book No.I) 4.8 Thereafter, the partnership business styled as Nirma Chemical Works was finally dissolved with effect from 04/01/1980 as per Dissolution Deed dated 07/02/1980. As a result of this Dissolution-deed, the running business of the partnership with all its assets and liabilities excluding the assets belonging to the party of the first part, i.e. Smt. SKP as per clause-9 of the deed and including rights and benefits of pending contracts, profits or losses, rights and liabilities that they have accrued to the partnership business between 01.04.1980 to the date of Dissolution (upto 4.1.80) were taken over by the party of the second part to the Dissolution-deed, i.e. by Trust styled as S.K.Patel Family Trust through its Trustee, Smt. SKP. The terms and conditions of Dissolution-deed as have been noticed from its copy placed at page Nos.183 to 190 of Assessee's paper-book No.II are as under-
"DEED OE DISSOLUTION THIS DEED OF DISSOLUTION OE PARTNERSHIP is entered into and executed at Ahmedabad on this 7th Day of February. 1980 by and between the earstwhile partners of M/s. Nirma Chemical Works.
(1) Smt. SHANTABEN KARSANBHAI PATEL, aged about 3 I years, Hindi. Hindu Patel, occupation household work and business, residing at 4, Surendra Mangaldas Compound.
Surendra Mangaldas Road, Ambawadi, Ahmedabad, hereinafter referred to as the party 18 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 of the "FIRST PART" ( which expression shall unless repugnant to the context or meaning thereof include her heirs, executors, administrators, assignees etc
2) Smt. SHANTABEN KARSANBHAI PATEL Trustee of S.K. Patel Family Trust, aged about 31 years, Hindi, Hindu Pate/, occupation household work and business, residing at 4, Surendra Mangaldas Compound, Surendra Road, Ambavadi, Ahmedabad, hereinafter referred to as the party of the " SECOND PART" ( which expression shall unless repugnant to the context of meaning thereof include other trustee or trustees or successors trustees or the beneficiaries of the trust etc., and (3) M/s. NIRMA CHEMICAL WORKS PVT. LTD. a private limited company incorporated under the Companies Act 1956, bearing registration No. And having its registered office at G.I.D.C. Estate, Vatva, Dist. : Ahmedabad through its Director Shri KARSANDAS KHODIDAS PATEL, aged about 35 years, Hindi, Hindu Patel, occupation business, residing at 4 Surendra Mangaldas Compound, Surendra Mangaldas Road, Ambavadi, Ahmedabad hereinafter referred to as party of the "THIRD PART" ( which expression shall unless repugnant to the context or assigning thereof include other Directors of the company and successors in title and assignees etc. WHEREAS the parties hereto had constituted a partnership under the firm name and style of M s N1RMA CHEMICAL WORKS to carry on the business of manufacturing, purchasing and selling of Colour Chemical Wasning Powder Determent Soap, etc as and from January L 1980 the terms conditions and stipulations whereof were recorded as per the Deed of partnership dated January 3, 1980.
AND WHEREAS for various reasons including the dissensions amongst the Directors of the party of the thud pail as well as the unwillingness of the party of the first part to continue as a oartner, the partners have by mutual con-cm and agreement agree to dissolve the said partnership as and from 4 January 1980. AND WHEREAS the partners do hereby confirm and agree that the partnership as aforesaid has been dissolved by the as per terms, conditions and stipulation recorded in this deed of Dissolution. NOW THIS DEED OF D1SS01A TION OF PARTNERSHIP WITNESS AND IT IS HEREBY MUTUALLY AGREED AND DECLARED, as follow:
19 ITA Nos. 1706 & 1514/Ahd/2009& C.O. No. 123/Ahd/2009 . A.Y.2001-02
1. That the aforesaid partnership is hereby dissolved with effect from -4, January 1980.
2. That the running business of the partnership with all its assets and liabilities excluding the assets belonging to the party of the first part as per Clause-9 of the partnership deed and deed and including rights and benefits of pending contracts and the profits of losses and rights and liabilities that may have accrued for the business carried on and from January 1, 1980, to the date of dissolution as per the books of accounts of the firm which the parties hereto have confirmed and agree that the accounts of the partnership are true and correct and there is no dispute regarding the accounts of the partnership that is dissolved hereby is taken over by the party of the account part.
3. The party of the second part has agreed to discharge all the liabilities of the firm for the period during which the partnership was in subsistence whether accrued or not and whether recorded in the books of the firm or not including those which may arise or accurate hereafter including those on account of Sales Tax, Excise, Octroi, Income-tax Act and bills outstanding which may be received hereafter.
4.That the party of the second part shall be the owner of all the profits and gains of the business that may have accrued, arisen or received or which may accrue, arise or be received for the business earned on by the firm from its Commencement i.e. January' 1, 1980 to its dissolution i.e. January 4, 1980 and shall be liable for all the losses and liabilities that may have been incurred or suffered or which may be inclined or suffered or which may be incurred or which may accrue or arise hereafter for the said period and for the profits and losses of the business that may be carried on by the party of the second part after dissolution either as a sole owner or in partnership with any other persons.
5. That the party of the second part has agreed to pay to the party of the first part as well as the party of the third part the amount standing to the credit or their respective capital accounts and current account without any share in profits and losses of the firm for the business carried on during its subsistence of the partnership i.e. from its commencement on January 1, 1980 to its dissolution on January 4, 1980. The party of the second part has agreed to pay interest at the rate of 12% per annum if the amount is not paid within one month from the signing of this deed of dissolution, till the final payment is made.
6. The parties of the first part and the third part in view of the dissolution of the partnership on settlement of amounts have agreed to take their capital investment in the 20 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 partnership firm back and handed over the running business to the party of the second part and they hereby agree and declare that they have upon dissolution agreed to receive the amount standing to the credit to their accounts in lieu of their respective share of interest in the assets of the business of the partnership including rights, title and interest in partnership properties, outstanding privileges, rights, and benefits, pending contracts and profit or loss run under the firm name and style from its commencement to its dissolution it is also made known that on account of the party of the second part who has undertaken to save harmless the parties of the first part and the third part from any and all liabilities or obligations of the partnership accrued due or which may accrued due hereafter including those arising on an account of their signing cheques bills receipts or contracts on or before the date of dissolution, and therefore the party of the First and Third part have by way of adjustment of their rights have agreed to take the amount standing to the credit together with and subject to the other terms and conditions mentioned herein this deed of dissolution.
7. The party of the second part has agreed to pay to the party of the first part in lieu of Compensation for the ownership of the tenancy rights of the firm premises, goodwill trade name and trade marks at the rate of 2.5% to be calculated on net profits of the firm every year or Rs.10,000/- (Rupees ten thousand) whichever is higher. This amount shall be payable during the life time of the party of the first part as we// as to the heirs of the first part after her demise The ownership right for the goodwill, trade name and trade marks as well as those of tenancy rights belongs to and shall remain as the sole proprietor rights of the party of the second pan. The said amount shall be paid within three months of the closing of the account of the trust or a partnership firm, if any.
Constituted by the trust in which the trust is a partner. The party of the Second part shall submit the calculation of amount payable to the party of the first part within three months from the end of the Accounting Year. It shall also submit the said statement duly certified by the Auditor if so desired by the party of the first part The party of the first part shall give a notice in writing for this purpose to the party of the Second Part.
8. That the parties have signed notices addressed to the Registrar of Firms, Income-tax Officer, Circle V, Ward A, Ahmedabad. Sates Tax Officer, Ahmedabad, prescribed 21 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 Authority under the Shop & Establishment Acts prescribed authority under the Professional Tax notifying the dissolution of the firm.
9. That each of the said parties has assured the other and warrants that except as recorded in the books of account of the partnership and other papers and correspondence of the partnership each of them has not received collected or discharged or compromised any claim demand or other credit due or to become due to the partnership or contracted or otherwise, incurred any liability debt or obligation that may now or hereafter directly or indirectly charged or affect the assets of the partnership hereby taken over by the party of the second part or any of its property.
10. The party of the second part shall have the sole and exclusive right to endorse, collect and realize cheques, notes, drafts, or other negotiable instruments or securities standing in the name of the firm and to receive and give effectual receipts for the debts of the firm and to take necessary legal steps for the collection thereof. That the party of the first pan and the third part have agreed not to collect or receive any of debts of the firm which is dissolved.
11. The party of the second part hereby covenants with the parties of the first part and third part to discharge and ft. .fill all debts, liabilities and obligations of the partnership and at all times hereafter effectually to indemnify and keep indemnified the parties of the first part thud pan and each of them individually and or his/their respective legal representations and estate and property therefrom and from all proceedings costs claims and expenses in respect thereof.
12. That the books of account, documents, correspondences and all papers of the partnership shall remain in the custody of the party of the second pan who shall allow to inspect and/or to take copies of such accounts documents correspondence etc. to the parties of the first part and the third part/or each of them and or his/their respective legal representatives etc. and/or agents or attorneys at all reasonable times and shall keep the same for a period of 8 (eight) years and before destroying them give a notice of not less than one month to the parties of the first part and the third part The party of the second part shall at the request of the parties of the first part request of the parties of the first part and the third part or each of them and/or his/their legal representatives etc. and/or 22 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 agents or attorneys cause the same to be produced at the cost and expenses of the requisitioning party before any Court of authority.
13. Each of the parties hereto hereby releases the other from all proceedings accounts costs claims and demands in respect of the partnership but without prejudice to any rights or remedies under the provisions of this deed.
14. Each of the parties hereto assures the other that he shall execute any other deed or deeds or releases or sign any other notice or notices or documents etc. to further assure the carrying into effect' the terms agreed to hereby at the expense of the requisitioning party.
15. If any doubt question or disputes shall at any time hereafter arise between the parties hereto touching the construction of this deed of dissolution or any clause or with regard to any mater or thing herein contained, -or relating to the dissolution of the said partnership and the affairs thereof as aforesaid, such doubt, dispute or question shall be referred to an arbitrator or arbitrators according to the Indian Arbitration Act, 1940 or any statutory modification or re-enactment thereof.
THIS DEED OF DISSOLUTION is executed on Stamp Paper of Rs. WO/- (Rupees One Hundred) bearing No. 14742 dated February 7, 1980 purchased from Thakorlal Chimanlal Pate!, Ahmedabad Stamp Vendor bearing licence No SB 15/1973 for the partnership firm hereby dissolved through Rajendra D. Shah & Co and shall be kept with the party of the second part and signed copies thereof are given to the parties hereto IN WITNESS WHEREOF the parties hereto have put their respective signatures on the day and the year hereinabove mentioned in the presence of witnesses. Ahmedabad, dated 7th day of February 1980.
SIGNED AND DELIVERED BY the Withinnamed Smt SHANTABEN KARSANBHAi PATEL in the presence of Witness:
1._______________ ______________"23 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009 . A.Y.2001-02
5. It is term No.7 of this Dissolution-deed whose interpretation and outcome is to be considered for disposal of various issues in this appeal and, therefore, we, for the sake of convenience, would like to reproduce the same once again as under:- "7. The party of the second part has. agreed to pay to the party of the first part in lieu of compensation for the ownership of the tenancy rights of the firm premises, goodwill trade name and trade marks at the rate of 2.5% to be calculated on net profits of the firm every year or Rs.10,000/- (Rupees ten thousand) whichever is higher. This amount shall be payable during the life time of the party of the first part as well as to the heirs of the first part after her demise. The ownership right for the goodwill, trade name and trade marks as well of tenancy rights belongs to and shall remain as the sole proprietary rights of the party of the second part. The said amount shall be paid within three months of the closing of the account of the trust or a partnership firm, if any, constituted by the trust in which the turst is a partner.
The party of the Second part shall submit the calculation of amount payable to the party of the first part within three months from the end of the Accounting Year. It shall also submit the said statement duly certified by the Auditor if so desired by the party of the first part. The party of the first part shall give a notice in writing for this purpose to the party of the Second Part."
6. In consequence upon the Dissolution of partnership styled as M/s. Nirma Chemical Works as a result of aforesaid Dissolution-deed (executed on 07/02/1980) w.e.f. 04/01/1980, the running business of erstwhile partnership alongwith all assets and liabilities, except the assets as provided in clause No.7 of the Dissolution-deed, were claimed to have been taken over by Trust S.K.Patel Family Trust through its Trustee, Smt. SKP who continued the same business. The Trust, however, also continued to use the intangible assets - goodwill, tenancy right, Trade-& Trade-name; in consequence of the terms of clause-7.
7. On the other hand, Smt. SKP started to receive a yearly payment which she offered for taxation in her return of income as income and the Revenue went on to tax the same as income from royalty under the Head "Income from other sources"
24 ITA Nos. 1706 & 1514/Ahd/2009& C.O. No. 123/Ahd/2009 . A.Y.2001-02
8. In between, the proprietary business of SK Family Trust was converted, again, into a partnership-firm with 6 other partners and it was, thereafter that the partnership business in the name and style of M/s.Nirma Chemical Works was converted under Chapter IX of Companies Act into a Body Corporate, i.e. of Company on 30/01/1994 which was styled as Nirma Chemical Works Pvt.Ltd. (hereinafter referred to as "NCWL") This Pvt.Ltd. Company became a deemed Ltd. Company w.e.f. 01/07/1997. 8.1 During the intervening period, i.e. the period when NCWL came into existence and the dispute between Smt.SKP and NCWL arose, two other Companies, named as Nirma Ltd. and Nirma Consumer Care Ltd. (in short termed as "NL" and "NCCL") also came into being. These two companies got rights for using the trade-marks and brands, which were the subject matter of cause-7 of Dissolution-deed dated 07/02/1980 and also the trade-marks and trade-names, if any, got developed/generated thereafter, from NCWL. NL was to use the trade-marks for overseas markets as well as for sale and supply to Canteen Stores Department in India, whereas NCCL, which was wholly owned subsidiary of NL; got the licence to use the trade-marks in relation to the production to be manufactured by NCCL or its sub-contractor.
9.1 In this way, the intangible assets, such as, tenancy right, good-will, trade-marks and brands, etc. which were owned by Smt. SKP and where the subject matter of clause-7 of Dissolution-deed executed pm 07.02.1980 got to be used by NCWL and finally by NL and NCCL.
15. When, it came to the notice of Smt. S.K.P somewhere at the beginning of the year 2001that NCWL was intending to assign/sale the trade-marks along with trade name (Brands) which were the subject matter of Clause-7 of Dissolution-deed dated 07.02.1980, she disputed the right of NCWL to assign or sell those intangible assets without her consent because she claimed herself to be the owner of those assets.
25 ITA Nos. 1706 & 1514/Ahd/2009
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. A.Y.2001-02
16. The erring parties entered into an agreement by which they put themselves to the Arbitration of sole Arbitrary, Retired Chief Justice of High Court of Gujarat, Mr. B.J. Divan.
17. The sole Arbitrary announced final award on 24.03.2001 which reads as under:-
" B.J. Divan 20, New Brahmakshtriya Society
(Retd. Chief Justice Prtiamraj Marg, Ellisbridge,
High Court of Gujarat) Ahmedabad-380006
Phone: 6579521
The Chairman and Managing Director
Nirma Chemical Works Ltd.
Nirma House, Ashram Road,
Ahmedabad-380009
Mrs. S.K. Patel
"Nima" Near Sundervan
Satellite Road
Ahmedabad-380015
Dear Sir/Madam,
This is with reference to agreement dated January 5, 2001 between Smt.Shantaben K.Patel ("SKP") and Nirma Chemical Works Limited ("NCWL") agreeing to appoint me as a sole arbitrator.
I have read the submissions made by SKP and NCWL in connection with disputes referred in the said agreement dated January 5, 2001. I have also perused the supporting documents and evidences submitted by both the parties. On the basis of claims submitted by each party, I understand that the following issues need to be decided.
26 ITA Nos. 1706 & 1514/Ahd/2009
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. A.Y.2001-02
1. Who is the owner of the said trademarks?
2. Whether NCWL is entitled to assign the said trademarks?
3. Based on the conclusion on both the issues listed above, in which ratio the compensation to be received from M/s. Nirma Industries Limited on assignment of the said trademarks should be shared by NCWL and SKP.
Examining all the circumstances, I make the award as under:
*The subject brands/trademarks are ownership of SKP. *SKP being the owner of the said brands/trademarks is entitled to assign the same. *NCWL has the user rights in the said trademarks and such rights are perpetual in nature.
*SKP's interest in the said trademarks is restricted to 2.5% of the profits that NCWL will make NCWL has made considerable efforts in promotion of the said trademarks and the incremental profit arising from use of the said trademarks is due such promotion efforts. *Considering all these facts, I direct that SKP should be entitled to 10% of the consideration receivable on assignment of the brands. Sd/-
(B.J. Divan)"
18. After the announcement of the award by the Arbitrator, an agreement to sell the assessee's user rights in trade-marks and brands which were acquired in consequence upon the transactions involved in Clause-7 of Dissolution Deed dated 07.02.1980 as well as all other trade-marks and brands developed/generated subsequently, was entered into amongst the assessee, i.e. NCWL; Smt. SKP and "Nirma" Ltd. on 26.03.2001 as per which intangible assets, namely, trade-marks, designs, copy rights and brands registered as well as pending Registration were sold to "Nirma" Ltd. for a total consideration of Rs. 500 crores out of which an amount of Rs. 50 crores was paid to the owner, Smt. SKP and an amount of Rs. 450 crores was paid to the licensee which as per the agreement was the assessee.
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. A.Y.2001-02
19. The assessee furnished its return of income for A.Y. 2001-02 declaring total income of Rs. 10,45,68,600/- and appended a note forming part of the return, the relevant note reads as under:-
"The assessee had rights in certain trade mark under the name and style of Nirma and Nima which were self generated assets. During the assessment year, the assessee sold its rights in the said trade-marks to Nirma Industries Ltd. for a consideration of Rs. 450 crores. The rights did not have a cost of acquisition. Accordingly relying upon the following decisions, no capital gainsji would arise on sale of the trade-marks.
B.C. Srinivas Shetty 128 ITR 294 (SC).
Cadell Weaving Mill Co. P. Ltd. vs. CIT 166 CTR 7 (Bom)"
20. With the aforementioned factual matrix, the contentious issues to be decided by us are as under:-
(i) What should be the fair market value as on 01.04.1981 in respect of trade-marks/brands prior to 1980? Whether it should be taken at Rs. 90 crores as adopted by the assessee supported by Valuer's report or it should be Rs. 10 crores as determined by the ld. CIT(A) Drawing support from the Valuation Report of Prof. Sahay or it should be Rs. 3,85,321/- as computed by the A.O.
(ii) Whether the apportionment made by the assessee in respect of sale consideration relating to brands developed post 01.04.1981 should be accepted in the ratio of 68.45% and 31.55% or whether the findings of the revenue authorities to be accepted that the trade-marks/brands are composite and cannot be bifurcated between the period's pre 1991 and post 1991.28 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009 . A.Y.2001-02
21. The first contentious issue relates to the fair market value of the user rights of trade-marks and brand names as on 01.04.1981. Before proceeding further, let us consider the observations of the Tribunal in the first round of litigation wherein the Tribunal has set aside the issue to the ld. A.O. by making following observations:-
"After careful consideration of totality of the facts and circumstances of the case relating to the issue as to what should have been the cost of assessee's "user rights" in trade-marks and brands acquired by it in consequence upon the terms of clause - 7 of Dissolution Deed dated 07.02.1980 and sold on 23.01.2001, we are of the opinion that -
(i). The Assessing Officer proceeded to determine the value of these assets as on 01.04.1981 himself at Rs.6 to 8 crores without giving the assessee an opportunity of being heard and also without having such jurisdiction.
ii). The Assessing Officer, further acquired the Report from Professor Arvind Sahay, IIM Ahmedabad, again, without giving the assessee an opportunity of being heard.
(iii) The Id. CIT(A) proceeded to determine the cost of acquisition of these assets as on 01.04.1981, again, without allowing the assessee an opportunity of being heard, i.e. in spite of assessee's specific request with respect to specific information and facts as per its letter dated 06.10.2005.
In addition of aforesaid facts and circumstances of the case, we are of the opinion that so far as issue relating fair market value of these assets as on 01.04.1981 is concerned, both the authorities had proceeded in complete disregard and violation to the principles of natural justice and, therefore, the ld. CIT(A)'s decision for adopting the fair market value of these assets as on 01.04.1981 is not in accordance with provisions of law."
22. While framing the fresh assessment, the A.O. surprised the assessee by dismissing the report of Prof. Sahay stating that "since the valuation report 29 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 of Prof. Sahay is not being used for ascertaining cost of acquisition of brands as on 01.04.1981, assessee's request to cross-examine him needs no consideration.
23. This observation of the A.O. is completely in disregard to the directions of the Tribunal. It is pertinent to mention here that the report of Prof. Sahay was called by the A.O. himself. After rubbishing the report of Prof. Sahay, the A.O. proceeded by determining the fair market value of the brands as on 01.04.1981 on the basis of the Wealth tax assessment of Smt. Shantaben K. Patel.
24. In our considered opinion, this approach of the A.O. is bad and illegal. Firstly, Smt. SKP had no right over the brand name as on 01.04.1981 and secondly, she was not the immediate previous owner, therefore, SKP did not have full rights of the owner. She only had the right to receive royalty for the use of the assets. Moreover, the assessee is not concerned with the valuation of the said assets in whichever form in the hands of Smt. SKP, the Wealth tax assessment of Smt. SKP does not have any bearing on the facts of the case in hand, for the simple reason that the case pleaded by one assessee cannot be held against another assessee.
25. Smt. SKP does not have the same status what the assessee had as on 01.04.1981, the partnership firm had truncated ownership right whereas the assessee's right was to use the license. This view finds support from the facts that out of full consideration of Rs. 500 crores Smt. SKP is entitled to 30 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 only 10% i.e. 50 crores, therefore, incomparable items should not be compared.
26. The A.O. valued the assets for Rs. 385321/- only. As against Prof. Sahay valuation of 8.25 crores to 11 crores.
27. When the assessee agitated this assessment before the ld. CIT(A), the ld. CIT(A) again surprised the assessee by accepting the valuation report of Prof. Sahay without giving any opportunity to cross-examine the valuer in spite of the specific directions of the Tribunal in the first round of litigation as mentioned hereinabove.
28. This has led to a precarious situation. The valuation report of Prof. Sahay has been rubbished by the A.O. whereas the ld. CIT(A) accepted the valuation of Prof. Sahay in gross violation of the principles of natural justice and flaunting the specific directions of the Tribunal. The only piece of evidence that survives is the valuation report of M/s. RSM & Co. which has been relied upon by the assessee and which had valued the trade-marks and brand names as on 01.04.1981 at Rs. 90 crores.
29. During the course of the assessment proceedings, the Assessing Officer raised certain issues which were replied by the assessee point to point-wise and the same can be understood in the following tabular form:-
As per para 4.1 of Assessment Appellant's observations Order 31 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02
(a) Sales for A.Y.81-82 have In annexure to the valuation report of RSM & been taken at Rs.25.87 crores Co., Mumbai dtd.l8m August, 2004 the sales for on actual basis whereas • year 1 to 5 year have taken for Rs.25.87 crores for other subsequent four to 169.54 crores is increased by 60% every years, estimated sales by year. In fact, the sales also increased increasing 60% every year have substantially. The actual sales of various been adopted. When actual entities are as under
sales were available, the estimated sales taken by increasing 60% every year clearly indicates that the report was prepared ignoring the actual sales which were much below than the estimated ones.
Year Name of Sales Rs (
Entity in lacs)
CY81 Bharat Soap 441.66
CY81 Norm a 518.97
Detergents.
CY81 Navbharat 544.04
Det. Works
CY81 Noble 71.36
Industries
Year ending on Neo 470.58
30-09-81 Detergents.
CY81 Nirma 539.95
Chemical
Works
Total: 2586.56
CY82 Norma 714.93
Detergents.
32 ITA Nos. 1706 & 1514/Ahd/2009
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. A.Y.2001-02
CY82 Navbharat 885.36
Det. Works
CY82 Bharat Soap 539.11
C Y82 Neo 839.59
Detergents.
Year ending on K.K. Patel 0.10
30-09-82 Industries,
C Y82 Nirma 1148.00
Chemical
Works
Total: 4127.09
Year ending on K.K. Patel 587.98
30-09-83 Industries,
Mehsana.
Year ending on K.K. Patel 64.60
30-09-83 Industries,
Ahmedabad.
C Y83 Noble 2019.82
Industries
CY83 S.K. Patel 1443.41
(F.T.)
01-01-83 to Norma 3.49
15-03-83 Detergents.
CY83 Norma 406.74
Detergents.
CY83 Nirma 1038.12
Chemical
Works
Total: 5564.16
33 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
CY84 Patel 1849.98
Detergents.
Year ending Patel 1167.90---
on 3 1-03-84 Detergents.
CY84 Nirma 985.76
Chemical
Works Pvt.
Ltd.
CY84 Noble 2972.57
Industries
C Y 84 S.K.Patel 2111.26
(F.T)
Year ending on K.K.PATEL 974.73
30-09-84 Industries
Mehsana.
Year ending on K.K.PATEL 23.09
30-09-84 Industries
Ahmedabad
C Y84 Nirma 133.22
Chemical
Works
Total 10218.51
The copy of annual accounts are enclosed.
These figures show that average growth was
59%
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. A.Y.2001-02
(b) Assessee did not prove that The sales of Rs.25.87 crores for Asst. Year sales of Rs.25.87 crores for A.Y. 1981-82wherein Nirma brand only. The 1981-82 were of NIRMA brand entities sold the goods in Nirma brand. The only. royalties were also paid in use of Nirma brand I to Nirma Chemical Works Ltd.
: Profits were adopted at The entities manufacturing the goods at 1 5% of 15% of estimated sales as profit on the estimated is almost correct. The above instead of actual profits. actual profit of 5 years of these entities is given This has further inflated the as under.
profits and eventually the
valuation of trademarks etc.
Year Name of Entity Profit Rs
CY81 BharatSoap 43.30
CY81 Norma 86.78
CY81 Navbharat Det. 88.26
C Y81 Noble Industries 2.58
Year ending Neo Detergents. 64.99
CY81 Nirma Chemical 114.37
Works
Total: 400.28
CY82 Norm a 104.54
Detergents.
35 ITA Nos. 1706 & 1514/Ahd/2009
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. A.Y.2001-02
C Y82 Navbharat Det. 139.02
Works
CY82 Bharat Soap 45.26
Year ended on Neo Detergents. 148.82
30-09-82
CY82 K.K. Patel (0.19)
Industries,
Mehsana.
CY82 Nirma Chemical 178.12
Works
Total: 615.57
Year ended on K.K. Patel 127.06
30-09-83 Industries,
Mehsana.
Year ended on K.K. Patel (7.91)
30-09-83 Industries,
Ahmedabad.
CY83 Noble Industries 460.18
C Y83 S.K. Patel (F.T.) 277.48
CY83 Norma 105.11
Detergents.
CY83 Nirma Chemical 201.65
Works
Total: 1163.57
CY84 Patel Detergents. 250.33
Year ended on Patel Detergents. 228.04
3 1-03-84
36 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
CY84 Nirma Chemical 166.45
Works Pvt. Ltd.
CY84 Noble Industries 562.74
CY84 S.K. Patel (F.T.) 353.80
Year ended on K.K. Patel 236.07
30-09-84 Industries,
Mehsana
Year ended K.K. Patel (0.74)
On Industries
30.09.1984 Ahmedabad
CY 84 Nirma Chemical 1.40
Works
Total 1798.99
This shows that entities earned profit above
17% on sales.
(d) Valuer failed to consider that The valuation made based on the actual sales in during 80's the NIRMA brand Asst. Year 1981-82 for 25.87 crores. The growth was in inception stage and it of sales by 60% shown that Nirma brand was was not so popular as is evident popular. The sales in Asst. Year 2001-02 were from the volume of sales. Actual Rs. 1723.60 crores would not have mixed as it is sales in A.Y. 1981-82 were based on adding further segment like toilet Rs.25.87 crores whereas in soaps and subsequent market condition. A.Y.2001-02 the sales were Rs.
1723.60 crores.
(e) Market share of Nirma was This is irrelevant for valuation of brand as on taken at 35% by volume while 01.04.1981 as it is only ascertaining the value valuing the brands in 2001 by as on 01.04.1981.
RSM & Co., whereas no such data was considered for valuation of brand as on 1.4.1981.
(f) For valuation of brands as on This aspect is discussed in valuation report at 1.4.1981, "Super Profit Method" Pages 8 & 9. This is also clarified in the has been adopted whereas in submission to Hon'ble CIT(A) by the appellant case of valuation for F.Y.2000- company vide letter dtd. 22nd January, 2001, "Discounted Cash Flow 2005.Copy enclosed marked Annex I. Method" had been adopted. He has not given any reasons for 37 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 following two different methods.
Therefore, is no parity between two valuation reports.
The transaction carried out for Rs.500 crores is
(g) Value of trademarks was between the parties whereas the valuation estimated for F.Y.2000-2001 at report shows that the estimated value of the Rs. 804.75 crores by RSM & Co. asset. The asset need not fetch the actual market whereas the transaction was price. The property could be valued at higher carried out by assessee at but parties may carry out the transaction at the Rs.500 crores. This also proves agreed price depending on the other financial that &, Co. has tendency to and economical criteria.
exaggerate ate the valuation.
(h) It is also very important to As mentioned in the para that ownership of note that value of brands brand and right to use are inseparable and assessed at Rs.90 crores as on hence, the value of brand as on 01.04.1981 1.4.1981 is the value of brands should be taken as per the valuation report. including the right to use them RSM & CO. was required to bifurcate the value of "Brand"
and value of "right to use" vide letter dtd. 14.10.2004, but no such bifurcation was given by them on the ground that ownership of brand & right to use are inseparable. This is very important to ascertain as only "right to use" has been claimed to have been transferred to Nirma Ltd.
(i) Report of RSM & Co. is As mentioned at earlier paras (b) & (c), this is based on estimated figures of near to the actual one and should not be taken sales & profits and hence it is as totally baseless and incorrect. totally baseless and incorrect.
(J) As already pointed out, RSM Please refer to the comments at (b), (c) & (i). & Co. has used estimated sales and estimated profits of entire group. , In fact actual sales and actual profits are the best basis for the working of super-profit attributable to Brand and that too of NIRMA brand of one entity only which was subject matter of transfer in 1980.
(k) RSM & Co. has failed to M/s. RSM & Co. has considered various consider various factors which methods at pages 6 to 9 of the valuation report. are responsible for super-profit. After considering each method, they adopted 38 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 It is established by various super-profit method.
authorities in this field, that super-profits is attributable to brand name, distribution network, intangible value of firm (i.e. non-brand factors such as R&D and production processes), value of intangible assets such as quality management and work force. Thus, the super-
profit attributable to brand as adopted by RSM & Co. is incorrect and suffers from various irregularities.
(l) RSM & Co. in its report This will have no effect on the valuation as on dated 18.8.2004, on page-4, has 01.04.81. On the contrary, this gives to the itself admitted that 'HLL' and brand that even with this low priced product, 'Sarabhai's' virtually controlled Nirma acquired substantial share in the market. the entire market that time and The sales and growth rate shows that Nirma hence Nirma's strategy was to brand was popular in 1980. introduce the detergent powder at l/4th the price of detergents offered by the competitors. This clearly establishes that Nirma brand was not popular in 1980's and hence nothing was attributable to brand name.
(m) It is an accepted principle The sales of the year is Rs.25.87 crores, which that "historical results are is actual growth rate @ 60% and hence there is crucial for accurate validation no manipulation of valuation report of RSM & as they provide correct and real Co.
picture". However, RSM & Co.
has used projected earnings without giving any reasons for such preference. This single factor has given them a lot of discretion to influence brand valuation figures through changes in figures of projected sales & projected earnings.
Therefore, valuation report of RSM & Co. is foil of manipulations.
(n) The assessee has never This has not effect on the value as on 01.04.81.
intimated RSM & Co. to value
the brands with "goodwill" or
39 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
without "goodwill". Thus, the
method adopted by RSM & Co.
shows that it has valued the
"goodwill" of "NIRMA Brand"
from the business of 5 - 6
concerns of NIRMA group
including NCWL (the assessee).
This is contrary to the stand
taken by the assessee that Smt.
Shantaben K. Patel had
transferred the brand name
without "goodwill". RSM & Co.
has made no efforts to separate
the value of "Brand" from the
total "goodwill" of the business
of 5-6 concerns of NIRMA
group. A brand (including
trademarks) may have its own
value which may be 5 - 10% of
the total "goodwill" of the
business. Therefore, for these
reasons also valuation report of
RSM & Co. can not be
considered.
(o) Report of RSM & Co. is not The report is given by RSM & Co. and hence the
signed by any individual sign by RSM & Co. has evidentiary value. The
Chartered Accountant or correspondence by the I.Tax department with
Authorised Signatory. In place RSM & Co. also confirmed about furnishing of
of signatures, only "RSM & Co." the report. If, it has no evidentiary value, then
is written. Since RSM & Co. is I.Tax department cannot ask further details/
an artificial person, it cannot explanations from RSM & Co.
sign the report. Therefore,
valuation report submitted by
the assessee has no evidentiary
value even otherwise.
Valuation Report of RSM & Co. The value as on 01.04.81 at Rs.90 crores by
is also required to be rejected valuer RSM & Co. was correct. The
for being part of tax evasion observations made in the para are totally
devise. Since the valuer is irrelevant and liable to be rejected.
suggesting astronomical high
value of brand at Rs. 90 crores
as on 01.04.1981 as against
already determined and
accepted in WT proceedings of
Smt. Shantaben K. Patel at Rs.
4.2 lacs, it indirectly admitting a
40 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
Gift-tax and Wealth tax evasion
of almost Rs. 50 - 60 crores in
1980's. The valuer is aware that
these assessments cannot be
reopened now due to time
limitation and hence his report
is liable to be rejected on the
ground of being colourable
device to avoid tax.
30. The observation of the A.O. at para 4.3 of his order reads as under-
"The question of estimation of fair market value arises only when there is no other alternative or appropriate basis for ascertaining the fair market value."
31. This observation of the A.O. is ill founded.
32. We have given a thoughtful consideration to the valuation report given by M/s. RSM & Co. and which is exhibited at pages 47 to 108 of the paper book. We find that the valuer has considered different methods and after analyzing each of them has used the most appropriate methods. The relevant findings of the valuer read as under:-
Different Methods of Brand Valuation There are primarily four categories of approaches to brand valuation • The first category of methods is based on the actual present cash flows of a firm with decisions on what part of the cash flow is attributable to a brand combined with a multiplier that is related to discounting future cash flows. These methods are also called Indicator methods (or Earnings Split methods) and include approaches by Interbrand, AC Nielsen, Brand Finance, Brand Rating and Semion. Simon and 41 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 Sullivan (1993) build on these to provide a more robust method in this category by clearing delineating the non-brand factors that are a part of the firm's intangible assets - separate from the brand value.
• The second category of methods depends on customer attitudinal data collected through primary data collection methods that attempts to put a numerical value 10 customer preferences of brand related attributes. Young and Rubicam's Brand Asset Valuation Model is one such method in this category. Also included are factors such brand awareness, advertising (Share-of-Voice), market penetration, level of distribution, market share, etc. that provide indicators of brand strength (see Dyson,"Farr and Hollis 1996 for an example).
• The third category of methods is cost based and uses probable replacement costs as an indicator of brand value. The IIPEN method is representative in this category.
33. The valuers further explained the information used which reads as under:-
3. INFORMATION USED In performing the valuation exercise, we have relied upon the following information/ documents made available to us:
• Five years financial statements of the entities referred in para 1.3 above for the period ending on March 31, 1981;
• Five years financial statements of the entities referred in para 1.3 above from April 1, 1981 to March 31, 1985 • Other information as on April 1, 1981 available in public domain and required for the purpose of this report e.g., information about business environment; n'sk free returns etc.
34. We also find that the discussion on valuation methods in the valuation report, the relevant part reads as under:-
C. VALUATION METHODS The common methods available for valuation of brands are as under:42 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009 . A.Y.2001-02
1. COST BASED METHODS 1.1 Valuation by Historical Costs Under this method, the brand is valued on the basis of investments made by the owner entity over a period of time for the brand. In other words, all the costs (direct and indirect) associated with a particular period - development costs, marketing costs, advertising and communication costs, etc. are added up to arrive at the brand value.
However, this method ignores the value the brand will bring in the future. Further at that time, the brand was not fully developed and therefore the costs already incurred prior to April 1,1981 do not give an idea of the value of the brand. 1.2 Valuation by Replacement Costs This method takes into consideration various characteristics of the brand (awareness, percentages of trial purchases and repurchases, image, leadership etc.).
On the basis of the assessment of these characteristics, the valuer attempts to arrive at a value - the amount that needs to be spent over a particular period in order to create a particular brand.
This method takes into consideration the future costs as against the historical costs in the earlier method. However, this method is very subjective, inasmuch as it requires assessment of factors such as brand awareness, market standing, etc.
2. VALUATION BY MARKET PRICE Under this method, similar transactions in the market are compared - the value which a comparable brand could fetch in the past - to arrive at the value for the brands under consideration.
However, this method raises two major problems:
*The market for brands does not exist or is relatively very small and the buyer is the price-setter whereas in case of other commodities or assets, market forces generally determine the price.
*The transactions for brand acquisitions and sales are relatively few and therefore, the comparable data/transaction is not always available. Further, the brands are not bought to be sold again. Hence, the past transactions are not of 43 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 much help except that the value can give an idea of the multiples applicable to the particular sector of activity.
3. VALUATION BY POTENTIAL EARNINGS Under these methods, the expected returns accruing as a result of brand ownership is taken into consideration. The process of valuing the expected profits of the brand can be divided into three independent stages:
*Isolation of the net income associated with the brand; *Strategic evaluation of brand strengths and weaknesses for the future; and *Choosing, by using a classic financial method, a discount rate and period. 3.1 The Price-Premium Method This method attempts to measure the extra profit, which a branded product would earn over the generic product. This consists of taking the difference between the brand price and that of a generic product and multiplying it by the sales volume of the brand to obtain the turnover, which is generated by the brand. This approach assumes that costs and sales volume for a branded product and an unbranded one are equal.
The problem with this method lies in its hypothetical nature, as a comparative generic product does not always exist.
3.2 Capitalization of Super Profits Method This method attempts to calculate the super profits, which the Brands are able to generate. Under this method, the super profits are calculated from the view of amount invested in the business. For this purpose the amount of capital employed (i.e. owners capital) could be used. The excess rate of return on capital employed earned by the business over the normal rate of return earned in normal business conditions is calculated to find the super-profits and the same is then capitalized by using an appropriate multiple. This gives the amount which is required to generate the same level of super-profits (attributable to the brand) at the normal rate of return.
3.3 The Royalties Method In this method, the brand value is based on the annual royalties that a company hopes to receive if it licensed the rights to use the brands.
44 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
For arriving at the brand value using the expected annual royalties figure either the Multiple Method or the Discounted Cash Flows Method is being used. The Multiple (similar to P/E multiple used for financial valuations) represents brand strength in the market and is estimated after analysing the factors such as brand awareness, image, etc. The expected annual royalty multiplied by the Multiple gives the brand value.
Under the Discounted Cash Flow method, on the basis of royalty figures the annual cash flows are worked out over a period of 3/5 years, which is then extended for the perpetuity. The present value of the future cash flows are then calculated using the discounting rate. The discounting rate represents cost of capital adjusted for risk associated with the brand (or the cash flows). However in the current context, this method is not appropriate as the arrangement for use of the Brands with the entities was not at arms length. Further, the rate of royalty as prevalent in the industry can not be known and therefore can not be used because first, such arrangements were relatively few during the relevant period and second, the brands having the same strength as that of Nirma as on that date are difficult to identify.
35. After analyzing the various methods, the valuer used the super profits method as the most appropriate method for the valuation of the fair market value of the brand as on 01.04.1981, the relevant findings of the valuer read as under:-
DETERMINATION OF VALUE OF THE BRANDS
2.1 The valuation of Brands under the Capitalization of Super-Profits method would involve carrying out of the following steps:
• Ascertaining the sales for the years 1981 to 1985. For this purpose the actual figures for the year 1981 are considered and for the period from 1982 to 1985 the sales are projected based on the growth rate achieved in the past years. During the 5 years preceding the year 1981, the actual sales growth in the branded products was close 45 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 to 100% compounded annually. However, a growth rate of 60% y-o-y has been considered for sales.
• Calculating the future maintainable profit by applying the rate of return to the sales determined as above. Rate of return of 15% for the year 1980-81, which was likely to grow, is applied.
• Ascertaining the capital employed for the years 1981 to 1985. For this purpose the actual figures for the year 1981 are considered. Capital employed for each subsequent year has been calculated by adding the internal accruals of the respective previous year, i.e., profits remaining after deducting income tax @ 60% from the estimated profits and providing for payout to the capital employed of the respective previous year.
• Calculating the normal profit with respect to the capital employed by applying the normal rate of return. The normal rate of return of 12% is based on the normal profit earned in normal business conditions.
• Since the business using the Brands was carried on by various entities, the sales and capital employed figures of all the entities are consolidated for this working. • Calculating the super-profits for each of the years considered. This involves subtracting the normal profits from the future maintainable profit calculated as above. Average of super-profits, has been worked out. • Applying an appropriate multiple to capitalize the profit figure calculated above would derive the Brand Valuation figure. Based on the brands inherent strength, its customer base, brand recall value, competitors, market share, etc we have applied a Brand Multiple of 8.
• A comparable working based on the actual sales and capital employed for the period from 1981 to 1985 gives a similar result vis-a-vis the valuation number. 2.3 One could also look at discounting the profits directly relatable to the Brand. The Brand value as per this method, with assumptions similar as above, would be Rs 117 crores. The workings thereof are annexed herewith as Annexure 1.
E. CONCLUSION 46 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 On the basis of above, we conclude that the value of the brand including the right to use them as on April, 1981 can be estimated to be about Rs. 90.00 crores (workings enclosed herewith as Annexure 2).
36. Finally, the Valuation of Brand as on 01.04.1981 was done as under:-
Particulars /Year Year 1 Year 2 Year 3 Year 4 Year 5 Capital Employed (a) 4.81 6.05 7.04 10.22 15.30 Sales (b) 25.87 41.39 66.23 105.96 169.54 Estimated Profits @ 15% of Sales (c) 3.88 6.21 9.93 15.89 25.43 = (b) * 15% Return on Capital Employed (in %) (d) 81 103 141 156 166 = © / (a) * 100 Normal Rate of Return (in % ) (e) 12 12 12 12 12 Super Profits (%) to the Group (f) 69 91 129 144 154 = (d) - (e) Super Profits (g) 3.30 5.48 9.09 14.67 23.59 = (f) /100 * (a) Average Super Profits before Tax (h) 11.23 Multiple (i) 8 Brand Value (h) * (i) 90
37. A perusal of the aforementioned report of the valuer M/s. RSM & Co. would show that the valuation is based on scientific method and has used the most appropriate method for the valuation of the brand as on 01.04.1981. Factually, this is the only surviving piece of evidence which is not only scientific but also pragmatic to the context. Therefore, we have no hesitation to accept this factually based scientific report for accepting the fair market value of the brand as on 01.04.1981 at Rs. 90 crores.
47 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
38. Before parting with this issue, we find that the A.O. disputed the valuation of M/s. RSM & Co. on the ground that they have taken incorrect figures of profits. On perusal of the records, we find that the actual profit and the projected profit do not differ significantly as can be seen from the following chart:-
Year Profit shown at para 4.4.2 of Actual profit (in crores ) order (in crores ) 1981 3.88 4.00 1982 6.21 6.16 1983 9.93 11.63 1984 15.89 17.99 1985 25.43 24.71
39. Unfortunately, without appreciating the facts, the A.O. has assumed that M/s. RSM & Co. has manipulated facts and figures, we find that the valuation report of RSM & Co. have adequate reasons for valuing the brand as on 01.04.1981 at Rs. 90 crores. We, accordingly, direct the A.O. to take the fair market value of the impugned brands as on 01.04.1981 at Rs. 90 crores.
40. The second contentious issue relates to the appropriation of the sale consideration of Rs. 450 crores between the trade-marks and valuation of trade-marks used in 1981out of the total bunch of the trade-marks. The valuer M/s. RSM & Co. valued the bunch of trade-marks at Rs. 804.75 crores though the sale consideration received by the assessee was only Rs.
48 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
500 crores out of which 50 crores was paid to Smt. SKP for the trade- marks/brand names prior to 1981.
41. We find that the assessee has calculated pro- rata sale value relating to brand developed post 01.04.1981 as under:-
NIRMA CHEMICAL WORKS PVT. LTD.
ITA No.l706/Ahd/2009( Assessee) ITA No.l514/Ahd/2009 (Dept.) C.O. No. 123/Ahd/2009 (Asseessee) Calculation of pro-rata sale value relating to Brands developed post 01-04-1991 (Rs. In Crore) Particulars Rs Rs Total sale proceeds on transfer of Trademarks 500.00 Sale proceeds received by appellant Company Nirma Chemical Works Pvt, Ltd 450.00 Sales value of Trademarks developed post 1981 in the following proportion.
As per valuation report of RSM & Co (Paper book pages -106 to 108) Value of Trademarks used in 1981 253.93 31.55% Other Trademarks 550.82 68.45% Total 804.75 100% 49 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 Sales Value-68.45% of 450 cr. 308.02
42. A perusal of the orders of the authorities below shows that the lower authorities were of the firm belief that the brand name "Nirma" was the Central word in almost all the trade-marks. Taking a leaf out of section 44 of trade-marks Act 1999, the authorities below were of the opinion that associate trade-mark cannot be transferred separately from the main trade- mark. The lower authorities were of the opinion that the only asset that was transferred is the brand "Nirma" and others are appended to it. Therefore, the brand "Nima" being associate trade-mark cannot be from main brand "Nirma".
43. The main contention of the assessee is that the capital gains, if any, arising on transfer of trade-marks and brand names was not subject to any tax. Before us also, it was strongly contended that part of the sale consideration pertains to the trade-marks/brand names which were self generated assets and free from any obligation to pay tax. Strong reliance was placed on the decision of the Hon'ble Supreme Court in the case of B. C. Shrinivasa Shetty 128 ITR 294 and also on the decision of the Co-ordinate Bench given in the case of Smt. Shantaben K. Patel in ITA No. 421/Ahd/2005 dated 16.06.2006. Accordingly, it was submitted that out of a sum of Rs. 450 crores, 68.45% i.e. 308 crores should be related to trade-marks/brand names generated by the assessee post 1981.
44. After giving a thoughtful consideration to the orders of the authorities below, we find that the main objection of the revenue authorities is that the 50 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 trade-marks of "Nima" was an associated trade-mark of trade-marks of "Nirma" and that same would not be transferred on standalone basis.
45. There is nothing on record which could suggest that the issue of trade-marks "Nima" brands recorded as associate trade-marks in "Nirma" brands. Further, u/s. 38 of the trade-marks Act 1999, it is always open to the owner of a registered trade-mark to assign a trade-mark wholly or in part. The restriction u/s. 44 of the Act is that associate trade-marks shall be assignable and transferable only as a whole and not separately, but, subject to the provision of this Act, they shall, for all other purposes we deemed to have been registered as separate trade-marks.
46. Assuming, yet not accepting, the Nirma Detergent Powder for all matters Nirma Detergent Cake, Nirma Soaps and Nima Detergent and Soaps could not have been transferred does not mean that the total consideration cannot be broken into two separate pieces. Out of total price of trade-marks apportion pertains to "Nirma" brands and rest to "Nirma" brands subsequently developed by the assessee. The total consideration of 68.5% pertains to the second category.
47. The another reason given by the revenue authorities for not accepting the claim of the assessee is that for the development of such brands, the assessee must have incurred expenditure on account of Advertisement, Publicity, Research and Development. In our understanding of the facts, such expenditure is neither cost of acquisition nor cost of improvement. Further, the cost of registration etc. is of revenue in nature and, therefore, cannot be 51 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 treated as the cost of acquisition for the purposes of computation of capital gains tax. It would be pertinent here to refer to the relevant part of the valuation of trade-marks done by M/s. RSM & Co.:-
Annexure Valuation of Trademarks as on March 2001 of Products used in 1981 Amt in Crores Year 2000-01 2001-02 2002-03 2003-04 Sales 557.09 579.40 602.58 626.68 Net Cash Flows 13.38 13.97 14.57 15.19 PV factor 0.93 0.86 0.79 0.74 PV of Cash Flow 12.39 11.98 11.57 11.17 Primary period value 47.10 Perpetuity Value 206.83 Total Value 253.93 Valuation of Trademarks as on March 2001 of Products used post 1981 i.e 'Other Trademarks' Amt in Crores Year 2000-01 2001-02 2002-03 2003-04 Sales 1,166.51 1 ,247.70 1 ,303.22 1,362.82 New Cash Flows 28.02 30.09 31.51 33.04 PV factor 0.93 0.86 0.79 0.74 52 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 PV of Cash Flow 25.94 25.80 25.02 24.29 Primary period 101.04 value Perpetuity Value 449.78 Total Value 550.82
48. The working for the aforementioned break up is based upon the fact that in 1981 only the Detergents were marked under the brand name "Nirma". Nirma branded Detergent Cakes and Soaps were introduced in the year 1986 and 1989 respectively and "Nima" branded products (Soaps and Detergents) were introduced in the year 1997 and 1998.
49. As mentioned elsewhere, the valuation report of M/s. RSM & Co. is not only scientific but also pragmatic to the context and, therefore, acceptable for the facts of the case in hand. We, accordingly direct the A.O to appropriate to the total sale consideration in the ratio of 31.55% and 68.45% between the value of trade-marks pre 1981 and post 1981 respectively.
50. Insofar as the computation of capital gains taxability is concerned, we find that the Co-ordinate Bench in the case of Shantaben K. Patel in ITA No. 421/Ahd/2005 dated 16.06.2006 has held as under:-
36. After having come to the conclusion that Receipt of Rs.50 crores was not taxable as 'income from other sources', the next question for consideration is that if the receipt is not taxable as 'income from other sources', then under which Head of the income the receipt is taxable and answer to this is self-evident, because the assessee's stand from the very beginning and the alternative stand of the Revenue has been that the Receipt was taxable as "long-term capital gain" and, therefore, we need not to devolve on this issue 53 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 more and hold that the Receipt in question, if at all was taxable, under the d "long-term capital gain".
37. Once we have come to the above conclusion, the next issue for our decision arises as to what was the cost of acquisition of ownership rights of these intangible assets in the hands of the Assessee.
37.1. However, before proceeding further, we would like to mention that though the Assessing Officer has considered the taxability of this Receipt, in alternative, as 'long-
term capital gain', with the observations in paragraph Nos.15 to 19 and the CIT(Appeals) having upheld the Assessing Officer's decision to tax the Receipt as 'income from other sources' has not decided the taxability of the receipt from the angle of 'long-term capital gain' and if that is the case, then in normal course, we, having arrived at the conclusion that the Receipt was not taxable as 'income from other sources' would have remanded the matter back to the file of CIT(Appeals) for deciding the issue relating to taxability of the Receipt form the angle of 'long-term capital gain', but we, for the reasons stated hereunder, are deciding this issue also
(i) None of the party has pleaded for the remanding the issue back to the file of CIT(Appeals) or Assessing Officer.
(ii) Both the parties have argued in length with reference to the issue relating to the taxability of the Receipt of Rs.50 crores as 'long-term capital gain' also.
(iii) Both the parties had pleaded that all the facts, necessary for deciding the issue at the end of the Tribunal being available on record remanding the matter back to the file of CIT(Appeals) will not serve any purpose, except to drag the parties in long drawn litigation and, therefore, had proceeded with the arguments so that in case, the Tribunal comes to the conclusion thai the Receipt was not taxable as 'income from other sources', then this issue can be decided by the Tribunal.
(iv) That, this issue having been dealt with and decided by the CIT(Appeals) in case of M/s.Nirma Chemical Works Limited, who is one of the parties to the agreement for sale of intangible assets and being inter-linked has to be decided here also. 38.1 (i) The Assessee has, though, accepts that the receipt could be, if at all was taxable, not only as "long-term capital gain" but at the same time has pleaded that since cost of 54 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 acquisition of these assets in her hands was not ascertainable, she was not liable to pay capital gain tax also .
38,1(ii) In view of above facts, the next issue for our determination is to find out as to whether the cost of acquisition of the Assets in the hands of the assessees was ascertainable or not and after having determined the mode of acquisition, which was "Acquisition on Distribution of Assets on Dissolution of a Firm", we are of the opinion that the cost of acquisition of these intangible assets in the hands of the assessee, if any, is to be determined in accordance with the provisions of Section 49 read with section 55(2)(a) of the Act and for that purpose, it is necessary to consider the provisions of section 49 as well as section 55 of the Act which, at the relevant time, were in the following terms:-
"Section 49. Cost with reference to certain modes of acquisition.
(i)Where the capital asset became the property of the assessee-
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;
(ii) under a gift or will; .
(iii)
(a) by succession, inheritance or devolution, or
(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, or
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (iv) or clause
(v) or clause (vi) or clause (via)of section 47;
(iv) such assessee being a Hindu undivided family, by .the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
Explanation.-In this sub-section the expression "previous owner of the property" in relation to any capital asset owned by an assessee means the last previous owner of the 55ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section. (2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company, (2A) Where the capital asset, being a share or debenture in a company, became the property of the assessee in consideration of a transfer referred to in clause (x) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, -debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee.
(2AA) Where the capital gain arises from the transfer of the shares, debentures or warrants, the value of which has been taken into account while computing the value of perquisite under clause (2) of section 17, the cost of acquisition of such shares, debentures or warrants shall be the value under that clause. (2C) The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger.
(2D) The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C).
Explanation. ...For the purposes of this section, "net worth" shall mean the aggregate of the paid up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger. (3) Notwithstanding anything contained in sub-section (1), where the capital gain arising from the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47 is deemed to be income chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of acquisition of such 56 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 asset to the transferee-company shall be the cost for which such asset was acquired by it.
"
"Section 55. Meaning of "adjusted", "cost of improvement" and "cost of acquisition".
(1) For the purposes of sections 48 and 49,-
(a) [,...]
(b)"cost of any improvement", -
(1)in relation to a capital asset being goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business shall be taken to be nil; and (2) in relation to any other capital asset,-
(i) where the capital asset became the property of the previous owner or the assessee before the 1st day of April, 1981 , means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and
(ii) in any other case, means all expenditure of a capital nature incurred incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49 , by the previous owner, but does include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property", "Profits and gains of business or profession", or "Income from other sources", and the expression "improvement" shall be construed accordingly. (2) For the purposes of sections 48 and 49, "cost of acquisition",-
(a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a rtght to manufacture, produce or process any article or thing or right to carry on any business , tenancy rights, stage carriage permits or loom hours,-
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and 57 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02
(ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil;
(aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee-
(A) becomes entitled to subscribe to any additional financial asset or (B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses (i) and (ii) of clause (b) ,-
(i)in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset;
(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when .such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee;
(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset; (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee;
(iv) in relation to any financial asset purchased by any person in whose favour the right to subscribe to such asset has been renounced, means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset; (ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognized stock exchange in India under a scheme for demutualization or corporatization approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be the cost of acquisition of his original membership of the exchange;
58ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 Provided that the cost of a capital asset, being trading or clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualization or corporatization, shall be deemed to be nil;
(b) in relation to any other capital asset,-
(i)where the capital asset became the property of the assessee before 1st day of April, 1981 , means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981 , at the option of the assessee;
(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 1981, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee;
(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under section 46, means the fair market value of the asset on the date of distribution:
(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on-
(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller amount, or
(e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived. (3) Where the cost for which the- previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner."59 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009 . A.Y.2001-02 From the aforesaid provisions of section 49(1) read with Explanation thereto and section 55(2)(a), it is evident that the cost of acquisition of an asset in the hands of a partner, received on the distribution of assets on Dissolution of the firm, is the same as was the cost of acquisition of that asset in the hands of previous owner, i.e. FIRM (in the present case) and, therefore, our next job is to find as to what was the cost of acquisition of these assets in the hands of Firm and for that purpose, we have to consider the Firm's History, etc. and after having considered the same, we are of the opinion that as already held in paragraph No.25(supra), the assessee having become the owner of assets on Distribution of Assets on Dissolution a Firm, the cost of acquisition in Assessee's hands is to be taken as the cost of acquisition in the hands of the Firm or in the hands of RKP (so far as his share is concerned) by virtue of provisions of Section 49(1 )(b) of the Act). 38.1 (iii) So far as cost of acquisition of these assets in the hands of partnership; i.e. the firm; is concerned, admittedly, the assets in question being of intangible nature and neither the date with effect from which they surfaced is known nor the firm had incurred any expenditure for the acquisition of the same, these assets have to be considered as self-generated one whose cost is not ascertainable; meaning thereby that the cost of these intangible assets, namely tenancy rights, goodwill, the Trade-marks and Trade-names in the hands of the Firm was not ascertainable and if that was the legal and factual position, then the cost of acquisition in the hands of Shri RKP (to the extent of his share) as well a"s in the hands of the assessee, by virtue of provisions of section 49(1 )(b) of the Act, was also not ascertainable.
38.1. (iv) The aforesaid findings of ours are applicable for acquisition of ownership of these assets by the assessee in the capacity of joint owner as well as acquisition of ownership of those very assets later on as sole owner. 38.2. Our findings with respect to this issue, therefore, are that the assessee having acquired intangible assets on distribution of assets on Dissolution of Firm and cost of acquisition of the same in the hands of Firm as well as in the hands of Shri RKP (to the extent of his share) being unascertainable, the cost of acquisition of these Assets in the hands of the assessee was also unascertainable.
60 ITA Nos. 1706 & 1514/Ahd/2009
& C.O. No. 123/Ahd/2009
. A.Y.2001-02
38.3. After having come to above conclusion, the natural outcome is that cost of acquisition being unascertainable, the assessee was not liable to long-term capital gain tax on Receipt of Rs.50 crores.
51. During the course of the hearing, we are told that the Hon'ble Jurisdictional High court is seizeds with this matter as appeal against this finding of the Co-ordinate Bench has been admitted in the case of Smt. Shantaben K. Patel. However, as on date, we have this decision of the Co-ordinate Bench and respectively following the findings of the Co-ordinate Bench (supra), we hold accordingly.
52. To sum up-
(a) Out of the total consideration of Rs. 500 crores, Rs. 450 crores have to be split in the ratio of 31.55% and 68.45% between the value of trade-marks pre 1981 and post 1981 respectively, because since, we have accepted the valuation report of M/s. RSM & Co. as not only scientific but pragmatic on the present context and based on factual matrix.
(b) The fair market value of trade-marks/brand names as on 01.04.1981 should be taken at Rs. 90 crores for the reasons given in (a) above.
(c) Since, we have followed the findings of the Co-ordinate Bench (supra), we hold that the cost of acquisition of trade-marks/brand values post 1981 is indeterminable and, therefore, not subject to any capital gains tax.
53. For our detailed discussion hereinabove, appeal filed by the Revenue is 61 ITA Nos. 1706 & 1514/Ahd/2009 & C.O. No. 123/Ahd/2009 . A.Y.2001-02 dismissed, appeal filed by the Assessee is allowed and so also the cross objection of the Assessee are allowed.
Order pronounced in Open Court on 19- 07 - 2016.
Sd/- Sd/-
(RAJPAL YADAV) (N. K. BILLAIYA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: True Copy
Rajesh
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals) -
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad