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 Jagdish Narayan Sharma vs. ITO (ITAT Jaipur)

M/s. Franco-Indian Pharmaceuticals Pvt. Ltd., 20,Dr. E. Moses Road , Mumbai-400 011 Vs. The ACIT, Range 6(2), Aayakar Bhavan, Mumbai-400 020
July, 20th 2015


   .. ,,                                      ,    



                / I.T.A. No.3404/Mum/2013
            (   / Assessment Year : 2009-10
M/s. Franco-Indian         / The ACIT, Range 6(2),
Pharmaceuticals Pvt. Ltd.,      Aayakar Bhavan,
20,Dr. E. Moses Road ,          Mumbai-400 020
Mumbai-400 011
     . /   . /PAN/GIR No. : AAACF 1794M
    ( /Appellant)          ..      (  / Respondent)
        / Appellant by:                         Shri B.V. Jhaveri
            /Respondent by:                    Shri Pawan Kumar

                 / Date of Hearing
                /Date of Pronouncement :17.07.2015

                               / O R D E R


        This appeal by the assessee is preferred against the order of the Ld.
CIT(A)-12, Mumbai dt. 1.2.2013 pertaining to assessment year 2009-10.

2.      The sole grievance of the assessee is that the Ld. CIT(A) erred in
confirming the disallowance of Rs. 75 lakhs paid by the assessee as
                                    2                     ITA. No. 3404/M/2013

3.    The assessee is in the business of manufacturing and marketing of
bulk drugs and formulation of pharmaceutical preparations. The return
for the year under consideration was selected for scrutiny assessment.
During the course of the scrutiny assessment proceedings, the Assessing
Officer noticed that the assessee has debited Rs. 75 lakhs towards
compensation for termination of royalty agreement. The assessee was
asked to produce the agreement and other documents relating to the
termination of this agreement. The assessee was also asked to justify the
claim of expenditure as revenue expenditure. The assessee explained the
sequence of events as under:

            "1.    On 28.3.2001, Ethypharma Pvt. Ltd (EPL) entered
            into as `Licence and Technical Assistance' with
            Laboratories Griffon Pvt. Ltd (GPL). As per this agreement,
            EPL granted GPL the right to use and sell the product
            (METOFRMIN 850mg & 500 mg) under the licensed "know-
            how". (It may be stated here that GPL is an associate
            company of assessee as clarified by assessee in its letter
            filed on 13/12/2011. Mr. E J De'Souza & Mr. L B Yadav
            are the common directors of GPL and assessee Company).

             (2) On 02/04/2001 - GPL entered into a "Deed of
            Assignment" with Assessee. As per this assignment, GPL
            agreed to Transfer its rights and liabilities arising out of the
            license agreement with EPL, to the assessee without
            consideration, including a non-transferable license of
            technical know-how, to manufacture, market, promote and
            distribute the product.

             (3)    On   30/04/2002    Assessee   entered  into   a
            "Manufacturing Agreement" with EPL. As per this
            agreement, EPL will manufacture and sell the product
            (GLYCIPHAGE 850 mg & 500 mg.) to assessee. (It may be
            clarified here that GLYCIPHAGE is the trademark for the
            same product METFORMIN as gathered from the letter of
            EPL dated 24/07/2008, addressed to the assessee.)

             (4) On 30/10/2008, assessee entered into a "Termination
            Agreement" with EPL. As per this agreement, both the
            parties waived all their rights and claims against each
                                    3                    ITA. No. 3404/M/2013

             other from their      respective   obligations   under    the

3.1.   It was explained that the amount has been paid in lieu of royalty
which the assessee was otherwise required to pay. After going through
the documents and the submissions of the assessee, the AO found that the
manufacturing agreement has expired through the efflux of time therefore
there was no necessity of entering into a specific Termination Agreement.
The AO further observed that the assessee was not a party to the payment
for termination of licence and technical assistance agreement. The AO
further observed that even assuming that the assessee has discharged the
liability of another person even then the same cannot be allowed u/s. 37
of the Act. The AO was convinced that the assessee has not been able to
specify the basis of arriving at the figure of Rs. 75 lakhs. The AO finally
disallowed the claim of payment of Rs. 75 lakhs.

4.     Aggrieved by this, the assessee carried the matter before the Ld.
CIT(A) and reiterated what has been stated during the course of the
assessment proceedings. After considering the facts and the submissions,
the Ld. CIT(A) observed that the payment has been made to compensate
M/s. Ethypharma Pvt. Ltd. (EPL) for the royalty loss cannot be accepted
as it is seen that under the said contract signed, there was no question of
any liability cast on any of the parties involved for loss of anticipated
sale. The ld. CIT(A) further observed that compensation payment made
for cancellation of agreement can be considered as revenue only when it
does not affect the trading profit earning structure of a business. The Ld.
CIT(A) was of the opinion that in this case, the termination agreement
had an impact on the profit earning structure of the business of the
assessee as a new advantage of enduring nature was acquired by the
assessee regarding its right to manufacture and sell Glyciphage.
                                         4                  ITA. No. 3404/M/2013

According to the Ld. CIT(A), at the most such payment could be
considered as capital in nature. The Ld. CIT(A) confirmed the addition
made by the AO.

5.    Aggrieved by this, the assessee is before us.

6.    The Ld. Counsel for the assessee advanced the very same
arguments which were before the lower authorities.

7.    Per contra, the Ld. Departmental Representative strongly supported
the orders of the lower authorities.

8.    We have carefully perused the orders of the authorities below. It is
an undisputed fact that on 28th March, 2001, M/s. Ethypharma Pvt. Ltd.
(EPL) entered into licence and technical assistance agreement with M/s.
Laboratories Griffon Pvt. Ltd. (GPL). It is also an admitted fact that by
the Deed of Assignment dt. 2nd April, 2001 M/s. Laboratories Griffon Pvt.
Ltd. assigned the rights to the assessee. In pursuance which the assessee
entered into manufacturing agreement with EPL by which it was agreed
that EPL shall manufacture the product as required by the assessee from
time to time. It is also an undisputed fact that the "Licence and Technical
Assistance Agreement" dt. 28.3.2001 executed between EPL and M/s.
Laboratories Griffon Pvt. Ltd. were subsequently assigned to the assessee
on 2.54.2001 by way of a Deed of assignment. On the basis of these
events, EPL manufactured the product Glyciphage which was marketed
by the assessee.     It is also an undisputed fact that on the sale of
Glyciphage, assessee has paid royalty to EPL as under:
        Assessment Year                Royalty Paid (Rs.)
         2003-04                        64,38,569/-
         2004-05                        20,01,252/-
         2005-06                        41,44,621/-
                                      5                     ITA. No. 3404/M/2013

           2006-07                    8,40,949/-
           2007-08                   14,95,767/-
           2008-09                   17,06,298/-
           2009-10                    9,36,016/-

8.1.   It is seen that the aforementioned payments made by the assessee
to EPL has been allowed in all the years.

8.2.   If the sale of Glyciphage in subsequent years is taken into
consideration, we find from the record in particular page-81 of the Paper
book, the sales of Glyciphage during the period from September 2008
upto 30.9.2012, the sales is at Rs. 73,64,59,680/- on which the assessee
had to pay royalty at Rs. 3,68,22.984/-.        If this figure is taken into
consideration, then by paying Rs. 75 lakhs for the termination of the
agreement, the assessee has saved liability of royalty of Rs. 3.68 crores.
This in itself would justify the claim of the payment of Rs. 75 lakhs as
revenue expenditure incurred solely for the purpose of the business of the
assessee. In our considered opinion and in particular, considering the
facts mentioned hereinabove, we have no hesitation to hold that the
payment of Rs. 75 lakhs is to be allowed as business expenditure incurred
solely for the purpose of business u/s. 37(1) of the Act. We, accordingly,
set aside the findings of the Ld. CIT(A) and direct the AO to delete the
impugned addition of Rs. 75 lakhs.

9.     In the result, the appeal filed by the assessee is allowed.

       Order pronounced in the open court on 17th July, 2015
              Sd/-                                 Sd/-
        (A.D. JAIN )                        (N.K. BILLAIYA)
  Mumbai;  Dated : 17 July , 2015

. ../ RJ , Sr. PS
                             6          ITA. No. 3404/M/2013

        /Copy of the Order forwarded to :
1.  / The Appellant
2.     / The Respondent.
3.     () / The CIT(A)-
4.      / CIT
5.       ,     ,         
     / DR, ITAT, Mumbai
6.     / Guard file.
                                      / BY ORDER,
                    //True Copy//
                     (Dy./Asstt. Registrar)
                     ,    / ITAT, Mumbai
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