1. This appeal is preferred on behalf of the revenue against the order of the Commissioner (Appeals) on various grounds. The assessee has filed the cross objection assailing the order of the Commissioner (Appeals) on certain grounds. Since the appeal and the cross objection were heard together, these are being disposed of by this consolidated order. We, however, prefer to adjudicate them one by one.
2. Through this appeal, the revenue has assailed the order of Commissioner (Appeals) on following grounds: On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in: (1) directing the assessing officer to give deduction of Rs. 2,83,33,333 under Section 35AB of the Income Tax Act, 1961, without appreciating the fact that the assessee itself is basically a trader and does not have any manufacturing facility/activity and also without appreciating the fact that the liabilities of excise, Modvat, sales tax etc., in respect of the production, claimed by the assessee to be its own, were actually being borne by M/s. Ambalal Sarabhai Enterprises Ltd. and not by the assessee; (2) not appreciating the fact that the facts in the cases of Commissioner of Sales Tax v. Dr. Sukhdeo (23 STC 385) and CIT v. Neo Pharma (P) Ltd. (137 ITR 879) were distinguishable from the facts of the assessee's own case; (3) directing the assessing officer to allow deduction of Rs. 2,42,85,714 under Section 35A of the Income Tax Act, 1961, on the ground that the terms 'trademarks' and 'patents' are synonymous, without appreciating the fact that expenditure incurred on acquisition of trademarks/Registered Users License is not covered by the provisions of Section 35A of the Income Tax Act, 1961; and (4) directing the assessing officer to allow the claim of deduction on account of interest amounting to Rs. 1,00,77,387 under Section 36(1)(iii) of the Income Tax Act, 1961, without appreciating the fact that this expenditure was not allowable as revenue expenditure.
3. Facts in brief borne out from the record are that the assessee is a joint venture company (hereinafter referred to as 'JVC') under an arrangement between M/s. Ambalal Sarabhai Enterprises (ASE) and Piramal Enterprises Ltd. (PEL). During the year, the name of the company was changed from Compact Pharma Ltd. to Sarabhai Piramal Pharmaceuticals Ltd. (SPPL) and became a joint venture company. During the assessment year in question the assessee-company was engaged in the business of manufacturing and marketing various pharmaceutical products, according to the assessee. During the year the assessee-company has purchased/acquired technical know-how and trademark for the purpose and use of manufacture and marketing of drugs from ASE for Rs. 17 crores and Rs. 34 crores respectively. The assessee accordingly claimed deduction at Rs. 2,83,33,333 under Section 35AB of the Income Tax Act (hereinafter called as an 'Act') and Rs. 2,44,85,714 under Section 35A of the Act. These claims of the assessee were disallowed by the assessing officer. Ground Nos. 1 to 3 relate to the claim of deductions under sections 35AB and 35A of the Income Tax Act.
4. With regard to deduction under Section 35AB it is noticed from the orders of the lower authorities that in order to verify whether the assessee was actually manufacturing drugs/medicines for which it has made payment for purchase of technical know-how/technology, a survey under Section 133A of the Act was conducted on 14-9-2000 by the assessing officer at the registered office of the assessee.
Simultaneously, survey was also conducted at the premises of ASE, Baroda where the operating office of the assessee is situated. At the time of survey it was found that there is neither plant and machinery nor any buildings, which is in existence and also there is no manufacturing or processing activity being taken place. During the course of survey statements of Shri Chetan Desai, General Manager (Corporate Taxation), Shri S.S.N. Gupta, CEO, Shri D.D. Nanavati, a Senior Manager- Accounts, Shri Nital Patel, Manager Accounts, Shri Rajul Shah, Manager - Administration of the assessee-company and Shri Shirish Shah, Vice President-Taxation of M/s. ASE were recorded. In these statements, they have confirmed that assessee itself was not manufacturing pharmaceutical products. It was rather manufactured by ASE for the assessee. The assessing officer has disallowed the claim of the assessee, having relied upon the proposition that acquisition of technical know-how should not only be for the assessee's business, but also assessee himself is involved in manufacturing activities and produce a thing or article, different from its components. The assessing officer further observed that since the business of the assessee is merely that of a trader in pharmaceutical products by acquiring marketing rights and is not engaged in the manufacturing or processing of pharmaceutical products, a deduction under Section 35AB cannot be allowed to the assessee as the know-how is not used for the purpose of assessee's business. Assessing officer accordingly disallowed the claim of the assessee and an appeal was preferred before the Commissioner (Appeals) with the submission that the provisions of Section 35AB require that know-how should be used for the purpose of business of the assessee only.
5. The Explanation to Section 35AB defines 'know-how' as "any industrial informations or technique likely to assist in the manufacturing or processing of goods..." Neither in the impugned provision nor in the Explanation there is a stipulation that manufacturing or processing of goods with the aid of technical know-how should be carried out by the assessee himself. The assessing officer has misdirected himself in considering the Explanation to Section 35AB as laying down the condition that manufacturing or processing of goods should be carried out by the assessee himself. It was further contended before the Commissioner (Appeals) that assessee has got various pharmaceutical products manufactured by ASE on the basis of the technical know-how acquired and made available to ASE by the assessee.
Such manufacturing was carried out under the assessee's direct supervision and control. A reliance of judgment of the Apex Court in the case of CST v. Dr. Sukhdeo (1969) 23 STC 385 (SC) was placed in support of his contention that the manufacturer is a person by whom or under whose direction or control the goods are manufactured. The learned Counsel for the assessee has further relied upon the judgment of Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co.
(P) Ltd. manufacturer need not possess any manufacturing plant or machinery.
Reliance on the judgment of the Bombay High Court in the case of CIT v.Neo Pharma (P) Ltd. was also placed. It was further contended before the Commissioner (Appeals) that even if the plant and machinery employed for manufacturing purposes belongs to ASE, the manufacturing activity was really that of the assessee. In the light of the foregoing judicial pronouncements it was argued that the technical know-how was owned and used for the purpose of the business of the assessee and, therefore, the assessee is entitled for deduction under Section 35AB of the Act.
6. The assessee had also raised an alternative plea that in case the assessee does not find favour with the Commissioner (Appeals) on an issue of claim of deduction under Section 35AB, the assessing officer be directed to allow depreciation on the technical know-how being a capital asset.
7. The Commissioner (Appeals) re-examined the issue in the light of provisions of Section 35AB of the Act and the judicial pronouncements relied upon before him. Being convinced with the contentions of the assessee, the Commissioner (Appeals) allowed deduction under Section 35AB of the Income Tax Act. The relevant observation of the Commissioner (Appeals) are extracted hereunder: 4, I have considered the submissions made by the appellant and also given careful consideration to the reasoning given by the assessing officer in the assessment order for disallowing the appellant's claim for deduction under Section 35AB. Having regard to the decision of the Supreme Court in the case of CST v. Dr. Sukhdeo (1969) 23 STC 385 (SC)as also the decision of the Jurisdictional High Court in the case of Neo Pharma (P) Ltd. 137 ITR 879 (Bom), it is held that the appellant was getting goods manufactured by ASE under its own control and supervision and therefore, the appellant has to be regarded as manufacturer and not ASE. The Hon'ble Supreme Court in the case of CST v. Dr. Sukhdeo (23 STC 385) (SC) has observed that the expression 'manufacture' has in ordinary acceptation a wide connotation : it means making of articles, or material commercially different from the basic components, by physical labour or mechanical process; and a manufacturer is a person by whom or under whose direction and control the articles or materials are made. Further the Hon'ble Bombay High Court in the case of CIT v. Neo Pharma (P.) Ltd. 137 ITR 879 (Bom) has observed that although the plant and machinery employed for the purpose of manufacture belong to other company and the services of certain employees of the other company were also utilized in that process, the manufacturing activity was really that of the assessee.
Therefore, it could not be said that it was not the assessee but the other company which manufactured the drugs and pharmaceuticals. In the said case the assessee-company engaged in the business of manufacturing and processing pharmaceuticals entered into an agreement with another company, to make available to the assessee their premises, plant, machinery and the services of the staff such as chemists and labourers to carry on the manufacturing activities for and on behalf of the assessee.
4.1 I am further in agreement with the argument advanced by the appellant that the assessing officer has misdirected himself in construing the Explanation to Section 35AB as laying down the condition that manufacturing of goods should be carried out by the appellant himself. The assessing officer is therefore, directed to allow the appellant's claim for deduction under Section 35AB amounting to Rs. 2,83,33,333.
5. During the course of the appeal hearing, the appellant has also raised an additional ground of appeal claiming that the assessing officer be directed to allow depreciation on the technical know-how fees paid if its claim for deduction under Section 35AB is not allowed. The additional ground of appeal was forwarded to the assessing officer for his comments. The assessing officer by his letter dated 19-2-2001, objected to admission of the additional ground of appeal. He further submitted that the applicant's claim for depreciation on technical know-how fees is not tenable in law since the issue does not emanate from the assessment order and would tantamount to filing a revised return of income after completion of assessment.
6. The appellant furnished written submissions dated 24-4-2001 praying for admission of additional ground of appeal. The main thrust of the appellant's argument was that whether technical know-how fees paid was allowable either under Section 35AB or under Section 32, the subject matter of the appeal remains the same. There is nothing in the Income Tax Act which restricts Commissioner (Appeals) to the determination of question raised before the departmental authority. All questions, whether of law or facts, which relate to the assessment of the assessee can be raised before Commissioner (Appeals). If, for reasons recorded by the assessing officer, in respect of a contention raised by the appellant, grant of relief to him on another ground is justified, it would be open to Commissioner (Appeals) to grant that relief. The right of the appellant to relief is not restricted to the plea raised by him. For this proposition, the appellant relief (sic) upon the decision of the Supreme Court in the case of CIT v. Mahalaxmi Textile Mills Ltd. 66 ITR 710 (SC).
7. it is further submitted that the appellant had made claim for deduction of technical know-how fees in the return of income filed for deduction under Section 35AB. In the additional ground of appeal, the claim for deduction of said expenditure is made in the alternative under Section 32. However, the subject-matter for the appeal remains the same, viz. the allowability of expenditure on technical know-how fees. Therefore, the contention of the assessing officer in this regard is not maintainable. It is further submitted that the issue of allowance of deduction of technical know-how fees emanate from the assessment order. The additional plea that the same be allowed as a deduction under Section instead of under Section 35AB does not mean that the issue does not emanate from the assessment order or that it is not a bona fide ground of appeal. The appellant further contended that the alternative plea raised in the additional ground of appeal for allowance of technical know-how fees under Section 32 does not tantamount to appellate authority travelling beyond the subject-matter of assessment. He further submitted that the appellant had made a statement of fact that it had incurred expenditure of Rs. 17 crores on technical know-how fees. The only grievance of the appellant is that the assessing officer has not allowed deduction for the said expenditure. Raising an alternative plea in the additional ground of appeal that the same be allowed as a deduction under Section 32 is permissible in law.
8. The appellant further submitted that as per Sub-section (5) of Section 250 of the Act, the Commissioner (Appeals) may at the hearing of an appeal, allow the appellant to go into any ground of appeal not specified in the grounds of appeal, if Commissioner (Appeals) is satisfied that the omission of the ground from the form of appeal was not wilful or unreasonable. The Supreme Court in the case of Jute Corporation of India Ltd. v. CIT 187 ITR 688 (SC) has held that if Commissioner (Appeals) is satisfied with the factors justifying the raising of new plea in an appeal, he would be acting within his jurisdiction in considering the question or plea so raised. He must be satisfied that the ground raised was bona fide and the same could not have been raised earlier for good reasons.
The jurisdictional High Court in the case of CIT v. Western Rolling Mills 156 ITR 54 (Bom) emphasized on the powers of Commissioner (Appeals)'s to entertain a new ground. The Bombay High Court has held that the Commissioner (Appeals) has jurisdiction to consider the appellant's relief provided there is sufficient material on record to support the claim. The Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. v. CIT 199 ITR 351 (Bom) has held that the basic purpose of an appeal in an income-tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages, cither before Commissioner (Appeals) or before the ITAT, the appellate authority can consider the proceedings before it and the material on record before it for the purpose of determining the correct tax liability of the assessee. The appellant relies on the decision of the Supreme Court in the case of Scientific Engg. House (P) Ltd. v. CIT 157 ITR 86 (SC), wherein the Supreme Court has held that plant was not necessarily confined to an apparatus which was used for mechanical operations or process or was employed in mechanical or industrial business. The test to be applied was did the article fulfil the function of a plant in the assessee's trading activity. Was it a tool of his trade with which he carried on his business? If the answer was in the affirmative, it would be a plant. The Supreme Court in that case has held that drawings, designs, charts, plans, processing data and other literature fell within the definition of plant. The capital asset acquired by the appellant, viz., technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature fell within the definition of plant and was therefore, a depreciable asset. The appellant therefore, submitted that having regard to the decision of the Supreme Court, the technical know-how acquired by the appellant from ASE be held to be plant.
9. I have considered the submissions made by the appellant and has also given careful consideration to the objections raised by the assessing officer for admitting the additional ground of appeal. In my view, the appellant is right in his argument that the subject-matter of the appeal, viz., allowance of technical know-how fees was before the assessing officer as well as in the appeal before me. The issue also emanates from the assessment order.
Relying upon the decision of the Supreme Court in the case of Mahalaxmi Textile Mills Ltd., and in the case of Jute Corporation of India Ltd., as well as that of the jurisdictional High Court in the case of Western Rolling Mills (P) Ltd. and Ahmedabad Electricity Co.
Ltd., I admit the additional ground of appeal. However, having regard to the fact that the appellant's first ground of appeal regarding allowance of deduction of technical know-how fees under Section 35AB has been upheld, the additional ground regarding allowance of depreciation on technical know-how fees does not survive. The additional ground of appeal is therefore, dismissed.
8. Aggrieved, the revenue has preferred an appeal before the Tribunal with the contention that the assessee is not a manufacturing company.
It had simply purchased the pharmaceutical products from the ASE on a fixed price and sold it in the open market. The excise duty on the pharmaceutical products was also paid by ASE. Since the assessee did not own any plant and machinery, it cannot be called to be the manufacturer of the pharmaceutical products. The learned Departmental Representative has also invited our attention to the joint venture agreements and other agreements executed between the assessee and ASE in support of his contention that it was a made up arrangement between the assessee and ASE, etc. and in fact, there was no transfer of technical know-how in favour of the assessee. It was rather a made up arrangement to reduce the tax liability. Since the assessee did not own any plant and machinery and was not involved in manufacturing activities, the technical know-how so acquired by the assessee was not utilized for the manufacturing business of the assessee and as such the assessee is not eligible for a deduction under Section 35AB of the Income Tax Act.
9. The learned Counsel for the assessee, Mr. C.S. Agarwal, Senior Advocate has invited our attention that the shareholder agreement was entered into between ASE and PEL, both independent and separate companies engaged in the business of manufacturing, marketing and selling pharmaceutical products. The object of the aforesaid agreement has indeed in the preamble of the agreement so that both the companies proposed to effectively utilize their core competence and synergies their operation to further strengthen their presence in related therapeutic groups in the human pharmaceutical market by forming a joint venture. It was also agreed between the promoter companies that the authorized and paid up capital of JVC would be raised from Rs. 1 lakh and Rs. 2,500 to Rs. 30 crores and Rs. 25 crores respectively.
Both ASE and PEL subscribed the paid up capitals of the JVC equally. It was also agreed through this shareholder agreement that ASE shall sell and transfer the technology for manufacture of products listed in Annexures 1A and 1B to the agreement at a consideration of Rs. 17 crores and assign the trademarks listed in Annexure 1A and register the trademarks listed in Annexure IB for a consideration of Rs. 34 crores.
It was also agreed that the ASE shall assign the manufacturing and marketing rights of the products and transfer field force of about 350 people to JVC. In the light of this shareholders' agreement during the financial year 1997-98 relevant to the instant assessment year, the name of the JVC was changed to Sarabhai Piramal Pharmaceuticals Ltd. (SPPL) with effect from 4-12-1997 and a fresh certification of incorporation was issued by the Registrar of Companies, Mumbai. Paid up capital of JVC was also increased to Rs. 25 crores by allotting shares equally to ASE & PEL. JVC acquired technology or know-how for manufacture of products listed in Annexures 1A and 1B to the agreement at a consideration of Rs. 17 crores from ASC as would be evident from documentation placed on pages 5 to 471 of paper book III. This was handed over to the JVC by ASE vide letter dated 23-3-1998, a copy of which is placed at pages 19 to 22 of the paper book II. It was further contended that JVC has also obtained various registration including sales tax and drug licence for commencement of its business, (copies of which are placed at pages 23 to 127 of the paper book II). Mr. Agarwal has further invited our attention to the Memorandum of Understanding dated 1-1-1998 executed between JVC and ASE, (Copy of the same is placed at pages 53 to 59 of the paper book No. 1) for manufacture of pharmaceutical products covering the anti-rheumatic, anti-inflammatory, cardio vascular and psychotropic range of drugs under direct supervision and control of the JVC. The JVC started marketing of the aforesaid pharmaceutical products with effect from 1-1-1998. To cope up with the marketing needs it took over 350 marketing personnel from ASE.Accordingly due intimation was also given to 350 personnel who have became employees of JVC. JVC has also obtained loans from banks and other financial institutions vide various agreements, first of which was dated 4-12-1997. JVC has also took over stock of existing finished products, raw material and packing materials in accordance with Clause 9.12 of shareholders agreement. While claiming deduction under sections 35AB and 35A, a specific note was given with regard to the aforesaid claim of deduction. Mr. Agarwal further invited our attention to the assessment order with the submissions that the assessing officer has disallowed the claim of the assessee after forming an opinion that since almost the entire material is purchased in the form of finished pharmaceutical products from ASE and they are sold in the market all over India through various branch offices of JVC and that there being no factory premises nor was there any machinery available for the manufacturing of the products for which the technical know-how have claimed to have been purchased by the JVC from ASE, the claim of the assessee cannot be allowed. The assessing officer was also of the opinion that in order to claim a deduction under Section 35AB, the technical know-how should be used for the purpose of assessee's business and also assist in the manufacturing or processing of goods.
10. During the course of assessment proceedings, in response to show-cause notice dated 31-10-2000, assessee has furnished the detailed reply dated 11-11-2000, a copy of which is placed at pages 80 to 85 of paper book-I, stating therein that provisions contained in Section 35AB of the Act does not provide as a pre-condition for deduction to be allowed, that assessee must necessarily possess manufacturing or processing facilities in order to enable it to claim of deduction. The statutory provisions merely require an assessee to use know-how acquired, for the purpose of the business. It was contended that ASE had manufactured for and on behalf of JVC various pharmaceutical products on the basis of technical know-how supplied by JVC and strictly in accordance with the standards, specification and testing and quality assurance requirements prescribed by JVC from time to time.
A certificate obtained from ASE in this regard was also furnished before the assessing officer. Manufacturing agreement was also filed before the assessing officer in which it has been categorically stated that the assessee gets pharmaceutical products manufactured from ASE under the former's strict supervision and control. As per the agreement between the parties, the products so manufactured by ASE are transferred to SPPL at the cost of raw and packing material plus a predetermined margin calculated on the net sale realisation. Such purchase of products clearly bear the logo/trademark owned by the assessee. The sales-tax and excise duty incidence are payable by ASE, which are reimbursed by the JVC and which form part of transfer pricing of product between the ASE and the assessee. The assessing officer without rebutting and adversely commenting upon the evidence tendered by the assessee held that deduction under Section 35AB of the Act was not allowable to JVC. Mr. Agarwal further contended that the interpretation drawn by the assessing officer with regard to the provisions contained in Section 35AB of the Act is fully misconceived and he, in fact, has failed to comprehend the factual substratum of the case. He further invited our attention to the provisions of Section 35AB with the submissions that for claiming deduction under Section 35AB it is not a condition precedent that the assessee itself should be a manufacturer of the product. In support of his plea, he placed reliance upon the Finance Minister's budgetary speech reported at 152 ITR (St.) 76 at page 80 and notes on clauses reported at 152 ITR (St.) 138 at page 142. A reliance on circular No. 421 dated 12-6-1985 reported at 146 ITR (St.) 130 at pages 140-141 was also placed. Mr.
Agarwal further contended that analysis of the statutory provision will reveal that the following essential requirements for claiming deduction under Section 35AB of the Act are required to be satisfied: (a) That the assessee should incur a lump sum consideration in order to acquire the know-how; (b) That the expression "acquired" in the context of provisions of Section 35AB of the Act has to be liberally construed and rigid interpretation does not deserve to be placed.
11. In other words, in order to attract the rigour of Section 35AB, it may not be necessary for the assessee to actually become an absolute owner of the know-how. But if on payment of money consideration, an assessee is able to use the know-how to run his business, then in such event, the requirement of Section 35AB stands satisfied. In support of this proposition, Mr. Agarwal relied upon the following judgments:CIT v. Drilcos (India) (P) Ltd. 12. Mr. Agarwal has also placed reliance upon the various judgments which are as under in support of his contentions that the manufacturer is a person by whom or under whose direction or control the goods are manufactured:CIT v. Neo Pharma (P) Ltd. 13. Mr. Agarwal further contended that even if assuming for the sake of argument that there is a pre-condition of being a manufacturer, though there is none, then also it would be held that the assessee is engaged in two activities, i.e. getting the goods manufactured from ASE and marketing such goods. However, since a common management, common administration and a common registered office manages the ultimate control of the operation, then in law it has to be held that there is a complete interconnection, inter-dependence of both the activities.
Therefore, the activity of manufacturing of goods by ASE on behalf of JVC and trading activities considered one and single business only. In support of this plea, he placed reliance upon the case of BBC Industries Ltd. v, Dy. CIT (1994) 48 ITD 292 (Hyd.).
14. The observation of the assessing officer that JVC was neither manufacturing nor processing the pharmaceutical products and only dealing in trading activities is based on complete misconception and in holding so, the assessing officer has overlooked the basic fact that JVC was owner of the technical know-how and trademark of certain pharmaceutical products for which a separate consideration of Rs. 17 crores and Rs. 34 crores have been paid to ASE respectively. In support of this plea, Mr. Agarwal has invited our attention to the Deed of Assignment of Trademark dated 3-10-1997 appearing at pages 48 to 52 of paper book I, Memorandum of Understanding between ASE and JVC dated 1-1-1998 appearing at pages 53 to 59 of paper book I, letter dated 23-3-1998 of ASE handing over technical know-how and documents to JVC along with documents relating to such know-how appearing in paper book III, Agreement for Manufacture and sale of goods dated 1-5-1998 appearing at pages 2 to 18 of paper book II, Applications to Registrar of Trademarks for recording of assignments of Trademark dated 16-11-1999/17-11-1999 appearing at pages 138 to 172 of paper book II and reference to Indian Pharmaceutical Guides of 1997 and 1999 showing that trademark which was earlier in the name of ASE were subsequently transferred in the name of JVC appearing at pages 173 to 180 of paper book II. It was further contended that in the absence of such technical know how being made available to ASE by JVC no manufacturing of such pharmaceutical products could have been done by ASE. The payment of acquisition of know-how by the JVC was made to enable the JVC to carry on business of manufacturing and marketing of pharmaceutical products.
In the absence of acquisition of know-how, the ASE would have been entitled to sell the same product, which it sold to JVC and others also and JVC would not have obtained the profit of margin, which it did by selling the products in the market. It was further contended that the entire manufacturing of ASE was under direct supervision and control of JVC as is evident from the certificate from ASE dated 19-9-2000 appearing at pages 86 to 89 of paper book I, statement of SSN Gupta and copy of Memorandum of Association dated 1-1-1998.
15. It was further contended that JVC got the pharmaceutical products manufactured by ASE in its own name as is evident from the main object and if the entire evidences arc properly looked into, only one inference would be drawn that the assessee was engaged in manufacturing activities, though not carrying out manufacturing operation by itself.
Since the manufacturing operations were totally under direct supervision and control of JVC, both in law and in fact, it cannot be said that the assessee, either did not have manufactured or did not carry out manufacturing operation. The learned Counsel further contended that the assessing officer has failed to appreciate the sequences of events from formation of JVC by ASE and PEL under Shareholders' Agreement to marketing and sale of goods by JVC. He was also failed to appreciate that ASE and PEL are independent separate companies and working under regulatory's approval. In fact, ASE is a listed company. Further as stated above, it was not only know-how which was transferred, but also trademarks and the marketing team of ASE engaged in distribution of such products. ASE had also contributed capital in JVC besides the contribution of other joint venturer, viz.
PEL to the capital of JVC. Mr. Agarwal further contended that the assessing officer has recorded the findings without confronting the evidence to the assessee during the assessment proceedings. Therefore, such finding arrived at arbitrarily has to be totally ignored.
16. The learned Counsel for the assessee further argued in the alternative that the expenditure on technical know-how of Rs. 17 crores falls within the definition of "plant' and therefore, the assessee is entitled for depreciation under Section 32. In support of his contention he placed reliance upon the judgment of the Apex Court in the case of Scientific Engg. House (P) Ltd. v. CIT .
The learned Counsel for the assessee has also invited our attention to the assessment order of ASE in which the receipt of cost of technical know-how and the trademark was duly shown.
17. Having carefully examined the order of the lower authorities in the light of rival submissions and the documents placed before us, we find that the formation of JVC through Shareholder Agreement by ASE and PEL was not disputed by the lower authorities. JVC, i.e., SPPL was duly incorporated and registration certificate from the Registrar of Companies was also obtained. It has also obtained the sales-tax numbers and has also applied to the Registrar of Trademarks for recording of Assignment of Trademarks. It had also obtained licence under the Drugs & Cosmetics Act to sell the stock or exhibit for sale or distribute drugs identified in the certificate. The copies of certificates are appearing at pages 136 and 137 of the paper book II. Through this Shareholder Agreement it has been explicitly clear that both the promoter companies ie. ASE and PEL were engaged in the business of manufacturing, marketing and selling various pharmaceutical products and in order to utilize their core competence and synergies their operation to further strengthen their presence in related therapeutic groups in the human pharmaceutical market, they form a new joint venture company in the name of SPPL. It was also agreed through this agreement that before the effective dates, i.e., the date on which both the parties have brought in their equities in the JVC and the loan amount has been disbursed to JVC, a charge to be created on trademark listed in Annexure IA and the relevant registration certificates and/or documents are to be handed over to JVC. The technology for manufacture of products under trademark in Annexure IA are also to be passed on to the JVC. Through this Shareholders Agreement it was also made emphatically clear that the trademark and the technical know-how are to be assigned to the JVC against the stipulated consideration. Through this agreement, JVC has purchased the technical know-how from ASE for Rs. 17 crores and vide letter dated 23-3-1998, ASE has handed over the entire technical know-how to the assessee. The copy of the relevant documents are placed in paper book III. A Memorandum of Understanding was also executed between the ASE and the assessee through which ASE has agreed to manufacture the pharmaceuticals for the assessee, as per the know-how and subject to the terms and conditions stipulated in this Memorandum of Understanding. It was stipulated in this Memorandum of Understanding that ASE shall manufacture the said products strictly in accordance with the standards and specifications and the testing and quality assurance requirement prescribed by the JVC from time to time and shall also comply with the provisions of the Drugs & Cosmetics Act and the Rules therein. A schedule of products was also annexed along with this Memorandum of Understanding. To understand the nature of work assigned to ASE by SPPL, the JVC we extract the relevant paras 4 to 8 of the Memorandum of Understanding herein under: 4. ASE shall manufacture the said products strictly in accordance with the standards and specifications and the testing and quality assurance requirements prescribed by SPPL from time to time and shall also comply with the provisions of the Drugs & Cosmetics Act, 1940 and the Rules thereunder and apply and affix on behalf of SPPL on the said products and/or labels, containers or packages thereof the said trademarks or such other mark or trademark or such legends as may be specified from time to time by SPPL and in the manner prescribed by SPPL.
5. ASE undertakes and warrants that the said products manufactured and packed hereunder by ASE will in all respect be in accordance with the standards and specifications disclosed to/communicated and prescribed by SPPL from time to time and the provisions of the Drugs and Cosmetics Act, 1940 and the Rules thereunder.
6. ASE shall permit or cause to be permitted SPPL, its authorized agents and representatives at all time during the continuance of this Agreement to inspect and examine the process or method of manufacturing and packing of the said products and the raw material ingredients and other material used or intended to be used by ASE for or in relation to the manufacture and packing of the said products.
7. Notwithstanding, the above, SPPL shall at all time be entitled to have the said products examined, inspected and tested or cause to be obtained, inspected or tested for quality control on its own and to depute a qualified and authorized representative for inspection and examination at all reasonable time when the said products are being manufactured at ASE facilities of the manufacturing operations of the said products.
8. This MOU records only the broad understanding reached for the time being and the parties would in due course enter into a detailed Agreement, until then the relations between the parties for the manufacture and sale by ASE to SPPL and purchase by SPPL from ASE of the said products shall be governed by the terms and conditions herein contained.
18. We have also carefully examined the statements of the employees of the JVC and we find that undisputedly, the assessee did not have the manufacturing facility of the drugs/pharmaceuticals. it was manufactured at the premises of ASE but under the direct supervision and control of JVC. The Shareholder Agreements and the Memorandum of Understanding were Dot doubted by the assessing officer. The assessing officer has disallowed the claim of the assessee only for the reasons that assessee itself was not involved in manufacturing activities.
Before dwelling upon the impugned issue whether the assessee is entitled for deduction under Section 35AB of the Act without involving itself in manufacturing activities, we prefer to reproduce the relevant provisions of Section 35AB of the Act: 35AB. Expenditure on know-how.(1 Subject to the provisions of Sub-section (2), where the assessee has paid in any previous year (relevant to the assessment year commencing on or before the 1-4-1998) any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years.
(2) Where the know-how referred to in Sub-section (1) is developed in a laboratory, university or institution referred to in Sub-section (2B) of Section 32A, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years.
(3) Where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the amalgamating or the damaged company is entitled to deduction under this section, then, the amalgamated company or the resulting company, as the case may be, shall be entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company, as the case may be, had such amalgamation or demerger not taken place.
.For the purposes of this section, 'know-how' means any industrial information or technique likely to assist in the manufacture of processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the search for, discovery or testing of deposits or the winning of access thereto).
19. From a plain reading of this section we are of the view that where the assessee has paid, in any previous year relevant to the assessment year commencing on or before the 1-4-1998 in lump sum consideration for acquiring a know-how for use for the purpose of business, 1/6th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. Sub-section (1) simply says that know-bow should be used for the purpose of business. Explanation below this section further clarifies that know-how means any industrial information or technique likely to assist in the manufacture or processing of goods, meaning thereby the know-how is a technical information or a technique which has to be used in the manufacture or processing of goods. But nowhere it has been said that only that assessee can take the benefit of this provision of Section 35AB, who himself is engaged in manufacturing activities. If the assessee is getting the product manufactured through some other agency, under his own control and direct supervision, it is not proper to hold that he is not involved in manufacturing or processing of product for the purpose of this section. During the course of hearing we have been carried through a series of judgments in support of this plea that the assessee is engaged in the manufacturing business if he gets the products manufactured or processed by some other agency. The object of the introduction of these provisions can be gathered from the budgetary speech of the Finance Minister reported at 152 ITR (St.) 76 and the notes on clauses reported at 152 ITR (St.) 138 at page 142 in which it has been made clear that for the purpose of this section know-how means any industrial informations or technique likely to assist in the manufacture or processing of goods. Through Circular No. 421 dated 12-6-1985 reported at 156 ITR (St.) 130 it has been further clarified that Section 35AB was introduced with a view to provide further encouragement to indigenous scientific research. This section provides that if any lump-sum consideration paid by the taxpayer for acquiring any know-how for the purpose of his business a deduction would be allowed to him over a period of 6 years. It was further clarified that know-how means an industrial information or technique likely to assist in the manufacture or process of goods meaning thereby that for claiming deduction under Section 35AB two conditions must be satisfied i.e., (1) the assessee should pay a lump sum consideration in order to acquire the know-how; and (ii) the know-how acquired should be used for the purpose of business of the assessee.
20. We have carefully perused the judgments of Madhya Pradesh High Court in the case of Bright Automotives & Plastics Ltd. (supra) in which it has been held by Their Lordships that the expression "acquiring" used in Section 35AB has to be liberally construed rather than rigid interpretation. In order to attract the rigour of Section 35AB, it may not be necessary for the assessee to actually become an absolute owner of the know-how. The expression "acquire" is to be used liberally and in the context of actual user of know-how, be that in a capacity as a conditional/ limited owner or absolute owner as a licensee. In this case assessee has acquired the know-how from its sister concern for its use in planning, designing, engineering, start-up operation of the plant. The assessee was required to pay a sum equivalent to the amount of 2.5 per cent of the total gross sales value of the goods or 5 per cent of the added value whichever is lower in lump-sum so long as the agreement was in force. The agreement also provided that the use of the brand name and also know-how would be personal to the assessee and is not transferable to any other person by an assessee unless permitted by the sister concern in writing meaning thereby that the assessee did not acquire the absolute ownership right in the know-how. He was mere a licensee to use it and to transfer it to some other persons on certain terms and conditions and in this case, Their Lordships of the High Court has held that the provisions of Section 35AB can be invoked and assessee is entitled for deductions.
21. In the case of Drilcos India (P) Ltd. (supra), Their Lordships have held categorically that irrespective of whether it is a capital or revenue expenditure, the expenditure incurred for the purpose of acquiring know-how was required to be treated only in accordance with Section 35AB of the Income Tax Act and the deduction that was allowable was 1/6th of the amounts paid as lump sum consideration for acquiring the know-how. Their Lordships further held that the time that refers to which the assessee's entitlement is to be judged is the previous year in which the payment was made and not the subsequent year in which the assessee's project was either abandoned or the know-how becomes useless by reason of the non -availability of the inputs required to make the project success, meaning thereby that the relevant factor for deciding an issue whether the assessee is entitled for deduction under Section 35AB is that the assessee should acquire the know-how against a lump-sum consideration for the purpose of its business. These facts can only be judged from the facts and circumstances of each and every case.
It is not necessary that the know-how acquired by the assessee should be used in the manufacturing of the product by the assessee. If the assessee's project is abandoned or become useless by certain reasons even then the assessee is entitled for deduction under Section 35AB of the Income Tax Act.
22. We have also examined the various judgments referred to by the assessee with regard to the proposition that the assessee is a manufacturer even though the assessee himself is not involved in manufacturing activities, but products are manufactured by some other agencies under the direct control and supervision of the assessee.
Similar view was expressed by the Apex Court in the case of Dr. Sukhdeo (supra). In the case of A. Mukherjee & Co. (P) Ltd. (supra), Their Lordships have held that in order that publisher of books should be manufacturer of books, it is wholly unnecessary for him either a owner of printing press or to be book binder himself. A publisher may get the book printed by any printer but the printer is not a manufacturer but a mere contractor. The assessee was the manufacturer though he did not own the printing press, etc. But the printing and binding done by outside agencies under its direct supervision. In the case of CIT v.Anglo French Drug Co. (Eastern) Ltd. , Their Lordships have held that to fall within the definition of "industrial company" in the relevant Finance Act and be entitled to the rebate of income-tax, it is not necessary that company must manufacture the goods by itself own plant and machinery at its own factory. If, in substance, the manufacturing company has employed another company for getting the goods manufactured by it under its own supervision or control the assessee can be considered as a company engaged in manufacturing of goods and thus an industrial company. If the assessee used to exercise sufficient control including quality control, etc., while getting the said goods manufactured from third party assessee is called to have been engaged in the business of manufacturing the goods in question. In the case of Neo Pharma (P) Ltd. (supra), Their Lordships of the Bombay High Court have held that though the plant and machinery employed for the purpose of manufacture belonged to third party and the services of certain employees of the third party were also utilized in that process, the manufacturing activities, if done under the direct control and supervision of the assessee was really that of the assessee.
Therefore, it could not be said that it was not the assessee but the third party which manufacture the drugs and pharmaceuticals.
23. From a careful reading of the aforesaid judgments, we arrive at a conclusion that there are two conditions precedent before claiming deduction under Section 35AB of the Act, i.e., (1) the assessee should have acquired the know-how against a lump-sum consideration which was paid in the relevant previous year; (2) the know-how should be used or assisted in the manufacturing and process of goods or the product, as the know-how is the technical informations which have to be used or assisted in the manufacturing and processing of goods. In order to determine an issue whether an assessee is engaged in the manufacturing process, it is not necessary that the assessee must own the plant and machinery and itself is engaged in the manufacturing activities. If the assessee gets its product manufactured from a third party under its direct control and supervision with a particular specification the assessee is engaged in manufacturing process for the purpose of Section 35AB of the Act.
24. Having applied this proposition to the instant case, we find that the assessee has acquired technical know-how against the lump sum consideration of Rs. 17 crores from ASE and these facts are not disputed by the revenue. It is also an undisputed fact that drugs and pharmaceuticals were got manufactured by the assessee from ASE under direct supervision and control of the assessee and the technical know-how was provided by the assessee to ASE. The assessing officer has rejected the claim of the assessee only for the simple reason that assessee itself was not engaged in the manufacturing activities and it has got manufactured the drugs and pharmaceuticals by third party, i.e., ASE, and as such the assessee is not a manufacturer. This proposition of the assessing officer is negated by the aforesaid judgments of the various High Courts. Moreover, nowhere it has been mentioned in Section 35AB that assessee must be a manufacturer of the product. The requirement of law is only that technical know-how must have been used for the purpose of business of the assessee.
25. In the case of Drilcos India (P) Ltd. (supra), Their Lordships have gone to that extent that if the project is abandoned in succeeding year or the know-how becomes useless for certain reasons even then the assessee is entitled for deduction under Section 35AB inasmuch as the know-how was acquired for the purpose of business. Keeping in view the proposition laid down by the various High Courts in the aforesaid cases, we are of the considered opinion that in the instant case, assessee has acquired the technical know-how against the lump sum consideration which was used for the purpose of business as such the assessee is entitled for deduction under Section 35AB of the Income Tax Act. We, therefore, find no infirmity in the order of the Commissioner (Appeals) and we confirm the same.
26. So far as deduction under Section 35A is concerned, the learned Counsel for the assessee invited our attention to the fact that the assessing officer has held that under Section 35A of the Act, deduction can only be allowed if any expenditure of , capital nature has been incurred on the acquisition of patent or copyright and used for the purpose of assessee's business. Since the patent rights and trademarks cannot be equated and considered as same, the assessee is not entitled for deduction under Section 35A as it has acquired the trademark and not a patent. According to him, patent right is a manufacturing concept conferring the right to make or manufacturer whereas trademark is marketing concept conferring a right to market a particular symbol, The assessing officer has also rejected the alternative contention of the assessee that since the expenditure incurred for the purpose of acquisition of capita) asset within the meaning of Section 32 of the Income Tax Act, depreciation should be allowed, after holding that at the most it could be said that the expenditure was incurred for acquiring an advantage or trade. Yet, he denied the benefit of allowability of expenditure under Section 37(1) of the Act relying upon the judgment of the Apex Court in the case of Sitalpur Sugar Works Ltd. v. CIT 27. The learned Counsel for the assessee, Mr. Agarwal has further contended that neither trademark nor patent was defined under the Act.
Therefore, in this context of pharmaceutical medicines, the term "trade mark" is similar in its meaning to that of a patent. Therefore, the meaning of patent has to be understood in its common parlance. Mr.
Agarwal further invited our attention to the dictionary meaning of Law Lexicon at pages 1291 and 953 in which the words 'trademark' and 'patent' are defined. A patent right is the exclusive liberty conferred by letters patent from the allini of making and vending articles according to the invention. A patent right in its useful significance means a privilege granted by the Government to an inventor of a new and useful discovery or made of a manufacture with the shape entitled during a limited period the exclusive use and benefit thereof A patent right is a monopoly of certain way of doing a thing. The trademark medicine defined in this dictionary is the trademark medicine which must be held to be a medicine as to which similar monopoly to that of a patent and proprietary medicines has been secured by the use of the trademark or trade name under which it is prepared and sold. (Emphasis supplied) The Commissioner (Appeals) having examined this meaning of trademark as defined in the Law of Lexicon dictionary has held that the term is synonymous in its meaning to that of a patent right. He accordingly allowed the claim of deduction of the assessee raised under Section 35A of the Income Tax Act.
28. The learned Counsel for the assessee further contended that in order to claim the benefit of Section 35A it is necessary that there should be an expenditure of a capital nature and such expenditure should be on the acquisition of patent right or copyright used for the.
purpose of the business. Since in the instant case all conditions are undisputedly satisfied except that patent as provided in the aforesaid provision does not in the opinion of the learned assessing officer include trademark, the assessee is not entitled for this deduction under Section 35A of the Income Tax Act. The learned Counsel for the assessee further invited our attention to the order of the Tribunal in the case of BPL Refrigeration Ltd. v. Asstt. CIT (2004) 91 ITD 203 (Bang.) in which the revenue itself has claimed that deduction under Section 35A of the Act should be allowed on trademarks acquired by the assessee, but the Tribunal has allowed the deduction of the same under Section 37 of the Income Tax Act. Our attention was further invited to the judgment of the Apex Court in the case of Astra Pharmaceuticals (P) Ltd. v. CCE that under the custom tariff "patent or proprietary medicines" have been defined as any drug or medicinal preparation in whatever form for use in the internal or external treatment of, or for the prevention of ailments in human beings or animals which bears either on itself or on its container or both, a name which is not specified in a monogram in a pharma copoeia formulary or other publications notified in this behalf by the Central Government in the Official Gazette or which is a brand name, i.e., the name or registered trademark under the Trade and Merchandise Marks Act, 1958, or any other mark such as symbol, monogram or labels or signatures or invented words or any writing which is used in relation to that medicine for the purpose of indicating or so as to indicate a connection in the course between the medicine and some person having the right either as a proprietary or otherwise to use the name or mark with or without any indication and the identity of that person. On the basis of this definition given in different dictionaries, the Hon'ble Apex Court has finally held that the other clause of patent or proprietary medicines to which this tariff items apply are those medicines, which have brand name or registered trademark under the Trade and Merchandise Marks Act and carry such market symbol or monogram as to establish relation between medicine and producers and manufacturers, i.e., the writing of the monogram on the medicines must establish that it was the producer or manufacturer, who was the proprietor of the medicines. Mr. Agarwal further invited our attention to another judgment of the Apex Court in the case of Sumat Prasad Jain v. Sheojanan Prasad Lordships have held that the function of the trademark is to give an indication to the purchaser or a possible purchaser as to the manufacturer or quality of the goods to give an indication to his eye of the trade, source from which the goods come or the trade hands through which they pass on their way to the market.
29. Therefore, it is clear that intimate relationship between the trademark used and the product and its manufacturer since a buyer on seeing trademark on the goods decides to purchase the goods taking it to be required quality as having been manufactured or supplied by the owner of such goods. Therefore, the trademark symbolizes the business reputation or goodwill of its owner and becomes an integral part thereof. In these circumstances, the term 'patent' include trademarks and, therefore, the assessee is entitled to deduction under Section 35A of the Income Tax Act.
30. Without prejudice to the above contentions, the learned Counsel for the assessee submitted that the expenditure on trademark falls within the definition of plant and, therefore, the assessee is entitled to depreciation under Section 32 of the Income Tax Act. In this regard it was contended that since the trademark was acquired by the assessee for unlimited period for its utilization it resulted into an enduring benefit to the assessee which lies in the capital field. Expenditure on trademark provides the assessee a too of its trade with which he carried on his business. He placed reliance upon the judgment of Scientific Engg. House (P) Ltd. v. CIT in support of his above proposition.
31. The learned Counsel for the assessee further argued in the alternative that if the aforesaid contention of the assessee that the acquisition of trademark is a capital asset, i.e., plant and the assessee is entitled for depreciation is not accepted, the expenditure in acquisition of trademarks is a revenue expenditure as it facilitates the trading operation of the JVC, In support of this proposition, Mr, Agarwal has placed reliance upon the judgment of the Apex Court in the case of Empire Jute Co. Ltd. v. CIT in which it has been held that the expenditure even if incurred for obtaining an advantage of enduring benefit may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in the test. What is material to consider is the nature, of the advantage in a commercial sense and it is only where the advantage in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operation or enabling the management and conduct of the assessee's business to be carried on more efficiently, or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may be endure for an indefinite future. Test of enduring benefit is therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of the given case. Our attention was also invited on the judgment of the Apex Court in the case of Alembic Chemical Works Co. Ltd. v. CIT and BPL Refrigeration Ltd. v. Asstt. CIT (2004) 91 ITD 203 (Bang.) in support of this proposition that the expenditure incurred in acquisition of trademark is on revenue account.
32. The learned Departmental Representative, on the other hand, has submitted that patent and trademarks are two different rights. Patent is a formula of a manufacturing or processing of a particular drug whereas the trademark is a name or a title or a symbol given to a particular drug. Under the name of trademark, particular drug is identified/recognized under the relevant Act and it has no application to its manufacturing process. If a person purchases or acquires a trademark, it does not mean it acquired the patent of the same drug meaning thereby that the patent and trademarks are two different rights which cannot be mixed up with each other. Since the assessee has acquired the trade mark, it is not entitled for deduction under Section 35A inasmuch as deduction under Section 35A is available on acquisition of patent or copyrights, etc. In these circumstances, the assessing officer was justified in rejecting the claim. With regard to the other arguments of the counsel for the assessee relating to an issue that acquisition of trademark is a capital asset, i.e., plant and assessee is entitled for deduction under Section 32 of the Income Tax Act and if it is not acquisition of capital asset, assessee is entitled for deduction of the entire amount as a revenue expenditure under Section 37 of the Income Tax Act, the learned Departmental Representative did not raise much argument. He simply relied upon the assessing officer's order.
33. Having carefully examined the orders of the lower authorities and documents available on record, in the light of rival submissions we find that admittedly assessee has acquired the trademark against a lump sum payment of Rs. 34 crores to ASE besides acquiring technical know-how. The transaction of acquisition of the trademark from ASE on a total consideration of Rs. 34 crores was not doubted. The revenue has disallowed the claim of the assessee on the ground that assessee is not entitled for deduction under Section 35A of the Income Tax Act as the trademark does not fall within the definition of "patent rights" on which deduction under Section 35A of the Act is available. The alternative arguments of the assessee were not raised before the assessing officer as such no view was expressed on this point by him.
The Commissioner (Appeals) accepted the contention of the assessee that the trademark has not been defined under the Income Tax Act and it is to be understood as in common parlance. Relying upon the meaning of trademark medicines as per dictionary of Law Lexicon, the Commissioner (Appeals) has held that trademark is synonymous in its meaning to that of a patent right and as such the assessee is entitled for deduction under Section 35A of the Income Tax Act. Now the revenue has taken a stand before us that the patent and the trademarks are different rights and they cannot be mixed up together. It is also an undisputed fact that trademark or a patent right has not been defined in the Income Tax Act and as such to understand the meanings of both these words, we have to take the assistance of dictionary of Law Lexicon in which both these words have been defined. For the sake of reference, we reproduce the exact meaning of the trade mark, trademark medicine and patent right, which are as under: A "trademark is the name, symbol, figure, letter, form or device adopted and used by the manufacturer or merchant in order to designate the goods that he manufactures or sells, and to distinguish them from those manufactured or sold by another, to the end that they may be known in the market as his, and thus enable him to secure such profits as result from a reputation for superior skill, industry, or enterprise." Trademark medicine" must be held to be medicine as to which a similar monopoly to that of patent and proprietary medicines has been secured, by the use of a trademark or trade name under which it is prepared and sold.A 'patent right' is the exclusive liberty conferred by letters patent from the sovereign on an inventor or his alience of making and vending articles according to the intention.
A patent right, in its usual significance, means a privilege granted by the Government to the first inventor of a new and useful discovery or mode of manufacture that he shall be entitled during a limited period to the exclusive use and benefit thereof.
34. Since we are dealing with trademark of pharmaceutical product, we have to examine the correct meaning relating to trademark medicines and patent right in this regard and from a careful reading of the definition of trademark medicines, patent right and patent medicines, we are of the opinion that these two words are very close to each other and their definitions also overlaps each other. In a pharmaceutical field, a medicine is known by its name or symbol. The manufacturing formula of a particular medicine cannot be separately identified and does not bear its own name. It always relates to particular name/symbol of the medicines. if we accept the contention of the revenue that the patent is a formula of manufacturing or processing of medicine and trademark is a name or a symbol of a particular medicine under which it is being marketed, in this situation, can a patent right have its own existence independently or can it be sold or transferred in the market without having its own name Once you give a name of a particular medicine it immediately relates with the trademark so that the particular name and formula of a medicine cannot be used by any other person if the medicine is registered under trademark and Merchandise Act, meaning thereby the formula of manufacturing or processing of medicine which may be termed as a patent right according to the revenue does not have its own existence independently without making reference to a particular name of the medicine which is the trademark. In the light of these propositions, we are of the considered opinion that the patent right and trademark in a pharmaceutical field are synonymous and cannot be separated from each other.
35. We have also carefully perused the judgment of the Apex Court in the case of Astra Pharmaceuticals (P) Ltd. (supra) in which Their Lordships have observed that under the custom tariff patent or proprietary medicines have been defined as any drug or medicinal preparation, in whatever form, for use in the internal or external treatment of, or for the prevention of ailments in human beings or animals, which bears either on itself or on its container or both, a name which is not specified in a monogram in a pharmacopoeia formulary or other publications notified in this behalf by the Central Government in the Official Gazette or which is a brand name, i.e., a name or a registered trademark under the Trade and Merchandise Marks Act, 1958, or any other mark such as symbol, monogram or labels or signatures or invented words or any writing which is used in relation to that medicine for the purpose of indicating or so as to indicate a connection in the course between the medicine and some person, having the right either as a proprietary or otherwise to use the name or mark with or without any indication of the identity of that person. Their Lordships in this case have further observed that the other class of medicine to which this explanation applies are those which have a brand name that is a name or registered trademark under a Trade and Merchandise Act. The medicine manufactured by the appellant is not registered under the Trade and Merchandise Marks Act, therefore, it would attract levy only if its container or packaging carried and distincted marks so as to establish the relation between the medicines and the manufacture. But the identification of the medicine should not be equated with the product mark. Identification is compulsory under the Drug Rules. Technically it is known as a "House Mark". In Narayan's Book on Trademark and passing off the distinction between the "House Marks" and "Product Marks" (Brand name) is brought out thus in the pharmaceutical business the distinction is made between the house mark and a product mark. The former is used on all products of the manufacture. It is usually a device in the form of an emblem, word or both. For each product separate mark known as 'product mark' or 'brand name' is used which is invariably word or a combination of a word and letter or numeral by which the product is identified and asked for. In respect of all products both the product mark and house mark will appear side by side on all the labels, cartoons etc. In the case of Indo-French Pharmaceutical Co. v. Union of India 1978 ELT 478 (Mad) the learned Judge of the Madras High Court while construing tariff item 14E, observed that, a close reading of the Explanations however in my view indicates that the marks, symbols, monograms, labels, signatures or of the words which are used in the medicinal preparation or its container should be such as to indicate that the medicine is a special preparation made by the manufacturer.Sumat Prasad Jain v. Sheojanan Prasad , Their Lordships have held that the function of the trademark is, to give an indication to the purchaser or a possible purchaser as to the manufacture or quality of the goods, to give an indication to his eye of the trade source from which the goods come, or the trade hands through which they pass on their way to the market.
They have also examined the definition of the trademark given in the Trademark Act, 1999 according to which, "Trademark" means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colour.
37. We have carefully perused the definitions of Trademarks given either in different Act or explained through various judgments of the Apex Court and High Courts and we are of the view that the Trademark is not alien to the patent right as there was a direct link between the patent right and trademark. The patent right cannot be identified in a pharmaceutical field without having its own name which is a trade mark, meaning thereby, trademark and the patent rights moves together and if trade mark is purchased, the patent right with respect to that particular trade mark is also passed on to the buyer in the transactions of a pharmaceutical fields. Turning to the case in hand, in the light of the above proposition, we find that revenue has not raised the dispute with regard to the acquisition of a trademark against a lump sum consideration of Rs. 35 crores. Revenue has simply disputed that it was a transfer of only trademark and not a patent right and the assessee cannot take the benefit of provisions of Section 35A of the Income Tax Act. But, in the light of the above propositions laid down by the Apex Court and various High Courts, we are of the view that the patent right and the trademarks are uniform and they cannot be differently treated in a pharmaceutical field. As such, the acquisition of a trademark amounts to the acquisition of patent right also in a pharmaceutical field inasmuch as, the patent right lost its identity on transfer its trademark, as it has no independent identity in the pharmaceutical field. A professional in a pharmaceutical field can visualise a formula or a composition through a trademark of a particular medicine. We, therefore, of the view that through acquisition of a trademark, assessee has also acquired the patent rights from the ASE, as such, it is, entitled for .deduction under Section 35A of the Income Tax Act on a total consideration paid in lieu of acquisition of trademark.
38. So far as other arguments of the assessee is concerned, the acquisition of the trademark is also amounts to acquisition of capital asset as the assessee has acquired enduring benefit. In this regard, we have carefully examined the provisions of Section 32 of the Income Tax Act in which the trademark was held to be a capital asset after 1-4-1998. We have also carefully perused the judgment of the Apex Court in the case of Alembic Chemical Works Co. Ltd. (supra) in which the expenditure incurred in acquisition of a trademark was held to be revenue expenditure and was allowable deduction under Section 37 of the Income Tax Act, meaning thereby, before this amendment in Section 32 of the Income Tax Act, the expenditure incurred on acquisition of trademark was considered to be revenue -expenditure in the light of the judgment of the Alembic Chemical Works Co. Ltd. v. CIT . if it is not considered to be an acquisition of a patent right in the light of the provisions of Section 35A of the Income Tax Act, the assessee is entitled either for a deduction of the entire expenditure or a revenue expenditure. If, the amendment in Section 32 is called to have a retrospective effect the acquisition of a trademark, can be also considered to be acquisition of capital asset and the assessee is entitled for depreciation. In no case, it cannot be held that the assessee is not eligible for any sort of deductions.
Since we find force in the main arguments of the assessee that the acquisition of trademark amounts to acquisition of patent right and as such is eligible for deduction under Section 3 5A of the Income Tax Act. We find no justification to deliberate on other alternative argument. But, in any case, we do not find any merit in the revenue's contention that the assessee is not eligible for any deduction. We, therefore, being convinced with the findings of the Commissioner (Appeals) in this regard, confirm his order.
39. Ground No. 4 relates to the direction of Commissioner (Appeals) to assessing officer to allow deduction on account of interest amounting to Rs. 1,00,77,387 raised under Section 36(1)(iii) of the Income Tax Act.
40. The facts borne out from the record are that during the impugned assessment year, the assessee has raised loans from various financial institutions of Rs. 30 crores and claimed interest thereon at Rs. 1,28,76,602 under Section 36(1)(iii) of the Income Tax Act. The assessing officer on analysis of the bank statement of the assessee held that out of the total consideration of Rs. 51 crores paid to ASE, a sum of Rs. 26 crores were utilized for the acquisition of the capital asset from the loan funds, and Rs. 25 crores from the equity capital.
Therefore, it is opined that the interest paid by the assessee out of such loans at Rs. 26 crores utilized for capital expenditure could not be allowed as an expenditure. He accordingly proceeded to disallow the claim of Rs. 1,01,65,476 out of the total claim of Rs. 1,28,73,602.
Assessee preferred an appeal before the Commissioner (Appeals) with the submissions that interest paid on monies borrowed for its business is allowable as deduction even the monies borrowed has been utilized for acquiring a capital asset. For this proposition, a reliance on the decision of the Calcutta High Court in the case of CIT v. Rajeev Lochan Kanoria is placed wherein it has been held that business expenditure is not confined to expenses incurred on a revenue account. Capital expenses may be allowed as deduction under Section 37 because the section specifically bars any deductions of the expenditure on capital nature. The Section 36 is differently worded. There is no bar in Section 36(1)(iii) to the allowance of the interest paid in respect of capital borrowed which had been utilized for the purpose of acquiring a capital asset. It is further submitted that business was set up during the year under appeal and any expenditure incurred after commencement of business is allowable as business expenditure. The interest paid on funds borrowed for acquisition of technical know-how and trademark, pertained to the period after commencement of business and therefore, allowable as deduction under Section 36(1)(iii) of the Income Tax Act. The Commissioner (Appeals) re-examined the issue and being convinced with it, he allowed the claim of the assessee under Section 36(1)(iii) of the Income Tax Act.
41. Now the revenue has preferred an appeal before the Tribunal, but, could not produce any judicial pronouncements in support of his contention that this type of expenditure cannot be allowed. The learned Counsel for the assessee has placed reliance upon the following judgments in support of his prepositions that interest paid on funds borrowed for acquiring the capital asset after commencement of business, would be treated as revenue expenditure and is allowable under Section 36(1)(iii) of the Income Tax Act.
CIT v. Associated Fibre & Rubber Industries (P) Ltd. Tata Chemicals Ltd. v. Dy. CIT (1999) 72 ITD 1 (Mum) affirmed by the Mumbai High Court in the case of CIT v. Tata Chemicals Ltd. 42. The learned Counsel for the assessee further submitted that the business was set up during the instant assessment year and the expenditure was incurred after the commencement of business, as such, it is allowable as a business expenditure. He, further relied upon the judgment of the Apex Court in the case of India Cements Ltd. v. CIT in which the assessee has obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation by a charge on its fixed assets and in connection therewith it has spent a sum of Rs. 84,633 on the stamp duty, registration fees, lawyer's fee etc. and claimed this amount as a business expenditure. The claim of the assessee was finally allowed on the ground that the amount spent was not in the nature of capital asset as it was laid out or expended wholly and exclusively for the purpose of assessee's business and was therefore, allowable as deduction under Section 10(2)(xv) of the Indian Income Tax Act, 1922.
43. We have carefully examined the orders of the authorities below in the light of rival submissions and judgments referred to above by the assessee and we find that through all these judgments it has been made clear that if the borrowed funds are utilized even for acquisition of a capital asset during the course of business, the interest paid on the borrowed funds is allowable as a revenue expenditure and is allowable as deduction under Section 36(1)(iii) of the Indian Income Tax Act, 1922. Since no contrary judgment has been placed before us, we find no infirmity in the order of the Commissioner (Appeals) who decided the issue in the light of various judicial pronouncements. We, therefore, find no infirmity therein. We accordingly, confirm the order of the Commissioner (Appeals).
45. CO. No. 139/2002.Through this cross -objection, the assessee has assailed the order of the Commissioner (Appeals) on certain grounds which are as under: 1. The Commissioner (Appeals) erred in holding that the entire expenditure of Rs. 1.50 crores incurred on corporate guarantee charges is not allowable as a deduction in one assessment year and in upholding the action of the assessing officer to spread it over 5 years. He ought to have allowed the entire expenditure as a deduction in one year, namely, in assessment year 1998-99 alone.
2. The cross objector prays for allowance of the entire expenditure in assessment year 1998-99.
1. The Commissioner (Appeals) ought to have held that the amount to be allowed as a deduction in assessment year 1998-99 should be one-fifth of Rs. 1.50 crores, that is, Rs. 30 lakhs and not Rs. 7,50,000 as erroneously computed by the assessing officer.
1. The Commissioner (Appeals) in not disposing of on merits, the additional Ground of appeal in respect of the alternative claim for depreciation on the technical know-how fees of Rs. 17 crores. He ought to have held that if the cross objector were to be held as not entitled to deduction under Section 35AB in respect of the technical know-how fees, the cross objector should be allowed depreciation on the aforesaid amount of Rs. 17 crores.
2. The cross objector prays that if its claim for deduction under Section 35AB is considered as inadmissible, it should be allowed appropriate deduction for depreciation.
1. The Commissioner (Appeals) erred in not disposing of on merit, the Ground of Appeal No. 3 raised before him in respect of the alternative claimed for depreciation on the trademark/Registered Users Licence of the value of Rs. 34 crores. He ought to have held that if the cross objector were to be held as being not entitled to deduction under Section 35A in respect of the expenditure of Rs. 34 crores, the cross objector should be allowed depreciation on the said amount.
2. The cross objector prays that if its claim for deduction under Section 35A is considered as inadmissible, it should be allowed appropriate deduction for depreciation.
1. The Commissioner (Appeals) erred in not disposing of on merits the Ground No. 6 raised before him relating to the claim for netting of the interest payments against interest receipts. He ought to have held that if the interest payments were to be held as not deductible, then the disallowance should be worked out by netting the payments and receipts of interest.
46. With regard to Ground Nos. 1 and 2, it is, noticed from the record that the assessee has incurred an expenditure of Rs. 1,50,00,000 as corporate guarantee charges and claimed deduction of the same, which was not accepted by the assessing officer and he restricted the allowance of corporate guarantee charges to only Rs. 7,50,000. Assessee preferred an appeal before the Commissioner (Appeals) with the submissions that it has taken a term loan of Rs. 30 crores from various Banks and financial institutions which have been guaranteed by NPIL which is one of the major promoter of the assessee. In the computation of total income, the assessee has claimed the entire corporate charges on Rs. 1.5 crores paid to NPIL as deductions, but the assessing officer did not allow it on the ground that the aforesaid liability should be spread over for five years as the sum was incurred to secure continuing benefit for five years. The Commissioner (Appeals) following the judgment of the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT assessing officer after holding that the total liability is to be spread over in five years. Now the assessee has approached the Tribunal through its cross objections. The learned Counsel for the assessee has argued in the alternative that if it is to be spread over in five years at least 1/5th should be allowed, whereas, the assessing officer has allowed only Rs. 7,50,000, 47. We have carefully examined the contention of the assessee in the light of the aforesaid judgments and we are of the view that this entire expenditure is to be spread over in five years and 1/5th of Rs. 1,50,00,000 comes to Rs. 30 lakhs whereas assessing officer has allowed Rs. 7,50,000.
We, therefore, modify the order of the Commissioner (Appeals) and direct the assessing officer to allow the expenditure of Rs. 30 lakhs in this assessment year.
48. So far as the Ground Nos. 3 to 5 are concerned, we decide this issue in the revenue's appeal in favour of the assessee. As such, these grounds are become infructuous.
49. In result, the appeal of the revenue is dismissed and cross objection of the assessee are partly allowed.