Astrix Laboratories Ltd.,, Hyderabad vs Assessee

Astrix Laboratories Ltd., Asst. Commissioner of Income- Hyderabad tax, Circle - 16(2), Hyderabad. PAN - AAFCA4120R

(Appellant) (Respondent)

Revenue by Shri Raghunathan Sampath Assessee by Shri D. Sudhakar Rao

Date of hearing 20-11-2014 Date of pronouncement 16-01-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal of assessee is directed against order dated 26/03/12 passed by ld. CIT-IV, Hyderabad u/s 263 of the Act pertaining to AY 2006-07.

2. Assessee has raised the following grounds:

" 1. The Order of the Commissioner of Income tax-IV, Hyderabad (CIT) under section 263 of the Income tax Act, 1961 (Act) dated 26.03.2012 is bad in law and facts.

2. On the facts and circumstances of the case, the CIT erred in setting aside the Assessment Order dated 29.12.2009 passed under section 143(3) of the Act and directing the re-computation of total income.

3. On the facts and circumstances of the case, the CIT without appreciating the facts of the case, erred in holding that the purchase of technical know-how and DMF from Matrix Laboratories Ltd (hereafter 2 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

referred to as Matrix) for Rs. 105.32 crores failed to satisfy the benefit test and disallowing depreciation of Rs.13,16,54,210/- claimed in respect of these assets.

4. On the facts and circumstances of the case, the CIT erred in not appreciating that the appellant has not only acquired technical know-how and DMF from Matrix but also other fixed assets including land, buildings and equipment for the sole purpose of setting up and carrying on the business of manufacture and sale of Anti retroviral (ARV) drugs in joint venture with Aspen Pharma care Holdings Ltd, South Africa.

5. On the facts and circumstances of the case, the CIT erred in holding that the value of technical knowhow and DMF acquired from Matrix has been enhanced for the purposes of claiming depreciation and therefore, the same is covered by section 43(1) r. w. Explanation 3 of the Act."

3. Briefly the facts are, assessee an Indian company is engaged in the business of manufacture and sale of active pharmaceutical ingredients and its intermediates. For the AY under consideration, assessee filed its return of income on 29/11/2006 declaring loss of Rs. 5,56,02,362 under normal provisions and book profit of Rs. 4,09,82,718 u/s 115JB. In course of assessment proceeding, assessee filed a revised computation by revising the book profit to Rs. 6,18,63,863. During the scrutiny assessment proceeding, AO noticing that assessee has entered into international transaction, made a reference to the Additional CIT(TP), Hyderabad for determining the arm's length price (ALP) of international transaction. In terms with the order passed u/s 92CA(3) of the Act, by the TPO, AO completed the assessment in case of assessee for the impugned AY u/s 143(3) read with section 92CA vide assessment order dated 29/12/2009 by determining the loss at Rs. 5,56,02,362 and book profit at Rs. 6,18,63,863 as shown by assessee. The assessment order so passed was also challenged by assessee before ld. CIT(A) on the issue of interest charged u/s 234B of the Act and the appeal of assessee was also disposed by ld. CIT(A) on 03/11/2012. Ld. CIT while examining assessee's assessment records for the impugned AY in exercise of power u/s 263 of the Act was of the view that the 3 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

assessment order passed is erroneous and prejudicial to the interests of revenue as AO has failed to examine the following issues:

1. As per assessee's letter dated 28/10/05 all the purchases were claimed to have been made from M/s Matrix Laboratories Ltd. and there was no opening stock. As per Schedule 2.02 to balance sheet assessee had shown purchases of current assets, material/inventory of Rs. 33,76,09,894. However, while quantifying the material consumption under schedule 2.02, a some of Rs. 44,11,79,306 was adopted which resulted into excess debit to the tune of Rs. 11,35,69,412 towards raw material consumption. Further, in the material consumed column in 12(c) to para 2.02 to audit report, it is reported that the entire raw material valued at a sum of Rs. 39.52 crores is consumed leaving no stock. Whereas in the balance sheet assessee has reflected a sum of Rs. 17.85 crore as closing stock of raw material, which has resulted in overstatement of losses by a sum of Rs. 17.85 crores.

2. Assessee claimed to have purchased intangible assets for a consideration of Rs. 101,02,74,500 in the form of technical know-how and DMF from Matrix Laboratories Ltd. However, assessee had shown the WDV/actual cost of these assets at Rs. 105,32,34,000 which resulted in excess claim of depreciation to the extent of Rs. 53,69,938.

3. During TP proceedings for AY 2007-08, the TPO determined the ALP in respect of purchase of technical know-

how and DMF from Matrix Laboratories Ltd. at NIL by applying CUP method as it failed the benefit test. The transaction involving purchase of know-how and DMF having been held to be not genuine for AY 2007-08 cannot be genuine for AY 2006-

07. 4 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

4. AO has not verified the genuineness of the expenditure incurred towards payments made to Matrix Laboratories Ltd. Further in the books of Matrix Laboratories Ltd. the consideration is shown at Rs. 101.02 crores whereas assessee has adopted the figure of Rs. 102.32 crores. The consideration of Rs. 105.32 crores paid to Matrix Laboratories Ltd. should not have been allowed as the expenditure is not genuine.

4. On the basis of the aforesaid reasons, ld. CIT issued a notice to assessee on 18/10/11 directing it to show cause as to why the assessment order should not be revised as it is erroneous and prejudicial to the interests of revenue. In response to the show cause notice, assessee submitted a detailed reply, and also made submissions before ld. CIT. After considering the submissions of assessee, ld. CIT dropped the proceeding with regard to the first issue relating to excess debit of raw material consumption to the P&L A/c. Hence, it is not necessary to deal with that issue any further.

5. As far as the other two issues are concerned, it was submitted on behalf of assessee that complete details of technical know-how, DMF and patent licencing were submitted to AO during the course of scrutiny assessment proceeding initiated both in case of assessee as well as Matrix Laboratories Ltd., who were assessed by same AO. It was submitted that while Matrix Laboratories treated the consideration received on transfer of know-how and DMF as capital gain, assessee on the other hand accounted the amounts paid towards know-how, DMF and patent licencing as intangible assets. Assessee also reconciled the alleged difference between the amounts shown in the books of Matrix and assessee. Thus, it was submitted that question of claiming excess depreciation does not arise. As far as the issue of genuineness of the transaction involving purchase of know-how and DMF, it was submitted by assessee that the transactions in issue being between two residents are not covered by 5 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

the definition of international transaction, hence, outside the purview of proceedings u/s 92CA. Therefore, the TPO who does not have any jurisdiction to examine the transactions between two resident companies could not have determined the ALP at NIL. Assessee further submitted that in course of assessment proceeding for the impugned AY also, the issue was not only examined by AO but was also examined by TPO, who did not find any reason to treat the transaction as not genuine. Therefore, on identical facts and circumstances, the transaction could not have been held to be not genuine in the subsequent AY. Assessee also submitted that the entire issue having been examined by AO and assessment having been completed after proper application of mind, initiation of proceeding u/s 263 is not valid.

6. Ld. CIT after considering the submissions of assessee, observed that the TPO did not go into the genuineness of the transaction in AY 2006-07 as assessee did not treat the purchase of technical know-how as international transaction in the audit report u/s 92E of the Act. However, the TPO examined the issue in AY 2007-08 and found it to be not genuine. Ld. CIT referring to the finding of the TPO in the TP order passed in AY 2007-08, wherein it is held that the purchase of intangible assets by assessee failed to satisfy the benefit test, hence, the ALP was determined at Nil and depreciation claimed was disallowed, ultimately concluded as under:

"16. I agree with the findings of the Transfer Pricing Officer in the order dated 29.10.2010 for AY 2007-08. The Assessing Officer in the assessment order for the asst.year 2006-07 did not examine the genuineness of the transaction of purchase of technical know how and DMF because the assessee did not report the transaction with M/s. Matrix Laboratories Ltd., as an international transaction. Non examination of the genuineness of the transaction re suited in under assessment of the total income. Further, the Assessing Officer ,while passing the assessment order on 29.12.2009 was not having the TPO's order for the asst.year 2007-08, as the TPO passed the order on 29.10.2010.Thus, there was no occasion for the Assessing Officer to examine the genuineness of the purchase of 6 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

intangible assets by the assessee from Matrix Laboratories Ltd in AY 2006-07. The Assessing Officer without examination of purchase of intangibles from Matrix Laboratories had accepted the purchase consideration in a mechanical manner and the TPO in Asst.Year 2007-08 gave a clear cut finding that the assessee failed to substantiate the purchase of intangible assets from Matrix Laboratories. Thus, the assessment order passed by the Assessing Officer AY 2006-07 is erroneous and it is prejudicial to the interests of revenue.

17. As observed earlier, the Assessing Officer did not examine as to how the value of intangible assets was determined at a sum of Rs. 105.32 crores. As a matter of fact, the purchase of technical know how and DMF was a transaction by the assessee with a shareholder. For the first time during the proceedings u/s .263, the assessee has filed a valuation report from Anmol Sekhri & Associates stating that the value was determined by an independent valuer. The valuation report does not exist on the assessment record and it is filed for the first time.

18. To sum up, my findings are as under;

i) I agree with the findings of the TPO and DRP that the purchase of intangible assets for a sum of Rs. 105.32 crores fails to satisfy the benefit test. The depreciation claimed by the assessee for a sum of Rs. 13,16,54,210/- requires to be disallowed.

ii) The Assessing Officer did not examine this issue of purchase of intangible assets from Matrix Laboratories at the time of original assessment as he was not having the benefit of TPO's order in relation to the asst.year 2007-08. The assessee did not place any material before the Assessing Officer either in the form of valuer's report or any other material to substantiate that the market price of the intangible assets was a sum of Rs.

105.32 crores. Without any basis, the claim was made and the Assessing Officer without application of mind and without examination of the genuineness of the expenditure allowed the depreciation claim.

iii) The assessee claims that it has acquired the intangible assets from M/ s. Matrix Laboratories Ltd. and M/ s. Matrix Laboratories Ltd., continues to hold the same technical know-how and produced the goods for the assessee company. I am at loss to understand as to why the assessee has paid Rs. 105.32 crores to M/s. Matrix Laboratories Ltd. when the same person is 7 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

manufacturing the same products by using the same technical know-how for the benefit of the assessee. Certainly, the transactions seems to be not at arm's length. It appears to me that the sole purpose of enhancing the value of intangible assets to Rs. 105.32 crores for claiming higher depreciation by the assessee. The technical know-how acquired by the assessee was not having any value in the books of account of M/ s. Matrix Laboratories Ltd. In my view, the Assessing Officer has failed in application of the provisions of section 43(1) r.w.explanation 3 of the IT. Act.

19. For the above reasons, the assessment order passed by the Assessing Officer u/ s 143(3) on 29.12.2009 is hereby set aside with a direction to recomputed the total Income after giving an opportunity of being heard and pass a fresh assessment order."

7. Being aggrieved of the aforesaid order of ld. CIT, assessee is before us.

8. The ld. AR more or less reiterating the submissions before ld. CIT in course of the revision proceeding, submitted that the TPO has no jurisdiction to either determine the ALP of the transaction involving purchase of know-how and DMF nor can disallow the depreciation by applying the benefit test as the transaction between two resident companies cannot be termed as international transaction under section 92B. In support of such contention, he relied upon a decision of the ITAT, Hyderabad Bench in case of DCIT Vs. M/s Swarnadhara IJMII Integrated Township Development Co. Pvt. Ltd., 2014 (6 TMI). Ld. AR submitted that ld. CIT relying upon the observations of the TPO in the order passed for AY 2007-08 has held the assessment order for impugned AY to be erroneous and prejudicial to the interests of revenue, which is not proper. It was submitted, AO who is same both for assessee as well as Matrix Laboratories Ltd. has gone into the entire factual aspect relating to the transfer of know-how and DMF by examining the relevant agreements and other documentary evidences produced not only in course of assessment proceeding of 8 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

Matrix but also in case of assessee. Therefore, the issue having been examined in detail by AO, ld. CIT was not correct in observing that AO has not examined the issue. It was submitted, when the consideration paid by assessee to Matrix towards technical know-how and DMF was accepted in case of Matrix and assessed as business income in their hand, the transaction cannot be held to be not genuine in case of assessee. Ld. AR submitted that only because the TPO in the assessment year 2007-08 has wrongly treated the transaction to be not genuine on some irrelevant consideration, on that basis assessment order cannot be termed as erroneous and prejudicial to the interests of revenue. Ld. AR, therefore, submitted that the order passed u/s 263 should be declared as invalid.

9. The ld. DR, on the other hand, supported the order of ld. CIT.

10. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. A perusal of the impugned order of ld. CIT, certainly gives an impression that he was totally swayed away by the finding in the TPO's order for AY 2007-08. As can be seen, ld. CIT has held the assessment order to be erroneous and prejudicial to the interests of revenue as according to him, in view of the findings of TPO and DRP for AY 2007-08 that the purchase of intangible assets for a sum of Rs. 105.32 crores fails to satisfy the benefit test, the depreciation claimed by assessee of Rs. 13,16,54,210 requires to be disallowed. Ld. CIT has also observed that there is no basis for payment of the amount of Rs. 105.32 crores as it is not substantiated by assessee that the value of intangible assets would be that much. He has further observed that the amount was enhanced to that extent only for the purpose of claiming depreciation. However, as can be seen from the materials placed on record, assessee was formed as a joint venture between Matrix and a South African company, namely, AspenSA. As per the terms of agreement between the parties Matrix transferred 9 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

certain capital assets in the form of land, building, etc. to assessee company for manufacture of certain active pharmaceutical ingredients, which were being manufactured by Matrix. For enabling assessee to manufacture those APIs, Matrix also passed over the technical know-how and DMF relating to those APIs to Astrix for a consideration of Rs. 105,32,34,000. The consideration received towards transfer of the capital assets as well as on account of know- how and DMF have been assessed at the hands of Matrix which is very much evident from the assessment order of Matrix for the impugned AY. Therefore, when the transaction is accepted as genuine in case of Matrix, it cannot be otherwise in case of assessee as they are two sides of same coin. Moreover, it is a fact on record that AO who completed the assessment in case of assessee as well as Matrix is same. Hence, it cannot be said that AO has not examined the evidences or applied his mind to the issue. On the contrary, the assessment order passed in case of Matrix for the impugned AY would clearly reveal that AO has gone into the depth of the issue while examining the transaction relating to acquisition of know-how and DMF by assessee from Matrix. Therefore, only because the TPO in the assessment year 2007-08, comes to a conclusion that the transaction is not genuine as it fails the benefit test, by relying upon such finding of TPO, the assessment order cannot be held to be either erroneous or prejudicial to the interests of revenue. Moreover, though, ld. CIT has observed that the TPO in course of proceeding for AY 2006-07 could not have examined the issue as assessee has not reported such transaction in the audit report, but, on examining the facts and materials on record and more particularly the order of the TPO for AY 2006-07, it is very much evident that assessee has produced not only its books of account but its entire financial statements relating to FY 2005-06 was available before the TPO. Therefore, it cannot be said that the transaction relating to purchase of know-how/DMF could not have been considered by TPO. It is also a fact, the AO has completed the assessment after examining the 10 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

issue and also in terms with TPO's order for AY 2006-07. Only because the TPO in AY 2007-08 takes a different view, by that reason alone, assessment order cannot be considered to be erroneous and prejudicial to the interests of revenue. Moreover, when the consideration paid by assessee to Matrix has been accepted to be genuine in the assessment conducted in case of Matrix which has been confirmed by DRP, the same transaction cannot be doubted in case of assessee.

11. The entire issue can also be considered from another angle. There is no doubt that the basis for invoking the jurisdiction u/s 263 is the order passed by TPO for 2007-08. Though the assessee has contended before ld. CIT, that the transaction between assessee and Matrix cannot be a international transaction as per section 92B of the Act, but, ld. CIT has brushed aside such contention of assessee. However, on a proper analysis of section 92B of the Act, it is very much clear that for coming within the expression 'international transaction' at least one of the parties should be a non-resident. This view gets support from the decision of coordinate Bench in case of DCIT Vs. Swarandhara IJMII (supra) In the present case, there is no doubt that neither assessee nor Matrix is a non-resident. Therefore, whether the transaction relating to acquisition of know-how and DMF can at all be within the purview of international transaction so as to empower the TPO to determine ALP of such transaction is a debatable issue. In these circumstances, assessment order cannot be considered to be erroneous and prejudicial to the interests of revenue by relying upon an order of TPO validity of which is not free from doubt. Moreover, an assessment order can be considered to be erroneous and prejudicial to the interests of revenue on the basis of facts and materials available on record as on the date of completion of assessment. In the present case, according to ld. CIT himself at the time of completion of assessment, AO did not have the benefit of the TPO's and DRP's order for AY 2007-08, which were passed 11 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

subsequently. That being the case, AO having passed the assessment order on the basis of facts and materials available before him, only because subsequently TPO in AY 2007-08 held the transaction to be not genuine on that basis alone assessment order cannot be held to be erroneous and prejudicial to the interests of revenue. More so, when the TPO in his order for AY 2006-07 has not questioned the genuineness of such transaction. Therefore, on considering the totality of facts and circumstances, we are of the view that as AO has passed the assessment order after examining all the facts and evidences and after proper application of mind relating to the transaction of know-how and DMF, the assessment order cannot be revised u/s 263 of the Act by treating it as erroneous and prejudicial to the interests of revenue. In this context, we rely upon the decision of Hon'ble AP High Court in case of Spectra Scrips and Shares Pvt. Ltd. Vs. CIT, 354 ITR 35 (AP). In the aforesaid view of the matter, the assumption of jurisdiction u/s 263 of the Act in the present case is neither proper nor justified. Accordingly, we set aside the impugned order of ld. CIT and restore the order passed by AO.

12. In the result, assessee's appeal is allowed.

Pronounced in the open court on 16/01/2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 16 th January, 2015 kv 12 ITA No. 840/ Hyd/201 2 Astrix Laborato ries Ltd.

Copy to:-

1) Astrix Laboratories Ltd., Plot No. 564/A/22, Road No. 92, Jubilee Hills, Hyderabad

2) ACIT, Circle 16(2), Aayakar Bhavan, Hyderabad.

3) CIT-IV, Hyderabad

4) Addl. CIT, Range - 16, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.

Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed befor e auth or Sr.P.S Draft pro posed & placed before the secon d AM 3 Mem ber 4 Draft discussed/appr oved b y second Mem ber VP 5 Appro ved Draft com es to the Sr.P.S./PS Sr.P.S. 6. Kept for pro nou ncem ent on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file go es to the Head Cle rk 9 Date of Dispatch of or der