Delhi High Court

Commissioner Of Income Tax vs Pepsico India Holdings Pvt. Ltd. on 25 March, 2011

Author: A.K.Sikri

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                              [ITA No.149 of 2008]

                                      RESERVED ON: 21.02.2011
%                                      PRONOUNCED: 25.03.2011



COMMISSIONER OF INCOME TAX                  . . . APPELLANT
                 Through : Ms. Rashmi Chopra, Advocate

                               VERSUS


PEPSICO INDIA HOLDINGS PVT. LTD.             ...RESPONDENT
                  Through: Mr. C.S. Aggarwal, Sr. Advocate with
                                  Mr. Vishal Kalra and Mr.
                                  Prakash Mumar, Advocates.
CORAM :-

       HON'BLE MR. JUSTICE A.K. SIKRI
       HON'BLE MR. JUSTICE M.L. MEHTA

       1.     Whether Reporters of Local newspapers may be allowed
              to see the Judgment?
       2.     To be referred to the Reporter or not?
       3.     Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. On 21st February, 2011 when the arguments in this case were

heard at the after notice stage and orders reserved, following order

was passed:-

"Two issues are involved in this appeal, one pertains to the deletion of the additions made by the ITAT on account of MODVAT credit receivable and its addition to the value of the closing stock. It could not be disputed by the learned counsel for the Revenue that this issue is covered by a judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. Indo Nippon, 261 ITR 275. In fact, in the case of the assessee only on this aspect, earlier appeal ITA 291/2008 filed by the Revenue which pertains to the assessment year 1996-97 was dismissed by this Court following the aforesaid judgment. Mr. Aggarwal, learned Senior Counsel for the respondent/assessee has also drawn our attention to the orders passed by the Assessing Officer in

subsequent assessment year 2001-02 onwards as per which the AO has accepted the exclusive method regularly followed by the assessee and no adjustment has been made in this regard. This would show that the method adopted by the assessee showing the closing stock in the aforesaid manner has been consistently followed and has been accepted by the Department. For all these reasons, in so far as this aspect is concerned, no question of law arises.

The arguments heard in detail on other question of law which pertains to accepting the valuation of assets of the five vendor companies."

2. This order makes it clear that though various question of law

are proposed, in respect of other questions raised, this Court was of

the opinion that substantial question of law does not arise. The

question on which the arguments were heard namely which pertains

to accepting the valuation of assets of five vendor companies,

following question has been raised in the appeal:-

"Whether the Ld. ITAT erred in law and on merits in directing the Assessing Officer to accept the valuation of assets acquired by the assessee from five vendor companies on the basis of valuation report as shown in the relevant agreements?"

3. The circumstances under which this question has come up for

our consideration may be narrated at this stage.

4. Pepsico India Holdings Private Limited (hereinafter referred to

as „the assessee‟) is a company engaged in the business of

manufacture of soft drinks. The assessee had filed return declaring

loss of ` 4,99,89,940/- on 30th November, 1995 and the same was

processed under Section 143 (1) (a) of the Income-Tax Act

(hereinafter referred to as the „Act‟) vide intimation dated 27th

March, 1996. The assessee acquired manufacturing assets and

other assets, land and building at various locations and started its

business of manufacturing and sale of aerated soft drinks under the

name Pepsi, Mrinda, Teem, 7up, Everyvess and Slice. During the

course of assessment proceedings, the Assessing Officer noticed that

assessee had claimed to have purchased only fixed assets although

the assessee had purchased five companies as running business.

The AO noticed that the assessee had purchased the running plant of

the abovementioned franchisees and the purchase was made to

eliminate these companies from the market for future competition to

establish the monopoly of the assessee in competition with other soft

drinks manufacturers like Coco-Cola. The AO further held that the

land value has been suppressed by the assessee and the price of

plant and machinery was inflated to claim excess depreciation and

that the agreement between the assessee and the franchise‟s for

sale and purchase of the assets was a collusive agreement. The AO

had increased the value of the land by 50% on estimated basis and

the value of bottles and crates was reduced by 50% and transferred

the cost of non-competition. Taking over of a running business, cost

of the retrenchment compensation to the plant and equipments and

reduced the cost of acquisition by 25%.

5. As mentioned above, we are not taking note of other additions

made by the Assessing Officer as they are not relevant to the present

appeal. The assessee had filed appeal before the CIT (A) which was

dismissed holding that the units acquired by the assessee were

working as bottling plants and stopped the manufacturing of aerated

drinks only after the assets of these units were acquired by the

assessee. The CIT (A) held that AO was justified in deciding the

value of the assets acquired by the assessee from the seller-bottling

company and disallowed the part of depreciation.

6. Still aggrieved, the assessee filed second appeal before the

Income Tax Tribunal. This time the assessee succeeded as the

Tribunal has allowed the appeal of the assessee by holding that the

acquisition of specified assets shown by the assessee was duly

supported by the relevant agreement as well as report of the

registered valuer and the action of the Assessing Officer in

distributing and refusing the same without any evidence in support

was not sustainable. The Tribunal has, thus directed the AO to

accept the valuation of the different assets acquired by the assessee

from the five vendor companies as shown in the relevant agreement

and supported by the valuation reports. It is this order of the Tribunal

which is in appeal before us.

7. Before we deal with the respective submissions of the learned

counsels on the either side, it would be of benefit to take note of the

some more facts, leading to the acquisition of the assets of the five

vendor companies. As mentioned above, the assessee company is

in the business of manufacturing of soft drinks and the soft/aerated

drinks are marketed by the assessee under the brand name Pepsi,

Mrinda, Teem, 7up, Everyvess and Slice etc. The assessee had given

franchisee to various distributors who manufacture these products

and marketed the same. Five of these companies were M/s

Residency Foods & Beverages Ltd, M/s Voltas Ltd & Pure Beverages

ltd. M/s City Drinks P. Ltd., M/s Falcon Beverages (Pvt.) Ltd and M/s

Jennys Agro Foods Ltd. It is not in dispute that they were bottling

the aforesaid aerated soft drinks under the same brand names as

specified above which belonged to the assessee. It appears that

these companies which were having their manufacturing units for the

manufacture and sale of the aforesaid aerated soft drinks were

running into losses. It was for this reason that the agreement was

reached between the assessee company and said five companies

whereby the assessee acquired manufacturing assets and other

assets such as land and building situated at various locations. For

acquisition of these assets, the assessee paid due consideration. In

order to show the value of the fixed assets, namely plant and

machinery as well as land and building and to claim deprecation

thereupon, the assessee filed valuation reports in respect of these

assets before the AO. These valuation reports were given by the

registered valuers and on that basis, the assessee had declared the

value of different assets and claimed depreciation thereupon. The

AO dug certain holes in the said valuation reports and found some

shortcomings therein to reject the valuation as given by the

registered valuers. He also found that the plastic crates and glass

bottles had been valued or the basis of the condition and quality of

the plastic crates and glass bottles at the plants and, therefore, the

basis adopted by the assessee for valuation of the assets was not

correct. According to him, the valuer had not given any reference of

purchase price of the plant and machinery, book value of land and

building and original cost of the assets to the seller. In his opinion,

the replacement cost has been worked out without making reference

to any specific criterion and life of assets has been determined

arbitrarily based on the estimates only. Further, the replacement

values of the assets taken by the valuer had not been linked with the

original cost to the seller. Going by these considerations, he

increased the value of land by 50% on estimated basis, reduced the

value of bottle and crates by 50% and reduced the cost of acquisition

of plant and machinery by 25%. The CIT (A) while confirming the

aforesaid order of the AO found the following determinative factors:-

(i) Before the assessee acquired these units from the five

companies, their business were in running condition and

they were working as franchisee of the assessee. Thus

when these functioning units were acquired, acquisition

of good will of those units cannot be denied.

(ii) Since these units were taken in working condition, it can

be presumed that the assessee paid something as

compensation to these units to stop manufacturing of

aerated drinks.

(iii) Likewise, as the seller bottling companies had paid

compensation to their employees, it can be presumed

that some compensation must have been paid by the

company to these employees.

(iv) Though the assessee had stated that seller bottling

companies were independent of the assessee, the fact

remains that they were franchisee of the assessee and

must have been under the influence of the assessee.

(v) The AO had asked the assessee to produce the registered

valuation officer before him for verification of the

methodology of valuation of different assets, but he was

not produced on the pretext of paucity of time.

8. On the aforesaid basis, the action of the AO in restricting the

depreciation was upheld by the CIT (A). The ITAT while upsetting the

order of the two authorities below has given the following rationale:-

(i) Only specific assets were produced by the assessee

company as on at an agreed price as per

agreements entered into with the said companies.

The agreements clearly showed that what was

purchased was only the specified assets and not

the ongoing business of these business and

consolidated price for acquisition of the assets

specified in the agreement was paid. This price was

supported by the valuation report of the registered

valuers. It was thus not a case where running

business of the companies were taken over, as

wrongly held by the Assessing Officer and CIT (A).

(ii) There was no question of acquiring any good will as

those companies were the franchisee of the

assessee only and were bottling the products in the

brand name of the assessee. Therefore, the

question of goodwill does not arise as the goodwill

in any case from very beginning belongs to the

assessee itself.

(iii) The valuation report which was submitted by the

registered valuers gave the basis for valuing

different assets as well as the bifurcation. No

significant defect was pointed out by the AO in

these valuation reports.

(iv) The method of valuation adopted by the registered

valuers was the well accepted method.

(v) There was no basis for the AO to deflate the value

of the land by 50% than agreed to be paid as per

the agreement and at the same time deflated the

value on bottles and crates by 50%.

(vi) The cost paid by the assessee for the purchase of

these assets was the actual cost and the assessee

as per the provisions of Section 43 (6) of the Act it

was rightly adopted for the purpose of claiming

depreciation. Likewise, there was no question of

making payment of non-compete fees, inasmuch as

these five companies were not in a competing

business but in fact were the franchisee of the

assessee itself. Therefore, there was no threat of

any competition to the assessee from these

companies.

9. After hearing the learned counsel for the parties, we are of the

opinion that the approach of the Tribunal in addressing the issues

was in accordance with law and has come to a correct conclusion. It

is not in dispute that specified lump sum consideration is paid for

acquisition of specified assets by the assessee to the vendor

companies. This consideration is paid as stipulated in the

agreements entered into between the parties. The Assessing Officer

or the CIT (A) assumed certain things which were non-existing. It

was assumed that some consideration for goodwill must have been

paid or the payments to the employees of the vendor companies

must have been borne by the assessee. There was neither any

material to arrive at this conclusion nor there were any

circumstances from which this could be legitimately inferred or

presumed. Likewise, there was no legitimate reason to discard the

valuation report. Furthermore, as mentioned above, the

consideration was actually paid which represented only the cost of

these assets and thus the assessee could legitimately claimed

depreciation on the said cost as per Section 43 (6) of the Act. For

bifurcation of the cost, valuation of the assets was required for which

valuation reports were produced. The ITAT recorded the following

reasons to support its conclusion that valuation report was wrongly

rejected:-

"While disputing the valuation shown by the registered valuer in his valuation report it was noted by the AO that the valuation of land had been made on the basis of local enquiries without giving any comparable instances of sale or purchase. As regards valuation of building he observed that the same was made by adopting plinth area method whereas the machinery had been valued on the basis of present replacement cost after consideration depreciation and average life of the assets. The learned CIT (A) while supporting the action of the AO on this count further noted in his impugned order that no reference was made by the valuer to original purchase price of plant and machinery book value of land& building and also the original cost of assets to the bottlers. He also noted that method of replacement value taken by the valuer had not been linked with the original cost to the seller. In our opinion, when the valuation of machinery was done by the valuer on the basis of present valuation cost after taking into consideration the depreciation of the said machinery as well as average life thereof the original cost of the said machinery to the seller was hardly of any relevance and therefore, there was no reason to refer to such original cost as well as book value thereof. What was relevant for the purpose of valuation as adopted by the valuer was the present replacement cost of the machinery and there was nothing brought on record either by the AO or by the learned CIT (A) to show that the values so adopted by him were not the present replacement cost of the concerned machinery. Moreover, the average life of the machinery as well as the depreciation thereof on the basis of actual use having been duly considered by the valuer to determine the valuation. We find that the method adopted by the valuer for the

purpose of valuation of plant & machinery was a well-recognised and well-accepted method and there was no material defect or deficiency pointed out therein to doubt or dispute the same. Similarly, the plinth area method adopted by the valuer for the valuation of building again was well-recognized method and no defect whatsoever was pointed out by the authorities below in the method so adopted. Even the valuation of plastic crates and glass bottles was done by the valuer on the basis of condition and quality of plastic crates and glass bottles available at the plant and the basis so adopted by the valuer being fair and reasonable, there was no justifiable reason to find fault with the same. As regards the valuation of land and building, the learned counsel for the assessee has pointed out before us that the agreement for transfer thereof being an immovable property was duly registered on payment of requisite stamp duty and the valuation shown was accepted by the registering authority. Having regard to all these facts and circumstances, we are of the view that the defects or deficiencies allegedly pointed out by the authorities below in the valuation report were not material enough to reject the said valuation report especially when there was no evidence material brought on record to dispute the said valuation. As a matter of fact the orders of the authorities below show that the adverse inference drawn by them while doubting or disputing the valuation report was mainly based on assumption and surmises without there being any evidence/material to support and substantiate the same. In these circumstances, we are of the view that no meaningful purpose would be served from the examination of valuer and it is not expedient to restore the matter to the file of the assessing Officer for conducting such examination as sought by the learned AR in the facts and circumstances of the present case including the fact that sufficient opportunity was apparently afforded by him to the assessee to produce the valuer during the course of assessment proceedings."

10. This approach is in accordance with law laid down by the

courts in various judgments including in Kalooram Govindaram Vs.

Commissioner of Income-Tax, Madhya Pradesh, 57 ITR 335,

Union of India and Another Vs. Azadi Bachao Andolan and

Another 263 ITR 706 and State of Orissa Vs. Maharaja Shri B.P.

Singh Deo, 76 ITR 690.

11. That apart, we find no reason, justification or rationale for the

Assessing Officer to inflate the value of land by 50% and reduced the

value of bottles and crates by 50%. In fact, while doing so, the AO

does not give any basis or the yardsticks adopted by him.

12. In the facts of this case, therefore, we are of the opinion that

the ITAT has rightly held that the depreciation was allowable and we