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2017 (4) TMI 343 - AT - Income TaxNon compete fees non eligible for depreciation - Held that:- What we find in the instant case is that clause 8.6.1 to 8.6.4 of the tripartite agreement between the assessee, Orchid India and Shri. K. Raghavendra Rao and the bipartite agreement between assessee and Shri. K. Raghavendra Rao were not carefully verified by any of the lower authorities. What is required to be seen is whether the payment of non compete fee was a supporting one to the transfer of the injectable drugs division. We are of the opinion that this issue also requires a fresh look by the ld. Assessing Officer . We therefore set aside the orders of the lower authorities with regard to disallowance of depreciation an intangible assets and remit it back to ld. Assessing Officer for to considering afresh, in accordance with law Nature of expenditure - capital outgo or revenue outgo - Held that:- It is not disputed that capacity expansion was of Orchid India and not of the assessee. Orchid India was not an Associated Enterprise of the assessee. The payments made by the assessee to ensure continuous supply of rawmaterial did not enhance its own asset structure in any way. Assessee was obliged to pay price charged by M/s. Orchid India apart from the lumpsum it had affected. Agreement between assessee and M/s. Orchid India placed at paper book page No.964 clearly places an obligation on M/s. Orchid India to maintain sufficient capacity and supply the projected needs of the assessee during the term of the agreement. In our opinion, the payments made by the assessee to M/s. Orchid India was only in the revenue field to ensure the supply of its raw material on a long term basis. Expenditure was primarily and essentially related to manufacturing operation of the assessee which ensured its profit earning capability. It was only an outlay of business in order to carry it on in an efficient manner. In our opinion, the expenditure was allowable as revenue outgo. Transfer pricing adjustment - Held that:- When the assessee had supplied a number of items to its Associated Enterprise abroad, prices of some of which were lower than the agreed price rates and some were higher than the agreed rates, then, in our opinion, considering only the items where there was a deficient pricing was not appropriate. Assessee has produced a chart at paper book page no.587 to 589 which interalia show that some of the items were charged at higher than the agreed rates. We are of the opinion that even though an adjustment can be made, such adjustment has to consider both positive as well as negative price difference. We are of the opinion that this issue requires a fresh look by the ld. Assessing Officer. We therefore set aside the orders of the lower authorites with regard to adjustment for difference in pricing between cost of shipment and standard price, back to the file of the ld. Assessing Officer /TPO for consideration afresh. Downward adjustment on interest paid by the assessee to its Associated Enterprise for ICCD - Held that:- There is a wide disparity between what is stated in the Balance sheet and the schedule of M/s. TPG Wholesale Private Limited filed before Registrar of Companies and the rate considered by the TPO. The rate 0.5% as well as 50% prime- facie appear to be incorrect, unless there were other conditions which constrained the said company to pay a interest which was significantly different from normal market rate for convertible debentures. The question of comparability of TPG Wholesale Private Limited for bench marking the ICCD interest rate of the assessee in our opinion requires a fresh visit by the ld. Assessing Officer/TPO. We set aside the orders of the lower authorities with regard to downward adjustment of H22,14,66,575/- and remit the issue back to the ld. Assessing Officer/TPO for consideration afresh in accordance with law. Selectio of Associated Enterprise of the assessee - Held that:- The term influence appearing in Sec.92A(2)(i) of the Act is a type of dominant influence which lead to a defacto control over the other enterprise. The entire sales of the assessee were to Apotex Cort/ Apotex Inc Signet and M/s. Hospira group, concerns of which the latter admittedly were Associated Enterprises of the assessee.The total sales to Hospira group as already mentioned by us at para 5 above, aggregated to H283,79,39,806/-. It can be safely concluded from the above data that more than 20% of assessee’s sales were to Apotex Corp and Apotex Inc. The profit shared earned by the assessee from them aggregated to H30,07,34,065/- out of the total profits of H125,26,61,036/-. We are therefore of the opinion that M/s. Apotex Corp and Apotex Inc were in a position to exercise a dominant influence over the assessee. A person who purchased more than 1/5th of the total sales of the assessee, in our opinion, would have a distinctly dominant influence on the pricing and can exercise a defacto control. In the circumstances, we are of the opinion that lower authorities were justified in treating M/s. Apotex Corp and Apotex Inc as Associated Enterprise of the assessee. Profit split ratio - Held that:- Essential elements that are required to be verified for applying the said method was never considered by the lower authorities while considering the profit split ratio at 60:40. Considering all these facts, while holding that M/s. Apotex Corp and M/s. Apotex Inc were Associated Enterprise of the assessee, the matter regarding bench marking Arms Length Pricing of the profit share, in our opinion requires a fresh visit by the ld. Assessing Officer/TPO. We therefore set aside the orders of the lower authorities and remit the issue regarding adjustment of profit share back to the file of the ld. Assessing Officer/TPO for consideration afresh in accordance with law.
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