TMI Blog2013 (9) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ew business. Secondly the assessee is a part of a multinational Group running several such companies worldwide and, therefore, it is in a much better position than the RA Group for setting up of a new business - investment companies holding shares which are part of RA Group and who are not involved in the day to day management of business, have also been paid non compete fees - assessee who had signed similar non compete agreement for three years could not be denied payment of such non compete fees - no justification for non payment of non compete fees to the assessee - no infirmity in the order of authorities below estimating the non compete fess at the same rate as paid in case of RA Group - Decided against assessee. Determination of arm's length price - Sale of shares - Control premium - Held that:- The SEBI regulations do not regulate the price to be negotiated between the buyer and seller of shares. It only provides that in case of transfer of stake exceeding 15% of share holding, the general public is also required to be offered to the extent of 20% of share holding which has to be the highest of the four factors i.e. negotiated price; the share price paid by the acquirer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given explanation in respect of differences positive or negative pointed out by the parties in the cases in which reply had been received and these explanation had been duly noted by AO in assessment order. The explanation given had not been examined and the entire difference had not been added - matter requires fresh examination at the level of AO by specifically considering each explanation by the assessee in respect of differences found and the assessee may also be given further opportunity to provide details and evidence in respect of cases in which no reply had been received or the notices had been returned back because disallowing the entire amount considering the voluminous nature of details is not justified - Decided in favour of assessee. - TA NO. 7202 /Mum/2012 - - - Dated:- 28-8-2013 - RAJENDRA SINGH AND AMIT SHUKLA , JJ. For the Appellant : Kanchan Kaushal, Aliajger and Dhanesh Batra. For the Respondent : Ajeet Kumar Jain. ORDER:- PER : Rajendra Singh This appeal by the assessee is directed against the order dated 25.10.2012 of the Assessing Officer (AO) passed in pursuance of direction by the Disputes Resolution Panel (DRP) dated 28.9.2012 issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3%. Consequent to the decision of Lanxess Group to divest Lustron Polymer business globally, the assessee sold the shares to INEOS ABS (New Jersey) Ltd. which is a joint venture of Lanxess Group and INEOS Group. Lanxess Deutschland GmbH the holding company of the assessee held 49% share holding in joint venture and the INEOS Group held 51%. The assessee was a subsidiary of Lanxess Deutschland GmbH. The shares of the assessee had been transferred to the joint venture at the rate of Rs. 196 per share whereas the payment made to Rakesh Agarwal (RA) Group was at the rate of Rs. 201 per share. The R.A. group had also been paid non compete fees of Rs. 165632565/- at the rate of 25% of share value wheareas the assessee who held 50.97 % share holding had not received any non compete fees. The assessee had also not been paid any control premium though it had sold the controlling stake in the company. 3.1 TPO, therefore asked the assessee to explain as to why TP adjustment should not be made in respect of sale of shares on account of control premium and non compete fees. The assessee submitted that the sale of shares had taken place between two Indian parties and, therefore it was not an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er did not accept the contentions raised. It was observed by him that the assessee being a corporate entity who had controlling stake in the company was likely to have more resources and the capabilities than Rakesh Agarwal to compete in the business with acquirer. The assessee who was controlling the company for about three years had more extensive involvement and must have developed its own capabilities to provide competition in the field. DRP, therefore rejected the case of the assessee and upheld the adjustment made by TPO on account of controlling stake, aggrieved by which the assessee is in appeal before Tribunal. 4.1 Before us the learned AR for the assessee reiterated the submissions made before the lower authorities that the assessee was only a strategic investor in the company i.e. Lanxess ABS. It was pointed out that it was Rakesh Agarwal who had promoted the company in the year 1973 in the name of ABS Plastic Ltd. The said Company had been taken by the Bayer Group in the year 1997. Lanxess Group had taken the controlling stake in the company in the year 2004 from Bayer Group. During all these years, Shri Rakesh Agarwal remained Managing Director of the company and rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of RA Group had also been upheld by SEBI. The assessee company on the other hand did not have extensive knowledge and experience about running of the company so as to provide significant competition to the acquirer and, therefore, no non compete fees was justified to the assessee company. 4.3 The learned CIT(DR) on the other hand strongly defended the orders of authorities below relating to the adjustment on account of non compete fess. It was argued that the assessee had control over the company for three years from 2004 to 2007 and at the time of selling the stake, it had signed 3 years non compete agreement as done by the RA Group. It was pointed out that nobody will sign non compete agreement without any consideration. It was also submitted that Lanxess ABS was with Bayer Group since 1998 and Bayer Group created Lanxess as subsidiary in 2004 in which the personnel of Bayers continued since 1998. Moreover, number of years was not relevant. The assessee company during the three year period had controlled the company and therefore had full knowledge of the business process and technology and also had resources to give effective competition in future. Mere knowledge and running ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired on account of non compete fees in case of the assessee company. 4.6 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding TP adjustment made by AO/TPO on account of non compete fees. The assessee held 50.97% share holding in Lanxess ABS in which RA Group headed by Shri Rakesh Agarwal held 18.33% shares. The assessee along with RA Group transferred their entire share holding in Lanxess ABS to INEOS ABS (New Jersy) Ltd. a joint venture between Lanxess Group and INEOS Group in which the holding company of the assessee company i.e. Lanxess Deutschland GmbH held 49% share holding and balance 51% was held by INEOS Group. Both the assessee and the RA Group had signed non compete agreement with the joint venture company for non competing in business with the said company for a period of three years. RA Group had been paid non compete fees at the rate of 25% of share value at Rs. 165632565/-. The assessee however had not been paid any such non compete fees to the assessee. The AO/TPO have treated the payment of non compete fees to RA Group as an internal comparable uncontrolled price (CUP) for the purpose of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology and working of the company and have the resources to compete with the business of the acquirer by setting up similar new businesses or in any other way. Shri Rakesh Agarwal had no doubt promoted the business and had been MD of the company for several years and had full day to day knowledge and the working of the company and also about business know how and relationships. However for setting up of a new business number of years spent on running the company is not the only factor to be considered. What is required for setting up of a new business is that the person should not only be knowing the business process and know how and technology used in the business, but he should also have resources to set up similar business. The assessee had controlling stake in the company for three years and, therefore, it had full access to knowledge, know how, process and working of the business, which are necessary for setting up of a new business. Secondly the assessee is a part of a multinational Group running several such companies worldwide and, therefore, it is in a much better position than the RA Group for setting up of a new business. If experience was the only relevant factor for set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. There is no difference in the transaction which is non compete fees in both the cases. In so far as the difference between the assessee and RA Group is concerned, the differences pointed out by the assessee have been noted earlier and these differences have to be evaluated from the point of view of capabilities of the two parties for competing in the business. As we have held earlier the assessee had better capabilities for setting up a similar new business to give competition to the buyer. Therefore, adjustment if any on this account under Rule 10B(1)(a)(ii) has only to be positive in favour of the assessee. 4.11 The learned AR has also referred to Rule 10B(2)(d) as per which while judging the comparability the laws and Government orders inforce are required to be kept in mind. The reference in this regard has been made to the order of SEBI which we have already dealt with and found not relevant. The learned AR has also referred to Rule 10B(2)(b) as per which while judging the comparability, the functions performed, asset employed and risk assumed by the parties have also to be considered. In this case, both the parties have signed non compete agreement for three years and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition in the market. It was pointed out that the assessee had been paid negotiated price of Rs. 196.36 per share and RA Group had been paid Rs. 201 per share. It was pointed out that the payment made to the general public was at the rate of 201 per share as per SEBI regulations 20(4). Therefore, the price paid to the assessee was at arm's length and there was no question of making any adjustment. DRP however did not accept the contentions raised. It was observed by him that RA Group which was holding only 18.33% share holding had been paid at the rate of Rs. 201 per share where the assessee had been paid at the rate of Rs. 196.36 per share. The assessee had divested the controlling stake and, therefore, it was required to be paid control premium. He, therefore, upheld the control premium estimated by TPO at the rate of 25% of the share price which was added by the AO to the total income. Aggrieved by the decision of AO the assessee is in appeal before Tribunal. 5.1 Before us learned AR for the assessee reiterated the submissions made before lower authorities that on the facts and in the circumstances of the case there was no justification for payment of controlling premium. Refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d had strong potential for growth for which any buyer will be willing to pay high premium. The deal was thus very valuable to INEOS. The control premium estimated by the TPO at the rate of 25% was, therefore, justified. 5.3 In reply, learned AR for the assessee stated that the research paper was not relevant as it did not take into account the fact that assessee was selling the business and, therefore, it could not ask for premium. It was also pointed out that even the research paper mentioned that the premium depended upon the facts and circumstances of each case. It was also argued that as per Rule 10B(2)(d) the comparability has to be judged after taking into account various factors including the Government laws and orders inforce. It was pointed out that as per the SEBI guidelines, the same price had been paid to other share holders and, therefore, the price paid to the assessee was at arm's length. 5.4 We have perused the records and considered the rival arguments carefully. The dispute raised in this ground is regarding TP adjustment on account of shares of Lanxess ABS sold by the assessee to the joint venture(JV) i.e. INEOS (New Jersey) Pvt. Ltd. The holding company of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business as the business was not doing well and, therefore, there was no case for the assessee to demand any premium. This fact had not been considered in case of Phillip Sounders Jr PHD. 5.6 We have carefully considered the various aspects of the matter. This issue involved is determination of arm's length price of shares sold by the assessee. AO/TPO have impliedly used CUP method. They have referred to the cases of Maruti etc. only to emphasize the point that substantial amounts are required to be paid on account of control over the market price. In case of Maruti, the Government had received Rs. 1000 crore only towards control premium. However for estimating the control premium in case of the assessee with respect to other un-related parties the TPO has referred the Phillip Sounders Jr PHD report who gave a finding that mean average premium varied from 30% to 50% of the public quoted price. AO/TPO have, therefore, estimated the control premium at 25% of share price as the share price received by the assessee has been considered as the price only towards sale of shares without taking into account the control premium. Though AO/TPO have not specifically mentioned, they have indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct it is only the seller who can demand control premium in case he or she is selling the control stake. The assessee in this case was selling the business because of rising competition in the market as was clear from the Lanxess global report referred to in this order earlier. Moreover the control premium does not depend upon the fact whether the assessee was selling the business or that the business was not doing well. The Article by Phillip Sounders Jr PHD has clearly mentioned that payment of control premium largely depends upon the potential buyer believing that he or she could enhance the value of the company. It is the potential for increasing the value that makes the buyers willing to pay the premium for control. The learned CIT(DR) has placed before us the report dated 29.6.2007 taken from INEOS ABS site as per which the Chairman of INEOS had stated that the joint venture with Lanxess provided INEOS strong market position in a new portfolio of product that complemented their Styrenic, Polyethylene, Polypropylene and PV Plastic activities which was a good fit in their existing business. The report also mentioned that Lustron Polymers was currently the world's third largest a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of public announcement. This is only a formula to safeguard the interest of general share holders. It does not in any way state that price negotiated by the assessee with the buyer is at arm's length price. Infact the general share holders would have got more price had the negotiated price also included the control premium. Therefore, the argument based on SEBI regulation is devoid of any merit. 5.9 In view of the foregoing discussion and for the reasons given earlier, we do not see any infirmity in the order of AO making adjustment on account of control premium. The order of the AO is, therefore, upheld on this point. 6. The third dispute is regarding adjustment made by TPO/AO on account of transactions relating to sale of TPC business. In the year 2006, the Lanxess Group globally divested the TPC business to Tanatex Group. Consequent to the global sale of TPC business, the TPC business of the assessee company had been transferred to Tanatex Chemical (India) Pvt. Ltd. The sale consideration of TPC business was negotiated between the Lanxess Deutschland GmbH and Tanatex Reuts GmbH as per Master Sale and Purchase Agreement (MSPA) as a result of which the assessee company receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the department in the earlier years TP adjustment. It was pointed out that Lanxess Deutschland GmbH had been paid only for the IPR and no part of sale consideration had been paid to them. It was accordingly urged that no adjustment was required. 6.2 The TPO however did not accept the contentions raised. It was observed by him that by removing Euro 52 Million from the assets of Lanxess BV before the date of transfer, total sale consideration had been effectively reduced. Therefore had the transfer not taken place, the consideration would have increased. It was also observed by him that the Indian company over the year had developed various intangible like marketing, manufacturing, employees knowledge, customers, goodwill etc. for which valuation should have been done along with value for its tangibles. Similarly there was no justification for allocation of sale of shares only to the seller number 2. The TPO, therefore, allocated on proportionate basis the above three items to the assessee company which came to Rs. 142.5 crore. The payment received by the assessee company was Rs. 4.43 crore. The TPO, therefore, made adjustment of Rs. 138.08 crore. 6.3 The assessee objected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of authorities below and submitted that since this was a worldwide sale of the assets belonging to different companies, the entire sale consideration should have been considered together for the purpose of allocation. It was also pointed out that the assessee itself had submitted before TPO that net asset value of Lanxess Deutschland BV was negative. It was, therefore urged that the order of AO regarding allocation or remaining assets should be upheld. 6.5 We have perused the records and considered the rival contentions carefully. The dispute raised is regarding adjustment made by TPO/AO on account of transactions relating to sale of TPC business. The Lanxess Group had globally divested the TPC business to Tanatex Group as a result of which TPC businesses of the assessee company and other entities of Lanxess Group had been transferred to the respective companies of Tanatex Group. The TPC business of the assessee company had been transferred to Tanatex Chemical (India) Pvt. Ltd. The sale consideration had been negotiated between the Lanxess Deutschland GmbH and Tanatex Reuts Gmbh as per Master Sale and Purchase Agreement (MSPA). Lanxess Deutschland Gmbh had distributed the sale c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 4.1 of MSPA and Sybron Chemicals had, therefore, received only the share sale consideration and not for any asset as the entire company had been sold. Therefore the said consideration had exclusively gone to Sybron Chemicals BV. As regards the transfer of reserve before the sale of shares it has been pointed out that this was an internal transfer which had been duly mentioned in Clause 4.2 of MSPA and the purchaser had been informed about this. Thus the total consideration agreed between the two parties for transfer of TPC business was after excluding the share sales which had been separately made. It has also been pointed out that the total sale consideration was equal to the net asset value of the companies and had been distributed in the ratio of net asset value and, therefore, if considerations relating to IPR sale, transfer of capital reserve and sale of shares are included in the total sale consideration, these will also increase the net asset value of those companies by that amount and the distribution being in the ratio of net asset value, this will not impact the share of individual entities in the total consideration. 6.8 We find substance in the arguments advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing segment. AO, therefore, asked the assessee to submit the details of TP study undertaken by it in relation to transfer pricing regulations. The assessee in the TP study applied Transactional Net Margin Method (TNMM) and selected seven comparables which gave arithmetic mean margin of 6.22%. Subsequently as per direction of the TPO, the assessee recomputed the mean margin at 5.42% using the financial data of the comparables only for financial year 2007-08 as per details given below:- S.No. Company Name Average PLI (OP/Sales) 1. Alkyl Amines Chemicals Ltd. 9.93% 2. Amines Plasticizers Ltd. 5.55% 3. Balaji Amines Ltd. 10.87% 4. Deepak Nitrite Ltd. 4.48% 5. Laffans Petrochemicals Ltd. 3.97% 6. NOCIL Ltd. -1.29% 7. SI Group-India Ltd. 4.41% Arithmetic Mean 5.42% 7.2 The assessee submitted that operating margin to sales in relation to the manufacturing segment was 9.04% in case of the assessee which was more than the mean margin of the comparables and, therefore, no adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on the order of AO/TPO. 7.4 We have perused the records and considered matter carefully. The dispute is regarding TP adjustment made by AO/TPO on account of transactions with associate enterprises (AEs) in relation to the manufacturing segment. The AO/TPO have applied TNMM for bench marking the transaction and seven comparable have been selected which gave arithmetic mean margin of 5.42%. The margin of the assessee has been computed at 1.73%. The assessee had computed the margin at 9.04% after making adjustment for under-utilization of capacity which has not been accepted by the AO/TPO. The learned AR for the assessee has not disputed before us either the comparables or the arithmetic mean margin of the comparables or the margin of the assessee computed by AO/TPO at 1.73%. Only limited dispute raised is that AO had made the adjustment with respect to entire revenue of manufacturing segment whereas the adjustment is required only in relation to transaction with associated enterprises. The plea raised by the learned AR for the assessee is quite reasonable and is supported by the several decisions of the Tribunal as mentioned in para 7.3 of this order. We, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the additional evidences filed before the DRP, confirmed addition of Rs. 53521277/- as per details below- (i) Parties from whom replies not received Rs. 1,12,79,496/- (ii) Parties in respect of which notices were returned back Rs.1,58,38,065/- (iii) Parties from replies received but amount c confirmed was less Rs. 1,53,87,198/- (iv) Parties from whom replies received but amount confirmed more Rs. 1,10,16,524/- Total Rs. 5,35,21,277/- AO, therefore, made the addition of Rs. 5,35,21,277/- u/s 69C of the Income Tax Act, aggrieved by which the assessee is in appeal before Tribunal. 8.3 Before us, the learned AR for the assessee submitted that the AO had made additions u/s 69C of the Income Tax Act as per which only the expenditure which is not explained by the assessee could be added. In this case all the transactions were duly accounted in the books of accounts and, therefore, no addition could be made u/s 69C, in respect of cases where notices were received back or replies were not received. It was also submitted that only in those cases where replies were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be deleted. We are however unable to accept the arguments advanced. Merely because the AO has used the wrong section it does not make the addition legally invalid if the addition could be justified based on some other provisions of the Act. In such cases the addition could always be made u/s 68 of the IT Act and, therefore, we reject the arguments advanced. However, we find, substance in the argument of learned AR that the AO/TPO had asked for almost entire details of transactions entered into by the assessee which was voluminous. The assessee before the DRP had filed further material on sample basis covering 89.43% of cases in which replies had not been received and 69.57% cases in which the notices had been returned back. It has been pointed out that the assessee was now having full details and, therefore, in case further details are required the assessee could submit the same before the AO. Similarly in case of discrepancies it has been pointed out that the assessee had given explanation in respect of differences positive or negative pointed out by the parties in the cases in which reply had been received and these explanation had been duly noted by AO at pages 25 to 31 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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