TMI Blog2013 (9) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Mahindra And Mahindra Ltd (2003 (1) TMI 71 - BOMBAY High Court) has substance. We also agree with the ld. AR that it is not for the revenue to rewrite the terms of agreement but at the same time, the AO is entitled to consider the nature of the receipt and the circumstances in which the amount has been received by the assessee under the agreement entered into. We are of the considered view that the reliance placed by the ld. AR on the decision of ITAT in the case of Sangeeta Wij (2012 (7) TMI 688 - ITAT DELHI) is not applicable to the facts of the present case as in that case. Considering the facts of the case, and the reasons stated hereinabove that the assessee has not been able to place any material on record on the basis of which the assessee has valued intangible assets and whether the amount of Rs.65,50,00,000/- may be considered as the amount received towards not compete fee or for other consideration, we are of the considered view that the said issue be restored to AO to consider nature of receipt in the light of evidence afresh. - Matter remanded back. Disallowance of Rs.2,96,71,013/- being 70% of cost of free samples distributed by the assessee - Held that:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d payment of royalty and technical consultancy services fees with its AE. The assesse imported raw material of 198 Kg of Bisoprolol Fumarate, the raw material used for the pharmaceutical business from its AE for aggregating to Rs.3,56,17,735/- at an average price of Rs.1,79,888/- per Kg. The assessee had also paid a sum of Rs.3,08,66,000/- to the parent company in Germany as technical consultancy services fees. Since the assessee had entered into international transaction with AE, the AO referred the matter for determination of transfer pricing adjustment to TPO, who after necessary examination recommended adjustment of Rs.2,56,19,527/- in respect of import of raw material and Rs.28,06,000/- in respect of technical consultancy service fees paid aggregating to Rs.2,84,25,527/-. Assessing Officer under the draft assessment order proposed above addition. The assessee filed objections before DRP contending that TPO/AO inappropriately applied the Comparable Uncontrolled Price Method (CUP Method) to arrive at ALP in respect of import of raw material Bisprolol Fumarate and also not considered differences in quality, characteristics, contractual terms and conditions of locally available ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved as being approved mandatory/stipulated criteria for comparison or permissions/ licenses by the concerned government authorities. It appears that these three criteria are cherry-picked by the assessee to discredit the CUP and comparable. The assessee has advanced an argument of its formulation manufactured by using the said imported API as being qualitatively superior as it has a high market share, in spite of a high price. In this regard, the assesse was asked to explain the reasons why an API was being compared with a formulation. The assessee was also asked to explain the process of manufacture of the formulation and whether there were no processes or other ingredients utilized for the manufacture of the formulation. But, till the date of this order, no explanation was received from the assessee. Therefore, it cannot be accepted that the API itself constitutes the formulation which is marketed. It follows that therefore, the high import price of API cannot be sought to be compared with the price of the ready formulation to justify the Arm s length nature of the price paid to AE. 4.1.4 Regarding this issue, it would be pertinent to mention here that the CIT(A) XXXII, Mumba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,000/- per kg. The assessee had also purchased small quantity of this product from the said company at Rs. 70,000/- per kg. The TPO, therefore, applied CUP method and adopted the rate of 60,000/- per kg. for the purpose of making TP adjustment. TPO has also held that TNMM was not suitable in this case as the total import of the product by the assessee was only Rs.3.49 crore whereas the turnover of the pharma segment was Rs. 220 crore. Therefore, the impact on price variation in respect of product on such high turnover would be too insginificant. The TPO, therefore, used CUP method and adopted the price charged by Unichem Laboratories Ltd for bench marking the transaction. The argument of the assessee that the AE had sold the same product to other group entities at a higher price had not been accepted. In our view the stand of the revenue authorities to reject such argument is reasonable as the other group entities were operating in different geographical locations and the transaction were with AE and therefore independent. 22.8 The assessee had also argued that there was major difference between quality of the product produced by the AE which was a branded item compared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 19.7.2013 (supra), which read as under: 24. The third adjustment made by AO/TPO is regarding the technical knowhow fees of Rs. 1.57 crore paid by the assesse to its parent company in Germany. The assessee filed copy of technical consultancy agreement from which the AO noted that as per the clause 3 of the agreement the assessee was to receive assistance from the parent in the following fields. (i) Support of engineering technology, construction of factory and services. (ii) Selection or right equipment, sourcing of supplies internationally. (iii) Support of production and quality control with regard to technical and analytical background. (iv) International marketing and sales trends. (v) Access to new products. (vi) Search for licence products. (vii) Information on engineering and scientific trends and training. (viii) International trends on finance and administration+ (ix) International banking contracts and issue of letters of comfort. (x) Advising on new trends on information technology and its implementation. (xi) Monitoring the setting up and working of the new project. (xii) Initiation/implementation of SAP. 24.1 The TPO asked the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. The agreement was only indicative in nature. The TPO therefore, erred in allocating technical services payment based on the number of heads mentioned in the agreement without appreciating the nature of the services received during the year and the value associated with the same. The assessee during the year had received significant support from the AE for implementation of SAP in India and in case the assessee had paid to the AE at man hour rate the technical services fees payble would have been significantly high. It was, therefore, urged that adjustment made by TPO was not justified. CIT (A) was however not satisfied with the explanation given. It was observed by him that the assessee had given general explanation without substantiating the claim. The assessee had given evidence only in respect of three out of twelve heads of services. Even during the appellate proceedings the assessee could not provide evidence in respect of all the services received during the year. CIT (A) therefore, confirmed the adjustment made by AO, aggrieved by which the assessee is in appeal before Tribunal. 24.3 Before us the learned Senior Counsel assailed the order of CIT(A) confirming the adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate on the facts of the case. The learned CIT(DR) also referred to the decision of Bangalore bench of Tribunal in case of Festo Controls (P) Ltd Vs. DCIT in ITA No. 969/BNG/2011 in which in a similar situation where certain services had been provided from the central point to more than one entities, the issue had been restored by the Tribunal to the file of AO. It was thus argued that in this case also the issue may be restored to the file of AO. The learned Senior Counsel however pointed out that the said decision of Tribunal was distinguishable as in that case services had been rendered and the issue was cost allocation which had been restored by the Tribunal. The said decision, therefore, will not apply to the facts of the present case. 24.5 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 in relation to technical knowhow fess paid by the assessee at Rs. 1.57 crore to its parent in Gernamy. The details of the various services which parent company was required to provide to the assessee have been given in para 24 earlier. There are twelve such services listed in the said pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the services as and when required. Therefore, applying CUP method to the service not availed by the assessee during the year is not justified. It would have been appropriate if the AO had applied CUP method to the payment made during the year by the assessee for the three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/AO to determine the market value of services received by the assessee during the year relating to SAP implementation and quality control to show that the assessee had paid more compared to any independent party for the same services. The assessee had submitted that in case the assessee had paid to the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Mc Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000/- is the profit and is LTCG and claimed exemption u/s 54EC of the Act. AO has stated that from the schedule of Fixed Assets, it is seen that total deduction in its fixed assets for the year under consideration was only Rs.3.18 crores. AO at the time of making Draft Assessment Order u/s 144C of the Act dated 31.12.2010 asked the assessee to submit the details of assets and liability comprising it s A R Business. AO has stated that as per Ex-A of the agreement it is quoted as under : Assets : i) A R Business; ii) Plant and Machinery and other tangible assets of A R Business AO has stated that no identifiable assets other than certain plant and machinery were transferred through the agreement. Thus, the assessee was asked to submit the details of assets transferred and in response thereto, the assessee submitted a valuation report stating that the assets mentioned in the valuation report were assets that were transferred. That the assets valued as per valuation report are as under : a Trade mark Rs.24,77,30,000 b Brands Rs.5,09,40,000 c Contracts with toll manufacturers Rs.10,45,40,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng huge consideration to the assessee company to use the same trade mark which it was already using. Thus, the asset name as Trade Mark by the assesse is only a fictitious asset which has been specifically thought of to avoid the incidence of tax in its hands. b) Brands: This asset has been valued at Rs.5,09,40,000/-. However, the assessee has not been able to submit any evidence as to which brands were transferred. If MERCK was the band that was transferred then it is worth mentioning that the transferee was already using the brand being a subsidiary of the same parent company MERCK KGaA Germany. Was it transfer of any specific brand owned by the assessee company which was transferred again the answer is in the negative. Hence, what the assessee has tried to impress by giving definitions of brand and how it has valued its brand is all in thin air without underlying the actual asset. Thus, the asset named as BRAND by the assessee is also illusive and is actually a fictitious asset which has been specifically thought of to avoid the incidence of tax in its hands. c) Contracts with Toll Manufacturers : Again no documentary evidence in support of existence of the asset c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an asset and transfer of the same for a high consideration is nothing but a design to cover up the reality. The customer data is also not an asset in the real sense. It is also seen that the transferee is also in the business of chemical and re-agents and has its own market and distribution network, customer data base set-up of vendors and toll manufacturers. It is also true that many of the customers, toll manufactures are common to both the transferors as well as transferee. Thus, it is difficult to appreciate that the transferee would pay such a huge sum for such fictitious assets. These assets have been included in the list of assets to only make the list more appealing apparently, so that the design of the assessee does not get exposed. f) Even the ISO certificate is not an asset in the real sense since the expenses for the same have actually been claimed as revenue expenses by the assessee and allowed as such in earlier years. It has thus been merely incorporated in the list of assets to make it believable . 15.1 AO has stated that the assessee has not been able to give any evidence or documents for the expenditure in support of intangibles transferred by it. That the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the assessee. That the claim of exemption u/s 54EC of the Act of Rs.65,50,00,000/- was also proposed not to be allowed to the assesse company. Assessee made its objections before DRP. 16. DRP after considering the submissions of the assessee, which are staed in para 4.2.2 to 4.2.4 of its order has stated in para 4.2.5 as under : 4.2.5 Further, the assessee s claim that these are capital assets cannot be accepted for the reasons that the expenditure relating to these items were never capitalized in the books . The assessee has capitalized these expenditure as intangible assets for the first time in its books of accounts in the year under consideration for the specific purpose of allocating the sale consideration received from the buyer,. This recognition of assets is relevant from the buyer s point of view because the buyer has to segregate its cost of acquisition of the business among various assets. For the buyer the purposes consideration is to be allocated between various items for the purpose of capitalization of assets in its books but for the seller, it is just a sale of business, which in the case under consideration mostly comprises of intangibles only. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also relied on the decision of Hon ble Apex Court in the case of Parimisetti Seetharamamma V/s CIT (1965) 57 ITR 532 (SC) and submitted that the department has not discharged its burden to apply section 28(iv) for receipt of any benefit/perquisites received by assessee in kind. Ld. AR further submitted that it is not the case of the AO/DRP that any part of this consideration received by the assessee is on account of non-compete fee and has not been considered as income of the assessee u/s 28 (va) of the Act. Ld. AR referred page 53 of the paper book which is a copy of resolution passed in the meeting of Board of Directors of the assessee-company on 27.1.2006 authorizing to execute necessary documents regarding transfer of sale of A R Business to MSPL. Ld. AR further referred pages 86 to 110 of the paper book and submitted that the assessee also obtained valuation reports from two valuers for transfer of the said assets. Ld. AR submitted that the department has no right to re-write the agreement and to consider that the consideration of Rs.65,50,00,000/- received by the assessee is on account of non-compete fee. Ld AR referred the decision of the Hon ble Calcutta High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferred any technical know-how. He submitted that the case of ITAT D Bench of Sangeeta Wij (supra) is not applicable as in that case, the Tribunal observed that there was no finding recorded by the AO that the agreement for transfer of the business was a sham or not acted upon by the parties thereto. Ld. DR also referred Article 9.2 of the sale agreement and submitted that the assessee entered into non-compete agreement i.e not to engage in or carry out the business which has been transferred by the assessee to MSPL for a period of 7 years. Therefore said consideration of Rs.65,50,00,000/- received by the assesse could be in lieu of non-compete fee and therefore the order of the AO should be confirmed. 20. We have carefully considered the orders of the AO/DRP along with the submissions of ld. Representatives of the parties. We have also carefully considered relevant Articles of the agreement for sale entered into between the assessee and MSPL and also decisions cited before us (supra). It is a fact that the assessee as well as the purchaser of A R Business viz MSPL, both are sister concern and there parent company is M/s Merck KGaA, Germany. We also observe that the trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n without valuation being assigned to the individual asset and liability of such sales. Considering the said facts in the light of explanation, we are of the considered view that the condition as provided in the case of slum sale for considering the consideration received on sale of an assets is not satisfied to consider it as a capital gain u/s 50B of the Act. Further, we also find merits in the contention of ld. DR that no basis of breakup of the capital asset has been stated in the agreement and/or in the valuation report on which the assessee has placed reliance before us. Besides, we also observe that Article 9.2 of the sale agreement provides that the assessee undertakes for a period of 7 years after the execution of this agreement not to engage in/or carry out any business anywhere, which would compete with A R Business except to the extent permitted under this agreement. On consideration of Article 9.2 of the sale agreement, it shows that the assessee has entered into a non-compete covenant with the transferee. Considering the facts, however, we do agree with ld. AR that section 28(iv) is applicable where benefit/perquisites are received in kind and is not applicable wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete details of such persons. AO has stated that this issue has been elaborately discussed to substantiate the expenses in the previous year and additions were made in view of assessee s inability to substantiate the expenses. The AO has stated that the assessee failed to submit the complete and proper details as asked for and accordingly, allowed 30% of the said expenditure and disallowed 70% of the expenditure stating that he is following the conclusion drawn in the previous year for want of proper verification. The DRP has also upheld the said addition made by AO which comes to Rs.2,96,71,013/-. Hence this appeal by the assessee. 24. At the time of hearing, Ld. Representatives of both the parties submitted that similar issue was also in the appeal being ITA No.925/Mum/2007 which was heard along with this appeal and whatever view is taken in the said appeal on above issue would ipso facto may apply to this ground. 25. We have considered the orders of the authorities below and submissions of ld. Representatives of the parties. We agree that in appeal bearing ITA No.925/Mum/2007 relating to assessment year 2003-04 the similar ground was there in which the AO disallowed the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examination of the issue to find out the genuineness of the claim. It was also brought to our notice that some disallowance has been made in the subsequent years also. Therefore, in our view the exercise initiated by the AO for detailed examination of the issue in this year has to be given a logical conclusion by examining the necessary details. Giving free samples is a normal business practice in pharmaceutical business and, therefore, disallowance of entire expenditure is prima facie unjustified. The matter in our view requires fresh examination after verification of details about names and addresses of doctors before the AO. We, therefore, set aside the order of CIT (A) on this point and restore the issue to the file of AO for passing a fresh order after necessary examination of the details filed by the assessee and after allowing opportunity of hearing to the assessee. 26. Respectfully following the above order of the Tribunal dated 19.7.2013 for AY 2003-04, we set aside the order of the authorities below and restore the matter to the AO for passing afresh order after necessary examination of details that may be filed by the assessee and after allowing opportunity of heari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head other income . Ld. AR conceded that no disallowance has been made by the assessee but a reasonable disallowance could be considered considering the fact that the assessee has not incurred any expenditure for earning the dividend income which is exempt from tax under the Act. 30. Ld. DR relied on the order of the AO for the purpose of making disallowance u/s 14A of the Act. 31. We have carefully considered the submissions of ld. Representatives of the parties. Considering the fact that the assessee has made investment aggregating to Rs.195.88 crores and the dividend income received by the assessee is Rs.10,15,39,276/- it cannot be said that the assessee has not incurred any expenditure indirectly to earn the said dividend income which is exempt from tax. At the time of hearing, ld. AR proposed disallowance of Rs.3 lakhs on adhoc basis for the purpose of section 14A of the Act. However, considering the details of investment, we are of the considered view that it will be reasonable and fair to consider 1% of exempt income towards expenses for earning the dividend income by the assessee in the financial year under consideration. Therefore, the orders of the authorities below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of any tax, duty cess or fees actual account of tax, duty etc., under the provisions of section 145A. Uy paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation . It is therefore clear that adjustment on account of tax, duty etc. is required to be made not only to the closing stock but also in the purchases, sales and opening stock. In the present case, the AO had made adjustment only in the closing stock. CIT (A) has directed him to make adjustment in the opening stock also in addition to closing stock. He has however omitted to consider the aspect that adjustment is also required to be made to the purchases and the grievance of the assessee is only on this account. We therefore modify the order of CIT (A) by holding that the adjustment on account of tax duty will also be made in the purchases. The ground raised by the assessee is thus allowed. 36. In view of above, we restore the matter to the AO that if the adjustment is made to the value of closing stock, then the adjustment on account of tax, duty etc. is also required to be made to the purchases, sales and opening stock as well as the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital field. Whereas in the case before us, the issue is as to whether claim for payment of club expenses for the Directors of the assessee-company for entertaining its customers is business expenditure and is allowable or not. We are of the considered view that the decision of the Hon ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd (supra) squarely applies to the facts of the case before us. Therefore, said amount is allowable as business expenditure u/s 37(1) of the Act. Similar issue was also considered by the Hon ble Delhi High Court in the case of CIT V/s Central Club Ltd reported in 326 ITR 25 (Del), wherein it has been held that corporate fee to Membership of the club is an expenditure wholly and exclusively for the purpose of business and is allowable as revenue expenditure u/s 37(1) of the Act. In view of above, we allow Ground No.1.8 of the appeal by deleting the addition of Rs.4,80,710/- . 41. Ground No.1.9 relates initiation of penalty proceedings u/s 271(1)( c ) of the Act does not requires any adjudication as it does not arise out of the order of the ld. CIT(A). 42. Further Ground No.1.10 of the appeal is of not granting credit of TDS and advance t ..... 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