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PR. COMMISSIONER OF INCOME TAX-VADODARA-1 Versus M/s. DIAMINES AND CHEMICALS LTD.

Disallowance u/s 40A(2)(b) - payment of sale value was in excess of the fair market value - related parties - Held that:- Section 40A(2)(a) of the Act provides that where the assessee incurs expenditure in respect of which payment has been made to any person referred to in clause (b) of that sub-section, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment i .....

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rket value of the goods, services or facilities for which the payment is made. As noticed hereinabove, the Commissioner (Appeals) has recorded a categorical finding of fact to the effect that the Assessing Officer has not brought any material on record to show that the payments in question exceeded the fair value of the services received. Insofar as the legitimate needs of such services etc. is concerned, the Commissioner (Appeals) has found as the matter of fact that as a result of utilising th .....

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o show that the payments made exceed the fair market value and that the services have been availed for legitimate needs of the assessee company. On behalf of the appellant nothing has been pointed out to show that the Tribunal has placed reliance upon any irrelevant material or that any relevant material has been ignored. No contrary material has been brought to the notice of the court so as to dislodge the findings of fact recorded by the Tribunal. Under the circumstances, the conclusions arriv .....

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ar nature, being intangible assets being acquired on or after the 1st day of April, 1998. Explanation 3 to section 32 provides that for the purposes of that sub-section, the expressions “assets” and “block of assets” shall mean (a) tangible assets, being buildings, machinery, plant or furniture; (b)intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. (a) While goodwill has not been specifically men .....

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- Dated:- 19-10-2015 - MS. HARSHA DEVANI AND MR. A.G.URAIZEE, JJ. FOR THE APPELLANT : MR KM PARIKH, ADVOCATE COMMON ORAL ORDER (PER: HONOURABLE MS.JUSTICE HARSHA DEVANI) 1 All these three appeals under section 260A of the Income-tax Act, 1961 (hereinafter referred to as the Act ) arise out of the common order dated 16th January, 2015, passed by the Income Tax Appellate Tribunal, Ahmedabad Bench D (hereinafter referred to as "the Tribunal") and the parties are common, hence, the same we .....

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yment, which was on higher side? The following question of law is common in Tax Appeals No.657 of 2015 and 658 of 2015: Whether on facts and under the circumstances and in law, ITAT has erred in allowing depreciation on goodwill by relying upon decision rendered by Hon'ble Supreme Court in the case of CIT v. Smifs Securities Limited, reported in (2012) 24 taxmann.com 222 (SC) without appreciating that facts of that case were totally different from those of the case under consideration? 3. Th .....

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ance & Trading Limited to various concerns on account of royalty, commission, services charges, etc. and that all the concerns to whom these payments were made fell under the category of concerns covered under section 40A(2)(b) of the Act. The Assessing Officer also found that the amounts paid were quite high as compared to the nature of services received. He, therefore, called for justification regarding payments of royalty to Alkyl Amines Chemicals Ltd, commission paid to Alkyl Amines Chem .....

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the competent professionals from Alkyl Amines & Chemicals Limited, Value Healthcare Private Limited and Perfochem India Pvt. Ltd. for operational matters like imports/exports, secretarial, finance and accounts or general management. Since the company did not have functional competent people, these services were availed so as to bring successful restructuring at the earliest. The Assessing Officer was of the view that the assessee company had reduced its tax liability by transferring the amo .....

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he made additions of the above expenses in relation to each of the assessment years. 4 The assessee carried the matters in appeal before the Commissioner (Appeals). The Commissioner (Appeals) decided the appeal for assessment year 2005-06 first in point of time, wherein, after appreciating the material on record, he held thus: 5.4 I have considered the submissions of the ld. A.R. and the facts of the case. I find from a perusal of the assessment order for AY 01-02 (when this issue was brought u .....

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ment of service charges, the assessee company started making operational profits from AY 2001-02 onwards. The disallowance can be made u/s 40A(2)(b) only where the expenditure in question can be shown to have been incurred which was either excessive or unreasonable. On the facts, in my opinion, the payment of service charges was justified by the results obtained. Further, no material has been brought on record to show that the payments in question exceeded the fair value of the services received .....

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ies and therefore, payments were made to reduce the tax liability. The Tribunal noted that the assessee had claimed to have made payment of royalty to M/s Alkyl Amines and Chemicals Ltd. @ 2% of sales on ex-factory selling price of ₹ 34,26,720/- amounting to ₹ 68,534/- and supervision charges @ ₹ 20 per kilogram on 6090 kilograms amounting to ₹ 1,20,800/- for sale of Triethylene Diamine (TEDA) and royalty @ 2% on ex-factory selling price of ₹ 1,32,29,550/- amounting .....

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d and professional fees of ₹ 24,11,160/- to Alkyl Amines Chemicals Ltd. Similarly for assessment year 2001-02 the assessee paid royalty to M/s Alkyl Amines and Chemicals Ltd. of ₹ 25,01,675, commission of ₹ 25,01,675/- to Value Healthcare Pvt. Ltd., service charge of ₹ 23,86,685/- to Alkyl Amines and Chemicals Ltd. and ₹ 3,71,200/- to Value Healthcare Pvt. Ltd. 7 The Tribunal found that the Assessing Officer had not brought any material on record to show that M/s Al .....

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ught on record by the Assessing Officer to controvert the claim of the assessee that the same was paid for the services received or to show that the payments were more than the fair market value of such services and accordingly, did not find any reason to interfere with the order of the Commissioner (Appeals). 8 From the facts as emerging from the record it is apparent that the Commissioner (Appeals) after appreciating the evidence on record has found, as a matter of fact that payment of service .....

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g the employees of its sister concerns and on payment of service charges, the assessee company had started making operational profits from assessment year 2001-02 onwards. The Commissioner (Appeals) observed that disallowance can be made under section 40A(2)(b) of the Act only where the expenditure in question can be shown to have been incurred which was either excessive or unreasonable. The Tribunal, for the reasons referred to hereinabove, has concurred with the findings of fact recorded by th .....

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that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefits derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Therefore, for the purpose of disallowing a deduction, the Assessing Officer has to form an o .....

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s the legitimate needs of such services etc. is concerned, the Commissioner (Appeals) has found as the matter of fact that as a result of utilising the employees of its sister concerns and on payment of service charges, the assessee company started making operational profits from assessment year 2001-02. Under the circumstances, it cannot be said that the services were not availed for any legitimate need. The Tribunal has concurred with the aforesaid findings of fact recorded by the Commissioner .....

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een brought to the notice of the court so as to dislodge the findings of fact recorded by the Tribunal. Under the circumstances, the conclusions arrived at by the Tribunal being based upon findings of facts recorded by it after appreciating the evidence on record, do not give rise to any question of law, much less, a substantial question of law warranting interference. 10 As regard the second question of law which arises in two of the appeals, the assessee claimed depreciation on goodwill of  .....

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n relation to depreciation on goodwill. In the assessee s appeals, the Commissioner (Appeals) allowed the ground of appeal. Revenue failed in its appeals before the Tribunal. 11 Mr. K.M. Parikh, learned Senior Standing Counsel for the appellant, submitted that the Tribunal has erred in allowing depreciation on goodwill without appreciating that the depreciation is allowable for wear and tear of assets whereas in the case of the assessee, the value of the intangible asset, viz., goodwill will inc .....

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., [2012] 24 taxmann.com 22 (SC) (2012) 13 SCC 488, wherein it has been held thus: 7. The assessing officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ( the Act , for short). 8. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: Explanation 3.-For the purposes of this sub-section, the expressions assets and block of assets shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible .....

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