TMI Blog2020 (3) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... honourable Karnataka High Court it fell into the realm of definition under section 32. No decision from honourable jurisdictional High Court has been cited before us. In this view of the matter honourable Apex Court decision in the case of Vegetable Products Ltd. [ 1973 (1) TMI 1 - SUPREME COURT] has to be followed. In the said case law honourable court had expounded that if two constructions are possible the one in favour of assessee should be adopted. Since the decision of the learned CIT(A) is in accordance with the ratio arising from the decision of honourable Karnataka High Court and honourable Madras High Court as above we do not find any infirmity in the same in absence of any direct jurisdictional High Court decision on the subject. Hence we uphold the order of ld CIT(A) on this issue Applicability of provision of section 43A - CIT(A CIT(A) held that since this criteria is not fulfilled as person from whom business is acquired is also an Indian company hence, he has held that section 43A is not at all applicable - HELD THAT:- CIT(A) in his adjudication has not considered the finding of the Assessing Officer that the asset involved in slump sale included areas of Nepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the AO be restored. 3. Grounds of appeal raised by the assessee read as under : On the facts and in the circumstances of the case and in law, the learned CIT(A)/Assessing officer has: Transfer pricing grounds 1. Erred in upholding the arm's length price determination of the learned Transfer pricing officer ('TPO') in relation to the international transaction of payment Central Service Charges of ₹ 3,87,44,898/- to ₹ 84,79,431/-, thus making an adjustment of ₹ 3,02,65,467/-; 2. Erred in not accepting the economic analysis undertaken by the Appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm's length price of the international transactions and arbitrarily selecting comparable uncontrolled price method as the 'most appropriate method' to benchmark the international transaction; 3. Erred in not accepting the combined transaction/ bundled approach of benchmarking adopted by the Appellant in its transfer pricing documentation and proceeding to determine the arm's length price of international transactions on a standalone basis by rejecting transaction net margin method a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6) Export of Diagnostic equipments 2,819,969 TNMM 7) Central Service Charges - cost allocation 38,744,898 TNMM 8) Provision of Business/ market support services 110,376,221 TNMM 9) Reimbursement of expenses (Receipts) 7,990,110 CUP 10) Reimbursement of expenses (Payments) 32,124,472 CUP Central Service Charges - Cost Allocation ₹ 38,744,898 /-: 5. During the year the assessee has made payment of ₹ 38,744,898/- to Abbott GmbH Co. KG (AE) as the assessee had entered into service center agreement dated 09.11.2005 (supplementary agreement to the main agreement dated 01.12,1988) with the AE. It was submitted vide letter dated 19.01.2015 that during the year, the assessee has been allocated the following sums relating to 'Payment for Central Service Charges' viz.:- Nature of the Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 25 to 30 lakhs as today's cost as discussed in para 5.7 above and the value of international re packages for Accounting, Finance and MIS Software that was made available and customized to assessee's requirements by Abbott GmbH could be anywhere more than ₹ 1 crore as per today's cost. Accordingly, the arm's length value of payment made towards central service charges (Personnel support and Accounting, Finance and MIS support)is considered as ₹ 8,479,431 /- and therefore adjustment of ₹ 30,265,467 /- to the total income of the assessee is proposed. 7. Upon assessee s appeal learned CIT(A) confirmed the TPO s action. He held as under :- As per the TPO during the year the appellant has allocated following sums relating to payment for Central Service charge Nature of the service Amount in Euro Amount in Rs. Marketing and strategic sales support 376,667 22,910,414 Personnel Support 11,551 702,549 Training and product support 121,071 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be charged on the distributor who is merely distributing the products. The TPO further contended that comparable independent services recipients, under comparable circumstance would not be willing to pay for that services. I have gone through the appellant's contentions and have discussed TPO's finding also. It is pertinent to bring to the record that in AY 2007-08, 200809 and 2009-10 the DRP has rejected the appellant s contentions and approved the AO's order in toto. During the current year the appellant has maintained that it has maintained documents that services were provided but I am of the opinion that still the proper documentation is not up to mark. In the light of the above discussion the arm's length nature of payment made towards central services charges (personnel support and Accounting, finance and MIS Support) consider at ₹ 84,79,431/- and therefore adjustment of ₹ 30,265,467/- to the total income of the appellant is confirmed. 8. Against this order the assessee is in appeal before us. 9. We have heard both the counsel and perused the records. Learned Counsel submitted that identical transfer pricing adjustment was also done in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rums used to interact with Germany and other 'countries Marketing Manager and share their experience of selling which can be replicated in India. This becomes more important when AHPL is launching new products. 'The benefits of products as well as positioning are shared with the Marketing managers. These acquired skills are used in India for the benefit of existing customer or potential customer. 3.2.2. Training and Product Support services : In this case, service engineers are invited for training during the launch of new instruments as well as for upgradation of existing skills. The service engineer is being familiarized with the product in technical' terms like how the Instruments 'function, how is the preventive maintenance done, how the instruments is installed at customer location, what are the precautions taken for installation etc. and other finer points of the instruments are explained in details. This training is of immense help when the instrument is launched in India. 3.2.3. Accounting Finance and MIS support services: ITS (Instrument tracking system), SEAS (Service Equipment Accounting System), DFAIFLEX are few package installed in AHPL. whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at whether the same was transacted at arm's length price, for which purpose the determination of price should be made in accordance with any of the methods prescribed in the statute u/s 92C of the Act. From the Transfer Pricing Study Report, the functions performed by supplying AEs and functions performed by the assessee are enumerated in detail. One such functions performed by the AE to all the participants companies including the assessee-company was marketing support services, which admittedly include new product pre-marketing activities and training given to the product management team by Abbott Group at global level. The training is imparted on the latest techniques and practices in marketing, the focus and emphasis is on delivering quality products to customers and regular services to them in terms of medical, product literature. Apart from this, marketing support services rendered by AEs also includes scientific promotion of the products through participation in medical meetings, both in India and abroad. Obviously, the AEs at global level had to incur expenses for rendering these services, which are meant for all participating countries across the globe. Hence, those co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee also has to maintain sufficient inventory of traded goods so that the sales are not reduced for want of stock. Hence, significant inventory risks coupled with the carrying cost of interest also lies with the assessee. This is mitigated by timely supply of quality goods by the assessee to the AEs so that the assessee does not get into the situation of stock out. The entire group risk arising as a result of sales to Indian customers is borne by the assessee. Hence, the assessee had to mandatorily leverage and mitigate those risks by providing quality products and following consistent practice at par with the global practices for which the shared costs were reimbursed to AEs. 12. Thereafter the Tribunal referred to the decision of the ITAT in the case of Firmenich Aromatics India Pvt. Ltd. Vs. ACIT (ITA no. 2590/Mum/2017 for A.Y. 2012-13 vide order dated 23.4.2018) and the ITAT order in the case of Dresser Rand India Pvt. Ltd. (53 SOT 173). The Tribunal further concluded as under :- 21. In view of the above, we hold that the lower authorities were not justified in determining the arm's length price in respect of marketing expenses at Rs. Nil as against the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue in accepting only 75% of the expenses to be at arm's length is not correct. Accordingly, we direct the ld.TPO to consider the entire 1,07,000 Euro (8,000 + 48,000 + 51,000) in respect of three expenses as stated supra, as the expenditure incurred for the purpose of business of the assessee and which is determined to be at arm's length and accordingly no adjustment in that regard is called for. 24. We also find that this issue is common in other appeals also for assessment years 2007-2008, 2008-2009, 2009-2010 and 2010-2011 with the following minor variance, which are tabulated herein below:- Assessment year Marketing strategic sales support Personnel support Training and product support Accounting, finance and MAM support 2008-2009 ALP at NIL 2009-2010 ALP at NIL 2010-2011 ALP was determined at ₹ 25 lakhs on adhoc basis 25. Our findings give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer was not convinced. He held that Hon'ble Delhi High Court in the case of Sharp Business System vs. CIT (ITA No. 492/2012) held that the non-compete fees paid by the taxpayer would not be allowed as revenue expenditure since the benefit accrued was in capital field for a substantial period of time. Further, the non-compete fees are not eligible for depreciation under section 32(1)(ii) of the Income Tax Act, 1961 because only intangible rights enforceable against the world at large would qualify for depreciation. In view of the above, the assessee is not entitled to claim depreciation on non-compete fees paid. Accordingly, the depreciation of ₹ 128,38,65,000/- on non-compete fees is hereby disallowed. 17. Upon assessee s appeal learned CIT(A) reproduced the assessee s submission. Thereafter learned CIT(A) noted the following submission of the assessee and made the same ground for allowing assessee s appeal by observing as under :- During the course of appellate proceedings the appellant submitted that it had entered into a Business Transfer Agreement (BTA) dated May 21, 2010 with Piramal Healthcare Ltd (Piramal) in order to acquire Piramal's Base Domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed in a Hidelberg Cement India Ltd vs ACIT (2014) 31 ITR(T)582( Mumbai Tribunal). Orchid Chemicals Pharmaceuticals Ltd vs ACIT (2011) 7 ITR (T) 601 (Chennai). The Tribunal relied on the principles laid down in the decision of the Apex Court i in Madras Industrial Investment Corporate Ltd vs ACIT (1997) 225 ITR 802 (SC) in the context of allowance of deferred revenue expenditure being discount on debentures, the Hon'ble Tribunal held that the non compete fee paid securing an advantage over a period of years should be allowed as deferred revenue expenditure over a period of agreement. Hence relying on the above discussions I direct the AO to treat the non compete fees as deferred revenue expenditure for a period of eight years. The ground of appeal is Allowed. 18. Against the above order the Revenue is in appeal before us. 19. Against this order revenue is in appeal before us. We have heard both the Counsel and perused the records. We find that the issue in dispute is the depreciation/amortisation of the non-compete fee paid. The assessing officer has relied upon honourable Delhi High Court decision in the case of Sharp business system (supra) and disallowed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to tax. The Assessing Officer asked the assessee to justify why the same is not a revenue receipt and alternatively the same should not be reduced from the capital cost of asset concerned. The assessee s response was noted by the Assessing Officer as under :- In response, the assessee vide letter dated 14.01.2015 submitted that whether a gain accruing to an assessee is a revenue receipt or a capital receipt depends upon whether the gain is in respect of a trading asset or a capital asset. The amount in foreign currency is utilized or intended to be utilized in the course or for a trading purpose!, any gain or loss arising from fluctuation in its value on account of alteration in the rate of exchange would be a trading gain or loss. However, where the underlying is of capital nature, the gain or loss arising from the foreign currency fluctuation will be a capital receipt or loss. Accordingly, the notional gain on reinstatement of the liability to the extent ₹ 306,55,23,898/- is capital in nature, is not taxable. With regard to why the foreign exchange gain on re-instatement of 'deferred purchase consideration payable' should not be reduced from capital c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (g) all know-how that is proprietary and confidential and which is not known within the wider pharmaceutical industry, including technical know-how, process know-how, technology, technical data, trade secrets, confidential business information, manufacturing and production processes and techniques, regulatory requirements and information, clinical data and protocols, research and development information ... Patents means all national, regional and international patents, patent applications, patent disclosures, utility models, utility model applications, petty patents, design patents and certificates of inventions, and all related reissues, re-examinations, divisions, revisions, restorations, renewals, extensions, provisionals, continuations and continuations in part, and all registrations and applications for registration of any of the foregoing; Registrations means the authorizations, approvals, licenses, permits, certificates, or exemptions issued by a Governmental Authority in India, Sri Lanka or Nepal (including: product certifications and rectifications; manufacturing approvals, authorizations and licenses; pricing and reimbursement approvals; and labeling approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Purchaser or its Affiliates of the Seller Corporate Name is subject to their use of the Seller Corporate Name with the standards of quality in effect for the Seller Corporate Name as of the closing Date. Any goodwill from the use of the Seller Corporate Name by Purchaser and its Affiliates shall inure solely to the benefit of Seller. Purchaser and its Affiliates shall indemnify and hold harmless Setter and its Affiliates for any Losses arising from or relating to the use by Purchaser or any of its Affiliates of the Seller Corporate Name. Section 10.6 on Non-competition; Non-solicitation states as below: (a) In view of above transactions contemplated by the terms of this Agreement and the acquisition by Purchaser of the goodwill, during the period commencing on the Closing Date and ending on the eight (8th) anniversary of the Closing Date (or, if not enforceable for such period in any country under the Competition/Investment Laws of such country, for such shorter period as shall be enforceable of such country) (the Restricted Period ), neither Promoter Group nor Seller shall, and Promoter Group and Seller shall cause their respective Affiliates (and their respective su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 308, 16,00,0007- into (a) gain on capital Amount of ₹ 306,55,23,898/- [Fixed assets and intangible assets, goodwill] and (b) gain on current account of ₹ 1,60,76,102/- (i.e. inventory, accounts recoverable and losses and advances). The appellant during the course of assessment proceedings stated that whether a gain accruing to an assessee is a revenue receipt or a capital receipt depends upon whether the gain is in respect of a trading assets or a capital asset. Further the adjustment vis-a- vis foreign gain/loss is governed by the provisions of section 43A, which are not applicable in the present case as the assessee has not acquired the asset from a country outside India. The AO however relied on the provisions of section 43 A and concluded that the capital assets acquired by the assessee inside India. During the course of appellate proceedings the appellant submitted that the AO has adjusted (redirect) the foreign exchange gain of ₹ 306,55,23,898/- from', the cost of asset and has added back ₹ 76,63,80,975/- to the taxable income of the appellant being the alleged excess depreciation (at 25%) claimed by the appellant or the unadjusted co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment. 28. From the above we note that the above provision is special provision consequential to change in rat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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