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TMI Blog2019 (12) TMI 1628X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the Learned TPO erred in proposing and the Hon'ble DRP further erred in confirming the addition of Rs. 1,26,84,500 in respect of fees paid by the Appellant to its AE for technical know-how. (a) Rejection of Appellant's Most Appropriate Method The Learned TPO erred in proposing and the Hon'ble DRP further erred in confirming the rejection of Transactional Net Margin Method ('FNMM) considered as the most appropriate method as specified in Section 92C(2) of the income-tax Act, 1961 ('the Act') read with Rule 1013(1) of the income-tax Rules, 1962 ('the Rules'). (b) Adjustment made on an adhoc basis The Ld. DRP and consequently the Ld. AO erred in not understanding the essence of the inter-company agreement, i.e. the Technical and Consultancy agreement and illogically proceeded to conclude the arm's length price to be Nil on an adhoc basis, without specifying any method which is devoid of any legal basis. (c) Considered that the services are general in nature Erred in concluding with a preconceived notion that the services received are general in nature and further erred in concluding that no benefit has been received by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nology Production & Quality control, Sourcing Supply and Logistics, Training in the field of Engineering Finance & Administration, Advisory on New Trends in information Technology and Advisory on launching new products, as per Agreement between the assessee and its AE, Merck KGA, Germany. To substantiate the receipt of services certain copies of cmails were furnished before the TPO. The TPO has exhaustively dealt with the matter in paragraph 6 of his order. The TPO carefully analysed the c-mails and has come to a finding that the e-mails certainly do not substantiate the rendering/ receipt of the services as contracted upon. The Panel has carefully considered the matter and concurs with the TPO that the sample copies of the cmails do not in any way support the contention raised by the assessee to justify the payment of Technical consultancy fees. In fact the assessee fails the benefit test. The assessee has taken a contention that the payment is in the form of a retainer fee to facilitate the ready availability of services from the AE on a need basis. But as pointed out by the TPO, there is no evidence of any services having being availed of on a need basis. The very fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the material on record and duly considered facts of the case in the light of the applicable legal position. 24. We find that there is a clear contradictions in the findings of the authorities below. On one hand, the stand of the authorities below is that no services are rendered, and, on the other hand, there are categorical findings that the services rendered are so general in nature that even an employee of the assessee could have rendered the same. In the event of no services actually having been rendered, there cannot be any occasion for the same services being rendered by a person without specialized knowledge. On one hand, it is held that arm's length price of these services is zero value, and, in the same breath, it is held that "there would hardly be any substantial payment" for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assessee was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be discarded. Dealing with almost a similar situation, as we are in seisin of, a coordinate bench of this Tribunal, in the case of AWB India Pvt Ltd VS DCIT [(2015) 152 ITD 570 (Del)], has observed as follows: 11. In ground nos. 5 to 9, which we will take up together, the assessee has raised the following grievances: 5. That, on the facts and circumstances of the case, the DRP and TPO/AO have failed to appreciate the business model and business realities of the appellant and role of its AE, while conducting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature. 6. That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company. 7. That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and development of human resources and it is also noticed that these services are of routine nature and duplicate at best". Accordingly, the TPO also treated ALP of these services as 'NIL'. As regards the payment of Rs 96,355 towards 'legal services', the TPO did take note of the services that the assessee was entitled to under these arrangements but as there is no evidence of any services having been actually rendered by the AE, the TPO concluded that it does not have any value in an arm's length situation. The value of this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm's length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied- though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless. 13. When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm's length value of which was taken at 'zero', aggregating to Rs 31,23,325, as against total management fees of Rs 58,20,571 paid by the assessee, assessee carried the matter before the DRP but without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver be the worth of such services, are actually rendered in the uncontrolled conditions. 17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration by virtue of which the assessee has made payment of technical know-how fee to its AE or group concerns Merck KGAA. In view of the above, we direct the AO to delete this addition. This issue of assessee's appeal is allowed. 8. The next issue in this appeal of assessee is against the order of DRP/ AO making disallowance of expenses relatable to exempt income under section 14A of the Act read with Rule 8D(2)(ii) at Rs.39,32,505/- and under Rule 8D(2)(iii) at Rs.8,06,133/-. Thereby, disallowance was made to the extent of Rs.47,38,638/-. Now before us, the learned Counsel for the assessee stated that the assessee has earned dividend income of Rs.86,979/- and disallowance more than this cannot be made in view of the decision of the Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT (2015) 372 ITR 694 (Delhi), wherein it is held that the window for disallowance was indicated in section 14A of the Act and was only to the extent of disallowing expenditure incurred by the assessee in relation to the exempt income. This proportion or portion of the exempt income surely cannot swallow the entire amount. In view of the above Delhi High Court decision, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. We find that the assessee had purchased A&R business from its sister concern for Rs.81.67 crores, that it had merged the assets and liabilities of the erstwhile business with the newly acquired assets and liabilities, that it had shown an addition to the block of intangible assets amounting to Rs. 65.50 crores, that it had also shown addition of Rs.3.18 crores with regard to other fixed assets, that it had obtained a valuation report of the intangibles, that as per the valuation report value of the intangibles was Rs.50 crores(app.),that it assigned Rs.15 crores to Goodwill, that depreciation at the rate of 25% was claimed on intangibles, that the AO rejected the claim made by it under the head depreciation, that he invoked the provisions of section 43(6)of the Act, that the FAA upheld the order of the AO. We further find that issue of assigning value to intangibles had arisen the case of the Merck Limited also, though the issue was about the head under which the amount, received from the assessee by the sister concern, was to be taxed. The matter had travelled up to the Tribunal and it decided the issue on 02.08.2013 (ITA/8120/ Mum/2011, AY.2007-08.). We would li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Rs.65,50,00,000//-. -He submitted that there is no document placed on record that the assessee has transferred any technical know-how. XXXXX 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 mark "MERCK" belongs to German Parent Company and assessee has been admittedly paying royalty to the parent company with regard to it. Therefore, the said "trade mark", for which the assessee has valued Rs.24.77 crores actually belongs to German Parent Company and not to the assessee. Further, we also observe that if "MERCK" is the brand and is transferred, it is also a brand name of the parent company and not of the assessee company. We also observe that the assessee has also bifurcated sum of Rs.65,50,00,000/- towards contract, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 where money is involved. Therefore, reliance placed by ld. AR on the decision of Hon'ble Bombay High Court in the case of Mahindra And Mahindra Ltd (supra) 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. XXXXX 21. Considering the facts of the case, and the reasons stated hereinab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case and in law, the Hon'ble DRP the Learned AO erred in not granting deduction of Rs.53,30,473/- as was claimed by the appellant in the proceedings before the Hon'ble DRP Learned AO and was granted by the Hon. DRP." 14. At the outset, the learned Counsel for the assessee has not pressed this ground and hence, the same is dismissed as not pressed. This issue of assessee's appeal is dismissed. 15. The next issue in this appeal of assessee is against the order of DRP/ AO in disallowing the merger of expenses of Rs.3,20,840/- and allowing 20% of the total amount of Rs.4,01,050/-. For this, assessee has raised the following ground:- "6. In the facts and circumstances of the case and in law, the Hon'ble DRP/ the Learned AO erred in disallowing the merger expenses of Rs. 3,20,840/- and allowing only 20% of the total amount of Rs.4,01,050/-." 16. At the outset, the learned Counsel for the assessee stated that this is being a very small amount, the same can be set aside to the file of the AO for re-adjudication as the AO has not gone into the details and hence, can be remitted back to the file of the AO/ DRP as the issue has not been considered properly. We remit t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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