2013 (9) TMI 163 - AT - Income Tax

Tribunal Ruling: Adjustments, Disallowances, and Credit Considerations

Merck Limited Versus The Assistant Commissioner of Income Tax, Mumbai

The Tribunal restored the issue of raw material transfer pricing adjustment for fresh examination, deleted the addition for technical know-how fees, and ... Adjustment of arm's length price - Import of raw materials - Payment of technical know how fees - Held that:- applying CUP method to the services made to the assessee during the year is not justified. - the adjustment made by TPO is nothing but disallowance of expenses which cannot be upheld. - That there is nothing produced before us to controvert the claim of the services 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. - additions deleted - Decided in favour of assessee. Business profit u/s 28(v) or capital gains - sale of A&R Business - slump sale - 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 - Held 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 (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:- Giving free samples is a normal business practice in pharmaceutical business and, therefore, disallowance of entire expenditure is prima facie unjustified. The matter requires fresh examination after verification of details about names and addresses of doctors before the AO. Disallowance u/s 14A - Held 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 is modified by restricting the disallowance to Rs.10,15,400/- as against Rs.83,04,945/- disallowed by the AO. Valuation of closing stock - unutilized cenvat credit - appellant followed net method of accounting - Held that:- matter remanded back 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 stated to be following exclusive method. Issues Involved:1. Transfer Pricing Adjustment for Import of Raw Materials and Technical Know-How Fees.2. Tax Treatment of Long-Term Capital Gain from Sale of A&R Business.3. Disallowance of Free Samples Distribution Expenses.4. Disallowance under Section 14A for Exempt Income.5. Addition under Section 145A for Unutilized CENVAT Credit.6. Disallowance of Club Expenses.7. Credit of TDS and Advance Tax, and Charging of Interest under Sections 234A, 234B, 234C, and 234D.Detailed Analysis:1. Transfer Pricing Adjustment for Import of Raw Materials and Technical Know-How Fees:The assessee challenged the transfer pricing adjustment of Rs. 2,84,25,527/- (Rs. 2,56,19,527/- for raw materials and Rs. 28,06,000/- for technical know-how fees). The Tribunal restored the issue of raw material adjustment to the AO for fresh examination, considering the quality and comparability of the product. For technical know-how fees, the Tribunal deleted the addition, holding that the TPO's method was inappropriate and the assessee's TNMM approach showed a higher margin than comparables.2. Tax Treatment of Long-Term Capital Gain from Sale of A&R Business:The assessee sold its Analytical Research Business for Rs. 81.67 crores, claiming Rs. 65.50 crores as long-term capital gain exempt under Section 54EC. The AO treated this as business income under Section 28(iv), arguing that the intangibles transferred were fictitious. The Tribunal restored the issue to the AO to reconsider the nature of the receipt, emphasizing that Section 28(iv) applies to benefits in kind, not cash.3. Disallowance of Free Samples Distribution Expenses:The AO disallowed 70% of the free samples distribution expenses (Rs. 2,96,71,013/-) due to lack of substantiation. The Tribunal restored the issue to the AO for fresh examination, allowing the assessee to provide detailed evidence of the expenses.4. Disallowance under Section 14A for Exempt Income:The AO disallowed Rs. 83,04,945/- under Section 14A, applying 0.5% of average investment. The Tribunal modified this, considering 1% of the exempt income (Rs. 10,15,400/-) as a reasonable disallowance.5. Addition under Section 145A for Unutilized CENVAT Credit:The AO added Rs. 3,53,513/- for unutilized CENVAT credit. The Tribunal restored the matter to the AO, directing that adjustments should be made to purchases, sales, and opening stock, not just closing stock.6. Disallowance of Club Expenses:The AO disallowed Rs. 4,80,710/- for club expenses. The Tribunal allowed the expenses, citing the Bombay High Court's decision in Otis Elevator Co. (India) Ltd. v. CIT, which held such expenses as allowable business expenditure under Section 37(1).7. Credit of TDS and Advance Tax, and Charging of Interest under Sections 234A, 234B, 234C, and 234D:The Tribunal directed the AO to grant credit for TDS and advance tax based on the assessee's details and noted that interest under Sections 234A, 234B, 234C, and 234D is consequential.Conclusion:The Tribunal's detailed analysis resulted in the restoration of several issues to the AO for fresh consideration, deletion of certain disallowances, and modifications to others, ensuring a fair and thorough reassessment of the assessee's claims.