TaxTMI 
TaxTMI 
2013 (9) TMI 163
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....fficer and also confirmed by Dispute Resolution Panel (DRP). Consequently AO has made aforesaid addition. 4. The assessee is a part of Merck Group of Germany and is an Indian listed company. The assessee, during the Financial Year 2006-07 entered into international transactions with its Associated Enterprise (AE) viz import of raw materials and 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 abov....
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....orted by the assessee has been subjected to an independent laboratory report, copy of which is given. However, the said laboratory report does not bear authentication or signature of the lab. Consequently, its reliability is un-established. Further, the assessee has identified additional 3 criterion. However, these additional criterion are not proved 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 ....
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....n. The assessee had selected certain comparables which gave arithematic mean margin at 13.36% which was lower than the margin of 15.10% in the pharma segment of the assessee. The assessee, therefore, submitted that no adjustment was required . TPO however made local enquiries and found that the Unichem Laboratories Ltd. which was manufacturing the same product had sold the same in the market at 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 be....
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....f ITAT in the assessee's own case for assessment year 2003-04 dated 19.7.2013, we restore the issue of adjustment made in respect of import of raw material Bisprolol Fumarate to AO to decide the same afresh on the lines of the order to be passed by the ld.CIT(A) for assessment year 2003-04. 10. Further in respect of adjustment of technical fees paid to AE, the Tribunal has discussed this issue in paras 24 to 24.7 of the order 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 l....
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....rnational trends on finance and administration and other related services. The consultancy agreement was in respect of list of services which was an ongoing exercise. The services were being received by way of continuous ineraction between the personnel of the assessee and overseas parent by phone calls, e-mails and personal visits. The agreement did not specify that all services mentioned in the agreement will be rendered during the same year. 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 th....
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....urged that the adjustment made should be deleted. 24.4 Learned CIT(DR) on the other hand strongly defended the orders of authorities below. It was argued that there was no evidence for payment of remaining nine services and, therefore, payment to those services had been treated as nil by the TPO as no independent party would be providing any free services. Therefore, it was argued that the TPO had applied the CUP method which was most appropriate 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. ....
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....UP method and made adjustment on account of nine services on average basis. 24.7 Such argument in our view is not convincing. The argument would have been valid if fees was fixed in respect of each service, which was compulsory required to provide to the assessee, but it is not so in the present case. The agreement listed certain services on which the assesse requires guidance/assistance from time to time. The assessee was thus entitled to any 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 prov....
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.....2006 for a total consideration of Rs.81.67 crores. Copy of the said agreement is placed at pages 21 to 41 of the paper Book No.2. As per said agreement, it is stated that purchase price of Rs.16,16,47,433/- represents book value of current assets and current liabilities as appearing in the books of assessee as on 31.3.2006 and Rs.65,50,00,000/- being value of intangibles relating to said A&R business. Assessee claimed that the sale value of Rs.65,50,00,000/- 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....
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....oyalty to the parent company over the years with regard to the same. If the trade mark does not belong to the assessee but the parent company, it is not understandable as to what was the asset which was actually sold. Moreover, if the transferee has been using the same trade mark MERCK prior to the transfer and there was no necessity for paying 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 ....
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....zed dealers. Moreover the assessee could not come forward with the list of authorized dealers or any agreement vide which the authorized dealers were not supposed to sell the product of any other company. It is also true that same set of dealers were also working for the transferee company prior to the transfer. Thus, claiming the same to be 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 ac....
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....e its liability to Income Tax. The AO after summarizing the above facts in para 8 of the assessment order has stated vide para 9 that the said sum of Rs. 65,50,00,000/- was proposed to be added to the business income of the assessee u/s 28(iv) for the year under consideration and as a consequence, there being no long term capital gain, in the hands 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 ....
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....ndra And Mahindra Ltd. V/s CIT (2003) 261 ITR 501( Bom) submitted that Section 28(iv) does not apply to benefits in cash and it applies only benefits/perquisites where no money is involved. Ld. AR submitted that the Hon'ble Bombay High Court has held that in trade transactions which involves money, section 28(iv) has got no application. The Ld. AR 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 assesse....
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....ation report and submitted that in the said valuation report and also in the sale agreement dated 17.4.2006, there is no reference of the valuation report on the basis of which the assessee has stated to have transferred intangibles assets to MSPL for Rs.65,50,00,000//-. He submitted that there is no document placed on record that the assessee has transferred 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....
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....ve from "EX-A", the annexure to the sale agreement, (copy placed at pages 30 to 39 of the paper book No.2) the assessee has given individual value of the assets and whereas in the case of "slum sell", as per section 2(42C), the term "slump sale" has been defined as the transfer of one or more undertakings as a result of sale for a lumpsum consideration 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....
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.... 70% of cost of free samples distributed by the assessee. 23. AO has stated that the assessee claimed free distribution samples to various persons amounting to Rs.4,23,87,162. The AO has stated that in order to justify the expenses, the assessee was asked to submit confirmations of the persons to whom such free samples were distributed including complete 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 vie....
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....tice of AO and in that case it could have given part of the details of expenses relating to each month for sample checking. It has been submitted that no disallowance had been made in the past. Merely because no disallowance had been made in the earlier years is no ground to seek relief in subsequent year. The AO in this year has attempted to make detailed 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 a....
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....e by applying Rule 8D. Ld.AR submitted that investment as on 31.3.2007 was Rs.195.88 crores and referred to page 254 of the paper book. He further referred page 12 of the paper book which contain the details of the investment made by the assessee. Ld. AR submitted that dividend income is Rs.10,15,39,276/- as shown at page 13 of the paper book in Sch.-II under the 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....
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....We have heard both the parties, perused the records and considered matter carefully. The dispute is regarding adjustment to be made on under the said provisions, the valuation of purchases and sale of goods and inventory is required to be made in accordance with the method of accounting regularly employed by the assessee and further adjustment is required to be made to include the 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 adjus....