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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
आदेश / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM:
This appeal is arising out of the order of Dispute Resolution Panel-IV, Mumbai [in short ‘DRP’], in objection No. 68 vide direction dated 29.12.2014. The Assessment was framed by the Dy. Commissioner of Income Tax (Int. Tax)-Circle 7(2)(1), Mumbai (in short ‘DCIT/AO’) for the assessment year 2010-11
2 | P a g e Merck Specialities Pvt. Ltd. vide order dated nil under section 143(3) read with section 144C(13) of the Income Tax Act, 1961(hereinafter ‘the Act’. 2. The first issue in this appeal of assessee is against the order of DRP/ Transfer Pricing Officer making addition in respect of technical knowhow fee of ₹1,26,84,500/-. For this, assessee has raised the following ground No. 2: - “2. Addition in respect of technical know-how fees of Rs. 1,26,84,500/: 2.1 In the facts and in the circumstances of the case, and 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
3 | P a g e Merck Specialities Pvt. Ltd. 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 the appellant even though various back up documents/ emails evidencing the receipt of the 4 | P a g e Merck Specialities Pvt. Ltd. technical knowhow services were submitted; (d) Incorrectly made an adjustment on Service Tax Without prejudice, the Ld. DRP and consequently the Ld. AO erred on facts and in law in upholding the 14. Transfer Pricing Officer's stance of making an adjustment towards the service tax component paid to the government of Rs. 26,84,500 charged on receipt of the aforesaid services on the basis that the payment made towards the technical know-how fees itself has been disallowed.”
Briefly stated facts are that the assessee is engaged in pharmaceutical and chemical business. During the financial year 2009-10, relevant to AY 2010-11, the assessee reported payments of technical consultancy fee of ₹1,26,84,500/- and this international transaction was benchmarked by using TNMM as the most appropriate method. As per consultancy agreement dated 16.03.2008, the assessee entered into a transaction with its AE Merck KGAA and assessee claimed that its AE was providing following services: - 5 | P a g e Merck Specialities Pvt. Ltd. (i) Support of engineering of production and quality control with regard to technical and analytical background. (ii) Selection of equipments and sourcing of supplies internationally. (iii) Training to employees on engineering and scientific trends and international trends on Finance & Administration as per Merck International guidelines. (iv) Advising on new trends on information technology and its implementation and (v) Assisting/ advising in the launching of new products. It was also submitted that the Agreement provides for a package of services by virtue of which all the services are available on as and when need basis, for which the option to avail services lies with the assessee. For availing the said service the assessee pays a fixed fee of ₹1,26,84,500/-.
But the AO was of the view that the assessee did not have any evidence to support or justification for payment of ₹1,26,84,500/- to its AE towards provision for technical services. The DRP also directed the Transfer Pricing Officer to make adjustment of ₹1,26,84,500/- by observing in Para 3.5 as under: -
6 | P a g e Merck Specialities Pvt. Ltd. “3.5 Discussions and direction of the DRP The assessee has made payment of technical consultancy service fees stated to be on account of services received in the five factors of Advisory on Engineering Technology 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 c- mails 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 c- mails do not in any way support the contention raised by the assessee to justify the payment of Technical
7 | P a g e Merck Specialities Pvt. Ltd. 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 the assessee terms it a retainer fee is one attempt to justify the payment even in the absence of receipt of any service. In fact the assessee has tacitly admitted the non- receipt of services by raising an argument that the AE continuously undertakes various activities and it is not practical to substantiate each and even' service rendered but that is the reason why the assessee performs efficiently and that such services were not charged but was part of the lump sum technical consultancy service fees. This Panel concurs with the TPO and holds that the assessee has failed to substantiate the receipt of services as stipulated in the Agreement, and even assuming that the assessee is in receipt of any services, it 8 | P a g e Merck Specialities Pvt. Ltd. has failed to show that the services have provided an exclusive benefit to it or that the same are not in the nature of stewardship activities. The TPO has quoted the OECD guidelines in this regard. A standard involving willingness as enunciated in the OECD guidelines is an important factor that determines whether a related party service recipient would pay for an inn-a-group service and therefore, whether the service provider can justify a charge for the provisions of intra-group services. A direct or perceived benefit from the service rendered has to be identified. The assessee has indeed failed the benefit rule. On account of the said facts and circumstances, the Panel confirms the adjustment of Rs. 1,26,84,500/- as made.,” Aggrieved, assessee came in appeal before Tribunal.
At the outset, the learned Counsel for the assessee stated that this issue of payment fee by group company on account of technical knowhow to Merck KGAA is squarely covered by Tribunal’s decision in assessee’s own case for AY 2009-10 i.e. immediately preceding year, wherein ITAT deleted the disallowance of technical knowhow fee paid to Merck KGAA and 9 | P a g e Merck Specialities Pvt. Ltd. the relevant finding in for AY 2009-10 vide order dated 11.11.2019 at Para 3.2 read as under: - “3.2 Upon due consideration, we find that similar issue is covered in assessee’s favor by the order of Tribunal rendered in the case of its group concerns viz. Merck Limited for same AY, order dated 31/03/2016 wherein the adjustment has been deleted on identical factual matrix by the coordinate bench by observing as under: -
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
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 10 | P a g e Merck Specialities Pvt. Ltd. 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 the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold 11 | P a g e Merck Specialities Pvt. Ltd. that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received all the services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The payment is made for the rights accruing to the assessee for the bundled services under the contract and not for each service on ala carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television 12 | P a g e Merck Specialities Pvt. Ltd. channel. The example may seem to be so simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm’s length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That’s not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and 13 | P a g e Merck Specialities Pvt. Ltd. sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm’s length price on the facts of this case will be more appropriate a method of ascertaining the arm’s length price, the TNMM 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 14 | P a g e Merck Specialities Pvt. Ltd. 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 15 | P a g e Merck Specialities Pvt. Ltd. case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm’s length price determined by the appellant and proceeding to decide the arm’s length price himself.
That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions without relying on any comparable transaction/companies using inappropriate method.
16 | P a g e Merck Specialities Pvt. Ltd.
9. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in determining the arm’s length price of international transactions consisting of cost and profit margin at ‘nil’.
So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance .001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of Rs 58,20,571 towards ‘management services’. On an 17 | P a g e Merck Specialities Pvt. Ltd. analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head ‘management services’ was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of Rs 20,35,907 towards financial management and reporting services, “but the services rendered are negligible compared to the cost 18 | P a g e Merck Specialities Pvt. Ltd. incurred”. The TPO was also of the view that “a minor clarification or seeking of certain guidance on verify basic issue does not call for a payment of Rs 20 lakhs. Therefore, the ALP of these services was taken as ‘NIL’. He further noted that while the assessee has made a payment of Rs 1,23,476 towards human resources services, the assessee has “not furnished any specific input on training 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 19 | P a g e Merck Specialities Pvt. Ltd. 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.
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 20 | P a g e Merck Specialities Pvt. Ltd. assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by the TPO, Accordingly, an ALP adjustment of Rs 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar 21 | P a g e Merck Specialities Pvt. Ltd. transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon’ble 22 | P a g e Merck Specialities Pvt. Ltd. jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), “Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same”.
16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO’s case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted 23 | P a g e Merck Specialities Pvt. Ltd. above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.
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 24 | P a g e Merck Specialities Pvt. Ltd. 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 application or relevance of TNMM in this case. Under these circumstances, the TPO’s impugned action cannot meet our judicial approval.
19. For the detailed reasons set out above, we uphold the 25 | P a g e Merck Specialities Pvt. Ltd. grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs.31,23,325. The assessee gets the relief accordingly.
We see no reasons to take any other view of the matter than the view so taken by the coordinate bench.
In the present case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view- particularly in the light of Hon’ble Delhi High Court’s judgment in the case of EKL Appliances (supra), cannot be conducted in the course of ascertaining the arm’s length price.
In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to 26 | P a g e Merck Specialities Pvt. Ltd. the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accordingly. Although the revenue contested this decision before Hon’ble Bombay High Court vide of 2014 dated 08/08/2016 but the Hon’ble court refused to admit substantial question of law. We find that the facts in the case of present assessee are pari-materia the same as in the case of its sister concern. Nothing on record would suggest that aforesaid ruling is not applicable to the facts of the present case. Therefore, respectfully, following the same, we delete the impugned additions. The grounds raised, in this respect, are allowed.”
When these facts were confronted to the learned Sr. Departmental Representative, he could not controvert the factual aspects, but he relied on the order of the DRP.
We noted that the above issue has already been considered by Tribunal in assessee’s own case and there is no distinguishable facts rather facts are exactly identical and the 27 | P a g e Merck Specialities Pvt. Ltd. same agreement i.e. consultancy agreement dated 16.03.2008 was under consideration 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 ₹39,32,505/- and under Rule 8D(2)(iii) at ₹8,06,133/-. Thereby, disallowance was made to the extent of ₹47,38,638/-. Now before us, the learned Counsel for the assessee stated that the assessee has earned dividend income of ₹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 learned Counsel for the assessee fairly conceded that the disallowance under Rule 8D(2) can be retained only to ₹ 86,979/- to the extent of dividend income.
As the issue is covered by Hon’ble Delhi High Court (supra), respectfully following the said decision, we direct the 28 | P a g e Merck Specialities Pvt. Ltd. AO to restrict the disallowance of expenses qua the exempt income at ₹86,979/-. We direct the AO accordingly. This issue of assessee’s appeal is partly allowed.
The next issue in this appeal of assessee is against the order of DRP/AO in disallowing depreciation in respect of intangible assets purchased by the assessee from Merck Limited for an aggregate value of ₹65.50 crores in the year ended 31.03.2007 and depreciation disallowed was ₹6,93,16,406/-. For this, assessee has raised the following ground No.4: - “In the facts and circumstances of the case and in law, the Hon'ble DRP / the Learned AO erred,- (1) in disallowing depreciation of Rs.6,93,16,406/- in respect of intangible assets purchased by the appellant from Merck Limited for an aggregate value of Rs.65.50 Crores in the year ended 31st March, 2007, though the appellant contended that it is entitled to depreciation u/s.32 of the Act in respect of all the items of Intangibles for reasons that know- how, trade-marks, brands and business or commercial rights of similar nature in that year had been acquired by the appellant for a 29 | P a g e Merck Specialities Pvt. Ltd. valuable consideration and were used by it for the purpose of its business, based on the premises, conjectures and observations of the Hon’ble DRP/ Learned AO as referred to in the assessment order for assessment year 2007-2008; (ii) stating that there were no assets purchased by the appellant from Merck Limited; (iii) following wrongful invocation of Explanation (3) to Section 43(1) of the Act as done by the Learned AO in the assessment year 200708 and disallowing depreciation of Rs.6,93,16,406/- on the written down value of the same at the beginning of the year.”
At the outset, the learned Counsel for the assessee stated that this issue is also covered by Tribunals decision in assessee’s own case, wherein the same set off of intangible assets purchased was under consideration and Tribunal in & 3944/Mum/2013 for AYs 2007-08 & 2008-09 vide order dated 25.01.2017 at Para 2.3 read as under: - 30 | P a g e Merck Specialities Pvt. Ltd. “2.3. We have heard the rival submissions and perused the material on 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 31 | P a g e Merck Specialities Pvt. Ltd. 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 like to refer the relevant portion of the said order and it reads as under: 13. Ground No.1.4 of the appeal taken by the assessee reads as under:
1.4. Taxing the long term capital gain of Rs.65,50,00,000/- realized and received by the appellant upon sale of A&R Business during the impugned assessment year as "business profits" u/s 28(iv) of the Act instead and in place of long term capital gain as computed by the appellant u/s 45 of the Act and the exemption claimed in respect thereof u/s 54EC of the Act.
XXXXX
At the time of hearing, ld. AR, besides reiterating the submissions made before the authorities below 32 | P a g e Merck Specialities Pvt. Ltd. referred agreement dated 17.4.2006, copy placed at pages 21 to 41 of the paper book and submitted that the assessee transferred it's A &R Business as a going concern to MSPL for Rs.81.67 crores. Ld. AR referred Article 4 of the said agreement and submitted that net book value of current assets and current liabilities as on 31.3.2006 as per books of account of the assessee was Rs.16,16,46,433/- and Rs.65,50.00,000/- being the value of intangibles relating to the A&R Business. Ld. AR submitted that the fixed assets relating to A&R Business are specifically listed in "Ex-A" to the said agreement and referred pages 32 to 39 of the paper book. Ld. AR submitted that the AO/DRP have held that there is no intangible assets of the assessee which have been transferred and the amount received of Rs.65,50,00,000/- have been assessed u/s 28(iv) of the Act.
XXXXX 33 | P a g e Merck Specialities Pvt. Ltd. Ld. AR further referred pages 86 to 110 of the paper book and submitted that the assessee also obtained valuation reports from two valuers for transfer of the said assets. Ld. AR submitted that the department has no right to re-write the agreement and to consider that the consideration of Rs.65,50,00,000/- received by the assessee is on account of non- compete fee.
XXXXX Ld.AR submitted that the consideration of Rs.65,50,00,000/- received by the assessee is on account of transfer of intangible assets. Therefore, it is a capital receipts which cannot be taxed u/s 28 of the Act.
Ld. DR referred the valuation 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 34 | P a g e Merck Specialities Pvt. Ltd. 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. 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 35 | P a g e Merck Specialities Pvt. Ltd. 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 related to contracts with toll manufacturers and earmarked Rs.10,45,40,000 towards its valuation. However, we observe that no documentary evidence is on record to support the existence of the said assets, therefore what AO has stated in para 7.1.2 (c ) has merits and the same cannot be ignored. Similar is the case in respect of the valuation "earmarked" by the assessee for the technical know-how Rs.3,75,90,000, no documentary evidence is on record 36 | P a g e Merck Specialities Pvt. Ltd. to establish that any secrete formulae for the production process etc has been transferred by the assessee to MSPL. We also observe that AO in para 7.1.2 (e) has also considered the fact that the assessee "earmarked" Rs. 5,37,70,000/- towards dealer value chain and the AO has stated that many of the customers, toll manufacturers are common to both the transferor as well transferee. The AO has also stated that same set of dealers were also working for the transferee company prior to the transfer of the business by the assessee to MSPL. At the time of hearing, ld. AR has not been able to controvert the said fact. In respect of valuation "earmarked" at Rs.10,90,000/- towards ISO certificate, the AO has stated that the expenses for the same have actually been claimed by the assessee as revenue expenses in the earlier years and if it is so we agree with the ld. DR that if any 37 | P a g e Merck Specialities Pvt. Ltd. consideration is received on transfer of that benefit i.e. ISO certificate, it cannot be considered as capital receipt on transfer of the business. Not only this, we observe 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 lump sum 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 38 | P a g e Merck Specialities Pvt. Ltd. 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 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.
39 | P a g e Merck Specialities Pvt. Ltd. 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 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. Therefore, we restore to AO to decide the issue afresh in the light of the observations made by us 40 | P a g e Merck Specialities Pvt. Ltd. hereinabove and consider such material as may be placed before him by a reasoned order. Hence, Ground No.1.4 is allowed for statistical purposes by restoring the matter to AO for fresh consideration.
The Tribunal has observed that the assessee had argued in the case of Merck Ltd that the transferor company had obtained valuation reports from two valuers. We are not aware as to what is the details bifurcation of the intangibles is given in those reports. In case there is difference in the values appearing in the valuation reports of the assessee and Merck, provisions of section 43 (6)may be applicable in deciding the issue. All these developments have taken place after the the FAA decided the appeal. In our opinion, these facts will be some bearing on the final outcome of the appeal. We further find that the alternate ground raised by the assessee about allowing the entire expenditure as 41 | P a g e Merck Specialities Pvt. Ltd. revenue expenditure has not been adjudicated upon by the FAA, though a specific ground was raised before him.
Considering the above, we are of the opinion that in the interest of justice matter should be restored back to the file of the FAA for fresh adjudication. He is directed to decide the issue afresh after affording a reasonable opportunity of hearing to the assessee. First ground of appeal is decided in favour of the assessee, in part.”
12. The learned Counsel for the assessee stated that this issue has been remitted back to the file of the DRP and exactly on same directions; we also remit back this issue to the file of the DRP. This issue of assessee’s appeal is allowed for statistical purposes.
13. The next issue in this appeal of assessee is against the order of DRP/ AO for not granting deduction of ₹53,30,473/- as disallowance under section 145A of the Act. For this assessee has raised the following ground: - “In the facts and circumstances of the case and in law, the Hon'ble DRP 42 | P a g e Merck Specialities Pvt. Ltd. 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 ₹3,20,840/- and allowing 20% of the total amount of ₹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 ₹ 3,20,840/- and allowing only 20% of the total amount of ₹4,01,050/-.”
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.