Income Tax Appellate Tribunal - Mumbai
Merck Ltd, Mumbai vs Assessee on 28 June, 2013
ुं ई यायपीठ "के" मब आयकर अपील य अ धकरण, मब ुं ई IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND RAJENDRA SINGH(AM) सव ी बी.आर. म तल, या यक सद य एवं राजे संह, लेखा सद य के सम आयकर अपील सं./I.T.A. No.8120/Mum/2011 ( नधारण वष / Assessment Year : 2007-08) Merck Limited बनाम/ The Assistant Commissioner of Income Shiv Sagar Estate, Vs. Tax, "A" Annie Besant Road, Range 6 (3) Worli, Aayakar Bhavan, M.K.Road, Mumbai - 400 018 Mumbai-400020.
थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. : AAACE2616F
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ ओर से / Assessee by : S/Shri P.J.Pardiwala,
Smt.Aarti Visanji and Ajit C.Shah
यथ क ओर से/Respondent by : Mrs.Sushmita Mishra and
Shri Ajeet Kumar Jain
सन
ु वाई क तार ख / Date of Hearing : 28.06.2013
घोषणा क तार ख /Dat e of Pronouncement : 02.08.2013
आदे श / O R D E R
PER B.R.MITTAL,JM:
The assessee has filed this appeal against the order of Assessing Officer dated 28.10.2011 passed under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act) for the assessment year 2007-08.
2. The assessee company is engaged in the business of manufacture and sale of distribution of pharmaceuticals formulations, bulk drugs, chemicals etc. The assessee filed return of income declaring total income of Rs.80,67,17,211/-.
3. In Grounds No. 1.3 of the appeal, assessee has disputed the transfer pricing adjustment of (a) Rs.2,56,19,527/- in respect of import of raw materials and (b) Rs.28,06,000/- in respect of technical know-how fees paid, aggregating to Rs.2,84,25,527/- as proposed by Transfer Pricing Officer and also confirmed by Dispute Resolution Panel (DRP). Consequently AO has made aforesaid addition.
I.T.A. No.8120/Mum/2011 2
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 assessee 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 above addition. The assessee filed objections before DRP contending that TPO/AO inappropriately applied the Comparable Uncontrolled Price Method (CUP Method) to arrive at ALP in respect of import of raw material Bisprolol Fumarate and also not considered differences in quality, characteristics, contractual terms and conditions of locally available raw material from M/s Unichem Laboratories Limited. In respect of adjustment proposed by TPO in relation to technical know-how, the assessee submitted that TPO did not understand essentials of international agreement and logic and proceeded to follow ALP on pro-rata basis. It is observed that it was also contended that the assessee's net profit margin (NPM) in the pharmaceutical manufacturing segment with other third party manufacturers of pharmaceuticals, earned a NPM of 28.50% during the Financial Year 2006-07, whereas weighted average NPM for comparable companies ranges from (-) 8.76 % to 82.70% which gives an arithmetical mean of 11.82%. It is relevant to state that TPO obtained the purchase rate information from M/s Unichem, who manufactured similar active ingredient and sold at an average price of Rs.50,496 per kg. to third parties in India and whereas assessee imported it at an average price of Rs.1,79,888/- per Kg. The assessee stated that differences in quality, contractual terms, importance of customs valuation, comparison of selling price of Concor5 (anti-hypertension drug) viz a-viz other anti-hypertension drugs, etc. were not considered by TPO while proposing said addition of 2,56,19,527/-. The assessee also stated in respect of technical consultancy services adjustment that the services were received by way of continuous interaction between the personnel of the assessee and Merck KGaA's personnel by phone, calls, I.T.A. No.8120/Mum/2011 3 email. Personal visits and teleconferencing as per business practice, and that cannot be mapped on a daily basis.
5. It is observe that DRP after considering the submissions of the assessee, vide paras 4.1.3 and 4.1.4 did not agree with the contentions of the assessee and directed AO to make necessary adjustments in the ALP as proposed by TPO in the order. The said paras 4.1.3 and 4.1.4 of DRP's order read as under :
"4.1.3 The submissions of the assessee have been gone through and considered. It is seen that the local CUP identified by the TPO for Active Pharmaceutical Ingredient (API) imported 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 assessee 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 that the API itself constitutes the formulation which is marketed. It follows that therefore, the high import price of API cannot be sought to be compared with the price of the ready formulation to justify the Arm's length nature of the price paid to AE.
4.1.4 Regarding this issue, it would be pertinent to mention here that the CIT(A) XXXII, Mumbai, vide his order dated 27.12.2008 for the AY 2004-05 has upheld the stand of the TPO that CUP was the correct method for arriving at the ALP and this stand was also accepted by the DRP for AY 2006-07. We have carefully gone through the order of the CIT(A) for the AY 2004-05 and we are also in agreement with the stand of the TPO and the proposed order of the AO. Therefore, the assessing officer is directed to make the necessary adjustment in the ALP as proposed in the order. Similarly, we find no anomaly in the proposed transfer pricing adjustment relating to the technical know-how."
Accordingly, AO in the assessment order added an amount of Rs.2,84,25,527/- to the total income of the assessee. Hence this appeal by the assessee.
6. It is relevant to state that this appeal was heard by us along with appeal of the assessee for assessment year 2003-04 being ITA No.925/Mum/2007, wherein a similar issue in respect of transfer pricing adjustment interalia for imported Bisprolol Fumarate I.T.A. No.8120/Mum/2011 4 raw material and payment to parent company for technical know how was involved and considered.
7. Ld. Representatives of both the parties submitted that whatever view is taken in the said appeal, the same would be applicable ipso facto while disposing of this ground of appeal in the assessment year under consideration.
8. We have passed the order in the said appeal on 19.7.2013 and in the said appeal, the Tribunal vide para 22.7. and 22.8 has passed the order as under:
"22.7 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding TP adjustment in relation to import of Bisoprolol Fumarate imported by the assessee from the associate enterprise. The assessee had imported the said raw material from the AE for manufacture of hypertension drug in the brand name of "CONCOR" at the rate of Rs. 1,41,750/- per kg. The assessee in its transfer pricing study had applied TNMM for bench marking the international transaction. 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 been accepted. In our view the stand of the revenue authorities to reject such argument is reasonable as the other group entities were operating in different geographical locations and the transaction were with AE and therefore independent.
22.8 The assessee had also argued that there was major difference between quality of the product produced by the AE which was a branded item compared to the low quality goods manufactured by Unichem Laboratories Ltd. It has been argued that the material produced from Unichem Laboratories Ltd. did not pass the particle size test and bulk density test which determine the quality of the product. A certificate dated 1.3.2005 from the factory manager of the assessee had been produced which had been rejected by the authorities below as being not contemporary. In our view the quality of the product is important as it affects the comparability of the transactions. Quality of product has I.T.A. No.8120/Mum/2011 5 influence on the pricing fo he product. There was however no independent evidence produced before the lower authorities to show superior quality of assessee's product. The assessee vide letter dated 8.2.2010 has filed an additional evidence before the Tribunal in which form of a quality certificate from Bee Pharma Labs (Pvt.) Ltd. an independent accredited third party and also comparative selling rate of the same product produced by Torrent Pharma and Unichem Laboratories Ltd has been filed and it has been requested the additional evidence may be submitted. It was argued that the assessee was made aware to these additional evidence only after passing of order by CIT (A) and accordinlgy it has been requested for admission of the same. In our view an independent evidence regarding quality of products and comparative prices will be useful in deciding the issue. Learned CIT (DR) had also no objection for admission of additional evidences if the issue was sent back to CIT (A) for fresh examination after considerin the decision of Tribunal in case of Sardia Pharmaceutical Vs. ACIT (Supra). We, therefore, admit the additional evidences filed by the assessee and the issue is restored to the file of CIT(A) for passing a fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee."
9. In view of above and respectfully following said order of 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 know how 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 licence products.
(vii) Information on engineering and scientific trends and training.
(viii) International trends on finance and administration+
(ix) International banking contracts and issue of letters of comfort.
(x) Advising on new trends on information technology and its
implementation.
I.T.A. No.8120/Mum/2011
6
(xi) Monitoring the setting up and working of the new project.
(xii) Initiation/implementation of SAP.
24.1 The TPO asked the assessee to produce evidence regarding
receipt of services under various heads mentioned in the agreement as well as payment of fess in the subsequent two years. The AO noted from the details filed that the payment of fees in each year was different which showed that the assessee was entering into annual agreement as per which the fees was increasing every year. As regards the evidence for receipt of services, the assessee explained that it received technical guidance whenever it required particularly in respect of new projects undertaken by it. It was pointed out that recently it had received technical assistance in respect of project of Thiamine Disulphide and the project for manufacture of 'Oxinex'. The TPO however noted that asistance on both the occasions had been received during the year 2004 and 2005. The TPO issued show cause notice as to why the arm's length price of services could not be taken as nil as no evidence had been given to substantiate the same. The assessee thereafter vide letter dated 7.3.2006 gave particulars of some services claimed to be received during the year. The assessee also filed E-
mails to show correspondences relating to SAP implementation, implementation of IT related software and regarding quality controls. The AO observed that the assessee had produced evidence only in respect of services rendered under three heads out of total tweleve services. He, therefore, appropriated the expenditure incurred only towards the three services at the average rate which gave the figure of Rs. .40 crore. He thus made adjustment of Rs. 1.175 crore in relation to fees paid of Rs. 1.57crore.
24.2 The assessee disputed the decision of AO/TPO and submitted before CIT (A) that the assessee paid fess for consultancy and related services to parent company for various consultancy and related services in the field of engineering technology, sourcing of supplies, information on engineering and scientific trends, international 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 the claim. The assessee had given evidence only in respect of three out of twelve heads of services. Even during the appellate proceedings the assessee could not provide evidence in respect of all the services received during the year. CIT (A) therefore, confirmed the I.T.A. No.8120/Mum/2011 7 adjustment made by AO, aggrieved by which the assessee is in appeal before Tribunal.
24.3 Before us the learned Senior Counsel assailed the order of CIT(A) confirming the adjustment made by AO/TPO. It was argued that adjustment under transfer pricing regulations had to be made on the basis of one of the prescribed methods only. The TPO had not followed any of the methods. He had made only estimated disallowance of expenses which is not permissible under transfer pricing regulations. It was also submitted that the fees paid by the assessee was not for fixed services. The assessee had the facility to obtain certain services which it availed from time to time depending upon the requirement. The fees paid by the assessee had been taken as part of the cost incurred in trading and marketing segment. For bench marking the transactions the assessee had applied entity level TNMM, the net margin of the assessee was 15% whereas that of the comparable was 13.36%, thus requiring no adjustment. He referred to the decision of Tribunal in case of McCan Ericsson (India) (P) Ltd. VS. ACIT in ITA (5871 Del/ 2011) in which in respect of similar management services and client coordination fees entity level TNMM has been upheld by the Tribunal. In that case also the TPO had taken the value of services as nil. The Tribunal observed that it was for the assessee to decide the legitimate business needs and the AO can not dictate the business needs. Reliance was also placed on the decision of Tribunal in case of Ericsson (India) (P) Ltd. in ITA 5141/Del/2011 in which in similar situation the Tribunal observed that it was for the assessee to decide whether services were required or not and what was the business expediency and enter into arrangement as per the business needs. The Tribunal also observed that it was not for the department to say as to how much should be paid for which service. Moreover it was further pointed out that it was a case of TP adjustment and not normal assessment and, therefore, adjustment can be made only by following the prescribed methods, which has not been done in this case. Therefore, it was 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.
24.5 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding TP adjustment made by AO/TPO in relation to technical know how fess paid by the I.T.A. No.8120/Mum/2011 8 assessee at Rs. 1.57 crore to its parent in Gernamy. The details of the various services which parent company was required to provide to the assessee have been given in para 24 earlier. There are twelve such services listed in the said para. The TPO on detailed examination concluded that during the year the parent company had provided services only under the three heads out of total twelve heads of services, which related to SAP implementation and quality control. The TPO has, therefore, held that no fees was required to be paid in respect of nine services and has, therefore, allowed only a sum of Rs .40 crore on average basis in respect of three heads which resulted into adjustment of Rs. 1.157 crore. The case of the assessee is that the parent as per the agreement was required to provide services as mentioned in the agreement from time to time as required by the assessee. The agreement did not specify that all the services mentioned in the agreement have to be rendered during the year. The assessee had the facility under the agreement to obtain certain services as mentioned therein which could be availed from time to time. The assessee has applied entity level TNMM for bench marking the international transaction and demonstrated that in case of comparables, the mean margin was 13.36% whereas the margin of the assessee was 15% and, therefore, no adjustment was required to be made. On the contrary the TPO has not applied any prescribed method.
24.6 We find substance in the argument advanced. The law is quite clear on the subject that TP adjustment is required to be made by applying one of the prescribed methods. The TPO has not applied any prescribed methods and has only disallowed part of the expenses as done in the normal assessment, which is not permitted under transfer pricing regulation as per which adjustment on account of any international transaction is required to be made as per the method prescribed. The learned CIT (DR) pointed out that the TPO in respect of the nine services not availed by the assessee has treated the payment as nil since no independent party would make any payment for services not provided. The TPO thus had applied the CUP 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 assessee 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 provided during the year in relation to SAP implementation, the fees payable would have been significantly higher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin I.T.A. No.8120/Mum/2011 9 shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Mc Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Considering the entirety of facts and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. We, therefore, set aside the order of CIT (A) on this point and delete the addition made."
11. Therefore, Tribunal has held that applying CUP method to the services made to the assessee during the year is not justified. It is held that considering the entirety of the facts and circumstances of the case, 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. Hence, Tribunal has deleted this addition as confirmed by ld.CIT(A) in regard to Technical fees. Respectfully following the reasons given in above order (supra), we delete the addition of Rs.28,06,000/-.
12. In view of above Ground No.1.3.1 taken by assessee is allowed for statistical purposes and whereas ground No.1.3.2 is allowed.
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".
14. The relevant facts are that the assessee in the assessment year under consideration had sold its Analytical Research Business (A&R Business) to its sister concern M/s MERCK Speciality Private Limited (hereinafter referred to as MSPL) by way of an agreement dated 17.4.2006 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 I.T.A. No.8120/Mum/2011 10 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 was asked to submit the details of assets transferred and in response thereto, the assessee submitted a valuation report stating that the assets mentioned in the valuation report were assets that were transferred. That the assets valued as per valuation report are as under :
a Trade mark Rs.24,77,30,000
b Brands Rs.5,09,40,000
c Contracts with toll Rs.10,45,40,000
manufacturers
d Authorized dealer value Rs.5,37,70,000
chain
e Technical know how Rs.3,75,90,000
f Employees contracts Rs.66,20,000
g Customer data Rs.13,10,000
h ISO certificate Rs.10,90,000
The AO has stated that from the above details, it is seen that assessee has actually not transferred any visible assets or for that any assets which was actually acquired by it. That the valuation report does not find any mention in the sale agreement and the plant and machinery and tangible assets appearing in the sale agreement are conspicuously absent from the valuation report. AO after considering the submissions of the assessee has stated that the assessee has not transferred any material asset or liability. That it has merely transferred assets which it has baptized as trade mark, brands, know how and other intangibles benefits, most of which are neither visible nor can be felt.
15. AO in para 7.1.2 has stated that the analysis of all the assets which have been purportedly transferred by the assessee is made as under :
"a) Trade mark :
This has been valued at Rs.24,77,00,000/-. However, as per the business purchase agreement, submitted by the assessee the trade mark is nothing but I.T.A. No.8120/Mum/2011 11 to rights to use the MERCK trade mark. This trade mark, however, is owned by the parent company MERCK KGaA, Germany. Both the transferee as well as the transferor has the right to use this trade mark for their respective businesses. The assessee has been using the trade mark even after the transfer and the transferee was using it even before the transfer. Thus, it is difficult to appreciate that any asset on this account was ever transferred. Moreover, the assessee could not transfer the same and continue to use it after the transfer. Further on perusal of the note submitted by the assessee vide letter dated 22.11.2010, it is also seen that the "MERCK" trade mark actually belongs to the German parent company and the assessee has began paying Royalty 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 assessee 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 in thin air without underlying the actual asset. Thus, the asset named as BRAND by the assessee is also illusive and is actually a fictitious asset which has been specifically thought of to avoid the incidence of tax in its hands.
c) Contracts with Toll Manufacturers :
Again no documentary evidence in support of existence of the asset could be submitted by the assessee. What the assessee has submitted is merely a fact that the persons which did job work for the assessee would now after the transfer do the job work for transferee. It is worthwhile to note that these parties are not doing the job work exclusively for the assessee company and after transfer, the transferee. They are parties who do job work for several other companies and hence are not in any kind of obligation to work for the transferee. The same parties were actually doing job work even for the transferee company. It is difficult to appreciate the nature of asset under such circumstances and believe that the transferee paid such huge sum on this count. Probably what the assessee has transferred is only the list of job workers which if termed as asset is really preposterous. In view of the above discussions, it is difficult to understand as to how contracts with the toll manufacturers can be a long term capital asset.
d) Technical Know How:
This has been again not supported by any documentary evidence like secret chemical formula a secrete production process or the closely guarded production I.T.A. No.8120/Mum/2011 12 set up or drawing or license. It is really difficult to understand exactly what was the know how that was transferred. The assessee during the course of hearing submitted that the training imparted to its job workers is part of know how that will be used by the transferee. This is really the wildest definition that can be ever thought of for know-how. As already discussed above, the job work contractors are not exclusively working for the assessee or the transferee. Thus, even this asset is only a figment of imagination created to cover up the reality.
e) Authorized Dealers Value Chain and Customer Data :
The authorized dealer value chain has been valued at Rs.5,77,00,000/-. It is difficult to understand how the list of authorized dealers is an asset and why would someone who already has a distribution network of its one, and that too in the same field/location pay for a list of authorized 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 actually been claimed as revenue expenses by the assessee and allowed as such in earlier years. It has thus been merely incorporated in the list of assets to make it believable".
15.1 AO has stated that the assessee has not been able to give any evidence or documents for the expenditure in support of intangibles transferred by it. That the assessee did not transfer any intangible patented process or product or for that matter any manufacturing facilities which was essential for manufacturing specific products under the sale agreement. What the assessee has purportedly transferred is without any substance or underlying assets. The AO also considered the assessee's submissions in respect of definition of capital asset u/s 2(14) in para 7.1.5 of the assessment order and stated that the reliance placed on the definition given by Mr. N.A.Palkiwala is misplaced as the list is not exhaustive and it provides an insight into what should be considered as capital asset. That none of the asset represented by the assessee to have been transferred are included in the list. The AO has stated that the assessee was asked to explain why the consideration received for transfer of toll manufactures list should not attract the provisions of section 28(va) of the Act. He has stated that the I.T.A. No.8120/Mum/2011 13 explanation given by the assessee relates to the entire transaction with its sister concern and is out of context. That the assessee has chosen to be silent on the explanation sought from it regarding the applicability of section 28(iv) in respect of entire transaction. The AO has stated that A and R business was transferred by the assessee to its sister concern who was already involved in similar business. That the assessee as well as transferee i.e. M/s MSPL, are 100 % subsidiary of the German holding company, M/s MERCK KGaA. That all the patens and processes for the different businesses of the two, the transferor as well as transferee, as well as the MERCK trade mark actually belong to parent holding company. That the intangible assets purportedly transferred are fictitious assets and are not backed by any material expression or evidence. The AO has stated that the entire transaction has been basically designed in such a fashion that the assessee company does not pay any tax by claiming exemption u/s 54EC and the transferee company claims huge depreciation on such intangible assets to reduce 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 assessee 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 to segregate its cost of acquisition of the business among various assets. For the buyer the purposes consideration is to be allocated between various items for the purpose of capitalization of assets in its books but for the seller, it is just a sale of business, which in the case under consideration mostly comprises of intangibles only. Therefore, for this reason also, the profit on sale of business has to be taxed as profits and gains of the business. Once again it is reiterated that on one hand the assessee has regularly claimed deduction for acquiring these assets as revenue expenditure and claimed benefit of taxes applicable to business profits and on the other hand while selling these assets, it is avoiding payments of tax at the maximum marginal rate on the ground that these are long term capital gains."
I.T.A. No.8120/Mum/2011 14
17. In view of above, DRP has confirmed the action of AO, as proposed in draft assessment order that the amount of Rs.65,50,00,000/- is to be added to the business income of the assessee u/s 28(iv) of the Act. Thus, the AO in the final assessment order passed, made the said addition of Rs.65,50,00,000/- u/s 28(iv) of the Act and consequently, stated that there being no LTCG in the hands of the assessee. Thus, the claim of exemption u/s 54EC of Rs.65,50,00,000/- is not allowed. Hence, the assessee is in appeal before the Tribunal.
18. At the time of hearing, ld. AR, besides reiterating the submissions made before the authorities below 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. Ld. AR relying on the decision of the Bombay High Court in the case of Mahindra 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 assessee also obtained valuation reports from two valuers for transfer of the said assets. Ld. AR submitted I.T.A. No.8120/Mum/2011 15 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. Ld AR referred the decision of the Hon'ble Calcutta High Court in the case of CIT V/s Arun Dua (1990) 186 ITR 494 (Cal) and the decision of the Delhi Bench of the Tribunal in the case of ACIT V/s Sangeeta Wij (2012) 17 ITR (Trib) 162(Delhi) and submitted that the said decision of the Tribunal has been confirmed by the Hon'ble Delhi High Court in ITA No.667 of 2012, dated 30.11.2012. He submitted that it was a slump sale and the sale consideration received is a capital receipt. Ld. AR also referred section 2 (42C) of the Act viz. definition of the term "slump sale". He submitted that explanation to Section 2(19AA) provides that "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole. He submitted that the assessee has transferred/sold its one of its activities viz A&R business and therefore it is a "slump sale" and as per section 50B of the Act, the consideration received by the assessee is a capital receipt. To substantiate his above submissions, ld. AR referred the decision of the Hon'ble Delhi High Court in the case of CIT V/s M/S Mediworld Publications Pvt., (2011) 337 ITR 178 (Del) and submitted that when the assessee had transferred entire assets of one of its division, and has retained a limited and non-exclusive right to use the pharmaceuticals activity solely for the purpose of its clinical trials business; in such cases section 28(va) of the Act will not apply. Ld. AR also referred the decision of the Hon'ble Delhi Bench of the Tribunal in the case of ACIT V/s Tirupati Udyog Ltd in ITA No.2610/Del/2012 (AY-2008-09) dated 20.6.2013 and submitted that the compensation received for loss of source of income has been held as capital receipt. Ld. AR also referred the decision of the Hon'ble Apex Court in the case of Guffic Chem P.Ltd V/s CIT (2011) 332 ITR 602 (SC). 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.
19. 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 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 I.T.A. No.8120/Mum/2011 16 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 assessee 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 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 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 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 consideration is received on transfer of that benefit i.e. ISO I.T.A. No.8120/Mum/2011 17 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 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 break up 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. 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 (supra) is not applicable to the facts of the present case as in that case, the assessee closed its business and ceased to operate as a result of sale of going concern and in that context, it was held that the amount received by the assessee is long tern capital gain within the meaning of the provisions of section 50B of the Income Tax Act and the same cannot be brought to tax under section 28(va) of the Act as the compensation received by the assessee was not for not carrying out any activity in relation to the business which had been transferred.
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 I.T.A. No.8120/Mum/2011 18 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 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.
22. In Ground No.1.5 of the appeal, the assessee has disputed the order of ld. CIT(A) in sustaining the disallowance of Rs.2,96,71,013/- being 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 view is taken in the said appeal on above issue would ipso facto may apply to this ground.
25. We have considered the orders of the authorities below and submissions of ld. Representatives of the parties. We agree that in appeal bearing ITA No.925/Mum/2007 relating to assessment year 2003-04 the similar ground was there in which the AO disallowed the entire claim of the assessee on account of free distribution of samples aggregating to Rs.5,32,69,002/- for similar reasons as stated in the assessment order under consideration. The Tribunal in the said appeal vide order dated 19.7.2013 after I.T.A. No.8120/Mum/2011 19 considering the facts of the case vide para 6.3 has restored the issue to the AO for fresh examination after verification of details about names and addresses of doctors to be filed before him. The said para viz 6.3 of the order of the Tribunal read as under :
"6.3 We have perused the records and considered the the rival contentions carefully. The dispute raised in this ground is regarding disallowance of expenses on account of free samples. The total claim of expenses on this account is Rs. 5,32,69,000/-. The assessee did not file the names and addresses of persons/physicians/doctors to whom free samples had been given despite specific requisition made by the AO. Such details were not filed even before CIT(A). The authorities below, have, therefore, not found the claim of such expenses genuine and accordingly disallowed the entire expenses. Thus it is not simply a case of estimated disallowance but a case of treating the entire claim as not genuine. It has been submitted before us that the details had not been given as the same were voluminous. The details for the month of march has been submitted before us showing large no. of entries. In our view, the reason for non submission of details requisitioned by AO is not convincing. It is a settled legal position that burden is on the assessee to prove that the expenditure has been incurred wholly and exclusively for the purpose of business and the AO is entitled to make enquiries in relation to any claim made by assessee. Therefore, in case the AO in connection with determination of total income of the assessee, wants to make enquiries in relation to any aspect of business of the assessee, the is required to render assistance in the matter. In case, the transactions were voluminous the assessee could have brought to the notice 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 allowing opportunity of hearing to the assessee."
26. Respectfully following the above order of the Tribunal dated 19.7.2013 for AY 2003-04, we set aside the order of the authorities below and restore the matter to the AO for passing afresh order after necessary examination of details that may be filed by the assessee and after allowing opportunity of hearing as per law. Hence Ground No.1.5 of the appeal is allowed for statistical purposes.
I.T.A. No.8120/Mum/2011 20
27. Ground No.1.6 of the appeal taken by the assessee is as under :
"1.6 Making disallowance u/s 14A of the Act amounting to Rs.83,04,945/- without considering the appellant's contention that it had not incurred any expenditure to earn tax free income or without considering the alternate contention of the appellant that if it all any expenditure is to be treated as disallowable u/s 14A of the Act, the same has to be determined at Rs.3,00,000/- being part of the salary paid to one of its employee who devoted part of his time in connection with investment of surplus funds in mutual funds and securities "
28. AO has stated that on perusal of computation of income, it is seen that the assessee company has claimed exempt income u/s 10 of the Act. AO has stated that the assessee was asked to furnish the details of expenditures incurred or attributable for earning of exempt income. The AO has stated that on consideration of submissions of the assessee, it is observed that the assessee has stated that it has incurred no expenses for the purposes of earning of exempt income and hence no disallowance u/s 14A is called for. AO did not agree with the contention of assessee and proceeded to determine the amount of expenditure by considering the provisions of section 14A(2) of the Act. It is relevant to state that the AO has stated that Rule 8D of the Income Tax Rules, 1962 is not applicable to the assessment year under consideration in view of the judgment of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (2010) 328 ITR 81 (Bom). However, AO has applied 0.5% of the average investment in considering the disallowance u/s 14A of the Act which comes to Rs.83,04,945/-. DRP has also confirmed the action of the AO. Hence this appeal by the assessee.
29. At the time of hearing, ld.AR submitted that the authorities below have not applied Rule 8D directly but indirectly disallowance u/s 14A has been made 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.
I.T.A. No.8120/Mum/2011 21
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.3 lakhs on adhoc basis for the purpose of section 14A of the Act. However, considering the details of investment, we are of the considered view 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. Hence Ground No.1.6 of the appeal taken by the assessee is allowed in part.
32. Ground No.1.7 of the appeal taken by the assessee is as under :
"1.7 Holding that Rs.3,53,513/- being the balance unutilized cenvat credit to the income of the appellant, representing the difference between the closing and opening stock u/s 145A of the Act though no adjustment was required to be made u/s 145A of the Act as the appellant followed "net method" of accounting"
33. AO has made addition of Rs.3,53,513/- under section 145A of the Act representing the difference between opening balance of CENVAT credit receivable and closing balance of CENVAT receivable to the income of the assessee.
34. During the course of assessment proceedings, assessee contended that it follows "net method" of accounting as regards sales tax, VAT and excise duty, vis-à-vis purchases and there will be no impact if one was to include the same in purchase and includes the same in the closing stock of the respective items. AO did not agree with the assessee and following the earlier year's order for making the similar additions made the addition of Rs.3,53,513/- to the income of the assessee and the same was also confirmed by DRP. Hence this appeal by the assessee.
35. At the time of hearing, ld. AR submitted that the similar addition has also been made for Assessment year 2003-04 and appeal has been heard by the Tribunal along with this appeal. Therefore, whatever view is taken in the said appeal this will ipso facto I.T.A. No.8120/Mum/2011 22 applied to this ground of appeal. It is relevant to state that the Tribunal has considered the said ground in paras 3.1 and 3.2 of the order dated 19.7.2013 (supra) and the Tribunal has stated that the 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. The said order of the Tribunal is as under :
"3.2 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 adjustment on account of tax duty will also be made in the purchases. The ground raised by the assessee is thus allowed."
36. In view of above, we restore the matter 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 . Hence, ground No.1.7 raised by the assessee is allowed subject to above observations.
37. In Ground No.1.8 of the appeal, assessee has disputed the order of AO/DRP to disallow Rs.4,80,710/- in respect of club expenses.
38. AO has stated that the assessee was asked to justify the club expenses. The assessee stated that Director in order to enable them to hold business meetings, conferences; and to meet customers and others in connections with business have incurred the said expenditure and the same is allowable u/s 37(1) of the Act. AO has stated that from the details filed by the assessee, it is seen that the assessee has incurred above sum on entrance fee to club and the details regarding the persons against whom these expenses incurred. That justification of the expenses is not clear.
I.T.A. No.8120/Mum/2011 23 Therefore, the AO disallowed the same and DRP also confirmed the action of the AO. Hence this appeal by the assessee.
39. At the time of hearing. Ld. AR submitted that the said club expenses were incurred for the business purpose to entertain the customers and the same should be allowed u/s 37(1) of the Act. Ld.AR relied on the decision of the Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd vs. CIT (1992)195 ITR 682 (Bom), wherein the Hon'ble Bombay High Court has held that club fee paid by a company for a certain category of its employees were made with a view that the assessee-company to improve its business relations and progress are allowable as business expenditure. However, ld. DR relied on the order of the AO and referred the decision of the Hon'ble Bombay High Court in the case of CIT V/s Diners Business Services Pvt.Ltd.(2003) 263 ITR 1(Bom).
40. We have carefully considered the submissions of the ld. Representatives of the parties and the orders relied upon by them. On perusal of the order in the case of Diners Business Services Pvt.Ltd. (supra), we observe that the facts are not relevant to the facts before us. In the said case the assessee received a sum of Rs.4,08,950/- on account of non-refundable entrance fees for enrolment of its customers as Members of the Executive Centre. The entrance fee were a one time fee and only Members were eligible to avail of the facilities available in the "Executive Centre". In that context, it was held that the entrance fee constitutes receipt in the capital field. Whereas in the case before us, the issue is as to whether claim for payment of club expenses for the Directors of the assessee-company for entertaining its customers is business expenditure and is allowable or not. We are of the considered view that the decision of the Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd (supra) squarely applies to the facts of the case before us. Therefore, said amount is allowable as business expenditure u/s 37(1) of the Act. Similar issue was also considered by the Hon'ble Delhi High Court in the case of CIT V/s Central Club Ltd reported in 326 ITR 25 (Del), wherein it has been held that corporate fee to Membership of the club is an expenditure wholly and exclusively for the purpose of business and is allowable as revenue expenditure u/s 37(1) of the Act. In view of above, we allow Ground No.1.8 of the appeal by deleting the addition of Rs.4,80,710/- .
41. Ground No.1.9 relates initiation of penalty proceedings u/s 271(1)( c ) of the Act does not requires any adjudication as it does not arise out of the order of the ld. CIT(A).
I.T.A. No.8120/Mum/2011 24
42. Further Ground No.1.10 of the appeal is of not granting credit of TDS and advance tax paid and charging of interest u/s 234A, 234B, 234C and 234D of the Act.
43. In respect of credit of TDS and advance tax paid, we direct the AO to consider the same on the basis of the details as may be furnished by the assessee in accordance with law. However, charging of interest under sections 234A, 234B, 234C and 234D is consequential and no specific adjudication is called for.
44. In the result, appeal of the assessee is allowed in part.
Order pronounced in the open court on 2nd Aug, 2013
आदे श क घोषणा खुले यायालय म दनांकः 2nd Aug, 2013 को क गई ।
Sd/- sd/-
(राजे संह/RAJENDRA SINGH) (बी.आर. म तल/B.R.MITTAL)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मब
ुं ई Mumbai; दनांक Dated 2/ 08/2013
व. न.स./ SRL , Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु त(अपील) / The CIT(A)-
4. आयकर आयु त / CIT
5. वभागीय त न ध, आयकर अपील य अ धकरण, मब
ुं ई /
DR, ITAT, Mumbai
6. गाड फाईल / Guard file.
आदे शानस
ु ार/ BY ORDER,
True copy
सहायक पंजीकार (Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई /ITAT, Mumbai