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2013 (9) TMI 13 - AT - Income TaxAdjustment of transfer pricing - Non compete fees - Estimation of income - Held that - Non compete fees is paid by a party, acquiring the business for signing the not compete agreement so as to not compete with the business aquired for a certain period. Such payments are made to persons who have complete and extensive knowledge of business process, technology and working of the company and have the resources to compete with the business of the acquirer by setting up similar new businesses or in any other way - However for setting up of a new business number of years spent on running the company is not the only factor to be considered. What is required for setting up of a new business is that the person should not only be knowing the business process and know how and technology used in the business, but he should also have resources to set up similar business. The assessee had controlling stake in the company for three years and, therefore, it had full access to knowledge, know how, process and working of the business, which are necessary for setting up of a new business. Secondly the assessee is a part of a multinational Group running several such companies worldwide and, therefore, it is in a much better position than the RA Group for setting up of a new business - investment companies holding shares which are part of RA Group and who are not involved in the day to day management of business, have also been paid non compete fees - assessee who had signed similar non compete agreement for three years could not be denied payment of such non compete fees - no justification for non payment of non compete fees to the assessee - no infirmity in the order of authorities below estimating the non compete fess at the same rate as paid in case of RA Group - Decided against assessee. Determination of arm s length price - Sale of shares - Control premium - Held that - The SEBI regulations do not regulate the price to be negotiated between the buyer and seller of shares. It only provides that in case of transfer of stake exceeding 15% of share holding, the general public is also required to be offered to the extent of 20% of share holding which has to be the highest of the four factors i.e. negotiated price; the share price paid by the acquirer for any acquisition during the 26 week period prior to the date of public announcement; the average daily high and low on the stock exchange during the 26 week period preceding the date of public announcement; and average daily high and low of the share price on the stock exchange during the two week period preceding the date of public announcement. This is only a formula to safeguard the interest of general share holders. It does not in any way state that price negotiated by the assessee with the buyer is at arm s length price. Infact the general share holders would have got more price had the negotiated price also included the control premium - Decided against assessee. Transactions relating to sale of TPC business - Sybron Chemicals BV had sold entire share holding in its 100% subsidiary i.e. Lanxess BV and, therefore, it was alone entitled for sale consideration. It had not received any payment for any other asset separately. The AO himself has noted that shares had been sold through a separate Dutch Share Transfer Agreement as per Clause 4.1 of MSPA. Thus the purchaser was aware about this sale and the total consideration thus did not include the share sale value. The share sale value therefore, had to go exclusively to Sybron Chemical BV. Further the transfer of capital reserve has taken place before the date of sale and had been duly noted in Clause 4.2 of MSPA. This was only internal transfer before the date of sale agreed between the two parties and, therefore, it had nothing to do with the total sale consideration. Similarly the IPR rights were held exclusively by the Lanxess Deutschland Gmbh. Therefore, it had been separately paid such consideration - entire issue requires fresh consideration at the level of AO/TPO - Decided in favour of assessee. Unexplained investment u/s 69 - Held that - AO/TPO had asked for almost entire details of transactions entered into by the assessee which was voluminous. The assessee before the DRP had filed further material on sample basis covering 89.43% of cases in which replies had not been received and 69.57% cases in which the notices had been returned back. It has been pointed out that the assessee was now having full details and, therefore, in case further details are required the assessee could submit the same before the AO. Similarly in case of discrepancies it has been pointed out that the assessee had given explanation in respect of differences positive or negative pointed out by the parties in the cases in which reply had been received and these explanation had been duly noted by AO in assessment order. The explanation given had not been examined and the entire difference had not been added - matter requires fresh examination at the level of AO by specifically considering each explanation by the assessee in respect of differences found and the assessee may also be given further opportunity to provide details and evidence in respect of cases in which no reply had been received or the notices had been returned back because disallowing the entire amount considering the voluminous nature of details is not justified - Decided in favour of assessee.
Issues Involved:
1. Transfer pricing adjustment on account of control premium and non-compete fees in relation to the sale of shares to AE. 2. Transfer pricing adjustment on account of other transactions with AEs relating to the manufacturing segment. 3. Transfer pricing adjustment on account of the sale of the textile processing business (TPC) unit. 4. Addition made by AO on account of creditors, purchases, and other expenses. Detailed Analysis: 1. Transfer Pricing Adjustment on Account of Control Premium and Non-Compete Fees: The assessee sold 50.97% shares in Lanxess ABS to INEOS ABS (New Jersey) Ltd. The TPO observed that the assessee did not receive any control premium or non-compete fees, whereas the RA Group, holding 18.33%, received Rs. 201 per share and non-compete fees of Rs. 165,632,565/-. The TPO considered the transaction an international transaction under section 92F and estimated a control premium at 25% of the share price. The total adjustment for control premium and non-compete fees was Rs. 900,541,864/- added to the total income. The assessee argued that it was a strategic investor and not involved in day-to-day management, thus not entitled to non-compete fees. The DRP rejected this, noting the assessee's extensive involvement and potential to compete. The Tribunal upheld the adjustment, stating that the assessee had the resources and knowledge to compete, and the SEBI order confirming the reasonableness of non-compete fees to RA Group did not preclude similar fees to the assessee. 2. Transfer Pricing Adjustment on Account of Other Transactions with AEs Relating to Manufacturing Segment: The AO noted that the assessee made several transactions with AEs in the manufacturing segment and applied the Transactional Net Margin Method (TNMM). The assessee's operating margin was 9.04%, but the TPO rejected the assessee's adjustment for under-utilized capacity, leading to a revised margin of 1.73%. The TPO made an adjustment of Rs. 80,103,961/- to the total income. The assessee argued that the adjustment should only apply to transactions with AEs, not the entire revenue. The Tribunal agreed, directing the AO to make adjustments only related to AE transactions, supported by precedents from other Tribunal decisions. 3. Transfer Pricing Adjustment on Account of Sale of Textile Processing Business (TPC) Unit: The Lanxess Group globally divested the TPC business to Tanatex Group, with the assessee receiving Rs. 4.42 crore. The TPO noted that certain transactions, such as the transfer of capital reserves and sale of IPR, were not distributed to other units. The TPO allocated these on a proportionate basis, resulting in an adjustment of Rs. 138.08 crore. The assessee argued that the capital reserve transfer was an internal transaction and that the sale of shares and IPR were separate transactions. The Tribunal found substance in the assessee's arguments but noted that the claims required verification. The matter was remanded to the AO/TPO for fresh consideration and verification. 4. Addition Made by AO on Account of Creditors, Purchases, and Other Expenses: The AO issued notices to verify the genuineness of transactions, resulting in discrepancies and non-responses. The AO made an addition of Rs. 53,521,277/- under section 69C of the Income Tax Act. The assessee argued that section 69C applies only to unaccounted expenditures and that the transactions were duly accounted for. The Tribunal rejected this argument, noting that the addition could be justified under section 68. However, the Tribunal found merit in the assessee's claim that the AO had not properly examined the explanations and additional evidences. The matter was remanded to the AO for fresh examination, allowing the assessee to provide further details and evidence. Conclusion: The appeal was partly allowed, with the Tribunal upholding some adjustments and remanding others for fresh consideration and verification by the AO. The Tribunal emphasized the need for proper examination and verification of the assessee's claims and evidence.
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