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TMI Blog2013 (9) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ring and trading in chemicals and chemicals ingredients during the relevant year. The Lanxess group in the year 2006 took the decision for worldwide sale of Lustron polymer business of the group. As a consequence, the assessee which held 50.97% shares of lanxess ABS sold the shares to INEOS ABS (New Jercy) Ltd in which the holding company of the assessee had 49% share holding. AO in the assessment Order made adjustment on account of control premium and non compete fees in relation to the said sale of shares to the AE consequent to order passed by TPO. The Lanxess group during the year had also sold the Textile Processing Chemical (TPC) business globally to Tanatex group as a result of which different business entities of the laxness group situated in different countries had been sold out to the said company. The consideration received had been distributed in the ratio of net asset value of those units. TPO further noted that the payment for capital reserve of Euro 53 Million and value of shares sale of Euro 26.9 Million received by the Sybron Chemicals BV and the payment for IPR to Lanxess Deutschland GmbH had not been distributed and adjustment of Rs. 9899128069/- was therefore ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in favour of Suzuki for a sum of Rs.1000 crore. The TPO also referred to the article by Phillip Sounders Jr PHD in which various aspects of control premium had been discussed. It was mentioned in the said paper that average median premium paid over the quoted price for acquisition of controlling stake varied from 30% to 50%. The TPO, therefore, estimated the control premium at 25% of share price which came to Rs. 49/- per share. The assessee had transferred 8963564 shares the value of which .45 per share came to Rs.439214636/-. The TPO also held that adjustment was required on account of non compete fees at the rate of 25% at which payment had been made to the RA Group, which came to Rs.461327228/-. Thus the total adjustment recommended by the TPO on account of control premium and non compete fees was Rs. 900541864/- which had been added by the AO to the total income. 4. We now take up the issue of non-compete fees. The assessee filed objections before the DRP against the order of TPO. The assessee submitted before DRP that the Rakesh Agarwal Group had been paid non compete fees as it was involved in day to day management of the company and had significant know how about the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Lustron Polymer business was successfully completed with INEOS ABS and the business was transferred in September 2007 w.e.f 30th September 2007. The investment in JV was treated as financial investment and was shown as current financial asset. The report further mentioned that it was agreed that INEOS will take over the Lanxess's remaining interest in JV two years after its transfer. The report therefore clearly showed that the Lanxess wanted to exit the business. 4.2 The ld. AR further argued that the TPO had impliedly used internal CUP method by bench marking the transaction with non compete fees paid to RA Group which as pointed out earlier is not comparable as Shri Rakesh Agarwal had long experience of day to day running of the company and also had significant know how about the company. The learned AR also pointed out that the share holders of Lanxess ABS had also filed complaint before SEBI regarding unreasonable payment of non compete fees to RA Group. The SEBI, however, vide order dated 7.2.2008 passed by whole time Member Shri T.C Nayar noted that Shri Rakesh Agarwal was a chemical engineer who had introduced engineering Thermo Dynamics in India in the year 1976 and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be denied to the assessee company which was controlling the company. 4.4 As regards the SEBI order, it was submitted that the order was relevant only from the point of view of reasonableness of the non compete fees and the SEBI had found the non compete fees reasonable. The issue whether similar non compete fees has to be paid to the assessee company which was having controlling stake was not the issue before the SEBI. The TPO/AO had followed the internal CUP in which the transaction had been compared with non compete fees paid to RA Group in identical situation and therefore had made the adjustment correctly. 4.5 In reply, the learned AR for the assessee reiterated the submissions made earlier that merely because someone had controlling stake in the company did not entitle him for non compete fees which had to be paid based on skills and experience required for this purpose as discussed in the order of SEBI. It was pointed out that, as mentioned earlier, Shri Rakesh Agarwal was founder of the business and remained its MD about forty years. The Lanxess, which had made only strategic investment, had no valid claim for non compete fees. As regards the internal CUP, the learned AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that case of the assessee was not comparable to the case of RA Group on various accounts such as (i) Shri Rakesh Agarwal being the promoter of business had long experience for day to day management of the business as well as significant know how about the company;(ii) the assessee was only a strategic investor and was selling the business and, therefore, there was no question of competing in business; (iii) the payment to non payment fees to RA Group had been considered by SEBI and found to be in order; there being substantial differences between the assessee and RA Group, no adjustment was required in case of the assessee in view of the provisions of Rule 10B(1)(a)(ii) and Rule 10B(2)(d). The department has however countered these arguments by pointing out that the assessee who was controlling the company had extensive involvement and full knowledge about the working of business and, therefore, it could easily compete in business. Moreover, it had more resources than Shri Rakesh Agarwal. It has also been argued that even the investment companies of the RA Group had been paid non compete fees and, therefore, there was no reason for denying payment to the assessee. The SEBI order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved in the day to day management of business, have also been paid non compete fees. Therefore, it has been rightly argued by the revenue that the assessee who had signed similar non compete agreement for three years could not be denied payment of such non compete fees. 4.9 The reliance placed by the assessee on the order of SEBI passed by whole time Member, is misplaced. The SEBI order was only regarding reasonableness of payment of non compete fess to RA Group. Some share holders had complained that the RA Group had been paid non compete fees which was nothing but part of the share price and thus by treating the part of the share price as non compete fees, they had reduced the sale price of shares which resulted into lower payment to them. The SEBI, however, considering knowledge and experience of RA Group as mentioned earlier held that the payment of non compete fees was justified and reasonable and it could not be considered as part of the sale price. There was no issue before SEBI as to whether similar non compete fess was required to be paid to the assessee or not. This issue has been raised in this appeal before the Tribunal. 4.10 The learned AR for the assessee has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erit. The non compete fees is paid only to the seller of business so that in future he does not compete with the business purchased by the buyer. However merely because the assessee was selling the business today it does not mean that the assessee could not start the same business again. In the present day business environment changes are taking place at a very fast pace. What is considered not viable today may become viable after couple of years later. The assessee was selling the business on the ground that it saw severe competition by addition of capacities in Asia which may change with time and the assessee if situation develops in favour could start business again. 4.12 Considering the facts and circumstances of the case and the reasons given earlier, we see no justification for non payment of non compete fees to the assessee. We, therefore, see no infirmity in the order of authorities below estimating the non compete fess at the same rate as paid in case of RA Group. The order of AO is, therefore, upheld. 5. The second dispute relating to TP adjustment is on account of control premium. As mentioned earlier, the assessee company had transferred 50.97% of share holding in Lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not applicable to the case of the assessee. It was also submitted that there have been cases in which the controlling stake had been transferred at discount to the market price. It was also argued that as per SEBI regulation 20(4) the same price had been paid to other share holders and, therefore, the price received by the assessee was at arm's length. 5.2 The learned CIT (DR) on the other hand strongly defended the orders of authorities below making adjustment on account of control premium. It was submitted that nobody will sell the controlling stake at the prevailing market price. The control premium is paid for transferring the controlling stake which is the price charged over the market price in ordinary trades. He referred to the article by Phillip Sounders Jr PHD in which it was mentioned that payment of control premium largely depended upon the potential buyer believing that he or she could enhance the value of the company. It is the potential for increasing the value that makes the buyers willing to pay the premium for control. In this context he referred to report dated 29.6.2007 (copy placed on record taken from INEOS ABS site) as per which the chairman of INEOS state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.36 per share, whereas the RA Group who had held only 18.83% share holding had been paid Rs. 201 per share. AO/TPO have held that for giving the controlling stake, the assessee was required to be paid control premium which had not been done in this case. They have referred to the cases of selling controlling stake by the Government in case of Maruti and other Government companies for which substantial payment had been made by the foreign companies. Reference has also been made by them to the research Article by Phillip Sounders Jr PHD as per whom mean average premium over the quoted price in case of public quoted businesses varied from 30% to 50%. The TPO/AO have estimated the control premium at 25% of the share value in case of the assessee and added the said amount to the total income. 5.5 The case of the assessee is that the comparable cases of Maruti and other Government companies was not really comparable as those cases of sales were not contemporary. In regard to Phillip Sounders Jr PHD report, it had been submitted that the report related to the public traded companies and, therefore, was not applicable. The report also mentioned that control premium depended upon the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment can be made to eliminate the material affect of differences if any. Further under the provisions of Rule 10B(1)(a)(ii) the price charged to a comparable uncontrolled transaction has to be adjusted on account of differences between the international transaction and the comparable uncontrolled transaction or between enterprises entering into such transactions if these differences materially affect the price in the open market. In the present case the share transaction of the assessee is identical to that of the uncontrolled transaction of RA Group the only difference is that the assessee had sold the controlling stake. The share price will not depend upon personal characteristics of the sellers and, therefore, no adjustment is required on account of differences between the assessee and RA Group which sold the shares. The only difference as pointed out earlier between the international transaction and the transactions with RA Group is that the assessee had sold the controlling stake. Therefore, we have only to consider adjustment on account of controlling stake transferred by the assessee by estimating the price for the controlling stake. The report by Phillip Sounders Jr PHD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrol premium should be towards the upper end of about 50% of the quoted price. But in this case, since control premium has been estimated with respect to the negotiated price which was higher than the public quoted price, the estimation at the rate of 25% of negotiated price in case of RA Group is considered reasonable. The argument that Phillip Sounders Jr PHD report related to only public quoted companies is also not relevant as the premium is linked to the potential for making the value addition to the company by the buyer and not upon whether the company is public quoted or not. The research had been made in cases of public quoted companies as data in such cases is easily available. 5.8 The learned AR for the assessee has also argued that the general public share holders had also been paid at the rate of Rs. 201 per share as per SEBI regulation no. 20(4). It has also been submitted that while judging the comparability of transaction, Government laws and orders inforce have also to be taken into account. We have perused the said regulation. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utschland GmbH had received sale consideration of Euro 2.63 million towards sale of IPR which had not been distributed to other units including the Indian company. Similarly the Sybron Chemicals BV had sold the entire share holding in Lanxess BV for Euro 26.9 million to Tanatex which had also not been distributed to other units. TPO further noted that before the sale of shares Lanxess BV had transferred the capital reserve of 52 million Euro to Sybron Chemicals BV which also remained undistributed. The TPO, therefore asked the assessee to explain as to why proportionate allocation should not be made to the assessee company in relation to transfer of capital reserves, sale of share and sale of IPR rights. 6.1 The assessee submitted that prior to the date of sale, the Lanxess BV had surplus cash which had been distributed as capital reserves to Sybron Chemicals BV. This had been mentioned in clause 4.2 of MSPA and thus the purchaser had been informed about it. This was an internal transaction which had nothing to do with the sale and was thus not part of sale consideration. It was also submitted that since the entire business of the Lanxess BV had been sold as per separate share tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He, further observed that once the global TPC business was transferred, the sale consideration had to be taken towards the sale of all the assets owned by the entities to be allocated on the basis of NAV. DRP, therefore, confirmed the order of TPO based on which the addition was made by AO in the assessment order. Aggrieved by said decision of AO, the assessee is in appeal before Tribunal. 6.4 Before us, the learned AR for the assessee submitted that transfer of capital reserve to the holding company before the date of transfer was a dividend pay out and it was an internal transaction which had been duly disclosed in clause 4.2 of MSPA. Therefore, it was not part of the sale consideration and thus not required to be allocated. He referred to the document at page 252 of the paperbook which clearly mentioned that dividend will be paid in the month of April as reported by the Auditor. As regards the sale of shares, it was submitted that the Lanxess BV had been sold separately and the value of the shares was same as NAV of the company. The company had been sold through a separate Dutch share transfer agreement as per clause 4.1 of MSPA which had also been duly noted by TPO in para 6.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad not been considered for distribution to other units. This consisted of consideration of Euro 2.63 million towards sale of IPR by Lanxess Deutschland GmbH, the consideration of Euro 26.9 billion received by the Sybron Chemical BV towards the sale of shares of Lanxess BV. These considerations had been paid exclusively to Lanxess Deutschland GmbH and Sybron Chemicals BV respectively. Further before transfer of shares of Lanxess BV, capital reserve of 52 million Euro had been transferred by Lanxess BV to Sybron Chemicals BV. TPO/AO, therefore, pointed out that the sale consideration had been reduced by that amount which had not been distributed to other entities. Authorities below also noted that net asset value of Lanxes Deutschland GmbH being negative and the said company having been paid the entire consideration towards IPR, it had resulted into lower allocation to other entities. 6.7 The case of the assessee is that the sale consideration negotiated and received by Lanxess Deutschland Gmbh was equal to net asset value of all the entities and therefore, the consideration had been distributed in the ratio of net asset value. It has been pointed out that the assessee by mistake ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Further, the claim of the assessee is that total consideration was nothing but the total sum of net asset value of individual entities and the sale consideration had been distributed in the ratio of net asset value and if this is found to be correct then even if these three transactions are added to the total consideration, the individual share of different entities will not change because these will also go to add to the NAV of these companies and all the entities will ultimately get their net asset value. However such claims of the assessee requires verification. The claim of the assessee that Lanxess Deutschland GmbH had no negative net asset value, which is contrary to the claim made before lower authorities also requires verification. In our view, entire issue requires fresh consideration at the level of AO/TPO. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heet also showed that under utilization this year was only 3041 tones per annum compared to 4564 tones per annum in 2006-07 and 3884 tone per annum in financial year 2005-06. Further the assessee itself had admitted that there may have been reallocation of work which also proves that there was no underutilized capacity. TPO therefore rejected the claim of adjustment on account of under utilization of capacity and calculated operating profit of Rs. 3,77,02,807/- on operating revenue of Rs. 2173556623/- which gave PLI (OP/OR) at 1.73%. The mean operating margin in case of comparable was 5.42%. TPO, therefore, made the adjustment of Rs. 80103961/- which was added by AO to the total income. Aggrieved by the decision of AO, the assessee is in appeal before Tribunal. 7.3 Before us, the learned AR for the assessee submitted that the assessee had no dispute either in relation to the selection of comparables or in relation to computation of mean margin of comparable or the margin computed by TPO/AO in case of the assessee. The assessee was disputing only the method of computation of TP adjustment. It was pointed out that the AO had made the adjustment to the entire revenue which was not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch no responses had been received. The assessee filed some details and evidences to prove the genuineness, on examination of which the AO accepted some of the transaction and proposed to add Rs. 310555574/- on his account in the draft assessment order dated 30 December 2011. 8.2 The assessee filed objection before the DRP against the draft assessment order and submitted that the AO had provided only seven days time before the order was passed for submitting further details and evidences. The assessee filed further details and evidences in the form of additional evidences. The DRP observed that because of voluminous nature of work and multiple parties involved, the assessee did not have adequate time to furnish details and evidences about all the parties before the AO and, therefore, in the interest of justice DRP directed the AO to admit the additional evidences and pass a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. AO even after considering the additional evidences noted that in respect of the category relating to 'reply not received' there was still aggregate sum of Rs. 11279496/-, in respect of which replies not received an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges 36 to 42 of the assessment order. The assessee had explained various reasons for differences which were not examined by the AO and the differences had been added by him which was not correct. It was, therefore, urged that the matter may be sent back to AO for proper examination. The learned CIT(DR) had no objection if the matter was restore back to AO for fresh examination of the additions made on account of other expenses. 8.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding addition made by AO on account of creditors, purchases and other expenses u/s 69 C of the IT Act. The AO had issued notices u/s 133(6) to the parties with a view to ascertain the genuineness of the transactions which had been returned in many cases or no reply had been received. In cases where reply had been received, there were discrepancies and amounts confirmed was more in some cases while less in some other cases. The total addition made by AO is Rs. 53521277/- on account of these factors as per details given in para 8.2 of this order. The learned AR for the assessee has argued that addition u/s 69C could be made only when the expenditure is accounte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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