MERCK SPECIALITIES Pvt. Ltd, MUMBAI V. THE DY. COMMISSIONER OF INCOME TAX,CIRCLE-7(2)(1), MUMBAI

ITA 2056/MUM/2016

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0845 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 18-07-2022
• Assessment Year: 2011-2012
• Appeal Filed On: 29-03-2016
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Additional depreciation; Question of law; Initiation of penalty proceedings; Wholly owned subsidiary; Valuation report; Scheme of amalgamation; Revised return
• Section: 32; 143(3); 234B; 144C; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT, AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER IT(TP)A No.2056/Mum./2016 (Assessment Year : 2011–12) M/s. Merck Specialities Pvt. Ltd. Godrej One, 8 th Floor, Pirojsha Nagar Eastern Express Highway, Vikhroli (East) Mumbai 400 079 PAN – AAECM2634B ................ Appellant v/s Dy. Commissioner of Income Tax Circle–7(2)(1), Mumbai ................Respondent Assessee by : Ms. Aarti Vissanji a/w Ms. Aastha Shah Revenue by : Ms. Vatsalaa Jha Date of Hearing – 19/07/2022 Date of Order – 14/10/2022 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the assessee challenging the final assessment order dated 25/01/2016, passed under section 143(3) r/w section 144C(1) of the Income Tax Act, 1961 (‘the Act’), for the assessment year 2011–12. 2. In this appeal, the assessee has raised following grounds: “1. General M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 2 On the facts and circumstances of the case and in law, the Learned Assessing Officer / Hon'ble Dispute Resolution Panel (DRP) / Transfer Pricing Officer (TPO) (as the case may be) erred in – 1.1 Passing the order U/s.143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) making huge additions and disallowances on the basis of surmises, conjectures, presumptions and assumptions and without considering the papers and documents submitted as also submissions made during the course of assessment proceedings and the proceedings before the Hon'ble Dispute Resolution Panel. 1.2 Passing the impugned order which is illegal and bad in law and consequently, null and void. 2. Transfer Pricing Issues: On the facts and circumstances of the case and in law, the Learned Assessing Officer (AO) / Hon'ble Dispute Resolution Panel (DRP) / Transfer Pricing Officer (TPO)(as the case may be) erred in – 2.1 Not upholding the alternate objection of the appellant that the learned AO did not satisfy himself about the necessity and requirement of referring the matter for determination of arm's length price in respect of the international transaction between the appellant and the AES and hence, the reference by learned AO to the Learned TPO is illegal and bad in law; 2.2 Not upholding the objection of the appellant that the transfer pricing adjustment made under provisions of section 92CA of the Act cannot be tax as the same is not a "charging provision" under the Income-tax Act and there is no corresponding provision to charge "such adjustments" as income of the appellant under Section 4 of the Act nor there is any provision for such income to be taxed under Section 5 of the Act. 2.3 Without prejudice to each of the above grounds, not upholding the appellant alternate grounds that the reference made by Learned AO to the Learned TPO in reference to the CBDT instruction no 10/2013 dated 05.08.13 as regards threshold limit of Rs. 15 crores for reference to him under "administrative limits" under said circular has no force of law and the reference made by following the said circular by the Ld. Assessing Officer was illegal and bad-in-law. 2.4 Not upholding the grounds of the appellant while making huge transfer pricing adjustment on the basis of surmises and conjectures, assumptions and presumptions without considering the papers and documents submitted as also submissions made during the course of the Transfer Pricing /DRP proceeding/ Assessment proceedings and therefore, the Order passed is illegal and bad-in-law and consequently, null and void. 2.5 Addition in respect of technical consultancy fees of Rs. 1.36.00.000/– M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 3 In the facts and in the circumstances of the case, and in law, the Learned TPO erred in proposing and the Hon'ble DRP further erred in confirming the addition of Rs. 136,00,000 in respect of fees paid by the Appellant to its AE for technical consultancy services. (a) Rejection of Appellant's Most Appropriate Method The Learned TPO erred in proposing and the Hon'ble DRP further erred in confirming the rejection of Transactional Net Margin Method (TNMM') considered as the most appropriate method as specified in Section 92C(1) of the Income-tax Act, 1961 (the Act) read with Rule 108(1) of the Income-tax Rules, 1962 (the Rules). (b) Adjustment made on an adhoc basis The Ld. DRP and consequently the Ld. A0 erred in not understanding the essence of the inter-company agreement, Le. the Technical Consultancy agreement and illogically proceeded to conclude the arm's length price to be INR 24,00,000 on an adhoc basis, without applying any of the method as prescribed under section 92C(1) of the Act which is devoid of any legal basis. (c) Considered that the services are general in nature Erred in concluding with a preconceived notion that the services received are general in nature and further erred in concluding that no benefit has been received by the appellant even though various back up documents/emails evidencing the receipt of the technical consultancy services were submitted; 3. Depreciation of Rs. 5.19.87.305/- on intangible assets purchased from Merck Limited: In the facts and circumstances of the case and in law, the Hon'ble DRP/ the Learned AO erred. (i) in disallowing depreciation of Rs. 5,19,87,305/- in respect of intangible assets purchased by the appellant from Merck Limited for an aggregate value of Rs.65.50 Crores in the year ended 31 March, 2007, though the appellant contended that it is entitled to depreciation U/s. 32 of the Act in respect of all the items of Intangibles, for reasons that know-how, trade marks, brands and business or commercial rights of similar nature in that year had been acquired by the appellant for a valuable consideration and were used by it for the purpose of its business, based on the premises, conjectures and observations of the Hon‟ble DRP/ Learned AO as referred to in the assessment order for assessment year 2007-2008; (ii) stating that there were no assets purchased by the appellant from Merck Limited; M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 4 (iii) following wrongful invocation of Explanation (3) to Section 43(1) of the Act as done by the Learned AO in the assessment year 2007-08 and disallowing depreciation of Rs. 5,19,87,305/- on the written down value of the same at the beginning of the year. 4. Depreciation on Goodwill arising from scheme of amalgamation with Bangalore Genei (India) Pvt. Ltd. Rs.5.49.87.789/–: (i) In the facts and circumstances of the case and in law, the Hon'ble DRP/the Learned AO erredin not allowing the claim for depreciation of Rs. 5,49,87,789/- representing depreciation on Goodwill arising from the scheme of amalgamation with Bangalore Genel (India) Pvt. Ltd., as claimed during the course of the assessment proceedings; (ii) stating that the claim for depreciation on Goodwill is not allowable since the same ought to have been made vide the Revised Return of Income. 5. Interest U/s.234A of the Act: In the facts and circumstances of the case and in law, the Hon'ble DRP/ the Learned AO erred in charging interest U/s.234B of the Act amounting to Rs.4,20,644/ though however, the appellant was not liable to pay the same. 6. Interest U/s.234B of the Act: In the facts and circumstances of the case and in law, the Hon'ble DRP/ the Learned AO erred in charging interest U/s.234B of the Act amounting to Rs.1,11,57,876/ though however, the appellant was not liable to pay the same. 7. Interest U/s.234C of the Act: In the facts and circumstances of the case and in law, the Hon'ble DRP/ the Learned AO erred in charging interest U/s.234C of the Act amounting to Rs.41,926/-. though however, the appellant was not liable to pay the same. 8. Initiation of penalty proceedings U/s.271(1)(c) of the Act: In the facts and circumstances of the case and in law, the Hon'ble DRP/ the Learned AO erred in initiating penalty U/s.271(1)(c) in respect of transfer pricing adjustments, disallowance of depreciation in respect of intangibles and merger expenses. 9. It is humbly prayed that the reliefs as prayed for hereinabove and/or such other reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice should be granted. M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 5 3. Ground No. 1 is general in nature and therefore, same need no separate adjudication. 4. The issue arising in ground No. 2, raised in assessee’s appeal, is pertaining to transfer pricing adjustment on account of technical know-how fees. 5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee was incorporated on 18/04/2005 as a subsidiary of M/s Merck Holding GmbH, Germany, which in turn is a wholly-owned subsidiary of M/s Merck KGaA, Germany. The assessee is engaged in trading and manufacturing of chemicals and related products extensively used in quality control, research and development, pathological laboratories, testing of water, food, beverages etc. For the year under consideration, assessee filed its return of income on 29/11/2011 declaring total income of Rs. 36,33,31,103. Thereafter, the assessee filed revised return of income on 28/03/2013 declaring total income of Rs. 34,84,38,680. During the year, assessee has made ‘payment of technical consultancy fees’ of Rs. 1,76,47,997, pursuant to consultancy agreement dated 25/04/2010 entered into between assessee and M/s Merck KGaA, Germany. The said fees was for three different segments ‘Trading of Pharmaceutical Segment‘, ‘Trading of Chemicals Segment’ and ‘Manufacturing of Chemicals Segment’. The assessee benchmarked said transaction of ‘payment of technical consultancy fees’ with its associated enterprise by applying Transactional Net Margin Method (‘TNMM') as the most M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 6 appropriate method. During the course of transfer pricing assessment proceedings, assessee was asked to submit the details of the services received under the aforesaid agreement. In reply, assessee submitted that agreement provides for a package of services by virtue of which all the services mentioned therein are available to the assessee on as and when needed basis, for which the option to the services lies with the assessee. The assessee further submitted that for availing the aforesaid services, assessee pays a fixed fee of Rs. 1,60,00,000, per annum plus applicable taxes. The assessee was further asked to submit complete set of documentation to demonstrate the fulfilment of benefit test for payment of aforesaid technical consultancy fees. In reply, assessee submitted that the services availed by him are highly technical nature, which enable the assessee to improve the quality of the product, to remain competitive in the market, to introduce new products in the market and to provide training to the employees. The Transfer Pricing Officer (‘TPO‟) vide order dated 12/01/2015, passed under section 92CA(3) of the Act did not agree with the submissions of the assessee and held that neither any service was received by the assessee nor any benefit was derived by the assessee in respect of payment of technical consultancy fees. The TPO further held that an arm’s length entity would be willing to pay for an activity only to the extent that the activity confers on it a benefit of economic or commercial value. The TPO benchmarked the transaction involving payment of technical consultancy fees to associated enterprise separately for the purpose of determining the arm’s length price. The TPO further proceeded to estimate arm’s length component for the expenditure actually incurred by the AE and M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 7 came to the conclusion that Rs. 24 lakh is the resultant cost in arm’s length scenario. Accordingly, the TPO proposed an addition of Rs. 1,52,47,997 in respect of international transaction pertaining to ‘payment of technical consultancy fees’. The AO passed the draft assessment order under section 143 (3) r/w section 144C(1) of the Act and, inter-alia, incorporated the adjustment proposed by the TPO. 6. The assessee filed detailed objections before the learned Dispute Resolution Panel (‘learned DRP‟) against the adjustment proposed by the TPO/AO. Vide directions dated 23/12/2015, issued under section 144C (5) of the Act, learned DRP rejected the objections filed by the assessee. However, the DRP granted partial relief to the assessee by directing to exclude the service tax competent of Rs. 16,47,997, from the amount of TPO’s adjustment computed on this issue. The relevant findings of DRP are as under: “Findings 3.6 We have considered the order of the TPO and the submissions of the assessee. As agreement entered into with the AE for providing technical consultancy services, the ape of the services are as under:  Support of engineering of production and quality control with regard to technical and analytical background;  Selection of equipments and sourcing of supplies internationally;  Training to employees on engineering and scientific trends and international trends on finance and administration as per Merck International Guidelines;  Advising on new trends on Information Technology and its implementation;  Assisting and advising in the launching of new products. 3.7 From the aforesaid list of technical services, which the assessee is entitled to receive from the AE, it cannot be ascertained as to which of these services are relatable to the trading segment of the business of the assessee. In fact, the nature of the services listed out in the agreement prima facie, gives M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 8 an impression that they are more relevant to manufacturing and purchase of capital goods as well as information technology than to any trading activities of the assessee. Therefore, aggregating the expenses stated to have been incurred towards payment of technical and consultancy fees under the trading segment for benchmarking ALP does not appear to be logically compatible under transfer pricing regulations. Therefore, we are of the view that the assessee has erroneously aggregated such a transaction with other transactions under trading segment for benchmarking under TNMM to determine the ALP. We, therefore, agree with the action of the TPO tu treat the transaction involving payment of technical and consultancy fees to AE separately for the purpose of determining its ALP. 3.8 On careful perusal of the scope of the technical services to be provided under the agreement, as listed above, it is seen that the services are of such a nature that the rendering of services would be by way of preparing and making available technical analysis, technical reports, operation manuals etc. which would be sent either as hard copies or by way e-mails. However, it is very surprising that the assessee was unable to furnish any such documents to substantiate its claim of receipt of technical services except for an instruction manual and accounting guidelines for group. 3.9 The services to be provided by the AE also include training to the employees of the assessee. Depending on the location where the training is organized, either the employees of the assessee need to be travel to Germany or the employees of the AE need to travel to India for the said purpose. However, as mentioned by the TPO in his order, the assessee failed to furnish details of the visits made by the technical personnel of the AE to India during the year or vice versa. 3.10 Further, it is pertinent to know that the assessee contended that the services specified in the agreement are required to be provided on a "as and when needed" basis implying that these services are provided only when specifically requested by the assessee though the AE is required to be in a standby mode for providing the services, in this context, it becomes Important to furnish evidence that the assessee had requested for specific services from time to time during the year in order to substantiate its claim. It is once again surprising to note that the assessee was unable to furnish any evidence regarding the request made by it for services made by it to the AE for specific services during the year though such a request would undoubtedly have been made in writing or through e-mails. 3.11 As observed above, the primary document presented to the TPO in support of the aforesaid international transaction is the agreement entered into by the assessee with its AE. However, the agreement alone, does not substantiate the actual rendering of such services by the AE to the assessee. Since the Issue in question impinges upon an intra-group service purportedly received by the assessee from the AE, it is absolutely necessary to first identify the existence of such services having been rendered by the AE to the assessee, before its ALP can be benchmarked. 3.12 It is also pertinent to observe that the very fact that the assessee terms the payment in pursuance of the agreement as a retainer fee is an attempt to M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 9 justify the payment even in the absence of receipt of any service. In fact, the assessee has tacitly admitted the non receipt of services by advancing the argument that the AE continuously undertakes various activities and it is not practical to substantiate each and every service rendered. 2.13 Having regard to the facts of the case we concur with the TPO and hold that the assessee failed to substantiate the receipt of services as stipulated in the agreement barring the minor evidences furnished relating to an instruction manual and common accounting guidelines for the group. The assessee also failed to substantiate the benefits derived by it from the rendering of technical services except making a general representation that it helped the assessee to remain competitive in the market. 3.14 Under the above mentioned circumstances of the case, we are of the view that the rejection of the benchmarking analysis made by the assessee by aggregating this transaction with the other international transactions in the three business segments of the assessee under TNMM. We also agree with the TPO that the assessee was able to provide very little evidence with regard to the receipt of services and the benefits derived therefrom. In view of this, we agree with the action of the TPO to make a reasonable estimate of the value of the services at Rs.24,00,000/-. Accordingly, we confirm the determination of the ALP of this international transaction at Rs.24,00,000/- by the TPO. 3.15 However, we find that the expenditure of Rs. 1,76,47,997/- debited by the assessee consist of the technical services fee of Rs.1,60,00,000/- and service tax paid to the Central Government at Rs.16,47,997/-. While computing the TP adjustment, the TPO has erroneously considered the service tax amount also which is not proper since the same does not form part of the consideration payable to the AE. Hence, the TPO is directed to exclude the service tax component of Rs.16,47,997/- from the amount of TP adjustment computed on this issue.” 7. In conformity, the AO, inter-alia, passed the final assessment order dated 25/01/2016. Being aggrieved, the assessee in appeal before us. 8. During the course of hearing, learned Authorised Representative (‘learned AR’) submitted that similar issue has been decided by coordinate bench of the Tribunal in assessee’s own case in preceding assessment years. 9. On the other hand, learned Departmental Representative (‘learned DR’) vehemently relied upon the orders passed by the lower authorities. M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 10 10. We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee’s own case in M/s Merck Specialties Private Ltd vs DCIT, in ITA No. 1947/Mum./2014, for assessment year 2009-10, vide order dated 11/11/2019, directed deletion of similar addition by observing as under: “3.2 Upon due consideration, we find that similar issue is covered in assessee‟s favor by the order of Tribunal rendered in the case of its group concerns viz. Merck Limited for same AY, ITA No.1946/Mum/2014 order dated 31/03/2016 wherein the adjustment has been deleted on identical factual matrix by the coordinate bench by observing as under: - “23. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 24. We find that there is a clear contradictions in the findings of the authorities below. On one hand, the stand of the authorities below is that no services are rendered, and, on the other hand, there are categorical findings that the services rendered are so general in nature that even an employee of the assessee could have rendered the same. In the event of no services actually having been rendered, there cannot be any occasion for the same services being rendered by a person without specialized knowledge. On one hand, it is held that arm‟s length price of these services is zero value, and, in the same breath, it is held that “there would hardly be any substantial payment” for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assessee was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received all the services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The payment is made for the rights accruing to the assessee for the bundled services under the contract and not for each service on ala carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be so simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm‟s length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 11 such cases is whether the price of this service is what an independent enterprise would have paid for the same. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That‟s not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm‟s length price on the facts of this case will be more appropriate a method of ascertaining the arm‟s length price, the TNMM cannot be discarded. Dealing with almost a similar situation, as we are in seisin of, a coordinate bench of this Tribunal, in the case of AWB India Pvt Ltd VS DCIT [(2015) 152 ITD 570 (Del)], has observed as follows: 11. In ground nos. 5 to 9, which we will take up together, the assessee has raised the following grievances: 5. That, on the facts and circumstances of the case, the DRP and TPO/AO have failed to appreciate the business model and business realities of the appellant and role of its AE, while conducting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature. 6. That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company. 7. That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm‟s length price determined by the appellant and proceeding to decide the arm‟s length price himself. 8. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions without relying on any comparable transaction/companies using inappropriate method. 9. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in determining the arm‟s length price of international transactions consisting of cost and profit margin at „nil‟. 12. So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance .001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of Rs 58,20,571 towards „management services‟. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head „management services‟ was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 12 method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of Rs 20,35,907 towards financial management and reporting services, “but the services rendered are negligible compared to the cost incurred”. The TPO was also of the view that “a minor clarification or seeking of certain guidance on verify basic issue does not call for a payment of Rs 20 lakhs. Therefore, the ALP of these services was taken as „NIL‟. He further noted that while the assessee has made a payment of Rs 1,23,476 towards human resources services, the assessee has “not furnished any specific input on training and development of human resources and it is also noticed that these services are of routine nature and duplicate at best”. Accordingly, the TPO also treated ALP of these services as „NIL‟. As regards the payment of Rs 96,355 towards „legal services‟, the TPO did take note of the services that the assessee was entitled to under these arrangements but as there is no evidence of any services having been actually rendered by the AE, the TPO concluded that it does not have any value in an arm‟s length situation. The value of this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm‟s length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied- though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless. 13. When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm‟s length value of which was taken at „zero‟, aggregating to Rs 31,23,325, as against total management fees of Rs 58,20,571 paid by the assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by the TPO, Accordingly, an ALP adjustment of Rs 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us. 14. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 15. One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon‟ble jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), “Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same”. M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 13 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO‟s case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions. 17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as „nil‟ just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO‟s impugned action cannot meet our judicial approval. 19. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs.31,23,325. The assessee gets the relief accordingly. 25. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. 26. In the present case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view- particularly in the light of Hon‟ble Delhi High Court‟s judgment in the case of EKL Appliances (supra), cannot be conducted in the course of ascertaining the arm‟s length price. 27. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accordingly.” Although the revenue contested this decision before Hon‟ble Bombay High Court vide ITA No. 272 of 2014 dated 08/08/2016 but the Hon‟ble court refused to admit substantial question of law. We find that the facts in the case M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 14 of present assessee are pari-materia the same as in the case of its sister concern. Nothing on record would suggest that aforesaid ruling is not applicable to the facts of the present case. Therefore, respectfully, following the same, we delete the impugned additions. The grounds raised, in this respect, are allowed.” 11. We further find that similar findings were also rendered by the coordinate bench of the Tribunal in assessee’s own case in Merck Specialties Private Ltd vs DCIT, in ITA no.1761/Mum./2015, vide order dated 05/12/2019, for the assessment year 2010–11. The learned Departmental Representative could not show us any reason to deviate from the aforesaid orders and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of the Tribunal for preceding assessment years. Thus, respectfully following the orders passed by the coordinate bench of the Tribunal in assessee’s own case cited supra, we uphold the plea of the assessee and direct the AO/TPO to delete the transfer pricing adjustment in respect of payment of technical consultancy fees. As a result, ground No. 2, raised in assessee’s appeal is allowed. 12. The issue arising in ground No.3, raised in assessee’s appeal, is pertaining to disallowance of depreciation on intangible assets. 13. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the course of assessment proceedings, it was observed that assessee is availing depreciation on intangibles at the rate of 25% on the various items appearing in the balance sheet in schedule of fixed assets of the assessee company. It was further observed that depreciation of these M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 15 intangibles has been disallowed in earlier assessment years i.e. assessment year 2007–08 to 2010–11. The AO vide draft assessment order by referring to the findings rendered in previous assessment years held that since actually there were no assets transferred, for which consideration was paid in the earlier year, the consideration paid by the assessee for the fictitious assets was rejected. Accordingly, the addition to the block of intangibles made by the assessee in the schedule of fixed assets for the year under consideration is determined at Nil for the purpose of depreciation. Accordingly, the depreciation amounting to Rs. 5,19,87,305 claimed by the assessee for the year under consideration was disallowed. 14. The assessee filed detailed objections before the learned DRP against the addition made by the AO. Vide directions dated 23/12/2015 issued under section 144C(5) of the Act, the DRP rejected the objections filed by the assessee, by observing as under: “5.6 On a careful perusal of the order of the CIT(A), it is clear that the business purchase agreement did not make any provision for transfer of any intangible assets from the transferor company to the assessee. The assessee has, on its own volition, introduced these intangible assets in its books of accounts by placing reliance upon the report of a valuer whose services were commissioned by the assessee itself for the purpose. Moreover, the aforesaid valuer's report did not include 'Goodwill' in the list of Intangible assets valued by it. The same has been suo-moto created and a value has been assigned to it by the assessee in its schedule of Fixed assets for the purpose of claiming depreciation in the return of income. 5.7 The aforesaid facts clearly show that the subject intangible assets on which depreciation has been claimed by the assessee never existed in the books of accounts of the transferor company, nor do they find any mention in the business purchase agreement as assets which are transferred to the assessee. Under the scheme of Income Tax Act, depreciation u/s.32 of the Act is allowed to assets which are existing, owned and used for the business of the assessee. Under no situation, depreciation can be allowed on the assets which never M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 16 existed and which have been created by way of self generation with the help of a valuation report. 5.8 Had the transferor company actually transferred some Intangibles to the assessee, there was no reason as to why the same could not have found specific mention in the agreement, even pending the determination of their fair market valuation subsequently. It therefore appears to us, the intangible assets were created afresh in the books of account of the assessee for a sum of Rs.65.50 Cr without any factual support or valid reasons. 5.9 The assessee's contention that consequent to its acquisition of a going concern, the sales and profit have Increased manifold which has been possible due to the Intangibles acquired by it, does not appear to be a valid justification for creating intangible assets in the books. In fact, the sales and profit have naturally grown as the assessee has taken over a going concern, which did not require any gestation period to commence its business. It will be futile to argue that a going concern would automatically result into creation of a host of intangible assets in the books of the assessee, which never existed in the books of the going concern itself. 5.10 In the light of the above discussion, we are not convinced with the contentions advanced by the assessee in support of its claim of depreciation on intangible assets. Under the circumstances, the proposed disallowance of Rs. 5,19,87,305/- on account of the depreciation on intangible assets is upheld.” 15. In conformity, the AO, inter-alia, passed the final assessment order dated 25/01/2016. Being aggrieved, the assessee in appeal before us. 16. During the course of hearing, learned AR submitted that the coordinate bench of the Tribunal in assessee’s own case has decided similar issue in preceding assessment years. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities. 17. We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee’s own case in M/s Merck Specialties Private Ltd (supra), for assessment year 2009–10, vide order dated 11/11/2019 remand this issue to the file of AO for de novo adjudication on similar lines as was directed in M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 17 earlier assessment years. The relevant findings of the coordinate bench of the Tribunal are as under: “4.2 Depreciation on Fictitious assets It transpired that the assessee claimed depreciation of Rs.924.21 Lacs, @25% on intangibles assets. Since similar depreciation claimed in AY 2007-08 & 2008- 09 was disallowed in view of the fact that no assets were transferred and the assets were fictious assets, the said claim was disallowed by Ld.AO which was confirmed by Ld. DRP. Upon perusal of chart, we find that this issue would go back to the file of Ld.AO for re-adjudication de-novo on similar lines as directed by coordinate bench of this Tribunal in assessee‟s own case for AYs 2007-08 & 2008-09, ITA No. 3943- 44/Mum/2013 order dated 25/01/2017. The Ld. AO is directed to re-adjudicate the same in the light of stand taken in AYs 2007-08 & 2008-09 pursuant to the aforesaid directions of the Tribunal. The ground stand allowed for statistical purposes.” 18. In absence of any allegation of change in facts and law in the year under consideration, we see no reason to deviate from the early orders passed by the coordinate bench of the Tribunal in assessee’s own case. Thus, respectfully following the judicial precedents in assessee’s own case, we remand this issue to the file of AO for de novo adjudication. As a result, ground No. 3 raised in assessee’s appeal is allowed for statistical purpose. 19. The issue arising in ground No. 4, raised in assessee’s appeal, is pertaining to denial of depreciation on goodwill arising from scheme of amalgamation. 20. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the course of assessment proceedings, the assessee vide letter dated 10/03/2015 claimed depreciation on goodwill, which arose upon the scheme of amalgamation of Bangalore Genei (India) Private Ltd with M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 18 the assessee. Assessee claimed that the said goodwill is allowable for depreciation. The AO vide draft assessment order rejected the claim of the assessee by placing reliance upon decision of Hon’ble Supreme Court in Goetze (India) Ltd. vs CIT, 157 Taxman 1 (SC), as the said claim was not made either in the return of income or the revised return of income. Accordingly, the entire claim of assessee for depreciation on goodwill of Rs. 5,49,87,789 was rejected and added to the total income of the assessee. 21. The assessee filed detailed objections before the learned DRP against the aforesaid addition made by the AO. Vide directions issued under section 144C (5) of the Act, the DRP rejected the objections filed by the assessee, while stating that the amount which has not been claimed in the return of income, cannot be added back to the total income and accordingly directed the AO to compute the total income without adding back the depreciation of Rs. 5,49,87,789 claimed on goodwill. The relevant findings of learned DRP are as under: “6.4 We have considered the draft assessment order and the submissions of the assessee. It is noticed that the AO did not accept the assessee's claim for allowing depreciation of Rs.5,49,87,789/- in respect of goodwill on the grounds that this claim has not been made in the return of income or the revised return of Income filed on 28.03.2013 and the claim has been made only during the assessment proceedings. The AO relied on the decision of the Hon'ble Supreme Court Goetze (india) Ltd, in support of his decision. 6.5 On perusal of the copy of the original return of income and the revised return of Income of the assessee, furnished by the assessee during the proceedings before us, we find that the revised return of income was filed on 28.03.2013 claiming depreciation of Rs.11,06,10,358/- as against the depreciation claimed at Rs.9,61,06,233/- in the original return of income. The additional amount of depreciation claimed by the assessee in the revised return of Income amounted to Rs.1,45,01,125/-. During the assessment proceedings, it was explained by the assessee that this additional depreciation claimed in the revised return relates to the depreciation computed @ 25% on the intangibles M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 19 of Rs.5,80,16,500/- acquired by the assessee company on amalgamation of BGIPL with the assessee with effect from 01.04.2010. After examining the claim of the assessee, the AO allowed the additional depreciation of Rs.1,45,04,125/- claimed in the revised return. 6.6 During the assessment proceedings, the assessee made a claim for the first time to allow depreciation of Rs.5,49,87,789/- computed @ 25% on "Goodwill of Rs.21,99,51,156/– acquired by the assessee company on account of amalgamation of BGIPL with the assessee with effect from 01.04.2010. It was explained that the goodwill represents the difference between the Investment made towards acquiring 100% equity in this company during the earlier F.Y. and the value of the net assets and liabilities taken over on amalgamation. 6.7 We find that the decision of the AO not to accept the claim of the assessee for allowance of depreciation on goodwill on the ground that no such claim was made in the revised return filed by the assessee is in accordance with the ratio laid down by the Hon'ble Supreme Court in the case of Goetze (India) Ltd. wherein it was held that the Assessing Officer has no power to entertain a claim for deduction otherwise than by filing a revised return. Hence, we confirm the decision of the AO not to accept the claim for allowance of depreciation on the goodwill. 6.8 However, we find that while computing the total income, the AO added back the depreciation of Rs.5,49,87,789/- to the total income admitted by the assessee in the revised return. This constitutes a mistake apparent from record since the AO himself has given a fact finding that such depreciation was not claimed in the revised return. An amount which was not claimed in the return cannot be added back to the total income. The AO had only declined the request of the assessee to allow this depreciation though it was not claimed in the revised return. Hence, we direct the AO to compute the total Income without adding back the depreciation of Rs.5,49,87,789/-.” 22. In conformity, the AO, inter-alia, passed the final assessment order. Being aggrieved, the assessee is in appeal before us. 23. During the course of hearing, learned AR submitted that pursuant to the amalgamation, tangible and intangible assets acquired from the amalgamating subsidiary company were revaluated in the books of the assessee. The learned AR further submitted that there was no goodwill in the books of amalgamating subsidiary company and the excess cost of investment over the net value of assets acquired upon amalgamation has been debited to the goodwill account M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 20 of the assessee and depreciation on same was claimed by the assessee during the course of assessment proceedings. Learned AR also submitted that the AO has allowed depreciation on intangible assets acquired by way of amalgamation @25%. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities. 24. We have considered the rival submissions and perused the material available on record. In the present case, the wholly owned subsidiary company of assessee i.e. Bangalore Genei (India) Private Ltd was amalgamated with the assessee in terms of the Scheme of Amalgamation as approved by the Hon’ble jurisdictional High Court vide order dated 16/04/2010, as per provisions of section 391 to 394 and other applicable provisions of the Companies Act, 1965 from the appointed date i.e. 01/04/2010. In accordance with the said scheme, all assets and liabilities of the amalgamating subsidiary company were transferred to and invested with the assessee company with effect from 01/04/2010 and have been recorded at their fair values in accordance with the scheme. As per the assessee, while recording the assets and liabilities upon amalgamation, purchase method of accounting as per Accounting Standard–14 and generally accepted accounting principles in India was followed. While recording the accounting entries upon amalgamation, the inter-company balances were cancelled and the investments of the assessee in shares of the subsidiary company were also cancelled against the assets acquired upon amalgamation. From the perusal of financials of Bangalore Genei (India) Private Ltd, forming part of the paper book from page 102 – 151, we find that the value of fixed assets was at Rs. 3,02,41,601 and intangible assets were at M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 21 Nil. Pursuant to the amalgamation, the tangible and intangible assets acquired from the amalgamating company were revalued in the books of the assessee and the excess cost of investment over net value of assets, amounting to Rs. 21,99,51,156, was debited to the goodwill account. Accordingly, assessee made a fresh claim for depreciation in respect of goodwill during the course of assessment proceedings. The AO denied the said claim of the assessee by placing reliance upon decision of Hon’ble Supreme Court in Goetze (India) Ltd. (supra). The learned DRP, inter-alia, upheld the conclusion of the AO. 25. As per the assessee, goodwill arose upon amalgamation representing the excess consideration discharged by the assessee company over the net worth of the amalgamating company and thus the same is eligible for depreciation. Reliance has been placed on the addition of Hon’ble Supreme Court in CIT v. Smifs Securities Ltd., 348 ITR 302 (SC). During the course of hearing, assessee placed on record audited accounts of assessee as well as order of Hon’ble jurisdictional High Court approving the scheme of amalgamation. Further, reference was also made to balance sheet of amalgamating subsidiary company as well as other documents forming part of the paper book in support of its claim. From the record it is evident that none of these documents were examined by the lower authorities and assessee’s claim was rejected at the threshold by placing reliance upon Hon’ble Supreme Court decision in Goetze (India) Pvt. Ltd. (supra). Vide our interim order dated 02/06/2022, remand report of the AO was sought in respect of the documents on which reliance was placed by the assessee in support of its claim of depreciation on goodwill. Further, the assessee was also directed to appear before the AO along with all M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 22 the documents in support of its claim. The AO vide its remand report dated 07/07/2022, inter-alia, raised doubts on the valuation report submitted by the assessee. The AO also agreed that the opportunity is being given in remand proceedings to verify the case on merits, however, prayed that matter be remanded to the AO to decide the case on merits, as it cannot disallow the goodwill during the remand proceedings. 26. At this stage, it is also relevant to note that assessee in its revised return of income made claim of depreciation on certain assets viz. intangibles acquired upon amalgamation of Bangalore Genei (India) Private Ltd with the assessee. The details of intangible assets are as under: (i) Trademark Rs. 1,07,74,700 (ii) Technical know-how Rs. 2,55,83,700 (iii) Brands Rs. 46,77,300 (iv) Customers data Rs. 1,70,25,800 27. As noted above, in the books of Bangalore Genei (India) Private Ltd, the intangible assets were at nil for the year ending 31/03/2010 and the aforesaid intangibles were acquired only upon amalgamation of subsidiary company with the assessee and thereafter same were revalued. We find that the AO vide final assessment order accepted the claim made by the assessee in its revised return of income and granted depreciation @25% on intangible assets. It is only in respect of depreciation claimed on goodwill, the AO did not grant the relief to the assessee. 28. We find that Hon’ble Delhi High Court in Triune Energy Services Private Limited vs DCIT: [2016] 237 Taxmann 230 (Delhi), by referring to Accounting M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 23 Standard 10, held that consideration paid in excess of value of tangible assets is classifiable as goodwill eligible for depreciation. We further find that the coordinate bench of the Tribunal in Altimetrik India (P) Ltd vs DCIT, [2022] 194 ITD 124 (Bangalore–Trib.) held that consideration paid by the amalgamated company over and above the net assets of the amalgamating company should be considered as goodwill arising on amalgamation. 29. Thus, once the AO has allowed the claim of depreciation on intangible assets acquired by the assessee upon amalgamation of subsidiary company, which were also revalued subsequent to the amalgamation, we are of the considered view that there is no basis to reject the claim of the assessee in respect of depreciation on goodwill. Particularly, when all the intangibles including the goodwill were nil in the books of the amalgamating subsidiary company for the year ending 31/03/2010. During the course of hearing, learned DR placed reliance upon decision of Hon’ble Supreme Court in Techno- Shares and Stocks Ltd vs CIT, [2010] 193 Taxmann 248 (SC) and submitted that assessee has to establish that goodwill as licensed/franchise. We find that in the aforesaid decision the Hon’ble Supreme Court was dealing with the issue of depreciation on BSE membership card under section 32(1)(ii) of the Act. Therefore, same is not applicable to the facts of the present case. Before concluding, it is relevant to note that the Hon’ble Supreme Court in Smifs Securities Ltd. (supra) has held that goodwill will fall under the expression 'or any other business or commercial rights of similar nature' and, hence, qualifies for depreciation under section 32(1) of the Act. In the present case, the AO as well as learned DRP did not entertain the claim of the assessee in view of M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 24 decision of Hon’ble Supreme Court in Goetze (India) Ltd. (supra), however, it is now well settled that there is no bar on the appellate authority to entertain a fresh claim of the assessee, if the relevant fact for deciding such issue are available on record. Further, it is pertinent to note that on one hand in the remand proceedings, the AO for the first time raised doubts about the valuation report, however, on the other hand AO has allowed depreciation on intangible assets @ 25%, which were also acquired by the assessee and were also revalued in the books of the assessee upon amalgamation. Therefore, in view of the above, we find merit in the claim of the assessee and accordingly we direct the AO to grant depreciation on goodwill arising on account of amalgamation of subsidiary company with the assessee. As a result, ground No. 4 raised in assessee’s appeal is allowed. 30. The issue arising in ground No. 5 raised in assessee’s appeal is pertaining to charging of interest under section 234A of the Act. Accordingly, we deem it appropriate to remand this issue to the file of AO for de novo adjudication after necessary examination of the fact whether the return of income was filed by the assessee within the prescribed time under the Act. As a result, ground No. 5 raised in assessee’s appeal is allowed for statistical purpose. 31. Ground No. 6 and 7 pertains to levy of interest under section 234B and section 234C of the Act, which are consequential in nature. Therefore, the said grounds are allowed for statistical purpose. M/s. Merck Specialties Pvt. Ltd. ITA No.2056/Mum./2016 Page | 25 32. Ground no. 8 is pertaining to initiation of penalty proceedings, which is premature in nature and therefore is dismissed. 33. In the result, appeal by the assessee is partly allowed for statistical purpose. Order pronounced in the open Court on 14/10/2022 Sd/- PRAMOD KUMAR VICE PRESIDENT Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 14/10/2022 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai