LANXESS INDIA P.LTD, THANE V. ADDL CIT RG 1, THANE

ITA 7202/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70960 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 17-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 04-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KANCHAN KAUSHAL SHRI ALIAJGER; DHANESH BATRA IZRFKHZ DH LS
• Keywords: Transfer pricing; International transaction; Additional evidence; Wholly owned subsidiary
• Section: 69C; 92F; 133(6); 68; 69; 144

Judgement Text

- 1 - VK;DJ VIHYH; VF/KDJ.K DS U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUM BAI JH JKTSUNZ FLAG YS[KK LNL; ,OA JH VFER 'KQDYK U;KF;D LNL; DS LE {K BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO. 7202 /MUM/2012 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR:- 2008-09 LANXESS INDIA PRIVATE LTD. PLOT NO. 162-264, ROAD NO. 27, WAGLE ESTATE, OPP ITI COLLEGE, MIDC, THANE;- 400604. CUKE@ VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE -1, 21, B-WING, 6 TH FLOOR,ASHER IT PARK, ROAD, NO. 16-Z, WAGLE INDUSTRIAL ESTATE THANE (W)- 400604. PAN:-AACCB3880A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY SHRI KANCHAN KAUSHAL, SHRI ALIAJGER AND SHRI DHANESH BATRA IZR;FKHZ DH VKSJ LS @ RESPONDENT BY SHRI AJEET KUMAR JAIN VKNS'K VKNS'K VKNS'K VKNS'K @ @@ @ ORDER PER RAJENDRA SINGH, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 25.10.2012 OF THE ASSESSING OFFICER (AO) PASSED IN PURSUANCE OF DIRECTION BY THE DISPUTES RESOLUTION PANEL (DRP) DA TED 28.9.2012 ISSUED U/S 144 C (5) OF THE INCOME TAX ACT. THE DIS PUTES RAISED BY THE ASSESSEE IN THIS APPEAL RELATE TO TRANSFER PRICING (TP) ADJUSTMENT ON ACCOUNT OF CONTROL PREMIUM AND NON COMPETE FEES IN RELATION TO SALE OF SHARES TO AE, ON ACCOUNT OF OTHER TRANSACTIONS WITH AES RELATING TO LQUOKBZ DH RKJH[K@ DATE OF HEARING 23-7-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 28-8-2013 - 2 - MANUFACTURING SEGMENT, ON ACCOUNT OF SALE OF TEXTIL E PROCESSING BUSINESS (TCP) UNIT, AND IN RELATION TO ADDITION MA DE BY AO ON ACCOUNT OF CREDITORS, PURCHASES AND OTHER EXPENSES. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE BELONGS TO LANXESS GROUP WHICH IS ENGAGED IN THE CHEMICAL BUSINESS GLOBALLY. THE ASSESSEE WAS MANUFACTURING AND TRADING IN CHEMICALS AND CHEMICAL S INGREDIENTS DURING THE RELEVANT YEAR. THE LANXESS GROUP IN THE YEAR 2006 TOOK THE DECISION FOR WORLDWIDE SALE OF LUSTRON POLYMER BUSI NESS OF THE GROUP. AS A CONSEQUENCE, THE ASSESSEE WHICH HELD 50.97% SH ARES OF LANXESS ABS SOLD THE SHARES TO INEOS ABS (NEW JERCY) LTD IN WHICH THE HOLDING COMPANY OF THE ASSESSEE HAD 49% SHARE HOLDI NG. AO IN THE ASSESSMENT ORDER MADE ADJUSTMENT ON ACCOUNT OF CONT ROL PREMIUM AND NON COMPETE FEES IN RELATION TO THE SAID SALE O F SHARES TO THE AE CONSEQUENT TO ORDER PASSED BY TPO. THE LANXESS GRO UP DURING THE YEAR HAD ALSO SOLD THE TEXTILE PROCESSING CHEMICAL (TPC) BUSINESS GLOBALLY TO TANATEX GROUP AS A RESULT OF WHICH DIFF ERENT BUSINESS ENTITIES OF THE LAXNESS GROUP SITUATED IN DIFFERENT COUNTRIES HAD BEEN SOLD OUT TO THE SAID COMPANY. THE CONSIDERATION REC EIVED HAD BEEN DISTRIBUTED IN THE RATIO OF NET ASSET VALUE OF THOS E 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 G MBH HAD NOT BEEN DISTRIBUTED AND ADJUSTMENT OF RS. 9899128069/- WAS THEREFORE MADE BY THE AO ON THE BASIS OF ORDER OF TPO. SIMILA RLY IN RELATION TO TRANSACTIONS WITH AE IN RESPECT OF MANUFACTURING SE GMENT ADJUSTMENT HAD BEEN MADE TO THE TOTAL INCOME BY RS. 80103961/- . THE AO ALSO MADE ADDITION OF RS. 53521277/- ON ACCOUNT OF SUNDR Y CREDITORS, PURCHASES AND EXPENSES U/S 69C OF THE INCOME TAX AC T. ALL THESE - 3 - ADDITIONS MADE BY AO HAVE BEEN DISPUTED BEFORE THE TRIBUNAL IN THIS APPEAL. 3. WE FIRST TAKE UP THE DISPUTE RELATING TO THE SAL E OF SHARES OF THE ASSESSEE HELD IN LANXESS ABS. THE ASSESSEE HELD 50. 97% SHARE HOLDING IN THE SAID COMPANY IN WHICH RA GROUP ALSO HELD 18.33%. CONSEQUENT TO THE DECISION OF LANXESS GROUP TO DIVE ST LUSTRON POLYMER BUSINESS GLOBALLY, THE ASSESSEE SOLD THE SH ARES TO INEOS ABS (NEW JERSEY) LTD. WHICH IS A JOINT VENTURE OF LANXE SS GROUP AND INEOS GROUP. LANXESS DEUTSCHLAND GMBH THE HOLDING COMPANY OF THE ASSESSEE HELD 49% SHARE HOLDING IN JOINT VENTURE AN D THE INEOS GROUP HELD 51%. THE ASSESSEE WAS A SUBSIDIARY OF LA NXESS DEUTSCHLAND GMBH. THE SHARES OF THE ASSESSEE HAD BE EN TRANSFERRED TO THE JOINT VENTURE AT THE RATE OF RS. 196 PER SHA RE WHEREAS THE PAYMENT MADE TO RAKESH AGARWAL (RA) GROUP WAS AT TH E RATE OF RS. 201 PER SHARE. THE R.A. GROUP HAD ALSO BEEN PAID NO N COMPETE FEES OF RS. 165632565/- AT THE RATE OF 25% OF SHARE VALUE W HEAREAS THE ASSESSEE WHO HELD 50.97 % SHARE HOLDING HAD NOT RE CEIVED ANY NON COMPETE FEES. THE ASSESSEE HAD ALSO NOT BEEN PAID A NY CONTROL PREMIUM THOUGH IT HAD SOLD THE CONTROLLING STAKE IN THE COMPANY. 3.1 TPO, THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY TP ADJUSTMENT SHOULD NOT BE MADE IN RESPECT OF SALE OF SHARES ON ACCOUNT OF CONTROL PREMIUM AND NON COMPETE FEES. THE ASSESS EE SUBMITTED THAT THE SALE OF SHARES HAD TAKEN PLACE BETWEEN TWO INDIAN PARTIES AND, THEREFORE IT WAS NOT AN INTERNATIONAL TRANSACT ION. TPO HOWEVER DID NOT ACCEPT THE EXPLANATION GIVEN. IT WAS OBSERVED B Y HIM THAT THE SHARES HAD BEEN SOLD TO JV IN WHICH THE HOLDING COM PANY OF THE ASSESSEE HAD 49% SHARE HOLDING AND 51% SHARE HELD B Y INEOS GROUP AND THEREFORE THE TRANSACTION WAS COVERED BY SECTIO N 92F AND WAS AN - 4 - INTERNATIONAL TRANSACTION. THE TPO ALSO OBSERVED TH AT ASSESSEE COULD NOT GIVE ANY SATISFACTORY EXPLANATION AS TO WHY NO PAYMENTS HAD BEEN RECEIVED BY THE ASSESSEE COMPANY ON ACCOUNT OF CONT ROL PREMIUM AND NON COMPETE FEES. THE TPO REFERRED TO THE CASE OF C ONTROLLING STAKE TRANSFERRED BY THE GOVERNMENT IN FAVOUR OF SUZUKI F OR 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, ESTIMAT ED THE CONTROL PREMIUM AT 25% OF SHARE PRICE WHICH CAME TO RS. 49/ - PER SHARE. THE ASSESSEE HAD TRANSFERRED 8963564 SHARES THE VALUE O F WHICH .45 PER SHARE CAME TO RS.439214636/-. THE TPO ALSO HELD THA T 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 RECOMMEN DED BY THE TPO ON ACCOUNT OF CONTROL PREMIUM AND NON COMPETE FEES WAS RS. 900541864/- WHICH HAD BEEN ADDED BY THE AO TO THE T OTAL INCOME. 4. WE NOW TAKE UP THE ISSUE OF NON-COMPETE FEES. TH E ASSESSEE FILED OBJECTIONS BEFORE THE DRP AGAINST THE ORDER O F 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 M ANAGEMENT OF THE COMPANY AND HAD SIGNIFICANT KNOW HOW ABOUT THE COMP ANY AND ITS BUSINESS RELATIONSHIPS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE WAS ONLY A STRATEGIC INVESTOR AND WAS NOT INVOLVED IN D AY TO DAY RUNNING OF THE COMPANY AND, THEREFORE, AFTER IT EXITED THE COM PANY, IT DID NOT HAVE THE CAPACITY TO START A SIMILAR NEW BUSINESS. MOREOVER, IT WAS ALSO SUBMITTED THAT THE ASSESSEE WANTED TO EXIT THE COMPANY AND, THEREFORE THERE WAS NO QUESTION OF COMPETING IN THE SAID BUSINESS. IT - 5 - WAS ALSO ARGUED THAT SHRI RAKESH AGARWAL AND OTHERS HAD BEEN ASSOCIATED WITH THE COMPANY FOR A LONG TIME AND HAD SIGNIFICANTLY BUILT THE COMPANY OVER THE YEARS. DRP HOWEVER DID NOT ACC EPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE ASSESSEE BEING A CORPORATE ENTITY WHO HAD CONTROLLING STAKE IN THE C OMPANY WAS LIKELY TO HAVE MORE RESOURCES AND THE CAPABILITIES THAN RA KESH AGARWAL TO COMPETE IN THE BUSINESS WITH ACQUIRER. THE ASSESSEE WHO WAS CONTROLLING THE COMPANY FOR ABOUT THREE YEARS HAD M ORE EXTENSIVE INVOLVEMENT AND MUST HAVE DEVELOPED ITS OWN CAPABIL ITIES TO PROVIDE COMPETITION IN THE FIELD. DRP, THEREFORE REJECTED T HE CASE OF THE ASSESSEE AND UPHELD THE ADJUSTMENT MADE BY TPO ON A CCOUNT OF CONTROLLING STAKE, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 4.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE REITE RATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES THAT THE ASSESSEE WAS ONLY A STRATEGIC INVESTOR IN THE COMPANY I.E. LANXE SS ABS. IT WAS POINTED OUT THAT IT WAS RAKESH AGARWAL WHO HAD PROM OTED THE COMPANY IN THE YEAR 1973 IN THE NAME OF ABS PLASTIC LTD. THE SAID COMPANY HAD BEEN TAKEN BY THE BAYER GROUP IN THE Y EAR 1997. LANXESS GROUP HAD TAKEN THE CONTROLLING STAKE IN TH E COMPANY IN THE YEAR 2004 FROM BAYER GROUP. DURING ALL THESE YEARS, SHRI RAKESH AGARWAL REMAINED MANAGING DIRECTOR OF THE COMPANY A ND REMAINED MD EVEN AFTER THE EXIST OF LANXESS GROUP IN 2007. I T WAS ALSO SUBMITTED THAT LANXESS GROUP WAS NOT IN THIS BUSINE SS PRIOR TO 2004. THE LEARNED AR FURTHER SUBMITTED THAT LANXESS GROUP WAS EXITING THE BUSINESS AND, THEREFORE, THERE WAS NO QUESTION OF P ROVIDING ANY COMPETITION IN THE FIELD. HE, REFERRED TO THE LANXE SS GLOBAL REPORT FOR THE YEAR 2007, A COPY OF WHICH WAS PLACED AT PAGE 6 2 OF THE PAPERBOOK WHICH MENTIONED THAT THE MARKET SITUATION OF THE BUSINESS - 6 - UNIT CONTINUED TO BE HAMPERED BY COMPETITORS ADDITI ON TO CAPACITIES SPECIALLY IN ASIA. THE REPORT ALSO MENTIONED THAT S EARCH FOR PARTNER FOR LUSTRON POLYMER BUSINESS WAS SUCCESSFULLY COMPLETED WITH INEOS ABS AND THE BUSINESS WAS TRANSFERRED IN SEPTEMBER 2007 W.E.F 30 TH 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 WIL L TAKE OVER THE LANXESSS REMAINING INTEREST IN JV TWO YEARS AFTER ITS TRANSFER. THE REPORT THEREFORE CLEARLY SHOWED THAT THE LANXESS WA NTED TO EXIT THE BUSINESS. 4.2. THE LD. AR FURTHER ARGUED THAT THE TPO HAD IMP LIEDLY USED INTERNAL CUP METHOD BY BENCH MARKING THE TRANSACTIO N WITH NON COMPETE FEES PAID TO RA GROUP WHICH AS POINTED OUT EARLIER IS NOT COMPARABLE AS SHRI RAKESH AGARWAL HAD LONG EXPERIEN CE OF DAY TO DAY RUNNING OF THE COMPANY AND ALSO HAD SIGNIFICANT KNO W HOW ABOUT THE COMPANY. THE LEARNED AR ALSO POINTED OUT THAT THE S HARE HOLDERS OF LANXESS ABS HAD ALSO FILED COMPLAINT BEFORE SEBI RE GARDING UNREASONABLE PAYMENT OF NON COMPETE FEES TO RA GROU P. 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 DYNA MICS IN INDIA IN THE YEAR 1976 AND HAD RUN THE COMPANY FOR SEVERAL Y EARS. HE HAD EXTENSIVE KNOWLEDGE OF MARKET AND THE BUSINESS OF T HE COMPANY, THE TECHNOLOGICAL KNOW HOW AND ABOUT SUPPLIERS AND CUST OMERS OF THE COMPANY. THE WHOLE TIME MEMBER, THEREFORE, HELD THA T THE RA GROUP WAS COMPETENT ENOUGH TO GIVEN EFFECTIVE COMPETITION TO THE SAID COMPANY. IT HAD BEEN PROHIBITED FOR THREE YEARS FRO M COMPETING WITH ANY BUSINESS CARRIED ON BY THE SAID COMPANY DIRECTL Y OR INDIRECTLY. THEREFORE, PAYMENT OF NON COMPETE FEES AT THE RATE OF 24.88% OF THE - 7 - OFFERE PRICE WAS REASONABLE. IT WAS THUS ARGUED THA T PAYMENT OF NON COMPETE IN CASE OF RA GROUP HAD ALSO BEEN UPHELD BY SEBI. THE ASSESSEE COMPANY ON THE OTHER HAND DID NOT HAVE EXT ENSIVE KNOWLEDGE AND EXPERIENCE ABOUT RUNNING OF THE COMP ANY SO AS TO PROVIDE SIGNIFICANT COMPETITION TO THE ACQUIRER AND , THEREFORE, NO NON COMPETE FEES WAS JUSTIFIED TO THE ASSESSEE COMPANY. 4.3. THE LEARNED CIT(DR) ON THE OTHER HAND STRONGLY DEFENDED THE ORDERS OF AUTHORITIES BELOW RELATING TO THE ADJUSTM ENT ON ACCOUNT OF NON COMPETE FESS. IT WAS ARGUED THAT THE ASSESSEE H AD CONTROL OVER THE COMPANY FOR THREE YEARS FROM 2004 TO 2007 AND A T THE TIME OF SELLING THE STAKE, IT HAD SIGNED 3 YEARS NON COMPET E AGREEMENT AS DONE BY THE RA GROUP. IT WAS POINTED OUT THAT NOBOD Y WILL SIGN NON COMPETE AGREEMENT WITHOUT ANY CONSIDERATION. IT WAS ALSO SUBMITTED THAT LANXESS ABS WAS WITH BAYER GROUP SINCE 1998 AN D BAYER GROUP CREATED LANXESS AS SUBSIDIARY IN 2004 IN WHICH THE PERSONNEL OF BAYERS CONTINUED SINCE 1998. MOREOVER, NUMBER OF YE ARS WAS NOT RELEVANT. THE ASSESSEE COMPANY DURING THE THREE YEA R PERIOD HAD CONTROLLED THE COMPANY AND THEREFORE HAD FULL KNOWL EDGE OF THE BUSINESS PROCESS AND TECHNOLOGY AND ALSO HAD RESOUR CES TO GIVE EFFECTIVE COMPETITION IN FUTURE. MERE KNOWLEDGE AND RUNNING OF THE COMPANY WHICH RA GROUP HAD, WAS NOT ENOUGH FOR PROV IDING COMPETITION IN BUSINESS UNLESS SOMEBODY HAD THE RES OURCES. RAKESH AGARWAL COULD NOT COMPETE WITH LANXESS IN TERMS OF RESOURCES BUT IT HAD BEEN GIVEN NON COMPETE FEES. IT WAS ALSO POINTE D OUT THAT NON COMPETE FEES HAD BEEN PAID NOT ONLY TO RAKESH AGARW AL BUT ALSO TO CORPORATE ENTITIES OF THE GROUP SUCH AS TASH INVEST MENT AND GEET GANGA INVESTMENT PVT. LTD. WHICH AS INVESTMENT COMP ANIES HAD NO KNOWLEDGE AND EXPERIENCE OF DAY TO DAY RUNNING OF T HE COMPANY. IF THOSE INVESTMENT COMPANIES COULD BE PAID NON COMPET E FESS, WHY - 8 - THEN SUCH FEES SHOULD BE DENIED TO THE ASSESSEE COM PANY WHICH WAS CONTROLLING THE COMPANY. 4.4. AS REGARDS THE SEBI ORDER, IT WAS SUBMITTED TH AT THE ORDER WAS RELEVANT ONLY FROM THE POINT OF VIEW OF REASONABLEN ESS OF THE NON COMPETE FEES AND THE SEBI HAD FOUND THE NON COMPETE FEES REASONABLE. THE ISSUE WHETHER SIMILAR NON COMPETE F EES HAS TO BE PAID TO THE ASSESSEE COMPANY WHICH WAS HAVING CONTROLLIN G 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 THEREFO RE HAD MADE THE ADJUSTMENT CORRECTLY. 4.5. IN REPLY, THE LEARNED AR FOR THE ASSESSEE REIT ERATED THE SUBMISSIONS MADE EARLIER THAT MERELY BECAUSE SOMEON E HAD CONTROLLING STAKE IN THE COMPANY DID NOT ENTITLE HI M FOR NON COMPETE FEES WHICH HAD TO BE PAID BASED ON SKILLS AND EXPER IENCE REQUIRED FOR THIS PURPOSE AS DISCUSSED IN THE ORDER OF SEBI. IT WAS POINTED OUT THAT, AS MENTIONED EARLIER, SHRI RAKESH AGARWAL WAS FOUN DER OF THE BUSINESS AND REMAINED ITS MD ABOUT FORTY YEARS. THE LANXESS, WHICH HAD MADE ONLY STRATEGIC INVESTMENT, HAD NO VALID CL AIM FOR NON COMPETE FEES. AS REGARDS THE INTERNAL CUP, THE LEAR NED AR POINTED OUT THAT AS PER RULE 10B(1)(A)(II), IN APPLYING THE CUP METHOD, ADJUSTMENT HAD TO BE MADE FOR DIFFERENCES BETWEEN THE TRANSACT IONS AND BETWEEN THE ENTERPRISES ENTERING INTO THE TRANSACTIONS. IN THIS CASE AS POINTED OUT EARLIER THERE WERE DIFFERENCES BETWEEN THE ASSE SSEE COMPANY AND THE RA GROUP IN TERMS OF SKILLS AND EXPERIENCE. FUR THER IN TERMS OF RULE 10B(2)(B) THE COMPARABILITY OF THE TRANSACTION S HAS TO BE JUSTIFIED WITH RESPECT TO FUNCTIONS PERFORMED, ASSET EMPLOYED AND RISK ASSUMED, WHICH WAS DIFFERENT IN THE TWO CASES. IT W AS, THEREFORE, - 9 - URGED THAT NO ADJUSTMENT WAS REQUIRED ON ACCOUNT OF NON COMPETE FEES IN CASE OF THE ASSESSEE COMPANY. 4.6 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS G ROUND IS REGARDING TP ADJUSTMENT MADE BY AO/TPO ON ACCOUNT OF NON COMPETE FEES. THE ASSESSEE HELD 50.97% SHARE HOLDING IN LANXESS ABS I N WHICH RA GROUP HEADED BY SHRI RAKESH AGARWAL HELD 18.33% SHA RES. THE ASSESSEE ALONG WITH RA GROUP TRANSFERRED THEIR ENTI RE SHARE HOLDING IN LANXESS ABS TO INEOS ABS (NEW JERSY) LTD. A JOINT V ENTURE BETWEEN LANXESS GROUP AND INEOS GROUP IN WHICH THE HOLDING COMPANY OF THE ASSESSEE COMPANY I.E. LANXESS DEUTSCHLAND GMBH HELD 49% SHARE HOLDING AND BALANCE 51% WAS HELD BY INEOS GROUP. BO TH THE ASSESSEE AND THE RA GROUP HAD SIGNED NON COMPETE AGREEMENT W ITH THE JOINT VENTURE COMPANY FOR NON COMPETING IN BUSINESS WITH THE SAID COMPANY FOR A PERIOD OF THREE YEARS. RA GROUP HAD BEEN PAID NON COMPETE FEES AT THE RATE OF 25% OF SHARE VALUE AT RS. 165632565/ -. THE ASSESSEE HOWEVER HAD NOT BEEN PAID ANY SUCH NON COMPETE FEES TO THE ASSESSEE. THE AO/TPO HAVE TREATED THE PAYMENT OF NO N COMPETE FEES TO RA GROUP AS AN INTERNAL COMPARABLE UNCONTROLLED PRICE (CUP) FOR THE PURPOSE OF COMPARISON AND HAVE MADE ADJUSTMENT AT THE RATE OF 25% OF SHARE VALUE AS NON COMPETE FEES IN CASE OF THE A SSESSEE. THE ASSESSEE BEFORE THE LOWER AUTHORITIES HAD RAISED TH E ISSUE THAT THE TRANSACTION WAS BETWEEN TWO INDIAN PARTIES AND, THE REFORE, IT WAS NOT AN INTERNATIONAL TRANSACTION. HOWEVER THE TRANSACTI ON BEING WITH THE JV IN WHICH THE HOLDING COMPANY OF THE ASSESSEE HAD 49% SHARE HOLDING AND THE BALANCE BEING HELD BY INEOS GROUP T HE LEARNED AR FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE ASSESSEE HAD NO OBJECTION TO TREATING THE TRANSACTION AS AN INTERNATIONAL TRA NSACTION. - 10 - 4.7 HOWEVER IT HAS BEEN ARGUED THAT CASE OF THE ASS ESSEE WAS NOT COMPARABLE TO THE CASE OF RA GROUP ON VARIOUS ACCOU NTS SUCH AS (I) SHRI RAKESH AGARWAL BEING THE PROMOTER OF BUSINESS HAD LONG EXPERIENCE FOR DAY TO DAY MANAGEMENT OF THE BUSINES S AS WELL AS SIGNIFICANT KNOW HOW ABOUT THE COMPANY;(II) THE ASS ESSEE 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 SEB I AND FOUND TO BE IN ORDER; THERE BEING SUBSTANTIAL DIFFERENCES BE TWEEN 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 RU LE 10B(2)(D). THE DEPARTMENT HAS HOWEVER COUNTERED THESE ARGUMENTS BY POINTING OUT THAT THE ASSESSEE WHO WAS CONTROLLING THE COMPANY H AD EXTENSIVE INVOLVEMENT AND FULL KNOWLEDGE ABOUT THE WORKING OF BUSINESS AND, THEREFORE, IT COULD EASILY COMPETE IN BUSINESS. MOR EOVER, IT HAD MORE RESOURCES THAN SHRI RAKESH AGARWAL. IT HAS ALSO BEE N ARGUED THAT EVEN THE INVESTMENT COMPANIES OF THE RA GROUP HAD BEEN P AID NON COMPETE FEES AND, THEREFORE, THERE WAS NO REASON FO R DENYING PAYMENT TO THE ASSESSEE. THE SEBI ORDER, IT HAS BEE N POINTED OUT WAS NOT RELEVANT AS IT HAD ONLY CONSIDERED THE REASONAB LENESS OF NON COMPETE FEES PAYMENT TO RA GROUP. THE CASE OF THE R A GROUP WAS IDENTICAL AND, THEREFORE, IT HAS RIGHTLY BEEN USED AS AN INTERNAL CUP BY AO/TPO. 4.8 WE HAVE GIVEN CAREFUL CONSIDERATION TO THE VARI OUS ASPECTS OF THE MATTER. NON COMPETE FEES IS PAID BY A PARTY, ACQUIR ING THE BUSINESS FOR SIGNING THE NOT COMPETE AGREEMENT SO AS TO NOT COMP ETE WITH THE BUSINESS AQUIRED FOR A CERTAIN PERIOD. SUCH PAYMENT S ARE MADE TO PERSONS WHO HAVE COMPLETE AND EXTENSIVE KNOWLEDGE O F BUSINESS PROCESS, TECHNOLOGY AND WORKING OF THE COMPANY AND HAVE THE - 11 - RESOURCES TO COMPETE WITH THE BUSINESS OF THE ACQUI RER BY SETTING UP SIMILAR NEW BUSINESSES OR IN ANY OTHER WAY. SHRI RA KESH AGARWAL HAD NO DOUBT PROMOTED THE BUSINESS AND HAD BEEN MD OF T HE COMPANY FOR SEVERAL YEARS AND HAD FULL DAY TO DAY KNOWLEDGE AND THE WORKING OF THE COMPANY AND ALSO ABOUT BUSINESS KNOW HOW AND RE LATIONSHIPS. HOWEVER FOR SETTING UP OF A NEW BUSINESS NUMBER OF YEARS SPENT ON RUNNING THE COMPANY IS NOT THE ONLY FACTOR TO BE CO NSIDERED. WHAT IS REQUIRED FOR SETTING UP OF A NEW BUSINESS IS THAT T HE PERSON SHOULD NOT ONLY BE KNOWING THE BUSINESS PROCESS AND KNOW HOW A ND TECHNOLOGY USED IN THE BUSINESS, BUT HE SHOULD ALSO HAVE RESOU RCES TO SET UP SIMILAR BUSINESS. THE ASSESSEE HAD CONTROLLING STAK E 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. IF EXPERIENCE WAS THE ONLY RE LEVANT FACTOR FOR SETTING UP OF A BUSINESS, SHRI RAKESH AGARWAL COULD HAVE SET UP SUCH NEW COMPANY IN THE PAST WHICH HE HAD NOT BEEN ABLE TO DO AND REMAINED MD THROUGHOUT EVEN THOUGH THE OWNERSHIP OF THE COMPANY CHANGED FROM TIME TO TIME. IF KNOWLEDGE AND EXPERIE NCE ARE THE REQUIREMENTS FOR PAYMENT OF NON COMPETE FEES, THEN A GENERAL MANAGER OF THE COMPANY WHO WAS MORE INTIMATELY CONN ECTED WITH DAY TO DAY KNOWLEDGE OF BUSINESS PROCESS AND ITS WORKIN G SHOULD ALSO HAVE BEEN PAID NON COMPETE FEES. MOREOVER, LEARNED CIT(D R) HAS RIGHTLY POINTED OUT THAT INVESTMENT COMPANIES HOLDING SHARE S 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. THEREFORE, IT HAS BEEN RIGHTLY ARGUED BY THE REVENUE THAT THE ASSESSE E WHO HAD SIGNED - 12 - 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 OR DER 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 R A GROUP HAD BEEN PAID NON COMPETE FEES WHICH WAS NOTHING BUT PA RT OF THE SHARE PRICE AND THUS BY TREATING THE PART OF THE SHARE PR ICE AS NON COMPETE FEES, THEY HAD REDUCED THE SALE PRICE OF SHARES WHI CH RESULTED INTO LOWER PAYMENT TO THEM. THE SEBI, HOWEVER, CONSIDERI NG KNOWLEDGE AND EXPERIENCE OF RA GROUP AS MENTIONED EARLIER HEL D THAT THE PAYMENT OF NON COMPETE FEES WAS JUSTIFIED AND REASO NABLE 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 REQ UIRED TO BE PAID TO THE ASSESSEE OR NOT. THIS ISSUE HAS BEEN RAISED IN THIS APPEAL BEFORE THE TRIBUANA. 4.10 THE LEARNED AR FOR THE ASSESSEE HAS ALSO ARGUE D THAT THE CASE OF THE ASSESSEE IS DIFFERENT AND NON COMPARABLE TO THE CASE OF THE RA GROUP. HE HAS REFERRED TO THE PROVISIONS OF RULE 10 B(1)(A)(II) AS PER WHICH WHILE APPLYING CUP METHOD ADJUSTMENTS ARE REQ UIRED TO BE MADE IN RESPECT OF DIFFERENCES IF ANY BETWEEN THE I NTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTION WHIC H COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. IN THIS CASE B OTH THE ASSESSEE AND RA GROUP HAD THE TRANSACTIONS WITH THE SAME JOINT V ENTURE WHO HAD PURCHASED THE BUSINESS. THERE IS NO DIFFERENCE IN T HE TRANSACTION WHICH IS NON COMPETE FEES IN BOTH THE CASES. IN SO FAR AS THE DIFFERENCE BETWEEN THE ASSESSEE AND RA GROUP IS CONCERNED, THE DIFFERENCES - 13 - POINTED OUT BY THE ASSESSEE HAVE BEEN NOTED EARLIER AND THESE DIFFERENCES HAVE TO BE EVALUATED FROM THE POINT OF VIEW OF CAPABILITIES OF THE TWO PARTIES FOR COMPETING IN THE BUSINESS. A S WE HAVE HELD EARLIER THE ASSESSEE HAD BETTER CAPABILITIES FOR SE TTING UP A SIMILAR NEW BUSINESS TO GIVE COMPETITION TO THE BUYER. THEREFOR E, ADJUSTMENT IF ANY ON THIS ACCOUNT UNDER RULE 10B(1)(A)(II) HAS ON LY TO BE POSITIVE IN FAVOUR OF THE ASSESSEE. 4.11 THE LEARNED AR HAS ALSO REFERRED TO RULE 10B(2 )(D) AS PER WHICH WHILE JUDGING THE COMPARABILITY THE LAWS AND GOVERN MENT ORDERS INFORCE ARE REQUIRED TO BE KEPT IN MIND. THE REFERE NCE IN THIS REGARD HAS BEEN MADE TO THE ORDER OF SEBI WHICH WE HAVE AL READY DEALT WITH AND FOUND NOT RELEVANT. THE LEARNED AR HAS ALSO REF ERRED TO RULE 10B(2)(B) AS PER WHICH WHILE JUDGING THE COMPARABIL ITY, THE FUNCTIONS PERFORMED, ASSET EMPLOYED AND RISK ASSUMED BY THE P ARTIES HAVE ALSO TO BE CONSIDERED. IN THIS CASE, BOTH THE PARTIES HA VE SIGNED NON COMPETE AGREEMENT FOR THREE YEARS AND, THEREFORE, T HE FUNCTIONS PERFORMED WAS THE SAME. IT DOES NOT REQUIRE ANY EMP LOYMENT OF ASSET FOR SIGNING NON COMPETE AGREEMENT AND THERE IS NO R ISK INVOLVED IN SIGNING OF SUCH AGREEMENT. AS REGARDS THE DIFFERENC E IN KNOWLEDGE AND EXPERIENCE, RESOURCES ETC, BETWEEN THE TWO PARTIES, WE HAVE ALREADY DISCUSSED THIS FACTOR EARLIER AND IN OUR VIEW, THES E FACTORS DO NOT IN ANY WAY ADVERSELY AFFECT THE PAYMENT OF NON COMPETE FEES TO THE ASSESSEE. IT HAS ALSO BEEN ARGUED THAT THE ASSESSEE WAS SELLING THE BUSINESS AND, THEREFORE, THERE WAS NO QUESTION OF C OMPETING IN THE BUSINESS. THIS ARGUMENT IS ALSO DEVOID OF ANY MERIT . 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. H OWEVER 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 - 14 - 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 SELLI NG THE BUSINESS ON THE GROUND THAT IT SAW SEVERE COMPETITION BY ADDITI ON 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 COMPE TE 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 LANXESS ABS TO THE JOINT VENTURE WITHOUT PAYMENT FOR ANY CONTROL PREMIUM. TH E TPO HELD THAT ADJUSTMENT ON ACCOUNT OF CONTROL PREMIUM WAS REQUIR ED AT THE RATE OF 25% OF SHARE VALUE. THE ASSESSEE ALSO RAISED OBJECT IONS BEFORE THE DRP AGAINST THE ADJUSTMENT PROPOSED BY TPO/AO ON A CCOUNT OF CONTROL PREMIUM. THE ASSESSEE SUBMITTED THAT CONTR OL PREMIUM WAS NOT A COMPULSORY REQUIREMENT IN RESPECT OF EVERY SA LE OF CONTROLLING STAKE AND THAT IT DEPENDED ON WHOLE SET OF FACTORS INCLUDING THE CAPABILITY OF THE ACQUIRER, THE NATURE OF BUSINESS, ITS FUTURE GROWTH PROSPECTS AND COMPARATIVE POSITION IN THE MARKET. I T WAS POINTED OUT THAT THE ASSESSEE HAD BEEN PAID NEGOTIATED PRICE OF RS. 196.36 PER SHARE AND RA GROUP HAD BEEN PAID RS. 201 PER SHARE. IT WAS POINTED OUT THAT THE PAYMENT MADE TO THE GENERAL PUBLIC WAS AT THE RATE OF 201 PER SHARE AS PER SEBI REGULATIONS 20(4). THEREF ORE, THE PRICE PAID - 15 - TO THE ASSESSEE WAS AT ARMS LENGTH AND THERE WAS N O QUESTION OF MAKING ANY ADJUSTMENT. DRP HOWEVER DID NOT ACCEPT T HE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT RA GROUP WHICH WAS HOLDING ONLY 18.33% SHARE HOLDING HAD BEEN PAID AT THE RATE OF R S. 201 PER SHARE WHERE THE ASSESSEE HAD BEEN PAID AT THE RATE OF RS. 196.36 PER SHARE. THE ASSESSEE HAD DIVESTED THE CONTROLLING STAKE AND , THEREFORE, IT WAS REQUIRED TO BE PAID CONTROL PREMIUM. HE, THEREFORE, UPHELD THE CONTROL PREMIUM ESTIMATED BY TPO AT THE RATE OF 25% OF THE SHARE PRICE WHICH WAS ADDED BY THE AO TO THE TOTAL INCOME. AGGRIEVED BY THE DECISION OF AO THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 5.1 BEFORE US LEARNED AR FOR THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THERE WAS NO JUSTIFICATIO N FOR PAYMENT OF CONTROLLING PREMIUM. REFERRING TO THE LANXESS GLOB AL REPORT PLACED AT PAGE 62 OF THE PAPERBOOK, IT WAS POINTED OUT THAT T HE BUSINESS WAS NOT DOING WELL AND THE ASSESSEE COMPANY WAS LOOKING FOR BUYERS AND, THEREFORE, IN SUCH A SITUATION THE ASSESSEE COULD N OT DEMAND CONTROL PREMIUM. IT WAS ALSO SUBMITTED THAT COMPARISON MADE BY TPO TO MARUTI SUZUKI AND OTHER GOVERNMENT COMPANIES WAS NO T VALID AS THOSE REPORTS WERE NOT CONTEMPORARY. AS REGARDS THE REPOR T OF PHILLIP SOUNDERS JR PHD IN WHICH THE CONTROLLING PREMIUM HA D BEEN STATED TO BE VARIED FROM 30% TO 50%, IT WAS SUBMITTED THAT SA ID REPORT RELATED ONLY TO PUBLICLY TRADED COMPANIES AND WAS NOT APPLI CABLE TO THE CASE OF THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THERE H AVE BEEN CASES IN WHICH THE CONTROLLING STAKE HAD BEEN TRANSFERRED AT DISCOUNT TO THE MARKET PRICE. IT WAS ALSO ARGUED THAT AS PER SEBI R EGULATION 20(4) THE SAME PRICE HAD BEEN PAID TO OTHER SHARE HOLDERS AND , THEREFORE, THE PRICE RECEIVED BY THE ASSESSEE WAS AT ARMS LENGTH. - 16 - 5.2 THE LEARNED CIT (DR) ON THE OTHER HAND STRONGLY DEFENDED THE ORDERS OF AUTHORITIES BELOW MAKING ADJUSTMENT ON AC COUNT 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 PRI CE CHARGED OVER THE MARKET PRICE IN ORDINARY TRADES. HE REFERRED TO THE ARTICLE BY PHILLIP SOUNDERS JR PHD IN WHICH IT WAS MENTIONED THAT PAYM ENT OF CONTROL PREMIUM LARGELY DEPENDED UPON THE POTENTIAL BUYER B ELIEVING THAT HE OR SHE COULD ENHANCE THE VALUE OF THE COMPANY. IT I S 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 STATED THAT JOINT VENTURE WITH LA NXESS PROVIDED INEOS STRONG MARKET POSITION IN A NEW PORTFOLIO OF PRODUCTS THAT COMPLEMENTED THEIR STYRENIC, POLYETHYLENE, POLYPROP YLENE AND PV PLASTIC ACTIVITIES WHICH WAS A GOOD FIT WITH A NUMB ER OF THEIR EXISTING BUSINESSES AND THE JV WOULD BENEFIT FROM UPSTREAM I NTEGRATION INTO KEY RAW MATERIALS. THE REPORT ALSO MENTIONED THAT L USRTON POLYMERS WAS CURRENTLY THE WORLDS THIRD LARGEST AND EUROPE S LEADING SUPPLIER OF ABS PLASTICS WITH SALES AMOUNTING TO ALMOST EURO 90 0 MILLION. THE LEARNED CIT(DR) THEREFORE SUBMITTED THAT THE COMPAN Y TRANSFERRED HAD STRONG POTENTIAL FOR GROWTH FOR WHICH ANY BUYER WILL BE WILLING TO PAY HIGH PREMIUM. THE DEAL WAS THUS VERY VALUABLE T O INEOS. THE CONTROL PREMIUM ESTIMATED BY THE TPO AT THE RATE OF 25% WAS, THEREFORE, JUSTIFIED. 5.3 IN REPLY, LEARNED AR FOR THE ASSESSEE STATED TH AT THE RESEARCH PAPER WAS NOT RELEVANT AS IT DID NOT TAKE INTO ACCO UNT THE FACT THAT ASSESSEE WAS SELLING THE BUSINESS AND, THEREFORE, I T COULD NOT ASK FOR PREMIUM. IT WAS ALSO POINTED OUT THAT EVEN THE RESE ARCH PAPER - 17 - MENTIONED THAT THE PREMIUM DEPENDED UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE. IT WAS ALSO ARGUED THAT AS PER RULE 10B(2)(D) THE COMPARABILITY HAS TO BE JUDGED AFTER TAKING INTO ACCOUNT VARIOUS FACTORS INCLUDING THE GOVERNMENT LAWS AND O RDERS INFORCE. IT WAS POINTED OUT THAT AS PER THE SEBI GUIDELINES, TH E SAME PRICE HAD BEEN PAID TO OTHER SHARE HOLDERS AND, THEREFORE, TH E PRICE PAID TO THE ASSESSEE WAS AT ARMS LENGTH. 5.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL ARGUMENTS CAREFULLY. THE DISPUTE RAISED IN THIS GROUND IS REG ARDING TP ADJUSTMENT ON ACCOUNT OF SHARES OF LANXESS ABS SOLD BY THE ASSESS EE TO THE JOINT VENTURE(JV) I.E. INEOS (NEW JERSEY) PVT. LTD. THE HOLDING COMPA NY OF THE ASSESSEE WAS HOLDING 49% OF SHARE HOLDING IN THE JV AND THE BALA NCE WAS HELD BY INEOS GROUP. THE TPO/AO HAVE TREATED THE TRANSACTION AS A N INTERNATIONAL TRANSACTION. THE ASSESSEE HAD SUBMITTED BEFORE THE LOWER AUTHORI TIES THAT THE TRANSACTION BEING BETWEEN TWO INDIAN PARTIES WAS NOT INTERNATIO NAL TRANSACTION. HOWEVER, AT THE TIME OF HEARING BEFORE US NO SUCH ARGUMENT HAD BEEN ADVANCED AND NO DISPUTE WAS RAISED IN REGARD TO TRANSACTION BEING A N INTERNATIONAL TRANSACTION. THE ASSESSEE HAD SOLD THE ENTIRE SHARE HOLDING OF 5 0.97% TO THE JOINT VENTURE PARTING WITH THE CONTROLLING STAKE AT A NEGOTIATED PRICE OF RS. 196.36 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 WH ICH HAD NOT BEEN DONE IN THIS CASE. THEY HAVE REFERRED TO THE CASES OF SELLI NG CONTROLLING STAKE BY THE GOVERNMENT IN CASE OF MARUTI AND OTHER GOVERNMENT C OMPANIES FOR WHICH SUBSTANTIAL PAYMENT HAD BEEN MADE BY THE FOREIGN CO MPANIES. 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%. TH E TPO/AO HAVE ESTIMATED THE CONTROL PREMIUM AT 25% OF THE SHARE V ALUE IN CASE OF THE ASSESSEE AND ADDED THE SAID AMOUNT TO THE TOTAL INCOME. - 18 - 5.5 THE CASE OF THE ASSESSEE IS THAT THE COMPARABLE CASES OF MARUTI AND OTHER GOVERNMENT COMPANIES WAS NOT REALLY COMP ARABLE AS THOSE CASES OF SALES WERE NOT CONTEMPORARY. IN REGARD TO PHILLIP SOUNDERS JR PHD REPORT, IT HAD BEEN SUBMITTED THAT THE REPORT R ELATED TO THE PUBLIC TRADED COMPANIES AND, THEREFORE, WAS NOT APPLICABLE . THE REPORT ALSO MENTIONED THAT CONTROL PREMIUM DEPENDED UPON THE FA CT AND CIRCUMSTANCES OF EACH CASE. THE CASE OF THE ASSESSE E IT HAS BEEN POINTED OUT IS DIFFERENT. IT HAS ALSO BEEN ARGUED T HAT AS PER RULE 10 B(2)(D) THE COMPARABILITY OF THE TRANSACTION HAS TO BE JUDGED TAKING INTO ACCOUNT THE GOVERNMENT LAWS AND ORDERS INFORCE . IT HAS BEEN POINTED OUT THAT AS PER SEBI REGULATIONS BEING THE REGULATION NO. 20(4) THE GENERAL PUBLIC HAD ALSO BEEN PAID AT THE RATE O F RS. 201 PER SHARE AND, THEREFORE, THE PAYMENT MADE TO THE ASSESSEE WA S AT ARMS LENGTH. IT HAS BEEN FURTHER ARGUED THAT THE ASSESSE E IN THIS CASE WAS SELLING THE LUSTRON POLYMER BUSINESS AS THE BUSINES S WAS NOT DOING WELL AND, THEREFORE, THERE WAS NO CASE FOR THE ASSE SSEE TO DEMAND ANY PREMIUM. THIS FACT HAD NOT BEEN CONSIDERED IN CASE OF PHILLIP SOUNDERS JR PHD. 5.6 WE HAVE CAREFULLY CONSIDERED THE VARIOUS ASPECT S OF THE MATTER. THIS ISSUE INVOLVED IS DETERMINATION OF ARMS LENGTH PRICE OF SHARES SOLD BY THE ASSESSEE. AO/TPO HAVE IMPLIEDLY USED CUP METHOD. THEY HAVE RE FERRED TO THE CASES OF MARUTI ETC. ONLY TO EMPHASIZE THE POINT THAT SUBSTA NTIAL AMOUNTS ARE REQUIRED TO BE PAID ON ACCOUNT OF CONTROL OVER THE MARKET PRICE . IN CASE OF MARUTI, THE GOVERNMENT HAD RECEIVED RS. 1000 CRORE ONLY TOWARDS CONTROL PREMIUM. HOWEVER FOR ESTIMATING THE CONTROL PREMIUM IN CASE OF THE ASSESSEE WITH RESPECT TO OTHER UN-RELATED PARTIES THE TPO HAS REF ERRED THE PHILLIP SOUNDERS JR PHD REPORT WHO GAVE A FINDING THAT MEAN AVERAGE PREMIUM VARIED FROM 30% TO 50% OF THE PUBLIC QUOTED PRICE. AO/TPO HAVE, THEREFORE, - 19 - ESTIMATED THE CONTROL PREMIUM AT 25% OF SHARE PRICE AS THE SHARE PRICE RECEIVED BY THE ASSESSEE HAS BEEN CONSIDERED AS THE PRICE ONLY TOWARDS SALE OF SHARES WITHOUT TAKING INTO ACCOUNT THE CONTROL PREMIUM. THOUGH AO/TPO HAVE NOT SPECIFICALLY MENTIO NED, THEY HAVE INDIRECTLY COMPARED TO PRICE OF RS. 201 PER SHARE P AID TO RA GROUP WHO HELD ONLY 18.83% SHARE WHICH WAS NOT A CONTROLL ING STAKE, WHICH IS CLEAR FROM THE FACT THAT CONTROL PREMIUM HAS BEE N COMPUTED BY THEM WITH RESPECT TO THE NEGOTIATED PRICE. THE RA G ROUP IN OUR VIEW IS A GOOD INTERNAL CUP AS BOTH THE ASSESSEE AND RA GRO UP HAVE SOLD THE SHARES OF THE SAME COMPANY AND BUYER WAS ALSO THE S AME. THEREFORE THE TRANSACTION IS IDENTICAL EXCEPT THE FACT THAT T HE ASSESSEE HAD SOLD THE CONTROLLING STAKE. THE PROVISIONS OF RULE 10B(3 ) MAKE IT QUITE CLEAR THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E IF REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MA TERIAL AFFECT OF DIFFERENCES IF ANY. FURTHER UNDER THE PROVISIONS OF RULE 10B(1)(A)(II) THE PRICE CHARGED TO A COMPARABLE UNCONTROLLED TRAN SACTION HAS TO BE ADJUSTED ON ACCOUNT OF DIFFERENCES BETWEEN THE INTE RNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION OR BETWEEN ENTERPRISES ENTERING INTO SUCH TRANSACTIONS IF THES E DIFFERENCES MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. IN THE PRESENT CASE THE SHARE TRANSACTION OF THE ASSESSEE IS IDENTICAL TO T HAT OF THE UNCONTROLLED TRANSACTION OF RA GROUP THE ONLY DIFFE RENCE IS THAT THE ASSESSEE HAD SOLD THE CONTROLLING STAKE. THE SHARE PRICE WILL NOT DEPEND UPON PERSONAL CHARACTERISTICS OF THE SELLER S AND, THEREFORE, NO ADJUSTMENT IS REQUIRED ON ACCOUNT OF DIFFERENCES BE TWEEN THE ASSESSEE AND RA GROUP WHICH SOLD THE SHARES. THE ONLY DIFFER ENCE AS POINTED OUT EARLIER BETWEEN THE INTERNATIONAL TRANSACTION A ND THE TRANSACTIONS WITH RA GROUP IS THAT THE ASSESSEE HAD SOLD THE CON TROLLING STAKE. THEREFORE, WE HAVE ONLY TO CONSIDER ADJUSTMENT ON A CCOUNT OF CONTROLLING STAKE TRANSFERRED BY THE ASSESSEE BY ES TIMATING THE PRICE - 20 - FOR THE CONTROLLING STAKE. THE REPORT BY PHILLIP SO UNDERS JR PHD WHICH IS BASED ON RESEARCH UNDERTAKEN IN RESPECT OF SEVER AL PUBLIC QUOTED COMPANIES CAN BE USED AS RELIABLE MATERIAL. AS PER THE SAID REPORT THE MEAN PREMIUM VARIED FROM 30% TO 50% . CONSIDERING THIS THE ADJUSTMENT OF 25% OF THE SHARE VALUE MADE BY AO/TPO ON ACCOUNT OF CONTROLLING PREMIUM WITH RESPECT TO THE SHARE PRICE CHARGED IN CASE OF RA GROUP WHICH WAS AN UNRELATED PERSON, IN OUR VIEW , IS QUITE JUSTIFIED. 5.7 THE ARGUMENT OF THE LEARNED AR THAT THE ASSESSE E WAS SELLING THE BUSINESS AND, THEREFORE, COULD NOT EXPECT CONTR OL PREMIUM, IN OUR VIEW, HAS NO MERIT. IN FACT IT IS ONLY THE SELLER W HO CAN DEMAND CONTROL PREMIUM IN CASE HE OR SHE IS SELLING THE CONTROL ST AKE. THE ASSESSEE IN THIS CASE WAS SELLING THE BUSINESS BECAUSE OF RISIN G COMPETITION IN THE MARKET AS WAS CLEAR FROM THE LANXESS GLOBAL REPORT REFERRED TO IN THIS ORDER EARLIER. MOREOVER THE CONTROL PREMIUM DOES NO T DEPEND UPON THE FACT WHETHER THE ASSESSEE WAS SELLING THE BUSINESS OR THAT THE BUSINESS WAS NOT DOING WELL. THE ARTICLE BY PHILLIP SOUNDERS JR PHD HAS CLEARLY MENTIONED THAT PAYMENT OF CONTROL PREMIUM L ARGELY DEPENDS UPON THE POTENTIAL BUYER BELIEVING THAT HE OR SHE C OULD ENHANCE THE VALUE OF THE COMPANY. IT IS THE POTENTIAL FOR INCRE ASING THE VALUE THAT MAKES THE BUYERS WILLING TO PAY THE PREMIUM FOR CON TROL. THE LEARNED CIT(DR) HAS PLACED BEFORE US THE REPORT DATED 29.6. 2007 TAKEN FROM INEOS ABS SITE AS PER WHICH THE CHAIRMAN OF INEOS H AD STATED THAT THE JOINT VENTURE WITH LANXESS PROVIDED INEOS STRON G MARKET POSITION IN A NEW PORTFOLIO OF PRODUCT THAT COMPLEMENTED THE IR STYRENIC, POLYETHYLENE, POLYPROPYLENE AND PV PLASTIC ACTIVITI ES WHICH WAS A GOOD FIT IN THEIR EXISTING BUSINESS. THE REPORT ALSO MEN TIONED THAT LUSTRON POLYMERS WAS CURRENTLY THE WORLDS THIRD LARGEST A ND EUROPES LEADING SUPPLIER OF ABS PLASTICS WITH SALES AMOUNTING TO AL MOST EURO 900 - 21 - MILLION. THUS IT IS THE PERCEPTION AND THE CAPACITY OF THE BUYER TO MAKE THE VALUE ADDITION DECIDES THE CONTROL PREMIUM. IN THIS CASE THE MATERIAL PLACED BEFORE US AS MENTIONED ABOVE CLEARL Y SHOWS THAT THE BUYER SAW TREMENDOUS POTENTIAL IN PURCHASING THE BU SINESS OF THE ASSESSEE AND, THEREFORE, THERE IS A JUSTIFICATION F OR SUBSTANTIAL CONTROL PREMIUM IN THIS CASE. THE PHILLIP SOUNDERS JR. PHD REPORT SHOWED THAT THE MEAN CONTROL PREMIUM VARIED FROM 30% TO 50% OF QUOTED PRICE. CONSIDERING THE POTENTIAL OF THE BUSINESS TRANSFERR ED, THE CONTROL 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 TH AN THE PUBLIC QUOTED PRICE, THE ESTIMATION AT THE RATE OF 25% OF NEGOTIATED PRICE IN CASE OF RA GROUP IS CONSIDERED REASONABLE. THE ARGU MENT THAT PHILLIP SOUNDERS JR PHD REPORT RELATED TO ONLY PUBLIC QUOTE D COMPANIES IS ALSO NOT RELEVANT AS THE PREMIUM IS LINKED TO THE POTENT IAL 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 C ASES 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 ACCOU NT. WE HAVE PERUSED THE SAID REGULATION. THE SEBI REGULATIONS D O NOT REGULATE THE PRICE TO BE NEGOTIATED BETWEEN THE BUYER AND SELLER OF SHARES. IT ONLY PROVIDES THAT IN CASE OF TRANSFER OF STAKE EXCEEDIN G 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 - 22 - 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 PUB LIC ANNOUNCEMENT; AND AVERAGE DAILY HIGH AND LOW OF THE SHARE PRICE O N THE STOCK EXCHANGE DURING THE TWO WEEK PERIOD PRECEDING THE D ATE OF PUBLIC ANNOUNCEMENT. THIS IS ONLY A FORMULA TO SAFEGUARD T HE 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 MOR E PRICE HAD THE NEGOTIATED PRICE ALSO INCLUDED THE CONTROL PREMIUM. THEREFORE, THE ARGUMENT BASED ON SEBI REGULATION IS DEVOID OF ANY MERIT. 5.9 IN VIEW OF THE FOREGOING DISCUSSION AND FOR THE REASONS GIVEN EARLIER, WE DO NOT SEE ANY INFIRMITY IN THE ORDER O F AO MAKING ADJUSTMENT ON ACCOUNT OF CONTROL PREMIUM. THE ORDER OF THE AO IS, THEREFORE, UPHELD ON THIS POINT 6. THE THIRD DISPUTE IS REGARDING ADJUSTMENT MADE B Y TPO/AO ON ACCOUNT OF TRANSACTIONS RELATING TO SALE OF TPC BUS INESS. IN THE YEAR 2006, THE LANXESS GROUP GLOBALLY DIVESTED THE TPC B USINESS TO TANATEX GROUP. CONSEQUENT TO THE GLOBAL SALE OF TPC BUSINESS, THE TPC BUSINESS OF THE ASSESSEE COMPANY HAD BEEN TRANSFERR ED TO TANATEX CHEMICAL (INDIA) PVT. LTD. THE SALE CONSIDERATION O F TPC BUSINESS WAS NEGOTIATED BETWEEN THE LANXESS DEUTSCHLAND GMBH AND TANATEX REUTS GMBH AS PER MASTER SALE AND PURCHASE AGREEMEN T (MSPA) AS A RESULT OF WHICH THE ASSESSEE COMPANY RECEIVED RS. 4 .42 CRORE FROM LANXESS DEUTSCHLAND GMBH. THE SALE CONSIDERATION HA D BEEN ALLOCATED TO DIFFERENT UNITS GLOBALLY INCLUDING INDIAN UNIT I N THE RATIO OF NET ASSET VALUE (NAV) OF THE COMPANIES. THE ASSESSEE STATED B EFORE THE TPO - 23 - THAT THE TRANSACTIONS WERE BETWEEN THE LANXESS GROU P AND TANATEX, GROUP, TWO INDEPENDENT COMPANIES AND, THEREFORE, IT WAS NOT INTERNATIONAL TRANSACTION AND NO ADJUSTMENT WAS REQ UIRED TO BE MADE. THERE WERE TWO SELLERS I.E. LANXESS DEUTSCHLAND GMB H BEING THE SELLER ONE AND THE SECOND SELLER WAS SYBRON CHEMICA LS BV WHICH HAD 100% SUBSIDIARY IN THE NAME OF LANXESS BV. THE TPO NOTED THAT LANXESS DEUTSCHLAND GMBH HAD RECEIVED SALE CONSIDER ATION 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 L ANXESS BV FOR EURO 26.9 MILLION TO TANATEX WHICH HAD ALSO NOT BEEN DIS TRIBUTED TO OTHER UNITS. TPO FURTHER NOTED THAT BEFORE THE SALE OF SH ARES LANXESS BV HAD TRANSFERRED THE CAPITAL RESERVE OF 52 MILLION EURO TO SYBRON CHEMICALS BV WHICH ALSO REMAINED UNDISTRIBUTED. THE TPO, THER EFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE ALLOCAT ION SHOULD NOT BE MADE TO THE ASSESSEE COMPANY IN RELATION TO TRANSFE R OF CAPITAL RESERVES, SALE OF SHARE AND SALE OF IPR RIGHTS. 6.1 THE ASSESSEE SUBMITTED THAT PRIOR TO THE DATE O F SALE, THE LANXESS BV HAD SURPLUS CASH WHICH HAD BEEN DISTRIB UTED AS CAPITAL RESERVES TO SYBRON CHEMICALS BV. THIS HAD BEEN MENT IONED IN CLAUSE 4.2 OF MSPA AND THUS THE PURCHASER HAD BEEN INFORME D 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 ALS O SUBMITTED THAT SINCE THE ENTIRE BUSINESS OF THE LANXESS BV HAD BEE N SOLD AS PER SEPARATE SHARE TRANSACTION DEAL, NO SEPARATE CONSID ERATION HAD BEEN PAID WITH REGARD TO ASSETS, WORKING CAPITAL ETC. AS REGARDS THE SALE OF IPR IT WAS SUBMITTED THAT LANXESS DEUTSCHLAND GMBH HAD NEGATIVE VALUE OF BUSINESS AT EURO 3.75 MILLION AND THE ONLY ASSET IT HAD WAS IPR ON WHICH IT HAD LEGAL AND ECONOMIC OWNERSHIP AN D AT NO POINT OF - 24 - TIME THE OWNERSHIP HAD BEEN TRANSFERRED OR ABSORBED IN INDIA. IT WAS ALSO SUBMITTED THAT THE ASSESSEE COMPANY HAD NEVER OWNED ANY INTANGIBLE ASSET WHICH HAD BEEN CLEARLY BROUGHT OUT IN THE TP STUDY SUBMITTED BY THE ASSESSEE, WHICH HAD BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEARS TP ADJUSTMENT. IT W AS POINTED OUT THAT LANXESS DEUTSCHLAND GMBH HAD BEEN PAID ONLY FOR THE IPR AND NO PART OF SALE CONSIDERATION HAD BEEN PAID TO THEM. IT WAS ACCORDINGLY URGED THAT NO ADJUSTMENT WAS REQUIRED. 6.2 THE TPO HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT BY REMOVING EURO 52 MILLION FR OM THE ASSETS OF LANXESS BV BEFORE THE DATE OF TRANSFER, TOTAL SALE CONSIDERATION HAD BEEN EFFECTIVELY REDUCED. THEREFORE HAD THE TRANSFE R NOT TAKEN PLACE, THE CONSIDERATION WOULD HAVE INCREASED. IT WAS ALSO OBSERVED BY HIM THAT THE INDIAN COMPANY OVER THE YEAR HAD DEVELOPED VARIOUS INTANGIBLE LIKE MARKETING, MANUFACTURING, EMPLOYEES KNOWLEDGE, CUSTOMERS, GOODWILL ETC. FOR WHICH VALUATION SHOULD HAVE BEEN DONE ALONG WITH VALUE FOR ITS TANGIBLES. SIMILARLY THERE WAS NO JUSTIFICATION FOR ALLOCATION OF SALE OF SHARES ONLY TO THE SELLER NUMBER 2. THE TPO, THEREFORE, ALLOCATED ON PROPORTIONATE BASIS THE ABO VE THREE ITEMS TO THE ASSESSEE COMPANY WHICH CAME TO RS. 142.5 CRORE. THE PAYMENT RECEIVED BY THE ASSESSEE COMPANY WAS RS. 4.43 CRORE . THE TPO, THEREFORE, MADE ADJUSTMENT OF RS. 138.08 CRORE 6.3 THE ASSESSEE OBJECTED TO THE ADJUSTMENT PROPOSE D BY THE TPO BEFORE THE DRP AND REITERATED THE SUBMISSIONS MADE EARLIER THAT THE EURO 52 MILLION WAS NOT PART OF THE SALE CONSIDERAT ION AND SINCE THE LANXESS BV HAD BEEN SOLD OUT AS A WHOLE, THE SALE P RICE EXCLUSIVELY BELONGED TO SYBRON CHEMICALS BV WHICH HELD 100% SHA RE IN THE SAID COMPANY. IT HAD NOTHING TO DO WITH SALE OF OTHER AS SETS. SIMILARLY - 25 - LANXESS DEUTSCHLAND GMBH HAD BEEN PAID ONLY FOR THE IPR AND NOT FOR ANY ASSET. THEREFORE, IT WAS NOT REQUIRED TO BE ALL OCATED. DRP HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSER VED THAT THAT ALL THE ASSETS WERE SOLD AS PART OF THE GLOBAL DEAL. HE, FU RTHER OBSERVED THAT ONCE THE GLOBAL TPC BUSINESS WAS TRANSFERRED, THE S ALE 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 MA DE 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 SUBM ITTED THAT TRANSFER OF CAPITAL RESERVE TO THE HOLDING COMPANY BEFORE THE DATE OF TRANSFER WAS A DIVIDEND PAY OUT AND IT WAS AN INTER NAL TRANSACTION WHICH HAD BEEN DULY DISCLOSED IN CLAUSE 4.2 OF MSPA . THEREFORE, IT WAS NOT PART OF THE SALE CONSIDERATION AND THUS NOT REQ UIRED 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 SEPARAT ELY AND THE VALUE OF THE SHARES WAS SAME AS NAV OF THE COMPANY. THE C OMPANY HAD BEEN SOLD THROUGH A SEPARATE DUTCH SHARE TRANSFER A GREEMENT AS PER CLAUSE 4.1 OF MSPA WHICH HAD ALSO BEEN DULY NOTED B Y TPO IN PARA 6.11 OF THE ORDER. THUS IT HAD NOTHING TO DO WITH S ALE OF OTHER BUSINESSES FOR WHICH ALLOCATION HAD BEEN MADE SEPAR ATELY BASED ON NET ASSET VALUE. AS REGARDS THE IPR, IT WAS SUBMITT ED THAT LANXESS DEUTSCHLAND GMBH HAD RECEIVED ONLY FOR IPR. IT WAS ALSO POINTED OUT THAT ITS NAV WAS NOT NEGATIVE AS SUBMITTED BEFORE L OWER AUTHORITIES AND, THEREFORE, IT HAD NOT RESULTED INTO LOWER ALLO CATION TO OTHER UNITS BASED ON NET ASSET VALUE. THE LEARNED AR ALSO SUBMI TTED THAT THIS - 26 - ASPECT COULD BE VERIFIED BY THE TPO. THE LEARNED DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT SINCE THIS WAS A WORLDWIDE SALE OF THE ASSETS BELON GING TO DIFFERENT COMPANIES, THE ENTIRE SALE CONSIDERATION SHOULD HAV E BEEN CONSIDERED TOGETHER FOR THE PURPOSE OF ALLOCATION. IT WAS ALSO POINTED OUT THAT THE ASSESSEE ITSELF HAD SUBMITTED BEFORE TPO THAT NET A SSET VALUE OF LANXESS DEUTSCHLAND BV WAS NEGATIVE. IT WAS, THEREF ORE URGED THAT THE ORDER OF AO REGARDING ALLOCATION OR REMAINING A SSETS SHOULD BE UPHELD. 6.5 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IS REGARDING ADJUSTME NT MADE BY TPO/AO ON ACCOUNT OF TRANSACTIONS RELATING TO SALE OF TPC BUS INESS. THE LANXESS GROUP HAD GLOBALLY DIVESTED THE TPC BUSINESS TO TANATEX GROUP AS A RESULT OF WHICH TPC BUSINESSES OF THE ASSESSEE COMPANY AND OTHER ENTITI ES OF LANXESS GROUP HAD BEEN TRANSFERRED TO THE RESPECTIVE COMPANIES OF TAN ATEX GROUP. THE TPC BUSINESS OF THE ASSESSEE COMPANY HAD BEEN TRANSFERR ED TO TANATEX CHEMICAL (INDIA) PVT. LTD. THE SALE CONSIDERATION HAD BEEN N EGOTIATED BETWEEN THE LANXESS DEUTSCHLAND GMBH AND TANATEX REUTS GMBH AS PER MASTER SALE AND PURCHASE AGREEMENT (MSPA). LANXESS DEUTSCHLAND GMBH HAD DISTRIBUTED THE SALE CONSIDERATION TO THE DIFFERENT ENTITIES INCLUD ING THE ASSESSEE WHO HAD BEEN PAID RS. 4.42 CRORE. THE ASSESSEE HAD INITIALLY ARG UED BEFORE THE LOWER AUTHORITIES THAT THE TRANSACTION WAS BETWEEN THE TW O INDEPENDENT COMPANIES BELONGING TO LANXESS GROUP AND TANATEX GROUP AND, T HEREFORE, IT WAS NOT AN INTERNATIONAL TRANSACTION AND NO ADJUSTMENT WAS, TH EREFORE, REQUIRED. HOWEVER SUCH ARGUMENTS WERE NOT PRESSED BEFORE US AND THE L EARNED AR RAISED NO OBJECTION OF TREATING THE TRANSACTION AS PART OF IN TERNATIONAL TRANSACTION. 6.6 AS REGARDS THE MERIT OF ADJUSTMENT, TPO NOTED T HAT CERTAIN TRANSACTIONS RELATING TO THE SALE OF BUSINESS HAD NOT BEEN CONSI DERED FOR DISTRIBUTION TO OTHER UNITS. THIS CONSISTED OF CONSIDERATION OF EURO 2.63 MILLION TOWARDS SALE OF IPR BY - 27 - LANXESS DEUTSCHLAND GMBH, THE CONSIDERATION OF EURO 26.9 BILLION RECEIVED BY THE SYBRON CHEMICAL BV TOWARDS THE SALE OF SHARES O F LANXESS BV. THESE CONSIDERATIONS HAD BEEN PAID EXCLUSIVELY TO LANXESS DEUTSCHLAND GMBH AND SYBRON CHEMICALS BV RESPECTIVELY. FURTHER BEFORE TR ANSFER OF SHARES OF LANXESS BV, CAPITAL RESERVE OF 52 MILLION EURO HAD BEEN TRA NSFERRED 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 ASS ET VALUE OF LANXES DEUTSCHLAND GMBH BEING NEGATIVE AND THE SAID COMPANY HAVING BEE N PAID THE ENTIRE CONSIDERATION TOWARDS IPR, IT HAD RESULTED INTO LOW ER ALLOCATION TO OTHER ENTITIES. 6.7 THE CASE OF THE ASSESSEE IS THAT THE SALE CONSI DERATION NEGOTIATED AND RECEIVED BY LANXESS DEUTSCHLAND GMBH WAS EQUAL TO N ET 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 ASSES SEE BY MISTAKE HAD SUBMITTED BEFORE LOWER AUTHORITIES THAT NET ASSET VALUE OF LA NXESS DEUTSCHLAND GMBH WAS NEGATIVE BUT THE FACT WAS THAT THE NET ASSET VALUE WAS NOT NEGATIVE AND, THEREFORE IT DID NOT REDUCE THE SALE CONSIDERATION TO OTHER ENTITIES. THE SAID COMPANY HAD RECEIVED ONLY TOWARDS IPR AND NOT FOR A NY OTHER ASSET AND, THEREFORE, THE ENTIRE CONSIDERATION HAD BEEN PAID T O THE SAID COMPANY. AS REGARDS THE SALE OF SHARES BY SYBRON CHEMICALS HELD IN LANXESS BV, IT HAS BEEN SUBMITTED THAT THE SHARES HAD BEEN SOLD THROUGH THE SEPARATE DUTCH SHARE TRANSFER AGREEMENT AS PER CLAUSE4.1 OF MSPA AND SYB RON CHEMICALS HAD, THEREFORE, RECEIVED ONLY THE SHARE SALE CONSIDERATI ON AND NOT FOR ANY ASSET AS THE ENTIRE COMPANY HAD BEEN SOLD. THEREFORE THE SAID CO NSIDERATION HAD EXCLUSIVELY GONE TO SYBRON CHEMICALS BV. AS REGARDS THE TRANSFE R OF RESERVE BEFORE THE SALE OF SHARES IT HAS BEEN POINTED OUT THAT THIS WAS AN INTERNAL TRANSFER WHICH HAD BEEN DULY MENTIONED IN CLAUSE 4.2 OF MSPA AND THE P URCHASER HAD BEEN INFORMED ABOUT THIS. THUS THE TOTAL CONSIDERATION A GREED BETWEEN THE TWO PARTIES FOR TRANSFER OF TPC BUSINESS WAS AFTER EXCLUDING TH E SHARE SALES WHICH HAD BEEN SEPARATELY MADE. IT HAS ALSO BEEN POINTED OUT THAT THE TOTAL SALE CONSIDERATION - 28 - WAS EQUAL TO THE NET ASSET VALUE OF THE COMPANIES A ND HAD BEEN DISTRIBUTED IN THE RATIO OF NET ASSET VALUE AND, THEREFORE, IF CON SIDERATIONS RELATING TO IPR SALE, TRANSFER OF CAPITAL RESERVE AND SALE OF SHARES ARE INCLUDED IN THE TOTAL SALE CONSIDERATION, THESE WILL ALSO INCREASE THE NET ASS ET VALUE OF THOSE COMPANIES BY THAT AMOUNT AND THE DISTRIBUTION BEING IN THE RATIO OF NET ASSET VALUE, THIS WILL NOT IMPACT THE SHARE OF INDIVIDUAL ENTITIES IN THE TOTAL CONSIDERATION. 6.8 WE FIND SUBSTANCE IN THE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSEE. FIRSTLY SYBRON CHEMICALS BV HAD SOLD ENTIRE SHARE H OLDING IN ITS 100% SUBSIDIARY I.E. LANXESS BV AND, THEREFORE, IT WAS ALONE ENTITL ED FOR SALE CONSIDERATION. IT HAD NOT RECEIVED ANY PAYMENT FOR ANY OTHER ASSET SEPARA TELY. 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 PURCH ASER WAS AWARE ABOUT THIS SALE AND THE TOTAL CONSIDERATION THUS DID NOT INCLU DE THE SHARE SALE VALUE. THE SHARE SALE VALUE THEREFORE, HAD TO GO EXCLUSIVELY T O SYBRON CHEMICAL BV. FURTHER THE TRANSFER OF CAPITAL RESERVE HAS TAKEN PLACE BEF ORE THE DATE OF SALE AND HAD BEEN DULY NOTED IN CLAUSE 4.2 OF MSPA. THIS WAS ONL Y INTERNAL TRANSFER BEFORE THE DATE OF SALE AGREED BETWEEN THE TWO PARTIES AND, TH EREFORE, IT HAD NOTHING TO DO WITH THE TOTAL SALE CONSIDERATION. SIMILARLY THE IP R RIGHTS WERE HELD EXCLUSIVELY BY THE LANXESS DEUTSCHLAND GMBH. THEREFORE, IT HAD BEE N SEPARATELY PAID SUCH CONSIDERATION. FURTHER, THE CLAIM OF THE ASSESSEE I S THAT TOTAL CONSIDERATION WAS NOTHING BUT THE TOTAL SUM OF NET ASSET VALUE OF IND IVIDUAL 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 TRANSA CTIONS ARE ADDED TO THE TOTAL CONSIDERATION, THE INDIVIDUAL SHARE OF DIFFERENT EN TITIES WILL NOT CHANGE BECAUSE THESE WILL ALSO GO TO ADD TO THE NAV OF THESE COMPA NIES AND ALL THE ENTITIES WILL ULTIMATELY GET THEIR NET ASSET VALUE. HOWEVER SUCH CLAIMS OF THE ASSESSEE REQUIRES VERIFICATION. THE CLAIM OF THE ASSESSEE TH AT LANXESS DEUTSCHLAND GMBH HAD NO NEGATIVE NET ASSET VALUE, WHICH IS CONTRARY TO THE CLAIM MADE BEFORE LOWER AUTHORITIES ALSO REQUIRES VERIFICATION. IN OU R VIEW, ENTIRE ISSUE REQUIRES FRESH CONSIDERATION AT THE LEVEL OF AO/TPO. WE, THE REFORE, SET ASIDE THE ORDRE OF - 29 - AO AND RESTORE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE IN TH IS ORDER AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. THE FOURTH DISPUTE IS REGARDING ADJUSTMENT OF RS . 8,01,03,961/- IN RELATION TO THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES (AE) IN RESPECT OF EXPORT OF FURNISHED GOODS IN THE MANUFACTURING SEGMENT. 7.1 THE AO NOTED THAT THE ASSESSEE HAD MADE SEVERAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AE) RELATING TO THE MA NUFACTURING SEGMENT. AO, THEREFORE, ASKED THE ASSESSEE TO SUBMI T THE DETAILS OF TP STUDY UNDERTAKEN BY IT IN RELATION TO TRANSFER PRIC ING REGULATIONS. THE ASSESSEE IN THE TP STUDY APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AND SELECTED SEVEN COMPARABLES WHICH GAVE AR ITHMETIC MEAN MARGIN OF 6.22%. SUBSEQUENTLY AS PER DIRECTION OF T HE TPO, THE ASSESSEE RECOMPUTED THE MEAN MARGIN AT 5.42% USING THE FINANCIAL DATA OF THE COMPARABLES ONLY FOR FINANCIAL YEAR 200 7-08 AS PER DETAILS GIVEN BELOW:- S. NO. COMPANY NAME AVERAGE PLI (OP/SALES) 1. ALKYL AMINES CHEMICALS LTD. 9.93% 2. AMINES & PLASTICIZERS LTD. 5.55% 3. BALAJI AMINES LTD. 10.87% 4. DEEPAK NITRITE LTD. 4.48% 5. LAFFANS PETROCHEMICALS LTD. 3.97% 6. NOCIL LTD. -1.29% 7. SI GROUP-INDIA LTD. 4.41% ARITHMETIC MEAN 5.42% - 30 - 7.2 THE ASSESSEE SUBMITTED THAT OPERATING MARGIN TO SALES IN RELATION TO THE MANUFACTURING SEGMENT WAS 9.04% IN CASE OF THE ASSESSEE WHICH WAS MORE THAN THE MEAN MARGIN OF THE COMPARABLES AND, THEREFORE, NO ADJUSTMENT WAS REQUIRED ON THIS ACCOUNT. THE TPO HOWEVER NOTED THAT WHILE COMPUTING THE MARGIN THE A SSESSEE HAD MADE ADJUSTMENT OF RS. 15,87,00,056/- ON ACCOUNT OF UNDER-UTILIZED CAPACITY COST. IT WAS POINTED OUT THAT THANE PLANT WHERE MANUFACTURING HAD TAKEN PLACE WAS SHUT DOWN IN A PH ASED MANNER AND SHIFTED TO JAGADIA, GUJARAT WHICH RESULTED INTO SERIOUS BOTTLENECKS IN THE PRODUCTION SCHEDULE AND THUS HAD THE UNDER-U TILIZED CAPACITY FOR WHICH THE ASSESSEE HAD MADE ADJUSTMENT. TPO HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT CAPACITY UTILIZATION IN FINANCIAL YEAR 2007-08 WAS 86.36% WHICH WAS MORE THAN CAPACITY UTILIZATION OF 78.39% IN FINANCIAL YEAR 2006-07 AND 81.62% IN FINANCIAL YEAR 2005-06. THE TPO ALSO OBSERVED THAT UNDER UTIL IZATION SHOWN BY THE ASSESSEE IN THE BALANCE SHEET 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 FINANCI AL YEAR 2005- 06. FURTHER THE ASSESSEE ITSELF HAD ADMITTED THAT T HERE MAY HAVE BEEN REALLOCATION OF WORK WHICH ALSO PROVES THAT THERE W AS NO UNDERUTILIZED CAPACITY. TPO THEREFORE REJECTED THE CLAIM OF ADJUS TMENT ON ACCOUNT OF UNDER UTILIZATION OF CAPACITY AND CALCULATED OPERAT ING PROFIT OF RS. 3,77,02,807/- ON OPERATING REVENUE OF RS. 217355662 3/- WHICH GAVE PLI (OP/OR) AT 1.73%. THE MEAN OPERATING MARGIN IN CASE OF COMPARABLE WAS 5.42%. TPO, THEREFORE, MADE THE ADJU STMENT OF RS. 80103961/- WHICH WAS ADDED BY AO TO THE TOTAL INCOM E. AGGRIEVED BY THE DECISION OF AO, THE ASSESSEE IS IN APPEAL BEFOR E TRIBUNAL. 7.3 BEFORE US, THE LEARNED AR FOR THE ASSESSEE SUBM ITTED THAT THE ASSESSEE HAD NO DISPUTE EITHER IN RELATION TO THE S ELECTION OF - 31 - COMPARABLES OR IN RELATION TO COMPUTATION OF MEAN M ARGIN OF COMPARABLE OR THE MARGIN COMPUTED BY TPO/AO IN CASE OF THE ASSESSEE. THE ASSESSEE WAS DISPUTING ONLY THE METHO D OF COMPUTATION OF TP ADJUSTMENT. IT WAS POINTED OUT THAT THE AO HA D MADE THE ADJUSTMENT TO THE ENTIRE REVENUE WHICH WAS NOT CORR ECT AS ADJUSTMENT IS REQUIRED TO BE MADE ONLY WITH RESPECT TO TRANSAC TIONS WITH AE. THE LEARNED AR PLACED RELIANCE ON THE DECISION OF TRIBU NAL IN CASE OF THYSSENKRUPP INDUSTRIES INDIA P. LTD VS. ACIT IN I TA NO. 7032/MUM/2011 AND THE DECISION OF TRIBUNAL IN CASE OF TARA JEWELS EXPORTS P. LTD VS. ACIT IN ITA 6972/MUM/2010 FOR THE SAID PROPOSITION. THE LEARNED CIT(D)R ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF AO/TPO. 7.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED MATT ER CAREFULLY. THE DISPUTE IS REGARDING TP ADJUSTMENT MADE BY AO/T PO ON ACCOUNT OF TRANSACTIONS WITH ASSOCIATE ENTERPRISES (AES) IN RE LATION TO THE MANUFACTURING SEGMENT. THE AO/TPO HAVE APPLIED TNMM FOR BENCH MARKING THE TRANSACTION AND SEVEN COMPARABLE HAVE B EEN SELECTED WHICH GAVE ARITHMETIC MEAN MARGIN OF 5.42%. THE MAR GIN OF THE ASSESSEE HAS BEEN COMPUTED AT 1.73%. THE ASSESSEE H AD COMPUTED THE MARGIN AT 9.04% AFTER MAKING ADJUSTMENT FOR UND ER-UTILIZATION OF CAPACITY WHICH HAS NOT BEEN ACCEPTED BY THE AO/TPO. THE LEARNED AR FOR THE ASSESSEE HAS NOT DISPUTED BEFORE US EITHER THE COMPARABLES OR THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES OR TH E MARGIN OF THE ASSESSEE COMPUTED BY AO/TPO AT 1.73%. ONLY LIMITED DISPUTE RAISED IS THAT AO HAD MADE THE ADJUSTMENT WITH RESPECT TO ENTIRE REVENUE OF MANUFACTURING SEGMENT WHEREAS THE ADJUSTMENT IS REQ UIRED ONLY IN RELATION TO TRANSACTION WITH ASSOCIATED ENTERPRISES . THE PLEA RAISED BY THE LEARNED AR FOR THE ASSESSEE IS QUITE REASONABLE AND IS SUPPORTED BY THE SEVERAL DECISIONS OF THE TRIBUNAL AS MENTION ED IN PARA 7.3 OF - 32 - THIS ORDER. WE, THEREFORE, DIRECT THE AO TO MAKE TH E ADJUSTMENT ONLY IN RELATION TRANSACTIONS WITH THE AE. 8. THE FIFTH DISPUTE RAISED IS REGARDING ADDITION M ADE BY AO ON ACCOUNT OF PURCHASES AND OTHER EXPENSES. 8.1 THE AO DURING THE COURSE OF ASSESSMENT PROCEEDI NGS OBTAINED FROM THE ASSESSEE YEARWISE DETAILS OF CREDITORS, PU RCHASES AND OTHER EXPENSES WITH A VIEW TO VERIFYING THE GENUINENESS O F THESE TRANSACTIONS. THE AO ISSUED NOTICES U/S 133 (6) TO THE PARTIES CONCERNED. THE NOTICES HAD BEEN ISSUED TO THE 300 PARTIES RELATING TO PURCHASE, CREDITORS AND EXPENSES INVOLVING AGGREGAT E AMOUNT OF RS. 1388771673/-. RESPONSES HAD BEEN RECEIVED FROM THE PARTIES INVOLVING AGGREGATE SUM OF RS. 596654474/-. AO, THE REFORE ASKED THE ASSESSEE VIDE LETTER DATED 23.12.2011 TO PROVE THE GENUINENESS OF THE BALANCE TRANSACTIONS IN RESPECT OF WHICH NO RESPONS ES HAD BEEN RECEIVED. THE ASSESSEE FILED SOME DETAILS AND EVIDE NCES TO PROVE THE GENUINENESS, ON EXAMINATION OF WHICH THE AO ACCEPTE D 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 AGA INST THE DRAFT ASSESSMENT ORDER AND SUBMITTED THAT THE AO HAD PROV IDED ONLY SEVEN DAYS TIME BEFORE THE ORDER WAS PASSED FOR SUBMITTIN G FURTHER DETAILS AND EVIDENCES. THE ASSESSEE FILED FURTHER DETAILS A ND EVIDENCES IN THE FORM OF ADDITIONAL EVIDENCES. THE DRP OBSERVED THAT BECAUSE OF VOLUMINOUS NATURE OF WORK AND MULTIPLE PARTIES INVO LVED, THE ASSESSEE DID NOT HAVE ADEQUATE TIME TO FURNISH DETAILS AND E VIDENCES ABOUT ALL THE PARTIES BEFORE THE AO AND, THEREFORE, IN THE IN TEREST OF JUSTICE DRP DIRECTED THE AO TO ADMIT THE ADDITIONAL EVIDENCES A ND PASS A FRESH - 33 - ORDER AFTER NECESSARY EXAMINATION AND AFTER ALLOWIN G OPPORTUNITY OF HEARING TO THE ASSESSEE. AO EVEN AFTER CONSIDERING THE ADDITIONAL EVIDENCES NOTED THAT IN RESPECT OF THE CATEGORY REL ATING TO REPLY NOT RECEIVED THERE WAS STILL AGGREGATE SUM OF RS. 1127 9496/-, IN RESPECT OF WHICH REPLIES NOT RECEIVED AND THE BALANCE FIGUR E IN THE CATEGORY OF NOTICES RETURNED BACK STILL REMAINED AT RS. 15838 065/-. THE AO FURTHER OBSERVED THAT IN RESPECT OF PARTIES FROM WH OM REPLIES HAD BEEN RECEIVED, THE AMOUNT CONFIRMED WAS LESS TO THE TUNE OF RS. 15387192/- AND THE AMOUNTS CONFIRMED WAS MORE TO TH E TUNE OF RS. 11016524/- IN CERTAIN OTHER CASES. THE AO, THEREFOR E, IN THE FINAL ORDER AFTER CONSIDERING THE ADDITIONAL EVIDENCES FI LED BEFORE THE DRP, CONFIRMED ADDITION OF RS. 53521277/- AS PER DETAILS BELOW- I) PARTIES FROM WHOM REPLIES NOT RECEIVED RS. 1,12,79,496/- II) PARTIES IN RESPECT OF WHICH NOTICES WERE RETURNED BACK RS.1,58,38,065/- III) PARTIES FROM REPLIES RECEIVED BUT AMOUNT C CONFIRMED WAS LESS RS. 1,53,87,198/- IV) PARTIES FROM WHOM REPLIES RECEIVED BUT AMOUNT CONFIRMED MORE RS. 1,10,16,524/- TOTAL RS. 5,35,21,277/- AO, THEREFORE, MADE THE ADDITION OF RS. 5,35,21,27 7/- U/S 69C OF THE INCOME TAX ACT, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 8.3 BEFORE US, THE LEARNED AR FOR THE ASSESSEE SUBM ITTED THAT THE AO HAD MADE ADDITIONS U/S 69C OF THE INCOME TAX ACT AS PER WHICH ONLY THE EXPENDITURE WHICH IS NOT EXPLAINED BY THE ASSESSEE COULD BE ADDED. IN THIS CASE ALL THE TRANSACTIONS WERE DULY ACCOUNTED IN THE - 34 - BOOKS OF ACCOUNTS AND, THEREFORE, NO ADDITION COULD BE MADE U/S 69C, IN RESPECT OF CASES WHERE NOTICES WERE RECEIVED BAC K OR REPLIES WERE NOT RECEIVED. IT WAS ALSO SUBMITTED THAT ONLY IN TH OSE CASES WHERE REPLIES WERE RECEIVED AND THERE WERE DISCREPANCIES WITH RESPECT TO THE BOOKS OF ACCOUNTS, THE ADDITION COULD BE MADE U/S 6 9C OF THE INCOME TAX ACT. LEARNED AR FOR THE ASSESSEE FURTHER SUBMIT TED THAT AFTER THE RECEIPT OF DRAFT ASSESSMENT ORDER THE ASSESSEE HAD FILED ADDITIONAL EVIDENCES IN 89.43% OF CASES IN WHICH REPLIES HAD N OT BEEN RECEIVED AND 69.51% IN WHICH NOTICES HAD BEEN RECEIVED BACK. THESE DETAILS HAD BEEN FILED ON SAMPLE BASIS AS THE DETAILS WERE QUITE VOLUMINOUS. THE AO HAD HOWEVER DISALLOWED THE BALANCE EXPENSES, WHICH WAS NOT CORRECT. IT WAS ALSO SUBMITTED THAT IN CASE FURTHER DETAILS AND DOCUMENTS WERE REQUIRED THE SAME COULD BE PRODUCED BY THE ASSESSEE FOR VERIFICATION. IT WAS ARGUED THAT IN RESPECT OF REPLIES RECEIVED IN WHICH THERE WERE DIFFERENCES, POSITIVE OR NEGATIVE, THE ASSESSEE HAD GIVEN EXPLANATION WHICH HAD BEEN MENTIONED BY THE A O AT PAGES 25 TO 31 OF THE ASSESSMENT ORDER AND AGAIN AT PAGES 36 TO 42 OF THE ASSESSMENT ORDER. THE ASSESSEE HAD EXPLAINED VARIOU S REASONS FOR DIFFERENCES WHICH WERE NOT EXAMINED BY THE AO AND T HE DIFFERENCES HAD BEEN ADDED BY HIM WHICH WAS NOT CORRECT. IT WAS , THEREFORE, URGED THAT THE MATTER MAY BE SENT BACK TO AO FOR PR OPER EXAMINATION. THE LEARNED CIT(DR) HAD NO OBJECTION IF THE MATTER WAS RESTORE BACK TO AO FOR FRESH EXAMINATION OF THE ADDITIONS MADE O N ACCOUNT OF OTHER EXPENSES. 8.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADDITION MADE B Y 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 - 35 - RECEIVED. IN CASES WHERE REPLY HAD BEEN RECEIVED, T HERE 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 ACCOUNTED. THE ENTIRE TRANSACTIO N IN RELATION TO THE CATEGORY IN WHICH REPLIES WERE NOT RECEIVED OR THE NOTICES WERE RETURNED BACK HAD BEEN UNACCOUNTED IN THE BOOKS AND , THEREFORE, NO ADDITION COULD BE MADE U/S 69C AND ACCORDINGLY IT H AS BEEN REQUESTED THAT THE ADDITION MADE ON THIS ACCOUNT MAY BE DELET ED. WE ARE HOWEVER UNABLE TO ACCEPT THE ARGUMENTS ADVANCED. ME RELY BECAUSE THE AO HAS USED THE WRONG SECTION IT DOES NOT MAKE THE ADDITION LEGALLY INVALID IF THE ADDITION COULD BE JUSTIFIED BASED ON SOME OTHER PROVISIONS OF THE ACT. IN SUCH CASES THE ADDITION C OULD ALWAYS BE MADE U/S 68 OF THE IT ACT AND, THEREFORE, WE REJECT THE ARGUMENTS ADVANCED. HOWEVER, WE FIND, SUBSTANCE IN THE ARGUMENT OF LEAR NED AR THAT THE AO/TPO HAD ASKED FOR ALMOST ENTIRE DETAILS OF TRANS ACTIONS ENTERED INTO BY THE ASSESSEE WHICH WAS VOLUMINOUS. THE ASSE SSEE BEFORE THE DRP HAD FILED FURTHER MATERIAL ON SAMPLE BASIS COVE RING 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 BE EN POINTED OUT THAT THE ASSESSEE WAS NOW HAVING FULL DETAILS AND, THEREFORE, IN CASE FURTHER DETAILS ARE REQUIRED THE ASSESSEE COULD SUB MIT THE SAME BEFORE THE AO. SIMILARLY IN CASE OF DISCREPANCIES IT HAS B EEN POINTED OUT THAT THE ASSESSEE HAD GIVEN EXPLANATION IN RESPECT OF DI FFERENCES POSITIVE OR NEGATIVE POINTED OUT BY THE PARTIES IN THE CASES IN WHICH REPLY HAD BEEN RECEIVED AND THESE EXPLANATION HAD BEEN DULY N OTED BY AO AT PAGES 25 TO 31 OF THE ASSESSMENT ORDER AND AGAIN AT PAGES 36 TO 42 OF ASSESSMENT ORDER. THE EXPLANATION GIVEN HAD NOT BEE N EXAMINED AND THE ENTIRE DIFFERENCE HAD NOT BEEN ADDED. IN OUR VI EW MATTER REQUIRES - 36 - FRESH EXAMINATION AT THE LEVEL OF AO BY SPECIFICALL Y CONSIDERING EACH EXPLANATION BY THE ASSESSEE IN RESPECT OF DIFFERENC ES FOUND AND THE ASSESSEE MAY ALSO BE GIVEN FURTHER OPPORTUNITY TO P ROVIDE DETAILS AND EVIDENCE IN RESPECT OF CASES IN WHICH NO REPLY HAD BEEN RECEIVED OR THE NOTICES HAD BEEN RETURNED BACK BECAUSE DISALLOW ING THE ENTIRE AMOUNT CONSIDERING THE VOLUMINOUS NATURE OF DETAILS IS NOT JUSTIFIED. WE, THEREFORE, SET ASIDE THE ORDER OF AO AND RESTOR E THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER AFTER NECESSARY EX AMINATION IN THE LIGHT OF OBSERVATIONS MADE IN THIS ORDER AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 9. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY A LLOWED . ORDER PRONOUNCED ON 28-8-2013 SD/- SD/- ( AMIT SHUKLA ) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 28.8.2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI