* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA Nos.892/2010 & 935/2010
Reserved On: 29.03.2011
%
Date of Decision: 06.04.2011
ITA No.892/2010
Commissioner of Income Tax .... APPELLANT
Through: Ms.Prem Lata Bansal, Sr. Advocate with
Mr.Deepak Anand, Sr. Standing Counsel
Versus
Shri Vibhu Talwar .... RESPONDENT
Through: Mr.Salil Aggarwal and Mr.Prakash Kumar,
Advocates
AND
ITA No.935/2010
Commissioner of Income Tax .... APPELLANT
Through: Ms.Prem Lata Bansal, Sr. Advocate with
Mr.Deepak Anand, Sr. Standing Counsel
Versus
Shri Shravan Talwar .... RESPONDENT
Through: Mr.Salil Aggarwal and Mr.Prakash Kumar,
Advocates
CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
ITA Nos.892/2010 & 935/2010 Page 1 of 9
1. Whether reporters of Local papers be No
allowed to see the judgment?
2. To be referred to the reporter or not? No
3. Whether the judgment should be No
reported in the Digest?
M.L. MEHTA, J.
*
1. These appeals are directed against the common order dated 6 th
March, 2009 of the Income Tax Appellate Tribunal (hereinafter
referred to as “the Tribunal”. Both these appeals are being
disposed of by this common judgment since facts and also issues
in both the appeals are common.
2. The assessees along with other family members are the
promoters of Paper Products Limited (for short “PPL”). They
entered into an agreement dated 16th July, 1999 with M/s.Royal
Packaging Industries Van Leer, N.V. Netherlands (for short
“M/s.RPIVL”). As per the agreement, the assessees along with
other members of the promoters family were restrained for a
period of 10 years from entering into any business that is same
or similar to that of the business of PPL in India and at all such
places where PPL has manufacturing presence or export boards
or carries any trading activity. The assessees had received a
ITA Nos.892/2010 & 935/2010 Page 2 of 9
sum of Rs.7.40 crores in consideration of said agreement from
M/s.RPIVL. In the income tax return filed for the assessment year
2000-2001, the assessee, Shravan Talwar, showed income of
Rs.4.26 crores and assessee, Vibhu Talwar, Rs.4.36 crores.
3. In computation of the income, the assessees showed 45% of
Rs.7.40 crores as relating to manufacturing activity, taxable
under Section 55 of the Income Tax Act (hereinafter referred to
as “the Act”) and balance 55% relating to the marketing activity,
not liable to be charged to tax. This segregation of non-compete
fees in the ratio of 45% (manufacturing) and 55% (marketing)
was based on the report of M/s.Ernst and Young Pvt. Ltd. dated
15th July, 1999 filed by the assessees along with the returns.
According to Assessing Officer there were various discrepancies
in the aforesaid report as it gave 55% weightage to marketing
and 45% toward non-compete fees (manufacturing). In arriving
at this conclusion, the Assessing Officer referred to some
literature of economics on the subject and specifically noted that
the amounts of manufacturing was not properly projected in the
report of the M/s.Ernst and Young Pvt. Ltd. He specifically noted
few points relating to manufacturing process missing in the said
report. Persuaded by the literature on the study of the subject,
ITA Nos.892/2010 & 935/2010 Page 3 of 9
he made a fresh conclusion in the ratio of 38% and 62%
respectively for marketing and manufacturing components.
Consequently, he made addition of Rs.1,25,80,000/- by making
disallowance on non-compete fee. The Assessing Officer also
ordered for initiation of penalty proceedings under Section
271(1)(c).
4. Aggrieved by this, the assessees preferred appeals before the
Commissioner, Income Tax (Appellate) [CIT(A)], which came to
be allowed by the common order dated 05.09.2003. The
Revenue preferred appeals against the order of CIT(A) which
were dismissed by the Tribunal by order dated 06.02.2009. It is
against this common impugned order that the appeals have been
preferred by the Revenue.
5. Learned counsel appearing for the Revenue tried to justify the
order of the Assessing Officer by taking us through various items
as noted by the Assessing Officer to be missing in the report of
the M/s.Ernst and Young Pvt. Ltd. Our attention was also drawn
to the table showing comparison of the items mentioned in the
order of the Assessing Officer and in the report of M/s.Ernst and
Young Pvt. Ltd. Comparison was sought to be demonstrated with
ITA Nos.892/2010 & 935/2010 Page 4 of 9
regard to various items to bring home the point that all the items
which were found to be missing by the Assessing Officer were
specifically not mentioned in the report of M/s.Ernst and Young
Pvt. Ltd. On the other hand, learned counsel for the assessee
stated that the report of M/s.Ernst and Young Pvt. Ltd. covered
all the items which were alleged to be missing by the Assessing
Officer. It was also submitted that in any case, this was nowhere
submitted by the Revenue before the CIT(A) and also the
Tribunal and thus this question could not be raised at this stage
before this Court.
6. We may note that the Assessing Officer while arriving at his
conclusion regarding the weightage of 38% to the component of
non-competing (marketing) and 62% to that of manufacturing he
referred to good and valuable literature on the subject. While
the work done by the Assessing Officer is appreciable, at the
same time, the manner of arriving at this conclusion needs to be
deprecated. There is no doubt that M/s.Ernst and Young Pvt.
Ltd. is a Chartered Accountant firm of international repute and its
report cannot be brushed aside so easily. At the same time,
there can also be no dispute that the Tax Department was within
its rights and competence to get the same verified from some
ITA Nos.892/2010 & 935/2010 Page 5 of 9
other equally reliable independent sources. Maybe the Assessing
Officer was an expert on the subject, but still, in all fairness, he
ought to have got the same either verified or compared by some
independent report of an expert.
7. On his part, CIT(A) proceeded to rely upon the report of M/s.Ernst
and Young Pvt. Ltd. and also a comparative charge presented by
the assessees in support of their claims that the report had
covered all the factors as pointed out by the Assessing Officer.
The CIT(A) while further noting that the valuation report of an
expert could not be brushed aside lightly also stated that the
same could be done by report of another expert. The CIT(A)
proceeded to pass a cryptic order in the following manner:
“It is a settled position of law that valuations report of an
expert can not be brushed aside in a lighthearted manner.
It has to be done by another report of an expert. Ernst &
Young have rated the company, (PPL) vis-à-vis their
competitors, which can be done only after studying the
industry & the competition. The contention of the
appellant that Ernst & Young is an expert professional
firm of international repute and is engaged even by
Governments also appears to be correct. The Ld. AO
though not have the where with all both in reference to
data and professional experience in such matters to give
a finding on his own.
I have gone through the report of Ernst & Young
and find that the contentions of the appellant that all the
factors alleged by the AO to have been missed by Ernst &
Young were indeed considered by them have sufficientITA Nos.892/2010 & 935/2010 Page 6 of 9
force in them therefore, I am inclined the delete this
changes made by the AO in the ratios and direct him to
accept the ratios adopted by the appellant on the basis of
the report of Ernst & Young Pvt. Ltd., both on law and
merit,”
8. The Tribunal also on its part did not do any exercise and simply
proceeded to accept the aforementioned observation of CIT(A) in
the manner as noted hereunder:
“7. We have carefully considered the rival submission
in the light of material placed before us. Ld. CIT(A) has
found that the observations of AO, according to which all
the points which were stated to be non considered had
been considered by Earnest & Young in their report. And
thus, ld. CIT(A) has held that the AO could not substitute
the allocation by distributing the said report without
calling another report of an expert. During the course of
hearing ld. DR also could not controvert the findings of ld
CIT(A) that the issues which have been brought in the
charts reproduced in the order of CIT(A) were considered
by Earnest & Young while preparing their report through
the terminology was different. Ld. DR could not point out
any discrepancy in such observation of CIT(A) that the
issues which are stated to be not considered by the AO in
the report of Earnest & Young were considered by them in
their report. In this view of the situation, as no defect is
pointed out in such observation of CIT(A) that all the
points were considered by Earnest & Young in their report
for which the another weightage was given by the AO, we
decline to interfere in the order of CIT(A) vide which the
allocation done by Earnest & Young has been upheld.
Therefore, the ground No.1 of the revenue is dismissed.”
9. It may also be noted that in the case of Commissioner of
Income Tax – IV, Delhi and another v. M/s.Glaxo
Smithkline Asia (P) Ltd., SLP(C) No.18121/2007, similar
ITA Nos.892/2010 & 935/2010 Page 7 of 9
question arose before the Hon‟ble Supreme Court. In this case,
assessee claimed deduction under Section 37 of the Act based
on the allocation of expenses as suggested by M/s.Price
Waterhousecooper. The same was not acceptable to the
Assessing Officer. The Supreme Court observed that allocation
of expenses in such case is a complex exercise and since the
assessee has relied on a formula suggested of M/s. Price
Waterhousecooper, the Department may engage an expert in
such matters. If the formula suggested by that expert was
proper and acceptable, that would bring an end to the
controversy failing which the suggestion of that expert will be
examined by the Court.
10. Having seen the order of both the CIT(A) and also the Tribunal,
we are also of the view that the Assessing Officer if not satisfied
could not have substituted his views by discarding the report of
M/s.Ernst and Young Pvt. Ltd. without calling for the report of
another expert. It appears to us that right course for both the
CIT(A) and the Tribunal was to remand the matter back to the
Assessing Officer to seek the opinion of some expert on the
subject and then proceed to take the comments of the assessees
and then to proceed to make assessment. The issues involved
ITA Nos.892/2010 & 935/2010 Page 8 of 9
have wide ramifications. We deem it appropriate to remand the
matter back to the Assessing Officer with the directions as
indicated above. Both the appeals are disposed of accordingly.
11. Needless to say that the assessees will furnish all the necessary
information which the Revenue or their expert may seek.
M.L.MEHTA
(JUDGE)
A.K. SIKRI
APRIL 06, 2011 (JUDGE)
„Dev‟
ITA Nos.892/2010 & 935/2010 Page 9 of 9