TMI Blog2012 (4) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. - Decided against the revenue. - I.T.A. Nos.1068/2011 & I.T.A. Nos.1070/2011 - - - Dated:- 29-3-2012 - MR. JUSTICE SANJIV KHANNA, MR. JUSTICE R.V. EASWAR, JJ. For Appellant: Mr. Kamal Sawhney, Sr. Standing Counsel and Mr. Amit Shrivastava, Advocate For Respondent: Mr. V.P. Gupta, Mr. Bassant Kumar and Mr. Anuj Bansal, Advocates. R.V. EASWAR, J.: In these appeals filed under Section 260A of the Income Tax Act, 1961 ( Act‟, for short) the Commissioner of Income Tax challenges the common order passed by the Income Tax Appellate Tribunal ( Tribunal‟, for short) on 11.02.2011 for the assessment years 2002-03 and 2003-04. 2. The appeals arise this way. The assessee is a public limited company engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to be unjustified. 3. It is necessary to narrate the order of the TPO on this aspect in some detail in order to appreciate the precise controversy. We have already noted that the brand fee payment was made under an agreement dated 01.10.1998. The assessee was to pay brand fee at the rate of 0.50% of the net sales under the brand name of Kelvinator . The payment was to be made to M/s. White Consolidated Inc. of Ohio, USA. However, the payment of the fee was waived till 01.01.2002 as advertising and launch support. On 27.09.2002, the agreement was modified to give effect to the new name of M/s. White Consolidated INC. It was thereafter known as Electrolux Home Products INC. The modified agreement also recognized the amalgamation of Electrolux Voltas Pvt. Ltd. with Electrolux Kelvinator Ltd. Another change made in the agreement was to change the brand fee to 1% of the net sales. The agreement was to remain in force till 31.12.2008. It was under this agreement that the assessee paid Rs. 3,42,97,910/- as brand fee for the assessment year 2003-04 and Rs. 3,99,51,000/- for the assessment year 2002-03. 4. The TPO obtained the financial statements of the assessee since the commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to incur all such expenditure that would be in the interest of its business. The brand fee payment is a legitimate expenditure which, had it not been incurred, would have seriously affected the operations of the assessee. It would have hampered the availability of the brand name Kelvinator . (v) It was due to availability of the brand name that the assessee was able to achieve substantial increase in its turnover as shown in the table set out above. Had it not been for the brand name there would have been more losses because of higher fixed cost coupled with lower sales. 7. The TPO considered the reply of the assessee containing the justification for the payment of brand fee. He conceded that there was an increase in the turnover but observed that it has not resulted in any profit to the assessee. According to him, despite the payment of the brand fee for several years, the assessee has not been able to make a turnaround. He further held that the fact that the A.E. had charged similar brand fee from another company in New Zealand did not prove that the price paid by the assessee for obtaining the use of the brand name and the technical knowhow represented the ALP. He was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly by it. He noted the assessee‟s economic analysis in great detail and recorded the following findings for the assessment year 2002-03: - (i) The assessee was forced to upgrade its technology with the advent of tough competition from makers of frost free refrigerators and large number of entrants in the refrigerator market. Once the technology was upgraded by clearing the usage of technical knowhow for payment of brand fee/ royalty the assessee was able to reduce the losses to a significant extent. Therefore, the claim of the TPO that by securing the use of the technical knowhow the assessee did not benefit was not correct; (ii) There was significant increase in the operating losses on account of the increase in the employees‟ cost, finance charges, administrative expenses, depreciation and installed capacity. In this regard the comparative statement filed by the assessee to show the expenses over a period of 5 years, the assets acquired during the aforesaid period, the loans incurred over the said period, etc. was examined by the CIT (Appeals) who found that the statement supported the claim of the assessee regarding huge increase in the costs/ expenses. He al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving regard to the circumstances of the case. In respect of the assessment year 2003-04 more or less the same findings were recorded by the CIT (Appeals). In fine, he held that the royalty/ brand fee payment for acquisition of use of technical knowhow was incurred for genuine business purposes and should be allowed even if the assessee had suffered continuous losses in the business. The losses are partly due to internal and external factors and according to the CIT (Appeals) it is difficult to subscribe to the TPO s view that if there was financial crunch then the appellant should have discontinued to payment to the A.E. on Brand Fee and the payment of royalty on acquisition of technical knowhow/ brand fee has not resulted in any financial benefit to the appellant . 11. Thus for both the assessment years under appeal the CIT (Appeals) decided the issue in favour of the assessee. The Revenue preferred appeals before the tribunal for both the years. ITA No.4878/Del/2009 was the appeal for the assessment year 2002-03. The Tribunal after noticing the facts and the rival contentions in some detail, agreed with the decision of the CIT (Appeals) that the royalty/ brand fee payment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: - (a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction; 16. The Organization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction differs from its form. In such a case the tax administration may disregard the parties characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm s length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred wholly, necessarily and exclusively for the purposes of business in order to merit deduction. Pursuant to public protest, the word necessarily was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. 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 or that in the view of the Revenue the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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