2012 (4) TMI 346 - DELHI HIGH COURT

Arms length price – Reference to TPO - Tribunal deleted the disallowance of the brand fee/ royalty payment while determining the ALP. - Tribunal hold that the royalty/ brand fee payment was justified and held that the TPO was totally wrong in disallowing the same on the footing that the assessee suffered continuous losses.

Held that:- 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. - 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.

Even on merits the disallowance of the entire 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.