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TMI Blog2013 (9) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case in upholding the order of A.O. in which he had disallowed a sum of Rs.29,30,504/- out of legal and professional expenses on wholly illegal, erroneous and untenable grounds. 3. That the learned CIT(A) has erred in law, on facts and in the circumstances of the case in upholding the order of A.O. in which he had disallowed a sum of Rs.7,60,621/- out of traveling expenses on wholly illegal, erroneous and untenable grounds. 4. That the learned CIT(A) has erred in law, on facts and in the circumstances of the case in upholding the order of A.O. in which he had disallowed a sum of Rs.602,000/- relating to accrued loss on account of foreign fluctuations on wholly illegal, erroneous and untenable grounds." 3. With respect to ground no-1, it was submitted by the Ld. AR that the issue in the light of the judgement of the Jurisdictional High Court has to be restored back to the AO as neither the AO nor the CIT(A) have followed the guidelines set out in the case of Maxop Investments and only what may be kept in mind is that this should not lead to a double disallowance as has been observed by the CIT(A) in para 12.3. 4. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of entering into joint venture with other companies and promoting companies which dealt with in products of the parent company. Accordingly, it was urged that there was no question of any income from its shareholder and parent company as it was exploiting the brand "Gillette" of its parent company without any payment. It was further stated that being a non-banking financial company, all its income derived from other sources was necessarily business income. The expenditure incurred was claimed to be in furtherance of its business of studying business projects in India taking legal and professional advice thereon, investing in joint venture companies, promoting subsidiary companies which conducted this business and then at opportune time exited out of it as well. It was emphasized that it was a separate legal juristic entity entitled to taxation as an independent entity. 8. Not convinced with the explanation, the AO pointed out that the assessee had changed its stand on the nature and purpose of its business from that what it had disclosed in the tax audit report. Accordingly, he required the assessee to point out the income which it claimed to derive from its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the AO was of the view that on the contrary, the facts showed that the assessee is actually doing the work of establishing Gillette business in India which would be evident from the investments made by the assessee company in the last several years which are made towards manufactured/sale of products which are also manufactured/sold by Gillette USA Group. The details of investments are set out at page 5 of the assessment order which are reproduced below:- Details of Investment from FY 1996*97 to 2000-01 I As on Purchase/Sales Purchase/Sales I Purchase/Sales I Purchase/Sales Name of the Company 31/3/1997 1997-98 1998-99 1999-00 2000-01 Quantity Amount Quantity Amount Quantity Amount Quantity Amount Quantity Amount Gillette Diversified Operations Pvt. Ltd. 9760889 97608890 -1394413 -13944130 69292954 693766188 4882738 51250110 L. P. Pens Private Limited 120000 1200000 Hi Line Pens Private Limited 120000 1200000 Luxor Writing Instruments Pvt. ltd. 1193750 635600000 40625 10400000 -641875 -49432000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was observed that the Gillette Group USA and assessee company may be different legal juristic entities but if the assessee company is incurring expenditure for its parent company's business without receiving any remuneration, let alone recovering the costs it incurs for doing that work. The AO concluded that it cannot be said that its expenditure is incurred for the purpose of its business solely. The AO was of the view that even when considering the assessee's submissions that it is doing its own business and should be assessed independently, it would be necessary to address which head of income, the assessee's income would fall under and what are the expenses pertaining to those heads of income. Admittedly, the assessee has used its fund in investing in joint venture and subsidiary companies and giving loans to these companies from its earning interest on the loans. The shares in these companies are not held as stock-in-trade and is claimed as investments. Considering the implications of section 57 and section 14A of the Act, he worked out the disallowance of Rs.2,98,99,503/-, observing as under :- "As regards the quantum of expenditure, which can be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next issue agitated by the assessee pertaining to the expenses of the Parker Pen Division are found addressed by ground nos-2 & 3. 16. Inviting attention to the same, the Ld. AR submitted that the assessee claimed an expenditure of Rs.1,17,90,278/- in its P & L account on account of legal and professional expenses. The AO observing the fact that the same had increased from 42,60,211/- rejected the explanation of the assessee. The explanation offered by the assessee was rejected who held that the expenses were incurred on behalf of Gillette USA. Specific attention was invited to page-9, 10, 11 & 12 of the assessment order, wherein the facts and submissions are considered. Referring to the same, it was reiterated that in furtherance of assessee's business, it had entered into a Joint Venture Agreement related to pen business in India with the Jain Group in 1996-97 assessment year and since the assessee is a 100% subsidiary of Gillette USA and Gillette USA had sold its Parker Pen Division to Newell Rubbermaid Incorporation. Consequently, the Joint Venture of the assessee with the Jain Group namely with JHPL Holdings Pvt. Ltd. had also to be necessarily exited and for exiting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons bearing on the question and ordinary principles of commercial trading and of commercial expediency....... The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it to pay and not in any other capacity then that of a trader." 12.1 In light of the above case law, the assessing authority has to consider the question of fact whether the expenditure incurred was in fact for the purpose of the business of the appellant. IN the facts of the case before me, I notice the following :- (i) The whole transaction for entering into a so called 'noncompete' waiver agreement with the Jain Group was undertaken because Gillette USA sold its Parker Pen business along with worldwide rights. (ii) The entire sale proceeds of the business were retained by Gillette USA. (iii) The rights held by the Jain Group with regard to Parker Pens in India was a stumbling block in the transaction of the sale of the worldwide Parker Pen division. (iv) The non-compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o these companies. Consequently, the companies main source of income was interest earned on the money which it had loaned to the joint venture company or those companies which had been promoted by it. In furtherance of its, stated position as per material available on record, the assessee had entered into pen business through Luxor Writing Instrument Ltd. (LWIL) with M/s JHPL Holding Ltd. (Jain Group). The Gillette USA Group as per record sold its Parker Pen division to Newell Rubbermaid Incorporation and as the assessee as 100% subsidiary of Gillette USA and not Gillette USA had entered into a Joint Venture Agreement with M/s JHPL (Jain Group) in Luxor Writing Instrument in India. Payment was made by Gillette USA to the Jain Group as non-corporate fee so that the sales transaction of Gillette USA is unhampered by litigation. Thus the record shows that JHPL received a certain specified sum of US dollars from the Gillette company USA. The record further shows that the assessee company along with its affiliate had 50% shareholding in LWIL and 50% shareholding is with the members of the Jain family. This joint venture agreements had been entered into in the year relevant to 1996-97 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of 36,91,125/- observing as under :- "The assessee has tried to establish a case that the services rendered by the legal consultants were purely for the business interest of the assessee. It has further submitted that the assessee company is a separate and distinct legal entity from Gillette Company USA. I have considered the submissions made by the assessee. However, a plain reading of the consent and waiver agreement reproduced above makes it crystal clear that M/s Gillette USA, the ultimate holding company of the assessee company was taking decisions on its behalf. If the argument of the AR is relied upon the M/s Gillette Company, USA had no business to sign the waiver agreement on behalf of the assessee company. If at all any agreement was to be signed it should have been by the assessee company because it was the assessee company which has entered into the joint venture agreement with M/s JHPL Holding Ltd., a Jain group company. Now I will briefly give the background in which the consent and waiver agreement was signed. As given in the consent and waiver agreement above, the joint venture, floated for the purpose of Parker pen b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to Jain group in connection with international deal, the assessee company at the behest of Gillette company USA, has incurred legal expenses and also traveling expenses of visits of consultants abroad. It is pertinent to mention here that the consultants have used the word settlement agreement and consent letter, which is nothing but the consent and waiver agreement signed by the Gillette Co., USA for protecting its worldwide business interest, the other expenses related to it cannot be business expense of the assessee company. With this discussion I hereby disallow a sum of Rs.36,91,125/- which is the total expense related to legal consultancy traveling and accommodation incurred in connection with sale of parker pen business by Gillette." 20. This action of the AO has been upheld by the CIT(A) and in the above arguments addressed in the course of the hearing, the LD. AR has pointed out no inaccuracy in appreciation of facts and has not been able to offer any arguments based on any facts as to show how this expenditure is relatable to the business interests of the assessee as admittedly being joint venture partner in LWIPL with 50% share holding along with its affiliates wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pported by the judgement of the Apex Court in the case of Woodward Governor 312 ITR 254 (SC) It was clarified that the said issue pertains to working capital. 25. Ld. CIT DR relies upon the impugned order. However no argument to persuade a contrary view then the view taken by the Coordinate Bench in assessee's own case was advanced. 26. We have heard the rival submissions and perused the material available on record. On a careful consideration of the same, it is seen that issue is covered in favour of the assessee by virtue of the orders of the Tribunals in assessee's own case. Copy of these it is seen has been placed in the paper book at page no-25-34. A perusal of the same shows that the Coordinate Bench in the case of the assessee for 1997-98 & 1998-99 by a consolidated order in ITA Nos.-1957 & 1958/Del/2002 vide paras 6-8 (in 1997-98) and paras 12-14 (in 1998-99) assessment years have considered the issue and while doing so they decided the same in favour of the assessee. The relevant findings in the order dated 24.02.2006 is reproduced here under for ready reference:- Para 8 in ITA No-1957/Del/2002 for Assessment Year 1997-98 "8. We have carefully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 97 (Bom.). 14. In view of the discussion in the foregoing paragraphs, we see no justification for the disallowance of Rs.36,36,030/- claimed by the assessee by way of additional liability incurred on account of fluctuation in foreign exchange rate. We, therefore, direct the Assessing Officer to allow the assessee's claim of deduction." 27. Reliance is also been placed upon the judgement of the Apex Court in the case of Woodword Governor India Pvt. Ltd. 312 ITR 254 (SC). 28. Accordingly in the above-mentioned peculiar facts and circumstances of the case, we are of the view that the assessee's grounds deserves to be allowed. The said view is also supported by the judgement of the Hon'ble Apex Court and respectfully following the judgement of the Hon'ble Apex Court and the orders of the Coordinate Bench on facts the assessee's ground no-4 is allowed. 29. Ground No-7 is consequential, ground no-8 & 9 are general in nature for adjudication. 30. In the result, the appeal of the assessee is partly allowed for statistical purposes as ground no-1 is restored; ground no 2& 3 are rejected and ground no-4 is allowed. The order is pronounced in the open court on 22.3.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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