TMI Blog2016 (8) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee purchased an intangible asset, what is required under the law is to examine whether the price paid by the assessee is arms length price or not. The TPO has no role to play in examining the decision of commercial nature. Under the guise of TPO provisions, the TPO cannot determine the ALP at NIL as held by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd., {2012 (4) TMI 346 - DELHI HIGH COURT }. Therefore, rejecting the entire payment without there being any analysis on the CUP method cannot be accepted. In the guise of analyzing the transactions in the CUP method, the TPO has not brought any evidence on record to reject the payment made to Fab India Inc. In the instant case, the TPO did not examine the arms length price of the impugned royalty payment in accordance with the provisions of Sec.92C of the Act. Accordingly, we are of the opinion that the ALP of the impugned payment for trademark and the issue relating to the depreciation on trade mark need to be examined afresh. Accordingly we set aside the order of Assessing Officer/TPO/CIT (A) on this issue and restore the same to the file of the TPO for examination of the same afresh in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income 179591758 Add Disallowance of deprecation on trade mark 12500000 Disallowance of fee paid to ROC as to increase in authorised capital incidental professional charges 24378 Disallowance of deduction claimed u/s 80-G 12500 Disallowance out of Repair Maintenance Head 2500000 Disallowance out of General charges/Misc , expenses on a/c of bribes/tips 15000 Disallowance out of General charges on account fine / penalty 5000 Disallowance out of General charges expenses being capital in nature 50000 Disallowance of bad debts 46945 Disallowance of sales tax penalty 2000 Disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO have grossly erred in rejecting Transaction Net Margin Method ( TNMM ) as the Most Appropriate Method ( MAM ) for determination of the Arm s Length Price ( ALP ) of the consideration payable by the Appellant to its AE for the purchase of the said trademark. 1.7 That on the facts and circumstances of the case and in law, the Hon ble CIT(A) has grossly erred in upholding Ld. TPO s application of Comparable Uncontrolled Price ( CUP ) as the MAM for the purposes of determination of the ALP of the purchase in respect of the said trademark by the Appellant to its AE. 2. That on the facts and circumstances of the case and in law, the Hon ble CIT(A) has erred in upholding the disallowance of depreciation claim amounting to ₹ 1,25,00,000/- on the cost of acquisition of the said trademark for the Appellant amounting to ₹ 5,00,00,000/-. 3. That on the facts and circumstances of the case and in law, Hon ble CIT(A) have failed to consider the submissions furnished by the Appellant in relation to repair and was not justified in making a disallowance amounting to ₹ 6,60,029/- from the ₹ 25,00,000/- disallowed by the AO. 4. That on the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia including US, all rights in the trademark were in Fabindia Inc. being the original owner of the trademark and a separate legal entity. Fabindia Inc. being proprietor of the US Trademark FABINDIA , had complete and unfettered right to use the said trademark in relation to goods falling in classes mentioned in Trademark/ Service application under the relevant US Laws. The Ld. AR submitted that in the year 2006, the assessee, taking into account its expansion plans including proposals of new investors approached Fabindia Inc., US for assignment of rights in respect of Brand name/ trademark to the assessee. The US authorities based on the application as filed by Fabindia Inc. on 6th April 2006, accorded registration in its name vide certificate issued to Fabindia Inc. dated 29th May, 2007. An agreement for assignment of trademark was made between Fabindia Inc. and the assessee dated June 1, 2006, pursuant to which all the rights in respect of said trademark for the US territory, were duly assigned to the assesee on an outright purchase basis. The Ld. AR submitted that in terms of the agreement as made for the assignment of said rights dated 1st June, 2006, an amount of ₹ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trade mark from the assessee. In this regard, it may be noted that it is a fact that Fabindia Inc. was the original owner of the brand i.e. trade mark and in the transaction under consideration, it has sold US rights relating to the trade mark to the assessee. It was submitted that the Ld. TPO has failed to appreciate the above and the fact that Fabindia Inc. has not charged from the assessee any amount pertaining to use of the trade mark in the Indian territory. It was submitted that the Ld. TPO has held that a legal fiction has been created to make the trade mark a commodity that had to be bought by FOPL from FIUS while FOPL was the one responsible for its development. As far as the objection of the Ld. TPO that the trade mark was not registered is concerned, the Ld. AR submitted that it is immaterial whether or not the trade mark is registered so far as existence of trade mark is concerned. Even under the Indian trade mark laws, unregistered trade mark have been recognized, meaning thereby that trade mark can be unregistered. The Ld. AR submitted that the ld. TPO has erred in observing that the assessee has paid the aforesaid sum for use of the trade mark in the Indian terri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee having seen the potential of US market and the value of the trade mark in the US had no option except to acquire the same from Fabindia Inc. at arm's length price. It was submitted that the assessee purchased the trade mark to have legitimate and exclusive right over the trade mark in its endeavour to expand its business outside the territory of India besides expansion in India, which was driven by commercial expediency of the business. It was submitted that trade mark is a valuable intangible right vested with the owner and the assessee could not have expanded its business in US market without having ownership rights of the trade mark. Further, the assignment of the trade mark could have been made only by way of formal registration of the same beforehand under the relevant law of US. Therefore, the registration of the trade mark was required to save it from unauthorized use, subsequent to its assignment to the assessee. 7. The Ld. AR also submitted that for purchasing the trade mark, both the parties viz. the assessee and Fabindia Inc. had mutually agreed to appoint an international firm of Trademark Valuers M/s CRA International Inc., USA to arrive at fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given in such valuations, out of the context. As regards Ld. TPO s observations that the operations in the US have altogether ceased, it was submitted that under trade mark valuation methodologies, it is the projection of the business by use of trade mark which is considered as a relevant factor. Under the agreements for assignment of trade mark, there cannot be any use of the trade mark by the seller post assignment of such trade mark to the buyer. Generally, in the case of sale of brand name, there is shifting of business to some other venture or closing of the business in certain cases. Under such circumstances, projections are not termed as false or erroneous in the absence of non-effecting of the sales. It is, therefore, submitted that mere fact that Fabindia Inc. has not conducted business effectively or was not intending to carry on the same, does not diminish the value of the trademark. In this regard, it may be noted that even in the cases where the businesses are altogether closed, the brands are sold at value determined on the basis of the accepted methods of valuation. 8. It was further submitted by the Ld. AR that the Ld. TPO has erred in holding the valuation re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of trade mark. The Ld. AR also relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances 345 ITR 241 (Del) for the proposition that it is not necessary for the assessee to show that any legitimate expenditure incurred by it was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by it for the purpose of business carried by it 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. The Ld. AR also relied on another decision of the Hon'ble Delhi High Court in the case of CIT-I vs Cushman and Wakefield (India) Pvt. Ltd. 46 taxmann.com 317 (Del) for the proposition that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. 11. The Ld. AR also drew the attention of the Bench to copies of various documents relating to the purchase of trade mark and placed on the paper book. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5- 437 of Paper Book 1) 14. On ground no. 3 of the Department s appeal on the issue of bad debts, the Ld. AR submitted that the assesseee had inadvertently debited the insurance premium paid to United India Insurance Company during the financial year 2004-05 and the excess amount paid was debited to the insurance company. Subsequently on failure to obtain a refund/adjustment of the same, the assessee wrote off the same as irrecoverable. It was submitted that the settled proposition in law is that merely because claim was filed by the assessee as a bad debt under section 36(l)(vii), the same could not be disallowed even after finding that it was a business loss to and the same was to be considered while computing its business income u/s 28 of the Act. I.T.A. Nos. 1894/Del/2013 2245/Del/2013 15. The ld. AR submitted that as far as the assessee s appeal is concerned, the solitary ground pertains to the issue of depreciation on purchase of trade mark and is the same as the assessee s grounds 1 2 in Assessment Year 2007-08 and the same are not being repeated for the sake of brevity. As far as the Departmental appeal is concerned, the Ld. AR submitted that ground no. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer s orders. 18. We have heard the rival submissions and perused the relevant material placed on record. Before proceeding to adjudicate the issue of purchase of trade-mark and depreciation thereon, it will be worthwhile to refer to some precedents laid down by the Hon ble Delhi High Court as well as the co-ordinate Benches of the ITAT. The Hon ble Delhi High Court in the case of CIT vs. EKL Appliances 345 ITR 241 (Del) has observed as under: 16. The Organization for Economic Cooperation and Development ( OECD ‟ , for short) has laid down transfer pricing guidelines for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate 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 Court is deciding a question under Section 12(2) of the Income Tax Act . It was further held in this case that it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned . In CIT v. Walchand Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fact determination or verification to be undertaken by the AO. This includes whether the referrals actually occurred (and thus took place for the 'purpose of the business'), independent of their valuation which the TPO determines. That determination is not and cannot be made by the TPO. Nor is the authority of fthe AO under section 37 curtailed in any manner by a reference under section 92C. 20. The Hyderabad Bench of the ITAT has held in the case of Social Media India Ltd. vs. ACIT in 148 ITD 222 (Hyderabad Trib.) as under : 5. We have considered the rival contentions and perused the paper books on record running into pages 513 in two Volumes. As seen from the record, assessee has conducted study report and placed necessary invoices, details, reports before the TPO. As rightly pointed out by the DRP, the assessee has capitalized the purchase price of the website and has not debited to the P L A/c, therefore, the addition of the income as determined by the TPO was not called for. However, the disallowance of depreciation in this case is also not warranted. We are unable to understand on what reason the depreciation was 'rightly disallowed' as held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report by the TPO/DRP or separate valuation done by the TPO, the assessee's valuation has to be accepted as it was supported by an independent valuer, who determined the cost price on the actual expenditure incurred by the AE. Considering the totality of the facts of the case, we are of the opinion that the website purchased by the assessee has to be considered at Arm's length. To this extent, the observation of the DRP stands confirmed by us. There is evidence on record that the website was used by the assessee in the business and earned more than the cost paid during the year and offered the same as its income. Since the said website was used in the business, there is no necessity for disallowing depreciation and, accordingly, we direct the AO to accept the assessee's purchase cost and allow the depreciation as claimed. Ground Nos. 2, 3 4 pertain to this issue are allowed. 21. The Hyderabad Bench of the ITAT in Zuari Cement Ltd. vs. DCIT in 57 taxmann.com 206 (Hyderabad Trib.) has held as under: Leave alone that amount; even the sub license fee for the use of trade mark is also faulty. Under the guise of TPO provisions, the TPO cannot determine the ALP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the ITAT has opined in the case of LG Polymers India (P) Ltd. Vs ACIT in 16 ITR (T) 240 as under : However, in the instant case, the TPO did not examine the arms length price of the impugned royalty payment in accordance with the provisions of Sec.92C of the Act. It is also the contention of the assessee that the TPO did not indicate to the assessee that he proposes to treat the impugned transaction as a sham one nor did he call for any objection from the assessee in that regard. The Learned A.R also relied up on host of case law in connection with this issue. Further the observation of DRP with regard to the trade mark registration, though defended before us by the assessee, requires examination at the end of the Assessing Officer/TPO. Accordingly we are of the view that the ALP of the impugned royalty payment and the issue relating to the trademark registration need to be examined afresh. Accordingly we set aside the order of Assessing Officer/TPO/DRP on this issue and restore the same to his file for examination of the same afresh in accordance with the law, after affording necessary opportunity of being heard. , _ 23. Therefore, on an overall consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal in Assessment Year 2007-08 are concerned, the Ld. CIT(A) has dealt with the issue in para 6.6 of the impugned order as under:- 6.6. I have carefully examined the issue. The case laws cited by the appellant are not applicable to the facts and circumstances this case. The disallowances are on two counts - 1) it is personal expenses and 2) it is capital in nature. The assessee tried to explain these expenses as incurred in the residence of the managing director which was used as Office also. This explanation of the appellant looks very spacious. The nature of the invoices and the narrations therein clearly indicate that they were personal expenses. I also agree with the view of the AO that they are capital in nature. However, the AO has examined the invoices amounting to ₹ 6,60,029/- and on the basis of this he has made an estimation to disallow ₹ 25,00,000/-. As there is no basis for this estimated disallowance, I am upholding the addition only to the extent of ₹ 6,60,029/-. Balance amount of the addition should be deleted by the AO. The AO is directed accordingly. 25. In view of specific finding recorded by the Ld. CIT (A), we find no reason to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO on the provisions of section 36(2) on the present facts is misplaced and the claim is duly allowable as revenue expenditure u/s 37, as the said loss is incidental and ancillary to the normal course of the business and is expended wholly and exclusively for the purpose of the business. The appellant further submitted that there is no presumption under the law regarding recovery of payment from a government enterprise. I hold that, under these circumstances, AO was not correct in disallowing the claim of the appellant. AO is directed to allow ₹ 46,945/- as bad debts. 29. In view of the specific findings of the Ld. CIT(A), we decline to interfere and dismiss ground no. 3 of the Department s appeal. Ground no. 4 of assessee s appeal is dismissed as being premature. 30. In the result, for Assessment Year 2007-08, the appeal of the assessee is partly allowed for statistical purposes whereas the appeal of the Department is dismissed. 31. In Assessment Year 2009-10, ground nos. 1, 2 3 of the assessee s appeal are the same as in ground nos. 1 2 of the assessee s appeal in Assessment Year 2007-08 which have already been restored to the file of the TPO for fresh det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Almirah repair remodeling, Drawers repair, polishing, purchase of MDF boxes Jelly filled wires, AMC payment for EPABX system, repairing of shed, AC fixing, welding of gate, window repairing, repair of kitchen, toilets including marble fixing, plaster, tile fixing and water proofing treatment at stores, , bulk purchase of low cost items like Shelf Tockers, Backlit flex, tape, paper prints, digital prints and signage at various stores, electrical repair fitting work and purchase of small electrical items like tube light, multi plug, wire, tape purchase of small repair items like Gate roller, reed switch, refilling of fire extinguishers and Job Work charges. In support of its contentions, the invoices were also placed on records, which substantiate the claim of the appellant. The appellant has submitted that the AO has not appreciated the above invoices during the course of assessment proceedings and that all the above expenditure is revenue in nature and has relied on the decision of jurisdictional High Court in Delhi Cloth and General Cotton Mills [1981] 6 Taxman 53 (Delhi), wherein the Hon ble High court of Delhi has held that expenditure on renovation of furniture 8s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 52 stores and 25 departmental stores, similar to the appellant s line of business. The appellant invested in East Limited, its associate company, for entering into the UK market, as the latter was in the same industry and business and having common Ethos 85 Philosophy as of the appellant s and it also had excellent management team, strategic store locations, which were imperative for a size of the business that the appellant was carrying on, to enter into a new market. In effect, the appellant submitted that the main purpose of the investment was to acquire controlling interest for launching .fabindia range using the latter s infrastructure and network in UK, thereby enhancing customer base and providing improved designs for western wear for women in India. The aforesaid objectives could not have been achieved without making any substantial investment in the company, thereby gaining control over the same for utilization in the best interest of the appellant s business. . For the purpose of making the investment, the appellant remitted an amount of ₹ 7,19,60,000/- from India on 5th January 2009, using its funds of ₹ 7,50,00,000/- raised on overdraft limit. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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