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2016 (10) TMI 998 - ITAT CHENNAI

2016 (10) TMI 998 - ITAT CHENNAI - TMI - Trademark licence fee payments - claim of expenditure u/s 37(1) - commercial expediency - Held that:- The assessee is exploiting the trademark "REDINGTON" for the purpose of carrying on its business. Therefore, there is nothing uncommon in assessee's making payment to the use of the trade-mark to M/s Redington Distribution Pte. Ltd., Singapore. It is not necessary for the TPO to go beyond this plausible explanation, since it is a widely accepted business .....

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s a matter to be decided by the assessee. In the facts and circumstances of the case, the said addition is deleted. - Disallowance under Section 14A - Held that:- We remit the issue back to the file of the Assessing Officer to verify and exclude the investments made in subsidiary companies for the purpose of calculation of disallowance under Rule 8D(2) of the Income-tax Rules, 1962 and also verify interest expenditure whether directly attributable to the exempt income. - ITA No. 1155, 1145/M .....

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2.12.2015. The Revenue has also filed an appeal against the very same order of Dispute Resolution Panel. Let's first take the assessee's appeal in I.T.A. No.1155/Mds/2016. 2. The assessee has raised three major grounds. The first ground is with regard to guarantee commission. At the time of hearing, the Ld. AR of the assessee has not pressed ground Nos. 2.1 to 2.1.6 as the same was allowed by the DRP in favour of the assessee. The second ground being trademark licence fee payments and th .....

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tiny, notice under Section 143(2) of the Act was issued. In compliance to the notice, the Ld. AR of the assessee appeared and filed the details. The Assessing Officer found that the assessee-company is having international transactions and for determining the arm's length price, the matter was referred to the Transfer Pricing Officer. The Ld. TPO vide order dated 28.01.2015, based on the information submitted and the international transactions with Associate Enterprises, made upward adjustme .....

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,737/-. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel. The Ld. DRP considered the submissions and passed an order on 22.12.2015. The DRP allowed the objections in respect of guarantee commission both for corporate and bank in favour of the assessee. However, the DRP upheld the disallowance under Section 14A of the Act and also the directions of Transfer Pricing Officer on trademark fees. The assessment was completed by order under Section 1 .....

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s, the assessee-company has entered into an agreement with its wholly owned subsidiary company for payment of trademark licence fees of USD 4,00,000 per annum for a period of ten years with effect from 1st April, 2006 and whereas, the amount of ₹ 1.81 Crores was paid during the financial year 2010-11. It was explained that the assessee-company is using the logo "Redington" from the date of commencement of its operations. This trademark was held by Redington Pte Ltd., Singapore. A .....

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ual legal owner of trademark. Further, there is no documentary evidence in respect of such transactions. This trademark was promoted by the Indian company in the year 1993 and shall be attributable to Indian company's growth. Therefore, the Ld. TPO found that there is no rationality behind the payment of trademark licence fee. The assessee-company had applied Transaction Net Margin Method (TNMM) as most appropriate method which the TPO has not accepted. The assessee relied on the judicial de .....

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assessee's own case in I.T.A. No.1743/Mds/2011 dated 26.06.2015 for assessment year 2007-08 and I.T.A. No.221/Mds/2013 dated 07.08.2015 for assessment year 2008-09 and I.T.A. Nos.513/Mds/2014 & 619/Mds/2014 dated 07.07.2014 for assessment year 2009-10 and prayed for allowing the grounds. 5. Contra, the Ld. Departmental Representative opposed to the grounds raised by the assessee and argued vehemently that the Revenue has filed an appeal against the earlier order of the Tribunal before th .....

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s Bench of the Tribunal as under:- "97. We think that this adjustment made by the TPO is not proper. The assessee is exploiting the trademark "REDINGTON" for the purpose of carrying on its business. Therefore, there is nothing uncommon in assessee's making payment to the use of the trade-mark to M/s Redington Distribution Pte. Ltd., Singapore. It is not necessary for the TPO to go beyond this plausible explanation, since it is a widely accepted business practice around the wor .....

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In the facts and circumstances of the case, the said addition is deleted." Following the earlier decision of the Tribunal in the assessee's own case, we direct the Assessing Officer to allow the expenditure of trademark licence fees. 7. Coming to the last ground, the Assessing Officer made disallowance of ₹ 5,95,44,737/- under Section 14A of the Act, in the assessment proceeding. The Assessing Officer found from the balance sheet that the assessee has made investment of ₹ 23 .....

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ning such exempt income. The Ld. AO was of the view that no deduction shall be allowed in respect of expenditure incurred by the assessee. During the financial year 2010-11, the subsidiary company M/s Easyaccess Financial Services Limited, which is owned 100% by the assessee-company, has paid dividend of ₹ 3,02,06,000/- which is tax free. During the financial year 2010-11, the assessee- company has made investment of ₹ 395 lakhs as an additional investment along with other sister con .....

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m the assessment year 2008-09, therefore, the assessee-company shall necessarily disallow the expenditure in respect of such investments. The Ld. AO calculated the disallowance under Rule 8D(2)(ii) and (iii) considering the investments made in the subsidiary companies and interest expenditure, and worked out the total disallowance to ₹ 5,95,44,737/-. The Ld. TPO and the DRP have confirmed the disallowance. Aggrieved by the disallowance, the assessee has filed appeal before the Tribunal. 8. .....

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Ltd. [8 ITR (Trib.) 33] and Punjab & Haryana High Court in CIT v. Hero Cycles Ltd. (323 ITR 518) where it was held that the Assessing Officer has to establish that specific expenditure was incurred for earning the exempt income, then only disallowance can be made. Similarly, to substantiate net worth the assessee- company has reserves and surplus in their balance sheet and these investments are made out of such accumulated profits and also submitted that interest-free funds were available a .....

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d. The Ld. AR submitted that the assessee-company was having adequate liquid funds and the investments were made out of own accruals and no part of borrowings were utilised for investment in tax-free securities. Further, the investments in subsidiary companies are for business prospective and for earning the profits and the dividend income is only incidental on investments. We find that neither the Assessing Officer nor the assessee-company could establish whether the cash flow statement or rece .....

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d out of business and no borrowed funds were utilized for the purpose of investments. Further, investments in subsidiary/sister company shall not be considered for the purpose of calculation of disallowance under Rule 8D(2). The ld. Authorised Representative drew our attention to the statement of details of subsidiary group companies and the investments reflected in financial statements and relied on judicial decisions. The assessee company made investments in these companies on Business expedie .....

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considered as investments for calculating disallowance u/sec. 14A r.wr.8D(2) and rely on the Co-ordinate Bench decision of M/s. Rane Holdings vs. ACIT, Chennai in ITA No.115/Mds/2015, dated 06.01.2016 were it was held as under:- ''Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in ITA No.156/Mds/13 cited supra, we hereby remit the matter back to the file of Ld. Assessing Officer to examine the issue involved in this case afresh and pass appropriat .....

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4/Mds/2012 dated 17th July, 2013, it has been held by the Chennai Bench of the Tribunal as follows:- "Disallowance U/s. 14A rw Rule 8D - CIT upheld disallowance - Held that - investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment o .....

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ssing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company - Decided in favour of assessee." For the above said reasons, we hereby hold that in the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee's sister concerns. Accordingly we restrain ourselves from interfe .....

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f this Tribunal, we remit the issue back to the file of the Assessing Officer to verify and exclude the investments made in subsidiary companies for the purpose of calculation of disallowance under Rule 8D(2) of the Income-tax Rules, 1962 and also verify interest expenditure whether directly attributable to the exempt income. 11. In the result, the appeal of the assessee is partly allowed for statistical purposes. 12. Now, let's take Revenue's appeal in I.T.A. No.1145/Mds/2016. 13. The R .....

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