TaxTMI 
TaxTMI 
2011 (1) TMI 148
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....iary of Adidas India Pvt. Ltd. During the year, the assessee had incurred expenditure on brand promotion and debited the same to the holding company. The assessee was required to pay royalty to the holding company as per the Technical Assistance Agreement. However, due to huge losses no royalty payable as per the Technical Assistance Agreement was actually paid for the last years. Therefore, the amount debited to the holding company towards expenditure incurred on brand promotion remained outstanding. In the course of assessment proceedings, it was noted by the Assessing Officer that the assessee had debited balance of Rs. 1,81,06,555 receivable from its holding company namely M/s. Adidas India Pvt. Ltd. The AO asked the assessee to show ca....
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....pany debited brand promotion expenses to the holding company and so the debit balance remained payable. The AO further observed that when the assessee was running in huge losses and the assessee borrowed funds both from banks and non-banking parties and was incurring liability of huge interest cost, the amount debited to the holding company could not be considered for business expediency. The AO further observed that there was a nexus between borrowed funds and debit balance outstanding against the holding company. The AO has, therefore, taken a view that such interest-free advances by the assessee company to holding company are not justified in terms of business needs. The AO therefore, worked out the interest @ 12% on the closing balance ....
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....bserving as under :- "I have gone through the observations of the Assessing Officer and the submissions of the AR of the appellant it is observed that the amount outstanding with the holding company was certainly in the nature of an interest free advance provided by the appellant to its holding company. It is also an undisputed fact that no interest was being charged by the appellant company on this amount which was effectively in the nature of the advance. The AR has tried to argue that this amount was lying with the holding company out of commercial expediency and therefore there was no reason for disallowing any interest being paid by the appellant on other loans/deposits. Be as it may, the basic fact remains that the amount which ....
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.... which have been incurred by the assessee but debited to the account of the holding company. It is also not in dispute that the assessee company is an hundred per cent subsidiary of its holding company. The holding company and the assessee company had entered into a Technical Assistance Agreement whereby the holding company was to provide exclusive, non-transferable, non-assignable right to manufacture, distribute and sell the licensed products in India, Nepal and Bhutan on payment of royalty @ 5% of the sales effective of the licensed products in the aforesaid territories. The assessee had incurred expenditure on advertisement and promotion of its brand name. The assessee had debited part of the expenditure on advertisement to its own prof....
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....expenditure was agreed to be borne by holding company. The assessee had incurred expenditure on advertisement and debited the same to the account of holding company. The act to incur expenditure on advertisement to promote the brand name is undoubtedly based on business interest and commercial expediency. Further, the assessee has been benefited by not paying the royalty @ 5% of the sales during the year under consideration which was required to be paid by the assessee as per Technical Assistance Agreement dated 14.02.1997 and therefore, the amount debited to the account of the holding company remained outstanding, otherwise the same would have been adjusted against the royalty payable, by the assessee company to the holding company. Furthe....