TaxTMI 
TaxTMI 
2011 (9) TMI 259
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder section 234B of the Act (e) Initiation of penalty proceedings under section 271(1)(c) of the Act. 3. The facts relating to the case are stated in brief. The assessee herein is engaged in business of manufacture of polystyrene and expandable polystyrene. It is wholly owned subsidiary of M/s LG Chemicals India Pvt. Ltd (Holding Company). The said holding company is 100% subsidiary of another company named M/s LG Chemicals Ltd., Korea. The transfer officer has depicted the ownership details of the impugned companies in the form of a chart as under: LG International Corpn. Korea (Associate Company) ↓ LG Corporation, Korea (25%) ↓ LG Chem Ltd. Korea (39.20%) ↓ LG Chemical India Pvt. Ltd. (100%) ↓ LG Polymers India Pvt. Ltd. (100%) (Assessee) During the year under consideration, the assessee company entered into an agreement titled as "Trade Mark Sub License Agreement" in the month of October, 2005 with M/s LG Chem Ltd Korea, as per which the assessee herein was given non exclusive sub license for the use of "LG" Trade Marks for its business. It is to be noted here that the right to use the "LG" trade mark was granted by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is to be noted that the assessee company did not make any such payment in the earlier years even though it was using the said LG brand. Hence the reasons for making the impugned royalty payment remain unsubstantiated. (b) Apart from the agreement, the assessee could not furnish any other evidence to justify the impugned payment. In order to determine the arms length price of any royalty payment towards any intangible, following are the factors that are to be taken into consideration: (1) The expected profits attributable to the trademark; (2) The cost of developing the brand name or trademark (3) The uniqueness of the trademark (4) Compensation charged by the taxpayer for the costs incurred in brand building activity for its AE. The assessee could not substantiate on any of the above factors/ attributes of trademark license to justify the payment made. (c) The assessee could not establish with any evidence as to what value added by the trade mark in terms of consumer acceptability, geographical significance, market share, sales volume and other relevant factors. (d) The trade mark has not gained any value in the market as there is a decli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing adjustment under section 92CA of the Act. 5. The dispute resolution panel also approved the views of the TPO by making following additional observations: (a) "LG" trade mark has brand value for consumer durables (white goods) only and it was not recognized for polystyrene chemicals. (b) The impugned trade mark was registered only in the year 2008 in India and hence there is no registered trade mark during the year under consideration. In the absence of proper registration, the said trade logo can be used by any concern. 6. We have heard the rival contentions on this issue. Both the counsel argued at length for and against the observations of the TPO/DRP discussed above. However, on a careful perusal of the observations of TPO, we find that the TPO has directed himself to examine the genuineness of the transaction, necessity of making the impugned payment and also the viability of the same. There should not be any doubt that these aspects are normally considered by the management of the company while making business decisions. Nevertheless, the assessee has made detailed submissions in respect of each of the observations made by the TPO and we highlight some of them ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce the customer can purchase a branded product believing in its quality which reduces his burden in matters such as, time in searching, examining for ensuring quality etc. (d) It has helped the assessee company to achieve a formidable position in the chemical business. (D) Economic Viability: (a) As per the press note No.9 (2000 series) issued by the Ministry of Commerce & Industry, Govt. of India, payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route on use of trade marks and brand name of the foreign collaborator without technology transfer. However, the assessee company has paid royalty only @ 0.20% of (revenue - advertisement), which is very much lower vis-a-vis the rate mentioned in the above said press note of the government. (b) The impugned payment has not affected the profitability of the company significantly. (c) There are various factors that can be considered to evaluate the value of brand of an organization. These factors could be a combination of increased sales or increased price, and/or reduced cost of goods sold, and/or reduced or more efficient marketing investment. It would be important to note th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eign brand/logo, on account of its use on the produces of the domestic entity, is only incidental in such cases, the primary objective being to bring benefit to the domestic entity by using a reputed brand name/logo on its products. In that case, it cannot be said that since the foreign brand and/or logo will be used by the domestic entity, the owner of the brand/logo should also make payment to the domestic entity for carrying the foreign brand/logo on its products. What is important to note is that it is the domestic entity which wants the use of foreign branch/logo on its products as well as on their promotion, marketing and development, so that it may cash upon the reputation associated with the foreign brand/logo, by selling its products under that name/logo. So long as the payment of royalty for use of the foreign brand/logo by a domestic entity is within the limits, if any, prescribed by law in this regard, there can be no reasonable objection to such a payment and it is not open to the IT authorities to claim payment to the domestic entity merely for using the foreign brand/logo on the domestic products". Thus, a company may use the foreign brand/logo for not only increa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... computed having regard to the arms length price. Under Sec. 92F (ii) the term "arms length price" is defined as under: "arms length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions". 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity to substantiate its claim with necessary documents. Accordingly, we set aside the order of Assessing Officer on this issue and restore the same to his file with a direction to examine the issue afresh in accordance with law. The assessee is also directed to furnish the documents/evidences in support of its claim and that may be called for by the Assessing Officer. 14. The next issue relates to the ad hoc disallowance made in the expenditure claimed under the head "Staff welfare". The assessee had claimed a sum of Rs. 96,07,553/- under this head. The Assessing Officer has observed that the assessee did not furnish complete details to substantiate the said claim and accordingly he disallowed 10% of the same by following the decision of Special bench of ITAT, Kolkata in the case of Jt. CIT v. ITC Ltd [2008] 112 ITD 57. It is the contention of the learned A.R that the assessee has given break up details before the Assessing Officer. However, it is the case of the Assessing Officer that though the assessee has given the break up details of the impugned expenditure, ye....