TaxTMI 
TaxTMI 
2016 (8) TMI 869
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.... this common order. ITA Nos. 1898/Del/2013 & 2244/Del/2013 2. The assessee, M/s Fabindia Overseas Pvt. Ltd (hereinafter referred to as FOPL) is engaged in the manufacturing and trading of handloom products consisting of garments and other items. During the FY 2006-07, the assessee had entered into the following international transactions: S. No. International Transaction Method Used by Assessee Value (in Rs.) 1. Sale of handicrafts fabrics, garments etc TNMM 1,79,42,321 2. Payment of salary and rent Cost Plus Method 13,76,530 3. Purchase of trademark TNMM/CUP 5,00,00,000 Total 6,93,18,851 The TP documentation and analysis were rejected by the TPO with respect to purchase of trademark. The ALP of the international transaction of purchase of trademarks was treated as 'Nil' under CUP method. The details of the total disallowances made during assessment year 2007-08 are as under:- Returned Income 179591758 Add Disallowance of deprecation on trade mark 12500000 Disallowance of fee paid to ROC as to increase in authorised capital &....
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....e said trademark's valuation and the operating territory for the trademark rights under consideration in the instant case. 1.5. Without prejudice to the above, the Hon'ble CIT (A) has erred in not valuing the trademark based on the application of 'cost approach' for valuation of the said trademark and for determination of a value of the said trademark. 1.6. That on the facts and circumstances of the case and in law, CIT(A)/ Ld. TPO 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 Rs. 1,25,00,000/- on the co....
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.... any royalty. The Ld. AR submitted that Fabindia Inc. was incorporated in US and continued to carry on business in US as before. The brand name and trademark 'Fabindia' which was built/owned by Fabindia Inc. US continued to be owned by Fabindia Inc. excepting that the assessee was allowed the use of the brand name for the purpose of carrying on the business in India. For all the territories outside India 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, ....
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....e is clearly evident from valuation report of the trade mark. The valuation report of the trade mark by M/s CRA International further fortifies the submission of the assessee. 5. The Ld. AR submitted that the learned TPO has held that Fabindia Inc. has not contributed towards development of the brand and that by registering the trade mark, it was not entitled to receive Rs. 5 crores for the 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 ....
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.... assessee) should acquire the rights in respect of trademark from Fabindia Inc., necessary for promotion, expansion of its business in the US market, as was envisaged. The Ld. AR submitted that since it became imperative for the assessee to have all the rights vested in such trade mark to be with it in view of its expansion plans outside India, the assessee had to pay this sum to Fabindia Inc. 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 l....
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.... after mutual discussions and negotiations between the parties that the price was fixed at Rs. 5 crore. As the said amount was falling between the price ranges as determined in the Valuation report, the amount has been considered as representing fair market value of the trade mark. It was submitted that the Ld. TPO has erred in understanding the standard "disclaimer clause", generally 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 eff....
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....f the ITAT in Johnson and Johnson Ltd. vs CIT-LTU 150 ITD 377 (Mumbai Trib.) for the proposition that where the assessee had purchased trade mark, the TPO could not make adjustment to assessee's ALP taking a view that payment for purchase of trade mark was unnecessary as products sold by the assessee had already acquired a reputation of quality before conclusion of the agreement for purchase 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. ....
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....as made on estimation basis without any basis and cogent reasoning and the same has been rightly deleted by the Ld. CIT(A). It was submitted that these expenses were incurred not for bringing into existence any advantage of enduring nature to the assessee and that the details of expenditure were submitted vide submission dated December 9, 2010 (page Nos. 425- 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....
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....without any justification. The Ld. DR also submitted that the approval from RBI is not a proof of ALP. It was submitted that the Ld. TPO has made a detailed analysis before determining the ALP at NIL and as such his observations merit a serious consideration. On the grounds in the Department's appeals, the Ld. DR strongly supported the Assessing 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 ....
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....rowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, 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 ....
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....e action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate 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 exp....
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....he assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him 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. 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 p....
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....e stated transaction value represents the ALP or not (including whether the ALP is nil), while the AO makes the decision as to validity of the deduction under section 37. This means the decision as to whether the expenditure was "laid out or expended wholly and exclusively for the purposes of the business" is 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 w....
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....that as it may, the assessee has paid only the cost price to its AE and justified the same by providing a valuation report as external CUP. Nothing has been brought on record by the TPO or by the DRP to determine the ALP against the value shown by the assessee. In the absence of any counter 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....
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.... under the provisions of the TP. The orders of the TPO/DRP on the TP issues are therefore set aside and the entire issue on TP analysis is restored to the file of AO for fresh consideration. The grounds raised are accordingly allowed for statistical purposes." 22. The Visakhapatnam 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 afres....
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....he same afresh in accordance with the law, after affording necessary opportunity of being heard. In the result, Ground nos. 1 & 2 of the assesee's appeal are allowed for statistical purposes. 24. As far as ground no. 3 of the assessee's appeal and ground no. 1 of the Department's 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 Rs. 6,60,029/- and on the basis of this he has made an estimation to disallow Rs. 25,00,000/-. As there is no basis for this....
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....ture, holding that the said amount does not fulfill the conditions for allowing the bad debts and further holding that the amount cannot be "irrecoverable" from a government company. 8.3 The appellant submitted that the reliance placed by the the 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 Rs. 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 dismisse....
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....ms of the appellant company are leased premises. Against the specific disallowances made by the AO, the appellant has given its specific reply and submitted that the expenditure included painting, floor repair, Door Repairs, 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 ....
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....a company incorporated in UK. The appellant submitted that East limited is a company incorporated in UK, which deals in clothing, jewellery and accessories including bags, scarves, belts and footwear etc from its 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. ....