DCIT, New Delhi V. M/s Fabindia overseas (P) Ltd., New Delhi

ITA 1894/DEL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7533 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 15-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 02-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A M GOVIL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Cost of acquisition; Fair market value; Bad and doubtful debts; Valuation report; Commercial expediency; Revenue expenditure
• Section: 37(1); 10B; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES I-2 NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.1894/DEL/2013 ASSTT. YEAR: 2009-10 ITA NO.1898/DEL/2013 ASSTT. YEAR: 2007-08 DY.COMMISSIONER OF INCOME TAX, VS M/S FABINDIA OV ERSEAS (P) CIRCLE 11(1), NEW DELHI. LTD., 14N BLOCK MARKET, G.K. PART-1, NEW DELHI-110001 ITA NO.2244/DEL/2013 ASSTT. YEAR: 2007-08 ITA NO.2245/DEL/2013 ASSTT. YEAR: 2009-10 M/S FABINDIA OVERSEAS (P) LTD., VS DCIT, CIRCLE 11(1), NEW DELHI. NEW DELHI (PAN: AAACF0782H) (APPELLANT) ( RESPONDENT) DEPARTMENT BY: SHRI A.M.GOVIL, CIT DR ASSESSEE BY: S/SHRI ASEEM CHAWLA, ADV. ANUJ MATHUR, ADV. MS PRIYANKA MONGIA, CA & SHRI PRASHU GOEL, CA DATE OF HEARING: 15.3.2016 DATE OF PRONOUNCEMENT : 13.06.2016 I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 2 ORDER PER SUDHANSHU SRIVASTAVA, J.M. I.T.A. 1898/DEL/2013 HAS BEEN PREFERRED BY THE DEPARTMENT AGAINST THE ORDER DATED 31.01.2013 PASSE D BY THE LD. CIT(A)-XX, NEW DELHI FOR ASSESSMENT YEAR 2007-0 8. I.T.A. NO. 2244/DEL/ 2013 IS THE APPEAL PREFERRED BY THE A SSESSEE FOR THE SAME YEAR. I.T.A. 1894/DEL/2013 PERTAINS TO AS SESSMENT YEAR 2009-10 AND HAS BEEN PREFERRED BY THE DEPARTME NT AGAINST ORDER DATED 13.2.2013 PASSED BY THE LD. CIT (A) - X X, NEW DELHI WHEREAS I.T.A. 2245/DEL/2013 ALSO PERTAINS TO ASSES SMENT YEAR 2009-10 AND HAS BEEN FILED BY THE ASSESSEE. SINCE ALL THE APPEALS WERE HEARD TOGETHER, FOR THE SAKE OF CONVEN IENCE, THEY ARE BEING DISPOSED OF THROUGH THIS COMMON ORDER. ITA NOS. 1898/DEL/2013 & 2244/DEL/2013 2. THE ASSESSEE, M/S FABINDIA OVERSEAS PVT. LTD (HE REINAFTER REFERRED TO AS FOPL) IS ENGAGED IN THE MANUFACTURIN G AND TRADING OF HANDLOOM PRODUCTS CONSISTING OF GARMENTS AND OTHER ITEMS. DURING THE FY 2006-07, THE ASSESSEE HAD ENTE RED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS: I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 3 THE TP DOCUMENTATION AND ANALYSIS WERE REJECTED BY THE TPO WITH RESPECT TO PURCHASE OF TRADEMARK. THE ALP OF T HE 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 & 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 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 I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 4 DISALLOWANCE OF SALES TAX PENALTY 2000 DISALLOWANCE OUT OF BOOKS &: PERIODICALS 50000 FURTHER DISALLOWANCE OUT OF BOOKS & PERIODICALS 1236 15207559 ASSESSED INCOME 194799317 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LD. FIRST APPELLATE AUTHORITY WHO PARTLY ALLOWED THE ASSESSEE S APPEAL AND NOW BOTH THE DEPARTMENT AS WELL AS THE ASSESSEE HAS FILED CROSS APPEALS BEFORE THE TRIBUNAL. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE A S UNDER:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE COMMISSIONER OF INCOME TAX (APPEAL S)- XX, NEW DELHI (CIT(A)) HAS ERRED IN DISALLOWING THE ENTIRE PURCHASE CONSIDERATION AMOUNTING TO RS. 5,00,00,000/- PAID BY THE APPELLANT TO ITS ASSOCIAT ED ENTERPRISE (AE) TOWARDS ACQUISITION OF TRADEMARK. 1.1. THAT ON THE FACTS OF THE CASE AND IN LAW, THE HON BLE CIT(A) HAS GROSSLY ERRED IN SUSTAINING THE DISALLOW ANCE MADE BY THE LEARNED TRANSFER PRICING OFFICER (TPO ) AND TREATMENT OF PURCHASE CONSIDERATION FOR TRADEMARK A S NIL AND 1.2. THAT ON THE FACTS OF THE CASE AND IN LAW, THE HON BLE CIT (A)/ LD. TPO HAVE FAILED TO APPRECIATE THE BENEFITS AS DERIVED BY THE APPELLANT FROM ACQUISITION OF RIGHTS IN THE SAID TRADEMARK. 1.3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE HONBLE CIT (A) HAS WRONGLY CONCLUDED THAT THE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 5 APPELLANT WAS THE ECONOMIC OWNER OF THE SAID TRADEM ARK. 1.4. THAT ON THE FACTS OF THE CASE, THE HONBLE CIT(A) H AS ERRED IN UPHOLDING LD. SUSTAINING THE REJECTION OF THE VA LUATION METHODOLOGY OF M/S CRA INTERNATIONAL (CRA), AN INTERNATIONAL VALUER, SUBMITTED BY THE APPELLANT FO R VALUATION OF THE SAID TRADEMARK. 1.4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE CIT(A)/ LD. TPO HAVE FAILED TO APPRECIATE THE VALUATION STRATEGIES APPROPRIATE FOR THE SAID TRADEMARKS VALUATION AND THE OPERATING TERRIT ORY FOR THE TRADEMARK RIGHTS UNDER CONSIDERATION IN THE INS TANT CASE. 1.5. WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE 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 S AID TRADEMARK. 1.6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, CIT(A)/ LD. TPO HAVE GROSSLY ERRED IN REJECTIN G TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINATION OF THE ARMS 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 HONBLE CIT(A) HAS GROSSLY ERRED IN UPHOLDING LD. TPOS 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 HONBLE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF DEPRECIATION CLAIM AMOUNTING TO RS. 1,25,00,000/- ON THE COST OF ACQUISITION OF THE SAI D TRADEMARK FOR THE APPELLANT AMOUNTING TO RS. 5,00,00,000/-. I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 6 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, HONBLE CIT(A) HAVE FAILED TO CONSIDER THE SUBMISSIONS FURNISHED BY THE APPELLANT IN RELATION TO REPAIR AND WAS NOT JUSTIFIED IN MAKING A DISALLOWAN CE AMOUNTING TO RS. 6,60,029/- FROM THE RS. 25,00,000/ - DISALLOWED BY THE AO. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS GROSSLY ERRED INITIATING PENALT Y PROCEEDINGS AGAINST THE APPELLANT UNDER SECTION 271 (L)(C) OF THE INCOME TAX ACT, 1961. ALL OF THE ABOVE GROUNDS OF APPEAL ARE WITHOUT PREJ UDICE AND NOTWITHSTANDING EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMI T OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL . 4. ON THE GROUND PERTAINING TO PURCHASE OF TRADE MA RK AND DEPRECIATION THEREON, THE LD. AR SUBMITTED THAT THE ASSESSEE COMPANY WAS INCORPORATED IN THE YEAR 1976 AND TOOK OVER THE BUSINESS STARTED BY FABINDIA INC. IN INDIA. AFTER ENACTMENT OF FOREIGN EXCHANGE REGULATION ACT IN 1973, WHOLLY OWN ED FOREIGN COMPANIES WERE BANNED FROM OPERATING IN INDIA. IN ORDER TO MAKE A TRANSFER OF BUSINESS CARRIED ON BY THE INDIA N BRANCH, TO THE NEW COMPANY I.E. THE ASSESSEE, AN AGREEMENT WAS ENTERED INTO BETWEEN FABINDIA INC., US AND THE ASSESSEE ON 16 TH DECEMBER, 1976. PURSUANT TO THE SAID AGREEMENT, THE BUSINESS I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 7 AS WAS CARRIED ON BY FABINDIA INC. AT NEW DELHI WAS TRANSFERRED TO THE ASSESSEE WITH EFFECT FROM 20 TH DECEMBER, 1976. THIS TRANSFER WAS EFFECTED AFTER OBTAINING APPROVAL FROM THE RESERVE BANK OF INDIA WHICH WAS GRANTED VIDE THEIR LETTER D ATED 24.6.1978. THE TRANSFER OF THE BUSINESS, AS WAS CAR RIED ON AT NEW DELHI, WAS MADE ON GOING CONCERN BASIS' . ALL THE ASSETS AND LIABILITIES OF FABINDIA INC.'S BUSINESS IN INDIA WE RE TRANSFERRED TO THE ASSESSEE AT BOOK VALUE. THE LD. AR FURTHER SUBM ITTED THAT THE ASSESSEE THUS CARRIED ON THE SAME BUSINESS BY A CQUIRING ALL THE ASSETS AND LIABILITIES OF THE SAID BUSINESS. UN DER THE AGREEMENT FOR TRANSFER OF BUSINESS OF THE INDIAN BR ANCH, NO AMOUNT WAS PAYABLE FOR GRANT OF RIGHT TO USE BRAND NAME FABINDIA BY THE ASSESSEE TO FABINDIA INC. THE ASS ESSEE HAS BEEN USING THE BRAND NAME FABINDIA'' SINCE THEN FO R SALE OF ITS PRODUCTS IN INDIA, AS WAS USED BY FABINDIA INC. WIT HOUT PAYMENT OF ANY ROYALTY. THE LD. AR SUBMITTED THAT FABINDIA INC. WAS INCORPORATED IN US AND CONTINUED TO CARRY ON BUSINE SS IN US AS BEFORE. THE BRAND NAME AND TRADEMARK FABINDIA WHI CH WAS BUILT/OWNED BY FABINDIA INC. US CONTINUED TO BE OWN ED BY FABINDIA INC. EXCEPTING THAT THE ASSESSEE WAS ALLOW ED THE USE OF THE BRAND NAME FOR THE PURPOSE OF CARRYING ON THE B USINESS IN I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 8 INDIA. FOR ALL THE TERRITORIES OUTSIDE INDIA INCLUD ING US, ALL RIGHTS IN THE TRADEMARK WERE IN FABINDIA INC. BEING THE OR IGINAL OWNER OF THE TRADEMARK AND A SEPARATE LEGAL ENTITY. FABIN DIA INC. BEING PROPRIETOR OF THE US TRADEMARK FABINDIA, HAD COMP LETE AND UNFETTERED RIGHT TO USE THE SAID TRADEMARK IN RELAT ION TO GOODS FALLING IN CLASSES MENTIONED IN TRADEMARK/ SERVICE APPLICATION UNDER THE RELEVANT US LAWS. THE LD. AR SUBMITTED TH AT IN THE YEAR 2006, THE ASSESSEE, TAKING INTO ACCOUNT ITS EX PANSION PLANS INCLUDING PROPOSALS OF NEW INVESTORS APPROACHED FAB INDIA INC., US FOR ASSIGNMENT OF RIGHTS IN RESPECT OF BRAND NAM E/ TRADEMARK TO THE ASSESSEE. THE US AUTHORITIES BASED ON THE APPLICATION AS FILED BY FABINDIA INC. ON 6 TH APRIL 2006, ACCORDED REGISTRATION IN ITS NAME VIDE CERTIFICATE ISSUED TO FABINDIA INC. DATED 29 TH MAY, 2007. AN AGREEMENT FOR ASSIGNMENT OF TRADEMAR K WAS MADE BETWEEN FABINDIA INC. AND THE ASSESSEE DATED J UNE 1, 2006, PURSUANT TO WHICH ALL THE RIGHTS IN RESPECT O F 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 RI GHTS DATED 1 ST JUNE, 2006, AN AMOUNT OF RS 5 CRORE WAS PAYABLE TO FABINDIA INC. BY THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT FOR THE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 9 PURPOSE OF VALUATION OF BRAND & FIXATION OF CONSIDE RATION, THE PARTIES HAD ENGAGED A VALUER IN US FOR THE VALUATION OF US BRAND NAME, TRADEMARK RIGHTS AND M/S CRA INTERNATIONAL US, A RE NOWNED VALUER, VIDE THEIR REPORT DATED 21 ST JULY, 2006 MADE VALUATION OF THE SAID TRADEMARK RIGHTS, WHICH FORMED THE BASIS F OR NEGOTIATION OF THE PRICE BETWEEN THE TWO PARTIES. THE LD. AR EMPHA SIZED THAT THE RIGHTS OBTAINED BY THE ASSESSEE PURSUANT TO THE US TRADEMARK CONSTITUTE VALUABLE RIGHTS FOR THE ASSESSEE, ENTITL ING IT TO CARRYON BUSINESS UNDER THE TRADEMARK IN THE TERRITORY OF US . FABINDIA INC. WAS ALREADY ENGAGED IN CARRYING ON BUSINESS IN VARI OUS YEARS SINCE 1960 AND WAS WELL KNOWN IN US. PURSUANT TO TH E SAID ACQUISITION, THE ASSESSEE COULD ENGAGE IN CARRYING ON OF BUSINESS IN US AT ANY TIME. THE LD. AR SUBMITTED THAT BEFOR E SUCH ACQUISITION, THE ASSESSEE WAS NOT ENTITLED TO USE T HE TRADEMARK FOR ITS BUSINESS ACTIVITIES IN US WITHOUT PERMISSIO N OF FABINDIA INC. IF FABINDIA INC. WOULD HAVE SOLD THE TRADEMARK TO ANY OTHER PARTY IN INDIA, THE APPELLANT WOULD HAVE LOST THE O PPORTUNITY TO EXPLORE THE WORLDS LARGEST ECONOMY IN TERMS OF BUS INESS. THEREFORE, IT BECAME IMPERATIVE FOR THE ASSESSEE TO PURCHASE THE TRADEMARK FROM FABINDIA INC. ON AN OUTRIGHT PURCHAS E BASIS TO PROTECT THE INTEREST OF ITS BUSINESS AND ITS STAKEH OLDERS. IT WAS I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 10 SUBMITTED THAT THE ASSESSEE HAS EXPANDED IN THE REC ENT YEARS IN THE INDIAN MARKET BY SETTING UP OF ITS OUTLETS ALL OVER INDIA. BASED ON THE SUCCESS IT HAD ACHIEVED IN THE INDIAN MARKET, THE ASSESSEE HAD PROPOSED TO SET UP AND EXPAND ITS BUSI NESS OVERSEAS. IT HAS ALREADY TIED UP BUSINESS WITH A UK COMPANY AND IS NEGOTIATING FOR SIMILAR TIE-UP IN THE US MAR KET. THE LD. AR SUBMITTED THAT THE TRANSFER OF RIGHT TO USE TRADEMA RK IN US TERRITORY BY FABINDIA INC. TO THE ASSESSEE, BEING T WO SEPARATE AND INDEPENDENT ENTERPRISES, WAS MADE ON AN ARMS LENGTH BASIS. THE SAME IS CLEARLY EVIDENT FROM VALUATION REPORT O F THE TRADE MARK. THE VALUATION REPORT OF THE TRADE MARK BY M/S CRA INTERNATIONAL FURTHER FORTIFIES THE SUBMISSION OF T HE ASSESSEE. 5. THE LD. AR SUBMITTED THAT THE LEARNED TPO HAS HE LD THAT FABINDIA INC. HAS NOT CONTRIBUTED TOWARDS DEVELOPME NT OF THE BRAND AND THAT BY REGISTERING THE TRADE MARK, IT WA S NOT ENTITLED TO RECEIVE RS 5 CRORES FOR THE TRADE MARK FROM THE ASS ESSEE. IN THIS REGARD, IT MAY BE NOTED THAT IT IS A FACT THAT FABI NDIA 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 I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 11 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 SUBMITTE D 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 FOP L FROM FIUS WHILE FOPL WAS THE ONE RESPONSIBLE FOR ITS DEVELOPM ENT. AS FAR AS THE OBJECTION OF THE LD. TPO THAT THE TRADE MARK WA S 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 TRAD E MARK LAWS, UNREGISTERED TRADE MARK HAVE BEEN RECOGNIZED, MEANI NG THEREBY THAT TRADE MARK CAN BE UNREGISTERED. THE LD. AR SUBMITT ED THAT THE LD. TPO HAS ERRED IN OBSERVING THAT THE ASSESSEE HAS PAID T HE AFORESAID SUM FOR USE OF THE TRADE MARK IN THE INDIAN TERRITO RY. IT WAS SUBMITTED THAT THE AMOUNT WAS RATHER PAID FOR ACQUI RING RIGHTS FOR THE US TERRITORY, WHERE FABINDIA INC. WAS THE U SER OF THE TRADE MARK AND ACCORDINGLY, THE LEGAL OWNER. IT MAY FURTHER BE NOTED THAT FOR ANY TERRITORY WHERE BOTH THE COMPANI ES DO NOT HAVE ANY PRESENCE, ANY THIRD PARTY CAN CLAIM THE RE GISTRATION BASED ON ITS USAGE OF THE MARK IN TERMS OF PROVISIO NS OF INTELLECTUAL PROPERTY LAWS. IT WAS THE LD. ARS CON TENTION THAT THE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 12 LD. TPO WITHOUT APPRECIATING THE INTELLECTUAL PROPE RTY RIGHTS LAWS HELD THAT SINCE TRADE MARK WAS NOT REGISTERED BY FABINDIA INC. TILL 2006, IT WAS NO RIGHT AT ALL. ITWAS SUBMITTED THAT THE TRADE MARK REMAINS THE PROPERTY OF THE USER. NO THI RD PARTY COULD CLAIM THE OWNERSHIP OF THE TRADE MARK AND SEE K REGISTRATION WITHOUT THE PERMISSION OF THE USER I.E . FABINDIA INC. IN VIEW OF THE ABOVE, EVEN THE OBSERVATION OF THE L D. TPO THAT FOPL (I.E. THE ASSESSEE) HAS DEVELOPED THE INHERENT VALUE OF THE TRADE MARK IS ERRONEOUS, AS THE RIGHTS HAVE BEEN AC QUIRED FOR US TERRITORY ONLY, WHICH HAS BEEN RECOGNIZED BY THE US AUTHORITIES. THE WHOLE DETERMINATION OF ARMS LENGTH PRICE OF TH IS TRANSACTION BY THE LD. TPO IS BASED ON THE PREMISE THAT UNREGIS TERED TRADE MARK CAN BE OWNED AND REGISTERED BY ANY THIRD PARTY AND HAS NO VALUE/EXISTENCE WITHOUT REGISTRATION. THE LD. AR SU BMITTED THAT FABINDIA INC. HAS BEEN GRANTED TRADE MARK REGISTRAT ION BY THE US TRADE MARK AUTHORITIES ON BEING SATISFIED THAT I T WAS THE REAL OWNER AND USER OF THE TRADE MARK IN US TERRITORY SI NCE 1960 AND IT IS ONLY THAT RIGHT WHICH HAS BEEN ACQUIRED BY TH E ASSESSEE. 6. THE LD. AR ALSO SUMMARIZED THE REASONS FOR PURCH ASE OF TRADE MARK BEFORE THE BENCH AND SUBMITTED THAT THE ASSESS EE HAS ALSO I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 13 ATTRACTED VARIOUS INVESTORS FROM US INCLUDING P.B. INVESTORS FROM US. MR. JAMES WOLFENSOHN, FORMER PRESIDENT OF WORLD BANK INVESTED IN THE COMPANY IN THE YEAR 2007 BY SUBSCRI BING TO THE SHARES AT A LARGE PREMIUM. IT WAS ALSO ONE OF THE C ONDITIONS OF THE SAID INVESTOR THAT FOPL (I.E. THE ASSESSEE) SHO ULD ACQUIRE THE RIGHTS IN RESPECT OF TRADEMARK FROM FABINDIA INC., NECESSARY FOR PROMOTION, EXPANSION OF ITS BUSINESS IN THE US MARK ET, AS WAS ENVISAGED. THE LD. AR SUBMITTED THAT SINCE IT BECAM E IMPERATIVE FOR THE ASSESSEE TO HAVE ALL THE RIGHTS VESTED IN S UCH TRADE MARK TO BE WITH IT IN VIEW OF ITS EXPANSION PLANS OUTSID E INDIA, THE ASSESSEE HAD TO PAY THIS SUM TO FABINDIA INC. THE A SSESSEE HAVING SEEN THE POTENTIAL OF US MARKET AND THE VALU E 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 SUBMITT ED THAT THE ASSESSEE PURCHASED THE TRADE MARK TO HAVE LEGITIMAT E AND EXCLUSIVE RIGHT OVER THE TRADE MARK IN ITS ENDEAVOU R TO EXPAND ITS BUSINESS OUTSIDE THE TERRITORY OF INDIA BESIDES EXP ANSION IN INDIA, WHICH WAS DRIVEN BY COMMERCIAL EXPEDIENCY OF THE BUSINESS. IT WAS SUBMITTED THAT TRADE MARK IS A VAL UABLE INTANGIBLE RIGHT VESTED WITH THE OWNER AND THE ASSE SSEE COULD NOT HAVE EXPANDED ITS BUSINESS IN US MARKET WITHOUT HAV ING I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 14 OWNERSHIP RIGHTS OF THE TRADE MARK. FURTHER, THE AS SIGNMENT OF THE TRADE MARK COULD HAVE BEEN MADE ONLY BY WAY OF FORMAL REGISTRATION OF THE SAME BEFOREHAND UNDER THE RELEV ANT LAW OF US. THEREFORE, THE REGISTRATION OF THE TRADE MARK WAS R EQUIRED TO SAVE IT FROM UNAUTHORIZED USE, SUBSEQUENT TO ITS ASSIGNM ENT TO THE ASSESSEE. 7. THE LD. AR ALSO SUBMITTED THAT FOR PURCHASING TH E 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 MARKET VALUE OF THE SAID TRADEMARK. M/S CRA INTERN ATIONAL INC., VIDE ITS REPORT DATED JULY 21, 2006, PROVIDED A REALISTIC VALUE ESTIMATE OF THE SAID TRADE MARK WHICH AFTER N EGOTIATION RESULTED IN FINALIZATION OF THE CONSIDERATION OF TH E SAID MARK TO BE RS. 5 CRORE IN TOTALITY, WHICH WAS A MEAGER SUM IN TERMS OF BRAND VALUATION PRINCIPLES AND ALSO CONSIDERING THE POTENTIAL OF THE ASSESSEE TO EXPLORE THE US MARKET AND IN VIEW O F THE WORLDWIDE VALUE OF ITS BRAND NAME FABINDIA. IN A CCORDANCE WITH THE AGREEMENT, THE CONSIDERATION WAS TO BE PAI D BY THE ASSESSEE IN 5 EQUAL INSTALLMENTS STARTING FROM 31.3 .07 TO 31.3.11, CARRYING NO INTEREST CHARGES AS PER THE AG REEMENT. I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 15 THE LD. TPO, HOWEVER, WITHOUT APPRECIATING THE REPO RT OF THE INTERNATIONAL AGENCY OF REPUTE, HAS SUBSTITUTED HER OWN VIEW AND PRINCIPLES OF VALUATION . IT WAS FURTHER SUBMITTED THAT THE LD. TPO HAS FURTHER ERRED IN HOLDING THAT SINCE IT IS IN OUTSIDE THE US THAT THE BRAND HAS PROGRESSED AND HAS ACHIEV ED PROMINENCE, IT MAKES VERY LITTLE LOGICAL SENSE THAT THE BRAND SHOULD NOW HAVE TO PAY TO ACQUIRE A TRADEMARK THAT IT ITSELF HAS BEEN RESPONSIBLE FOR. IT WAS SUBMITTED THAT THE LD. TPO WHILE HOLDING THIS HAS IGNORED THE FACT THAT THE ASSESSEE IS PAYING FOR ACQUIRING THE RIGHTS RELATING TO THE US TERRITORY, THE VALUATION OF WHICH HAS BEEN MADE STRICTLY ON THE BASIS OF US RELATED PROJECTIONS AND CRITERIA. AS THE ASSESSEE IS NOT PAYING ANYTHING FOR ACQUIRING A RIGHT FOR A TERRITORY OTHER THAN TH E US, THE OBSERVATION OF THE LD. TPO ARE ILLOGICAL AND IRRELE VANT TO THE FACTS OF THE CASE AND ACCORDINGLY, UNTENABLE. AS RE GARDS THE OBSERVATION OF THE TPO THAT THE VALUATION MADE BY C RA INTERNATIONAL HAS PROVIDED ONLY INDICATIVE VALUE AN D CANNOT BE TAKEN TO REFLECT THE FAIR MARKET VALUE, IT WAS SUBM ITTED THAT THE SAID STATEMENT MADE IN THE VALUATION REPORT WAS MAD E BY THE AGENCY IN THE CONTEXT THAT ONLY A PRICE RANGE FROM $ 0.80 MILLION TO $ 1.88 MILLION WAS DETERMINED AND NO FIX ED VALUE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 16 WAS GIVEN IN THE TRADE MARK. IT WAS AFTER MUTUAL DI SCUSSIONS 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 A MOUNT HAS BEEN CONSIDERED AS REPRESENTING FAIR MARKET VALUE O F THE TRADE MARK. IT WAS SUBMITTED THAT THE LD. TPO HAS ERRED I N UNDERSTANDING THE STANDARD DISCLAIMER CLAUSE, GEN ERALLY GIVEN IN SUCH VALUATIONS, OUT OF THE CONTEXT. AS RE GARDS LD. TPOS OBSERVATIONS THAT THE OPERATIONS IN THE US HA VE ALTOGETHER CEASED, IT WAS SUBMITTED THAT UNDER TRA DE MARK VALUATION METHODOLOGIES, IT IS THE PROJECTION OF TH E 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 P OST ASSIGNMENT OF SUCH TRADE MARK TO THE BUYER. GENERAL LY, IN THE CASE OF SALE OF BRAND NAME, THERE IS SHIFTING OF BU SINESS TO SOME OTHER VENTURE OR CLOSING OF THE BUSINESS IN CE RTAIN CASES. UNDER SUCH CIRCUMSTANCES, PROJECTIONS ARE NOT TERME D AS FALSE OR ERRONEOUS IN THE ABSENCE OF NON-EFFECTING OF THE SALES. IT IS, THEREFORE, SUBMITTED THAT MERE FACT THAT FABINDIA I NC. HAS NOT CONDUCTED BUSINESS EFFECTIVELY OR WAS NOT INTENDING TO CARRY ON I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 17 THE SAME, DOES NOT DIMINISH THE VALUE OF THE TRADEM ARK. IN THIS REGARD, IT MAY BE NOTED THAT EVEN IN THE CASES WHERE THE BUSINESSES ARE ALTOGETHER CLOSED, THE BRANDS ARE SO LD 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 REPORT OF INTANGIBLE ASSET AS ERRONEOUS. IT MAY BE NOTED THAT VALUATION OF AN INT ANGIBLE ASSET REQUIRES AN UTMOST EXPERTISE AND KNOWLEDGE OF INTER NATIONAL MARKETS AND BUSINESS. WITHOUT PREJUDICE, IT IS SUBM ITTED THAT THE LD. TPO SHOULD HAVE SOUGHT THE REPORT OF SOME O THER EXPERT OF THE SAME REPUTE FOR THE PURPOSE OF VALUATION OF THE TRADEMARK, IN CASE OF ANY DOUBT OVER THE METHODOLOG Y ADOPTED BY THE VALUER, IN VIEW OF THE DECISION OF HONBLE H IGH COURT OF DELHI IN THE CASE OF CIT V VIBHU TALWAR [2011] 11 T AXMANN.COM 419 (DELHI). 9. ON THE ISSUE OF REJECTION BY THE AO OF THE METHO D USED TO DETERMINE ARMS LENGTH PRICE, THE LD. AR SUBMITTED THAT THE LD. TPO, WITHOUT APPRECIATING THE SUBMISSIONS MADE BY T HE ASSESSEE FOR JUSTIFICATION OF ARMS LENGTH PRICE OF THE TRAD E MARK I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 18 PURCHASED FROM ITS ASSOCIATED ENTERPRISE AND EVIDEN CES PLACED ON RECORD TO SUBSTANTIATE THE SAME, ERRONEOUSLY TRE ATED THE ARMS LENGTH PRICE OF THE TRANSACTION AS NIL BY A PPLYING CUP METHOD AND HAS ALSO ERRED IN REJECTING TRANSACTION AL NET MARGIN METHOD AS APPLIED BY THE ASSESSEE. WITHOUT PREJUDI CE TO THE AFORESAID, IT IS SUBMITTED THAT VALUATION REPORT BY AN EXPERT IS ACCEPTABLE AS COMPARABLE UNDER CUP METHOD, AS HELD BY BANGALORE ITAT IN THE CASE OF INTEL ASIA ELECTRONIC S INC., INDIA BRANCH OFFICE V ADIT ITA NO. 131/BANG/2010 WHEREIN IT WAS HELD THAT IN ORDER TO DETERMINE THE ACTUAL MARKET PRICE, IN THE ABSENCE OF ANY SUCH IDENTICAL TRANSACTION/TRANSACTI ONS, AS OPTED BY THE ASSESSEE, THE VALUATION DETERMINED BY THE RE GISTERED VALUER COULD BE THE MOST APPROPRIATE MEANS UNDER CUP METHO D. IN VIEW OF THIS, IT WAS SUBMITTED THAT THE LD. TPO OUGHT TO HAVE ACCEPTED THE PRICE BAND DETERMINED IN THE VALUATION REPORT. 10. MAKING HIS SUBMISSIONS ON THE IMPUGNED ORDER, T HE LD. AR SUBMITTED THAT THE ISSUE INVOLVED IS A CASE OF PURC HASE OF TRADE MARK AND THEREFORE THE LD. CIT (A) HAS GROSSLY ERRE D IN LINKING IT WITH ADVERTISING, PROMOTION AND MARKETING (AMP) EXPENSES. HE RELIED ON THE DECISION OF THE MUMBAI BENCH OF TH E ITAT IN JOHNSON AND JOHNSON LTD. VS CIT-LTU 150 ITD 377 (MU MBAI I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 19 TRIB.) FOR THE PROPOSITION THAT WHERE THE ASSESSEE HAD PURCHASED TRADE MARK, THE TPO COULD NOT MAKE ADJUST MENT TO ASSESSEES ALP TAKING A VIEW THAT PAYMENT FOR PURCH ASE 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 CO URT IN THE CASE OF CIT VS EKL APPLIANCES 345 ITR 241 (DEL) FOR THE PROPOSITION THAT IT IS NOT NECESSARY FOR THE ASSESS EE TO SHOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY IT WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSAR Y FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY I T FOR THE PURPOSE OF BUSINESS CARRIED BY IT HAS ACTUALLY RESU LTED 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 O N ANOTHER DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E 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 TH E ALP AND I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 20 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 TR ADE MARK AND PLACED ON THE PAPER BOOK. 12. ON THE ISSUE OF SUSTENANCE OF DISALLOWANCE OF R S. 6,60,029/- OUT OF RS. 25,00,000/- INCURRED ON REPAIRS AND MAIN TENANCE, THE LD. AR SUBMITTED THAT OUT OF THE ABOVE AMOUNT OF RS . 6,60,029/- THE DISALLOWANCE OF RS. 2,54,912/- WAS O N ACCOUNT OF EXPENDITURE INCURRED AT THE RESIDENCE OF THE MD, RS . 34,375/- WAS HELD TO BE CAPITAL IN NATURE AND THE BALANCE OF RS. 3,70,742/- PERTAINED TO SPECIFIC DISALLOWANCE BY TH E ASSESSING OFFICER AFTER EXAMINATION OF THE LEDGER ACCOUNTS. IT WAS SUBMITTED THAT EXPENDITURE INCURRED AT THE MDS RES IDENCE HAS TO BE IN LINE WITH THE PRESENT MODERN DAY REQUIREME NTS OF MAINTAINING PARALLEL OFFICES BY THE MD AT THEIR RES IDENCE AND HENCE THE SAME WAS A PERMISSIBLE EXPENDITURE. IT W AS ALSO SUBMITTED THAT NO PART OF THE EXPENSE WAS OF CAPITA L IN NATURE. IT WAS ALSO SUBMITTED THAT THE SPECIFIC DISALLOWANC ES NEED TO BE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 21 EXAMINED AFRESH. THE LD. AR SUBMITTED THAT DISALLO WANCE WAS MADE BY THE ON AN AD-HOC BASIS AND THE LD. CIT (A) REJECTED THE ASSESSEES PLEA WITHOUT ANY COGENT REASONING. THE S AME WAS MADE ONLY ON ESTIMATION BASIS. IT WAS SUBMITTED THA T THE AO IN HIS REMAND REPORT DATED SEPTEMBER 21, 2012 HAS HIMS ELF NOTED THAT THE DISALLOWANCE WAS NOT MADE OUT OF REPAIR AN D MAINTENANCE EXPENSES DUE TO THE REASON THAT BILLS/ VOUCHERS WERE NOT PRODUCED. IT WAS SUBMITTED THAT THE ASSESS EE WAS NEVER REQUESTED TO FURNISH ANY VOUCHERS, BILLS TO S UBSTANTIATE THE EXPENDITURE INCURRED AND THE ADDITIONS WERE PUR ELY BASED ON ESTIMATIONS/SUSPICIONS. IT WAS SUBMITTED THAT TH E SETTLED LAW IS THAT THE ADDITION/ DISALLOWANCE SHOULD BE MADE I N LIGHT OF COGENT EVIDENCE AND REASONING WITHOUT ANY SURMISE/ ESTIMATION OR ON AD-HOC BASIS. THE LD. AR RELIED ON THE IMPUGN ED ORDER WHILE CONTESTING GROUND NO. 1 OF THE DEPARTMENTS A PPEAL RELATING TO DELETION OF ADDITION UNDER REPAIRS/MAIN TENANCE. 13. ON GROUND NO. 2 OF THE DEPARTMENTS APPEAL FOR AY 2007-08 PERTAINING TO DISALLOWANCE ON ACCOUNT OF GENERAL CH ARGES, THE LD. AR SUBMITTED THAT THE ADDITION AMOUNTING TO RS. 50,000/- WAS MADE ON ESTIMATION BASIS WITHOUT ANY BASIS AND COGENT I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 22 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 ENDURI NG NATURE TO THE ASSESSEE AND THAT THE DETAILS OF EXPENDITURE WERE SUBMITTED VIDE SUBMISSION DATED DECEMBER 9, 2010 (PAGE NOS. 4 25- 437 OF PAPER BOOK 1) 14. ON GROUND NO. 3 OF THE DEPARTMENTS APPEAL ON T HE 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 2 004-05 AND THE EXCESS AMOUNT PAID WAS DEBITED TO THE INSUR ANCE COMPANY. SUBSEQUENTLY ON FAILURE TO OBTAIN A REFUND/ADJUSTMENT OF THE SAME, THE ASSESSEE WROTE O FF THE SAME AS IRRECOVERABLE. IT WAS SUBMITTED THAT THE SE TTLED PROPOSITION IN LAW IS THAT MERELY BECAUSE CLAIM WAS FILED BY THE ASSESSEE AS A BAD DEBT UNDER SECTION 36(L)(VII), TH E SAME COULD NOT BE DISALLOWED EVEN AFTER FINDING THAT IT WAS A BUSINESS LOSS TO AND THE SAME WAS TO BE CONSIDERED WHILE COMPUTIN G ITS BUSINESS INCOME U/S 28 OF THE ACT. I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 23 I.T.A. NOS. 1894/DEL/2013 & 2245/DEL/2013 15. THE LD. AR SUBMITTED THAT AS FAR AS THE ASSESS EES APPEAL IS CONCERNED, THE SOLITARY GROUND PERTAINS TO THE ISSU E OF DEPRECIATION ON PURCHASE OF TRADE MARK AND IS THE S AME AS THE ASSESSEES 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 SUBMIT TED THAT GROUND NO. 1 PERTAINS TO AD HOC DISALLOWANCE OF REP AIRS AND MAINTENANCE EXPENSES WITHOUT ANY COGENT REASONING A ND EVIDENCE. IT WAS SUBMITTED THAT THE AO ERRED IN TRE ATING THE EXPENDITURE TO BE CAPITAL IN NATURE IN VIEW OF THE EXPLANATION (1) TO SECTION 32(1) OF THE INCOME TAX ACT, 1961, AS TH E EXPENDITURE DO NOT RELATE TO ANY EXPENSE ON RENOVATION ETC. OF ANY BUILDING IN PLACE. THE REPAIR AND MAINTENANCE EXPENSES ARE GENE RAL IN NATURE WHICH IS VERY MUCH NECESSARY FOR SMOOTH RUNN ING OF THE BUSINESS OF THE ASSESSEE. IT WAS SUBMITTED THAT THE EXPENDITURE IS REVENUE IN NATURE AS IT DOES NOT PROVIDE ANY END URING BENEFIT TO THE ASSESSEE AND ARE MERE GENERAL REPAIR AND MAI NTENANCE EXPENSES. 16. ON THE ISSUE OF DISALLOWANCE OF INTEREST AND GR OUND NO. 2 OF THE DEPARTMENTS APPEAL, IT WAS SUBMITTED BY THE LD . AR THAT I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 24 INVESTMENT AMOUNTING TO RS. 7,19,00,000/- WAS MADE IN EAST LIMITED, A COMPANY INCORPORATED IN UK WHICH ALSO DE ALS IN SAME BUSINESS, FOR ENTERING INTO THE UK MARKET. THE INVE STMENT WAS MADE OUT OF OVERDRAFT FACILITY AND INTEREST WAS PAI D AMOUNTING TO RS. 3,73,973/-. THE AO DISALLOWED THE EXPENSE SOLELY ON ONE GROUND THAT THE ASSESSEE WAS NOT AN I NVESTMENT COMPANY AND THEREBY INTEREST UNDER SECTION 36(L)(II I) SHALL NOT BE ALLOWED. THE CONDITION STIPULATED FOR ADMISSIBILIT Y OF BUSINESS EXPENDITURE IN TERMS OF PROVISIONS OF SECTION 36(L) (III) OF THE ACT, IS THAT THE SAME IS EXPENDED FOR THE PURPOSES OF TH E BUSINESS. THE ASSESSEE HAD BORROWED THE FUNDS TO INVEST IN AN ENTITY TO ENLARGE THE SCOPE OF ITS BUSINESS AND ENTER A NEW G EOGRAPHICAL MARKET WITH EASE. THE FUNDS WERE BORROWED WITH A PU RPOSE TO ENLARGE THE BUSINESS OF THE ASSESSEE. 17. IN RESPONSE, FOR BOTH THE YEARS, THE LD. DR PL ACED HEAVY RELIANCE ON THE ASSESSING OFFICERS ORDERS, CIT(A) S ORDERS AND THE FINDINGS OF THE LD. TPO AS FAR AS THE ISSUE OF PURC HASE OF TRADE MARK AND DEPRECIATION THEREON WAS CONCERNED. IT WA S SUBMITTED THAT EVEN THE COSTS INCURRED BY FABINDIA INC. SINC E 1960 TOWARDS BRAND BUILDING WAS NOT ON RECORD AND HENCE THE QUAN TUM OF I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 25 PAYMENT WAS 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 O BSERVATIONS MERIT A SERIOUS CONSIDERATION. ON THE GROUNDS IN T HE DEPARTMENTS APPEALS, THE LD. DR STRONGLY SUPPORTED THE ASSESSING OFFICERS ORDERS. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. BEFORE PROCEEDI NG TO ADJUDICATE THE ISSUE OF PURCHASE OF TRADE-MARK AND DEPRECIATION THEREON, IT WILL BE WORTHWHILE TO REFER TO SOME PRE CEDENTS LAID DOWN BY THE HONBLE DELHI HIGH COURT AS WELL AS THE CO-ORDINATE BENCHES OF THE ITAT. THE HONBLE DELHI HIGH COURT I N THE CASE OF CIT VS. EKL APPLIANCES 345 ITR 241 (DEL) HAS OBSERV ED 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 ARMS LENGTH PRICE PRINCIPLE AN D 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 CONDITIO NS, HAVE ACCRUED TO ONE OF THE ENTERPRISES, BUT, BY REA SON OF I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 26 THOSE CONDITIONS, IF NOT SO ACCRUED, MAY BE INCLUDE D IN THE PROFITS OF THAT ENTERPRISE AND TAXED ACCORDINGL Y. BY SEEKING TO ADJUST THE PROFITS IN THE ABOVE MANNER, THE ARMS LENGTH PRINCIPLE OF PRICING FOLLOWS THE APPRO ACH OF TREATING THE MEMBERS OF A MULTI-NATIONAL ENTERPRISE GROUP AS OPERATING AS SEPARATE ENTITIES RATHER THAN AS INSEPARABLE PARTS OF A SINGLE UNIFIED BUSINESS. AFT ER REFERRING TO ARTICLE 9 OF THE MODEL CONVENTION AND STATING THE ARM S LENGTH PRINCIPLE, THE GUIDELINES PROVIDE FOR RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN IN PARAGRAPHS 1.36 TO 1.41. PARAGRAPHS 1.36 TO 1.38 AR E IMPORTANT AND ARE RELEVANT TO OUR PURPOSE. THESE PARAGRAPHS ARE REPRODUCED BELOW: - 1.36 A TAX ADMINISTRATIONS EXAMINATION OF A CONTROLLED TRANSACTION ORDINARILY SHOULD BE BASED O N THE TRANSACTION ACTUALLY UNDERTAKEN BY THE ASSOCIATED ENTERPRISES AS IT HAS BEEN STRUCTURED BY THEM, USIN G THE METHODS APPLIED BY THE TAXPAYER INSOFAR AS THESE AR E CONSISTENT WITH THE METHODS DESCRIBED IN CHAPTERS I I AND III. IN OTHER THAN EXCEPTIONAL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTIONS OR SUBSTITUTE OTHER TRANSACTIONS FOR T HEM. RESTRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS W OULD BE A WHOLLY ARBITRARY EXERCISE THE INEQUITY OF WHIC H COULD BE COMPOUNDED BY DOUBLE TAXATION CREATED WHER E THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAM E VIEWS AS TO HOW THE TRANSACTION SHOULD BE STRUCTURE D. 1.37 HOWEVER, THERE ARE TWO PARTICULAR CIRCUMSTA NCES IN WHICH IT MAY, EXCEPTIONALLY, BE BOTH APPROPRIATE AND LEGITIMATE FOR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. THE FIRST CIRCUMSTANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM. IN SUCH A CASE T HE TAX ADMINISTRATION MAY DISREGARD THE PARTIES CHARACTERIZATION OF THE TRANSACTION AND RECHARACTER ISE IT IN ACCORDANCE WITH ITS SUBSTANCE. AN EXAMPLE OF THI S CIRCUMSTANCE WOULD BE AN INVESTMENT IN AN ASSOCIATE D ENTERPRISE IN THE FORM OF INTEREST -BEARING DEBT WH EN, AT ARMS LENGTH, HAVING REGARD TO THE ECONOMIC I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 27 CIRCUMSTANCES OF THE BORROWING COMPANY, THE INVESTM ENT WOULD NOT BE EXPECTED TO BE STRUCTURED IN THIS WAY. IN THIS CASE IT MIGHT BE APPROPRIATE FOR A TAX ADMINIS TRATION TO CHARACTERIZE THE INVESTMENT IN ACCORDANCE WITH I TS ECONOMIC SUBSTANCE WITH THE RESULT THAT THE LOAN MA Y 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 W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVI NG IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALLY IMPEDES THE TAX ADMINISTRATIO N FROM DETERMINING AN APPROPRIATE TRANSFER PRICE. AN EXAMP LE 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 ARI SING AS A RESULT OF FUTURE RESEARCH FOR THE TERM OF THE CONTR ACT (AS PREVIOUSLY INDICATED IN PARAGRAPH 1.10). WHILE IN T HIS CASE IT MAY BE PROPER TO RESPECT THE TRANSACTION AS A TRANSFER OF COMMERCIAL PROPERTY, IT WOULD NEVERTHEL ESS 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 REASONABL Y HAVE BEEN EXPECTED HAD THE TRANSFER OF PROPERTY BEEN THE SUBJECT OF A TRANSACTION INVOLVING INDEPENDENT ENTERPRISES. THUS, IN THE CASE DESCRIBED ABOVE IT M IGHT BE APPROPRIATE FOR THE TAX ADMINISTRATION, FOR EXAM PLE, TO ADJUST THE CONDITIONS OF THE AGREEMENT IN A COMMERC IALLY RATIONAL MANNER AS A CONTINUING RESEARCH AGREEMENT. 1.38 IN BOTH SETS OF CIRCUMSTANCES DESCRIBED ABO VE, THE CHARACTER OF THE TRANSACTION MAY DERIVE FROM TH E RELATIONSHIP BETWEEN THE PARTIES RATHER THAN BE DETERMINED BY NORMAL COMMERCIAL CONDITIONS AS MAY HAVE BEEN STRUCTURED BY THE TAXPAYER TO AVOID OR MINIMIZE TAX. IN SUCH CASES, THE TOTALITY OF ITS TE RMS WOULD BE THE RESULT OF A CONDITION THAT WOULD NOT H AVE BEEN MADE IF THE PARTIES HAD BEEN ENGAGED IN ARMS LENGTH DEALINGS. ARTICLE 9 WOULD THUS ALLOW AN ADJUSTMENT OF CONDITIONS TO REFLECT THOSE WHICH THE PARTIES WOULD HAVE ATTAINED HAD THE TRANSACTION BEE N I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 28 STRUCTURED IN ACCORDANCE WITH THE ECONOMIC AND COMMERCIAL REALITY OF PARTIES DEALING AT ARMS LENG TH. 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTION AL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM AND THE EXAMINATION OF A CONTROLLED TRANSACTIO N SHOULD ORDINARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICAN CE THAT THE GUIDELINES DISCOURAGE RE-STRUCTURING OF LEGITIM ATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISA TION OF SUCH RE-STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOE S NOT SHARE THE SAME VIEW AS TO HOW THE TRANSACTION SHOUL D BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORES AID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBST ANCE OF A TRANSACTION DIFFERS FROM ITS FORM AND (II) WHE RE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVI NG IN A COMMERCIALLY RATIONAL MANNER. 19. THERE IS NO REASON WHY THE OECD GUIDELINES SHO ULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE I N JUDGING THE ACTION OF THE TPO. IN FACT, THE CIT (AP PEALS) HAS REFERRED TO AND APPLIED THEM AND HIS DECISION H AS 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 H ELD BY OUR COURTS THAT IT IS NOT FOR THE REVENUE AUTHORITI ES TO DICTATE TO THE ASSESSEE AS TO HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSE E AS TO WHAT EXPENDITURE THE ASSESSEE CAN INCUR. WE MAY RE FER TO A FEW OF THESE AUTHORITIES TO ELUCIDATE THE POIN T. IN EASTERN INVESTMENT LTD. V. CIT , (1951) 20 ITR 1, I T WAS HELD BY THE SUPREME COURT THAT THERE ARE USUALLY M ANY I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 29 WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLES BUT IT IS NOT FOR THE COURT TO DEC IDE 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 T HAT IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNE D. IN CIT V. WALCHAND & CO. ETC., (1967) 65 ITR 381, IT W AS 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 EXPENDIT URE 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 ERRONEOUS. IT HAS BEEN CLASSICALLY OBSERVED BY LORD THANKERTON IN HUGHES V. BANK OF NEW ZEALAND, (1938) 6 ITR 636 THAT EXPENDITURE IN THE COURSE OF THE TRAD E WHICH IS UNREMUNERATIVE IS NONETHELESS A PROPER DEDUCTION IF WHOLLY AND EXCLUSIVELY MADE FOR THE PURPOSES OF TRADE. IT DOES NOT REQUIRE THE PRESENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE. THE QUESTION WHETHER AN EXPENDITURE CAN BE ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN A NY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPR EME COURT AGAIN IN CIT V. RAJENDRA PRASAD MOODY , (1978 ) 115 ITR 519, AND IT WAS OBSERVED AS UNDER: - WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME. WHATE VER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACC OUNTING AND THE INTERPRETATION OF SECTION 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOME. IT IS NOTEWORTHY THAT THE ABOVE OBSERVATIONS WERE MADE IN THE CONTEXT OF SECTION 57(III) OF THE ACT WHERE THE LANGUAGE IS SOMEWHAT NARROWER THAN THE LANGUAGE EMPLOYED IN I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 30 SECTION 37(1) OF THE ACT. THIS FACT IS RECOGNISED I N THE JUDGMENT ITSELF. THE FACT THAT THE LANGUAGE EMPLOYE D IN SECTION 37(1) OF THE ACT IS BROADER THAN SECTION 57 (III) OF THE ACT MAKES THE POSITION STRONGER. 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LTD . V. CIT, (1979) 118 ITR 261 (SC), THE SUPREME COURT REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME TAX BILL OF 1961 WAS INTRODUCED, SECTION 37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEE N INCURRED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS IN ORDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTEST, THE WORD NECESSARILY WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISION S IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW T HAT 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 H IM 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 O F BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THA T INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN TH E 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 HA VE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENU E THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF T HE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INC URRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIO NS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER IN TO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUAN TUM 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 DISALL OW I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 31 THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GRO UND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. T HE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERI ON TO JUDGE ALLOWABILITY OF AN EXPENSE; THERE IS CERTAINL Y NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PR ESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FE E, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO T O DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALL Y FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BU T A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICUL ARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EV EN ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ RO YALTY PAYMENT WAS NOT WARRANTED. THE ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE THAT THE INCREASE IN THE EMPLOYEES COST, FINANCE CHARGES , ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPA CITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMPARATIVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFOR E THE CIT (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY THE ASSESSEE BEFORE THE CIT (APPEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE CIT (APPEALS) OR BEFORE T HE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASON S FOR THE LOSSES ARE NOT GENUINE. I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 32 19. SIMILARLY, THE HONBLE DELHI HIGH COURT HAS OPI NED IN CIT VS. CUSHMAN AND WAKEFIELD (INDIA)(P) LTD 367 ITR 73 0 (DEL.) : THIS IS THE DISTINCTION BETWEEN THE JURISDICTION O F THE AO AND THE TPO; THE TPO DETERMINES WHETHER THE STATED TRANSACT ION VALUE REPRESENTS THE ALP OR NOT (INCLUDING WHETHER THE AL P IS NIL), WHILE THE AO MAKES THE DECISION AS TO VALIDITY OF THE DED UCTION UNDER SECTION 37. THIS MEANS THE DECISION AS TO WHETHER T HE EXPENDITURE WAS ' LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS' IS A FACT DETERMINATION OR VERIFIC ATION TO BE UNDERTAKEN BY THE AO. THIS INCLUDES WHETHER THE REF ERRALS ACTUALLY OCCURRED (AND THUS TOOK PLACE FOR THE 'PURPOSE OF T HE BUSINESS'), INDEPENDENT OF THEIR VALUATION WHICH THE TPO DETERM INES. THAT DETERMINATION IS NOT AND CANNOT BE MADE BY THE TPO. NOR IS THE AUTHORITY OF F THE 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 (HY DERABAD TRIB.) AS UNDER : 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE PAPER BOOKS ON RECORD RUNNING INTO PAGE S 513 IN TWO VOLUMES. AS SEEN FROM THE RECORD, ASSESS EE HAS CONDUCTED STUDY REPORT AND PLACED NECESSARY INVOICES, DETAILS, REPORTS BEFORE THE TPO. AS RIGHT LY POINTED OUT BY THE DRP, THE ASSESSEE HAS CAPITALIZE D THE PURCHASE PRICE OF THE WEBSITE AND HAS NOT DEBIT ED 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 N OT WARRANTED. WE ARE UNABLE TO UNDERSTAND ON WHAT REASON THE DEPRECIATION WAS 'RIGHTLY DISALLOWED' AS HELD I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 33 BY THE DRP. FIRST OF ALL, AS SEEN FROM THE ORDER OF THE DRP, THEY HAVE ARRIVED AT THE CONCLUSION THAT THE W EB PURCHASE WAS AT ALP. HOWEVER, THEY AGREED WITH THE TPO FOR DETERMINING THE VALUE AT NIL ON THE REASON THAT THE MAJOR ISSUES WERE NOT ANSWERED BY THE ASSESSEE. WE ARE UNABLE TO UNDERSTAND WHAT MAJOR ISSUES WERE RAISED BY THE TPO, WHICH WENT UNANSWERED. ON A QUESTION WAS RAISED BY THE TPO THAT WHETHER THERE I S ANY NEED FOR PURCHASE OF SUCH INTANGIBLE, WE ARE OF THE VIEW THAT WHAT IS TO PURCHASE AND WHAT NOT TO PURCH ASE IS NOT IN THE DOMAIN OF THE AO, BECAUSE IT IS A BUS INESS DECISION OF THE ASSESSEE COMPANY AND ACCORDINGLY, WHEN ASSESSEE PURCHASED AN INTANGIBLE ASSET, WHAT I S REQUIRED UNDER THE LAW IS TO EXAMINE WHETHER THE PR ICE PAID BY THE ASSESSEE IS ARMS LENGTH PRICE OR NOT. T HE TPO HAS NO ROLE TO PLAY IN EXAMINING THE DECISION O F COMMERCIAL NATURE. ANOTHER QUESTION RAISED, AS LIST ED OUT IN PARA 24 OF THE DRP'S ORDER, IS THAT WHETHER I THE SO-CALLED INTANGIBLE IS ACTUALLY DELIVERED AND IF DELIVERED WHAT ARE THE COMMENSURATE BENEFITS TO THE TAXPAYER ON ITS USE. WE FIND THAT THERE IS NO DISPU TE WITH REFERENCE TO THE DELIVERY OF THE INTANGIBLE I ASSET AS THE ASSESSEE HAS DONE BUSINESS ON THIS WEBSITE. IN FACT, IT WAS SUBMITTED AND ALSO RECORDED BY THE DRP VIDE PARAS 15 & 16 IN ITS ORDER, ABOUT THE VISITS TO THE SITE AND ALSO THAT ASSESSEE COMPANY GENERATED REVENUES O F RS. 4.47 CRORES CONSTITUTING 45% OF THE TOTAL REVEN UES FROM BHARATSTUDENT.COM. EVEN AFTER EXPLAINING THAT THE INTANGIBLE ASSET WAS ACTUALLY USED BY THE ASSESSEE IN EARNING THE REVENUES TO THE COMPANY OF RS. 4.47 CRO RES, WHAT ELSE IS REQUIRED TO ESTABLISH IS NOT UNDERSTANDABLE. FURTHER, THE ASSESSEE ALSO FURNISHE D THE VALUATION REPORT WHERE THE VALUER ADOPTED THE C OST METHOD AND THE ASSESSEE HAS PAID ONLY THE COST INCURRED BY AE. AS SEEN FROM THE ORDER OF DRP, THE DRP STATED THAT VALUER ARRIVED AT THE COST OF WEBSITE A T RS. I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 34 5,38,31,832/-, AS AGAINST THE COST VALUED BY THE VA LUER AT RS. 3,67,82,863/-. WE ARE UNABLE TO UNDERSTAND F ROM WHERE THE SAID PRICE WAS TAKEN UP BY THE TPO/DRP. B E THAT AS IT MAY, THE ASSESSEE HAS PAID ONLY THE COST PRICE TO ITS AE AND JUSTIFIED THE SAME BY PROVIDING A VAL UATION REPORT AS EXTERNAL CUP. NOTHING HAS BEEN BROUGHT ON RECORD BY THE TPO OR BY THE DRP TO DETERMINE THE AL P 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 O N THE ACTUAL EXPENDITURE INCURRED BY THE AE. CONSIDER ING THE TOTALITY OF THE FACTS OF THE CASE, WE ARE OF TH E OPINION THAT THE WEBSITE PURCHASED BY THE ASSESSEE HAS TO B E CONSIDERED AT ARM'S LENGTH. TO THIS EXTENT, THE OBSERVATION OF THE DRP STANDS CONFIRMED BY US. THER E IS EVIDENCE ON RECORD THAT THE WEBSITE WAS USED BY THE ASSESSEE IN THE BUSINESS AND EARNED MORE THAN THE C OST 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 PERTA IN 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 HE LD AS UNDER: I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 35 LEAVE ALONE THAT AMOUNT; EVEN THE SUB LICENSE FEE FOR THE USE OF TRADE MARK IS ALSO FAULTY. UNDER THE GUI SE 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., {SUPRA). 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 T PO HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO REJECT TH E 1% PAYMENT MADE TO ITALCEMENTI GROUP. MOREOVER, WHILE DETERMINING THE PRICE AT NIL ON THE ISSUE, THE TPO SURPRISINGLY HOLDS THAT ASSESSEE HAS TRANSFERRED IT S 'ZUARI BRAND' TO 'ITALCEMENTI GROUP'. WE ARE UNABLE TO UNDERSTAND THIS LOGIC. ITALCEMENTI GROUP NEVER OBTA INED, ACQUIRED OR USED ZUARI BRAND ANYWHERE IN THE WORLD, SO THAT THIS CANNOT BE CONSIDERED FOR TRANSFER PRICING ANALYSIS. IT IS THE ITALCEMENTI GROUP BRAND WHICH I S USED BY ASSESSEE-COMPANY. THE TPO'S ANALYSIS OF AMP EXPENSES ARE ALSO NOT CORRECT. EVEN THOUGH ITALCEME NTI GROUP WAS BEING USED FROM EARLIER YEARS, AMP EXPENSES OF CURRENT YEAR ALSO INCLUDED IN THIS, WHI CH IS NOT CORRECT. MOREOVER, ITALCEMENTI GROUP ITSELF IS A 50% SHAREHOLDER IN THE ASSESSEE-COMPANY FROM THE BEGINNING. THEREFORE, IT CANNOT BE STATED THAT 'ZUA RI CEMENTS' IS EXCLUSIVE BRAND OWNER OF THE BIRLA GROU P IN EXCLUSION OF ITALCEMENTI GROUP. THE ENTIRE APPROACH BY THE TPO IS BIASED AND CANNOT BE JUSTIFIED ON THE FA CTS OF THE CASE. THEREFORE, WE ARE NOT IN A POSITION TO UP HOLD ANY OF THE CONTENTIONS RAISED BY TPO IN HIS ORDER. LIKEWISE, THE DISALLOWANCE OF VARIOUS SERVICE FEES INCLUDING REIMBURSEMENTS MADE BY ASSESSEE TO AE. SINCE WE DO NOT FIND ANY VALID REASON FOR TPO TO DISALLOW THESE EXPENDITURES, WE HAVE NO OTHER GO TH AN TO SET ASIDE THE ENTIRE ORDER OF THE TPO WHICH IS B ASED ON WRONG PRESUMPTIONS - AND PROPOSITIONS. DRP UNFORTUNATELY, EVEN THOUGH CONSISTED OF THREE SENIO R I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 36 OFFICERS, DID NOT APPLY ITS MIND TO THE VALID OBJEC TIONS RAISED BY ASSESSEE. IN VIEW OF THIS, WITHOUT DECIDI NG THE MERITS OF VARIOUS ISSUES, WE SET ASIDE THE ORDERS A ND DIRECT THE TPO TO RE-CONSIDER THE ENTIRE ORDER AND ANALYSE THEM IN FRESH, FIRST BY DETERMINING THE MOS T APPROPRIATE METHOD AND THEN ANALYZING THE TRANSACTI ONS UNDER THE PROVISIONS OF THE TP. THE ORDERS OF THE TPO/DRP ON THE TP ISSUES ARE THEREFORE SET ASIDE AN D 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 IT R (T) 240 AS UNDER : HOWEVER, IN THE INSTANT CASE, THE TPO DID NOT EXAM INE THE ARMS LENGTH PRICE OF THE IMPUGNED ROYALTY PAYMENT IN ACC ORDANCE WITH THE PROVISIONS OF SEC.92C OF THE ACT. IT IS ALSO TH E CONTENTION OF THE ASSESSEE THAT THE TPO DID NOT INDICATE TO THE ASSES SEE THAT HE PROPOSES TO TREAT THE IMPUGNED TRANSACTION AS A SHA M 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 C ONNECTION WITH THIS ISSUE. FURTHER THE OBSERVATION OF DRP WITH REG ARD TO THE TRADE MARK REGISTRATION, THOUGH DEFENDED BEFORE US BY THE ASSESSEE, REQUIRES EXAMINATION AT THE END OF THE ASSESSING OF FICER/TPO. ACCORDINGLY WE ARE OF THE VIEW THAT THE ALP OF THE IMPUGNED ROYALTY PAYMENT AND THE ISSUE RELATING TO THE TRADE MARK REGISTRATION NEED TO BE EXAMINED AFRESH. ACCORDINGL Y WE SET ASIDE THE ORDER OF ASSESSING OFFICER/TPO/DRP ON THIS ISSU E AND RESTORE THE SAME TO HIS FILE FOR EXAMINATION OF THE SAME AF RESH IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD. , _ I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 37 23. THEREFORE, ON AN OVERALL CONSIDERATION OF THE F ACTS OF THE CASE AND THE JUDICIAL PRECEDENTS AVAILABLE, IT IS OUR CO NSIDERED OPINION THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW T HAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INC URRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSE E TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT O R 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 EX PRESSION IN THE OECD GUIDELINES. AS FAR AS THE OBJECTION OF THE LD. TPO THAT WHETHER THERE IS ANY NEED FOR PURCHASE OF SUCH INTA NGIBLE OR NOT IS CONCERNED, WE ARE OF THE VIEW THAT WHAT IS TO PU RCHASE AND WHAT NOT TO PURCHASE IS NOT IN THE DOMAIN OF THE TP O/AO, BECAUSE IT IS A BUSINESS DECISION OF THE ASSESSEE C OMPANY AND ACCORDINGLY, WHEN 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 H AS NO ROLE TO PLAY IN EXAMINING THE DECISION OF COMMERCIAL NATURE . UNDER THE GUISE OF TPO PROVISIONS, THE TPO CANNOT DETERMINE T HE ALP AT I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 38 NIL AS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD., {SUPRA}. THEREFORE, REJECTING THE ENTIRE PAYMENT WITHOUT THERE BEING ANY ANALYSIS ON THE CUP METHOD CANNOT BE ACCEPTED. IN THE GUISE OF ANALYZING THE TRANSACTION S IN THE CUP METHOD, THE TPO HAS NOT BROUGHT ANY EVIDENCE ON REC ORD TO REJECT THE PAYMENT MADE TO FAB INDIA INC. I N THE INSTANT CASE, THE TPO DID NOT EXAMINE THE ARMS LENGTH PRICE OF THE IM PUGNED ROYALTY PAYMENT IN ACCORDANCE WITH THE PROVISIONS O F SEC.92C OF THE ACT. ACCORDINGLY, WE ARE OF THE OPINION THAT THE ALP OF THE IMPUGNED PAYMENT FOR TRADEMARK AND THE ISSUE RELATI NG TO THE DEPRECIATION ON TRADE MARK NEED TO BE EXAMINED AFRE SH. ACCORDINGLY WE SET ASIDE THE ORDER OF ASSESSING OFF ICER/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 T HE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD. IN THE RESULT, GROUND NOS. 1 & 2 OF THE ASSESEES APPEAL ARE ALLOW ED FOR STATISTICAL PURPOSES. 24. AS FAR AS GROUND NO. 3 OF THE ASSESSEES APPEAL AND GROUND NO. 1 OF THE DEPARTMENTS 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:- I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 39 6.6. I HAVE CAREFULLY EXAMINED THE ISSUE. THE CASE LAWS CITED BY THE APPELLANT ARE NOT APPLICABLE TO THE FACTS AN D CIRCUMSTANCES THIS CASE. THE DISALLOWANCES ARE ON T WO COUNTS - 1) IT IS PERSONAL EXPENSES AND 2) IT IS CAPITAL I N NATURE. THE ASSESSEE TRIED TO EXPLAIN THESE EXPENSES AS INCURRE D IN THE RESIDENCE OF THE MANAGING DIRECTOR WHICH WAS USED A S 'OFFICE' ALSO. THIS EXPLANATION OF THE APPELLANT LOOKS VERY SPACIOUS. THE NATURE OF THE INVOICES AND THE NARRATIONS THERE IN CLEARLY INDICATE THAT THEY WERE PERSONAL EXPENSES. I ALSO A GREE 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 ESTI MATED DISALLOWANCE, I AM UPHOLDING THE ADDITION ONLY TO T HE EXTENT OF RS. 6,60,029/-. BALANCE AMOUNT OF THE ADDITION SHOU LD 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 INTERFERE AND UPHOLD HIS FINDINGS. HE NCE, GROUND NO. 3 OF ASSESSEES APPEAL AND GROUND NO. 1 OF DEPA RTMENTS APPEAL ARE DISMISSED. 26. SIMILARLY, GROUND NO.2 OF THE DEPARTMENTS APPE AL IS AGAINST THE SPECIFIC FINDING OF THE LD. CIT(A) IN PARAS 7.1 TO 7.3 OF THE IMPUGNED ORDER WHICH ARE BEING REPRODUCED AS UNDER: - THE AO HAS DISALLOWED CERTAIN GENERAL CHARGES CL AIMED BY THE APPELLANT AS REVENUE EXPENDITURE BASED ON TH E LEDGERS SUBMITTED DURING THE OF ASSESSMENT PROCEEDINGS. THE EXPENDITURE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 40 WERE HELD TO BE CAPITAL IN NATURE BY THE AO. 7. 2 . .. . THE APPELLANT SUBMITTED THAT DISALLOWANCES HAVE BEE N MADE WITHOUT CONSIDERING THE INVOICES PLACED ON REC ORD. IN ONE CASE, INVOICE FOR RS. 1,664/- WAS FILED AS ADDITION AL EVIDENCE VIDE LETTER DATED 19 TH JUNE, 2012 ON WHICH REMAND REPORT WAS CALLED FROM THE AO. ON THIS INVOICE UNDER GENERAL CHARGES, NO SPECIFIC COMMENTS WERE GIVEN BY THE AO. ON PERUSAL OF THE INVOICE FOR THE 8 ENTRIES IN RESPECT OF WHICH DISAL LOWANCE WAS MADE, IT IS CLEAR THAT THE EXPENDITURE WAS IN THE N ATURE OF UPGRADATION OF TALLY SOFTWARE, DECORATION MATERIAL, RENTAL CHARGES FOR PROJECTOR, AND PETTY ITEMS LIKE PAD LOC KS, MANNEQUINS, UTENSILS ETC. IN VIEW OF THE EVIDENCE PLACED ON RECORD BY THE APP ELLANT, I HOLD THAT THIS IS AN ALLOWABLE EXPENSE. THE AO IS DIRECT ED TO ALLOW THE SAME. 27. IN VIEW OF THE SPECIFIC FINDING RECORDED BY THE LD. CIT(A) THERE IS NO REASON FOR US TO INTERFERE AND WE UPHOLD HIS FINDINGS. HENCE, GROUND NO. 2 OF THE DEPARTMENTS APPEAL IS D ISMISSED. 28. GROUND NO. 3 OF THE DEPARTMENTS APPEAL PERTAIN S TO ALLOWABILITY OF AMOUNT CLAIMED AS BAD DEBTS. THE S PECIFIC FINDING OF THE LD. CIT (A) IS IN PARAS 8.1 TO 8.3 OF THE IM PUGNED ORDER, THE SAME ARE REPRODUCED AS UNDER:- 8.1 THE APPELLANT HAS MADE PAYMENT OF INSURANCE PREMIUM TWICE TO UNITED INDIA INSURANCE COMPANY DUR ING THE FY 2004-05 AND THE EXCESS AMOUNT PAID WAS DEBIT ED TO INSURANCE COMPANY. ON FAILURE TO GET THE REFUND/ I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 41 ADJUSTMENT OF THE SAME, THE APPELLANT WRITTEN OFF T HE SAID AMOUNT AS IRRECOVERABLE DURING THE YEAR UNDER CONSIDERATION. 8.2 THE AO DISALLOWED THE SAID CLAIM AS REVENUE EXPENDITURE, HOLDING THAT THE SAID AMOUNT DOES NOT FULFILL THE CONDITIONS FOR ALLOWING THE BAD DEBTS AND FURTH ER HOLDING THAT THE AMOUNT CANNOT BE IRRECOVERABLE F ROM A GOVERNMENT COMPANY. 8.3 THE APPELLANT SUBMITTED THAT THE RELIANCE PL ACED BY THE THE AO ON THE PROVISIONS OF SECTION 36(2) ON TH E PRESENT FACTS IS MISPLACED AND THE CLAIM IS DULY ALLOWABLE AS REVENUE EXPENDITURE U/S 37, AS THE SAID LOSS IS INC IDENTAL 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 THER E IS NO PRESUMPTION UNDER THE LAW REGARDING RECOVERY OF PAY MENT FROM A GOVERNMENT ENTERPRISE. I HOLD THAT, UNDER TH ESE CIRCUMSTANCES, AO WAS NOT CORRECT IN DISALLOWING TH E CLAIM OF THE APPELLANT. AO IS DIRECTED TO ALLOW RS. 46,94 5/- 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 DEPARTMEN TS APPEAL. GROUND NO. 4 OF ASSESSEES APPEAL IS DISMISSED AS B EING PREMATURE. 30. IN THE RESULT, FOR ASSESSMENT YEAR 2007-08, TH E APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES WHEREAS THE APPEAL OF THE DEPARTMENT IS DISMISSED. I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 42 31. IN ASSESSMENT YEAR 2009-10, GROUND NOS. 1, 2 & 3 OF THE ASSESSEES APPEAL ARE THE SAME AS IN GROUND NOS. 1 & 2 OF THE ASSESSEES APPEAL IN ASSESSMENT YEAR 2007-08 WHICH HAVE ALREADY BEEN RESTORED TO THE FILE OF THE TPO FOR FR ESH DETERMINATION. ON THE SAME REASONING AND OBSERVATI ONS, WE ALLOW THESE GROUNDS BY RESTORING THE ISSUE TO THE F ILE OF THE TPO FOR ALLOWING DEPRECIATION ON TRADE MARKS AFTER THE DETERMINATION OF ALP IN ASSESSMENT YEAR 2007-08 AS PER OUR DIRECT IONS. GROUND NO. 4 OF THE ASSESSEES APPEAL IS DISMISSED AS BEING PREMATURE. 32. AS FAR AS GROUND NO. 1 OF THE DEPARTMENTS APPE AL IN AY 2009-10 IS CONCERNED, THE ISSUE HAS BEEN EXAMINED A T LENGTH IN PARA 5 OF THE IMPUGNED ORDER AS UNDER:- 5. GROUND NO. 3 IS ON THE ISSUE OF DISALLOWANCE OF REPAIR AND MAINTENANCE EXPENSES. THE APPELLANT IS AGGRIEVED B Y THE DISALLOWANCE OF RS. 20,00,000/- OUT OF RS. 8,96,61, 833/- CLAIMED AS REPAIRS AND MAINTENANCE EXPENDITURE. THE AO HAS MADE THE DISALLOWANCE ON THE BASIS THAT MAJOR PART OF EXPENS ES WAS INCURRED ON RENOVATION WORK RELATED TO FURNITURE AN D FIXTURES, MAKING OF CUPBOARDS AND ELECTRICAL FITTINGS IN LEAS EHOLD PREMISES, AND HELD THE EXPENDITURE TO BE CAPITAL IN NATURE AN D ELIGIBLE FOR DEPRECIATION. THE APPELLANT HAS SUBMITTED THAT THE EXPENDITURE HA S BEEN INCURRED MAINLY ON ROUTINE BUSINESS MAINTENANCE EXP ENSES AND SMALL REPAIRS, FOR SMOOTH AND EFFICIENT CONDUCTING OF ITS BUSINESS AND WERE REQUIRED TO BE INCURRED AT REGULAR INTERVA LS OWING TO COMMERCIAL EXPEDIENCY OF THE BUSINESS, WHICH DOES N OT LEAD TO COMING INTO EXISTENCE OF ANY CAPITAL ASSET ADDING T O THE PROFIT I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 43 MAKING APPARATUS OF THE BUSINESS AND AS SUCH, NO EN DURING BENEFIT CAN BE SAID TO HAVE,BEEN DERIVED FROM SUCH EXPENDITURE, AS THE SAME IS REGULAR FEATURE OF THE TRADE. IT HAS FURTHER SUBMITTED THAT SINCE THE APPELLANT IS ENGAGED IN RE TAIL TRADE OF READYMADE GARMENTS AND VARIOUS HANDLOOM 8S OTHER PR ODUCTS THROUGH VARIOUS RETAIL SHOWROOMS ACROSS THE COUNTRY , IT IS IMPORTANT FOR IT TO KEEP THESE SHOWROOMS PROPERLY M AINTAINED AT ALL TIMES TO ATTRACT MORE CUSTOMERS. THIS ENTAILS T HE NEED FOR A CONSTANT RESTORATION OF ALL ITS OUTLETS ON REGULAR BASIS, TO GIVE A FRESH AND NEAT LOOK FOR DISPLAY OF ITS PRODUCTS. AS THE EXPENDITURE NEED TO BE CONSTANTLY INCURRED, THE BENEFIT DERIVED IS EPHEMERAL IN NATURE DUE TO THE NATURE OF BUSINESS OF THE APPELLA NT. THIS IS FURTHER SO AS THE SHOWROOMS OF THE APPELLANT COMPAN Y ARE LEASED PREMISES. AGAINST THE SPECIFIC DISALLOWANCES MADE BY THE AO, THE APPELLANT HAS GIVEN ITS SPECIFIC REPLY AND SUBMITTE D THAT THE EXPENDITURE INCLUDED PAINTING, FLOOR REPAIR, DOOR R EPAIRS, ALMIRAH REPAIR & REMODELING, DRAWERS REPAIR, POLISHING, PU RCHASE OF MDF BOXES & JELLY FILLED WIRES, AMC PAYMENT FOR EPABX S YSTEM, REPAIRING OF SHED, AC FIXING, WELDING OF GATE, WIND OW REPAIRING, REPAIR OF KITCHEN, TOILETS INCLUDING MARBLE FIXING, PLASTER, TILE FIXING AND WATER PROOFING TREATMENT AT STORES, , BULK PURC HASE OF LOW COST ITEMS LIKE SHELF TOCKERS, BACKLIT FLEX, TAPE, PAPER PRINTS, DIGITAL PRINTS AND SIGNAGE AT VARIOUS STORES, ELECTRICAL RE PAIR & FITTING WORK AND PURCHASE OF SMALL ELECTRICAL ITEMS LIKE TU BE LIGHT, MULTI PLUG, WIRE, TAPE PURCHASE OF SMALL REPAIR ITEMS LIK E GATE ROLLER, REED SWITCH, REFILLING OF FIRE EXTINGUISHERS AND JO B WORK CHARGES. IN SUPPORT OF ITS CONTENTIONS, THE INVOICES WERE AL SO PLACED ON RECORDS, WHICH SUBSTANTIATE THE CLAIM OF THE APPELL ANT. THE APPELLANT HAS SUBMITTED THAT THE AO HAS NOT APP RECIATED THE ABOVE INVOICES DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND THAT ALL THE ABOVE EXPENDITURE IS REVENUE IN NA TURE AND HAS RELIED ON THE DECISION OF JURISDICTIONAL HIGH COURT IN DELHI CLOTH AND GENERAL COTTON MILLS [1981] 6 TAXMAN 53 (DELHI) , WHEREIN THE HONBLE HIGH COURT OF DELHI HAS HELD THAT EXPENDITU RE ON RENOVATION OF FURNITURE 8S FITTINGS BY THE ASSESSEE , WHO WAS ALSO IN THE SAME BUSINESS AS OF THE APPELLANT, IS REVENU E IN NATURE. THE APPELLANT THUS SUBMITTED THAT AS THE EXPENDITUR E INCURRED: - A) IS NOT TOWARDS INITIAL OUTLAY OF BUSINESS; B) HAS NOT RESULTED IN ACQUISITION OF SOURCE OF PROFI T; C) NO ENDURING BENEFIT HAS BEEN DERIVED; I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 44 D) THE EXPENDITURE IS NOT INCURRED ONCE FOR ALL; E) THE EXPENDITURE INCURRED IS TOWARDS TRADING OPERAT IONS; F) THE EXPENDITURE ENABLES THE MANAGEMENT TO RUN THE BUSINESS MORE EFFICIENTLY AND PROFITABLY. NO DISALLOWANCE IS PERMISSIBLE. FURTHER, IN RESPECT OF INVOICE NO. 252, 254 AN D 291 FOR THE AMOUNT OF RS. 3,40,000/-, RS. 30,000/- AND RS. 1,68 ,750/- REGARDING PURCHASE OF LABEL DEACTIVATOR, ELECTRONI C ARTICLE SURVEILLANCE SYSTEM, ETC, IT HAS ALSO SUBMITTED THA T THE SAID AMOUNT HAS BEEN ALREADY CAPITALIZED IN ITS BOOKS OF ACCOUNT WHICH IS CLEARLY EVIDENT FROM THE FIXED ASSETS SCHE DULE AND AS SUCH, NO FURTHER CAPITALIZATION WAS WARRANTED. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE DE CISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF DELHI CLOT H AND GENERAL COTTON MILLS (SUPRA), I HOLD THAT THE AO WAS NOT CO RRECT IN DISALLOWING THE REPAIR AND MAINTENANCE EXPENSES AS CLAIMED BY THE APPELLANT. THE AO IS DIRECTED TO DELETE THIS AD DITION. 33. IN VIEW OF THE SPECIFIC FINDINGS OF THE LD. CIT (A), WE FIND NO REASON TO INTERFERE WITH THE SAME AND DISMISS GROUN D NO. 1 OF DEPARTMENTS APPEAL. 34. THE LAST ISSUE FOR ADJUDICATION IS GROUND NO. 2 OF THE DEPARTMENTS APPEAL FOR ASSESSMENT YEAR 2009-10 WHE RE THE DEPARTMENT IS CONTESTING THE DELETION OF ADDITION O F RS.3,73,973/- ON ACCOUNT OF INTEREST PAYMENT ON BOR ROWED FUNDS. THE ISSUE HAS BEEN DEALT IN PARA 6 OF THE I MPUGNED ORDER WHICH READS AS UNDER:- 6. GROUND NO. 4 IS ON THE ISSUE OF DISALLOWANCE OF INT EREST PAYMENT ON BORROW OF FUNDS HOLDING THAT THE FUNDS W ERE I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 45 USED FOR ACQUISITION OF A COMPANY AND THEREFORE NOT FOR THE PURCHASE OF BUSINESS. THE AO HAS DISALLOWED AN AMOUNT OF RS 3,73,973/- ON ACCOUNT OF INTEREST PAYMENT ON BORROWED FUNDS USED IN MAKING INVESTMENT BY THE APPELLANT COMPANY IN EAST LIMITED, A COMPANY INCORPORATED IN UK. THE APPELLANT SUBMITTED THAT EAST LIMITED IS A COMP ANY INCORPORATED IN UK, WHICH DEALS IN CLOTHING, JEWELL ERY AND ACCESSORIES INCLUDING BAGS, SCARVES, BELTS AND FOOT WEAR ETC FROM ITS 52 STORES AND 25 DEPARTMENTAL STORES, SIMI LAR TO THE APPELLANTS LINE OF BUSINESS. THE APPELLANT INVESTE D IN EAST LIMITED, ITS ASSOCIATE COMPANY, FOR ENTERING INTO T HE UK MARKET, AS THE LATTER WAS IN THE SAME INDUSTRY AND BUSINESS AND HAVING COMMON ETHOS 85 PHILOSOPHY AS OF THE APPELLANTS AND IT ALSO HAD EXCELLENT MANAGEMENT TE AM, STRATEGIC STORE LOCATIONS, WHICH WERE IMPERATIVE FO R A SIZE OF THE BUSINESS THAT THE APPELLANT WAS CARRYING ON, TO ENTER INTO A NEW MARKET. IN EFFECT, THE APPELLANT SUBMITT ED THAT THE MAIN PURPOSE OF THE INVESTMENT WAS TO ACQUIRE CONTROLLING INTEREST FOR LAUNCHING .FABINDIA RANGE USING THE LATTERS INFRASTRUCTURE AND NETWORK IN UK, THEREBY ENHANCING CUSTOMER BASE AND PROVIDING IMPROVED DESIGNS FOR WE STERN WEAR FOR WOMEN IN INDIA. THE AFORESAID OBJECTIVES C OULD 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 AP PELLANTS BUSINESS. . I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 46 FOR THE PURPOSE OF MAKING THE INVESTMENT, THE APPE LLANT REMITTED AN AMOUNT OF RS. 7,19,60,000/- FROM INDIA ON 5TH JANUARY 2009, USING ITS FUNDS OF RS. 7,50,00,000/- RAISED ON OVERDRAFT LIMIT. THE SAID FUNDS WERE REPAID ON 1 9 TH J ANUARY 2009 I.E. THE APPELLANT USED ITS OVERDRAFT L IMIT FOR 13 DAYS ON WHICH THE BANK HAS CHARGED A SUM OF RS 3,73,973/- AS INTEREST. THE AO DISALLOWED THE AFORESAID INTEREST HOLDING T HAT THE APPELLANT IS NOT AN INVESTMENT COMPANY. IT IS THE S UBMISSION OF THE APPELLANT THAT BEING AN INVESTMENT COMPANY I S NOT A RELEVANT CRITERIA TO CLAIM DEDUCTION OF INTEREST U/ S 36( 1)(III) OF THE INCOME TAX ACT. FOR THIS PROPOSITION, THE APPEL LANT STATED THAT ITS CASE IS SQUARELY COVERED BY THE DECISION O F JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V TULI P STAR HOTELS LTD., ITA NO.43 OF 2009 AND 505 86 562 OF 2010, WHE REIN ON SIMILAR FACTS, CLAIM FOR INTEREST WAS ALLOWED BY TH E HONBLE HIGH COURT OF DELHI. THE APPELLANT THUS SUBMITTED THAT ITS CLAIM FOR DED UCTION OF INTEREST IS DULY ALLOWABLE IN VIEW OF THE CONSISTEN T VIEW OF HIGHER JUDICIAL FORUMS, INCLUDING BY THE APEX COURT AND JURISDICTIONAL HIGH COURT ON THE SAME SET OF FACTS AS OF THE APPELLANTS, PARTICULARLY WHEN THE COMMERCIAL EXPED IENCY OF THE INVESTMENT IS NOT IN DISPUTE AND THE DISALLOWAN CE IS MADE MERELY ON THE BASIS THAT THE APPELLANT IS NOT AN INVESTMENT COMPANY. THE APPELLANT HAS ALSO TAKEN AN ALTERNATIVE ARGUMEN T THAT IMPUGNED INTEREST IS ALLOWABLE UNDER SECTION 57 OF THE INCOME TAX ACT IN VIEW OF THE DECISION OF HONBLE S UPREME COURT IN CIT V RAJENDRA PRASAD MOODY [1978] 115 ITR 519 ..(SC), WHEREIN IT WAS HELD THAT EXPENDITURE IS DED UCTIBLE IRRESPECTIVE OF THE FACT NO INCOME HAVE BEEN EARNED . I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 47 IN VIEW OF THE ABOVE FACTS OF THE CASE AND SINCE TH ESE FACTS ARE EXACTLY ON THE SAME LINE AS IN THE CASE OF TULI P STAR HOTELS LTD. (SUPRA) DECIDED BY THE HON'BLE JURISDIC TIONAL HIGH COURT, I HOLD THAT THE INTEREST AMOUNTING TO RS. 3, 73,973/- IS ALLOWABLE AS BUSINESS EXPENSES. THE ASSESSING OFFI CER IS DIRECTED TO DELETE THE ADDITION MADE IN THIS REGARD . 35. IN VIEW OF THE SPECIFIC REASONED ADJUDICATION B Y THE LD. CIT(A), WE FIND NO REASON TO INTERFERE AND ACCORDIN GLY DISMISS GROUND NO. 2 OF THE DEPARTMENTS APPEAL. 36. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES WHEREAS THE DEPARTMENTS APPEA L IS DISMISSED. 37. IN THE FINAL RESULT, I.T.A.S 1894/DEL/2013 AND I.T.A. NO. 1898/DEL/2013 FILED BY THE DEPARTMENT ARE DISMISSED . I.T.A. NOS. 2244/DEL/2013 AND 2245/DEL/2013 ARE PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JUNE, 2016. SD/- SD/- (S.V. MEHROTRA) (SUDHANSHU SRIVAST AVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 13 TH OF JUNE 2016 GS I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 48 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER ASSTT. REGISTRAR I.T.A. NO. 1894, 1898, 2244, 2245/D/2013 ASSESSMENT YEARS: 2007-08, 2009-10 49