Magick Woods Exports Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 871/CHNY/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4805 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 10-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS RU GEORGE
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Proportionate interest; Additional evidence; Fair market value; Valuation report; Notional interest
• Section: 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , , $ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 871/MDS/2017 / ASSESSMENT YEAR : 2012-13 M/S. MAGIC WOODS EXPORTS PRIVATE LIMITED, A-8, INDUSTRIAL COMPLEX, MARAIMALAI NAGAR, KANCHEEPURAM 603 209 [PAN: AADCM 6228N] VS. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -4(1), CHENNAI. ( / APPELLANT) ( / RESPONDENT) &' / APPELLANT BY : SHRI. SRIRAMSESHADRI, CA *+&' / RESPONDENT BY : MRS. RUBY GEORGE, CIT ' /DATE OF HEARING : 08.11.2017 ' /DATE OF PRONOUNCEMENT : 06.02.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED THIS APPEAL AGAINST THE ORDER OF THE DEPUTY COMMISSIONER OF INCOME TAX , CORPORATE CIRCLE -4(1) , CHENNAI PASSED IN PURSUANCE OF THE DIRECTIONS OF THE DRP-2, BENGALURU DT 28.12.2016 FOR AY2012-13. :-2-: ITA NO. 871/MDS/2017 2. M/S. MAGICK WOODS EXPORTS PRIVATE LIMITED, THE A SSESSEE, INCORPORATED IN INDIA AND HAS ITS REGISTERED OFFICE IN CHENNAI. ASSESSEE IS IN THE BUSINESS OF MANUFACTURING KITCHEN AND BATH FURNITURE AND THE MARKETING IS DONE BY THE HOLDING COMPANY. THE PRODUCTS PRINCIPALLY ARE MEAN T FOR SALE IN CANADA AND USA. 3. AT THE TIME OF ASSESSMENT FOR ASSESSMENT YEAR 20 12-13, THE TPO FOUND THAT ITS PAID UP CAPITAL CONSISTING OF RS. 63,60,00 0 SHARE OF RS. 10 EACH WAS HELD BY MAGIC WOODS LTD (MWL), CANADA TILL 17 TH DECEMBER, 2011. THE ASSESSEE ACQUIRED THE TRADE MARK, MAGICK WOODS AS P ER TRADING AGREEMENT DATED 23. 12.2011, FOR A CONSIDERATION OF US DOLLAR S 5.36 MILLION BASED ON CALCULATIONS MADE BY M/S KALEX VALUATION INC., CANA DA, TORONTO, ONTARIO REVALIDATED BY DELOITTEE TOUCHE-E TOHMASTSA AND KAN ISH& PARTNERS, LLP INDIA PVT. LTD. THE VALUE OF TRADE MARK IS STATED AS COST PLUS AMORTIZATION FOR THE YEAR 2011-12 AS PER AS-26. AS PART OF RELATED PARTY DISCLOSURES UNDER AS -18, TRUST INVESTMENT AND MARKETING INC.,AND MWL, CANADA ARE DISCLOSED AS SISTER CONCERNS UNDER AS-IS. KEY MANAGEMENT PERSONNEL IDEN TIFIED ARE INDIRA KUMAR PATHMANATHAN, PATHMAKUMAR PATHMANATHAN AND THAVAKUM AR PATHMANATHAN. IN SUCH BACKGROUND, TWO SIGNIFICANT EVENTS HAVE TAK EN PLACE WITH CLOSE LINK BETWEEN THEM. ONE IS CLAIM OF ACQUISITION OF TRADE MARK FROM THE ERSTWHILE HOLDING COMPANY, MWL, CANADA FOR A CONSIDERATION OF RS.28,75,79,362. THIS IS FUNDED BY AVAILING SECURED LOAN FROM STATE BANK OF INDIA. PART OF THE :-3-: ITA NO. 871/MDS/2017 FUNDING HAS TAKEN PLACE BY ADJUSTMENT OF RECEIVABLE S DUE TO FROM MWL, CANADA. TRANSFER OF ENTIRE SHARES (PAID UP CAPITAL) HELD BY ERSTWHILE HOLDING COMPANY, OF THE ASSESSEE COMPANY, MWL, CANADA, IN F AVOUR OF THREE PERSONS VIZ., INDIRA KUMAR PATHMANATHAN, PATHMAKUMAR PATHMA NATHAN AND M/S TRUST INVESTMENT & MARKETING INC., CANADA WHO ARE ACKNOWL EDGED TO BE RELATED PARTIES. IN ESSENCE, THE COMPANY HAS MADE AVAILABL E FUNDS BY AVAILING SECURED LOAN FROM STATE BANK OF INDIA IN RELATION T O THE TRANSACTION RECORDED IN ITS BOOKS AS ACQUISITION OF TRADE MARK FROM THE ERSTWHILE HOLDING COMPANY WHICH IN TURN DIVESTED ITS STAKES IN THE ASSESSEE C OMPANY IN FAVOUR OF THREE- TWO PERSONS AND ONE ENTITY. MWL, CANADA, NON-RESID ENT ENTITY DIVESTED ITS ENTIRE HOLDINGS IN THE ASSESSEE-INDIAN COMPANY, FOR A CONSIDERATION OF RS.6.36 CRORES SUPPORTED BY VALUATION WHICH DETERMINED THE VALUE OF THE SHARES USING DCF METHOD AT MINUS- RS.15.06. SINCE THE VALUE DETE RMINED WAS A NEGATIVE RS.15.06, SHARES WERE REQUIRED TO BE TRANSFERRED (A S PER RESERVE BANK OF INDIA REQUIREMENTS) NOT BELOW THE FACE VALUE OF RS. 10. THIS IS THE TRANSACTION MATRIX. THE ASSESSEE PARTING WITH FUNDS TO THE EXTE NT OF RS.28,75,79,362 TO THE ERSTWHILE HOLDING COMPANY AND THE RECIPIENT DIV ESTING ITS STAKES IN FAVOUR OF THE PROMOTER SHAREHOLDERS WHO ARE THE CANADIAN R ESIDENTS/CITIZENS ARE EVENTS WHICH HAVE A CLOSE NEXUS AND PROXIMITY. THUS , THE TPO EXAMINED THE ASSESSEES CLAIM AND OTHER MATERIAL AND REJECTED IT S CLAIM OF BRAND ACQUISITION AT RS. 28,75,79,362/- FOR THE PURPOSE OF CONSEQUENT IAL CLAIM OF DEPRECIATION AS WELL AS FOR THE PURPOSE OF CLAIM OF DEDUCTION OF INTEREST ON THE CORPORATE :-4-: ITA NO. 871/MDS/2017 LOAN USED FOR SUCH ACQUISITION. THE AO FOLLOWING T HE TPOS FINDINGS DISALLOWED PROPORTIONATE INTEREST ON THE CORPORATE LOAN AT RS. 63,68,478/-. FURTHER, THE AO DISALLOWED RS. 35,46,298/- BEING PR OPORTIONATE INTEREST RELATABLE TO THE ADVANCES GIVEN TO THE DIRECTORS AN D ITS GROUP COMPANIES. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP. THE DRP UPHELD THE ACTIONS OF THE AO/TPO. 4. AGGRIEVED, THE ASSESSEE FILED THIS APPEAL WITH F OLLOWING GROUNDS OF APPEAL: THE GROUNDS MENTIONED HEREIN ARE WITHOUT PREJUDI CE TO ONE ANOTHER. GENERAL: 1. THE LEARNED ASSESSING OFFICER ('LD. AO'), THE LE ARNED TRANSFER PRICING OFFICER ('LD. TPO') AND THE LEARNED DISPUTE RESOLUTION PANE L ('LD. DRP') HAS ERRED IN FINALIZING AN ORDER OF ASSESSMENT TO THE EXTENT PRE JUDICIAL TO THE INTEREST OF THE APPELLANT, AGAINST THE PRINCIPLES OF NATURAL JUSTIC E AND THE PROVISIONS OF THE ACT, DEVOID OF MERITS, WITHOUT APPRECIATING THE FACTS IN VOLVED AND THE DOCUMENTS SUBMITTED IN PROPER LIGHT AND WITHOUT CONDUCT OF AD EQUATE INQUIRIES AND AS SUCH IS WITHOUT JURISDICTION. TRANSFER PRICING ISSUES 2. THE LD. TPO, LD. AO AND THE LD. DRP HAVE ERRED I N DETERMINING THE ARM'S LENGTH PRICE ('ALP') OF TRADEMARKS AT NIL. 3. THE LD. TPO AND LD. DRP HAVE ERRED IN LAW AND ON FACTS: A. IN ESTABLISHING THAT THE APPELLANT, ITS ASSOCIAT ED ENTERPRISE ('AE') AND THE ULTIMATE SHAREHOLDERS OF THE AE ARE ALL MEMBERS OF THE SAME GROUP / FAMILY, WITHOUT APPRECIATING THAT SUCH RELATIONSHIP IS GERM ANE TO APPLICABILITY OF TRANSFER PRICING('TP') REGULATIONS AND AS SUCH, IT HAS NO RELEVANCE ON THE DETERMINATION OF THE ARM'S LENGTH PRICE ('ALP') OF TRADEMARK ACQUIRED; B. IN CONCLUDING THAT THE APPELLANT MADE AVAILABLE FUNDS TO ITS AES AND THEIR SHAREHOLDERS BY ESTABLISHING A NON-EXISTENT NEXUS B ETWEEN THE ACQUISITION OF :-5-: ITA NO. 871/MDS/2017 TRADEMARK AND THE DISINVESTMENT OF MAGICK WOODS LIM ITED, CANADA IN BUSINESS OF THE APPELLANT; C. IN CONCLUDING THAT THE SAID TRADEMARK MUST NOT H AVE BEEN VALUED AS A GOING CONCERN MERELY BECAUSE THE AE, WHICH SUCH SOL D SUCH TRADEMARK, WAS EVENTUALLY LIQUIDATED; D. IN DISREGARDING THE VALUATION REPORT OBTAINED FR OM AN INDEPENDENT VALUER JUSTIFYING THE VALUE AT WHICH THE TRADEMARK WAS ACQ UIRED; E. IN DETERMINING THE ALP OF ACQUISITION OF TRADEMA RK AT NIL ON AN ADHOC BASIS WITHOUT APPLYING ONE OF THE ACCEPTED METHODOL OGIES, AS PRESCRIBED UNDER TP REGULATIONS; F. IN DETERMINING THE ALP OF THE SAID TRANSACTION A S NIL ON THE BASIS THAT NEGATIVE FUTURE CASH FLOWS WOULD ACCRUE TO THE APPE LLANT, AS PER THE SHARE VALUATION REPORT; G. IN REJECTING THE ADDITIONAL EVIDENCE SUBMITTED B Y THE APPELLANT BY DISREGARDING THE REASONS FOR SUBMISSION OF ADDITION AL EVIDENCE AND ERRONEOUSLY RELYING ON RULE 46A OF THE INCOME-TAX R ULES. 4. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LD. TPO, LD. AO AND THE LD. DRP HAVE ERRED IN CONCLUDING THAT THE VALUE OF TRADEMAR KS SHOULD BE NIL, DESPITE LD. TPO'S OWN RE-COMPUTATION OF ALP VALUE OF TRADEMARK ACQUISITION BASED ON PROJECTIONS OF SALES AS PER SHARE VALUATION REPORT BEING IN THE RANGE OF INR 18 - 20 CRORES. 5. WITHOUT PREJUDICE TO OUR ABOVE GROUNDS, THE LD. TPO, LD. AO AND THE LD. DRP HAVE ERRED IN COMPUTING THE VALUE OF TRADEMARK BASE D ON THE PROJECTIONS OF SALES AS PER SHARE VALUATION REPORT BY USING THE 'D ERIVED EXPORT VALUE' INSTEAD OF 'ACTUAL EXPORT VALUE'. CORPORATE TAX ISSUES DISALLOWANCE OF INTEREST ON CORPORATE LOAN 6. THE LD. TPO ERRED IN SUGGESTING DISALLOWANCE OF THE INTEREST PAID ON SECURED LOAN TO STATE BANK OF INDIA ('SBI'), AN INDEPENDENT BANK, WHICH IS NOT AN INTERNATIONAL TRANSACTION, THUS EXCEEDING HIS JURIS DICTION; 7. THE LD. AO AND THE LD. DRP HAVE ERRED IN LAW AND ON FACTS BY DISALLOWING THE INTEREST PAID TO SBI FOR LOAN OBTAINED FOR ACQUISIT ION OF TRADEMARK MERELY ON THE BASIS OF THE SUGGESTION OF THE LD. TPO WITHOUT COND UCTING ANY FURTHER INQUIRIES INTO THE FACTS OF THE CASE; :-6-: ITA NO. 871/MDS/2017 8. THE LD. AO AND THE LD. DRP ERRED IN CONCLUDING T HAT THE INTEREST PAID TO SBI WAS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF B USINESS WITHOUT ANY FACTUAL AND LEGAL BASIS. DISALLOWANCE OF NOTIONAL INTEREST 9. THE LD. AO AND THE LD. DRP HAVE ERRED IN LAW AND ON FACTS BY DISALLOWING THE NOTIONAL WORKING CAPITAL INTEREST, PROPORTIONATE TO THE FUNDS ADVANCED TO RELATED PARTIES; 10. THE LD. AO AND THE LD. DRP HAVE ERRED IN LAW AN D ON FACTS BY DISALLOWING THE NOTIONAL INTEREST: A. WITHOUT APPRECIATING THAT THE APPELLANT HAD ITS OWN FUNDS TO THE EXTENT OF ADVANCES MADE TO THE RELATED PARTIES; B. WITHOUT ESTABLISHING THAT THE BORROWED FUNDS WER E USED FOR NON-BUSINESS PURPOSES. THE APPELLANT WISHES TO SUBMIT THAT EACH OF THE ABO VE GROUNDS ARE ALTERNATIVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, SUBSTITUTE, AMEN D, DELETE, OR OTHERWISE MODIFY ANY OF THE GROUNDS OF APPEAL STATED HEREINABOVE BEF ORE COMMENCEMENT OF OR AT THE TIME OF HEARING. 5. THE ASSESSEE ALSO FILED THE PETITION FOR ADMITT ING ADDITIONAL GROUNDS OF APPEAL AS UNDER: THE APPELLANT WISHES TO RAISE THE FOLLOWING ADDITI ONAL GROUND OF APPEAL BEFORE YOUR HONORS IN THIS APPEAL (ENCLOSED IN ANNEXURE 1) : 1. THE LD. AO OUGHT TO ALLOW DEPRECIATION ON THE VA LUE OF TRADEMARK AS DETERMINED BY YOUR HONOURS AT THE RATE OF 25 PERCEN T AS ELIGIBLE UNDER THE ACT. REASONS FOR RAISING ADDITIONAL GROUND OF APPEAL: THE APPELLANT STATES THAT IT IS RAISING THE ABOVE G ROUND FOR THE FIRST TIME BEFORE YOUR HONORS. THE APPELLANT HUMBLY SUBMITS THAT IT HAD INADVERTEN TLY OMITTED TO CLAIM THE DEPRECIATION ON THE SAID ACQUIRED TRADEMARK AS ELIG IBLE UNDER THE INCOME-TAX ACT, 1961 ('ACT'). AS YOUR HONOURS WOULD APPRECIATE, THE CLAIM OF DEPR ECIATION IS A MANDATORY DEDUCTION UNDER THE ACT PURSUANT TO THE INTRODUCTIO N OF EXPLANATION 5 TO SECTION 32 OF THE ACT BY THE FINANCE ACT, 2001 WITH EFFECT FROM 1-4-2002. IT IS NO MORE :-7-: ITA NO. 871/MDS/2017 AT THE OPTION OF THE APPELLANT TO CLAIM SUCH DEPREC IATION AND EVEN IN THE ABSENCE OF THE CLAIM BY THE APPELLANT, IT IS THE OB LIGATION OF THE LD. AO TO GRANT SUCH DEPRECIATION WHILE COMPUTING THE TOTAL INCOME OF THE APPELLANT. WITH REFERENCE TO ABOVE, THE APPELLANT WISHES TO RE LY UPON THE ORDER OF THE JURISDICTIONAL HIGH COURT OF MADRAS IN THE CASE OF SREESENHAVALLI TEXTILES (P.) LTD. [[2003] 259 ITR 77] AND THE ORDER OF THE MUMBA I BENCH OF THE INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF KELLOGG INDIA (P.) LTD. [(2006) 8 SOT 679], WHEREIN IT IS HELD THAT THE ASSESSING OFFICER IS BOUND TO ALLOW THE ELIGIBLE DEPRECIATION TO THE ASSESSEE, IRRESPECTIVE OF WHETH ER THE SAME HAS BEEN CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME. FURTHER RELIANCE IS PLACED BY THE APPELLANT ON THE CIRCULAR NO. 14 (XL - 35), DATED 11 APRIL 1995, ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT), WHEREIN THE FOLLOWING INSTRUCTIONS WERE GIVEN TO TH E OFFICERS: - THE OFFICERS OF THE DEPARTMENT MUST NOT TAKE ADVANT AGE OF IGNORANCE OF ASSESSEE TO COLLECT MORE TAX THAN WHAT IS LEGITIMATELY DUE; - IT IS ONE OF THE DUTIES OF THE OFFICERS TO ASSIST A TAXPAYERS IN EVERY REASONABLE WAY, PARTICULARLY IN THE MATTER' OF CLAI MING AND SECURING RELIEFS AND IN THIS REGARD THE OFFICERS SHOULD TAKE THE INITIATIVE IN GUIDING A TAXPAYER WHERE PROCEEDINGS OR OTHER PARTI CULARS BEFORE THEM INDICATE THAT SOME REFUND OR RELIEF IS DUE TO HIM. IN THIS REGARD, THE APPELLANT RESPECTFULLY SUBMITS THAT WHILE THE DEPRECIATION IS A MANDATORY ALLOWANCE, WHICH OUGHT TO BE ALLOWED BY THE LD.AO WHILE GIVING EFFECT TO THE ORDER OF YOUR HONOURS FOR DETERMINING THE VALUE OF THE TRADEMARK, THE APPELLANT WISHES TO SUBMIT THIS ADDITIONAL GROU ND OUT OF ABUNDANT CAUTION, EVEN THOUGH IT MAY BE CONSIDERED AS A CONSEQUENTIAL CLAIM. IT IS FURTHER SUBMITTED THAT THE ADDITIONAL GROUNDS BEING RAISED BY THE APPELLANT ARE PURELY LEGAL GROUNDS REQUIRING NO FURTHER EXAMI NATION OF FACTS. HENCE, IT IS HUMBLY REQUESTED THAT THE ADDITIONAL GROUNDS BE ADM ITTED BASED ON THE ORDER OF THE HON'BLE SUPREME COURT IN THE CASE OF NATIONA L THERMAL POWER CORPORATION [229 ITR 383 (SC)]. ADDITIONAL GROUND OF APPEAL 1. THE LD. AO OUGHT TO ALLOW DEPRECIATION ON THE VALUE OF TRADEMARK AS DETERMINED BY YOUR HONOURS AT THE RATE OF 25 PERCEN T AS ELIGIBLE UNDER THE ACT. :-8-: ITA NO. 871/MDS/2017 6. WE HEARD THE RIVAL CONTENTIONS AND THE ADDITIONA L GROUND AND ADMIT THEM ON MERITS. 7. THE AR SUBMITTED THAT ITS CLAIM IS BASED UPON TH E VALUATION REPORT FURNISHED BY M/S. KALEX VALUATION INC., CANADA AND REAFFIRMED BY M/S. DELOITTE TOUCHE TOHMATSU INDIA PVT. LTD. THE SHARE S WERE TRANSFERRED BASED ON SHARE VALUATION CERTIFICATE PREPARED BY M/S. R.G . RAJAN ASSOCIATES, CHENNAI WHICH RELIED ON THE DISCOUNTED CASH FLOW (DCF) METH OD. THE PURCHASE OF TRADEMARK WAS ESSENTIAL TO THE VERY BUSINESS AS MWI , SINCE ITS PRESENCE IN THE OVERSEAS MARKET WAS DEPENDANT ON THE SAID TRADE MARK. THOUGH, THE TPO HAS DETERMINED THE VALUE OF THE SAID TRADEMARK (TM) IN PARA 19 & 20 AT CERTAIN VALUE, HOWEVER, CONCLUDED THE ALP AS NIL IN PARA 22 & 23 WHICH ARE EXTRACTED AS UNDER: 19. THE SUBMISSIONS ARE CONSIDERED IN THE LIGHT OF THE FACTUAL MATRIX PRESENTED ABOVE. THE ASSESSEE'S CLAIM OF INADVERTENT OMISSION TO CONSIDER THE REVISED ESTIMATES CANNOT BE ACCEPTED. IT IS THE MANAGEMENT' S RESPONSIBILITY TO FURNISH THE CORRECT PROJECTIONS OF SALES AND IT IS SPECIFIC ALLY MENTIONED IN THE VALUATION REPORT THAT THEY ARE GUIDED BY THE MANAGEMENT'S PRO JECTIONS OF SALES. 20. THE VALUE OF TRADEMARKS CLAIMED TO BE WORTH RS. 28.75 CRORES AS PER THE VALUATION REPORT OF M/S. KALEX VALUATION INC. WOULD STAND REDUCED TO RS.20,47,38,609 IF THE PROJECTION OF EXPORT SALES A S DETERMINED IN PARA 17 IS ADOPTED. TAKING INTO ACCOUNT THE LOWER END OF THE V ALUE DETERMINED BY THE CANADIAN VALUER, WITH ADJUSTMENT TOWARDS EXPORT SAL ES AS PROPOSED WOULD RESULT IN THE VALUE GETTING DETERMINED AT RS. 18,71 ,62,770. ON THE OTHER HAND, TAKING THE MIDPOINT VALUE AS THE BASIS, SUBJECT TO THE ABOVE ADJUSTMENT, THE VALUE OF TRADEMARKS WOULD BE DETERMINED AT RS.19,59 ,50,690/- CRORES. THE RELEVANT CALCULATIONS FORM PART OF THE ANNEXURE TO THIS ORDER. :-9-: ITA NO. 871/MDS/2017 21. THE PROJECTIONS OF DISCOUNTED NET CASH INFLOWS AFTER ACQUISITION OF THE TRADEMARK ARC REPRODUCED AT THE COST OF REPETITION ONCE AGAIN HEREUNDER: FREE CASH FLOW YEAR RS. IN CRORES 2011 - 12 ( - ) 8.53 2012 - 13 (+)0.16 2013 - 14 0.00 2014 - 15 0.00 2015 - 16 0.00 PRIMARY VALUE (A) ( - )8.37 TERMINAL VALUE (B) ( - )2.87 ENTERPRISE VALUE (C) ( - )11.25 LESS DEBT 3.85 TOTAL EQUITY VALUE (D) ( - )15.06 22. TAKING THIS INTO ACCOUNT THE FACT THAT IT IS TH E ASSESSEE'S OWN PERCEPTION ABOUT THE PRESENT VALUE OF THE FUTURE NET CASH INFL OWS THAT THE ACQUISITION OF THE TRADEMARKS WOULD NOT BENEFIT THE ASSESSEE THROU GHOUT THE LIFETIME OF ITS BUSINESS. THEREFORE, AS PER THE ASSESSEE'S OWN ADMI SSION, SINCE THE TRADEMARKS ACQUIRED WOULD NOT RESULT IN POSITIVE NET CASH INFL OWS, A THIRD PARTY WOULD NOT BE INTERESTED IN ACQUIRING IT FOR A CONSIDERATION O F RS.28.75 CRORES. THEREFORE, THE ALP OF SUCH ACQUISITION OF TRADEMARKS IS DETERM INED AT NIL. 23. IT IS PROPOSED TO THE AO THAT A DOWNWARD ADJUST MENT OF RS.28,75.79,362 MAY BE MADE TO THE VALUE OF TRADEMARKS, ON WHICH TH E ASSESSEE HAS CLAIMED DEPRECIATION, IT IS ALSO SUGGESTED THAT SINCE THE SO CALLED ACQUISITION IS FUNDED OUT OF A SECURED LOAN TAKEN FROM STATE BANK OF INDI A, OVERSEAS BRANCH, CHENNAI 1, THE CORRESPONDING DISALLOWANCE OF INTERE ST MAY ALSO BE MADE UNDER APPROPRIATE PROVISIONS OF THE INCOME TAX ACT. 7.1. THE AR FURTHER SUBMITTED THAT AGAINST THE ABOV E ORDER, WHEN THE ASSESSEE APPROACHED THE DRP WITH CERTAIN ADDITIONAL EVIDENCES, THE DRP WITHOUT CONSIDERING THE ADDITIONAL EVIDENCES REJECT ED ITS PLEA. THE AR :-10-: ITA NO. 871/MDS/2017 SUBMITTED RELYING ON VARIOUS CASE LAWS THAT THE COM MERCIAL EXPEDIENCY CANNOT BE QUESTIONED BY TPO, THE ASSESSEE WAS NOT GIVEN AD EQUATE OPPORTUNITY OF BEING HEARD AND THE DRP DENIED THE ADDITIONAL EVIDE NCES, THOUGH RULE 9 OF DRP RULES, 2009 EMPOWERS THE LD. DRP TO ENTERTAIN A DDITIONAL EVIDENCE. THE RELEVANT EXTRACT IS REPRODUCED BELOW: POWER TO CALL FOR OR PERMIT ADDITIONAL EVIDENCE- WHERE THE PANEL DEEMS IT NECESSARY, IT MAY CALL UPON OR, AS THE CASE MAY BE, PERMIT THE ELIGIBLE ASSESSEE TO PRODUCE ANY DOCUMENT OR EXAMINE ANY WIT NESS OR FILE ANY AFFIDAVIT TO ENABLE IT TO ISSUE PROPER DIRECTIONS: PROVED THAT THE PANEL SHALL, WHILE SO PERMITTING TH E ELIGIBLE ASSESSEE RECORD ITS REASONS FOR SUCH PERMISSION. AND RELIED ON THE RATIO OF THE SUPREME COURT IN THE CASE OF JASWANT RAI 234 ITR 745 (SC) IN WHICH IT IS HELD THAT DISCRETIONARY POWERS MUST BE USED BY A QUASI-JUDICIAL AUTHORITY WHEN ALL THE REQUIRED COND ITIONS FOR THE USE OF SUCH POWER ARE SATISFIED. THEREAFTER, THE ASSESSEE SOUGH T OUR ATTENTION TO THE VARIOUS MATERIAL AND CASE LAWS IN THE PAPER BOOK ET C TO SUBMIT THAT ON MERITS IT IS HAVING A CASE IN ITS FAVOUR. PER CONTRA, THE DR SUPPORTED THE ORDERS OF THE TPO/AO AND THE DRP. 8. WE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT PO RTION OF THE DRP ORDER IS EXTRACTED AS UNDER: 6. PANEL: THESE OBJECTIONS ARE RELATED AND THEREFO RE ARE TAKEN UP TOGETHER. THE FOUNDER OF MAGIC WOODS LTD (MWL), CANADA IS INDY PAT HMANATHAN (FOUNDED IN 1993). INDIAN COMPANY WAS FULLY OWNED SUBSIDIARY OF M WL CANADA. MAGICK WOODS EXPORTS PRIVATE LIMITED IS INCORPORATED IN INDIA AN D ITS DIRECTORS ARE INDY PATHMANATHAN AND FAMILY MEMBERS. :-11-: ITA NO. 871/MDS/2017 7. THE MAGIC WOODS LTD (MWL), CANADA HAS BEEN LIQUI DATED. JUST BEFORE THE LIQUIDATION, THE TRADEMARK IS VALUED AT CERTAIN PR ICE AS ABOVE AND AMOUNT IS PAID BY THE INDIAN COMPANY. THE TPO HAS ANALYSED THE REL ATIONSHIP BETWEEN THE ASSESSEE ITS AE AND THE DIRECTORS. IT IS BASICALLY ONE FAMILY WHICH IS OWNING ALL THE ENTITIES. 8. IN PARA 10.6 OF THE ORDER THE TPO HAS HELD THAT TRADEMARK IS ONLY ASSIGNED TO THE ASSESSEE AND THERE IS NO TRANSFER OF OWNERSHIP. NO ALP HAS BEEN FOUND OUT BY THE ASSESSEE EXCEPT SAYING THAT IT IS USING THE SIX TH METHOD PRESCRIBED BY THE CBDT. DETAILS REGARDING LIQUIDATION OF THE CANADIA N COMPANY AND BENEFITS ASSIGNED ON LIQUIDATION ARE NOT AVAILABLE ON RECORD . TRADEMARK ROYALTY NOT BEEN PAID FOR THE YEARS PRECEDING THE SALE OF TRADEMARK. 9. THE VALUATION REPORT CLEARLY SAYS THAT VALUE OF THE ASSETS OF A GOING CONCERN IS MORE THAN THE VALUE OF ASSETS OF A CONCERN UNDER LI QUIDATION 20. THE ASSETS METHOD IS USED TO DETERMINE THE VALU E 0/ SHARES EITHER WHERE: (A) ASSET VALUES CONSTITUTE THE PRIME DETERM INANT 0/ CORPORATE WORTH, DEPENDING ON THE NATURE OF THE OPERATIONS (E. G. A REAL ESTATE HOLDING COMPANY OR AN INVESTMENT HOLDING COMPANY); OR. (B) LIQUIDATION IS CONTEMPLATED BECAUSE THE BUSINESS IS NOT VIABLE AS AN ONGOING OPERATION. 21. WHERE IT IS DETERMINED THAT THE ASSETS METHOD I S APPROPRIATE. A COMPANY'S SHARES CAN GENERALLY BE VALUED ON ONE OF THE FOLLOWING BASES: A. ADJUSTED BOOK VALUE OR ADJUSTED SHAREHOLDERS' EQ UITY WHICH IS THE EQUITY THAT RESULTS WHEN GOODWILL IS ELIMINATED FRO M AN UNADJUSTED BALANCE SHEET AND ALL OTHER ASSETS ARE RESTATED TO FAIR MARKET VALUE. EACH ASSET AND LIABILITY IS ADJUSTED TO ITS CURRENT OR (FAIR MARKET VALUE AT THE VALUATION DATED, ON A GOING CONCERN BA SIS (AS OPPOSED TO REALIZABLE LIQUIDATION VALUES). AN APPROPRIATE AMOUNT/OR INCOME TAXES ARISING AS A RESULT OF THE ABOVE ADJUSTMENTS MAY BE DEDUCTED. DEPENDING ON THE CIRCUMSTANCES. B. LIQUIDATION VALUE WHICH IS THE NET AMOUNT OF MON EY, IF ANY, AVAILABLE TO EQUITY OWNERS FOLLOWING A VOLUNTARY, OR DERLY LIQUIDATION OR A FORCED SALE. UNDER THIS SCENARIO, A GOING CONC ERN IS NOT ASSUMED. ......... .......... 24. THE EARNING POWER OF A GOING CONCERN ENTITY IS OFTEN GREATER THAN THE VALUE OF THE INDIVIDUAL ASSETS OWNED BY IT. THIS IS BECAUSE THE VALUE OF ASSETS CAN BE REALIZED ONLY IF THE BUSINESS IS LIQUI DATED AND THE PROCESS OF :-12-: ITA NO. 871/MDS/2017 LIQUIDATION MAY OFTEN REDUCE ASSET VALUES SUBSTANTIA LLY. THE EARNINGS METHOD THEREFORE SUGGESTS THE CONTINUATION OF THE BU SINESS OPERATIONS. AND IS BASED UPON THE PURCHASER'S DESIRE TO ACQUIRE. OR TO SHARE IN. THE EARNING POWER OR THE FUTURE PROFITS OF THE ENTERPRISE. 10. HOWEVER, ALTHOUGH UNDER LIQUIDATION THE TRADEMA RK OF THE AE (LE. MWL) HAS BEEN VALUED ON A GOING CONCERN BASIS; AND AVERAGE R ANGE 4.8% TO 5.1 % HAS BEEN CONSIDERED FOR THE SAME. 40. BASED ON OUR REVIEW, WE FOUND THE MARKET ROYALTY RATES OF COMPARABLE LICENSES TO BE IN A RANGE OF 1.0% TO 12.0% WITH AN AVERAGE IN THE LOW RANGE OF 4.8% AND AN AVERAGE IN THE HIGH RANGE OF 5. 1 %. 41 BASED ON OUR ANALYSIS OF COMPARABLE ROYALTY RATE S AND OUR EVALUATION OF THE STRENGTHS AND WEAKNESSES OF THE TRADEMARKS, WE H AVE SELECTED A PRE- TAX ROYALTY RATE IN THE RANGE OF 4.8% 11. THE SELLER AND PURCHASER ARE MEMBERS OF THE SAM E FAMILY THE PROPOSAL TO PURCHASE THE TRADE MARK AND BRAND MAGIC WOODS FROM THE COMPANYS PARENT COMPANY MIS. MAGICK WOODS LIMI TED, CANADA FOR A VALUE OF USD 5.36 MILLION WAS PLACED BEFORE THE BOAR D FOR ITS CONSIDERATION. A DETAILED PRESENTATION OF THE TRADE MARKS AGREEMENT TO-BE ENTERED INTO WITH MESSRS MAGICK WOODS LIMITED, CANADA. MESSRS M AGICK WOODS EXPORTS PRIVATE LIMITED AND INDRAKUMARPATHMANATHAN, THE PAR TIES TO THE AGREEMENT AND VALUATION REPORT IN THIS CONNECTION FR OM KALEX VALUATIONS INCOME TAX ACT., VALUATIONS DATED DECEMBER 14 TH 2011 WAS MADE DURING THE MEETING AND THE SAME WAS TAKEN NOTE OF BY THE BO ARD. THE PROCESS OF SETTLEMENT OF CONSIDERATION OF USD 5.36 MILLION WAS P RESENTED DURING THE MEETING. MR.INDRAKUMAR PATHMANATHAN FURTHER EXPLAINE D THAT THE NECESSITY TO BUY AND OWNED BRAND BY MRS.MAGICK WOODS EXPORTS PVT. LTD. THAT THE COMPANY HAS BEEN USING THE BRAND FOR THE EXPORT BUSI NESS IN USA & CANADA SINCE 2007, FREE OF COST, WITH CONSENT OF MAGIC K WOODS CANADA. AS PER THE VENDOR AGREEMENT WITH BUYERS LIKE MENARDS E TC. THAT THE COMPANY SHOULD OWNED THE BRAND MINIMUM PERIOD OF 10 YEARS S INCE THIS BUYERS ARE SPENDING LARGE AMOUNT FOR THE PROMOTION OF THE MAGI CK WOODS. THE BOARD DISCUSSED AT LENGTH THE MATTERS PRESENTED AND THERE AFTER PASSED THE FOLLOWING RESOLUTIONS. RESOLVED THAT APPROVAL OF THE BOARD BE AND IS HEREBY ACCORDED TO PURCHASE THE TRADE MARKS & BRAND 'MAGICK WOODS' BEAR ING REGISTRATION NOS.TMA 683212 & TMA 676014 FROM M/S. MAGICK WOODS LIMITED, CANADA, THE COMPANY'S PARENT COMPANY FOR A TOTAL CONSIDERAT ION OF USD 5.36 MILLION :-13-: ITA NO. 871/MDS/2017 (RUPEE EQUIVALENT RS.26.53 CRORES @RS.49.50J USD) A S PER THE VALUATION REPORT FROM KALEX VALUATIONS INC. PLACED BEFORE THE MEETING RESOLVED FURTHER TJIAT THE COMPANY DO ENTER INTO AN AGREEMENT FOR PURCHASE OF TRADE MARKS & BRAND AS PER THE DRAFT PLA CED BEFORE THE BOARD AND MR. THAVAKUMAR PATHMANATHAN, DIRECTOR' AND MR. PATHMAKUMAR PATHMANATHAN, DIRECTOR BE AND IS HEREBY AUTHORISED SEVERALLY TO NEGOTIATE, FINALISE AND DECIDE THE TERMS OF THE AGREEMENT AND T O SIGN, EXECUTE, FILE, VERIFY AND AUTHENTICATE THE DOCUMENTS, PAPERS, AGREE MENTS, APPLICATIONS ETC., ON BEHALF OF THE COMPANY AND TO SUBMIT I REGI STER SUCH APPLICATIONS, AGREEMENTS AND OTHER REQUISITE DOCUMENTS, WRITINGS AND DEEDS AS MAY BE DEEMED NECESSARY OR EXPEDIENT WITH SUCH REGISTERING AUTHORITIES IN CANADA AND INDIA OR SUCH OTHER COUNTRIES. 12. THE ASSESSEE HAS SUBMITTED MORE DOCUMENTS WHICH ARE IN THE NATURE OF ADDITIONAL EVIDENCE. NO REASONS ARE GIVEN FOR NOT P RODUCING THE SAME BEFORE AO. 13. AS PER RULE 46A OF THE IT RULES, THE APPELLANT IS NOT ENTITLED TO PRODUCE ANY EVIDENCE, ORAL OR DOCUMENTARY OTHER THAN PRODUCED B EFORE THE AO. THE FOLLOWING EXCEPTIONS HAVE BEEN PROVIDED IN THE SAID RULES: THE AO HAS REFUSED TO ADMIT WHICH OUGHT TO HAVE BE EN ADMITTED. THE APPELLANT WAS PREVENTED BY SUFFICIENT CAUSE FROM PRODUCING EVIDENCE, WHICH HE WAS CALLED UPON TO PRODUCE BY THE AO. THE APPELLANT WAS PREVENTED BY SUFFICIENT CAUSE FROM PRODUCING THE EVIDENCE BEFORE THE AO, WHICH IS RELEVANT TO THE GR OUNDS IN APPEAL. THE AO HAS MADE ORDER WITHOUT GIVING SUFFICIENT OPP ORTUNITY TO THE APPELLANT TO ADDUCE EVIDENCE RELEVANT TO ANY GROUND IN APPEAL. 14. AS PER RULES OF ADMISSION OF THE EVIDENCE THE ADD ITIONAL EVIDENCE CANNOT BE ENTERTAINED WITHOUT GIVING AN OPPORTUNITY TO THE AO TO REBUT THE EVIDENCES PRODUCED BY THE ASSESSEE. THE CASE IS TIME BOUND A ND LIMITATION IS WITHIN THIS MONTH AND THEREFORE, GIVING AN OPPORTUNITY TO THE AO IS NOT POSSIBLE. THE ITAT, BANGALORE IN CASE OF ANUPAM KOTHARI, ITA NO. 937(BAN G) 2012 HAS HELD THAT FOR ADMISSION OF ADDITIONAL EVIDENCE, IT IS REQUIRED FOR THE ASSESSEE TO SHOW THAT AUTHORITIES HAD DECIDED ITS GROUNDS WITHOUT GIVING SUFFICIENT OPPORTUNITY TO ADDUCE EVIDENCE. THEREFORE, THE PANEL IS UNABLE TO ADMIT THE ADDITIONAL EVIDENCE AS THE SAME WILL BE. 15. THE TPO HAS CLEARLY BROUGHT OUT IN PARA 11.1 TO 13.1 OF THE ORDER THAT DIFFERENT FIGURES OF SALES PROJECTION HAVE BEEN FOLLOWED BY THE ASSESSEE FOR SHARE VALUATION AND TRADEMARK VALUATION. HIGHER FIGURES OF SALES PRO JECTION HAVE BEEN ADOPTED BY THE ASSESSEE FOR TRADEMARK VALUATION. NO REASONABLE EXPLANATION HAS BEEN GIVEN BY :-14-: ITA NO. 871/MDS/2017 THE ASSESSEE FOR THIS DIFFERENCE. THE PANEL FINDS THAT THE EVALUATION OF FREE CASH FLOW AND SALES PROJECTION ARE CORRECTLY DONE BY THE TPO. THE OBJECTIONS ARE ACCORDINGLY REJECTED. 16. OBJECTIONS GROUND NO.8: THE ACIT/TPO FAILED TO A PPRECIATE THAT THE CONSEQUENTIAL ADAPTATION OF TPO'S SUGGESTION/FINDING S FOR MAKING DISALLOWANCE OF THE PROPORTIONATE INTEREST ON THE CORPORATE LOAN US ED FOR ACQUIRING THE SAID BRAND WAS WRONG, ERRONEOUS, UNJUSTIFIED, INCORRECT AND NOT SUSTAINABLE IN LAW. OBJECTIONS GROUND NO.9: THE ACIT WENT WRONG IN RECO RDING THE FINDINGS IN THIS REGARD IN PARA 4 & .5 OF THE DRAFT ASSESSMENT ORDER/I MPUGNED ORDER WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. OBJECTIONS GROUND NO.10: THE ACIT/TPO FAILED TO APPR ECIATE THAT HAVING USED THE CORPORATE LOAN TAKEN FOR BRAND ACQUISITION WHICH SHO ULD BE CONSTRUED AS UTILIZED FOR BUSINESS PURPOSES, THE PROPORTIONATE DISALLOWANCE O F INTEREST IN RELATION THERETO WAS WHOLLY UNJUSTIFIED. 17. PANEL: THESE OBJECTIONS ARE RELATED AND THEREFO RE ARE TAKEN UP TOGETHER. THE AO HAS BASED HIS ORDER ON THE FINDINGS OF THE TPO. SIN CE THE AMOUNT OF INTEREST PAID IS NOT WHOLLY AND EXCLUSIVELY FOR THE BUSINESS THE SAME HAS BEEN DISALLOWED. SO, THE OBJECTIONS OF THE ASSESSEE ARE NOT ACCEPTED. 9. FROM THE ABOVE, IT IS CLEAR THAT THE RELEVANT MA TERIAL REQUIRED FOR THE DETERMINATION OF THE ISSUES HAVE NOT BE PROPERLY AP PRECIATED. IN THE FACTS AND CIRCUMSTANCES, WE DEEM IT FIT TO SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMIT THESE ISSUES, WHICH ARE INTE R CONNECTED, INCLUDING THE ISSUES RAISED IN THE ADDITIONAL GROUND, BACK TO TH E AO/TPO FOR A FRESH EXAMINATION AND PASSING A SPEAKING ORDER, AFRESH, A FTER AFFORDING ADEQUATE OPPORTUNITY TO THE ASSESSEE IN ACCORDANCE WITH LAW. THE ASSESSEE SHALL FURNISH ALL RELEVANT MATERIAL IN ITS SUPPORT BEFORE THE TPO /AO, AS THE CASE MAY BE, AS REQUIRED UNDER THE PROVISIONS OF LAW. NEEDLESS TO SAY THAT SUCH AN ORDER WOULD BE SUBJECT TO THE PROVISIONS OF SECTION 144C AND ITS CONSEQUENCES, AFRESH. :-15-: ITA NO. 871/MDS/2017 10. IN THE RESULT, THE ASSESSSEES APPEAL IS TREATE D AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON TUESDAY, THE 06 TH DAY OF FEBRUARY, 2018 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) !' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 06 TH FEBRUARY, 2018 JPV '*2343 /COPY TO: 1. &/ APPELLANT 2. *+& /RESPONDENT 3. 5 ) (/CIT(A) 4. 5 /CIT 5. 3* /DR 6. 7 /GF