DCIT, NEW DELHI vs. M/S FABINDIA OVERSEAS (P) LTD.,, NEW DELHI

Department against the order dated 31.01.2013 passed by the Ld. CIT(A)-XX, New Delhi for assessment year 2007-08. I.T.A.

No. 2244/Del/ 2013 is the appeal preferred by the assessee for the same year. I.T.A. 1894/Del/2013 pertains to assessment year 2009-10 and has been preferred by the Department against order dated 13.2.2013 passed by the Ld. CIT (A) - XX, New Delhi whereas I.T.A. 2245/Del/2013 also pertains to assessment year 2009-10 and has been filed by the assessee. Since all the appeals were heard together, for the sake of convenience, they are being disposed of through this common order.

Returned Income 179591758 Add Disallowance of deprecation on trade 12500000 mark

24378 Disallowance of fee paid to ROC as to increase in authorised capital & incidental professional charges Disallowance of deduction claimed 12500 u/s 80-G Disallowance out of ‘Repair & 2500000 Maintenance’ Head Disallowance out of ‘General 15000 charges/Misc’ , expenses on a/c of bribes/tips Disallowance out of General charges 5000 on account fine / penalty Disallowance out of “General charges’ 50000 expenses being capital in nature Disallowance of bad debts 46945 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 Disallowance of sales tax penalty 2000 Disallowance out of ‘Books &: 50000 periodicals Further disallowance out of ‘Books & 1236 15207559 periodicals Assessed Income 194799317

The grounds of appeal raised by the assessee are as under:-

“1. That on the facts and circumstances of the case and in law, the Hon’ble Commissioner of Income Tax (Appeals)- 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 Associated 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 disallowance made by the Learned Transfer Pricing Officer (“TPO”) and treatment of purchase consideration for trademark as 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 and in law, the Hon’ble CIT (A) has wrongly concluded that the , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 Appellant was the economic owner of the said trademark. 1.4. That on the facts of the case, the Hon’ble CIT(A) has erred in upholding Ld. sustaining the rejection of the valuation methodology of M/s CRA International (“CRA”), an international valuer, submitted by the Appellant for valuation of the said trademark.

1.4.1 That on the facts and circumstances of the case and in law, the Hon’ble CIT(A)/ Ld. TPO have failed to appreciate the valuation strategies appropriate for the said trademark’s valuation and the operating territory for the trademark rights under consideration in the instant case. 1.5. Without prejudice to the above, the Hon’ble CIT (A) has erred in not valuing the trademark based on the application of ‘cost approach’ for valuation of the said trademark and for determination of a value of the said trademark. 1.6. That on the facts and circumstances of the case and in law, CIT(A)/ Ld. TPO have grossly erred in rejecting Transaction Net Margin Method (“TNMM”) as the Most Appropriate Method (“MAM”) for determination of the Arm’s Length Price (“ALP”) of the consideration payable by the Appellant to its AE for the purchase of the said trademark. 1.7 That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has grossly erred in upholding Ld. TPO’s application of Comparable Uncontrolled Price (“CUP”) as the MAM for the purposes of determination of the ALP of the purchase in respect of the said trademark by the Appellant to its AE.

2. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in upholding the disallowance of depreciation claim amounting to Rs. 1,25,00,000/- on the cost of acquisition of the said trademark for the Appellant amounting to Rs. 5,00,00,000/-.

, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 3. That on the facts and circumstances of the case and in law, Hon’ble CIT(A) have failed to consider the submissions furnished by the Appellant in relation to repair and was not justified in making a disallowance amounting to Rs. 6,60,029/- from the Rs. 25,00,000/- disallowed by the AO.

All of the above grounds of appeal are without prejudice and notwithstanding each other.

The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”

4. On the ground pertaining to purchase of trade mark 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 owned foreign companies were banned from operating in India. In order to make a transfer of business carried on by the Indian branch, to the new company i.e. the Assessee, an agreement was entered into between Fabindia Inc., US and the assessee on 16th December, 1976. Pursuant to the said agreement, the business 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 as was carried on by Fabindia Inc. at New Delhi was transferred to the assessee with effect from 20th December, 1976. This transfer was effected after obtaining approval from the Reserve Bank of India which was granted vide their letter dated 24.6.1978. The transfer of the business, as was carried on at New Delhi, was made on ‘going concern basis'. All the assets and liabilities of Fabindia Inc.'s business in India were transferred to the assessee at book value. The Ld. AR further submitted that the assessee thus carried on the same business by acquiring all the assets and liabilities of the said business. Under the agreement for transfer of business of the Indian Branch, no amount was payable for grant of right to use brand name “Fabindia” by the assessee to Fabindia Inc. The assessee has been using the brand name “FABINDIA'' since then for sale of its products in India, as was used by Fabindia Inc. without payment of any royalty. The Ld. AR submitted that Fabindia Inc. was incorporated in US and continued to carry on business in US as before. The brand name and trademark ‘Fabindia’ which was built/owned by Fabindia Inc. US continued to be owned by Fabindia Inc. excepting that the assessee was allowed the use of the brand name for the purpose of carrying on the business in I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 India. For all the territories outside India including US, all rights in the trademark were in Fabindia Inc. being the original owner of the trademark and a separate legal entity. Fabindia Inc. being proprietor of the US Trademark ‘FABINDIA’, had complete and unfettered right to use the said trademark in relation to goods falling in classes mentioned in Trademark/ Service application under the relevant US Laws. The Ld. AR submitted that in the year 2006, the assessee, taking into account its expansion plans including proposals of new investors approached Fabindia Inc., US for assignment of rights in respect of Brand name/ trademark to the assessee. The US authorities based on the application as filed by Fabindia Inc. on 6th April 2006, accorded registration in its name vide certificate issued to Fabindia Inc. dated 29th May, 2007. An agreement for assignment of trademark was made between Fabindia Inc. and the assessee dated June 1, 2006, pursuant to which all the rights in respect of 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 rights dated 1st June, 2006, an amount of Rs 5 Crore was payable to Fabindia Inc. by the assessee. It was further submitted that for the 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 purpose of valuation of brand & fixation of consideration, the parties had engaged a valuer in US for the valuation of US brand name, trademark rights and M/s CRA International US, a renowned valuer, vide their report dated 21st July, 2006 made valuation of the said trademark rights, which formed the basis for negotiation of the price between the two parties. The Ld. AR emphasized that the rights obtained by the assessee pursuant to the US trademark constitute valuable rights for the assessee, entitling it to carryon business under the trademark in the territory of US. Fabindia Inc. was already engaged in carrying on business in various years since 1960 and was well known in US. Pursuant to the said acquisition, the assessee could engage in carrying on of business in US at any time. The Ld. AR submitted that before such acquisition, the assessee was not entitled to use the trademark for its business activities in US without permission of Fabindia Inc. If Fabindia Inc. would have sold the trademark to any other party in India, the Appellant would have lost the opportunity to explore the world’s largest economy in terms of business.

Therefore, it became imperative for the assessee to purchase the trademark from Fabindia Inc. on an outright purchase basis to protect the interest of its business and its stakeholders. It was 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 submitted that the assessee has expanded in the recent 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 business overseas. It has already tied up business with a UK Company and is negotiating for similar tie-up in the US market. The Ld. AR submitted that the transfer of right to use trademark in US territory by Fabindia Inc. to the assessee, being two separate and independent enterprises, was made on an ‘arm’s length’ basis.

The same is clearly evident from valuation report of the trade mark. The valuation report of the trade mark by M/s CRA International further fortifies the submission of the assessee.

5. The Ld. AR submitted that the learned TPO has held that Fabindia Inc. has not contributed towards development of the brand and that by registering the trade mark, it was not entitled to receive Rs 5 crores for the trade mark from the assessee. In this regard, it may be noted that it is a fact that Fabindia Inc. was the original owner of the brand i.e. trade mark and in the transaction under consideration, it has sold US rights relating to the trade mark to the assessee. It was submitted that the Ld. TPO has failed to 10 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 appreciate the above and the fact that Fabindia Inc. has not charged from the assessee any amount pertaining to use of the trade mark in the Indian territory. It was submitted that the Ld. TPO has held that a “legal fiction” has been created to make the trade mark a commodity that had to be bought by FOPL from FIUS while FOPL was the one responsible for its development. As far as the objection of the Ld. TPO that the trade mark was not registered is concerned, the Ld. AR submitted that it is immaterial whether or not the trade mark is registered so far as existence of trade mark is concerned. Even under the Indian trade mark laws, unregistered trade mark have been recognized, meaning thereby that trade mark can be unregistered. The Ld. AR submitted that the ld. TPO has erred in observing that the assessee has paid the aforesaid sum for use of the trade mark in the Indian territory. It was submitted that the amount was rather paid for acquiring rights for the US territory, where Fabindia Inc. was the user of the trade mark and accordingly, the legal owner. It may further be noted that for any territory where both the companies do not have any presence, any third party can claim the registration based on its usage of the mark in terms of provisions of intellectual property laws. It was the Ld. AR’s contention that the I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 Ld. TPO without appreciating the Intellectual Property 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 third party could claim the ownership of the trade mark and seek registration without the permission of the user i.e. Fabindia Inc.

In view of the above, even the observation of the Ld. TPO that FOPL (i.e. the assessee) has developed the inherent value of the trade mark is erroneous, as the rights have been acquired for US territory only, which has been recognized by the US authorities.

The whole determination of arm’s length price of this transaction by the Ld. TPO is based on the premise that unregistered trade mark can be owned and registered by any third party and has no value/existence without registration. The Ld. AR submitted that Fabindia Inc. has been granted trade mark registration by the US trade mark authorities on being satisfied that it was the real owner and user of the trade mark in US territory since 1960 and it is only that right which has been acquired by the assessee.

Therefore, the registration of the trade mark was required to save it from unauthorized use, subsequent to its assignment to the assessee.

I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 The Ld. TPO, however, without appreciating the report 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 achieved 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 the US, the observation of the Ld. TPO are illogical and irrelevant to the facts of the case and accordingly, untenable. As regards the observation of the TPO that the valuation made by CRA International has provided only indicative value and cannot be taken to reflect the fair market value, it was submitted that the said statement made in the Valuation report was made by the Agency in the context that only a price range from $ 0.80 million to $ 1.88 million was determined and no fixed value 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 was given in the trade mark. It was after mutual discussions and negotiations between the parties that the price was fixed at Rs 5 crore. As the said amount was falling between the price ranges as determined in the Valuation report, the amount has been considered as representing fair market value of the trade mark. It was submitted that the Ld. TPO has erred in understanding the standard “disclaimer clause”, generally given in such valuations, out of the context. As regards Ld. TPO’s observations that the operations in the US have altogether ceased, it was submitted that under “trade mark” valuation methodologies, it is the projection of the business by use of trade mark which is considered as a relevant factor.

Under the agreements for assignment of trade mark, there cannot be any use of the trade mark by the seller post assignment of such trade mark to the buyer. Generally, in the case of sale of brand name, there is shifting of business to some other venture or closing of the business in certain cases.

Under such circumstances, projections are not termed as false or erroneous in the absence of non-effecting of the sales. It is, therefore, submitted that mere fact that Fabindia Inc. has not conducted business effectively or was not intending to carry on 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 the same, does not diminish the value of the trademark. In this regard, it may be noted that even in the cases where the businesses are altogether closed, the brands are sold at value determined on the basis of the accepted methods of valuation.

He relied on the decision of the Mumbai Bench of the ITAT in Johnson and Johnson Ltd. vs CIT-LTU 150 ITD 377 (Mumbai 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 Trib.) for the proposition that where the assessee had purchased trade mark, the TPO could not make adjustment to assessee’s ALP taking a view that payment for purchase of trade mark was unnecessary as products sold by the assessee had already acquired a reputation of quality before conclusion of the agreement for purchase of trade mark. The Ld. AR also relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances 345 ITR 241 (Del) for the proposition that it is not necessary for the assessee to show that any legitimate expenditure incurred by it was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by it for the purpose of business carried by it has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred ‘wholly and exclusively’ for the purpose of business and nothing more. The Ld. AR also relied on another decision of the Hon'ble Delhi High Court in the case of CIT-I vs Cushman and Wakefield (India) Pvt. Ltd. 46 taxmann.com 317 (Del) for the proposition that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 not to determine whether there is a service or not from which the assessee benefits.

It was also submitted that the specific disallowances need to be 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 examined afresh. The Ld. AR submitted that disallowance was made by the on an ad-hoc basis and the Ld. CIT (A) rejected the assessee’s plea without any cogent reasoning. The same was made only on estimation basis. It was submitted that the AO in his remand report dated September 21, 2012 has himself noted that the disallowance was not made out of repair and maintenance expenses due to the reason that bills/ vouchers were not produced. It was submitted that the assessee was never requested to furnish any vouchers, bills to substantiate the expenditure incurred and the additions were purely based on estimations/suspicions. It was submitted that the settled law is that the addition/ disallowance should be made in light of cogent evidence and reasoning without any surmise/ estimation or on ad-hoc basis. The Ld. AR relied on the impugned order while contesting ground no. 1 of the Department’s appeal relating to deletion of addition under repairs/maintenance.

The assessee had borrowed the funds to invest in an entity to enlarge the scope of its business and enter a new geographical market with ease. The funds were borrowed with a purpose to enlarge the business of the assessee.

17. In response, for both the years, the Ld. DR placed heavy reliance on the Assessing Officer’s orders, CIT(A)’s orders and the findings of the Ld. TPO as far as the issue of purchase of trade mark and depreciation thereon was concerned. It was submitted that even the costs incurred by FabIndia Inc. since 1960 towards brand building was not on record and hence the quantum of 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 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 observations merit a serious consideration. On the grounds in the Department’s appeals, the Ld. DR strongly supported the Assessing Officer’s orders.

“16. The Organization for Economic Cooperation and Development (“OECD‟, for short) has laid down transfer pricing guidelines” for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm’s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two 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 conditions, have accrued to one of the enterprises, but, by reason of 25 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm’s length principle of pricing follows the approach 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. After 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 are important and are relevant to our purpose. These paragraphs are reproduced below: -

“1.36 A tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.

1.37 However, there are two particular circumstances 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 the tax administration may disregard the parties’ characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest -bearing debt when, at arm’s length, having regard to the economic 26 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

1.38 In both sets of circumstances described above, the character of the transaction may derive from the 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 terms would be the result of a condition that would not have been made if the parties had been engaged in arm’s length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been 27 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 structured in accordance with the economic and commercial reality of parties dealing at arm’s length.”

18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where 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 would have been adopted by independent enterprises behaving in a commercially rational manner.

“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. Whatever 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 accounting 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 29 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger.

22. Even Rule 10B (1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow 30 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, 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 to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.

, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 19. Similarly, the Hon’ble Delhi High Court has opined in CIT vs. Cushman and Wakefield (India)(P) Ltd 367 ITR 730 (Del.) :

“This is the distinction between the jurisdiction of the AO and the TPO; the TPO determines whether the stated transaction value represents the ALP or not (including whether the ALP is nil), while the AO makes the decision as to validity of the deduction under section 37. This means the decision as to whether the expenditure was "laid out or expended wholly and exclusively for the purposes of the business" is a fact determination or verification to be undertaken by the AO. This includes whether the referrals actually occurred (and thus took place for the 'purpose of the business'), independent of their valuation which the TPO determines. That determination is not and cannot be made by the TPO. Nor is the authority of fthe AO under section 37 curtailed in any manner by a reference under section 92C.”

20. The Hyderabad Bench of the ITAT has held in the case of Social Media India Ltd. vs. ACIT in 148 ITD 222 (Hyderabad – Trib.) as under :

21. The Hyderabad Bench of the ITAT in Zuari Cement Ltd. vs. DCIT in 57 taxmann.com 206 (Hyderabad Trib.) has held as under:

I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 “Leave alone that amount; even the sub license fee for the use of trade mark is also faulty. Under the guise 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 TPO has not brought any evidence on record to reject the 1% payment made to Italcementi Group. Moreover, while determining the price at NIL on the issue, the TPO surprisingly holds that assessee has transferred its 'Zuari Brand' to 'Italcementi Group'. We are unable to understand this logic. Italcementi Group never obtained, 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 is used by assessee-company. The TPO's analysis of AMP expenses are also not correct. Even though Italcementi Group was being used from earlier years, AMP expenses of current year also included in this, which is not correct. Moreover, Italcementi Group itself is a 50% shareholder in the assessee-company from the beginning. Therefore, it cannot be stated that 'Zuari Cements' is exclusive brand owner of the Birla Group in exclusion of Italcementi Group. The entire approach by the TPO is biased and cannot be justified on the facts of the case. Therefore, we are not in a position to uphold 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 than to set aside the entire order of the TPO which is based on wrong presumptions- and propositions. DRP unfortunately, even though consisted of three senior 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 officers, did not apply its mind to the valid objections raised by assessee. In view of this, without deciding the merits of various issues, we set aside the orders and direct the TPO to re-consider the entire order and analyse them in fresh, first by determining the most appropriate method and then analyzing the transactions under the provisions of the TP. The orders of the TPO/DRP on the TP issues are therefore set aside and the entire issue on TP analysis is restored to the file of AO for fresh consideration. The grounds raised are accordingly allowed for statistical purposes.”

“However, in the instant case, the TPO did not examine the arms length price of the impugned royalty payment in accordance with the provisions of Sec.92C of the Act. It is also the contention of the assessee that the TPO did not indicate to the assessee that he proposes to treat the impugned transaction as a sham one nor did he call for any objection from the assessee in that regard. The Learned A.R also relied up on host of case law in connection with this issue. Further the observation of DRP with regard to the trade mark registration, though defended before us by the assessee, requires examination at the end of the Assessing Officer/TPO. Accordingly we are of the view that the ALP of the impugned royalty payment and the issue relating to the trademark registration need to be examined afresh. Accordingly we set aside the order of Assessing Officer/TPO/DRP on this issue and restore the same to his file for examination of the same afresh in accordance with the law, after affording necessary opportunity of being heard.” , _ 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 23. Therefore, on an overall consideration of the facts of the case and the judicial precedents available, it is our considered opinion that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred “wholly and exclusively” for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines. As far as the objection of the Ld. TPO that whether there is any need for purchase of such intangible or not is concerned, we are of the view that what is to purchase and what not to purchase is not in the domain of the TPO/AO, because it is a business decision of the assessee company 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 has no role to play in examining the decision of commercial nature. Under the guise of TPO provisions, the TPO cannot determine the ALP at I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 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 TPO has not brought any evidence on record to reject the payment made to Fab India Inc. In the instant case, the TPO did not examine the arms length price of the impugned royalty payment in accordance with the provisions of Sec.92C of the Act. Accordingly, we are of the opinion that the ALP of the impugned payment for trademark and the issue relating to the depreciation on trade mark need to be examined afresh.

Accordingly we set aside the order of Assessing Officer/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 the law, after affording necessary opportunity of being heard. In the result, Ground nos. 1 & 2 of the assesee’s appeal are allowed for statistical purposes.

“6.6. I have carefully examined the issue. The case laws cited by the appellant are not applicable to the facts and circumstances this case. The disallowances are on two counts - 1) it is personal expenses and 2) it is capital in nature. The assessee tried to explain these expenses as incurred in the residence of the managing director which was used as "Office" also. This explanation of the appellant looks very spacious. The nature of the invoices and the narrations therein clearly indicate that they were personal expenses. I also agree with the view of the AO that they are capital in nature. However, the AO has examined the invoices amounting to Rs. 6,60,029/- and on the basis of this he has made an estimation to disallow Rs. 25,00,000/-. As there is no basis for this estimated disallowance, I am upholding the addition only to the extent of Rs. 6,60,029/-. Balance amount of the addition should be deleted by the AO. The AO is directed accordingly.”

“The AO has disallowed certain “General charges” claimed by the Appellant as revenue expenditure based on the ledgers submitted during the of assessment proceedings. The expenditure 39 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 were held to be capital in nature by the AO. 7.2. The Appellant submitted that disallowances have been made without considering the invoices placed on record. In one case, invoice for Rs. 1,664/- was filed as additional evidence vide letter dated 19th 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 disallowance was made, it is clear that the expenditure was in the nature of upgradation of Tally software, decoration material, rental charges for projector, and petty items like pad locks, mannequins, utensils etc. In view of the evidence placed on record by the appellant, I hold that this is an allowable expense. The AO is directed to allow the same.”

Hence, ground no. 2 of the Department’s appeal is dismissed.

“8.1 The Appellant has made payment of insurance premium twice to United India Insurance Company during the FY 2004-05 and the excess amount paid was debited to insurance company. On failure to get the refund/ , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 adjustment of the same, the Appellant written off the 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 further holding that the amount cannot be “irrecoverable” from a government company.

8.3 The appellant submitted that the reliance placed by the the AO on the provisions of section 36(2) on the present facts is misplaced and the claim is duly allowable as revenue expenditure u/s 37, as the said loss is incidental and ancillary to the normal course of the business and is expended wholly and exclusively for the purpose of the business. The appellant further submitted that there is no presumption under the law regarding recovery of payment from a government enterprise. I hold that, under these circumstances, AO was not correct in disallowing the claim of the appellant. AO is directed to allow Rs. 46,945/- as bad debts.”

Ground no. 4 of assessee’s appeal is dismissed as being premature.

Ground no. 4 of the assessee’s appeal is dismissed as being premature.

“5. Ground No. 3 is on the issue of disallowance of repair and maintenance expenses. The appellant is aggrieved by 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 expenses was incurred on renovation work related to furniture and fixtures, making of cupboards and electrical fittings in leasehold premises, and held the expenditure to be capital in nature and eligible for depreciation. The appellant has submitted that the expenditure has been incurred mainly on routine business maintenance expenses and small repairs, for smooth and efficient conducting of its business and were required to be incurred at regular intervals owing to commercial expediency of the business, which does not lead to coming into existence of any capital asset adding to the profit 42 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 making apparatus of the business and as such, no enduring 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 retail trade of readymade garments and various handloom 8s other products through various retail showrooms across the country, it is important for it to keep these showrooms properly maintained at all times to attract more customers. This entails the 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 appellant. This is further so as the showrooms of the appellant company are leased premises. Against the specific disallowances made by the AO, the appellant has given its specific reply and submitted that the expenditure included painting, floor repair, Door Repairs, Almirah repair & remodeling, Drawers repair, polishing, purchase of MDF boxes & Jelly filled wires, AMC payment for EPABX system, repairing of shed, AC fixing, welding of gate, window repairing, repair of kitchen, toilets including marble fixing, plaster, tile fixing and water proofing treatment at stores, , bulk purchase of low cost items like Shelf Tockers, Backlit flex, tape, paper prints, digital prints and signage at various stores, electrical repair & fitting work and purchase of small electrical items like tube light, multi plug, wire, tape purchase of small repair items like Gate roller, reed switch, refilling of fire extinguishers and Job Work charges. In support of its contentions, the invoices were also placed on records, which substantiate the claim of the appellant. The appellant has submitted that the AO has not appreciated the above invoices during the course of assessment proceedings and that all the above expenditure is revenue in nature and has relied on the decision of jurisdictional High Court in Delhi Cloth and General Cotton Mills [1981] 6 Taxman 53 (Delhi), wherein the Hon’ble High court of Delhi has held that expenditure on renovation of furniture 8s fittings by the assessee, who was also in the same business as of the appellant, is revenue in nature. The appellant thus submitted that as the expenditure incurred: - a) is not towards initial outlay of business; b) has not resulted in acquisition of source of profit; c) no enduring benefit has been derived; 43 , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 d) the expenditure is not incurred once for all; e) the expenditure incurred is towards trading operations; 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 and 291 for the amount of Rs. 3,40,000/-, Rs. 30,000/- and Rs. 1,68,750/- regarding purchase of Label Deactivator, Electronic article surveillance system, etc, it has also submitted that the said amount has been already capitalized in its books of account which is clearly evident from the fixed Assets schedule and as such, no further capitalization was warranted.

In view of the above, respectfully following the decision of the jurisdictional High Court in the case of Delhi Cloth and General Cotton Mills (supra), I hold that the AO was not correct in disallowing the repair and maintenance expenses as claimed by the appellant. The AO is directed to delete this addition.”

“6. Ground No. 4 is on the issue of disallowance of interest payment on borrow of funds holding that the funds were , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 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 company incorporated in UK, which deals in clothing, jewellery and accessories including bags, scarves, belts and footwear etc from its 52 stores and 25 departmental stores, similar to the appellant’s line of business. The appellant invested in East Limited, its associate company, for entering into the UK market, as the latter was in the same industry and business and having common Ethos 85 Philosophy as of the appellant’s and it also had excellent management team, strategic store locations, which were imperative for a size of the business that the appellant was carrying on, to enter into a new market. In effect, the appellant submitted that the main purpose of the investment was to acquire controlling interest for launching .fabindia range using the latter’s infrastructure and network in UK, thereby enhancing customer base and providing improved designs for western wear for women in India. The aforesaid objectives could not have been achieved without making any substantial investment in the company, thereby gaining control over the same for utilization in the best interest of the appellant’s business. .

I.T.A. No. 1894, 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 For the purpose of making the investment, the appellant 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 19th January 2009 i.e. the appellant used its overdraft limit 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 that the appellant is not an investment company. It is the submission of the appellant that being an investment company is not a relevant criteria to claim deduction of interest u/s 36( 1)(iii) of the Income Tax Act. For this proposition, the appellant stated that its case is squarely covered by the decision of jurisdictional High Court in the case of CIT v Tulip Star Hotels Ltd., of 2009 and 505 86 562 of 2010, wherein on similar facts, claim for interest was allowed by the Hon’ble High Court of Delhi. The appellant thus submitted that its claim for deduction of interest is duly allowable in view of the consistent view of higher judicial forums, including by the Apex Court and jurisdictional High Court on the same set of facts as of the appellant’s, particularly when the commercial expediency of the investment is not in dispute and the disallowance is made merely on the basis that the appellant is not an investment company. The appellant has also taken an alternative argument that impugned interest is allowable under section 57 of the Income Tax Act in view of the decision of Hon’ble Supreme Court in CIT v Rajendra Prasad Moody [1978] 115 ITR 519 ..(SC), wherein it was held that expenditure is deductible irrespective of the fact no income have been earned. , 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 In view of the above facts of the case and since these facts are exactly on the same line as in the case of Tulip Star Hotels Ltd. (supra) decided by the Hon'ble Jurisdictional High Court, I hold that the interest amounting to Rs. 3,73,973/- is allowable as business expenses. The Assessing Officer is directed to delete the addition made in this regard.”

Nos. 2244/Del/2013 and 2245/Del/2013 are partly allowed for statistical purposes.

Order pronounced in the open court on 13th June, 2016. Sd/- Sd/- (S.V. MEHROTRA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: the 13th of June 2016 ‘GS’ 1898, 2244, 2245/D/2013 Assessment Years: 2007-08, 2009-10 Copy of the Order forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard File By order