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2016 (10) TMI 998 - AT - Income TaxTrademark licence fee payments - claim of expenditure u/s 37(1) - commercial expediency - Held that - The assessee is exploiting the trademark REDINGTON for the purpose of carrying on its business. Therefore, there is nothing uncommon in assessee s making payment to the use of the trade-mark to M/s Redington Distribution Pte. Ltd., Singapore. It is not necessary for the TPO to go beyond this plausible explanation, since it is a widely accepted business practice around the world. This is not an unique case for the assessee company alone. Further, it is for the assessee to decide the dynamics of its business. The assessee is the best judge to decide on such issues. The Hon ble Supreme Court in the case of S.A. Builders vs. CIT (2006 (12) TMI 82 - SUPREME COURT ) has held that any expenditure incurred by the assessee, if justified by commercial expediency, is an expenditure allowable for the purpose of taxation and what is commercial expediency is a matter to be decided by the assessee. In the facts and circumstances of the case, the said addition is deleted. Disallowance under Section 14A - Held that - We remit the issue back to the file of the Assessing Officer to verify and exclude the investments made in subsidiary companies for the purpose of calculation of disallowance under Rule 8D(2) of the Income-tax Rules, 1962 and also verify interest expenditure whether directly attributable to the exempt income.
Issues Involved:
1. Guarantee Commission 2. Trademark Licence Fee Payments 3. Disallowance under Section 14A of the Income-tax Act, 1961 Detailed Analysis: 1. Guarantee Commission: The assessee did not press ground Nos. 2.1 to 2.1.6 as the Dispute Resolution Panel (DRP) had already ruled in favor of the assessee. The DRP allowed objections regarding guarantee commission for both corporate and bank guarantees in favor of the assessee. The Revenue's appeal argued that the DRP erred in not considering the decision of the ITAT, Mumbai in the case of Everest Kanto Cylinders Ltd., which stated that "guarantee commission" falls under the purview of "international transaction." However, the Tribunal followed its earlier decisions in the assessee's own case, holding that the TP addition against corporate and bank guarantees is not sustainable in law. Consequently, the Revenue's grounds were dismissed. 2. Trademark Licence Fee Payments: The assessee argued that it paid ?1,81,51,501/- as trademark fees to its wholly owned subsidiary, M/s Redington Distribution Pte Ltd. The Transfer Pricing Officer (TPO) was not satisfied due to the lack of documentary evidence proving the legal ownership of the trademark. The TPO made a downward adjustment of ?1,81,51,501/-, which was confirmed by the DRP. The Tribunal noted that in the assessee's own case for the assessment year 2009-10, it had allowed the expenditure for trademark licence fees. The Tribunal reiterated that the assessee is the best judge of its business dynamics and that the expenditure was justified by commercial expediency. Therefore, the Tribunal directed the Assessing Officer to allow the expenditure of trademark licence fees. 3. Disallowance under Section 14A of the Income-tax Act, 1961: The Assessing Officer disallowed ?5,95,44,737/- under Section 14A, considering that the assessee must have incurred certain expenditures related to investments. The assessee contended that the investments were made out of accruals and income earned, not borrowed capital. The Tribunal observed that the provisions of Section 14A read with Rule 8D are mandatory from the assessment year 2008-09. However, it was necessary to verify whether the investments in subsidiary companies were made for business expediency and whether interest expenses were directly attributable to the exempt income. The Tribunal remitted the issue back to the Assessing Officer to verify and exclude investments in subsidiary companies for the purpose of calculating disallowance under Rule 8D(2) and to provide the assessee an adequate opportunity of being heard. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes, and the appeal filed by the Revenue was dismissed. The Tribunal directed the Assessing Officer to allow the trademark licence fee expenditure and to verify the disallowance under Section 14A, excluding investments in subsidiary companies.
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