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2016 (8) TMI 869 - AT - Income TaxDisallowance of the entire purchase - CIT(A) sustaining the disallowance made by TPO and treatment of purchase consideration for trademark as NIL - Held 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 NIL as held by the Hon ble Delhi High Court in the case of EKL Appliances Ltd., 2012 (4) TMI 346 - DELHI HIGH COURT . 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. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Purchase of Trademark and Depreciation Thereon 2. Disallowance of Repair and Maintenance Expenses 3. Disallowance of General Charges 4. Disallowance of Bad Debts 5. Disallowance of Interest on Borrowed Funds Issue-wise Detailed Analysis: 1. Purchase of Trademark and Depreciation Thereon: The assessee, engaged in manufacturing and trading handloom products, entered into an agreement with Fabindia Inc., US, to purchase trademark rights for ?5 crore. The TPO rejected the TP documentation and analysis, treating the ALP of the trademark purchase as 'Nil' under the CUP method. The assessee argued that the purchase was necessary for its expansion plans and justified by an international valuer's report. The Tribunal referred to precedents, emphasizing that the TPO cannot determine the ALP at NIL without proper analysis and evidence. The Tribunal set aside the TPO's order and restored the issue for fresh examination, emphasizing that expenditure should be judged based on its necessity for business purposes. 2. Disallowance of Repair and Maintenance Expenses: The AO disallowed ?6,60,029 out of ?25,00,000 claimed under repair and maintenance, considering some expenses as personal and capital in nature. The CIT(A) upheld the disallowance of ?6,60,029 but deleted the rest. The Tribunal found no reason to interfere with the CIT(A)'s specific findings and upheld the decision. 3. Disallowance of General Charges: The AO disallowed certain general charges, considering them capital in nature. The CIT(A) allowed the expenses, noting they were for routine business maintenance and supported by invoices. The Tribunal upheld the CIT(A)'s findings, emphasizing that the expenses were necessary for the business. 4. Disallowance of Bad Debts: The AO disallowed ?46,945 claimed as bad debts, arguing it did not meet the conditions under Section 36(2). The CIT(A) allowed the claim, noting it was a business loss incidental to the normal course of business. The Tribunal upheld the CIT(A)'s decision, emphasizing that the loss was legitimate and incidental to business operations. 5. Disallowance of Interest on Borrowed Funds: The AO disallowed ?3,73,973 interest on borrowed funds used for investment in East Limited, UK, arguing that the assessee was not an investment company. The CIT(A) allowed the interest, noting the investment was for business expansion and supported by the jurisdictional High Court's decision in a similar case. The Tribunal upheld the CIT(A)'s findings, emphasizing the commercial expediency of the investment. Conclusion: The Tribunal partly allowed the assessee's appeals for statistical purposes, restoring certain issues for fresh examination by the TPO. The Department's appeals were dismissed, upholding the CIT(A)'s findings on various disallowances. The Tribunal emphasized the importance of judging business expenditures based on their necessity and relevance to business operations, aligning with established legal precedents.
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