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TMI Blog2013 (9) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness in India and the assessee has now contended that it was doing its own business and entering into joint ventures and promoting other companies which were in the same business as that of Gillette Group USA. - Held That:- matter remanded back fresh decision - the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment - Following decision of Maxop Investment vs CIT [2011 (11) TMI 267 - Delhi High Court] - Decided in favor of assessee. Fluctuation in rate of exchange - Increased liability in respect of loans taken - in which year, loss incurred on “revenue account” should be deducted u/s 37(1) - Held that:- Assessing Officer has merely assumed that external commercial borrowing was utilized for loans and advances made by the assessee during this year because there was an increase in unsecured loans. In relation to the assessee’s claim of deduction on account of additional foreign exchange liability, we are not concerned with unsecured loans of the assessee but only with external ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , erroneous and untenable grounds. 3. With respect to ground no-1, it was submitted by the Ld. AR that the issue in the light of the judgement of the Jurisdictional High Court has to be restored back to the AO as neither the AO nor the CIT(A) have followed the guidelines set out in the case of Maxop Investments and only what may be kept in mind is that this should not lead to a double disallowance as has been observed by the CIT(A) in para 12.3. 4. The Ld. CIT DR did not disagree with the submissions advanced on behalf of the assessee and stated that the issue has to be restored back to the AO. 5. The relevant facts of the case as available on record are that the AO took note of the fact that as per the tax audit report in Form No-3CB, the assessee disclosed the nature of the business as under :- The principal business of the company is to establish Gillette s business in India either through wholly owned subsidiary companies or on their own by making investments directly or in joint venture with any Indian partner. 6. As per the assessment order, the assessee reiterated the position vide its letter dated 21.10.2003 namely that this continued to be the business as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a separate legal juristic entity entitled to taxation as an independent entity. 8. Not convinced with the explanation, the AO pointed out that the assessee had changed its stand on the nature and purpose of its business from that what it had disclosed in the tax audit report. Accordingly, he required the assessee to point out the income which it claimed to derive from its business while doing so he pointed out that the income which arose in respect of the investments was either dividend income or capital gains either of which were not taxable as business income . In view of the same, the assessee was required to show why such expenses should not be disallowed as no business income could possibly be earned from such expenses. 9. In response thereto, the assessee urged that there was no change in its stand. The principle objective of the company was to establish Gillette Business in India which meant that it was engaged in the same business as Gillette business USA. It was further stated that all its activities were for its own purpose in line with its objectives and all the expenses have been incurred wholly and exclusively for the purpose of assessee company s own bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity Amount Quantity Amount Quantity Amount Quantity Amount Gillette Diversified Operations Pvt. Ltd. 9760889 97608890 -1394413 -13944130 69292954 693766188 4882738 51250110 L. P. Pens Private Limited 120000 1200000 Hi Line Pens Private Limited 120000 1200000 Luxor Writing Instruments Pvt. ltd. 1193750 635600000 40625 10400000 -641875 -494320000 -53462047 Wilkinson Sword India Ltd. 2253607 95124652 20774040 873298440 -23027647 -968423092 Braun India Pvt. ltd. 500002 5000020 499999 5024990 -1000001 -10025010 Oral - B Labs. India Pvt. Ltd. 500020 5000200 499990 5024900 -1000010 -100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany s business without receiving any remuneration, let alone recovering the costs it incurs for doing that work. The AO concluded that it cannot be said that its expenditure is incurred for the purpose of its business solely. The AO was of the view that even when considering the assessee s submissions that it is doing its own business and should be assessed independently, it would be necessary to address which head of income, the assessee s income would fall under and what are the expenses pertaining to those heads of income. Admittedly, the assessee has used its fund in investing in joint venture and subsidiary companies and giving loans to these companies from its earning interest on the loans. The shares in these companies are not held as stock-in-trade and is claimed as investments. Considering the implications of section 57 and section 14A of the Act, he worked out the disallowance of Rs.2,98,99,503/-, observing as under :- As regards the quantum of expenditure, which can be considered for the purpose of earning the dividend income it would be fair to allocate the expenditure in the ratio of investments in shares and the amount given as loans and advances. Since transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the assessee claimed an expenditure of Rs.1,17,90,278/- in its P L account on account of legal and professional expenses. The AO observing the fact that the same had increased from 42,60,211/- rejected the explanation of the assessee. The explanation offered by the assessee was rejected who held that the expenses were incurred on behalf of Gillette USA. Specific attention was invited to page-9, 10, 11 12 of the assessment order, wherein the facts and submissions are considered. Referring to the same, it was reiterated that in furtherance of assessee s business, it had entered into a Joint Venture Agreement related to pen business in India with the Jain Group in 1996-97 assessment year and since the assessee is a 100% subsidiary of Gillette USA and Gillette USA had sold its Parker Pen Division to Newell Rubbermaid Incorporation. Consequently, the Joint Venture of the assessee with the Jain Group namely with JHPL Holdings Pvt. Ltd. had also to be necessarily exited and for exiting the same, it was urged that the record would show that non-compete charges to the tune of 13 US Million USD were paid to the Jain Group and the assessee was necessarily required to take l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it to pay and not in any other capacity then that of a trader. 12.1 In light of the above case law, the assessing authority has to consider the question of fact whether the expenditure incurred was in fact for the purpose of the business of the appellant. IN the facts of the case before me, I notice the following :- (i) The whole transaction for entering into a so called noncompete waiver agreement with the Jain Group was undertaken because Gillette USA sold its Parker Pen business along with worldwide rights. (ii) The entire sale proceeds of the business were retained by Gillette USA. (iii) The rights held by the Jain Group with regard to Parker Pens in India was a stumbling block in the transaction of the sale of the worldwide Parker Pen division. (iv) The non-compete waiver agreement was signed by Gillette USA. (v) The agreed amount of USD 15 million was paid by Gillette USA. 12.2 In light of these circumstances, I do not see any justification for the legal and related expenses towards this transaction to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had entered into pen business through Luxor Writing Instrument Ltd. (LWIL) with M/s JHPL Holding Ltd. (Jain Group). The Gillette USA Group as per record sold its Parker Pen division to Newell Rubbermaid Incorporation and as the assessee as 100% subsidiary of Gillette USA and not Gillette USA had entered into a Joint Venture Agreement with M/s JHPL (Jain Group) in Luxor Writing Instrument in India. Payment was made by Gillette USA to the Jain Group as non-corporate fee so that the sales transaction of Gillette USA is unhampered by litigation. Thus the record shows that JHPL received a certain specified sum of US dollars from the Gillette company USA. The record further shows that the assessee company along with its affiliate had 50% shareholding in LWIL and 50% shareholding is with the members of the Jain family. This joint venture agreements had been entered into in the year relevant to 1996-97 assessment year and was terminated in the year relevant to 2002-03 assessment year, the facts are found mentioned at pages 10-12 of the assessment order which also refer to the agreement dated 17.01.2001 between the Gillette company, a Delaware Corporation, USA together with its affili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity from Gillette Company USA. I have considered the submissions made by the assessee. However, a plain reading of the consent and waiver agreement reproduced above makes it crystal clear that M/s Gillette USA, the ultimate holding company of the assessee company was taking decisions on its behalf. If the argument of the AR is relied upon the M/s Gillette Company, USA had no business to sign the waiver agreement on behalf of the assessee company. If at all any agreement was to be signed it should have been by the assessee company because it was the assessee company which has entered into the joint venture agreement with M/s JHPL Holding Ltd., a Jain group company. Now I will briefly give the background in which the consent and waiver agreement was signed. As given in the consent and waiver agreement above, the joint venture, floated for the purpose of Parker pen business, could not have been terminated without the consent of either of the two parties. However it so happened that M/s Gillette Company USA sold the international Parker pen business to a third party. As it was violation of the joint venture agreement the Jain group wanted to take legal as well as internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing but the consent and waiver agreement signed by the Gillette Co., USA for protecting its worldwide business interest, the other expenses related to it cannot be business expense of the assessee company. With this discussion I hereby disallow a sum of Rs.36,91,125/- which is the total expense related to legal consultancy traveling and accommodation incurred in connection with sale of parker pen business by Gillette. 20. This action of the AO has been upheld by the CIT(A) and in the above arguments addressed in the course of the hearing, the LD. AR has pointed out no inaccuracy in appreciation of facts and has not been able to offer any arguments based on any facts as to show how this expenditure is relatable to the business interests of the assessee as admittedly being joint venture partner in LWIPL with 50% share holding along with its affiliates where the other 50% belonged to the Jain family wherein only Jain family was paid non-compete fee and the assessee being a partner in the joint venture was instead burdened with legal and travel costs which are in the business interests of the ultimate holding company i.e Gillette USA and not the assessee have not been addressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as advanced. 26. We have heard the rival submissions and perused the material available on record. On a careful consideration of the same, it is seen that issue is covered in favour of the assessee by virtue of the orders of the Tribunals in assessee s own case. Copy of these it is seen has been placed in the paper book at page no-25-34. A perusal of the same shows that the Coordinate Bench in the case of the assessee for 1997-98 1998-99 by a consolidated order in ITA Nos.-1957 1958/Del/2002 vide paras 6-8 (in 1997-98) and paras 12-14 (in 1998-99) assessment years have considered the issue and while doing so they decided the same in favour of the assessee. The relevant findings in the order dated 24.02.2006 is reproduced here under for ready reference:- Para 8 in ITA No-1957/Del/2002 for Assessment Year 1997-98 8. We have carefully considered the rival submissions. In our opinion, the learned Assessing Officer has completely misunderstood the provisions of section 43A that have been enacted to enable an assessee to claim additional liability incurred in relation to a capital expenditure on account of fluctuation in foreign exchange rates. From that it cannot be inf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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