COMMISSIONER OF INCOME TAX Vs. EKL APPLIANCES LTD

JUDGEMENT

(1.) In these appeals filed under Section 260A of the Income Tax Act, 1961 ("Act", for short) the Commissioner of Income Tax challenges the common order passed by the Income Tax Appellate Tribunal ("Tribunal", for short) on 11.02.2011 for the assessment years 2002-03 and 2003-04.

(2.) The appeals arise this way. The assessee is a public limited company engaged in the business of manufacturing of refrigerators, washing machines, compressor and spares thereof and also trading all these items and microwaive ovens, dish washers, cooking ranges, air conditioners and spares thereof. In respect of the assessment years 2002-03 and 2003-04, it filed returns of income declaring losses amounting to Rs. 148,23,80,117/- and Rs. 1,14,59,660/- respectively. The Assessing Officer noticed that there were international transactions entered into by the assessee during the relevant previous years and accordingly invoked the provisions of Section 92CA(3) of the Act and referred the question of determination of the Arms Length Price ("ALP", for short) to the Transfer Pricing Officer ("TPO", for short). The TPO examined the matter in considerable detail and noticed that AB Electrolux, Sweden held 76% of the assessee's equity as on 31.03.2002 and out of the balance, 26% was held by the local joint venture partners and the balance 18% was held by the public. He noted that the turnover of the assessee for the assessment year 2003-04 amounted to Rs. 440.97 crores including trading sales of Rs. 48.29 crores pertaining to goods partly imported from the associated enterprises and also purchased locally. The major international transactions undertaken by the assessee were also noticed by him and he has listed the same at page 2 of the order passed by him on 20.03.2006 under Section 92CA (3) of the Act. It is noticed from the order that there are 13 types of international transactions entered into by the assessee in the previous relevant year 2003-04. The TPO accepted all of them to be Arm's Length Transactions, except the payment of brand fee/ royalty of Rs. 3,42,97,940/-. The corresponding figure for the assessment year 2002-03 is Rs. 3,99,51,000/-. We may clarify that the revenue has filed before us the order passed by the TPO for the assessment year 2003-04 on 20.03.2006, but the order passed by the TPO for assessment year 2002-03 has not been made available. This, however, is not material because it is common ground that the facts and the controversy arising in both the assessment years are the same so far as the ALP is concerned. Reverting to the order of the TPO, he considered the payment of brand fee/ royalty by the assessee to the associated enterprise namely AB Electrolux, Sweden under an agreement dated 01.10.1998 to be unjustified.

(3.) It is necessary to narrate the order of the TPO on this aspect in some detail in order to appreciate the precise controversy. We have already noted that the brand fee payment was made under an agreement dated 01.10.1998. The assessee was to pay brand fee at the rate of 0.50% of the net sales under the brand name of "Kelvinator". The payment was to be made to M/s. White Consolidated Inc. of Ohio, USA. However, the payment of the fee was waived till 01.01.2002 as advertising and launch support. On 27.09.2002, the agreement was modified to give effect to the new name of M/s. White Consolidated INC. It was thereafter known as Electrolux Home Products INC. The modified agreement also recognized the amalgamation of Electrolux Voltas Pvt. Ltd. with Electrolux Kelvinator Ltd. Another change made in the agreement was to change the brand fee to 1% of the net sales. The agreement was to remain in force till 31.12.2008. It was under this agreement that the assessee paid Rs. 3,42,97,910/- as brand fee for the assessment year 2003-04 and Rs. 3,99,51,000/- for the assessment year 2002-03.