TMI Blog2011 (8) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1997-98 after recording that the shares of the assessee were held by six (6) entities goes on to observe that the assessee "became a subsidiary of Shaw Wallace Group of Companies" - There is no finding recorded by the Assessing Officer that SWCL had acquired substantial interest i.e., 20 per cent or more of the share capital with attending voting rights, whether directly or beneficially - If that is so, then the provisions of section 40A(2)(a) could not have got triggered - Further, CIT(A) records that six (6) individuals held ten (10) shares each in the assessee while, one gentleman by the name of Mr. Suraj P. Gupta held 8,61,610 shares who was neither an employee of the assessee and nor was any payment made to Mr. Suraj P. Gupta or his relative or to a company of which he was a Director - Held that:-payments had not been made to persons specified under section 40A(2)(b) and therefore, the provisions of section 40A(2) were not applicable. - 594 AND 646 OF 2005 AND 559 OF 2006 - - - Dated:- 19-8-2011 - SANJAY KISHAN KAUL, RAJIV SHAKDHER, JJ. Ms. Rashmi Chopra for the Appellant. Ajay Vohra, Ms. Kavita Jha and Somnath Shukla for the Respondent. JUDGMENT Rajiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f IMFL products. The sample spirit shall be in accordance with the specifications and tolerances given in Appendix 'A'. 2.2 The UNIT shall procure spirit in such form as may be agreed to by Shaw Wallace in conformity with the sample, specifications and tolerances in such quantities as may be required for the purpose of utilizing the same for the manufacture of IMFL products. 2.3 Unless otherwise agreed in writing the 'spirit' shall mean manufactured and distilled out of raw materials molasses. 2.4, 2.5 and 2.7** ** ** 3. Manufacture/Bottling of IMFL 3.1 The UNIT hereby undertakes to manufacture different brands of IMFL, which Shaw Wallace may specify taking into account the market condition from time to time. 3.2** ** ** 3.3 Unless otherwise agreed to in writing the IMFL products shall be supplied and delivered to the purchasers in bottles sealed, labelled and packed in cartons. 3.4 and 3.5** ** ** 3.6 The packing material shall be as per the specifications of Shaw Wallace as regards size, shape, design, quality etc. Such packing materials shall also conform to the statutory regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arranged by Shaw Wallace or the persons designated by Shaw Wallace for purchase of IMFL products. The import permits shall be sent to the UNIT along with the indents with full particulars of the type of products to be dispatched by the UNIT and the place, date and mode of such dispatch. 4.5** ** ** 5.** ** ** 6. Trade Marks and Marketing 6.1 The trade marks, brand names, design and the get up in which the IMFL products will be sold, supplied and delivered by the UNIT and in particular and not limited to those listed in APPENDIX 'C' hereto shall always be the sole property of Shaw Wallace or its associate or related companies as the case may be. 6.2 The UNIT hereby acknowledges and accepts that the UNIT never had nor has any right title or interest therein and shall not at any time claim any right whatsoever to the use of the labels, brand names, trade marks and or get up of the IMFL products belonging to Shaw Wallace or to the nominees associates of Shaw Wallace except under written permission from Shaw Wallace. 6.3 Shaw Wallace hereby authorizes the UNIT as a licensee, under a separate agreement to manufacture, process pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall cease to be a licensee or registered user of the trade marks or brand names of Shaw Wallace and shall not have any right to use such trademarks or brand names thereafter. The UNIT agrees to cease and desist forthwith from using the said trade marks, brand names, get up of Shaw Wallace and or any similar trademarks upon termination of this agreement for any reasons whatsoever in respect of the goods of Shaw Wallace or goods of the same description or any other goods.. 8.4** ** ** 9. and 10.** ** ** 11. Assigment The UNIT shall not assign subject or part with the rights and obligations under this Agreement which are personal to the UNIT provided however Shaw Wallace may at any time designate any of its subsidiary company to undertake the work under this Agreement and be the beneficiary of the terms and conditions of this agreement." [Emphasis supplied] 4. At this stage it may also be relevant to note that insofar as the provision for consideration payable under the said agreement is concerned, the details are largely provided in appendix 'D'. The relevant portion of appendix 'D' reads as follows : "Consideration 1. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness inasmuch as it had produced 61634 cases of IMFL as against 621 cases in the earlier year. The assessee went on to suggest that under the said agreement, SWCL provided brand names, sample of spirits, labels, arranged supply of raw-materials and sale through a chain of its customer, which proved beneficial to the assessee. Consequently, the assessee debited in its accounts the amount of royalty paid to SWCL in consonance with the said agreement. The assessee submitted that the amount paid was expended wholly and exclusively for its own business and hence, the expenditure incurred deserved to be allowed fully. 7. The Assessing Officer, however, disagreed with the explanation rendered by the assessee as according to him, this was a case of 'transfer of income' having been undertaken by employing a device of setting up a separate entity. The Assessing Officer came to the conclusion that the day-to-day management and control of the assessee company lay with the Shaw Wallace Group. The fact that the Shaw Wallace Group held majority shares in the assessee was not even disclosed in the audit report or, notes to the accounts or even in the tax audit report, and that, this fact emerge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 40A(2) and section 35A of the Income-tax Act. In so far as the provisions of section 40A(2) are concerned the CIT(A) adverted to the following : "The appellant's case is covered under clause (iv) of sub-section (b) where a company having a substantial interest in the business or profession of the assessee is covered for this purpose. The substantial interest is also defined in the Explanation thereto. According to this if a company has 20 per cent of the voting power or more it is said to have a substantial interest. The Assessing Officer has already pointed out that the majority share holding is by the SW which has not been contravened. The ld. AR further submitted that the employees of SW have the controlling share holding. Therefore, the payment of royalty to SW is covered under section 40A(2) and it has to be seen whether the payment is excessive or unreasonable." 8.1 In conjunction with the above, the CIT(A) took note of the difference in bottling charges paid to Balbir Distilleries Ltd., as against that which was paid to the assessee. The CIT(A) sustained the findings of the Assessing Officer that this was a case of transfer pricing. Accordingly, he di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee did not acquire any asset of enduring nature; the expenditure incurred by way of royalty was for the purposes of business and hence, in the nature of revenue expenditure. A particular reference was made to the fact that expenditure was incurred by the assessee not only for use of trademark but also towards services rendered by SWCL, in connection with, quality control of "sample of spirit" provided to it, purchase of raw materials, packing materials and in obtaining import permits, etc. 11. Insofar as the second aspect is concerned, i.e., whether the payments were hit under section 40A(2) of the Income-tax Act, the CIT(A) returned the following finding of fact while disagreeing with the view taken by the CIT(A)-XIV, New Delhi vide his order dated 20-2-2001 pertaining to assessment year 1997-98 : "The second issue relates to the applicability of provisions of section 40A(2). The equity capital of the appellant company as on 31-3-1997 was held by the following investment companies and individuals and number of shares held by them are indicated against their names : ( i ) Alaknanda Manufacturing and Finance Ltd. 5,18,800 ( ii ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 per cent shares. Therefore, the provisions of section 40A(2) will not be applicable to the facts of the instance case. The Assessing Officer has not brought any material on record to justify his conclusion as to how the provisions of section 40A(2) will be applicable .. [Emphasis supplied] 5.4 . . . In the instant case, the payment has not been made to the specified persons under section 40A(2)(b) and therefore, provisions of section 40A(2) are not applicable. Since provisions of section 40A(2)(b) are not applicable, the question for estimating excessive amount of expenditure does not arise though the appellant has given explanation for differential rate of payment of bottling charges to the Balbir Industries ." [Emphasis supplied] Assessment year 1999-2000 12. The Assessing Officer noticed a sum of Rs. 10,20,35,544 had been debited to the profit and loss account as payments made on account of royalty to SWCL. The Assessing Officer more or less adopted the view taken in the assessment year 1997-98 and came to the conclusion that the assessee had along with SWCL put in place the present arrangement only to transfer profits. The Assessing Officer in the net result allowed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale turnover as well as the profitability of the assessee had increased pursuant to the operability of the said agreement. In the opinion of the Tribunal the payments made to SWCL in the form of royalty was for use of technical know-how and experience of SWCL. The assessee not having acquired any asset of enduring nature the payment could not be termed as a capital expenditure. In the background of these findings, the Tribunal held that the Assessing Officer was not justified in applying the provisions of section 35A of the Income-tax Act. 15. Insofar as the applicability of the provisions of section 40A(2) of the Income-tax Act was concerned, the Tribunal was of the view that the Assessing Officer had failed to bring any evidence on record that SWCL held majority shares in the assessee. In this connection the Tribunal also noticed that the revenue was obliged to show that SWCL either held 20 per cent or more of the shares (including right to receive dividend) or 20 per cent or more of the voting rights in the assessee. The Tribunal deprecated the approach adopted by the Assessing Officer, which according to it, was not backed by cogent findings that SWCL had a substantial int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders passed by the Assessing Officers in the concerned assessment years. More specifically, Ms. Rashmi Chora argued, based on the terms and conditions contained in the said agreement that the assessee had acquired right to use the brands and the trademarks referred to in Appendix 'C' of the said agreement, and hence the payments made SWCL towards royalty were in the nature of capital expenditure. It was the contention of Ms. Rashmi Chopra that in clause 6.3 of the agreement there is a reference to a separate agreement; an agreement which the assessee did not supply and hence, an adverse inference ought to be drawn against the assessee. To buttress her contention that the payments made for use of trademark and brand names were in the nature of capital expenditure, reliance was placed on the observations made by this court in CIT v. J.K. Synthetics Ltd. [2009] 309 ITR 371/176 Taxman 355 in paragraph 58 at page 414. 17.2 Insofar as the invocation of provisions of section 40A(2) was concerned, Ms. Rashmi Chopra submitted that the Assessing Officer had noticed in paragraph 2 of his order dated 27-3-2000, passed in respect of assessment year 1997-98, that shares in the assessee had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. 19. Mr. Vohra, who appeared on behalf of the assessee submitted that the provisions of section 35A of the Income-tax Act were not attracted since there was neither acquisition of a patent nor any copyright. It was learned counsel's submission that the assessee had acquired, if at all, only the use of trademarks and brand names of SWCL. He further submitted that in any event, the expenditure incurred, in the form of royalty paid to SWCL was in the nature of revenue expenditure and therefore, even on this ground the provisions of section 35A of the Income-tax Act were not attracted. On the other aspect as to whether the expenditure incurred by the assessee by way of royalty was excessive or unreasonable, having regard to the fair market value of the goods in issue, it was the learned counsel's say that in order to attract the provisions of the said section, the conditionalities provided therein had to be fulfilled. 19.1 Mr. Vohra submitted that ordinarily expenses incurred by the assessee in connection with his business or profession had to be allowed notwithstanding the alleged imprudence of such expenditure from the point of view of the Assessing Officer. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contrary stands taken by the revenue, in respect of the nature of the expenditure involved. The revenue was required to first determine the nature of the expenditure and then assess for itself the relevant provisions which ought to have been invoked if at all to deny the deduction claimed by the assessee. The revenue on the other hand has tried to straddle two boats at the same time. In this regard, the Assessing Officer in the assessment year 1997-98 while observing that the expenditure incurred by the assessee towards royalty was hit by the provisions of section 40A(2)(a), went on to ultimately disallow 13/14th part of the expenditure incurred, in the said assessment year, by taking recourse to section 35A of the Act. The CIT(A) in the said assessment year i.e., assessment year 1997-98 bifurcated the disallowance by invoking both the provisions, that is, section 40A(2)(a) and section 35A. The result was that the disallowances crystallized by the CIT(A) was higher than that which had been made by the Assessing Officer. 21. In the subsequent assessment years (i.e., 1998-99 and 1999-2000) the Assessing Officer and in assessment year 1999-2000 has ultimately disallowed a part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e attendant circumstances, such as : (a) the tenure of the licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the license to third parties without the consent of the licensor, (d) whether the licence transfers the "fruits of research" of the licensor, "once for all", (e) whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which "access" to knowledge was obtained during the subsistence of the licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the license for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. Ms. Rashmi Chopra was unable to refer to any such ground. It is quite evident that the Revenue took the stand, though erroneously, that royalty paid on use of brand names and trade marks would classify the expenditure as one made on capital account. 23. This brings us to the issue as to whether the Assessing Officer could have invoked the provisions of section 40A(2)(a) of the Act in the facts and circumstances of the present case. As is noticed in the earlier part of our judgment, the Assessing Officer in the assessment year 1997-98 after recording that the shares of the assessee were held by six (6) entities goes on to observe that the assessee "became a subsidiary of Shaw Wallace Group of Companies". There is no finding recorded by the Assessing Officer that SWCL had acquired substantial interest i.e., 20 per cent or more of the share capital with attending voting rights, whether directly or beneficially. If that is so, then the provisions of section 40A(2)(a) could not have got triggered. It is noticed that the CIT(A) in the assessment year 1998-99 has returned a finding that there were five (5) limited companies apart from two (2) individuals who held shares in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
