TMI Blog2005 (1) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... tmental Representative. We are disposing them by this consolidated order for convenience. 3. The main dispute in these appeals pertains to the deduction claimed by the assessee-company on account of payments made to two companies, viz., Nestec Ltd. and Societe Des Produits, Nestle SA, hereinafter referred to as Nestec and SPN respectively. These two companies were 100 per cent subsidiary of Nestle SA, Switzerland. As to the shareholding of the assessee-company, i.e., M/s Nestle India Ltd., 51 per cent was held by two companies, namely, M/s Nestle SA and M/s Nestle Holding Ltd. Bahamas and 49 per cent by others including Indian public. The Nestle Holding Ltd. Bahamas was 100 per cent subsidiary of M/s Nestle S.A, Switzerland. The assessee-company has been making such payments to Nestec and SPN for last several assessment years and the deduction of the same as claimed by the assessee has been allowed in those assessment years. During the course of the assessment proceedings, for the asst. yr. 1997-98, the assessee claimed deduction of a sum of Rs. 47 crores under the head Royalty for technical assistance and the AO examined the claim of deduction in detail. He addressed a letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed questionnaire vide order-sheet entry dt. 29th Dec., 1999. He further directed that the technical persons in charge of each manufacturing unit should be produced in person for examination along with supporting documents/evidence for clarification in regard to payment of royalty for technical assistance. The assessee made its submissions dt. 7th Jan., 2000. Further, on 18th Jan., 2000, Mr. Donati, Managing Director, appeared along with Mr. J.M. Stoker, Executive Vice President (Technical), Shri B. Murli, Head of Legal and Company Secretary, Mr. Duggal, Head of Financial Control and Taxation and Shri S.K. Sharma, Manager (Taxation). Mr. J.M. Stoker made submissions regarding the technicalities of technical assistance and the written submission dt. 18th Jan., 2000, was also made. Subsequently, the assessee made the submissions vide letter dt. 1st Feb., 2000 and 15th Feb., 2000. While the learned AO has reproduced verbatim in the assessment order all requisitions and order sheet noting made by him, he has summarized the assessee's reply including letters dt. 6th Oct., 1999; 29th Nov., 1999; 24th Dec., 1999; 7th Jan., 2000; 18th Jan., 2000; 1st Feb., 2000 and 15th Feb., 2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts own interest as distinguished from the interest of the group. The assessee had entered into royalty agreement for the business of Soya based product but discontinued the same as the product was not found to be commercially viable. The payments were being made only for those products that were commercially successful in India and not all the products of Nestle Group. The assessee-company paid for tested technology. The technology being received by the assessee-company was proprietary and in terms of the agreements, complete confidentiality and secrecy had to be maintained. There was no question, therefore of any evaluation of royalty by an outside financial institution. The RBI was the nodal agency of Government of India for payment of royalty for technical assistance. In these matters discretion of the businessman was supreme unless the AO derived authority under s. 40A(2). The onus was on the Department to prove that because of the close connection between the payer and the payees, the excess payment had been made. Vide letter dt. 18th Jan., 2000, and during the personal hearing, Mr. J.M. Stoker, Executive Vice President (Technical) had made detailed submissions regarding the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Rs. 17.20 crores respectively against the turnover of Rs. 589.47 crores and Rs. 755.10 crores. For asst. yr. 1997-98, the payment of royalty was almost equal to the book profit. The learned AO further noted that the Agron Industrial Unit had shown a turnover of Rs. 166.81 crores, profit of Rs. 42.78 crores and royalty payment of Rs. 7.74 crores whereas for the Nanjangud Industrial Undertaking, the assessee showed the turnover of Rs. 144.71 crores, profit of Rs. 8.69 crores and payment of royalty Rs. 5.98 crores. Thus, the payment of royalty on the product-wise profit was not proportionate to the profit being generated in various units. In this background, the assessee was asked to file the complete working on the basis of which, the percentage of royalty payment for technical assistance was fixed up at the time of signing of the agreement. As huge amounts were being paid, the assessee-company was also asked to explain whether any annual evaluation of the payment of royalty was made keeping in view those aspects, the following queries were made : (a) The day/year when the product was started manufacturing in India. (b) The product-wise details of sale, profit, the quantum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ultimate analysis, the payment of royalty for technical assistance had to be viewed vis-a-vis the profit generated by the company because the main goal of a business venture remains profit at the top. 8. According to the learned AO, the payment of almost equal to book profit was nothing but an arrangement to transfer excessive profit to group/holding company. The course of business was so arranged that the business transacted between them produced the resident assessee-company less than the ordinary profits that might be expected to arise in the business. It was totally wrong to say that the payment of royalty for technical assistance approved by the Government of India could not for that reason be examined by the AO. The argument that the payment of royalty was in the interest of the assessee-company could not be accepted unless the working was provided. No working was done like what was the sale of each of the product and what was going to be the effect of technical assistance on the quality and consequent sale of such product finally on profit. It was pertinent to note that all the products on which the royalty for technical assistance was paid and agreement entered into ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the process of manufacturing was also routine. In view of the nature of such products and that too being produced by the assessee-company itself in India for many years, as early as 1960, suddenly entering into an agreement for technological assistance was for taking the advantage of guidelines issued in the form of Industrial Policy. The learned AO further argued that in the absence of details filed by the assessee, it was difficult to arrive at the correct amount which should be allowed as royalty for technical assistance. It was noticed that out of total sum of Rs. 47 crores, a sum of Rs. 20.72 crores had been paid only on coffee that had been under manufacture by the assessee-company since 1964. The learned AO did not see force in the contention of the assessee that over the years, the foreign collaborator of the assessee-company had evolved the improved technology of the process of breaking large molecules in coffee beans which resulted in greater solubility of compound and that the improved technology had been evolved for aroma recovery and handling in coffee process resulting into an enhanced taste profile. According to the AO, these technological advancement could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be pruned. (iii) That the royalties were linked not to profit but to sales. (iv) That the higher royalty payments were a device to siphon off parts of possible profits in the garb of royalty payments, thereby reducing the profits earned in India and also tax incidence in India. 11. According to the learned CIT(A), the above mentioned premises of the AO were not acceptable. The royalty payments were in terms of sales in the range of 3.5 per cent to 5 per cent against the Government's norms of 5 per cent to 8 per cent. The assessee's arguments that the profit is a derived figure which may be low, high or even negative whereas the sales figures are invariable and, therefore, the royalty is usually linked to sales were acceptable. Looking at the payments from the businessman point of view, it was difficult to see as to how the same could be considered as excessive. The learned AO had not applied any yardstick whereas measured against the Government norms of royalty payments the same appeared very reasonable. The learned CIT(A), therefore, deleted the disallowance of Rs. 15 crores made by the AO. Aggrieved by that order, the Revenue is in appeal before us. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Policy in 1991, the assessee submitted that the same was because the Government realized the importance of the Indian business availing the fruits of the technology developed internationally on an on-going basis. Hence, the restrictions over payment of royalty were removed. All the agreements were within the parameters of Industrial Policy. Reliance was placed on the Supreme Court judgment in the case of LIC vs. Escorts Ltd. Ors. (1986) 1 SCC 264 : 59 Comp Cas 548 (SC). The AO also filed the written comments before the learned CIT(A). It was pointed out that the royalty payment was more than 40 per cent of the profits on the products concerned. The learned AO recapitulated various contentions of the AO for asst. yr. 1997-98. 14. The learned CIT(A) confronted the assessee with the aforesaid report of the AO for the asst. yr. 1998-99. The assessee filed its rejoinder by way of letter dt. 4th Jan., 2002, and that has been reproduced in para 8 of the impugned order of the learned CIT(A) for the asst. yr. 1998-99. The assessee denied that during the course of the assessment proceedings for the asst. yr. 1997-98, the assessee had not furnished the details required by then AO. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs for the asst. yr. 1997-98, the assessee had given answers only in general terms to the queries of the AO. The assessee had not furnished the complete profile and balance sheet of two foreign companies to whom the royalty payments had been made. The nine agreements in question had been entered into by the assessee post liberalization in 1991 taking advantage of the fact that in place of specific approval an automatic route had been provided. It was, therefore, deliberate policy on behalf of the assessee-company to siphon away the profit in the liberalized atmosphere and processes in vogue in India after liberalization. For the asst. yr. 1988-89, the royalty payment was 2.5 per cent of the profit before tax. The same was 5.2 per cent in the asst. yr. 1991-92. But suddenly in the asst. yr. 1997-98 it was 78.37 per cent. Therefore, it was more than 3/4th of the profit. Even for the asst. yr. 1998-99, it was 49.94 per cent of the profit before tax. The assessee was throughout making its case on the low rate of royalty in terms of its turnover rather than connecting the same with its profitability. In the context of Transfer Pricing, the amendment had been made to ss. 92 to 92F. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Institutions. It was pointed out that the person who got 100 shares in the year 1970 at face value, it resulted into 3712 shares of the market value of Rs. 19 lakhs in addition to dividend of Rs. 2,66,563. The assessee-company was holding status of Star Trading House and its export turnover had increased to Rs. 292 crores in the asst. yr. 2001-02 from a level of Rs. 4.6 crores in the asst. yr. 1989-90. 18. In its reply dt. 13th Feb., 2002, the assessee-company strongly disputed the legal contention of the Department that the provisions of s. 40A(2)(b) are applicable. As to the approval granted by the RBI, the assessee contended that there was no difference between the approval by the RBI and that of Government of India. The AO failed to take any cognizance of CBDT Circular No. 6-P, dt. 6th July, 1968, where in para 75 it was clarified by the Board that when scale of remuneration of a director of a company has been approved by the Company Law Administration, there was no question of disallowance of any part thereof in the income-tax assessment. On the same basis, once the reduce payment of royalty was approved by RBI, the same should not have been questioned in the income-tax ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y payment was a global practice recognized by the Government of India. It could not be linked with the profits for obvious reason because profit depended on a host of other external factors beyond the control of service provider and scope of service agreements. The assessee reiterated para 9 of s. C of the submission dt. 23rd Nov., 2001. Royalty rates paid by group companies in comparable countries like China, Sri Lanka, Bangladesh were cited to support the royalty payment by the assessee-company. As to the assessee not furnishing the information, the assessee argued that the same were supplied whenever asked for. Particulars as to how the technologies were developed by the recipient company were irrelevant to the issue of allowability of royalty payment in the assessment of the assessee-company. The assessee took strong exception to the observations of the Addl. DIT that it was deliberate policy on the part of the company to siphon away the profits in liberalized atmosphere and that the assessee was trying to take undue advantage of liberal industrial policy of Government of India. The assessee also relied on the decision of the Tribunal, Pune in the case of Kinetic Honda Motors L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The learned CIT(A), therefore, concluded that all was not well with the claim of deduction of the assessee. The CIT(A), thereafter proceeded to compare the ratio between the turnover and net profit and payment of royalty on profit, which according to him, were as follows : Asst. yr. Turnover Total amount of royalty, tax and R D cess. Profit before tax (But after charge of royalty) Net profit ratio Royalty to net profit Rs. (crores) Rs. (crores) Rs. (crores) per cent per cent 2001-02 1781 62.2 215.9 12.12 28.83 2000-01 1551 54.4 170 10.98 31.99 1999-00 1569 56.7 130 8.31 43.46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 also but in that year the issue was not examined by the AO. There was no res judicata in income-tax proceedings. According to the learned CIT(A), it appeared as if the assessee was doing business not for itself but for the closely connected companies to whom the royalties for technical assistance had been paid. 23. The learned CIT(A) examined also the details of net profit ratio mentioning the position as follows : Asst. yr. Turnover Profit before tax (but after charge of royalty) Net profit ratio (1) (2) (3) (4=3/2100) 2001-02 17,813,662 2,159,694 12.12 % 2000-01 15,517,088 1,703,371 10.98 % 1999-00 15,699,637 1,305,309 8.31 % 1998-99 15,211,346 1,167,300 7.67 % 1997-98 12,530,188 5,99,765 4.79 % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uling reported in XYZ, In re (1998) 150 CTR (AAR) 504 : (1999) 235 ITR 565 (AAR). On p. 573, it had been held that the corporate veil was required to be lifted to see the real nature of the transaction. The learned CIT(A) also referred to the judgment of Hon'ble Supreme Court in the case of State of U.P. vs. Renusagar Power Co. (supra) to the effect that the doctrine of lifting corporate veil was expanding in the context of modern jurisprudence. 26. According to the learned CIT(A), enquiries were made with the Asst. Director, Enforcement Directorate and it was found that certain FERA violation by the assessee during the period 1994-95 was detected in relation to irregularity in the export of coffee by the assessee-company. Investigation revealed that while ostensibly the assessee-company had concluded contracts with several Russian companies for sale of coffee in Indian rupees, but the entire operation was actually controlled by Nestle World Trade Corporation, Switzerland, and that the same consignments were sold to other than LC opening parties. 27. The CIT(A) found that the reliance placed by the assessee on Industrial Policy of 1991 and judgment of the Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he alternative contention also and upheld the disallowance of Rs. 17 crores made by the AO for asst. yr. 1998-99. Aggrieved by that order, the assessee also is in appeal in ITA No. 2239/Del/2002. 29. At the outset, in the course of hearing of these appeals by us, the learned CIT (Departmental Representative) argued that there was an error on the part of the authorities below in describing the payments made by the assessee as 'royalty'. The fact of the matter was that the assessee paid technical assistance fee and not any royalty. He, therefore, requested certain time to be allowed to file additional grounds of appeal in this behalf for asst. yr. 1997-98. Subsequently, on 13th Aug., 2004, the following additional grounds of appeal were filed in relation to Revenue's appeal for asst. yr. 1997-98 : In the facts and circumstances of the case and law, the order of the leaned CIT(A) is perverse inasmuch as that, (a) He has deleted the disallowance made for the remuneration paid as fees for technical assistance, erroneously holding it as royalty payment for technical know-how. (b) The learned CIT(A) has ignored the material fact in the form of agreements for techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover of the assessee was Rs. 263 crores and profit before tax but after royalty amounted to Rs. 20 crores. The royalty was paid amounting to Rs. 0.51 crore only. The percentage of royalty to profit was only 2.53 per cent. However, for asst. yr. 1997-98, the assessee paid remuneration of Rs. 47 crores against the total turnover of Rs. 1,253 crores and profit before tax but after royalty amounting to Rs. 59.9 crores. The payment was equal to 78.37 per cent of net profit. For asst. yr. 1998-99, the figures were Rs. 1,521 crores, Rs. 58 crores and Rs. 116 crores, respectively and thus the payment was equal to 49.95 per cent of net profit. It was, therefore, essential to examine as to what the assessee had got for having parted with such a huge junk of its profit. This aspect of the issue assumed utmost importance when it was realized that the payees were none other than 100 per cent subsidiaries of Nestle SA, Switzerland, who owned 51 per cent of the share capital of the assessee-company. 32. The learned CIT (Departmental Representative) followed up his oral arguments by a written note. The AO had sought justification for payment of such huge amounts. Inter alia, the AO sought det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which could justify a payment of royalty of Rs. 20.72 crores. The profitability from coffee was found to be extremely low and it could not justify payment of a huge amount. Invoking s. 40A(2)(b), s. 92 of the IT Act, 1961, and the provisions contained under art. 9 of DTAA with Swiss Federation and the general law of the land that each expense must be for the benefit and for the purpose of the business, the AO on estimate disallowed a sum of Rs. 10 crores. Out of the balance amount of payments, the AO made an estimated disallowance of Rs. 5 crores in the absence of various details regarding various products, which were not filed by the assessee. The disallowance, apparently, was extremely reasonable. 34. The learned CIT(A) had deleted the disallowance by holding that the royalty payments amounted to 3.5 per cent on domestic sales and 5 per cent on export sales as against the norms fixed by Government of India which permitted payment of royalty up to 5 per cent on domestic sales and 8 per cent on export sales. The learned CIT(A) had also accepted the assessee's argument that royalty payments for technical know-how which went into the manufacture of products should be usually l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy transferred to the assessee-company by overseas associates was placed on record. 35. In such situation, the AO was fully justified in making a disallowance of Rs. 15 crores on account of excessive fees for technical assistance and the order of the learned CIT(A) deserved to be challenged. A second appeal was, therefore, filed. The learned CIT(A) had thus erred in law and on facts in deleting the disallowance made for remuneration paid as fees for technical assistance, erroneously holding it as royalty payment for technical know-how. The learned CIT(A) had also ignored the material fact in the form of agreements for technical assistance, which were on record and under which the payment had been made and had treated the entire payment a royalty for technical know-how. 36. The learned counsel for the assessee argued that the case of the Revenue was entirely uncalled for. He pointed out that for asst. yr. 1997-98 there were 7 agreements under which payments in question had been made. Thereafter, during the year on 29th Aug., 1996, 2 more agreements were made and accordingly there were 9 agreements in question for asst. yr. 1998-99. The assessee had received technical assistanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 208 (d) File with photograph, description and drawing of 'Lateral Injection Technology' for Coffee collected by Nestle India technical personnel in Indonesia 208 (e) Noodles, Pasta, etc. 209 (f) Nestle intranet as tool to be updated on latest technological developments including access to 'Production Technology Centres' sites 209 (g) Guidelines on Confectionery Sensory Evaluation for Chocolates 209 (h) Guidelines on Sensory Evaluation packing material including kit with samples of typical off flavours 209 (i) Continuous improvement tool box 209 (j) Environment 209 4B Coffee AO 236 to 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding kit with samples of typical off flavours (i) Continuous Improvement Tool box (j) Environment 5B Coffee CIT(A) 72 (These are already at pp. 205 to 273 in paper book of asst. yr. 1997-98 39. The learned counsel argued that voluminous evidences that the assessee produced before the AO as well as before the learned CIT(A) for asst. yr. 1998-99, does not find mention in their orders. He further stated that apart from the documents filed with the authorities as enlisted above, during the course of hearing before the AO and the learned CIT(A), a large number of files and folders pertaining to material received by way of technical assistance from the foreign companies had been produced. The assessee had received planeloads of material and documents by way of technical assistance from the foreign companies. The assessee could, therefore, produce only specimen files and folders and documents for the perusal of the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... witzerland as well as the assessee-company that only those products, which were of the highest quality, reached the consumers. Rigorous conditions were, therefore, imposed on the assessee-company. He pointed out that these agreements had various parts. Part A related to Manufacturing Licence . The assessee was granted license during the term of the agreement to use the know-how for the manufacture of the products. The learned counsel pointed out that the assessee was granted only license to use know-how for manufacture of the products, otherwise know-how always remained the property of the parent company. Without this license, the assessee could not produce or manufacture any product that utilized the know-how communicated by Nestle, SA, Switzerland. Clauses 11 and 12 of the agreement clearly laid down that know-how and any improvement or development thereto communicated to the assessee-company were and would at all times remain the property of foreign companies. The learned counsel emphasized that the assessee was in food products. For that reason and having regard to the extraordinary reputation and value of the brands, the assessee had to undergo exacting standards; therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the company, the same would have certainly impacted the share price of the company. The remuneration which the assessee paid to the parent company was not for any single purpose. The assessee got a bundle of benefits (i) Brand; (ii) know-how; (iii) Technical Up-gradation; (iv) Technical Supervision, and (v) Collaboration and Assistance. 43. Sec. 9 of FERA, 1973, required an approval of RBI for every payment of foreign exchange. Thus, one prestigious organ of Government of India had already looked into the quantum of remuneration with the anxiety of preserving precious foreign exchange of the country. The approval received by the assessee-company from RBI was a statutory approval. The parent company had been in this line of business for the last 135 years. Nescafe as a product grew and developed over a period of 60 years. In the beginning, it was 12 minutes coffee brew; today it is instant coffee with improved test profile. It was necessary for the assessee to receive continuous technical assistance. The AO did however, not appreciate the need of continuous assistance from the collaborator. He referred to p. 349 of the paper book and pointed out that during the year 1997, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing Instructions CP Control Procedures TM Technical Manuals LI (Lab Instructions) The learned counsel pointed out that there were several thousand GI, MI, CP, TM and LI and it was physically impossible to produce all of them in the office of the learned AO as well as CIT(A). For that reason, the assessee produced specimen or sample of instructions in various areas under each classification code. However, all the instructions were open to the AO for inspection and assessee requested the AO to visit its factory and office premises. The learned counsel pointed out that GI were divided under two main heads Company policies, strategies and standards which covered the areas : Personnel, Quality, Safety, Environment, Hygiene, Packaging, Operations Development, Agriculture, Regulatory and other. Under the head Systems , GI covered the areas of Factory Management, Production, Maintenance, Recipes and Environment. 46. Manufacturing Instructions were divided in 3 categories viz. Milk and Nutrition that covered Non-Concentrated Milk, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils, machine layouts and installation drawings, etc. The learned counsel enumerated the examples of drawings as given from pp. 473 to 485 of the paper book. 52. The learned counsel emphasized R D aspects of the technical assistance agreement. He pointed out that Nestle as a worldwide group had developed a unique technology in relation to the extraction process called MUCH process. This resulted in a better-finished product out of the same coffee beans. All the assistance, know-how, equipment design and specification, commissioning and post-commissioning assistance was given by Nestle. Also analytical methods and instructions for process control and analysis were provided. The learned counsel enumerated various instructions related to MUCH process at pp. 486 to 489 of the paper book. He further pointed out that Nestle company published an in-house periodical named Technical Communications . The purpose was to communicate to the managers of technical functions at head offices and factories of the Nestle group. The learned counsel referred to particulars of the publications as given at pp. 490 to 506 of the paper book. Further, the Nestle followed a system of transferring know-how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of new formulae and recipes; assistance for drawing and technical concept; procurement of raw materials and packing materials and reference to special sample analysis; details of visits made by technical personnel to various factories of Nestle India Ltd. in respect of each of the 9 agreements entered into by the assessee. The particulars of the same were indicated on pp. 600 to 645 of the paper book. 55. The learned counsel took us through the Directors' Report of Nestle India Ltd. dt. 26th March, 1992, 25th March, 1993, 19th March, 1997 and 24th April, 1998. He pointed out that technical assistance being received by the assessee-company was always in focus of the annual report submitted by the Board of Directors to the shareholders, financial institutions, creditors and the world at large. 56. The learned counsel emphasized the tremendous value of nutrition in the foods that form our daily diets. Therefore, the science and technology of food was being given high priority and nowhere that was more true than at Nestle who had been in the food business for 125 years. Through constant research and development, Nestle sought to improve the quality of food and thereby qual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant reduction in foreign exchange outflow through imported tinplate but also resulted in cost savings in excess of 35 per cent. 61. Reading from the annual report for the year 1996, the leaned counsel referred to continuous Business Excellence Common Application (BECA) Initiative. He pointed out that in a country as diverse as India, supply chain management was critical to rapid growth. The BECA concentrated heavily on streamlining and improving supply chain management. The major benefits included reduction in working capital through lower inventories of finished goods and material, better stock availability, reduction in obsolescence of materials. Further, the Moga Factory was chosen as a pilot plant and the Moga Improvement Team (MIT) was put in place. The team members comprising international experts from Nestle Technical Services (NESTEC) and local staff embarked on a programme in 1996 with the single-minded objective of optimizing production cost while enhancing product quality so as to make Nestle product even more competitive in the market place. The team identified the following areas for detailed study : 'Process improvement to ensure optimal usage of resource ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduced under the MAGGI brand-dosa and sambhar mixes, pickles and new varieties of soups. Expansion of manufacturing capacity of milkmaid dessert mixes was undertaken at Samalkha factory. A project for enhancement of manufacturing capacity for sweetened condensed milk was implemented at Moga factory. The technical operations at the company's largest factory at Moga and the sales and marketing operations in South India came under scrutiny by two separate international teams. 64. During 1997, Nestle's worldwide Process Improvement Programme was implemented. The assessee received know-how and assistance in the erection and commissioning of a factory at Bicholim, Goa. It was the third new factory commissioned during the last 5 years involving capital investment of over Rs. 350 crores. Technical expertise in various forms enabled the assessee-company to launch more new products during the last four years than had been done in last 30 years. Despite difficult market conditions the assessee succeeded to achieve its objective of doubling turnover every three years-from Rs. 716 crores in 1994 to Rs. 1,435 crores in 1997. At the end of 1997, the company's products were avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionally. The statutory accounts prepared in India are, on the other hand, based on the Indian Standards and hence the results of the two would always be subject to reconciliation. 66. The learned counsel for the assessee argued that all the agreements entered into by the assessee had approval from RBI. In addition, two agreements received approval from the Department of Industrial Development also. The assessee was regularly paying research and development cess levied by the Central Government. In the earlier assessment years, deduction as claimed by the assessee had been allowed. In these circumstances, the rule of consistency demanded that the AO should not have entertained any suspicion or doubt against the assessee's claim of deduction in the absence of even an iota of material pointing against the assessee's case. The argument of the AO that royalty paid during this year was disproportionately high was a lame excuse to rake up the settled issues. For this purpose, he applied the incorrect basis of profit during the year. He did not appreciate that expenditure on technical know-how and upgradation does not result into instant gains and takes some time to bear fruit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1995-96 751 17.00 11.89 83.40 14.26 11.11 1994-95 571 9.00 6.20 62.30 9.95 10.91 1993-94 523 7.90 5.30 54.20 9.78 10.36 1992-93 420 1.95 1.30 45.45 2.86 10.82 1991-92 334 1.51 1.01 30.41 3.32 9.10 1990-91 264 1.20 0.80 22.20 3.59 8.41 The learned counsel argued that the payments made during asst. yrs. 1997-98 and 1998-99 constituted only 34.89 per cent and 26.59 per cent of the profits during the year as against 78.37 per cent and 49.95 per cent wrongfully projected by the AO. Asst. yr. 1997-98 was par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the RBI may be questioned by an interested party in a proceeding under Art. 226 of the Constitution, on the ground that it was mala fide or that there was no application of the mind or that it was opposed to the national interest as contemplated by the Act, being in contradiction of the provisions of the Act and the rules, orders and directions issued under the Act : Once permission is granted by the RBI, ordinarily, it is not open to anyone to go behind the permission and seek to question it. The learned counsel for the assessee pointed out that the observations of the Hon'ble Supreme Court abovementioned have been noted in the order of Tribunal Mumbai Bench 'A', dt. 6th Sept., 2002 in ITA No. 2158/Mum/2000 in the case of the Bombay Burma Trading Corporation Ltd. and it was held that once permission is granted by RBI, ordinarily, it is not open to any one to question it and go behind the permission. The learned counsel of the assessee argued that the same issue was before Tribunal, Pune Bench in the case of Kinetic Honda Motors Ltd. (supra). In that case, the Tribunal held that the principle laid down in CBDT Circular dt. 6th July, 1968, that when payments are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Dy. CIT (1994) 50 TTJ (Ind) 375; Vikshara Trading Investment (P) Ltd. vs. Dy. CIT (1998) 61 TTJ (Ahd) 6; ITO vs. J.K.K. Textile Processing Mills (1985) 23 Taxman 27 (Mad)(Mag); Binit Corporation vs. ITO (1986) 24 TTJ (Ahd) 571 : (1986) 25 Taxman 238 (Ahd)(Mag) and Rangoon Chemical Works (P) Ltd. vs. Asstt. CIT (1998) 100 Taxman 163 (Ahd)(Mag). In addition, he placed reliance upon the High Court judgment reported in Pandit Bros. vs. CIT (1954) 26 ITR 159 (Punj) and Voltamp Transformers (P) Ltd. vs. CIT (1981) 23 CTR (Guj) 312 : (1981) 129 ITR 105 (Guj). The learned counsel argued that it was also trite law that an expenditure legitimately incurred by the assessee cannot be disallowed merely because the AO thought that the assessee could have managed by expending a lesser amount. Support in this respect was derived from the judgments reported in Sanjeevi Co. vs. CIT (1966) 62 ITR 156 (Mad); Amarjothi Pictures vs. CIT (1968) 69 ITR 755 (Mad); CIT vs. Turner Morrison Co. (P) Ltd. (1974) 93 ITR 385 (Cal); CIT vs. Vijayalakshmi Mills Ltd. (1974) 94 ITR 173 (Mad) and Jamshedpur Motor Accessories Stores vs. CIT (1974) 95 ITR 664 (Pat). The learned counsel argued that reasonablene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s than ordinary profits to the resident assessee in that business was entirely on the AO and such onus had not been discharged in the case of the assessee. The AO had not led any evidence/material which would show that the assessee would have paid lesser royalty to an unrelated party. The provider of the know-how or the assessee could not have known at the time of entering into the agreements in question as to what would be the quantum of sale or profit of the assessee in the ensuing years. In fact, the assessee discontinued manufacture of two products subsequently as the same were not profitable. In such a scenario, it could not be said that the course of the business was so arranged as to result in less than ordinary profit to the assessee. 70. The learned counsel argued that the learned AO once again misdirected himself when he invoked the provisions of art. 9 of the DTAA. That article of the DTAA between India and Switzerland was relevant for the purpose of determining the income of the non-resident liable to tax in India and had been wrongly invoked by the AO in the case of the assessee who was a resident Indian company. 71. The learned counsel argued that nothing much t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with profits had no basis and had vitiated the conclusion of the AO. 72. In his reply, the learned CIT (Departmental Representative) pointed out that the dispute insofar as it relates to asst. yr. 1997-98 is academic. The AO completed the assessment under s. 143(3) and determined total income after making an addition of Rs. 15 crores on account of part disallowance of royalty. However, he found that the total income thus computed was lower than income under s. 115JA as per the return filed by the assessee himself at Rs. 17,99,29,538. The AO, therefore, completed assessment under s. 115JA at Rs. 17,99,29,540 exactly at the same figure as returned by the assessee. The learned CIT (Departmental Representative), therefore, argued that the CIT(A) erred in admitting the assessee's appeal for asst. yr. 1997-98 because disputed demand was nil. 73. The learned CIT (Departmental Representative) argued that the AO was anxious to know the basis on which quantum of royalty was determined. However, the assessee kept on giving long-winded submissions. By not going to the assessee's factory, the conclusions of the AO were not rendered invalid or insignificant. The provisions of IT Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see only furnished generalised statements. 76. The learned CIT (Departmental Representative) argued that over the course of time, there was substantial increase in turnover. The increased turnover was required to result into increased revenue as well. That did not happen. In percentage terms, the assessee was losing. There was not much force in the contention that royalty at the same rate was being charged in other countries, such as Malaysia. Malaysia was not comparable because the products had not fully established there. 77. The learned CIT (Departmental Representative) argued that the assessee found a lame excuse in confidentiality clauses of the agreements. Those clauses did not apply to the AO or a Government for that matter. The assessee was under obligation to reveal everything. The AO was anxious to know what technology upgrades the assessee had received during the previous year under assessment. R D being carried out in Switzerland hardly had any connection. What material was produced to show that benefited India. Whatever had come to the assessee was not shown to the AO. R D Cess Act, 1986, did not prove assessee's case. It was R D cess in name only as it was l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument that there was no such procedure laid down in the Act was lame excuse. IT Act specifically provided for site visit, even despite the unwillingness or reluctance of the site owner, by way of the provisions of s. 133A. The assessee had in a bona fide manner requested the AO to visit its office and factory premises. The AO insisted upon production of everything related to services received by the assessee under various agreements. There was planeload of material that the assessee had received by way of technical assistance from Switzerland and elsewhere in terms of the agreement. The AO if he genuinely was interested in looking into such material should have readily accepted the assessee's offer. The learned counsel referred to the judgments reported in Webbing Belting Factory (P) Ltd. vs. CIT (1961) 43 ITR 234 (Punj) and United Nilgiri Tea Estates Co. Ltd. vs. State of Tamil Nadu (1991) 191 ITR 397 (Mad) at p. 401. He also referred to Tribunal decisions reported in 47 ITD 441 (sic), Puransingh M. Verma Anr. vs. ITO (2001) 72 TTJ (Ahd)(TM) 399 : (2001) 78 ITD 277 (Ahd)(TM) and ITO vs. Kanchanlal Manchharam (1988) 32 TTJ (Ahd)(TM) 38 : (1989) 28 ITD 1 (Ahd)(TM). 84. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the evaluation of cost of technical assistance to the assessee were not the information of the assessee but the foreign companies. The AO was calling for extraneous material beyond the control of the assessee, hence no adverse inference could be drawn against the assessee. The assessee did not challenge the power of State but expressed its inability to produce the information not belonging to the assessee. Nucleolus of research assistance, quality of technology and its impact on the assessee's business had been graphically established in the material the assessee produced. From meager investment of Rs. 100 in the share of Nestle, an Indian shareholder came to own Rs. 19,000 in the span of 20 years. How could it be said that the assessee was not benefited by technical assistance. Revenue's case was based entirely on refusing to believe, no matter the evidence. The AO simply ignored mass of evidence produced before him but on his part he did not bring even an iota of material to rebut the evidence. The AO invoked every possible provision. Sec. 40A(2)(b), s. 92, art. 9 of DTAA without noticing that under all these provisions the burden of proof was on the AO himself and not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r mainly on the basis of the findings and reasoning of the AO for asst. yr. 1997-98. The learned CIT(A) entertained, in addition to the report of the AO, a report also from the previous incumbent who was then working as Addl. DIT (Inv.) on the ground that he was the officer who had framed the assessment order for asst. yr. 1997-98. We are, therefore, of the view that, academic or not academic, the assessment order for asst. yr. 1997-98 has to be kept in view while deciding the assessee's appeal for asst. yr. 1998-99. Hence, now that matter for asst. yr. 1997-98 has travelled unto us, we may as well deal with Revenue's appeal for asst. yr. 1997-98, for whatever impact, our order in relation to that assessment year may have. 90. On perusal of the assessment order for asst. yr. 1997-98 that has formed the bedrock of the assessment order for asst. yr. 1998-99, we find that the learned AO has made part disallowance of the assessee's claim of deduction on account of agreements with SPN on the following grounds : (a) The assessee refrained from furnishing to the AO the full details as asked for and thus not allowing the AO to examine in depth the correctness or otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply and the submissions in one single para 10 of the assessment order. The learned AO has charged the assessee also for not establishing the commercial expediency. During the course of hearing before us, while the learned CIT-Departmental Representative stoutly emphasized this allegation, the learned counsel for the assessee, with equal vehemence, relied upon the voluminous evidence, material and record filed/produced before the AO during the course of the assessment proceedings for asst. yr. 1997-98. We find that in the assessment order for asst. yr. 1997-98, the learned AO has spelt out in para 22, various queries that according to him were not compiled with by the assessee. We have reproduced the same in para 6 of this order. The learned counsel for the assessee has painstakingly taken us through the letters from the assessee and other evidence, material and record produced during the course of assessment proceedings for asst. yrs. 1997-98 and 1998-99 and the same have been enumerated by us from paras 37 to 65 of this order. On consideration, we find that by and large, the assessee furnished almost entire information, material and evidence as was asked for by the AO. In addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arguments were made in relation to the applicability or otherwise of the provisions of s. 40A(2)(b)/s. 927/art. 9 of DTAA, etc. For the purpose of this order, we do not wish to go into the finer technical points relating to these legal provisions. In our view, in the absence of any specific material, evidence or information, the entire exercise undertaken by the AO could have been tempered if due importance was attached by him to the fact that the RBI approvals had been granted in respect of each one of the nine agreements. We see ample authority for the submissions made by the assessee's counsel in this respect as enumerated by us in para 67 of this order. After consideration, we reject the contention that the adverse inference was correctly drawn against the assessee on account of alleged non-compliance to various requisitions of the AO during the course of the assessment proceedings for asst. yr. 1997-98. 93. We now address ourselves to the question whether the assessee has discharged the initial onus that lay upon him to substantiate its claim of deduction. We may state that irrespective of the question whether the provisions of s. 40A(2)(b) or s. 92 or art. 9 of DTAA co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company. The learned AO has argued in the assessment order for asst. yr. 1997-98 that from the very fact that no evaluation and analysis of technical assistance had been made at the time of entering into agreements and subsequently to determine the impact of technical assistance on the business of the company, it was clear that these agreements had been entered into with the sole object of diverting profit of the assessee-company. In this context, the learned AO even asked the assessee to produce a certificate from an independent technical agency that the payments were commensurate to actual services received. Besides, both the learned AO in the assessment proceedings for the asst. yr. 1997-98 and the learned CIT(A) in the order for the asst. yr. 1998-99 emphasised that the assessee was already well established and well versed in the business of products in question, and was not new to the business of manufacture and sale of those products and, therefore, the assessee could not by any stretch of imagination be considered to need further technical assistance of the magnitude so as to part with a substantial chunk of its business profit. 95. The authorities below in their orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t company and its subsidiaries. The assessee had been given a right to use only that technology for manufacture and sale of products under the parent company's brand name. The technology was highly sensitive and confidential and, therefore, in every agreement, the assessee was bound by confidentiality clause. In such circumstances, to invite an independent agency for evaluation and certification as desired by the AO was unthinkable. As to the basis on which, the quantum of remuneration for technology assistance was fixed, the learned counsel argued that at the time of entering into the agreement, it was not possible to predict accurately the amount of remuneration to be paid to technical assistance providers. That depended on the success of the product launched and actual working of the project in India and subject to several imponderables. It was for that reason that there was no specific working made at the time of entering into agreements in question and insistence of the learned AO on production of the same was not justified. The assessee as well as the technical assistance providers were in the line of business and had experience for a long time and based on their experien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had access to all the required technology available with the parent company not only in respect of manufacturing but also in various other fields like quality control, personnel, staff management, marketing, storage and so on. The kind of technical assistance received by the assessee was of such nature as to sustain its position as number one manufacturer in India in respect of the products being manufactured by it. During the course of hearing before us, the learned counsel for the assessee has given several examples of major technological advancements that had taken place in the area of the assessee's products. He explained to us in detail the major changes that took place in the field of coffee manufacturing and state of art technology that allowed to capture the aroma of fresh coffee in the products of the assessee. The learned counsel dwelt at length on the unique technology in relation to extraction process called MUCH process resulting into better-finished product from the same coffee beans. He made reference to the changes in the manufacturing process of weaning foods that ensured bio availability of carbohydrates through the process of Enzymation to provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icion, howsoever strong, cannot take the place of material/evidence. We, therefore, hold that the disallowance of the assessee's claim of deduction on account of remuneration paid for technical assistance is not called for in both the asst. yrs. 1997-98 and 1998-99. We direct accordingly. 97. In the cross-objection, the assessee has disputed the disallowance of provision of pension amounting to Rs. 85,13,668. We find that during the course of hearing before the learned CIT(A), the assessee did not raise any ground of appeal in this regard. Be that as it may, we find that eventually the assessee has been charged tax under s. 115JA only. We, therefore, decline to consider this issue. The same applies to the assessee's cross-objection relating to the disallowance of club fee amounting to Rs. 11,805 as entertainment expenditure. 98. In the assessee's appeal for asst. yr. 1998-99, the ground of appeal No. 2 is the alternative contention of the assessee that corresponding increase in the claim of the assessee of deduction under s. 80HH may be given to the extent the disallowance out of royalty in respect of coffee is sustained. As we have deleted this disallowance entir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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