9911796707
TMI Blog2007 (4) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had claimed to have paid the royalty @ 3.5 per cent on domestic sales and 5 per cent on export sales net of taxes and by including the tax of 20 per cent and cess of 5 per cent, the payment of technical fee/royalty on domestic sale becomes 4.41 per cent and on export sale becomes 6.3 per cent. In respect of same payments the assessee had entered into 7 agreements starting from 4th Feb., 1992 to 29th Aug., 1998 as per product-wise details. The AO mentioned that copy of agreement given by the assessee would reflect that the company had paid for the following three services to be rendered by the two companies: 1. Licence to manufacture/pack/sell food product; 2. To provide process and know-how; 3. Continuous assistance and upgradation of technology. 3. The AO asked the assessee to justify payment of royalty or technical fee giving details of exact services rendered by these non-resident companies in support of royalty/fee payment claimed within the provisions of s. 92, in view of the fact that SPN and Nestec are subsidiaries of Nestle, Switzerland holding substantial interest in appellant company. It was explained by the assessee that these agreements were duly app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to net profit has gone very high which has reached to 78.37 per cent. In the asst. yr. 1997-98 it is 78.37 per cent but in the asst. yr. 1998-99 its 49.95 per cent and in the year under consideration i.e., 1999-2000 it is 43.46 per cent. Therefore, the moot question is whether the assessee company is paying royalty for commercial consideration or not and whether such huge payment is justified to the parent company on the basis of commercial expediency? Nestle SA is having 51 per cent share ratio in the company and the dividend is being paid for such investment. Any payment under s. 37 will be allowed only on the basis of commercial expediency of the company. He has further observed that in the case of Jaipur Electro (P) Ltd vs. CIT (1996) 134 CTR (Raj) 237 : (1997) 223 ITR 535 (Raj) it has been held that doctrine that the businessman as the best judge of business expediency does not affect the right, nay duty of the AO to know whether it was meant for business purposes and not for extraneous consideration. In the case of Siddho Mal & Sons vs. CIT (1980) 122 ITR 839 (Del) it has been held that such a point of view has to be prudent and reasonable point of view which is free from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany had less than the ordinary profits. The conditions as laid down in s. 92 of the IT Act are fully satisfied in this case. He has further mentioned that the above facts were also examined by his predecessor in asst. yr. 1998-99 in Appeal No. 30/2001-02 vide order dt. 21st Feb., 2002 and he is in agreement with him for applicability of s. 92 of the IT Act and who on the issue decided that the payment of royalty is excessive considering the commercial business expediency. He has further mentioned that the reliance on the case of Kinetic Honda Motor Ltd. vs. Jt. CIT (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune) is of no help as the facts are different in the present case. He has further mentioned that the case of Dy. CIT vs. Nabulls Chemicals Ltd. relied upon by the assessee is also distinguishable from the assessee's case. The CIT(A) has further mentioned that it is also to be ascertained as to how much excessive payment was made by the appellant within the meaning of s. 37 or s. 92 of the IT Act. From the reply of the assessee it is clear that 13 products were already existing with the appellant company prior to signing up of these agreements whereas 6 products were in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in addition to the report of the AO, a report also from the previous incumbent who was then working as Addl. Director of IT (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 non-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 the 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 of the assessee's claim of deduction. (b) The assessee not furnishing the material/evidence in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 the asst. yr. 1997-98, the learned AO has spelt out in para 22, various queries that according to him were not complied 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, the assessee also furnished plenty of material giving the AO for asst. yrs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of s. 40A(2)(b)/s. 92/art. 9 of DTAA, etc. For the purpose of his 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 tampered 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 could be invoked or not in this case, it is quite clear that the burden to prove under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 and the learned CIT-Departmental Representative in his arguments before us have relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 experience and perception, by mutual discussion, the rate of remuneration was fixed. It was not possibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provide higher nutrition in meals and enhanced digestibility. These were just a few examples from out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 6. Since the facts and circumstances of the instant case are identical to that for asst. yrs. 1997-98 and 1998-99, we, concurring with the above said decision of the Tribunal hold that the disallowance of royalty payments made by the AO and confirmed by the learned CIT(A) was not justified. We, therefore, direct to delete the same. 7. The second ground of appeal states that on the facts and in the circumstances of the case and in law the CIT(A) erred in holding that UPS which are attached to computers and form an integral part of the whole computer system cannot be categorized as computer, for the purpose of depreciation under s. 32 of the Act. 8. Briefly stated facts are that during the year the assessee had claimed depreciation on UPS @ 60 per cent treating it as part of computer. But the AO asked the AO to justify the higher claim of depreciation, as UPS is part of plant and machinery and not of computer. After going through the details of UPS submitted by the assessee, it was found by the AO th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration. The AO and the CIT(A) held that UPS is not part of computers. The lower authorities held that UPS was classified as general plant and machinery and allowed depreciation @ 12.5 per cent on the same. The learned counsel has argued that according to the functional test, the principle followed by the Courts, it is required to be seen if an item is an apparatus with which the business is carried on; if yes, then the same is to be considered as 'plant'. On the basis of this principal, the following were held to be 'plant': (i) Sanitary and pipeline fittings in a hotel [CIT vs. Taj Mahal Hotel 1973 CTR (SC) 480 : (1971) 82 ITR 44 (SC)]; (ii) Warehouses [CIT vs. Kanodia Warehousing Corporation (1980) 121 ITR 996 (All)]; (iii) Buildings specially built to conserve temperature and filtered air [R.C. Chemical Industries vs. CIT (1981) 25 CTR (Del) 244 : (1982) 134 ITR 330 (Del)]. 10. Further, in the present case also, it will be appreciated, what is important is the function for which UPS were purchased and used. UPS were purchased and actually used in running the computer network only, as an integral part thereof. He has further pointed out that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Thus, he has submitted that the authorities below were not justified in not treating the UPS as an integral part of the computer and, as such, denying the higher depreciation @ 60 per cent on UPS. 12. On the other hand, learned Departmental Representative has submitted that the UPS cannot be held to be part of the computer and hence, it cannot be considered as an integral part of the computer. In western countries UPS is not used as power supply is constant and regular. He has further argued that in case the UPS is an integral part of computer, then the air conditioners used in server room and power back-up would also form part of computer. Thus, he has submitted that UPS cannot be held to be an integral part of computer so as to entitle the assessee to claim higher depreciation @ 60 percent. Thus, he has supported the order of the CIT(A). 13. We have heard the parties and perused the record of the case. The assessee is engaged in the business of manufacturing of various food products and beverages. During the year the assessee company had purchased UPS for a sum of Rs. 68,55,814 and claimed depreciation on UPS @ 60 per cent treating it as part of computer. However, the AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs mainly because the technology used in the making of computer is rapidly developing and the same becomes obsolete very fast. Applying this criteria also, the UPS cannot be treated as a part of computer since the technology which goes into making UPS is not developing so rapidly to make it obsolete in the short span. Keeping in view all these relevant and material aspects, we find it difficult to accept the contention of the learned counsel for the assessee that UPS is a part of computer and is entitled to a higher depreciation rate of 60 per cent and rejecting the same, we uphold the impugned order of the learned CIT(A) confirming the disallowance made by the AO by restricting the claim of the assessee for depreciation on UPS treating the same as plant and machinery. Ground No. 2 of the assessee's appeal is accordingly dismissed. 14. The third ground of appeal states that on the facts and in the circumstances of the case and in law the CIT(A) has erred in confirming the setting off of the losses of Rs. 7,72,636 incurred by the appellant in respect of business of export of 'traded goods' against the profit made by it from the business of export of manufactured goods f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of establishment of products having Nestle's brand. The incurrence of advertisement expenses to the benefit of non-resident company is certainly resulting in less than ordinary profits to assessee company for which provisions of s. 92 are invoked and therefore, the AO disallowed 50 per cent of total expenditure incurred on advertisement and sales promotion and treated it as not wholly and exclusively for assessee's business and therefore, she disallowed Rs. 52,43,18,000. On appeal, the CIT(A) has held thus: "4.4 I have examined the reply of the appellant and facts of the case carefully. From the details furnished by the appellant before the AO it is clear that the appellant company. had made expenditure in respect of advertisement and sales promotion in respect of only with those products in which the Indian company is actually dealing in. These expenses were incurred for advertisement in India only that too in respect with those products in which they are dealing in. The expenses are payments made to the third party in India that are not in anyway related to them either in the loose definition of s. 92 or strict definition of s. 40A(2). The expenditure has been incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant has also not incurred any expenditure outside Indian territory for any other products. Therefore, in my opinion the expenditure has been incurred wholly and exclusively for business purposes and not for establishing brand name of Nestle SA. All the conditions which are prescribed under s. 37(1) are satisfied in the appellant's case and AO has not brought any material on record justifying the disallowance of part expenditure The ad hoc disallowance of 50 per cent made by the AO is without any appreciation of facts or basis and not in accordance with legal position. Therefore, the disallowance of Rs. 52,43,18,000 made by the AO is hereby deleted. The appellant succeeds on this ground." 20. Before us, the learned Departmental Representative has submitted that the assessee has incurred the expenses on advertisement and sale promotion under various heads during the previous year. The advertisement expenses have been incurred by the assessee for the purpose of establishment of products having Nestle brand. Thus, the impugned expenses have resulted in benefit to Nestle SA, a non-resident. Therefore, the AO was justified to disallow 50 per cent of the total expenses incurred in ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n brought on record by the AO. Thus, he has supported the order passed by the CIT(A). 22. We have heard the parties and perused the record of the case. The assessee is engaged in the business of manufacturing of various food products and beverages. The assessee is manufacturing various products under various brands owned by Nestle, Switzerland. During the year under consideration, the assessee has incurred advertisement and sales promotion expenses of Rs. 104,86,36,000. According to the AO, the benefit of advertisements/sales promotion expenses to the assessee's business cannot be ruled out but simultaneously it is resulting in establishing of brands and products of Nestle SA a non-resident, substantially interested company in assessee's business. However, it may be mentioned that the fact that assessee company had incurred expenditure on account of advertisement and sales promotion in respect of only those products in which India company is dealing in, has not been controverted by the Revenue. Thus, the expenditure has been incurred to promote sales in India. Therefore, these expenses were incurred wholly and exclusively for the purpose of business of the assessee. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
