TaxTMI 
TaxTMI 
2005 (1) TMI 333
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....ative. 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 dt. 7th June, 1999....
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....e 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, in para 10 of the a....
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....stinguished 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 technical assistance r....
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....ctively 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 of royalty paid during the ....
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....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 had long been under production in India ....
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....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 considered worth payment of Rs. 20.72 cr....
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....nts, 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. During the course of the assessment proceedings for the asst. yr. 1998-99, the AO relied upon the findings of his predecessor for the asst. yr. 1997-98. He noted that the disallowance as made by the AO had been d....
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....e, 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. The assessee argued that for the asst. yr. 1997-98, the learned CIT(A) had mainly acted on commercial expediency. The learned CIT(A) did not ignore the provisions of s. 40A(2) and s. 92 because, he found that the payment made....
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....yments 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. There were several methods laid down such as comparable uncontrolled price method; resale price method; cost plus method; profit split method and transaction net margin method. The assessee had also not furnished the details regard....
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....s 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 assessment. The assessee argued that the commercial expediency was required to be viewed from the point of view of the businessman and not that of the AO. Reference was made to the judgments reported in Newtone Studio Ltd. vs. CIT (19....
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....ope 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 Ltd. vs. Jt. CIT (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune). 21. The learned CIT(A) observed that he had considered at length the order of his predecessor for the asst. yr. 1997-98 as well as the assessment order passed in the ....
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.... 4.86 60.63 1995-96 751 17 66.4 8.83 25.91 1994-95 571 9 53.3 9.33 17.39 1993-94 523 7.9 46.3 8.84 17.15 1992-93 420 1.95 43.5 10.36 4.48 1991-92 334 1.51 28.9 8.64 5.24 1990-91 264 1.2 21 7.99 5.71 1989-90 263 51 20 7.67 2.53 22. The learned CIT(A) found that the ratio of royalty to net profit worked out at a whopping 49.95 per cent in respect of asst. yr. 1998-99 and 78.37 per cent in respect of asst. yr. 1997-98 whereas the same was as low as to 2.53 per cent, 5.71 per cent, 5.24 per cent, 4.48 per cent, etc., in respect of asst. yrs. 1989-90 to 1992-93. Even the figures for 1993-94 to 1995-96, were relatively low as 17.15 per cent, 17.39 per cent and 25.91 per cent only, respectively. In respect of asst. yrs. 2000-01 and 2001-02, the percentage worked out at only 31.99 per cent and 28.83 per cent. He, therefore, found that the claim of royalty was quite disproportionate so far as the asst. yrs. 1998-99 and 1997-98 were concerned. The ratio was high for asst. yr. 1996-97 also but in that year the issue was not examined by th....
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.... the assessee, practice of royalty payment was started after two decades of the commencement of business in India. The learned CIT(A) found support from the Advance Ruling 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 ....
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....lea could be considered only if the assessee had surrendered and accepted the disallowance of 17 crores made by the AO. The learned CIT(A), therefore rejected the 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, e....
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....n India. 31. Lastly, the learned CIT (Departmental Representative) referred to Chart III and pointed out that for the asst. yr. 1989-90 the total turnover 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....
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....xtra. The AO found that there was no technological advancement in the field of coffee, which had been in production since 1964, had taken place, 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 ac....
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.... thereafter for such products which had been produced and marketed since the 1960's and the 1970's and no evidence for any new technology 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 ag....
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....'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 245 4C Nestle Group CEO document named "Blue Print for the Future" 264 to 273 List of documents filed with lower authorities for asst. yr. 1998-99 Sr. No. Particulars Filed with Paper book reference 1. Letter dt. 8.2.2001 explaining some of the technological improvements received under the agreements ' list of Indian officers who went for foreign training. AO 557 to 560 2. CM Magazine AO 588 to 599 3. Noodles, Pasta, etc. AO 600 to 645 4. 14. Training to Nestle India personnel CIT(A) and 2nd copy given to AO 549 to 553 5A Letter dt. 18.1.2000 confirming production of following evidences in the meeting held on 11.1.2000 : CIT(A) (These are already at pp. 205 to 207 in paper book of asst. yr. 1997-98 (a) Cell testing and cell modification (b) Wheat flour analysis an....
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....n., 2000." On this letter, the AO made the following noting : "First, let the briefing be at my office at the same time. If need be, we will have demonstration at your place. Adjourned to 1600 hrs on 11th Jan., 2000, at my office. Sd/- Vinod Kumar" 40. Thereafter, in the letter dt. 18th Jan., 2000, addressed to the AO, Mr. Murli, head of the legal and company secretary of the company, submitted to the AO that if even after various material produced and presentation made by the top management of the company, should the AO still desire clarification, the assessee would appreciate the learned AO visiting the assessee's factories and head office where the learned AO could see more detailed evidence of technology in the assessee's operations. Similar letter was addressed on 27th Jan., 2002, to the learned CIT(A) during the course of appellate proceedings for asst. yr. 1998-99. The assessee submitted to him "Know-how and technology being intangible, we request you to visit any one or more of the factories and research centres, to fully satisfy yourself on the state of art technology being used, the manufacture of products with the know-how and assistance received and the ....
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....ope of assistance" under part B and pointed out that technical assistance to be given to the assessee was all pervasive in the operations of the assessee-company. It included oral advice or supply of documents or samples, manuals, plans, papers and/or other material. The Swiss company undertook to supply to the assessee-company complete technical documentation. The technical assistance was to be provided from Switzerland and in India by way of spot assistance as well as training of the personnel of the assessee-company. Having regard to the nature of the agreement, cl. 32 bearing sub-heading "Confidentiality" bound the assessee to keep secret and confidential all information and documentation and, in particular, the compliance of this provision by the assessee's staff, employees and workers. 42. The learned counsel referred to pp. 57 and 58 of the paper book for asst. yr. 1998-99 and stated that the average of the royalty charged by the parent company world-over was 3.55 per cent. It could not, therefore, be argued that the Swiss company was charging royalty in India at an exorbitant rate. The assessee was a widely held public limited company and had more than 60,000 sharehold....
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....ly were invisible but were of paramount importance. The efficacy of the same could not be gauged by the profits earned by the assessee in the year of investment itself. To bring home these points, the learned counsel took us through the booklet "Nestle Product Technology Centre Orbe" (PTC Orbe) at pp. 379 to 397 of the paper book. He then took us to paper book p. 398 relating to network of quality control and quality analytical laboratories. With reference to p. 400, it was pointed out that specialists at the headquarters in Switzerland or at product technology research centres wrote technical know-how documents. The documents were validated through industrial usage and were continuously updated. With a strong centralised research and development organization and the very long experience in setting up and operation of factories, Nestle had been able to develop a vast knowledge base, which was essentially proprietary. To be able to impart this knowledge to the Nestle organizations entitled to receive it, Nestle had created the technical instruction system that guided the creation, distribution and management of "know-how" flow. These instructions covered product specific information....
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....irectly related to manufacturing or which applied to different product groups. These covered the area of Processing, Utilities, Maintenance, Automation, Building and Construction, Filling and Packaging, Project Management and Safety. 49. Lab Instructions (LI) were documents that described method for carrying out various quality related tests and analysis, on-line and in the laboratory. These tests covered all Nestle products and all relevant quality criteria and parameters. They were based on internationally recognized methods that had been adapted to Nestle specific equipment and products or developed in-house. These lab instructions were in the areas of General Methods, Raw Materials, specific areas such as Fresh Milk, Instant Drinks, Coffee and Coffee substitutes, Ices, Culinary Products, Meat Products, Canned Foods, Baby Foods, Fruits and Vegetable Juices and Sauces, etc. 50. After having explained the broad network of Instructions, the learned counsel took us specifically through the details of technical instructions that were applied to the assessee's Nanjangud factory alone mentioned in pp. 407 to 472. 51. After technical instructions, the learned counsel gave us exam....
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....ny and other advanced Nestle organizations as noted at pp. 546 to 548 of the paper book that enumerated the visits by technical personnel during the period 3rd March, 1995 to 12th July, 2000. Thereafter, the learned counsel mentioned the features of Nestle International Training at pp. 549 to 553 of the paper book. He pointed out that technical managers of the company were trained in various functions and on various sites at Nestle organizations spread all over the world. 54. The learned counsel pointed out that all this material and much more had been furnished and produced before the AO for both asst. yrs. 1997-98 and 1998-99. He referred to letters dt. 8th Feb., 2000 and 19th Feb., 2000, addressed to the AO and annexures thereto as given at pp. 554 to 645 of the paper book. He argued that commercial expediency of remuneration for technical assistance had been explained to the AO at considerable length, both orally as well as in writing along with voluminous supporting material. However, the submissions of the assessee did not find place or mention in the assessment orders made by the AO, except cryptic reference to some of the submissions in a single paragraph of the assessment....
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....sel pointed out that coffee-manufacturing facility of the assessee-company at Nanjangud was comparable with the best in the world; as a result agglomerated instant coffee was introduced in India for the first time. 58. The introduction of Maggi Noodles revolutionized the eating habits in the country and added a new dimension to convenience foods. The Noodle plant was feasible only because of the know-how and expertise received from NESTEC. 59. The learned counsel for the assessee pointed out that quality assurance aspect of the assessee-company's product could never be over emphasized. For this purpose, vitamins, and amino-acid analyses were carried to ensure correct proportions in the finished product. Contaminants like affatoxins and pesticide residues were regularly monitored on sensitive raw materials and finished products. Additionally intensive on-going microbiological analyses were conducted to search for pathogens like salmonella and staph aureus. 60. In the field of packaging, Nestle India introduced for the first time in the country polyester/low density polyethylene. 2 Minute Noodles sachet with reduced oxygen permeability enables consumers to get a fresher produc....
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.... in India; ' Expand distribution to reach one million retail outlets on a regular basis; ' Work in partnership with the distributors. The aim was to access and evaluate various operations with a view to optimize the company's secondary sales from distributor to the retailer. SMIT took step-by-step approach, the team continued to focus solely on actionable solutions that were not only achievable but also sustainable over the long-term. The pilot project having been successful in Chennai, the company intended to implement key learning all over India. 62. The learned counsel stated that training was an integral and indispensable part of Nestle. It was a major investment in the future of the company and imperative because it was an investment in people. To this end, Nestle India benefited greatly from the training programme offered at the Rive Reine International Training Centre at Vevey, Switzerland. These programmes were an irreplaceable part of Nestle India's overall training plan. In addition to Rive Reine courses, in-house training and development programme within the country received considerable support from the international experts who visited India. 63.....
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....per book for asst. yr. 1997-98. This letter was followed by number of explanatory communications to the AO from time to time. The learned counsel referred to the detailed note dt. 22nd Jan., 2002, furnished before the learned CIT(A) and placed at pp. 57 to 97 of the paper book for asst. yr. 1998-99. The learned counsel stated that initially the assessee had some reservation in furnishing product-wise profitability. The assessee was in highly competitive line of business. It was also controlled by confidentiality clauses of its agreement with parent company. Despite such reservation, the assessee furnished to the AO particulars of product-wise profitability as given on pp. 274 to 279 of the paper book for asst. yr. 1997-98. The learned counsel referred to the following extracts from the assessee's letter dt. 1st Feb., 2000, addressed to the AO during the course of assessment proceedings for asst. yr. 1997-98 : "Without prejudice to all our above submissions and merely for the sake of good order and against the legal advice that we have received, we enclose herewith the desired information about the product-wise profitability for the past 3 calendar years (i.e. 1996, 1997 and 1....
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.... (Amount in crores) A B C D E F Asst. yr. Turnover Royalty (including tax and R&D cess) Royalty (excluding tax and R&D cess) NP before charging royalty, tax and cess Royalty as percentage of NP NP as percentage of turnover 2001-02 1781 62.20 51.56 278.00 18.55 15.61 2000-01 1551 54.40 43.39 224.40 19.34 14.47 1999-00 1569 56.70 44.89 186.70 20.04 11.90 1998-99 1521 58.00 46.27 174.00 26.59 11.44 1997-98 1253 47.00 37.30 106.90 34.89 8.53 1996-97 1028 30.00 23.88 79.90 29.89 7.77 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 particularly a less successful year from the point of profitability inasmuch as net profit was 8.53 per ce....
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....n 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 approved by one wing of Government, there is no question of such payment being treated under s. 40A(2)(b) as....
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.... 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 reasonableness of the expenditure had to be seen from the point of view of the businessman and not that of the Revenue. Fo....
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....een 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 turned upon the argument that only 2 out of the 9 agreements had been approved by the Department of Industrial Develo....
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....l 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 Act, 1961, did not provide for such procedure. The prescribed procedure was the proceedings to take place in the office of....
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.... 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 linked to voluntary payments of others. 78. The learned CIT (Departmental Representative) argued that the provisions of s. 40A(2....
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....e 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. The learned counsel argued that assessment under s. 115JA did not mean that the assessee could not challenge the wrong additions made by the ....
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....ng 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 on the assessee. The learned AO simply required the assessee to prove negative and to prove it to the hilt that the assessee had not overpaid the tec....
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...., 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 of the assessee's claim of deduction. (b) The assessee not furnishing the material/evidence in relation to technical assistance actually received so....
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.... 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, the assessee also furnished plenty of material giving the AO, for asst. yrs. 1997-98 and 1998-99, a fair view of the kind, quality and significance of technical ....
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....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 could be invoked or not in this case, it is quite clear that the burden to prove under those special provisions is cast on the AO and not upon the assessee. At the same ....
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....en 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 upon certain charts indicating 78.37 per cent and 49.95 per cent of the profit ha....
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....ame. 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 possible to physically demonstrate that intangible exercise. The fact of the matter....
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.... 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 the many advancements and changes taking place every year. The learned c....