TaxTMI 
TaxTMI 
2005 (1) TMI 333
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....ssee and the learned Departmental 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 det....
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....refore, once again issued 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.....
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....ompany was looking after its 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 s....
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....nts were Rs. 9.28 crores and 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....
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....cal assistance was made to the group/holding company. According to the AO, in the 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 w....
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....me may be under a brand. The ingredients of such products were commonly known and 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 t....
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.... 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. During the course of the assessment pr....
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....991, 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. The assessee argu....
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....t. 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. There were several ....
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....t 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 assessment. The as....
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.... 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 Ltd. vs. Jt. CIT....
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.... 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 1998-99 1521 58 116 7.67 49.95 1997-98 1253 47 59.9 4.79 78.37 1996-97 1028 30 49.9 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....
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....sessee and, therefore, the assessee's case was hit by the judgment of the Hon'ble Supreme Court in the case of McDowell & Co Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). 25. During the course of hearing before the learned CIT(A), the assessee had relied upon the judgment of the Pune Bench of Tribunal in the case of Kinetic Honda Motors Ltd. (supra). The CIT(A) held that the facts of the assessee's case were distinguishable because in the case of Kinetic Honda Motors Ltd. (supra) the royalty payment was made for technical assistance for setting up of the plant for manufacture and sale of scooters whereas in the case of 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....
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....d not be rendered superfluous for the reason of RBI approval. 28. The CIT(A) did not accept the contention of the assessee that the disallowance of Rs. 17 crores for the asst. yr. 1998-99 out of the royalty of Rs. 58.3 crores was merely an ad hoc disallowance. The disallowance made by the AO was 29.15 per cent. The disallowance of Rs. 15 crores out of the royalty payment of Rs. 47 crores for asst. yr. 1997-98 worked out 31.91 per cent. The learned CIT(A) also rejected the contention of the assessee that it should be given the benefit of higher deduction under s. 80HH in respect of the disallowance of royalty payment. According to him, this alternative plea 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 b....
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.... established in the market and the assessee had already commenced production in full swing. In such circumstances, one could not help wondering as to why the assessee made payments to the foreign companies almost equal to the profits derived by the assessee himself. The learned CIT (Departmental Representative) referred to chart II and pointed out that there were 7 agreements for asst. yr. 1997-98 that had been entered into by the assessee during the period starting from 4th Feb., 1992 to 29th Aug., 1997. The agreements were thus, not in relation to any new products and mostly pertained to those products, which the assessee had already been manufacturing and successfully marketing in 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 pro....
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....required to examine the quantum of profit derived on the sale of a particular product and the justification for payment of remuneration for technical assistance on the basis of commercial expediency. The details as required by the AO were not furnished by the assessee even though umpteen opportunities were given. The assessee, however, did provide details of turnover and royalties paid in respect of each product. On a careful scrutiny of the limited details filed, the AO found that out of the total payment for technical assistance amounting to Rs. 47 crores a sum of Rs. 20.72 crores was paid on coffee only on account of different brand of coffee like Nescafe, Sunrise Premium and Sunrise Extra. 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 t....
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....dered by the two non-resident companies What should have been appreciated by the learned CIT(A) is that the AO correctly applied s. 92 after proving close connection between the assessee-company and the two non-resident companies to whom impugned royalties had been paid. The AO had been able to prove that the said royalty agreements were in fact made to transfer profits to the non-resident shareholders through 100 per cent subsidiary companies since it was only after relaxation of Government norms in the year 1990 to attract foreign capital that the ceiling for automatic approval of royalty payment had been increased and the assessee-company had made five out of seven agreements immediately 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 ....
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....dia during the years 1997 and 1998 AO 203 to 204 4A Letter dt. 18.1.2000 confirming production of following evidences in the meeting held on 11.1.2000 : 205 (a) Cell testing and cell modification 208 (b) Wheat flour analysis and wheat flour improvements 208 (c) File with photographs taken Nestle India Chief Engineer of technical details of a MILO production line at Japan 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 ....
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....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 below. Hence, Mr. C.M. Donati, Managing Director of the assessee-company addressed following letter to the AO on 7th Jan., 2000 : "Further to our telephone conversation, I confirm that since it was not possible for you to receive us today, a fresh meeting is fixed for early next week, and I proposed this should take place at our office. I invite you to have the meeting here since, for a full and comprehensive presentation on technical assistance, we will need both supporting equipment as well as a number of Nestle India persons to participate and it would be more convenient to do so at the conference room of our office. May I suggest that the meeting take place at 1600 hrs on Tuesday, 11th Jan., 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. Ad....
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....ed 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, the technical assistance was very vital. Moreover, the technical assistance was for the quality of the products and, therefore, the assistance was vital for the very basis on which the assessee-company would make profits. He pointed out that Part B of the agreement pertained to "Duties and Obligation of SPN", Part C pertained to "Duties and Obligation of the Assessee", Part D pertained to "Consideration", while part E pertained to "Terms and Termination" and Part F "Miscellaneous Provisions". Remuneration was fixed at the level much below than as permitted by the Industrial Policy. In other words, the foreign company displayed a fair and reasonable approach in that regard. The learned counsel pointed out to "Scope 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.....
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....ffee 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, the assessee had achieved the record level of exports and had established itself as a leading exporter of Value Added Instant Coffee. The company's products were available in 6,00,000 outlets in 3,000 towns throughout the country, serviced by 3,900 distributors. The assessee exported instant coffee from India to Russia, Hungary, Poland, Taiwan and instant tea to the USA and Japan. During the year 1997, the company's export was over Rs. 330 crores. 44. The learned counsel pointed out that R&D budget of Nestle, SA, Switzerland, was over Rs. 2,000 crores. The assessee participated in a scheme to reap benefits of the same on payment of a very small amount. The learned counsel argued that R&D achievements mostly 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 invest....
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....nufacturing Instructions were divided in 3 categories viz. "Milk and Nutrition" that covered Non-Concentrated Milk, Condensed Milk, Milk Powder, Cream and Creamers, Infant Formulas, Infant Specialties, Infant Cereals, Clinical Nutrition, Yogurt and Desserts. Under the head "Coffee and Beverages" MI covered Soluble Coffee, Soluble Coffee Mixes, Ready-to-drink Coffee, Powdered Milk, Modifiers and under the sub-head "Food" MI covered Dehydrated Products, Heat Preserved products, Sauces and meal, Accompaniments, Pasta, Shelf-stable Desserts. 47. Control Procedures (CP) were documents that defined the procedures that needed to be implemented to comply with the Nestle Quality System. They covered all operations, from raw material reception to the release of the finished products. For example, there were procedures relating to Salmonella Monitoring; Installing, Evaluating and Testing Metal Detectors; Proficiency Tests Manual; Quality Monitoring Scheme for drinking water. 48. Technical Manuals (TM) were documents that provided technical guidelines which were not directly related to manufacturing or which applied to different product groups. These covered the area of Processing, Utili....
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....ations as given at pp. 490 to 506 of the paper book. Further, the Nestle followed a system of transferring know-how directly from the persons or organizations that had the information to the one needing it. For this purpose, Nestle had network of markets and factories with the technology centres, research centres, adaptation centres, laboratories and head office. This big investment allowed the instant transfer of documents, drawings and correspondence by e-mail. The learned counsel referred to the particulars of technical assistance correspondence in relation to coffee as given at pp. 508 to 523 of the paper book. This system was known as 'Nestle Intranet'. The access to Nestle Intranet and links to Nestle Intranet services were made available to all recipients of technical assistance. The learned counsel referred to particulars of Intranet services as enumerated at pp. 524 to 545 of the paper book. 53. The learned counsel emphasized that a major aspect of technical assistance being received by the assessee was visits by technical personnel of the parent company and other advanced Nestle organizations as noted at pp. 546 to 548 of the paper book that enumerated the visi....
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....125 years. Through constant research and development, Nestle sought to improve the quality of food and thereby quality of life itself. The learned counsel took us through the report of the Directors of the assessee-company relating to structure of Nestle Research; Technological Development; Quality Assurance, Nestle India Access to Global Technology Bank. Referring to these reports, the learned counsel highlighted some examples of technology advancement directly relating to the business of the assessee-company. For example, in 1992 weaning food manufacturing technology was enhanced through the introduction of "Z line" manufacturing process. This process was developed by NESTEC to meet the specific needs of overseas market and was found to meet the requirements of the Indian scenario. As a result, Nestle India was able to introduce weaning foods that ensured improved bio-availability of carbohydrates through the process of enzymation, providing higher nutrition per meal and enhanced digestibility. It was clearly visible achievement of the global Nestle R&D. 57. The learned counsel pointed out that coffee-manufacturing facility of the assessee-company at Nanjangud was comparable w....
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....identified the following areas for detailed study : 'Process improvement to ensure optimal usage of resources; 'Improvement of operational efficiency; 'Cost optimization. A series of small but critically important initiatives ranging from redesigning of laboratories to palletisation of raw materials and improvements in on-line analyses led to significant reduction in raw and packing material utilization, manufacturing and filling losses and labour manhours resulting in substantial savings and improved productivity and machine utilization. The pilot project in Moga having proved successful, the company intended to implement key learnings of the MIT in other factories. During later part of 1996, an international Sales and Marketing Improvement Team (SMIT) undertook a 4 months' SMIT exercise in India as a part of major global initiative of Nestle to enhance sales and marketing productivity on a worldwide basis. Following three critical areas were identified from the point of view of the growth objectives of the sales : ' Ensure direct coverage of all urban towns in India; ' Expand distribution to reach one million....
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....f 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 available in over 6,00,000 outlets in 3,000 towns throughout the country, serviced by 3,900 distributors. During 1997, the company launched a record number of new products-more than 30 in the thrust areas of culinary and chocolate and confectionery. 65. The leaned counsel argued that there was no substance in the allegation that the assessee did not comply with various requisitions of the AO. Voluminous material produced before the AO, analysed properly should have convinced the authorities below. There was practically no information that had been called for by the AO but not supplied by the assessee. The assessee-company made offer to the AO and the CIT(A) to visit the company's business and manufacturing establishments in India, and if need be abroad, so as to enhance their perception of the critical need and importance of technology assistance agreements in question. The learned counsel referred to the letter addressed to the AO on 18th June, 2000, and placed on pp. 205 to 245 of the paper book for asst. yr. 1997-98. This lette....
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....g 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 fruits. Taking his argument to logical end would mean that if the business of an assessee resulted into loss during a particular year, it signified that the expenditure incurred on technical know-how and related matters had no justification at all. The fact of the matter was that profit depended on a number of factors and, therefore, payment of royalty was ordinarily linked to turnover and not net profit. At any rate, the chart prepared by the AO in this respect was unsound. The same applied to Chart III submitted by the learned CIT(Departmental Representative). With a view to accuse the assessee of having made exorbitant payments, the percentage was worked out on the basis of the figures of profit after deducting payments of royalty. In all fairless, faulty as the criteria of profit was, the authorities below should have at least applied reasonable methodology. They should have compared the payments with profits of the assessee before those payments. On that basis, the following position emerged : (Amount in crores) &nb....
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.... assessee's agreements from the same angle as the AO. There was no qualitative difference between the objective of approval by RBI and requirements of income-tax assessment. The learned counsel referred to the judgment of Hon'ble Supreme Court in the case of LIC vs. Escorts Ltd. & Ors. (supra) wherein after considering the approval given by the RBI, Their Lordships held as under : "As we said earlier, under the scheme of the Act, it is the RBI that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the 'custodian-general' of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the RBI and the RBI alone that has to decide whether permission may or may not be granted under s. 29(1) of the Act. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally. We do not, h....
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....substantial interest in the assessee, nor did the assessee or any of its directors or relative of its directors held any substantial interest in NESTEC and SPN. Without prejudice, the leaned counsel argued that the onus was on the AO to find out the fair market value of goods and services and bring on record comparable instances and establish that the expenditure was excessive or unreasonable having regard to the market value of goods or services; the legitimate business needs; benefit derived by or accruing to the assessee therefrom. In the instant case, the learned AO had brought no material worth the name and merely and most unreasonably accused the assessee of not having established that the expenditure was not hit by the provisions of s. 40A(2)(b). Not only the AO wrongly placed his own burden on the assessee, he ignored plethora of material placed before him. In support of the contention that the burden of proof was on the AO, the learned counsel invited reference to the Tribunal decisions reported in Upvan International vs. ITO (1986) 15 ITD 215 (Del); (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune) (supra); Hathiwala Silk Mills vs. ITO (1984) 19 TTJ (Ahd) 284; Shriram Pi....
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....he assessee as a company carried on its business independently. There was no business carried on between the assessee as a resident company and the NESTEC/SPN as a non-resident. As there was no business between them, the question of the course of business being arranged did not arise. The AO completely misdirected himself in invoking the provisions of s. 92. The learned counsel relied in this aspect on the judgment of Hon'ble Supreme Court in the case of Mazagaon Dock Ltd. vs. CIT (1958) 34 ITR 368 (SC) and the judgment of Hon'ble Calcutta High Court in the case of CIT vs. Kusum Products Ltd. (1992) 104 CTR (Cal) 401 : (1993) 71 Taxman 611 (Cal). Above all, the CBDT Circular No. 14 of 2001 reported in (2002) 172 CTR (St) 13 : (2001) 251 ITR (St) 65, in para 55.2 clarified that the provisions of s. 92 of the Act as they stood up to asst. yr. 2001-02 did not apply to transactions such as royalty, etc, which are not part of regular business carried on between a resident or a non-resident. The learned counsel argued that assuming without admitting that the provisions of s. 92 applied, the onus under s. 92 to prove that the course of business between the resident and the non-res....
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....al assistance which was provided by the foreign company. To make the grant of license of the know-how more meaningful and beneficial to the assessee, cl. 13 of the agreement provided an exhaustive list of technical assistance services and advices, which had to be provided by the foreign company to the assessee. Clause 13 also ensured that these were continuously available during the term of agreement. Simple reading of cl. 13 made it clear that the foreign company was obliged and bound to make available to the assessee technical assistance services and advice in almost every facet of the manufacturing and marketing operations. The assessee paid the price for the services, which were to be received under the agreement and, therefore, whether it was called 'royalty' or 'fees for technical services' was a point, which had no bearing to the issue on hand. Voluminous information or details had been produced to explain that technology/upgrades received from time to time resulted into improved quality of various products including coffee. In any case, the assessee would not have been able to manufacture any product had it not paid the royalty, as it would not have been abl....
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....th parties benefited. 75. The learned CIT (Departmental Representative) stated that he was not saying that no royalty was payable. He was saying that there should be reasonability in charging royalty. Provisions of s. 92 of the Act empowered the AO to ask this question. How could the royalty be charged at the same rate in all cases ? Industrial Policy, 1991, had fixed a ceiling and did not lay down a norm. The fact that the Swiss company was not justified in charging royalty at an exorbitant rate was established as the percentage of royalty to the net profit had gone up from 2.53 per cent in the beginning to 78.37 per cent during asst. yr. 1997-98. That too when the assessee had become a full-fledged manufacturer of most of the products in its own right. Fee to be paid now should be in return of what new the assessee would receive from the licensor and not in return of what the assessee had already received in the past. As to the various services to be rendered as enumerated in the agreements, the same were lofty sentiments. The AO asked the assessee to pinpoint what he was receiving. It was assessee's bounden duty to show that to the AO. Specific improvements during the cur....
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....e, acceptance of assessee's claim in earlier years did not matter. There was increase in royalty by Rs. 17 crores whereas the increase in the profit of the assessee left behind was only Rs. 10 crores. 81. The learned CIT (Departmental Representative) referred to para 23 of assessment order for asst. yr. 1997-98 and argued that many of those queries had not been answered. The learned AO had summarized in para 24 as to how he was handicapped by want of necessary information from the assessee. At p. 33, the AO had summarized what he had been told by the assessee. The plant which was under commissioning could not be the basis for the payment of royalty. 82. As to the applicability of s. 92, Swiss parties were doing business with the assessee. It could not therefore, be said that the provision was not applicable. In broader sense, both parties were doing business with each other. At any rate, the requirements for the purposes of s. 37(1) were also the same, the expenditure had to be incurred wholly and exclusively for the purpose of business. 83. The learned counsel for the assessee argued that whether a site visit was necessary or not was a judicial decision. Even Tribunal....
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....only the recipient or end user of technical know-how. The assessee had furnished the details of visits inward and outward. The purpose of travel was also given that showed that the assessee was receiving and not giving. The assessee received improved technology as an ongoing process. Every year the assessee received something or the other. Today excellent coffee could be brewed in 30 seconds. That was not the case 10-15 years ago. Moreover it was not necessary to receive significant technical know-how every year. The assessee had the right to receive as and when technology developed with no extra cost. 87. The learned counsel argued that the assessee produced voluminous material before the AO as was evident from the paper books of the assessee. Before the AO, the managing director and the entire senior management team of the assessee appeared. The minutes of the meeting recorded at paper book p. 206 stated "detailed presentation along with supporting documentary evidence and material." Initially the assessee stated that it could not produce everything but eventually the assessee produced everything it could. The assessee could not give the statements of accounts of other foreign....
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....iver to take custody of prototype was allowed. 89. We have carefully considered the rival submissions. We see considerable force in the contention of the learned CIT, (Departmental Representative) that the appeal in relation to asst. yr. 1997-98 is by and large academic because there is no dispute between the assessee and Revenue as to the quantum of the assessed tax liability for asst. yr. 1997-98. However, during the course of assessment proceedings for asst. yr. 1997-98, the learned AO has examined the question of allowability of the assessee's payments to SPN at considerable length. The learned AO has given a harsh finding that the payments were part of a device followed by the party to siphon away the profits of the assessee-company in the disguise of royalty payment and thereby reducing, among other things, the assessee-company's tax incidence in India. We find that while completing the assessment for asst. yr. 1998-99, the AO has merely adopted the argument, reasoning and basis of disallowance as given in the assessment order for asst. yr. 1997-98. In spite of the assessment order for asst. yr. 1997-98, not finding favour with the learned CIT(A), the succeeding le....
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.... the payments in question were a colourable device on the part of the assessee and, therefore, hit by the judgment of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (supra). However, we find that in the order of the learned CIT(A) for asst. yr. 1997-98, the emphasis is upon his inference that the payments in question were disproportionately high looking at the profits earned by the assessee and the assessee has not been accused of hiding from examination or not furnishing the information regarding technical assistance actually received. 91. As to the case of the AO that the assessee failed to establish the commercial expediency of payments in question by production of reliable information and evidence, on careful perusal of the assessment order for asst. yr. 1997-98, we find that the learned AO has mainly alleged non-compliance to various requisitions made by way of order-sheet notings in the course of the assessment proceedings. So much so that in the assessment order for asst. yr. 1997-98, while the learned AO has reproduced verbatim his letter dt. 17th June, 1999, and order-sheet notings dt. 20th Sept., 1999, 6th Oct., 1999 and 29th Nov., 1999, the lette....
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....rvations that the requisite details and supporting material, evidence and information were not furnished by the assessee. We see force in the contention of the assessee that while making such observation, the learned AO ignored and omitted to make a reference to voluminous material placed before him by the assessee. It is true that some of the information asked for was not furnished. The learned counsel for the assessee has informed us that the same was either not in the possession of the assessee or did not exist. The assessee had certain reservation about furnishing the sensitive information regarding the product-wise profitability as the assessee was in highly competitive market of fast moving consumer goods. However, eventually, the assessee furnished even the data pertaining to product-wise profitability. The assessee did not furnish the particulars of profit and balance sheet, etc. of Nestec, SPN, Nestle SA of Switzerland, because the same fell outside the assessee's obligation to supply. Ironically, according to the assessee, all this emphasis on working of profit of the assessee and service providers was irrelevant because the quantum of remuneration could neither be fi....
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....he Act. We, find that the assessee's case is well armed in this respect on account of approval also granted by the RBI to the agreements in question. At any rate, from the facts stated and the evidence/material produced in the assessee's paper book, we are of the view that the technical assistance agreements in question were essential for the purpose of the business of the assessee during the assessment years before us. The assessee appears to have been highly benefited both in respect of profitability as well as growth of its business on account of close association and support from Nestle SA, Switzerland, internationally renowned and leading food processing company. 94. We now come to the question as to whether the quantum of remuneration as agreed upon in the agreements in question and actually paid during the course of the assessment years before us is justified on the facts and in the circumstances of the case. In other words, whether both the AO in the assessment order for asst. yr. 1997-98 and the learned CIT(A) in the appellate order for asst. yr. 1998-99 justified are in their conclusion that the assessee in collusion with parent company in Switzerland adopted a....
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....h the investment in technology was made. The benefit could be gauged only over sufficiently long-term allowing the technical initiative to bear fruits. That apart, the learned counsel for the assessee pointed out that the working done by the Department was highly unreasonable inasmuch as the payments were compared with the profit of the company after payment of remuneration in question. The learned counsel, therefore, furnished a separate chart to show that even on imperfect and irrational basis of comparison with the profit adopted by the assessing authority, the payments in question constituted only 34.89 per cent and 26.59 per cent of the profits for asst. yrs. 1997-98 and 1998-99, respectively. The learned counsel further argued that the percentage was higher during asst. yrs. 1997-98 and 1998-99 because the net profit as percentage of turnover itself was lower in those assessment years. As to the question that no independent evaluation of the value and utility of technical services were carried out, the learned counsel argued that such was never a practice in a case where highly specialized and restricted technology was imparted. Technology provided to the assessee by the pare....
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....le brand product without the consent of the parent company. We do not subscribe to the argument of the learned CIT (Departmental Representative) that as intellectual property rights were not recognized in India, the assessee could have snapped ties with the foreign company and carry on its business as before. We also find that the technical assistance provided by the parent company was all pervasive in the operations of the assessee-company and permeated into almost every detail. The assessee-company in India was reaping harvest of fine production technology evolved by the parent company over 125 years by virtue of presence in more than 70 countries. For continuing to harvest the benefit, it was essential for the assessee to have a perennial source of supply of all the technological innovation, advancement and upgrade. It would not be an exaggeration to say that in modern times, no businessman can afford to be oblivious of the fast moving technology related to his business on the ground of contented with the knowledge and experience already gathered. The assessee did not contribute a single penny to R&D cost of Nestle SA stated to be over Rs. 2,000 crores per year. Nestle India rec....
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....inst the assessee in the orders of the authorities below ? Apart from preparing some charts, no material or evidence has been brought on record by the authorities below to substantiate their allegations against the assessee. As we have pointed out that the assessee only had initial onus to substantiate its claim of deduction of expenditure as laid down under s. 37(1). The burden to prove that the claim of expenditure was a colourable device or a camouflage for diversion of profits rested upon the Revenue. In the order of the authorities below, no material has been brought on record except disbelieving the assessee's explanation and their subjective opinions. The burden of their order is that the assessee so arranged its course of business that it was left with a less than ordinary profit expected in the assessee's line of business. No one, however, has taken care to specify as to how much that ordinary profit was supposed to be and on what basis the same could be determined. It appears to us that the assessment order for asst. yr. 1997-98 and the learned AO as well as the CIT(A) for the asst. yr. 1998-99 have argued without adequate material that the assessee might have tak....