TaxTMI 
TaxTMI 
2011 (8) TMI 485
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....ed appeals are common and the Tribunal has dealt with the cross appeals by a common judgment, we intend to dispose of the captioned appeals by a common judgment. 2. The assessee at the relevant time was in the business of manufacturing and sale of Indian Made Foreign Liquor (in short 'IMFL') at the Pathankot, Punjab when, evidently, it entered into an agreement dated 6-7-1996 (in short the 'said agreement') with a public limited company by the name of Shaw Wallace Co. Ltd., (in short 'SWCL') for the purposes of manufacturing IMFL products under the brands owned by SWCL or its associated or related companies. The said agreement comprised of following addendums : (i) Annexure 1 provided for : General Terms and Conditions which were to operate inter se the parties. (ii) Appendix 'A' provided for : specification of spirit. (iii) Appendix 'B' provided for : specification of demineralized water to be used for reducing the strength of spirit. (iv) Appendix 'C provided for: trademarks/ brand names etc. (v) Appendix 'D' provided for : consideration to be paid by the assessee. (vi) Appendix 'E' provided for : Packing material wast....
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.... UNIT shall obtain necessary permission from the Excise Authorities for taking back such stocks and arrange for re-processing, the parties will then examine the causes of such defect and the party to bear the cost for the same will be mutually agreed upon based on the report of such examination. The intention of providing for the above terms is to ensure that only quality products are sold in the market under the brand names belonging to or designated by Shaw Wallace. 4. Excise Formalities 4.1** ** ** 4.2 All excise formalities required for the UNIT (Distillery) shall be the responsibility of the UNIT. The above shall include the registration of the labels with the Excise authorities, obtain permission from the Excise Authorities for the manufacture, bottling, blending, storage, selling and supplying of IMFL products of brands mentioned above and for the use of packing materials as per specifications and requirements of Shaw Wallace as well as for use of Shaw Wallace labels. 4.3 The obtaining of Export passes as may be necessary for the purpose of despatches of the IMFL products manufactured bottled supplied by the UNIT under this agreement shall be the responsibility o....
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....cencing the use of the said trademarks or brand names or get up on any goods including IMFL in India of elsewhere. 6.6** ** ** 7. Consideration 7.1 Royalty including charges for services to be rendered by Shaw Wallace are payable by the UNIT to Shaw Wallace at the rates and in the manner set out in APPENDIX 'D' hereto. The parties may mutually agree to revise the above changes from time to time. 7.2 The UNIT shall be liable to pay the royalty due to Shaw Wallace as specified in the agreement entered into between the parties within the time specified in APPENDIX 'D'. 7.3 No such royalty etc. shall be payable in respect of the IMFL products which are purchased by and supplied to Shaw Wallace under import permits obtained in the name of Shaw Wallace. In the case of such purchases Shaw Wallace shall pay the price of IMFL at the rate mentioned in APPENDIX 'D'. In the case of sale to Permit Holders other than Shaw Wallace the UNIT shall include in the price marketing, royalty and service charges as may be advised to the person undertaking the marketing of the IMFL products. . 7.4 and 7.5** ** ** 8. Duration Termination and Consequences Thereof 8.1 and 8.2**....
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....responsible to sell and arrange for collection of sale proceeds and declaration forms required for sales tax to/from Direct Indentors. The payment shall be made by Direct Indentors by way of Cheque or DD in the name of the Unit. The UNIT, after deducting the value of each product at applicable rates as specified above and the amount representing the statutory dues like Sales Tax, Excise Duty etc., will pay the balance amount to Shaw Wallace (which represents Royalty/ Marketing services charges etc.)." [Emphasis supplied] 5. Based on transaction which have emanated from the said agreement, the authorities below have returned the following findings for each of the assessment year. We shall briefly refer to the findings of each of the authorities in respect of the assessment years in issue. Assessment year 1997-98 6. The Assessing Officer noted that the assessee had debited an amount of Rs. 84,01,160 as payments towards royalty. The assessee had rendered its justification, as noted by the Assessing Officer, vide two letters dated 24-1-2000 and 10-3-2000. By the said letter the assessee had briefly made reference to the said agreement adverted to hereinabove by us. The assessee had ....
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....e view that the payment made by the assessee towards use of trademarks, brand names, designs and get up were in the nature of capital expenditure, and that SWCL had authorized the assessee in that regard vide a separate agreement, which despite repeated directions had not been produced by the assessee. Reference in this regard was made to Clause 6.3 read with appendix 'C' annexed to the said agreement. 7.2 For the aforesaid reasons, the Assessing Officer rejected the alternative claim of the assessee to allow deduction under section 37 of the Income-tax Act, 1961 (in short 'IT. Act'). Furthermore, having held that it was in the nature of capital expenditure and hence not an expenditure allowable under section 37 of the Income-tax Act, the Assessing Officer concluded that the assessee had acquired patent rights for the use in its business, and therefore, the condition stipulated under section 35A of the IT. Act was satisfied. 7.3 The Assessing Officer went on to observe that a part of the royalty paid was excessive in nature. He proceeded, however, to restrict the expenditure to 1/14th of the amount claimed in the year in issue by invoking provision of section 35A. Consequently, a....
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....s of section 35A of the Income-tax Act. He adopted the same methodology. Consequently, apart from a sum of Rs. 4,05,671 which was 1/14th of the amount claimed, the balance sum amounting to Rs. 5,27,35,429 was disallowed. 9.1 Being aggrieved, the assessee carried the matter in appeal to the CIT(A). The CIT(A) considered the matter from two angles. The first being: whether the payment made by the assessee for use of trademark and services rendered by SWCL was in the nature of capital or revenue expenditure? If the inquiry resulted in coming to the conclusion that the payment was in the nature of capital expenditure, whether it was covered under the provisions of section 35 A of the Income-tax Act. 9.2 Besides this, the CIT(A) also examined the matter as to whether the payments made to SWCL were unreasonable and hence, hit by the provisions of section 40A(2) of the Income-tax Act. 10. Insofar as the first aspect was concerned, the CIT(A) on applying the ratio of the decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 came to the conclusion, after interpreting various clauses of the agreement, which inter alia included, the termination clause, and clause 9 w....
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....son is deemed to have substantial interest in the business or profession of such person is beneficial owner of at least 20 per cent of equity capital in case of a company. The expression "not less than 20 per cent of voting power" implies that the person must hold equity shares directly and not distantly. Therefore, Shaw Wallace & Co Ltd., cannot be said to be the beneficial owner of shares of the appellant company..... . . . From the list of shareholders it is clear that the employees of Shaw Wallace do not have the controlling share holding. Six individuals are holding ten shares each and Sh. Suraj P. Gupta held 8,61,610 shares. Shri Suraj Gupta is not employee of the appellant. Further the payment has not been made to Shri Suraj P. Gupta or his relative of the company of which he is a director. I would like to mention here that the CIT(A), SIV, New Delhi had made reference to finding of the Assessing Officer that the majority share holding is by the Shaw Wallace which has not been controverted. However, the appellant for the assessment year 1998-99 has controverted this fact. The shares are neither held by the Shaw Wallace nor by the employees of Shaw Wallace as also the paymen....
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....s of facts: (i) under the agreement the assessee had acquired a right to manufacture and, sale of brands of SWCL; (ii) out of the gross royalty payable to SWCL rebate and discount was required to be allowed. SWCL was thus entitled to receive only the net amount of royalty after the adjustment of rebate and discounts to the customers; (iii) Under the said agreement SWCL was required to supply to the assessee only sample of spirits; (iv) SWCL was obliged to specify the raw materials required for manufacture, distillation and bottling of products and render advice on the purchase of packing material to enable the assessee to retain quality control; (v) SWCL was also required to render its service for acquiring import permits and obtaining certificates from the excise authorities, besides giving advice to the assessee qua marketing arrangements being adopted in respect of sale of IMFL products; (vi) and finally, apart from the pregoing SWCL was also required to render financial support to the assessee. 14. Based on the aforesaid findings, the Tribunal came to the conclusion that the royalty was paid by the assessee to SWCL for carrying out day-to-day business activities. The payment m....
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....times the capacity of Balbir Distilleries Ltd.; the unit charges claimed by Balbir Distilleries Ltd., would naturally be higher in comparison to those claimed by the assessee since, the variable cost per unit in the case of the assessee would be appreciably lower given its capacity for higher production, and that this would also be true of fixed overheads which were again apportioned on, larger production, generated in case of assessee. 16.2 The Tribunal also noticed that the assessee had two bottling lines, while Balbir Distilleries Ltd. had only one bottling line. 16.3 For all these reasons, the Tribunal came to the conclusion that the royalty paid by the assessee to SWCL was neither excessive nor unreasonable and hence invocation of the provisions of section 40A(2)(a) by the Assessing Officer was unjustified and, thus, the disallowance had to be deleted. The Tribunal thus upheld the order of the CIT(A) for assessment year 1998-99 and directed the Assessing Officer to apply the same in respect of assessment years 1997-98 and 1999-2000 also. 17. Before us arguments on behalf of the revenue have been advanced by Ms. Rashmi Chopra, Advocate and those on behalf of the assessee by ....
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....n the same breath has categorized the sums paid by the assessee to SWCL in the form of royalty both as capital as well as revenue expenditure. After making such diametrically opposite observations, in each of the assessment years, the Assessing Officer has finally disallowed a substantial portion of the claim of the assessee by taking recourse to the provision of section 35A of the Income-tax Act. Consequently, in each of the assessment years in issue, only 1/14th of the expenditure, was allowed. This disallowance, by the Assessing Officer, is decidedly done on the basis that the expenditure in issue is in the nature of capital expenditure. 18.1 Ms. Rashmi Chopra even while reluctantly conceding that there was perhaps an element of contradiction, submitted that she had no choice but to adopt the line of reasoning reflected in the order passed by the Assessing Officer. We find this approach inexplicable. The reason for this being: in the assessment year 1998-99 the CIT(A) has taken this approach of the Assessing Officer to absurd length by bifurcating the disallowance to the extent of Rs. 24,70,929 under section 40A(2) and a balance sum equivalent to Rs. 55,06,643 under section 35A....
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....ld indicate, that the Assessing Officer would have jurisdiction to disallow a portion of the expenditure incurred by the assessee only if, in the facts of the present case, it could have shown that SWCL had a demonstrable substantial interest in the business of the assessee. The substantial interest as has been defined in the Explanation would require either a direct interest or a beneficial interest in at least 20 per cent of the voting power attached to the share holding or a share of not less than 20 per cent in the profits of the business of such an assessee. Mr. Vohra submitted that the Assessing Officer in none of the years has returned a finding which fulfils the requirement of substantial interest as contained in section 40A(2)(b)(iv) read with the Explanation. Therefore, it was contended, as rightly found by the Tribunal in the impugned judgment, that the provisions of section 40A(2)(a) not having been triggered, the disallowance under the said provision was not permissible. 20. We have heard the learned counsels for the parties. According to us, the appeal deserves to be dismissed for the reasons which are articulated hereinafter. But before we do that we must advert to ....
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....ned counsel for the revenue that the expenses incurred for use of trademark ought to be treated as capital expenditure. In this regard, the learned counsel has relied upon a judgment of Division Bench of this court in the case of J.K. Synthetics Ltd. (supra). 22.1 On a reading of the judgment, we do not find any observation which could support the submissions made by the assessee. The broad principles as gleaned from various rulings of the Supreme Court and the High Courts have been noted at page 412 in paragraph 55 of the report. There is nothing to suggest in the principles referred to therein which would support the contention of the learned counsel for the revenue that a mere use of trademark or brand name would give colour to the expenditure incurred as if, it was on capital account. As a matter of fact principles (v) and (vi) adverted to at pages 412 and 413 run completely counter to the submission made on behalf of the revenue. For the sake of convenience the same are extracted hereinafter : "(v) expenditure incurred for grant of License which accords "access" to technical knowledge, as against, "absolute" transfer of technical knowledge and information would ordinarily be....
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....well settled that a judgment is an authority for what it decides and not what is construed as logically flowing from it. Judgments cannot be read as statutes. A stray sentence picked out of context, cannot be used to turn its ratio around. 22.3 We have already referred to the provisions of the agreement. A perusal of the provisions of the agreement would show all that the assessee acquired was the use of the brand names and the trade marks of SWCL, which find a mention in Appendix-C annexed to the said agreement. The assessee acquired no right to any secret process or formulae or even any right title and interest in the trade marks and brands under which the IMFL products were sold. As a matter of fact assessee's rights were co-terminus with the subsistence of the said agreement. Therefore, we have no hesitation in rejecting the contention of the revenue in this regard. On this issue Ms. Rashmi Chopra had referred to the fact that the copy of the separate agreement had not been supplied by the assessee and, therefore, Tribunal ought to have drawn an adverse inference against the assessee. To test the veracity and seriousness of this submission we had called upon Ms. Rashmi Chopra ....