TaxTMI 
TaxTMI 
2011 (8) TMI 485
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.... Since the facts obtaining in the captioned 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)&....
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....he UNIT. If stocks are required to be taken back for other reasons, such as, sedimentation etc., the 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 despatche....
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....ll be construed as precluding in any manner Shaw Wallace or its associated companies or related companies as the case may be from using or licencing 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 pe....
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....ems of packing materials with standard allowable wastages Plus (vii) Cost of chemicals for conversion at the rate of Rs. 0.50 per case (to be reviewed by Shaw Wallace on an annual basis)." 2. Shaw Wallace will be 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 r....
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....Furthermore, the Assessing Officer, on perusal of the terms of the agreement, came to the conclusion that the assessee had acquired right to manufacture and, sale of IMFL products under the SWCL brand name. The Assessing Officer was thus of the 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 Asse....
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....the assessee had claimed a sum of Rs. 5,67,92,000 as royalty paid to SWCL since in the immediately preceding year (i.e., assessment year 1997-98), the Assessing Officer had allowed only 1/14th amount towards royalty to the assessee by invoking the provisions 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 concern....
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....in the company. Now the question arises whether the payment made to Shaw Wallace which has distant and indirect control on the assessee can be said to be a person having substantial interest in the appellant company. The expression "substantial interest" has been defined in Explanation 2 to sub-section (2) of section 40A. A person 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 Delh....
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....t year 1997-98 and 1999-2000, while the revenue was in appeal in respect of the order of the CIT(A) for the assessment year 1998-99. The Tribunal vide impugned judgment has decided the issue by way of a common judgment. The Tribunal in the impugned judgment, upon perusal of the terms of the said agreement has returned the following findings 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 ....
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....h its presence in North India it ended up paying higher bottling charges to Balbir Distilleries Ltd. 16.1 That apart the Tribunal was persuaded by the explanation given by the assessee that given the fact that Balbir Distilleries Ltd., had a plant of a much lower capacity, as compared to that of the assessee which had a capacity which was four 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 disallo....
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....bunal being the final fact finding authority, it ought to have undertaken this exercise. 18. At this stage we may notice that we had put to Ms. Rashmi Chopra, as to whether the revenue was required to take a stand at the beginning of the assessment proceedings as to the nature of the expenditure involved. As noticed by us hereinabove, the Assessing Officer in 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....
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....fil the test of proximity either by way of relationship or interest as provided in section 40A(2)(b) read with the Explanation appended to sub-section (2)(b). Mr. Vohra submitted that the Assessing Officer in this regard had relied upon the provisions of section 40A(2)(b)(iv) read with the Explanation. According to Mr. Vohra, a bare reading of the said provisions would 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 th....
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....re should be in the nature of capital expenditure. 22. In the instant case, we have no hesitation in saying that the expenditure incurred by the assessee was neither for acquisition of any patents or copyrights. This is not even the case of the revenue. The revenue has latched on to royalty paid for use of trademarks and brands of SWCL. It was agued by Ms. Rashmi Chopra, learned 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 f....
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.... mentioned that not even a right to use the trademark or brand name had inhered in the assessee. From this, it cannot be concluded, as is sought to be done by the learned counsel for the revenue that any payment made for use of trademark or trade name ipso facto will give colour to the payment as if it is made on capital account. This is in our view is a complete mis-reading of the judgment. It is 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. There....