AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (5) TMI 566
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....led for the assessment year 1997-98 it had declared total income of Rs. 17,99,29,538/-under Section 115 JA of the Income-Tax Act (hereinafter referred to as „the Act). The case was selected for scrutiny and in the assessment made by the Assessing Officer, several additions/disallowances were made. Here we are concerned with only one disallowance which was made, as aforesaid, i.e. qua the royalty payment made by the assessee. The Assessing Officer noticed that the assessee had debited the amount of Rs. 47,00,41,000/- on account royalty payable to two overseas companies namely Nestec S.A. and Societe Des Produits Nestle S.A., Switzerland. These payments were claimed as business expenditure on account of technical assistance rendered by the two companies to the assessee. The Assessing Officer took this payment of royalty as huge when the book profit of the assessee after pay in that assessment years were Rs. 53.43 crores. The AO asked for various details with supporting evidence and documents about the nature of technical assistance and the basis on which the assessee had entered into agreement to pay the aforesaid amounts. The AO also noticed that the two foreign compan....
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....assessee and allowed the entire amount of royalty. In this manner, disallowance of Rs. 15 crores made by the AO was deleted by the CIT (A). It was inter alia, held by the CIT (A) that royalty payment in terms of sales at 3.5% to 5% as against the Government norms of 5-8% was reasonable. It was further held that the royalty payments for technical know-how are linked to sales and not to profit which is a derived figure that can vary from year to year. It would be relevant to state here that for the assessment year 1998-99, the Assessing Officer had made a similar disallowance of Rs. 17 crores. However, the appeal preferred by the assessee against that order was dismissed by the CIT (A) sustaining the disallowance made by the Assessing Officer. 3. In so far as the assessment year 1997-98 is concerned, the CIT (A) had allowed the appeal of the assessee. The Revenue approached the Tribunal challenging the order of the CIT (A). The assessee, on the other hand, filed appeal in so far as order of CIT (A) in respect of assessment year 1998-99 is concerned. These appeals have been decided by the Tribunal in favour of the assessee. Thus, the order of CIT (A) in respect of assessment year 199....
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....se found that the amount of royalty was neither unreasonable nor exorbitant. 5. These appeals are against the order of the Tribunal which were admitted on the following substantial question of law:- "Whether the Income Tax Appellate Tribunal in law in deleting the addition of Rs. 15 crores made by the Assessing Officer on account of alleged remuneration/royalty paid by the Assessee top 100% subsidiaries of the Assessees holding companies by relying upon Section 40A (2) (b) and Section 92 of the Income Tax Act, 1961 and Article 9 of the Double Taxation Avoidance Agreement?" "(2) Whether the Income Tax Appellate Tribunal was correct in law in holding that the Assessing Officer could not have examined reasonableness and genuineness of the alleged expenses/ payments made by the Assessee to 100% subsidiaries of the Assessees holding companies in view of the permission given by the Reserve Bank of India?" 6. The aforesaid questions were formulated in respect of assessment year 1997-98 as mentioned above. In so far as assessment year 1998-99 is concerned, there is only a difference in amount which is Rs. 17 crores instead of Rs. 15 crores in this year. The perusal of....
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....to the assessee under these agreements. 10. Nine agreements which are signed between the parties relate to different products, like coffee, pasta, noodles, dry mix infant foods, chocolates, infant weaning foods, dairy whitener etc. By virtue of these agreements, the assessee is permitted to manufacture and sell in India, the Nestle S.A. branded products under the same brand name, logo and packing etc. These agreements have various parts, part-A relates to "Manufacturing Licence". As per the provisions contained in this part, the assessee is granted licence during the term of the agreement to use the know- how for the manufacture of the products. The said know-how which the assessee is allowed to use, remains the property of the parent company. Not only the existing know-how but any improvement or development thereto are also to be given and communicated to the assessee. Part-B of the agreement deals with "duties and obligation of SPN". Under this part clause relating to "Scope of Assistance" is provided as per which technical assistance to be given to the assessee is all pervasive in the operations of the assessee company. It includes oral advice or supply of documents or samples,....
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.... attended the Annual General Meeting of the Company every year where the annual accounts and major issues of the company were placed and approved. The local shareholders of the company benefited tremendously. A person who held 100 shares in 1970 had received dividend of Rs. 2,66,563/- and the value of his holding as a result of bonus shares and attractive right shares was nearly Rs. 19 lakhs. (ii) The parent company had been in this line of business for the last 135 years. Nescafe as a product grew and developed over a period of 60 years. In the beginning, it was 12 minutes coffee brew; today it is instant coffee with improved test profile. It was necessary for the assessee to receive continuous technical assistance. The Assessing Officer however, did not appreciate the need of continuous assistance from the collaborator. (iii) 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 companys products were available in 600000 outlets in 3000 towns throughout the country, serviced by 3900 distributors. The assessee exported instant coffee from India to Russia, Hungary....
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....like salmonella and staph aureus. 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 product on the shelf. Nestle India also brought about successful shift from traditional rigid tin containers to flexible packs in regard to its milk products, instant foods and weaning foods not only resulted in significant reduction in foreign exchange outflow through imported tinplate but also resulted in cost savings in excess of 35 per cent. Reading from the annual report for the year 1996, the leaned counsel referred to continuous Business Excellence & Common Application (BEGA) Initiative. He pointed out that in a country as diverse as India, supply chain management was critical to rapid growth. The BECA concentrated heavily on streamlining and improving supply chain management. The major benefits included reduction in working capital through lower inventories of finished goods and material, better stock availability, reduction in obsolescence of materials. Further, the Moga Factory was chosen as a pilot plant and the Moga Improvemen....
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....uld achieve because of the nature of technical know how as well as the advancements made in the field of technology. (vi) The Tribunal also noted 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 programme were an irreplaceable part of Nestle Indias overall training plan. In addition to Rive Reine courses, in-house Training & Development programme within the country received considerable support from the international exports who visited India. (vii) The Tribunal also took note of the argument of the learned counsel for the assessee and found substance therein namely providing this technical know-how for the first time to the assessee company was not possible without such rigorous and continuous R& D activities undertaken by the recipient companies/parent company. It was noticed that R & D budget of Nestle, SA, Switzerland was over Rs. 2000 crores. The assessee participated in a scheme ....
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....ssistance had been made at the time of entering into agreements and subsequently to determine the impact of technical assistance on the business of the company, it was clear that these agreements had been entered into with the sole object of diverting profit of the assessee-company. In this context, the learned AO even asked the assessee to produce a certificate from an independent technical agency that the payments were commensurate to actual services received. Besides, both the learned AO in the assessment proceedings for the asst. yr. 1997-98 and the learned CIT(A) in the order for the asst. yr. 1998-99 emphasised that the assessee was already well established and well versed in the business of products in question, and was not new to the business of manufacture and sale of those products and, therefore, the assessee could not by any stretch of imagination be considered to need further technical assistance of the magnitude so as to part with a substantial chunk of its business profit. 95. The authorities below in their orders and the learned CIT (Departmental Representative) in his arguments before us have relied upon certain charts indicating 78.37 per cent and 49.95 pe....
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....ent company's brand name. The technology was highly sensitive and confidential and, therefore, in every agreement, the assessee was bound by confidentiality clause. In such circumstances, to invite an independent agency for evaluation and certification as desired by the AO was unthinkable. As to the basis on which, the quantum of remuneration for technology assistance was fixed, the learned counsel argued that at the time of entering into the agreement, it was not possible to predict accurately the amount of remuneration to be paid to technical assistance providers. That depended on the success of the product launched and actual working of the project in India and subject to several imponderables. It was for that reason that there was no specific working made at the time of entering into agreements in qustion 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. T....
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....ous other fields like quality control, personnel, staff management, marketing, storage and so on. The kind of technical assistance received by the assessee was of such nature as to sustain its position as number one manufacturer in India in respect of the products being manufactured by it. During the course of hearing before us, the learned counsel for the assessee has given several examples of major technological advancements that had taken place in the area of the assessee's products. He explained to us in detail the major changes that took place in the field of coffee manufacturing and state of art technology that allowed to capture the aroma of fresh coffee in the products of the assessee. The learned counsel dwelt at length on the unique technology in relation to extraction process called MUCH process resulting into better-finished product from the same coffee beans. He made reference to the changes in the manufacturing process of weaning foods that ensured bio availability of carbohydrates through the process of Enzymation to provide higher nutrition in meals and enhanced digestibility. These were just a few examples from out of the many advancements and changes taking place....
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...., therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the Income Tax Act and that is the function of the income tax authorities and, therefore, they can validly go into such an issue. Thus, we answer question of law no.2 in favour of the Revenue and against the assessee but hasten to add that it has no bearing on the outcome of the case as the payment is found to be reasonable and genuine, even otherwise. 16. Coming to first question of law, it is an inter-play of section 40-A (2), Section 92 and Article 9 of the DTAA. These provisions are reproduced below:- Section 40 A (2) "(2) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause 9b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of ....
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....ssing Officer can disallow such expenditure which is found to be excessive and unreasonable. This is a question of fact and as held so in the following cases:- (i) Upper India Steel Manufacturing & Engg. Co. Pvt. Ltd. Vs. CIT, 117 ITR 569 (SC) (ii) CIT Vs. Northern India Iron & Steel Co. Ltd. 179 ITR 599 (Del) (iii) CIT Vs. Sriram Piston & Rings Ltd, 181 ITR 230 (Del) (iv) CIT Vs. Padmini Packaging Pvt. Ltd. 155 Taxman 268 (Del) 18. Since on facts of this case, it is held that expenditure was neither excessive nor unreasonable, the same could not be disallowed under Section 40 A (2) of the Act. It is stated at the cost of repetition that the AO did not question the genuineness of the payment namely that the payment was in fact made by the assessee to the recipient foreign company/parent company. The assessee has been able to discharge its burden namely it was a justifiable and reasonable business expenditure and thus should be allowed under Section 37 of the Act. We may recapitulate the following findings of the Tribunal in this behalf:- (i) That the assessee has successfully discharged this burden; (ii) That the assessee has furn....