TaxTMI 
TaxTMI 
2012 (9) TMI 48
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....Nos. 1451, 1652/2010 & 825/2011) 3. The facts in brief are that the assessee, an Indian company, is the result of a joint venture (JV) between Modi Mundipharma Pvt. Ltd. (MMPL) and Revlon Mauritius Ltd. (RML) for manufacturing and marketing Revlon products in India and neighboring countries on an exclusive basis. MMPL and RML had invested in the ratio of 74:26 to form the assessee-company. In terms of the JV agreement, MMPL was responsible for the setting up, manufacturing, distribution and marketing Revlon products in the designated territory. RML was to provide know-how, trade mark, etc. The assessee entered into a technical know-how agreement with Revlon Mauritius Ltd. for supply of technical know-how to manufacture the goods. Under the said agreement, in consideration for the supply of know-how, the assessee has to pay, every year, royalty (net of taxes) at the rate of 5 %, on domestic sales and 8 %, on export sales. During the year, the assessee paid royalty of Rs.. 4,73,06,822 to RML in pursuance of the grant of right to use the technical know-how. The assessing officer disallowed this royalty expenditure stating that the amount paid to the licensor was not expenditure wholl....
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.... internationally applicable specifications and standards, suggesting changes in the product design and the specifications based on market feedback of new products, product advertising policies and campaign, price negotiations of various inputs from the suppliers, etc. The assessing officer alleged that consultancy charges were nothing but an arrangement to siphon off part of the assessee's profits to its sister concern and JVs. The assessing officer allowed Rs..30 lakhs as directors' remuneration and disallowed Rs.. 58.98 lakhs under Section 40A(2), holding it as unreasonable and excessive. The Commissioner (Appeals) deleted this disallowance holding that the assessing officer wrongly concluded that no services had been rendered by MMPL. The Commissioner (Appeals) held that rendering of services by MMPL was proved from the records, and no disallowance was warranted under Section 40A (2). The revenue's appeal to the ITAT on this score was rejected. 6. The revenue argues that the fact that the know-how agreement between the assessee and Revlon Mauritius was a continuing one, and the time agreed to originally had long since passed. This, coupled with the fact that the Revlon brand wa....
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....able. Furthermore, the Tribunal's reasoning that the brand promotion expenditure was based on a commercial decision, cannot be sustained. If every commercial decision were to be let alone, the Income Tax authorities would be bereft of jurisdiction and would be obliged to accept, uncritically, such arguments on their face value. 9. Learned counsel for the Assessee argues that the Revenue's contention is groundless. On the question of payment of royalty, it was submitted that the material on record showed that the original know-how license agreement was entered into on 14.01.1994 and was in force till August 2002; it was in accordance with the approval of the Central Government. The royalty payment in the Assessment Year in question was in terms of the Supplementary Agreement dated 16.09.2003. It is clear that the royalty payable was for the continued use of the brand and patents owned by the licensor company. This was a clear indicator that no asset of enduring nature, vested in the assessee's favor, justifying the AO to hold that 25% of the expenditure in that regard had to be treated as capital. It was further submitted that merely because two sister concerns were engaged in the ....
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.... right to use any technical know-how or process was obtained finally. Such being the case, the benefit of the technical know-how and the brand did not vest once and for all thereby resulting in creation of an asset of enduring nature. 11. Learned counsel for the Assessee further submitted that as far as brand promotion expenses are concerned, there was nothing in the Income Tax Act nor were there any materials on record suggestive of the fact that the Assessee could not claim them. It was submitted that even though one of its sister concerns, i.e. the distributor had to bear normal advertising expenses; the fact remained that as brand licensee, in a highly competent consumer market, the Assessee had to stay ahead of its competition and thus engage itself in brand promotional activities. This had to be distinguished from advertisements. Learned counsel here underlined the fact that the AO did not reject the expenses claimed in its entirety and it allowed as much as 50%. However, the reasoning of the AO and the CIT (Appeals) in disallowing the sum of Rs..14.87 lakhs was tenuous and unsustainable. It was submitted that having accepted the fact that the Assessee could spend amounts fo....
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....ufacture, marketing, sale and distribution of Revlon Products in the Territory. 2.02 Patent License. Subject to the provisions of this Agreement, from the Effective Date, Licensor hereby grants to Licensee the exclusive right to use the Patents in the manufacture, distribution and sale of Revlon Products in the Territory. xxxxxxxxxx xxxxxxxxxxx 4. FURTHER LICENSES. 4.01 Contract Manufacturer. Licensee shall not assign or sublicense any of its rights or obligations hereunder without the prior written consent of Licensor. If Licensee desires to appoint a Contract Manufacturer to manufacture Revlon Products, Licensee may do so only if (i) Licensee first submits to Licensor such information about such proposed Contract Manufacturer as Licensor may reasonably require, (ii) such proposed Contract Manufacturer agrees to be bound by the obligations of the Licensee hereunder and (iii) Licensor, in its sole discretion, consents in writing. xxxxxxxxxx xxxxxxxxxxx 7. CONSIDERATION AND TAXES. 7.01 Royalty. In consideration of the grant of license rights to it hereunder, Licensee shall pay to Licensor during the subsistence of this Agreement a royalty of 5% net of taxes, of its Net....
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.....In the case in hand it cannot be said that the Swiss Company had wholly parted with its Indian business. There was also no attempt to part with the technical knowledge absolutely in favour of the assessee. The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss Company to the assessee: (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons; (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss Company; (e) there was no transfer of the fruits of research once for all: the Swiss Company which was continuously carrying on research and had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement. We agree with t....
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....e profit making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was, therefore, in the nature of revenue expenditure." The Supreme Court also presciently observed that there may be cases where the test of "enduring benefit" may breakdown in that though expenditure incurred may result in advantage of enduring benefit, the money spent, may still be, on revenue account. The Supreme Court observed that the nature of advantage had to be viewed in a commercial sense and it was only when the advantage was in the capital field that the expenditure would be disallowable. It also held that if the advantage merely facilitates the assessee's trading operations or helps it to carry on business with greater efficiency, or profit, at the same time leaving the fixed assets intact, the expenditure would be classifiable as revenue expenditure regardles....
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....rocess knowledge to licensor even though it may continue to manufacture the product; whether any secret or process of manufacture was sold by the licensor to the licensee. 19. The know-how agreement between Revlon Mauritius and the assessee initially was for a period contained in the foreign collaboration letter issued by the FIPB, Government of India, dated 14-1-1994; (that fixed the duration of the agreement was ten years from the date of agreement or seven years from the date of commencement of commercial production). The seven year period expired on 29-8-2002. The assessee had requested the Government on 21-7-2003 for extension of technical collaboration agreement. Approval to this was granted by letter dated 6-8-2003. The supplement agreement dated 16-9-2003 was executed between RML (Licensor) and the assessee, made effective from 1-10-2003. Clause 1 of the said supplement agreement reads as under: "The agreement will continue from 1-10-2003 until such time as both parties mutually decide to terminate the agreement." In terms of Clause 3 of the agreement, it was treated as part of the original assessment except as modified. Consequently all the terms and conditions remained u....
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....s not indefinite; the supplementary agreement no doubt does not indicate a terminus quo. However, that factor is rendered insignificant, because the supplementary agreement expresses the term (of the arrangement) to be the duration of the Central Government approval. Moreover, the arrangement can be terminated. Clause 12.01 of the agreement stipulates that upon expiration or termination of this agreement, the licensee shall have no right to exploit or in any way to use the know-how and shall forthwith discontinue all use of the know-how and shall not thereafter use the know-how. Furthermore, there is nothing in the agreement suggestive of any vesting of the know-how, or part of it, or the goodwill in the brand, in the licensee/ assessee. In these circumstances, this Court is of the opinion that the revenue's arguments about the royalty amount being really in the nature of capital expenditure, is meritless. The Tribunal's findings on this point are therefore, upheld. 22. As far as the second aspect, i.e. expenditure for promotion of the brand is concerned, there is no doubt that the dealer's functions extend to advertising the products of the assessee, manufactured by the si....
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....a Marketing (P) Ltd 195 Taxman 256 has recognized that brand promotion exercises undertaken through media campaigns, schemes, programmes etc are essential for propagation of the brand. The necessity (or lack of it) is not something which income tax authorities can go into; as long as it is voluntarily undertaken by the business enterprise for profit earning, it would be entitled to claim relief under Section 37 (1). 23. In the present case, the AO was conscious of the fact that brand promotion expenses are a necessary ingredient in marketing strategies. Therefore, he allowed about 50% of those expenses. However, the reasoning for disallowance of the rest, i.e. that the assessee could claim only a proportion of such expenses, since advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld. This Court does not see any fallacy in the Tribunal's approach or reasoning, on this aspect. One is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances the visibility of given products or services, and are often perceived as ....
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...., India and MODI-MUNDIPHARMA LIMITED, an Indian corporation ("MM"), having its registered office at 1400 Hemkunt Tower, 98 Nehru Place, New Delhi 110-019, India. 3. Consultation to Modi-Revlon. (a) MM shall provide consulting advice concerning day-to-day conduct of the management of Modi-Revlon, including recommendations concerning the appointment and dismissal of employees and advice concerning Modi-Revlon's outside dealings, and shall assist Modi-Revlon in the development of its business in accordance with the terms of the Shareholders' Agreement, the TM License and the Know How License. xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxx 4. Compensation. (a) Modi-Revlon agrees to pay MM an amount in rupees equal to US$200,000 per calendar year, commencing with 1995, plus an amount equal to one percent of the Net Sales of Modi-Revlon in each calendar year in excess of US$ 15,000,000; provided, however, that the aggregate remuneration payable to MM hereunder shall not exceed the sum of US$ 300,000 per annum. (b) The compensation payable to MM stated in paragraph 4(a) and the determination of the U.S. dollar equivalent of the Net Sales of Modi-Revlon shall be paid and determined, as applica....
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.... It would be useful to recollect the decision of the Supreme Court in S.A. Builders Ltd. v. CIT (2006) 289 ITR 26 (SC) where it was held that the revenue cannot place itself in the arm chair of businessman or in the position of the Board of Directors and assume the role of deciding what is the reasonable expenditure having regard to the circumstances of the case. The Appellate Commissioner's order in this case, contains the following reasons: "MMPL has been actively associating with the appellant in various services such as manpower planning and recruitment, sales review, preparation of marketing plans, product advertising and promotional policies, budgeting, motivational schemes etc identified in Para 10.1 by the agreement....Without any evidence to the contrary, it cannot be said that Mr. Modi has not rendered services as a representative of MMPL. If it is so, the services rendered by him for MMPL but would take the character of a gratuitous payment or payment received in spite of not rendering any services. Such finding can only be made in the case of MMPL and that too after examining the various documents in relation to services rendered by him for MMPL. In any case, renderin....