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TaxTMI 
TaxTMI 
TaxTMI 
2022 (4) TMI 1073
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....d the issue itself rather than remitting it to the AO. The Hon'ble High Court, vide its judgment dated 14-08-2014, sent the matter back to the Tribunal for deciding the matter afresh at its own. In the second round of proceedings before the Tribunal, the issue of `Service charges' was thoroughly argued on behalf of the assessee urging that the same was covered in favour of the assessee by the order of the Tribunal for the immediately preceding A.Y. 1997-98. The Tribunal passed the order on 22-08-2019 enhancing the disallowance as sustained in the first appeal. The assessee moved Miscellaneous Applications. Vide order dated 29-10-2021, the Tribunal has recalled its order dated 22-08-2019, inter alia, on the issue of `Service charges' for the reasons stated therein. This is how, the matter has now come up before this Bench for consideration and decision. 2. We are espousing the factual panorama for the A.Y. 1998-99. Pithily put, the assessee, earlier known as Britco Company Ltd., is a 100% subsidiary of Coca Cola South Asia Holding Inc. with The Coca Cola INC, USA (hereinafter also called as 'TCCC') as the ultimate holding company. The assessee is engaged in the manufacture of `beve....
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....t `Royalty' paid indirectly to TCCC for use of its trademark and technical know-how. Without prejudice to such a view and in the absence of the assessee having furnished details about the nature of services allegedly received by it from CCI Inc., the AO disallowed 10% of the expenditure at Rs. 7.04 crore. The matter was taken up in the first appeal. The assessee furnished necessary details and justification for the payment of Service charges before the ld. first appellate authority, who called for a remand report from the AO. In his report, the AO canvassed a view that entire `Service charges' amounting to Rs. 70.40 crore were liable to be disallowed in full. The ld. CIT(A) conducted inquiry at the appellate level by discussing the matter with Sh. K.S. Nair, General Manager of the assessee company, whose statement was also recorded on 22-05-2003. Taking note of the detailed submissions filed by the assessee and all other relevant material/evidence, the ld. CIT(A) issued enhancement notice and thereafter concluded that 25% of service charges, as relatable to services rendered by CCI Inc. to the bottlers, were not allowable in the hands of the assessee, which implies that the Service....
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....uality audit of the bottlers' plants primarily helped the assessee in having business at a higher scale. The ld. AR further relied on a judgment of the Hon'ble jurisdictional High Court to contend that the allowability of expenditure incurred by the assessee, which is otherwise wholly and exclusively for its business, will not be disturbed even if third parties get substantial benefit. 4. The ld. Counsel for assessee submitted that Coco-Cola group entities were collectively working in India under TCCC having a common goal of producing Beverages. The activity of manufacturing the concentrate was done by the assessee; Bottling was partly done by the assessee as well as HCCB; and Services were rendered by another group, namely, CCI Inc. He submitted that the price charged by the assessee from the unrelated bottlers was inclusive of the service charges of their quality audit borne by the assessee. The fact that the revenue of assessee included compensation towards rendition of the services by CCI Inc., the deductibility of such expenses in the hands of assessee, on considering Coca Cola group as one unit, should not have been questioned. 5.1. The ld. AR stated that the issue of deduc....
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....to the assessee company advisory services including but not limited to the following: (a) Develop and promote the export activities of Britco (b) Advise, monitor and co-ordinate the activities of Bottlers in the Country with Britco and provide : (i) Technical support in sourcing Bottlers supplies; (ii) Technical know-how and assistance to Bottlers in upgradation of production capabilities and quality of Products for which the beverage essence and beverage bases are manufactured by Britco; (iii) Systems support to enable Bottlers to manage their business more efficiently and effectively; (iv) Assistance and guidance to Bottlers and Britco, on advertising and promotion; (v) Support in evolving effective storage, distribution and dispensing systems; (vi) Advise and assist on recruitment, development and implementation of human resource management and procedures; (vii) Advise Britco on all business procedures and practices; (viii) Study the possibility of Indian business entities becoming Bottlers in the Country and to oversee and support the activities of potential customer of Britco; (ix) Evaluate, qualify and assist in development or upgradation of po....
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....y and the consequential profits. The said inspection had no association with the assessee's business. He read out further from the report that "plant was using excessive pressure for Syrup ... for faulty regulator and pressure Syrup. The pressure ... was revised and plant was advised for faulty regulator and to maintain a pressure.... in order to avoid CO2 loss". He thus accentuated on the fact that services rendered by CCI Inc. to Indore Bottling Company were aimed at the upkeep and maintenance of their plant for achieving efficiency in production, reducing production losses and removing the bottlenecks in procedures so as to maximise their profits, which had absolutely no relation whatsoever with the assessee supplying Concentrate to them. 6.3. The ld. DR submitted that though the Agreement talks of a bouquet of services to be provided by CCI Inc. to the bottlers including co-ordination with the production of the assessee and their requirements etc., but no evidence worth the name has been placed on record qua the services other than inspection of plant of the bottlers either before the authorities below or the Tribunal even in the extant third round of proceedings. It was state....
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....ch service charges were paid by the assessee to CCI Inc, benefitted exclusively the Bottlers and not the assessee. Even though the assessee's contention was that it was getting higher orders by means of maintenance of plants of Bottlers by CCI Inc., the primary object of expenditure was the upkeep and maintenance of plants of the Bottlers and not that of the assessee. It was only some incidental benefit flowing to the assessee from the services of plant maintenance of the Bottlers in terms of its more sales, which even did not ingrain any co-relation with such services. He drew a parallel between the services rendered by CCI Inc. to the assessee for upkeep and maintenance of its plant, which were wholly and exclusively for the assessee's business and the incidental benefit was flowing to the Bottlers because of smooth supply of Concentrate to them and on the other hand, the upkeep and maintenance services provided by CCI Inc. to the Bottlers which were wholly and exclusively for their businesses and the incidental benefit was percolating to the assessee in terms of increase in sale of Concentrate to them. He rather stressed that the plant maintenance services rendered by CCI Inc. w....
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.... Referring to the correspondence of TCCC with Reserve Bank of India (RBI), the ld. DR submitted that a letter dated 23.05.1994 was addressed by Coca Cola India to RBI stating that it was permitted by RBI to operate liaison offices in Bombay and Delhi and the "chief function of the liaison office is to provide technical and systems support to authorised bottlers in India, licensed to bottle Beverages of TCCC". This letter further indicates that "TCCC is desirous of housing the two activities, viz. the manufacturing and support activities respectively, in two separate entities, as has been done by it in 195 countries it conduct its operations in". Based on this letter dated 23.05.1994 written by Coca Cola India to RBI, the ld. DR submitted that TCCC set up the assessee as a manufacturing entity and CCI Inc. as a services rendering entity. This was emphasized to demonstrate that TCCC was controlling the operations of CCI Inc. as well as the assessee. With a further reference to another letter dated 26.09.1994 addressed by Coca Cola to RBI, the ld. DR submitted that the assessee in para 1 of the same has been described `in essence a mere supply entity' set up for manufacturing Concentr....
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.... carried on by the assessee was fully and strictly as per the directions of TCCC. Not only the Concentrate was to be manufactured as per specifications and instructions of TCCC, even the assessee was obliged to sell the same only to the Authorized Bottlers, namely, those who were appointed by TCCC. 6.11. Referring to the Agreement between TCCC and Parle Beverages Limited (one of the Bottlers), a copy placed at page 38 onwards of the Paper book- III, the ld. DR submitted that the Company (TCCC) issued license to the bottler to use trademarks in connection with the preparation and packaging of beverages. As per Part-II of the Agreement with the heading "Obligations of the Company', TCCC or the assessee were obliged to sell such quantities of Beverage Bases as may be ordered by the Bottlers from time to time. TCCC or the assessee under clause 4(a) of the Agreement undertook to sell and deliver to the Bottler, only such quantities of the Beverage Bases as was necessary and sufficient to implement the Bottler's Agreement. Clause 4(b) provides that "Bottler will use the Beverage Bases exclusively for the preparation of Beverages as prescribed from time to time by the Company (TCCC)". Pa....
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....ge Bases.....". Clause 26(b) provides that the Company reserves the right to establish and to revise, by giving written notice to the Bottler, maximum price at which each of the Beverages in Authorized Containers may be sold by the Bottler to retail outlets and the maximum retail prices for each of the Beverages. Clause 26(d) provides that "if the Bottler is unwilling to pay the revised price in respect of the Beverage Base, then the Bottler shall so notify the Company in writing and the company shall terminate the Agreement with the Bottler for manufacturing the beverages". 6.12. The ld. DR vociferously submitted that the assessee was manufacturing the Concentrates by means of the technical knowhow and trademark supplied by TCCC; the manufacturing was to be done as per the standards set up by TCCC; personnel of TCCC could visit the assessee's plant and operations at any time; the Concentrate manufactured by the assessee was to be sold to the bottlers as per the directions of TCCC and even its pricing was determined by TCCC. He further stated that the operations of the Bottlers were also in control of TCCC, who were deciding everything right from granting license to manufacture; t....
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....Bottlers by CCI Inc., which indicated that the assessee was nowhere in the loop qua the rendition of the services to the bottlers. 6.14. On the question of quantum of the addition sustained at 25% of the total service charges paid by the assessee to CCI Inc., the ld. DR submitted that ld. CIT(A) was extraordinarily generous in restricting the disallowance to this level. His raison d'etre was that there were more than 50 unrelated Bottlers and only four group companies engaged in the Bottling business apart from the assessee doing this activity at two units for few months of the year. Given the magnitude of number of outside Bottlers vis-a-vis consumption of Concentrate by the assessee for self and other related group companies, the ld. DR submitted that actual service charges paid by the assessee to CCI Inc. as pertaining to the bottlers should have been much more than 25%. 7. On the contention of the ld. AR about the deductibility of service charges on the cumulative approach of Coca Cola group companies, the ld. DR submitted that the assessee is liable to tax only qua its income unmindful of the activities of other group companies. 8. Replying to the contention of the ld. AR t....
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....ote that similar disallowance of Service charges was made by the AO in his order for the immediately preceding assessment year. As against the total expenditure of Rs. 46.75 crore incurred by the assessee towards service fee to CCI Inc., the AO made disallowance of Rs. 10.80 crore (nearly 25%) on similar grounds of the services rendered by CCI Inc. to the bottlers not for the business purpose of the assessee. The ld. CIT(A) confirmed the addition by holding that such expenditure was not wholly and exclusively for the purpose of the assessee's business because that was benefitting the bottlers. When the matter finally came up for consideration before the Tribunal, the disallowance came to be deleted vide its order dated 30-06-2008, whose copy has been placed on record. 11.2. Here it is pertinent to mention that the immediately preceding year was governed by the Service agreement dated 1.4.1995. However, the year in question came to be covered by a new Service agreement effective from 1.4.1997, whose copy has been placed at page 1 of the paper book. While discussing the submissions of the ld. DR, we have reproduced hereinabove Clause (1) of the 1997 Agreement. There are fresh clause....
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....that the services rendered by CCI Inc. to Bottlers in the A.Y. 1997-98 were of similar nature as given in the assessment year under consideration. The point for determination is only the deductibility of service charges paid by the assessee to CCI Inc. for rendering services to the bottlers. Thus, even though there is some change in the facts from the preceding year to the current year by means of substitution of the Agreement expanding the scope of services, but such change has no impact on the issue for determination, being the services rendered to the bottlers. As such, we find it difficult to hold that the facts for the year under consideration have undergone change vis-a-vis the immediately preceding year qua the issue of deductibility of service charges paid for the plant maintenance of the unrelated bottlers. This very issue has been examined by the Tribunal in its order for A.Y. 1997-98 and a decision has been rendered that such expenses are allowable in terms of section 37(1) of the Act. Albeit there is a massive force in the contentions of the ld. DR, but we do not wish to accord our imprimatur to the same by disturbing the consistency of the Tribunal's conclusion on the ....