TaxTMI 
TaxTMI 
2005 (5) TMI 244
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....of appeal is regarding disallowance of commission paid to Givaudan Roure (India) Ltd. (GRIL). The assessee claimed payment of commission at the rate of 5 per cent of the turnover. The Assessing Officer disallowed 4/5th of this payment i.e. the Assessing Officer allowed commission payment at the rate of 1 per cent of the turnover. Learned CIT(A) following his order pertaining to assessment years 1995-96 to 1997-98 held that commission at the rate of 2 per cent is to be allowed. Whereas the assessee challenges disallowance of commission to the extent of 3 per cent, the revenue challenges the allowance of commission over and above that allowed by the Assessing Officer. 2.1 Similar issue arose before this Tribunal in assessee's appeal for assessment years 1995-96 to 1996-97. The Tribunal after elaborate consideration of the fact as well as argument and the results for the years, held as under:- "All these details have been extracted from the accounts of both the companies and are not in dispute also. From the above, it is clear that the assessee has been showing best results after the holding company has come into play. From the details found in the record it is clear that M/s. G....
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....s. Learned CIT(A), following his order for assessment year 1995-96, upheld the disallowance. However, he also directed to follow the order of the Tribunal for earlier year in this regard. 3.1 As stated, the issue regarding payment of commission and consultancy fees to the Director Shri Vijay Kumar arose before this Tribunal for earlier years. The Tribunal, after considering the entire facts and circumstances of the case in para 7 of its order, held as under:- "From the details furnished in the aforesaid letter, it can be seen that from the assessment years 1991-92 to 1994-95 there is a steep increase in turnover and profit. This cannot be achieved without the technical advise from a qualified and experienced perfumers. It is the case of the assessee that both Shri Vijaya Kumar and Shri Nagendra are technically qualified and experienced perfumers having more than 15 years of experience in this field. The perfumery compounds and chemicals are specialised work. To manufacture aromatic products, it can be carried out only by the professionals in this line. A minor variance in the technique and formulae will directly affect the quality of products. Further procurement of raw mater....
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....terms and conditions set forth herein for use by Licensee in the manufacture and sale of its products'." Pursuant to the license, the know-how was made available to the assessee company. As per clause (5) of the said license agreement, in consideration of the rights granted and the services provided under the agreement, the assessee was to pay a royalty at the rate of 5 per cent of the net sales value of the agreement products manufactured and sold by the assessee. The assessee was therefore liable to pay royalty to the extent of Rs. 2,74,88,099 for assessment year 1998-99. The assessee claimed Rs. 2,39,61,276 out of the said royalty, as for the balance sum, the tax was not deducted under section 195 and hence, in view of section 40(a)(i), the claim for the balance sum was not made. The Assessing Officer noted that GRIL is a fully owned subsidiary company of GRISA. GRIL owns 76 per cent of the share of the assessee company. Balance shares were held by erstwhile owner of the company viz. Shri Vijay Kumar and his nominees. For the year ended 31-3-2000, the entire share capital of assessee-company was held by GRIL and its nominees. The Assessing Officer held that though the assesse....
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....eld the disallowance. 4.1 Learned counsel for the assessee submitted that the appellant company has been given a license to make use of the confidential information, experience, know-how, trade secrets and formula relating to the development formulation processing, manufacture use and sale of flavours, fragrances and related materials by GRISA vide License executed on 1-11-1995 between the parties. A copy of the license agreement is filed in paper book. This agreement was put to RBI for approval and RBI vide its letter dated 22-9-1997 had approved with certain conditions to be fulfilled as provided therein. One of the conditions was that the royalty payment should not exceed 5 per cent of the domestic sales and 5 per cent of the export (net of taxes) for the period of 3 years. A copy of the said letter of the RBI is enclosed in paper book. In pursuance of this approval, the supplementary agreement was also made to define the effective date of the operation of the license on 30-9-1997. A copy of the said agreement is enclosed in paper book. Thus it may be appreciated that the agreement between the appellant-company and the GRISA was a genuine agreement which had been screened by ....
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....ly the assessing authority had drawn the conclusion only on surmise because of the relationship between the appellant and GRISA. The appellant had vide its letter dated 24-1-2001 had explained the assessing authority the license obtained and justification for making the payment of royalty of 5 per cent. A copy of the said letter is filed in paper book. It was also submitted that on account of the manufacturing activity of the flavours and fragrances by the appellant with the GRISA's expertise it could procure vast customers who were originally importing the flavours and fragrances from GRISA directly. The appellant submits that on account of this arrangement the turnover of the appellant had gone up substantially which is evident from the following:- ---------------------------------------------------- A. Yrs. Total turnover Net profit Royalty payment Rs. Rs. Rs. ---------------------------------------------------- 1997-98 29,89....
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....is excessive, then a part of it could be disallowed. For this purpose the assessing authority has to prove that the consideration paid by the appellant to GRISA was excessive and over and above the prevailing market value of the services obtained from GRISA. Here again it has to be examined as to whether GRISA comes within the susceptible character as contemplated under section 40A(2) of the Act. The appellant-company is a subsidiary company of M/s. Givaudan Roure (India) Ltd. which is a 100 per cent subsidiary of GRISA. The Indian company holding 76 per cent share in the appellant company whereas the GRISA has no shareholding. Section 40A(2) of the Act could be invoked only when the appellant-company makes payment to any director of the company or any person (Individual, firm, company, AOP, HUF, etc.) having a substantial interest (i.e. owning at lease 20 per cent voting rights on holding of equity shares) in the company or any person of which a director, partner or member has a substantial interest in the company or any relative of any such director or person. As GRISA is having no shareholding in the appellant-company, any of the conditions to invoke section 40A(2) of the Act ar....
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.... achieved, the court might be justified in overlooking the intermediate steps, but it is not permissible for the court to treat the intervening legal step as non est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests." In the circumstances, the impugned addition may kindly be deleted. 4.2 Learned DR Shri Arun Bhatnagar, CIT(A)-III on the other hand strongly supported the order of the learned CIT(A). He submitted that M/s. GRIL is a fully owned subsidiary company of M/s. GRISA. The payment of royalty to GRISA has to be analysed in the context of these facts concerning the ownership of the assessee-company. The payment of royalty to GRISA is de fecto a payment to oneself for the reason that GRISA beneficiary owns 76 per cent shares of the assessee-company through its fully owned subsidiary GRIL. Hence, the payee of the royalty is none other than an entity which holds more than 76 per cent shares of the assessee-company. The transaction therefore is not one....
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....orld Electronics (P.) Ltd. [1990] 184 ITR 308 wherein it was held thus: "Even though the corporation might be legal personality distinct from its members, the court is entitled to lift the mask of corporate entity, if the concept is used for tax evasion, or to circumvent tax obligation, or to perpetrate a fraud." "It is true that tax planning is legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." 4.4 He invited our attention to the decision of Hon'ble Kerala High Court in the case of CIT v. Paulose & Mathen (P.) Ltd. [1999] 236 ITR 416. This was a case relating to the applicability of Explanation 3 to section 43(1). The court found that revaluation of assets belonging to a firm taken over by the company which was a partner in the said firm was not bona fide. The court also observed, relying on the decision of the Apex Court in Sunil Sidharthbhai v. CIT [1985] 156 ITR 509 that the Assessing Officer is en....
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....axation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not so skilful, advisers, on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers'." 4.6 Shri Bhatnagar also ....
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....ng which is within the framework of law. The finding recorded by the authorities referred to above does not suffer from any error, much less, an error involving a substantial question of law. Therefore, we are of the view that the Tribunal, having regard to the facts and circumstances of the case was fully justified in relying upon the principle enunciated by the Supreme Court in the case of McDowell and Co. Ltd. [1985] 154 ITR 148." "In the facts of this case, we are inclined to take the view that while the APSEB was interest in securing financial assistance by way of loan and for the said purpose the machinery/equipment was offered as a security by creating the documents in question to assure repayment of the loan advanced, the appellant found it convenient to enter into such a transaction as a device adopted to avoid payment of tax. Therefore, the Tribunal and the subordinate authorities were fully justified, taking into account several circumstances referred to by them in the orders impugned, to determine the nature of the new and sophisticated acumen adopted to avoid payment of tax legitimately due to the State. In a matter like this, we consider that it is the duty of this....
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....omers were being manufactured by assessee-company and supplied through the orders booked by GRIL. But for the license agreement, the assessee would not have executed these orders. These facts are not disputed by the Assessing Officer. Though he mentions in the order that receipt of know-how necessary for advancement of its business and commercial benefit out of same is not "seriously disputed", we find that the same is not disputed at all. The question is but for the licence agreement, the assessee would have availed the commercial benefit? The answer is clearly 'no'. It is the contention of the Assessing Officer that the transaction should be carried on at an 'arms length'. A transaction can be said to be at an 'arms length' when the two entities put aside the relation. The transaction is done in commercial way without bringing the relation in between. In such transaction, the consideration due and payable is paid, neither more nor less. The relationship of holding subsidiary, principal agent or any other relations is put aside and the transaction is termed solely on the basis of commercial consideration. A Managing Director of the Company, holding substantially the entire capital....
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....that the payment was only a make believe. On the other hand the royalty payments are actually being made. In the circumstances, the payment being a legitimate business expenditure is required to be allowed under section 37(1) of the Act. The other argument that the device was colourable was also without merit. It is an undisputed fact that the foreign company has supplied know-how but for which the company could not have expanded its business. The performance of the company is again proved on account of the various customers which could gain by applying the know-how provided by the foreign company. Had the foreign company not provided the know-how and directly dealt with the various esteemed customers of the appellant, the appellant company would nowhere be in the market. On the other hand, the appellant-company having reaped the benefit for obtaining the know-how is providing the fraction of the profit by way of royalty to the foreign company. By no stretch of imagination the agreement may be held to be colourable. The recent judgment of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, the Supreme Court has observed as follows:- ....
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....e of the business, the department cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. But this principle is now subject to express provisions of section 40A(2). No effort has been made to find out as to what is the market value of service provided and to what extent the amount is excessive or unreasonable. On the contrary, from the order under section 92CA of the Act, for assessment year 200203, it is seen that the transaction is treated at arms length and even as per the amended provisions of section 92, no adjustment in respect of such international transaction has been made. 5.2 The expression "wholly" has been used with reference to the quantum, while the expression "exclusively" refers to the nature or the purpose of the activity in which the expenditure is incurred. In other words, the whole of the expenditure must have been wholly and exclusively incurred for business purposes, in order to qualify for allowance under section 37(1) of the Act. If there is a dual purpose, then, it is obvious ....