TMI Blog2014 (10) TMI 695X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A read with Rule 8D of I.T Rules 1962 should not be made - sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively does not mean that the AO is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure - If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further – relying upon CIT., Mumbai Versus M/s. Walfort Share & Stock Brokers P. Ltd. [2010 (7) TMI 15 - SUPREME COURT] - in this light of the departmental stand the assessee’s stand that detailed argument on facts are required to be addressed stands addressed by the issue accordingly after having the parties is restore, by the AO who shall adjudicated upon the issue denovo after giving the assessee a reasonable opportunity of being heard – thus, the matter is to be remitted back to the AO for fresh adjudication – Decided in favour of assessee. - (In I.T.A .No.-4669/Del/2012 A. Y 2007-08), (In I.T.A .No.-4670/Del/2012A.Y 2008-09), C.O-433/Del/2012, C.O-434/Del/2012 - - - Dated:- 3-1-2014 - SMT DIVA SINGH AND SHRI SHAMIM YAHYA, JJ. For The Appellant : Sh.Gunjan Prasad, CIT DR For The Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence in amount. The same is reproduced hereunder:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) has erred in deleting the addition of ₹ 40,07,44,800/-( ₹ 49,98,34,379/- 2008-09) being the disallowance of 40% of License Fee paid to M/s Societes D\des Products Nestle, SA, Switzerland .. 7. The relevant facts of the case which are taken from 2007-08 Assessment Year are that the Assessing Officer considering the e-return filed by the assessee wherein an income of ₹ 436,49,21,710/- was declared selected the case for scrutiny assessment by issuance of notice u/s 143(2)/142(1) along with questionnaire etc. The AO took into consideration the fact that the assessee company was engaged in the business of manufacturing and sale of various food products and beverages. He also observed that the assessee is one of the major players in the manufacturing and sale of food product and powerful brands like Nescafe, Lactogen, Cerelac, Maggi, Milkmaid, Everyday etc., are licensed to the assessee and the assessee manufactures and sells these products. 8. Qua the issue raised by the revenue the facts are found discussed in the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70.42 crores as against the book profit of ₹ 214.72 397.29 crores, which is in fact 29% 18% of the net profit respectively. Likewise, in F.Y 2004-05, the assessee has paid royalty of ₹ 75.29 crores against profit of ₹ 414.12 crores, which is 18% of the profits. In AY: 2005-06, the assessee has paid a sum of ₹ 75.29 crores against profit of R. 414.21 corres, which is 18% of the profits. In A.Y: 2005-06, the assessee has paid a sum of ₹ 84.56 crores, against profit of ₹ 482.95 crores towards royalty to the parent company. In view of these facts, it appears as if the assessee was doing business not for itself but for the closely connected companies to whom the General License Agreement Fee for technical assistance has been paid. 3.4 In view of the above, an explanation was called for from the assessee as to why royalty payment shall not be disallowed. In response thereto the assessee has given the following submission: Query raised by your honour as to why the payment of royalty should not be disallowed. In the absence of any specific reason given for disallowance of royalty, it is presumed that the query relating to isallowance of royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh advertisement and business promotion expenses with higher sales resulting into higher payment of licenses fee payment to M/s Nestle SA and its brand building has been established. However, no separate disallowance is being made on these two issues as royalty or general license fee is the only which is being paid to overseas entity. 3.9 Therefore, ₹ 40,07,44,800/- being 40% out of the total license fee payment of ₹ 100,18,62,000/- is treated as expenditure not incurred wholly and exclusively for the purpose of business of the assessee and accordingly disallowed as expenditure and added back to the taxable income of the assessee. Penalty proceedings u/s 271 (1) (C) are also initiated herewith. [Addition of ₹ 40,07,44,800/-] ( Bold testing by the Bench for emphasis) 9. In appeal before the First Appellate Authority detailed arguments are found advanced on behalf of the assessee which are reproduced in Para 6 of the impugned order. The same are reproduced hereunder for ready reference:- 7. As regards the first issue, i.e, the allowability of deduction in respect of royalty, the same arises out of the following facts: 6.1 The claim of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant, and higher expenditure on advertisement had resulted in higher sales and consequently higher royalty payment. 6.5 Tracing the history of disallowance on account of royalty, the appellant contended that disallowance in this regard was made for the first time in Assessment Year 1997-98, which disallowance was deleted by the CIT(A). It was further submitted that similar disallowance was made by the AO in Assessment Year 1998-99, which was confirmed by the CIT(A). However, the Tribunal, vide consolidated order, dated 10/1/2005, upheld the deletion of the disallowance for Assessment Year 1997-98 and deleted disallowance upheld by the CIT(A) for Assessment Year 1998-99. The Tribunal, in the department s appeal for A.Y 1997-98 and in the appellant s appeal for the A.Y 1998-99, vide consolidated order dated 10/1/2005, examined the issue threadbare and after considering the each of the reasons given by the AO and the appellate authority to disallow part claim of royalty, which are also the reasons given by the AO to disallow appellant s claim of royalty in the Assessment Year under consideration and the appellant s submissions, deleted the disallowance of royalty. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, in the case of CIT Vs. Adidas India Marketing: 195 Taxman 256 upheld the order of the Tribunal deleting similar disallowance out of advertisement expenditure. 6.10 The history of litigation on the issue of royalty disallowance may be tabulated as under:- S.No. AY Amount disallowed CIT(A) order ITAT order High Court order SC order 1 1997 -98 ₹ 15 crores disallowed on an adhoc basis Disallowanc e deleted vide order dated 31/8/2000 CIT(A) order upheld vide order dated 10/1/2005 ITAT order upheld vide order dated 11/5/2011 Appeal of the Deptt. Has been admitted 2 1998 -99 ₹ 17 crores disallowed on an ad hoc basis. Disallowanc e upheld by CIT(A) Disallowanc e deleted vide order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by CIT(A) CIT(A) order upheld vide order dated 24/7/2009 No informatio n 8 2004 -05 40% of royalty Disallowanc e deleted vide order dated 30/4/2007 CIT(A) order upheld vide order dated 24/7/2009 No informatio n 9 2005 -06 40% of royalty Disallowanc e deleted vide order dated 25/11/2009 CIT(A) order upheld vide order dated 22/3/2010 ITAT order upheld vide order dated 11/5/2011 Appeal of the Deptt has been admitted. 10 2006 -07 40% of royalty Disallowanc e delted vide order dated 26/7/2010 CIT(A) order upheld vide order dated 18/11/2011 No i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT DR which have been tabulated by way of a chart, reproduced in para 6.10 was not assailed. 12. Ld. AR on the other hand requested for time, however in the face of the material available on record qua the issue concerned the said request was rejected. A perusal of the record which has been extracted from the relevant orders in the earlier part of this order would show that the part disallowance of license fee has been a subject matter of continuous litigation as per the past history of the assessee on the issue and this fact has been taken note of by the Assessing Officer in para 3.3 of his order which has been by reproduced in the earlier part of this order, it is further evident that the Assessing Officer was apprised of the fact as its found discussed by him in para 3.5 that the issue had been decided but the ITAT in favour of the assessee in the earlier years. However, since the Revenue s appeal was admitted on a question of law before the Hon ble High Court and the matter was subjudice it is seen the AO proceeded to make a disallowance following the past position at the assessment stage. It is also seen that considering the arguments advanced before the CIT(A) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court vide its order dated 11/5/2011 is also seen that identical disallowance in the case of the assessee from 1999-2000 to 2006-07 were deleted in appeal by the First Appellate Authority which orders were confirmed by the ITAT. It is also a matter of record that the orders for 1999-2000 to 2000-01 and 2005-06 assessment year were confirmed by the Hon ble High Court by way of a consolidated order dated 11/5/2011. The CIT(A) further took into consideration the fact that the TPO in his order dated 26/7/2010 u/s 92(A)(3) admittedly accepted the payment of Royalty made by the assessee to SPN were at Arm s Length. In the said background before the CIT(A) the argument advanced was that the advertisement and salary promotion expenses was incurred solely for the benefit of the parent company was assailed and it was argued that the expenditure incurred was solely for promotion of the products manufactured by it and for deriving benefit for the business carried on by it and not for brand building of Nestle S.A. A perusal of the record further shows that cognizance was also taken of the decision of the ITAT in assessee s case in 1999-2000 Nestle India Vs. DCIT (2007) 111TTJ 498 vide ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as, therefore, disallowable u/s 14A of the Act. 1.5 That the CIT(Appeals) erred on facts and in law in holding administrative expenditure to the extent of ₹ 19,00,009, as disallowable u/s 14A of the Act. Grounds of CO 434/Del/12 1. That the CIT(Appeals) erred on facts and in law in holding expenditure to the extent of ₹ 22,14,685, as disallowable u/s14A of the Income-tax Act ( the Act ). 1.2 That the CIT(Appeals) erred on facts and in law in not appreciating that no satisfaction as required in law was recorded by the AO before making disallowance of expenses u/s 14A of the Act and the disallowance made under that Section was, therefore, bad in law. 1.3 That the CIT(Appeals) erred on facts and in law in not appreciating tht the satisfaction of the assessing officer as required to be recorded in terms of Section 14A of the Act cannot be substituted with the satisfaction of the CIT(A). 1.4 That the CIT(Appeals) erred on facts and in law in holding that interest expenditure to the tune of ₹ 3,83,741/- was directly relatable to borrowed funds used for investments, income wherefrom exempt from tax and was, therefore, disallowable u/s 14A read with Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering the facts that the assessee had earned dividend income of 7,49,47,159/- which did not form part of the total income required the assessee to address why disallowance u/s 14A read with Rule 8D of I.T Rules 1962 should not be made. Relying upon the decision of the Special Bench in the case of Daga Capital he made disallowance of ₹ 23,05,952/-. In appeal before the First Appellate Authority the CIT(A) considering the argument that Rule 8D was not applicable prior to 2008-09 assessment year as held in Godrej and Boyce Manufacturing Company Vs. DCIT 328 ITR 81 (Bombay) was of the view that the AO was duty bound to determine the expenditure which had been incurred in relation to income which did not form part of the total income under the Act and he was to adopt a reasonable basis consistent with the relevant facts and circumstances. He further relying upon CIT Vs. Walfort Stock Brokers (P) Ltd. (2010) (326 ITR 1) (SC) and Maxopp Investment Ltd Vs. CIT held that since his powers are co-terminus with AO has held in Kanpur Coal Syndicate Vs. CIT 53 ITR 225 (SC)proceeded to make a disallowance of 22,42,685/-. Aggrieved by this assessee is in appeal before the Tribunal. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share Stock Brokers (P.) Ltd. (supra) to the following effect:- The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14A. So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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