2010 (3) TMI 845 - AT - Income Tax

Disallowance of 40 per cent. of royalty - royalty amount was considered as excessive and not an expenditure incurred wholly and exclusively for the purpose of business - Held that - disallowance of royalty payments made by the Assessing Officer and confirmed by the learned Commissioner of Income-tax (Appeals) was not justified, therefore, direct to delete the same, appeal of the Revenue is dismissed. Remuneration paid for technical assistance - whether both the Assessing Officer in the assessment order for the assessment year 1997-98 and the learned Commissioner of Income-tax (Appeals) in the appellate order for the assessment year 1998-99 are justified in their conclusion that the assessee in collusion with parent company in Switzerland adopted a colourable device whereby the profits of Indian company were siphoned away to be aggrandised by the Swiss company - Held that - burden to prove that the claim of expenditure was a colourable device or a camouflage for diversion of profits rested upon the Revenue. In the order of the authorities below, no material has been brought on record except disbelieving the assessee s explanation and their subjective opinions, assessment order for the assessment year 1997-98 and the learned Assessing Officer as well as the Commissioner of Income-tax (Appeals) for the assessment year 1998-99 have argued without adequate material that the assessee might have taken the advantage of liberalisation of industrial policy from the year 1991 in judicial proceedings, suspicion howsoever strong cannot take place of material/evidence, disallowance of the assessee s claim of deduction on account of remuneration paid for technical assistance is not called for in both the assessment years 1997-98 and 1998-99. appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 30,11,50,000, being 40% of the license fee paid by the assessee-company to its parent company.
2. Examination of the allowability of the assessee's payments to SPN.
3. Allegation of the payments being a device to siphon away profits and reduce tax incidence.
4. Justification and reasonableness of the quantum of royalty paid.
5. Compliance with the requisitions made by the Assessing Officer.
6. Discharge of the initial onus by the assessee to substantiate its claim of deduction.
7. Burden of proof under section 37(1) of the Income-tax Act, 1961.
8. Applicability of section 40A(2)(b)/section 92/article 9 of the Double Taxation Avoidance Agreement.
9. Evaluation of technical assistance and its impact on the assessee's business.

Detailed Analysis:

1. Deletion of the Addition of Rs. 30,11,50,000:
The Revenue's primary grievance was against the Commissioner of Income-tax (Appeals)'s action in deleting the addition of Rs. 30,11,50,000, which was 40% of the license fee paid by the assessee-company to its parent company. The Tribunal had previously decided similar issues in favor of the assessee for the assessment years 1997-98, 1998-99, 2003-04, and 2004-05. The Tribunal observed that the payment of royalty had significantly benefited the assessee in terms of profitability and business growth due to the close association and support from Nestle SA, Switzerland.

2. Examination of the Allowability of Payments to SPN:
The Assessing Officer had examined the allowability of the assessee's payments to SPN in considerable detail. The officer had found that the payments were part of a device to siphon away profits and reduce the tax incidence of the assessee-company in India. This conclusion was based on the observation that the payments were excessively high and not justified by the technical assistance received.

3. Allegation of Payments as a Device to Siphon Away Profits:
The Assessing Officer and the Commissioner of Income-tax (Appeals) alleged that the payments were a colorable device to siphon away profits, referencing the Supreme Court's judgment in McDowell and Co. Ltd. v. CTO. However, the Tribunal found that the assessee had provided substantial evidence and material to justify the payments and the technical assistance received, which were essential for the business.

4. Justification and Reasonableness of the Quantum of Royalty Paid:
The Tribunal noted that the quantum of royalty paid could not be linked directly to the profit, as the remuneration was fixed based on mutual discussions and experience, and not on the yardstick of profit. The Tribunal found that the payments were justified and reasonable considering the significant technical assistance and support provided by the parent company.

5. Compliance with the Requisitions Made by the Assessing Officer:
The Tribunal observed that the assessee had largely complied with the requisitions made by the Assessing Officer, providing substantial material and evidence. The Assessing Officer's observation that the requisite details were not furnished was found to be less than fair, as the assessee had offered to make a full presentation at its premises, which was not accepted by the Assessing Officer.

6. Discharge of the Initial Onus by the Assessee:
The Tribunal held that the assessee had successfully discharged the initial onus of substantiating its claim of deduction under section 37(1) of the Income-tax Act, 1961. The assessee had provided detailed submissions and evidence to support the claim, which were found satisfactory by the Tribunal.

7. Burden of Proof Under Section 37(1) of the Income-tax Act, 1961:
The Tribunal emphasized that the burden of proof to establish that the expenditure was a colorable device or a camouflage for diversion of profits rested upon the Revenue. The Tribunal found that the Revenue had not brought any material evidence on record to substantiate its allegations against the assessee.

8. Applicability of Section 40A(2)(b)/Section 92/Article 9 of the Double Taxation Avoidance Agreement:
The Tribunal did not delve into the finer technical points relating to these legal provisions, as the primary focus was on whether the assessee had substantiated its claim of deduction and whether the Revenue had proven that the payments were a colorable device.

9. Evaluation of Technical Assistance and Its Impact on the Assessee's Business:
The Tribunal found that the technical assistance provided by the parent company was essential for the assessee's business, contributing significantly to its profitability and growth. The Tribunal noted that the technical assistance agreements were crucial for the assessee to maintain its competitive edge and benefit from the parent company's extensive research and development.

Conclusion:
The Tribunal, concurring with its previous decisions, held that the disallowance of royalty payments made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) was not justified. The appeal of the Revenue was dismissed, and the deletion of the addition of Rs. 30,11,50,000 was upheld.