2011 (5) TMI 566 - HC - Income Tax

TDS u/s 195 - remuneration/royalty paid by it to other subsidiaries by assessees holding companies - DTAA - disallowance u/s 40 - Held that - In so far as Article 9 of the DTAA is concerned, it is brought into focus because of the reason that the royalty is paid to the foreign companies and there is a Double Tax Avoidance Agreement between the Indian Government and the Switzerland Government - Tribunal also noticed that the assessee had supplied plethora of documents before the lower authorities in respect of both the assessment years and tabulated those documents in the impugned order and found that the AO had not discussed or referred to even those documents - As to the question that no independent evaluation of the value and utility of technical services were carried out, the learned counsel argued that such was never a practice in a case where highly specialized and restricted technology was imparted - The fact of the matter was that the remuneration was fixed at a very reasonable rate in spite of the Government regulations having permitted payment of remuneration at much higher rate It is held that expenditure was neither excessive nor unreasonable, the same could not be disallowed under Section 40 A (2) of the Act - assessee has been able to discharge its burden namely it was a justifiable and reasonable business expenditure and thus should be allowed under Section 37 of the Act - Tribunal has held that the assessee having discharged the initial onus, burden shifted to the Revenue to show that the payment of royalty was excessive or unreasonable having regard to the legitimate needs of business or that the assessee has made less than ordinary profits and the Revenue has not discharged the said onus - Revenue has not specified as to how much ordinary profit was supposed to be and basis of its determination, before treating royalty payment as excessive and unreasonable. Coming to Section 92 of the Act, the CBDT has itself clarified in its Circular No. 14 dated 27.11.2001 that Section 92 of the Act does not apply in respect of payment of royalty etc which are not the part of regular business carried on between a resident and a non- resident. This aspect is suitably dealt with by the Tribunal and we agree with its reasoning.Decided in favor of the assessee

Issues Involved:
1. Deduction claimed by the assessee for remuneration/royalty paid to subsidiaries and holding companies.
2. Applicability of Sections 40A(2)(b) and 92 of the Income Tax Act.
3. Relevance of Article 9 of the Double Taxation Avoidance Agreement (DTAA).
4. Reasonableness and genuineness of the expenditure in light of RBI's permission.

Issue-Wise Detailed Analysis:

1. Deduction Claimed by the Assessee for Remuneration/Royalty:
The assessee, involved in manufacturing and marketing food products and beverages, claimed deductions for royalty payments made to two overseas companies, Nestec S.A. and Societe Des Produits Nestle S.A., Switzerland, as business expenditure. The Assessing Officer (AO) deemed the payments excessive and disallowed Rs. 15 crores out of Rs. 47 crores for the assessment year 1997-98, and Rs. 17 crores for 1998-99. The CIT (A) allowed the entire amount for 1997-98 but upheld the AO's disallowance for 1998-99. The Tribunal ruled in favor of the assessee for both years, affirming that the payments were neither unreasonable nor exorbitant and were legitimate business expenditures.

2. Applicability of Sections 40A(2)(b) and 92 of the Income Tax Act:
The AO invoked Section 40A(2)(b) to question the reasonableness of the expenditure due to the close relationship between the assessee and the recipient companies. Section 92 was also invoked, which deals with the arms-length price in transactions between residents and non-residents. The Tribunal found that the payments were justified based on the technical know-how and services provided, which were essential for the assessee's business, and hence, the provisions of Section 40A(2) and Section 92 were not applicable.

3. Relevance of Article 9 of the DTAA:
Article 9 of the DTAA was considered because the royalty payments were made to foreign companies. This article addresses the conditions under which profits can be adjusted in transactions between associated enterprises. The Tribunal noted that Article 9 is relevant for bringing back to India the income of the non-resident and does not mandate disallowing the expenditure in the hands of the Indian resident. Thus, the Tribunal concluded that the payments were not excessive or unreasonable and were in line with the DTAA provisions.

4. Reasonableness and Genuineness of the Expenditure in Light of RBI's Permission:
The Tribunal initially observed that the RBI's permission for royalty payments implied reasonableness and genuineness. However, it was clarified that the RBI's role is limited to foreign exchange considerations and does not encompass the provisions of the Income Tax Act. Despite this, the Tribunal found the payments reasonable based on the comprehensive technical assistance and benefits received by the assessee. The Tribunal emphasized that the technical assistance was continuous and essential for the assessee's operations, and the quantum of remuneration was justified.

Conclusion:
The Tribunal ruled in favor of the assessee, holding that the royalty payments were legitimate business expenditures and not excessive or unreasonable. The Tribunal's findings were based on the detailed analysis of the technical know-how agreements and the substantial benefits derived by the assessee. Consequently, the appeals were dismissed, and the payments were allowed as deductions under Section 37 of the Income Tax Act.

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