2023 (12) TMI 629 - AT - Income Tax

Disallowance of Royalty paid u/s 37(1) - assessee is a franchisee bottler for the brand Aquafina owned by the franchisor PepsiCo India Holdings Pvt. Ltd. (erstwhile Pepsi Foods Private Ltd.) - non-compliance of notice issued under section 133(6) of the Act to Pepsi Foods Private Ltd and non-production of the party for verification by the assessee, for proving the genuineness of the transaction - HELD THAT - It cannot be disputed that Pepsi Foods Private Ltd. now merged with PepsiCo India Holdings Pvt. Ltd. is well-known beverage and soft drink Company, having a presence across the globe. Therefore, mere non-compliance with the notice issued under section 133(6) and non-production of the said entity by the assessee before the AO cannot lead to the conclusion that the said entity is a non-existent entity and the transaction is not genuine. No material has been brought on record by the Revenue to show that the assessee did not manufacture and sell Aquafina bulk packaged drinking water in Mumbai as agreed under the aforesaid agreement dated 09/06/2003 during the year under consideration and the Royalty was paid to Pepsi Foods Private Ltd without usage of the trademark. It is also relevant to note that usage of the trademark without the consent of the owner is a violation of the provisions of the Trade Marks Act, 1999. Therefore accepting the submission of the Revenue that there was no agreement during the year under consideration will also lead to the conclusion that the assessee used the trademark of Pepsi Foods Private Ltd without any license, which is not the facts of the present case, as there is no material available on record to show that the assessee has infringed the trademark registered in the name of PepsiCo Inc. No basis in the submissions of the Revenue in denying the claim of deduction of Royalty paid by the assessee to Pepsi Foods Private Ltd during the year under consideration. Accordingly, AO is directed to allow the claim of Royalty paid by the assessee in the year under consideration. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Royalty Expenses under section 37(1) of the Income Tax Act.
2. Validity of the agreement between the assessee and Pepsi Foods Private Ltd.
3. Non-compliance with notice issued under section 133(6) of the Act.
4. Non-production of Pepsi Foods Private Ltd. for verification.

Summary:

Disallowance of Royalty Expenses under Section 37(1) of the Act: The primary issue in both appeals is the disallowance of royalty expenses paid to Pepsi Foods Private Ltd. under section 37(1) of the Income Tax Act. The assessee, a franchisee bottler for the brand Aquafina, claimed royalty expenses based on an agreement dated 09/06/2003. The Assessing Officer (AO) disallowed the expenses, citing the non-renewal of the agreement after its initial five-year term.

Validity of the Agreement: The assessee argued that the agreement continued to subsist beyond the initial term, supported by correspondences and monthly invoices raised by Pepsi Foods Private Ltd. The Tribunal found that both parties continued to honor their obligations under the agreement, even after the initial term, and referred to the agreement in their correspondences. Thus, the Tribunal held that the payment of royalty was valid and pursuant to the agreement.

Non-compliance with Notice under Section 133(6): The Revenue emphasized the non-compliance of Pepsi Foods Private Ltd. with the notice issued under section 133(6) and the non-production of the party by the assessee. The Tribunal noted that Pepsi Foods Private Ltd., now merged with PepsiCo India Holdings Pvt. Ltd., is a well-known entity, and mere non-compliance with the notice does not render the transaction non-genuine.

Non-production of Pepsi Foods Private Ltd. for Verification: The Tribunal observed that the non-production of Pepsi Foods Private Ltd. for verification does not lead to the conclusion that the entity is non-existent or the transaction is not genuine. The Tribunal found no material evidence from the Revenue to show that the assessee did not use the trademark or that the royalty payment was without basis.

Conclusion: The Tribunal set aside the impugned orders passed by the learned Commissioner of Income Tax (Appeals) and directed the AO to allow the claim of royalty expenses for both assessment years 2010-11 and 2011-12. Other grounds raised by the assessee were dismissed as not pressed. Both appeals by the assessee were partly allowed.

Order pronounced in the open Court on 09/10/2023.