2005 (5) TMI 244 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of commission paid to Givaudan Roure (India) Ltd. (GRIL).
2. Disallowance of professional fees paid to a Director.
3. Disallowance of royalty payment to Givaudan-Roure (International) SA, Switzerland (GRISA).

Detailed Analysis:

1. Disallowance of Commission Paid to Givaudan Roure (India) Ltd. (GRIL):
The first issue concerns the disallowance of commission paid to GRIL. The assessee claimed a commission payment at the rate of 5% of the turnover. The Assessing Officer allowed only 1%, disallowing the remaining 4%. The CIT(A) allowed 2%, leading to cross-appeals by both the assessee and the revenue.

The Tribunal referenced a similar issue from previous assessment years (1995-96 to 1996-97), where it was established that GRIL was responsible for introducing major clients and significantly increasing the assessee's turnover and profit. The Tribunal found the commission payment justified and in accordance with law. Given the identical facts, the Tribunal allowed the assessee's ground and dismissed the revenue's ground, holding that the commission paid at the rate of 5% of the turnover is reasonable.

2. Disallowance of Professional Fees Paid to a Director:
The second issue involves the disallowance of Rs. 30,60,000 paid to a Director as professional fees. The CIT(A) upheld the disallowance based on an earlier order but also directed adherence to the Tribunal's previous ruling on this matter.

The Tribunal, referencing its earlier decision, noted that the steep increase in turnover and profit from assessment years 1991-92 to 1994-95 was attributed to the technical advice from qualified and experienced perfumers, including the Director. The Tribunal found that the payment was reasonable and not excessive, given the significant contribution to the business's success. Following this precedent, the Tribunal directed the allowance of the professional fees and deleted the disallowance of Rs. 30,60,000.

3. Disallowance of Royalty Payment to Givaudan-Roure (International) SA, Switzerland (GRISA):
The third issue pertains to the disallowance of a royalty payment of Rs. 2,39,61,276 to GRISA. The Assessing Officer disallowed the payment, arguing it was a colorable device to reduce tax liability, as GRISA indirectly held 76% of the assessee-company's shares. The CIT(A) upheld the disallowance.

The Tribunal examined the license agreement, which provided the assessee with access to GRISA's confidential information, know-how, and trade secrets. The agreement was approved by the RBI, which allowed royalty payments not exceeding 5% of domestic and export sales. The Tribunal found that the payment was genuine, commercially justified, and within the RBI-approved limits. It noted that the relationship between the entities did not negate the commercial necessity and reasonableness of the payment.

The Tribunal emphasized that the transaction was at arm's length and commercially justified, rejecting the Assessing Officer's view that it was a colorable device. The Tribunal noted that the royalty payment was essential for the assessee's business expansion and success, as evidenced by the significant increase in turnover and profit post-agreement. The Tribunal concluded that the payment was a legitimate business expenditure under section 37(1) of the Act and deleted the disallowance.

Conclusion:
The Tribunal allowed the appeals of the assessee and dismissed those of the revenue, upholding the commission and professional fees payments as reasonable and justified, and confirming the legitimacy and necessity of the royalty payment to GRISA.