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2005 (1) TMI 333 - AT - Income TaxDeduction of expenditure - Payment of fixed amount for technical assistance - discharge of initial onus to prove - Evaluation of technical assistance and related payment - Applicability or otherwise of the provisions of s. 40A(2)(b)/s. 92/art. 9 of DTAA between India and Switzerland - Disallowance of provision of pension and club fee as entertainment expenditure - deduction u/s 80HH - HELD THAT - keeping in view that the assessee was not granted the advantage of first hand demonstration at the assessee's own premises where technical assistance was supposed to be rendered. We, therefore, hold that the learned AO has been less than fair in his observations that the requisite details and supporting material, evidence and information were not furnished by the assessee. We see force in the contention of the assessee that while making such observation, the learned AO ignored and omitted to make a reference to voluminous material placed before him by the assessee. It is true that some of the information asked for was not furnished. The learned counsel for the assessee has informed us that the same was either not in the possession of the assessee or did not exist. The assessee had certain reservation about furnishing the sensitive information regarding the product-wise profitability as the assessee was in highly competitive market of fast moving consumer goods. However, eventually, the assessee furnished even the data pertaining to product-wise profitability. The assessee did not furnish the particulars of profit and balance sheet, etc. of Nestec, SPN, Nestle SA of Switzerland, because the same fell outside the assessee's obligation to supply. Ironically, according to the assessee, all this emphasis on working of profit of the assessee and service providers was irrelevant because the quantum of remuneration could neither be fixed nor adjudged on the yardstick of profit. Applicability or otherwise of the provisions of s. 40A(2)(b)/s. 927/art. 9 of DTAA , etc. For the purpose of this order, we do not wish to go into the finer technical points relating to these legal provisions. In our view, in the absence of any specific material, evidence or information, the entire exercise undertaken by the AO could have been tempered if due importance was attached by him to the fact that the RBI approvals had been granted in respect of each one of the nine agreements. We see ample authority for the submissions made by the assessee's counsel in this respect as enumerated by us in para 67 of this order. After consideration, we reject the contention that the adverse inference was correctly drawn against the assessee on account of alleged non-compliance to various requisitions of the AO during the course of the assessment proceedings for asst. yr. 1997-98. We are satisfied that the assessee had successfully discharged the burden of proof which lay upon him under the provisions of s. 37(1) of the Act. We, find that the assessee's case is well armed in this respect on account of approval also granted by the RBI to the agreements in question. At any rate, from the facts stated and the evidence/material produced in the assessee's paper book, we are of the view that the technical assistance agreements in question were essential for the purpose of the business of the assessee during the assessment years before us. The assessee appears to have been highly benefited both in respect of profitability as well as growth of its business on account of close association and support from Nestle SA, Switzerland, internationally renowned and leading food processing company. Quantum of remuneration - The learned AO has argued in the assessment order for AY 1997-98 that from the very fact that no evaluation and analysis of technical assistance had been made at the time of entering into agreements and subsequently to determine the impact of technical assistance on the business of the company, it was clear that these agreements had been entered into with the sole object of diverting profit of the assessee-company. In this context, the learned AO even asked the assessee to produce a certificate from an independent technical agency that the payments were commensurate to actual services received. Besides, both the learned AO in the assessment proceedings for the AY 1997-98 and the learned CIT(A) in the order for the AY 1998-99 emphasised that the assessee was already well established and well versed in the business of products in question, and was not new to the business of manufacture and sale of those products and, therefore, the assessee could not by any stretch of imagination be considered to need further technical assistance of the magnitude so as to part with a substantial chunk of its business profit. As we have pointed out that the assessee only had initial onus to substantiate its claim of deduction of expenditure as laid down u/s 37(1). The 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. The burden of their order is that the assessee so arranged its course of business that it was left with a less than ordinary profit expected in the assessee's line of business. No one, however, has taken care to specify as to how much that ordinary profit was supposed to be and on what basis the same could be determined. It appears to us that the assessment order for AY 1997-98 and the learned AO as well as the CIT(A) for the AY 1998-99 have argued without adequate material that the assessee might have taken the advantage of liberalization of Industrial Policy from the year 1991. In judicial proceedings, suspicion, howsoever strong, cannot take the place of material/evidence. We, therefore, hold that the disallowance of the assessee's claim of deduction on account of remuneration paid for technical assistance is not called for in both the AY 1997-98 and 1998-99. We direct accordingly. In the cross-objection, the assessee has disputed the disallowance of provision of pension. We find that during the course of hearing before the learned CIT(A), the assessee did not raise any ground of appeal in this regard. Be that as it may, we find that eventually the assessee has been charged tax u/s 115JA only. We, therefore, decline to consider this issue. The same applies to the assessee's cross-objection relating to the disallowance of club fee as entertainment expenditure. In the assessee's appeal for AY 1998-99, the ground of appeal No. 2 is the alternative contention of the assessee that corresponding increase in the claim of the assessee of deduction u/s 80HH may be given to the extent the disallowance out of royalty in respect of coffee is sustained. As we have deleted this disallowance entirely, this alternative contention became infructuous and is accordingly rejected. In the result, for statistical purposes, Revenue's appeal and the assessee's cross-objection are dismissed. The assessee's appeal is partly allowed.
Issues Involved:
1. Deduction claim for royalty payments. 2. Application of s. 40A(2) and s. 92 of the IT Act. 3. Validity of RBI approval for royalty payments. 4. Evaluation of technical assistance received. Summary: 1. Deduction Claim for Royalty Payments: The primary dispute pertains to the deduction claimed by the assessee-company for payments made to Nestec Ltd. and Societe Des Produits Nestle SA (SPN), both 100% subsidiaries of Nestle SA, Switzerland. The AO examined the claim of Rs. 47 crores under "Royalty for technical assistance" and issued detailed questionnaires and requisitions. Despite submissions by the assessee, including letters and personal appearances by company executives, the AO found the responses unsatisfactory and disallowed Rs. 15 crores of the claimed deduction, citing excessive royalty payments relative to profits and lack of detailed justification for the payments. 2. Application of s. 40A(2) and s. 92 of the IT Act: The AO invoked s. 40A(2) and s. 92, arguing that the payments were excessive and a device to siphon off profits to the parent company, thus reducing taxable income in India. The AO noted that the royalty payments were almost equal to the book profit and concluded that the payments were not justified by the technical assistance received. The CIT(A) initially accepted the AO's disallowance but later reversed it, finding the payments reasonable compared to government norms. 3. Validity of RBI Approval for Royalty Payments: The assessee argued that all agreements had RBI approval, which should validate the payments. The CIT(A) noted that the payments were within the limits prescribed by the Industrial Policy of 1991, which allowed royalty payments up to 5% on domestic sales and 8% on export sales. The Tribunal found that the RBI's approval was a significant factor supporting the assessee's claim, emphasizing that the approval process considered the reasonableness of the payments. 4. Evaluation of Technical Assistance Received: The AO demanded detailed justification for the payments, including product-wise profitability and the impact of technical assistance. The assessee provided extensive documentation, including technical reports, training details, and examples of technological improvements. The Tribunal found that the assessee had sufficiently demonstrated the commercial expediency and benefits derived from the technical assistance, rejecting the AO's claim of non-compliance and lack of detailed justification. Conclusion: The Tribunal concluded that the disallowance of the royalty payments was not justified. The assessee had adequately demonstrated the necessity and reasonableness of the payments, supported by RBI approval and extensive documentation of the technical assistance received. The Tribunal directed the deletion of the disallowance for both assessment years 1997-98 and 1998-99.
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