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TMI Blog2007 (4) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... ral part of the computer system. It merely gives external aid to the computer system by ensuring the uninterrupted power supply in emergency and in regulating the flow of power. It is worthwhile to note here that the computer system can function independently without the UPS and even the UPS generally can be used to ensure uninterrupted power supply to other equipments besides computer. It is, thus, not the integral part of the computer system like printer and scanner, which being output devices of the computer system are its integral part and, thus, are included in the definition of a computer as given in s. 2(1)(i) of the Information Technology Act, 2000. It is also pertinent to note here that a higher rate of depreciation is provided on computers mainly because the technology used in the making of computer is rapidly developing and the same becomes obsolete very fast. Applying this criteria also, the UPS cannot be treated as a part of computer since the technology which goes into making UPS is not developing so rapidly to make it obsolete in the short span. Thus, we find it difficult to accept the contention of the learned counsel for the assessee that UPS is a part of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishir Sinha ORDER These are the cross-appeals filed by the assessee and the Revenue against the order dt. 6th March, 2003 passed by the CIT(A), New Delhi for asst. yr. 1999-2000. ITA No. 2755/Del/2003 2. The first ground of appeal in substance relates to the order confirming the disallowance of Rs. 37.82 crores out of total expenditure of Rs. 56.73 crores on account of royalty debited to the P L a/c and claimed as allowable expenditure. Briefly stated facts are that during the year the assessee had made total payment of royalty of Rs. 56,73,24,000 on account of technical fee/royalty to the Societe de Products SA (SPN) and Nestec Ltd., Switzerland (Nestec) for 7 major categories of products. Nestec and SPN are subsidiary non-resident companies of Nestle, Switzerland. The AO observed that the assessee had claimed to have paid the royalty @ 3.5 per cent on domestic sales and 5 per cent on export sales net of taxes and by including the tax of 20 per cent and cess of 5 per cent, the payment of technical fee/royalty on domestic sale becomes 4.41 per cent and on export sale becomes 6.3 per cent. In respect of same payments the assessee had entered into 7 agreements star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment and research of the parent company. Only during the liberalization era, the assessee started paying a hefty royalty to the parent company. The CIT(A) has further mentioned that the details of payment of royalty, total amount of royalty, tax and R D net profit ratio and royalty to net profit were analysed by his predecessor as per his order dt. 21st Feb., 2002 in Appeal No. 3/2001-02 in the assessee's own case. The learned CIT(A) has extracted the details of payment of royalty as well as details of net profit ratio of various years at pp. 5 and 6 of the order and has, thus, observed that it is clear that in the earlier asst. yrs. 1989-90 to 1992-93 the payment of royalty to the net profit was a very small percentage ranging from 2.53 per cent to 4.48 per cent. From 1993-94 onwards the royalty percentage to net profit has gone very high which has reached to 78.37 per cent. In the asst. yr. 1997-98 it is 78.37 per cent but in the asst. yr. 1998-99 its 49.95 per cent and in the year under consideration i.e., 1999-2000 it is 43.46 per cent. Therefore, the moot question is whether the assessee company is paying royalty for commercial consideration or not and whether such huge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent company would not have 51 per cent voting rights, the assessee company would never have agreed to pay 43.46 per cent of total profits (as per chart). This was not a new company where the manufacturing licence for the know-how was obtained on the payment of royalty. The products and the brand were already existing in the Indian market and in the ordinary course of business in such circumstances the assessee could not have paid such huge royalty for the existing products. Therefore, AO was justified in holding that the payment of royalty has been paid excessively for extraneous consideration. As the payment has been made to the non-resident company, the provisions of s. 92 of IT Act are also applicable as owing to the close connection between the assessee company and the non-resident company, the resident company had less than the ordinary profits. The conditions as laid down in s. 92 of the IT Act are fully satisfied in this case. He has further mentioned that the above facts were also examined by his predecessor in asst. yr. 1998-99 in Appeal No. 30/2001-02 vide order dt. 21st Feb., 2002 and he is in agreement with him for applicability of s. 92 of the IT Act and who on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments to SPN at considerable length. The learned AO has given a harsh finding that the payments were part of a device followed by the party to siphon away the profits of the assessee company in the disguise of royalty payment and thereby reducing, among other things, the assessee company's tax incidence in India. We find that while completing the assessment for asst. yr. 1998-99, the AO has merely adopted the argument, reasoning and basis of disallowance as given in the assessment order for asst. yr. 1997-98. In spite of the assessment order for asst. yr. 1997-98 not finding favour with the learned CIT(A), the succeeding learned CIT(A) has for asst. yr. 1998-99 sought to differ from his predecessor mainly on the basis of the findings and reasoning of the AO for asst. yr. 1997-98. The learned CIT(A) entertained, in addition to the report of the AO, a report also from the previous incumbent who was then working as Addl. Director of IT (Inv.) on the ground that he was the officer who had framed the assessment order for asst. yr. 1997-98. We are, therefore, of the view that academic or non-academic the assessment order for asst. yr. 1997-98 has to be kept in view while deciding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually received. 91. As to the case of the AO that the assessee failed to establish the commercial expediency of payments in question by production of reliable information and evidence, on careful perusal of the assessment order for asst. yr. 1997-98, we find that the learned AO has mainly alleged non-compliance to various requisitions made by way of order-sheet notings in the course of the assessment proceedings. So much so that in the assessment order for asst. yr. 1997-98, while the learned AO has reproduced verbatim his letter dt. 17th June, 1999 and order-sheet notings dt. 20th Sept., 1999, 6th Oct., 1999 and 29th Nov., 1999, the letter dt. 10th Dec., 1999 and order-sheet noting dt. 27th Dec., 1999, he has summarized the assessee's reply and the submissions in one single para 10 of the assessment order. The learned AO has charged the assessee also for not establishing the commercial expediency. During the course of hearing before us, while the learned CIT-Departmental Representative stoutly emphasized this allegation, the learned counsel for the assessee, with equal vehemence, relied upon the voluminous evidence, material and record filed/produced before the AO during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvation 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 on 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. 92. During the course of hearing before us, considerable arguments were made in relation to the applicability or otherwise of the provisions of s. 40A(2)(b)/s. 92/art. 9 of DTAA, etc. For the purpose of his 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 tampered if due importance was attached by him to the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of close association and support from Nestle SA, Switzerland, internationally renowned and leading food processing company. 94. We now come to the question as to whether the quantum of remuneration as agreed upon in the agreements in question and actually paid during the course of the assessment years before us is justified on the facts and in the circumstances of the case. In other words, whether both the AO in the assessment order for asst. yr. 1997-98 and the learned CIT(A) in the appellate order for asst. yr. 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 aggrandized by the Swiss company. The learned AO has argued in the assessment order for asst. yr. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority, the payments in question constituted only 34.89 per cent and 26.59 per cent of the profits for asst. yrs. 1997-98 and 1998-99 respectively. The learned counsel further argued that the percentage was higher during asst. yrs. 1997-98 and 1998-99 because the net profit as percentage of turnover itself was lower in those assessment years. 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. Technology provided to the assessee by the parent company and its subsidiary had always been and was intended to always remain the property of the parent company and its subsidiaries. The assessee had been given a right to use only that technology for manufacture and sale of products under the parent company's brand name. The technology was highly sensitive and confidential and, therefore, in every agreement, the assessee was bound by confidentiality clause. In such circumstances, to invite an independent agency for evaluation and certification as desired by the AO was unthinkable. As to the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy evolved by the parent company over 125 years by virtue of presence in more than 70 countries. For continuing to arrest the benefit, it was essential for the assessee to have a perennial source of supply of all the technological innovation, advancement and upgrade. It would not be an exaggeration to say that in modern times, no businessman can afford to be oblivious of the fast moving technology related to his business on the ground of contentment with the knowledge and experience already gathered. The assessee did not contribute a single penny to R D cost of Nestle SA stated to be over Rs. 2,000 crores per year. Nestle India received tested technology and, therefore, did not have to suffer loss of a failed technology or project. The assessee had access to all the required technology available with the parent company not only in respect of manufacturing but also in various other fields like quality control, personnel, staff management, marketing, storage and so on. The kind of technical assistance received by the assessee was of such nature as to sustain its position as number one manufacturer in India in respect of the products being manufactured by it. During the course of hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asst. yr. 1997-98 and, the learned AO as well as the CIT(A) for the asst. yr. 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 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 asst. yrs. 1997-98 and 1998-99. We direct accordingly. 6. Since the facts and circumstances of the instant case are identical to that for asst. yrs. 1997-98 and 1998-99, we, concurring with the above said decision of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as part of computer is not justified and the AO was justified in making the disallowance out of excess claim of depreciation. 9. Before us, the learned counsel for the assessee has submitted that UPS purchased were connected to local area network (LAN), PCs, servers, routers, V-sats, etc. and thus formed an integral part of the overall computer systems. Considering the fact that the UPS were an integral part of computer system and were meant only for and could be used only as part of computer, therefore, the UPS is an integral part of computer. The learned counsel for the assessee has further submitted that accordingly the assessee claimed the depreciation on the UPS at the rate of 60 per cent applicable to 'computers' as per Entry No. (2B) of Part III of Appendix I to IT Rules, 1962, as applicable to the assessment year under consideration. The AO and the CIT(A) held that UPS is not part of computers. The lower authorities held that UPS was classified as general plant and machinery and allowed depreciation @ 12.5 per cent on the same. The learned counsel has argued that according to the functional test, the principle followed by the Courts, it is required to be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , enabling you to save data that is in RAM and shut down the computer gracefully. Many UPSs now offer a software component that enables you to automate back-up and shut down procedures in case there is a power failure while you are away from the computer. There are two basic types of UPS systems; standby power systems (SPSs) and on-line UPS systems. An SPS monitors the power line and switches to battery power as soon as it detects a problem, The switch to battery, however, can require several milliseconds, during which time the computer is not receiving any power. Standby Power Systems are sometimes called line-interactive UPSs. An on-line UPS avoids these momentary power lapses by constantly providing power from its own inverter, even when the power line is functioning properly, In general, on-line UPSs are much more expensive than SPSs. 11. Thus, he has submitted that the authorities below were not justified in not treating the UPS as an integral part of the computer and, as such, denying the higher depreciation @ 60 per cent on UPS. 12. On the other hand, learned Departmental Representative has submitted that the UPS cannot be held to be part of the computer and hence, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter system. The UPS is also not inbuilt in the computer as a battery in the laptop to make it an integral part of the computer system. It merely gives external aid to the computer system by ensuring the uninterrupted power supply in emergency and in regulating the flow of power. It is worthwhile to note here that the computer system can function independently without the UPS and even the UPS generally can be used to ensure uninterrupted power supply to other equipments besides computer. It is, thus, not the integral part of the computer system like printer and scanner, which being output devices of the computer system are its integral part and, thus, are included in the definition of a computer as given in s. 2(1)(i) of the Information Technology Act, 2000. It is also pertinent to note here that a higher rate of depreciation is provided on computers mainly because the technology used in the making of computer is rapidly developing and the same becomes obsolete very fast. Applying this criteria also, the UPS cannot be treated as a part of computer since the technology which goes into making UPS is not developing so rapidly to make it obsolete in the short span. Keeping in view all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtisement expenses of Rs. 104,86,36,000. The advertisement and sale promotion expenses had been incurred for promotion of products manufactured by the assessee under license of M/s Nestec and M/s SPN. He has further observed that the assessee was manufacturing and marketing specific products in the brand names of Nestle and had been paying royalty/technical fee for using the licence to manufacture and sell the products. Though the benefits of advertisement/sale promotion expenses to the assessee's business cannot be ruled out but simultaneously it is resulting in establishment of brands and products of Nestle, SA a nonresident, substantially interested company in assessee's business. On this basis, the AO has observed that it is clear that the provisions of s. 92 are squarely applicable to the assessee's advertisement expenses incurred for the purpose of establishment of products having Nestle's brand. The incurrence of advertisement expenses to the benefit of non-resident company is certainly resulting in less than ordinary profits to assessee company for which provisions of s. 92 are invoked and therefore, the AO disallowed 50 per cent of total expenditure incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out or away must be (a) paid out wholly and exclusively for the purpose of the business or profession and further (b) must not be (i) capital expenditure (ii) personal expense or (iii) an allowance of the character prescribed in ss. 30 to 36. In the appellant's case the AO has nowhere mentioned that the expenditure is capital in nature or personal in nature or covered in ss. 30 to 36 of IT Act. The payment has not been made to any person covered under s. 40A(2). The payment on advertisement has not been paid to any non-resident person mentioned in s. 92. The appellant has not spent any amount with the sole intention that only the brand name Nestle is to be advertised. The appellant has made expenditure only on advertisement of these products which are manufactured and sold in India to boost the sale and exclusively and wholly for business purposes. The appellant has also not incurred any expenditure outside Indian territory for any other products. Therefore, in my opinion the expenditure has been incurred wholly and exclusively for business purposes and not for establishing brand name of Nestle SA. All the conditions which are prescribed under s. 37(1) are satisfied in the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. (1960) 38 ITR 601 (SC); (iii) CIT vs. Royal Calcutta Turf Club (1961) 41 ITR 414 (SC); (iv) Eastern Investment Ltd. vs. CIT (1951) 20 ITR 1 (SC); (v) Campa Beverages (P) Ltd. vs. IAC (1990) 34 ITD 241 (Del); (vi) Star India (P) Ltd. vs. Addl. CIT 104 TTJ (Mumbai)(TM) 1. 21. He has further argued that s. 92 has no application as the advertisement expenses have not been paid to Nestle or to any party in India who is related to Nestle SA. He has pointed out that there is no business dealing with Nestle SA in respect of advertisement expenses. He has further submitted that as has been held by the Tribunal in assessee's own case for asst. yrs. 1997-98 and 1998-99, the AO is required to bring evidence on record to justify that the expenses has resulted in less than ordinary profits to the assessee for invoking the s. 92 of the Act. No such evidence has been brought on record by the AO. Thus, he has supported the order passed by the CIT(A). 22. We have heard the parties and perused the record of the case. The assessee is engaged in the business of manufacturing of various food products and beverages. The assessee is manufacturing various products under various ..... X X X X Extracts X X X X X X X X Extracts X X X X
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