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TMI Blog2011 (11) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated company. For the use of this brand name, the assessee has been paying licence fee computed @ 1% of the sales. It is also incurring heavy expenses on advertisement promoting the brand name. The expenditure on advertisement is obviously intended to increase sales. Once sales increase on account of advertisement, the licence fee payable to the foreign company also gets increased. The expenditure on advertisement leads to benefit to the foreign company also as its brand name gets promoted. No reimbursement is made by the foreign company to the assessee in respect of advertisement expenses. Thus, it is a case double jeopardy in so far as the assessee is concerned. 2.2 To support his case, reliance is placed on the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. Vs. Additional CIT, (2011) 328 ITR 210. The major finding is that in order to ascertain fair market value of the expenses incurred by a domestic company for use of brand name, trade-mark or logo, similarly situated comparables should be ascertained. Thus, in case the domestic company incurs heavy expenditure on advertisement of brand name, trade-mark or logo, for which suitable compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity for assessment year 1997-98. However, during the course of assessment proceedings for assessment year 1997-98, the ld. Assessing Officer has examined the question of allowability of the assessee's payments to SPN at considerable length. The ld. Assessing Officer 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 assessment year 1998-99, the Assessing Officer has merely adopted the argument, reasoning and basis of disallowance as given in the assessment order for assessment year 1997-98. In spite of the assessment order for assessment year 1997- 98, not finding favour with the ld. CIT(A), the succeeding ld CIT(A) has for assessment year 1998-99 sought to differ from his predecessor mainly on the basis of the findings and reasoning of the Assessing Officer for assessment year 1997-98. The ld. CIT(A) entertained, in addition to the report of the Assessing Officer, a report also from the previous incumbent who was then worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. CIT(A) for assessment year 197-98, the emphasis is upon his inference that the payments in question were disproportionately high looking at the profits earned by the assessee and the assessee has not been accused of hiding from examination or not furnishing the information regarding technical assistance actually received. 91. As to the case of the Assessing Officer 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 assessment year 1997-98, we find that the ld Assessing Officer 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 assessment year 1997-98, while the ld. Assessing Officer has reproduced verbatim his letter dated 17th June, 1999 an order sheet notings dated 20th Sept, 99, 6th Octo, 1999 and 29th November, 1999, the letter dated 10h December, 1999 and order sheet noting dated 27th December, 1999 , he has summarized the assessee's reply and the submissions in one single paragraph 10 of the assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. We see force in the contention of the assessee that while making such observation, the ld. Assessing Officer 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 ld. 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 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 Assessing Officer in the assessment order for assessment year 1997-98 and the ld CIT(A) in the appellate order for assessment year 1998- 99 are justified in their conclusion that the assessee in collusion with parent company in Switzerland adopted a colourable device whereby t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy was made. The benefit could be gauged only over sufficiently long term allowing the technical initiative to bear fruits. That part, the ld. counsel for the assessee pointed out that the working done by the department was highly unreasonable inasmuch as the payments were compared with the prior of the company after payment of remuneration in question. The ld. counsel, therefore, furnished a separate chart to show that even on imperfect and irrational basis of comparison with the profit adopted by the assessing authority, the payments in question constituted only 34.89% and 26.59% of the profits for assessment years 1997-98 and 198-99 respectively. The ld. Counsel further argued that the percentage was higher during assessment years 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 ld. 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the parent company We do not subscribe to the argument of the Ld. CIT DR that as intellectual property rights were not recognized in India, the assessee could have snapped tiles with the foreign company and carry on its business as before. We also find that the technical assistance provided by the parent company was all pervasive in the operations of the assessee company and permeated into almost every detail. The assessee company in India was reaping harvest of fine production technology 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 time, no business man 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 ₹ 2000 crores per year. Nestle India received tested technology and, therefore, did not have to suffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame charts, no material or evidence has been brought on record by the authorities below to substantiate their allegations against the assessee. As we have pointed out that the assessee only had initial onus to substantiate its claim of deduction of expenditure as laid down under section 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 assessment yea 1997-98 and the Ld. Assessing Officer as well as the CIT(A) for the assessment year 1998-99 have argued without adequate material that the assessee might have taken the advantage of liberalization of industrial policy from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue's appeal stands dismissed." 3.3 This order along with others was carried to Hon'ble Delhi High Court in appeal bearing ITA Nos. 662 of 2005, 288 of 2011, 294 of 2008, 96 of 2008 and 1202 of 2005, (337 ITR 103). Appeal bearing ITA 288 of 2011 pertains to assessment year 2005-06. The Hon'ble Court mentioned that the Tribunal had 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 legitimate needs of the business or that the assessee had made less than ordinary profits and the revenue has not discharged the said onus. It is recorded that - (i) no material or evidence has been brought on record by revenue to substantiate applicability of above provision; and (ii) the revenue has not specified as to how much ordinary profit was supposed to be on the basis of its determination, before treating royalty payment as excessive or unreasonable. The CBDT has clarified in 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 part of the regular business carried on between a resident and non-resident. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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