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TMI Blog2022 (4) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance of service charges paid by the assessee to CCI Inc. at 25% is unwarranted. The same is, ergo, directed to be deleted. The only issue raised in the cross appeals for the assessment year 1999-2000 is about the extent of deductibility of service charges paid by the assessee to CCI Inc. For this year also, the assessee claimed deduction of service charges after adjustment of certain debit notes with the gross amount - AO, following the parity of reasoning given for the earlier years, disallowed the full amount of service charges. The ld. CIT(A), however, restricted the disallowance to 30%. Both the assessee as well as the Revenue have come up in cross appeals on their respective stands. The rival parties fairly conceded that the facts and circumstances of the appeals for the instant year are mutatis mutandis similar to those of the preceding year, which was argued by them at length. In fact, the parties simply adopted their arguments made for the assessment year 1998-99[ 2019 (9) TMI 300 - ITAT PUNE] . The only distinguishing feature brought to our notice was that the assessee did not carry out any bottling activity in the instant year. Having regard to the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. with The Coca Cola INC, USA (hereinafter also called as TCCC ) as the ultimate holding company. The assessee is engaged in the manufacture of `beverage bases , which are also called `beverage Concentrates , made by beverage essence imported from TCCC. For manufacturing the beverage Concentrates, the assessee entered into an agreement dated 01-06-1993 with TCCC under which ordinary gratuitous non inclusive license was granted to it. The Concentrate manufactured by the assessee was sold to various unrelated bottling companies (all of whom were authorized by and had entered into agreement with TCCC for manufacturing beverages) and related four group companies that got amalgamated with the new entity called Hindustan Coca Cola Beverages (HCCB). During the year under consideration, the assessee also carried out bottling operations for a period of 8 months up to 30-11-1997 at two units, the Concentrate for which was transferred by the assessee from its own unit. The bottlers produce the beverages known in the market as Coca Cola, Fanta, Sprite etc. The extant dispute is anent to the `Service charges paid by the assessee to CCI Inc. amounting to ₹ 70.40 crore for rendering servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f service charges, as relatable to services rendered by CCI Inc. to the bottlers, were not allowable in the hands of the assessee, which implies that the Service charges paid by the assessee to CCI Inc. for services rendered to self have been allowed and that the part relating to the services rendered to unrelated bottlers amounting to ₹ 17.60 crore, quantified at 25% of total service charges, has been disallowed. The assessee has come up in appeal before the Tribunal. SUBMISSIONS ON BEHALF OF THE ASSESSEE 3. The ld. AR submitted that the ld. first appellate authority failed to appreciate the correct legal position by holding that service charges for quality audit of the bottlers was not for the purpose of the assessee s business. He emphasized that the bottlers were procuring the Concentrate only from the assessee company for making the beverages in their manufacturing units. The quality audit of the bottlers plants and manufacturing facilities conducted by CCI Inc. was meant to push up their productivity, thereby consequently increasing the volumes of the assessee s business as it was wholly dependent on them. The ld. AR relied on section 37(1) of the Income-tax Act, 1961 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the hands of assessee, on considering Coca Cola group as one unit, should not have been questioned. 5.1. The ld. AR stated that the issue of deductibility of the Service charges paid by the assessee to CCI Inc. for quality audit of the Bottlers plants was fully covered in favour of the assessee by virtue of the Tribunal s order for the immediately preceding A.Y. 1997-98. He further highlighted that the ld. CIT(A) in the impugned order examined the nature of Service charges paid to CCI Inc. for both the years, viz., the expenses for the month of June, 1996 (relating to A.Y. 1997-98) at page 67 and expenses for June, 1997 (A.Y. 1998-99) at page 68 onwards of the order and reached the conclusion about non-deductibility of service charges to that extent. He also pointed out that the order passed by the ld. CIT(A) for the year under consideration on 14.08.2003 is almost on same lines as his order for the A.Y. 1997-98 which was also passed on the same date. 5.2. He further submitted that the assessee claimed deduction of Marketing expenses amounting to ₹ 98.46 crore for the year under consideration, out of which the AO disallowed ₹ 32.69 crore. The ld. CIT(A) inquired in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port the activities of potential customer of Britco; (ix) Evaluate, qualify and assist in development or upgradation of potential sources of supplies, goods and equipment in India, so as to authorize the production/manufacture of such goods and equipment for supply to Bottlers in the Country and in other countries, and to assist such bottlers, in the purchase of the same; (x) Actively look for and keep Britco informed of potential business opportunities and the general market situation in the Country as far as is relevant for its Products and its scope of activities, and advise them on applicable laws and regulations. 6.2. It was submitted that albeit the Agreement referrs to a basket of services, but the actual services were confined only to the upkeep and maintenance of the plants of the bottlers, which was overt from the report of inspection of Indore Bottling Unit conducted by CCI Inc. on 14.8.1997, whose copy has been placed at page 115 onwards of the assessee s Paper book. Referring to the very first page of the report, he submitted that inspection was restricted only to the plant of the bottlers as was manifest from the mention therein of: `As requested, a Production Impact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lers either before the authorities below or the Tribunal even in the extant third round of proceedings. It was stated that the ld. CIT(A) was justified in disregarding the terms of the Agreement effective from 1.4.1997 in the face of the fact that CCI Inc. provided only plant maintenance services to the bottlers and nothing more. 6.4. Coming to the contention of the ld. AR about the applicability of section 37(1) of the Act, the ld. DR submitted that the conditions attached for the deductibility, inter alia, were that the expenditure must be wholly and exclusively for the purpose of the assessee s business. He emphasized on the meaning of the word wholly in terms of `quantum and the word exclusively in terms of `purpose to highlight that the expenditure must be incurred fully for the purpose of business of the assessee and not for someone else. If an expense is incurred wholly and exclusively for the purpose of the assessee s business, its deductibility will not be affected simply because of the fact that some incidental benefit out of such expense also reached someone else. However, the decisive point is that the expenditure at the first instance must be wholly and exclusively for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of Concentrate to them. He rather stressed that the plant maintenance services rendered by CCI Inc. were wholly and exclusively for the purpose of the business of Bottlers much less any incidental benefit reaching the assessee. 6.7. The ld. DR then espoused the contention of ld. AR about substantial benefit going to some third party as not an impediment in the deductibility of the expenditure in the hands of an assessee who incurs it wholly and exclusively for its business. He submitted that the extent of incidental benefit to the third parties - substantial or minimal - does not come in the way of the deductibility in the hands of assessee, but the primary condition of the expenditure being incurred wholly and exclusively for the purpose of assessee s business, must be invariably satisfied. It was thus underlined that the plant maintenance services to the bottlers, paid for by the assessee, were neither wholly nor exclusively for the purpose of the assessee s business. 6.8. The ld. DR highlighted one more aspect that services rendered by CCI Inc. to HCCB were admittedly similar to those rendered to unrelated Bottlers. Price of such services rendered by CCI Inc. to HCCB was born ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same has been described `in essence a mere supply entity set up for manufacturing Concentrates, to be supplied to the Bottlers, appointed directly by TCCC, who, in turn, were to manufacture the beverages in strict compliance with the directions of its ultimate company, TCCC. The ld. DR highlighted the fact that TCCC was operating in 195 countries on the same business model of doing manufacturing activity from one company and service activity from another company and both such companies were acting under the overall directions of TCCC. 6.10. He further argued that the bottlers were appointed and licensed only by TCCC in the same way in which the assessee was set up by TCCC to manufacture Concentrate. There was no agreement between the assessee and the bottlers for rendition of any services concerning the maintenance of their plants or regulating the supply etc. The ld. DR submitted that the assessee was acting under the control of TCCC as was observed by the ld. CIT(A) from the Internal instruction authority chart submitted by the assessee itself. Drawing our attention towards the Agreement dated 01.06.1993 between TCCC and the assessee, copy placed at page 24 onwards of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preparation of Beverages as prescribed from time to time by the Company (TCCC) . Part-III of the Agreement refers to `Obligations of the Bottler... , which oblige the Bottler to manufacture and sell the Beverages as per the directions of the TCCC. Part-V of the Agreement provides under para 20(a) that Bottler agrees with the company to use only the Beverage Bases purchased from the Company or the Authorized Supplier . . The bottler further agreed with the Company that in preparing each packaging and distributing the beverages: `the Bottler shall at all times conform to the manufacturing standards, hygienic and otherwise, established from time to time by the Company and the Bottler shall permit the company, its officers, agents and designees at all times to enter and inspect plant, facilities, equipment and methods used by Bottler in the preparation, packaging, storage and handling of Beverages to ascertain whether the Bottler is complying with the terms of this agreement. Clause 20(c) states that in the event, the Company determines or becomes aware of the existence of any quality or other technical problems relating to any of the Beverages or Authorized Containers in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o were deciding everything right from granting license to manufacture; to provide Concentrate through the assessee; fixing its price; regulating the manufacturing of beverage; sale in the fixed territory and also its pricing. There was no obligation of the assessee to inspect, upkeep and maintain plant of the bottlers, which entire issue was within the overall domain of TCCC. In the backdrop of such facts emerging from the respective agreements as discussed above and the communication with RBI, the ld. DR submitted that the assessee was a mere supply entity of TCCC and had neither any requirement nor an obligation to upkeep and maintain plant of the bottlers. As such, the expenditure incurred by the assessee on the upkeep and maintenance of the bottlers plants was neither wholly nor exclusively for the purpose of its business. 6.13. Another point was highlighted by the ld. DR to the effect that the assessee failed to lead any evidence to demonstrate that CCI Inc. was rendering plant upkeep and maintenance services to the bottlers on the instructions of the assessee. Considering the entire position about the agreements between TCCC and the bottlers on one hand and agreement between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group companies. 8. Replying to the contention of the ld. AR that the facts and circumstances of the case for the year under consideration were similar to the A.Y. 1997-98, which has already been decided in favour of the assessee by the Tribunal, the ld. DR submitted that the facts for the current year were different inasmuch as a new service agreement between the assessee, TCCC and CCI Inc. came into force w.e.f. 01.04.1997 and substituted the earlier agreement, under which the preceding year was decided. It was thus urged that the year under consideration should be decided independent of the decision of the immediately preceding year. 9. We have heard the rival submissions and gone through the relevant material on record. The short question before this Tribunal is to decide as to whether the expenditure incurred by the assessee for upkeep and maintenance of the bottlers plants (referred to as `quality audit by the assessee) is deductible in its hands. 10. One of the contentions of ld. AR was that the deduction for the service charges towards plant maintenance of unrelated Bottlers should be allowed because the assessee is a part of the overall Coca Cola group of companies managi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nabove Clause (1) of the 1997 Agreement. There are fresh clauses 2 to 4 dealing with the nature of services to be provided. Clause 2 of the Agreement states that CCI Inc. shall: `Provide technical knowhow, service and assistance to Britco in all its manufacturing operations including its manufacture of Products in Cans and PET bottles shall primarily comprise of: (a) Technical advice to ensure efficiency in all its manufacturing operations and advise on minimization of materials usage consistent with production guidelines of the Company. (b) Technical guidance of equipment maintenance and on sourcing of spare parts and other services. (c) Assistance and monitoring the quality of finished products and package, in particular the Cans and PET packages and providing feedback to ensure consistently high standards of finished products and packaging are achieved by Britco. (d) Guidance related to new plant and equipment purchase and operational expansion. (e) Operational staff training. 11.3. Clause 3 states that CCI Inc. shall: `Provide Marketing Support to Britco including development of creative, development of the advertising campaign, media planning, media buying, development of mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istency of the Tribunal s conclusion on the issue because the matter is already sub judice before the Hon ble High Court. Respectfully following the Tribunal order for the immediately preceding year, we hold that the disallowance of service charges paid by the assessee to CCI Inc. at 25% is unwarranted. The same is, ergo, directed to be deleted. 12. The only issue raised in the cross appeals for the assessment year 1999-2000 is about the extent of deductibility of service charges paid by the assessee to CCI Inc. For this year also, the assessee claimed deduction of service charges amounting to ₹ 45,27,29,472/- after adjustment of certain debit notes with the gross amount at ₹ 54,22,93,800/-. The AO, following the parity of reasoning given for the earlier years, disallowed the full amount of service charges. The ld. CIT(A), however, restricted the disallowance to 30%. Both the assessee as well as the Revenue have come up in cross appeals on their respective stands. 13. We have heard both the sides and gone through the relevant material on record. At the very outset, the rival parties fairly conceded that the facts and circumstances of the appeals for the instant year are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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