M/s. Nestle India Ltd., Gurgaon V. ACIT, New Delhi

CO 433/DEL/2012

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9256 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 03-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 10-12-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 30-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TEYIN JAIN SH USHA SHARMA
• Assessee Lawyers: GUNJAN P RASAD
• Keywords: Transfer pricing; Opportunity of being heard; Question of law; Royalty expenses
• Section: 143(3); 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: C NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A .NO. 4669 /DEL/2012(AY-2007-08) I.T.A .NO. 4670 /DEL/2012(AY-2008-09) ACIT, LTU, NBCC PLAZA, PUSHP VIHAR NEW DELHI (APPELLANT) VS NESTLE INDIA LTD. NESTLE HOUSE, JACARANDA MARG. M-BLOCK, DLF CITY, PHASE-II GURGAON P AN-AAACN0757G (RESPONDENT) C.O- 433/DEL/2012 (IN I.T.A .NO.-4669/DEL/2012 A. Y 2007-08) C.O-434/DEL/2012 (IN I.T.A .NO.-4670/DEL/2012A.Y 2008-09) APPELLANT BY SH.GUNJAN PRASAD, CIT DR RESPONDENT BY SH. TEYIN JAIN, SH USHA SHARMA, C.A ORDER PER DIVA SINGH, JM THE TWO DEPARTMENTAL APPEALS ON IDENTICAL ISSUE AR E FILED AGAINST THE SEPARATE ORDERS DATED 4/7/2012 FOR 2007-08 & 2008-0 9 ASSESSMENT YEARS OF THE CIT(A) LTU, NEW DELHI. THE ASSESSEE ALSO IN BOTH T HE YEARS HAS AGITATED IDENTICAL ISSUE IN ITS TWO CROSS OBJECTIONS FILED F OR 2007-08 & 2008-09 NESTLE INDIA LTD NESTLE HOUSE, JACARANDA MARG. M-BLOCK, DLF CITY, PHASE-II GURGAON P AN-AAACN0757G (RESPONDENT) VS ACIT, LTU, NBCC PLAZA, PUSHP VIHAR NEW DELHI (APPELLANT) 2 ASSESSMENT YEAR. BOTH THE DEPARTMENTAL APPEALS ALO NG WITH C.OS ARE BEING DECIDED BY A COMMON ORDER FOR THE SAKE OF CONVENIE NCE. 2. AT THE TIME OF HEARING AN ADJOURNMENT PETITION W AS MOVED ON BEHALF OF THE ASSESSEE REQUESTING FOR TIME ON THE GROUND THAT THE ARGUING COUNSEL WAS TRAVELING. HOWEVER THE SPECIFIC REASON GIVEN IN TH E PETITION READS AS UNDER:- THE ABOVE MENTIONED APPEAL IS FIXED FOR HEARING B EFORE YOUR HONOURS TODAY. IN THIS REGARD, IT IS RESPECTFULLY SUBMITTED THAT W E ARE CURRENTLY IN PROCESS OF COLLECTING NECESSARY INFORMATION/DOCUMENTS FOR THE PREPARATION OF CASE AND PAPER BOOK. UNDER THE AFORESAID CIRCUMSTANCES, IT IS RESPECTFUL LY PRAYED THAT THE CAPTIONED APPEALS MAY KINDLY BE ADJOURNED TO LATER DATE SUBJE CT TO CONVENIENCE OF THE HONBLE BENCH. 3. CONSIDERING THE SAID REQUEST AFTER HEARING THE L D. CIT DR AND GOING THROUGH THE MATERIAL AVAILABLE ON RECORD IT WAS NOT ICED THAT THE ISSUE APPEARS TO BE COVERED IN FAVOUR OF THE ASSESSEE BY VIRTUE O F THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT WHICH HAD BEEN FOLLOWED B Y THE CIT(A) THE POSITION WAS NOT REFUTED BY THE CIT(DR). ACCORDING LY THE PETITION SEEKING TIME WAS REJECTED AND THE APPEAL WAS PASSED OVER WI TH THE DIRECTION THAT IT SHALL BE TAKEN UP FOR HEARING AT THE END OF THE BOA RD. 4. WHEN THE APPEALS ALONG WITH THE TWO C.OS CAME U P FOR HEARING AT THE END OF THE BOARD. MR. T. JAIN RE-ITERATED THE REQU EST SELECTING TIME. HOWEVER CONSIDERING THE SUBMISSION OF THE CIT (DR) AND THE MATERIAL AVAILABLE ON RECORD THE FOLLOWING ORDER ON THE ASSE SSEES REQUEST WAS PASSED AFTER HEARING THE.PARTIES. REJECTED APPEAL OF REVENUE DISMISSED.. ASSESSEES C .O RESTORED TO AOS PRONOUNCED . AM JM 5. THE REASONS FOR COMING TO THE SAID CONCLUSION AR E ELABORATED HEREINAFTER. 6. SINCE THE GROUNDS IN ITA 4669/DEL/12 IS IDENTICA L IN ITA 4670/DEL/12 ACCORDINGLY FIRST, WE FOR THE SAKE OF CONVENIENCE P ROPOSE TO REPRODUCE THE 3 GROUND FROM ITA 4669/DEL/12 WHICH IS IDENTICALLY W ORDED IN 2008-09 ASSESSMENT YEAR EXCEPT THE DIFFERENCE IN AMOUNT. TH E SAME IS REPRODUCED HEREUNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.40,07,44,800/-( RS. 49,98,34,379/- 2008-09) BEING THE DISALLOWANCE OF 4 0% OF LICENSE FEE PAID TO M/S SOCIETES D\DES PRODUCTS NESTLE, SA, SWITZERLAND .. 7. THE RELEVANT FACTS OF THE CASE WHICH ARE TAKEN F ROM 2007-08 ASSESSMENT YEAR ARE THAT THE ASSESSING OFFICER CONSIDERING THE E-RETURN FILED BY THE ASSESSEE WHEREIN AN INCOME OF RS.436,49,21,710/- WA S DECLARED SELECTED THE CASE FOR SCRUTINY ASSESSMENT BY ISSUANCE OF NOTICE U/S 143(2)/142(1) ALONG WITH QUESTIONNAIRE ETC. THE AO TOOK INTO CONSIDERATION T HE FACT THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURIN G AND SALE OF VARIOUS FOOD PRODUCTS AND BEVERAGES. HE ALSO OBSERVED THAT THE ASSESSEE IS ONE OF THE MAJOR PLAYERS IN THE MANUFACTURING AND SALE OF FOOD PRODUCT AND POWERFUL BRANDS LIKE NESCAFE, LACTOGEN, CERELAC, MAGGI, MILK MAID, EVERYDAY ETC., ARE LICENSED TO THE ASSESSEE AND THE ASSESSEE MANUFACTU RES AND SELLS THESE PRODUCTS. 8. QUA THE ISSUE RAISED BY THE REVENUE THE FACTS AR E FOUND DISCUSSED IN THE ASSESSMENT ORDER AT PAGE 2 TO 5 VIDE PARAS 3 TO 3.9 . THE SAME ARE REPRODUCED HEREUNDER FOR READY REFERENCE: 3. PART DISALLOWANCE OF LICENSE FEES PAYMENT THE RETURN OF INCOME WAS ACCOMPANIED A REPORT BY T HE AUDITOR IN FORM NO. 3CEB, DETAILING THE INTERNAL TRANSACTIONS OF THE AS SESSEE WITH THE ASSOCIATED ENTERPRISES (AE). THE CASE WAS REFERRED TO THE TRA NSFER PRICING OFFICER U/S 92CA OF THE ACT. THE TRANSFER PRICING OFFICER HAS PASSED A N ORDER U/S 92CA(3) OF THE ACT FOR AY 2006-07 ON 29/7/2009. IN THIS ORDER HE HAS OBSE RVED THT LICENSE FEES PAYMENTS BY THE ASSESSEE TO ITS PARENT COMPANY M/S SOCIETE DES PRODUCTS NESTLE S.A, SWITZERLAND (SPN) ARE NOT ABOVE BOARD AND HE SUGGESTED THAT THI S MAY BE EXAMINED FURTHER. IN THIS CONTEXT THE ISSUE WAS EXAMINED AND DISCUSSED H EREIN BELOW: 3.2 ON PERUSAL OF THE DETAILS SUBMITTED, IT IS EVID ENT THAT THE ASSESSEE IS HELPING THE PARENT COMPANY TO ENHANCE THE VALUE OF PARENTS BRANDS IN INDIA WHICH IS DIRECTLY ATTRIBUTABLE TO THE MARKETING EFFORTS BY THE ASSESS EE. THE OECD GUIDELINES ALSO PROPOUNDS THAT THE ACTUAL CONDUCT OF THE PARTIES OV ER A PERIOD OF YEARS SHOULD BE GIVEN SIGNIFICANT WEIGHT IN EVALUATING THE RETURN A TTRIBUTABLE TO MARKETING ACTIVITIES. 4 AS SUCH, IT IS EVIDENT THT LICENSE FEE PAID BY THE ASSESSEE CANNOT BE COMPLETELY AND EXCLUSIVELY ATTRIBUTED TO THE PURPOSE OF ASSESSEES BUSINESS AS A PART OF THE BENEFIT IN THE FORM OF BRAND BUILDING GOES TO ITS PARENT COMPA NY THROUGH ITS MARKETING EFFORTS. 3.3 DURING THE ASSESSMENT PROCEEDINGS, IT IS NOTICED TH AT THE ASSESSEE HAS MADE TOTAL PAYMENT OF RS. 100,18,62,000/- ON ACCOUNT OF GENERAL LICENSE FEE PAYABLE TO M/S SOCIETE DES PRODUCTS NESTLE S.A SWITZERLAND (SP N). IN A.Y 1997-98, THE ASSESSEE HAD PAID A SUBSTANTIAL ACCOUNT OF MONEY AS ROYALTY OF 47 CRORES AGAINST THE BOOK PROFIT OF RS. 53.42 CRORES TO THE PARENT COMPA NY I.E M/S SOCIETE DES PRODUCTS NESTLE S.A. SWITZERLAND (SPN). THE RATIOS OF ROYAL TY TO THE NET PROFIT WORKED OUT ARE 49.95% IN RESPECT OF A.Y 1998-99 AND 78.37 % IN RESPECT OF A.Y 1997-98 WHEREAS THE SAME WAS AS LOW AS 2.53%, 5.71%, 5.24%, 4.48% ETC. IN RESPECT OF A.Y 1989-90 TO 1992-93. AS SUCH, IT CAN BE SEEN THAT TH E CLAIM OF ROYALTY WAS QUITE DISPROPORTIONATE TO THE NET PROFIT TIN A. Y 1998-9 9 AND 1997-98. SIMILARLY DURING THE F.Y 2002-03 & 2003-04, THE ASSESSEE HAD PAID A SUBSTANTIAL AMOUNT OF MONEY AS ROYALTY AMOUNTING TO RS. 63.00 & 70.42 CRORES AS AGAINST THE BOOK PROFIT OF RS. 214.72 & 397.29 CRORES, WHICH IS IN FACT 29% & 18% OF THE NET PROFIT RESPECTIVELY. LIKEWISE, IN F.Y 2004-05, THE ASSESSEE HAS PAID ROY ALTY OF RS.75.29 CRORES AGAINST PROFIT OF RS. 414.12 CRORES, WHICH IS 18% OF THE PR OFITS. IN AY: 2005-06, THE ASSESSEE HAS PAID A SUM OF RS. 75.29 CRORES AGAINST PROFIT OF R. 414.21 CORRES, WHICH IS 18% OF THE PROFITS. IN A.Y: 2005-06, THE ASSESSEE HAS PAID A SUM OF RS. 84.56 CRORES, AGAINST PROFIT OF RS. 482.95 CRORES T OWARDS ROYALTY TO THE PARENT COMPANY. IN VIEW OF THESE FACTS, IT APPEARS AS IF THE ASSESSEE WAS DOING BUSINESS NOT FOR ITSELF BUT FOR THE CLOSELY CONNECTED COMPAN IES TO WHOM THE GENERAL LICENSE AGREEMENT FEE FOR TECHNICAL ASSISTANCE HAS BEEN PAI D. 3.4 IN VIEW OF THE ABOVE, AN EXPLANATION WAS CALLED FOR FROM THE ASSESSEE AS TO WHY ROYALTY PAYMENT SHALL NOT BE DISALLOWED. IN RE SPONSE THERETO THE ASSESSEE HAS GIVEN THE FOLLOWING SUBMISSION: QUERY RAISED BY YOUR HONOUR AS TO WHY THE PAYMENT OF ROYALTY SHOULD NOT BE DISALLOWED. IN THE ABSENCE OF ANY SPECIFIC REASON GIVEN FOR DISALLOWANCE OF ROYALTY, IT IS PRESUMED THAT THE QUERY RELATING TO DISALLOWANCE OF ROYALTY HAS BEEN RAISED IN VIEW OF THE DISALLOWANCE MADE IN THI S REGARD IN THE EARLIER YEARS. IT IS RESPECTFULLY SUBMITTED THAT THE ISSUE RELATIN G TO ALLOWABILITY OF ROYALTY HAS BEEN SETTLED BY THE DELHI BENCH OF TRIB UNAL IN FAVOUR OF THE ASSESSEE IN ALL THE APPEALS FOR ASSESSMENT YEAR1997 -98 TO ASSESSMENT YEAR 2004-05. IN VIEW OF ABOVE IT IS RESPECTFULLY PRAYE D THAT THE ALLOWABILITY OF ROYALTY IS A WELL SETTLED MATTER IN FAVOUR OF ASSES SEE AND NO DISALLOWANCE OUT OF ROYALTY EXPENSES IF THEREFORE CALLED FOR. 3.5 SUBMISSIONS OF THE ASSESSEE HAVE BEEN PERUSED AND C AREFULLY CONSIDERED. THE ASSESSEE HAS CONTENDED THAT IN VIEW OF THE DECISION OF THE HONBLE ITAT, NO ADDITION IS CALLED FOR IN THIS CASE. CONTENTION OF THE ASSESSSEE IS NOT LENABLE AS THE HIGH COURT HAS ADMITTED QUESTION OF LW IN REVENUES APPEAL ON THIS ISSUE AND THE MATTER IS SUB-JUDICE. 3.6 THE ASSESSEE HAS BEEN PAYING SUCH WHOPPING AMOUNTS TO ITS PARENT AND GROUP COMPANIES, WITHOUT BEING ABLE TO SHOW, HOW IN THOSE YEARS IT BENEFITED FROM ANY TECHNICAL ASSISTANCE, INDICATES THAT THE WHOLE ARRA NGEMENT WAS CONCOCTED TO SIPHON OFF A MAJOR PORTION OF ITS PROFITS. HENCE THE ASSE SSEES CASE IS HIT BY THE JUDGMENT OF 5 THE HONBLE SUPREME COURT IN THE CASE OF MCDOWELL A ND CO. LTD. VS. CTO 154 ITR, 148 (SC) 3.7 WHEN A COMPANY SELLS THE RIGHTS TO USE A BRAND NAME TO ANOTHER COMPANY FOR USE ON A NON-COMPETING PRODUCT OR IN ANOTHER GEOGRAPHICAL AREA, THIS IS REFERRED TO A AS BRAND LICENSING. BRAND MANAGEMENT IS THE APPLICAT ION OF MARKETING TECHNIQUES TO A SPECIFIC PRODUCT, PRODUCT LINE, OR BRAND. IT SEEKS TO INCREASE THE PRODUCTS PERCEIVED VALUE TO THE CUSTOMER AND THEREBY INCREASE BRAND FR ANCHISE AND BRAND EQUITY. MARKETERS SEE A BRAND AS IN IMPLIED PROMISE THAT TH E LEVEL OF QUALITY PEOPLE HAVE COME TO EXPECT FROM A BRAND WILL CONTINUE WITH FUTU RE PURCHASES OF THE SAME PRODUCT. THIS MAY INCREASE SALES BY MAKING A COMPARISON WITH COMPETING PRODUCTS MORE FAVORABLE. ALL OF THESE ENHANCEMENTS MAY IMPROVE T HE PROFITABILITY OF A BRAND, AND THUS BRAND MANAGERS AFTER CARRY LINE-MANAGEMENT A CCOUNTABILITY FOR A BRANDS P &L (PROFIT AND LOSS) PROFITABILITY. IN CONTRAST T O MARKETING STAFF MANAGER ROLES, WHICH ARE ALLOCATED BUDGETS FORM ABOVE, TO MANAGER AND EXECUTE. IN THIS REGARD, BRAND MANAGEMENT IS OFTEN VIEWED IN ORGANIZATIONS A S A BROADER AND MORE STRATEGIC ROLE THAT MARKETING ALONE. 3.8 THE NEXUS OF HIGH ADVERTISEMENT AND BUSINESS PROMOT ION EXPENSES WITH HIGHER SALES RESULTING INTO HIGHER PAYMENT OF LICENSES FEE PAYME NT TO M/S NESTLE SA AND ITS BRAND BUILDING HAS BEEN ESTABLISHED. HOWEVER, NO SEPARAT E DISALLOWANCE IS BEING MADE ON THESE TWO ISSUES AS ROYALTY OR GENERAL LICENSE FEE IS THE ONLY WHICH IS BEING PAID TO OVERSEAS ENTITY. 3.9 THEREFORE, RS.40,07,44,800/- BEING 40% OUT OF THE T OTAL LICENSE FEE PAYMENT OF RS.100,18,62,000/- IS TREATED AS EXPENDITURE NOT IN CURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND ACCORDI NGLY DISALLOWED AS EXPENDITURE AND ADDED BACK TO THE TAXABLE INCOME OF THE ASSESSE E. PENALTY PROCEEDINGS U/S 271 (1) (C) ARE ALSO INITIATED HEREWITH. [ADDITION OF RS.40,07,44,800/-] ( BOLD TESTING BY THE BENCH FOR EMPHASIS) 9. IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY D ETAILED ARGUMENTS ARE FOUND ADVANCED ON BEHALF OF THE ASSESSEE WHICH ARE REPRODUCED IN PARA 6 OF THE IMPUGNED ORDER. THE SAME ARE REPRODUCED HEREUNDER FOR READY REFERENCE:- 7.AS REGARDS THE FIRST ISSUE, I.E, THE ALLOWABILI TY OF DEDUCTION IN RESPECT OF ROYALTY, THE SAME ARISES OUT OF THE FOLLOWING FACTS: 6.1 THE CLAIM OF THE APPELLANT IS THT THAT FOR THE PURPOSES OF PROCURING TECHNICAL KNOW-HOW AND ASSISTANCE IN THE BUSINESS OF MANUFACT URE AND SALE OF ITS PRODUCTS, THE APPELLANT HAD ENTERED INTO DIFFERENT AGREEMENTS WIT H NESTEC LTD. (NESTEC) AND SOCIETE DES PRODUITS NESTLE S.A (S.P.N), WHICH WERE SWITZERLAND BASED SUBSIDIARIES OF ONE OF ITS HOLDING COMPANY, NESTLE S.A OF SWITZE RLAND (NSA). 6.2 THE APPELLANT FURTHER STATED THAT ONE SUCH AGRE EMENT WAS APPROVED BY SECRETARIAT OF INDUSTRIAL APPROVAL (SIA), DEPARTMEN T OF INDUSTRIAL DEVELOPMENT, MINISTRY OF INDUSTRY, GOVERNMENT OF INDIA CONSEQUEN T TO CONVERSION OF THE TEA MAKING UNIT INTO AN EXPORT ORIENTED UNIT. THE REMA INING AGREEMENTS, HAVING BEEN ENTERED INTO AFTER 1991, HAD THE AUTOMATIC APPROVAL OF THE GOVERNMENT OF INDIA AS 6 PER THE INDUSTRIAL POLICE, 1991. THE AGREEMENTS WE RE APPROVED BY RESERVE BANK OF INDIA IN TERMS OF SECTION 9 OF FOREIGN EXCHANGE REG ULATION ACT, 1973. 6.3 THE APPELLANT STATED THAT UNDER ALL THESE AGREE MENTS, ROYALTY @ 3.5% ON DOMESTIC SALES AND 5% ON EXPORT SALES IS PAYABLE IN LIEU OF THE APPELLANT BEING ENTITLED TO USE THE AVAILABLE KNOW-HOW OWNED BY THE LICENSORS RELATING TO MANUFACTURE OF PRODUCTS, ITS FUTURE IMPROVEMENTS AN D DEVELOPMENT, DEPUTATION OF EXPERTS BY THE LICENSORS FOR MATTERS REQUIRING ON- THE-SPOT TECHNICAL ASSISTANCE, PROVISION OF TRAINING BY THE LICENSORS TO APPELLANT S TECHNICAL PERSONS, ETC. AND GENERALLY ADVISING THE APPELLANT ON ALL TECHNICAL M ATTERS CONCERNING MANUFACTURING OPERATIONAL PRODUCTION METHODS, QUALITY CONTROLS, E TC. WITH EFFECT FROM 1.12.2002, THE RIGHT/LICENSE TO USE LICENCORS WORLD RENOWNED TRAD EMARKS WAS FORMALIZED IN THE GENERAL LICENSE AGREEMENT AND ROYALTY WAS PAYABLE T HEREUDNER TO SPN. PURSUANT TO THE ABOVE AGREEMENTS, THE APPELLANT HAS BEEN PAYING ROYALTY TO FOREIGN COLLABORATORS FOR THE LAST SEVERAL YEARS. APPROPRIATE TAXES HAVE BEEN DULY DEDUCTED FROM SUCH PAYMENTS. IN ADDITION, R &D CESS @ 5% HAS BEEN PAI D ON THE AMOUNT OF ROYALTY UNDER THE RESEARCH AND DEVELOPMENT CESS ACT, 1986. 6.4 DURING THE YEAR UNDER CONSIDERATION THE APPELLA NT PAID ROYALTY OF RS.1,00,18,62,000 ON ACCOUNT OF GENERAL LICENCE FEE PAYABLE TO SPN BUT THE AO IN HIS ORDER U/S 143(3) DATED 30/11/2010 DISALLOWED 40% OF THE ROYALTY PAID, ALLEGING THAT THE APPELLANT HAD INCURRED HUGE EXPENDITURE ON ADVE RTISEMENT WHICH HAD RESULTED IN BRAND-BUILDING OF NESTLE SA, THE PATENT COMPANY OF THE APPELLANT, AND HIGHER EXPENDITURE ON ADVERTISEMENT HAD RESULTED IN HIGHER SALES AND CONSEQUENTLY HIGHER ROYALTY PAYMENT. 6.5 TRACING THE HISTORY OF DISALLOWANCE ON ACCOUNT OF R OYALTY, THE APPELLANT CONTENDED THAT DISALLOWANCE IN THIS REGARD WAS MADE FOR THE FIRST TIME IN ASSESSMENT YEAR 1997-98, WHICH DISALLOWANCE WAS DEL ETED BY THE CIT(A). IT WAS FURTHER SUBMITTED THAT SIMILAR DISALLOWANCE WAS MAD E BY THE AO IN ASSESSMENT YEAR 1998-99, WHICH WAS CONFIRMED BY THE CIT(A). H OWEVER, THE TRIBUNAL, VIDE CONSOLIDATED ORDER, DATED 10/1/2005, UPHELD THE DEL ETION OF THE DISALLOWANCE FOR ASSESSMENT YEAR 1997-98 AND DELETED DISALLOWANCE UP HELD BY THE CIT(A) FOR ASSESSMENT YEAR 1998-99. THE TRIBUNAL, IN THE DEPARTMENTS APPEAL FOR A.Y 1 997-98 AND IN THE APPELLANTS APPEAL FOR THE A.Y 1998-99, VIDE CONSOL IDATED ORDER DATED 10/1/2005, EXAMINED THE ISSUE THREADBARE AND AFTER CONSIDERING THE EACH OF THE REASONS GIVEN BY THE AO AND THE APPELLATE AUTHORITY TO DISALLOW P ART CLAIM OF ROYALTY, WHICH ARE ALSO THE REASONS GIVEN BY THE AO TO DISALLOW APPELL ANTS CLAIM OF ROYALTY IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE APPELLA NTS SUBMISSIONS, DELETED THE DISALLOWANCE OF ROYALTY. IT WAS FURTHER SUBMITTED THAT THE AFORESAID DECISIO N OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE DELHI HIGH COURT, VIDE ORDER DATED 11/5/2011. 6.6 THE APPELLANT FURTHER SUBMITTED THAT SIMILAR DI SALLOWANCE MADE BY THE AO FOR A.YS 1990-00 TO 2006-07 HAVE BEEN DELETED BY SU CCESSIVE CIT (A) AND TRIBUNAL, VIDE SEPARATE ORDERS, WHILST THE ORDERS FOR A.YS 199-00, 2000-01 AND 2005-06 HAVE ALSO BEEN CONFIRMED BY THE DELHI H IGH COURT VIDE CONSOLIDATED ORDER DATED 11/5/2011. 7 IT WAS ALSO POINTED OUT THAT MY PREDECESSOR, IN TH E APPELLANTS OWN CASE, ON IDENTICAL FACTS, FOR THE IMMEDIATELY PRECEDING ASSE SSMENT YEAR, 2006-07, DECIDED THE AFORESAID ISSUE IN FAVOUR OF THE APPELLANT VIDE ORD ER DATED 26/7/2010. IT WAS ALSO SUBMITTED THAT THE AFORESAID ORDER OF MY PREDECESSO R HAS BEEN RECENTLY CONFIRMED BY THE TRIBUNAL VIDE ORDER DATED 18/11/2011. 6.7 THE APPELLANT ALSO POINTED OUT THAT THE TRANSFE R PRICING OFFICER VIDE ORDER DATED 6/10/2010 PASSED U/S 92CA(3) OF THE ACT, HAS ACCEPTED THE PAYMENT OF ROYALTY MADE BY THE APPELLANT TO SPN, AS AT ARMS LENGTH. 6.8 IN RELATION TO THE ISSUE RAISED BY THE A.O THAT ADVERTISEMENT AND SALES PROMOTION EXPENSES BY THE APPELLANT RESULTED IN THE BENEFIT TO THE PARENT COMPANY, IT WAS SUBMITTED THAT THE ADVERTISEMENT EXPENDITURE WA S INCURRED BY THE APPELLANT SOLELY FOR PROMOTION OF THE PRODUCTS MANUFACTURED B Y IT AND FOR DERIVING BENEFIT FOR THE BUSINESS CARRIED ON BY IT AND NOT FOR BRAND-BU ILDING OF NESTLE S.A. IT WAS FURTHER SUBMITTED THAT THE DELHI BENCH OF TH E TRIBUNAL IN THE APPELLANTS OWN CASE FOR A.Y 1999-2000, VIZ., NESTL E INDIA LTD. VS DCIT (DEL) (2007) 111 TTJ 498, HELD THAT ADVERTISEMENT AND SAL ES PROMOTION EXPENSES INCURRED BY THE APPELLANT FOR PROMOTING SALES IN IN DIA IN RESPECT OF PRODUCTS MANUFACTURED BY IT UNDER THE VARIOUS BRANDS OF A FO REIGN COMPANY WERE ALLOWABLE IN ENTIRETY EVEN THOUGH IT MIGHT HAVE BENEFITED THE NON-RESIDENT COMPANY WHO OWNED THE BRANDS OF SUCH PRODUCTS. IT WAS FURTHER POINTED OUT THAT THE REVENUES APPE AL ON THE AFORESAID ISSUE WAS DISMISSED BY THE HONBLE DELHI HIGH COURT VIDE ORDER DATED 7/8/2008 IN ITA NO. 96/08. FURTHER THE REVENUES SLP AGAINST THE A FORESAID DECISION OF THE HIGH COURT WAS ALSO DISMISSED BY THE SC VIDE ORDER DATED 2/4/2009 IN ITA NO. 96/2002. CONSEQUENTLY, THE DECISION OF THE TRIBUNAL HAS BECO ME FINAL. 6.9 INDEPENDENT OF THE AFORESAID, IT WAS SUBMITTED THAT THE DELHI HIGH COURT, IN THE CASE OF CIT VS. ADIDAS INDIA MARKETING: 195 TAX MAN 256 UPHELD THE ORDER OF THE TRIBUNAL DELETING SIMILAR DISALLOWANCE OUT OF A DVERTISEMENT EXPENDITURE. 6.10 THE HISTORY OF LITIGATION ON THE ISSUE OF ROYA LTY DISALLOWANCE MAY BE TABULATED AS UNDER:- S.N O AY AMOUNT DISALLOWED CIT(A) ORDER ITAT ORDER HIGH COURT ORDER SC ORDER 1 1997 -98 RS. 15 CRORES DISALLOWED ON AN ADHOC BASIS DISALLOWANC E DELETED VIDE ORDER DATED 31/8/2000 CIT(A) ORDER UPHELD VIDE ORDER DATED 10/1/2005 ITAT ORDER UPHELD VIDE ORDER DATED 11/5/2011 APPEAL OF THE DEPTT. HAS BEEN ADMITTED 2 1998 -99 RS. 17 CRORES DISALLOWED ON AN AD HOC BASIS. DISALLOWANC E UPHELD BY CIT(A) DISALLOWANC E DELETED VIDE ORDER DATED 10/1/2005 ITAT ORDER UPHELD VIDE ORDER DATED 11/5/2001 APPEAL OF THE DEPTT. HAS BEEN ADMITTED 3 1999 .2/3 OF THE DISALLOWANC BOTH ITAT SLP 8 -00 EXPENDITURE ON ROYALTY WAS DISALLOWED . 50% OF THE ADVERTISEME NT EXPENDITURE WAS DISALLOWED E OF ROYALTY UPHELD BY CIT(A), BUT DISALLOWANC E OF ADVERTISEME NT EXPENSES WAS DELETED DISALLOWANC ES DELETED VIDE ORDER DATED 30/4/2007 ORDER UPHELD VIDE ORDER DATED 11/5/2011 ADMITTED ON ROYALTY DISALLOWANC E BUT NOT ON ISSUE OF ADVERTISEME NT EXPENSES 4 2000 -01 1/3 RD OF THE EXPENDITURE ON ROYALTY WAS DISALLOWED DISALLOWANC E DELETED BY CIT(A) CIT(A) ORDER UPHELD VIDE ORDER DATED 15/6/2007 ITAR ORDER UPHELD VIDE ORDER DATED 11/5/2011 APPEAL OF THE DEPTT HAS BEEN ADMITTED 5 2001 -02 1/3 RD OF THE ROYALTY PAID BY THE APPELLANT WAS DISALLOWED DISALLOWANC E DELETED BY CIT(A) CIT(A) ORDER UPHELD VIDE ORDER DATED 27/3/2009 HC DID NOT ADMIT THE REVENUES APPEAL ON ROYALTY ISSUE REVENUES SLP AGAINST NON ADMISSION OF APPEAL IS PENDING 6 2002 -03 1/3 RD OF THE ROYALTY PAID BY THE APPELLANT WAS DISALLOWED DISALLOWANC E DELETED BY CIT(A) CIT(A) ORDER UPHELD VIDE ORDER DATED 27/3/2009 NO INFORMATIO N 7 2003 -04 1/3 RD OF THE ROYALTY PAID BY THE APPELLANT WAS DISALLOWED DISALLOWANC E DELETED BY CIT(A) CIT(A) ORDER UPHELD VIDE ORDER DATED 24/7/2009 NO INFORMATIO N 8 2004 -05 40% OF ROYALTY DISALLOWANC E DELETED VIDE ORDER DATED 30/4/2007 CIT(A) ORDER UPHELD VIDE ORDER DATED 24/7/2009 NO INFORMATIO N 9 2005 -06 40% OF ROYALTY DISALLOWANC E DELETED VIDE ORDER DATED 25/11/2009 CIT(A) ORDER UPHELD VIDE ORDER DATED 22/3/2010 ITAT ORDER UPHELD VIDE ORDER DATED 11/5/2011 APPEAL OF THE DEPTT HAS BEEN ADMITTED. 9 10 2006 -07 40% OF ROYALTY DISALLOWANC E DELTED VIDE ORDER DATED 26/7/2010 CIT(A) ORDER UPHELD VIDE ORDER DATED 18/11/2011 NO INFORMATIO N IN THE LIGHT OF THE AFORESAID, THE APPELLANT CONTE NDED THAT NO PART OF THE ROYALTY PAID BY THE APPELLANT TO SPN COULD HAVE BEEN DISALLOWED ON THE GROUND OF BEING EXCESSIVE OR UNREASONABLE. THEREFORE THE ASSESSING OFFICERS ACTION IN DISALLOWING 40% OF THE ROYALTY PAID TO SPN WAS CONTENDED AS NOT BASED ON P ROPER APPRECIATION OF FACTS AND LAW AND ITS DELETION WAS PRAYED FOR. 10. CONSIDERING THESE ARGUMENTS THE CIT(A) CAME TO THE FOLLOWING CONCLUSION WHICH IS UNDER CHALLENGE BY THE REVENUE: - 7. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT, THE FINDINGS OF THE AO AND THE FACTS ON RECORD AND HAVE PERUSED THE ORDER PASSED U NDER SECTION 143(3). ON PERUSAL OF THE RELEVANT RECORDS AND DOCUMENTS, I AM OF THE CONSIDE RED VIEW THAT THE PRESENT CONTROVERSY RELATING TO DISALLOWANCE OF ROYALTY IS SQUARELY COV ERED BY THE ORDER OF MY PREDECESSOR IN THE APPELLANTS OWN CASE FOR THE A.YS 2004-05 TO 2006-0 7 WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL . THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEA R 2005-06 HAS, INFACT BEEN DISMISSED BY THE HIGH COURT. IN VIEW OF THERE BEIN G NO CHANGE IN FACTS AND LAW, IN THE YEAR UNDER CONSIDERATION AS WELL AS, IN ASSESSMENT YEAR 2005-06, I DO NOT SEE ANY REASON TO DISAGREE WITH THE ORDER OF THE MY PREDECESSOR. IN VIEW OF THE ABOVE, THE DISALLOWANCE MADE BY THE AO IN RESPECT OF ROYALTY PAID BY THE APPELLANT TO SPN THEREFORE, DESERVES TO BE DELE TED. (HIGHLIGHTED FOR EMPHASIS BY THE BENCH) 11. THE LD. CIT DR PLACED RELIANCE UPON THE ASSESSM ENT ORDER AND ADDRESSING THE LD. ARS PETITION SEEKING TIME IF WA S STATED THAT FACTS ARE IDENTICAL AS IN EARLIER YEARS WHICH HAVE BEEN TAKEN INTO CONSIDERATION BY THE AO AND ALSO NOTED BY HIM IN THE ORDER. IT WAS HIS SUB MISSION THAT BEFORE THE AO THE ITAT ORDERS IN ASSESSEES OWN CASE WERE RELIED UPON AND SINCE THE ISSUE WAS SUB-JUDICE BEFORE THE HIGH COURT THE AO MADE TH E DISALLOWANCE RELYING UPON THE PAST HISTORY. AS SUCH IT WAS HIS ARGUMENT THAT AS FAR AS THE PRESENT FORM IS CONCERNED THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT 10 OF THE JURISDICTIONAL HIGH COURT, HOWEVER HE WOULD BE PLACING RELIANCE UPON THE ASSESSMENT ORDER IN ORDER TO KEEP THE ISSUE ALIVE. IN THE CIRCUMSTANCES, IT WAS HIS STAND THAT THERE IS NO PURPOSE IN GRANTING TIME BY THE ASSESSEE. THE FACTS AS CONSIDERED BY THE CIT(A) ON QUERY IT WAS STATED B Y THE LD. CIT DR WHICH HAVE BEEN TABULATED BY WAY OF A CHART, REPRODUCED I N PARA 6.10 WAS NOT ASSAILED. 12. LD. AR ON THE OTHER HAND REQUESTED FOR TIME, HO WEVER IN THE FACE OF THE MATERIAL AVAILABLE ON RECORD QUA THE ISSUE CONCERNE D THE SAID REQUEST WAS REJECTED. A PERUSAL OF THE RECORD WHICH HAS BEEN EX TRACTED FROM THE RELEVANT ORDERS IN THE EARLIER PART OF THIS ORDER WOULD SHOW THAT THE PART DISALLOWANCE OF LICENSE FEE HAS BEEN A SUBJECT MATTER OF CONTINUOUS LITIGATION AS PER THE PAST HISTORY OF THE ASSESSEE ON THE ISSUE AND THIS FACT HAS BEEN TAKEN NOTE OF BY THE ASSESSING OFFICER IN PARA 3.3 OF HIS ORDER WHICH HA S BEEN BY REPRODUCED IN THE EARLIER PART OF THIS ORDER, IT IS FURTHER EVIDENT T HAT THE ASSESSING OFFICER WAS APPRISED OF THE FACT AS ITS FOUND DISCUSSED BY HIM IN PARA 3.5 THAT THE ISSUE HAD BEEN DECIDED BUT THE ITAT IN FAVOUR OF THE ASSESSEE IN THE EARLIER YEARS. HOWEVER, SINCE THE REVENUES APPEAL WAS ADMITTED ON A QUESTION OF LAW BEFORE THE HONBLE HIGH COURT AND THE MATTER WAS SUBJUDICE IT IS SEEN THE AO PROCEEDED TO MAKE A DISALLOWANCE FOLLOWING THE PAST POSITION AT THE ASSESSMENT STAGE. IT IS ALSO SEEN THAT CONSIDERING THE ARGUME NTS ADVANCED BEFORE THE CIT(A) WHICH HAVE ALSO BEEN EXTRACTED BY US IN THE EARLIER PART OF THIS ORDER, THE FIRST APPELLANT AUTHORITY FOLLOWING THE LEGAL PRECE DENT ON THE ISSUE DELETED THE ADDITION MADE BY WAY OF THE DISALLOWANCE. A PERUSA L OF THE RECORD SHOWS THAT THE DECISIONS ARE BASED ON THE BASIS OF SPECIFIC AG REEMENTS ENTERED INTO BY THE ASSESSEE WITH NESTEC LTD. AND SOCIETE DES PRODUITS NESTLE S.A (S.P.N) WHICH WERE SWITZERLAND BASED SUBSIDIARIES OF ONE OF ITS H OLDING COMPANY, NESTLE S.A OF SWITZERLAND. THE PAYMENT CLAIMED IS UNDER THE G ENERAL LICENSE AGREEMENT FEE FOR TECHNICAL ASSISTANCE TO SPN WHEREIN ROYALTY @ 3.5% ON DOMESTIC SALES 11 AND 5% ON EXPORT SALES IS PAYABLE IN LIEU OF THE AP PELLANT BEING ENTITLED I.E THE ASSESSEE TO USE THE AVAILABLE KNOW-HOW OWNED BY THE LICENSORS RELATING TO MANUFACTURE OF PRODUCTS; ITS FUTURE IMPROVEMENTS AN D DEVELOPMENT DEPUTATION OF EXPERTS BY THE LICENSORS FOR MATTERS REQUIRING ON-THE-SPOT TECHNICAL ASSISTANCE; PROVISION OF TRAINING BY THE LICENSORS TO THE ASSESSEES TECHNICAL PERSONS ETC AND GENERALLY ADVISING THE ASSESSEE ON ALL TECHNICAL MATTERS CONCERNING MANUFACTURING OPERATIONS; PRODUCTION MET HODS; QUALITY CONTROLS, ETC. WITH EFFECT FROM 1/12/2002,THE RIGHT/LICENCE TO USE LICENSORS WORLD RENOWNED TRADEMARKS WAS FORMALIZED IN THE GENERAL LICENSE AG REEMENT AND ROYALTY WAS PAYABLE THERE UNDER TO SPN. IT IS SEEN THAT IT WAS ARGUED BEFORE THE CIT(A) THAT PURSUANT TO THE AGREEMENTS, THE ASSESSEE HAS BEEN P AYING ROYALTY TO FOREIGN COLLABORATORS FOR THE LAST SEVERAL YEARS. APPROPRI ATE TAXES HAVE BEEN DULY DEDUCTED FROM SUCH PAYMENTS. IN ADDITION, R &D CES S @ 5% HAS BEEN PAID ON THE AMOUNT OF ROYALTY UNDER THE RESEARCH AND DEVELO PMENT CESS ACT, 1986. 12.1 A PERUSAL OF THE RECORD FURTHER SHOWS THAT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE PAID ROYALTY TO THE EXTENT OF RS.100,1 8,62,000/- ON ACCOUNT OF GENERAL LICENSE FEE PAYABLE TO SPN. THE AO DISALLOW ED THE SAME TO THE EXTENT OF 40% HOLDING THAT THE ASSESSEE HAS INCURRED HUGE EXPENDITURE ON ADVERTISEMENT WHICH HAD RESULTED IN BRAND BUILDING FOR THE PARENT COMPANY. IN THE SAID BACKGROUND IT IS SEEN THAT THE HISTORY OF DISALLOWANCE HAS BEEN TRACED RIGHT FROM 1997-98 ASSESSMENT YEAR BY THE AO. THIS WAS ADDRESSED BY THE CIT(A) ALSO WHO CONSIDERING THE CONSOLIDATED ORDER DATED 10/1/2005OF THE TRIBUNAL FOR 1997-98, 1998-99 WHICH WAS RELIED UPON BY THE ASSESSEE WAS FOUND AFFIRMED BY THE HONBLE HIGH COURT VIDE ITS O RDER DATED 11/5/2011 IS ALSO SEEN THAT IDENTICAL DISALLOWANCE IN THE CASE OF THE ASSESSEE FROM 1999-2000 TO 2006-07 WERE DELETED IN APPEAL BY THE FIRST APPELLA TE AUTHORITY WHICH ORDERS WERE CONFIRMED BY THE ITAT. IT IS ALSO A MATTER OF RECORD THAT THE ORDERS FOR 12 1999-2000 TO 2000-01 AND 2005-06 ASSESSMENT YEAR WE RE CONFIRMED BY THE HONBLE HIGH COURT BY WAY OF A CONSOLIDATED ORDER D ATED 11/5/2011. THE CIT(A) FURTHER TOOK INTO CONSIDERATION THE FACT THA T THE TPO IN HIS ORDER DATED 26/7/2010 U/S 92(A)(3) ADMITTEDLY ACCEPTED THE PAYM ENT OF ROYALTY MADE BY THE ASSESSEE TO SPN WERE AT ARMS LENGTH. IN THE SA ID BACKGROUND BEFORE THE CIT(A) THE ARGUMENT ADVANCED WAS THAT THE ADVERTISE MENT AND SALARY PROMOTION EXPENSES WAS INCURRED SOLELY FOR THE BENE FIT OF THE PARENT COMPANY WAS ASSAILED AND IT WAS ARGUED THAT THE EXPENDITURE INCURRED WAS SOLELY FOR PROMOTION OF THE PRODUCTS MANUFACTURED BY IT AND FO R DERIVING BENEFIT FOR THE BUSINESS CARRIED ON BY IT AND NOT FOR BRAND BUILDIN G OF NESTLE S.A. A PERUSAL OF THE RECORD FURTHER SHOWS THAT COGNIZANCE WAS ALSO T AKEN OF THE DECISION OF THE ITAT IN ASSESSEES CASE IN 1999-2000 NESTLE INDIA V S. DCIT (2007) 111TTJ 498 VIDE ORDER DATED 7/8/2008 IN ITA 96/08 AND SLP AGAINST THE SAID JUDGMENT WAS DISMISSED VIDE ORDER DATED 2/4/2009 IN ITA 96/2 002. BEFORE THE CIT(A)RELIANCE WAS ALSO PLACED UPON ACIT VS. ADIDAS 195 TAXMAN 256 (DELHI) ACCORDINGLY IN THESE PECULIAR FACTS AND CIR CUMSTANCES WHEREIN THE VERY SAME FACTS AND CIRCUMSTANCES OVER THE YEARS HAVE BE EN CONSIDERED BY THE AO; THE CIT(A)THE TRIBUNAL AND THE HONBLE HIGH COURT, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER. BEING SATISFIED BY THE REASONING A ND FINDING, THE DEPARTMENTAL GROUND IS DISMISSED. 13. THE FACTS AND CIRCUMSTANCES ON THE ISSUE REMAI N IDENTICAL IN ITA 4670/DEL/2012 ORDER A PERUSAL OF THE SAME SHOWS THA T PAST HISTORY ON THE ISSUE HAS BEEN THE REASONING FOR MAKING THE DISALLOWANCE BY THE AO AND THUS APART FROM DIFFERENCE IN THE AMOUNTS THE REASONING FOR M AKING THE DISALLOWANCE HAS REMAINED THE SAME. SIMILARLY, THE CIT(A) TAKING IN TO CONSIDERATION THE PAST HISTORY AS DISCUSSED IN THE EARLIER APPEAL HAS DELE TED THE ADDITION MADE BY A DISALLOWANCE. SINCE FACTS AND CIRCUMSTANCES QUA TH E AGREEMENTS REMAIN THE 13 SAME WHICH HAVE HAD AN OCCASION TO BE CONSIDERED BY THE JURISDICTIONAL HIGH COURT IN THE EARLIER YEARS WE FIND NO NEED IN THE D EPARTMENTAL APPEAL. ACCORDINGLY FOR THE DELETED REASONING IN ITA 4669/D EL/12 THE DEPARTMENT GROUND IN ITA 4670/DEL/12 IS ALSO DISMISSED. 14. IN THE ASSESSEES CO 433 & 434/DEL/12 FILED FOR THE TWO YEARS UNDER CONSIDERATION THE FOLLOWING GROUNDS HAVE BEEN RAISE D:- GROUNDS OF CO NO 433/DEL/12 1. THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING EXPENDITURE TO THE EXTENT OF RS.22,14,685, AS D ISALLOWABLE U/S14A OF THE INCOME-TAX ACT (THE ACT). 1.2 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT NO SATISFACTION AS REQUIRED IN LAW WAS RECORDED BY THE AO BEFORE MAKING DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT AND THE DISALLOWANCE MADE UNDER THAT SECTION WAS, THEREFORE, BAD IN LAW. 1.3 THAT THE CIT(APPEALS) ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THT THE SATISFACTION OF THE ASSESSING OFFICER AS REQUIRED T O BE RECORDED IN TERMS OF SECTION 14A OF THE ACT CANNOT BE SUBSTITUTED WITH T HE SATISFACTION OF THE CIT(A). 1.4 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING THAT INTEREST EXPENDITURE TO THE TUNE OF RS.3,14,676/- WAS DIRECT LY RELATABLE TO BORROWED FUNDS USED FOR INVESTMENTS, INCOME WHEREFROM EXEMPT FROM TAX AND WAS, THEREFORE, DISALLOWABLE U/S 14A OF THE ACT. 1.5 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING ADMINISTRATIVE EXPENDITURE TO THE EXTENT OF RS.19,00,009, AS DISAL LOWABLE U/S 14A OF THE ACT. GROUNDS OF CO 434/DEL/12 1. THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING EXPENDITURE TO THE EXTENT OF RS.22,14,685, AS D ISALLOWABLE U/S14A OF THE INCOME-TAX ACT (THE ACT). 1.2 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT NO SATISFACTION AS REQUIRED IN LAW WAS RECORDED BY THE AO BEFORE MAKING DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT AND THE DISALLOWANCE MADE UNDER THAT SECTION WAS, THEREFORE, BAD IN LAW. 1.3 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THT THE SATISFACTION OF THE ASSESSING OFFICER AS REQUIRED T O BE RECORDED IN TERMS OF SECTION 14A OF THE ACT CANNOT BE SUBSTITUTED WITH T HE SATISFACTION OF THE CIT(A). 1.4 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING THAT INTEREST EXPENDITURE TO THE TUNE OF RS.3,83,741/- WAS DIRECT LY RELATABLE TO BORROWED FUNDS USED FOR INVESTMENTS, INCOME WHEREFROM EXEMPT FROM TAX AND WAS, THEREFORE, DISALLOWABLE U/S 14A READ WITH RULE 8D(2 ) OF THE INCOME-TAX RULES, 1963, (THE RULES.) 14 1.5 THAT THE CIT(APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE TO THE E XTENT OF RS.28,16,895/- MADE BY THE ASSESSING OFFICER U/S 14A OF THE ACT, R EAD WITH RULE 8D (2) (II) OF THE RULES. 15. FOR THE SAKE OF COMPLETENESS IT MAY BE SET OUT LIGHT AT THE OUTSET WHILE DIVIDING THE GROUNDS THAT ON BEHALF OF THE ASSESSEE IT WAS SUBMITTED THAT DETAILED ARGUMENTS ON FACTS ARE NEEDED FOR WHICH THE PAPER B OOK WILL NEED TO BE COMPILED AND AS SUCH TIME MAY BE GRANTED. THE RECO RD SHOWS THAT THE C.OS HAVE BEEN FILED ON 30 TH OCTOBER 2012 FOR BOTH THE YEARS AND THE APPEALS ALONGWITH C.OS HAVE BEEN LINKED HAVE CAME UP FOR H EARING ON THREE DIFFERENT OCCASIONS AND ON EACH OF THOSE DATES ADJOURNMENTS W ERE SOUGHT BY THE LD. AR. THIS POSITION IS EVIDENT FROM A PERUSAL OF THE ORDE R SHEET NOTING DATED 1/11/2012, 7/3/2013 AND 15/7/2013 THESE ARE REPRODU CED FOR READY REFERENCE. ACCORDINGLY THE REQUEST FOR TIME WAS REJECTED. 1/11/2012 PRESENT FOR THE ASSESSEE; MS. PRIYANKA JAIN, AR PR ESENT FOR THE REVENUE; SH. GUNJAN PRASAD, CIT DR. AT THE REQUEST OF THE LD. AR HEARING ADJOURNED TO 7/3/2013 ALONG WITH CO NO. 433 /12 & 434/12 PARTIES INFORMED. (A.N. PAHUJA) (RAJPAL YADAV) AM JM 7/3/2013 HEARING ADJOURNED TO 15/7/2013 AND THE WRITTEN REQU EST OF THE AS COUNSEL. BOTH PARTIES INFORMED IN THE COURT. (R.P.YADAV) (G. D. AGRAWAL) JM V.P 15/7/2013 HEARING ADJOURNED TO 10/12/2013 AT THE WRITTEN REQU EST OF THE AS COUNSEL. BOTH PARTIES INFORMED IN THE COURT. (S. YAHYA) (I.C. SUDHIR) AM JM 16. ADDRESSING THE GROUNDS THE STAND OF THE CIT, DR QUA THE ISSUE WAS THAT FOR BOTH THE YEARS IT MAY BE RESTORED TO THE AO WIT H THE DIRECTION TO APPLY THE 15 PRINCIPLE LAID DOWN BY THE JURISDICTIONAL HIGH COUR T IN THE CASE OF MAXOPP INVESTMENT VS. CIT 64 DTR 122 (DELHI). AS OBSERVED THE LD. AR SUBMITTED THAT DETAILED ARGUMENTS ON FACTS NEED TO BE ADVANCE D AS SUCH AN ADJOURNMENT WAS SOUGHT. HOWEVER, IN THE LIGHT OF THE DEPARTMENT AL STAND AND THE MATERIAL AVAILABLE ON RECORD THE ASSESSEES, REQUEST WAS REJ ECTED AND IT WAS DIRECTED THAT THE ISSUE SHALL GO BACK TO THE AO FOR BOTH THE YEAR S. THE DETAILED REASONING FOR COMING T THE SAID CONCLUSION IS BEING ADDRESSED IN THE SUBSEQUENT PARAS. 17. A PERUSAL OF THE RECORD FOR 2007-08 ASSESSMENT YEARS SHOWS THAT THE AO CONSIDERING THE FACTS THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF 7,49,47,159/- WHICH DID NOT FORM PART OF THE TOTAL INCOME REQUIRED THE ASSESSEE TO ADDRESS WHY DISALLOWANCE U/S 14A READ WITH RULE 8D OF I.T RULES 1962 SHOULD NOT BE MADE. RELYING UPON THE DECISION OF TH E SPECIAL BENCH IN THE CASE OF DAGA CAPITAL HE MADE DISALLOWANCE OF RS.23,05,95 2/-. IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY THE CIT(A) CONSIDERING TH E ARGUMENT THAT RULE 8D WAS NOT APPLICABLE PRIOR TO 2008-09 ASSESSMENT YEAR AS HELD IN GODREJ AND BOYCE MANUFACTURING COMPANY VS. DCIT 328 ITR 81 (BO MBAY) WAS OF THE VIEW THAT THE AO WAS DUTY BOUND TO DETERMINE THE EX PENDITURE WHICH HAD BEEN INCURRED IN RELATION TO INCOME WHICH DID NOT FORM P ART OF THE TOTAL INCOME UNDER THE ACT AND HE WAS TO ADOPT A REASONABLE BASIS CONS ISTENT WITH THE RELEVANT FACTS AND CIRCUMSTANCES. HE FURTHER RELYING UPON CIT VS. WALFORT STOCK BROKERS (P) LTD. (2010) (326 ITR 1) (SC) AND MAXOPP INVESTMENT LTD VS. CIT HELD THAT SINCE HIS POWERS ARE CO-TERMINUS WITH AO HAS HELD I N KANPUR COAL SYNDICATE VS. CIT 53 ITR 225 (SC)PROCEEDED TO MAKE A DISALLOW ANCE OF 22,42,685/-. AGGRIEVED BY THIS ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. IN THE FACE OF THE DEPARTMENTAL STAND THAT THE ISSUE HAS TO GO BACK IN TERMS OF THE PRINCIPLE LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CAST O F MAXOPP INVESTMENT WHEREIN IT HAS BEEN HELD THAT FOR 2007-08 ASSESSMEN T YEAR RULE 8D IS NOT 16 APPLICABLE, THE AO IS DIRECTED TO DECIDE THE ISSUE AFRESH AFTER TAKEN INTO CONSIDERATION THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE WHICH HE IS DUTY BOUND TO CONSIDER. A PERUSAL OF THE SAID JUDG MENT WOULD SHOW THAT FOR ASSESSMENT YEARS PRIOR TO 2008-09 ASSESSMENT YEAR C ERTAIN SPECIFIC DIRECTIONS ARE GIVEN IN PARA 42. THE SAME IS REPRODUCED HEREU NDER FOR READY REFERENCE:- HOW IS SECTION 14A TO BE WORKED FOR THE PERIOD PRI OR TO THE INTRODUCTION OF RULE 8D? 41. SUB-SECTION (2)OF SECTION 14A, AS WE HAVE SEEN, STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN AC CORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. OF COURSE, THIS DETERMINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A (2) WHICH EXPLICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT IS ALSO IMPLIC IT IN SECTION 14A (1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14 A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINING SUCH EXPENDITUR E WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A , EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPE NDITURE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION(2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECTI ONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIVELY (AND, NOT RETRO SPECTIVELY) DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATISFY HIMSELF WIT H THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO SUCH EXPENDITURE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REFLECTED THE AMOUNT OF SUCH EXPENDITURE, HE HAS TO DO NOTHING FURTHER. ON THE OTHER HAND, IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT REASONS THAT THE AMOUNT OF SUCH EXPENDITURE AS CLAIMED BY THE AS SESSEE IS NOT CORRECT, HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITUR E ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IT WOULD B E APPROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT SHARE & STOCK BROKE RS (P.) LTD. (SUPRA) TO THE FOLLOWING EFFECT:- THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S ECTION 14A. SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE I SSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCE RTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. 17 IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH TH E CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NOT EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASSESSEE IN SO FAR AS THE Q UANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE F OR THE PURPOSES OF SECTION 14A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WI TH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. 18. ACCORDINGLY CONSIDERING THE CLEAR DIRECTION O F THE HONBLE HIGH COURT IT IS SEEN THAT IN THIS LIGHT OF THE DEPARTMENTAL STAND T HE ASSESSEES STAND THAT DETAILED ARGUMENT ON FACTS ARE REQUIRED TO BE ADDRESSED STAN DS ADDRESSED BY THE ISSUE ACCORDINGLY AFTER HAVING THE PARTIES IS RESTORE, BY THE AO WHO SHALL ADJUDICATED UPON THE ISSUE DENOVO AFTER GIVING THE ASSESSEE A R EASONABLE OPPORTUNITY OF BEING HEARD. THE GROUND RAISED IN CO FILED BY THE ASSESSEE AS SUCH IS ALLOWED FOR STATISTICAL PURPOSES. 19. ADDRESSING THE C.O FILED BY THE ASSESSEE WHEREI N THE GROUNDS REPRODUCED IN THE EARLIER PART OF THIS ORDER. IT IS SEEN THAT IN 2008-09 ASSESSMENT YEARS THE POSITION OF LAW IS DIFFERENT AS FROM THE SAID ASSES SMENT YEAR RULE 8D IS APPLICABLE. A PERUSAL OF THE ASSESSMENT ORDER WOUL D SHOW THAT THE ASSESSING OFFICER DID NOT HAVE THE BENEFIT OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT WHICH NO DOUBT WAS REFERRED TO BEFORE THE CIT(A) HOWEVER, SINCE THE ISSUE IS FACTUAL AND IT H AS NOT BEEN CONSIDERED BY THE AO IN THE LIGHT OF THE DIRECTION GIVEN BY THE JURIS DICTION HIGH COURT. ACCORDINGLY CONSIDERING THE DEPARTMENTAL STAND THAT THE ISSUE HAS TO GO BACK AND THE ASSESSEES STAND THAT THE DETAILED ARGUMENT S ON FACTS ARE REQUIRED, IT IS CONSIDERED APPROPRIATE TO RESTORE THE ISSUE BACK TO THE FILE OF THE AO WITH DIRECTION TO DECIDE THE SAME IN ACCORDANCE WITH LAW BY WAY OF SPEAKING ORDER AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 18 19. ACCORDINGLY THE APPEALS OF THE REVENUE ARE DISM ISSED AND THE ASSESSEES COS ARE ALLOWED FOR STATISTICAL PURPOSES, AS PER T HE PRONOUNCEMENT MADE IN THE OPEN COURT IN THE PRESENCE OF THE PARTIES ON THE DA TE OF HEARING ITSELF. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 3 RD JANUARY 2014. SD/- SD/- (SHAMIM YAHYA) (DI VA SINGH) ACCOUNTANT MEMBER JUDICI AL MEMBER DATED: 03 /01/2014 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGI STRAR ITAT NEW DELHI