DCIT (LTU), New Delhi V. M/s. Nestle India Ltd., Gurgaon

ITA 319/DEL/2010

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5661 (ITAT-DELHI)
• Duration Of Justice: 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 22-03-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 21-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H K LAL
• Assessee Lawyers: RUPESH J AIN; DINESH VYAS
• Keywords: Double taxation relief; Non compliance; Commercial expediency; Onus to prove
• Section: 37(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI RAJPAL YADAV, JM AND SHRI R.C.SHARMA, A M ITA NO.319/DEL/2010 ASSESSMENT YEAR : 2005-06 DY.COMMISSIONER OF INCOME TAX (LTU), DELHI. VS. M/S NESTLE INDIA LIMITED, NESTLE HOUSE, JACARANDA MARG, M-BLOCK, DLF CITY PHASE-II, GURGAON. PAN NO.AAACN0757G. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI H.K.LAL, SR.DR. RESPONDENT BY : SHRI DINESH VYAS, SR.ADVOCATE AND SHRI RUPESH JAIN, CA. ORDER PER R.C.SHARMA, AM : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 25.11.2009, IN THE MATTER OF ORDER PASSED U/S 143(3 ) OF THE IT ACT. 2. THE ONLY GRIEVANCE OF THE REVENUE RELATES TO CIT (A)S ACTION IN DELETING ADDITION OF RS.30,11,50,000/- BEING 40% OF THE LICE NSE FEE PAID BY THE ASSESSEE COMPANY TO ITS PARENT COMPANY. 3. AT THE OUTSET, LEARNED AR PLACED ON RECORD SERIE S OF ORDERS OF THE TRIBUNAL, WHEREIN EXACTLY ON SIMILAR FACTS, THE ISSUE WAS DEC IDED IN FAVOUR OF THE ASSESSEE. LEARNED AR ALSO DREW OUR ATTENTION TO THE RELEVANT PARA OF THE CIT(A)S ORDER WHEREIN HE HAS DELETED THE DISALLOWANCE BY RELYING ON THE ORDER OF THE TRIBUNAL FOR AY 1997-98 AND 1998-99, AND ALSO ORDER OF THE TRIBU NAL FOR AY 2003-04 AND 2004-05, ORDER DATED 24.7.2009. 4. IN AY 2004-05, SIMILAR ISSUE WITH REGARD TO DISA LLOWANCE OF 40% OF ROYALTY AMOUNT WHICH WAS CONSIDERED TO BE EXCESSIVE AND NOT AN EXPENDITURE INCURRED ITA-319/DEL/2010 2 WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, WAS DULY CONSIDERED BY THE TRIBUNAL AND THE ORDER OF CIT(A) CONFIRMING THE DEL ETION OF ADDITION WAS CONFIRMED BY FOLLOWING THE DECISION OF ITAT ON EXAC TLY SIMILAR ISSUE FOR AY 1997-98. IT WAS OBSERVED THAT BY PAYMENT OF ROYALT Y, THE ASSESSEE COMPANY HAS BEEN HIGHLY BENEFITED BOTH IN RESPECT OF PROFITABIL ITY AS WELL AS GROWTH OF ITS BUSINESS ON ACCOUNT OF CLOSE ASSOCIATION AND SUPPOR T FROM NESTLE SA, SWITZERLAND, INTERNATIONALLY RENOWNED AND LEADING FOOD PROCESSIN G COMPANY. FOLLOWING WAS THE OBSERVATION OF THE TRIBUNAL IN ASSESSEES OWN C ASE FOR AY 1997-98 & 1998- 99:- 5. WE HAVE HEARD THE PARTIES AND PERUSED THE RECOR D OF THE CASE. THE SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE ITAT, D BENCH, NEW DELHI IN ASSESSEES OWN CASE FOR ASSESSM ENT YEAR 1997- 98, 1998-99 IN ITA NO.4545/D/2000 AND 2239/D/2002 W HEREIN THE TRIBUNAL HAS HELD THUS:- 89. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. WE SEE CONSIDERABLE FORCE IN THE CONTENTION OF THE LD. CIT, DR THAT THE APPEAL IN RELATION TO ASSESSMENT YEAR 1 997-98 IS BY AND LARGE ACADEMIC BECAUSE THERE IS NO DISPUTE B ETWEEN THE ASSESSEE AND REVENUE AS TO THE QUANTUM OF THE A SSESSED TAX LIABILITY 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 ASSESSEES PAYMENTS TO SPN A T CONSIDERABLE LENGTH. THE LD. ASSESSING OFFICER HAS GIVEN A HARSH FINDING THAT THE PAYMENTS WERE PART OF A DEVI CE 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 COMPANYS TAX INCIDENCE IN INDIA. WE FIND THAT WHI LE 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 SP ITE OF THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 1997-98, NOT F INDING 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 1997-9 8. THE LD. CIT(A) ENTERTAINED, IN ADDITION TO THE REPORT OF TH E ASSESSING ITA-319/DEL/2010 3 OFFICER, A REPORT ALSO FROM THE PREVIOUS INCUMBENT WHO WAS THEN WORKING AS ADDL. DIT (INV.) ON THE GROUND THAT HE WAS THE OFFICER WHO HAD FRAMED THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 1997-98. WE ARE, THEREFORE, OF THE VIEW THAT ACADEMIC OR NON ACADEMIC THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 1997-98 HAS TO BE KEPT IN VIEW WHIL E DECIDING THE ASSESSEES APPEAL FOR ASSESSMENT YEAR 1998-99. HENCE, NOW THE MATTER FOR ASSESSMENT YEAR 1997-98 H AS TRAVELLED UNTO US WE MAY AS WELL DEAL WITH REVENUE S APPEAL FOR ASSESSMENT YEAR 1997-98, FOR WHATEVER IMPACT, O UR ORDER IN RELATION TO THAT ASSESSMENT YEAR MAY HAVE. 90. ON PERUSAL OF THE ASSESSMENT ORDER FOR ASSESSME NT YEAR 1997-98 THAT HAS FORMED THE BEDROCK OF THE ASS ESSMENT ORDER FOR ASSESSMENT YEAR 1998-99, WE FIND THAT THE LD. ASSESSING OFFICER HAS MADE PART DISALLOWANCE OF THE ASSESSEES CLAIM OF DEDUCTION ON ACCOUNT OF AGREEME NTS WITH SPN ON THE FOLLOWING GROUNDS:- A) THE ASSESSEE REFRAINED FROM FURNISHING TO THE AS SESSING OFFICER THE FULL DETAILS AS ASKED FOR AND THUS NOT ALLOWING THE ASSESSING OFFICER TO EXAMINE IN DEPTH THE CORRECTNE SS OR OTHERWISE OF THE ASSESSEES CLAIM OF DEDUCTION. B) THE ASSESSEE NOT FURNISHING THE MATERIAL/EVIDENC E IN RELATION TO TECHNICAL ASSISTANCE ACTUALLY RECEIVED SO AS TO JUSTIFY THE HUGE PAYMENT OF RS.47 CRORES FOR ASSESSMENT YEAR 19 97-98. C) THE ASSESSEE NOT EXPLAINING AS TO ON WHAT BASIS THE SCALE OF REMUNERATION WAS AGREED UPON IN THE AGREEMENTS IN Q UESTION AND WHETHER ANY EVALUATION AND ANALYSIS OF THIS TEC HNICAL ASSISTANCE WAS BEING MADE. D) PRIMA FACIE, THE QUANTUM OF ROYALTY PAID WAS EXC ESSIVE AND UNREASONABLE HAVING REGARD TO THE AMOUNT OF THE ASS ESSEES BUSINESS PROFIT. E) THE ASSESSEE WAS ALREADY WELL ESTABLISHED IN THE BUSINESS, PARTICULARLY COFFEE BUSINESS, AND THEREFORE NEED NO T HAVE MADE SUCH LARGE PAYMENT FOR TECHNICAL ASSISTANCE. ON THIS BASIS, THE LD ASSESSING OFFICER FOR ASSESSM ENT YEAR 1997-98, CONTENDED THAT THE PAYMENTS IN QUESTION WE RE ONLY PART OF A DEVICE TO SIPHON AWAY THE PROFITS OF THE INDIAN COMPANY THEREBY REDUCING THE PROFIT DISTRIBUTABLE I N INDIA AND INCIDENCE OF TAX THEREON. THE LD. CIT(A) FOR A SSESSMENT YEAR 1998-99 HAS ALSO DRAWN THE SAME CONCLUSION THA T THE PAYMENTS IN QUESTION WERE A COLOURABLE DEVICE ON TH E PART OF THE ASSESSEE AND, THEREFORE, HIT BY THE JUDGEMENT O F HONBLE SUPREME COURT IN THE CASE OF MCDOWELL AND CO. LTD. VS. CTO, 154 ITR 148 (SC). HOWEVER, WE FIND THAT IN TH E ORDER OF THE LD. CIT(A) FOR ASSESSMENT YEAR 197-98, THE E MPHASIS IS ITA-319/DEL/2010 4 UPON HIS INFERENCE THAT THE PAYMENTS IN QUESTION WE RE DISPROPORTIONATELY HIGH LOOKING AT THE PROFITS EARN ED BY THE ASSESSEE AND THE ASSESSEE HAS NOT BEEN ACCUSED OF H IDING FROM EXAMINATION OR NOT FURNISHING THE INFORMATION REGARDING TECHNICAL ASSISTANCE ACTUALLY RECEIVED. 91. AS TO THE CASE OF THE ASSESSING OFFICER THAT TH E ASSESSEE FAILED TO ESTABLISH THE COMMERCIAL EXPEDIE NCY OF PAYMENTS IN QUESTION BY PRODUCTION OF RELIABLE INFO RMATION AND EVIDENCE, ON CAREFUL PERUSAL OF THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 1997-98, WE FIND THAT THE LD ASSESS ING OFFICER HAS MAINLY ALLEGED NON COMPLIANCE TO VARIOU S 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 LET TER DATED 17 TH JUNE, 1999 AN ORDER SHEET NOTINGS DATED 20 TH SEPT, 99, 6 TH OCTO, 1999 AND 29 TH NOVEMBER, 1999, THE LETTER DATED 10H DECEMBER, 1999 AND ORDER SHEET NOTING DATED 27 TH DECEMBER, 1999 , HE HAS SUMMARIZED THE ASSESSEES REPLY AND T HE SUBMISSIONS IN ONE SINGLE PARAGRAPH 10 OF THE ASSES SMENT ORDER. THE LD. ASSESSING OFFICER HAS CHARGED THE A SSESSEE ALSO FOR NOT ESTABLISHING THE COMMERCIAL EXPEDIENCY . DURING THE COURSE OF HEARING BEFORE US, WHILE THE LD. CIT- DR STOUTLY EMPHASIZED THIS ALLEGATION, THE LD. COUNSEL FOR THE ASSESSEE, WITH EQUAL VEHEMENCE, RELIED UPON THE VOLUMINOUS EV IDENCE, MATERIAL AND RECORD FILED/PRODUCED BEFORE THE ASSES SING OFFICER DURING THE COURSE OF THE ASSESSMENT PROCEED INGS FOR ASSESSMENT YEAR 1997-98. WE FIND THAT IN THE ASSES SMENT ORDER FOR THE ASSESSMENT YEAR 1997-98, THE LD. ASSE SSING OFFICER HAS SPELT OUT IN PARA 22, VARIOUS QUERIES THAT ACCORDING TO HIM WERE NOT COMPLIED WITH BY THE ASSE SSEE. WE HAVE REPRODUCED THE SAME IN PARA 6 OF THIS ORDER. THE LD. COUNSEL FOR THE ASSESSEE HAS PAINSTAKINGLY TAKEN US THROUGH THE LETTERS FROM THE ASSESSEE AND OTHER EVIDENCE, M ATERIAL AND RECORD PRODUCED DURING THE COURSE OF ASSESSMENT PRO CEEDINGS FOR ASSESSMENT YEARS 1997-98 AND 1998-99 AND THE SA ME HAVE BEEN ENUMERATED BY US FROM PARAS 37 TO 65 OF THIS O RDER. ON CONSIDERATION, WE FIND THAT BY AND LARGE THE ASSESS EE FURNISHED ALMOST ENTIRE INFORMATION, MATERIAL AND E VIDENCE AS WAS ASKED FOR BY THE ASSESSING OFFICER. IN ADDITIO N, THE ASSESSEE ALSO FURNISHED PLENTY OF MATERIAL GIVING T HE ASSESSING OFFICER FOR ASSESSMENT YEARS 1997-98 AND 1998-99 A FAIR VIEW OF THE KIND, QUALITY AND SIGNIFICANCE O F TECHNICAL ASSISTANCE RECEIVED AND BEING RECEIVED BY THE ASSES SEE BY VIRTUE OF THE AGREEMENTS IN QUESTION. THE ASSESSEE INFORMED ITA-319/DEL/2010 5 THE LD. ASSESSING OFFICER THAT IT COULD COMPLY WITH HIS REQUISITIONS AND SUBSTANTIATE ITS CLAIM OF DEDUCTIO N BY MAKING A FULL AND COMPREHENSIVE PRESENTATION OF TECHNICAL ASSISTANCE MORE CONVENIENTLY AT THE ASSESSEES OWN PREMISES WH ERE THE RELEVANT RECORD WAS LOCATED. DURING THE COURSE OF APPEAL BEFORE THE LD CIT(A) FOR ASSESSMENT YEAR 1998-99 AL SO, THE ASSESSEE OFFERED THAT HE MAY VISIT THE ASSESSEES O FFICE PREMISES AND FACTORIES. HOWEVER, THESE REQUESTS WE RE NOT ACCEDED TO. WE HAVE, THEREFORE, TO SEE THE MATERIA L AND EVIDENCE PRODUCED BY THE ASSESSEE KEEPING IN VIEW T HAT THE ASSESSEE WAS NOT GRANTED THE ADVANTAGE OF FIRST HAN D DEMONSTRATION AT THE ASSESSEES OWN PREMISES WHERE TECHNICAL ASSISTANCE WAS SUPPOSED TO BE RENDERED. WE, THEREFORE HOLD THAT THE LD ASSESSING OFFICER HAS B EEN LESS THAN FAIR IN HIS OBSERVATIONS THAT THE REQUISITE DE TAILS AND SUPPORTING MATERIAL, EVIDENCE AND INFORMATION WERE NOT FURNISHED BY THE ASSESSEE. WE SEE FORCE IN THE CO NTENTION OF THE ASSESSEE THAT WHILE MAKING SUCH OBSERVATION, TH E LD. ASSESSING OFFICER IGNORED AND OMITTED TO MAKE A REF ERENCE TO VOLUMINOUS MATERIAL PLACED BEFORE HIM BY THE ASSESS EE. IT IS TRUE THAT SOME OF THE INFORMATION ASKED FOR WAS NOT FURNISHED. THE LD. COUNSEL FOR THE ASSESSEE HAS INFORMED US TH AT THE SAME WAS EITHER NOT IN THE POSSESSION OF THE ASSESSEE OR DID NOT EXIST. THE ASSESSEE HAD CERTAIN RESERVATION ABOUT F URNISHING THE SENSITIVE INFORMATION REGARDING THE PRODUCT WIS E PROFITABILITY AS THE ASSESSEE WAS IN HIGHLY COMPETI TIVE MARKET OF FAST MOVING CONSUMER GOODS. HOWEVER, EVENTUAL LY, THE ASSESSEE FURNISHED EVEN THE DATA PERTAINING TO PROD UCT-WISE PROFITABILITY. THE ASSESSEE DID NOT FURNISH THE PA RTICULARS OF PROFIT AND BALANCE SHEET, ETC. OF NESTEC, SPN, NEST LE SA OF SWITZERLAND BECAUSE THE SAME FELL OUTSIDE THE ASSES SEES OBLIGATION TO SUPPLY. IRONICALLY, ACCORDING TO THE ASSESSEE, ALL THIS EMPHASIS ON WORKING ON PROFIT OF THE ASSES SEE AND SERVICE PROVIDERS WAS IRRELEVANT BECAUSE THE QUANTU M OF REMUNERATION COULD NEITHER BE FIXED NOR ADJUDGED ON THE YARDSTICK OF PROFIT. 92. DURING THE COURSE OF HEARING BEFORE US, CONSIDE RABLE ARGUMENTS WERE MADE IN RELATION TO THE APPLICABILIT Y OR OTHERWISE OF THE PROVISIONS OF SECTION 40A(2)(B)/SE CTION 92/ARTICLE 9 OF DTAA, ETC. FOR THE PURPOSE OF HIS ORDER, WE DO NOT WISH TO GO INTO THE FINER TECHNICAL POINTS R ELATING TO THESE LEGAL PROVISIONS. IN OUR VIEW, IN THE ABSENC E OF ANY SPECIFIC MATERIAL, EVIDENCE OR INFORMATION, THE ENT IRE EXERCISE UNDERTAKEN BY THE ASSESSING OFFICER COULD HAVE BEE N TEMPERED IF DUE IMPORTANCE WAS ATTACHED BY HIM TO T HE FACT ITA-319/DEL/2010 6 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 ASSESSEES COUNSEL IN THIS RESPECT AS ENUMERATED BY US IN PARA 67 OF THIS ORDER. AFTER CONSIDERATION, WE REJECT THE CONTENTION THAT THE AD VERSE INFERENCE WAS CORRECTLY DRAWN AGAINST THE ASSESSEE ON ACCOUNT OF ALLEGED NON-COMPLIANCE TO VARIOUS REQUIS ITIONS OF THE ASSESSING OFFICER DURING THE COURSE OF THE ASSE SSMENT PROCEEDINGS FOR ASSESSMENT YEAR 1997-98. 93. WE NOW ADDRESS OURSELVES TO THE QUESTION WHE THER THE ASSESSEE HAS DISCHARGED THE INITIAL ONUS THAT LAY U PON HIM TO SUBSTANTIATE ITS CLAIM OF DEDUCTION. WE MAY STATE THAT IRRESPECTIVE OF THE QUESTION WHETHER THE PROVISIONS OF SECTION 40A(2)(B) OR SECTION 92 OR ARTICLE 9 OF DTAA COULD BE INVOKED OR NOT IN THIS CASE, IT IS QUITE CLEAR THAT THE BURDEN TO PROVE UNDER THOSE SPECIAL PROVISIONS IS CAST ON THE ASSESSING OFFICER AND NOT UPON THE ASSESSEE. AT THE SAME TIM E UNDER THE PROVISIONS OF SECTION 37(1), THE PRIMARY BURDEN TO SUBSTANTIATE A CLAIM OF DEDUCTION OF EXPENDITURE IS ON THE ASSESSEE. ACCORDING TO THE LD. COUNSEL FOR THE ASS ESSEE, LD. ASSESSING OFFICER/LD CIT(A), IF THEY ENTERTAINED AN Y DOUBT, SHOULD HAVE ACCEPTED THE ASSESSEES OFFER TO VISIT THE ASSESSEES FACTORY AND OFFICE PREMISES. WE DO NOT UNDERSTAND AS TO WHY THE REQUEST OF THE ASSESSEE COULD NOT BE ACCEPTED. IN OUR OPINION, THIS REQUEST ON THE PART OF THE ASS ESSEE AS QUITE REASONABLE ON THE ACTS AND IN THE CIRCUMSTANC ES OF THE CASE. BE THAT AS IT MAY, FROM THE DETAILED SUBMISS IONS OF THE LD. COUNSEL FOR THE ASSESSEE IN THIS BEHALF DURING THE COURSE OF A NUMBER OF SITTINGS ON VARIOUS DATES WHICH WE HAVE ATTEMPTED TO SUMMARISE FROM PARAS 41 TO 64 OF THIS ORDER, WE ARE SATISFIED THAT THE ASSESSEE HAD SUCCESSFULLY DI SCHARGED THE BURDEN OF PROOF WHICH LAY UPON HIM UNDER THE PROVIS IONS OF SECTION 37(1) OF THE ACT. WE FIND THAT THE ASSESSE ES CASE IS WELL ARMED IN THIS RESPECT ON ACCOUNT OF APPROVAL A LSO GRANTED BY THE RBI TO THE AGREEMENTS IN QUESTION. AT ANY RATE FROM THE FACTS STATED AND THE EVIDENCE/MATERIAL PRO DUCED IN THE ASSESSEES PAPER BOOK, WE ARE OF THE VIEW THAT THE TECHNICAL ASSISTANCE AGREEMENTS IN QUESTION WERE ES SENTIAL FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE DURING THE ASSESSMENT YEARS BEFORE US. THE ASSESSEE APPEARS T O HAVE BEEN HIGHLY BENEFITED BOTH IN RESPECT OF PROFITABIL ITY AS WELL AS GROWTH OF ITS BUSINESS ON ACCOUNT OF CLOSE ASSOC IATION AND SUPPORT FROM NESTLE SA, SWITZERLAND, INTERNATIONALL Y RENOWNED AND LEADING FOOD PROCESSING COMPANY. ITA-319/DEL/2010 7 94. WE NOW COME TO THE QUESTION AS TO WHETHER T HE QUANTUM OF REMUNERATION AS AGREED UPON IN THE AGREE MENTS IN QUESTION AND ACTUALLY PAID DURING THE COURSE OF THE ASSESSMENT YEARS BEFORE US IS JUSTIFIED ON THE FACT S AND IN THE CIRCUMSTANCES OF THE CASE. IN OTHER WORDS, WHETHER BOTH THE ASSESSING OFFICER IN THE ASSESSMENT ORDER FOR ASSES SMENT YEAR 1997-98 AND THE LD CIT(A) IN THE APPELLATE ORDER FO R ASSESSMENT YEAR 1998-99 ARE JUSTIFIED IN THEIR CONC LUSION THAT THE ASSESSEE IN COLLUSION WITH PARENT COMPANY IN SW ITZERLAND ADOPTED A COLOURABLE DEVICE WHEREBY THE PROFITS OF INDIAN COMPANY WERE SIPHONED AWAY TO BE AGGRANDIZED BY THE SWISS COMPANY. THE LD ASSESSING OFFICER HAS ARGUED IN TH E ASSESSMENT ORDER FOR ASSESSMENT YEAR 1997-98 THAT FROM THE VERY FACT THAT NO EVALUATION AND ANALYSIS OF TECHNI CAL ASSISTANCE HAD BEEN MADE AT THE TIME OF ENTERING IN TO 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 W ITH THE SOLE OBJECT OF DIVERTING PROFIT OF THE ASSESSEE COM PANY. IN THIS CONTEXT, THE LD. ASSESSING OFFICER EVEN ASKED THE A SSESSEE TO PRODUCE A CERTIFICATE FROM AN INDEPENDENT TECHNICAL AGENCY THAT THE PAYMENTS WERE COMMENSURATE TO ACTUAL SERVI CES RECEIVED. BESIDES, BOTH THE LD. ASSESSING OFFICER IN THE ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 199 7-98 AND HT LD. CIT(A) IN THE ORDER FOR THE ASSESSMENT YEAR 1998-99 EMPHASISED THAT THE ASSESSEE WAS ALREADY WELL ESTAB LISHED AND WELL VERSED IN THE BUSINESS OF PRODUCTS IN QUES TION, 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 TECHNI CAL ASSISTANCE OF THE MAGNITUDE SO AS TO PART WITH A SU BSTANTIAL CHUNK OF ITS BUSINESS PROFIT. 95. THE AUTHORITIES BELOW IN THEIR ORDERS AND THE L D. CIT- DR IN HIS ARGUMENTS BEFORE US HAVE RELIED UPON CERT AIN CHARTS INDICATING 78.37% AND 49.95% OF THE PROFIT H AD BEEN PAID OF BY HE ASSESSEE COMPANY UNDER THE AGREEMENTS IN RELATION TO THE ASSESSMENT YEARS 1997-98 AND 1998- 99 RESPECTIVELY. DURING THE COURSE OF HEARING BEFORE U S, THE LD. COUNSEL FOR THE ASSESSEE HAS ATTACKED THE VERY RAT IONALE OF THE EXERCISED DONE IN THESE CHARTS BY THE INCOME TA X AUTHORITIES. ACCORDING TO HIM, THE QUANTUM OF REMU NERATION COULD NOT, IN ANY CASE, BE LINKED WITH THE PROFIT. THE PROFIT AS A DERIVATIVE FIGURE DEPENDING ON VARIOUS FACTORS OU TSIDE THE DIRECT AND REASONABLE CONTROL OF THE TECHNICAL ASSI STANCE PROVIDERS. CONTRACTING FOR A FIXED AMOUNT OF ROYAL TY COULD BE ITA-319/DEL/2010 8 DISASTROUS IF THE PRODUCT DID NOT CLICK IN THE MARK ET. IN THE SALE-LINKED AGREEMENT, THE TECHNICAL ASSISTANCE PRO VIDERS INTEREST IN THE SUCCESS OF THE PRODUCT WAS HIGHEST AND ENSURED MAXIMUM ASSISTANCE WAS RECEIVED. MOREOVER, INTANGI BLE BENEFIT OF TECHNICAL ASSISTANCE COULD NOT BE GAUGED BY THE PERFORMANCE OF THE SAME YEAR IN WHICH THE INVESTMEN T IN TECHNOLOGY WAS MADE. THE BENEFIT COULD BE GAUGED O NLY OVER SUFFICIENTLY LONG TERM ALLOWING THE TECHNICAL INITI ATIVE TO BEAR FRUITS. THAT PART, THE LD. COUNSEL FOR THE ASSESSE E 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 REMUNERAT ION 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 ONL Y 34.89% AND 26.59% OF THE PROFITS FOR ASSESSMENT YEARS 1997 -98 AND 198-99 RESPECTIVELY. THE LD. COUNSEL FURTHER ARGUE D THAT THE PERCENTAGE WAS HIGHER DURING ASSESSMENT YEARS 1997- 98 AND 1998-99 BECAUSE THE NET PROFIT AS PERCENTAGE OF TUR NOVER ITSELF WAS LOWER IN THOSE ASSESSMENT YEARS. AS TO THE QUESTION THAT NO INDEPENDENT EVALUATION OF THE VALUE AND UTI LITY OF TECHNICAL SERVICES WERE CARRIED OUT, THE LD. COUNSE L ARGUED THAT SUCH WAS NEVER A PRACTICE IN A CASE WHERE HIG HLY SPECIALIZED AND RESTRICTED TECHNOLOGY WAS IMPARTED. TECHNOLOGY PROVIDED TO THE ASSESSEE BY THE PARENT C OMPANY AND ITS SUBSIDIARY HAD ALWAYS BEEN AND WAS INTENDED TO ALWAYS REMAIN THE PROPERTY OF THE PARENT COMPANY A ND ITS SUBSIDIARIES. THE ASSESSEE HAD BEEN GIVEN A RIGHT TO USE ONLY THAT TECHNOLOGY FOR MANUFACTURE AND SALE OF PRODUCT S UNDER THE PARENT COMPANYS BRAND NAME. THE TECHNOLOGY WA S HIGHLY SENSITIVE AND CONFIDENTIAL AND, THEREFORE, I N EVERY AGREEMENT, THE ASSESSEE WAS BOUND BY CONFIDENTIALIT Y CLAUSE. IN SUCH CIRCUMSTANCES, TO INVITE AN INDEPENDENT AGE NCY FOR EVALUATION AND CERTIFICATION AS DESIRED BY THE ASSE SSING OFFICER WAS UNTHINKABLE. AS TO THE BASIS ON WHICH THE QUANTUM OF REMUNERATION FOR TECHNOLOGY ASSISTANCE W AS FIXED, THE LD. COUNSEL ARGUED THAT AT THE TIME OF ENTERING INTO THE AGREEMENT, IT WAS NOT POSSIBLE TO PREDICT ACCURATEL Y THE AMOUNT OF REMUNERATION TO BE PAID TO TECHNICAL ASSI STANCE PROVIDERS. THAT DEPENDED ON THE SUCCESS OF THE PROD UCT LAUNCHED AND ACTUAL WORKING OF THE PROJECT IN INDI A AND SUBJECT TO SEVERAL IMPONDERABLES. IT WAS FOR THAT REASON THAT THERE WAS NO SPECIFIC WORKING MADE AT THE TIME OF E NTERING INTO AGREEMENTS IN QUESTION AND INSISTENCE OF THE L D. ASSESSING OFFICER ON PRODUCTION OF THE SAME WAS NOT JUSTIFIED. ITA-319/DEL/2010 9 THE ASSESSEE AS WELL AS THE TECHNICAL ASSISTANCE PR OVIDERS WERE IN THE LINE OF BUSINESS AND HAD EXPERIENCE FOR A LONG TIME AND BASED ON THEIR EXPERIENCE AND PERCEPTION, BY MUTUAL DISCUSSION, THE RATE OF REMUNERATION WAS FIXED. IT WAS NOT POSSIBLE TO PHYSICALLY DEMONSTRATE THAT INTANGIBLE EXERCISES. THE FACT OF THE MATTER WAS THAT THE REMUNERATION WA S FIXED AT A VERY REASONABLE RATE IN SPITE OF THE GOVERNMENT R EGULATIONS HAVING PERMITTED PAYMENT OF REMUNERATION AT MUCH HI GHER RATE. THE JUSTIFICATION OF REMUNERATION PAID WAS T O BE SEEN IN THE VOLUMINOUS MATERIAL AND EVIDENCE FILED BY THE A SSESSEE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS AND THE PROCEEDINGS BEFORE US. IT WAS TOTALLY INAPPROPRIAT E TO TEST THE REASONABLENESS OF THE REMUNERATION ON THE YARDSTICK OF PROFIT OF THE YEAR IN WHICH THE PAYMENT WAS MADE. THIS IS SUE REQUIRED A LONG-TERM VIEW TO BE TAKEN. ON CAREFUL CONSIDERATION OF THE DETAILED SUBMISSIONS MADE BY T HE ASSESSEE IN THIS BEHALF AND BRIEFLY ENUMERATED BY U S IN PARAS 37 TO 65 OF THIS ORDER, WE FIND OURSELVES IN SUBSTA NTIAL AGREEMENT WITH THE ASSESSEE. IN THE FIRST INSTANCE , THE ASSESSEE ONLY HAD LICENSE TO USE THE TECHNOLOGY AND , THEREFORE, THE ASSESSEE COULD NOT HAVE CONTINUED TH E MANUFACTURE OF ANY NESTLE BRAND PRODUCT WITHOUT THE CONSENT OF THE PARENT COMPANY WE DO NOT SUBSCRIBE TO THE A RGUMENT OF THE LD. CIT DR THAT AS INTELLECTUAL PROPERTY RIG HTS WERE NOT RECOGNIZED IN INDIA, THE ASSESSEE COULD HAVE SNAPPE D 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 DE TAIL. THE ASSESSEE COMPANY IN INDIA WAS REAPING HARVEST O F FINE PRODUCTION TECHNOLOGY EVOLVED BY THE PARENT COMPANY OVER 125 YEARS BY VIRTUE OF PRESENCE IN MORE THAN 70 COU NTRIES. FOR CONTINUING TO ARREST THE BENEFIT, IT WAS ESSENT IAL FOR THE ASSESSEE TO HAVE A PERENNIAL SOURCE OF SUPPLY OF AL L 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 ALREA DY GATHERED. THE ASSESSEE DID NOT CONTRIBUTE A SINGLE PENNY TO R&D COST OF NESTLE SA STATED TO BE OVER RS.2000 CRO RES PER YEAR. NESTLE INDIA RECEIVED TESTED TECHNOLOGY AND, THEREFORE, DID NOT HAVE TO SUFFER LOSS OF AN FAILED TECHNOLOGY OR PROJECT. THE ASSESSEE HAD ACCESS TO ALL THE REQUIRED TECHNOL OGY AVAILABLE WITH THE PARENT COMPANY NOT ONLY IN RESPE CT OF MANUFACTURING BUT ALSO IN VARIOUS OTHER FIELDS LIKE QUALITY ITA-319/DEL/2010 10 CONTROL, PERSONNEL, STAFF MANAGEMENT, MARKETING, ST ORAGE AND SO ON. THE KIND OF TECHNICAL ASSISTANCE RECEIVED B Y THE ASSESSEE WAS OF SUCH NATURE AS TO SUSTAIN ITS POSIT ION AS NUMBER ONE MANUFACTURER IN INDIA IN RESPECT OF THE PRODUCTS BEING MANUFACTURED BY IT. DURING THE COURSE OF HEA RING BEFORE US THE LD. COUNSEL FOR THE ASSESSEE HAS GIVE N SEVERAL EXAMPLES OF MAJOR TECHNOLOGICAL ADVANCEMENTS THAT H AD TAKEN PLACE IN THE AREA OF THE ASSESSEES PRODUCTS. HE EXPLAINED TO US IN DETAIL THE MAJOR CHANGES THAT TO OK LACE IN THE FIELD OF COFFEE MANUFACTURING AND STATE OF ART TECHNOLOGY THAT ALLOWED TO CAPTURE THE AROMA OF FRESH COFFEE I N THE PRODUCTS OF THE ASSESSEE. THE LD. COUNSEL DWELT AT LENGTH ON THE UNIQUE TECHNOLOGY IN RELATION TO EXTRACTION PRO CESS CALLED MUCH PROCESS RESULTING INTO BETTER FINISHED PRODUCT FROM THE SAME COFFEE BEANS. HE MADE REFERENCE TO THE CHANGE S IN THE MANUFACTURING PROCESS OF WEANING FOODS THAT ENSURED BIO AVAILABILITY OF CARBOHYDRATES THROUGH THE PROCESS O F ENZYMATION TO PROVIDE HIGHER NUTRITION IN MEALS AND ENHANCED DIGESTIBILITY. THESE WERE JUST A FEW EXAM PLES FROM OUT OF THE MANY ADVANCEMENTS AND CHANGES TAKING PLA CE EVERY YEAR. THE LD. COUNSEL POINTED OUT THAT DURING THE PERIOD UNDER CONSIDERATION, MORE PRODUCES WERE LAUNCHED BY NESTLE THAN IN THE IMMEDIATELY PRECEDING TWO DECADES. HE ALSO EMPHASIZED WITH CONSIDERABLE JUSTIFICATION THAT SEV ERAL THOUSAND INDIAN SHAREHOLDERS OF THE ASSESSEE COMPAN Y TREMENDOUSLY BENEFITED AN INVESTOR WHO PURCHASED 1 00 SHARES IN 1970 HAD GROWN INTO SHAREHOLDING OF 3700 SHARES OF THE MARKET VALUE OF RS.19 LAKHS AFTER HAVING REC EIVED THE DIVIDEND TOTALLING TO RS.2,66,653/-. THE LD. COUNS EL ARGUED THAT THESE ASPECTS WERE REQUIRED TO BE APPRECIATED RATHER THAN MERELY SUSPECTING THAT THE REMUNERATION FOR TE CHNICAL ASSISTANCE WAS NOTHING BUT A CAMOUFLAGE TO SIPHON A WAY AND REPATRIATE THE PROFITS OF INDIAN OPERATIONS. ON CA REFUL CONSIDERATION, WE SEE CONSIDERABLE FORCE AND JUSTIF ICATION IN THESE ARGUMENTS OF THE ASSESSEE. 96. THERE IS ONE MORE IMPORTANT ASPECT OF THE CASE. AFTER ALL WHAT IS THE MATERIAL AGAINST THE ASSESSEE IN TH E ORDERS OF THE AUTHORITIES BELOW. APART FROM PREPARING SAME C HARTS, 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 COLOURABL E DEVICE OR A CAMOUFLAGE FOR DIVERSION OF PROFITS RESTED UPO N THE ITA-319/DEL/2010 11 REVENUE. IN THE ORDER OF THE AUTHORITIES BELOW, NO MATERIAL HAS BEEN BROUGHT ON RECORD EXCEPT DISBELIEVING THE ASSESSEES EXPLANATION AND THEIR SUBJECTIVE OPINIONS. THE BURD EN OF THEIR ORDER IS THAT THE ASSESSEE SO ARRANGED ITS COURSE O F BUSINESS THAT IT WAS LEFT WITH A LESS THAN ORDINARY PROFIT E XPECTED IN THE ASSESSEES 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 DETERMINE D. IT APPEARS TO US THAT THE ASSESSMENT ORDER FOR ASSESSM ENT YEA 1997-98 AND THE LD. ASSESSING OFFICER AS WELL AS TH E CIT(A) FOR THE ASSESSMENT YEAR 1998-99 HAVE ARGUED WITHOUT ADEQUATE MATERIAL THAT THE ASSESSEE MIGHT HAVE TAKE N THE ADVANTAGE OF LIBERALIZATION OF INDUSTRIAL POLICY F ROM THE YEAR 1991 IN JUDICIAL PROCEEDINGS, SUSPICION HOWSOEVER S TRONG CANNOT TAKE PLACE OF MATERIAL/EVIDENCE. WE, THEREF ORE, HOLD THAT THE DISALLOWANCE OF THE ASSESSEES CLAIM OF DE DUCTION ON ACCOUNT OF REMUNERATION PAID FOR TECHNICAL ASSISTAN CE IS NOT CALLED FOR IN BOTH THE ASSESSMENT YEARS 1997-98 AND 1998-99. WE DIRECT ACCORDINGLY. 6. SINCE THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE ARE IDENTICAL TO THAT FOR ASSESSMENT YEAR 1997-98, 1998-99, WE, CONCURRING WITH THE ABOVE-SAID DECISION OF THE TRIBUNAL HOLD THAT THE DISALLOWANCE OF ROYALTY PAYMENTS MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) W AS NOT JUSTIFIED. WE, THEREFORE, DIRECT TO DELETE THE SAME . 5. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR U NDER CONSIDERATION ARE IN PARI-MATERIA AND A VIEW HAS ALREADY BEEN TAKEN BY T HE COORDINATE BENCH IN THIS MATTER WHOSE ORDER IS HAVING BINDING PRECEDENT, RES PECTFULLY FOLLOWING THE SAME, THIS GROUND OF REVENUES APPEAL STANDS DISMISSED. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 22 ND MARCH, 2010. SD/- SD/- (RAJPAL YADAV) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 22.03.2010. VK. ITA-319/DEL/2010 12 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR