NESTLE INDIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0430-1]

Citation 2007-LL-0430-1
Appellant Name NESTLE INDIA LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 30/04/2007
Assessment Year 1999-2000
Judgment View Judgment
Keyword Tags wholly and exclusively for business purposes • higher rate of depreciation • commercial consideration • warehousing corporation • business or profession • information technology • commercial expediency • intellectual property • non-resident company • technical assistance • plant and machinery • higher depreciation • ad hoc disallowance • business expediency • capital expenditure • computing deduction • business of export • payment of royalty • promotion expenses • technical know-how • colourable device • incidence of tax
Bot Summary: 1998-99, we find that the learned AO has made part disallowance of the assessee s claim of deduction on account of agreements with SPN on the following grounds: The assessee refrained from furnishing to the AO the full details as asked for and thus not allowing the AO to examine in depth the correctness or otherwise of the assessee s claim of deduction. 1997-98, 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. As to the case of the AO that the assessee failed to establish the As to the case of the AO that the assessee failed to establish the commercial expediency of payments in question by production of reliable information and evidence, on careful perusal of the assessment order for asst. The learned counsel for the assessee has painstakingly taken us through the letters from the assessee and other evidence, material and record produced during the course of assessment proceedings for asst. We have to see the material and evidence produced by the assessee keeping in view that the assessee was not granted the advantage of first-hand demonstration at the assessee s own premises where technical assistance was supposed to be rendered. According to the learned counsel for the assessee, learned AO/learned CIT(A), if they entertained any doubt, should have accepted the assessee s offer to visit the assessee s factory and office premises. The expenditure incurred by the assessee company on advertisement/sales promotion of some Nestle products in India may give rise to certain benefit to Nestle SA, but this cannot be a ground to disallow the claim of the assessee, once it is established that the expenditure in question has been incurred by the assessee for the purpose of business of the assessee inasmuch as the expenditure by the assessee on advertisement/sales promotion has direct nexus with the earning of income by the assessee.


These are cross-appeals filed by assessee and Revenue against order dt. 6th March, 2003 passed by CIT(A), New Delhi for asst. yr. 1999-2000. ITA No. 2755/Del/2003 first ground of appeal in substance relates to order confirming disallowance of Rs. 37.82 crores out of total expenditure of Rs. 56.73 crores on account of royalty debited to P&L a/c and claimed as allowable expenditure. Briefly stated facts are that during year assessee had made total payment of royalty of Rs. 56,73,24,000 on account of technical fee/royalty to Societe de Products SA (SPN) and Nestec Ltd., Switzerland (Nestec) for 7 major categories of products. Nestec and SPN are subsidiary non-resident companies of Nestle, Switzerland. AO observed that assessee had claimed to have paid royalty @ 3.5 per cent on domestic sales and 5 per cent on export sales net of taxes and by including tax of 20 per cent and cess of 5 per cent, payment of technical fee/royalty on domestic sale becomes 4.41 per cent and on export sale becomes 6.3 per cent. In respect of same payments assessee had entered into 7 agreements starting from 4th Feb., 1992 to 29th Aug., 1998 as per product-wise details. AO mentioned that copy of agreement given by assessee would reflect that company had paid for following three services to be rendered by two companies: Licence to manufacture/pack /sell food product; To provide process and know-how; Continuous assistance and upgradation of technology. AO asked assessee to justify payment of royalty or technical fee giving details of exact services rendered by these non-resident companies in support of royalty/fee payment claimed within provisions of s. 92, in view of fact that SPN and Nestec are subsidiaries of Nestle, Switzerland holding substantial interest in appellant company. It was explained by assessee that these agreements were duly approved by RBI or industrial policy resolution. It was further observed by AO that out of three major services claimed to have been rendered by licensor, only one service of granting of licenses to manufacture and sell its licensed products had been rendered by SPN and Nestle. As regards other two services, it was noted by AO that assessee was already manufacturing these products much before entering into agreements and had not substantiated specific services which had been rendered to assessee company during year under consideration. In view of these observations, AO allowed only 1/3rd of total payment claimed by assessee and 2/3rd of payments were disallowed under s. 92 r/w s. 37(1) of IT Act. On appeal, CIT(A), after having considered submissions of assessee observed that assessee company was manufacturing various products for last many years but appellant had started paying royalty only after industrial policy was framed. For purpose of procuring technical know-how and assistance in business of manufacture of its products assessee had entered into different agreements with Nestec and SPN which are 100 per cent subsidiaries of Nestle S.A. From order of AO, it is clear that various brands which were manufactured by assessee are from 1973 to 1989 and only few items have been introduced in year 1995, 1997 and 1998. Thus, assessee company was already having access to facility of manufacturing as well as various scientific development and research of parent company. Only during liberalization era, assessee started paying hefty royalty to parent company. CIT(A) has further mentioned that details of payment of royalty, total amount of royalty, tax and R&D net profit ratio and royalty to net profit were analysed by his predecessor as per his order dt. 21st Feb., 2002 in Appeal No. 3/2001-02 in assessee s own case. learned CIT(A) has extracted details of payment of royalty as well as details of net profit ratio of various years at pp. 5 and 6 of order and has, thus, observed that it is clear that in earlier asst. yrs. 1989-90 to 1992-93 payment of royalty to net profit was very small percentage ranging from 2.53 per cent to 4.48 per cent. From 1993-94 onwards royalty percentage to net profit has gone very high which has reached to 78.37 per cent. In asst. yr. 1997-98 it is 78.37 per cent but in asst. yr. 1998-99 its 49.95 per cent and in year under consideration i.e., 1999-2000 it is 43.46 per cent. Therefore, moot question is whether assessee company is paying royalty for commercial consideration or not and whether such huge payment is justified to parent company on basis of commercial expediency? Nestle SA is having 51 per cent share ratio in company and dividend is being paid for such investment. Any payment under s. 37 will be allowed only on basis of commercial expediency of company. He has further observed that in case of Jaipur Electro (P) Ltd vs. CIT (1996) 134 CTR (Raj) 237: (1997) 223 ITR 535 (Raj) it has been held that doctrine that businessman as best judge of business expediency does not affect right, nay duty of AO to know whether it was meant for business purposes and not for extraneous consideration. In case of Siddho Mal & Sons vs. CIT (1980) 122 ITR 839 (Del) it has been held that such point of view has to be prudent and reasonable point of view which is free from apparent taint of excessiveness, collusiveness or colourable discretion. In view of these decisions, payment will have to be examined from point of view of commercial expediency and treating this company as independent entity. It was duty of AO to examine whether payment of such royalty was for business purposes or for extraneous consideration. He has further observed that automatic approval by RBI as well as Indian Industrial Policy does not debar AO from examining allowability of this expenditure under s. 37 of Act or under s. 92 of IT Act. It is undisputed fact that assessee company was already having know-how of manufacturing various products and was also having benefit of scientific and technical development of parent company. assessee has accepted that there were thirteen products which were in manufacture even prior to signing up agreements. Only six products were introduced after signing of agreements. Thus in view of these facts it was to be examined by AO that whether such huge payment of royalty was paid for commercial expediency of company in liberalized era. It is clear from facts that company started paying huge royalty siphoning off substantial amount of net profit to parent company which holds 51 per cent share. Considering services rendered by parent company which were already existing in case of most of products, amount paid was excessive and was for extraneous consideration other than wholly for business purposes. If parent company would not have 51 per cent voting rights, assessee company would never have agreed to pay 43.46 per cent of total profits (as per chart). This was not new company where manufacturing licence for know-how was obtained on payment of royalty. products and brand were already existing in Indian market and in ordinary course of business in such circumstances assessee could not have paid such huge royalty for existing products. Therefore, AO was justified in holding that payment of royalty has been paid excessively for extraneous consideration. As payment has been made to non-resident company, provisions of s. 92 of IT Act are also applicable as owing to close connection between assessee company and non-resident company, resident company had less than ordinary profits. conditions as laid down in s. 92 of IT Act are fully satisfied in this case. He has further mentioned that above facts were also examined by his predecessor in asst. yr. 1998-99 in Appeal No. 30/2001-02 vide order dt. 21st Feb., 2002 and he is in agreement with him for applicability of s. 92 of IT Act and who on issue decided that payment of royalty is excessive considering commercial business expediency. He has further mentioned that reliance on case of Kinetic Honda Motor Ltd. vs. Jt. CIT (2001) 72 TTJ (Pune) 72: (2001) 77 ITD 393 (Pune) is of no help as facts are different in present case. He has further mentioned that case of Dy. CIT vs. Nabulls Chemicals Ltd. relied upon by assessee is also distinguishable from assessee s case. CIT(A) has further mentioned that it is also to be ascertained as to how much excessive payment was made by appellant within meaning of s. 37 or s. 92 of IT Act. From reply of assessee it is clear that 13 products were already existing with appellant company prior to signing up of these agreements whereas 6 products were introduced post/after signing up of these agreements and in case of new product (instant tea) agreement was approved by Government of India. Thus, about 2/3 products were already existing with assessee company prior to signing of agreements and assessee company was already having know- how of manufacturing of these products and access to scientific development of these products as they were existing in Indian market. Therefore, 2/3rd of royalty payment in respect of these existing products was excessive, collusive and was beyond commercial expediency. Therefore, disallowance of 2/3rd of royalty payment made by AO has been confirmed by CIT(A). We have heard parties and perused record of case. similar issue came up for consideration before Tribunal, D Bench, New Delhi in assessee s own case for asst. yrs. 1997-98 and 1998-99 in ITA Nos. 4545/Del/2000 and 2239/Del/2002 [reported as Addl. CIT vs. Nestle India Ltd. (2005) 94 TTJ (Del) 53 Ed.] wherein Tribunal has held thus: "89. We have carefully considered rival submissions. We see considerable force in contention of learned CIT-Departmental Representative that appeal in relation to asst. yr. 1997-98 is by and large academic because there is no dispute between assessee and Revenue as to quantum of assessed tax liability for asst. yr. 1997-98. However, during course of assessment proceedings for asst. yr. 1997-98, learned AO has examined question of allowability of assessee s payments to SPN at considerable length. learned AO has given harsh finding that payments were part of device followed by party to siphon away profits of assessee company in disguise of royalty payment and thereby reducing, among other things, assessee company s tax incidence in India. We find that while completing assessment for asst. yr. 1998-99, AO has merely adopted argument, reasoning and basis of disallowance as given in assessment order for asst. yr. 1997-98. In spite of assessment order for asst. yr. 1997-98 not finding favour with learned CIT(A), succeeding learned CIT(A) has for asst. yr. 1998-99 sought to differ from his predecessor mainly on basis of findings and reasoning of AO for asst. yr. 1997-98. learned CIT(A) entertained, in addition to report of AO, report also from previous incumbent who was then working as Addl. Director of IT (Inv.) on ground that he was officer who had framed assessment order for asst. yr. 1997-98. We are, therefore, of view that academic or non-academic assessment order for asst. yr. 1997-98 has to be kept in view while deciding assessee s appeal for asst. yr. 1998-99. Hence, now matter for asst. yr. 1997-98 has travelled unto us, we may as well deal with Revenue s appeal for asst. yr. 1997-98, for whatever impact, our order in relation to that assessment year may have. On perusal of assessment order for asst. yr. 1997-98 that has formed t h e bedrock of assessment order for asst. yr. 1998-99, we find that learned AO has made part disallowance of assessee s claim of deduction on account of agreements with SPN on following grounds: (a) assessee refrained from furnishing to AO full details as asked for and thus not allowing AO to examine in depth correctness or otherwise of assessee s claim of deduction. (b) assessee not furnishing material/evidence in relation to technical assistance actually received so as to justify huge payment of Rs. 47 crores for asst. yr. 1997-98. (c) assessee not explaining as to on what basis scale of remuneration was agreed upon in agreements in question and whether any evaluation and analysis of this technical assistance was being made. (d) Prima facie, quantum of royalty paid was excessive and unreasonable having regard to amount of assessee s business profit. (e) assessee was already well-established in business, particularly coffee business, and therefore need not have made such large payment for technical assistance. On this basis, learned AO for asst. yr. 1997-98, contended that payments in question were only part of device to siphon away profits of Indian company thereby reducing profit distributable in India and incidence of tax thereon. learned CIT(A) for asst. yr. 1998-99 has also drawn same conclusion that payments in question were colourable device on part of assessee and, therefore, hit by judgment of Hon ble Supreme Court in case of McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC). However, we find that in order of learned CIT(A) for asst. yr. 1997-98, emphasis is upon his inference that payments in question were disproportionately high looking at profits earned by assessee and assessee has not been accused of hiding from examination or not furnishing information regarding technical assistance actually received. As to case of AO that assessee failed to establish As to case of AO that assessee failed to establish commercial expediency of payments in question by production of reliable information and evidence, on careful perusal of assessment order for asst. yr. 1997-98, we find that learned AO has mainly alleged non-compliance to various requisitions made by way of order-sheet notings in course of assessment proceedings. So much so that in assessment order for asst. yr. 1997-98, while learned AO has reproduced verbatim his letter dt. 17th June. 1999 and order-sheet notings dt. 20th Sept., 1999, 6th Oct., 1999 and 29th Nov., 1999, letter dt. 10th Dec., 1999 and order-sheet noting dt. 27th Dec., 1999, he has summarized assessee s reply and submissions in one single para 10 of assessment order. learned AO has charged assessee also for not establishing commercial expediency. During course of hearing before us, while learned CIT-Departmental Representative stoutly emphasized this allegation, learned counsel for assessee, with equal vehemence, relied upon voluminous evidence, material and record filed/produced before AO during course of assessment proceedings for asst. yr. 1997-98. We find that in assessment order for asst. yr. 1997-98, learned AO has spelt out in para 22, various queries that according to him were not complied with by assessee. We have reproduced same in para 6 of this order. learned counsel for assessee has painstakingly taken us through letters from assessee and other evidence, material and record produced during course of assessment proceedings for asst. yrs. 1997-98 and 1998-99 and same have been enumerated by us from paras 37 to 65 of this order. On consideration, we find that by and large assessee furnished almost entire information, material n d evidence as was asked for by AO. In addition, assessee also furnished plenty of material giving AO for asst. yrs. 1997-98 and 1998-99 fair view of kind, quality and significance of technical assistance received and being received by assessee by virtue of agreements in question. assessee informed learned AO that it could comply with his requisitions and substantiate its claim of deduction by making full and comprehensive presentation of technical assistance more conveniently at assessee s own premises where relevant record was located. During course of appeal before learned CIT(A) for asst. yr. 1998-99 also, assessee offered that he may visit assessee s office premises and factories. However, these requests were not acceded to. We have, therefore, to see material and evidence produced by assessee keeping in view that assessee was not granted advantage of first-hand demonstration at assessee s own premises where technical assistance was supposed to be rendered. We, therefore hold that learned AO has been less than fair in his observations that requisite details and supporting material, evidence and information were not furnished by assessee. We see force in contention of assessee that while making such observation, learned AO ignored and omitted to make reference to voluminous material placed before him by assessee. It is true that some of information asked for was not furnished. learned counsel for assessee has informed us that same was either not in possession of assessee or did not exist. assessee had certain reservation about furnishing sensitive information regarding product-wise profitability as assessee was in highly competitive market of fast moving consumer goods. However, eventually, assessee furnished even data pertaining to product-wise profitability. assessee did not furnish particulars of profit and balance sheet, etc. of Nestec, SPN, Nestle SA of Switzerland because same fell outside assessee s obligation to supply. Ironically, according to assessee, all this emphasis on working on profit of assessee and service providers was irrelevant because quantum of remuneration could neither be fixed nor adjudged on yardstick of profit. During course of hearing before us, considerable arguments were made in relation to applicability or otherwise of provisions of s. 40A(2)(b)/ s. 92/art. 9 of DTAA, etc. For purpose of his order, we do not wish to go into finer technical points relating to these legal provisions. In our view, in absence of any specific material, evidence or information, entire exercise undertaken by AO could have been tampered if due importance was attached by him to fact that RBI approvals had been granted in respect of each one of nine agreements. We see ample authority for submissions made by assessee s counsel in this respect as enumerated by us in para 67 of this order. After consideration, we reject contention that adverse inference was correctly drawn against assessee on account of alleged non- compliance to various requisitions of AO during course of assessment proceedings for asst. yr. 1997-98. We now address ourselves to question whether assessee has discharged initial onus that lay upon him to substantiate its claim of deduction. We may state that irrespective of question whether provisions of s. 40A(2)(b) or s. 92 or art. 9 of DTAA could be invoked or not in this case, it is quite clear that burden to prove under those special provisions is cast on AO and not upon assessee. At same time under provisions of s. 37(1), primary burden to substantiate claim of deduction of expenditure is on assessee. According to learned counsel for assessee, learned AO/learned CIT(A), if they entertained any doubt, should have accepted assessee s offer to visit assessee s factory and office premises. We do not understand as to why request of assessee could not be accepted. In our opinion, this request on part of assessee as quite reasonable on facts and in circumstances of case. Be that as it may, from detailed submissions of learned counsel for assessee in this behalf during course of number of sittings on various dates which we have attempted to summarise from paras 41 to 64 of this order, we are satisfied that assessee had successfully discharged burden of proof which lay upon him under provisions of s. 37(1) of Act. We find that assessee s case is well armed in this respect on account of approval also granted by RBI to agreements in question. At any rate from facts stated and evidence/material produced in assessee s paper book, we are of view that technical assistance agreements in question were essential for purpose of business of assessee during assessment years before us. 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. We now come to question as to whether quantum of remuneration s agreed upon in agreements in question and actually paid during course of assessment years before us is justified on facts and in circumstances of case. In other words, whether both AO in assessment order for asst. yr. 1997-98 and learned CIT(A) in appellate order for asst. yr. 1998-99 are justified in their conclusion that assessee in collusion with parent company in Switzerland adopted colourable device whereby profits of Indian company were siphoned away to be aggrandized by Swiss company. learned AO has argued in assessment order for asst. yr. 1997-98 that from very fact that no evaluation and analysis of technical assistance had been made at time of entering into agreements and subsequently to determine impact of technical assistance on business of company, it was clear that these agreements had been entered into with sole object of diverting profit of assessee company. In this context, learned AO even asked assessee to produce certificate from independent technical agency that payments were commensurate to actual services received. Besides, both learned AO in assessment proceedings for asst. yr. 1997-98 and learned CIT(A) in order for asst. yr. 1998-99 emphasised that assessee was already well-established and well versed in business of products in question, and was not new to business of manufacture and sale of those products and, therefore, assessee could not by any stretch of imagination be considered to need further technical assistance of magnitude so as to part with substantial chunk of its business profit. authorities below in their orders and learned CIT-Departmental Representative in his arguments before us have relied upon certain charts indicating 78.37 per cent and 49.95 per cent of profit had been paid off by assessee company under agreements in relation to asst. yrs. 1997-98 and 1998-99 respectively. During course of hearing before us, learned counsel for assessee has attacked very rationale of exercise done in these charts by income-tax authorities. According to him, quantum of remuneration could not, in any case, be linked with profit. profit as derivative figure depending on various factors outside direct and reasonable control of technical assistance providers. Contracting for fixed amount of royalty could be disastrous if product did not click in market. In sale- linked agreement, technical assistance providers interest in success of product was highest and ensured maximum assistance was received. Moreover, intangible benefit of technical assistance could not be gauged by performance of same year in which investment in technology was made. T h e benefit could be gauged only over sufficiently long-term allowing technical initiative to bear fruits. That part, learned counsel for assessee pointed out that working done by Department was highly unreasonable inasmuch as payments were compared with prior of company after payment of remuneration in question. learned counsel, therefore, furnished separate chart to show that even on imperfect and irrational basis of comparison with profit adopted by assessing authority, payments in question constituted only 34.89 per cent and 26.59 per cent of profits for asst. yrs. 1997-98 and 1998-99 respectively. learned counsel further argued that percentage was higher during asst. yrs. 1997-98 and 1998-99 because net profit as percentage of turnover itself was lower in those assessment years. As to question that no independent evaluation of value and utility of technical services were carried out, learned counsel argued that such was never practice in case where highly specialized and restricted technology was imparted. Technology provided to assessee by parent company and its subsidiary had always been and was intended to always remain property of parent company and its subsidiaries. assessee had been given right to use only that technology for manufacture and sale of products under parent company s brand name. technology was highly sensitive and confidential and, therefore, in every agreement, assessee was bound by confidentiality clause. In such circumstances, to invite independent agency for evaluation and certification as desired by AO was unthinkable. As to basis on which quantum of remuneration for technology assistance was fixed, learned counsel argued that at time of entering into agreement, it was not possible to predict accurately amount of remuneration to be paid to technical assistance providers. That depended on success of product launched and actual working of project in India and subject to several imponderables. It was for that reason that there was no specific working made at time of entering into agreements in question and insistence of learned AO on production of same was not justified. assessee as well as technical assistance providers were in line of business and had experience for long time and based on their experience and perception, by mutual discussion, rate of remuneration was fixed. It was not possible to physically demonstrate that intangible exercise. fact of matter was that remuneration was fixed at very reasonable rate in spite of Government regulations having permitted payment of remuneration at much higher rate. justification of remuneration paid was to be seen in voluminous material and evidence filed by assessee during course of assessment proceedings and proceedings before us. It was totally inappropriate to test reasonableness of remuneration on yardstick of profit of year in which payment was made. This issue required long-term view to be taken. O n careful consideration of detailed submissions made by assessee in this behalf and briefly enumerated by us in paras 37 to 65 of this order, we find ourselves in substantial agreement with assessee. In first instance, assessee only had license to use technology and, therefore, assessee could not have continued manufacture of any Nestle brand product without consent of parent company. We do not subscribe to argument of learned CIT-Departmental Representative that as intellectual property rights were not recognized in India, assessee could have snapped ties with foreign company and carry on its business as before. We also find that technical assistance provided by parent company was all pervasive in operations of assessee company and permeated into almost every detail. T h e assessee company in India was reaping harvest of fine production technology evolved by parent company over 125 years by virtue of presence in more than 70 countries. For continuing to arrest benefit, it was essential for assessee to have perennial source of supply of all technological innovation, advancement and upgrade. It would not be exaggeration to say that in modern times, no businessman can afford to be oblivious of fast moving technology related to his business on ground of contentment with knowledge and experience already gathered. assessee did not contribute single penny to R&D cost of Nestle SA stated to be over Rs. 2,000 crores per year. Nestle India received tested technology and, therefore, did not have to suffer loss of failed technology or project. assessee had access to all required technology available with parent company not only in respect of manufacturing but also in various other fields like quality control, personnel, staff management, marketing, storage and so on. kind of technical assistance received by assessee was of such nature as to sustain its position as number one manufacturer in India in respect of products being manufactured by it. During course of hearing before us learned counsel for assessee has given several examples of major technological advancements that had taken place in area of assessee s products. He explained to us in detail major changes that took place in field of coffee manufacturing and state of art technology that allowed to capture aroma of fresh coffee in products of assessee. learned counsel dwelt at length on unique technology in relation to extraction process called MUCH process resulting into better finished product from same coffee beans. He made reference to changes in manufacturing process of weaning foods that ensured bio availability of carbohydrates through process of enzymation to provide higher nutrition in meals and enhanced digestibility. These were just few examples from out of many advancements and changes taking place every year. learned counsel pointed out that during period under consideration, more products were launched by Nestle than in immediately preceding two decades. He also emphasized with considerable justification that several thousand Indian shareholders of assessee company tremendously benefited. investor who purchased 100 shares in 1970 had grown into shareholding of 3,700 shares of market value of Rs.19 lakhs after having received dividend totalling to Rs. 2,66,653. learned counsel argued that these aspects were required to be appreciated rather than merely suspecting that remuneration for technical assistance was nothing but camouflage to siphon away and repatriate profits of Indian operations. On careful consideration, we see considerable force and justification in these arguments of assessee. There is one more important aspect of case. After all what is material against assessee in orders of authorities below. Apart from preparing same charts, no material or evidence has been brought on record by authorities below to substantiate their allegations against assessee. As w e have pointed out that assessee only had initial onus to substantiate its claim of deduction of expenditure as laid down under s. 37(1). burden to prove that claim of expenditure was colourable device or camouflage for diversion of profits rested upon Revenue. In order of authorities below, no material has been brought on record except disbelieving assessee s explanation and their subjective opinions. burden of their order is that assessee so arranged its course of business that it was left with less than ordinary profit expected in 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 same could be determined. It appears to us that assessment order for asst. yr. 1997-98 and, learned AO as well as CIT(A) for asst. yr. 1998-99 have argued without adequate material that assessee might have taken advantage of liberalization of industrial policy from year 1991 in judicial proceedings, suspicion howsoever k cannot take place of material/evidence. We, therefore, hold that disallowance of assessee s claim of deduction on account of remuneration paid for technical assistance is not called for in both asst. yrs. 1997-98 and 1998-99. We direct accordingly." Since facts and circumstances of instant case are identical to that for asst. yrs. 1997-98 and 1998-99, we, concurring with above said decision of Tribunal hold that disallowance of royalty payments made by AO and confirmed by learned CIT(A) was not justified. We, therefore, direct to delete same. second ground of appeal states that on facts and in circumstances of case and in law CIT(A) erred in holding that UPS which are attached to computers and form integral part of whole computer system cannot be categorized as computer, for purpose of depreciation under s. 32 of Act. Briefly stated facts are that during year assessee had claimed depreciation on UPS @ 60 per cent treating it as part of computer. But AO asked AO to justify higher claim of depreciation, as UPS is part of plant and machinery and not of computer. After going through details of UPS submitted by assessee, it was found by AO that UPS had been used for less than 180 days and by treating it as part of plant and machinery, AO allowed depreciation @ 12.5 per cent on UPS and accordingly disallowed excess sum of Rs. 11,99,768. On appeal before CIT(A), assessee submitted that it had purchased few UPS costing aggregate to Rs. 68,55,814. These UPS were purchased for purpose of running computers uninterruptedly during power cuts and avoid loss of data in computer due to sudden frequent power cuts and voltage fluctuation. These UPS were connected to LAN, PCs, servers, routers, V. Sats, etc. and formed integral part of overall computer system. Considering that they were in fact connected to computer system and were not used for any other purpose and further fact that computer could not have functioned properly without support from UPS, they were considered as integral part of computer and capitalised so and accordingly depreciation at rate applicable to computer was claimed. However, CIT(A) after having considered submissions of assessee has observed that UPS is instrument which gives uninterrupted power supply to computer and it cannot be termed as computer by any stretch of imagination. depreciation of 60 per cent is available only on computers and not on any other instrument connected to computer. Therefore, UPS cannot be categorized as computer and it is not eligible for higher depreciation. Therefore, assessee who had claimed higher slab of depreciation i.e., 60 per cent on UPS claiming it as part of computer is not justified and AO was justified in making disallowance out of excess claim of depreciation. Before us, learned counsel for assessee has submitted that UPS purchased were connected to local area network (LAN), PCs, servers, routers, V-sats, etc. and thus formed integral part of overall computer systems. Considering fact that UPS were integral part of computer system and were meant only for and could be used only as part of computer, therefore, UPS is integral part of computer. learned counsel for assessee has further submitted that accordingly assessee claimed depreciation on UPS at rate of 60 per cent applicable to computers as per Entry No. (2B) of Part III of Appendix I to IT Rules, 1962, as applicable to assessment year under consideration. AO and CIT(A) held that UPS is not part of computers. lower authorities held that UPS was classified as general plant and machinery and allowed depreciation @ 12.5 per cent on same. learned counsel has argued that according to functional test, principle followed by Courts, it is required to be seen if item is apparatus with which business is carried on; if yes, then same is to be considered as plant . On basis of this principal, following were held to be plant : (i) Sanitary and pipeline fittings in hotel [CIT vs. Taj Mahal Hotel 1973 (i) Sanitary and pipeline fittings in hotel [CIT vs. Taj Mahal Hotel 1973 CTR (SC) 480: (1971) 82 ITR 44 (SC)]; (ii) Warehouses [CIT vs. Kanodia Warehousing Corporation (1980) 121 ITR 996 (All)]; (iii) Buildings specially built to conserve temperature and filtered air [R.C. Chemical Industries vs. CIT (1981) 25 CTR (Del) 244: (1982) 134 ITR 330 (Del)]. Further, in present case also, it will be appreciated, what is important is function for which UPS were purchased and used. UPS were purchased and actually used in running computer network only, as integral part thereof. He has further pointed out that UPS did not merely ensure uninterrupted power supply to computer network, but more importantly, also regulated flow of power to avoid any kind of damage to computer network due to fluctuation in power. central unit of assessee s computer system is located at one place, which is connected to different locations spread all over India through satellite networking. computers work in live environment and sudden loss of power could bring whole operations to halt besides causing loss of valuable data in mean time. UPS were essential and integral part of computer network and must be classified as computer only, given functions for which it was actually used. learned counsel further mentioned that printer/scanner have been held as essential parts of computer and eligible for depreciation @ 60 per cent in case of ITO vs. Samiran Majumdar (2006) 101 TTJ (Kol) 501: (2006) 98 ITD 119 (Kol). He has further argued that UPS has no other function but to assist functioning of computer. It cannot be used for another purpose. As, in laptop, battery is integral part, same is position of UPS. learned counsel for assessee has further referred to word definition from Webopedia Computer Dictionary of UPS which reads as under: "Short for uninterruptible power supply, power supply that includes battery to maintain power in event of power outage. Typically, UPS keeps computer running for several minutes after power outage, enabling you to save data that is in RAM and shut down computer gracefully. Many UPSs now offer software component that enables you to automate back-up and shut down procedures in case there is power failure while you are away from computer. There are two basic types of UPS systems; standby power systems (SPSs) n d on-line UPS systems. SPS monitors power line and switches to battery power as soon as it detects problem. switch to battery, however, can require several milliseconds, during which time computer is not receiving any power. Standby Power Systems are sometimes called line-interactive UPSs. on-line UPS avoids these momentary power lapses by constantly providing power from its own inverter, even when power line is functioning properly. In general, on-line UPSs are much more expensive than SPSs." Thus, he has submitted that authorities below were not justified in not treating UPS as integral part of computer and, as such, denying higher depreciation @ 60 per cent on UPS. On other hand, learned Departmental Representative has submitted that UPS cannot be held to be part of computer and hence, it cannot be considered as integral part of computer. In western countries UPS is not used as power supply is constant and regular. He has further argued that in case UPS is integral part of computer, then air conditioners used in server room and power back-up would also form part of computer. Thus, he has submitted that UPS cannot be held to be integral part of computer so as to entitle assessee to claim higher depreciation @ 60 per cent. Thus, he has supported order of CIT(A). We have heard parties and perused record of case. assessee is engaged in business of manufacturing of various food products and beverages. During year assessee company had purchased UPS for sum of Rs. 68,55,814 and claimed depreciation on UPS @ 60 per cent treating it as part of computer. However, AO has treated same as plant and machinery and allowed depreciation @ 12.5 per cent on UPS where as per Entry No. (2B) of Part III of old Appendix I of IT Rules (as applicable for asst. yrs. 1988-89 to 2002-03) depreciation on computer is fixed @ 60 per cent of WDV. expression "computer" has not been defined in Act. However, it has been defined by s. 2(1)(i) of Information Technology Act, 2000. As per said Act, "computer" means any electronic, magnet, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulation of electronics or magnetic or optical impulses and include all input-output processing, storage, computer software or communication facilities which are connected or related to computer in computer system or computer network. It may be mentioned that there is no inbuilt system of power supply in computer. Therefore, it works on electric power supply. UPS, as defined by Webopedia Computer Dictionary, stands for uninterruptible power supply. UPS keeps computer running for several minutes after power outage enabling to save data that is in RAM and shuts down computer gracefully. Thus, UPS mainly ensured uninterrupted power supply to computer network and also regulated flow of power to avoid any kind of damage to computer network. It is, thus, source of alternative supply of power to computer and applying functional test also, it is part of power supply system and not computer system. UPS is also not inbuilt in computer as battery in laptop to make it integral part of computer system. It merely gives external aid to computer system by ensuring uninterrupted power supply in emergency and in regulating flow of power. It is worthwhile to note here that computer system can function independently without UPS and even UPS generally can be used to ensure uninterrupted power supply to other equipments besides computer. It is, thus, not integral part of computer system like printer and scanner, which being output devices of computer system are its integral part and, thus, are included in definition of computer as given in s. 2(1)(i) of Information Technology Act, 2000. It is also pertinent to note here that higher rate of depreciation is provided on computers mainly because technology used in making of computer is rapidly developing and same becomes obsolete very fast. Applying this criteria also, UPS cannot be treated as part of computer since technology which goes into making UPS is not developing so rapidly to make it obsolete in short span. Keeping in view all these relevant and material aspects, we find it difficult to accept contention of learned counsel for assessee that UPS is part of computer and is entitled to higher depreciation rate of 60 per cent and rejecting same, we uphold impugned order of learned CIT(A) confirming disallowance made by AO by restricting claim of assessee for depreciation on UPS treating s m e as plant and machinery. Ground No. 2 of assesee s appeal is accordingly dismissed. third ground of appeal states that on facts and in circumstances of case and in law CIT(A) has erred in confirming setting off of losses of Rs. 7,72,636 incurred by appellant in respect of business of export of traded goods against profit made by it from business of export of manufactured goods for purpose of allowing deduction under s. 80HHC of Act. When matter came up for hearing, learned counsel for assessee fairly concedes that this issue is covered against assessee by decision of Hon ble Supreme Court in case of IPCA Laboratories Ltd. vs. Dy. CIT (2004) 187 CTR (SC) 513: (2004) 266 ITR 521 (SC). Therefore, this ground of appeal of assessee is dismissed. fourth ground of appeal relates to charging of interest under s. 234B of Act. This ground being consequential in nature, AO is directed to consider same accordingly. ITA No. 3072/Del/2003 first ground of appeal states that on facts and in circumstances of case CIT(A) has erred in directing AO to exclude excise duty from total turnover while computing deduction under s. 80HHC. We find that this issue stands decided in favour of assessee in assessee s own case by Tribunal for asst. yr. 1998-99 and Department s appeal filed before Hon ble jurisdictional High Court since has been dismissed vide order dt. 7th July, 2006 in ITA No. 1023/Del/2006. Therefore, this ground of appeal of Revenue is dismissed. second ground of appeal states that on facts and circumstances t h e CIT(A) has erred in allowing relief of Rs. 52,43,18,000 on account of advertisement expenses. Briefly stated facts are that AO has observed that during year under consideration assessee had incurred advertisement expenses of Rs. 104,86,36,000. advertisement and sale promotion expenses had been incurred for promotion of products manufactured by assessee under license of M/s Nestec and M/s SPN. He has further observed that assessee was manufacturing and marketing specific products in brand names of Nestle and had been paying royalty/technical fee for using licence to manufacture and sell products. Though benefits of advertisement/sale promotion expenses to assessee s business cannot be ruled out but simultaneously it is resulting i n establishment of brands and products of Nestle, SA non-resident, substantially interested company in assessee s business. On this basis, AO has observed that it is clear that provisions of s. 92 are squarely applicable to t h e assessee s advertisement expenses incurred for purpose of establishment of products having Nestle s brand. incurrence of advertisement expenses to benefit of non-resident company is certainly resulting in less than ordinary profits to assessee company for which provisions of s. 92 are invoked and therefore, AO disallowed 50 per cent of total expenditure incurred on advertisement and sales promotion and treated it as not wholly and exclusively for assessee s business and therefore, she disallowed Rs. 52,43,18,000. On appeal, CIT(A) has held thus: "4.4 I have examined reply of appellant and facts of case carefully. From details furnished by appellant before AO it is clear that appellant company. had made expenditure in respect of advertisement and sales promotion in respect of only with those products in which Indian company is actually dealing in. These expenses were incurred for advertisement in India only that too in respect with those products in which they are dealing in. expenses are payments made to third party in India that are not in anyway related to them either in loose definition of s. 92 or strict definition of s. 40A(2). expenditure has been incurred to promote sales in India in Indian territory. AO has not brought out anything on record to justify invoking of s. 92 of IT Act. Neither any payment has been given for advertisement to Nestle SA nor there is any business dealing as far as advertisement expenses are concerned between Nestle SA and Nestle India Ltd. Therefore, provisions of s. 92 are not applicable for allowability of this expenditure. In case of Wiltshire Brewery Ltd. vs. Bruce 6 Tax Cases 399 (HL) cited by appellant in which it is clearly mentioned that "where whole and exclusive purpose of expenditure is purpose of expender s trade and object which expenditure serves is same, mere fact that to some extent expenditure enures to third party s benefit or that spender incidentally obtains some advantage in some character other than that of trader, cannot in law defeat effect of finding as to whole and exclusive purpose. It was reiterated in judgment of Supreme Court in case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) and Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383: (1979) 118 ITR 261 (SC) and Eastern Investment Ltd. vs. CIT (supra). From facts submitted before me and before AO, it is clear that appellant company. has made expenditure on advertisement in respect of only those products which are sold by this company within Indian territory. To be allowable expenditure within meaning of s. 37(1) money paid out or away must be (a) paid out wholly and exclusively for purpose of business or profession and further (b) must not be (i) capital expenditure (ii) personal expense or (iii) allowance of character prescribed in ss. 30 to 36. In appellant s case AO has nowhere mentioned that expenditure is capital in nature or personal in nature or covered in ss. 30 to 36 of IT Act. payment has not been made to any person covered under s. 40A(2). payment on advertisement has not been paid to any non-resident person mentioned in s. 92. appellant has not spent any amount with sole intention that only brand name Nestle is to be advertised. appellant has made expenditure only on advertisement of these products which are manufactured and sold in India to boost sale and exclusively and wholly for business purposes. appellant has also not incurred any expenditure outside Indian territory for any other products. Therefore, in my opinion expenditure has been incurred wholly and exclusively for business purposes and not for establishing brand name of Nestle SA. All conditions which are prescribed under s. 37(1) are satisfied in appellant s case and AO has not brought any material on record justifying disallowance of part expenditure. ad hoc disallowance of 50 per cent made b y AO is without any appreciation of facts or basis and not in accordance with legal position. Therefore, disallowance of Rs. 52,43,18,000 made by AO is hereby deleted. appellant succeeds on this ground." Before us, learned Departmental Representative has submitted that assessee has incurred expenses on advertisement and sale promotion under various heads during previous year. advertisement expenses have been incurred by assessee for purpose of establishment of products having Nestle brand. Thus, impugned expenses have resulted in benefit to Nestle SA, non-resident. Therefore, AO was justified to disallow 50 per cent of total expenses incurred in advertisement by invoking provisions of s. 92 of Act. Thus, he has supported order passed by AO. On other hand, learned counsel for assessee has submitted that assessee has incurred expenses in India on advertisement and sale promotion by advertisement over television channel, radio, cinema and other print media. sale promotion activities includes incentives, trade give aways, consumer sampling, sponsorship, etc. advertisement expenses have been incurred only in India and in respect of products sold by assessee in India. No advertisement expenses have been incurred by assessee outside India. assessee only decides extent of expenditure it needs to be incurred on advertisement to promote its own sale in best interest of its business and Nestle SA has no say in this regard. benefit arising from promotion of Nestle brand is to account of assessee only. extent of expenditure incurred wholly and exclusively for business purpose of assessee is allowable as revenue deduction. learned counsel for assessee has submitted that though benefit may have arisen to Nestle SA by impugned expenditure, but it is well settled that expenditure incurred for purpose of assessee s business is allowable even if it results in advantage to third party. reliance in this regard has been placed on following decisions: (i) Witshire Brewery Ltd. vs. Bruce 6 Tax Cases 399 (HL); (ii) CIT v Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC); (iii) CIT vs. Royal Calcutta Turf Club (1961) 41 ITR 414 (SC); (iv) Eastern Investment Ltd. vs. CIT (1951) 20 ITR 1 (SC); (v) Campa Beverages (P) Ltd. vs. IAC (1990) 34 ITD 241 (Del); (vi) Star India (P) Ltd. vs. Addl. CIT 104 TTJ (Mumbai)(TM) 1. He has further argued that s. 92 has no application as advertisement expenses have not been paid to Nestle or to any party in India who is related to Nestle SA. He has pointed out that there is no business dealing with Nestle SA in respect of advertisement expenses. He has further submitted that as has been held by Tribunal in assessee s own case for asst. yrs. 1997-98 and 1998-99, AO is required to bring evidence on record to justify that expenses has resulted in less than ordinary profits to assessee for invoking s. 92 of Act. No such evidence has been brought on record by AO. Thus, he has supported order passed by CIT(A). We have heard parties and perused record of case. assessee is engaged in business of manufacturing of various food products and beverages. assessee is manufacturing various products under various brands owned by Nestle, Switzerland. During year under consideration, assessee has incurred advertisement and sales promotion expenses of Rs. 104,86,36,000. According to AO, benefit of advertisements/sales promotion expenses to assessee s business cannot be ruled out but simultaneously it is resulting in establishing of brands and products of Nestle SA non-resident, substantially interested company in assessee s business. However, it may be mentioned that fact that assessee company had incurred expenditure on account of advertisement and sales promotion in respect of only those products in which India company is dealing in, has not been controverted by Revenue. Thus, expenditure has been incurred to promote sales in India. Therefore, these expenses were incurred wholly and exclusively for purpose of business of assessee. Further, payment for these expenses have been made to third parties in India who are not in anyway related Nestle SA. Therefore, there is no justification on part of AO to invoke provisions of s. 92 of Act in matter. Therefore, we find ourselves in agreement with view of CIT(A) that provisions of s. 92 are not applicable for allowability of t h i s expenditure. expenditure incurred by assessee company on advertisement/sales promotion of some Nestle products in India may give rise to certain benefit to Nestle SA, but this cannot be ground to disallow claim of assessee, once it is established that expenditure in question has been incurred by assessee for purpose of business of assessee inasmuch as expenditure by assessee on advertisement/sales promotion has direct nexus with earning of income by assessee. It may be mentioned that identical issue had come up for consideration before Tribunal, Mumbai in case of Star India (P) Ltd. vs. Addl. CIT (supra) wherein it has been held that advertisement expenses incurred on promoting viewership of TV channel by assessee engaged in procuring programmes for those channel was expenditure incurred wholly and exclusively for purpose of its business and it could not be disallowed on ground that it might have also benefited assessee s principal. In view of what has been discussed above, we do not find any reason to interfere with order of CIT(A) passed in this regard. Hence, same is upheld. In result, appeal filed by assessee is partly allowed and that of Revenue is dismissed. *** NESTLE INDIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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