Delhi High Court
Cit vs M/S V.R.V. Breweries & Bottling ... on 19 August, 2011
Author: Rajiv Shakdher
* THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 09.08.2011
% Judgment delivered on: 19.08.2011
+ ITA Nos. 594/2005, 646/2005 & 559/2006
CIT ...... Appellant
Vs
M/S V.R.V. BREWERIES & BOTTLING
INDUSTRIES Ltd. ..... Respondent
Advocates who appeared in this case:
For the Appellant: Ms Rashmi Chopra, Advocate
For the Respondent: Mr Ajay Vohra, Ms Kavita Jha & Mr Somnath Shukla,
Advocates.
CORAM :-
HON‟BLE MR JUSTICE SANJAY KISHAN KAUL
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported Yes
in the Digest ?
RAJIV SHAKDHER, J
1. The Income Tax Appellate Tribunal (in short the Tribunal) by a
common judgment dated 29.07.2004 has disposed of cross appeals
of the assessee and revenue for assessment years 1997-1998, 1998-
1999 and 1999-2000. The said judgment of Tribunal has given rise
to the three (3) captioned appeals. It is important to note that while
for each of the assessment years under consideration (i.e.,
assessment year 1997-1998, 1998-1999 and 1999-2000) the
Assessing Officer has passed orders (on the issue with which we are
concerned in the captioned appeals) against the assessee, the
Commissioner of Income Tax (Appeals) [hereinafter referred to as
„CIT(A)‟] has taken a view in favour of the assessee in the
assessment year 1998-99. Since the facts obtaining in the captioned
appeals are common and the Tribunal has dealt with the cross
appeals by a common judgment, we intend to dispose of the
captioned appeals by a common judgment.
2. The assessee at the relevant time was in the business of
manufacturing and sale of Indian Made Foreign Liquor (in short
„IMFL‟) at the Pathankot, Punjab when, evidently, it entered into an
agreement dated 06.07.1996 (in short the „said agreement‟) with a
public limited company by the name of Shaw Wallace Co. Ltd. (in
short „SWCL‟) for the purposes of manufacturing IMFL products under
the brands owned by SWCL or its associated or related companies.
The said agreement comprised of following addendums:
(i) Annexure 1 provided for: General Terms and Conditions
which were to operate inter-se the parties.
(ii) appendix „A‟ provided for: specification of spirit.
(iii) appendix „B‟ provided for: specification of demineralized
water to be used for reducing the strength of spirit.
(iv) Appendix „C‟ provided for: trademarks/ brand names etc.
(v) Appendix „D‟ provided for: consideration to be paid by
the assessee.
(vi) Appendix „E‟ provided for: Packing material wastage
standard.
3. In so far as the General Terms and Conditions contained in
annexure „1‟ to the said agreement are concerned, the following
clauses would perhaps be relevant to draw out the broad obligations
undertaken by the assessee. We propose to extract the same to the
extent they are relevant:
"2. ARRANGING FOR SPIRIT AND UTILISATION THEREOF
2.1 Shaw Wallace will supply to the UNIT sample of spirit
normally used by Shaw Wallace in the manufacture of IMFL
products. The sample spirit shall be in accordance with
the specifications and tolerances given in Appendix „A‟.
2.2 The UNIT shall procure spirit in such form as may be
agreed to by Shaw Wallace in conformity with the sample,
specifications and tolerances in such quantities as may be
required for the purpose of utilizing the same for the
manufacture of IMFL products.
2.3 Unless otherwise agreed in writing the „spirit‟ shall
mean manufactured and distilled out of raw materials
molasses.
2.4 xxxx
2.5 xxxx
2.7 xxxx
3. MANUFACTURE/BOTTLING OF IMFL
3.1 The UNIT hereby undertakes to manufacture different
brands of IMFL, which Shaw Wallace may specify taking
into account the market condition from time to time.
3.2 xxxx
3.3 Unless otherwise agreed to in writing the IMFL
products shall be supplied and delivered to the purchasers
in bottles sealed, labeled and packed in cartons.
3.4 xxxx
3.5 xxxx
3.6 The packing material shall be as per the specifications
of Shaw Wallace as regards size, shape, design, quality
etc. Such packing materials shall also conform to the
statutory regulations as may be laid down from time to
time by the Excise and other authorities. The packing
materials shall prominently display the trade/brand names
of Shaw Wallace and such other brand/trade names as
Shaw Wallace may designate from time to time.
3.7 The UNIT shall purchase the packing materials after
getting the samples approved by Shaw Wallace and on
terms to be approved by Shaw Wallace.
3.8 xxxx
3.9 xxxx
3.10 If any IMFL product is declared unsaleable in any
state on account of its being under strength the UNIT
undertakes to take back all such mocks and reprocess them
so as to conform to the required specification. All expenses
incurred in this connection will be to the account of the
UNIT.
If stocks are required to be taken back for other reasons,
such as, sedimentation etc. the UNIT shall obtain necessary
permission from the Excise Authorities for taking back such
stocks and arrange for re-processing, the parties will then
examine the causes of such defect and the party to bear
the cost for the same will be mutually agreed upon based
on the report of such examination. The intention of
providing for the above terms is to ensure that only quality
products are sold in the market under the brand names
belonging to or designated by Shaw Wallace
4. EXCISE FORMALITIES
4.1 xxxx
4.2 All excise formalities required fo the UNIT (Distillery)
shall be the responsibility of the UNIT. The above shall
include the registration of the labels with the Excise
authorities, obtain permission from the Excise Authorities
for the manufacture, bottling, blending, storage, selling and
supplying of IMFL products of brands mentioned above and
for the use of packing materials as per specifications and
requirements of Shaw Wallace as well as for use of Shaw
Wallace labels.
4.3 The obtaining of Export passes as may be necessary
for the purpose of despatches of the IMFL products
manufactured bottled supplied by the UNIT under this
agreement shall be the responsibility of and to the account
of the UNIT. The responsibility for arranging the import
permits as may be necessary for arranging such
despatches shall not however be the responsibility of the
UNIT.
4.4 The import permits as may be necessary for the
purpose of sale and supply of the IMFL products etc.
manufactured from the UNIT to the purchaser shall be
arranged by Shaw Wallace or the persons designated by
Shaw Wallace for purchase of IMFL products. The import
permits shall be sent to the UNIT along with the indents
with full particulars of the type of products to be
dispatched by the UNIT and the place, date and mode of
such dispatch.
4.5 xxxx
5. xxxx
6. TRADE MARKS AND MARKETING
6.1 The trade marks, brand names, design and the get up
in which the IMFL products will be sold, supplied and
delivered by the UNIT and in particular and not limited to
those listed in APPENDIX „C‟ hereto shall always be the sole
property of Shaw Wallace or its associate or related
companies as the case may be.
6.2 The UNIT hereby acknowledges and accepts that the
UNIT never had nor has any right, title or interest therein
and shall not at any time claim any right whatsoever to the
use of the labels, brand names, trade marks and or get up
of the IMFL products belonging to Shaw Wallace or to the
nominees associates of Shaw Wallace except under written
permission from Shaw Wallace.
6.3 Shaw Wallace hereby authorizes the UNIT as a
licensee, under a separate agreement to manufacture,
process package and sell the IMFL products of various
brands of Shaw Wallace as contained in the APPENDIX „C‟
and such other brands as may be agreed upon from time
to time for which Shaw Wallace or its associate or related
or nominee company own or will own valid trademark
registrations in India or otherwise which names, brands,
etc. belong to or are associated with Shaw Wallace or any
such other companies mentioned above.
6.4 Shaw Wallace from time to time advise the UNIT as to
the marketing arrangement for IMFL of brand names
belonging to Shaw Wallace or brands designated by the
Shaw Wallace and the UNIT shall act in accordance with
the directions of Shaw Wallace in so far as the sale of
above brands of IMFL.
6.5 Nothing herein contained or implied shall be
construed as precluding in any manner Shaw Wallace or
its associated companies or related companies as the case
may be from using or licencing the use of the said
trademarks or brand names or get up on any goods
including IMFL in India of elsewhere.
6.6 xxxx
7. CONSIDERATION
7.1 Royalty including charges for services to be rendered
by Shaw Wallace are payable by the UNIT to Shaw Wallace
at the rates and in the manner set out in APPENDIX „D‟
hereto. The parties may mutually agree to revise the
above changes from time to time.
7.2 The UNIT shall be liable to pay the royalty due to
Shaw Wallace as specified in the agreement entered into
between the parties within the time specified in APPENDIX
„D‟.
7.3 No such royalty etc. shall be payable in respect of
the IMFL products which are purchased by and supplied to
Shaw Wallace under import permits obtained in the name
of Shaw Wallace. In the case of such purchases Shaw
Wallace shall pay the price of IMFL at the rate mentioned
in APPENDIX „D‟. In the case o sale to Permit Holders other
than Shaw Wallace the UNIT shall include in the price
marketing, royalty and service charges as may be advised
to the person undertaking the marketing of the IMFL
products.
7.4 xxxx
7.5 xxxx
8. DURATION, TERMINATION AND CONSEQUENCES
TEHREOF
8.1 xxxx
8.2 xxxx
(a) Upon completion of the period of 5 years unless
terminated earlier or renewed ____ the said period of five
years, or
(b) xxxx
8.3 Upon such determination of this agreement the UNIT
shall cease to be a licensee or registered user of the trade
marks or brand names of Shaw Wallace and shall not have
any right to use such trademarks or brand names
thereafter. The UNIT agrees to cease and desist forthwith
from using the said trade marks, brand names, get up of
Shaw Wallace and or any similar trademarks upon
termination of this agreement for any reasons whatsoever
in respect of the goods of Shaw Wallace or goods of the
same description or any other goods.
8.4 xxxx
9. xxxx
10. xxxx
11. ASSIGMENT
The UNIT shall not assign subject or part with the rights
and obligations under this Agreement which are personal
to the UNIT provided however Shaw Wallace may at any
time designate any of its subsidiary company to undertake
the work under this Agreement and be the beneficiary of
the terms and conditions of this agreement.
4. At this stage it may also be relevant to note that in so far as
the provision for consideration payable under the said agreement is
concerned, the details are largely provided in appendix „D‟. The
relevant portion of appendix „D‟ reads as follows:
"CONSIDERATION
1. The prices at which Shaw Wallace will purchase IMFL
products from the UNIT will be computed as under:
i) Actual cost of Sprit incurred by the UNIT as per Shaw
Wallace‟s direction
Plus
ii) Actual cost of Electricity and Water charges
Plus
iii) Actual cost of Labour and other expenses which are
incurred by the UNIT (with the prior approval of Shaw
Wallace)
Plus
iv) Actual Excise Establishment expenses
Plus
v) Bottling charges at the rate of Rs 15/- per case (to be
reviewed by Shaw Wallace on an annual basis)
Plus
vi) Packing Materials on actual basis plus wastage as per
Annexure „E‟ specifying individual items of packing
materials with standard allowable wastages
Plus
vii) Cost of chemicals for conversion at the rate of Rs 0.50
per case (to be reviewed by Shaw Wallace on an annual
basis)."
2. Shaw Wallace will be responsible to sell and arrange for
collection of sale proceeds and declaration forms required
for sales tax to / from Direct Indentors. The payment shall
be made by Direct Indentors by way of Cheque or DD in
the name of the Unit. The UNIT, after deducting the value
of each product at applicable rates as specified above and
the amount representing the statutory dues like Sales Tax,
Excise Duty etc., will pay the balance amount to Shaw
Wallace (which represents Royalty/ Marketing services
charges etc.)
(emphasis is ours)
5. Based on transaction which have emanated from the said
agreement, the authorities below have returned the following
findings for each of the assessment year. We shall briefly refer to
the findings of each of the authorities in respect of the assessment
years in issue.
ASSESSMENT YEAR 1997-98
6. The Assessing Officer noted that the assessee had debited an
amount of ` 84,01,160/- as payments towards royalty. The assessee
had rendered its justification, as noted by the Assessing Officer, vide
two letters dated 24.01.2000 and 10.03.2000. By the said letter the
assessee had briefly made reference to the said agreement
adverted to hereinabove by us. The assessee had indicated
evidently that it had executed the said agreement due to lack of
demand for its products which was, prior to the agreement, sold
under the assessee‟s own brands. The assessee justified the
payment on the ground that the arrangement had proved successful
and beneficial for its business in as much as it had produced 61634
cases of IMFL as against 621 cases in the earlier year. The assessee
went on to suggest that under the said agreement, SWCL provided
brand names, sample of spirits, labels, arranged supply of raw-
materials and sale through a chain of its customer, which proved
beneficial to the assessee. Consequently, the assessee debited in its
accounts the amount of royalty paid to SWCLin consonance with the
said agreement. The assessee submitted that the amount paid was
expended wholly and exclusively for its own business and hence, the
expenditure incurred deserved to be allowed fully.
7. The Assessing Officer, however, disagreed with the explanation
rendered by the assessee as according to him, this was a case of
„transfer of income‟ having been undertaken by employing a device
of setting up a separate entity. The Assessing Officer came to the
conclusion that the day-to-day management and control of the
assessee company lay with the Shaw Wallace Group. The fact that
the Shaw Wallace Group held majority shares in the assessee was
not even disclosed in the audit report or, notes to the accounts or
even in the tax audit report, and that, this fact emerged only during
the course of assessment. The Assessing Officer compared the
bottling charges, which were received by another entity by the name
of Balbir Distilleries Limited located at Solan, Himachal Pradesh from
SWCL, with that, which were received by the assessee. According to
the findings returned by the Assessing Officer, Balbir Distilleries Ltd.
received towards bottling charges ` 40 per case in 1995, while the
assessee received only ` 15 per case, pursuant to the said
agreement, which was decidedly executed between the assessee
and the SWCL a year later, i.e., in 1996. According to the Assessing
Officer this was a case of transfer of profits.
7.1 Furthermore, the Assessing Officer, on perusal of the terms of
the agreement, came to the conclusion that the assessee had
acquired right to manufacture and, sale of IMFL products under the
SWCL brand name. The Assessing Officer was thus of the view that
the payment made by the assessee towards use of trademarks,
brand names, designs and get up were in the nature of capital
expenditure, and that SWCL had authorized the assessee in that
regard vide a separate agreement, which despite repeated directions
had not been produced by the assessee. Reference in this regard
was made to Clause 6.3 read with appendix „C‟ annexed to the said
agreement.
7.2 For the aforesaid reasons, the Assessing Officer rejected the
alternative claim of the assessee to allow deduction under Section 37
of the Income Tax Act, 1961 (in short „I.T. Act‟). Furthermore, having
held that it was in the nature of capital expenditure and hence not an
expenditure allowable under Section 37 of the I.T. Act, the Assessing
Officer concluded that the assessee had acquired patent rights for
the use in its business, and therefore, the condition stipulated under
Section 35A of the I.T. Act was satisfied.
7.3 The Assessing Officer went on to observe that a part of the
royalty paid was excessive in nature. He proceeded, however, to
restrict the expenditure to 1/14th of the amount claimed in the year
in issue by invoking provision of Section 35A. Consequently, a sum
of ` 78,01,077/-, being 1/14th of the claimed amount, i.e., `
84,01,160/- was disallowed.
8. Aggrieved by the same an appeal was preferred by the
assessee in respect of this aspect with the CIT(A). The CIT(A)
proceeded to examine the issue with reference to the application of
provisions of Section 40A(2) and Section 35A of the I.T. Act. In so far
as the provisions of Section 40A(2) are concerned the CIT(A)
adverted to the following:
"The appellant‟s case is covered under clause (iv) of
subsection (b) where a company having a substantial
interest in the business or profession of the assessee is
covered for this purpose. The substantial interest is also
defined in the Explanation thereto. According to this if a
company has 20% of the voting power or more it is said
to have a substantial interest. The AO has already
pointed out that the majority share holding is by the SW
which has not been contravened. The Ld AR further
submitted that the employees of SW have the controlling
share holding. Therefore, the payment of royalty to SW
is covered under section 40A(2) and it has to be seen
whether the payment is excessive or unreasonable."
8.1 In conjunction with the above, the CIT(A) took note of the
difference in bottling charges paid to Balbir Distilleries Ltd. as
against that which was paid to the assessee. The CIT(A) sustained
the findings of the Assessing Officer that this was a case of transfer
pricing. Accordingly, he disallowed a sum of ` 24,70,929/- out of the
total sum claimed, i.e., ` 84,01,160/- under Section 40A(2) of the I.T.
Act. As regards the balance sum, i.e., ` 59,30,231/- (84,01,160 -
24,70,929) he applied the provisions of Section 35A of the I.T. Act.
Thus in consonance with the provisions of Section 35A, the CIT(A)
allowed 1/14th of the said amount, i.e., ` 4,23,588/-. Resultantly, the
CIT(A) in fact disallowed an amount equivalent to ` 79,77,572
(24,70,929 + 55,06,643). As against this, the Assessing Officer had
disallowed an amount of ` 78,01,077/-.
ASSESSMENT YEAR 1998-1999
9. In this assessment year, the Assessing Officer noticed that the
assessee had claimed a sum of Rs.5,67,92,000/- as royalty paid to
SWCL since in the immediately preceding year (i.e., A.Y. 1997-1998),
the Assessing Officer had allowed only 1/14th amount towards royalty
to the assessee by invoking the provisions of section 35A of the IT
Act. He adopted the same methodology. Consequently, apart from
a sum of Rs.4,05,671/- which was 1/14th of the amount claimed, the
balance sum amounting to Rs.5,27,35,429/- was disallowed.
9.1 Being aggrieved, the assessee carried the matter in appeal to
the CIT (A). The CIT (A) considered the matter from two angles. The
first being: whether the payment made by the assessee for use of
trademark and services rendered by SWCL was in the nature of
capital or revenue expenditure? If the inquiry resulted in coming to
the conclusion that the payment was in the nature of capital
expenditure, whether it was covered under the provisions of Section
35 A of the IT Act.
9.2 Besides this, the CIT(A) also examined the matter as to
whether the payments made to SWCL were unreasonable and hence,
hit by the provisions of section 40A(2) of the IT Act.
10. In so far as the first aspect was concerned, the CIT (A) on
applying the ratio of the decision of the Supreme Court in CIT Vs.
Ciba of India Limited (1968) 69 ITR 692 SC came to the conclusion,
after interpreting various clauses of the agreement, which interalia
included, the termination clause, and clause 9 which, required the
assessee to maintain strict confidence in respect of communication,
correspondence, records and information, knowledge and documents
falling within its domain - that at no stage did SWCL part with any
asset of its business. According to the CIT (A), the assessee did not
acquire any asset of enduring nature; the expenditure incurred by
way of royalty was for the purposes of business and hence, in the
nature of revenue expenditure. A particular reference was made to
the fact that expenditure was incurred by the assessee not only for
use of trademark but also towards services rendered by SWCL, in
connection with, quality control of "sample of spirit" provided to it,
purchase of raw materials, packing materials and in obtaining import
permits, etc.
11. In so far as the second aspect is concerned, i.e., whether the
payments were hit under section 40A(2) of the IT Act, the CIT (A)
returned the following finding of fact while disagreeing with the view
taken by the CIT(A)-XIV, New Delhi vide his order dated 20.02.2001
pertaining to Assessment Year 1997-1998 :-
"The second issue relates to the applicability of provisions of
Sec. 40A(2). The equity capital of the appellant company as
on 31.3.1997 was held by the following investment
companies and individuals and number of shares held by
them are indicated against their names:
i) Alaknanda Manufacturing and 5,18,800
Finance Ltd.
ii) Tribtis Investment Ltd. 4,50,000
iii) Manaswar Wall Investment Ltd. 3,60,000
iv) Canver Investment Ltd. 1,35,000
v) Maharashtra Distilliaries Ltd. 87,930
vi) Sh. Suraj P. Gupta 8,61,610
each
It may be noted that not a single share is not held by the
Shaw Wallace & Co. Ltd....."
5.3 .....
In the instant case the payment has not been made to any
director of the company or any relative of a director, partner
or member who has substantial interest in the company.
Shaw Wallace & Co. is not holding any equity shares in the
company. Now the question arises whether the payment
made to Shaw Wallace which has distant and indirect control
on the assessee can be said to be a person having substantial
interest in the appellant company. The expression
"substantial interest" has been defined in Explanation 2 to
sub-section (2) of Section 40A. A person is deemed to have
substantial interest in the business or profession of such
person is beneficial owner of at least 20% of equity capital in
case of a company. The expression "not less than 20% of
voting power" implies that the person must hold equity
shares directly and not distantly. Therefore, Shaw Wallace &
Co Ltd. cannot be said to be the beneficial owner of shares of
the appellant company.....
.....From the list of share holders it is clear that the employees
of Shaw Wallace do not have the controlling share holding.
Six individuals are holding ten shares each and Sh. Suraj P.
Gupta held 8,61,610 shares. Shri Suraj Gupta is not employee
of the appellant. Further the payment has not been made to
Shri Suraj P. Gupta or his relative of the company of which
he is a director. I would like to mention here that the CIT (A),
SIV, New Delhi had made reference to finding of the
Assessing Officer that the majority share holding is by the
Shaw Wallace which has not been controverted. However,
the appellant for the Asstt. Year 1998-1999 has controverted
this fact. The shares are neither held by the Shaw Wallace
nor by the employees of Shaw Wallace as also the payment of
royalty was not made to the employees of Shaw Wallace.
Further payment was not made to Sh. Suraj P. Gupta who was
holding more than 20% shares. Therefore, the provisions of
Section 40A(2) will not be applicable to the facts of the
instance case. The Assessing Officer has not brought any
material on record to justify his conclusion as to how the
provisions of section 40A(2) will be applicable.....(emphasis is
ours)
5.4.....In the instant case, the payment has not been made to
the specified persons under section 40A(2)(b) and therefore,
provisions of section 40A(2) are not applicable. Since
provisions of section 40A(2)(b) are not applicable, the
question for estimating excessive amount of expenditure does
not arise though the appellant has given explanation for
differential rate of payment of bottling charges to the Balbir
Industries...." (emphasis is ours)
ASSESSMENT YEAR 1999-2000
12. The Assessing Officer noticed a sum of Rs.10,20,35,544/- had
been debited to the profit and loss account as payments made on
account of royalty to SWCL. The Assessing Officer more or less
adopted the view taken in the Assessment Year 1997-1998 and came
to the conclusion that the assessee had alongwith SWCL put in place
the present arrangement only to transfer profits. The Assessing
Officer in the net result allowed only 1/14th of the amount claimed;
resultantly, a sum of Rs.9,97,78,120/- was disallowed.
12.1 Being aggrieved, the matter was carried in appeal by the
assesse once again to the CIT (A). The CIT (A) in this assessment
year agreed with the views taken by his predecessor in the
Assessment Year 1997-1998, while disagreeing with the view taken
by his other predecessor in the Assessment Year 1998-1999. The
net result was that CIT (A) confirmed the disallowance of
Rs.9,97,78,120/- as ordered by the Assessing Officer.
13. As noticed in the very first paragraph hereinabove, appeals
were filed both by the revenue and the assessee. The assessee was
in appeal before the Tribunal in respect of orders of the CIT (A) for
the Assessment Year 1997-1998 and 1999-2000, while the revenue
was in appeal in respect of the order of the CIT (A) for the
Assessment Year 1998-1999. The Tribunal vide impugned judgment
has decided the issue by way of a common judgment. The Tribunal
in the impugned judgment, upon perusal of the terms of the said
agreement has returned the following findings of facts: (i) under the
agreement the assessee had acquired a right to manufacture and,
sale of brands of SWCL; (ii) out of the gross royalty payable to SWCL
rebate and discount was required to be allowed. SWCL was thus
entitled to receive only the net amount of royalty after the
adjustment of rebate and discounts to the customers; (iii) Under the
said agreement SWCL was required to supply to the assessee only
sample of spirits; (iv) SWCL was obliged to specify the raw materials
required for manufacture, distillation and bottling of products and
render advice on the purchase of packing material to enable the
assessee to retain quality control; (v) SWCL was also required to
render its service for acquiring import permits and obtaining
certificates from the excise authorities, besides giving advice to the
assessee qua marketing arrangements being adopted in respect of
sale of IMFL products; (vi) and finally, apart from the pregoing SWCL
was also required to render financial support to the assessee.
14. Based on the aforesaid findings, the Tribunal came to the
conclusion that the royalty was paid by the assessee to SWCL for
carrying out day-to-day business activities. The payment made
under the agreement enhanced, promoted the assessee‟s product
and added to its business efficiency. The Tribunal concluded that the
sale turnover as well as the profitability of the assessee had
increased pursuant to the operability of the said agreement. In the
opinion of the Tribunal the payments made to SWCL in the form of
royalty was for use of technical know-how and experience of SWCL.
The assessee not having acquired any asset of enduring nature the
payment could not be termed as a capital expenditure. In the
background of these findings, the Tribunal held that the Assessing
Officer was not justified in applying the provisions of Section 35A of
the I.T. Act.
15. In so far as the applicability of the provisions of Section 40A(2)
of the I.T. Act was concerned, the Tribunal was of the view that the
Assessing Officer had failed to bring any evidence on record that
SWCL held majority shares in the assessee. In this connection the
Tribunal also noticed that the revenue was obliged to show that
SWCL either held 20% or more of the shares (including right to
receive dividend) or 20% or more of the voting rights in the
assessee. The Tribunal deprecated the approach adopted by the
Assessing Officer, which according to it, was not backed by cogent
findings that SWCL had a substantial interest in the assessee‟s
business. The Tribunal after noticing the divergent views expressed
by the CIT(A) in assessment year 1998-1999 as against those taken
in 1997-1998 and 1999-2000, approved the view of the CIT(A) taken
in assessment year 1998-1999, including the reasoning given
therein.
16. On the aspect of the difference in bottling charges paid to the
assessee, as against those paid to one Balbir, Distilleries Ltd. by
SWCL; in paragraph 29, the Tribunal accepted the rationale provided
by the assessee that at the time at which SWCL had entered into a
bottling agreement with Balbir Distilleries Ltd. it did not have the
necessary facilities for the said purpose in the North India; therefore,
in order to establish its presence in North India it ended up paying
higher bottling charges to Balbir Distilleries ltd.
16.1 That apart the Tribunal was persuaded by the explanation
given by the assessee that given the fact that Balbir Distilleries Ltd.
had a plant of a much lower capacity, as compared to that of the
assessee which had a capacity which was four times the capacity of
Balbir Distilleries ltd.; the unit charges claimed by Balbir Distilleries
Ltd. would naturally be higher in comparison to those claimed by the
assessee since, the variable cost per unit in the case of the assessee
would be appreciably lower given its capacity for higher production,
and that this would also be true of fixed overheads which were again
apportioned on, larger production, generated in case of assessee.
16.2 The Tribunal also noticed that the assessee had two bottling
lines, while Balbir Distilleries Ltd. had only one bottling line.
16.3 For all these reasons, the Tribunal came to the conclusion that
the royalty paid by the assessee to SWCL was neither excessive nor
unreasonable and hence invocation of the provisions of Section
40A(2)(a) by the Assessing Officer was unjustified and, thus, the
disallowance had to be deleted. The Tribunal thus upheld the order
of the CIT(A) for assessment year 1998-99 and directed the
Assessing Officer to apply the same in respect of assessment years
1997-98 and 1999-2000 also.
17. Before us arguments on behalf of the revenue have been
advanced by Ms Rashmi Chopra, Advocate and those on behalf of the
assessee by Mr Ajay Vohra, Advocate.
17.1 In support of the appeals filed by the revenue Ms Rashmi
Chopra has largely relied upon the orders passed by the Assessing
Officers in the concerned assessment years. More specifically, Ms
Rashmi Chora argued, based on the terms and conditions contained
in the said agreement that the assessee had acquired right to use
the brands and the trademarks referred to in Appendix „C‟ of the said
agreement, and hence the payments made SWCL towards royalty
were in the nature of capital expenditure. It was the contention of
Ms Rashmi Chopra that in clause 6.3 of the agreement there is a
reference to a separate agreement; an agreement which the
assessee did not supply and hence, an adverse inference ought to be
drawn against the assessee. To buttress her contention that the
payments made for use of trademark and brand names were in the
nature of capital expenditure, reliance was placed on the
observations made by this court in CIT Vs J.K. Synthetics (2009) 309
ITR 371 in paragraph 58 at page 414.
17.2 In so far as the invocation of provisions of Section 40A(2) was
concerned, Ms Rashmi Chopra submitted that the Assessing Officer
had noticed in paragraph 2 of his order dated 27.03.2000, passed in
respect of assessment year 1997-1998, that shares in the assessee
had been acquired by six (6) entities; and thus according to her the
SWCL group had substantial interest in the assessee. She submitted
that if this was so then the conclusion of the Tribunal that the
provisions of Section 40A(2)(b) were not attracted, is erroneous.
17.3 It may, however, be noted here that Ms Rashmi Chopra did
contend that the Assessing Officer had returned no finding as to the
exact shareholding interest, and thereby, the extent of voting power
acquired by SWCL in the assessee. She submitted that the Assessing
Officer had admittedly only referred to the number of shares held by
the six (6) entities in SWCL without taking the exercise to its logical
conclusion. She thus submitted that the Tribunal being the final fact
finding authority, it ought to have undertaken this exercise.
18. At this stage we may notice that we had put to Ms Rashmi
Chopra, as to whether the revenue was required to take a stand at
the beginning of the assessment proceedings as to the nature of the
expenditure involved. As noticed by us hereinabove, the Assessing
Officer in the same breath has categorized the sums paid by the
assessee to SWCL in the form of royalty both as capital as well as
revenue expenditure. After making such diametrically opposite
observations, in each of the assessment years, the Assessing Officer
has finally disallowed a substantial portion of the claim of the
assessee by taking recourse to the provision of Section 35A of the
I.T. Act. Consequently, in each of the assessment years in issue, only
1/14th of the expenditure, was allowed. This disallowance, by the
Assessing Officer, is decidedly done on the basis that the
expenditure in issue is in the nature of capital expenditure.
18.1 Ms Rashmi Chopra even while reluctantly conceding that there
was perhaps an element of contradiction, submitted that she had no
choice but to adopt the line of reasoning reflected in the order
passed by the Assessing Officer. We find this approach inexplicable.
The reason for this being: in the assessment years 1998-99 the
CIT(A) has taken this approach of the Assessing Officer to absurd
length by bifurcating the disallowance to the extent of ` 24,70,929/-
under Section 40A(2) and a balance sum equivalent to ` 55,06,643/-
under Section 35A of the I.T. Act. Resultantly, the disallowance
sustained by the CIT(A) is more than that which was quantified by
the Assessing Officer.
19. Mr. Vohra, who appeared on behalf of the assessee submitted
that the provisions of Section 35A of the I.T. Act were not attracted
since there was neither acquisition of a patent nor any copyright. It
was learned counsel‟s submission that the assessee had acquired, if
at all, only the use of trademarks and brand names of SWCL. He
further submitted that in any event, the expenditure incurred, in the
form of royalty paid to SWCL was in the nature of revenue
expenditure and therefore, even on this ground the provisions of
Section 35A of the I.T. Act were not attracted. On the other aspect
as to whether the expenditure incurred by the assessee by way of
royalty was excessive or unreasonable, having regard to the fair
market value of the goods in issue, it was the learned counsel‟s say
that in order to attract the provisions of the said section, the
conditionalities provided therein had to be fulfilled.
19.1 Mr. Vohra submitted that ordinarily expenses incurred by the
assessee in connection with his business or profession had to be
allowed notwithstanding the alleged imprudence of such expenditure
from the point of view of the Assessing Officer. The expenditure
incurred was amenable for deduction under the provisions of section
37 of the I.T. Act. The Assessing Officer if at all obtained jurisdiction
to disallow a certain part of the expenditure on the ground that it
was either excessive or unreasonable having regard to the fair
market value of the goods, services or facilities in issue or by
applying the test of legitimate needs of business or profession of the
assessee or the benefit derived by or accruing therefrom to the
assessee by virtue of the provisions of section 40A of the I.T. Act. In
order to trigger the provisions of Section 40A(2)(a) of the Act, the
person to whom such payments have been made by the assessee
had to fulfill the test of proximity either by way of relationship or
interest as provided in section 40A(2)(b) read with the explanation
appended to sub section (2)(b). Mr. Vohra submitted that the
Assessing Officer in this regard had relied upon the provisions of
section 40A(2)(b)(iv) read with the explanation. According to Mr.
Vohra, a bare reading of the said provisions would indicate, that the
Assessing Officer would have jurisdiction to disallow a portion of the
expenditure incurred by the assessee only if, in the facts of the
present case, it could have shown that SWCL had a demonstrable
substantial interest in the business of the assessee. The substantial
interest as has been defined in the explanation would require either
a direct interest or a beneficial interest in atleast 20% of the voting
power attached to the share holding or a share of not less than 20%
in the profits of the business of such an assessee. Mr. Vohra
submitted that the Assessing Officer in none of the years has
returned a finding which fulfills the requirement of substantial
interest as contained in section 40A(2)(b)(iv) read with the
explanation. Therefore, it was contended, as rightly found by the
Tribunal in the impugned judgment, that the provisions of section
40A(2)(a) not having been triggered, the disallowance under the
said provision was not permissible.
20. We have heard the learned counsels for the parties. According
to us, the appeal deserves to be dismissed for the reasons which are
articulated hereinafter. But before we do that we must advert to one
aspect of the matter to which reference has been made by us
hereinabove. This aspect which we seek to refer to, is the contrary
stands taken by the revenue, in respect of the nature of the
expenditure involved. The revenue was required to first determine
the nature of the expenditure and then assess for itself the relevant
provisions which ought to have been invoked if at all to deny the
deduction claimed by the assessee. The revenue on the other hand
has tried to straddle two boats at the same time. In this regard, the
Assessing Officer in the assessment year 1997-1998 while observing
that the expenditure incurred by the assessee towards royalty was
hit by the provisions of section 40A(2)(a), went on to ultimately
disallow 13/14th part of the expenditure incurred, in the said
assessment year, by taking recourse to section 35A of the Act. The
CIT (A) in the said assessment year i.e., Assessment Year 1997-1998
bifurcated the disallowance by invoking both the provisions, that is,
sections 40A(2)(a) and Section 35A. The result was that the
disallowances crystallized by the CIT (A) was higher than that which
had been made by the Assessing Officer.
21. In the subsequent assessment years (i.e., 1998-1999 and
1999-2000) the Assessing Officer and in assessment year 1999-2000
has ultimately disallowed a part of the expenditure by invoking the
provisions of section 35A of the I.T. Act; the only exception being the
order of CIT(A) in assessment year 1998-1999. Therefore, we would
first like to deal with the revenue‟s stand that the expenditure had to
be disallowed partially that is to the extent of 13/14 th by taking
recourse to section 35A. Sub-section (1) of Section 35A requires
broadly three (3) conditionalities to be fulfilled for it to be triggered:-
(i) the expenditure ought to have been incurred after 28.02.1966;
(ii) the expenditure should be related to acquisition of patent
rights or copyrights used for the purposes of business;
(iii) lastly, the expenditure should be in the nature of capital
expenditure.
22. In the instant case, we have no hesitation in saying that the
expenditure incurred by the assessee was neither for acquisition of
any patents or copyrights. This is not even the case of the revenue.
The revenue has latched on to royalty paid for use of trademarks and
brands of SWCL. It was agued by Ms. Rashmi Chopra, learned
counsel for the revenue that the expenses incurred for use of
trademark ought to be treated as capital expenditure. In this regard,
the learned counsel has relied upon a judgment of Division Bench of
this court in the case of CIT Vs. J.K. Synthetics Ltd (supra).
22.1 On a reading of the judgment, we do not find any observation
which could support the submissions made by the assessee. The
broad principles as gleaned from various rulings of the Supreme
Court and the High Courts have been noted at page 412 in
paragraph 55 of the report. There is nothing to suggest in the
principles referred to therein which would support the contention of
the learned counsel for the revenue that a mere use of trademark or
brand name would give colour to the expenditure incurred as if, it
was on capital account. As a matter of fact principles (v) and (vi)
adverted to at pages 412 & 413 run completely counter to the
submission made on behalf of the revenue. For the sake of
convenience the same are extracted hereinafter.
"(v) expenditure incurred for grant of License which accords
"access" to technical knowledge, as against, "absolute"
transfer of technical knowledge and information would
ordinarily be treated as revenue expenditure. In order to
sift, in a manner of speaking, the grain from the chaff, one
would have to closely look at the attendant circumstances,
such as:
(a) the tenure of the licence.
(b) the right, if any, in the licensee to create further rights
in favour of third parties,
(c) the prohibition, if any, in parting with a confidential
information received under the license to third parties
without the consent of the licensor,
(d) whether the licence transfers the "fruits of research" of
the licensor, "once for all",
(e) whether on expiry of the licence the licensee is required
to return back the plans and designs obtained under the
licence to the licensor even though the licensee may
continue to manufacture the product, in respect of, which
"access" to knowledge was obtained during the subsistence
of the licence.
(f) whether any secret or process of manufacture was sold
by the licensor to the licensee. Expenditure on obtaining
access to such secret process would ordinarily be construed
as capital in nature;
(vi) the fact that assessee could use the technical
knowledge obtained during the tenure of the license for the
purposes of its business after the Agreement has expired,
and in that sense, resulting in an enduring advantage, has
been categorically rejected by the courts. The Courts have
held that this by itself cannot be decisive because
knowledge by itself may last for a long period even though
due to rapid change of technology and huge strides made in
the field of science, the knowledge may with passage of
time become obsolete;"
22.2 The observation made in paragraph 58 at page 414 of the
aforementioned judgment, on which reliance has been placed by the
learned counsel for revenue seeks only to emphasise that the
assessee in that case, had only acquired access to technology which
was not related to any secret process or patent rights and thus in
continuum it is mentioned that not even a right to use the trademark
or brand name had inhered in the assessee. From this, it cannot be
concluded, as is sought to be done by the learned counsel for the
revenue that any payment made for use of trademark or trade name
ipso facto will give colour to the payment as if it is made on capital
account. This is in our view is a complete mis-reading of the
judgment. It is well settled that a judgment is an authority for what
it decides and not what is construed as logically flowing from it.
Judgments cannot be read as statutes. A stray sentence picked out
of context, cannot be used to turn its ratio around.
22.3 We have already referred to the provisions of the agreement.
A perusal of the provisions of the agreement would show all that the
assessee acquired was the use of the brand names and the trade
marks of SWCL, which find a mention in Appendix-C annexed to the
said agreement. The assessee acquired no right to any secret
process or formulate or even any right title and interest in the trade
marks and brands under which the IMFL products were sold. As a
matter of fact assessee‟s rights were co-terminus with the
subsistence of the said agreement. Therefore, we have no hesitation
in rejecting the contention of the revenue in this regard. On this
issue Ms Rashmi Chopra had referred to the fact that the copy of the
separate agreement had not been supplied by the assessee and,
therefore, Tribunal ought to have drawn an adverse inference
against the assessee. To test the veracity and seriousness of this
submission we had called upon Ms Rashmi Chopra to show from the
record whether such a ground had been taken in either their appeal
filed before the Tribunal against the order of CIT(A) for assessment
year 1998-99 or in the appeal filed before us. Ms Rashmi Chopra
was unable to refer to any such ground. It is quite evident that the
Revenue took the stand, though erroneously, that royalty paid on
use of brand names and trade marks would classify the expenditure
as one made on capital account.
23. This brings us to the issue as to whether the Assessing Officer
could have invoked the provisions of section 40A(2)(a) of the Act in
the facts and circumstances of the present case. As is noticed in the
earlier part of our judgment, the Assessing Officer in the assessment
year 1997-1998 after recording that the shares of the assessee were
held by six (6) entities goes on to observe that the assessee
"became a subsidiary of Shaw Wallace Group of Companies". There is
no finding recorded by the Assessing Officer that SWCL had acquired
substantial interest i.e., 20% or more of the share capital with
attending voting rights, whether directly or beneficially. If that is so,
then the provisions of section 40A(2)(a) could not have got triggered.
It is noticed that the CIT (A) in the assessment year 1998-1999 has
returned a finding that there were five (5) limited companies apart
from two (2) individuals who held shares in the assessee, but none of
the entities adverted to, by the Assessing Officer, both in the
assessment year 1997-1998 and 1998-1999 is SWCL. As a matter of
fact, the CIT (A) in assessment year 1998-1999 records that not a
single share in the assessee is held by SWCL. The CIT (A) further
records a finding of fact that, on a perusal of list of shareholders, it is
clear that even the employees of SWCL did have ownership of a
controlling share holding interest in the assessee. CIT(A) records
that six (6) individuals held ten (10) shares each in the assessee
while, one gentleman by the name of Mr. Suraj P. Gupta held
8,61,610 shares who was neither an employee of the assessee and
nor was any payment made to Mr. Suraj P. Gupta or his relative or to
a company of which he was a Director. The CIT (A) went on to hold
that, in the instant case, payments had not been made to persons
specified under section 40A(2)(b) and therefore, the provisions of
section 40A(2) were not applicable. Both CIT (A) as well as the
Tribunal have also accepted the explanation given by the assessee
with regard to difference in payment of bottling charges vis-à-vis
Balbir Industries Limited and the assessee. The reference to which
we have already made hereinabove. We find no perversity in the
findings of the Tribunal and those recorded by CIT(A) in assessment
year 1998-1999.
24. Therefore, for the foregoing reasons, we are of the view that
the Tribunal in the impugned judgment and the CIT (A) in its order
dated 15.05.2000 passed in the Assessment Year 1998-1999 has
correctly appreciated the provisions of section 40A(2) of the I.T. Act
thus the contention of the revenue even on this aspect has to be
rejected.
25. In our considered opinion, the matter raises pure findings of
fact. There are no questions of law much less substantial questions
of law which require our consideration. The appeals are accordingly
dismissed.
RAJIV SHAKDHER, J
SANJAY KISHAN KAUL,J
AUGUST 19, 2011
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