COMMISSIONER OF INCOME TAX Vs. NESTLE INDIA LTD

JUDGEMENT

(1.) The questions of law which arise for consideration in these appeals are common. These appeals concern with the same assessee though it pertain to different assessment years. The issue is with regard to deduction claimed by the assessee in respect of remuneration/royalty paid by it to other subsidiaries and the assessee's holding companies. Only the amount of royalty paid in two years is different. To recapitulate briefly the circumstances under which the aforesaid payments of royalties are claimed, the assessee company is involved in the business of manufacturing and marketing of various food products and beverages. In the Income Tax Return filed for the assessment year 1997-98 it had declared total income of '17,99,29,538/-under Section 115 JA of the Income-Tax Act (hereinafter referred to as the Act'). The case was selected for scrutiny and in the assessment made by the Assessing Officer, several additions/disallowances were made. Here we are concerned with only one disallowance which was made, as aforesaid, i.e. qua the royalty payment made by the assessee.

(2.) The assessee felt aggrieved by this order of the Assessing Officer and went in appeal. In this appeal, the assessee triumphed as the CIT (A) accepted the contention of the assessee and allowed the entire amount of royalty. In this manner, disallowance of '15 crores made by the AO was deleted by the CIT (A). It was inter alia, held by the CIT (A) that royalty payment in terms of sales at 3.5% to 5% as against the Government norms of 5-8% was reasonable. It was further held that the royalty payments for technical know-how are linked to sales and not to profit which is a derived figure that can vary from year to year. It would be relevant to state here that for the assessment year 1998- 99, the Assessing Officer had made a similar disallowance of '17 crores. However, the appeal preferred by the assessee against that order was dismissed by the CIT (A) sustaining the disallowance made by the Assessing Officer.

(3.) In so far as the assessment year 1997-98 is concerned, the CIT (A) had allowed the appeal of the assessee. The Revenue approached the Tribunal challenging the order of the CIT (A). The assessee, on the other hand, filed appeal in so far as order of CIT (A) in respect of assessment year 1998-99 is concerned. These appeals have been decided by the Tribunal in favour of the assessee. Thus, the order of CIT (A) in respect of assessment year 1997-98 was affirmed dismissing the appeal of the Revenue. Likewise, the appeal of the assessee in respect of assessment year 1998-99 has been allowed. Effect is that the Tribunal has held that the payment of commission was not huge or unreasonable and since it was a business expenditure the entire expenditure incurred by the assessee in both these years by way of payment of royalty/commission to the aforesaid two overseas companies is entitled for deduction.