Tapuriah Jain & Associates

INCOME TAX APPELATE TRIBUNAL - DELHI

COCA - COLA INDIA INC. VS. ADDL. CIT

DATED : 17.11.2005

Summarised Judgement (Scroll for Complete Judgement)

The Hon’ble Court, while deprecating the conduct of the revenue in ignoring the parameters laid down in KEC International Ltd. observed that the practice of attaching bank  accounts even before communicating  the order passed on the stay application was high handed. The court expressed hope that the revenue shall ensure that such instances do not occur in future.

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Complete Judgement

INCOME TAX APPELATE TRIBUNAL - DELHI

COCA - COLA INDIA INC. VS. ADDL. CIT

DATED : 17.11.2005

This is assessee's appeal for assessment year 1998-99, raising the following grounds :

"1. The order passed by the Commissioner (Appeals) is bad in law, totally contrary to facts, perverse and without application of mind and, therefore, deserves to be set aside to the extent it fails to deal with the main and only surviving ground of appeal.

2. The Commissioner (Appeals) erred in failing to give a clear order on non-applicability of section 44D to our case while at the same time holding that the appeal is partly allowed.

3. The Commissioner (Appeals) erred in following his own order passed for the earlier years upholding the applicability of section 44D to the facts of the appellant's case, thus totally failing to take cognizance of crucial developments subsequent to the date of passing orders for earlier years.

3.1 The Commissioner (Appeals) erred in not taking cognizance of the developments even after the same was brought to his notice.

3.2 As a result of the above, the Commissioner (Appeals) has grossly erred in holding that the grounds of protective assessment are not required to be adjudicated upon.

4. The Commissioner (Appeals) failed to appreciate the basic fact that consequent to the agreement already reached on the non-applicability of section 44D to the appellant's case, the only surviving grounds are the ones dealing with disallowances in protective assessment. Thus, the Commissioner (Appeals) totally failed to deal with the main issues in the appeal.

5. The Commissioner (Appeals) misdirected himself in adjudicating once again on issues on which a legally binding conclusion has been reached by a due process of law, resulting in substantial miscarriage of justice as the main surviving grounds which ought to have been adjudicated upon were dismissed without even being heard.

6. The Commissioner (Appeals) has erred in holding on the one hand that the appeal is partly allowed and at the same time refusing to adjudicate the only surviving portion of the appeal. The order of the Commissioner (Appeals) is bad in law and perverse and, therefore, deserves to be set aside and may be set aside.

7. The Commissioner (Appeals) erred in holding that there was no communication to the effect that the decision reached under section 90 was applicable to assessment year 1998-99, contrary to the clear mention in the CBDT communications submitted to him. Thus the decision-making process is totally vitiated and, therefore, the order of the Commissioner (Appeals) deserves to be set aside.

8. The order passed by the Commissioner (Appeals) is in gross violation of the principles of natural justice. No opportunity whatsoever was given to your appellants subsequent to receipt of the remand order from the assessing officer. The order of the Commissioner (Appeals) was passed in haste without considering relevant material and, therefore, deserves to be set aside.

9. The Commissioner (Appeals) erred in totally failed to consider the detailed evidence submitted in remand proceedings, in the form of vouchers, books of account, agreements etc., for verification, and in holding that the grounds dealing with disallowance made in protective assessment need not be adjudicated upon.

10. The order of the Commissioner (Appeals) is predetermined and without taking into consideration basic facts, submissions and judicial pronouncements on the subject and, therefore, bad in law and on facts,

11. The Commissioner (Appeals) misdirected himself in considering totally irrelevant material like non-withdrawal of appeals for earlier years, without appreciating the fact that, in earlier years, the grounds dealing with disallowances made in protective assessment remain to be adjudicated.

12. The Commissioner (Appeals) totally misdirected himself in holding that the communication from the Board conveying the fact of agreement having been reached by a due process of law under section 90 was equivalent with the circular/ instruction under section 119. Therefore, the Commissioner (Appeals) has wrongly proceeded to hold that this decision could not be taken cognizance of in judicial proceedings.

13. Without prejudice to the above, the Commissioner (Appeals) has erred in law in not accepting the appellant's contention that the amounts received from the service receivers towards actual sums incurred by the assessee, being in the nature of reimbursements, do not form part of either expenditure or income as held by the courts. The Commissioner (Appeals) has erred in confirming the action of the assessing officer without giving any opportunity for hearing and without citing any reasons in support of such action.

14. Without prejudice to the above, the Commissioner (Appeals) has grossly erred in upholding levy of interest under section 234B and penalty under section 201 without giving any opportunity of being heard and without citing any reasons whatsoever for confirming the action of the assessing officer."

2. The learned counsel for the assessee has drawn our attention to letter dated 6-6-2002, which stands already filed with this Tribunal. As per this letter, the assessee has submitted, inter alia, that subsequent to the passing of the assessment order, under a mutual agreement procedure, it has been agreed by both the Governments, ie., of the United States of America and India, that section 44D of the Income Tax Act will not be applicable to the facts and circumstances of the assessee's case; that consequence to the said mutual decision, the assessing officer had passed an order under section 154, holding that the provisions of section 44D will not be applicable in the case of the assessee; that therefore, the total income of the assessee was redetermined; that the assessee had, in its appeal, challenged the then existing conclusions of the Income-tax Authorities that section 44D was applicable to the assessee's case; that in view of the said developments, the assessee wishes to withdraw the contentions in its appeal pertaining to the applicability of section 44D; and that since this issue had been agreed upon by both the parties, only the grounds challenging the determination (revised), total income would alone survive out of the appeals raised in the Memorandum of Appeal. The learned counsel for the assessee has stated at the bar, that in view of the above request for withdrawal of 'the grounds other than those challenging the determination of revised total income, only ground Nos. 13 and 14 would survive consequence to the withdrawal of the other grounds. The learned Departmental Representative has not opposed this statement and consequent withdrawal of said ground. As such, the assessee is allowed to withdraw ground Nos. 1 to 12 and 15. These grounds are, therefore, rejected as withdrawn.

3. Apropos ground No. 13, the facts are that the assessee-company derives income from advisory services. It is a Corporation organized and existing under the Laws of the State of Delaware, USA. It has a branch office in India. During assessment year 1998-99, the assessee entered into a service agreement with Britco Foods Co. Ltd., with effect from 1-4-1995, to provide advisory services to Britco. Britco is a company organized and existing under the Laws of India, having its registered office in Maharashtra. It is an indirect wholly owned subsidiary of the Coca-Cola Company of USA (TCCC) and has acquired from TCCC the authorization to manufacture and sell in India concentrates, beverages, bases and syrups for the products. Britco further acts in India to promote and enhance the business of the said company in the production and sale of products. The assessee-company has expertise and know-how in the field of manufacture, sale and marketing of beverages, syrups, food stuffs in general and the products in particular and in providing services in connection therewith. During the year, the assessee received service fees amounting to Rs. 63,68,36,936 from Britco under the terms of agreement dated 1-4-1995 between the assessee-company and Britco. This receipt was treated by the assessee as its business income and its profit was computed after claiming various expenses. The assessee has been of the view that article 7(3) of the India-USA Double Tax Avoidance Agreement ('DTAA' for short) is applicable to the assessee's case. The stand of the assessee has been consistant with that taken by the assessee and considered by the Authorities for assessment years 1996-97 and 1997-98, i.e., the immediately two preceding assessment years. 

As per clause (3) of the Agreement for service and fees, the assessee is entitled to certain fees in respect of the services rendered, which fee is to be calculated on the basis of the actual cost incurred by the assessee in providing such services plus a mark up of up to 5 per cent on such costs. According to the assessee, it is the mark up of up to 5 per cent on actual costs incurred by the assessee in providing services, which is the assessee's taxable income. This, so says the assessee, is in consonance with article 7 of the DTAA with USA, which provides for taxation of business profits. Where a foreign company has a Permanent Establishment (hereinafter referred to as the 'PE') in India, article 7(3) of the DTAA provides that the profits of a PE shall be determined, after allowing expenses of the PE subject to limitations of the Taxation Laws. The stand of the assessee is that the limitation under the Act would govern only those expenses which are allocable to a PE and it would not apply to other expenses.

4. By virtue of the assessment order dated 22-3-2001, the assessing officer rejected the aforesaid stand of the assessee, holding, inter alia, that he did not subscribe to the view of the assessee that the words restricting the allowance in accordance with the provisions and subject to the limitations of the Act only referred to allocation of executive and general administrative expenses; that as per article 7(3) of the DTAA between India and USA, the deduction of the expenses incurred for the purposes of business is to be allowed; that such expenses would include a reasonable allocation of general overheads, etc.; that so, allocable expenses are includible in the expenses referred to in the first limb of article 7(3), which are allowed; that the article does not make any distinction between the two; that the deduction is subjected to the provisions of the Act by the said article 7(3); that there is no restriction on the type of expenses; that the Act as such does not lay down any classification or category, but does provide for deduction and limitation in respect of certain types of expenses; that since article 7(3) deals with deduction of expenses irrespective of category thereof, it cannot be said that it provides for disallowance only in respect of certain expenses and not regarding all; that the Protocol does not lay down that the restriction contained in article 7(3) is confined only to the executive and general administrative expenses; and that based on article 7 read with article 12 of the DTAA between India and USA and section 115A of the Income Tax Act, royalties or fees for technical services/fees have included services, was being charged to tax at 30 per cent of the total receipt of Rs. 63,68,36,936, amounting to Rs. 19,10,51,080.

5. The learned Commissioner (Appeals), vide the impugned order dated 5-2-2002, upheld the action of the assessing officer.

6. The learned counsel for the assessee has placed on record before us copies of order dated 16-3-2005, in the assessee's own case for assessment years 1996-97 and 1997-98, in ITA Nos. 1362 & 1363 (Delhi' of 2001. It is submitted that in accordance with the said order, for the year under consideration also, it is the mark up of up to 5 per cent on the actual costs incurred bv the assessee in providing the services under consideration to Britco, which is the only taxable income of the assessee in this regard. The assessee has not claimed any expenses thereagainst.

7. On the other hand, the learned Departmental Representative has placed strong reliance on the orders of the Taxing Authorities.

8. We have gone through the aforesaid Tribunal order in the assessee's own case for assessment year 1996-97, passed on 16-3-2005 in ITA Nos. 1362 & 1363 (Delhi) of 2001. The same issue, as is before us, was also considered by the Tribunal in the aforesaid order for the immediately two preceding assessment years. The Tribunal held that the question as to whether the reimbursement of actual cost incurred by the assessee could be considered as the income of the assessee, was squarely covered by the judgment of the Hon'ble Delhi High Court in the case of CIT v. Industrial Engg. Products (P.) Ltd. (1993) 202 ITR 101 (Del), wherein it has been held that the reimbursement of expenses cannot be considered as the assessee's income. The Tribunal, as such, held in favour of the assessee. However, the factual aspects needing verification, the assessing officer was directed to delete the amount of reimbursement of actual expenses incurred by the assessee after verification.

9. The facts involved in the assessment year under consideration indubitably being pari materia with those present in assessment years 1996-97 and 1997-98, the aforesaid Tribunal decisions for these years is squarely applicable for this year also. Therefore, respectfully following the said Tribunal order dated 16-3-2005 in ITA Nos. 1362 & 1363 (Delhi) of 2001, in the assessee's own case, for this year also, it is held that reimbursement of expenses cannot be considered as the income of the assessee. The assessing officer is directed to delete the amount of reimbursement of actual expenses incurred by the assessee, after verification.

10. Ground No. 14 pertains to levy of interest under sections 234B and 201. The assessing officer is directed to give consequential effect.

11. As a result, the appeal is partly allowed, as indicated.