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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAIL
The present appeals have been filed by the assessee challenging the separate impugned orders dated 21/02/2018 and 30/01/2017, passed by the M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 learned Commissioner of Income Tax (Appeals)-18, Mumbai [“learned CIT(A)”], for the assessment year 2010-11 and 2011-12, respectively.
The present appeals have been listed for hearing before us pursuant to the order dated 21/08/2023, passed by the Co–ordinate Bench of the Tribunal in Winsel Aquas Pvt. Ltd. v/s ITO, M.As.no.87 and 88/Mum./2023 (in and 1163/Mum./2019, for the assessment years 2010-11 and 2011- 12), whereby, the earlier common order dated 04/07/2022, passed under section 254(1) of the Act was recalled and the appeals were directed to be re- fixed for hearing.
Since both the appeals pertain to the same assessee and involve a similar issue that arises out of a similar factual matrix, therefore, these appeals were heard together and are being decided by way of this consolidated order. With the consent of the parties, the appeal for the assessment year 2011-12 is taken up as a lead case and the decision rendered therein shall apply mutatis mutandis to the assessee’s appeal for the assessment year 2010-11.
Assessee’s appeal – A.Y. 2011-12
In this appeal, the assessee has raised the following grounds:-
“1. The appellant is franchisee of M/s Pepsico India Holdings Pvt Ltd since 9/6/2003 and continued the business of producing and selling the water under brand "Aquafina" bulk water jar. The franchisee agreement secures the interest of Franchisor and Franchisee. During the financial year 2010-11 relevant to assessment year 2011-12, M/s Pepsico India Hodlings Pvt Ltd raised the invoices amounting to Rs.1,44,01,878/-being royalty @ 7.50/ Jar for 19,20,250 jars produced during the year. The appellant deducted the tds @ 10% amounting to Rs.15,88,528/-, deposited the same and issued TDS certificate to M/s Pepsico India Holding Pvt Ltd. Against the invoices raised by Page | 2 M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 it. In addition to monthly invoices raised by M/s Pepsico, it also reduced the royalty to Rs.1/Jar on 10/05/2013 and referred clearly that rate is revised to Rs. 1/jar against Rs.7.50/ jar as per original agreement dated 09/06/2003. During this period various mails related to rates, and other issues were exchanged between appellant company and M/s Pepsico. All these documents were provided to assessing officer and to Ld Commissioner of Income Tax(A). However, they overlooked the same. Royalty expenses forms direct expense for the appellant and disallowance u/s 37(1) is erroneous and appellant prays you to delete the addition.
2. The original assessment was completed u/s 143(3) r.w.s 147 on 30/12/2016 determining total income of Rs. 1,42,72,340/- by making disallowance on account of depreciation of Rs. 49,185/-, expenses of PPF of Rs. 2,483/- and Royalty expenses of Rs. 1,44,01,878/-.All the records were produced before the assessing officer at that time. However, he has resorted to fresh assessment u/s 143(3) r.w.s 147 for disallowing expenses.
3. The appellant craves for the leave to aleter, amend,modify, delete any ground of appeal in course of hearing.”
5. The only dispute raised by the assessee is against the disallowance of Royalty paid to Pepsi Foods Private Ltd. under section 37(1) of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a franchisee bottler for the brand Aquafina owned by the franchisor PepsiCo India Holdings Pvt. Ltd. (erstwhile Pepsi Foods Private Ltd.). For the assessment year 2011-12, the assessee filed its return of income on 29/09/2011 declaring a total income of Rs. Nil. The return filed by the assessee was processed under section 143(1) of the Act. Subsequently, the proceedings under section 147 of the Act were initiated on the basis that the assessee has obtained accommodation entries by way of bogus bills. During the reassessment proceedings, from the perusal of the profit and loss account of the assessee, it was observed that the assessee has claimed Royalty expenditure amounting to Rs. 1,44,01,878. In order to verify the genuineness of the claim, the assessee was asked to furnish the copy of agreement in respect of Royalty payment. In response thereto, the assessee Page | 3
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 submitted a copy of the Royalty agreement and details of Royalty payment. From the details filed by the assessee, it was observed that Pepsi Foods Private Ltd entered into Bulk Water Manufacturing Appointment and Trade Mark Licence Agreement with the assessee on 09/06/2003. It was further observed that the said agreement was for a period of 5 years, with clause for extension of the agreement at the option of Pepsi Foods Private Ltd. Accordingly, the assessee was asked to produce the copy of the renewal of agreement with Pepsi Foods Private Ltd. In response thereto, the assessee filed correspondences with PepsiCo India Holdings Pvt. Ltd. dated 26/12/2012. Notice under section 133 (6) of the Act was also issued to Pepsi Foods Private Ltd calling for various information. As the said notice was not complied with by Pepsi Foods Private Ltd, the assessee was asked to produce the said party. Since after the expiry of 5-year tenure there was no correspondence between the assessee and Pepsi Foods Private Ltd regarding the extension of the aforesaid agreement and the assessee also failed to produce the said party, the Assessing Officer (“AO”) vide order dated 30/12/2016 passed under section 143(3) read with section 147 of the Act, inter-alia, disallowed the Royalty expenses of Rs. 1,44,01,878.
The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee on this issue and affirmed the findings of the AO regarding the non-genuineness of Royalty payment to Pepsi Foods Private Ltd. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee and Pepsi Foods Private Ltd continued the Page | 4
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 arrangement during the year under consideration and neither party had expressed any intent to terminate the agreement. The learned AR by placing reliance upon the correspondences between the assessee and PepsiCo India Holdings Pvt. Ltd. submitted that both the parties continued to honour the initial agreement entered on 09/06/2003. The learned AR also submitted that Pepsi Foods Private Ltd raised invoices on the assessee on a monthly basis during the assessment year under consideration, which were duly paid by the assessee after deducting tax at source. In this regard, the learned AR also referred to Form 16A forming part of the paper book. The learned AR further submitted that in the year 2012, both parties agreed to amend the initial agreement entered on 09/06/2003. Thus, it was submitted that the assessee paid Royalty to Pepsi Foods Private Ltd under a valid agreement during the year under consideration.
On the other hand, the learned Departmental Representative (“learned DR“) submitted that the terms of the original agreement dated 09/06/2003 regarding the extension of the agreement after the expiry of the period of 5 years were not complied with by either of the parties and therefore no valid agreement was in existence to make the Royalty payment to Pepsi Foods Private Ltd. The learned DR further submitted that neither the notice issued under section 133(6) of the Act to Pepsi Foods Private Ltd was complied nor the assessee produced the said party before the lower authorities. Accordingly, the learned DR submitted that the Royalty expenses have been rightly disallowed in the present case.
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 10. We have considered the submissions of both sides and perused the material available on record. In the present case, vide Bulk Water Manufacturing Appointment and Trademark License Agreement dated 09/06/2003 Pepsi Foods Private Ltd granted a license to the assessee to use the trademark “LEHAR” in conjunction with trademark “Aquafina” on bulk packaged drinking water. The assessee was also authorised under the aforesaid agreement to sell Aquafina bulk packaged drinking water in Mumbai in the package size of 25 Liter jar. Under the aforesaid agreement, Pepsi Foods Private Ltd was under obligation to provide technical assistance to the assessee to enable it to meet the technical specifications for producing bulk packaged drinking water. As a consideration for the use of the trademark by the assessee in the manufacture and distribution of Aquafina bulk packaged drinking water, it was agreed that Pepsi Foods Private Ltd will charge Royalty @ 7.50% for each jar of Aquafina bulk packaged drinking water produced by the assessee. It was further agreed that the term of this agreement shall be for a period of 5 years and at the expiration of the said term, the appointment may be extended at the option of Pepsi Foods Private Ltd for the successive terms of 5 years each. The relevant clause of the aforesaid agreement pertaining to tenure is reproduced as under:-
“3. TENURE The term of this PFL Bottling Appointment and Trademark License Agreement (the "Appointment') shall be for five (5) years commencing from the date hereof. At the expiration of the said term of five (5) years, the Appointment may be extended at the. option of the PFL for successive terms of five (5) years each. PFL shall give notice in writing to the Franchisee of its intention not to renew the Appointment or of the terms under which the Appointment shall be renewed, the said notice is to be given at least 6 months prior to the expiry of the term of five (5) years or of any additional five-year terms.”
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 11. As per the Revenue, since the agreement is dated 09/06/2003, the agreement was valid only till 08/06/2008 unless the same was extended for a further period of 5 years as per the terms of clause 3 of the aforesaid agreement. Since no evidence has been brought on record by the assessee that the aforesaid agreement was further renewed for a period of 5 years, it was held that there is no basis for payment of Royalty under the aforesaid agreement to Pepsi Foods Private Ltd. On the other hand, it is the plea of the assessee that the aforesaid agreement continued to subsist, and thus the payment of Royalty @ 7.5% during the year under consideration is only pursuant to the aforesaid agreement. In support of its submission, the assessee has placed on record the correspondences dated 27/06/2012, 26/12/2012, and 10/05/2013 between the assessee and PepsiCo India Holdings Pvt. Ltd. (erstwhile Pepsi Foods Private Ltd).
From the perusal of the letter dated 27/06/2012 by PepsiCo India Holdings Pvt. Ltd. to the assessee, forming part of the paper book on page 26, we find that PepsiCo India Holdings Pvt. Ltd. referred to the aforesaid Trademark License Agreement dated 09/06/2003 executed between the assessee and Pepsi Foods Private Ltd for use of trademark “LEHAR” in conjunction with trademark “Aquafina”. In the said letter, PepsiCo India Holdings Pvt. Ltd. requested the assessee to address all the purchase orders, invoices, bills, and other documents and letters to it and all payments under the aforesaid agreement such as Royalty, etc. to be paid in favour of PepsiCo India Holdings Pvt. Ltd., since Pepsi Foods Private Ltd was merged with PepsiCo India Holdings Pvt. Ltd. pursuant to the order passed by the Hon’ble
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 Punjab and Haryana High Court. In the said letter, it was also mentioned that Pepsi Foods Private Ltd as mentioned in the aforesaid agreement dated 09/06/2003 be replaced with PepsiCo India Holdings Pvt. Ltd., and other terms and conditions to the said agreement shall remain the same. Further, vide letter dated 26/12/2012, forming part of the paper book on page 27, again by referring to the Bottling Appointment and Trademark License Agreement dated 09/06/2003, PepsiCo India Holdings Pvt. Ltd. agreed to authorise the assessee to manufacture and sell Aquafina bulk packaged drinking water in Mumbai in the package size of 20 Liter jar. Vide letter dated 10/05/2013, forming part of the paper book on page 28, the assessee and PepsiCo India Holdings Pvt. Ltd. agreed to reduce the rate of Royalty to Re.1 for the period starting from 01/01/2013 to 31/12/2013 in respect of bulk packaged drinking water of 25 and 20 liters capacity. Further, from the copy of monthly invoices raised by Pepsi Foods Private Ltd, we find that the assessee was charged Royalty for the use of the trademark as agreed under the aforesaid agreement dated 09/06/2003. Thus, it is evident that even though the Bulk Water Manufacturing Appointment and Trademark License Agreement dated 09/06/2003 was not extended in strict terms of clause 3 of the said agreement, as noted above, however, both parties continued to honour their obligations under the said agreement and even after a period of almost 10 years referred to the said agreement in their correspondences and amended terms in respect of the quantity of bulk packaging jar and rate of Royalty.
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 13. As evident from the record, much emphasis has been laid by the Revenue on the non-compliance of notice issued under section 133(6) of the Act to Pepsi Foods Private Ltd and non-production of the party for verification by the assessee, for proving the genuineness of the transaction. It cannot be disputed that Pepsi Foods Private Ltd. now merged with PepsiCo India Holdings Pvt. Ltd. is well-known beverage and soft drink Company, having a presence across the globe. Therefore, mere non-compliance with the notice issued under section 133(6) and non-production of the said entity by the assessee before the AO cannot lead to the conclusion that the said entity is a non-existent entity and the transaction is not genuine. It is further pertinent to note that no material has been brought on record by the Revenue to show that the assessee did not manufacture and sell Aquafina bulk packaged drinking water in Mumbai as agreed under the aforesaid agreement dated 09/06/2003 during the year under consideration and the Royalty was paid to Pepsi Foods Private Ltd without usage of the trademark. It is also relevant to note that usage of the trademark without the consent of the owner is a violation of the provisions of the Trade Marks Act, 1999. Therefore accepting the submission of the Revenue that there was no agreement during the year under consideration will also lead to the conclusion that the assessee used the trademark of Pepsi Foods Private Ltd without any license, which is not the facts of the present case, as there is no material available on record to show that the assessee has infringed the trademark registered in the name of PepsiCo Inc. Thus we find no basis in the submissions of the Revenue in denying the claim of deduction of Royalty paid by the assessee to Pepsi Foods Private Ltd during the year under consideration. Accordingly, the impugned Page | 9
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 order passed by the learned CIT(A) is set aside and the AO is directed to allow the claim of Royalty paid by the assessee in the year under consideration. As a result, the ground raised by the assessee regarding the disallowance of Royalty expenses is allowed.
Other grounds raised in the assessee’s appeal were not pressed during the hearing and accordingly the same are dismissed as not pressed.
In the result, the appeal by the assessee for the assessment year 2011- 12 is partly allowed. Assessee’s appeal – A.Y. 2010-11
In this appeal, the assessee has raised the following grounds:-
“1. The appellant is franchisee of M/s Pepsico India Holdings Pvt Ltd since 9/6/2003 and continued the business of producing and selling the water under brand "Aquafina" bulk water jar. The franchisee agreement secures the interest of Franchisor and Franchisee. During the financial year 2009-10 relevant to assessment year 2010-11, M/s Pepsico India Hodlings Pvt Ltd raised the invoices amounting to Rs. 1,49,81,157/- being royalty @ 7.50/ Jar for 19,97,487 jars produced during the year. The appellant deducted the tds @ 10% amounting to Rs. 17,41,090/-, deposited the same and issued TDS certificate to M/s Pepsico India Holding Pvt Ltd. Against the invoices raised by it. In addition to monthly invoices raised by M/s Pepsico, it also reduced the royalty to Rs.1/ Jar on 10/05/2013 and referred clearly that rate is revised to Rs. 1/jar against Rs.7.50/ jar as per original agreement dated 09/06/2003. During this period various mails related to rates, and other issues were exchanged between appellant company and M/s Pepsico. All these documents were provided to assessing officer and to Ld Commissioner of Income Tax(A). However, they overlooked the same. Royalty expenses forms direct expense for the appellant and disallowance u/s 37(1) is erroneous and appellant prays you to delete the addition.
2. The original assessment was completed u/s 143(3) r.w.s 147 on 30/11/2015 by making addition of Rs. 2,990/ on account of bogus purchases made. All the records were produced before the assessing officer at that time. However, he has resorted to fresh assessment u/s 143(3) r.w.s 147 for disallowing royalty expenses.
3. The appellant craves for the leave to aleter, amend, modify, delete any ground of appeal in course of hearing.”
M/s. Winsel Aquas Pvt. Ltd. ITA no.1162/Mum./2019 ITA no.1163/Mum./2019 17. The only dispute raised by the assessee is against the disallowance of Royalty paid to Pepsi Foods Private Ltd. under section 37(1) of the Act. Since a similar issue has already been decided in assessee’s appeal for the assessment year 2010-11, therefore the findings/conclusions rendered therein shall apply mutatis mutandis. Accordingly, the impugned order passed by the learned CIT(A) is set aside and the AO is directed to allow the claim of Royalty paid by the assessee in the year under consideration. As a result, the ground raised by the assessee regarding the disallowance of Royalty expenses is allowed.
Other grounds raised in the assessee’s appeal were not pressed during the hearing and accordingly the same are dismissed as not pressed.
In the result, the appeal by the assessee for the assessment year 2010- 11 is partly allowed.
To sum up, both appeals by the assessee are partly allowed. Order pronounced in the open Court on 09/10/2023