VS, 2008 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 779 (2008)

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss. 62, 79 & 80AA---Assessment on production of accounts, evidence etc.---Income from transactions with non-resident---Fee for technical services---Assessee (received payment of royalty in respect of use of trademarks under an agreement as well as free for technical services provided for development of products---Assessing Officer invoked the provisions of S.79 of the Income Tax Ordinance, 1979 and considered part of the receipts on account of royalty and fees for technical services as dividend income---Annulment of such assessment was by the First Appellate Authority---Validity---Assessing Officer was of the view that the payment of royalty, by the local company, at a uniform rate did not match with the number of trademarks used in relation to any particular products---Taxation Officer had failed to appreciate that the rate of royalty was agreed in the context of aggregate trademarks---Royalty would be received for aggregate trademarks irrespective of the number---View of Taxation Officer was based merely on presumption---Contribution of the assessee's entity towards business management, strategy development, development of milk sourcing, development of milk products, safety and quality assurance procedures etc. of the local company clearly supported the charge of fee on this account---Such process had clearly improved the business efficiency, volumes and the image of the local company in the market justifying the receipt and its classification---View regarding absence of growth in business of the local company after payment of amounts to assessee company was not based on proper reasoning---After achieving a particular level of business volumes extraordinary and sophisticated business processes were required to be employed to penetrate further in the market and it also made reasonable business sense---Growth in the business volumes of the local company was there, which was undoubtedly being achieved only due to technical assistance by the assessee in the hard competition---First Appellate Authority rightly annulled the orders and had directed to accept the declared version---No interference was warranted by the Appellate Tribunal in the circumstances.

1991 PTD 488 and PLD 1991 Kar. 158 rel.

(b) Income-tax---

----Agreement---Intention of the parties to the agreement could only be analyzed by the conduct of the parties.

1991 PTD 488 rel.

Ghazanfar Hussain, D.R. for Appellant.

Asim Zulifqar, ACA for Respondent.

ORDER

Through these three appeals, the appellant Department has objected against the consolidated impugned order of the learned CIT(A)dated 8-7-2006 for the assessment years 2000-01 to 2002-2003 on the following common ground:---

"That the learned C.I.T.(A) was not justified in annulling the assessment order, directing to accept the declared version and rejecting reclassification made by the Taxation Officer".

We have heard the learned representatives from both the sides and have also perused the consolidated impugned order of the learned C.I.T.(A) and the consolidated assessment order for all the three years under review.

The assessee, in this case, is a non-resident company incorporated in. Switzerland and represents one of the units of the worldwide Nestle Group, deriving income in Pakistan from Royalty and Fees for Technical Services paid to it by Messrs Nestle Milk Pak Limited. Returns for the assessment years 1997-98 to 2002-2003 were not filed in the normal course of events and were subsequently filed in response to statutory notices issued by the Department. The assessee, in compliance to the statutory notices, filed provisional returns on 22-10-2002 and thereafter, proper returns on 5-11-2002 declared NIL income in all the returns for the assessment years 1997-98 to 2002-2003. However, certain incomes were declared under Presumptive Tax Regime and exempt in respect of Fee for Technical Services and Royalty. Fee for Technical Services has been declared as full and final discharge of tax liability under section 80AA of the repealed Ordinance, 1979, whereas Royalty has been claimed as exempt under Article VII of the Avoidance of Double Taxation Treaty between Pakistan and Switzerland. The assessee company owns various trademarks e.g.:--

Nestle (R)

Nido (R)

Cerelac (R)

Pure Life (R)

Everday (R)

In addition to the above trademarks, the assessee also arranges activities involving Technical Assistance in respect of numerous food products of Nestle being manufactured throughout the world. Such technical activities are arranged in collaboration with another group company named "Nestec", whose core activity is to provide necessary technical assistance to all associated company of Nestle Group throughout the world. The assessee company received payments during the years under review i.e. 2000-2001 to 2002-2003 from Nestle Milk Pak Limited on account of:--

(a) Royalty in respect of trademarks; and

(b) Fees for technical services in respect of the technical assistance provided to Messrs Nestle Milk Pak Limited.

All such payments were received under a General Licensing Agreement executed in March, 1998 with the then Milk Pak Limited, who is now Nestle Milk Pak Limited. Under the said Agreement, Messrs Nestle Milk Pak Limited was required to pay certain amounts to the assessee in respect of its use of the trademarks including Nestle (R) and the technical assistance being undertaken by the assessee. Under the provisions of para. 2 of the Agreement, the Agreement could be extended from time to time to cover such further food products, which were not included before in the Agreement and on the same terms and conditions as has been set out in the said Agreement, the assessee company approved the request for extension made by Nestle Milk Pak Limited through its letters of extension and necessary approval from Board of Investment and State Bank of Pakistan were also obtained in respect of such extensions. UHT milk is one of the major products of Nestle Milk Pak Limited and prior to December, 1999, one such product was being marketed with trademark of "Milk pak (R)" on its packing only. Subsequently, in terms of Agreement, UHT milk was also included in the list of products being covered by the Agreement. Consequently, the extension letter, dated February 4, 1999 was issued to Nestle Milk Pak Limited allowing the use of following trademarks on the packing of the material:--

"Nestle(R)" - Trademark Registration No.88096

"Nestle(R)" - On Ribbon" Trademark Registration No.135632.

As a result of the inclusion of UHT milk in the Agreement, the assessee started receiving payments of Royalty in respect of use of above trademarks by Nestle Milk Pak Limited. In addition, the assessee also provided Technical Assistance for development of products and therefore, Nestle Milk Pak Limited also started making payments of Fees for Technical Services provided in connection with UHT Milk.

The Taxation Officer has invoked the provisions of section 79 of the repealed Ordinance,. 1979 in the case of the assessee and has considered part of the receipts on account of Royalty and Fees for Technical Services as dividend income of Nestle S.A., Switzerland through the assessee. The learned CIT(A) has annulled the consolidated order passed by the Taxation Officer under section 62 of the repealed Ordinance, 1979.

After considering the arguments from both the sides and perusal of the impugned order of the learned CIT(A), we have found that sole controversy in this matter is regarding determination of exact nature of receipts of the assessee declared on account of Royalty/Fees for Technical Services in the backdrop of the Agreement entered into between the assessee and the local company. The matter clearly relates to incorporation of the Agreement which as per the ratio of the decision of the Hon'ble Supreme Court of Pakistan reported as 1991 PTD 488 is not the mandate of tax authorities. We are of the view that intention of the parties to the Agreement can only be analyzed by the conduct of the parties, which in the present case supports the position of the assessee. The contention of the Department that under the Agreement, payment could only be validly received as Royalty and Fee for Technical Services for additional plants to be set up after 1988, for milk powder and infant cereal based foods, it is itself negated, when the Taxation Officer has himself treated the amounts as Royalty Fee for Technical Services in respect of butter and ghee for which plants were already there at the time of signing the Agreement and in respect of purified water and juices for which additional plants were subsequently installed notwithstanding that these items are neither milk powder nor infant cereal based goods. The acceptance of amounts under these heads shows in respect of these varied products, demonstrates the confusion in the mind of the Taxation Officer, who has himself contradicted his stance while framing the assessments. The acceptance of the claim under these heads by the Taxation Officer not only demonstrates the intention of the parties, but also the use of trademarks/technical know how by the local company for items referred to above. The view of the Taxation Officer that a product cannot have two different trademarks having different owners/sources is not supported with any reasoning or legal provision. It is a fact on record that Trademark Registry has registered separately the trademark "Nestle (R)" on Ribbon", and "Milkpak(R)", which clearly indicates that under the relevant laws, there is no bar or prohibition for product for more than one trademark. The view of the Taxation Officer, therefore, becomes irrelevant in this background. On the issue that on a packet of UHT milk, the word "Nestle(R)" represents trade name of the local company and the word "Milkpak(R)" represents trademark is also based on incorrect understanding. Since "Nestle(R)" and "Milkpak(R)" have been registered as trademarks, there does not remain any necessity for debating any further on the contention of Taxation Officer. The Hon'ble Karachi High Court in PLD 1991 Kar. 158 has discussed at length the distinction between the trade name and the trademark while appreciating the difference between the connotation of these expressions.

The Taxation Officer in the present case seems to be totally confused the matter by using these two expressions interchangeably. We have further noted that Taxation Officer in this case has not properly understood the intention of the parties behind the Agreement. He is of the view that in certain cases, the payment of Royalty, by the local company, at a uniform rate does not match with the number of trademarks used in relation to any particular products. We are of the view that the Taxation Officer has failed to appreciate that the rate of Royalty was agreed in the context of aggregate trademarks owned by it. Whether the assessee owns one trademark for any product or more than one trademark for any product, the Royalty would remain uniform in such a way that a uniform Royalty would be received for aggregate trademarks irrespective of the number and the view of the Taxation Officer is based merely on presumption. We have found that contribution of the assessee's entity towards business management, strategy development, development of milk sourcing, development of milk products, safety and quality assurance procedures etc. of the local company clearly support the charge of fee on this account. These processes have clearly improved the business efficiency, volumes and the image of the local company in the market thus justifying the receipt and its classification. The view of the Taxation Officer regarding absence of growth in business of the local company after the payment of amounts to the assessee company is also not based on proper reasoning. It is an established fact that after achieving a particular level of business volumes extraordinary and sophisticated business processes are required to be employed to penetrate further in the market and it also makes reasonable business sense. We have found that there is still growth in the business volumes of the local company, which is undoubtedly being achieved only due to this technical assistance by the assessee in the extreme competition in this line of trade. The learned CIT(A) has therefore in the above facts and circumstances of the case rightly annulled the orders for the three years under review and has directed to accept the declared version.

In view of these facts and circumstances of the case, we find no warrant for interference in the impugned order of the learned CIT(A), which is upheld and all the three appeals filed by the Department are dismissed.

C.M.A./28/Tax(Trib.)Appeals dismissed.