IN THE COURT OF APPEAL OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA In the matter of an Application of a case stated under Section 11A of the Tax Appeals Commission Act No. 23 of 2011 as amended by Act No. 20 of 2013.

The Commissioner General of Inland Revenue, Department of Inland Revenue, Inland Revenue Building, Sir Chittampalam A. Gardiner Mawatha, Colombo 02.

Appellant Court of Appeal Application Vs.

No: CA/TAX/10/2021 Case Stated:

Fonterra Brands Lanka (Pvt) Ltd, TAC/TT/051/2017 No. 100, Delgoda Road, Biyagama.

Respondent BEFORE : D. N. Samarakoon J Neil Iddawala J COUNSEL : Chaya Sri Nammuni DSG for the Appellant.

Manoj Bandara with Praveena Muhandiram for the Respondent, instructed by Sudath Perera Associates Argued on : 27.07.2023 Written Submissions filed on : 10.10.2023 Decided on : 02.11.2023 Iddawala – J This is an application made by the Commissioner General of Inland Revenue (hereinafter referred to as the Appellant) under the Tax Appeals Commission Act No. 23 of 2011 as amended challenging a determination made by the Tax Appeals Commission (hereinafter referred to as the TAC) regarding the taxation of Fonterra Brands Lanka (Pvt) Ltd. (hereinafter referred to as the Respondent).

The instant appeal is made against the assessment made for the taxable period 2011/2012 which was heard by the TAC on 21.01.2021. The Respondent is a limited liability company incorporated in Sri Lanka engaged in importing, manufacturing and distribution of dairy products. The largest shareholder of the Respondent is Fonterra Brands (Singapore) Pvt. Ltd. which is in turn a wholly owned subsidiary of Fonterra Co-operative Group Ltd. of New Zealand. The Respondent entered into a licensing agreement with the ‘New Zealand Milk Brands Ltd.’ for ten years with effect from 01.06.2006 as licensor granting a non-exclusive right to the Respondent to use the "technical Know-How and Communication Package" in connection with the manufacture, packaging, marketing, distribution and sale of products in Sri Lanka. The Agreement also provided for the payment of royalty of 4% from the net sales amount. The Respondent company has claimed and deducted Rs. 585,880,132/= as royalty payment from the statutory income for the assessment year 2011/2012, which had been paid to an associate company in the group of companies called New Zealand Milk Brands Ltd., which is closely connected to the Appellant. The Assessor disallowed the royalty payments and issued an assessment against which the Respondent appealed to the Appellant who confirmed the assessment. Thereafter the Respondent appealed to the TAC which annulled the assessment. At the request of the Appellant the TAC has forwarded this Case Stated containing the following questions of law in accordance with Section 11A of the TAC Act;

1. Whether the TAC erred in law when determining the payment of royalty amounting to Rs. 585, 880,132/- was not excessive?

2. Whether the TAC erred in law when determining that the royalty payment to the Fonterra Co-operative Group Ltd. Was correct though the agreement was to pay the given amount to New Zealand Milk Brand Ltd who was actually entered into agreement with the Fonterra Brands Lanka (Pvt) Ltd.?

This Court is of the opinion that both of these questions are not questions of law but of fact. The first question is to determine whether the royalty payment was ‘excessive’ and the second question involves determining who the real receiver of the royalty payment was. However, the submissions of the parties have provided certain legal provisions in support of their stances. This Court would consider such legal provisions and the law referred to by the TAC in their determination, interpreting them to provide more clarity to the matter. This Court is mandated to determine on questions of law under the TAC Act, therefore the judiciary being the upholder of law, is inherently obliged to draw attention to improper or inadequate adherences to legal provisions even if it is seemingly rel