ACIT, Madurai V. M/s Fenner (India) Ltd., Madurai

ITA 1047/CHNY/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61051 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 26-06-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Keywords: Capital asset; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 14A

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL CHENNAI B BENCH, CHENNAI. BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT & SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 722/MDS/2009 ASSESSMENT YEAR: 2005-06 M/S. FENNER (INDIA) LTD., 3, MADURAI MELAKKAL ROAD, KOCHADAI, MADURAI 625 016. [PAN:AAACF2348D] VS. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE I, MADURAI. (APPELLANT) (RESPONDENT) I.T.A. NO. 1047/MDS/2009 ASSESSMENT YEAR: 2005-06 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I, MADURAI. VS. M/S. FENNER (INDIA) LTD., 3, MADURAI MELAKKAL ROAD, KOCHADAI, MADURAI 625 016. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIKRAM VIJAYARAGHAVAN, ADVOCATE REVENUE BY : DR. S. MOHARANA, CIT-DR DATE OF HEARING : 19 . 0 3 .201 2 DATE OF PRONOUNCEMENT : 23.04.2012 ORDER PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER THESE CROSS APPEALS ONE BY THE ASSESSEE AND THE OTH ER BY THE DEPARTMENT ARE AGAINST THE ORDER OF THE CIT(A) I, M ADURAI DATED 11.03.2009 IN ITA NO. 0075/2008-09 FOR THE ASSESSMENT YEAR 200 5-06. SHRI VIKRAM I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 2 VIJAYARAGHAVAN, ADVOCATE REPRESENTED ON BEHALF OF T HE ASSESSEE AND DR. S. MOHARANA, CIT - DR REPRESENTED ON BEHALF OF THE REV ENUE. 2. THE FIRST GROUND IN THE APPEAL OF THE ASSESSEE IS THAT THE CIT(A) ERRED IN HOLDING THAT 25% OF THE ROYALTY PAYMENT MADE BY THE ASSESSEE IS IN THE NATURE OF CAPITAL. THE DEPARTMENT IS IN APPEAL AGAI NST THE ORDER OF THE CIT(A) IN HOLDING THAT 75% OF THE ROYALTY PAID BY T HE ASSESSEE IS IN THE NATURE OF REVENUE. 3. THE ASSESSEE IS A PUBLIC LIMITED COMPANY CARRYI NG ON THE BUSINESS OF MANUFACTURE AND SALE OF V-BELT, FAN BELT, OIL SEALS AND COTTON YARN AND ENGAGED IN INSTALLATION OF MATERIAL HANDLING EQUIPM ENTS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.10.2005 ADMITTING TOTAL INCOME OF ` .2,72,07,140/-. THE RETURN WAS PROCESSED UNDER SECTION 143(1) ON 21 .08.2006 AND THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) ON 19 .12.2008 COMPUTING TOTAL INCOME AT ` .6,37,89,240/- AFTER MAKING CERTAIN DISALLOWANCES A ND ADDITIONS. WHILE COMPLETING THE ASSESSMENT, THE ASS ESSING OFFICER TREATED LUMP SUM ROYALTY OF ` .4,77,90,000/- PAID BY THE ASSESSEE TO FENNER, U.K. FOR THE USE OF TRADE MARK AS CAPITAL EXPENDITURE AND AL LOWED DEPRECIATION AT THE RATE OF 25% ON SUCH ROYALTY TREATING IT AS INTANGIB LE ASSET. 4. THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A) AGAINST THE SAID DISALLOWANCE MADE BY THE ASSESSING OFFICER AND THE CIT(A) HELD THAT 25% OF I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 3 THE ROYALTY OF ` .4,77,90,000/- IS TO BE CONSIDERED ONLY AS EXPENDIT URE IN THE NATURE CAPITAL AND THE REMAINING 75% OF SUCH ROYALT Y IS ALLOWED AS REVENUE EXPENDITURE. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE ENTERED INTO TRADE MARK & NAME LICENCE AGREEMENT WITH FENNE R, U.K. ON 17.08.2004. THE OBJECT FOR WHICH THE AGREEMENT WAS ENTERED INTO BY THE ASSESSEE WITH FENNER, U.K. WAS FOR THE USE OF TRADE MARK FOR 10 YEARS AND USE OF NAME OF FENNER FOREVER ON LICENSED PRODUCT S AS DEFINED IN THE SCHEDULE OF THE AGREEMENT. THE AGREEMENT IS RENEWAB LE AFTER 10 YEARS AS MUTUALLY AGREED UPON. IT IS SUBMITTED THAT FOR THE USE OF TRADE MARK AND THE NAME OF FENNER, THE ASSESSEE PAID A LUMP SUM ROYA LTY OF ` .4,77,90,000/- TO FENNER, U.K. THE ASSESSEES COUNS EL SUBMITTED THAT THE PAYMENT OF ROYALTY WAS MERELY FOR THE USE OF TRADE MARK FOR A LIMITED PERIOD AND THERE WAS NO ACQUISITION OF ANY ASSET ON PAYMEN T OF SUCH ROYALTY. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASS ESSEE HAS ACQUIRED ONLY LICENSE TO USE THE BRAND NAME AND TRADE MARK OF THE FOREIGN COLLABORATOR FENNER, U.K. THEREFORE, THE ENTIRE AMOUNT OF ROYALT Y SHOULD BE ALLOWED AS REVENUE EXPENDITURE. IT IS SUBMITTED THAT FENNER, U .K. IS THE OWNER OF TRADE MARK AND THE WORLDWIDE RIGHTS OF THE TRADE MARK ARE STILL HELD BY THE FENNER, U.K. AND THE ASSESSEE HAS NO RIGHT TO ALIENATE, TRA NSFER OR WHATSOEVER. IT IS ALSO SUBMITTED THAT THE RIGHT TO USE THE TRADE MARK DID NOT CREATED ANY ASSET I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 4 OR CONFER ANY PERMANENT RIGHT IN FAVOUR OF THE ASSE SSEE AND THEREFORE, THE ROYALTY PAID TO FENNER, U.K. IS IN THE NATURE OF RE VENUE. FURTHER, THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING DE CISIONS IN SUPPORT OF HIS CONTENTION THAT ROYALTY PAID IS IN THE NATURE OF RE VENUE: CIT V. IAEC (PUMPS) LTD. 232 ITR 316 (SC) ACIT V. SIERRA INDUSTRIAL ENTERPRISES P. LTD. 2009- TIOL-97-ITAT DEL DCIT V. DCM BENETTON 9 DTR 587 DEL TRIB. CIT V. LUMAX INDUSTRIES LTD. 5 DTR 338 (DELHI) SOUTHERN SWITCHGEARS LTD. V. CIT 232 ITR 359 (SC) CIT V. PANASONIC CARBON INDIA LTD. TC(A) NOS. 552, 553, 554 AND 556/2010 DT. 12.07.2010 (MAD). INDIA JAPAN LIGHTING P. LTD. VS. ACIT IN I.T.A. NOS . 676 TO 678/MDS/2010 & ACIT VS. INDIA JAPAN LIGHTING IN I.T .A. NO. 862/MDS/2010 CHENNAI TRIBUNAL PANASONIC CARBON INDIA LTD. IN I.T.A. NO. 1968 TO 1 973/MDS/2008 CHENNAI TRIBUNAL. 6. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH E ASSESSEE ACQUIRED AN ASSET BY PAYING LUMP SUM ROYALTY TO FENNER, U.K. , WHICH IS ENDURING IN NATURE. THEREFORE, THE EXPENDITURE INCURRED IS CAPI TAL IN NATURE. THE LD. DR SUBMITTED THAT THE ASSESSING OFFICER HAS RIGHTLY TR EATED THE PAYMENT OF ROYALTY AS AN INTANGIBLE ASSET AND ALLOWED DEPRECIA TION. HE FURTHER SUBMITTED THAT AS PER THE PROVISIONS OF SECTION 32(1)(II) OF THE ACT, DEPRECIATION IS ALLOWABLE ON KNOWHOW, PATENTS, COPY RIGHTS, TRADE M ARKS, LICENSES, FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMIL AR NATURE BEING INTANGIBLE ASSET ACQUIRED ON OR AFTER 01.04.1998. HE SUBMITTED THAT SINCE THE ASSESSEE HAS ACQUIRED AN INTANGIBLE ASSET BY PAYING ROYALTY FOR USE OF TRADE MARK AND USED FOR THE PURPOSE OF ITS BUSINESS, THE ASSESSING OFFICER IS CORRECT IN I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 5 ALLOWING DEPRECIATION ON SUCH INTANGIBLE ASSET. 7. WE HAVE HEARD BOTH THE SIDES, PERUSED THE MATER IALS FILED BEFORE US AND GONE THROUGH THE ORDERS OF LOWER AUTHORITIES AN D THE CASE LAWS RELIED ON. THE ASSESSING OFFICER DISALLOWED THE LUMP SUM ROYAL TY PAID BY THE ASSESSEE TO FENNER, U.K. FOR USE OF TRADE MARK ON THE GROUND THAT PATENTS, COPY RIGHTS, TRADE MARK, KNOW-HOW, ETC., ARE INTANGIBLE ASSETS A LLOWABLE FOR DEPRECIATION UNDER SUB-SECTION (1)(II) OF SECTION 32. THE ASSESS ING OFFICER WAS OF THE VIEW THAT THE LUMP SUM ROYALTY PAYMENT MADE TO FENNER, U .K. IS FOR ACQUIRING INTANGIBLE ASSET OF ENDURING BENEFIT AND THEREFORE IS CAPITAL EXPENDITURE. THE CIT(A), AFTER CONSIDERING THE AGREEMENT ENTERED INT O WITH FENNER, U.K. BY THE ASSESSEE AND THE DECISION OF HONBLE JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT V. SOUTHERN SWITCHGEARS LTD. [148 ITR 2 72], WHICH WAS AFFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF SOUTHER N SWITCHGEARS LTD. V. CIT [232 ITR 359] AND THE DECISION IN THE CASE OF C IT V. IAEC (PUMPS) LTD. [232 ITR 316 (SC)] HELD THAT 25% OF ROYALTY IS TOWA RDS CAPITAL EXPENDITURE AND 75% OF ROYALTY IS IN THE NATURE OF REVENUE EXPE NDITURE. THE FACTS BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. IA EC (PUMPS) LTD. (SUPRA) ARE THAT UNDER AN AGREEMENT ENTERED INTO BY THE ASS ESSEE WITH A FOREIGN COMPANY, THE ASSESSEE WAS GRANTED A LICENSE TO USE ITS PATENTS AND DESIGNS EXCLUSIVELY IN INDIA. THE AGREEMENT WAS FOR A DURAT ION OF 10 YEARS WITH THE PARTIES HAVING THE OPTION TO EXTEND OR RENEW THE AG REEMENT. THE FOREIGN I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 6 COMPANY UNDERTOOK NOT TO SURRENDER ITS PATENTS WITH OUT THE CONSENT OF THE ASSESSEE AND TO MAKE AVAILABLE TO THE ASSESSEE ANY IMPROVEMENTS, MODIFICATIONS AND ADDITIONS TO DESIGNS. THE FOREIGN COMPANY HAD ALSO UNDERTAKEN TO ENABLE THE ASSESSEE TO DEFEND ANY COU NTERFEIT BY OTHERS. THE ASSESSEE WAS NOT TO DISCLOSE TO THE THIRD PARTIES A NY OF THE DOCUMENTS MADE AVAILABLE BY THE FOREIGN COMPANY TO THE ASSESSEE WI THOUT HAVING RECEIVED A WRITTEN AUTHORIZATION FROM THE FOREIGN COMPANY. ON THESE FACTS, THE HONBLE SUPREME COURT UPHOLD THE ORDER OF THE HONBLE HIGH COURT, WHEREIN IT HELD THAT THESE FEATURES OF THE AGREEMENT CLEARLY ESTABL ISHED THAT WHAT WAS OBTAINED BY THE ASSESSEE WAS ONLY A LICENSE AND WHA T WAS PAID BY THE ASSESSEE TO THE FOREIGN COMPANY WAS ONLY A LICENSE FEE AND NOT THE PRICE FOR ACQUISITION OF ANY CAPITAL ASSET. THE CIT(A), AFT ER GOING THROUGH VARIOUS CLAUSES OF THE TRADE MARK AND NAME LICENSE AGREEMEN T ENTERED INTO BY THE ASSESSEE WITH FENNER, U.K. HELD AS UNDER: 12. COMING TO THE FACTS OF THE PRESENT CASE, WHAT HAS BEEN GRANTED TO THE ASSESSEE COMPANY IS THE CONTINUED USE OF THE NAME FENNER INDEFINITELY AND THE USE OF THE TRADEMARKS WITHIN I NDIA IN RESPECT OF THE LICENCED PRODUCTS FOR A PERIOD OF 10 YEARS AND AS R ENEWED THEREAFTER FROM TIME TO TIME. IN PARA 3.3 OF THE AGREEMENT IT HAS BEEN CLARIFIED THAT THE LICENSORS RETAIN THE WORLDWIDE RIGHTS TO U SE, LICENCE AND EXPLOIT THE TRADEMARK EXCEPT IN THE EXCLUSIVE TERRITORY WHI CH HAS BEEN DEFINED IN THE COLLABORATION AGREEMENT AS INDIA. THE LICENS OR IN CLAUSE 3.3 OF THE AGREEMENT HAS ALSO UNDERTAKEN NOT BY ITSELF OR THROUGH ANY MEMBER OF THE FENNER GROUP, IT USE OR AUTHORISE THE USE OF ANY OF THE TRADEMARKS WITHIN THE TERRITORY OF INDIA DURING THE SUBSISTENCE OF THIS AGREEMENT. 13. THE JURISDICTIONAL MADRAS HIGH COURT IN THE CAS E OF CIT VS. SOUTHERN SWITCHGEAR LIMITED [148 ITR. 272], WHICH W AS SUBSEQUENTLY I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 7 AFFIRMED BY THE SUPREME COURT IN THE DECISION REPOR TED AS SOUTHERN SWITCHGEAR LIMITED VS. CIT [232 ITR 359], ACCEPTED THE PROPOSITION THAT A PORTION OF THE ROYALTY PAYMENTS, IN THE FACT S OF A PARTICULAR CASE, COULD BE TREATED AS TOWARDS ACQUISITION OF A CAPITA L ASSET BY THE ASSESSEE COMPANY, AND THE BALANCE TOWARDS REVENUE E XPENDITURE ALLOWABLE UNDER THE ACT. THE SUPREME COURT, WHILE A FFIRMING THE DECISION OF THE MADRAS HIGH COURT, HELD [AS EXTRACT ED FROM THE HEAD NOTES] AS UNDER:- ''SINCE THE FOREIGN COMPANY HAD AGREED NOT TO MANUF ACTURE IN INDIA,. ANY OF THE PRODUCTS IN QUESTION OR GRANT OR MAKE AVAILABLE TO ANY OTHER PERSON ANY INFORMATION RELAT ING TO MANUFACTURE, LICENCE, OR RIGHTS, FOR ANY OF THE PRO DUCTS IN QUESTION IN INDIA, THEREBY CONFERRING ON THE ASSESS EE EXCLUSIVE RIGHT OF MANUFACTURE AND SALE OF THE PRODUCTS, THE HIGH COURT HELD THAT THE CLAUSES IN THE AGREEMENT INDICATED TH AT THE ASSESSEE PAID THE ROYALTY FOR THE ACQUISITION OF A EXCLUSIVE PRIVILEGE OF MANUFACTURING AND SELLING THE PRODUCTS AND SELLING THE PRODUCTS AND THE ACQUISITION OF SUCH A RIGHT WAS RIGHTLY TRE ATED BY THE TRIBUNAL AS PARTLY TOWARDS CAPITAL AND PARTLY TOWAR DS REVENUE. THE HIGH COURT AFFIRMED THE DISALLOWANCE OF ROYALTY ESTIMATED AT 25% BY THE TRIBUNAL. ON FURTHER APPEAL TO THE SUPREME C OURT, THE SUPREME COURT AFFIRMED THE JUDGEMENT OF THE MA DRAS HIGH COURT. 14. THE ASSESSEE, IN THE PRESENT CASE, SIMILAR TO T HE FACTS OF THE CASE BEING DEALT BY THE APEX COURT IN THE SOUTHERN SWITC HGEAR CASE, HAD ACQUIRED AN EXCLUSIVE RIGHT TO CONTINUE TO MANUFACT URE AND SELL ITS PRODUCTS IN INDIA. IT IS TRUE THAT THROUGH THE PAYM ENT OF THE LUMP SUM ROYALTY THE CAPITAL STRUCTURE OF THE ASSESSEE COMPA NY WAS NOT ENHANCED OR IMPROVED, BUT SUCH PAYMENT WAS TO CONTINUE ITS B USINESS OPERATIONS IN SPITE OF THE EXIT OF FENNER U.K AS A SHAREHOLDER . EXPENSES TO PROTECT THE BUSINESS AND TO RETAIN THE ADVANTAGES ACCRUING FROM THE USE OF THE BRAND NAME FENNER AND THE ASSOCIATED TRADE MARKS WO ULD ALSO BE IN THE NATURE OF A CAPITAL EXPENDITURE. SUMS PAID AS C OMPENSATION TO A VENDOR OF AN UNDERTAKING NOT TO MARKET ITS PRODUCTS IN A PARTICULAR TERRITORY IS FOR AN ENDURING BENEFIT AND, THEREFORE , NOT ALLOWABLE AS A DEDUCTION. IT WAS SO HELD BY JURISDICTIONAL MADRAS HIGH COURT IN THE CASE OF TAMILNADU DAIRY DEVELOPMENT CORPORATION LIM ITED VS. CIT [239 ITR 142], A PREPOSITION WHICH IS WELL ESTABLIS HED LONG SINCE THE APEX COURT DECISIONS IN ASSAM BENGAL CEMENT COMPANY LIMITED VS. CIT [27 ITR 34] AND CIT VS. COAL SHIPMENTS PRIVATE LIMITED [82 ITR 902]. SIMILARLY, IN THE CASE OF THE ASSESSEE COMPAN Y ALSO, AT LEAST A PART I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 8 OF THE PAYMENT OF ROYALTY WAS TOWARDS RETAINING THE EXCLUSIVE RIGHT TO MANUFACTURE AND SELL ITS PRODUCTS IN INDIA USING TH E BRAND NAME AND TRADE MARKS OF THE FOREIGN COLLABORATOR. AS HAS BEE N NOTICED BY THE MADRAS HIGH COURT IN THE TAMILNADU DAIRY DEVELOPMEN T CASE, THE CAPITAL STRUCTURE OF A CONCERN DOES NOT NECESSARILY HAVE TO BE ENHANCED FOR AN EXPENDITURE TO BE CONSIDERED AS CAPITAL IN N ATURE. THE MADHYA PRADESH HIGH COURT DECISION IN GROVER SOAPS PRIVATE LIMITED VS. CIT [221 ITR 299] NOTED BY THE ASSESSING OFFICER EMPHAS ISES THE SAME POINT. 15. THE ASSESSEE, IN THE FACTS OF THE PRESENT CASE, HAS ACQUIRED ONLY A LICENCE TO USE THE BRAND NAME AND TRADE MARKS OF TH E FOREIGN COLLABORATOR. A MERE LIENCE TO USE THE OTHER PARTY' S PATENT AND KNOWLEDGE HAVE BEEN CONSIDERED AS PERMISSIBLE REVEN UE EXPENDITURE BY THE APEX COURT IN THE I.A.E.C (PUMPS) CASE [232 ITR 316]. HOWEVER, AT THE SAME TIME, A PORTION OF SUCH EXPENSES WOULD ALSO BE IN THE NATURE OF A CAPITAL EXPENDITURE TO THE EXTENT THAT SUCH EX PENSES WERE TO PROTECT THE ADVANTAGE OF USING THE FOREIGN COLLABORATOR'S B RAND NAME AND TRADE MARKS. ON THESE FACTS, IN MY OPINION, 25% OF THE LU MP SUM ROYALTY PAYMENT COULD BE ATTRIBUTED AS A PAYMENT FOR ACQUIS ITION OF A CAPITAL ASSET IN THE FORM OF A COMMERCIALLY VALUABLE RIGHT TO CONTINUE TO USE THE FENNER BRAND NAME AND TRADE MARKS, WHILE THE BALANC E 75% WOULD BE PERMISSIBLE AS A DEDUCTION, BEING A REVENUE EXPENDI TURE FOR THE MERE USE OF THE BRAND NAME AND THE TRADE MARKS. RELIANCE FOR SUCH ESTIMATED BIFURCATION OF THE LUMP SUM ROYALTY PAYMENT IS PLAC ED ON THE JURISDICTIONAL MADRAS HIGH COURT DECISION IN THE CA SE OF SOUTHERN SWITCHGEAR LIMITED [148 ITR 272], WHICH WAS SUBSEQU ENTLY AFFIRMED BY THE APEX COURT IN THE DECISION REPORTED IN 232 ITR 359. APPEAL FILED BY THE ASSESSEE COMPANY ON THIS GROUND MAY, ACCORDINGL Y, BE TREATED AS PARTLY ALLOWED. 8. THE CIT(A), ON ANALYZING THE FACTS OF THE ASSES SEES CASE, CONCLUDED THAT 25% OF THE LUMP SUM ROYALTY PAYMENT COULD BE A TTRIBUTED TO ACQUIRING CAPITAL ASSET IN THE FORM OF COMMERCIALLY VALUABLE RIGHT TO CONTINUOUSLY USE THE FENNER BRAND NAME AND TRADE MARK AND THE BALANC E 75% COULD BE PERMISSIBLE AS DEDUCTION AS REVENUE EXPENDITURE FOR MERE USE OF BRAND NAME AND THE TRADE MARK. IN COMING TO SUCH CONCLUSI ON AND BIFURCATION OF I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 9 ROYALTY PAID TOWARDS CAPITAL AND REVENUE EXPENDITUR E, HE PLACED RELIANCE OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. SOUTHERN SWITCHGEAR LIMITED (SUPRA), WHICH WAS SUBSEQUENTLY AFFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LIMITED VS . CIT (SUPRA). 9. WITH REGARD TO THE CONTENTION OF THE LD. DR THA T THE ASSESSEE HAS ACQUIRED INTANGIBLE ASSET AND THEREFORE IS ALLOWABL E UNDER SECTION 32(1), WE OPINED THAT THE PROVISIONS OF SECTION 32(1) ARE APP LICABLE WHEN THE ASSESSEE ACQUIRES ON OR AFTER 01.04.1998 AND OWNED WHOLLY OR PARTLY ANY KNOW-HOW, PATENTS, COPY RIGHTS, TRADE MARK, ETC. BY THE ASSES SEE AND USED FOR THE PURPOSE OF BUSINESS OR PROFESSION, DEPRECIATION IS ALLOWABLE. IN THIS CASE, THE ASSESSEE HAS NOT EITHER OWNED WHOLLY OR PARTLY ANY KNOW-HOW, PATENTS, COPY RIGHTS, TRADE MARK, ETC. SO AS TO APPLY THE PR OVISIONS OF SECTION 32(1). THE ASSESSEE IS ONLY PERMITTED TO USE TRADE MARK AN D BRAND NAME OF THE FOREIGN COLLABORATOR WITH CERTAIN CONDITIONS. THERE FORE, IN OUR VIEW, THE PROVISIONS OF SECTION 32(1) ARE NOT APPLICABLE TO T HE FACTS OF THE ASSESSEES CASE. 10. WE ARE INCLINED TO FOLLOW THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SOUTHERN SWITCHGE AR LTD. (SUPRA), WHICH WAS AFFIRMED BY THE HONBLE SUPREME COURT IN THE CA SE OF SOUTHERN SWITCHGEAR LTD. VS. CIT (SUPRA) AND THEREFORE, WE S EE NO REASON TO INTERFERE WITH THE REASONING OF THE CIT(A), WHICH IS WELL FOU NDED AND IS IN ACCORDANCE WITH THE LAW LAID DOWN BY THE HONBLE JURISDICTIONA L HIGH COURT AND THE I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 10 HONBLE SUPREME COURT. ACCORDINGLY, WE DISMISS THE GROUNDS OF APPEAL OF THE ASSESSEE ON THIS ISSUE. 11. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE I S AGAINST THE ACTION OF THE CIT(A) IN DIRECTING THE ASSESSING OFFICER TO RE COMPUTE THE QUANTUM OF EXPENSES FOR DISALLOWANCE UNDER SECTION 14A READ WI TH PROVISIONS OF RULE 8D OF THE INCOME TAX RULES AS AGAINST 5% OF CORPORA TE EXPENSES DISALLOWED BY THE ASSESSING OFFICER. 10. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. THIS ISSUE IS DECIDED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT [2010] 328 ITR 81 (BOMB), WHEREIN THEIR LORDSHIPS HELD AS UNDER: HELD, THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSMENT YEAR 2008-09 , WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAD TO ENFORCE TH E PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOU ND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/ INCOME FR OM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SH OULD PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMST ANCES OF THE CASE. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 11 THEREFORE, IN VIEW OF THE HONBLE BOMBAY HIGH COURT S DECISION (SUPRA), WE, SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND D IRECT THE ASSESSING OFFICER NOT TO APPLY RULE 8D IN THE PRESENT CASE SINCE THE ASSESSMENT YEAR UNDER APPEAL IS 2005-06 AND RULE 8D IS APPLICABLE ONLY FR OM THE ASSESSMENT YEAR 2008-09. HOWEVER, THE ASSESSING OFFICER MAY REASONA BLY ESTIMATE THE EXPENSES ATTRIBUTABLE TO EARNING OF EXEMPT INCOME A S HELD BY THE HONBLE BOMBAY HIGH COURT. ACCORDINGLY, THIS GROUND OF APPE AL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. I.T.A. NO. 1047/MDS/2009: 11. THE FIRST ISSUE IN THE APPEAL OF THE DEPARTMEN T IS THAT THE CIT(A) ERRED IN HOLDING THAT 75% OF ROYALTY PAID BY THE ASSESSEE TO FENNER, U.K. IS IN THE NATURE OF REVENUE. IN VIEW OF OUR DISCUSSIONS ON TH IS ISSUE IN ASSESSEES APPEAL IN I.T.A. NO. 722/MDS/2009 AND SINCE WE HAVE AGREED WITH THE REASONING OF THE CIT(A) IN HOLDING THAT THE ROYALTY PAID IS PARTLY TOWARDS CAPITAL AND PARTLY TOWARDS REVENUE FOR THE REASONS STATED ABOVE, WE DISMISS THIS GROUND OF APPEAL OF THE REVENUE ON THIS ISSUE. 12. THE NEXT ISSUE IN THE APPEAL OF THE DEPARTMENT IS THAT THE CIT(A) ERRED IN ALLOWING DEDUCTION UNDER SECTION 43B IN RE SPECT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND. 13. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. THE HONBLE SUPREME COURT IN THE CASE OF CI T VS. ALOM EXTRUSIONS I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 722 & 1047/M/09 12 LTD. [319 ITR 306] HELD THAT THE OMISSION OF SECOND PROVISO TO SECTION 43B OF THE INCOME TAX ACT, 1961 BY THE FINANCE ACT, 2003 O PERATED RETROSPECTIVELY FROM 01.04.1988 AND NOT PROSPECTIVELY FROM 01.04.20 04. THEREFORE, IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT (SUPRA ), WE DIRECT THE ASSESSING OFFICER TO VERIFY AS TO WHETHER THIS CONT RIBUTION PAID BY THE ASSESSEE BEFORE THE DUE DATE FOR FILING OF RETURN. IF THE PAYMENTS WERE MADE BEFORE THE DUE DATE FOR FILING OF RETURN, SUCH CONT RIBUTIONS ARE TO BE ALLOWED AS DEDUCTION IN VIEW OF THE HONBLE APEX COURT IN T HE CASE OF CIT VS. ALOM EXTRUSIONS LTD. (SUPRA). THE ASSESSING OFFICER IS D IRECTED ACCORDINGLY. THE GROUND RAISED BY THE DEPARTMENT ON THIS ISSUE IS AL LOWED FOR STATISTICAL PURPOSE. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN I .T.A. NO. 722/MDS/2009 AND THE DEPARTMENTS APPEAL IN I.T.A. NO. 1047/MDS/ 2009 ARE PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 23.04.2012. SD/ - SD/ - (DR. O.K. NARAYANAN) VICE-PRESIDENT (CHALLA NAGENDRA PRASAD) JUDICIAL MEMBER CHENNAI, DATED, THE 23.04.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.