TTK Protective Devices Limited, CHENNAI V. ACIT, CHENNAI

ITA 106/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4957 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 07-03-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 16-01-2017
• Court: TRIBUNAL
• Department Lawyers: R DURAI
• Keywords: Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND CHANDRA POOJARI, ACCOUNTANT MEMBER ./ ITA NO.:106/MDS/2017 / ASSESSMENT YEAR : 2011-12 M/S. TTK PROTECTIVE DEVICES LIMITED , NO.6, CATHEDRAL ROAD, CHENNAI 600 086 V. THE ACIT, CORPORATE CIRCLE 3(1), CHENNAI 34. PAN: AABCT1184G ( /APPELLANT) ( /RESPONDENT) /ASSESSEE BY : SHRI SAROJ KUMAR PARIDA, ADVOCATE /REVENUE BY : SHRI R. DURAIPANDIAN, JCIT /DATE OF HEARING : 07.03.2017 /DATE OF PRONOUNCEMENT : 03-04-2017 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-13, CH ENNAI DATED 20.12.2016 PERTAINING TO ASSESSMENT YEAR 2011-12. 2. THE FIRST ISSUE RAISED IN THE APPEAL OF ASSESSE E IS THAT LD.CIT(A) ERRED IN TREATING 75% OF THE EXPENDITURE INCURRED TOWARDS 2 I.T.A. NOS. 106/MDS/2017 TECHNICAL KNOW-HOW IS TREATED AS REVENUE IN NATURE AND BALANCE 25% IS TREATED AS CAPITAL IN NATURE AND ENTITLED FO R DEPRECIATION. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CLAIMED SUM OF ` 5,49,09,220/- AS ROYALTY IN THE NATURE IN THE P&L A /C UNDER THE HEAD MANUFACTURING AND OTHER EXPENSES. THE ASSESSEE CLARIFIED BEFORE THE AO THAT AS PER THE COPY OF THE AGREEMENT FOR FOREIGN TECHNOLOGY TRANSFER ENTERED BY THE ASSESSEE WITH M/ S LRC PRODUCTS LTD., UK, WHO HAD AGREED TO MAKE AVAILABLE NEW FORM ULATION ON CONTINUOUS BASIS TO THE ASSESSEE COMPANY FOR UPGRAD ING THE QUALITY OF PRODUCTS IN THEIR PLANTS IN INDIA AND IN CONSIDE RATION THEREOF, THE ASSESSEE COMPANY AGREED TO PAY M/S LRC PRODUCTS LTD . THE ROYALTY FOR TECHNICAL KNOW-HOW AT THE RATE OF 2.5% OF TOTAL ANNUAL SALES TURNOVER, ON DEDUCTION AS PER THE STANDARD CONDITIO NS OF RESERVE BANK OF INDIA OR AT THE RATE 2% OF THE TOTAL ANNUAL SALES TURNOVER WHICHEVER IS LESS. HOWEVER, THE ASSESSEES CONTENTI ON WAS THAT PAYMENT OF ROYALTY IS OF REVENUE IN NATURE WAS NOT ACCEPTABLE TO THE AO ON THE GROUND THAT LEGISLATURES INTENTION WAS TO TREAT SUCH EXPENDITURE AS CAPITAL IN NATURE AND THEREFORE 25% DEPRECIATION IS PROVIDED ON INTANGIBLE ASSET SUCH AS TECHNICAL KNOW -HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES ETC. T HE AGREEMENT ALSO REVEALS THAT ASSESSEE COMPANY DESIRES TO HAVE THE SAME ON A 3 I.T.A. NOS. 106/MDS/2017 CONTINUOUS BASIS FOR UPGRADING THE QUALITY OF PRODU CTS MANUFACTURED BY IT. THE ASSESSEE THEREFORE OBVIOUSLY DECIDED TO IMPROVE THE QUALITY OF PRODUCTS WHICH INCLUDED RUBBER CONTRACEP TIVES IN THE FACE OF STIFF COMPETITION IN THE MARKET BY ITS COMPETITO RS AND IN THIS DIRECTION THE SAID AGREEMENT WOULD SERVE THE DESIRE D PURPOSE OF IMPROVING THE QUALITY OF THE PRODUCTS MANUFACTURED AND THEREBY IMPROVING THE MARKET BASE AND ITS PROFIT. THEREFORE , THE PAYMENT OF TECHNICAL KNOW-HOW FEES WOULD BRING IN ENDURING BEN EFITS TO THE ASSESSEE COMPANY IN THE LONG RUN. FURTHER THE ROYAL TY PAYMENT IS RENEWED FROM TIME TO TIME WHICH CLEARLY INDICATES T HAT THE TECHNICAL KNOWLEDGE OBTAINED BY THE ASSESSEE THROUGH THE AGRE EMENT HAS ENDURING ADVANTAGE AND BENEFITS. 3.1 IT WAS SUBMITTED THAT SINCE IT WAS AN EXCLUSIV E RIGHT TO MANUFACTURE THE PRODUCT IN QUESTION AND LRC PRODUCT S LTD., UK WOULD NOT GRANT FOR MAKE AVAILABLE TO ANY OTHER PER SON ANY INFORMATION RELATING TO MANUFACTURE/ LICENCE/RIGHTS FOR ANY OF THE PRODUCTS IN QUESTION IN INDIA THEREBY THE EXCLUSIVE RIGHTS ARE CONFIRMED TO THE ASSESSEE TO MANUFACTURE AND SALE O F THE PRODUCTS WHICH IS ALSO EVIDENT BY CLAUSE 5.2(A) OF THE MOU B ETWEEN TTK GROUP AND THE ASSESSES. CONSIDERING THE ABOVE, THE AO TREATED ROYALTY EXPENDITURE AS CAPITAL AND ALLOW4L 25% DEPR ECIATION. 4 I.T.A. NOS. 106/MDS/2017 3.2 FURTHER, THE LD.A.R CONTENDED BEFORE THE LD.CI T(A) THAT IN ASSESSEES OWN CASE THE HONBLE ITAT, CHENNAI, ITA N O.1791 TO 1796/11 DT. 31.10.2012 HAS HELD THAT:- 75% OF THE EXPENDITURE INCURRED TOWARD THE ROYALTY IS ALLOWABLE AS REVENUE EXPENDITURE AND THE BALANCE 25% AS CAPITAL EXPENDITURE ENTITLED FOR DEPRECIATION. THE LD.CIT(A) , FOLLOWING THE DECISION OF THE TRIBU NAL IN ASSESSEE'S OWN CASE, ( SUPRA), HELD THE 75% OF THE EXPENDITURE INCURRED TOWARDS TECHNICAL KNOWHOW IS TREATED REVENUE IN NAT URE AND BALANCE 25% IS TREATED AS CAPITAL IN NATURE. AGAINS T THIS THE ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE CAME FOR CONSIDERATION BEFORE TH IS TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEARS 2002-03 TO 2007-08 IN ITA NOS.1791 TO 1796/MDS./2011 VIDE ORDER DATED 31. 01.2012 WHEREIN THE TRIBUNAL HELD THAT:- 18.1. IN THE SUBSEQUENT AGREEMENT DATED 01.04.05 A S WELL, WE HAVE COME ACROSS THE SAME SET OF CLAUSES. IT IS TH EREFORE, CLEAR THAT ASSESSEES OBLIGATION TO PAY ROYALTY @ 2%(SUPRA) ST EMS FROM THE TERMS INCORPORATED IN THE AGREEMENTS. WE NOTICE TH AT IN THE SAID AGREEMENTS, THERE IS NO COVENANT GRANTING EXCLUSI VE RIGHTS OF TECHNICAL KNOW-HOW OR TITLE IN FAVOUR OF THE ASSESS EE PERTAINING TO TECHNICAL INPUTS AS OBTAINED FROM THE OTHER ENTITY. FURTHER, THE ELEMENT OF ENDURABILITY IS ALSO NOWHERE FORTHCOM ING AND EVEN 5 I.T.A. NOS. 106/MDS/2017 DURATION OF THE AGREEMENT IS NOT INDEFINITE I.E. IT IS FOR A PERIOD OF FIVE YEARS. IN ADDITION TO THIS, THERE IS NO CLAUSE OF EXCLUSIVE USAGE IN FAVOUR OF ASSESSEE FOR USING THE TECHNICAL INPUTS. IN THESE CIRCUMSTANCES, IN OUR OPINION, THE CASE LAW OF M/S .SOUTHERN SWITCH GEAR (SUPRA) DOES NOT APPLY TO THE FACTS OF THE CAS E AS IN THE SAID CASE, THE NON-COMPETE CLAUSE WAS THERE WHEREIN THE FOREIGN COMPANY CONCERNED HAD AGREED NOT TO MANUFACTURE SIMILAR PRO DUCTS IN INDIA AND NOT TO GIVE RIGHTS OF MANUFACTURE TO OTHERS. T HE INSTANT CASE IS RATHER COVERED BY CASE LAW OF M/S.IAEC PUMPS LTD., WHEREIN THE LICENSE TO USE THE INTELLECTUAL KNOW-HOW WAS FOR TE N YEARS WITH CLAUSES FOR RESCINDING THE AGREEMENT BEFORE THE EX PIRY OF SAID TIME PERIOD AS WELL. SIMILARLY IN THE CASE OF M/S.G4S S ECURITIES SYSTEM, THERE WAS NO EXCLUSIVE USE OF THE TECHNICAL KNOW -H OW AND ROYALTY WAS PAYABLE ON YEAR TO YEAR BASIS AND THE HONBLE D ELHI HIGH COURT HAD HELD THAT THE OWNERSHIP RIGHTS OF THE TRADE MARK AND KNOW-HOW THROUGHOUT VESTED WITH THE FOREIGN COMPANY AND ON T HE EXPIRATION OR TERMINATION OF THE AGREEMENT THE ASSE SSEE WAS TO RETURN ALL THE KNOW-HOW OBTAINED BY IT UNDER THE AGREEMENT. THE PAYMENT OF ROYALTY WAS ALSO TO BE O N YEAR TO YEAR BASIS ON THE NET SALES OF THE ASSESSEE AND AT NO POINT OF TIME WAS THE ASSESSEE ENTITLED TO BECOM E THE EXCLUSIVE OWNER OF THE KNOW-HOW AND TRADE MARK. HEN CE, THE EXPENDITURE INCURRED BY THE ASSESSEE AS ROYALTY WAS REVENUE EXPENDITURE AND WAS DEDUCTIBLE UNDER SECTIO N 37(1) OF THE INCOME-TAX ACT, 1961. ACCORDINGLY WE ARE OF THE VIEW THAT THE CIT(A) HAS NOT RIGHTLY DELETED THE DISALLOWANCE OF EXPENDITURE AS MADE BY THE ASSE SSING OFFICER TO THE TUNE OF 25%. THEREFORE, WE HOLD THAT THE PAYME NT MADE BY THE ASSESSEE IN THE SHAPE OF TECHNICAL KNOW-HOW FEE BY WAY OF ROYALTY @ 2% OF THE GROSS SALES IS REVENUE EXPENDITURE. SO , THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 6 I.T.A. NOS. 106/MDS/2017 BEING SO, IN OUR OPINION, THE EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS ROYALTY TO BE CONSIDERED AS A REVENUE EXPEN DITURE TO BE ALLOWED AS A REVENUE EXPENDITURE SUBJECT TO 2% OF THE SALES VALUE AND ACCORDINGLY, THIS GROUND TAKEN BY THE ASSESSEE IS ALLOWED. 5. THE NEXT ISSUE IS WITH REGARD TO DISALLOWANCE U /S.14A R.W.RULE 8(2)(II) OF INCOME TAX RULES, 1962. 6. THE FACTS OF THE CASE ARE THAT THE ASSESSEE, IN A STATEMENT OF INCOME DISALLOWED AN AMOUNT OF ` 11,24,427/- U/S 14A R.W. RULE 8D. THE AO INVOKED RULE 8D AND DISALLOWED AS UNDER: 8(I) EXPENDITURE DIRECTLY ATTRIBUTABLE TO AN DIVIDEND I NCOME RS. NIL 8(I) INTEREST EXPENDITURE RS.8,51,507/- 8(I) 0.5% OF AVERAGE VALUE OF INVESTMENT RS.23,28,848 /- TOTAL DISALLOWANCE RS.31,80,355/ ACCORDING TO ASSESSEE, AS PER RULE 8D(I) THE AO HAS NOT EXPRESSED ANY SATISFACTION AS TO THE CORRECTNESS OF THE CLAIM OF EXPENDITURE OF ` 1 1,24,427/-MADE BY TH ASSESSEE AND THEREFORE DISAL LOWANCE MADE UNDER RULE 8D(II) IS INVALID. THE APPELLANT HA S REFERRED THE DECISION OF HONBLE PUNJAB AND HARYANA HIGH COURTS THE CASE OF CIT VS HERO CYCLES LTD,323 ITR 518, THE DELHI ITAT IN THE CASE OF ACIT VS SUN INVESTMENTS, 8 ITR 33, AND THE CHENNAL ITAT DECISION IN THE CASE OF SHRI RAM PROPERTIES PRIVATE LIMITED VS ACIT, 36 CCH 297 WHERE IN IT WAS HELD UNLESS THE AO ESTABLISHES 7 I.T.A. NOS. 106/MDS/2017 THAT SPECIFIC EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME, THERE CAN BE NO DISALLOWANCE UNDER SECTION 14A. THE ASSESSEE FURTHER CONTENDED THAT T HE AO HAS PRESUMED THAT THE ASSESSEE HAS UTILISED BORROWINGS FOR MAKING INVESTMENTS. THE ASSESSEE HAS CAPITAL AND RESERVES FOR ` 1,78,72,60,342/-AS ON 3 1/03/2010 AND ` 2,04,14,10,374/- AS ON 31/03/2011. THE TOTAL INVESTMENT WAS ONLY ` 33,10,57,470/-WHICH THE INVESTMENT IN MUTUAL FUND WAS ONLY ` 3,01,73,225/- AND THEREFORE THE ASSESSEE SUBMITS THAT NO BORROWINGS WERE UTILISED FOR MAKING THE INVESTMENTS AND THERE FOR NO PORTION OF THE INTEREST PAYMENT IS TO BE DISALLOWED. 6.1 IT IS FURTHER SUBMITTED THAT THE ASSESSEE HAS NO BORROWINGS OTHER THAN FINANCIAL LEASES FOR VEHICLES. THE INTER EST OF ` 35,60,764/-CONSIDERED BY THE AO UNDER RULE 8D(II) I S THEREFORE NOT CORRECT AS INTEREST HAS BEEN PAID TOWARDS LEASE FIN ANCE CHARGES WHICH IS FOR EARNING TAXABLE INCOME. AGGRIEVED, TH E ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 6.2 ON APPEAL, LD.CIT(A) OBSERVED THAT THE AO HAS NOT EXPRESSED ANY SATISFACTION AS TO THE CORRECTNESS OF THE CLAIM OF THE EXPENDITURE MADE BY THE ASSESSEE U/S. 14A FOR ` 11,24,427/- IS NOT CORRECT AS THE AO HAS GIVEN CLEAR FINDING IN THE AS SESSMENT ORDER THAT THE ASSESSEE HAD NOT ADMITTED ANY EXPENDITURE AGAINST THE 8 I.T.A. NOS. 106/MDS/2017 EARNING OF EXEMPT INCOME. FURTHER, LD.CIT(A) OBSERV ED THAT GIVEN THE VOLUME AND PORTFOLIO OF INVESTMENT, THE ASSESSE E SHOULD HAVE INCURRED EXPENDITURE IN THE FORM OF MANAGERIAL, AD MINISTRATIVE AND MONETARY NATURE. HENCE, THE LD.CIT(A) OPINED THAT T HE ASSESSEES EXPLANATION THAT NO EXPENDITURE IS INCURRED IN EARN ING INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IS NOT CO RRECT. THE LD.CIT(A) CAME TO A CONCLUSION THAT AFTER ARRIVING TO A SATISFACTION ONLY, THE AO HAS INVOKED PROVISION OF SECTION 14A R .W. RULE 8D AND THE CLAIM OF ASSESSEE WAS DISMISSED BY LD.CIT(A ). AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE LD.A.R IS THAT EXPENDITURE INCURRED ON EARNING EXEMPTED INCOME BY THE ASSESSEE TOWARDS FINANCIALS AND INTEREST CHARGES AT ` 35,60,764/- INCLUDES INTEREST AND LEASED VEHICLES AT ` 7,52,328/- AND BANK CHARGES AT ` 28,08,436/- AND IT DOES NOT PERTAIN TO EARNING OF T HE EXEMPTED INCOME. BEIG SO, THIS SPECIFIC EXPENDITURE TO BE E XCLUDED FROM AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR SO AS TO APPLY FORMULA IN RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962. IN OUR OPINION, THERE IS A MERIT IN THE ARGU MENT OF THE LD.A.R. 9 I.T.A. NOS. 106/MDS/2017 ACCORDINGLY, IF THE ASSESSEE IS ABLE TO PROVE THAT THIS EXPENDITURE ARE NOT RELATING TO THE EARNING OF EXEMPTED INCOME, THIS CANNOT BE INCLUDED IN A IN THE FORMULA PRESCRIBED IN RULE -8D(2)(II) OF RULES. ACCORDINGLY, WE REMIT THIS ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. 8. IN THE RESULT, THE APPEAL OF ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 03RD APRIL, 2017 AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER KSSUNDARAM /CHENNAI, /DATED, THE 03 RD APRIL, 2017 . . /COPY TO: 1. /ASSESSEE 2. /REVENUE 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF.