M/s Kyungshin Industrial Motherson Ltd., New Delhi V. DCIT, New Delhi

ITA 1080/DEL/2010

• Counselvise Citation: 108020114 RSA 2010
• Duration Of Justice: 2 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 02-07-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 11-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R S NEGI
• Assessee Lawyers: R K J K KHANNA
• Keywords: Capital asset; Business expenditure; Rule of consistency; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : D : NEW DELHI BEFORE SHRI G.D. AGRAWAL VICE PRESIDENT AND SHRI I.C. SUDHIR, JUDICIAL MEMBER ITA NOS. 1079,1080/DEL/2010 ASSESSMENT YEARS: 2004-05, 2005-06 M/S. KYUNGSHIN INDUSTRIAL VS. THE DY. COMMISS IONER OF INCOME TAX, MOTHERSON LTD. CIRCLE-5 (1) 2 ND FLOOR, F-7 BLOCK B-1 NEW DELHI. MOHAN COOPERATIVE INDUSTRIAL ESTATE MATHURA ROAD NEW DELHI -44 (APPELLANT) (RE SPONDENT) APPELLANT BY : SHRI R.K.J.K KHANNA, CA RESPONDENT BY : SHRI R.S. NEGI, SR. DR DATE OF HEARING : 2/07/2012 DATE OF PRONOUNCEMENT : 31.8.2012 ORDER PER I.C. SUDHIR, JUDICIAL MEMBER IN BOTH THE APPEALS PREFERRED BY THE AS SESSEE A COMMON ISSUE HAS BEEN RAISED IN GROUND NO. 1 OF THE APPEALS. THE ISSUE RA ISED IS AS TO WHETHER THE LD. CIT(A) HAS ERRED IN UPHOLDING DISALLOWANCE OF ` 17,59,000/- IN ASSTT. YEAR 2004- ITA NOS. 1079, 1080/DEL/10 2 05 AND ` 18,84,750/- IN ASSTT. YEAR 2005-06 OUT OF EXPENSES ON ROYALTY LAID OUT FOR THE BUSINESS PURPOSE. 2. BESIDES IN THE APPEAL FOR THE ASSESSMEN T YEAR 2004-05 VIDE GROUND NO. 2 THE ASSESSEE HAS QUESTIONED FIRST APPELLATE ORDER WHEREBY THE LD. CIT(A) HAS UPHELD THE DISALLOWANCE OF EXPENSES INCURRED ON LEG AL FEES ( ` 40,000/-) AND SOIL TEST FEE ( ` 27,450/-) HOLDING THEM AS CAPITAL IN NATURE. 3. AT THE OUTSET OF HEARING THE LD. AR POINTE D OUT THAT THE ISSUE RAISED IN GROUND NO. 1 OF THE APPEALS IS NOW SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT O F DELHI IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 2002-03. A COPY OF S AID DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN ITA NO.1226 OF 2010 HA S BEEN MADE AVAILABLE FOR THE PERUSAL OF THE BENCH WITH COPY TO THE OTHER SIDE. 4. LD. DR DID NOT DISPUTE THE ABOVE DEVELOPM ENT. HE FURTHER PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 5. HAVING GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW AS WELL AS DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF A SSESSEE (SUPRA) ON AN IDENTICAL ISSUE IN THE ASSESSMENT YEAR 2002-03, WE NOTE THE R ELEVANT FACTS THAT THE ASSESSEE COMPANY WAS SET UP DURING OCTOBER, 1997 IN COLLABORATION WITH KYUNGSHIN INDUSTRIAL MOTHERSON CORPORATION (KIC), K OREA FOR THE MANUFACTURING ITA NOS. 1079, 1080/DEL/10 3 OF INTEGRATED WIRING HARNESS, MAINLY USED BY AUTOMO BILE INDUSTRIES IN INDIA. THE MANUFACTURING FACILITIES OF THE ASSESSEE COMPANY AR E SET UP AT CHENNAI. THE COMPANY IN 50 : 50 IS A JOINT VENTURE BETWEEN ASSES SEE AND KIC. IT HAD ENTERED INTO TECHNICAL ASSISTANCE AND LICENCE AGREEMENT D ATED 21.10.1997 WITH KIC, A COMPANY FORMED UNDER THE LAWS OF KOREA, WHICH HAD A GREED TO PROVIDE THE ASSESSEE TECHNICAL ASSISTANCE. UNDER THIS AGREEMENT KIC WAS OBLIGED TO PROVIDE THE ASSESSEE TECHNICAL INFORMATION AND GRANT RIGHT AND LICENSE TO MANUFACTURE, PROCESS, ASSEMBLE, USE AND SALE IN THE SALES TERRIT ORY, INTEGRATED WIRING HARNESS AND SUCH OTHER PRODUCTS AS MAY BE MUTUALLY AGREED T O BY THE PARTIES AND ALSO PROVIDE SUCH TECHNICAL SERVICES AS MAY BE REQUIRED FOR MANUFACTURING THE PRODUCTS BY THE ASSESSEE. SUCH AN ASSISTANCE WAS TO BE PROVIDED FOR A PERIOD OF 5 YEARS WHICH EXPIRES ON 31.7.2003. HOWEVER BY SUPP LEMENTARY AGREEMENT DATED 18.11.2003 THE AFORESAID AGREEMENT WAS RENEWE D FOR A FURTHER PERIOD OF FIVE YEARS. AS PER ARTICLE 7 OF THE AGREEMENT DATED 21.10.1997, THE ASSESSEE WAS OBLIGED TO PAY A RUNNING ROYALTY @5% OF NET SALES I N THE TERRITORIES OF INDIA AND 7% OF NET SALES BY WAY OF EXPORTS. THE PAYMENT WAS TO BE MADE AFTER WITHHOLDING TAXES TO THE AUTHORITIES. IN THE ASSTT. YEAR 2002-03 THE AO MADE A DISALLOWANCE OF ` 14,50,000/- BEING 25% OF THE TOTAL ROYALTY PAYMENT OF ` 58 LAC CLAIMED BY THE ASSESSEE WHICH WAS PAID TO THE KIC, BY TREATING THE SAME AS CAPITAL EXPENDITURE. THE AO WAS OF THE VIEW THAT DE VELOPING A NEW DESIGN A PRODUCT CHANGE ULTIMATELY BE MANUFACTURED, REPRESEN TS CAPITAL ASSET WILL GIVE THE ASSESSEE A BENEFIT OF ENDURING NATURE. THE ASSESSEE CONTENDED THAT IN EARLIER ITA NOS. 1079, 1080/DEL/10 4 TWO YEARS THE EXPENDITURE WAS ALLOWED. THE MATTER U LTIMATELY TRAVELED TO THE TRIBUNAL. THE TRIBUNAL HELD THAT THE RULE OF CONSIS TENCY CANNOT BE INVOKED IN THIS CASE BECAUSE AFTER REALIZING THE MISTAKE, THE PROCE EDINGS FOR THIRD YEAR WAS REOPENED TO DISALLOW A PART OF THE EXPENDITURE AS C APITAL EXPENDITURE. THE TRIBUNAL UPHELD THE ACTION OF THE LD. CIT(A) IN AFF ORDING THE DISALLOWANCE OF 25% MADE BY THE AO. AGGRIEVED ASSESSEE WENT IN APPEAL B EFORE THE HONBLE JURISDICTIONAL HIGH COURT. THE HONBLE HIGH COURT H AS BEEN PLEASED TO SUMMARIZE ITS FINDING ON THE ISSUE IN THE FOLLOWING PARAGRAPH S :- 14. AFTER CONSIDERING THE CONTENTIONS OF BOT H THE PARTIES AND ON PERUSAL OF VARIOUS CLAUSES OF THE AGREEMENT ENTE RED INTO BETWEEN THE ASSESSEE AND KIC, WE ARE OF THE OPINIO N THAT ENTIRE PAYMENT OF ` 58 LACS IS TO BE TREATED ON REVENUE ACCOUNT AND IT WAS NOT PROPER TO TREAT 25% OF THE AFORESAID PAYMEN T AS CAPITAL IN NATURE. THE FACTS NOTED ABOVE WOULD DISCLOSE THA T THE ROYALTY OF ` 58 LACS PAID BY THE APPELLANT COMPANY TO THE KIC WA S ONLY TOWARDS UTILIZING THE KNOWLEDGE, PROCESS AND PATENT S ETC. AND NOT FOR THE TRANSFER OF SUCH ASSETS TO THE APPELLANT CO MPANY. MOREOVER, THE ASSESSEE HAD PAID THE ROYALTY TO ITS JOINT VENTURE PARTNERS @ 5% ON THE NET SELLING PRICE BIANNUALLY A FTER DEDUCTING A WITHHOLDING TAX @ 20% ON SUCH AMOUNT OF ROYALTY. THE ROYALTY AGREEMENT IS DULY APPROVED BY THE RESERVE BANK OF I NDIA. SINCE, ROYALTY PAID BY THE ASSESSEE IS A RUNNING ROYALTY B ASED UPON THE SALES MADE BY THE ASSESSEE IN INDIA OR ABROAD IS PU RELY OF REVENUE LINKED AS IT IS LINKED TO REVENUE ITEM SAL ES. IT, THEREFORE, QUALIFIES AS BUSINESS EXPENDITURE U/S 37 (1) OF THE ACT. 15. IN IDENTICAL CIRCUMSTANCES, THIS COUNT IN DENSO HARYANA P. LTD. (SUPRA) REVERSED THE ORDER OF THE TRIBUNAL OF 1/4 TH DISALLOWANCE OF PAYMENTS MADE FOR USE OF KNOW-HOW H OLDING THAT THE ENTIRE EXPENDITURE WAS REVENUE EXPENDITURE AS N O ASSET, WHATSOEVER, HAD BEEN ACQUIRED BY THE ASSESSEE BY MA KING SUCH PAYMENT. 16. WE ALSO FIND THAT THE ASSESSEE HAD BEEN I NCURRING THE EXPENDITURE REGULARLY UNDER THE TERMS OF THE AFORES AID AGREEMENT. THE SAID EXPENDITURE WAS ALLOWED IN THE ASSESSMENT YEARS 1999- ITA NOS. 1079, 1080/DEL/10 5 2000, 2000-01 AND 2001-02. THE REVENUE ITSELF HAS N OT TAKEN CONSISTENT STAND WITH REGARD TO THE TREATMENT GIVEN TO THE PAYMENTS OF ROYALTY MADE UNDER THE SAME TECHNICAL ASSISTANCE AND LICENSING AGREEMENT DATED 21.10.1997 TO THE KI C. 17. WE DO NOT AGREE WITH THE VIEW OF THE LEA RNED CIT(A) THAT PRINCIPLE OF CONSISTENCY IS NOT APPLICABLE. 18. THE QUESTIONS ARE THUS DECIDED IN FAVOUR OF THE ASSESSEE, AS A RESULT, THIS APPEAL IS ALLOWED. 6. SIMILAR ARE THE FACTS DURING THE YEARS UNDER WHICH THE AUTHORITIES BELOW HAVE DISALLOWED 25% OF THE CLAIMED EXPENDITURE INCU RRED AS PAYMENT ON ROYALTY. LD. CIT(A) HAS UPHELD THE ACTION OF THE AO ALSO IN VIEW OF THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF THE ASS ESSEE IN THIS REGARD FOR THE ASSESSMENT YEAR 2002-03. AS DISCUSSED ABOVE, THE SA ID ORDER OF THE TRIBUNAL ON THE ISSUE FOR THE ASSTT. YEAR 2002-03 AFFIRMING THE DISALLOWANCES OF 25% ON THE CLAIMED ROYALTY PAYMENT, HAS BEEN REVERSED BY THE H ONBLE JURISDICTIONAL HIGH COURT ON THE ENTIRE CLAIMED PAYMENT ON ACCOUNT OF R OYALTY HOLDING IT AS REVENUE IN NATURE. WE THUS RESPECTFULLY FOLLOWING THE ABOVE REFERRED JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ASSESSEE O N AN IDENTICAL ISSUE UNDER SIMILAR STATE OF AFFAIRS FOR THE ASSESSMENT YEAR 20 02-03 HOLD THAT THE CLAIMED EXPENDITURE INCURRED ON ROYALTY PAYMENT TO KIC DURI NG THE YEARS UNDER CONSIDERATION IS REVENUE IN NATURE. THE AO IS ACCOR DINGLY DIRECTED TO ALLOW THE CLAIMED EXPENDITURE IN ITS ENTIRETY AS REVENUE EXPE NDITURE. THE ISSUE IS THUS DECIDED IN FAVOUR OF THE ASSESS. GROUND NO. 1 IS AC CORDINGLY ALLOWED. ITA NOS. 1079, 1080/DEL/10 6 7. IN THE APPEAL FOR THE ASSTT YEAR 2004-05 ON E MORE ISSUE HAS BEEN RAISED VIDE GROUND NO. 2 AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF ` 40,000/- TOWARDS LEGAL FEES AND ` 27,450/- TOWARDS SOIL TEST TREATING THE SAME AS CAPITAL IN NATURE. 8. IN SUPPORT OF THE GROUND LD. AR HAS REITERA TED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. LD. DR ON THE CONTRAR Y TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW ON THE ISSUE. 9. HAVING GONE THROUGH THE ORDERS OF THE AUT HORITIES BELOW IN THIS REGARD WE FIND THAT THE ASSESSEE HAD CLAIMED THE AFORESAID LE GAL FEES AND SOIL TEST CHARGES AS REVENUE EXPENDITURE INCURRED IN CONNECTION WITH THE REGISTRATION OF SALE DEED OF THE PROPERTY OF SHREE PERUMBAUDUR, TAMIL NADU A ND TESTING THE PROPERTIES OF THE LAND. IT WAS SUBMITTED BY THE ASSESSEE THAT THE SE EXPENSES DO NOT ADD TO THE VALUE OF THE PROPERTY PURCHASED AND THEREFORE, MAY BE ALLOWED AS REVENUE EXPENDITURE. THE LD. CIT(A) DID NOT AGREE WITH THE ASSESSEE WITH THIS OBSERVATION THAT THE ASSESSEE HAS NOT DENIED THIS F ACT THAT BOTH THE ABOVE PAYMENTS ARE RELATING TO ACQUISITION OF A CAPITAL ASSET AND THEREFORE HE TREATED THE CLAIMED EXPENDITURE ON CAPITAL ACCOUNT ONLY. TH E FIRST APPELLATE ORDER ON THE ISSUE, IN OUR VIEW IS REASONED ONE HENCE WE ARE NOT INCLINED TO INTERFERE THEREWITH. THE SAME IS UPHELD. THE GROUND NO. 2 OF THE APPEAL FOR THE ASSESSMENT YEAR 2004-05 IS THUS REJECTED. ITA NOS. 1079, 1080/DEL/10 7 10. CONSEQUENTLY APPEAL IS PARTLY ALLOWED. 11. IN SUMMARY ITA NO. 1079/D/2010 IS PARTLY ALLOW ED AND ITA NO. 1080/D/2010 IS ALLOWED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST, 2012. SD/- SD/- ( G.D. AGRAWAL) ( I.C. SUDHIR ) VICE PRESIDENT JUDICIAL MEMBER *VEENA COPY OF ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR, ITAT BY ORDER DEPUTY REGISTRAR, ITAT