DCIT, Gurgaon V. M/s. Mitsubishi Electric Automotive India Pvt. Ltd., Gurgaon

ITA 1267/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6844 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 29-09-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 05-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: BHAVITA KUMAR
• Keywords: Transfer pricing; Revenue expenditure
• Section: 37(1); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH E EE E : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT G.D. AGRAWAL, VICE PRESIDENT G.D. AGRAWAL, VICE PRESIDENT G.D. AGRAWAL, VICE PRESIDENT AND AND AND AND SHRI SUDHANSHU SRIVASTAVA SHRI SUDHANSHU SRIVASTAVA SHRI SUDHANSHU SRIVASTAVA SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER ITA NO ITA NO ITA NO ITA NO S SS S . .. . 1267/DEL/2014 & 5884/DEL/2014 1267/DEL/2014 & 5884/DEL/2014 1267/DEL/2014 & 5884/DEL/2014 1267/DEL/2014 & 5884/DEL/2014 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR S SS S : : : : 2008 2008 2008 2008 - -- - 09 & 2009 09 & 2009 09 & 2009 09 & 2009 - -- - 10 1010 10 DEPUTY COMMISSIONER O DEPUTY COMMISSIONER O DEPUTY COMMISSIONER O DEPUTY COMMISSIONER O F F F F INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -2, 2,2, 2, GURGAON. GURGAON. GURGAON. GURGAON. VS. VS. VS. VS. M/S MITSUBISHI ELECTRIC AUTOMOTIVE M/S MITSUBISHI ELECTRIC AUTOMOTIVE M/S MITSUBISHI ELECTRIC AUTOMOTIVE M/S MITSUBISHI ELECTRIC AUTOMOTIVE INDIA PVT.LTD., INDIA PVT.LTD., INDIA PVT.LTD., INDIA PVT.LTD., PLOT NO.167 PLOT NO.167 PLOT NO.167 PLOT NO.167- -- -170, SECTOR 170, SECTOR 170, SECTOR 170, SECTOR- -- -5, 5,5, 5, IMT MANESAR, IMT MANESAR, IMT MANESAR, IMT MANESAR, GURGAON. GURGAON. GURGAON. GURGAON. PAN : AABCM8474A. PAN : AABCM8474A. PAN : AABCM8474A. PAN : AABCM8474A. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PIYUSH JAIN, CIT - DR. RESPONDENT BY : MS. BHAVITA KUMAR, ADVOCATE. DATE OF HEARING : 29.09.2016 29.09.2016 29.09.2016 29.09.2016 DATE OF PRONOUNCEMENT : 19.10.2016 19.10.2016 19.10.2016 19.10.2016 ORDER ORDER ORDER ORDER PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP : :: :- -- - THESE APPEALS BY THE REVENUE FOR THE ASSESSMENT YE ARS 2008-09 AND 2009-10 ARE DIRECTED AGAINST THE ORDER OF LEARN ED CIT(A)-2, FARIDABAD DATED 27.12.2013 AND 29.08.2014. 2. IN BOTH THESE YEARS, THE REVENUE HAS RAISED COMM ON GROUNDS OF APPEAL EXCEPT THE DIFFERENCE IN THE AMOUNT OF DISAL LOWANCE. THE GROUNDS RAISED IN ASSESSMENT YEAR 2008-09 READ AS U NDER :- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LD.CIT(A) WAS RIGHT IN LAW IN ALLOWING RO YALTY OF RS.1,50,50,557/- PAID BY ASSESSEE TO ITS ASSOCIATED ENTERPRISES (MITSUBISHI ELECTRIC CORPORATION, JAPAN ) AS REVENUE IN NATURE WHEREAS THE ASSESSEE COMPANY HAS THE EXCLUSIVE RIGHT TO SELL AND MANUFACTURE PRODUCT IN INDIA, WHICH RESULTED IN SECURING BENEFIT OF ENDURING NATU RE. ITA-1267 & 5884/D/2014 2 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS RIGHT IN LAW IN HOLDING THA T THE FACTS OF THE CASE ARE DIFFERENT FROM RATIO OF JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LT D. VS. CIT (1998) 232 ITR 359 WHEREAS THE FACTS OF THE CAS E ARE ALMOST SIMILAR TO THAT OF THE JUDGMENT OF APEX COUR T. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMP ANY IS AN ASSEMBLY UNIT ASSEMBLING AUTO COMPONENTS AND SUPPLY ING THE SAME TO OEMS LIKE MARUTI UDYOG LTD., HONDA C. CARS LTD., HI NDUSTAN MOTORS LTD. ETC. THE ASSESSEE HAS ENTERED INTO A TECHNOLOGY TR ANSFER AGREEMENT AND PATENT LICENSE AGREEMENT DATED 20 TH JULY, 2000 WITH MITSUBISHI. THIS AGREEMENT WAS SUBSEQUENTLY AMENDED VIDE AGREEM ENT DATED 13 TH APRIL, 2008. THE AGREEMENT CONFERS A NON-EXCLUSIVE , NON-TRANSFERABLE RIGHTS TO THE ASSESSEE TO MANUFACTURE, USE OR SELL ALL LICENSED PRODUCTS UNDER LICENSED KNOW-HOW IN LICENSED TERRITORY. FRO M A PERUSAL OF THE AGREEMENT, IT IS EVIDENT THAT BY THE AGREEMENT, THE ASSESSEE ACQUIRED LICENSE AND RIGHT TO MAKE, USE, DISTRIBUTE AND SELL THE PRODUCTS FOR THE LIMITED PERIOD AS PROVIDED IN THE AGREEMENT AND AFT ER THE TERMINATION OF THIS AGREEMENT, ALL RIGHTS OF THE ASSESSEE SHALL RETURN TO MITSUBISHI. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE M ADE THE PAYMENT OF ROYALTY AMOUNTING TO `1,50,50,557/-. THE SAME W AS DISALLOWED BY THE ASSESSING OFFICER TREATING IT TO BE CAPITAL IN NATURE. ON APPEAL, LEARNED CIT(A) ALLOWED THE SAME. HENCE, THIS APPEA L BY THE REVENUE. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D HAVE PERUSED THE MATERIAL PLACED BEFORE US. AT THE TIME OF HEARING BEFORE US, IT WAS POINTED OUT BY THE LEARNED COUNSEL THAT FOR FIRST FIVE YEARS I.E. ASSESSMENT YEAR 2001-02 TO 2005-06, THE REVENUE HAS ACCEPTED THE ROYALTY PAYMENT AS REVENUE EXPENDITURE. IN ASSESSM ENT YEAR 2006- 07, IN THE ORIGINAL ASSESSMENT, THE SAME WAS ACCEPT ED. HOWEVER, THE NOTICE FOR REASSESSMENT WAS ISSUED U/S 148 WHICH WA S QUASHED BY HON'BLE JURISDICTIONAL HIGH COURT. THE SAID DECISI ON IS REPORTED IN 231 TAXMAN 343. IN ASSESSMENT YEAR 2007-08, AGAIN, THE SAME WAS ITA-1267 & 5884/D/2014 3 ACCEPTED BY THE ASSESSING OFFICER AS REVENUE EXPEND ITURE. IN ASSESSMENT YEAR 2008-09, 2009-10 & 2010-11, IT WAS DISALLOWED FOR WHICH APPEAL IS PENDING BEFORE THE ITAT. IN ASSESS MENT YEAR 2011-12, THE DISALLOWANCE WAS PROPOSED BY THE ASSESSING OFFI CER IN THE DRAFT ASSESSMENT ORDER BUT WHICH WAS DIRECTED TO BE DELET ED BY THE DRP. THE ORDER OF THE DRP HAS BEEN ACCEPTED BY THE ASSES SING OFFICER AND IN THE FINAL ASSESSMENT ORDER DATED 25 TH JANUARY, 2016, NO ADDITION IS MADE. SIMILARLY, IN ASSESSMENT YEAR 2012-13, IN TH E ORDER PASSED U/S 143(3), THE ASSESSING OFFICER ACCEPTED THE ROYALTY PAYMENT AS REVENUE EXPENDITURE. IT IS STATED BY THE LEARNED COUNSEL T HAT THE PAYMENT IS ON YEAR TO YEAR BASIS AT A PERCENTAGE OF THE SALES OF THE LICENSED PRODUCT MADE BY THE ASSESSEE. THUS, IT IS RECURRING REVENU E EXPENDITURE AND NO ASSET IS TRANSFERRED TO THE ASSESSEE. HE ALSO R ELIED UPON THE FOLLOWING DECISIONS :- (I) CIT VS. CIBA OF INDIA LTD. [1968] 69 ITR 692 (SC). (II) CIT VS. HERO HONDA MOTORS LTD. [2015] 372 IT R 481 (DELHI). (III) HERO MOTOCORP LIMITED VS. ADDL.CIT ORDER DA TED 23.11.2012 OF ITAT IN ITA NO.5130/DEL/2010. (IV) CIT VS. SHARDA MOTOR INDUSTRIAL LTD. [2009] 319 ITR 109 (DELHI). (V) CLIMATE SYSTEMS INDIA LTD. VS. CIT [2009] 319 ITR 113 (DELHI). (VI) CIT VS. G4S SECURITIES SYSTEM (INDIA) P.LTD. [2011] 338 ITR 46 (DELHI). (VII) SHRIRAM REFRIGERATION INDUSTRIES LTD. VS. CIT , DELHI-I 127 ITR 746. (VIII) SHRIRAM PISTONS & RINGS LTD. VS. CIT [2008 ] 171 TAXMAN 81 (DELHI). (IX) PRAGA TOOLS LTD. VS. CIT [1980] 123 ITR 773 (AP). (X) CIT VS. AVERY INDIA LTD. [1994] 207 ITR 813 ( CALCUTTA). (XI) MARUTI SUZUKI INDIA LTD. VS. ADDL.CIT [2015] 60 TAXMANN.COM 411 (DELHI-TRIB). ITA-1267 & 5884/D/2014 4 (XII) LG ELECTRONICS INDIA PVT.LTD. VS. ACIT ORDE R DATED 08.12.2014 OF ITAT IN ITA NO.5140/DEL/2011. 5. LEARNED DR, ON THE OTHER HAND, HAS RELIED UPON T HE ORDER OF THE ASSESSING OFFICER. 6. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF BOTH THE SIDES AND HAVE PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT THE REVENUE HAS ACCEPTED THE ROYALTY AS REVENUE EXPENDI TURE IN THE PRECEDING AS WELL AS SUBSEQUENT YEARS. THUS, THERE WOULD BE NO JUSTIFICATION FOR TREATING THE SAME TO BE CAPITAL E XPENDITURE IN SOME OF THE INTERVENING YEARS. HONBLE APEX COURT IN THE C ASE OF RADHASOAMI SATSANG VS. CIT [1992] 193 ITR 321 HELD AS UNDER: - HELD, REVERSING THE DECISION OF THE HIGH COURT, ON THE FACTS, (I) THAT PROPERTY GIVEN TO THE SATGURU WAS I NTENDED FOR THE COMMON PURPOSE OF FURTHERING THE PURPOSE OF THE INSTITUTION. THE CENTRAL COUNCIL HAD AUTHORITY TO MANAGE THE PROPERTIES OF THE INSTITUTION AND, ON REVOCATIO N OF THE TRUST, THE PROPERTY WAS NOT TO GO BACK TO THE SATGU RU, AND, AT THE MOST, IN THE PLACE OF THE TRUST, THE CENTRAL COUNCIL WOULD EXERCISE AUTHORITY. THE TRIBUNAL WAS JUSTIFI ED IN HOLDING THAT THE PROPERTIES WERE SUBJECT TO A LEGAL LIABILITY OF BEING USED FOR THE RELIGIOUS OR CHARITABLE PURPO SES OF THE SATSANG. (II) THAT, IN THE ABSENCE OF ANY MATERIAL CHANGE JUSTIFYING THE DEPARTMENT TO TAKE A DIFFERENT VIEW FROM THAT TAKEN IN EARLIER PROCEEDINGS, THE QUESTION OF THE E XEMPTION OF THE ASSESSEE APPELLANT SHOULD NOT HAVE BEEN REOP ENED. STRICTLY SPEAKING, RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. THOUGH, EACH ASSESSMENT YE AR BEING A UNIT, WHAT WAS DECIDED IN ONE YEAR MIGHT NO T APPLY IN THE FOLLOWING YEAR; WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS H AS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTI ES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLE NGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO AL LOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. ITA-1267 & 5884/D/2014 5 7. THE RATIO OF THE ABOVE DECISION WOULD BE SQUAREL Y APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. MOREOVER, HON'BL E DELHI HIGH COURT IN THE CASE OF CIT VS. G4S SECURITIES SYSTEM (INDIA) P . LTD. (SUPRA), HELD AS UNDER :- HELD, DISMISSING THE APPEALS, THAT THE OWNERSHIP R IGHTS OF THE TRADE MARK AND KNOW-HOW THROUGHOUT VESTED WITH THE FOREIGN COMPANY AND ON THE EXPIRATION OR TERMINATIO N OF THE AGREEMENT THE ASSESSEE WAS TO RETURN ALL THE KN OW- HOW OBTAINED BY IT UNDER THE AGREEMENT. THE PAYMEN T OF ROYALTY WAS ALSO TO BE ON YEAR TO YEAR BASIS ON THE NET SALES OF THE ASSESSEE AND AT NO POINT OF TIME WAS T HE ASSESSEE ENTITLED TO BECOME THE EXCLUSIVE OWNER OF THE KNOW-HOW AND THE TRADE MARK. HENCE, THE EXPENDITUR E INCURRED BY THE ASSESSEE AS ROYALTY WAS REVENUE EXPENDITURE AND WAS DEDUCTIBLE UNDER SECTION 37(1) OF THE INCOME-TAX ACT, 1961. 8. THE RATIO OF THE ABOVE DECISION WOULD BE SQUAREL Y APPLICABLE TO THE FACTS OF THE ASSESSEES CASE BECAUSE THE PAYMEN T OF ROYALTY IN THE CASE OF THE ASSESSEE IS ALSO ON YEAR TO YEAR BASIS ON THE NET SALES OF THE ASSESSEE AND AT NO POINT OF TIME, THE ASSESSEE IS ENTITLED TO BECOME THE EXCLUSIVE OWNER OF KNOW-HOW AND THE TRAD EMARK. WE ALSO FIND THAT IN ASSESSMENT YEAR 2011-12, THE DRP, AFTE R CONSIDERING THE AGREEMENT AND LEGAL POSITION IN DETAIL, HELD AS UND ER:- PERUSAL OF THE EXTRACTS FROM THE AGREEMENT DOES NO T REVEAL TO US THAT ANY SECRET OR PROCESS OF MANUFACT URE IS SOLD SO AS TO BE CONSTRUED TO BE CAPITAL IN NATURE. LIMITED NON-EXCLUSIVE, NON TRANSFERABLE RIGHTS TO MANUFACTU RE, USE, OR SELL ALL LICENSED PRODUCTS UNDER LICENSED PATENT S AND LICENSED KNOW-HOW IN LICENSED TERRITORY ARE OBTAINE D BY TAXPAYER IN LIEU OF PAYMENT OF ROYALTY FOR THE TERM OF THE AGREEMENT WHICH IS 7 YEARS. THERE IS A PROHIBITION ON PARTING WITH CONFIDENTIAL INFORMATION AND CREATION OF FURTHER RIGHTS IN FAVOUR OF THIRD PARTIES. WHAT IS ACCORDED IS PURELY ACCESS TO TECHNICAL KNOWLEDGE WHICH IS FOR T HE TENURE OF THE AGREEMENT. DRP HAS ALSO NOTED A RECE NT DECISION OF THE ADVANTA INDIA LTD. (TS 590-HC-2015 (TEL&AP) WHEREIN THE HONBLE HIGH COURT HAS DISTING UISHED ALEMBIC CHEMICAL WORKS AND HELD IN FAVOR OF CAPITAL IZATION ITA-1267 & 5884/D/2014 6 OF OF PAYMENT FOR KNOW-HOW ONLY AS CAPITAL IN NAT URE, ON FACTS WHERE THE TAXPAYER ACQUIRED A LIVING ORGANISM GERMPLASM USED TO PRODUCE REVENUE GENERATING PRODUCTS. BUT, EVEN HERE THE ROYALTY PAID WAS CONF IRMED AS A REVENUE EXPENSE. HAVING EXAMINED THE AGREEMENT GOVERNING ROYALTY, AN D THE TERMS OF ITS PAYMENT IN LIGHT OF THE PRINCIPLES LAID DOWN BY THE SUPREME COURT AND HIGH COURT AND IN DUE DEFE RENCE TO DECISIONS IN THE CASE OF ALEMBIC CHEMICAL WORKS CO LTD V CIT, 177 ITR 377 (SC) SUPRA AND DELHI HIGH COURT IN THE CASE OF CIT V JK SYNTHETICS LTD 309 ITR 371, SHRI REFRIGERATION INDUSTRIES LTD V CIT 127 ITR 746, TRI VENI ENGR WORKS LTD V CIT 136 ITR 340 CIBA OF INDIA 69 ITR 69 2 HON'BLE SUPREME COURT AND OTHER DRP CONCLUDES THAT ROYALTY PAID IS REVENUE IN NATURE. AO IS DIRECTED TO ALLOW IT ACCORDINGLY. 9. THE ABOVE DECISION OF DRP HAS BEEN ACCEPTED BY T HE REVENUE AND HAS BECOME FINAL. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LEARNED CIT(A). THE SAME IS UPHELD AND THE APPEALS FILED BY THE REVENUE ARE DISMISSED. 10. IN THE RESULT, THE APPEALS OF THE REVENUE ARE D ISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 19.10.2016 . SD/- SD/- (SUDHANSHU SRIVASTAVA (SUDHANSHU SRIVASTAVA (SUDHANSHU SRIVASTAVA (SUDHANSHU SRIVASTAVA ) )) ) ( (( ( G.D. AGRAWAL G.D. AGRAWAL G.D. AGRAWAL G.D. AGRAWAL ) )) ) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VK. COPY FORWARDED TO: - 1. APPELLANT : DEPUTY COMMISSIONER OF INCOME TA X, DEPUTY COMMISSIONER OF INCOME TAX, DEPUTY COMMISSIONER OF INCOME TAX, DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -2, GURGAON. 2, GURGAON. 2, GURGAON. 2, GURGAON. 2. RESPONDENT : M/S MITSUBISHI ELECTRIC AUTOMOTIVE INDIA PVT.LTD., M/S MITSUBISHI ELECTRIC AUTOMOTIVE INDIA PVT.LTD., M/S MITSUBISHI ELECTRIC AUTOMOTIVE INDIA PVT.LTD., M/S MITSUBISHI ELECTRIC AUTOMOTIVE INDIA PVT.LTD., PLOT NO.167 PLOT NO.167 PLOT NO.167 PLOT NO.167- -- -170, SECTOR 170, SECTOR 170, SECTOR 170, SECTOR- -- -5, IMT MANESAR, 5, IMT MANESAR, 5, IMT MANESAR, 5, IMT MANESAR, GURGAON. GURGAON. GURGAON. GURGAON. 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR