NEFAB INDIA P.LTD, Gurgaon V. DCIT, Circle-3(1), Gurgaon

ITA 1338/DEL/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5545 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2014-2015
• Appeal Filed On: 25-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S.K. AGGARWAL
• Section: 32; 43; 48; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E” DELHI BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER I.T.A. No.1338/DEL/2018 Assessment Year 2014-15 M/s. Nefab India Pvt. Ltd., 277 & 278, Sector-7, IMT Manesar, Gurgaon, Haryana. v. DCIT, Circle-3(1), Gurgaon, Haryana TAN/PAN: AACCN1599G (Appellant) (Respondent) Appellant by: Shri S.K. Aggarwal, CA Ms. Akanshi Bhatia, CA Respondent by: Shri Bhopal Singh, Sr.D.R. Date of hearing: 15 03 2022 Date of pronouncement: 31 03 2022 O R D E R PER PRADIP KUMAR KEDIA, A.M.: Th e cap tio n ed ap peal h as b een filed at th e in s tan ce o f th e assesse e ag ain st t h e o rd er o f th e Co mmiss io n er o f Inco me Tax (Ap p eals)-I, Gu rgao n [‘CIT(A)’ in sh o rt], d ated 20 .1 2 .2 01 7 arisin g fro m th e o rd er d ated 1 9 .1 2 .20 1 6 p assed by th e Dy . CIT, Circ le-3 , Gu rg aon u nd er Sectio n 1 43 (3 ) o f th e In co me Tax Act, 1 9 61 (th e Act) co n cern in g AY 2 0 14 -15 . 2 . As p er its g ro u n ds o f ap p eal, th e a ssessee h as ch a ll e n g ed th e d isal lo wan ce o f ex p en d itu re amo u n tin g to Rs.2 0 ,7 1 ,5 10 /- as cap it al ex p en d itu re b ein g 2 5 % of ro y alty amo u n t p aid o f Rs.8 2 ,8 6 ,0 3 9 /- b y th e asse ssee o n acco u n t o f u se o f tech n ic al k n ow-ho w an d tech n ical p ro cess o f l i cen so r. I.T.A. No.1338/DEL/2018 2 3 . Brie fly sta ted asse ssee is a su b sid i ary o f Ne fab AB, S wed en an d is en g ag ed i n th e b u sin ess o f man u factu re an d sale o f cu sto mized p ack ag in g so lu tio n s to v ario u s cu sto mers in In d ia. For th e assess men t y e ar u nd er con sid eratio n , th e asses se e fi led its retu rn o f in co me d eclarin g lo ss o f Rs.4 ,8 0 ,4 3 ,9 0 1 /-. Th e case o f th e assess ee was selec ted fo r sc ru tin y . In th e co u rse of assess men t , th e Assessin g Officer i n ter a l ia o b serv ed th at th e assesse e h as in cu rred ex p end itu re to ward s roy alty fo r u se o f tech n ica l k n o w-ho w an d tech n ica l p ro cess o f th e l icen so r amo u n tin g to R s.8 2 ,8 6 ,0 39 /-. Th e Assessin g Officer to o k n o te o f certa in clau se s o f th e l icen se ag ree men t d ated 0 1 .01 .2 00 8 with its p aren t co mp an y Nefab AB , Swed en an d came to co n cl u sio n th at a p art o f th e ro y alt y ex p en ses fo r u se o f tech n ica l kn ow-h ow etc. req u ires to b e treated as cap i tal ex p en d itu re. Th e Assessin g Officer a cco rd in g ly d isallo wed ro y alty ex p en ses to th e ex ten t o f 2 5 % as ex p end it u re o f cap it al n atu re b u t h o wever allo wed d ep reciat io n o n such cap it al ex p en d it u re @ 2 5 % u nd er Sect io n 32 o f th e Act . 4 . Ag g riev ed , th e ass essee p re ferred ap p eal b e fo re th e CI T(A). Th e CIT(A) h o wev er affirmed th e d isal lo wan ce o f 2 5 % o f th e ro y alty ex p en ses b ein g cap i ta l ex p en d itu re. 5 . Ag g riev ed , th e assesse e p referred ap p eal b efo re th e Trib u n al. 6 . Ld . Co u n sel fo r th e asses see , a t th e o u tset, ad verted to th e lic en se ag ree men t en tered in to wit h th e p aren t co mpan y an d su b mit ted th a t th e assesse e was u sin g th e ex clu siv e lic e n se fo r th e u se o f t ech n ica l k n ow-ho w, p aten t rig h ts an d trad e mark rig h ts o wn ed b y th e ap p ellan t p aren t co mp a n y . It was p o in ted o u t th at as I.T.A. No.1338/DEL/2018 3 p er clau se 2 .5 of th e ag ree men t, th ere was n o tran sfer o f o wn ersh ip o f tech n ical p ro cess k n o w-h ow or th e p aten t rig h ts or th e trad emark rig h ts fro m th e l icen so r (p aren t co mpan y ) to th e lic en see (as sesse e co mp an y ) an d th e lic en so r co n tinu ed to re main th e so le o wn er o f su ch tech n ical p ro cess k n ow-ho w. As p er th e ag reemen t , th e ro y alty p ay ab le was c alcu l ated at 2 % o f th e to ta l amo u n t o f sal e o f su b ject p ro d u cts u sin g su ch tech nical p ro cess k n ow-ho w etc. an d th u s th e q u an tum o f fe e p aid is variab le an d n o t fix ed . It was fu rth er po in ted o u t th at as p er clau se 4 .2 o f th e ag reemen t , th e a ssessee h erein s h all re ce iv e su ch tech n ic al in fo rma t io n an d ma in ta in same in stric tes t co n fid ence an d sh all n o t rev eal o r d isclo se th e same to an y th ird p arty . It was su b mit ted th at ter m/p erio d o f th is ag ree men t was th ree y ears su b ject to au to ma ti c ren ewal fo r ad d it io n al p erio d u n less t ermin ated b y eith er p ar ty to th e ag reemen t. As p e r clau se n o .7 .5 o f th e l icen se ag reemen t , u p o n termin at io n , th e assessee was req u ired to immed ia tely cea se th e u se o f any and all tech n ic al p ro cess k n o w- h o w to g eth er wit h p aten t r ig h ts a n d trad emark rig h ts e tc. as p ro v id ed b y th e li cen so r. It was th u s su b mi tted th at t h e ter ms o f lic en se ag reemen t clear ly p ro v id es for u se o f tech nical k n ow-how p ro cess o n ly up to th e su b sisten ce o f l icen se ag reeme n t an d th e rig h t to u se co me s to an en d o n ter min at io n o f ag ree me n t. It was p o in ted o u t th at th e CIT(A) itse lf h as ad mit ted th at th ere is n o tran sfer o f an y te ch n ical p ro cess k n o w-h ow an d u se o f l icen so r trad emark rig h ts p er se an d su ch rig h ts can b e u sed o n ly u p to th e p erio d o f licen se a n d as su ch , th ere is n o p erman ent o r lo n g term b en efi ts accru in g t o th e ass esse e. 6 .1 In th is fac tu al b ack d ro p , ld . co un sel fo r th e ass essee su b mit ted th a t th e CIT(A) h as wro n g ly app lied th e ratio o f I.T.A. No.1338/DEL/2018 4 d ecisio n o f Ho n ’b le Su p reme Co u rt in th e c ase o f CIT v s. So uthern Sw itchg ea r Ltd., 1 4 8 ITR 2 73 (Ma d) with o u t an y d elin ea tio n o n i ts a p p licab i li ty to th e fac ts o f the case . 6 .2 Ld . Co u n sel e ssen t ial ly co n ten d ed th a t; ( i ) t h e a s s e s s e e h a s o n l y r i g h t t o u s e t h e t e c h n i c al k n o w - h o w t i l l t h e t i m e , t h e l i c e n s e i s i n f o r c e ; ( i i ) t e c h n i c a l k n o w - h o w i s u s e d t o i m p r o v e t h e e x i st i n g b u s i n e s s w h i c h i s a l r e a d y s e t u p a n d n o t t o s e t u p a n e w b u si n e s s ; ( i i i ) t h e u s e o f s u c h t e c h n i c a l k n o w h o w i s r e s t r i c te d t o t h e a s s e s s e e a l o n e a n d t h e a s s e s s e e c o m p a n y c a n n o t e x p l o i t i t i n a n y o t h e r m a n n e r f o r . A l s o , t h e r e a r e c o n t i n u o u s c h a n g e s i n ex i s t i n g p r o d u c t s a n d t h e i r d e s i g n s a n d t h e t e c h n i c a l p r o c e s s k n o w - h ow i s t h u s c o n t i n u o u s l y p r o v i d e d a n d u p g r a d e d b y t h e l i c e n s o r t o s u i t t h e c h a n g e s i n t h e e x i s t i n g p r o d u c t s o f t h e a s s e s s e e ; ( i v ) t h e j u d i c i a l p r o n o u n c e m e n t s r e l i e d u p o n b y t h e R e v e n u e A u t h o r i t i e s a r e r e n d e r e d i n s q u a r e l y d i f f e r e n t f a c tu a l b a c k d r o p a n d t h u s c a n n o t b e a p p l i e d . ( v ) J u d i c i a l p r e c e d e n t s a n d p r i n c i p l e s l a i d d o w n i n C B D T C i r c u l a r N o . 2 1 d a t e d 0 9 . 0 7 . 1 9 6 9 s u p p o r t s t h e c a s e o f a s s e s s ee . 7 . Ld . DR fo r th e R e v en u e, o n th e o th er h an d , p laced re li an ce u p on th e o rd ers o f th e lo wer au th o rities an d su b mi tted in fu rth eran ce th a t te x t an d ten o r o f lic en se ag reement wou ld su gg est th at th e ass essee h as acq u ired the rig h t to u se the tech n ica l p ro cess k n ow-ho w fo r p erp etu al u se an d th e b en efi t a ccru in g to th e assess ee is o f l o n g term in n atu re g iv in g rise to th e creat io n o f cap it al ass et o f co n sid erab le v alu e. Ld . DR acco rd in g ly sub mi tted th at n o in t erfer en ce with th e o rd er o f th e CIT(A) is th u s cal led fo r I.T.A. No.1338/DEL/2018 5 in th e lig h t o f th e d ecisio n o f th e Ho n ’b le Sup reme C o u rt in th e case o f CIT v s. So uthern Sw itchg ear Ltd (su p ra). 8 . We h av e carefu ll y co n sid ered th e riv al su b miss ion s and p eru sed th e o rd ers o f th e lo wer au th o rit ies an d ma teri al r eferred to an d relied u p o n . Th e assessee , in t h e in stan t c ase , h as in cu rred certa in ro y alty p aymen t in co n sid erat io n o f u se o f tech n ica l k n o w- h o w etc. as p er li cen se ag reemen t. Th e so litary issu e in q u estio n in fac tu al s et u p is wh eth er p ay me n t to ward s u se o f te ch n ical k n ow-ho w in terms o f li cen se ag ree men t b e tween th e assesse e an d th e p aren t co mp an y wou ld g iv e rise to an y cap ital ex p en d itu re o r th e en t ire a mo u n t o f ro y alty fo r u se o f t ech n ica l kn o w-h o w can be reg ard ed as rev en u e ex p en d itu re as c l ai med b y asse ssee . 9 . As po in ted o u t on b eh alf o f th e ass es see, th e sali en t fe a tu res o f th e lic en se ag reemen t b ro ad ly are; th e assess ee is en ti tled to u se th e tech n ic al k n o w-h ow ex clu siv ely an d can n o t ex p lo it fo r th e b en efi t o f o th er p arties ; th e asses see is p ro h ib ited to u se th e tech n ica l k n o wh ow o n ex p iry o f li cen se p erio d , i.e . th e b en efit flo win g fro m l ic en se ag reemen t is n o t av a ilab le after its ter min a tio n ; te ch n ica l k n o w-h ow und er th e ag reemen t is b ein g u sed to imp ro v e th e ex ist in g b u sin ess wh ich is alread y set u p with en ab lin g cl au ses li k e u p g rad atio n o f su ch tech n ica l k n ow-h ow. 9 .1 A read in g o f th e l i cen se ag ree men t t h u s g iv es an imp re ssio n th at th e ass essee can n o t su b -licen se th e sa me to any th ird p arty an d th e li cen so r co n tin u es to ex erci se al l p erv asive d o main o v er th e o wn ersh ip over th e tech n ica l k n o wh o w in ex clu sio n to th e lic en see assess ee. Th e assess ee h as b een merely g iven a l icen se to u se th e li cen sed in fo r mat io n /t ech n ical k n o w-h o w d u rin g the cu rren cy o f licen s e ag reemen t. Fu rt h er, th ere is a co n fid en t ia li ty I.T.A. No.1338/DEL/2018 6 clau se wh ich p rev en ts th e ass esse e fro m d is clo sin g th e li cen sed in fo rma t io n to a th ird p arty . To reit erat e, th e asses see is n o t en ti tled to th e u se o f licen sed tech n i cal k n o w-h o w on termin at io n o f ag reemen t an d is o b lig ed u n d er th e co n tract, to rel in q u ish th e ad v an tag e accru in g b y v irtu e o f l ice n se ag reemen t . Al l th e ab o v e fea tu res o f th e a g reemen t mak e i t u n equ iv o cal th at wh at the assesse e, in essen ce, h as acq u ired u n d er th e ag reemen t is a mer e rig h t to u se th e l ic en sed tech n ic al k n o w-ho w in q u estio n . A mere access to th e tec h n ical k n o wled g e b y v irtu e o f su ch licen se ag reemen t , in o u r v iew, co u ld n o t permit th e rev en ue au th o ritie s to art ific ia lly assu me certa in p art o f th e ex p en d itu re as ad v an tag e o f cap ita l n a tu re o r so me th in g ak in t o acq u isi tio n o f a n y asset o r ad v an tag e o f en d u rin g n atu re fo r th e b en efi t o f i ts b u sin ess. In th e case in q u estio n , i t can n o t b e said th at th e Swed en Co mp an y h ad relin q u ish ed it s co mman d o v er th e i mp u g n ed tech n ical k n ow-how in fo rma t io n in fa v o u r o f th e asses see in an y man n er. In the ab sen ce o f an y v ested ad v an tag e to assesse e o r an y ind efeas ib le rig h t, it is far fe tch ed to hy p o th etical l y p resu me an y comp o n en t o f cap it al ex p en d itu re i mp l ic it in th e o u t g o to ward s ro y alty . 9 .2 . Un d er th ese circu ms tan ces , we fin d co n sid erab le meri t in th e p lea o f th e ass esse e fo r cla i min g th e en tire ro y alty ex p e n d itu re fo r u se o f t ech n ica l k n o w-h ow as rev en u e ex p en d itu re. We also fin d th at th e ju d g men t ren d ered by th e Ho n ’b le Mad ras High Co u rt in th e case o f CIT v s. So uthern Sw itchg ea r Ltd., rep o rted in 1 48 ITR 2 7 3 (Mad ) as affir med b y Ho n’ble Su p reme Co u rt, rep o rted in 2 3 2 ITR 25 9 (SC) weig h ed in th e min d o f CIT(A) is in d ifferen t fac tu al b ack d ro p with real d i fferen ce. In th at cas e, t h e assessee was en tit led to u se th e b en efit flo win g fro m lic en se ev en after th e ter min a tio n o f l ic e n se ag reemen t. Th i s fe atu re i s th e d iv id in g lin e I.T.A. No.1338/DEL/2018 7 fo r in ap p licab i l ity o f d ecisio n in So u th ern Switch gear. Hen ce, th ere is n o sco p e o f treat in g th e ro y alty p aid fo r the ‘licen sed in fo rma t io n ’ as c a p ita l ex p en d itu re i n th e fac ts o f th e c ase. 1 2 . In th e resu l t, th e a p p eal o f th e asses s ee is a llo wed . Order pronounced in the open Court on 31/03/2022. Sd/- Sd/- [KUL BHARAT] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31/03/2022 Prabhat