ITO, New Delhi V. M/s. Cryobanks International (I) Ltd., New Delhi

ITA 136/DEL/2013

• Counselvise Citation: 13620114 RSA 2013
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 23-12-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 08-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K JAIN
• Assessee Lawyers: NIDHI SRIVASTAVA
• Keywords: Depreciation; Royalty expenses; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO.136/DEL/2013 ASSESSMENT YEAR : 2009-10 ITO, CRYOBANKS INTERNATIONAL (I) WARD-3 (4), PVT. LTD. F-2/7, OKHLA INDL. AREA, NEW DELHI. V. PHASE-I, NEW DELHI. (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AACCC AACCC AACCC AACCC- -- -6069 6069 6069 6069- -- -Q QQ Q APPELLANT BY : SHRI V.K. JAIN, C.A. RESPONDENT BY : MS. NIDHI SRIVASTAVA, SR. DR. ORDER PER TS KAPOOR, AM: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORD ER OF LD CIT(A) DATED 2.11.2012. THE GROUNDS OF APPEALS TAKEN BY THE REVENUE ARE AS UNDER:- 1. THE LD CIT(A) HAS ERRED IN LAW BY HOLDING THAT THE R OYALTY PAID BY THE ASSESSEE TO THE AMOUNT OF ` .53,98,410/- FOR USING THE BRAND NAME CRYO BANK IS REVENUE IN NATURE INSTEAD OF CAPI TAL EXPENDITURE AS HELD BY THE ASSESSING OFFICER. 2. THE LD CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELET ING THE ADDITION ON ACCOUNT OF DEPRECIATION ON COMPUTER PER IPHERALS AMOUNT TO ` .73,832/- IGNORING THE FACTS THAT DEPRECIATION ON COMPUTER PERIPHERALS CAN BE ALLOWED ONLY @ 15% AND N OT 60%. 3. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT T O AMEND, MODIFY ALTER ADD OR FOREGO ANY GROUND(S) OF APPEAL A T ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. ITA NO136/DEL/2013 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE CASE OF TH E ASSESSEE WAS SELECTED FOR SCRUTINY AND DURING ASSESSMENT PROCEEDINGS, T HE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD DEBITED AN AMOU NT OF ` .53,98,410/- WHICH WAS PAID AS ROYALTY TO CRYOBANK IN TERNATIONAL INC. FLORIDA, USA. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE ROYALTY PAYMENT MAY NOT BE DISALLOWED BEING CAPITAL EXPENDIT URE. IN REPLY THE ASSESSEE SUBMITTED THAT IT WAS NOT THE OWNER OF THE TECHN OLOGY OR THE BRAND NAME AND HAS ONLY THE RIGHT TO USE SUCH TECHNOLO GY. IT WAS FURTHER SUBMITTED THAT INITIAL FEES PAID IN ASSESSMENT Y EAR 2007-08 WAS ALREADY CAPITALIZED AS BEING OF CAPITAL NATURE AND T HE PAYMENT MADE IN CURRENT YEAR WAS ONLY ANNUAL ROYALTY PAYMENT CALCULA TED ON THE BASIS OF SALES WHICH WAS A REVENUE EXPENDITURE. THE ASSESSING O FFICER, HOWEVER, DID NOT AGREE WITH THE CONTENTIONS OF THE A SSESSEE AND AFTER CITING VARIOUS CLAUSES OF LICENSE AGREEMENT MADE THE AD DITION BY HOLDING AS UNDER:- CONSIDERING THE DIFFERENT CLAUSES OF THE AGREEMENT BE TWEEN THE TWO PARTIES AND FACTS AND CIRCUMSTANCES OF THE CASE, IT IS HEREBY CONCLUDED THAT THE ASSESSEE BY ACQUIRING THE RIGHT OF T ECHNOLOGY BRAND NAME, TRADE MARK FROM M/S CRYOBANK INTERNATION AL INC. BY VIRTUE OF LICENSE AGREEMENT HAS ACQUIRED A BENEFIT OF ENDURING NATURE WHICH WILL CONSTITUTE ACQUISITION OF AN ASSET AN D THE AMOUNT OF ` .53,98,410/- PAID TO THE ABOVE FOREIGN COMPANY FOR THE SAME DURING THE CURRENT YEAR WOULD CONSTITUTE CAP ITAL EXPENDITURE. IT IS ALSO HEREBY CONCLUDED THAT THE PA YMENT STIPULATED UNDER CLAUSE 3.1.1. OF THE AGREEMENT BY TH E ASSESSEE WITH THE FOREIGN COMPANY WAS NOT REMUNERATION FOR USE R OF THE RIGHTS GRANTED BY THE AFORESAID FOREIGN COMPANY BUT A COMPOSITE PAYMENT FOR ALL THE SERVICES RENDERED AND TRANSFER OF TECHNOLOGY AND TRADEMARK FURNISHED BY THE SAID FOREIGN COMPANY T O THE ASSESSEE INITIALLY AS WELL AS DURING THE COURSE OF ASSESSEES ITA NO136/DEL/2013 3 CARRYING ON THE BUSINESS OF STORAGE AND PRESERVATION OF CORD BLOOD STEM CELLS ETC WHICH IS CAPITAL. 3. THE ASSESSING OFFICER FURTHER OBSERVED THAT ASSESSEE HAD CLAIMED DEPRECIATION ON COMPUTER PERIPHERALS AND ACC ESSORIES @ 60% WHEREAS THE SAME WAS ALLOWABLE ONLY @ 15%. THEREFORE, HE MADE THE ADDITION OF EXCESS DEPRECIATION AMOUNTING TO ` .73,832/-. 4. AGGRIEVED WITH THE ADDITION THE ASSESSEE FILED APPE AL BEFORE LD CIT(A) AND SUBMITTED VARIOUS SUBMISSIONS BASED UPON VARIO US CLAUSES OF LICENSE AGREEMENT TO HIGHLIGHT THAT THE PAYMENT W AS REVENUE IN NATURE. THE ASSESSEE ARGUED THAT THE PAYMENT WAS REVENUE IN NATURE AS THE SAME WAS PAID ACCORDING TO THE TURNOVER OF THE YEAR AND FURTHER CITING FROM THE LICENSE AGREEMENT SUBMITTED AS UNDER:- A) THE ROYALTY AND LABORATORY MANAGEMENT SERVICES FEE I S PAID BY THE APPELLANT COMPANY @ 4.25% AND 5% OF ALL DOMESTIC SALES. B) THE DURATION OF THE LICENSE AGREEMENT AND THE PAYMEN T OF ROYALTY IS FOR A PERIOD OF 20 YEARS AND SHALL CONTIN UE TO BE PAYABLE TILL THE APPELLANT COMPANY IS USING THE NAME CRYOBANK AND MARKS IM C) ON TERMINATION OF THE AGREEMENT THE APPELLANT COMPA NY SHALL NOT BE ENTITLED TO USE THE NAME OF CRYOBANK OR ANY O THER RIGHT WHICH THE APPELLANT COMPANY HAS RECEIVED BY WAY OF L ICENSE AGREEMENT. D) NO RIGHT PROPERTY OR INTEREST IS TRANSFERRED IN FAVOUR OF THE APPELLANT COMPANY BY VIRTUE OF PAYING THE ROYALTY A ND SUCH RIGHT PROPERTY OR INTEREST SHALL ALWAYS BE OWNED BY CYROBANK INTERNATIONAL INC. 5. IT WAS FURTHER SUBMITTED THAT IN THE CASE OF ASSESSEE I TSELF FOR ASSESSMENT YEAR 2007-08, THE SIMILAR ADDITION MADE BY TH E ASSESSING OFFICER WAS DELETED BY THE LD CIT(A). THE LD CIT(A) ON THE BASIS OF SUBMISSIONS DELETED THE ADDITIONS BY HOLDING AS UNDER:- ITA NO136/DEL/2013 4 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE LD AR AND HAVE GONE THROUGH THE ASSESSMENT ORDER. IT IS OBSERVE D THAT THIS ISSUE ALSO AROSE IN THE APPELLANTS CASE IN ASSESSMENT YE AR 2007-08 WHEREIN THE LD CIT(A) DELHI AFTER ELABORATE DISCUSSION HELD THE ROYALTY EXPENSE AS REVENUE EXPENDITURE. FOR READY REFERENCE THE RELEVANT EXTRACTS OF THE AFORESAID ORDE R OF THE LD CIT(A) DELHI IN APPEAL NO.144/11-12 DATED 15.3.2012 ARE REPRODUCED BELOW:- I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER AND T HE SUBMISSIONS MADE BY THE LD AR. UNDER THE FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE, I FIND THAT THE SAID PAYMENT HAS BEEN MADE TOWARDS ANNUAL FEE/ROYALTY OR USE OF TECHNOLOGY AND TRADEMARK OF THE LICENSOR, M/S CRYO BANK INTERNATIONAL IN. FLORIDA USA CALCULATED ON THE BASI S OF SALES TURNOVER OF THE APPELLANT. THE SAID LICENSE PROV IDES THE APPELLANT COMPANY WITH NON EXCLUSIVE RIGHTS TO O PERATE THE TECHNOLOGY AND USE THE TRADE MARK FOR A PERIOD O F 20 YEARS. THE ONE TIME LICENSE OF ` 2,64,75,376/- PAID BY THE APPELLANT TO THE ABOVE LICENSOR FOR THE PURPOSE OF OB TAINING THE LICENSE HAS ALREADY BEEN CAPITALIZED BY THE APPEL LANT. IT IS ONLY THE ANNUAL ROYALTY CALCULATED OF 5% OF THE G ROSS SALES AMOUNTING TO ` .5,64,117/- FOR THE YEAR CONSIDERATION WHICH HAS BEEN DEBITED AS REVENUE EXPENDITURE. FURTHE R THE SAID USE OF TECHNOLOGY AND TRADEMARK GRANTED TO T HE APPELLANT IS ON A NON EXCLUSIVE BASIS AND WITHOUT TRANSF ER OF OWNERSHIP TO THE APPELLANT. IN VIEW OF THE ABOVE AND FOLLOWING THE CASE LAWS CITED BY LD AR I FIND THAT TH IS EXPENDITURE IS CLEARLY IN THE FIELD OF REVENUE. IN V IEW OF THE ABOVE, THE IMPUGNED ADDITION OF ` .5,64,117/- IS DELETED. ITA NO136/DEL/2013 5 SINCE THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE IS SIMILAR TO THE FACTS FOR THE ASSESSMENT YEAR 20078 I FI ND NO REASON TO DEVIATE FROM THE AFORESAID FINDINGS OF LD CIT(A), DELHI THE IMPUGNED ROYALTY EXPENSES ARE HELD TO BE REVENUE IN NATURE AND ACCORDINGLY THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF ` .53,98,410/-. 6. AS REGARDS THE OTHER ADDITION ON ACCOUNT OF EXCESS D EPRECIATION ON COMPUTER PERIPHERALS THE LD CIT(A) DELETED THE SAM E BY RELYING UPON THE CASE LAW BSES RAJDHANI LTD., IN I.T.A. NO.1 266/2010. 7. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 8. AT THE OUTSET THE LD DR REFERRED TO PAGE 1OF ASSESSME NT ORDER AND SUBMITTED THAT PART OF ROYALTY WAS CAPITALIZED BY THE ASSESSEE ITSELF AND IT WAS NOT JUSTIFIED THAT THE OTHER PART OF ROYALTY WAS CLAIMED IN P&L ACCOUNT AS REVENUE EXPENDITURE. IT WAS ARGUED THAT THE EXPENSES SHOULD HAVE BEEN CAPITALIZED AS DONE IN EARLIE R YEARS. 9. AS REGARDS SECOND ADDITION THE LD DR RELIED UPON TH E ORDER OF ASSESSMENT ORDER. 10. THE LD AR, ON THE OTHER HAND, SUBMITTED THAT IN ASSESSMENT YEAR 2007-08 SIMILAR ISSUE HAD ARISEN AND LD CIT(A) HAD DEL ETED THE ADDITION AGAINST WHICH REVENUE HAD NOT FILED ANY APP EAL AND THEREFORE THAT ORDER HAS BECOME FINAL AND REVENUE NOW CANNOT T AKE A CONTRARY STAND. MOREOVER, IT WAS SUBMITTED THAT THE EXPENSES WERE CLEARLY REVENUE IN NATURE AS THEY WERE LINKED WITH THE TURNO VER OF THE COMPANY. AS REGARDS CAPITALIZATION OF ROYALTY IN EARL IER YEAR IT WAS SUBMITTED THAT ONE TIME PAYMENT AT THE TIME OF ENTER ING INTO LICENSE AGREEMENT WAS DEFINITELY A CAPITAL EXPENDITURE AND W AS CAPITALIZED WHEREAS THE REGULAR ANNUAL EXPENSES ARE OF REVENUE NAT URE. THEREFORE WERE RIGHTLY ALLOWED BY THE LD CIT(A). RELIANCE IN THIS RESPECT WAS PLACED ON THE HON'BLE DELHI HIGH COURT JUDGMENT IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. REPORTED AT 319 ITRV 113 (DEL.) PL ACED AT PAPER ITA NO136/DEL/2013 6 BOOK PAGE 1 TO 7 AND IT WAS SUBMITTED THAT HON'BLE DE LHI HIGH COURT IN THE SAID ORDER HAD CLEARLY HELD THAT ROYALTY CONNECT ED WITH TURNOVER IS REVENUE EXPENDITURE. THE LD AR SUBMITTED THAT THE F ACTS OF THE CASE ARE EXACTLY SAME AS THAT OF ASSESSEE AND THEREFORE IT WAS RIGHTLY ALLOWED BY THE LD CIT(A). THE LD AR FURTHER RELIED UPON THE CASE LAW RELIED UPON BEFORE LD CIT(A). 11. AS REGARDS SECOND ADDITION THE LD AR SUBMITTED THAT LD CIT(A) RELYING UPON THE CASE LAW OF BSES RAJDHANI LTD. HAS R IGHTLY ALLOWED THE RELIEF. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PA RTIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT AS PER VARIOUS CLAUSES OF LICENSE AGREEMENT THE ASSESSEE WAS TO PAY AT THE TIME OF ENTERING OF AGREEMENT CERTAIN AMOUNTS CO VER EQUIPMENT AND TRAINING AND FURTHER IT WAS REQUIRED TO PAY REGU LAR ANNUAL ROYALTY ON ALL DOMESTIC SALES WHICH WAS TO BE CALCULATED ON THE BASIS OF TURNOVER. THE LD CIT(A) THEREFORE HAS RIGHTLY HELD T HE PAYMENT TO BE OF REVENUE NATURE AND HAS RIGHTLY ALLOWED THE RELIEF. T HE HON'BLE DELHI HIGH COURT IN THE CASE LAW OF CLIMATE SYSTEMS (INDIA) LTD. UNDER SIMILAR FACTS AND CIRCUMSTANCES HAS HELD AS UNDER:- HELD ALLOWING THE APPEAL, THAT UNDER THE AGREEMENT PAYMENTS WERE TO BE MADE BY THE ASSESSEE IN TWO PARTS : A LUMP SU M FEE FOR TRANSFER OF TECHNOLOGY WHICH THE ASSESSEE HAD ADMITT ED AS BEING OF CAPITAL NATURE AND ROYALTY PAYMENT IN CONSI DERATION OF PROVIDING TECHNOLOGY SERVICES. THE PAYMENT OF ROYALTY DEPENDED ON THE QUANTUM OF DOMESTIC AS WELL AS EXPORT SALES WHI CH WOULD DECREASE OR INCREASE EVERY YEAR DEPENDING UPON THE DE CREASE OR INCREASE IN THE SALES. THIS PAYMENT WAS NOT BECAUSE OF TR ANSFER OF TECHNOLOGY BUT FOR PROVIDING TECHNICAL SERVICES. I N SUCH ITA NO136/DEL/2013 7 CIRCUMSTANCES, THE PAYMENT OF ROYALTY WHICH WAS A CONT INUOUS PROCESS, SHOULD HAVE BEEN TREATED AS REVENUE EXPENDITUR E. THEREFORE, RELYING UPON THE JUDGMENT OF HON'BLE DEL HI HIGH COURT JUDGMENT AND ON THE BASIS OF FACTS AND CIRCUMSTANCES OF THE CASE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD CIT(A) . THEREFORE, GROUND NO. 1 OF APPEAL IS DISMISSED. 13. WITH REGARDS TO DISALLOWANCE OF DEPRECIATION ON C OMPUTER PERIPHERALS WE OBSERVE THAT THE SAME IS SQUARELY COVERE D BY THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF B SES RAJDHANI POWERS LTD. AND LD CIT(A) HAS RIGHTLY ALLOWED THE REL IEF. 14. IN VIEW OF THE ABOVE, THE APPEAL FILED BY THE R EVENUE IS DISMISSED. 15. ORDER PRONOUNCED IN THE OPEN COURT ON 14TH DAY OF MARCH, 2014. SD/- SD/- (I.C. SUDHIR) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DT.14.03.2014. HMS COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). ITA NO136/DEL/2013 8 DATE OF HEARING 23.12.2013 DATE OF DICTATION 06.03.2014 DATE OF TYPING 06.03.2014 DATE OF ORDER SIGNED BY 14.03.2014 BOTH THE MEMBERS & PRONOUNCEMENT. DATE OF ORDER UPLOADED ON NET & SENT TO THE BENCH CONCERNED.