Rhine Engineering Pvt.Ltd., Baroda V. The Income tax Officer,Ward-4(2), Baroda

ITA 1432/AHD/2012

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8117 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 03-07-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 29-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: M K PATEL
• Keywords: Capital asset; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH (BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 1432/AHD/2012 (ASSESSMENT YEAR: 2007-08) RHINE ENGINEERING P. LTD. PLOT NO. 454, GIDC POR, RAMANGAMDI-391243 V/S INCOME TAX OFFICER, WARD- 4 (2), BARODA (APPELLANT) (RESPONDENT) PAN: AACCR 5624C APPELLANT BY : SHRI M.K. PATEL, AR RESPONDENT BY : SHRI KEYUR PATEL, SR. D.R. ( )/ ORDER DATE OF HEARING : 12 -04-201 8 DATE OF PRONOUNCEMENT : 15 -06-2018 PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-III, BARODA DATED 17.04.2012 PERTAINING TO A.Y. 2007-08 AND FOLLOWING GROUNDS HAVE BEEN TAKEN: 1.THAT ON FACTS, AND IN LAW, THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN CONFIRMING THE DISALLOWANCE OF RS.42,32,200/- PAID AS ROYALTY. ITA NO. 1432 /AHD/2012 . A.Y. 2007-08 2 2. THAT ON FACTS AND IN LAW, THE SAID PAYMENT OF ROYAL TY IS A REVENUE EXPENDITURE INCURRED DURING THE COURSE OF CARRYING ON OF BUSINESS OF THE ASSESSEE A ND OUGHT TO HAVE BEEN ALLOWED AS SUCH. 2. THE FACTS OF THE CASE ARE THAT THE LD. A.O. MADE AN ADDITION OF RS. 42,32,200/- AND RS. 22,70,264/- ON ACCOUNT OF ROYALTY AND TECHN ICAL FEES RESPECTIVELY. THE AO NOTED THAT THE APPELLANT COMPANY HAD INCURRED RO YALTY EXPENSE AMOUNTING TO RS. 42,32,200/- TO WITTEMANN, A LTD. COMPANY. AS PER THE AGREEMENT WITTERMANN WAS TO PROVIDE TECHNICAL ASSISTANCE TO T HE APPELLANT COMPANY IN THE FORM OF ENGINEERING DATA, MANUALS, DATA DESIGN DETA ILS AND DRAWING ETC. FOR CO2 GENERATING AND RECOVERY EQUIPMENT AND RELATED C OMPONENTS SOLD BY WITTEMANN. IN CONSIDERATION, THE APPELLANT AGREED T O PAY 10% OF THE ANNUAL TURNOVER OF THE PRODUCT CO2. THEREFORE, THE A.O. HELD THAT THE APPELLANT HAD ACQUIRED KNOWLEDGE OR ADVANTAGE OF AN ENDURING NATURE AND HENCE, THE AMOUNT PAID WAS NOT ADMISSIBLE AS REVENU E EXPENDITURE. THE A.O. ALSO NOTED THAT THE APPELLANT HAD INCURRED TECHNICA L FEES EXPENSES AMOUNTING TO RS. 22,70,264/- TO CRYOGENIC INDUSTRIES LTD., A COR PORATION ESTABLISHED IN HONG KONG. THE AGREEMENT COVERED THE TECHNICAL AID AND A SSISTANCE TO FOLLOW THE PATTERN OF CONDUCTING BUSINESS AS DEVELOPED BY CRYO GENIC GROUP AND TO CONTINUE ITS CULTURE AND ADMINISTRATIVE SKILLS AND MANAGERIAL AND ADMINISTRATIVE KNOW-HOW TO FOLLOW A UNIFORM PATTERN OF FUNCTIONING TECHNICALLY AS WELL-AS ADMINISTRATIVELY, AND IN CONSIDERATION OF THE SERVI CES, THE APPELLANT WAS REQUIRED TO PAY, EACH MONTH, AN AMOUNT EQUAL TO 3.25% OF GRO SS SALES. THE A.O. ASKED THE APPELLANT TO EXPLAIN AS TO WHY THE EXPENDITURE OF ROYALTY AND TECHNICAL FEES BE NOT TREATED AS CAPITAL EXPENDITURE. THE APPELLAN T CONTENDED BEFORE THE A.O. THAT THE ROYALTY FEES AND TECHNICAL FEES DO NOT IMP ROVE THE EARNING CAPACITY OF THE BUSINESS, BUT ONLY MAINTAIN THE CURRENT PROFITS OF THE BUSINESS AND AS SUCH THE SAID EXPENDITURE IS REVENUE IN NATURE AS IT IS INCURRED TO MAINTAIN THE PROFIT MAKING CAPACITY OF THE COMPANY AND THAT THIS IS A R ECURRING EXPENDITURE. THE ITA NO. 1432 /AHD/2012 . A.Y. 2007-08 3 A.O. DID NOT ACCEPT THE CONTENTIONS OF THE APPELLAN T ON THE GROUND THAT THE AIM AND OBJECT OF THE EXPENDITURE WOULD DETERMINE T HE CHARACTER OF THE SUM- WHETHER IT IS CAPITAL OR REVENUE EXPENDITURE. THERE FORE, THE A.O. RELYING ON THE DECISIONS IN THE CASES OF TRANSFORMERS & SWITCHGEAR LTD VS. CIT (MAD) 103 ITR 352, CIT VS. POLYFORMALIN (P) LTD. (KR) 161 ITR 36 AND FENNER WOODROFFEE & CO. LTD. VS. CIT (MAD) 102 ITR 665, TR EATED THE ROYALTY EXPENDITURE OF RS.42,32,200/- AND TECHNICAL FEES AM OUNTING TO RS. 22,70.,264/- AS CAPITAL EXPENDITURE AND ADDED TO THE TOTAL INCOM E OF THE APPELLANT. 3. AGAINST THE SAID ADDITION, ASSESSEE PREFERRED FIRST STATUTORY APPEAL BEFORE THE LD. CIT(A) WHO PARTLY ALLOWED THE APPEAL OF THE APPELLA NT. 4. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IN THE IMPUGNED ORDER. LD. A.R. CITED A JUDGMENT OF HONBLE GUJARAT HIGH COURT IN T HE MATTER OF CIT VS. JYOTI ELECTRIC MOTORS LTD. WHEREIN IT HAS BEEN HELD : 14. HAVING CONSIDERED THE TERMS OF THE AGREEMENT IN THE LIGHT OF THE LAW LAID DOWN BY VARIOUS DECISIONS CITED BY BOTH THE SIDES, WE FEEL THAT THE ASSESSEE-COMPANY DID NOT ACQUIRE ANY ENDURING ADVANTAGE IN THE CAPITAL FIELD IN VIEW OF THE TERMS AND CONDITIONS STIPULATED IN THE AGREEMENT. THE ASSESSEE-COMPANY HAS BEEN MERELY GRANTED A NON-EXCL USIVE LICENCE FOR THE USE OF AN ASSET AND UNDER THE AGREEMENT, THERE IS NO ACQUISITION OF ANY ASSET WHICH WOULD RENDER THE PAYMENT IN QUESTION TO BE TREATED AS CAPITAL IN NATURE. THE ROYALTY IS PAYABL E ON THE BASIS OF THE SALES WHICH THE LICENSEE WOUL D MAKE SOLELY THROUGH THE SOLE-SELLING AGENT APPOINTE D BY THE LICENSOR AND, THUS, THE PAYMENT IS STRICTL Y LINKED WITH THE QUANTUM OF SALES AND WOULD VARY WIT H THE QUANTUM OF SALES. 5. THE PRINCIPLE FOR DETERMINING ANY EXPENDITURE AS CA PITAL OR REVENUE DEPENDS UPON THE FACT O THE CASE. THE TEST OF SUCH DISTINCT ION REVOLVES AROUND THE FACT THAT WHETHER ANY SUCH EXPENDITURE BRINGS INTO EXIST ENCE ANY CAPITAL ASSET OF ENDURING NATURE OR WHETHER THE EXPENDITURE EXHAUSTS THE BENEFIT OF IT IN THE ITA NO. 1432 /AHD/2012 . A.Y. 2007-08 4 SAME YEAR UNDER CONSIDERATION AND THE PAYMENT WAS R ELATED TO PERCENTAGE OF SALE TO BE EFFECTED AND IN OUR CONSIDERED OPINION, IN VIEW OF THE ABOVE SAID HIGH COURT JUDGMENT, SUCH PAYMENT COULD BE TREATED AS REVENUE EXPENDITURE. THEREFORE, APPEAL OF THE APPELLANT IS ALLOWED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN OPEN COURT ON 15- 06- 2018 SD/- SD/- (PRAMOD KUMAR) (MAHAVIR PRASAD) ACCOUNTANT MEMBER TRUE COPY JUDICIAL MEMBER AHMEDABAD: DATED 15/06/2018 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD