India Nippon Electricals Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1706/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96554 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 10-12-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 16-06-2014
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Keywords: Depreciation; Earning of tax free income; Cost of acquisition; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI , . ! ' , # '$ % [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ] ./ I.T.A.NO.1706/MDS/2014 / ASSESSMENT YEAR : 2007-08 M/S INDIA NIPPON ELECTRICALS LTD AALIM CENTRE, II FLOOR 82, RADHAKRISHNAN SALAI CHENNAI 600 004 VS. THE AS STT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE II(3) CHENNAI [PAN AAACI 0921 R ] ( &' / APPELLANT) ( ()&' /RESPONDENT) ./ I.T.A.NO.2020/MDS/2014 / ASSESSMENT YEAR : 2007-08 THE ASSTT. C OMMISSIONER OF INCOME-TAX COMPANY CIRCLE II(3) CHENNAI VS. M/S INDIA NIPPON ELECTRICALS LTD AALIM CENTRE, II FLOOR 82, RADHAKRISHNAN SALAI CHENNAI 600 004 ( &' / APPELLANT) ( ()&' /RESPONDENT) ASSESSEE BY : SHRI VIKRAM VIJAYARAGHA VAN, ADVOCATE DEPARTMENT BY : SHRI A V SREEKANTH, JCIT / DATE OF HEARING : 10 - 1 2 - 2015 / DATE OF PRONOUNCEMENT : 18 - 1 2 - 2015 ITA NOS.1706 & 2020/14 :- 2 -: * / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS FILED BY THE ASSESSEE A ND THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME-TAX (APPEALS)-II, CHENNAI, DATED 12.2.2014 FOR ASSESSME NT YEAR 2007-08. 2. THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GR OUND: 2. THE COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN HOLDING THAT THE ASSESSING OFFICER S JUSTIFIED IN T REATING THE ROYALTY PAYMENTS OF ` 9,39,000/- BEING 3% OF THE SALES OF THE YEAR, AS CAPITAL EXPENDITURE AND DISALLOWING 75 % OF THE SAME AFTER ALLOWING DEPRECIATION @ 25%. THE ACTION OF THE ASSESSING OFFICER IS AS PER LAW AND CONFIRMED. 3. THE FACTS OF THIS ISSUE ARE THAT DURING THE FINANCI AL YEAR 2006-07, RELEVANT TO ASSESSMENT YEAR 2007-08, THE A SSESSEE-COMPANY DEBITED IN ITS PROFIT & LOSS ACCOUNT A SUM OF ` 9,39,000/- UNDER THE HEAD ROYALTY PAID TO M/S KOKUSAN DENKI CO. LTD, J APAN. THE ASSESSING OFFICER, BY RELYING ON THE DECISION OF TH E SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD VS CIT, 232 IT R 359, CONSIDERED 25% OF THE SAID PAYMENT AS A CAPITAL EXPENDITURE AN D DISALLOWED THE SAME. HOWEVER, THE ASSESSING OFFICER ALLOWED DEPRE CIATION @ 25% ON THE PAYMENT. ON APPEAL, THE CIT(A) OBSERVED THAT T HE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD (SUPRA) WHEREIN IT WAS HELD THAT SINCE THE ITA NOS.1706 & 2020/14 :- 3 -: BENEFITS ARE ENDURING IN NATURE, THE SAME ARE CAPIT AL EXPENSES. IN FACT, THE HIGH COURT HAS HELD AS UNDER: EVEN WITHOUT ACQUISITION OF AN ASSET, A RIGHT OF A PERMANENT ADVANTAGE COULD BE ACQUIRED AND THE COST OF ACQUISITION OF SUCH A RIGHT COULD BE TAKEN TO BE CAPITAL EXPENDITURE. IN THE INSTANT CASE, THOUGH THE DURATION OF THE AGREEMENT WAS FIVE YEARS, THE ASSESSEE EVEN AFTER THE EXPIRY OF THE PERIOD, COULD USE THE METHODS OF PRODUCTION, PROCEDURE, EXPERIMENTS, IMPROVEMENTS WHICH HAD BEEN MADE AVAILABLE TO THEM IN PURSUANCE OF THE AGREEMENT. THUS, THE ASSESSEE HAD ACQUIRED A KNOWLEDGE OF ENDURING NATURE. IN ADDITION TO THE ACQUISITION OF TECHNICAL KNOWLEDGE, THE ASSESSEE-COMPANY GOT AN EXCLUSIVE RIGHT TO MANUFACTURE AND SELL ITS ARTICLES WITHOUT ANY OBJEC TION FROM ANYONE INCLUDING THE FOREIGN COMPANY AND THIS WAS C LEARLY AN ADVANTAGE OF ENDURING NATURE. ACCORDINGLY, THE TRIBUNAL WAS JUSTIFIED. 4. ACCORDINGLY, THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER AGAINST WHICH THE ASSESSEE IS IN APPEAL BE FORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. WE HAVE CAREFULLY GONE THROUG H THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF SOUTHE RN SWITCH GEAR LTD (SUPRA). IN THAT CASE THE FOREIGN COMPANY WAS REQ UIRED TO MAINTAIN THE ASSESSEES FACTORY IN INDIA. BEING SO, IT WAS HELD THAT THE ASSESSEE GOT THE ENDURING BENEFIT AND IT IS A CAPIT AL EXPENDITURE. HOWEVER, IN THE PRESENT CASE, THOUGH THE AGREEMENT WAS FOR 10 YEARS, THE ROYALTY IS BASED ON THE QUANTUM OF SALES MADE BY THE ASSESSEE ITA NOS.1706 & 2020/14 :- 4 -: ONLY. BEING SO, THE ABOVE JUDGMENT CANNOT BE STRAI GHTLY APPLIED TO THE FACTS OF THE PRESENT CASE. CONSIDERING THE FACTS O F THE CASE, IN OUR OPINION, THE JUDGMENT OF THE JURISDICTIONAL HIGH CO URT IN THE CASE OF CIT VS HITECH ARAI LTD, 368 ITR 577, IS APPLICABLE. IN THAT CASE, IT WAS HELD THAT WHERE THE ROYALTY PAYMENT MADE BY THE AS SESSEE UNDER RENEWAL AGREEMENTS WERE FOR GRANT OF LICENSE TO AN EXISTING COMPANY FOR MANUFACTURE AND SALE OF AUTOMOBILE PARTS AND CO MPONENTS FOR SUBSEQUENT PERIODS, AFTER THE EXPIRY OF ORIGINAL PE RIOD OF LICENSE AND IT WAS NOT TECHNICAL KNOW-HOW FOR SETTING UP A NEW PL ANT OR FOR MANUFACTURING A COMPLETELY NEW PRODUCT WITH AID AND ASSISTANCE OF FOREIGN COMPANY, PAYMENT MADE WAS PURELY REVENUE IN NATURE, MORE SO, WHEN DEPARTMENT HAD FOR THE NINE EARLIER ASSESS MENT YEARS ACCEPTED THE FACT THAT THE PAYMENT MADE TOWARDS ROY ALTY WAS REVENUE EXPENDITURE AND HAD NOT RAISED DISPUTE THEREON. FU RTHER, SIMILAR VIEW WAS TAKEN BY THE MADRAS HIGH COURT IN THE CASE OF C IT VS PANASONIC CARBON INDIA COMPANY LTD IN TAX CASE APPEAL NOS. 55 2, 553, 554 AND 556 OF 2010, ORDER DATED 12.7.2010. THE TRIBUNAL H AS ALSO TAKEN THE SAME VIEW IN THE CASE OF M/S INDIA JAPAN LIGHTING P . LTD VS ACIT IN I.T.A.NOS.676 TO 678/MDS/2010, DATED 10.6.2011. AC CORDINGLY, IN OUR OPINION, THE ASSESSEES CLAIM HAS TO BE ALLOWED AN D IT IS TO BE TREATED AS REVENUE EXPENDITURE ONLY. ITA NOS.1706 & 2020/14 :- 5 -: 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED. 7. IN ITS APPEAL, THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 2.1 THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER TO THE TUNE OF ` 33,74,270/- U/S 14A OF THE ACT FOR EXPENSES ATTRIBUTABLE TO EARNING OF EXE MPTED INCOME . 2.2. IT IS SUBMITTED THAT THE DECISION OF THE HON' BLE MADRAS HIGH COURT RELIED ON BY THE CIT(A) IN THE CASE OF M /S SIMPSON & CO. LTD VS DCIT IN TCA NO.2621 OF 2006 DA TED 15.10.2012 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND SLP HAS BEEN FILED BEFORE THE HON'BLE APEX COURT AN D THE ISSUE HAS NOT REACHED FINALITY. 8. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE-COMPA NY IS FOUND TO HAVE INVESTED AN AMOUNT OF ` 85,45,95,000/- IN SHARES AS ON 31.3.2007 AS COULD BE SEEN FROM THE INVESTMENTS OF THE BALANCE SHEET AND EARNED A DIVIDEND INCOME OF ` 3,49,79,000/- DURING THE FINANCIAL YEAR 2006-07. HOWEVER, THE ASSESSEE HAS NOT SEGRE GATED ANY EXPENDITURE ATTRIBUTABLE TO SUCH INVESTMENTS AND EA RNING OF DIVIDEND INCOME WHICH IS EXEMPT FROM TAX. HENCE, THE ASSESS ING OFFICER INVOKED THE PROVISIONS OF SEC. 14A OF THE ACT R.W.R ULE 8D AND DETERMINED THE EXPENDITURE ATTRIBUTABLE FOR EARNING SUCH EXEMPT INCOME AT ` 40,73,850/- AND DISALLOWED THE SAME. ITA NOS.1706 & 2020/14 :- 6 -: 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. THE ASSESSMENT YEAR UNDER CON SIDERATION IS 2007- 08 AND, THEREFORE, THE PROVISIONS OF RULE 8D CANNOT BE APPLIED. RULE 8D CAME INTO OPERATION WITH EFFECT FROM 24.3.2008 I .E FROM ASSESSMENT YEAR 2008-09. IN OUR OPINION, THE MADRA S HIGH COURT IN THE CSE OF M/S SIMPSON & CO. LTD VS THE DY. CIT IN TCA NO.2621 OF 2006 DATED 15.10.2012, HAS HELD THAT DISALLOWANCE 2 % OF THE EXEMPT INCOME EARNED IS REASONABLE. APPLYING THE ABOVE RA TIO, THE CIT(A) IS JUSTIFIED IN COMPUTING DISALLOWANCE OF 2% OF THE EX EMPT INCOME EARNED. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME IS CONFIRMED. 10. THE REVENUE HAS TAKEN A GROUND THAT THE DEPARTMENT HAS NOT ACCEPTED THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF M/S SIMPSON & CO. LTD. (SUPRA) AND SLP IS PENDING BEFOR E THE APEX COURT. WE ARE OF THE OPINION THAT MERE PENDENCY OF SLP BEF ORE THE APEX COURT CANNOT BE A REASON TO ADOPT A DIFFERENT VIEW. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISS ED. 12. TO SUMMARIZE, THE APPEAL OF THE ASSESSEE IS ALLOWE D WHEREAS THAT OF THE REVENUE IS DISMISSED. ITA NOS.1706 & 2020/14 :- 7 -: ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER, 2015, AT CHENNAI. SD/- SD/- ( . ! ' ) (G. PAVAN KUMAR) # / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER / CHENNAI / DATED: 18 TH DECEMBER, 2015 RD ' #$ %$ / COPY TO: 1 . &' / APPELLANT 4. ( / CIT 2. ')&' / RESPONDENT 5. $*+ ' , / DR 3. ( () / CIT(A) 6. +/ 0 / GF