The DCIT, (OSD)-1, Circle-4, Ahmedabad V. Klockner Desma Machinery Pvt.Ltd.., Ahmedabad

ITA 2201/AHD/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8574 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 31-07-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 01-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH
• Keywords: Capital asset; Depreciation; Difference of opinion; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 143(3); 32; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD BEFORE SHRI RAJPAL YADAV , JM, & SHRI AMARJIT SINGH , AM. ITA NO. 2201 /AHD/ 2014 A SST. Y EAR: 2006 - 07 DCIT(OSD) - 1, CIR - 4, AHMEDABAD VS. KLOCKNER DESMA MACHINERY (P) LTD., 53, MAD HUBAN, NR. MADALPUR UNDERBRIDGE, ELLISBRIDGE, AHMEDABAD. APPELLANT RESPONDENT PAN AAACK8768N APPELLANT BY SHRI MUDIT NAGPAL, SR.DR RESPONDENT BY SHRI J.P. SHAH, AR DATE OF HEARING: 31 / 7 /2017 DATE OF PRONOUNCEMENT : 06 / 09 /201 7 O R D E R PER AMARJIT SINGH , ACCOUNTANT MEMBER . THIS APPEAL OF REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) - VIII, AHMEDABAD, DATED 22/05/2014 VIDE NO. CIT(A) - VIII/DCIT/CIR - 4/209/13 - 14 PASSED AGAINST ORDER U/S 143(3) R.W.S. 147 OF THE IT ACT, 1961 (THE ACT), FR AMED ON 29/08/2013 BY DCIT(OSD) - 1, CIRCLE - 4, AHMEDABAD. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENUE IN THIS APPEAL : - 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.42,16,100/ - MADE ON ACCOUNT OF ROYALTY PAYMENT TREATING IT AS REVENUE EXPENDITURE, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE M ATERIAL BROUGHT ON RECORD. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. ITA NO. 2201 /AHD/ 2014 ASST. YEAR 2006 - 07 2 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EXTENT. 2. IN THIS CASE THE RETURN OF INCOME DECLARING TOTAL INCOME AT RS..3,32,38,900/ - WAS FILED ON 28.11.2006. SUBSEQUENTLY THE ASSESSMENT U/S 143 (3) OF THE ACT WAS FINALIZED ON 24.12.2008 AFTER DETERMINING THE TOTAL INCOME AT RS.4,22,11,802/ - AFTER MAKING CERTAIN ADDITIONS/DISALLOWANCES. THEREAFTER THE CASE WAS REOPENED U/S 147 AFTER ISSUING NOTICE U/S 148 OF THE ACT ON THE GROUND THAT ASSESSEE COM PANY HAS OBTAINED TECHNICAL KNOWHOW LICENSE FOR 10 YEARS FROM A FOREIGN COUNTRY AND IT HAS BEEN PAYING ROYALTY ON THE SAID KNOWHOW. IT WAS OBSERVED THAT SINCE THIS EXPENDITURE WAS OF A CAPITAL NATURE THE AMOUNT WAS REQUIRED TO BE CAPITALIZED. DURING THE CO URSE OF RE - ASSESSMENT PROCEEDINGS THE ASSESSEE HAS CONTENDED THAT IT HAS NOT ACQUIRED ANY TECHNOLO GY AND THE ROYALTY PAYMENT WAS LINKED WITH THE TURNOVER WHICH WAS PAYABLE EVERY YEAR @ 5% OF DOMESTIC SALES AND 8% OF EXPORT SALES. THE AO HAS NOT ACCEPTED TH E CONTENTIONS OF ASSESSEE AND TREATED THE ROYALTY PAYMENT AS CAPITAL EXPENDITURE AFTER ALLOWING DEPRECIATION @ 25%. 3. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE LD. CIT(A). THE LD. CIT(A) HAS ALLOWED THE APPEAL OF ASSESSEE BY OBSERVING AS UNDER : - 2.3 DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE APPELLANT. IT IS NOTED FROM THE GROUNDS OF APPEAL THAT THE APPELLANT HAS NOT TAKEN A SPECIFIC GROUND AGAINST THE REOPENING OF THE PROCE EDINGS HOWEVER, IT HAS MADE WRITTEN SUBMISSION ON THE ISSUE AND HAS SUBMITTED THAT THE REOPENING OF THE ASSESSMENT WAS ON ACCOUNT OF CHANGE OF OPINION. THE APPELLANT HAS SUBMITTED THAT THE ISSUE WAS EXAMINED IN CONNECTION WITH THE DEDUCTION OF IDS AND ROYA LTY WAS DISALLOWED ITA NO. 2201 /AHD/ 2014 ASST. YEAR 2006 - 07 3 BY THE AO DURING THE COURSE OF ORIGINAL PROCEEDINGS. THE MATTER WENT UP TO ITAT AND THE ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT. A PERUSAL OF THE ASSESSMENT ORDER INDICATE THAT THE AO HAS DULY RECORDED THE REASONS AND THE ASSESSMENT HAS BEEN REOPENED ON THE GROUND THAT ROYALTY PAYMENT MADE BY THE APPELLANT WAS OF CAPITAL NATURE AND THEREFORE, THE EXPENDITURE WAS WRONGLY ALLOWED. IT IS FURTHER NOTED THAT THE AO HAS PROVIDED REASONS OF REOPENING TO THE AO AND PROPER OPPORTUNITY HAS BEE N GIVEN TO THE APPELLANT. THE APPELLANT HAS NOT GIVEN ANY OTHER FACT IN SUPPORT OF ITS CLAIM THAT THE ISSUE WAS EXAMINED ON THE GROUND THAT WHETHER IT WAS A CAPITAL OR REVENUE EXPENDITURE. ACCORDINGLY, THE REOPENING MADE BY THE AO IS HELD TO BE VALID. FUR THER, ON MERITS OF THE ISSUE, IT IS NOTED THAT THE AO HAS TREATED THE PAYMENT AS CAPITAL EXPENDITURE ON THE GROUND THAT AS PER THE PROVISIONS OF SECTION 32 OF THE ACT TECHNICAL KNOW - HOW LICENSE IS TREATED TO BE AS INTANGIBLE ASSET OF CAPITAL NATURE. HE ACC ORDINGLY HELD THAT THE EXPENDITURE INCURRED OF SUCH ASSET CANNOT BE ALLOWED AS IS REVENUE EXPENDITURE. THE APPELLANT ON THE OTHER HAND HAS SUBMITTED THAT THE PAYMENT OF TECHNICAL KNOW - HOW IS BEING MADE IN ACCORDANCE WITH THE LICENSE AGREEMENT. ALL THE OWNE RSHIP OF KNOWHOW AND RIGHTS THEREIN VEST WITH THE PARENT COMPANY. THE APPELLANT COMPANY HAS NOT MADE LUMP - SUM PAYMENT FOR THE ACQUISITION OF THE KNOWHOW BUT THE PAYMENT WAS MADE FOR USE OF KNOWHOW AND ROYALTIES ARE BASED ON THE SALES MADE BY THE APPELLANT COMPANY. IN ACCORDANCE WITH THE TERMS AND CONDITION, THE APPELLANT COMPANY WAS PAYING ROYALTY EQUAL TO 5% NET OF THE INDIAN TAXES OF THE NET SELLING PRICE OF THE LICENSED ITEM SOLD BY IT IN INDIA AND A FEE EQUAL TO 8% OF INDIAN TAXES OF NET SELLING PRICE O F LICENSE ITEM EXPORTED BY IT FROM INDIA, IT HAS ACCORDINGLY BEEN SUBMITTED BY RNE APPELLANT THAT THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. AFTER EXAMINING ALL THE FACTUAL ASPECTS IT IS NOTED THAT THE APPELLANT HAS ACQUIRED TECHNICAL KNOW - HOW UND ER A LICENSE AGREEMENT WITH THE PARENT COMPANY. A LICENSE HAS BEEN GRANTED FOR MANUFACTURE AND USE AND SALE OF THE LICENSED ITEM. THE APPELLANT IS PAYING ROYALTY WHICH IS EQUAL TO CERTAIN PERCENTAGE OF SALES MADE IN INDIA AND ABROAD. IT IS FURTHER NOTED TH AT NO LUMP - SUM PAYMENT FOR ONE - TIME PURCHASE OF THE TECHNICAL KNOW - HOW HAS BEEN MADE. THE PAYMENT WHICH IS NOW BEING MADE IS RECURRING IN NATURE AND IS DEPENDENT ON THE SALES MADE DURING THE YEAR. IT IS ONE TYPE OF USAGE CHARGE. THE ITA NO. 2201 /AHD/ 2014 ASST. YEAR 2006 - 07 4 APPELLANT HAS NOT ACQUI RED ANY ASSET WHICH IS OF ENDUNNG NATURE OR HAS GIVEN LONG - TERM BENEFIT TO THE APPELLANT. THE PARENT COMPANY HAS NOT TRANSFERRED THE KNOWHOW TO THE APPELLANT COMPANY BUT HAS ALLOWED IT TO USE THE SAME FOR MANUFACTURING FOR WHICH IT IS CHARGING A LICENSE FE E WHICH IS LINKED TO THE SALE OF PRODUCTS MANUFACTURED BY THE APPELLANT BY USING THE KNOWHOW. THE APPELLANT HAS PLACED RELIANCE ON SEVERAL JUDGEMENTS OF HONOURABLE SUPREME COURT WHICH APPEARS TO BE IN ORDER. THE HONOURABLE SUPREME COURT IN THE CASE OF L.A. E.C. (PUMPS) LTD, 232 ITR 316, HAS HELD THAT THE AMOUNT PAID BY THE ASSESSEE TO THE FOREIGN COLLABORATOR FOR TECHNICAL KNOW - HOW WAS REVENUE EXPENDITURE AS IF WAS A LICENSE FEE AND NOT THE PRIZE FOR ACQUISITION OF A CAPITAL ASSET. IN THE PRESENT CASE ALSO T HE APPELLANT HAS NOT MADE ANY LUMP SUM PAYMENT AND HAS NOT ACQUIRED THE TECHNICAL KNOW - HOW. HONOURABLE GUJARAT HIGH COURT ALSO, IN THE CASE OF MIHIR TEXTILES LTD, 210 CTR 416 HAS EXPRESSED A SIMILAR OPINION. ACCORDINGLY, IN MY CONSIDERED OPINION THE PAYM ENT MADE BY THE APPELLANT FOR LICENSE FEE IS NOT FOR ACQUIRING THE TECHNICAL KNOW - HOW BUT FOR USE OF THE SAME AND HENCE THE SAME SHOULD BE TREATED AS REVENUE IN NATURE. THE DISALLOWANCE MADE BY THE AO IS THERE FORE, DIRECTED TO BE DELETED. THE GROUND OF A PPEAL ARE ACCORDINGLY, PARTLY ALLOWED. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. WE NOTICE THAT THE ASSESSEE COMPANY ENTERED INTO A LICENSE AGREEMENT FOR USE OF TECHNICAL KNOWHOW AND AS PER THE AGREEMENT THE ASSESSEE HAD TO PAY ROYALTY BASED ON THE TOTAL TURNOVER. THE ROYALTY PAYMENT WAS CLAIMED AS REVENUE EXPENDITURE SINCE IT WAS RELATED TO PRODUCTION PROCESS AND TECHNICAL KNOWHOW FOR THE MANUFACTURING OF MACHINES. THE ROYALTY PAYMENT WAS LINKED WITH THE TURNOVER WHICH W AS PAYABLE EVERY YEAR @ 5% OF DOMESTIC SALES AND 8% OF EXPORT SALES ON THE NET SELLING PRICE. THE ASSESSEE HAS PAID THE ROYALTY FOR THE USE AND SALE OF LICENSED ITEMS INCLUDING DRAWINGS, PLANS, DESCRIPTIONS, FLOW CHARTS AND CONTROL SOFTWARE FOR ITA NO. 2201 /AHD/ 2014 ASST. YEAR 2006 - 07 5 THE MANUFAC TURE AND PROCESS DESCRIPTION. WE OBSERVE THAT THE ASSESSEE HAS NOT ACQUIRED ANY RIGHT IN THE PROPERTY BELONGING TO THE FOREIGN COMPANY BUT IT HAS PAID A SPECIFIC PER CE NTAGE OF SALES AS ROYALTY FOR THE USE OF THE FORMULATION IN MANUFACTURING BUSINESS OF THE ASSESSEE. AFTER CONSIDERING ALL THE ABOVE STATED FACTS AND THE DETAILS FILED BEFORE LD. CIT(A), WE DO NOT FIND ANY ERROR IN THE FINDINGS OF LD. CIT(A) . WE UPHOLD THE SAME. ACCORDINGLY, THE APPEAL OF REVENUE IS DISMISSED. 5. IN THE RESULT, APPEAL OF REVEN UE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 6 SEPTEMBER , 201 7 SD/ - SD/ - ( RAJPAL YADAV ) J UDICIAL MEMBER ( AMARJIT SINGH ) A CCOUNTANT M EMBER DATED 06 / 9 /2017 MAHATA/ - COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST . REGISTRAR, ITAT, AHMEDABAD