Goetze (India) Limited., New Delhi V. CIT, New Delhi

ITA 2302/DEL/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58463 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 12-01-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 28-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RIS GILL
• Assessee Lawyers: R K KAPOOR C AS
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : C : NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER ITA NO.2302/DEL/2009 ASSESSMENT YEAR : 2004-05 GOETZE (INDIA) LIMITED, A-26/3, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. PAN : AAACG3769M VS. CIT, DELHI CIRCLE II, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PRADEEP DINODIA & SHRI R.K. KAPOOR, CAS REVENUE BY : SHRI R.I.S. GILL, CIT, DR ORDER PER I.P. BANSAL, JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE. IT IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT, DELHI (CENTRAL)-II, NEW DELH I DATED 20 TH MARCH, 2009 FOR ASSESSMENT YEAR 2004-05. THE GROUNDS OF APPEAL READ AS UNDER:- 1.0 THE LEARNED CIT DELHI CENTRAL-II HAS GROSSLY ERR ED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN PASSIN G THE ORDER REVISING ORDER OF ASSESSMENT PASSED BY THE ASSE SSING OFFICER I.E., ACIT CENTRAL CIRCLE-3 DATED 27.12.2006 FOR ASSESSMENT YEAR 2004-05, ORDER U/S 263 OF THE INCOME TAX ACT, ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS. 1.1 THAT THE ORDER PASSED BY THE CIT DELHI CENTRAL-II D ATED 20.3.2009 IS BAD IN LAW AND BE CANCELLED. ITA NO.2302/DEL/2009 2 1.2 THAT THE ORDER PASSED BY THE CIT DELHI CENTRAL II D ATED 20.03.2009 U/S 263 IS BEYOND THE POWERS GRANTED TO THE CIT U/S 263 OF THE INCOME TAX ACT, AND THEREFORE BE CANCELLED. 2.0 THAT THE CIT DELHI CENTRAL II HAS GROSSLY ERRED IN LAW AND ON FACT & IN THE CIRCUMSTANCES OF THE APPELLANTS CASE I N DIRECTING TO DISALLOW THE CLAIM OF RUNNING ROYALTY RS.1 94.03 LACS AS CAPITAL EXPENDITURE. THE DECISION OF THE APEX COUR T IN THE CASE OF M/S SOUTHERN SWITCHGEAR LTD. 232 ITR 359 (SC) IS NOT APPLICABLE ON THE FATS OF THE APPELLANTS CASE. 2.1 THAT THE CIT DELHI CENTRAL-II OUGHT TO HAVE APPRECIA TED THAT NO ASSET OF ENDURING NATURE HAS BEEN ACQUIRED BY P AYMENT OF ROYALTY ON SALES AND THE SAME IS ON REVENUE ACCOUN T. 3.0 THAT EACH GROUND IS INDEPENDENT AND WITHOUT PREJUDI CE TO THE OTHER GROUNDS RAISED HEREIN. 2. THE ASSESSMENT FOR THE PRESENT YEAR WAS FRAMED VIDE OR DER DATED 27 TH DECEMBER, 2006 U/S 143(3) OF THE ACT AT AN INCOME O F ` 4,62,11,350/- AGAINST RETURNED INCOME OF ` 4,15,87,7 98/-. VIDE LETTER DATED 28 TH .MAY, 2008, THE ASSESSING OFFICER INFORMED THE CIT THAT THE ASSESSEE COMPANY HAS DEBITED ` 194.03 LACS IN PROFIT & LO SS ACCOUNT TOWARDS ROYALTY PAID TO A FOREIGN COMPANY. ACCORDIN G TO LD. CIT, AS PER DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUT HERN SWITCHGEAR LTD. VS. CIT, 232 ITR 359 (SC), SUCH ROYALTY COULD NO T BE CLAIMED AS REVENUE EXPENDITURE AND 25% OF THE EXPENDITURE WAS T O BE TREATED AS CAPITAL EXPENDITURE. SINCE THE SAID 25% WAS NOT DISAL LOWED, AS PER AFOREMENTIONED DECISION OF THE HONBLE SUPREME COURT , LD. CIT HAS HELD THAT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICE R WAS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. ACCORDINGLY, A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. DURING THE COURSE OF HEARING BEFORE THE CIT, IT WAS SUBMITTED THAT THERE WERE TWO AGREEMENTS DATED 17 TH AUGUST, 1994 AND SUPPLEMENTARY AGREEMENT DATED 7 TH AUGUST, 1995 BETWEEN THE ASSESSEE AND THE GERMAN COMPANY M/S GOETZE TECHNOLOGIES-VERTRIEBS AND SERVICE GMBII. ANOTHER AGREEMENT WITH M/S FADERAL MOGUL BUR SCHEID GABH IN ITA NO.2302/DEL/2009 3 WHICH AGREEMENT DATE WAS NOT MENTIONED AND A SUPPLEME NTARY AGREEMENT DATED 13 TH AUGUST, 2003 WAS EXECUTED. LD. CIT OBSERVED THAT FROM THE RECORD IT APPEARS THAT THE ASSESSEE WAS TO ENTER INTO A SEPARATE AGREEMENT WITH M/S AE GOETZE, USA WITH REGAR D TO CUMMINS B SERIES PISTON RINGS AND BESIDES THIS THE ASSESSEE HAS ALSO EN TERED INTO SUPPLEMENTARY COLLABORATION AGREEMENT WITH M/S G OETZE TECHNOLOIES-VERTRIEBS AND SERVICE GMBH AND M/S AE GOE TZE GMBH IN 1998, THE COPIES OF WHICH WERE NOT PLACED BY THE ASSESSE E. IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE HAS BEE N IN THE BUSINESS OF MANUFACTURING PISTONS AND RINGS FOR THE LAST 4 0 YEARS WITH THE GERMAN TECHNOLOGY AND NO DISALLOWANCES WERE MADE IN THE PAST. IT WAS SUBMITTED THAT THE ASSESSEE ALSO DID NOT SET UP ANY NEW PLANT OR MANUFACTURING UNIT DURING THE YEAR UNDER CONSIDERATI ON. DUE TO VAST TECHNOLOGICAL DEVELOPMENT THE ASSESSEE NEEDED CHANGES AN D THE ASSESSEE HAD OBTAINED ONLY TECHNICAL ASSISTANCE AND DID NO T PURCHASE ANY KNOW-HOW OR PATENTS SO AS TO JUSTIFY CAPITALIZATION . RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS:- A) CIT VS. J.K. SYNTHETIC LTD. 176 TAXMAN 355 (DEL) B) SHRIRAM PISTONS AND RINGS LTD. VS. CIT 307 ITR 363 ( DEL) C) CIT VS. LUMAX INDUSTRIES LTD. 173 TAXMAN 390 (DEL) D) CIT VS. EICHER MOTORS LTD. 214 CTR 629 (MP). 3. IT WAS SUBMITTED THAT AGREEMENT WITH THE FOREIGN P ARTIES DO NOT GUARANTEE ANY MINIMUM PAYMENT OF ROYALTY AND ROYALT Y IS LINKED WITH THE PRODUCTION/SALES. CONSIDERING THESE SUBMISSIONS, LEARN ED CIT HAS HELD THAT PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS, THEREFORE, ACCEPTANCE OF THE ISSUE IN EA RLIER YEAR DOES NOT DEBAR THE REVENUE FROM RAISING THIS ISSUE IN THIS YEAR. AS PER COPY OF THE AGREEMENT DATED 17 TH AUGUST, 1994, M/S GOETZE TECHNOLOGIES- VERTRIEBS AND SERVICE GMBII WAS TO PROVIDE WITH ALL SP ECIFICATIONS, ITA NO.2302/DEL/2009 4 TECHNICAL DATA, INSTRUCTIONS, STANDARDS, WORKING INSTRUC TIONS U/S 2 (DISCLOSURE OF KNOW-HOW OF THE AGREEMENT) AND SIMILAR OTHER MODIFICATION IN DESIGNS, ETC. WERE ALSO TO BE PROMPTLY DISCLOSED. THE ASSESSEE WAS ALSO FREE TO GRANT SUB-LEASE TO OTHER INDIAN C OMPANIES AND SIMILAR WERE THE TERMS WITH RESPECT TO OTHER AGREE MENT AND THE ROYALTY WAS NOT MERELY FOR THE SALES, BUT FOR MANY OTH ER SERVICES TO BE RECEIVED BY THE ASSESSEE. THE AGREEMENT DID NOT PUT ANY RESTRICTION ON THE USE OF TECHNOLOGY AFTER THE END OF THE AGREEMENT PERIOD. THE COPIES OF THE AGREEMENTS WERE PLACED BEFORE THE ASSESSING OFFICER AND BEFORE HIM. THEREFORE, THE ASSESSING OFFICER DID NOT E XAMINE THE NATURE OF BENEFIT ARISING TO THE ASSESSEE AND THE NATURE OF EXPENDITURE WHETHER THE SAME IS CAPITAL OR REVENUE. VIDE LETTER DATED 25 TH JULY, 2003, MINISTRY OF COMMERCE AND INDUSTRIES HAD GRANTED PERMISSION FOR COLLABORATION WITH M/S FADERAL MOGUL BURSCHEID GABH AND THE PROPOSED LOCATIONS WERE STATED TO BE PATIALA AND BANGA LORE. THE ASSESSING OFFICER DID NOT MAKE ANY INQUIRY IN THIS REGAR D. THE DECISIONS RELIED UPON BY THE ASSESSEE WERE DISTINGUISHABLE. THE PERUSAL OF AGREEMENT WILL REVEAL THAT THE ASSESSEE HAS PA ID ROYALTY IN LIEU OF ALL SPECIFICATIONS, TECHNICAL DATA, INSTRUCTIO NS, STANDARDS, WORKING INSTRUCTIONS FOR MANUFACTURING OF PISTON RINGS WHICH DULY FALL IN THE CATEGORY OF BOOKS AND PLANT AS PER PROVISIO NS OF SECTION 43 (3) OF THE ACT AND THESE ARE DEPRECIABLE ASSETS AND THE FOREIGN COMPANY HAS ALLOWED THE ASSESSEE THE EXCLUSIVE RIGHT TO U SE THE TRADE MARK IN THE TERRITORY OF INDIA. THUS, THE ASSESSEE HAD ACQUIRED DEPRECIABLE ASSETS IN THE FORM OF SUCH TRADE MARK AND, THEREFORE, THE ASSESSING OFFICER HAS ALLOWED THE SAID PAYMENT OF ROYALTY WITHOUT MAKING NECESSARY INQUIRIES IN THE MATTER. IN THIS MANN ER, LD. CIT HAS HELD THAT THE ORDER PASSED BY THE ASSESSING OFFICER IS ERR ONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE WITH RESPE CT TO ALLOWANCE OF EXPENSE OF ` 194.03 LAC AS ROYALTY IN ITS ENTIRETY. HE DIRECTED THE ASSESSING OFFICER TO MAKE NECESSARY INQUIRY WITH REGARD TO THE ITA NO.2302/DEL/2009 5 ALLOWABILITY OF THE SAID AMOUNT AND TO FIND OUT WHET HER IT IS TO BE CAPITALIZED @ 100% OR 25% AS PER LAW AND PASS A FRESH O RDER AFTER CONSIDERING THE RESULT OF INQUIRY. IT IS AGAINST SUCH O RDER OF CIT THE ASSESSEE HAS FILED THE AFOREMENTIONED GROUNDS OF APPEAL. 4. AT THE OUTSET, IT IS THE CASE OF THE LEARNED AR THA T THE ROYALTY PAID BY THE ASSESSEE IS BASED ON SALE TURNOVER. HE IN THI S REGARD REFERRED TO THE COPIES OF AGREEMENT FILED IN THE PAP ER BOOK ACCORDING TO WHICH THE ROYALTY PAYMENT IN CONSIDERATION OF KNO W HOW SUPPLIED AND TO BE SUPPLIED AND THE ASSISTANCE GIVEN AND TO BE G IVEN WERE BASED ON THE PERCENTAGE OF DOMESTIC SALES, EXPORT SALES, EXTRA CHARGE FOR CKS SALES AND CHROME PLATING (NON-CKS APPLIANCES). THUS, IT WAS PLEADED BY HIM THAT ALL THESE ROYALTY PAYMENTS ARE BA SED ON TURNOVER BASIS AND HE SUBMITTED THAT THIS FACT HAS ALSO BEEN RECOG NIZED BY THE ASSESSING OFFICER IN THE ORDER FRAMED IN PURSUANCE OF AF OREMENTIONED ORDER PASSED BY CIT WHICH IS AN ORDER DATED 30 TH DECEMBER, 2009. HE HAS PLACED COPY OF THE SAID ORDER ON OUR RECORD. HE DREW OUR ATTENTION TOWARDS THE FOLLOWING OBSERVATIONS OF THE ASSESSING OFFICE R VIDED WHICH HE HAS TREATED 25% OF THE ROYALTY PAID ON ACCOUNT OF CAPITAL FIELD AND 75% HAS BEEN ALLOWED:- 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF AUTOMOBILE PARTS ETC. 3. THE ASSESSEE WAS ASKED TO FILE ITS OBJECTIONS IF A NY, FOR NOT TO ADD BACK 25 % OF RS. 194.3 LAKHS DEDUCTED TOWARDS R OYALTY PAYMENTS TO A FOREIGN COMPANY TREATING AS CAPITAL EXPEND ITURE AS HELD BY THE HON'BLE SUPREME COURT IN ITS DECISION I N THE CASE OF M/S SOUTHERN SWITCH GEAR LTD. VS. CIT & ANOTHER 232 ITR 259 (1998) (SC) 4. IN RESPONSE TO ABOVE THE ASSESSEE COMPANY VIDE I TS LETTER DT. 18-12-2009 SUBMITTED THAT THE ROYALTY OF RS. 194.03 LA KHS IS BEING PAID ON ACCOUNT OF TECHNICAL ASSISTANCE PROVIDED BY THE FOREIGN COMPANY DURING THE PERIOD OF LICENCE AGREEME NT. THE ITA NO.2302/DEL/2009 6 ROYALTIES BEING PAID AT FIXED A PERCENTAGE ON SALES MA DE BY THE ASSESSEE UNDER THE TECHNICAL ASSISTANCE AGREEMENT AND TH ERE IS NO ABSOLUTE TRANSFER OR OUTRIGHT SALES OF ANY TECHNICAL KNOW-HOW. IN THIS REGARD THE ASSESSEE COMPANY RELIED ON DECISIO N OF HON'B1E HIGH COURT ,DELHI IN THE CASE OF CIT VS. M/S SHARDA MOTOR INDUSTRIES (2009) 319 ITR 109 (DEL) 5. I HAVE GONE THROUGH THE TECHNICAL ASSISTANCE AGREEM ENT DATED 23-092004 BETWEEN THE ASSESSEE COMPANY AND FEDE RAL MOGUL NUREMBERG GMBH, SITUATED AT GERMANY FOR A PERIOD OF 1 ST OCT. 2004 TO 30-SEP 2009 OVER A FIVE YEARS. IT ENVISAG ES OF ROYALTY PAYMENT TO THE COLLABORATORS AT RATES FROM 1 % TO 3 % ON THE TURNOVER OF THE COMPANY. IT WAS CONTEND THAT THE AGREEM ENT WAS AT FIXED PERCENTAGE ON TURNOVER BUT NOT A LUMSUM PAY MENT AND PAID OVER A PERIOD OF SIX MONTH. IT WAS ALSO SUBM ITTED THAT THE AGREEMENT IS ALREADY RENEWED FOR NEXT PERIOD. THE COMPANY IS PAYING TO ITS GROUP COMPANY FOR PROVIDING TECHNICAL KNOW- HOW. 6. THE RELIANCE PLACED BY THE ASSESSEE COMPANY IN TH E CASE OF CIT VS. MIS SHARDA MOTOR INDUSTRIES (2009) 319 ITR 109 (DEL) IS NOT ACCEPTABLE ON THE FOLLOWING GROUNDS. A) THE TENURE OF THE LICENCE IS MORE THAN 5 YEARS. B) IT IS PROHIBITED, IN PARTING WITH CONFIDENTIAL INFOR MATION RECEIVED UNDER THE LICENCE TO THE THIRD PARTIES WITHOUT TH E CONSENT OF THE LICENSOR. C) THE LICENCE IS IN FREE POSSESSION OF CERTAIN SEC RET PROCESSES, FORMULAE AND INFORMATION RELATING TO OPERATI ONS NECESSARY FOR THE MANUFACTURER OF THE LICENSED PRODUCT. EXPENDITURE ON OBTAINING ACCESS TO SUCH SECRET PROCESS WOULD ORDINARILY BE CONSTRUED AS CAPITAL IN NATURE. 7. THE CRUX OF THE ISSUE IS THE NATURE OF THE PAYMENT HA S ENDURING BENEFIT OR NOT. THE OTHER ISSUE IS, IT IS NOT A LUMP SUM AMOUNT BUT BASED ON THE AGREED PERCENTAGE ON THE TURNOVER . THE FACT, IS THE PAYMENT HAS TO BE MADE FOR TECHNICAL KN OW-HOW BEING ROYALTY PAYMENT FOR OVER A PERIOD. THE CHARACTER OF PAYMENT CAN BE DETERMINED BY LOOKING AT WHAT IS THE TRUE NATURE OF THE ASSET WHICH IS ACQUIRED AND NOT BY THE FAC T WHETHER IT IS PAYMENT IN LUMP SUM OR INSTALMENT OR EVEN PAYMENT BASED ON TURNOVER. AS IT WAS ALREADY HELD THE EXPENSES INCURRED FOR ACQUISITION OF A SOURCE OF A P ROFIT OR INCOME WOULD IN ABSENCE OF ANY CONTRARY CIRCUMSTANCES BE IN THE NATURE OF CAPITAL EXPENDITURE. AS AGAINST THIS ANY ITA NO.2302/DEL/2009 7 EXPENDITURE, WHICH ENABLES THE PROFIT MAKING STRUCTURE TO WORK MORE EFFICIENTLY LEAVING THE SOURCE OR THE PROFIT MAKIN G STRUCTURE UNTOUCHED WOULD BE IN THE NATURE OF REVENUE EXPENDITURE . BY THE ABOVE OBSERVATION IT IS FELT THAT THE EXPENDITURE IN QU ESTION WAS WITHIN THE AMBIT OF HON'BLE APEX COURT DECISION IN THE CASE OF M/S SOUTHERN SWITCH GEAR LTD. V S. CIT & ANOTHER 232 ITR 259 (1998) (SC). 8. FURTHER THE HON'BLE SUPREME COURT IN THE CASE OF JO NAS WOODHEAD & SONS(SUPRA) HAS TREATED 25% OF THE TOTAL PAYM ENT OF CAPITAL SIDE. THE SAID CRITERION OF ALLOCATION 25% OF PAYMENT TOWARDS CAPITAL HAS ALSO BEEN APPLIED BY THE HON'BLE M ADRAS HIGH COURT IN THE CASE OF CIT VS. SOUTHERN SWITCHGEAR L TD. 148 ITR 272, WHICH HAS BEEN AFFIRMED BY THE HON'BLE SUPR EME COURT AS REPORTED IN 232 ITR 359. 9. ACCORDINGLY BY RELYING ON HON'BLE APEX COURT DEC ISION THE 25% OF THE PAYMENT PAID IN THE YEAR UNDER CONSIDERATION SHALL BE ALLOCATED TOWARDS CAPITAL EXPENDITURE AND THE BALANCE 75% OF THE PAYMENT IS TO BE ALLOWED AS REVENUE EXPENDITURE. NEEDLESS TO SAY THAT THE ASSESSEE SHALL BE ENTITLED TO DEPRECIATION ON THE AMOUNT ALLOCATED TOWARDS CAPITAL FIEL D. THE ASSESSMENT WAS FINALIZED ACCORDINGLY. 5. REFERRING TO THE AFOREMENTIONED OBSERVATIONS OF TH E ASSESSING OFFICER, HE SUBMITTED THAT FROM THE AGREEMENTS IT HAS BEEN HELD BY THE ASSESSING OFFICER THAT ROYALTY PAYMENT TO THE COLLABORA TORS ARE MADE @ 1% TO 3% ON THE TURNOVER OF THE COMPANY. HE SUBMI TTED THAT FOR SUBSEQUENT YEAR I.E., FOR ASSESSMENT YEAR 2006-07 THE SIMI LAR ADDITION WAS MADE BY THE ASSESSING OFFICER WHICH WAS UPHELD BY CIT (A) AND, IN THIS MANNER, THE DISALLOWANCE OF ` 45,12,22,000/- WAS MADE. THE ASSESSEE CHALLENGED THE ORDER OF THE CIT (A) BEFORE THE TRIBUNAL AND THE TRIBUNAL VIDE ITS ORDER DATED 17 TH SEPTEMBER, 2010 HAS CLEARLY HELD THAT IF THE ROYALTY HAS BEEN PAID ON TURNOVER BASIS, T HEN, THE SAME WILL BE TREATED AS REVENUE EXPENDITURE. HE HAS PLACED BEF ORE US COPY OF THE SAID ORDER OF THE TRIBUNAL AND DREW OUR ATTENTIO N TO THE FOLLOWING OBSERVATIONS:- ITA NO.2302/DEL/2009 8 THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 200 6-07 ARISES OUT OF ORDER OF LD. CIT (A)-II, NEW DELHI. T HE ONLY ISSUE FOR CONSIDERATION RELATES TO UPHOLDING THE DISALLOWANCE OF 1/4 TH OF ROYALTY AT RS.45,12,22,000/- BY TREATING THE SAME AS CAP ITAL EXPENDITURE. THE RELEVANT GROUND OF APPEAL IS REPROD UCED AS UNDER: 1. THAT THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE DISALLOWANCE OF 1/4 TH OF ROYALTY AT RS.45,12,22,000/- BY HOLDING THE SAME TO BE AN EXPENDITURE OF CAPITAL NATURE, ON WHOLLY ERRONEOUS, ILLEGAL AND UNTENABLE GROUNDS. 2. THE FACTS OF THE CASE, STATED IN BRIEF, ARE THAT THE ASS ESSEE DURING THE RELEVANT ASSESSMENT YEAR WAS ENGAGED IN THE BUSINESS OF MANUFACTURING SUPPLY AND DISTRIBUTION OF A UTOMOBILE COMPONENTS. THE ASSESSEE DEBITED AN AMOUNT OF RS.469. 64LACS TOWARDS ROYALTY. THE ASSESSING OFFICER RELYING ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF M/S SOUTHERN SWITC H GEAR LTD. V. CIT, 232 ITR 359, TREATED I/4 TH OF EXPENDITURE CAPITAL IN NATURE. 3. BEFORE ID. CIT(A) NO SUBMISSIONS WERE ADVANCED B Y THE LD. A.R. OF THE ASSESSEE EXCEPT RELYING UPON THE GROUND OF APPEAL. LD. CIT(A) RELYING ON THE DECISION OF HON'BLE SUPREM E COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD. (SUPRA) UPHELD THE STAND TAKEN BY ASSESSING OFFICER. 4. BEFORE US, ID. A.R. OF THE ASSESSEE SUBMITTED THAT A SSESSEE HAS BEEN IN SIMILAR BUSINESS FOR LAST 50 YEARS AND R OYALTY WAS PAID IN ALL THE YEARS WHICH HAS BEEN ALLOWED. HOWEVE R, IN THE RELEVANT ASSESSMENT YEAR ASSESSING OFFICER HAD TREATED 1/4 TH OF THE ROYALTY AS CAPITAL IN NATURE RELYING ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD.(S UPRA). LD. AR OF THE ASSESSEE FURTHER SUBMITTED THAT NO NEW ASSE T HAS BEEN CREATED OR NEW RIGHT IS BEING CREATED IN FAVOUR O F THE ASSESSEE AND ONLY THE EXISTING BUSINESS IS ADMITTED TO R UN MORE PROFITABLY AND EFFICIENTLY. THEREFORE, THE EXPENSES OF SUCH NATURE ARE ALLOWABLE. THE ASSESSEE PLACED RELIANCE ON THE F OLLOWING DECISIONS: 1) CIT V. SHARDA MOTOR INDUSTRIAL LTD. 319 ITR 109 (DEL.) ITA NO.2302/DEL/2009 9 2) SHRI RAM PISTONS AND RINGS LTD. V. CIT 307 ITR 3 63 (DEL.) ON THE OTHER HAND, ID. SR. D.R. REFERRING TO THE AGREEM ENT FILED BY ASSESSEE IN PAPER BOOK SUBMITTED THAT COPY OF AGREEM ENT WAS NOT FILED BEFORE ASSESSING OFFICER AND LD. CIT(A ). THE COPY OF AGREEMENT FILED IN THE PAPER BOOK WAS FOR A PERIOD OF 10 YEARS AND THE PERIOD OF 10 YEARS HAD EXPIRED IN AUGUST, 200 4 AND, THEREFORE, .THE PAYMENT OF ROYALTY CANNOT BE DECIDED ON THE BASIS OF THIS AGREEMENT. THE COPY OF AGREEMENT EFFECTI VE FROM AUGUST, 2004 WAS NEITHER FILED BEFORE ASSESSING OFFIC ER NOR BEFORE LD. CIT(A). THEREFORE, IT IS NOT CLEAR WHETHER THE PAYMENT OF ROYALTY HAS BEEN MADE IN LUMP SUM, OR IS BASED ON PRODUCTION BASIS. THESE FACTS ARE TO BE ASCERTAINED FRO M THE AGREEMENT. 5. IN REJOINDER LD. A.R. OF THE ASSESSEE SUBMITTED THAT ASS ESSEE IS IN BUSINESS FOR LAST 50 YEARS AND AGREEMENTS HAVE BEEN RENEWED CONTINUOUSLY. HOWEVER, AT THE TIME OF HEARING H E WAS NOT HAVING COPY OF RENEWAL OF THE AGREEMENT. HE FAIRL Y CONCEDED THAT THIS ISSUE CAN BE EXAMINED BY ASSESSING OFFICER AND IF THE PAYMENT RELATES TO LUMP SUM PAYMENT OF ROYALTY , THE DECISION OF HON'BLE SUPREME COURT COULD BE APPLIED B UT IF THE PAYMENT IS MADE BASED ON SALES IT HAS TO BE ALLOWED AS REVENUE EXPENDITURE. 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. HONBLE DELHI HIGH CO URT IN THE CASE OF CIT V. SHARDA MOTOR INDUSTRIAL LTD. (SUPRA) HA S HELD THAT PAYMENT OF ROYALTY MADE DEPENDING ON THE QUANTUM OF PRODUCTION WAS REVENUE IN NATURE. IN THIS CASE, THE LD . COUNSEL FOR THE REVENUE SUBMITTED THAT THE TRIBUNAL HAD NOT CONSID ERED THE EFFECT OF JUDGMENT OF HONBLE SUPREME COURT IN SOUTH ERN SWITCH GEAR LTD. (SUPRA) INASMUCH AS IN THAT CASE THE PA YMENT OF ROYALTY WAS TREATED AS CAPITAL EXPENDITURE. HOWEVER, WHAT WAS GLOSSED OVER WAS THAT UNDER THE TERMS OF AGREEMENT I N THAT CASE THE ASSESSEE COMPANY HAD AGREED TO PAY THE FOREIG N COMPANY LUMP SUM OF ROYALTY AND IT WAS IN THOSE CIRCUM STANCES THE SAME WAS TREATED AS CAPITAL AND THE TRIBUNAL HAD DIS ALLOWED 25% THEREOF. HOWEVER, IN THE CASE OF SHARDA MOTOR INDU STRIAL LTD.(SUPRA)THE LABOUR WAS PAID FOR QUANTITY OF GOODS PR ODUCED, CALCULATING PER PIECE OF SAID GOODS PRODUCED AND, THE REFORE, THE TRIBUNAL RIGHTLY HELD THAT THE JUDGEMENT IN THE CASE OF S OUTHERN ITA NO.2302/DEL/2009 10 SWITCHGEAR LTD. (SUPRA) WAS NOT APPLICABLE TO THE FACTS O F THE CASE. SIMILARLY, IN THE CASE OF CIT V. J.K. SYNTHETIC S LTD. 309 ITR 371, HONBLE DELHI HIGH COURT HAS LAID DOWN THE PRINC IPLES WHICH ARE REQUIRED TO BE APPLIED TO THE FACTS OF EACH CASE WH ILE DETERMINING THE NATURE OF EXPENDITURE WHETHER IT WAS IN C APITAL FIELD OR REVENUE FIELD. HOWEVER, SINCE IN THE CASE B EFORE US, THE ASSESSEE HAD NOT FILED THE COPY OF AGREEMENT RELATING TO THE YEAR UNDER CONSIDERATION, WE, FEEL IT PROPER TO SET ASI DE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIREC TION TO EXAMINE THE CASE OF ASSESSEE IN THE LIGHT OF DECISIONS OF HONBLE DELHI HIGH COURT IN THE CASE OF J.K.SYNTHETICS (SUPRA); SHARDA MOTOR INDUSTRIAL LTD.; AND SHRIRAM PISTONS AND RINGS LTD . (SUPRA). IF ROYALTY HAS BEEN PAID ON TURNOVER BASIS, THE SAME W ILL BE TREATED AS REVENUE EXPENDITURE. HOWEVER, IF ASSESSEE H AD PAID THE ROYALTY IN LUMP SUM FOR ACQUIRING ENDURING BENEFI T, THE SAME WILL BE IN THE CAPITAL FIELD. WE, THEREFORE, SET ASIDE THE MATTER TO THE FILE OF ASSESSING OFFICER TO EXAMINE THE CASE OF A SSESSEE AND DECIDE THE ISSUE IN TERMS OF ABOVE DIRECTIONS. 7. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. 6. IT IS THE CASE OF THE LEARNED AR THAT AFTER CONSIDE RING ALL THE AVAILABLE JUDICIAL PRONOUNCEMENTS IT HAS BEEN HELD BY THE TRIBUNAL THAT IF THE ROYALTY IS PAID ON TURNOVER BASIS, THE SAME IS RE VENUE EXPENDITURE. HE SUBMITTED THAT THE ASSESSING OFFICER HA S NOT DISPUTED THIS FACT THAT ROYALTY PAID BY THE ASSESSEE IS BASED ON TU RNOVER. THEREFORE, HE SUBMITTED THAT KEEPING IN VIEW THE LAW EXPLAINED BY THE TRIBUNAL IN THE AFOREMENTIONED ORDER, THE ORDER PASSE D BY THE ASSESSING OFFICER CANNOT BE SAID TO BE ERRONEOUS AS WELL A S PREJUDICIAL TO THE INTEREST OF THE REVENUE. HENCE, THE SAME SHOUL D BE QUASHED. 7. ON THE OTHER HAND, RELYING UPON THE OBSERVATIONS O F THE CIT IN THE ORDER WHICH HAVE ALREADY BEEN POINTED OUT IN EA RLIER PART OF THIS ORDER, IT IS THE CASE OF THE LEARNED DR THAT IT HAS RI GHTLY BEEN HELD THAT THE ORDER PASSED BY THE ASSESSING OFFICER WAS ERRONEOUS AS W ELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. HE SUBMI TTED THAT THE ITA NO.2302/DEL/2009 11 ASSESSING OFFICER FAILED TO MAKE PROPER INQUIRIES AND FA ILED TO DISALLOW THE SAID AMOUNT. THEREFORE, HE PLEADED THAT THE ORD ER OF THE CIT SHOULD BE UPHELD AND THE APPEAL FILED BY THE ASSESSEE SHO ULD BE DISMISSED. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF THE MATERIAL PLACED BEFORE US. THE ORDER OF THE TRI BUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 HAS BEEN REPRODUCED ABOVE. THE FACTS ARE SAME. IT WAS THE CONTENTION OF THE ASSESSEE THAT IT IS IN THE SAME BUSINESS FOR THE LAST 50 YEARS AND ROYALTY WAS PA ID IN ALL THE YEARS AND HAS BEEN ALLOWED. IT WAS FOR THE FIRST TIME 1/4 TH DISALLOWANCE WAS MADE RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. (SUPRA). IN THE PRE SENT CASE ALSO THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE ON THE BASIS OF THE SAME DECISION OF HONBLE SUPREME COURT. THE TRIBUNAL HAS ELABORATELY CONSIDERED THIS DECISION AS WELL AS THE SUBSEQUENT DECISION OF HONBLE DELHI HIGH COURT WHICH ARE MENTIONED IN THE ORDER O F THE TRIBUNAL AND IT WAS FOUND THAT THE APPLYING THE RATIO OF ALL THESE DECISIONS IF THE ROYALTY HAS BEEN PAID ON TURNOVER BASIS, THE SAME HAS TO BE TREATED AS REVENUE EXPENDITURE. THE ASSESSING OFFICER IN THE ORDE R DATED 30 TH DECEMBER, 2009 PASSED IN PURSUANCE OF IMPUGNED ORDER O F THE CIT HAS NOT DISPUTED THIS FACT THAT ROYALTY IN THE PRESENT CASE IS BASED ON TURNOVER. THE CASE OF THE ASSESSING OFFICER IS THAT FOR GETTING THAT ROYALTY THE ASSESSEE HAS BEEN SUPPLIED WITH THE MATERIAL WHICH IS OF ENDURING NATURE, BUT, IT IS NOT DISPUTED BY THE ASSESSING OFFICER THAT THE ROYALTY IS BASED ON PERCENTAGE OF TURNOVER. IF I T IS SO, THEN, IT CAN BE SAID THAT THE LEGAL ISSUE RAISED IN THE PRESENT CASE I S COVERED BY THE AFOREMENTIONED DECISION OF THE TRIBUNAL IN THE CASE O F THE ASSESSEE FOR ASSESSMENT YEAR 2006-07. IN THE SAID CASE, IN THE ABSENCE OF AGREEMENT TO BE PLACED ON RECORD IT WAS NOT ASCERTAIN ABLE THAT WHETHER THE ROYALTY WAS PAID ON TURNOVER BASIS. HOWEV ER, THE TRIBUNAL ITA NO.2302/DEL/2009 12 HAS CLEARLY GIVEN THE DIRECTION THAT IF ROYALTY HAS B EEN PAID ON TURNOVER BASIS, THE SAME WILL BE TREATED AS REVENUE EXPENDITURE. SINCE THE FACT THAT ROYALTY IS PAID ON TURNOVER BASIS IS NOT DISPUTED B Y THE ASSESSING OFFICER IN THE ORDER DATED 30 TH DECEMBER, 2009, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE. THE PAYMENT OF RO YALTY BY THE ASSESSEE HAS TO BE CONSIDERED IN FIELD OF REVENUE. THERE FORE, THE ORIGINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER CAN NOT BE SAID TO BE ERRONEOUS WHICH IS ONE OF THE ESSENTIAL CONDI TIONS FOR APPLICABILITY OF SECTION 263. IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT CIT HAS WRONGLY EXERCISED HIS POWER U/S 263 AND HI S ORDER IS LIABLE TO BE QUASHED AND IS ACCORDINGLY QUASHED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALL OWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 20.01.20 12. SD/- SD/- [SHAMIM YAHYA] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 20.01.2012. DK COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR, ITAT, DELHI BENCHES