DCIT, New Delhi V. M/s. Fibcom India Ltd., New Delhi

ITA 2647/DEL/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65232 (ITAT-DELHI)
• Duration Of Justice: 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-08-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-12-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 31-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: I AHMED
• Assessee Lawyers: RAJESH ARORA
• Keywords: Royalty expenses; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : B : NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER ITA NO.2647/DEL/2012 ASSESSMENT YEAR : 2006-07 DCIT, CIRCLE 11 (1), ROOM NO.312, CR BUILDING, NEW DELHI. VS. FIBCOM INDIA LTD., LGF-84, WORLD TRADE CENTRE, BARAKHAMBA LANE, NEW DELHI. AAACF2237P (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJESH ARORA, CA REVENUE BY : SHRI I. AHMED, SR.DR ORDER PER A.D. JAIN, JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE DEPARTMENT FOR ASSESSMENT YEAR 2006-07 AGAINST THE ORDER DATED 26.03.2012 PASSED BY T HE CIT (A)-XIII, NEW DELHI, CONTENDING THAT THE LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF ` 21,52,828/- ON ACCOUNT OF ROYALTY EXPENSES BEING TRE ATED AS CAPITAL IN NATURE. 2. THE ASSESSEE COMPANY, AS PER THE RELEVANT ORDERS, IS EN GAGED IN DESIGNING AND MANUFACTURING OF OPTICAL NETWORKING EQ UIPMENTS AND MANAGEMENT SYSTEMS IN TECHNICAL COLLABORATION WITH TEL LABS OF DENMARK. THE ASSESSING OFFICER DISALLOWED 75% OF THE RO YALTY PAYMENT CLAIMED BY THE ASSESSEE, TREATING THE SAME AS CAP ITAL EXPENDITURE. THE LD. CIT (A) DELETED THE ADDITION OBSERVING AS FOLLOWS:- ITA NO.2647/DEL/2012 2 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AN D OBSERVATION OF THE ASSESSING OFFICER. IT IS SEEN THAT D URING THE YEAR THE APPELLANT HAS CLAIMED RS.28,70,438/- AS ROYA LTY PAID ON ITS SALE ON PERCENTAGE BASIS. THE ASSESSING OFFICER IN THE ASSESSMENT ORDER HAS HELD THAT PAYMENT IS IN NATURE OF E NDURING ADVANTAGE TO THE APPELLANT. THE ASSESSING OFFICER DISA LLOWED TREATING THE 75% ROYALTY PAYMENT AS CAPITAL IN NATURE IN VIEW OF THE HONBLE SUPREME COURT JUDGMENT IN THE CASE OF SOUTH ERN SWITCHGEAR LTD. VS. CIT 232 ITR 359 WHEREIN IT WAS H ELD THAT GRANT OF TECHNICAL HEAD FEES FOR SETTING UP FACTORY AN D RIGHT TO SELL THE PRODUCT AS PER COLLABORATION AGREEMENT IS NOT A LLOWABLE AS REVENUE EXPENDITURE. THE APPELLANT IN HIS SUBMISSION STATED THAT AGREEMENT OF ROYALTY WAS OF DATED 09.08.2002 BETWEEN THE APPELLANT COMPANY AND TELLABS OF DENMARK. IT IS ALSO SUBMITTED BY THE APPELLANT THAT TERMS AND CONDITIONS OF THE AGREEMEN T HAVE BEEN SPECIFIED IN THE AGREEMENT. THE ROYALTY HAS BEEN PAID AS PER CLAUSE 9.6 OF THE AGREEMENT WHICH WAS DEB ITED TO THE PROFIT AND LOSS ACCOUNT. THE ROYALTY WAS CALCULATED AS A PERCENTAGE OF GROSS SALES AFTER DEDUCTING EXPORTS, EXC ISE, OTHER EXPENSES AND MATERIAL CONSUMED. THE SAME HAVE BEEN CERTIFIED BY THE STATUTORY AUDITOR AND SUCH CERTIFICATE WA S FILED BEFORE ASSESSING OFFICER AS WELL AS BEFORE ME. IT I S SUBMITTED BY THE APPELLANT THAT ROYALTY IS BASED UPON THE SALE TURNOVER OF THE ITEMS MANUFACTURED BY THE APPELLANT, THEREFORE, SUCH ROY ALTY PAYMENT IS A REVENUE EXPENDITURE. IT IS ALSO SUBMITTED BY THE APPELLANT AND WHICH IS PART OF THE EARLIER AGREEMENT D ATED 09.08.2002 THAT ONE TIME PAYMENT FOR ACQUIRING THE TECH NICAL KNOWHOW HAS BEEN SEPARATELY PAID AND CAPITALIZED IN THE BOOKS OF THE APPELLANT AND SAME HAS NOT BEEN CHARGED TO THE R EVENUE. THIS IS MENTIONED IN CLAUSE 9.1 OF THE AGREEMENT DATED 09.08.2002. THE ROYALTY PAID DURING THE YEAR HAS BEE N DEFINED IN CLAUSE 9.6.1 OF THE AGREEMENT WHICH HAS BEEN CALCU LATED @ 5% OF DOMESTIC SALES AND @ 8% OF EXPORT SALES. THER EFORE, THE EXPENDITURE INCURRED BY THE APPELLANT IS OF RECURRING NATURE AND IS RELATED TO PERCENTAGE OF SALES. THE APPELLANT HAS NOT ACQUIRED ANY TANGIBLE OR INTANGIBLE ASSETS BY PAYING TH E ROYALTY ON SALES. IN VIEW OF THE ABOVE THE FACTS OF THE APPEL LANTS CASE ARE DIFFERENT WITH THE FACTS OF THE CASE OF SOUTHERN SWITC HGEAR LTD. WHEREIN THE ROYALTY PAYMENT WAS FOR COMPOSITE IN NA TURE I.E. FOR ESTABLISHING THE FACTORY AS WELL AS ON MANUF ACTURING OF TRANSFORMERS. IN THAT CASE THE TECHNICAL KNOWLEDGE ACQ UIRED BY THE PARTY WAS ENDURING IN NATURE AND BENEFIT OF THE SAME WAS AVAILABLE TO THE SOUTHERN SWITCHGEAR LTD. FOR ITS MANUFA CTURING AND INDUSTRIAL PROCESSES EVEN AFTER TERMINATION OF THE AGREEMENT. IN THE CASE OF APPELLANT THE AGREEMENT IS V ALID FOR 10 YEARS FROM THE EFFECTIVE DATE OR 7 YEARS FROM COMME RCIAL PRODUCTION WHICHEVER IS EARLIER. ALL THE RIGHTS TO THE DESIGN IN THE KNOWHOW AND TECHNICAL DOCUMENTATION ARE SUBJECT TO T ELLABS COPYRIGHT AND THEY WILL REMAIN THE PROPERTY OF TELLABS DURING THE PERIOD OF AGREEMENT. THE AGREEMENT WITH THE APPELLANT COMPANY IS NOT OF ENDURING NATURE SINCE IT HAS GRANTED A NON ITA NO.2647/DEL/2012 3 EXCLUSIVE, NON TRANSFERABLE LICENSE TO USE OPERATIONS AND MAINTENANCE MANUALS. IN VIEW OF THE ABOVE THE RATIO OF THE JUDGMENT OF THE S OUTHERN SWITCHGEAR LTD. IS NOT APPLICABLE TO THE FACTS OF THE APPE LLANTS CASE. THE FOLLOWING FURTHER POINTS PROVE THAT THE ROYAL TY PAYMENT IS REVENUE EXPENDITURE. THE TECHNOLOGY AND LICENSE AGREEMENT WAS MADE BY THE APPELLANT COMPANY ON 9 TH AUGUST, 2002 AND WAS RENEWED ON 10 TH MARCH, 2006. THE APPELLANT COMPANY HAD MADE THE REMITTANCE AFTER DEDUCTING TDS AS PER THE PROVISIONS OF INCOME TAX ACT, 1961. ROYALTY IS BASED UPON THE SALES TURNOVER OF THE ITEMS MANUFACTURED BY THE APPELLANT COMPANY; THEREFORE, IT IS A REVENUE EXPENDITURE AND NOT CAPITAL EXPENDITURE. THE ROYALTY WAS CALCULATED AS A PERCENTAGE OF GROSS SA LES AFTER DEDUCTING EXPORTS, EXCISE, OTHER EXPENSES AND THE MATERIAL CONSUMED. IT MAY ALSO MENTIONED HERE THAT SIMILAR ADDITIONS WERE MADE IN THE A.Y. 2004-05, 2005-06, 2006-07 AND 2007-08 WHICH HAVE BEEN DECIDED BY THE CIT (APPEAL) IN FAVOUR OF THE APP ELLANT. FOR A.Y. 2004-05 AND 2005-06 THE DEPARTMENT PREFERRED AN A PPEAL BEFORE ITAT AGAINST THE ORDER OF THE CIT (APPEAL), HO WEVER THE SAME HAS BEEN DISMISSED ON THIS ISSUE VIDE ITS ORDER ITA NO.471/DEL/2010 DATED 26.08.2011. THE RELEVANT EXTRACT OF THE HONBLE ITAT, DELHIS DECISION IS REPRODUCED HEREUN DER:- THE ROYALTY EXPENSES INCURRED BY THE ASSESSEE WERE AS PER THE AGREEMENT DATED 9.8.2002. AS PER THIS AGREEMENT, ONE TIME PAYMENT FOR ACQUIRING KNOW-HOW HAS BEEN SEPARATELY PAID WHICH HAS BEEN CAPITALIZED AND IT HAS BEEN CHARGED TO REVENUE ACCOUNT. IN TERMS OF CLAUSE 9.1 OF SAID AGREEMENT A SEPARATE FEE HAS BEEN PRESCRIBED IN CONSIDERATION OF THE TRANSFER OF TECHNICAL KNOW-HOW, TECHNICAL DOCUMENTATION LICENSING RIGHT GRANTED UNDER THIS AGREEMENT AND FOR THE SAME, A NON- REFUNDABLE AMOUNT HAS BEEN PAID BY THE ASSESSEE. AS PER CLAUSE 9.6.1 OF THE AGREEMENT, THE ASSESSEE HAS TO PAY ROYALTY @ 5% OF DOMESTIC SALES AND THE CALCULATION HAS BEEN MADE AS PER THE AGREEMENT WHICH IS NOT IN DISPUTE. THE PAYMENT HAS BEEN MADE DURING THE RUNNING OF THE BUSINESS. THESE EXPENSES ARE RECURRING AND BASED ON PERCENTAGE OF ITA NO.2647/DEL/2012 4 SALES. THE NON-REFUNDABLE ONE TIME WAS SEPARATELY MADE AND THE SAME WAS CAPITALIZED. BY INCURRING THIS EXPENSE, THE ASSESSEE HAD NOT ACQUIRED ANY ASSET ENDURING BENEFIT. IN CASE OF SOUTHERN SWITCHGEAR LIMITED, THE EXPENDITURE WAS COMPOSITE OF RECURRING AND NON-RECURRING EXPENDITURE. IN ABSENCE OF SEGREGATION, 25% WAS TREATED AS CAPITAL BUT IN ASSESSEES CASE, SUCH SEGREGATION WAS ALREADY MADE. KEEPING ALL THESE FACTS IN VIEW, WE FIND NO FAULT IN ORDER OF CIT (APPEALS) AND WE SUSTAIN THE SAME ON THIS ISSUE. IN VIEW OF THE FACTUAL POSITION DISCUSSED ABOVE AND TH E DECISION OF THE HONBLE ITAT, DELHI IT IS HELD THAT THE ROYALTY P AYMENT MADE BY THE APPELLANT OF RS.28,70,438/- WAS REVENUE EXPENDITURE AND SAME IS AN ALLOWABLE EXPENDITURE. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.21, 52,828/- TREATING THE SAME AS CAPITAL EXPENDITURE IS DELETED. 3. THE LD. CIT (A), IT IS SEEN, HAS DELETED THE ADDITI ON ON THE BASIS OF THE DELHI TRIBUNAL ORDER DATED 26.08.2011, IN ASSESSEE S OWN CASE FOR A.Y.S 2004-05 AND 2005-06, WHEREIN, THE DEPARTMENTS APPEALS WERE DISMISSED BY THE TRIBUNAL, HOLDING THAT THE ROYALTY EX PENSES INCURRED BY THE ASSESSEE WERE AS PER THE AGREEMENT DATED 09.08.20 02, ACCORDING TO WHICH ONE TIME PAYMENT FOR ACQUIRING K NOW-HOW HAD BEEN SEPARATELY PAID AND HAD BEEN CAPITALIZED AND CH ARGED TO THE REVENUE ACCOUNT; THAT CLAUSE 9.1 OF THE SAID AGREEMEN T PRESCRIBED A SEPARATE FEE IN CONSIDERATION OF THE .TRANSFER OF TECH NICAL KNOW-HOW AND TECHNICAL DOCUMENTATION LICENSING RIGHT GRANTED UNDER THE AGREEMENT; THAT THE ASSESSEE HAD PAID A NON-REFUNDABLE AMOUNT AS SUCH FEE; THAT AS PER CLAUSE 9.6.1 OF THE AGREEMENT TH E ASSESSEE HAD ALSO TO PAY ROYALTY @ 5% FOR DOMESTIC SALES AND @ 8% F OR EXPORT SALES; THAT SINCE THERE WAS NO EXPORT DURING THE YEAR, THE ASSESSEE HAD PAID ROYALTY @ 5% OF THE DOMESTIC SALES AND THE CALCUL ATION HAD BEEN MADE, UNDISPUTEDLY, AS PER THE AGREEMENT; THAT THE P AYMENT HAD BEEN MADE DURING THE RUNNING OF THE BUSINESS; THAT THESE EXP ENSES WERE RECURRING EXPENSES AND WERE BASED ON THE PERCENTAGE O F SALES; THAT THE NON-REFUNDABLE ONE TIME FEE HAD BEEN SEPARATELY PAID AND HAD ITA NO.2647/DEL/2012 5 BEEN CAPITALIZED; AND THAT BY INCURRING THIS EXPENSE, THE ASSESSEE HAD NOT ACQUIRED ANY ASSET OF ENDURING BENEFIT. THE TRIB UNAL DISTINGUISHED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. VS. CIT 232 ITR 259 (SC) HOLDING TH AT THEREIN THE EXPENDITURE WAS A COMPOSITE EXPENDITURE OF RECURRING AND NON- RECURRING EXPENDITURE AND IN THE ABSENCE OF SEGREGAT ION, 25% HAD BEEN TREATED AS CAPITAL EXPENDITURE. THE TRIBUNAL H ELD THAT IN THE ASSESSEES CASE, HOWEVER, SUCH SEGREGATION HAD ALREADY BEEN MADE. 4. BEFORE US, THE DEPARTMENT HAS NOT BEEN ABLE TO SHOW AS TO HOW THE LD. CIT (A) HAS ERRED IN FOLLOWING THE AFORESAID TRIBUNAL DECISION IN THE ASSESSEES OWN CASE FOR A.Y.S 2004-05 AND 2005-06 (COP Y AT PAGES 78-87 OF THE ASSESSEES PAPER BOOK). THIS DECISION OF THE TRIBUNAL HAS NOT BEEN SHOWN TO HAVE BEEN OVER-TURNED BY THE HIGH COURT. 5. IN VIEW OF THE ABOVE, FINDING NO ERROR WHATSOEVER IN THE ORDER OF THE LD. CIT (A), WE HEREBY CONFIRM THE SAME. 6. IN THE RESULT, THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 01.08.20 12. SD/- SD/- [K.D. RANJAN] [A.D. JAIN] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 01.08.2012. DK ITA NO.2647/DEL/2012 6 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES