HERCULES INDUSTRIAL CHEMICALS P.LT, NAVI MUMBAI V. ASST CIT 10(3), MUMBAI

ITA 2848/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7736 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: H
• Next Hearing Date: 11-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 13-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Keywords: Additional evidence; Royalty expenses
• Section: 10; 143(3)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI D . T . GARASIA, JM AND SHRI ASAWANAI TANEJA , AM I.T.A. NO S . 2848 & 2849 /MUM/2015 ASSESSMENT YEAR S : 2009 - 10 & 2010 - 11 ASHLAND INDIA PRIVATE LIMITED 601 , 606 - 608, PLATINUM TECHNOPARK, PLOT NO. 17 - 18, SECTOR 30A, VASHI, NEW MUMBAI - 400705 VS. ACIT 10(3) R.NO. 451 AAYAKAR BHAVAN, M.K. MARG MUMBAI - 400020 PAN: AA BCH3827Q (APPELLANT) : (RESPONDENT) APPELLANT BY : SHRI KETAN VED, AR RESPONDENT BY : SHRI M.C. OMI NINGSHEN DATE OF HEARING : 09 /02/2017 DATE OF PRONOUNCEMENT : 29 /03 /2017 O R D E R PER D. T. GARASIA, JM : THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) - 24 MUMBAI, DATED 23/02/2015 AGAINST THE OUT OF ORDER OF ASST. CIT - 10(3) MUMBAI DATED 16/12/2011 PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEARS 2009 - 10 & 2010 - 11. 2 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 2. THE ONLY GROUND IN THIS APPEAL IS DISALLOWANCE OF EXPENDITURE AMOUNTIN G TO RS.22,92,306/ - . 3. THE SHORT FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE IS ENGAGE IN BUSINESS OF PROVIDING TECHNOLOGY KNOW - HOW FOR MANUFACTURING CHEMICAL PRODUCT S RELATING TO PULP AND PAPER PRODUCTS. DURING THE YEAR IT HAD DECLARE D R OYALTY INCOME OF RS.2.09 CRORE APART FRO M OTHER INCOME OF RS.2.22 CRORE AND HAD COMPUTED NET LOSS OF RS.85.13 LACS. THE ROYALTY INCOME WAS MAINLY DERIVED ON ACCOUNT OF PROVIDING TECHNICAL KNOW - HOW WHICH WAS PURCHASED FROM THE HOLDING COMPANY M/S HERCULES INC., U.S. AS P ER THE AGREEMENT DATED 01/01/2008 THE ASS ESSEE NEEDS TO PAY ROYALTY OF 5% NET SALE VALUE OF THE PRODUCT SOLD APA RT FROM WHOLESOME AMOUNT OF U.S$ 2,00,000/ - SPREAD OVER A PERIOD OF 10 YEARS. THE ASSESSEE HAS ENTERED INTO SERVICE AGREEMENT DATED 01/07/2007 WI TH M/S HERCULES ASIA PACIFIC SHANGHAI REGIONAL COMPANY LTD. AND AS PER THE AGREEMENT THE ASSESSEE NEEDS TO RECEIVE THE SERVICE FEE AT COST PLUS 5%. THE AO NOTICED THAT THE SERVICE INCOME OFFERED DURING THE YEAR WAS RS.1,88,23,910/ - AND IN HIS VIEW THE COST ATTRIBUTED TO THE SERVICE INCOME WAS RS.1,79,27,533/ - . THE ASSESSEE CL AIMED EXPENSES OF RS.2.48 CRORE TOWARDS EMPLOYEES COST AND TRAVELLING I N TOTAL AMOUNTING TO 3.03 CRORE AGAINST THE COST ATTRIBUTED TO SERVICE INCOME OF RS.1.79 CRORE . WE FIND THE AGREEM ENT WAS ENTERED WITH M/S CONNELL BROTHERS COMPANY AND A.O. ANALYSED THE AGREEMENT AND THE AO ASCERTAINED THAT THE ROYALTY RECEIVED WAS 14% ON THE NET SALES VALUE OF PRODUCT W HEREAS THE ASSESSEE WAS MAKING PAYMENT OF ONLY TO 5% TO TH E PARENT COMPANY TOWARDS ROYALTY .T HEREFORE, ACCORDING TO THE AO THE NET MARGIN ON SALE VALUE WAS 9%. THE ROYALTY INCOME OFFERED BY THE ASSESSEE WAS @14% OF THE SALES. 3 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 THE ASSESSEE HAS PROJECTED SALE AT RS.20,32,90,295/ - . THE ROYALTY EXPENSES WAS 7.16% OF THE SALE, T HEREFORE, THE AO HAS DISALLOWED THE EXCESS OVER AND ABOVE 5% I.E. 2.16% AND IT WAS ADDED TO THE INCOME OF THE ASSESSEE. THE MATTER TRAVEL TO THE CIT(A) AND CIT(A) HAS NOT ADMITTED THE ADDITIONAL EVIDENCE GROUND AND APPEAL WAS DISMISSED. 4. DURING THE COURSE OF HEARING THE LD. AR SUBMITTED THAT THE CIT(A) HAS NOT ADMITTED THE ADDITIONAL EVIDENCE IN TERMS OF SECTION 46A OF THE INCOME TAX RULES, 1962 AND NOT CONSIDERED THE ALTERNATIVE ARGUMENT OF THE ASSESSEE THAT ROYALTY EXPENSE HAS BEEN REVERSED IN SUBSEQUEN T YEARS AND HAS BEEN OFFERED TO, AND SUBJECTED TO TAX IN THAT YEAR. 5. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS NOT PRODUCED THE ADDITIONAL AGREEMENT WHICH WAS EXECUTED BETWEEN THE ASSESSEE AND THE U.S.A. PARTY. THIS IS NEW EVIDENCE WHICH CANNOT BE ALLOWED. 6. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE THAT WE FIND IN THE ASSESSMENT ORDER FOR AY 2008 - 09 WHEREIN THE ASSESSING OFFICER HAS MADE THE ADDITION ON ACCOUNT OF ROYALTY EXPENSES THE A.O. HAS DISAL LOWED. WHEREIN THE A.O. HAS MADE DISALLOWANCE OF ROYALTY OF RS.23,66,000/ - HAS RELYING UPON THE AMENDED AGREEMENT WHICH WAS ENTERED INTO 2005 WHERE STIPULATION IN THE CHANGE OF ROYALTY PERCENTAGE. THEREAFTER, THE MATTER TRAVELLED IN THE TRIBUNAL IN ITA NO. 4380/MUM/2013 IN THE SAME ASSESSMENT THE DEPARTMENTAL APPEAL WAS DISMISSED IN THIS YEAR THE SAME ADDITION HAS BEEN REPEATED BY THE A.O., THEREFORE, WE ADMIT THE ADDITIONAL EVIDENCE FOR THE YEAR UNDER CONSIDERATION AND WE DECIDE THE APPEAL ON MERIT. 4 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 7. TH E LD. AR SUBMITTED THAT THE ASSESSEE IS ENGAGED IN BUSINESS OF PROVIDING TECHNOLOGY KNOW - HOW FOR MANUFACTURING CHEMICAL PRODUCT RELATING TO PULP AND PAPER PRODUCT. THE ASSESSEE HAS ARRIVED ROYALTY INCOME ON ACCOUNT OF PROVIDING TECHNICAL KNOW - HOW PURCHASE FROM HOLDING COMPAY M/S HERCULES U.S. AS PER AGREEMENT THE ASSESSEE NEEDS TO PAY ROYALTY OF 5% ON NET SALE VALUE OF PRODUCT SOLD APART FROM WHOLESOME AMOUNT OF US$ 2,00,000/ - SPREAD OVER A PERIOD OF 10 YEARS. THE ASSESSEE ENTERED INTO SERVICE AGREEMENT DAT ED 01/07/2007 WITH M/S HERCULES ASIA PACIFIC SHANGHAI REGIONAL COMPANY LTD. AND AS PER THE AGREEMENT THE ASSESSEE NEEDS TO RECEIVE SERVICE FEE AT COST OF PLUS 5%. HOWEVER, THE ASSESSEE COMPANY HAS ALSO MADE AGREEMENT WITH TRANSFER OF TECHNOLOGY AND AS PER ARTICLE 7 THE LICENSEE WILL PAY ROYALTY OF 14% ON THE NET VALUE OF PRODUCT AFTER DEDUCTION OF SALES TAX, SERVICE TAX. IN RESPECT OF HERCON AND IMPRESS PRODUCTS THE ROYALTY CHARGED BY THE ASSESSEE WAS 5% AND THE ROYALTY CHARGED FOR OTHER PRODUCTS IS 14%. 8. THE LD. AR SUBMITTED THAT DURING THE PREVIOUS YEAR 2008 - 09 RELEVANT TO ASSESSMENT YEAR 2009 - 10. THE ASSESSEE HAS EARNED THE ROYALTY INCOME AND INCOME FROM SERVICES. THE COMPANY HAS ALSO UNDERTAKEN THE MARKETING IN BUSINESS DEVELOPMENT ROYALTY ACTIVITIES D URING THE RELEVANT YEAR. DURING THE YEAR THE ASSESSEE COMPANY EARNED ROYALTY INCOME AMOUNTING TO RS.2,09,92,115/ - FROM SUB LICENSING OF THE TECHNOLOGY TO UNRELATED PARTY. THE SAID TECHNOLOGY HAS BEEN PROVIDED TO THE ASSESSEE BY ITS PARENT COMPANY HERCULES INC ON LICENSE ON PAYMENT OF ROYALTY. AS PER THE ROYALTY AGREEMENT BETWEEN HERCULES INC AND THE ASSESSEE COMPANY, THE ASSESSEE COMPANY REQUIRED TO MAKE PAYMENT OF ROYALTY TO HERCULES INC @ 5% OF THE NE T SALE VALUE OF PRODUCT SOLD BY CONNELL BROTHERS COMPAN Y. AS PER THE AGREEMENT BETWEEN CBC AND THE ASSESSEE COMPANY THE ROYALTY INCOME WAS 5 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 EARNED ON DIFFERENT PRODUCTS. THE ASSESSEE WILL RECEIVE ROYALTY PAYMENT OF 14% ON NET SALES VALUE OF PRODUCT SOLD AGAINST WHICH THE ASSESSEE HAS TO MAKE PAYMENT OF 5% TO HE RCULES INC, USA, SO THE ASSESSEE IS LEFT WITH NET MARGIN OF 9%OF THE SALES VALUE EFFECTED. THE AO AND THE CIT(A) HAS HELD THAT THE ASSESSEE IS EARNING INCOME OF 5% AND 14% ON OTHER PRODUCT AND HE WORKED OUT NOTIONAL MARGIN OF 9%. 9. THE LD. AR SUBMITTED TH AT THE SIMILAR DISALLOWANCE WAS MADE IN AY 2008 - 09 WHICH WERE DELETED BY COMMISSIONER OF INCOME TAX (APPEALS) SPEAKING ORDER AND WHICH WERE CONFIRMED BY THE TRIBUNAL. THEREFORE, THIS APPEAL MAY BE ALLOWED. 10. THE LD. DR SUBMITTED THAT THE CIT(A) HAS VERI FIED CLAUSE 7 WAS ASKED AGREEMENT WHEREIN IT IS INDICATED THAT CBC WILL PAY THE ASSESSEE OF 5% OF NET VALUE OF HERCON PRODUCT MANUFACTURING AND SOLD. THE LICENSEE WILL PAY THE ROYALTY TO LICENSOR. THE COPY OF THE AGREEMENT DID NOT FIND A PLACE PRODUCT HERC ON AND IMPRESS. THEREFORE, CONSIDERING THE SAME THE COMMISSIONER HAS RIGHTLY DISMISSED THE APPEAL OF THE ASSESSEE. 11. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT THE SIMILAR ROYALTY EXPENDITURE AMOUNTING TO RS. 23,66,000 / - WAS DELETED BY CIT(A) FOR AY 2008 - 09. IN AY 2008 - 09 THE ASSESSING OFFICER H AS VERIFIED AND FOUND THAT THE ASSESSEE WAS DERIVING ROYALTY INCOME MAINLY ON TECHNICAL KNOW - HOW PURCHASE FROM M/S HERCULES USA VIDE AGREEMENT DATED 01/01/2003 WHOM THE ROYALTY IS PAID 5% OF NET SALE VALUE OF THE PRODUCT. THE ASSESSEE HAS SOLD THIS TECHNIC AL KNOW - HOW TO ONE PARTY CONNELL BROTHERS COMPANY (CBC) WITH WHICH HE ENTERED INTO AGREEMENT AND AS PER THIS SAID AGREEMENT THE ASSESSEE WOULD RECEIVE A ROYALTY PAYMENT OF 14% ON NET SALES VALUE OF THE 6 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 PRODUCT AGAINST WHICH THE ASSESSEE HAS TO MAKE PAYMENT OF 5% TO HERCULES USA. THUS THE DIFFERENCE OF 9% ON THE SALES VALUE IS EFFECTED. THE ASSESSEE HAS CREDITED IN PROFIT AND LOSS ACCOUNT 14% OF THE ROYALTY INCOME AND NET SALE VALUE WAS ARRIVED AT. AFTER GIVING 5% TO HERCULES AND CONSIDERING THE SAME AGREEME NT THE CIT(A) WAS OF A VIEW THAT THE ADDITION ON ACCOUNT OF DIFFERENCE IS NOT REQUIRED THEREFORE, SAME WAS DELETED BY CIT(A) AND THE MATTER WENT TO THE TRIBUNAL AND THE TRIBUNAL HAS CONFIRMED THE SAME. THEREFORE, THIS ISSUE IS COVERED IN THE FAVOUR OF THE ASSESSEE. 12. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES LOOKING TO THE FACTS OF THE CASE WE FIND THAT SIMILAR ADDITION WAS MADE IN AY 2008 - 09 BY THE AO HAS DISALLOWED THE ROYALTY INCOME OF RS. 23,66 , 0 00 / - AND WHEN THE MATTER TRAVEL LED TO CIT(A ) AND CIT(A) HAS DELETED THIS ADDITION BY OBSERVING AS UNDER: 6. I HAVE GONE THROUGH THE REMAND REPORT AND ALSO THE SUBMISSIONS MADE BY THE APPELLANT. IT IS SEEN THAT THE APPELLANT HAS ENTERED INTO ORIGINAL AGREEMENT IN THE YEAR 2003 AND THE SUBSEQUENT A MENDMENTS WERE ENTERED INTO IN THE YEAR 2005 WHICH HAS BEEN PLACED ON RECORD. THE SAID AGREEMENTS CLEARLY STATES THAT ON PRODUCTS HERCON AND IMPRESS, ROYALTY IS 5% AND FOR OTHER PRODUCTS IT IS 14%. REGARDING THE TOW AGREEMENTS NOT BEING REGISTERED, I AGREE WITH THE APPELLANTS CONTENTION THAT REGISTRATION OF THE AGREEMENT IS NOT NECESSARY AND THE AMENDMENT AGREEMENT WAS ENTERED INTO IN THE YEAR 2005 WHICH CLEARLY STIPULATES THE CHANGE IN ROYALTY PERCENTAGE. HENCE, DISALLOWANCE MADE ON ROYALTY INCOME OF RS.2 3,66,000/ - IS DELETED. MOREOVER, THE A.OS OBSERVATION IN THE REMAND REPORT THAT THE EXCESS EXPENDITURE INCURRED IS SERVICE CHARGES COMPRISING OF TRAVELLING EXPENSES IS IN CONTRAVENTION 7 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 OF THE AGREEMENTS IS NOT UNDERSTOOD IN THE PROPER PERSPECTIVE AND THE SAME IS NOT TENABLE. THIS GROUND OF APPEAL IS ALLOWED. 13 . MOREOVER THE TRIBUNAL IN ITA NO. 4380/M/2013 HAS DISMISSED THE APPEAL OF THE DEPARTMENT BY OBSERVING AS UNDER : 8. BEFORE US, THE LD. A.R. OF THE ASSESSEE SUBMITTED THAT SINCE THE ABOVE STATED PRODUCT 'HERCON AND IMPRESS' WERE NEWLY ADDED PRODUCTS AND T HAT IT WAS A COMMERCIAL DECISION OF THE ASSESSEE COMPANY TO SELL THE SAID PRODUCTS ON NO PROFIT BASIS SO AS TO ATTRACT MORE CUSTOMERS. IT HAS ALSO BEEN SUBMITTED THAT IN THE SUBSEQUENT ASSESSMENT YEAR 2011 - 12, THE PARENT COMPANY I.E. M/S. HERCULES INC, USA HAS WAIVED OFF THE ENTIRE ROYALTY PAYABLE BY THE ASSESSEE AND THAT THE ASSESSEE HAS NOT PAID ANY ROYALTY TO THE PARENT COMPANY AND THE ENTIRE AMOUNT HAS BEEN OFFERED TO TAX BY THE ASSESSEE COMPAN Y FOR A. Y. 2011 - 12. IT HAS, THEREFORE, BEEN CONTENDED THAT THE DISALLOWANCE MADE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WOULD RESULT IN DOUBLE TAXATION OF THE SAME INCOME. 9. CONSIDERING THE ABOVE CONTENTIONS, WE DO NOT FIND AN Y INFIRMITY IN THE ORDER OF THE LD. CIT(A) WHILE DELETING THE DISALLOWANCE OF ROYALTY EXPENDITURE. THE APPEAL OF THE REVENUE IS THEREFORE DISMISSED. 14 . WE RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL THE FACTS OF THIS CASE IN THIS YEAR IS RELATING TO THE ROYALTY INCOME. IN THIS YEAR THE ORIGINAL AGREEMENT ENTERED IN 2003 AND SUBSEQUENT AMENDMENT WAS ENTERED INTO THE YEAR 2005. THE SAID AGREE MENT CLEARLY STATED THAT ON PRODUCT HERCON 8 HERCULES INDUSTRIES ITA NO.2848 & 2849/M/2015 AND IMPRESS ROYALTY IS 5% AND FOR THE OTHER PRODUCT IT IS 14%. THE SIMILAR DISALLOWANCE IS MADE IN THE YEAR UNDER CONSIDERATION. THEREFORE, WE RESPECTFULLY FOLLOWING THE DECISION OF THE ASSESSEES OWN CASE WE ALLOW THE APPEAL OF THE ASSESSEE. JUDGEMENT PRONOUNCED IN THE OPEN COURT ON 29 T H MARCH, 2017. S D/ - S D/ - ( ASAWANI TANEJA ) ACCOUNTANT MEMBER (D.T.GARASIA) JUDICIAL MEMBER MUMBAI, DATE: 29 TH MARCH , 2017 *RAHUL SHARMA* COPY TO: 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) CONCERNED 4) THE CIT CONCERNED 5) THE D.R, H BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR I.T.A.T, MUMBAI