The ITO, Ward-1(3), Ahmedabad V. Arvind Brands Ltd., Ahmedabad

ITA 3256/AHD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6408 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 22-01-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 09-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: P M MEHTA
• Keywords: Depreciation; Royalty expenses; Revenue expenditure
• Section: 32

Judgement Text

ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHME DABAD ( BEFORE SHRI D. C. AGRAWAL & SHRI D. K. TYAGI) I.T.A. NO. 3256/AHD/2010 (ASSESSMENT YEAR : 2006 -2007) INCOME TAX OFFICER, WARD 1(3), INSURANCE BUILDING, ASHRAMROAD, AHMEDABAD. (APPELLANT) VS. ARVIND BRANDS LTD., ARVIND MILLS PREMISES, NARODA ROAD, AHMEDABAD. (RESPONDENT) PAN: AAACE 4173 D APPELLANT BY : SHRI S.K. GUPTA, SR. D.R. RESPONDENT BY : SHRI P.M. MEHTA. ( )/ ORDER PER: SHRI D. K. TYAGI , J.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST ORD ER OF LD. C.I.T.(A)-VI, AHMEDABAD DATED 5-10-2010 FOR ASSESSMENT YEAR 2006- 07. 2. THE REVENUE HAS TAKEN FOLLOWING TWO GROUNDS :- 1. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN AL LOWING THE ASSESSEES CLAIM OF RS. 94,40,000/- ON ACCOUNT OF ROYALTY TREA TING THE SAME AS REVENUE EXPENDITURE. 2. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN AL LOWING THE ASSESSEES CLAIM OF RS. 2,85,50,720/- ON ACCOUNT OF DEPRECIATI ON ON MARKETING AND DISTRIBUTION RIGHT AND LICENSE TO USE TRADEMARK. ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 2 3. AT THE TIME OF HEARING, AT THE OUTSET THE LD. CO UNSEL OF THE ASSESSEE SUBMITTED THAT THE GROUNDS TAKEN BY THE REVENUE ARE NOW COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THIS TRIBUNAL, IN ASSESSEES OWN CASE IN ITA NO.2320/AHD/2007 DATED 30-7-2010 FO R ASSESSMENT YEAR 2004- 05. 4. THE LD. D.R. HOWEVER, RELIED ON THE ORDER OF THE A.O. 5. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THE FIRST ISSUE IN RESPECT OF ASSESSEES CLAIM OF RS.94,40,000/- ON ACCOUNT OF ROYALTY TREATING THE SAME AS REVENUE EXPENDITURE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE, IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 WHE REIN FOLLOWING WAS HELD:- 9. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR RIVAL SUBMISSIONS. WE FIND THAT THE ISSUE IS COVERED IN F AVSSOUR OF THE ASSESSEE BY THE DECISION OF ITAT AHMEDABAD BENCH-A IN THE CASE OF ARVIND CLOTHING LTD., ITA NO. 1471/AHD/2005 AND ITA NO.1677/AHD/200 5 FOR A.Y. 2001- 02, ORDER DATED 6-11-2009, WHEREIN THE TRIBUNAL VID E PARAS 33 TO 35 OF THE ORDER HAS DEALT WITH THE ISSUE AS UNDER:- 33. FROM THE READING OF ABOVE JUDGMENTS, WE NOTICE THAT WHERE TECHNICAL KNOW-HOW IS OBTAINED AND THE BENEFIT PERM EATES/SPILLS BEYOND THE PERIOD OF THE AGREEMENT, THE ASSESSEE GE TS ENDURING BENEFIT. BUT IN THE PRESENT CASE, IT IS CLEAR FROM THE AGREEMENTS THAT SUCH RIGHT TO USE THE KNOW-HOW WOULD CEASE THE MOME NT AGREEMENT IS TERMINATED. THE ASSESSEE DOES NOT GET ANY RIGHT TO MANUFACTURE THE LICENSED PRODUCT AND SALE THEM IN INDIA OR ABROAD A FTER THE TERMINATION OF THE AGREEMENT. THEREFORE, AS RIGHTLY OBSERVED BY THE LD. CIT (APPEALS) THIS DECISION WOULD NOT BE APPLICABLE ON THE FACTS OF THE PRESENT CASE. ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 3 34. ON THE OTHER HAND, THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE JUDGMENTS REFERRED TO BY THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE. IN BRIEF, THE HEAD NOTES OF THOSE JUD GMENTS ARE AS UNDER:- (A) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. J YOTI ELECTRIC MOTORS LTD. 255 ITR 345 (GUJ.) WHERE THE ASSESSEE WHICH WAS MANUFACTURING MOTORS , PAID THE SUM OF RS. 50,000 TOWARDS TECHNICAL REPORT FEES FOR ASCERTAINING FEASIBILITY OF MANUFACTURING MOTORS OF KINDS DIFFER ENT FROM THOSE MANUFACTURED BY IT: HELD, THAT THE AMOUNT WAS REVENUE EXPENDITURE AND T HE ASSESSEE WAS ENTITLED TO DEDUCTION IN RELATION THERETO IN COMPUT ING ITS PROFITS. UNDER AN AGREEMENT DATED SEPTEMBER 1, 1972, WITH JYOTI LT D., THE ASSESSEE WAS GRANTED A NON-EXCLUSIVE LICENCE TO MANUFACTURE ELECTRIC MOTORS WHICH WERE MANUFACTURED BY JYOTI LTD., AND FOR THIS PURPOSE JYOTI LTD., WAS TO RENDER TECHNICAL AND OTHER EXPERIENCED GUIDANCE TO THE ASSESSEE. JYOTI LTD. RESERVED THE RIGHT TO GRANT S IMILAR LICENCES TO ANY OTHER PARTIES. THOUGH THE PERIOD OF THE AGREEMENT W AS TEN YEARS AND COULD BE EXTENDED FOR A FURTHER PERIOD AND THE AGRE EMENT WAS TO CONTINUE IN FORCE UNTIL IT WAS TERMINATED, THE AGRE EMENT WAS LIABLE TO BE TERMINATED EVEN EARLIER THAN THE STIPULATED DATE , AND UPON TERMINATION THE ASSESSEE WAS REQUIRED TO RETURN TO JYOTI LTD. ALL THE TECHNICAL DOCUMENTATION WITHIN ONE MONTH IN THE EVE NT OF TERMINATION OR LAPSE OF THE AGREEMENT. THE ASSESSEE HAD NO SELL ITS PRODUCTS SOLELY THROUGH THE SOLE SELLING APPOINTED BY JYOTI LTD. TH E ASSESSEE WAS TO PAY ROYALTY AT THE RATE OF 7 PER CENT, ON THE NET S ALE PRICE OF THE PRODUCTS MANUFACTURED IN TERMS OF THE AGREEMENT: HELD, THAT THE ASSESSEE DID NOT ACQUIRE ANY ENDURIN G ADVANTAGE IT HAD MERELY BEEN GRANTED A NON-EXCLUSIVE LICENCE FOR THE USE OF AN ASSET. THE ROYALTY WAS PAYABLE ON THE BASIS OF THE SALES W HICH THE LICENSEE WOULD MAKE AND THE PAYMENT WAS STRICTLY LINKED WITH THE QUANTUM OF SALES AND WOULD VARY WITH THE QUANTUM OF SALES. THE AMOUNT OF ROYALTY PAID BY THE ASSESSEE WAS REVENUE EXPENDITUR E AND ALLOWABLE AS A DEDUCTION IN COMPUTING ITS PROFITS. JYOTI ELECTRIC MOTORS LTD. V CIT [1999] 237 ITR 280 (GUJ.) EXPLAINED. ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 4 HELD, ALSO, THAT THE AMOUNT OF KNOW-HOW FEES OF RS. 3 LAKHS AND ROYALTY OF RS.1,03,068 PAID BY THE ASSESSEE UNDER A GREEMENT JANUARY 1, 1981, WERE ALLOWABLE AS REVENUE EXPENDITURE. DECISION OF THE GUJARAT HIGH COURT IN INCOME-TAX AP PLICATION NO.269 OF 1999, DATED NOVEMBER 3, 1999, FOLLOWED. (B) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. G UJARAT CARBON LTD., 254 ITR 295 (GUJ.) THE ASSESSEE-COMPANY HAD ENTERED INTO TWO AGREEME NTS WITH A COLLABORATOR FOR OBTAINING TECHNICAL KNOW-HOW AS WE LL AS VARIOUS SERVICES IN RESPECT OF SPOT ASSISTANCE TO PROMOTE S ALE OF FURNISHED CARBON BLACK MANUFACTURED BY THE ASSESSEE. UNDER TH E FIRST AGREEMENT, IN ADDITION LUMP-SUM PAYMENT, THE ASSESSEE HAD TO P AY THE COLLABORATOR A ROYALTY BASED ON FIGURES OF SALES FO R A PERIOD OF FIVE YEARS IN RETURN FOR VARIOUS AFTER-INSTALLATION SERV ICES BY TECHNICALLY QUALIFIED PERSONS FOR SPOT TECHNICAL ASSISTANCE TO BE RENDERED BY THE COLLABORATOR. THERE WAS NO PROVISION IN THAT AGREEM ENT REQUIRING THE ASSESSEE TO RETURN THE DESIGNS ETC., AFTER THE EXPI RY OF THE PERIOD OF FIVE YEARS. UNDER THE SECOND AGREEMENT, THE ASSESSEE WAS REQUIRED TO PAY A ROYALTY OF 3 PER CENT, OF THE NET EX-FACTORY SALE P RICE FOR THE SUPPLY OF INFORMATION ON DAY-TO-DAY DEVELOPMENTS IN THE RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE AND PERTAINING TO THE RESEARCH CARRIED OUT BY THE COLLABORATOR. THE APPELLATE TRIBUNAL HEL D (I) THAT THE ROYALTY UNDER THE FIRST AGREEMENT PERTAINED TO SERV ICES IN RESPECT OF THE STAGE AFTER INSTALLATION OF THE PLANT; AND (II) THA T THE SUPPLY OF INFORMATION UNDER THE SECOND AGREEMENT AS REGARDS D AY-TO-DAY DEVELOPMENTS IN VIEW OF THE RESEARCH CARRIED OUT BY THE COLLABORATOR WAS ONLY FOR THE PURPOSE OF OBTAINING INFORMATION A S TO THE RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE AND, THEREFOR E, PAYMENTS OF ROYALTY UNDER BOTH THE AGREEMENTS WERE DIRECTLY REL ATABLE TO SERVICES WHICH WERE IN THE REVENUE FIELD AND WERE ALLOWABLE AS REVENUE EXPENDITURE. ON A REFERENCE: HELD, AFFIRMING THE DECISION OF THE APPELLATE TRIBU NAL, THAT THE AMOUNTS PAID BY THE ASSESSEE TOWARDS ROYALTY TO THE COLLABORATORS WERE REVENUE EXPENDITURE. THAT THERE WAS NO PROVISI ON IN THE FIRST ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 5 AGREEMENT FOR RETURN THE DESIGNS ETC., DID NOT AFFE CT THE NATURE OF THE ROYALTY PAYABLE. BY THE COURT: WHENEVER ANY PARTY CHALLENGES THE INT ERPRETATION OF ANY DOCUMENT, PRIMARILY IT WOULD BE THE DUTY OF THAT PA RTY TO PLACE SUCH DOCUMENT ON RECORD SO AS TO ENABLE THE COURT TO APP RECIATE WHETHER THE LOWER AUTHORITIES HAVE RIGHTLY READ THE DOCUMENT. (C) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. W AVIN (INDIAN) LTD. 236 ITR 314 (SC). HELD, THAT, IN THE INSTANT CASE, THE EXPENDITURE WAS INCURRED TO OBTAIN BENEFIT OF RESEARCH AND DEVELOPMENT MADE BY THE FOR EIGN COMPANY. THE TECHNICAL INFORMATION GIVEN TO THE INDIAN COMPA NY WAS NON- EXCLUSIVE AND NON-TRANSFERABLE. IN OTHER WORDS, THIS WAS NOT AN OUT AND OUT SALE OF TECHNICAL KNOW-HOW. THE ASSESSEE WA S MERELY GIVEN A NON-EXCLUSIVE AND NON-TRANSFERABLE RIGHT OF USER OF THE TECHNICAL INFORMATION. THE EXPENDITURE WAS DEDUCTIBLE. DECISION OF THE MADRAS HIGH COURT IN CIT V. WAVIN INDIA LTD. [1983] 143 ITR 281 AFFIRMED. (D) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. SWARAJ ENGINES LTD. (2008) 301 ITR 284 (P&H). THE PRE-REQUISITE FOR APPLICATION OF SECTION 35AB OF THE INCOME-TAX ACT, 1961, IS THAT THE PAYMENT HAS TO BE AS LUMP SU M CONSIDERATION FOR ACQUIRING ANY KNOW-HOW. HELD, ACCORDINGLY, DISMISSING THE APPEAL, THAT THE PRE-CONDITION FOR APPLICATION OF SECTION 35AB WAS TOTALLY MISSING IN THE ASSESSEES CASE AS THE PAYMENT BEING MADE TO K WAS NOT LUMP SUM PAY MENT FOR ACQUIRING OF THE KNOW-HOW RATHER IT WAS PAYABLE PER IODICALLY ON THE BASIS OF PERCENTAGE OF INVOICED PRICE DEPENDING UPO N THE NUMBER OF ENGINES MANUFACTURED. THIS WAS NOT A CASE OF OUTRIG HT SALE OF TECHNICAL KNOW-HOW. THUS, THE ROYALTY PAYMENTS MADE BY THE ASSESSEE UNDER THE AGREEMENT DID NOT FALL WITHIN THE DOMAIN OF SECTION 35AB. CIT VS. WEAVIN (INDIA) LTD. [1999] 236 ITR 314 (SC ) APPLIED. ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 6 (E) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. P OWER BUILD LTD. 355 ITR 19 (GUJ.) THE ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTU RING VARIOUS TYPES OF MOTORS AND WEIGHING MACHINES CLAIMED DEDUCTION O F THE PAYMENT MADE TOWARDS ROYALTY TO THE COLLABORATORS. THE INCO ME-TAX OFFICER FOUND THAT IN VIEW OF THE AMENDED AGREEMENT THE ASS ESSEE WAS ENTITLED TO RETAIN ALL THE TECHNICAL DATA, DESIGN, DOCUMENTA TION, ETC., AND THERE WAS ALSO NO RESTRICTION ON MANUFACTURE. ACCORDINGLY , THE INCOME TAX OFFICER NEGATIVED THE CLAIM OF THE ASSESSEE. THE TR IBUNAL ALLOWED THE EXPENDITURE. ON A REFERENCE: HELD, THAT IN VIEW OF THE TRIBUNALS FINDING THAT THE ASSESSEE WAS NOT A NEW UNIT ENGAGED IN MANUFACTURING VARIOUS TYPE OF M OTORS AND WEIGHING MACHINES AND THE ADVANTAGE AND BENEFIT WAS ACQUIRED ONLY FOR RUNNING THE EXISTING BUSINESS, THE AMOUNT PAID WAS ALLOWABLE AS REVENUE EXPENDITURE. CIT VS. SAYAJI IRON AND ENGINEERING CO. LTD. [1994 ] 210 ITR 950 (GUJ.) AND CIT V. SUHRID GEIGY LTD. [1996] 220 ITR 153 (GUJ.) FOLLOWED. 35. AS A RESULT, WE HOLD THAT THE ENTIRE EXPENDITUR E MADE BY THE ASSESSEE THIS YEAR IS REVENUE IN NATURE AND DISALLOWANCE NEE D NOT BE MADE EVEN 1/4 TH. NOTWITHSTANDING, THE REVENUE HAS TAKEN A VIEW IN TH E EARLIER ASSESSMENT YEARS, I.E. 1996-97 AND 1997-98 THAT THE ENTIRE PA YMENT IS OF REVENUE IN NATURE AND NO DISALLOWANCE OUT OF SUCH PAYMENTS HAD BEEN MADE. THEREFORE, THERE IS NOR REASON FOR TAKING A DIFFERENT VIEW THA N BY THE DEPARTMENT IN EARLIER ASSESSMENT YEARS. WE ARE FORTIFIED IN OUR V IEW BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RADHASWAMY SAT SANG VS. CIT (1992) 193 ITR 321 (SC), OF CIT VS. DALMIA PROMOTORS PVT. LTD. (2006) 281 ITR 346 (DELHI), OF CIT VS. SOOD HARVESTOR (2008) 304 I TR 279 (P&H) AND OF CIT VS. DYNAVISION LTD. (2004) 256 ITR 289 (MAD.). RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF TH E TRIBUNAL, WE UPHOLD THE ORDER OF THE LD. CIT (A) IN DELETING THE IMPUGNED D ISALLOWANCE @ 1/4 TH OF ROYALTY EXPENSES AMOUNTING TO RS.38,31,181/-. THUS, GROUND NO.2 IN THE REVENUES APPEAL ALSO STANDS DISMISSED. ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 7 6. THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THIS TRIBUNAL (SUPRA), THE GROUND NO.1 OF THE REVENUE IS DISMISSE D. 7. NOW COMING TO THE SECOND GROUND RELATING TO ASSE SSEES CLAIM OF RS. 2,85,50,720/- ON ACCOUNT OF DEPRECIATION ON MARKETI NG AND DISTRIBUTION RIGHT AND LICENSE TO USE TRADEMARK IS ALSO COVERED BY THE SAM E DECISION WHEREIN THIS TRIBUNAL AT PARAGRAPH 6 HELD AS UNDER:- 6. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY G ONE THROUGH THE RECORDS. BEFORE US, THE LD. AR OF THE ASSESSEE REIT ERATED THE SUBMISSIONS AS WERE MADE BEFORE THE AUTHORITIES BELOW AND STRONGLY SUPPORTED THE IMPUGNED ORDER OF THE LD. CIT (A). THE LD. D.R. ON THE OTHER HAND, SUPPORTED THE IMPUGNED ORDER OF THE ASSESSING OFFIC ER. THE MOOT QUESTION THAT IS TO BE DECIDED WHETHER THE DEPRECIATION CLAI MED ON THE INTANGIBLE ASSETS AMOUNTING TO RS. 12,03,12,500 WHICH RELATES TO THESE TWO ASSETS IN THE NAMES OF BRAND NAME ARVIND AND MARKETING AND DIS TRIBUTION NETWORK IS ALLOWABLE U/S. 31(1) (II) OF THE INCOME-TAX ACT, 19 61.GOING THROUGH THE SAID SECTION, IT IS VERY MUCH CLEAR THAT THIS SECTION IN CLUDES KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENSES, FRANCHISEES OR A NY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIB LE ASSETS. THE REVENUE IS NOT DISPUTING THAT THE ASSESSEE HAS ACQUIRED THESE TWO INTANGIBLE ASSETS IN QUESTION UNDER AN AGREEMENT. THE ITEMS MENTIONED IN SECTION 32 (1)(II) ARE WIDE ENOUGH SO AS TO INCLUDE THESE TYPES OF INTANGI BLE ASSETS UNDER CONSIDERATION. THEREFORE, IN OUR CONSIDERED VIEW, T HE LD. C.IT(A) HAS RIGHTLY ALLOWED THE DEPRECIATION CLAIMED BY THE ASSESSEE AN D AS SUCH, IT NEEDS NO INTERFERENCE. 8. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THIS TRIBUNAL (SUPRA), THE GROUND NO.2 OF THE REVENUE IS DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ITA NO.3256/AHD/2010 ASSESMENT YEAR 2006-07 8 ORDER PRONOUNCED IN OPEN COURT ON 17 -06 - 2011. SD/- SD/- (D. C. AGARWAL) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER. AHMEDABAD. DATED: 17 - 06 - 2011. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS)-VI, AHMEDABAD. 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD. 1.DATE OF DICTATION 17 - 06 -2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 17 / 06 / 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S 17 - 06 -2011. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 17 -06 -2011 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 20 -06 -2011 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 2 0 -06 -2011. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..