ACIT, New Delhi V. M/s Modi Revlon Pvt. Ltd., New Delhi

ITA 3738/DEL/2011

• Counselvise Citation: 373820114 RSA 2011
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 11-10-2011
• Assessment Year: 2008-2009
• Appeal Filed On: 03-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RA J TANDON
• Keywords: Capital asset; Business expenditure; Royalty expenses; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E DELHI BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL ITA NO. 3738(DEL)/2011 ASSESSMENT YEAR: 2008-09 ASSTT. COMMISSIONER OF MODI REVLON PRIVATE LTD., INCOME-TAX, CIRCLE 5(1), VS. 1400, MODI TOWER, 98, NEHRU NEW DELHI. PLACE, NEW DELHI. PAN: AAACM5901B (APPELLANT) (RESPON DENT) APPELLANT BY : SHRI RAJ TANDON, CIT, DR RESPONDENT BY: SH RI SALIL KAPOOR, ADVOCATE & SHRI ANKIT GUPTA, ADVOCATE DATE OF HEARING : 11.10.2011 DATE OF PRONOUNCEMENT: 21.10.2011. ORDER PER K.G. BANSAL : AM GROUND NOS. 2 AND 2.1 TAKEN UP BY THE REVENUE AR E AGAINST DELETING OF THE DISALLOWANCE OF RS. 4,54,85,325/- MADE BY THE AO OUT OF ROYALTY EXPENSES. RELIANCE HAS BEEN PLACED ON THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEARS LTD., ( 1984) 232 ITR 359. 2. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE ISSUE STANDS COVERED BY THE DECISION OF D BENC H OF DELHI TRIBUNAL IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEARS 2005-06 AND 2006-07 IN ITA NO. 3738(DEL)/2011 2 ITA NOS. 5 AND 2063(DEL)/2009, A COPY OF WHICH HAS BEEN PLACED BEFORE US. THE RELEVANT PORTION OF THE DECISION IS REPRODUCED BELOW:- 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFU LLY AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. F ROM THE RECORD, WE FOUND THAT THE KNOW-HOW AGREEMENT BETWEE N RML AND THE ASSESSEE HAD BEEN INITIALLY FOR A PERIOD CO NTAINED IN FOREIGN COLLABORATION LETTER ISSUED BY THE FIPB, GO VT.OF INDIA. ACCORDING TO THEIR LETTER BEARING NO.FC.II.27(94) D ATED 14.1.1994, THE DURATION OF THE AGREEMENT APPROVED W AS 10 YEARS FROM THE DATE OF AGREEMENT OR 7 YEARS FROM TH E DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. ACCORDINGLY, THE SEVEN YEARS TERM EXPIRED ON 29.8.2002. PURSUANT TO PRESS NOTE NO.2 OF 2003 DATED 24.6.2003 ISSUED BY GOVT.OF INDIA, THE ASSESSEE MADE A REQUEST TO THE GOVERNMENT ON 21.7.2003 FOR SEEKING EXTENSION OF TECHNICAL COLLAB ORATION AGREEMENT. THE DEPARTMENT OF ECONOMIC AFFAIRS, GOVT .OF INDIA ACCORDED THE APPROVAL BY LETTER OF EVEN NO. DATED 6 .8.2003. ACCORDINGLY, THE SUPPLEMENT AGREEMENT DATED 16.9.20 03 WAS EXECUTED BETWEEN RML AND THE ASSESSEE, WHICH IS MAD E EFFECTIVE FROM 1.10.2003. CLAUSE 1 OF THE SAID SUPP LEMENT AGREEMENT READS AS UNDER:- THE AGREEMENT WILL CONTINUE FROM 1 OCTOBER 2003 UN TIL SUCH TIME AS BOTH PARTIES MUTUALLY DECIDE TO TERMIN ATE THE AGREEMENT. 6. ACCORDING TO CLAUSE 3 OF THE AGREEMENT, THIS SUP PLEMENT AGREEMENT IS PART OF THE ORIGINAL ASSESSMENT EXCEPT AS MODIFIED AND THEREFORE, ALL THE TERMS AND CONDITION S REMAINED UNCHANGED. THE ORIGINAL KNOW-HOW LICENSE AGREEMENT WAS ENTERED INTO ON 14.1.1994 AT THE TIME OF INCEPTION OF BUSINESS OF THE COMPANY AND THE PAYMENTS OF ROYALTY UNDER TH AT AGREEMENT WERE MADE TILL AUGUST 2002 I.E. FOR A PER IOD OF 7 YEARS FROM THE COMMENCEMENT OF AGREEMENT AS PER THE APPROVAL OF THE GOI. THE PAYMENT OF ROYALTY IN THE YEAR UNDER ASSESSMENT WAS MADE IN TERMS OF SUPPLEMENT AGREEMEN T DATED 16.9.2003. HENCE, THERE IS NO QUESTION OF ANY FRESH INPUT OF KNOW-HOW/TECHNOLOGY AND THE PAYMENTS ARE O NLY IN ITA NO. 3738(DEL)/2011 3 RESPECT OF CONTINUED USE OF BRAND NAME AND PATENTS OWNED BY THE FOREIGN COMPANY. HENCE NO BENEFIT OF ENDURING N ATURE IS DERIVED BY ASSESSEE AGAINST THESE PAYMENTS OF ROYAL TY. AS PER VARIOUS CLAUSES OF KNOW-HOW LICENSE AGREEMENT V IS--VIS SUPPLEMENT AGREEMENT DATED 16.9.2003, THE ROYALTY P AYABLE AS NET SALES OF TAXES THE KNOW-HOW HAS BEEN PROVIDE D BY THE CONTRACT MANUFACTURER IN TERMS OF CLAUSE 4.01 OF TH E AGREEMENT FOR LIMITED PURPOSE OF MANUFACTURING REVL ON PRODUCTS ONLY WHEN PASSING ON ANY PROPERTY IN THE S ALE TO THE ASSESSEE. OBLIGATIONS OF THE CONTRACT MANUFACTURER WERE CLEARLY DEFINED IN THE AGREEMENT BETWEEN THE ASSESS EE COMPANY AND THE CONTRACT MANUFACTURER, ACCORDING TO WHICH OBLIGATION RELATING TO ROYALTY PAYMENT HAS NOT BEEN PASSED ON TO THE CONTRACT MANUFACTURER. THE ENTIRE BENEFIT OF THE KNOW- HOW WAS MEANT FOR MANUFACTURING OF THE PRODUCTS TO BE SUPPLIED TO THE COMPANY AND THERE WAS NO OBLIGATION OF CONTRACTING MANUFACTURER TO PAY ROYALTY TO THE LICE NSOR. SINCE THE ASSESSEE COMPANY WAS ENJOYING THE COMPLETE BENE FIT OF THE KNOW-HOW TO RUN ITS BUSINESS, THE EXPENDITURE I NCURRED EVERY YEAR ON PAYMENT OF ROYALTY WAS REVENUE IN NAT URE AND IS VERY MUCH A BUSINESS EXPENDITURE. THESE EXPENDITURE CANNOT BE CLASSIFIED AS CAPITAL EXPENDITURE. FROM THE RECO RD, WE FOUND THAT ARRANGEMENT ENTERED INTO BY THE ASSESSEE WITH KCPL AND WMPL WAS FOR BONA-FIDE COMMERCIAL NEEDS WH ICH CANNOT BE TESTED AGAINST TOUCHSTONE OF TAX AVOIDANC E. THE ROYALTY PAYMENT WAS MADE BY THE ASSESSEE IN THE NOR MAL COURSE OF ITS BUSINESS WHICH IS REVENUE IN NATURE, ALLOWABLE U/S 37(1) OF THE ACT. THE KNOW-HOW LICENSE WAS GRAN TED WAY BACK IN 1994 IN TERMS OF AN EARLIER AGREEMENT DATED 22.7.1994 AND THE PAYMENT OF ROYALTY WAS IN TERMS OF THE SUPP LEMENTARY AGREEMENT DATED 16.9.2003. EVEN AS PER PARA 12.01 O F THE AGREEMENT UPON EXPIRATION OR TERMINATION OF THIS AG REEMENT, THE LICENSEE SHALL HAVE NO RIGHT TO EXPLOIT OR IN A NY WAY TO USE THE KNOW-HOW AND SHALL FORTHWITH DISCONTINUE ALL US E OF THE KNOW-HOW AND SHALL NOT THEREAFTER USE THE KNOW-HOW AND SO ON. THUS, IT IS CLEAR THAT THE KNOW-HOW HAS NOT BEE N SOLD TO THE COMPANY AND THE LICENSOR HAS AN EXCLUSIVE OWNER SHIP OF THE KNOW-HOW, THEREFORE THERE IS NO REASON TO DISAL LOW THE EXPENDITURE INCURRED ON ROYALTY PAYMENT WHICH IS RE VENUE IN NATURE, BY TREATING THE SAME AS CAPITAL EXPENDITURE . ITA NO. 3738(DEL)/2011 4 7. THE CIT(A) HAS ACCEPTED ASSESSEES METHOD OF CO MPUTING ROYALTY ON THE BASIS OF SALES VALUE OF WML AND ADDI TION MADE IN THIS REGARD OF RS.21.39 MILLION DELETED. HOWEVER , CIT(A) HAS MADE AD-HOC ADDITION OF 5% OF ROYALTY RELYING O N HON'BLE SUPREME COURT JUDGMENT IN THE CASE OF SOUTHERN SWIT CHGEAR. THE CIT(A) HAS MADE A CHART SHOWING COMPARISON OF T HE FACTS OF THE CASE OF SOUTHERN SWITCHGEAR AND THE ASSESSEE S OWN FACTS AND FOUND OUT THAT ONLY ONE FACT I.E. THE ASS ESSEE HAS AN EXCLUSIVE RIGHT TO MANUFACTURE IS COMMON IN BOTH. T HE CIT(A) HAS HELD THAT SINCE ONE OF THE CONDITION MENTIONED IN THAT ORDER NAMELY THE RIGHT TO MANUFACTURE IS EXCLUSIVE IN INDIA IS ALSO APPLICABLE IN CASE OF ASSESSEE, THEREFORE SMAL L PART OF PAYMENT (5% OF ROYALTY) MADE BY ASSESSEE DESERVES T O BE CAPITALIZED AS AGAINST CAPITALIZATION OF 25% OF ROY ALTY PAID. 8. IN TERMS OF THE AGREEMENT, THERE IS NO DISPUTE T O THE FACT THAT THE ASSESSEE HAD BEEN GIVEN ONLY RIGHT TO USE KNOW-HOW AND THE PATENTS AND AT NO POINT OF TIME ANY PROPERT Y OF ENDURING BENEFIT HAS BEEN TRANSFERRED IN FAVOUR OF THE ASSESSEE. IN VIEW OF THE DECISION OF HON'BLE SUPREM E COURT IN THE CASE OF CIBA INDIA 69 ITR 692, IT CAN SAFELY BE CONCLUDED THAT WHERE THE ASSESSEE CANNOT ASSIGN OR SUBLICENSE ANY PART OF THE RIGHT OBTAINED FROM THE KNOW-HOW, THE PAYMENT MADE THEREOF CANNOT BE TERMED AS CAPITA L IN NATURE. IN THE INSTANT CASE, RML HAS NOT PROVIDED A NY ASSETS TO THE ASSESSEE FOR ESTABLISHING ANY FACTORY, BY GI VING RIGHT TO USE TECHNICAL KNOW-HOW, NO ASSET OF ENDURING NATURE WAS ACQUIRED AND UPON TERMINATION THE ASSESSEE WAS NOT ENTITLED TO USE THE INDUSTRIAL PROPERTIES AND KNOW-HOW OF RM L. ENDURING BENEFIT CAN BE SAID ONLY IF RIGHT TO MANUF ACTURE IS GIVEN EVEN AFTER TERMINATION OF THE AGREEMENT. 9. IN THE RESULT, THE GROUND TAKEN BY THE ASSESSEE WITH REGARD TO REVENUE NATURE OF ROYALTY PAYMENT IS ALLOWED, WH EREAS THE GROUND OF THE REVENUE IS DISMISSED IN BOTH THE YEAR S UNDER CONSIDERATION. 2.1 THE LD. CIT, DR FAIRLY SUBMITTED THAT THE MAT TER STANDS COVERED BY THE AFORESAID DECISION, HOWEVER, THE DECISION HAS NOT BEEN ACCEPTED BY ITA NO. 3738(DEL)/2011 5 THE REVENUE. THERE ARE STRONG REASONS TO HAVE A RE-LOOK AT THE DECISION AND, THEREFORE, EVEN IF THE PRESENT BENCH OF THE TRIBUNAL CHOOSES TO FOLLOW THE EARLIER DECISION, HIS SUBMISSIONS MAY BE I NCORPORATED IN THE ORDER. 2.2 THE LD. CIT, DR BRIEFLY FURNISHED THE FINDINGS OF THE AO THAT (I) THE COMPUTATION OF ROYALTY IS NOT CORRECT AS PER AGRE EMENT, (II) THE EXPENDITURE ON ROYALTY HAS NOT BEEN INCURRED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF BUSINESS AS THE ASSESSEE NEITHER MANUFACTURES TH E GOODS NOR SELLS THEM ON ITS OWN, AND (III) A PART OF THE EXPENDITURE IS CAPITAL IN NATURE IN VIEW OF THE DECISION OF APEX COURT MENTIONED IN THE GROU ND OF THE REVENUE. BRIEFLY, THE FACTS ARE THAT THE ASSESSEE HAS B EEN PAYING ROYALTY TO REVLON MAURITIUS LTD. COMPUTED @ 5% OF NET DOMESTIC SAL ES AND 8% OF EXPORT SALES. THE AMOUNT PAYABLE AS PER THE AGREEMENT COMES TO RS. 3,40,52,880/- AS PER COMPUTATION FURNISHED ON PA GE 5 OF THE ASSESSMENT ORDER. AS AGAINST THE AFORESAID, THE ASSESSEE HA S CLAIMED DEDUCTION OF RS. 7,10,24,985/- AS PER COMPUTATION GIVEN ON PAGE 2 OF THE ASSESSMENT ORDER. THE AO HAS CONSIDERED 75% OF THE ROYALTY PAYABLE AS REVENUE EXPENDITURE AND 25% AS CAPITAL EXPENDITURE. THEREFORE, THE REV ENUE EXPENDITURE IS COMPUTED AT RS. 2,55,39,660/-. THUS, THE CLAIM TO THE EXTENT OF RS. 4,54,85,325/- HAS NOT BEEN ALLOWED. ITA NO. 3738(DEL)/2011 6 2.3 THE LD. DR HAS DRAWN OUR ATTENTION TO VARI OUS PAGES OF THE PAPER BOOK, THE CONTENTS OF WHICH ARE DISCUSSED HEREIN AFTER BRIEFLY. IN THE AGREEMENT DATED 27.07.1994, UNDER WHICH THE ROYALT Y IS PAID, THE TERM KNOW-HOW MEAN FORMULAE, PROCESSES, RECEIPTS, P RODUCT SPECIFICATION, TECHNICAL AND MANUFACTURING DATA, INFORMATION, EQU IPMENT SPECIFICATION, SPECIFICATION OF RAW-MATERIAL, AND OTHER TECHNICAL INFORMATION AND DATA NECESSARY TO MANUFACTURE REVLON PRODUCTS. VARIOU S LICENSES HAVE BEEN GRANTED TO THE ASSESSEE AS PER ARTICLE 2 UNDER TH E HEAD KNOW-HOW LICENSE AND PATENT LICENSE. UNDER THE KNOW-H OW LICENSE, THE LICENSOR GRANTED TO THE ASSESSEE THE EXCLUSIVE R IGHT TO USE THE KNOW-HOW IN ANY PLANT APPROVED BY THE LICENSOR IN ACCORDANCE W ITH THE PROCESSES, SPECIFICATION AND RECIPES THEREOF IN CONNECTION W ITH MANUFACTURE, MARKETING, SALE AND DISTRIBUTION OF REVLON PRODUC TS IN THE TERRITORY. UNDER THE PATENT LICENSE, THE ASSESSEE HAS BEEN GRANTED EXCLUSIVE RIGHT TO USE THE PATENTS IN THE MANUFACTURE, DISTRIBUTION AND SALE OF REVLON PRODUCTS IN THE TERRITORY. THE LICENSOR IS UNDER OBLIGATION TO PROV IDE FREE OF COST ALL MODIFICATIONS AND IMPROVEMENTS MADE BY IT TO THE K NOW-HOW AND EVEN THE ASSESSEE IS OBLIGED THAT ANY RIGHT TO REGISTER AND OBTAIN PATENTS IN ANY RESPECT OF SUCH MODIFICATIONS AND IMPROVEMENTS VES T EXCLUSIVELY IN THE ITA NO. 3738(DEL)/2011 7 LICENSOR. IN VIEW OF THE IMPROVEMENT CLAUSE, IT I S SUBMITTED THAT THE FINDING OF THE TRIBUNAL IN PARAGRAPH NO. 6 TO THE EFFECT THAT THERE IS NO QUESTION OF ANY FRESH IN-PUT OF KNOW-HOW OR TECHNO LOGY AND PAYMENTS ARE MADE IN RESPECT OF CONTINUED USE OF BRAND NAME AN D PATENT OWNED BY THE FOREIGN COMPANY IS NOT CORRECT. CONSEQUENTLY, THE FINDING THAT NO BENEFIT OF ENDURING NATURE IS DERIVED BY THE ASSESSEE REQUIRES RE-CONSIDERATION. THE AGREEMENT HAS BEEN NOVATED ON 16.09.2003 UNDE R WHICH THE NOVATED AGREEMENT SHALL REMAIN IN FORCE FROM THE DATE OF AGREEMENT TILL SUCH TIME AS BOTH THE PARTIES MUTUALLY DECIDE TO TERMINATE THE SAME. THE AGREEMENT IS OPEN ENDED AND, THEREFORE, VARIOUS BENEFITS D ERIVED BY THE ASSESSEE FROM THE AGREEMENT ARE OF ENDURING NATURE. 2.4 RELIANCE HAS BEEN PLACED ON THE DECISION OF H ONBLE DELHI HIGH COURT IN THE CASE OF MY FAIR LADY LTD. VS. ITO, ( 1988) 41 TAXMAN 22 (MAG.). IN THIS CASE, THE ASSESSEE WAS GRANTED LICENSE BY ONE ML TO USE ITS BRAND NAME MF IN RESPECT OF COSMETICS MANUFAC TURED BY THE ASSESSEE ON THE CONDITION THAT THE ASSESSEE WILL PAY RO YALTY @ 2% OF THE SALES ON ALL SUCH ITEMS IN RESPECT OF WHICH THE BRAND NAME MF WAS USED. FURTHER, THE ML WAS TO PROVIDE TECHNICAL KNOW-HOW TO TH E ASSESSEE FOR MANUFACTURE OF HAIR REMOVING CREAMS AND WAXES ON CONSIDERATION OF ITA NO. 3738(DEL)/2011 8 PAYMENT OF ROYALTY COMPUTED ON THE BASIS OF 5% OF T HE SALE PROCEEDS IN THE FIRST YEAR AND 3% IN THE SECOND YEAR. THEREAFT ER, THE ASSESSEE WOULD HAVE EXCLUSIVE RIGHT OVER THE SAID ITEM. THE QUESTION WAS-WHETHER, PAYMENT OF 5% ROYALTY WAS FOR ACQUISITION OF CAPITAL ASSET AN D HENCE A CAPITAL EXPENDITURE? AFTER CONSIDERING VARIOUS DECISIONS , IT HAS BEEN HELD THAT PAYMENT OF 5% ROYALTY WAS FOR ACQUISITION OF A CAP ITAL ASSET. IT WAS NOT OF IMPORTANCE THAT THE ACQUIRED ASSET DID NOT LAST B EYOND A PERIOD OF FOUR YEARS. THE REASON IS THAT IT WAS PAID TO ACQUIRE THE KNOW-HOW OUTRIGHT AND NOT BY WAY OF EXPLOITING THE KNOW-HOW BY USING TH E PATENT OR OTHERWISE. THUS, THE QUESTION WAS DECIDED IN FAVOUR OF THE RE VENUE AND AGAINST THE ASSESSEE. 2.5 FURTHER, RELIANCE HAS BEEN PLACED ON THE DECIS ION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF RAM KUMAR PHA RMACEUTICAL WORKS VS. CIT, (1979) 119 ITR 33. THE ASSESSEE PAID R OYALTY FOR FIVE YEARS AFTER WHICH NOTHING WAS REQUIRED TO BE PAID AND STILL IT WAS ABLE TO USE KNOW- HOW FOR LONG TIME. AS THE AGREEMENT PROVIDED THAT KNOW-HOW AND THE DATA STOOD TRANSFERRED TO THE ASSESSEE FOR BEING USED BY IT IN FUTURE WITHOUT TIME LIMIT, THE ONLY RESTRICTION WAS THAT IT COULD NOT TRANSFER THE SAME TO ITA NO. 3738(DEL)/2011 9 ANY ONE ELSE, IT WAS HELD THAT THE ROYALTY PAID CONSTITUTED AN ITEM OF CAPITAL EXPENDITURE. 2.6 IN THE CASE OF CIT VS. SHRI RAM BEARINGS LTD ., (2001) 119 TAXMAN 970 (CAL.), THE ASSESSEE ENTERED INTO A TECHNICA L COLLABORATION WITH A FOREIGN COMPANY FOR SUPPLY OF TECHNICAL KNOW-HOW FOR A LUMP-SUM CONSIDERATION IT WAS CLAIMED AS REVENUE EXPEND ITURE. THE HONBLE COURT MENTIONED THAT THE AGREEMENT SUBSISTED FOR A PERI OD OF FIVE YEARS. THEREAFTER, THE ASSESSEE COULD CONTINUE TO USE TH E KNOW-HOW AND TO MANUFACTURE THE PRODUCT WHETHER PATENTED OR NOT. IT WAS HELD THAT THE EXPENDITURE IS CAPITAL IN NATURE. 2.7 IN THE CASE OF CONTROLS & SWITCH GEAR CO. LT D. VS. DCIT, DECIDED BY THE DELHI TRIBUNAL IN ITA NO. 5007(DEL)/2007 F OR ASSESSMENT YEAR 2003-04, DATED 31.12.2010, THE AGREEMENT WAS TO SU BSIST FOR A PERIOD OF 10 YEARS AND THEREAFTER THE ASSESSEE COULD USE TECHN ICAL INFORMATION, IMPROVEMENTS, PATENT ETC. FREE OF CHARGE FOR A PE RIOD OF 10 YEARS. THUS, RESIDUARY BENEFIT WAS AVAILABLE TO THE ASSESSEE FREE OF CHARGE. RELYING ON THE DECISION IN THE CASE OF SOUTHERN SWITCH GEAR LTD. (SUPRA), IT WAS HELD THAT 25% OF THE EXPENDITURE IS CAPITAL IN NATURE. ITA NO. 3738(DEL)/2011 10 2.8 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. WE FIND THAT UNDER THE AGREEMENT, TH E ASSESSEE HAS BEEN GRANTED THE RIGHT TO USE KNOW-HOW, PATENTS AND IMPROVEMENTS. THE ORIGINAL AGREEMENT DATED 27.7.1994 SUBSISTED FO R A PERIOD OF 10 YEARS AND THEREAFTER IT HAS BEEN NOVATED ON 16.09.2003 . THE NEW AGREEMENT IS OPEN ENDED AND VARIOUS TERMS AND CONDITIONS AR E THE SAME AS IN THE ORIGINAL AGREEMENT. IN FACT, THIS AGREEMENT ME NTIONS THAT IT WILL BECOME THE PART OF THE ORIGINAL AGREEMENT EXCEPT FOR M INOR MODIFICATIONS MADE IN IT. VARIOUS ISSUES REGARDING THE NATURE OF EXP ENDITURE AND ITS COMPUTATION HAVE ALREADY BEEN CONSIDERED BY THE TRIBUNAL. IT HAS ALSO TAKEN INTO ACCOUNT THE FACT THAT THE ASSESSEE DOES NOT MAN UFACTURE THE GOODS ON ITS OWN AND ALSO DOES NOT SELL OR MARKET THE PRODUCTS ON ITS OWN. THE TRIBUNAL HAS ALSO CONSIDERED THE MATTER OF COMPUTATION OF ROYALTY. WE ARE OF THE VIEW THAT ALTHOUGH IT IS AN OPEN ENDED AGREEME NT, IT IS ONLY FOR THE USE OF KNOW-HOW AND PATENTS INCLUDING IMPROVEMENTS TO TH E KNOW-HOW. NO PROPRIETARY RIGHT HAS BEEN PASSED ON TO THE ASS ESSEE IN THE KNOW-HOW OR THE PATENT. THEREFORE, THE VIEW TAKEN BY THE TR IBUNAL IN THE DECISION FOR ASSESSMENT YEARS 2005-06 AND 2006-07 IS FOLLOWED. THE RESULT IS THAT THESE GROUNDS ARE DISMISSED. ITA NO. 3738(DEL)/2011 11 3. GROUND NOS. 3 AND 3.1 ARE AGAINST THE DELETIO N OF THE ADDITION OF RS. 87,60,601/- MADE BY THE AO BY INVOKING THE PROVI SION CONTAINED IN SECTION 40A(2) OF THE ACT. THE FACTS ARE THAT T HE ASSESSEE CLAIMED DEDUCTION OF CONSULTANCY CHARGES OF RS. 1,17,60,60 1/-. THE AO HAD TAKEN THE POSITION IN EARLIER YEARS THAT THE AGREEMEN T IS AN ARRANGEMENT TO SIPHON OFF PART OF THE PROFITS AND DIVERT THE SA ME TO JOINT VENTURE PARTNERS. THEREFORE, FOLLOWING THE EARLIER ORDER, DEDUCTIO N OF RS. 30.00 LAKH ONLY WAS ALLOWED, WHICH IS STATED TO BE THE FAIR MARKE T VALUE OF THE SERVICES RENDERED BY SHRI U.K. MODI TO THE ASSESSEE-COMPAN Y ON BEHALF OF JOINT VENTURE PARTNER. THE LD. CIT(APPEALS) HAD DECI DED THE MATTER AGAINST THE REVENUE IN EARLIER YEARS. IT WAS ALSO FOUND BY HIM THAT THE MATTER HAD BEEN DECIDED AGAINST THE REVENUE BY THE TRIBUNAL IN ASS ESSMENT YEARS 2005-06 TO 2007-08. THEREFORE, HE DELETED THE ADDITION. 3.1 THE ONLY POINT MADE BY THE LD. DR IS THAT THE LD. CIT(APPEALS) DID NOT ASK FOR PROOF OF SERVICES AVAILED OF BY THE ASSESSEE. THE CASE OF THE LD. COUNSEL IS THAT THE MATTER IS COVERED UNDER E ARLIER DECISION OF THE TRIBUNAL. ITA NO. 3738(DEL)/2011 12 3.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. THE DISALLOWANCE HAS NOT BEEN MADE ON THE GROUND THAT NO SERVICE HAS BEEN AVAILED OF BY THE ASSESSEE IN LIEU OF PAYMENT OF THE AFORESAID AMOUNT. HIS CASE IS THAT THE PAYMENT IS A DEVISE FOR SIPHONING OFF PROFITS. NO PROOF HAS BEEN BROUGHT ON RECO RD IN RESPECT THEREOF. HE HAS MERELY RELIED ON HIS FINDINGS OF EARLIER YEAR S WHICH HAVE BEEN REVERSED BY THE TRIBUNAL. THEREFORE, FOLLOWING THE DECI SION OF THE TRIBUNAL, THESE GROUNDS ARE ALSO DISMISSED. FOR THE SAKE OF READ Y REFERENCE, THE RELEVANT PORTION OF THE DECISION OF THE TRIBUNAL IS REPRODU CED BELOW:- 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND F OUND FROM THE RECORD THAT THE CONSULTANCY CHARGES HAVE BEEN P AID IN LIEU OF MMPL FOR PROVIDING VARIOUS ADVICES AS DISCUSSED IN ABOVE PARA. MR.U.K.MODI HAS REPRESENTED ONE OF THE JOINT VENTURE PARTIES, MMPL, AS DIRECTOR, IN THE BUSINESS OF COLL ABORATION WITH RML. WE FOUND HIM AS AN INSTRUMENT IN NEGOTIAT ING THE COLLABORATION AS REPRESENTATIVE OF MMPL FOR WHICH H E HIMSELF GAVE HIS PERSONAL UNDERTAKING. WE ALSO FOUND THAT MR.U.K.MODI DID NOT RENDER ANY SERVICES IN HIS CAPA CITY AS DIRECTOR OF THE ASSESSEE COMPANY AND IS NOT BEING P AID ANY REMUNERATION TO WORK AS A DIRECTOR. SUFFICIENT EVID ENCE WAS PRODUCED BEFORE THE AO TO INDICATE THAT MMPL WAS AC TIVELY INVOLVED IN DAY TO DAY ACTIVITIES OF THE ASSESSEE C OMPANY. MMPL HAS DULY INCORPORATED THE CONSULTANCY CHARGES IN HIS INCOME AND PAID DUE TAXES THEREON, IT CANNOT BE SAI D THAT AGREEMENT WAS ENTERED FOR SIPHONING OF INCOME OF TH E SISTER CONCERN. IN VIEW OF THE DECISION OF DHANRAJGIRIJI R AJA ITA NO. 3738(DEL)/2011 13 NARSINGHJI 91 ITR 544, IT IS UPON THE ASSESSEE TO DECIDE WHAT EXPENSES ARE TO BE INCURRED OR WHAT IS REQUIRED FOR BUSINESS PURPOSES AND IT IS NOT OPEN TO THE REVENUE TO PRESC RIBE AS TO WHAT EXPENSES ARE TO BE INCURRED BY THE ASSESSEE. T HE CATEGORICAL FINDING RECORDED BY THE CIT(A) WITH REG ARD TO REASONABILITY OF THE CONSULTANCY CHARGES PAID HAS N OT BEEN CONTROVERTED BY LEARNED DR, WE THEREFORE DO NOT FIN D ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) FOR DELE TING DISALLOWANCE MADE BY THE AO BY INVOKING PROVISIONS OF SECTION 40A(2). 4. GROUND NO. 4 IS AGAINST DELETION OF THE DISALLOW ANCE OF RS. 10,31,886/- MADE BY THE AO FROM ADVERTISEMENT AN D SALE PROMOTION EXPENSES. THE DISALLOWANCE HAS BEEN MADE BY THE AO ON THE GROUNDS THAT THE EXPENDITURE OF RS. 2,36,934/- IN RESPECT OF ADVERTISEMENT IN PRINT MEDIA IS IN RESPECT OF BRAND PROMOTION. FURTHER, THE ADVERTISEMENT EXPENDITURE PERTAINS NOT ONLY TO THE ASSESSEE B UT ALSO CONFER BENEFITS TO OTHER ASSOCIATE CONCERNS AND, THEREFORE, THE ASS ESSEE IS ENTITLED TO THE DEDUCTION OF PROPORTIONATE EXPENDITURE ONLY. THE ALLOCATION IS MADE ON THE BASIS OF TURNOVER OF THE ASSESSEE TO THE TOTAL TUR NOVER OF THE GROUP CONCERNS. THE LD. CIT(APPEALS) HAS DELETED THE ADDITION B Y FOLLOWING THE DECISION OF THE TRIBUNAL IN EARLIER YEARS. THE ONLY POINT MADE BY THE LD. DR IS THAT FACTUAL BASIS FOR MAKING THE CLAIM HAS NOT BEEN FULLY EXAMINED BY THE LD. CIT(APPEALS). ITA NO. 3738(DEL)/2011 14 4.1 WE FIND THAT THE ISSUE STANDS COVERED BY THE DECISION OF THE TRIBUNAL FOR ASSESSMENT YEARS 2005-06 AND 2006-07. RESP ECTFULLY FOLLOWING THE DECISION, IT IS HELD THAT NO INTERFERENCE IS RE QUIRED IN THE DECISION OF THE LD. CIT(APPEALS). FOR READY REFERENCE, PARAGRAPH NO. 14 OF THE EARLIER DECISION OF THE TRIBUNAL IS REPRODUCED BELOW:- 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND F OUND FROM THE RECORD THAT AN AGREEMENT WAS ENTERED INTO BY TH E ASSESSEE ACCORDING TO WHICH WMPL HAS TO BEAR ONLY THE COST O F ADVERTISING AND OTHER EXPENSES RELATING TO CONSUMER SECTOR. AS THE BENEFIT OF PROMOTION OF BRAND REVLON ACCRUED ONLY TO THE ASSESSEE, THE SAME IS REQUIRED TO BE INCURRED BY AS SESSEE HIMSELF. WE ALSO FOUND THAT IN SPITE OF THE AGREEME NT WITH WMPL, THE ASSESSEE WAS NOT PRECLUDED FROM INCURRING ADVERTISING EXPENSES SINCE IT WAS PURELY COMMERCIAL DECISION TAKEN BY THE ASSESSEE. SINCE THE ASSESSEE WAS THE B RAND OWNER, IT HAS VESTED INTERESTS AND INCURRING OF EXPENDITUR E FOR PROMOTION OF BRAND WAS IN THE INTEREST OF THE BUSIN ESS OF THE ASSESSEE COMPANY ONLY. WE ALSO FOUND THAT SIMILAR E XPENDITURE WAS ALLOWED CONSISTENTLY IN THE PAST AND NO DISALLO WANCE HAS BEEN MADE TOWARDS THESE EXPENSES. EVEN UNDER THE SC RUTINY ASSESSMENT FOR AY 2000-01 & 2001-02, SIMILAR EXPEND ITURE WAS ALLOWED. THERE IS NO CHANGE IN THE FACTS AND CIRCUM STANCES DURING THE YEAR, EVEN ON THE PRINCIPLE OF CONSISTEN CY, SUCH EXPENDITURE CANNOT BE DISALLOWED. ON THE SIMILAR RE ASONING, THE DISALLOWANCE MADE BY THE LOWER AUTHORITIES DURI NG AY 2006-07 ALSO STANDS DELETED. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE DISALLOWANCE MADE BY THE LOWER AUTHORI TIES ON ACCOUNT OF EXPENDITURE INCURRED FOR ADVERTISING AND PUBLICITY. 5. GROUND NO. 5 IS TO THE EFFECT THAT THE LD. CIT( APPEALS) ERRED IN RESTRICTING THE DISALLOWANCE TO RS. 8,87,557/- AGAI NST RS. 73,26,507/- MADE BY THE AO. THIS GROUND HAS NOT BEEN ARGUED BY T HE LD. CIT, DR POSSIBLY ITA NO. 3738(DEL)/2011 15 BECAUSE NO SUCH DISALLOWANCE HAS BEEN MADE BY THE A O, AS SEEN FROM THE COMPUTATION OF INCOME MADE BY HIM AS UNDER:- PROFIT AND GAINS OF BUSINESS RETURNED TOTAL INCOME AS PER THE COMPUTATION OF INCOME FILED WITH THE RETURN RS. 4,92,65,389/- ADD: 1. ROYALTY DISALLOWED RS. 4,54,85,325/- 2. EXCESS PAYMENT OF CONSULTANCY CHARGES DISALLOWED U/S 40A(2) RS. 87,60,601/- 3. PROPORTIONATE ADVERTISING EXPENSES DISALLOWED RS. 10,31,886/- TOTAL INCOME: RS. 10,45,43,201/- 5.1 THE ISSUE ALSO DOES NOT EMANATE FROM THE ORDER OF THE LD. CIT(APPEALS). THEREFORE, THE GROUND IS DISMISSED AS INFRUCTUOUS. 6. IN THE RESULT, THE APPEAL IS DISMISSED. SD/- SD/- (RAJPAL YADAV) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA- 21/10/2011 COPY OF THE ORDER FORWARDED TO:- M/S MODI REVLON PVT. LTD., NEW DELHI. ACIT, CIRCLE 5(1), NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.