DCIT 15(1)(1), MUMBAI V. M/S.FREUDENBERG PERFORMANCE MATERIALS INDIA LTD., MUMBAI

ITA 3894/MUM/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 8930 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2011-2012
• Appeal Filed On: 01-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJIV GUBGOTRA
• Keywords: Business income; Revenue expenditure; Capital expenditure
• Section: 43B; 37(1)

Judgement Text

1 ITAS 3894 & 3895/MUM/2018 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI PAWAN SINGH(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) ITA NO. 3894/MUM/2018 (ASSESSMENT YEAR : 2011-12) DY.CIT 15(1)(1), MUMBAI VS M/S FREUDENBERG PERFORM ANCE MATERIALS INDIA LTD, 200, SAI SAMPANNA BLDG STATION ROAD, VIKHROLI (W) MUMBAI-400 083 PAN : AAACF1787G APPELLANT RESPONDEDNT ITA NO. 3895/MUM/2018 (ASSESSMENT YEAR : 2012-13) M/S. FREUDENBERG PERFORMANCE MATERIALS INDIA LTD, 200, SAI SAMPANNA BLDG STATION ROAD, VIKHROLI (W) MUMBAI-400 083 VS DY.CIT 15(1)(1), MUMBAI APPELLANT RESPONDEDNT REVENUE BY SHRI RAJIV GUBGOTRA ASSESSEE BY NONE DATE OF HEARING 01-07-2019 DATE OF PRONOUNCEMENT 10-07-2019 O R D E R PER G MANJUNATHA, AM : 2 ITAS 3894 & 3895/MUM/2018 THESE TWO APPEALS FILED BY THE REVENUE ARE DIRECTE D AGAINST SEPARATE, BUT IDENTICAL ORDERS OF THE CIT(A)-24, MUMBAI DATED 19-03-2018 & 28-03-2018 AND THEY PERTAIN TO AYS 2011-12 & 2012-13. SINCE, FACTS ARE IDENTICAL AND ISSUES ARE COMMON, FOR THE SAKE OF CONVENIENCE, THE SE APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS CONSOLIDATED O RDER. 2. THE BRIEF FACTS OF THE CASE EXTRACTED FROM ITA38 94/MUM/2018 FOR AY 2011-12 ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING AND TRADING OF WOVEN AND NON WOVEN PRODUCTS, FILED ITS RETURN OF INCOME FOR AY 2011-12 ON 29-11-2011 DECLARING TOTAL INCOME AT RS. 9,37,19,343. THE CASE WAS SELECTED FOR SCRUTINY AND DURING THE ASSESSMENT PRO CEEDINGS, AO NOTICED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.89,26,627 UNDE R THE HEAD, LICENCE FEES PAID; ACCORDINGLY, CALLED UPON THE ASSESSEE TO EXPL AIN AS TO WHY SAID EXPENSES SHOULD NOT BE CAPITALISED AS THE SAME HAS ENDURING BENEFIT OVER A PERIOD OF TIME AND WAS NOT RESTRICTED TO THE CURRENT YEAR. TH E AO, AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE AND ALSO BY RELYING UPO N THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO . LTD VS CIT (1955) 27 ITR 234 (SC) HELD THAT LICENCE FEE PAID TO ITS AE I S IN THE NATURE OF CAPITAL EXPENDITURE BECAUSE SUCH LICENCE FEE GIVES ENDURING BENEFIT TO THE ASSESSEE, THEREFORE, THE SAME CANNOT BE ALLOWED AS REVENUE EX PENDITURE. SIMILARLY, THE AO HAS MADE ADDITION TOWARDS DISALLOWANCE OF EMPLOY EES CONTRIBUTION 3 ITAS 3894 & 3895/MUM/2018 TOWARDS ESIC FOR BELATED PAYMENT OF SUCH FUND BEFO RE THE DUE DATE PRESCRIBED UNDER RESPECTIVE ACTS. 3. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREF ERRED APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), ASSESSEE HAS EXPLAI NED THE NATURE OF AGREEMENT BETWEEN THE ASSESSEE AND ITS AE, M/S FREUDENBERG VL IESSTOFFE KG AND ARGUED THAT IT HAS PAID 1% ROYALTY ON TOTAL SALE OF PRODUC TS FOR USING FREUDENBERG BRAND FOR THOSE ARTICLES PRODUCED AND SOLD FROM IND IAN FACTORY AND SUCH EXPENDITURE IS IN THE NATURE OF ROYALTY AND ALLOWAB LE AS REVENUE EXPENDITURE. THE LD.CIT(A), AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE AND ALSO BY TAKING NOTE OF AGREEMENT BETWEEN THE PARTIES FOR PAYMENT O F ROYALTY @1% ON TOTAL SALES, HELD THAT IN ORDER TO DECIDE WHETHER A PARTI CULAR EXPENDITURE IS CAPITAL OR REVENUE IN NATURE, ONE OF THE KEY ASPECTS TO BE EXA MINED IS WHETHER THERE WAS A TRANSFER OF OWNERSHIP IN THE INTELLECTUAL PROPERT Y RIGHTS OR IN LICENCE. HOWEVER, WHERE NO SUCH RIGHTS HAVE BEEN TRANSFERRED , BUT AN ARRANGEMENT FACILITY FOR GRANT OF LICENCE TO USE THOSE RIGHTS F OR A LIMITED PURPOSE, THE SAME CANNOT BE CONSIDERED AS CAPITAL EXPENDITURE WHICH G IVES ENDURING BENEFIT TO THE ASSESSEE. ACCORDINGLY, HE DELETED ADDITION MAD E BY THE AO TOWARDS DISALLOWANCE OF LICENCE FEE PAID. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 4 ITAS 3894 & 3895/MUM/2018 4. NONE APPEARED FOR THE ASSESSEE. WE HAVE HEARD T HE LD.DR, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE O RDERS OF AUTHORITIES BELOW. THE LD.DR VEHEMENTLY ARGUED THE ISSUE IN LIGHT OF F ACTS BROUGHT OUT BY THE AO DURING ASSESSMENT PROCEEDINGS AND SUBMITTED THAT LI CENCE FEES PAID TO AE FOR USE OF BRAND NAME IS IN THE NATURE OF CAPITAL EXPEN DITURE, BECAUSE SUCH LICENCE FEE GIVES BENEFIT TO THE ASSESSEE DURING TH E PERIOD OF AGREEMENT. THE LD.DR FURTHER ARGUED THAT THE AO HAS BROUGHT OUT CL EAR FACTS IN THE LIGHT OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF AS SAM BENGAL CEMENT CO. LTD VS CIT (SUPRA), WHERE THE HONBLE APEX COURT HAS CL EARLY HELD THAT WHEREVER THERE IS ENDURING BENEFIT, THE EXPENDITURE IS TO BE TREATED AS CAPITAL EXPENDITURE. THE LD.CIT(A), WITHOUT APPRECIATING T HESE FACTS, SIMPLY DELETED ADDITION MADE BY THE AO. HAVING CONSIDERED THE ARG UMENTS OF LD.DR, WE FIND THAT THE LD.CIT(A) HAS BROUGHT OUT CLEAR FACTS IN T HE LIGHT OF AGREEMENT BETWEEN THE PARTIES THAT PAYMENT OF LICENCE FEE IS FOR USE OF BRAND NAME OF ASSESSEES AE AND SUCH ROYALTY HAS BEEN PAID @1% OF TOTAL SALES EFFECTED IN INDIA. WE FURTHER NOTE THAT PAYMENT OF LICENCE FEE IS DIRECTLY LINKED TO SALE MADE BY THE ASSESSEE AND HENCE THERE IS NO ERROR IN THE FINDING RECORDED BY THE LD.CIT(A) THAT IT IS IN THE NATURE OF REVENUE E XPENDITURE. NO DOUBT, THE HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL C EMENT CO. LTD VS CIT (SUPRA) CLEARLY STATED THAT WHEREVER ENDURING BENEF IT IS DERIVED, THE 5 ITAS 3894 & 3895/MUM/2018 EXPENDITURE IS TO BE TREATED AS CAPITAL EXPENDITURE . BUT TO DECIDE WHETHER A PARTICULAR EXPENDITURE GIVE S ENDURING BENEFIT TO T HE ASSESSEE OR NOT HAS TO BE DECIDED IN THE LIGHT OF ARRANGEMENT BETWEEN PARTIES . IN THIS CASE, ON PERUSAL OF AGREEMENT BETWEEN THE PARTIES IT IS CLEAR THAT T HE ASSESSEE WAS AGREED TO PAY 1% ROYALTY ON TOTAL SALES WHICH IS PERIODICALLY LINKED TO SALES EFFECTED BY THE ASSESSEE, BUT NOT A LUMP SUM PAYMENT FOR ACQUIR ING ANY RIGHT IN INTELLECTUAL PROPERTY. THEREFORE, WE ARE OF THE CO NSIDERED VIEW THAT THE AO WAS INCORRECT IN HOLDING THAT LICENCE FEE PAID TO A E IS IN THE NATURE OF CAPITAL EXPENDITURE WHICH GIVES ENDURING BENEFIT. THE LD.C IT(A), AFTER CONSIDERING RELEVANT FACTS, HAS RIGHTLY DELETED ADDITION MADE B Y THE AO. HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF LD.CIT(A) AND DI SMISS APPEAL FILED BY THE REVENUE. ITA NO.3895/MUM/2018 5. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM THIS APPEAL FOR AY 2012-13 IS DISALLOWANCE OF LICENCE FEE PAID AMOUNTI NG TO RS.77,30,967. THE FACTS ARE IDENTICAL TO THE ISSUE, WHICH WE HAVE ALR EADY CONSIDERED AND DECIDED IN ITA NO.3894/MUM/2018, WHERE WE HAVE DELIBERATED AT LENGTH ON THE ISSUE OF LICENCE FEE PAID TO ASSESSEES AE IN THE LIGHT O F AGREEMENT BETWEEN THE PARTIES AND HELD THAT IT IS A REVENUE EXPENDITURE D EDUCTIBLE U/S 37(1) OF THE I.T. ACT, 1961. THE REASONS GIVEN BY US IN THE PRECEDIN G PARAGRAPHS SHALL MUTATIS 6 ITAS 3894 & 3895/MUM/2018 MUTANDIS APPLY TO THIS APPEAL ALSO. THEREFORE, FO R THE DETAILED REASONS GIVEN BY US IN THE PRECEDING PARAGRAPHS, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE LD.CIT(A) AND REJECT GROUND TAKEN BY THE REVENUE. 6. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATIO N IS DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PF & ESIC AMOUNTING TO RS .85,838 U/S 36(1)(VIIA) R.W.S. 2(24)(X) OF THE I.T. ACT, 1961. WE FIND THA T THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY H IGH COURT IN THE CASE OF CIT VS HINDUSTAN ORGANICS CHEMICAL LTD 366 ITR 1 (B OM) WHERE IT WAS HELD THAT SECTION 43B IS NOT APPLICABLE TO PAYMENTS MADE BEYO ND THE DUE DATE SPECIFIED UNDER RESPECTIVE ACTS, IF SUCH PAYMENTS HAVE BEEN MADE ON OR BEFORE DUE DATE OF FILING RETURN OF INCOME. WE FURTHER NOTED THAT THE HONBLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS LTD 319 ITR 30 6 (SC) HAD CONSIDERED AN IDENTICAL ISSUE AND HELD THAT CONTRIBUTION PAYABLE BY THE EMPLOYER TO THE PF OR ANY OTHER FUND FOR THE WELFARE OF THE EMPLOYEES WAS ALLOWABLE, IF SUCH CONTRIBUTION IS PAID ON OR BEFORE THE DUE DATE OF F ILING RETURN OF INCOME. IN THIS CASE, THE LD.CIT(A) HAS BROUGHT OUT CLEAR FACTS TO THE EFFECT THAT ALTHOUGH THE ASSESSEE HAS REMITTED EMPLOYEES CONTRIBUTION TO PF / ESIC AFTER THE DUE DATE SPECIFIED UNDER RESPECTIVE ACT, BUT SUCH CONTRIBUTI ON HAS BEEN PAID ON OR BEFORE DUE DATE OF FURNISHING RETURN OF INCOME. WE DO NOT FIND ANY ERROR IN THE FINDINGS OF LD. CIT(A) AND HENCE, REJECT GROUND TAKEN BY THE REVENUE. 7 ITAS 3894 & 3895/MUM/2018 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. 8. AS A RESULT, BOTH APPEALS FILED BY THE REVENUE A RE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10-07-2019. SD/- SD/- (PAWAN SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 10 TH JULY, 2019 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI