DCIT, New Delhi V. M/s. Chang Yun India Ltd., New Delhi

ITA 4377/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53069 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 28-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 28-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ANIL CHADHA
• Keywords: Capital asset; Depreciation; Business expenditure; Principle of natural justice; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI RAJPAL YADAV, JM AND SHRI K. D. RAN JAN, AM I. T. APPEAL NO. 4389 (DEL) OF 2010 ASSESSMENT YEARS : 2006-07. CHANG YUN INDIA LTD., ASSTT. COMMISSIONER O F INCOME-TAX, 77, IDC, MEHRAULI ROAD, VS. C I R C L E : 3 (1), G U R G A O N. N E W D E L H I. PAN/GIR NO. AAACC0368E . A N D I. T. APPEAL NO. 4377 (DEL) OF 2010 ASSESSMENT YEARS : 2006-07. ASSTT. COMMISSIONER OF INCOME-TAX, C HANG YUN INDIA LTD., C I R C L E : 3 (1), VS. 1, SRI AUTOBINDO MARG, N E W D E L H I. N E W D E L H I . P A N / G I R NO. AAA CC 0368 E . ( APPELLANTS ) ( RE SPONDENTS ) ASSESSEE BY : SHRI ANIL CHADHA, C. A.; DEPARTMENT BY : SHRI ROHIT GARG, SR. D. R.; O R D E R. PER K. D. RANJAN, AM : THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE FOR ASSESSMENT YEAR 2006-07 ARISE OUT OF THE ORDER OF THE LD. CIT (APPEALS)VI, NEW D ELHI. THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF, FOR THE SAKE OF CONVENIENCE, BY THIS CONSOLIDATED ORDER. 2 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 2. THE GROUNDS OF APPEAL, RAISED BY THE ASSESSEE AN D REVENUE, READ AS FOLLOWS :- I. T. APPEAL NO. 4389 (DEL) OF 2010 [BY THE ASS ESSEE] : 1. THAT AS PER THE FACTS AND THE LAW APPLICA BLE TO THE CASE, THE LD. ASSESSING OFFICER IS NOT JUSTIFIED IN TREATING 25 PER CENT OF THE ROYALTY PAYMENT I.E. RS.6,41,217/- AS EXPENDITURE OF CAPITAL NATURE AND DISALLOWING THE SAME; 2. THAT AS PER THE FACTS AND THE LAW APPLIC ABLE TO THE CASE, THE LD. ASSESSING OFFICER IS NOT JUSTIFIED IN CHANGING THE FINDINGS OF THE ASSESSING OFFICER IN THE EARLIER ASSESSMENT YEARS; 3. THAT THE LD. ASSESSING OFFICER IS NOT JU STIFIED IN OVER-RULING THE JUDGEMENTS OF THE HONOURABLE SUPREME COURT IN THE CASE OF RADH A SOAMI SATSANG VS. CIT [193 ITR 321]. I. T. APPEAL NO. 4377 (DEL) OF 2010 [BY THE REV ENUE] : THE LD. CIT (APPEALS) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS.13,93,692/- MADE ON ACCOUNT OF CAPITALIZATION OF SYNCHRONIZER RINGS IGNORING THE FACT THAT THE ASSESSEE INCURRED EXPENS ES ON DEVELOPMENT OF HIS PRODUCT I.E. SYNCHRONIZER RINGS FOR EXTENDING HIS B USINESS WHICH IS CLEARLY CAPITAL EXPENDITURE. RELIANCE IS PLACED ON THE DECISION OF THE APEX COURT IN THE CASE OF M/S. MADRAS AUTO SERVICES (P) LTD. [1998] 233 ITR 468 (SC). 3. THE ONLY ISSUE FOR CONSIDERATION IN ASSESSEES A PPEAL RELATES TO CONFIRMING THE ADDITION ON DISALLOWANCE OF 25 PER CENT OF ROYALTY TREATING THE SAME AS EXPENDITURE OF CAPITAL IN NATURE. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSE SSEE HAD PAID ROYALTY OF RS.25,64,869/- TO CHANG YUN INDUSTRIAL CO. LTD., KOREA. THE ASSESSEE DEBIT ED THE ENTIRE AMOUNT IN PROFIT AND LOSS ACCOUNT UNDER THE HEAD SELLING AND DISTRIBUTION EXPENSES. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO PROVIDE DETAILS OF ROYALTY EX PENSES ALONG WITH COPY OF AGREEMENT. THE ASSESSEE WAS ALSO ASKED TO EXPLAIN AS TO WHY THE AM OUNT OF ROYALTY SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE IN VIEW OF DECISION OF HONBLE APEX COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. 232 ITR 359 (SC). AFTER CONSIDERING THE ASSES SEES REPLY, THE AO NOTED THAT THE AGREEMENT 3 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 WAS ORIGINALLY DATED 17/08/1992, WHICH WAS RENEWED VIDE FIRST SUPPLEMENTAL AGREEMENT DATED 1/9/2000 AND WAS VALID TILL 1 ST JANUARY, 2006. THE AGREEMENT WAS FURTHER RENEWED FOR A PERIOD OF FIVE YEARS WITH EFFECT FROM 22/01/2006. FROM THE A BOVE AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE COMPANY AND THE CHANG YUN INDUSTRIAL CO. L TD., THE AO OBSERVED THAT THE ASSESSEE COMPANY HAD AN EXCLUSIVE RIGHT OVER THE TECHNICAL K NOW-HOW PROVIDED TO IT IN THE TERRITORY OF INDIA. FURTHER, EVEN IF THERE IS TERMINATION OF AG REEMENT, THE ASSESSEE COMPANY WILL HAVE THE RIGHT FOR CONTINUED AND FREE USE OF KNOW-HOW. THE ASSESSING OFFICER RELYING ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF SOUTHERN SWITCHGE AR LTD.(SUPRA) TREATED 25 PER CENT OF RS.25,64,869/- AMOUNTING TO RS 6,41,217/- AS CAPITA L IN NATURE. 4. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED TH AT THE ASSESSEE COMPANY SINCE ITS INCORPORATION WAS IN THE BUSINESS OF MANUFACTURING SYNCHRONIZER RINGS FOR MOTOR CARS AS THE ORIGINAL EQUIPMENT SUPPLIERS, NAMELY, TO MARUTI AND HYNDUI. THE ASSESSEE COMPANY WAS MANUFACTURING THE SAID ITEMS UNDER THE LICENSE AND TECHNICAL AGREEMENT WITH M/S. CHANG YUN INDUSTRIAL CO. LTD. (CYICL), KOREA AND ALSO WITH M/ S. CHUETSU METAL WORKS CO. LTD. (CMWCL), JAPAN. THE ASSESSEE COMPANY UNDER THE TER MS OF THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT WITH CYICL HAS PAID A LUMP SUM PAYMENT OF US $ 1,47,500 AS PER ARTICLE 7.1 OF THE SAID AGREEMENT. THESE LUMP SUM PAYMENTS HAVE BEEN MADE FOR PROVIDING TECHNICAL INFORMATION AS PER ARTICLE 4 FOR GRANT OF LICENSE UNDER ARTICLE 2 OF BOTH THE AGREEMENTS. THESE PAYMENTS HAVE BEEN TREATED AS CAPITAL EXPENDI TURE BY THE ASSESSEE IN ITS ACCOUNTS. THE ASSESSEE COMPANY HAD PAID ROYALTY OF 2 PER CENT ON THE EX-FACTORY SELLING PRICE OF THE PRODUCTS MANUFACTURED UNDER THE AGREEMENT WITH CYICL AS PER ARTICLE 7(B) OF THE FIRST SUPPLEMENTAL AGREEMENT. EARLIER IT WAS 3 PER CENT ON SALES AS PE R ORIGINAL AGREEMENT AND WAS REDUCED TO 1 PER CENT OF SALES AS PER SECOND SUPPLEMENTAL AGREEMENT. THIS ROYALTY WAS BEING PAID FOR THE USE AND DISPLAY OF THE TRADE MARK OF THE LICENSOR COMPANY O N THE PRODUCTS AS PER ARTICLE 6 OF THE AGREEMENT. THE ASSESSEE HAS ALSO PAID ROYALTY AT T HE RATE OF 1.5 PER CENT OF NET SALE PRICE OF THE PRODUCTS TO CMWCL. AS PER ARTICLE 6.4 OF THE AGREE MENT WITH CYICL AND ARTICLE 22.1 OF THE AGREEMENT WITH CMWCL, THE ASSESSEE COMPANY IS PROHI BITED AFTER EXPIRY OR TERMINATION OF THE AGREEMENT TO USE THE TRADE MARK OR DESIGN OF THE LI CENSOR COMPANY AND, THEREFORE, THE PAYMENT OF ROYALTY WILL ALSO STOP. THEREFORE, THE ROYALTY PAY MENTS WERE LINKED WITH THE TRADE-MARK OF THE 4 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 LICENSOR COMPANY ON THE PRODUCTS MANUFACTURED BY TH E LICENSEE WHEREAS THE LUMP SUM PAYMENT MADE WAS FOR USE OF TECHNOLOGY VIZ. THE LICENSEE CO MPANY COULD USE EVEN AFTER TERMINATION OF THE AGREEMENT WITH CYICL AS PER ARTICLE 23.1. THE PAYMENTS OF ROYALTY IS LINKED WITH THE SALE AND, THEREFORE, VARIABLE IN A CASE WHEN THERE WAS N O SALES, NO ROYALTY WAS PAYABLE. THEREFORE, THE LUMP SUM PAYMENT WERE TREATED AS CAPITAL EXPEND ITURE WHEREAS PAYMENTS MADE ON THE BASIS OF SALES WERE TREATED AS REVENUE EXPENDITURE. THE ASSESSEE RELIED ON SEVERAL DECISIONS IN SUPPORT OF ITS CONTENTION THAT PAYMENTS OF ROYALTY BASED ON SALES WERE REVENUE IN NATURE. THE LD. CIT (APPEALS) EXAMINED THE MATTER IN DETAIL. HOWEVER, SHE OBSERVED THAT WHETHER THE PAYMENT WAS NAMED AS LUMP SUM OR BY WAY OF ROYALTY, IT WAS PAID TOWARDS ONE PURPOSE. BY INCURRING THE EXPENDITURE THE ASSESSEE HAD DERIVED A BENEFIT OF E NDURING NATURE. THERE WAS NO JUSTIFICATION IN TREATING ONE PART OF THE PAYMENT AS CAPITAL AND THE OTHER PART OF IT AS REVENUE WHEN PURPOSE FOR WHICH PAYMENT WAS MADE REMAINED THE SAME. THE LD. CIT (APPEALS) ACCORDINGLY UPHELD THE STAND TAKEN BY THE ASSESSING OFFICER. 5. BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED T HAT ROYALTY HAS BEEN MADE ON PERCENTAGE BASIS ON SALES ON ACCOUNT OF USE OF TRADEMARKS ON T HE PRODUCTS OF THE ASSESSEE. THE LUMP SUM PAYMENT MADE TOWARDS TRANSFER OF TECHNICAL KNOW-HOW WAS CAPITALIZED IN EARLIER YEARS. THE ROYALTY BEING PAID IS REVENUE BASED I.E. ON A PERCE NTAGE OF SALES. IF THERE ARE NO SALES, NO ROYALTY WOULD BE PAYABLE. ONCE THE PAYMENT OF THE ROYALTY IS STOPPED, USE OF TRADE MARK AND OTHER SERVICES WILL ALSO BE STOPPED. THE LD. AR OF THE A SSESSEE FURTHER SUBMITTED THAT FOR EARLIER THREE ASSESSMENT YEARS WHERE ASSESSMENTS WERE MADE UNDER SECTION 143(3) THIS EXPENDITURE HAS BEEN ALLOWED AS REVENUE WHEREAS IN THE YEAR UNDER CONSID ERATION 25 PER CENT OF THE EXPENDITURE HAS BEEN TREATED AS CAPITAL EXPENDITURE. THE TREATMENT GIVEN BY THE ASSESSING OFFICER IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. IT HAS FURTHER BEEN SUBMITTED THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. IS NO T APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. HE PLACED RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. VS. CIT 319 ITR 113 (DEL.) WHEREIN IT H AS BEEN HELD THAT THE LUMP SUM PAYMENT MADE FOR TECHNOLOGY WAS OF CAPITAL NATURE, BUT 3 PE R CENT ROYALTY PAYMENT WAS REVENUE ON THE GROUND THAT THE ROYALTY PAYMENT WAS DEPENDENT ON QU ANTUM OF SALES AND ALSO FOR PROVIDING TECHNICAL SERVICES. HE PLACED ALSO RELIANCE ON THE DECISION OF ITAT, FBENCH, DELHI IN THE 5 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 CASE OF SENIOR INDIA PVT. LTD. 210 TAXMAN 78 AND IN THE CASE OF SHIVANI LOCKS LTD. PASSED BY ITAT, DELHI BENCHD. ON THE OTHER HAND, THE LD. SR. DR SUPPORTED THE ORDER OF THE LD. CIT (APPEALS). 6.1 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH AGREEMENTS ENTERED INTO BETW EEN THE PARTIES. WE FIND THAT LUMP SUM PAYMENT HAS BEEN MADE FOR TRANSFER OF TECHNOLOGY WH ICH HAS BEEN CAPITALIZED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. THE RELEVANT ARTICLES OF THE AGREEMENT WITH CYICL GOVERNING USE OF TRADEMARK AND PAYMENTS THEREFOR, ARE REPRODUCED AS UNDER: ARTICLE 6. TRADEMARK : 6.1 THE LICENSEE MAY USE THE TRADEMARK AND SHALL NO T USE ANY OTHER MARKS THAN THE PARTIES HERETO AGREED IN WRITING ON PRODUCTS AND PA RTS. PROVIDED, HOWEVER, THAT THE LICENCEE SHALL NOT PERMIT THE TRADEMARK TO BE USED ON ANY PRODUCTS AND PARTS WHICH HAVE NOT BEEN MANUFACTURED OR ASSEMBLED IN ACCORDAN CE WITH THE LICENSOR'S SPECIFICATIONS OR WHICH DO NOT ATTAIN STANDARDS OF QUALITY SATISFACTORY TO THE LICENSOR. 6.2 THE LICENSEE SHALL DISPLAY THE TRADEMARK IN SUC H FORM OF LETTERING, STYLE, DESIGN, POSITIONING, AND MANNER ON PRODUCTS AND PARTS AS SH ALL BE AGREED UPON IN WRITING BETWEEN THE PARTIES HERETO; 6.3 THE LICENSEE SHALL NOT ALTER OR MODIFY ANY TRAD EMARK OR OTHER MARKS WHICH ARE ATTACHED TO THE PARTS IMPORTED FROM THE LICENSOR IF ANY; 6.4 THE LICENSEE HEREBY AGREES THAT THE USE OF THE TRADEMARK PURSUANT TO PARAGRAPH 6.1 HEREOF, SHALL BE DEEMED TO INCLUDE THE AUTHORIZ ATION WHICH ENABLES THE LICENSEE TO PERMIT ITS DEALERS TO USE THE TRADEMARK IN THEIR AD VERTISEMENTS AND PROMOTIONAL MATERIALS FOR THE SALE OF PRODUCTS AND PARTS, PROVI DED, HOWEVER, THAT THE LICENSEE SHALL ENSURE THAT SUCH DEALERS SHALL USE THE TRADEMARK ON LY IN CONNECTION WITH THE SAID PURPOSE AND SHALL COMPLY WITH ALL PROVISIONS OF THIS AGREEM ENT RELATING TO DISCONTINUATION OF THE USE OF THE TRADEMARK UPON THE TERMINATION OR EXPIRA TION OF THIS AGREEMENT. 6 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 ARTICLE 7. PAYMENT : 7.1 IN CONSIDERATION OF THE CONTINUING USE BY THE L ICENSEE, THROUGHOUT THE TERM OF THIS AGREEMENT OF TECHNICAL INFORMATION, INDUSTRIAL PROP ERTY RIGHTS AND TRADEMARK TO BE USED IN CONNECTION WITH PRODUCTS AND PARTS, AND THE OBLI GATIONS ASSUMED BY THE LICENSOR UNDER THIS AGREEMENT, THE LICENSEE SHALL PAY TO THE LICEN SOR SUBJECT TO APPLICABLE INDIAN TAXES THE FOLLOWING AMOUNTS : (A) LUMPSUM : A LUMP SUM OF US $ 147,000 [UNITED STATES DOLLARS O NE HUNDRED AND FORTY SEVEN THOUSAND ONLY] NOT OF APPLICABLE INDIAN TAXES AS FO LLOWS : I) 1/3 RD OF THE SAID AMOUNT WITHIN THIRTY (30) DAYS FROM TH E EFFECTIVE DATE; II) 1/3 RD OF THE SAID AMOUNT WITHIN THIRTY (30) DAYS OF THE DATE OF TRANSFER OF TECHNICAL INFORMATION OUTSIDE INDIA; AND III) 1/3 RD OF THE SAID AMOUNT WITHIN THIRTY (30) DAYS AFTER C OMMENCEMENT OF COMMERCIAL PRODUCTION OF THE PRODUCTS. (B) ROYALTY : ROYALTY DURING THE ROYALTY PERIOD IN THE FOLLOWIN G SUBJECT TO APPLICABLE INDIAN TAXES OF THE NET EX FACTORY SELLING PRICE OF THE PR ODUCTS SOLD BY THE LICENSEE DURING THE ROYALTY PERIOD : 3 (THREE) PERCENT OF THE NET EX-FACTORY SELLING PRI CE. ARTICLE 7.2 ALL PAYMENTS UNDER THIS ARTICLE SHALL BE MADE I N UNITED STATES DOLLARS AND SHALL BE REMITTED TO THE LICENSORS ACCOUNT AT THE BANK DESIGNATED BY THE LICENSOR IN .. (RENT). THE CONVERSION TO U.S. DOLLA RS SHALL BE MADE AT THE TELEGRAPHIC TRANSFER BUYING RATE OF EXCHANGE QUOTAT ION ON THE DAY OF PAYMENT AT THE BANK; 7 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 7.3 THE LICENSEE SHALL BEAR AND PAY ANY AND ALL FEE , CHARGE AND COMMISSION CHARGED BY THE LICENSEES BANK ON SUCH REMITTANCE; 7.4 IN ORDER FOR THE LICENSOR TO AVOID THE DOUBLE T AXATION, THE LICENSEE SHALL TAKE THE NECESSARY PROCEDURES AND PROVIDE THE LICEN SOR WITH ALL PROPER DOCUMENTS, INCLUDING THE OFFICIAL RECEIPTS OF TAXES , FOR THE SAID PROCEDURES. AS REGARDS THE AGREEMENT WITH CMWCL, THE RELEVANT A RTICLES GOVERNING TERMS PROVIDING SERVICES AND PAYMENTS THEREFOR ARE REPRODUCED AS BE LOW: ARTICLE 10. TRADEMARKS, LABELING : (1) UNLESS OTHERWISE AGREED UPON IN WRITING, LICENS EE MAY SELL THE PRODUCTS UNDER LICENSORS TRADEMARKS, AND MAY LABEL THE PACKAGES O F THE PRODUCTS WELL VISIBLE FOR CUSTOMERS AT A SUITABLE PLACE AS FOLLOWS : MANUFA CTURED UNDER LICENCE FROM CHUETSU METAL CORPORATION, JAPAN FOR THE PRODUCTS MADE WI TH CMWCL RAW MATERIALS. ARTICLE 14. ROYALTIES : (A) LUMPSUM PAYMENT : (1) LUMPSUM OF TWENTY FIVE THOUSAND DOLLARS (US$ 25 000) SUBJECT TO APPLICABLE INDIAN TAXES TO BE PAID TO THE LICENSOR IN FOLLOWING THREE INSTALLMENTS (AS PER THE STANDARD REGULATIONS OF RESERVE BANK OF INDIA). LICENSEE WOULD FURNISH CERTIFICATE OF DEDUCTION OF TAX TO THE LICENSOR. I) 1/3 RD WITHIN 30 DAYS OF APPROVAL OF THE AGREEMENT BY RES ERVE BANK OF INDIA; II) 1/3 RD WITHIN 30 DAYS OF TRANSFER OF TECHNICAL KNOW-HOW; AND III) 1/3 RD WITHIN 30 DAYS OF COMMENCEMENT OF COMMERCIAL PRODU CTION. (B) ROYALTIES : (1) LICENSEE SHALL PAY TO LICENSOR A RUNNING ROYALT Y OF ONE POINT FIVE PERCENT (1.5%) OF THE NET SALES PRICE OF THE PRODUCTS SOLD BY LICENSEE, SUBJECT TO INDIAN TAXES. LICENSEE WOULD REGULARLY FURNISH CERTIFICATE OF DED UCTION OF TAX TO THE LICENSOR. 6.2 FROM READING OF ARTICLE 7.1(B) OF AGREEMENT WIT H CYICL AND ARTICLE 14(B) OF AGREEMENT WITH CMWCL WHICH DEAL WITH PAYMENT OF ROYALTY AT TH E RATE OF 3/1.5 PER CENT OF NET EX-FACTORY 8 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 SELLING PRICE. THE PAYMENT OF ROYALTY ON EX-FACTOR Y SALE PRICE FOR THE USE OF TRADEMARK ON THE PRODUCTS MANUFACTURED BY THE ASSESSEE IN THE CASE O F CYICL HAS CHANGED FROM 3 TO 2 PER CENT FOR THE RELEVANT ASSESSMENT YEAR. THE PAYMENT OF R OYALTY IS DEPENDENT ON SALES MADE BY THE ASSESSEE. THERE IS NO OTHER CRITERION FOR DETERMINA TION OF ROYALTY PAYABLE BY THE ASSESSEE. HONBLE DELHI HIGH COURT IN THE CASE OF CLIMATE SYS TEMS INDIA LTD. (SUPRA) HELD THAT UNDER THE AGREEMENT, PAYMENTS WERE TO BE MADE BY THE ASSESSEE IN TWO PARTS; A LUMP SUM FEE FOR TRANSFER OF TECHNOLOGY WHICH THE ASSESSEE HAD ADMITTED AS BE ING OF CAPITAL IN NATURE AND ROYALTY PAYMENTS IN CONSIDERATION OF PROVIDING TECHNOLOGY SERVICES. THE PAYMENT OF ROYALTY DEPENDED ON THE QUANTUM OF DOMESTIC AS WELL AS EXPORT SALES WHICH W OULD DECREASE OR INCREASE EVERY YEAR DEPENDING UPON THE DECREASE AND INCREASE IN THE SAL ES. THIS PAYMENT WAS NOT BECAUSE OF TRANSFER OF TECHNOLOGY, BUT FOR PROVIDING TECHNICAL SERVICES . IN SUCH CIRCUMSTANCES, HONBLE DELHI HIGH COURT HELD HAS THAT THE PAYMENT OF ROYALTY, WHICH W AS CONTINUOUS PROCESS, SHOULD HAVE BEEN TREATED AS REVENUE EXPENDITURE. IN THE CASE BEFORE US, THE ASSESSEE HAS MADE PAYMENT AT THE RATE OF 2/1.5 PER CENT OF THE EX-FACTORY SELLING PRICE F OR THE ROYALTY PERIOD FOR USE OF TRADEMARKS, TECHNICAL ASSISTANCE, TECHNICAL SERVICES ETC. ON DI SCONTINUATION OF USE OF TRADEMARKS UPON TERMINATION OF THE AGREEMENTS, THE PAYMENT OF ROYAL TY WOULD ALSO BE STOPPED. THEREFORE, THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBL E DELHI HIGH COURT IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. (SUPRA). SIMILAR VIEW HAS BEEN TAKEN BY THE ITAT, DELHI BENCH F IN THE CASE OF SENIOR INDIA PVT. LTD. VS. CIT (SUPRA) WHER EIN IT HAS BEEN HELD THAT PAYMENT MADE FOR TRADEMARK USER WAS REVENUE IN NATURE. IN THIS CASE THE ASSESSEE DID NOT BECOME THE EXCLUSIVE AND ABSOLUTE OWNER OF TECHNICAL KNOW-HOW, BUT IT SIMPLY ACQUIRED A LICENSE OR A LIMITED RIGHT TO USE THIS TECHNICAL KNOW-HOW AND HENCE, PAYMENT MADE BY THE ASSESSEE, WAS HELD TO BE REVENUE IN NATURE. IN VIEW OF THE ABOVE, IT IS HELD THAT THE PAYMENT MADE ON THE BASIS OF EX-FACTORY SELLING PRICE FOR THE USE OF THE TRADEMARKS ON THE PRODUCTS OF THE ASSESSEE COMPANY IS REVENUE EXPENDITURE AND NO PART OF IT COULD BE CAPITALIZED. THE ASSESSEE HIMSELF HAS CAPITALIZED THE LUMP SUM PAYMENTS MADE FOR SUPPLY OF TECHNICAL KNOW-HOW WHICH IT COULD USE FOR ITS BUSINESS EVEN AFTER TERMINATION OF THE SAID AGREEMENTS. HENCE BOT H THE PAYMENTS ARE DIFFERENT IN NATURE. THEREFORE, THE LD CIT (A) WAS NOT JUSTIFIED IN HOLD ING THAT THERE WAS NO JUSTIFICATION IN TREATING ONE PART OF THE PAYMENT AS CAPITAL AND THE OTHER PA RT OF IT AS REVENUE WHEN PURPOSE FOR WHICH PAYMENT WAS MADE REMAINED THE SAME. THUS, THE PAYME NT OF ROYALTY OF RS.6,41,217/- BASED ON 9 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 SALES MADE BY THE ASSESSEE IS TO BE TREATED REVENUE IN NATURE. ACCORDINGLY, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 7. NOW COMING TO APPEAL FILED BY THE REVENUE, THE O NLY ISSUE FOR CONSIDERATION RELATES TO DELETING THE ADDITION OF RS.13,93,692/- MADE ON ACC OUNT OF CAPITALIZATION OF SYNCHRONIZER RINGS. THE ASSESSING OFFICER FROM THE DETAILS OF MISCELLAN EOUS EXPENDITURE OF RS.28,34,103/- FOUND THAT AN AMOUNT OF RS.16,39,638/- WAS CLAIMED ON ACCOUNT OF DEVELOPMENT OF SYNCHRONIZER RINGS FOR FORD INDIA AND TVS MOTORS AND AN EXPENDITURE OF RS. 16,39,638/- NET OFF OF RECOVERY FROM PROSPECTIVE CUSTOMER WAS DEBITED TO PROFIT AND LOSS ACCOUNT AS NEW BUSINESS DEVELOPMENT. AFTER CONSIDERING THE REPLY OF THE ASSESSEE, THE ASSESSIN G OFFICER CONCLUDED THAT THE EXPENDITURE WAS INCURRED FOR THE DEVELOPMENT OF SYNCHRONIZER RINGS WHICH ARE USED AS AUTOMOTIVE COMPONENTS. THESE SYNCHRONIZER RINGS WERE DEVELOPED BY THE ASSE SSEE COMPANY FOR THE SPECIFIED BENEFIT OF FORD INDIA AND TVS MOTORS, WHO WERE THE REGULAR CLI ENTS OF THE ASSESSEE COMPANY. SINCE THE DEVELOPMENT EXPENDITURE WAS GOING TO GIVE ENDURING BENEFIT TO THE ASSESSEE IN TERMS OF ITS TRANSACTIONS/PROVISION OF AUTOMOTIVE PARTS SUCH AS DEVELOPED SYNCHRONIZER RINGS, THE ASSESSING OFFICER TREATED THE EXPENDITURE INCURRED ON DEVELOP MENT OF SYNCHRONIZER RINGS CAPITAL IN NATURE. THE AO, HOWEVER, ALLOWED DEPRECIATION. 8. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED TH AT THE ASSESSEE HAD SPENT AN AMOUNT OF RS.16,39,638/- TO DEVELOP SYNCHRONIZER RINGS WHICH THE ASSESSEE OTHERWISE HAS BEEN MANUFACTURING SINCE INCEPTION. THE PRODUCT DEVELOP ED BY INCURRED THE EXPENDITURE, CONSISTING OF COST OF IMPORTED RAW-MATERIAL, CUSTOM AND EXCISE DU TY ON IT, COST OF TOOLS, DYES, GAUGES, ETC. [WHICH OTHERWISE ALSO THE ROUTINE EXPENSE OF MANUFA CTURE WAS CHARGED TO PROFIT AND LOSS ACCOUNT]. IT DID NOT QUALIFY THE TEST REQUIREMENTS OF THE SAID PARTY CONDUCTED AT THEIR END. THEREFORE, THE SAID EXPENDITURE WAS CHARGED TO REVE NUE ACCOUNT AS PER NORMAL ACCEPTED PRINCIPLES. THESE EXPENSES BEARING A NATURE OF SAM PLE EXPENSES, WERE BOOKED UNDER ACCOUNT HAD NEW BUSINESS DEVELOPMENT EXPENSES. ONCE THE PROD UCT GETS APPROVAL OF PROSPECTIVE CUSTOMERS THIS ACCOUNT WAS CONTINUED UNDER NORMAL ACCOUNTING HEAD. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD RECOVERED AMOUNT OF RS.6,70,995/- AGAI NST THE EXPENDITURE OF RS.23,10,633/-. IT 10 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 WAS, THEREFORE SUBMITTED THAT THE EXPENDITURE WAS R EVENUE IN NATURE. THE LD. CIT (APPEALS) AFTER CONSIDERING THE REPLY OF THE ASSESSEE, DELETED THE ADDITION BY OBSERVING AS UNDER :- 2.3 I HAVE CAREFULLY CONSIDERED THE SU BMISSIONS OF LD. AR AND HAVE GONE THROUGH THE ASSESSMENT ORDER. FROM THE FACTS OF TH E CASE, IT IS EVIDENT THAT THE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SYNCHRONIZER RINGS. AN AMOUNT OF RS.23,10,633/- WAS INCURRED FOR DEVELOPME NT OF SYNCHRONIZER RINGS FOR FORD INDIA AND TVS MOTOR. OUT OF THE ABOVE EXPENDI TURE, A SUM OF RS.6,70,995/- WAS RECOVERED AND THE REMAINING AMOUNT OF RS.16,39, 638/- IS DEBITED TO PROFIT AND LOSS ACCOUNT UNDER THE HEAD NEW BUSINESS DEVEL OPMENT. THE ASSESSING OFFICER HAS DISALLOWED THIS EXPENDITURE ON THE GROU ND THAT THIS IS A CAPITAL EXPENDITURE. HOWEVER, NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SUBSTANTIATE THAT THE AMOUNT IS SPENT TOWARDS CREATION OF A CAPI TAL ASSET. IT IS AN ADMITTED FACT THAT APPELLANT IS IN THE BUSINESS OF MANUFACTURING SYNCHRONIZER RINGS. IN SUCH CIRCUMSTANCES, EXPENDITURE INCURRED ON DEVELOPMENT OF SYNCHRONIZER RINGS FOR FORD INDIA AND TVS MOTOR IS PART OF REGULAR BUSINES S ACTIVITY OF THE ASSESSEE COMPANY. HENCE, THE ASSESSING OFFICER WAS NOT JUST IFIED IN DISALLOWING THE SAME. THE ADDITION IS, THEREFORE, DIRECTED TO BE DELETED. 9. BEFORE US, THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE EXPENDITURE INCURRED ON DEVELOPMENT OF SYNCHRONIZER RINGS WHICH IS THE BUSI NESS OF THE ASSESSEE AND IS REVENUE IN NATURE. ON THE OTHER HAND, THE LD. SR. DR SUPPORTED THE ORD ER OF THE ASSESSING OFFICER. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. DURING THE COURSE OF HEARING THE REVENUE COULD NOT BRING ANY MATERIAL ON RECORD TO COUNTER THE FINDINGS RECORDED BY THE LD. CIT (APPEALS). THE EX PENDITURE WAS INCURRED DURING THE COURSE OF NORMAL BUSINESS ACTIVITIES. THE ASSESSEE HAD BEEN MANUFACTURING SYNCHRONIZER RINGS SINCE INCEPTION. THE MANUFACTURING OF SAMPLES OF THE PRO DUCT IS NORMAL BUSINESS EXPENDITURE, WHICH IS ALLOWABLE AS REVENUE EXPENDITURE. IT IS NOT THE CA SE OF THE REVENUE THAT SYN. RINGS WERE 11 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 DEVELOPED FOR NEW BUSINESS. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF SYN. RINGS FOR MARUTI & HYUNDAI. HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. J. K. SYNTHETICS 309 ITR 371 (DEL.) HAS HELD THAT IN DETERMINING WHETHER A PARTICULAR EXPENDITURE IS REVENUE OR CAPITAL, THE BROAD PRINCIPLE, WHICH REQUIRED TO BE APPLIED TO THE FACTS OF EACH CASE ARE (I) THE EXPENDITURE INCURRED TOWARDS INITIAL OUTLAY OF BUSI NESS WOULD BE IN THE NATURE OF CAPITAL EXPENDITURE, HOWEVER, IF THE EXPENDITURE IS INCURRE D WHILE THE BUSINESS IS GOING ON, IT WOULD HAVE TO BE ASCERTAINED IF THE EXPENDITURE IS MADE F OR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING BENEFIT FOR THE B USINESS, AND IF THAT BE SO, IT WILL BE IN THE NATURE OF CAPITAL EXPENDITURE. IF THE EXPENDITURE, ON THE OTHER HAND, IS FOR RUNNING THE BUSINESS OR WORKING WITH A VIEW TO PRODUCE PROFITS, IT WOULD BE IN THE NATURE OF REVENUE EXPENDITURE. THERE IS NO DOUBT THAT THE EXPENDITURE HAS BEEN INC URRED ON DEVELOPMENT OF RINGS FOR FORD & TVS MOTORS, BUT THE EXPENDITURE HAS BEEN INC URRED IN THE SAME LINE OF BUSINESS. THE ASSESSEE MIGHT HAVE BEEN BENEFITTED BY INCURRING TH E EXPENDITURE FOR OBTAINING THE ORDERS FROM FORD AND TVS MOTORS, BUT NO CAPITAL ASSET OR ADVANT AGE OF ENDURING BENEFIT HAS BEEN CREATED. HONBLE DELHI HIGH COURT HAS ALSO HELD THAT AN EXPE NSES INCURRED FOR ACQUISITION OF A SOURCE OF PROFIT OR INCOME, IN THE ABSENCE OF ANY CONTRARY CIRCUMSTANCES, BE IN THE NATURE OF CAPITAL EXPENDITURE. AS AGAINST THIS, AN EXPENDITURE WHICH ENABLES THE PROFIT MAKING STRUCTURE TO WORK MORE EFFICIENTLY LEAVING THE SOURCE OR THE PRO FIT MAKING STRUCTURE UN-TOUCHED, WOULD BE IN THE NATURE OF REVENUE EXPENDITURE. IN OTHER WOR DS, EXPENDITURE INCURRED TO FINE TUNE TRADING OPERATIONS TO ENABLE THE MANAGEMENT TO RUN THE BUSI NESS EFFECTIVELY, EFFICIENTLY AND PROFITABLY LEAVING THE FIXED ASSETS UN-TOUCHED WOULD BE AN EXP ENDITURE OF A REVENUE NATURE, EVEN THOUGH THE ADVANTAGE OBTAINED MAY LAST FOR AN INDEFINITE P ERIOD. TO THAT EXTENT, THE TEST OF ENDURING BENEFIT FOR ADVANTAGE COULD BE CONSIDERED AS HAVING BROKEN DOWN. IN THE CASE BEFORE US, THE EXPENDITURE INCURRED BY THE ASSESSEE FOR DEVELO PMENT OF SYNCHRONIZER RINGS FOR FORD INDIA AND TVS MOTORS IS IN THE SAME LINE OF BUSINES S. NO CAPITAL ASSET HAS COME INTO EXISTENCE. NO DOUBT, BUSINESS ADVANTAGE HAS BEEN O BTAINED WHICH WOULD ENABLE THE ASSESSEE TO OBTAIN ORDERS FROM FORD INDIA & TVS MOTORS, BUT THAT WOULD BE IN THE NATURE OF FINE TUNING THE BUSINESS ALREADY IN EXISTENCE. THEREFORE, THE ASSESSEES CASE IS SQUARELY COVERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF J. K. SYNTH ETICS LTD. (SUPRA). THEREFORE, IN OUR CONSIDERED OPINION, THE LD. CIT (APPEALS) IS JUSTIF IED IN ALLOWING THE CLAIM OF THE ASSESSEE. 12 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010 ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE OR DER PASSED BY THE LD. CIT (APPEALS) DELETING THE ADDITION. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 12. TO SUM UP THE APPEAL FILED BY THE ASSESSEE IS A LLOWED WHILE THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 31 ST OCTOBER, 2011. SD/- SD/- [ RAJPAL YADAV ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 31 ST OCTOBER, 2011. * MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANTS. 2. RESPONDENTS. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 13 I. T. APPEAL NO. 4389 & 4377 (DEL) OF 2010