Carboline (India) Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 48/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90577 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2015
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 01-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 09-01-2015
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI . . . , . , ! '# $ [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ] ./ I.T.A.NO.48/MDS/2015 / ASSESSMENT YEAR : 2006-07 M/S CARBOLINE (INDIA) PVT. LTD (FORMERLY KNOWN AS M/S CDC CARBOLINE (INDIA) PVT. LTD.) 356/357, AMBATTUR INDUSTRIAL ESTATE , CHENNAI 600 098 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCE I(3) CHENNAI [PAN AAACC 2469 G] ( %& / APPELLANT) ( '(%& /RESPONDENT) / APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE /RESPONDENT BY : SHRI P. RADHAKRISHNAN, JCIT / DATE OF HEARING : 01-06-2015 ! / DATE OF PRONOUNCEMENT : 30-06-2015 / O R D E R PER N.R.S GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, CHE NNAI, DATED 30.9.2014 AND PERTAINS TO ASSESSMENT YEAR 2006-07. ITA NO.48/15 :- 2 -: 2. THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISALLOW ANCE OF 25% OF THE TOTAL ROYALTY PAID BY THE ASSESSEE. 2. SHRI R. VIJAYARAGHAVAN, LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE ASSESSEE ENTERED INTO AN AGREEM ENT WITH M/S CARBOLINE INTERNATIONAL CORPORATION, USA, FOR MANU FACTURING AND SALE OF THE PRODUCTS MENTIONED IN ANNEXURE 1 TO THE AGRE EMENT. REFERRING TO THE COPY OF THE AGREEMENT ENTERED INTO BETWEEN T HE ASSESSEE AND M/S CARBOLINE INTERNATIONAL CORPORATION, USA, THE L D. COUNSEL SUBMITTED THAT A LICENCE WAS GIVEN TO THE ASSESSEE TO MANUFACTURE THE LICENCED PRODUCTS AND TO SELL THE SAME IN THE SALES TERRITORY. THE ASSESSEE HAS TO PAY ROYALTY TO M/S CARBOLINE INTERN ATIONAL CORPORATION, USA. ACCORDING TO THE LD. COUNSEL, THE ROYALTY WHI CH WAS PAID TO M/S CARBOLINE INTERNATIONAL CORPORATION, USA, IS IN TH E NATURE OF REVENUE EXPENDITURE, THEREFORE, THE ENTIRE PAYMENT OF ROYA LTY WAS CLAIMED AS DEDUCTION WHILE COMPUTING THE TAXABLE INCOME. HOWE VER, THE ASSESSING OFFICER BY PLACING RELIANCE ON THE JUDGME NT OF HON'BLE MADRAS HIGH COURT IN CIT VS SOUTHERN SWITCHGEAR LTD 148 ITR 272, FOUND THAT THE PAYMENT MADE BY THE ASSESSEE TOWARD S ROYALTY IS PARTLY TOWARDS CAPITAL AND PARTLY TOWARDS REVENUE. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED 25% OF THE ROYALTY. T HE CIT(A) HAS CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OF FICER. REFERRING TO THE JUDGMENT OF THE HON'BLE MADRAS HIGH COURT IN SOUTHERN ITA NO.48/15 :- 3 -: SWITCHGEAR LTD (SUPRA), THE LD. COUNSEL SUBMITTED T HAT IN THE CASE BEFORE THE MADRAS HIGH COURT, THE LICENSOR FURNISHE D ONE COMPLETE SET OF WORKING DRAWING, SPECIFICATIONS AND OTHER WRITTE N MANUFACTURING INFORMATION TO THE LICENSEE. IN THOSE CIRCUMSTANCE S, THE MADRAS HIGH COURT FOUND THAT THOUGH THE DURATION OF THE AGREEME NT WAS FIVE YEARS, THE ASSESSEE EVEN AFTER THE EXPIRY OF THE PERIOD, COULD USE THE METHODS OF PRODUCTION, PROCEDURE, EXPERIMENTS, IMPR OVEMENTS ETC. WHICH WERE MADE AVAILABLE TO THEM IN PURSUANCE OF T HE AGREEMENT. ACCORDINGLY, THE MADRAS HIGH COURT FOUND THAT IN AD DITION TO ACQUISITION OF TECHNICAL KNOWLEDGE, THE ASSESSEE G OT AN EXCLUSIVE RIGHT TO MANUFACTURE AND SELL ITS ARTICLES WITHOUT ANY OB JECTION FROM ANYONE INCLUDING THE FOREIGN COMPANY, THEREFORE, IT WAS CL EARLY AN ADVANTAGE OF ENDURING NATURE. IN THE CASE BEFORE US, ACCORDI NG TO THE LD. COUNSEL, THE AGREEMENT WAS FOR A PERIOD OF 10 YEARS . THE ASSESSEE RECEIVED FROM TIME TO TIME, FURNISH THE TECHNICAL K NOWLEDGE AND KNOW- HOW TO MANUFACTURE THE LICENSED PRODUCTS. THE ASS ESSEE HAS ALSO RECEIVED TECHNICAL ADVICE FROM THE LICENSOR. REFER RING TO THE JUDGMENT OF HON'BLE APEX COURT IN CIT VS I.A.E.C(PUMPS) LTD [1998] 232 ITR 316, THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE BE FORE THE APEX COURT HAS ENTERED INTO AN AGREEMENT WITH A FOREIGN COLLABORATOR TO USE ITS PATENT AND DESIGN EXCLUSIVELY IN INDIA. THE AGREEMENT WAS FOR A PERIOD OF 10 YEARS WITH AN OPTION TO EXTEND THE AGREEMENT . DURING THE CURRENCY OF ITA NO.48/15 :- 4 -: THE AGREEMENT, THE FOREIGN COLLABORATOR UNDERTOOK N OT TO SURRENDER ITS PATENTS WITHOUT THE CONSENT OF THE ASSESSEE AND TO MAKE AVAILABLE ANY IMPROVEMENTS, MODIFICATIONS AND ADDITIONS TO TH E DESIGNS. IN THOSE CIRCUMSTANCES, THE APEX COURT FOUND THAT THE AGREEMENT CLEARLY SHOWS THAT WHAT WAS OBTAINED BY THE ASSESSEE WAS O NLY A LICENCE AND WHAT WAS PAID BY THE ASSESSEE TO THE FOREIGN COLLA BORATOR WAS ONLY A LICENCE FEE AND NOT A PRICE FOR ACQUISITION OF ANY CAPITAL ASSET. ACCORDING TO THE LD. COUNSEL, IN VIEW OF THIS JUDGM ENT OF THE APEX COURT, THE ASSESSING OFFICER CANNOT DISALLOW ANY PA RT OF THE PAYMENT MADE TO M/S CARBOLINE INTERNATIONAL CORPORATION, US A. 3. THE LD. COUNSEL HAS ALSO PLACED HIS RELIANCE ON TH E JUDGMENT OF THE HON'BLE MADRAS HIGH COURT IN CIT VS HITECH A RAI LTD [2014] 368 ITR 577 AND SUBMITTED THAT THE ASSESSEE BEFORE THE HON'BLE MADRAS HIGH COURT ENGAGED IN MANUFACTURING OF AUTOMOBILE PARTS AND COMPONENTS ENTERED INTO TECHNICAL COLLABORATION AGR EEMENT WITH A JAPANESE COMPANY FOR A PERIOD OF 10 YEARS. AS PER THE AGREEMENT, THE ASSESSEE WAS GRANTED EXCLUSIVE LICENCE TO MANU FACTURE AND SELL THE ENTIRE RANGE OF REED VALVES. THE ASSESSEE SUB SEQUENTLY ENTERED INTO ANOTHER AGREEMENT TO CONTINUE THE USAGE OF TEC HNICAL KNOW-HOW GRANTED IN THE EARLIER AGREEMENT FOR A PERIOD OF FI VE YEARS IN RESPECT OF MOULDED RUBBER PARTS AND REED VALVE ASSEMBLIES. TH E HIGH COURT FOUND THAT WHEN THE DEPARTMENT ACCEPTED THE PAYMENT AS ROYALTY FOR ITA NO.48/15 :- 5 -: THE ASSESSMENT YEARS 1986-87 TO 1994-95, IT CANNOT RAISE ANY DISPUTE FOR THE ASSESSMENT YEAR 1995-96. THE MADRAS HIGH C OURT FURTHER FOUND THAT THE OPINION SHOULD NOT DIFFER FROM TIME TO TIME BASED ON THE PERCEPTION OF THE INDIVIDUAL OFFICERS. THE PAY MENT OF ROYALTY BASED ON TWO AGREEMENTS DATED 24.5.1989 AND 8.12.1993 WER E OF REVENUE NATURE. THE LD. COUNSEL HAS ALSO PLACED RELIANCE O N THE UNREPORTED JUDGMENT OF HON'BLE MADRAS HIGH COURT IN THE CASE O F CIT VS PANASONIC CARBON INDIA CO. LTD IN T.C.(A) NOS. 552, 553, 554 AND 556 OF 2010, A COPY OF WHICH IS FILED BY THE LD. COUNSE L. ACCORDING TO THE LD. COUNSEL, IN THE CASE BEFORE THE MADRAS HIGH COU RT, THE ENTIRE ROYALTY PAYMENT WAS ALLOWED AS REVENUE EXPENDITURE. IN VIEW OF THE ABOVE, ACCORDING TO THE LD. COUNSEL, WHAT WAS PAID BY THE ASSESSEE IS ONLY REVENUE EXPENDITURE THEREFORE, THE CIT(A) IS N OT JUSTIFIED IN RESTRICTING THE PAYMENT MADE BY THE ASSESSEE. 4. ON THE CONTRARY, SHRI N. MADHAVAN, LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF THE ASSESSIN G OFFICER AND THE CIT(A). 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMI TTEDLY, THE ASSESSEE ENTERED INTO AN AGREEMENT ON 26.9.1995 WIT H M/S CARBOLINE INTERNATIONAL CORPORATION, USA, WHEREBY THE ASSESS EE WAS GRANTED ITA NO.48/15 :- 6 -: LICENCE TO MANUFACTURE THE LICENSED PRODUCTS WHICH ARE DETAILED AT ANNEXURE 1 OF THE AGREEMENT. THE AGREEMENT PERIOD WAS 10 YEARS. THERE UNDER, THE ASSESSEE HAS RIGHT TO MANUFACTURE THE LICENSED PRODUCTS WITHIN THE MANUFACTURING TERRITORY AND TO SELL THE SAME IN THE SALES TERRITORY. THE ASSESSEE HAS TO PAY ROYALTY FOR THE AGREEMENT PERIOD AND SHALL ALSO PAY FULL COMPENSATION FOR USE OF THE PATENT RIGHTS. AS PER CLAUSE 3.2 OF THE AGREEMENT, THE LI CENSOR AGREES TO FURNISH THE NEWLY ACQUIRED OR DEVELOPED CONFIDENTIA L MATTERS APPLICABLE TO THE MANUFACTURE OF THE LICENSED PRODUCTS. THE L ICENSOR HAS ALSO AGREED TO PROVIDE TECHNICAL ADVICE FOR THE EFFICIEN T DAY TO DAY OPERATION OF THE LICENSEES PLANT AND MANUFACTURE O F THE LICENSED PRODUCTS. UNDER CLAUSE 11.1, AN OPTION WAS GIVEN TO THE ASSESSEE TO SUB-LICENSE THE TECHNICAL KNOW-HOW TO THAT PARTIES IN THE MANUFACTURING TERRITORY AS PER THE TERMS AND CONDIT IONS THAT MAY BE AGREED BY M/S CARBOLINE INTERNATIONAL CORPORATION, USA. UNDER CLAUSE 14.7 OF THE AGREEMENT, AN OPTION WAS GIVEN TO THE P ARTIES TO EXTEND THE PERIOD OF AGREEMENT ON THE MUTUALLY ACCEPTED TE RMS AND CONDITIONS SUBJECT TO APPROVAL OF GOVERNMENT OF IND IA. THEREFORE, IT IS OBVIOUS THAT A LICENCE WAS GRANTED TO THE ASSESSEE SUBJECT TO THE TERMS AND CONDITIONS THAT WERE PRESCRIBED IN THE AG REEMENT EVEN THOUGH AN OPTION WAS GIVEN TO THE ASSESSEE TO SUB- LICENSE THE TECHNICAL KNOW-HOW, WHICH COULD BE DONE ONLY AS PER THE TERMS AND ITA NO.48/15 :- 7 -: CONDITIONS AGREED BY THE LICENSOR. THE HON'BLE MA DRAS HIGH COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. (SUPRA), AFTER CONSIDERING THE TERMS AND CONDITIONS OF THE AGREEMENT WHICH PROVIDE S FOR FURNISHING ONE COMPLETE SET OF THE WORKING DRAWINGS, SPECIFICA TIONS AND OTHER WRITTEN MANUFACTURING INFORMATION, CAME TO THE CONC LUSION THAT THE ASSESSEE COULD CONTINUE THE MANUFACTURING PROCESS E VEN AFTER EXPIRY OF THE AGREEMENT. THEREFORE, A PART OF THE PAYMENT WAS TREATED AS CAPITAL IN NATURE. IN THE CASE BEFORE US, WHAT WAS PROVIDED TO THE ASSESSEE IN TERMS OF THE AGREEMENT IS CONFIDENTIAL MATTER WHICH ARE APPLICABLE TO THE MANUFACTURE OF LICENCED PRODUCTS. APART FROM SPECIFICATIONS AND MANUFACTURING TECHNIQUES, THE LI CENSOR HAS TO PROVIDE TECHNICAL ADVICE FOR THE EFFICIENT DAY TO D AY OPERATION OF THE PLANT. THEREFORE, THE ASSESSEE MAY CONTINUE THE M ANUFACTURING PROCESS EVEN AFTER EXPIRY OF THE LICENSE PERIOD. 6. WE HAVE ALSO GONE THROUGH THE JUDGMENT OF HON'BLE A PEX COURT IN THE CASE OF I.A.E.C(PUMPS) LTD (SUPRA). I N THE CASE BEFORE THE APEX COURT, DURING THE CURRENCY OF THE AGREEMEN T, THE ASSESSEE WAS NOT TO DISCLOSE THE TECHNICAL KNOW-HOW TO ANY T HIRD PARTIES WITHOUT WRITTEN AUTHORIZATION FROM THE FOREIGN COLLABORATOR . THE APEX COURT FOUND THAT WHAT WAS PAID BY THE ASSESSEE IS A LICE NCE FEE WHICH ARE IN THE REVENUE FILED. IN THE CASE BEFORE US ALSO, DUR ING THE CURRENCY OF THE AGREEMENT, THOUGH AN OPTION WAS GIVEN TO THE A SSESSEE TO SUB- ITA NO.48/15 :- 8 -: LEASE THE LICENCE THAT COULD BE DONE ONLY AS PER TE RMS AND CONDITIONS OF THE LICENSOR. THE LICENSEE CANNOT DO IT INDIVID UALLY WITHOUT CONSENT OF THE LICENSOR. THEREFORE, THIS TRIBUNAL IS OF TH E CONSIDERED OPINION THAT THE FACTS OF THE CASE BEFORE THE TRIBUNAL ARE IDENTICAL TO THAT OF I.A.E.C(PUMPS) LTD (SUPRA). THEREFORE, THE JUDGM ENT OF THE HON'BLE APEX COURT IN I.A.E.C(PUMPS) LTD (SUPRA) IS SQUAREL Y APPLICABLE TO THE FACTS OF THE PRESENT CASE. THUS, THE PAYMENT MADE BY THE ASSESSEE HAS TO BE TREATED AS REVENUE EXPENDITURE AND THERE IS NO NEED FOR TREATING ANY PART OF THE PAYMENT AS CAPITAL EXPENDI TURE. IN VIEW OF THE JUDGMENT OF THE HON'BLE APEX COURT IN I.A.E.C(PUMPS ) LTD (SUPRA) THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE JUDG MENT OF THE HON'BLE MADRAS HIGH COURT IN SOUTHERN SWITCHGEAR LTD (SUPRA ) MAY NOT BE APPLICABLE TO THE FACTS OF THE CASE. 7. WE HAVE GONE THROUGH THE JUDGMENTS OF HON'BLE MADR AS HIGH COURT IN CIT VS HITECH ARAI LTD(SUPRA) AND PAN ASONIC CARBON INDIA CO. LTD. (SUPRA). IN BOTH THE JUDGMENTS, THE IDENTICAL PAYMENT WAS TREATED AS REVENUE EXPENDITURE. OF COURSE, TH E HIGH COURT HAS NOT CONSIDERED ITS EARLIER JUDGMENT IN SOUTHERN SWI TCHGEAR LTD (SUPRA). IN VIEW OF THE JUDGMENT OF THE HON'BLE APEX COURT I N I.A.E.C(PUMPS) LTD(SUPRA), THIS TRIBUNAL IS OF THE CONSIDERED OPIN ION THAT THERE IS NO NEED OF DISALLOWANCE OF ANY PART OF THE PAYMENT AS CAPITAL EXPENDITURE. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ITA NO.48/15 :- 9 -: ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO ALLO W THE ENTIRE PAYMENT AS REVENUE EXPENDITURE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH OF JUNE, 2015, AT CHENNAI. SD/- SD/- ( . ) (D. KARUNAKARA RAO) ! / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 30 TH JUNE, 2015 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF