Appeal details
Counselvise Citation
[2021] 104 COUNSELVISE.COM (IT) 5635 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
6 year(s) 8 month(s) 6 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
22-12-2021
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Assessment Year
2000-2001
Appeal Filed On
15-04-2015
Judgement Text
आयकर अपीलीय अिधकरण “ए” ᭠यायपीठ पुणे मᱶ । IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE (Through Virtual Court) BEFORE SHRI INTURI RAMA RAO, AM AND SHRI S. S. VISWANETHRA RAVI, JM आयकर अपील सं. / ITA Nos.378 & 379/PUN/2015 िनधाᭅरण वषᭅ / Assessment Years : 2000-01 & 2001-02 Mercedez-Benz India Pvt. Ltd., E-3, MIDC Chakan, Phase-III, Chakan Industrial Area, Kuruli & Nighoje, Tal: Khed, Pune-410501. PAN : AABCM1789L .......अपीलाथᱮ / Appellant बनाम / V/s. DCIT, Circle-8, Pune. आयकर अपील सं. / ITA Nos.484 & 485/PUN/2015 िनधाᭅरण वषᭅ / Assessment Years : 2000-01 & 2001-02 ACIT, Circle-9, Pune. .......अपीलाथᱮ / Appellant बनाम / V/s. Mercedez-Benz India Pvt. Ltd. (Formerly known as Daimer Chrysler India Pvt. Ltd.), E-3, MIDC Chakan, Phase-III, Chakan Industrial Area, Kuruli & Nighoje, Tal: Khed, Pune-410501. PAN : AABCM1789L ......ᮧ᭜यथᱮ / Respondent Assessee by : Shri Percy Pardiwala (Sr. Adv.) Shri Darpan Kirpalani Revenue by : Shri Abhivay S. Kumbhar सुनवाई कᳱ तारीख / Date of Hearing : 09.12.2021 घोषणा कᳱ तारीख / Date of Pronouncement : 23.12.2021 आदेश / ORDER PER BENCH : These are the cross appeals filed by the assessee as well as by the Revenue directed against the common orders of ld. Commissioner of Income 2 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 Tax (Appeals)- 6, Pune [‘CIT(A)’ for short] dated 30.01.2015 for the assessment years 2000-01 and 2001-02 respectively. 2. Since the identical facts and issues are involved in these four appeals, we proceed to dispose of the same vide this common order. 3. For the sake of convenience and clarity, the facts relevant to the cross appeals in ITA No.378/PUN/2015 filed by the assessee and ITA No.484/PUN/2015 filed by the Revenue are stated herein. 4. Briefly, the facts of the case are as under : The appellant is a company engaged in the business of manufacture and sale of cars. The return of income for the assessment year 2000-01 was filed by the assessee on 30.11.2000 declaring a loss of Rs.3,77,62,19,433/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-8, Pune (‘the Assessing Officer’) vide order dated 27.03.2003 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total loss of Rs.4,43,26,060/-. While doing so, the Assessing Officer denied the claim of deduction u/s 35AB of the Act being 1/6 th of Technical Know-how fees of Rs.16,72,05,320/- by holding that the consideration for acquisition of Technical Know-how had not been paid placing reliance on the order of The Commissioner of Income Tax-II, Pune passed u/s 263 of the Act dated 16.10.2000. The factual background of said claim made u/s 35AB of the Act is as under : The appellant company is formed as a Joint Venture Company between Daimler Benz AG, Mercedez Benz AG and TELCO in December, 1994. There was also an agreement for transfer of Technical Know-how which was valid for 10 years. There was also a Contribution Agreement dated 17 th June, 1994 3 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 between Daimler Benz AG, Mercedez Benz AG, another group company of Daimler Group and TELCO. In terms of the said Contribution Agreement, the Mercedez Benz AG was to provide Mercedez Benz India Technical Know-how for manufacture of cars for a certain consideration. A separate Technical Know-how agreement was executed on 12.12.1994 between appellant and Mercedez Benz AG in terms of which the appellant was to pay consideration towards transfer of Technical Know-how, which is asunder :- “(a) a lump sum consideration of OM 56.6 million Deutsche Mark net of taxes Payable in four installments as follows: (i) OM 18.8 million one month after effectiveness of this agreement (ii) OM 18.8 million upon handing over of technical product documentation as per Article 3, however, not earlier than April 1, 1995 (iii) DM 12.4 million on commencement of commercial production of the industrialized Licensed Vehicles according to Phase III of Annex 2 envisaged to take place in July 1996 but in any case not later than four years after effectiveness of this Agreement (iv) OM 6.6 million on April 1, 1997 but in any case not later than four years after effectiveness of this Agreement (b) a running royalty in the amount of 2.75% gross of taxes for a period of seven years ... " Out of the above, instalments (iii) and (iv) were subsequently waived off when the Amended and Restated Agreement on the Transfer of Technical Know-how was signed (in December 1999).” 5. The above-said agreement also provides that Mercedez Benz AG shall discharge consideration in the form of allotment of shares to Daimler Benz AG, which is asunder :- “1.4. The first instalment of the lump sum consideration for the technical know-how acquired was booked as payable in MB India's books in FY 1994-95 (ie AY 1995-96) as per the agreement (ie this was expenditure that MB India incurred on technical know-how in FY 1994-95). In accordance with the above JV and Contribution agreements, DBAG opted to contribute this sum payable by MB India to MBAG as its capital contribution and accordingly, was allotted 3,72,42,800 equity shares on 27 November 1995 after obtaining No Objection Certificate from the AO and also after deducting applicable taxes at source. TDS certificate was issued in the name of MBAG, being the entity from whom the technical know-how was acquired (refer page 102 and 107 of Paper Book for No Objection Certificate issued by the AO and TDS certificates) 4 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 1.5 The second instalment of the lump sum consideration for the technical know-how acquired was booked as payable in MB India's books in FY 1995-96 (i.e. AY 1996-97) as per the agreement (ie this was expenditure that MB India incurred on technical know-how in FY 1995-96). In accordance with the above JV and Contribution agreements, DBAG opted to contribute this payable by MB India to MBAG as its capital contribution and accordingly, was allotted 4,23,00,000 equity shares on 16 March 1996 (A Y 1996-97) after obtaining No Objection Certificate from the AO and also after deducting applicable taxes at source. TDS certificate was issued in the name of MBAG, being the entity from whom the technical know-how was acquired (refer page 104 and 109 of Paper Book for No Objection Certificate issued by the AO and TDS certificates). 1.6 The Assessee claimed a deduction in respect of the above technical know-how fees (after inclusion of TDS paid of Rs.15,88,22,400 over and above such fees and the R&D cess of Rs.4,89,81,520) under section 35AB of the Act (1/6th in every year) amounting to Rs.16,72,05,320 for AY 1999-00 in its return of income filed under section 139(1) of the Act.” Out of the above, an amount of Rs.13,25,71,334, pertained to the aforementioned 2 instalments of share allotment, has been disallowed and the balance amount of Rs.3,46,33,986, pertained to technical know-how fees paid in cash, has been allowed.” 6. The claim of the assessee for deduction u/s 35AB of the Act for the assessment year 1995-96 came to be allowed originally by the Assessing Officer. Subsequently, the same was sought to be withdrawn by initiating the reassessment proceedings u/s 147 of the Act. On appeal before the ld. CIT(A), the reassessment proceedings were quashed by the ld. CIT(A). On further appeal by the Department before the Tribunal, the same was dismissed. Even, Hon’ble High Court had also confirmed the order of the Tribunal and the SLP filed before the Hon’ble Supreme Court against the High Court’s judgment was also dismissed. Thus, the claim of deduction u/s 35AB came to be allowed in the assessment year 1995-96. 7. The claim of deduction u/s 35AB of the Act for the assessment years 1996-97 and 1997-98 was originally allowed by the Assessing Officer in the assessment. However, the same was sought to be withdrawn by exercising the power vested with the Commissioner of Income Tax u/s 263 of the Act. However, on appeal before the Tribunal, the revision proceedings were quashed by the Tribunal and it was stated at bar that, as on today, the 5 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 appeals filed by the Revenue against the order of the Tribunal are pending for disposal before the Hon’ble High Court. Thus, as on today, the claim for deduction u/s 35AB of the Act stands allowed for the assessment years 1996- 97 and 1997-98. 8. The claim of deduction u/s 35AB of the Act for the assessment year 1998-99 was not allowed by the Assessing Officer. Even on appeal before the ld. CIT(A) as well as the Tribunal, the claim came to be rejected as the issue is pending for disposal before the Hon’ble High Court. 9. For the assessment year 1999-2000, the claim for deduction u/s 35AB of the Act was disallowed by the Assessing Officer and upheld by the ld. CIT(A). However, on appeal before the Tribunal, the Tribunal remanded the matter to the Assessing Officer with a direction that the adjudication of claim u/s 35AB can be made only in the initial year, in the subsequent 5 years the claim of deduction u/s 35AB should be allowed without adjudicating on admissibility of said claim. Even in the consequential order passed to the Tribunal’s order, the Assessing Officer disallowed the claim for deduction u/s 35AB on the ground that the same was confirmed by the ld. CIT(A) in earlier year, on further appeal before the Tribunal in second round of litigation, the matter was remanded to the Assessing Officer after admitting the additional evidence. It is stated that even in the consequential order passed to the Tribunal’s order in the second round of appeal, the Assessing Officer disallowed the claim. 10. In the assessment year 2000-01, the claim with which we are concerned, the appellant company made a claim for deduction of Rs.16,72,05,320/- u/s 35AB of the Act. Out of which a sum of Rs.13,25,71,334/- represents Technical Know-how contributed by Daimler 6 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 Benz AG as contribution to the share capital, in lieu of allotment of shares. The balance amount of Rs.3,46,33,986/- represents tax deducted and paid in cash on the said consideration of Rs.13,25,71,334/-. The Assessing Officer placing reliance on the order of revision passed by the Commissioner of Income Tax-II, Pune passed u/s 263 vide order dated 16.10.2000 for the assessment years 1996-97 and 1997-98 disallowed the claim of Rs.13,25,71,334/- on the ground that the consideration for acquisition of Technical Know-how was not paid in cash. 11. On appeal before the ld. CIT(A), it was held that the action of the appellant through internal arrangement enhanced the running royalty from 2.75% to 5% is nothing but an afterthought in order to claim entire expenditure of royalty as ‘revenue’. Accordingly, the ld. CIT(A) held that the excess of running royalty of 2.25% which came to Rs.87,24,022/- is capital expenditure and directed the Assessing Officer to allow the depreciation and the balance of royalty expenditure was allowed. 12. As regards to the claim of deduction u/s 35AB, the ld. CIT(A) placing reliance on the decision of the Hon’ble Supreme Court in the case of EIMCO K.C.P. Ltd. vs. CIT, 242 ITR 659 (SC) and the decision of Hon’ble Delhi High Court in the case of CIT vs. Reinz Talbros (P.) Ltd., 252 ITR 637 (Delhi) confirmed the action of the Assessing Officer. 13. Being aggrieved by the decision of the ld. CIT(A), the assessee is in appeal in ITA No.378/PUN/2015 challenging the decision of the ld. CIT(A) confirming the disallowance of claim for deduction u/s 35AB of the Act and holding part of running royalty expenditure as a ‘capital expenditure’ and the Revenue is in cross appeal in ITA No.484/PUN/2015 being aggrieved by the 7 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 decision of the ld. CIT(A) holding part of running royalty expenditure as ‘revenue expenditure’. ITA No.378/PUN/2015, A.Y. 2000-01 – By Assessee : 14. Now, we shall take up the assessee’s appeal in ITA No.378/PUN/2015 for the assessment year 2000-01. 15. The appellant raised the following grounds of appeal :- “Based on the facts and circumstances of the case and in law, the Appellant respectfully craves to prefer an appeal against the order dated 30 January 2015 (received by the Appellant on 18 February 2015) passed by the learned Commissioner of Income tax (Appeals) Pune - 6 [hereinafter referred as ‘the learned CIT(A)’] under section 250 of the Income-tax Act, 1961 (‘the Act’) on the following grounds which are independent of and without prejudice to each other: On the facts and circumstances of the case and in law the learned Assessing Officer: Ground No. 1: Disallowance of deduction under section 35AB of the Act of Rs.13,25,71,334 Erred in upholding the action of the Assessing Officer of not granting deduction under section 35AB of the Act in the year under consideration. Ground No. 2: Disallowance of part of the royalty expenditure Erred in upholding the disallowance of royalty expenditure to the extent of Rs.97,24,022 by considering the same to be capital in nature. The Appellant prays leave to add, alter, vary, omit, amend or delete grounds of appeal at any time before, or at the time of, hearing of the appeal, so as to enable the Hon’ble Tribunal to decide this appeal, according to the law.” 16. The first ground of appeal relates to the disallowance of claim for deduction u/s 35AB of the Act. It is submitted before us that the Assessing Officer reiterated the addition based on the orders passed in the earlier assessment years. It is submitted before us that for the assessment year 1998-99, during the course of proceedings before the Tribunal, the appellant could not demonstrate the reasons for the issue of shares to Daimler Benz AG when the Technical Know-how was provided by the Mercedez Benz AG. Accordingly, in an attempt to demonstrate the reasons for allotment of shares 8 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 in favour of the Daimler Benz AG the additional evidence in the form of approval taken from Government of India for entering the collaboration of agreement between Daimler Benz AG and Mercedez Benz AG and the approval from Reserve Bank of India for allotment of shares in favour of Daimler Benz AG and No Objection Certificate issued by the Assessing Officer etc. was filed. It is further submitted that the Tribunal had failed to appreciate the definition of term “paid” as given u/s 43(2) of the Act. 17. On the other hand, ld. CIT-DR placing reliance on the orders of the lower authorities as well as the orders passed by the Tribunal for the assessment years 1998-99 and 1999-2000 prayed that the addition be upheld. 18. We heard the rival submissions and perused the material on record. The issue in the first ground of appeal relates to the disallowance of deduction under the provisions of section 35AB of the Act. The relevant provisions of section 35AB of the Act reads as under :- “Expenditure on know-how. 35AB. (1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year relevant to the assessment year commencing on or before the 1st day of April, 1998 any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. (2) Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years. (3) Where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the amalgamating or the demerged company is entitled to a deduction under this section, then, the amalgamated company or the resulting company, as the case may be, shall be entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company, as the case may be, had such amalgamation or demerger not taken place. 9 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 Explanation.—For the purposes of this section, "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). 19. On mere reading of the above extracted provisions of section 35AB of the Act, it is clear that the above section provides that any lump-sum consideration paid by the assessee for acquiring any Technical Know-how for the purpose of use of business will be allowed as deduction by spreading it over a period of 6 years, namely, the year in which the lump-sum consideration is paid and five immediately succeeding years from the assessment years 1986-87 to 1998-99. The provisions of section 35AB had been rendered inoperative from the assessment year 1999-2000 in consequence of allowing the depreciation on Technical Know-how treating as intangible asset u/s 32(1) of the Act. Admittedly, in the case on hand, the lump-sum consideration was not paid during the previous year relevant to the assessment year under consideration. The claim for deduction u/s 35AB for the year under consideration is in relation to the lump-sum consideration paid in the earlier years. On mere reading of the provisions of section 35B of the Act, it would reveal that once the claim was allowed in the first year of payment of lump-sum consideration, the balance 5 instalments shall be allowed as deduction in succeeding 5 years without necessity of looking into the admissibility or otherwise of the claim. In other words, once the claim was allowed in the first year in which lump-sum consideration was paid, the claim in succeeding 5 years shall be allowed automatically unless and until the claim allowed in the initial year was not disturbed under the process known to the law. Therefore, in these circumstances, it would suffice to hold that once the claim for deduction u/s 35AB was allowed in initial year, such claim cannot be disallowed subsequently, without disturbing the decision in the initial year. The balance of claim in succeeding 5 years should be allowed 10 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 as deduction without adjudicating on admissibility of the law. Therefore, we remand this ground of appeal no.1 to the file of the Assessing Officer with direction to allow claim of deduction u/s 35AB of the Act after due verification, if it is found claim u/s 35AB was allowed in the initial year of payment of lump-sum consideration. 20. In the preceding paragraphs, we held that the claim for deduction u/s 35AB should be allowed in the year under consideration, once the claim was allowed as deduction in the initial assessment year, in the circumstances, it is not necessary to deal with the additional evidence filed before us as the claim for deduction u/s 35AB for the year under consideration does not relate to the initial year payment of lump-sum consideration. Thus, the first ground of appeal raised by the assessee stands partly allowed for statistical purposes. 21. By the second ground of appeal, the assessee challenges the decision of the ld. CIT(A) holding the part of running royalty expenditure as “capital”. This second ground of appeal was not pressed by the assessee during the course of hearing of the appeal. Hence, this second ground of appeal is dismissed as not pressed. 22. In the result, the appeal of the assessee in ITA No.378/PUN/2015 for the assessment year 2000-01 stands partly allowed for statistical purposes. ITA No.484/PUN/2015, A.Y. 2000-01 – By Revenue : 23. Now, we shall take up the Revenue’s appeal in ITA No.484/PUN/2015 for the assessment year 2000-01. 24. The Revenue raised the following grounds of appeal :- 11 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 “Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in restricting the disallowance of royalty expenses when the AO during the course of assessment proceedings, carried out proper verification against the claim and found that there was an element of enduring benefit and the said expenses was capital in nature..? The appellant craves leave to add, amend or alter any of the above grounds of appeal.” 25. The Revenue challenges the decision of the ld. CIT(A) holding that incremental running royalty expenditure of 2.25% is capital in nature. The factual background of the said claim is as under :- In terms of Technical Know-how agreement entered into between the appellant and Mercedez Benz AG on 12.12.1994, the appellant was to pay lump-sum royalty of four instalments and running royalty at the rate of 2.25%. However, subsequently, considering the marketing conditions, it was decided to amend the original agreement by waiving off the 3 rd and 4 th instalments of Technical Know-how fees and the running royalty was increased to 5% of each licence and vehicle sold. The Assessing Officer had disallowed the entire royalty payment holding it to be capital in nature. However, on appeal before the ld. CIT(A), he held that only incremental royalty paid was capital in nature and balance is revenue expenditure. 26. It is submitted before us that amending the MOUs/agreement is not an afterthought as held by the ld. CIT(A). As the ld. CIT(A) lost sight of the fact that section 32(1) of the Act was amended by the Finance Act, 1998 to allow depreciation of intangible asset such as Technical Know-how acquired on or after April, 1998, the parallel deduction u/s 37 of the Act was discontinued to the subsequent assessment year 1999-2000. It is further submitted that royalty expenditure for the assessment year 2002-03 to 2010-11 was held be revenue in nature by the Tribunal. 12 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 27. On the other hand, ld. CIT-DR placed reliance on the order of the Assessing Officer. 28. We heard the rival submissions and perused the material on record. The relevant findings of the ld. CIT(A)’s order is extracted as under :- “15. After considering the reply of the appellant, it is seen that the claim of the appellant was basically on the ground that the first agreement covered engineering services which were relevant for creating setting up of factory building, manufacturing set up, plants etc. While second agreement does not have such features, as manufacturing set up was already created and no expansion/increase in the capacity was to take place and only requirement was to incorporate new models to remain competitive in the business. There is no denying the fact that the introduction of new models is a must to remain competitive in the business. However, in this case the appellant through internal arrangement has waived off the lumpsum payment which was capital in nature and instead of that running royalty was increased from 2.75% to 5%. This arrangement is nothing but an afterthought and therefore the capital element can be very well said to be embedded in the second agreement. In this case the amount of capital expenditure on account of 2.25% excess royalty comes to Rs.97,24,022/- while for A.Y. 2001-02, the same comes to Rs.1,09,77,372/-. The reasons for increase in running royalty is also on account of the fact that the appellant could not have claimed deduction u/s. 35AB of Income-tax Act as payment was not made by the appellant till A.Y. 1998-99 as required by the statute. Accordingly, on the facts and circumstances of the case, it is held that the amount of Rs.97,24,022/- is to be disallowed being Capital Expenditure. The appellant will be however entitled for depreciation on the same.” 29. From the terms of the agreement, it is clear that the royalty is paid in the case of running business and in terms of number of vehicles sold there is no increase in the capacity and existing productivity. Therefore, royalty paid is to the extent of 2.75% of number of vehicle sold is a revenue expenditure. The relevant findings of the ld. CIT(A) is hereby upheld. 30. It is trite law as held by Hon’ble Gujarat High Court in the case of CIT vs. Gujarat Carbon Ltd., 254 ITR 294 (Gujarat) and CIT vs. Power Build Ltd., 244 ITR 19 (Gujarat) and the Hon’ble Delhi High Court in the case of Climate Systems India Ltd. vs. CIT, 319 ITR 113 (Delhi) and the Hon’ble Karnataka High Court in the case of Diffusion Engineers Ltd. vs. DCIT, 376 ITR 487 that where the royalty is paid as percentage of sale in consideration of supply of Technical Know-how, the amount is allowable as ‘revenue expenditure’. The 13 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 relevant paragraph of the decision of the Hon’ble Delhi High Court in the case of Climate Systems India Ltd. (supra) is reproduced as under :- “7. Thus, for transfer of technology, the assessee agreed to pay lump sum amount of US$ 1 billion. This payment is admittedly treated as capital expenditure by the assessee and has been shown as such. However, insofar as payment of royalty is concerned which is an issue before us, that depends on the domestic as well as export sales. Quantum of the said sales would determine the extent of royalty to be paid and it will decrease or increase every year depending upon the decrease or increase in the sales. Significantly, this payment is not because of "transfer" of technology, but for providing "technical services". In such circumstance, we are of the opinion that this payment of royalty, which is a continuous process, should have been treated as revenue expenditure. In a recent judgment given by this Court in the case of CIT v. Sharda Motor Industrial Ltd. [IT Appeal No. 837 of 2009, decided on 3-9-2009] identical issue arose. In the aforesaid case also, lump sum payment was made for providing technical know-how, which was considered as capital expenditure. In addition, royalty was also paid by the assessee at a particular percentage of the sales. Holding that, the said payment would be in the nature of revenue expenditure. This Court dealt with the issue in the following manner : "3. Insofar as lump sum payment against transfer of technical know- how provided by the Korean company is concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The CIT(A) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler. 4. We are of the opinion that this finding of the CIT(A), as approved by the ITAT, is a finding of fact which is rightly arrived at as expenditure is purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year. 5. In CIT v. J.K. Synthetic Ltd. 309 ITR 371, after elaborately discussing the entire case law on the subject, the Court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. One of the principle enumerated therein reads as under:— '(v )expenditure incurred for grant of licence which accords "access" to technical knowledge, as against, "absolute" transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the licence, (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the licence to third parties without the consent of the licensor, (d) whether the licence transfer the "fruits of research" of the licensor, "once for all", 14 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 (e) whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which "access" to knowledge was obtained during the subsistence of the licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature'." 8. In these circumstances, we answer the question in favour of the assessee and against the revenue. As a result, order of the Authorities below is set aside. No costs.” 31. Thus, we do not find any infirmity in the order of the ld. CIT(A) holding that the royalty paid in terms of percentage sale is revenue expenditure. Thus, the ground of appeal raised by the Revenue stands dismissed. 32. In the result, the appeal filed by the Revenue in ITA No.484/PUN/2015 for assessment year 2000-01 stands dismissed. Assessment Year – 2001-02 33. Now, we shall take up another set of cross appeals filed by the assessee as well as the Revenue in ITA No.379/PUN/2015 and ITA No.485/PUN/2015 for the assessment year 2001-02. 34. Briefly, the facts of the case are as under :- The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is a Joint Venture between Daimler Benz AG (earlier known as DaimlerChrysler India Pvt. Ltd.), Germany and Tata Engineering & Locomotive Company Limited. It is engaged in the business of manufacturing and sale of cars. The return of income for the assessment year 2001-02 was filed on 31.10.2001. Against the said return of income, the assessment was completed by the Addl. Commissioner of Income Tax, Range- 15 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 8, Pune (‘the Assessing Officer’) vide order dated 19.03.2004 passed u/s 143(3)(ii) of the Act at a total income of Rs.10,40,54,690/- under the regular provisions of the Act and book profits under the provisions of section 115JB of the Act of Rs.18,46,86,077/- after making following disallowances :- (i) Technical Know-how fees deduction claimed u/s 35AB. (ii) Re-location Expenses. (iii) Travelling & Conveyance Expenses. (iv) Telephone Expenses. (v) Royalty (vi) Disallowance of Prior Period Expenses. (vii) Disallowance of Expenses under other heads. 35. Being aggrieved by the above assessment order, an appeal was preferred before the ld. CIT(A), who vide impugned order confirmed the disallowances of deduction u/s 35AB of Rs.7,04,99,997/- following its order in assessee’s own case for the assessment year 1999-2000. As regards to the relocation of expenses of Rs.8,06,901/-, the same was held to be allowable following the order of the Tribunal in assessee’s own case for the assessment year 1999-2000. As regards to the Travelling & Conveyance Expenses and Telephone Expenses, the same was allowed following this Tribunal’s order in assesse’s own case for the assessment year 1999-2000. As regards to the royalty expenditure, the ld. CIT(A) held that the incremental royalty of 2.25% worked out to Rs.1,09,77,372/- to be capital for the reasons assigned by him in the preceding years and the balance of royalty was held to be revenue expenditure. The ld. CIT(A) had also allowed the ground of appeal relating to disallowance of prior period expenses of Rs.29,18,115/- considering the evidence on record that the expenditure for the quarter ending January to March, 2000 was included in the invoice dated 04.10.2000 which pertained to the expenditure of quarter July to September, 2000. The ld. CIT(A) also allowed the sales tax credit written off of Rs.18,29,222/- taking into account 16 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 the fact that the sales tax authorities had denied credit to the extent of Rs.18,29,222/- during the year under consideration. As regards to the disallowance of miscellaneous expenditure of Rs.25,00,000/-, the ld. CIT(A) directed the Assessing Officer to restrict the disallowance to Rs.2,50,000/-. Thus, the appeal filed by the assessee came to be partly allowed by the ld. CIT(A). 36. Being aggrieved by that part of the order of the ld. CIT(A) which is against the assessee, the assessee is in appeal before us in ITA No.379/PUN/2015 for the assessment year 2001-02 and being aggrieved by the decision of the ld. CIT(A) which is against the Revenue, the Revenue is in appeal before us in ITA No.485/PUN/2015 for the assessment year 2001-02. ITA No.379/PUN/2015, A.Y. 2001-02 – By Assessee : 37. Now, we shall take the assessee’s appeal in ITA No.379/PUN/2015 for the assessment year 2001-02. 38. The assessee raised the following grounds of appeal :- “Based on the facts and circumstances of the case and in law, the Appellant respectfully craves to prefer an appeal against the order dated 30 January 2015 (received by the Appellant on 18 February 2015) passed by the learned Commissioner of Income tax (Appeals) Pune -6 [hereinafter referred as ‘the learned CIT(A)’] under section 250 of the Income-tax Act, 1961 (‘the Act’) on the following grounds which are independent of and without prejudice to each other: On the facts and circumstances of the case and in law the learned Assessing Officer: Ground No. 1: Disallowance of deduction under section 35AB of the Act of Rs. 7,04,99,997 Erred in upholding the action of the Assessing Officer of not granting deduction under section 35AB of the Act in the year under consideration. Ground No. 2: Disallowance of part of the royalty expenditure Erred in upholding the disallowance of royalty expenditure to the extent of Rs 1,09,77,372 by considering the same to be capital in nature. Ground No. 3: Disallowance of certain other expenses on ad-hoc basis 17 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 Erred in upholding ad hoc disallowance to the extent of Rs 2,50,000 out of miscellaneous expenses, staff welfare expenses, advertisement and sales promotion expenses based on the possibility that the same could have been booked for non-business purposes. The Appellant prays leave to add, alter, vary, omit, amend or delete grounds of appeal at any time before, or at the time of, hearing of the appeal, so as to enable the Hon’ble Tribunal to decide this appeal according to the law.” 39. The first ground of appeal relates to the disallowance of deduction u/s 35AB of the Act of Rs.7,04,99,997/-. In the identical facts in assessee’s own case for the assessment year 2000-01 in ITA No.378/PUN/2015 we remanded the matter to the file of the Assessing Officer with a direction to allow the claim for deduction u/s 35AB of the Act, once the claim of the assessee was allowed in the initial year of claim made. In this case also for the reasons stated by us in the forgoing paragraphs, we remand this issue under similar lines to the file of the Assessing Officer. Thus, the first ground of appeal raised by the assessee stands partly allowed for statistical purposes. 40. The ground of appeal no.2 challenges the decision of the ld. CIT(A) holding the incremental royalty paid in terms of modified agreement to be capital expenditure. During the course of hearing of the appeal, this ground of appeal no.2 was not pressed by the ld. AR for the assessee. Hence, this ground of appeal no.2 is dismissed as not pressed. 41. The ground of appeal no.3 relates to the disallowance of miscellaneous expenditure of Rs.2,50,000/-. The Assessing Officer had disallowed Rs.25,00,000/- out of the following three expenses : (i) Miscellaneous Expenses of Rs.2,52,20,706/-; (ii) Staff Welfare Expenses of Rs.1,49,14,446/- and (iii) Advertisement & Sales Promotion of Rs.9,56,54,426/- totalling to Rs.13,57,89,578/- on the ground that the possibility of incurring expenses for non-business purposes cannot be ruled out. However, on appeal before 18 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 the ld. CIT(A), the ld. CIT(A) restricted the miscellaneous expenses to Rs.2,25,000/- following his order for the assessment year 2002-03. 42. Being aggrieved, the appellant is in the present appeal before us. 43. It is submitted before us that no disallowance can be made on ad-hoc basis without bringing evidence that the expenditure was incurred for the purpose of non-business purposes. 44. On the other hand, ld. Sr. DR placed reliance on the orders of the lower authorities. 45. We heard the rival submissions and perused the material on record. On mere reading of the order of the Assessing Officer, it is apparent that the Assessing Officer made disallowance of Rs.25,00,000/- out of the expenses incurred on miscellaneous expenditures on account of capital etc. on the presumption that the possibility of incurring expenditure for non-business of personal nature cannot be ruled out. This addition is made merely based on the presumption, assumption, not based on any material brought on record by the Assessing Officer. The ld. CIT(A) restricted the disallowance to Rs.2,25,000/- even without referring to any material on record. The approach of both the Assessing Officer as well as the ld. CIT(A) making ad- hoc disallowance cannot be accepted in the absence of any evidence of bogus payments and the disallowance of part of payment on assumption and conjectures has to be rejected. The lower authorities are not justified in assuming that the deduction was actually incurred for personal/non- business purposes without bringing any evidence on record. Therefore, we direct the Assessing Officer to allow the entire miscellaneous expenses of 19 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 Rs.25,00,000/-. Thus, the ground of appeal no.3 raised by the assessee stands allowed. 46. In the result, the appeal of the assessee in ITA No.379/PUN/2015 for the assessment year 2001-02 stands partly allowed for statistical purposes. ITA No.485/PUN/2015, A.Y. 2001-02 – BY Revenue : 47. Now, we shall take up the Revenue’s appeal in ITA No.485/PUN/2015 for the assessment year 2001-02. 48. The Revenue raised the following grounds of appeal :- “1. Whether on the facts and circumstances of the case, the Hon’ble CIT(A) was justified in deleting disallowance of travelling expenses of Rs. 21,62,700/- when the assessee failed to substantiate its claim with supporting evidences to prove that these expenses are directly related to business activity of the company ? 2. Whether on the facts and circumstances of the case, the Hon’ble CIT(A) was justified in deleting disallowance of telephone expenses of Rs.5,47,627/- when the assessee could not discharge its onus to prove that these expenses are wholly and exclusively relating to business with supporting evidences ? 3. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in restricting the disallowance of royalty expenses when the AO during the course of assessment proceedings, carried out proper verification against the claim and found that there was an element of enduring benefit and the said expenses was capital in nature ? 4. Whether on the facts and circumstances of the case, the Hon’ble CIT(A) was justified in deleting disallowance of prior period expenses relating to technical assistance fees of Rs.29,18,155/- and sales tax set off of Rs. 18,29,222/- when the assessee could not establish that the expenses were crystallized during the year, more so when the assessee was following mercantile system of accounting ? 5 Whether on the facts and circumstances of the case, the Hon’ble CIT(A) was justified in deleting disallowance of Rs. 25,00,000/- out of miscellaneous, staff welfare expenses and sales promotion expenses by not appreciating the fact that the assessee could not discharge its onus to prove that these expenses are wholly and exclusively relating to business with supporting evidences ? 6. The appellant craves leave to add, amend or alter any of the above grounds of appeal.” 49. The ground of appeal no.1 challenges the decision of the ld. CIT(A) directing the Assessing Officer to delete the ad-hoc disallowance of telephone 20 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 and travelling expenses of Rs.21,62,700/-. The Assessing Officer disallowed 10% of the travelling expenditure of Rs.21,62,700/- on the ground that the vouchers are self-made. However, on appeal before the ld. CIT(A), the same came to be allowed following the Tribunal’s order in assessee’s own case for the assessment year 1999-2000. 50. Being aggrieved, the Revenue is in the present appeal before us. 51. The ld. CIT-DR submits that in the absence of proper evidence in support of the travelling expenditure, the entire expenditure cannot be allowed as deduction. Therefore, the ld. CIT-DR submitted that the ld. CIT(A) was not justified in deleting the disallowance of 10% of the travelling expenditure. 52. On the other hand, ld. AR for the assessee placed reliance on the order of the Assessing Officer. 53. We heard the rival submissions and perused material on record. The issue in the present ground of appeal relates to the disallowance of 10% of travelling expenditure on ad-hoc basis. The Assessing Officer was of the opinion that since the vouchers in support of the travelling expenditure were self-made and proper verification of expenditure cannot be made, therefore, made an ad-hoc disallowance of 10% of the total travelling expenditure. However, the ld. CIT(A) following the Tribunal’s order in assessee’s own case for the assessment year 1999-2000 allowed the same. On careful perusal of the order of the assessment, it would reveal that the Assessing Officer had resorted disallowance of 10% of the travelling expenditure solely on the ground that the vouchers are self-made and there is no allegation by the Assessing Officer that the expenditure is bogus in nature. Therefore, we do 21 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 not find any infirmity in the order of the ld. CIT(A). Thus, this ground of appeal no.1 filed by the Revenue is dismissed. 54. The ground of appeal no.2 challenges the decision of the ld. CIT(A) directing the Assessing Officer to delete the disallowance of 10% of telephone expenses of Rs.5,47,627/-. The finding given by us in relation to the ground of appeal no.1 raised by the Revenue in ITA No.485/PUN/2015 for the assessment year 2001-02 holds good in respect of this ground of appeal no.2. Thus, we do not find any infirmity in the order of the ld. CIT(A) in directing the Assessing Officer to delete 10% of telephone expenses. Accordingly, this ground of appeal no.2 raised by the Revenue stands dismissed. 55. The ground of appeal no.3 challenges the decision of the ld. CIT(A) holding royalty expenditure at the rate of 2.75% of sales is revenue expenditure. In an identical facts in assessee’s own case for the assessment year 2000-01 in ITA No.378/PUN/2015 we held that the royalty expenditure incurred in terms of percentage of sale is always revenue expenditure. In these circumstances, we do not find any merit in the ground of appeal no.3 filed by the Revenue. Hence, this ground of appeal no.3 is dismissed. 56. The ground of appeal no.4 challenges the decision of the ld. CIT(A) allowing the prior period expenses of Rs.29,18,155/- and sales tax set off of Rs.18,29,222/- written off in the books of account. The Assessing Officer disallowed both the claims on account of prior period expenses. On appeal before the ld. CIT(A), the ld. CIT(A) considering the evidence filed before him came to the conclusion that the liability on account of technical assistance of Rs.29,18,155/- was crystallized during the previous year relevant to the assessment year under consideration considering the fact that the invoice for the technical assistance fees was received during the previous year relevant to 22 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 the assessment year under consideration. Similarly, the ld. CIT(A) also held that the sales tax claim written off of Rs.18,29,222/- can be allowed as deduction considering the orders of the sales tax authorities passed during the year under consideration. Therefore, we find that the decision of the ld. CIT(A) is based on the proper appreciation of evidence filed in support of both the claims. Hence, we do not find any reason to interfere with the order of the ld. CIT(A). Thus, the ground of appeal no.4 is dismissed. 57. Ground of appeal no.5 challenges the decision of the ld. CIT(A) restricting the disallowance of 25,00,000/-. In assessee’s own appeal for the assessment year 2000-01, we held that the ld. CIT(A) was not justified in restricting the disallowance of Rs.2,25,000/-. For the reasons stated by us therein, we are of the considered opinion that no disallowance of miscellaneous expenses can be made. Thus, the ground of appeal no.5 is dismissed. 58. In the result, the appeal filed by the Revenue in ITA No.485/PUN/2015 for the assessment year 2001-02 stands dismissed. 59. Resultantly, both the appeals filed by the assessee are partly allowed for statistical purposes and both the cross appeals filed by the Revenue are dismissed, as above. Order pronounced on this 23 rd day of December, 2021. Sd/- Sd/- (S. S. VISWANETHRA RAVI) (INTURI RAMA RAO) ᭠याियक सद᭭य/JUDICIAL MEMBER लेखा सद᭭य/ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 23 rd December, 2021. Sujeet 23 ITA Nos.378 & 379/PUN/2015 ITA Nos.484 & 485/PUN/2015 आदेश कᳱ ᮧितिलिप अᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A)-6, Pune. 4. The CIT-5, Pune. 5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, “ए” बᱶच, पुणे / DR, ITAT, “A” Bench, Pune. 6. गाडᭅ फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.
