DCIT, Circle-4(1)(2), Ahmedabad V. M/s. Vishnu Pouch Packaging Pvt. Ltd, Ahmedabad

ITA 672/AHD/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 4559 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2016-2017
• Appeal Filed On: 18-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O.P. SHARMA
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 37; 143(3); 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH (CONDUCTED THROUGH VIRTUAL COURT) BEFORE: SHRI MAHAVIR PRASAD, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEM BER THE DCIT, CIRCLE-4(1)(2), AHMEDABAD (APPELLANT) VS VISHNU POUCH PACKAGING PVT. LTD., PLOT NO. 49 & 50, BLOCK A, MAHA GUJARAT ESTATE, VILLAGE MORIYA, TAL: SANAND, AHMEDABAD-382210 PAN: AADCV6860B (RESPONDENT) REVENUE BY: SHRI O.P. SHARMA, SR. D.R. ASSESSEE BY: SHRI AFAQ SAIYED, A.R. DATE OF HEARING : 23-09-2021 DATE OF PRONOUNCEMENT : 29-09-20 21 /ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:- THIS ASSESSEES APPEAL FOR A.Y. 2016-17, ARISES FRO M ORDER OF THE CIT(A)-8, AHMEDABAD DATED 05-02-2019, IN PROCEEDIN GS UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE A CT. ITA NO. 672/AHD/2019 ASSESSMENT YEAR 2016-17 I.T.A NO. 672/AHD/2019 A.Y. 2016-17 PAGE NO DCIT VS. VISHNU POUCH PACKAGING PVT. LTD. 2 2. THE SOLITARY GROUND OF APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) IN DELETING THE ADDITION AMOUNT ING TO RS. 10,64,08,971/- MADE ON ACCOUNT OF DISALLOWANCE ON TRADEMARK LICENS E UTILIZATION FEES. 3. THE FACT IN BRIEF IS THAT RETURN OF INCOME DECLA RING LOSS OF RS. 7,19,71,472/- WAS FILED ON 17 TH OCTOBER, 2016. THE CASE WAS SUBJECT TO SCRUTINY ASSESSMENT AND NOTICE U/S. 143(2) OF THE A CT WAS ISSUED ON 10 TH AUGUST, 2018. DURING THE COURSE OF ASSESSMENT, TH E ASSESSING OFFICER NOTICED THAT THE ASSESSEE INCURRED EXPENSES OF RS. 14,18,78,627/- FOR TRADEMARK LICENSE UTILIZATION FEES UNDER THE HEAD S ELLING AND DISTRIBUTION EXPENSES. THE ASSESSEE HAS PAID THESE FEES TO MUKE SH GARG, M/S. VISHNU & COMPANY TRADEMARK PVT. LTD., NEW DELHI WHO WAS PROP RIETOR OF TRADE MARK VIMAL AND IT HAS GRANTED EXCLUSIVE RIGHT TO SHRI MUKESH GARG TO OPERATE AND CARRY ON THE BUSINESS OF MANUFACTURING AND MARK ETING UNDER THE TRADE MARK AND ENTERED INTO AGREEMENT WITH SAME LICENSE I N THE FORM OF SPECIAL LICENSE AGREEMENT. COPY OF THE AGREEMENT ENTERED INTO BY SHRI MUKESH GARG WITH VISHNU AND COMPANY TRADE MARK PVT. LTD. AND SUBSEQUENTLY AGREEMENT OF SHRI MUKESH GARG AND THE ASSESSEE HAS BEEN SUBMITTED TO THE ASSESSING OFFICER. ON PERUSAL OF THE AGREEMENT, TH E ASSESSING OFFICER WAS OF THE VIEW THAT THE NATURE OF EXPENDITURE CLAIMED WAS OF CAPITAL IN NATURE. ON QUERY, THE ASSESSEE HAS SUBMITTED VARIOUS DETAIL S IN RESPECT OF TRADE MARK LICENSE UTILIZATION FEES WHICH IS INCORPORATED AT P AGE NO. 2 & 3 OF THE ASSESSMENT ORDER. THE FEES IS PAID AS A PERCENTAGE OF SALES DURING THE YEAR UNDER AGREEMENT WITH THE LICENSEE. THE ASSESSEE HA S EXPLAINED THAT IT HAS ENTERED INTO SUB-LICENSE AGREEMENT AND THE SUB-LICE NSEEE IS HAVING RIGHT TO BREAK THE SAID AGREEMENT AS AND WHEN REQUIRED MEANI NG THERE IS NO CERTAINTY I.T.A NO. 672/AHD/2019 A.Y. 2016-17 PAGE NO DCIT VS. VISHNU POUCH PACKAGING PVT. LTD. 3 OF THE CONTINUITY OF THE SAID AGREEMENT. HOWEVER, THE ASSESSING OFFICER HAS NOT AGREED WITH THE SUBMISSION OF THE ASSESSEE AND TREATED THE TRADEMARK LICENSE UTILIZATION FEES AS PAYMENT MADE FOR ACQUIS ITION OF TRADEMARK AND LICNESES WITHIN THE MEANING OF CAPITAL ASSET AS DEF INED IN SECTION 32(1)(II) OF THE ACT AND ALLOWED 25% OF DEPRECIATION OF THE SAME DURING THE YEAR UNDER CONSIDERATION. 4. THE ASSESSEE HAS FILED APPEAL BEFORE THE LD. CIT (A). THE LD. CIT(A) HAS ALLOWED THE APPEAL OF THE ASSESSEE AFTER FOLLOW ING THE DECISIONS OF CO- ORDINATE BENCH OF THE ITAT IN THE CASE OF THE ASSES SEE ITSELF FOR ASSESSMENT YEAR 2010-11 AND 2011-12 VIDE ITA NO. 2046/AHD/2013 AND 1218/AHD/2015 ORDER DATED 6 TH APRIL, 2017. THE RELEVANT PART OF THE DECISION OF LD. CIT(A) IS REPRODUCED AS UNDER:- 5. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CAS E AND SUBMISSION MADE BY THE APPELLANT AS WELL AS ARGUMENTS TAKEN BY THE AO. I FIND THAT IT IS A R ECURRING ISSUE IN THE CASE OF APPELLANT (EARLIER IN THE CAPACITY OF FIRM) AND ON THE VERY SAME DISALLOW ANCE APPEAL HAS BEEN ALLOWED BY MY PREDECESSORS IN A.Y.2010-11 , 2011-12 & 2012-13. FO R A.Y. 2012-13 MY PREDECESSOR ALLOWED THE APPEAL ON THIS GROUND VIDE APPELLATE ORDER NO.CIT(A )-3/WARD3(2)(2)/01/15-1G DATED 12.05.2016. ALSO DEPARTMENTAL APPEALS ON THIS ISSUE IN A.Y.2010 -11 & 2011-12 HAVE BEEN DISMISSED BY HON'BLE ITAT IN ITA NO. 2046/AHD/2Q13 & 1218/AHD/20 15 ORDER DATED 06.04.2017. UNDERSIGNED IN THE APPEAL NO. CIT(A)- 8/02, 263 & 10968/15-16 A ND 16-17 PERTAINING TO A.Y. 2012-13, 2013- 14 & 2014-15 HAVE ALLOWED THE APPEAL OF THE APPELLA NT ON THIS ISSUE VIDE ORDER DATED 21.03.2018. FACTS OF THE CASE CONTINUE TO BE SAME HENCE, RESPEC TFULLY FOLLOWING THE ORDER OF HON'BLE ITAT IN THE APPELLANT'S CASE AND FOR THE REASONS AS PER THE ORDERS OF MY PREDECESSOR AND MY ORDER REFERRED HEREINABOVE THE DISALLOWANCE MADE BY AG TO WARDS PAYMENT OF LICENSE FEE AMOUNTING TO RS.10,64,08,971- IS DELETED. THE SUM OF RS.14,18,78 ,627/- CHARGED BY THE APPELLANT TO REVENUE TOWARDS TRADE MARK LICENSE UTILIZATION FEES IS TREA TED AS REVENUE. THE RELATED GROUNDS OF THE APPEAL ARE ALLOWED. 5. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFOR E US AT THE OUTSET THE LD. COUNSEL HAS CONTENDED THAT ISSUE RAISED IN THE APPEAL IS SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH OF THE ITA T ADJUDICATED IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YEAR 2010-11 TO 2014 -15. THE LD. DEPARTMENTAL REPRESENTATIVE IS FAIR ENOUGH NOT TO C ONTROVERT THE UNDISPUTED I.T.A NO. 672/AHD/2019 A.Y. 2016-17 PAGE NO DCIT VS. VISHNU POUCH PACKAGING PVT. LTD. 4 FACTS AS CONTENDED BY THE LD. COUNSEL THAT ISSUE I N THE INSTANT APPEAL IS SQUARELY COVERED BY THE DECISION OF THE ITAT AHMEDA BAD IN THE CASE OF THE ASSESSEE ITSELF FOR THE EARLIER YEARS. 6. HEARD BOTH THE SIDES AND PERUSED THE MATERIAL ON RECORD. WITHOUT REITERATING THE FACTS AS CITED ABOVE, WITH THE ASSI STANCE OF LD. REPRESENTATIVES, WE HAVE GONE THROUGH THE DECISION OF ITAT AHMEDABAD VIDE ITA NO. 1190 TO 1192/AHD/2018 IN THE CASE OF THE ACIT VS. M/S. V ISHNU POUCH PACKAGING PVT. LTD. DATED 18-12-2019. THE RELEVANT OPERATIVE PART OF THE DECISION OF THE ITAT IS REPRODUCED AS UNDER:- 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE SHORT CONTROVERSY RELATES TO THE MAINTAINABILITY OF EXPEN DITURE INCURRED BY WAY OF LICENSE FEES TO THE LICENSOR OF THE TRADEMARK AS RE VENUE EXPENDITURE. WHEREAS, IT IS THE CASE OF THE ASSESSEE THAT LICENSE FEES PA ID AS SPECIFIED PERCENTAGE OF SALES (6%) IS REVENUE EXPENDITURE FOR USE OF TRADEM ARK OWNED BY THE LICENSOR, THE REVENUE, ON THE OTHER HAND, CONTENDS THAT LICEN SE IS BEING USED BY THE ASSESSEE FOR INDEFINITE PERIOD AND THE EXPENDITURE INCURRED IS BRINGING ENDURING ADVANTAGE TO THE ASSESSEE AND THEREFORE IN CURRED IN THE CAPITAL FIELD AND CONSEQUENTLY LIABLE TO BE DISALLOWED. WE FIND THAT ISSUE HAS BEEN EARLIER EXAMINED BY THE CO-ORDINATE BENCH IN THE HANDS OF T HE ERSTWHILE PARTNERSHIP FIRM (NOW CONVERTED INTO PRIVATE LIMITED COMPANY I. E. ASSESSEE). THE RELEVANT OPERATIVE PARA OF THE ORDER OF THE TRIBUNAL IS REPR ODUCED HEREUNDER: 8. THE SECOND GRIEVANCE OF THE REVENUE RELATES TO THE DELETION OF THE ADDITION OF RS. 5,32,83,949/- MADE ON ACCOUNT OF PA YMENT PAID TO VISHNU & COMPANY TRADE MARK PVT. LTD. FOR USE OF T RADE MARK WHICH WAS TREATED AS CAPITAL EXPENDITURE BY THE A.O. 9. WHILE SCRUTINIZING THE RETURN OF INCOME, THE ASS ESSEE HAS INCURRED EXPENSES OF RS. 5,32,83,949/- FOR TRADE MARK LICENS E UTILIZATION FEES. THE ASSESSEE WAS ASKED TO JUSTIFY PAYMENT OF THE SA ME. THE ASSESSEE FILED THE COPY OF THE AGREEMENT WITH M/S. VISHNU & COMPANY TRADE MARK PVT. LTD. THAT (VIMAL BRAND PAN GUTAKHA AND PAN MASALA) ARE LICENSE ON TRADE MARK OF M/S. VISHNU & COMPANY TRAD E MARK PVT. LTD AND SINCE THE ASSESSEE HAS USED THE LICENSE TRADE M ARK OF VISHNU & COMPANY TRADE MARK PVT. LTD. THE LICENSE FEE PAID B Y THE ASSESSEE IS AN ALLOWABLE EXPENDITURE U/S. 37 OF THE ACT. THIS S UBMISSION OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE A.O. WHO WAS OF THE OPINION THAT THE TRADE MARK LICENSE UTILIZATION FEES TREATE D TO M/S. VISHNU & COMPANY TRADE MARK PVT. LTD. HAVE TO BE CONSIDERED AS A CAPITAL EXPENDITURE AND ACCORDINGLY DISALLOWED THE SAME AND AT THE SAME TIME ALLOWED DEPRECIATION @ 25%. I.T.A NO. 672/AHD/2019 A.Y. 2016-17 PAGE NO DCIT VS. VISHNU POUCH PACKAGING PVT. LTD. 5 10. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MAT TER BEFORE THE LD. CIT(A) AND REITERATED ITS CLAIM. 11. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS , THE LD.CIT(A) FOUND THAT THE VIMAL TRADE MARK IS OWNED BY M/S. VISHNU & COMPANY TRADE MARK PVT. LTD. AND THE ASSESSEE HAS PAID ROYA LTY @ 6% OF ITS TURNOVER AS PER THE TERMS AND CONDITIONS OF LICENSE /REGISTERED USER AGREEMENT DATED 11.05.2007. THE LD. CIT(A) FURTHER OBSERVED THAT THE CBDT CIRCULAR RELIED UPON BY THE A.O. DOES NOT APPL Y ON THE IMPUGNED PAYMENT SINCE THERE IS NO ACQUISITION OF ANY TECHN ICAL KNOWHOW; THEREFORE, THERE IS NO REASON TO TREAT THE IMPUGNED PAYMENT AS CAPITAL EXPENDITURE. THE LD. CIT(A) ACCORDINGLY DIRECTED T HE A.O. TO DELETE THE IMPUGNED ADDITION. 12. BEFORE US, THE LD. D.R. STRONGLY RELIED UPON TH E FINDINGS OF THE A.O. 13. WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF TH E AUTHORITIES BELOW AND THE RELEVANT DOCUMENTARY EVIDENCES BROUGHT ON RECOR D IN THE FORM OF A PAPER BOOK. THERE IS NO DISPUTE THAT THE VIMAL TR ADE MARK IS OWNED BY VISHNU & COMPANY TRADE MARK PVT. LTD. IT IS ALSO TRUE THAT THE ASSESSEE HAS PAID THE ROYALTY AS PER THE TERMS AND CONDITIONS OF THE REGISTERED AGREEMENT. IT IS EQUALLY TRUE THAT THE C BDT CIRCULAR NO. 10/69/61-IT(AI) DATED 04.09.1962 IS NOT APPLICABLE IN THE INSTANT CASE. WE FURTHER FIND THAT IN THE IMMEDIATELY PRECEDING A SSESSMENT YEAR, SIMILAR PAYMENTS WERE ALLOWED BY THE A.O. IN SCRUTI NY ASSESSMENT. CONSIDERING THE FACTS IN TOTALITY, WE DO NOT FIND A NY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). GROUND NO. 2 I S ACCORDINGLY DISMISSED. 10. IN THE LIGHT OF THE DECISION OF THE CO-ORDINATE BENCH, THE CLAIM OF THE ASSESSEE FOR PAYMENT OF USER LICENSE FEES BASED ON TURNOVER IS DEDUCTIBLE AS REVENUE EXPENDITURE. IN OUR VIEW, WHERE THE LICENS OR CONTINUES TO BE OWNER OF THE CAPITAL ASSET I.E. TRADEMARK VIMAL, THE ASSES SEE CANNOT BE SAID TO HAVE ACQUIRED ANY CAPITAL ASSET BY MAKING PAYMENT OF USE R LICENSE FEE. THE INTERPRETATION OF CERTAIN RESTRICTIVE COVENANTS BY THE AO IS TOTALLY MISPLACED. THE CONTRACTUAL OBLIGATIONS ARE ORDINARY IN COMMERC IAL PARLANCE AND DOES NOT GRANT ANY VALUABLE RIGHT TO THE LICENSEE. THE ADVA NTAGE EARNED BY THE ASSESSEE BY USE OF THE LICENSE IS NEITHER PERMANENT NOR EPHEMERAL BUT IS LINKED TO THE USE OF THE TRADEMARK OWNED BY THE LICENSOR. THE EXPENSE TOWARDS USE OF TRADEMARK WAS CLEARLY LAID OUT FOR THE PURPOSE OF O NGOING BUSINESS CARRIED ON BY THE ASSESSEE AND FEE PAID FOR USE OF SUCH TRADEM ARK IS CLEARLY DEDUCTIBLE AS REVENUE EXPENDITURE. THE ASSESSEE HEREIN HAS BEEN MERELY GRANTED A LICENSE TO USE TRADEMARK ON PAYMENT OF LICENSE FEE DETERMINED ON THE BASIS OF A FORMULA LAID DOWN IN THE AGREEMENT. THE RIGHT TO USE CAN N EITHER BE ASSIGNED AT THE WISHES OF LICENSEE NOR IS THE LICENSOR PROHIBITED T O TERMINATE THE USER LICENSE AGREEMENT EXECUTED WITH LICENSEE. THUS, LICENSOR RE TAINS THE INHERENT CONTROL OVER THE MANNER OF USE OF TRADEMARK. THUS LICENSE FEE PAID FOR MERE USE OF CAPITAL ASSET WHICH CONTINUES TO BELONG TO SOMEONE ELSE THUS CANNOT BE REGARDED TO BE IN THE CAPITAL FIELD IN THE HANDS OF LICENSEE. WE THUS SEE NO ERROR IN THE CONCLUSION DRAWN BY THE CIT(A) IN FAVO UR OF THE ASSESSEE. HENCE, WE DECLINE TO INTERFERE. I.T.A NO. 672/AHD/2019 A.Y. 2016-17 PAGE NO DCIT VS. VISHNU POUCH PACKAGING PVT. LTD. 6 RESPECTFULLY FOLLOWING THE DECISION OF THE ITAT AS REFERRED ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. C IT(A). THEREFORE, THE APPEAL OF THE REVENUE IS DISMISSED. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29-09-2021 SD/- SD/- (MAHAVIR PRASAD) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD : DATED 29/09/2021 / COPY OF ORDER FORWARDED TO:- 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,