M/s. India Japan Lighting P Ltd., CHENNAI V. ACIT, CHENNAI

ITA 677/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4943 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 08-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 11-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR I VIJAYAKUMAR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C : CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NOS. 676 TO 678/MDS/2010 ASSESSMENT YEARS : 2004-05, 2005-06 AND 2006- 07 M/S INDIA JAPAN LIGHTING P. LTD AALIM CENTRE, 2 ND FLOOR 82, DR. RADHAKRISHNAN SALAI CHENNAI 600 004 VS THE ACIT LARGE TAX PAYER UNIT CHENNAI [PAN - AAACI2663L] (APPELLANT) (RESPONDENT) I.T.A NO. 862/MDS/2010 ASSESSMENT YEAR : 2006-07 THE ACIT LARGE TAX PAYER UNIT CHENNAI VS M/S INDIA JAPAN LIGHTING P. LTD AALIM CENTRE, 2 ND FLOOR 82, DR. RADHAKRISHNAN SALAI CHENNAI 600 004 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.VIJAYARAGHAVAN DEPARTMENT BY : DR. I. VIJAYAKUMAR, CIT O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS IS A BUNCH OF THREE APPEALS BY THE ASSESSE E FOR ASSESSMENT YEARS 2004-05, 2005-06 AND 2006-07 AND O NE APPEAL BY ITA 676 TO 678 & 862/10 :- 2 -: THE REVENUE FOR ASSESSMENT YEAR 2006-07. THE APPE ALS OF THE ASSESSEE ARE DIRECTED AGAINST SEPARATE ORDERS OF T HE LD. CIT(A), LARGE TAX PAYER UNIT, CHENNAI, DATED 8.3.2010. IN ALL TH ESE APPEALS, COMMON ISSUE RELATING TO ACCEPTABILITY OF ROYALTY E XPENDITURE INCURRED TOWARDS THE USE OF TECHNICAL INFORMATION PROVIDED B Y A FOREIGN COMPANY TO THE ASSESSEE-COMPANY, IS INVOLVED, SO IT WOULD BE CONVENIENT TO DECIDE THEM BY A COMMON ORDER. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE A ND SALE OF AUTOMOTIVE LIGHTING EQUIPMENTS. THE ASSESSEE HAD P AID CERTAIN SUM INITIALLY AS ROYALTY TO M/S KOITO MANUFACTURING CO. ,(KMC), JAPAN, UNDER AN AGREEMENT ENTERED INTO WITH THEM ON 24.11.1995. THE BREAK-UP OF SELLING EXPENSES SHOWED (IN ALL THE YEARS) THAT HUG E AMOUNTS HAVE BEEN DEBITED TOWARDS ROYALTY PAID TO KMC, JAPAN. T HE SELLING EXPENSES ARE SHOWN AT ` 1,51,35,350/-, ` 2,41,33,099/- AND ` 2,26,03,382/- IN ASSESSMENT YEARS 2004-05, 2005-06 AND 2006-07, RESPECTIVELY. THE ASSESSEE HAS CLAIMED THESE EXPEN SES DEBITED TOWARDS ROYALTY AS REVENUE EXPENDITURE AS AGAINST W HICH THE ASSESSING OFFICER HAS TREATED THEM AS CAPITAL EXPE NDITURE, AND HAS GRANTED DEPRECIATION THEREON. THE LD. CIT(A) HAS T AKEN A THIRD VIEW. HE HAS TREATED 75% AS REVENUE AND 25% AS CAPITAL. IN ITS APPEAL FOR ITA 676 TO 678 & 862/10 :- 3 -: ASSESSMENT YEAR 2006-07, THE REVENUE HAS TAKEN A GR OUND THAT THE REQUISITE CERTIFICATE OF THE PRESCRIBED AUTHORITY U NDER SECTION 35(2AB) TO ALLOW WEIGHTED DEDUCTION WAS NOT FILED BEFORE TH E ASSESSING OFFICER, BUT WAS FILED BEFORE THE LD. CIT(A) AND NO OPPORTUN ITY WAS GIVEN TO ASSESSING OFFICER, SO THERE IS A VIOLATION OF RULE 46A. UNDENIABLY, THIS CERTIFICATE IS ISSUED ONLY BY THE REVENUE AUTHORITI ES, SO IN A WAY, THIS OBJECTION DOES NOT HOLD WATER. IN NUTSHELL, THE O NLY ISSUE BEFORE US IS AS TO WHETHER THE EXPENSES DEBITED TOWARDS ROYALTY PAYMENT ARE TO BE TREATED AS REVENUE EXPENDITURE IN TOTO, OR A CAP ITAL EXPENDITURE IN TOTO, OR PARTLY REVENUE AND PARTLY CAPITAL. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERUSED THE ENTIRE RELEVANT PROVISIONS OF LAW AND PRECEDENTS AP PLICABLE THERETO AND RELIED BEFORE US. IT WAS ARGUED ON BEHALF OF THE A SSESSEE THAT IN ASSESSMENT YEAR 2003-04, THE DEPARTMENT HAS ITSELF ACCEPTED THIS EXPENDITURE AS REVENUE EXPENDITURE AND HAS ALLOWED THE SAME AS DEDUCTION U/S 35(2AB). THIS FACT COULD NOT BE SUCC ESSFULLY CONTROVERTED FROM THE SIDE OF THE REVENUE. WE HAVE FOUND FROM THE PERUSAL OF THE AGREEMENT THAT KMC GRANTED THE ASSES SEE AN EXCLUSIVE RIGHT TO MANUFACTURE AND SELL THE PRODUCTS IN INDI A USING THE LICENCED TECHNOLOGY PROVIDED. AN EXCLUSIVE RIGHT HAS BEEN C ONFERRED ON THE ASSESSEE FOR MANUFACTURING AND SELLING THE PRODUCTS IN INDIA. THE ITA 676 TO 678 & 862/10 :- 4 -: PAYMENT OF ROYALTY TOWARDS TECHNICAL INFORMATION P ROVIDED BY A FOREIGN COMPANY IN RESPECT OF MANUFACTURING METHOD S OF THE PRODUCTS AND THE LICENCE GRANTED TO THE ASSESSEE-COMPANY TO MANUFACTURE AND SELL THE PRODUCTS WAS TREATED BY THE ASSESSING OFFI CER AS ACQUIRING OF AN ADVANTAGE OF ENDURING NATURE AND THUS, HELD IT T O BE A CAPITAL EXPENDITURE. ON THE OTHER HAND, THE ARGUMENT ADVA NCED BY THE LD.AR IS THAT THOSE EXPENSES FOR ACQUISITION OF TECHNIC AL KNOW-HOW YEAR AFTER YEAR HAVE BEEN HELD BY THE HON'BLE MADRAS HIG H COURT AS REVENUE EXPENDITURE. IN THIS REGARD, RELIANCE WA S ALSO PLACED ON THE DECISION OF HON'BLE SUPREME COURT RENDERED IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD VS CIT, 177 ITR 377. THE L D.DR HAS RELIED ON VARIOUS DECISIONS AND HAS FILED THEIR ZEROX COPI ES BEFORE US. 4. A PIQUANT SITUATION HAS ARISEN BECAUSE IT IS A CA SE WHERE ROYALTY WAS PAID INITIALLY AND ALSO RUNNING EXPENSE S TOWARDS ROYALTY ARE BEING PAID YEAR AFTER YEAR. AS PER THIS AGREEMENT FOR TRANSFER OF KNOW-HOW AS TECHNICAL AID, INITIAL ROYALTY OF 9 LAK HS US DOLLAR HAS TO BE PAID, AND THEREAFTER RUNNING ROYALTY AT THE RATE O F 3.5% OF THE NET SALES IS REQUIRED TO BE PAID BY THE ASSESSEE. WE HAVE TO EXAMINE THE STIPULATIONS MADE IN THE AGREEMENT QUA THE RIGH TS RESERVED BY BOTH THE PARTIES TO DETERMINE WHETHER THE ASSESSEE HAS ACQUIRED A RIGHT TO USE THE TECHNOLOGY AND LICENCE DURING TH E ASSESSMENT YEARS ITA 676 TO 678 & 862/10 :- 5 -: OR WHETHER THE PAYMENTS TOWARDS KNOW-HOW/LICENCE FA LLS WITHIN THE AMBIT OF SECTION 32 OR NOT. THE ASSESSEE-COMPANY H AS ENTERED INTO A TECHNICAL LICENCE AGREEMENT WITH KMC, WHICH HAD A 5 0% SHAREHOLDING IN THE ASSESSEE-COMPANY, TO MANUFACTURE AND SELL TH E CONTRACT PRODUCTS IN INDIA USING LICENCED TECHNOLOGY. THE A SSESSEE-COMPANY PAID A LUMP SUM AMOUNT OF 9 LAKHS US DOLLARS TO KM C TO GET THIS TECHNOLOGY. THIS AMOUNT WAS PAID IN THREE INSTALME NTS OF 3 LAKHS US DOLLARS FROM FINANCIAL YEAR 1996-97 TO 1998-99. AP ART FROM THIS, THE ASSESSEE-COMPANY HAS BEEN PAYING ROYALTY @ 3.5% FOR PRODUCTS MANUFACTURED BY USING LICENCED TECHNOLOGY SUPPLIED BY KMC THIS ROYALTY IS PAID @ 3.5% OF NET SALES LESS IMPORTED C OMPONENTS. AS PER THIS AGREEMENT, IF THERE IS NO SALES, NO ROYALTY IS PAYABLE BY THE ASSESSEE. 5. WE HAVE GONE THROUGH VARIOUS ARTICLES OF THIS AGRE EMENT WHICH ARE INCORPORATED IN THE APPELLATE ORDER FOR ASSESSM ENT YEAR 2005-06 TOWARDS WHICH OUR ATTENTION WAS ALSO INVITED. THE ASSESSING OFFICER HAS RELIED ON THE DECISION OF HON'BLE MADRAS HIGH C OURT RENDERED IN THE CASE OF CIT VS SOUTHERN SWITCHGEAR, 148 ITR 272 , AFFIRMED BY THE HON'BLE SUPREME COURT IN 232 ITR 359, TO HOLD THAT THE ENTIRE ROYALTY PAID HAS TO BE TREATED AS CAPITAL. BUT WE HAVE NO TICED THAT THE FACTS OF THIS CASE ARE SLIGHTLY DIFFERENT AND THE HON'BLE MADRAS HIGH COURT ITA 676 TO 678 & 862/10 :- 6 -: HAS HELD IN NUMEROUS OTHER DECISIONS THAT MERE GRAN T OF EXCLUSIVE RIGHT TO MANUFACTURE MAY NOT RESULT IN ACQUIRING AN Y CAPITAL ASSET. IN THIS REGARD, DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS LUCAS TVS LTD, 110 ITR 338 WHICH HAS BEEN CONFIR MED BY THE APEX COURT BY DISMISSING THE SLP OF THE REVENUE, 196 ITR 78 (STATUTE); CIT VS SUNDARAM CLAYTON, 136 ITR 350 (MDS); CIT VS BRAK ES INDIA LTD, 136 ITR 322(MAD); CIT VS LAKSHMI CARDT CLOTHING, 149 IT R 712 AND CIT VS IAEC PUMPS, 110 ITR 353 WHICH HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT IN THE 232 ITR 316, ARE RELEVANT. TH E HON'BLE JURISDICTIONAL HIGH COURT HAS BEEN CONSISTENTLY HO LDING THAT GRANT OF RIGHT TO USE TECHNICAL KNOW-HOW COUPLED WITH EXCLUS IVE RIGHT TO MANUFACTURE WILL NOT RESULT IN ANY ASSET OF ENDURIN G BENEFIT. IN THE CASE OF SOUTHERN SWITCHGEAR(SS), THE FACTS ARE THAT ALL DRAWINGS/SPECIFICATIONS AND OTHER DATA FURNISHED TO SS WERE TO BE IN ENGLISH WITH MEASUREMENT SHOWN IN THE SYSTEM CURREN TLY USED BY BRUSH BUT SHALL BE THE PROPERTY OF SS ON THE CONDIT ION THAT SS SHALL AGREE TO HOLD SUCH PROPERTY ALWAYS SUBJECT TO THE C ONTINUED FULFILLMENT IN CLAUSE 6(C), 6(D), 23 & 25 OF THIS AGREEMENT AND THE PERIOD OF TEN YEARS THEREAFTER. BUT TECHNICAL ASSISTANCE CONTEMP LATED IN THE AGREEMENT COVERED THE ESTABLISHMENT OF THE FACTORY AND THE OPERATION THEREOF FOR THE MANUFACTURE OF TRANSFORMERS OF ALL KINDS AND TYPES. ITA 676 TO 678 & 862/10 :- 7 -: THUS, THE PROPERTY IN THAT CASE, I.E, THE DRAWING, WAS TRANSFERRED TO INDIAN COMPANY AND THE TECHNICAL KNOW-HOW TRANSFERR ED WAS ALSO FOR THE SETTING UP OF THE FACTORY WHICH ARE ALL IN THE CAPITAL FIELD. IN THOSE CIRCUMSTANCES, 25% OF THE PAYMENT HAD BEEN HELD TO BE CAPITAL BECAUSE ONLY 25% OF THE INITIAL LUMP SUM AND ROYALT Y PAYMENT WAS CONSIDERED AS CAPITAL. IN THE GIVEN CASE, NO SUC H PROPERTY HAS BEEN TRANSFERRED TO INDIAN COMPANY NOR IS THE TECHNICAL DATA PROVIDED TO SET UP THE PLANT. KEEPING IN VIEW THE DIFFERENTIAL NUA NCE OF FACTS BETWEEN THE FACTS OF ASSESSEES CASE AND OTHER DECISIONS OF HON'BLE MADRAS HIGH COURT REFERRED TO ABOVE, OUT OF WHICH TWO HAVE BEEN AFFIRMED BY THE APEX COURTS WHOSE FACTS ARE MORE AKIN TO THE FA CTS OF THE GIVEN CASE, IT WOULD BE JUST AND PRUDENT TO APPLY THE RA TIO DECIDENDI THEREOF. THE CAPITAL ELEMENT INVOLVED DEFINITELY, IN OUR CONSIDERED OPINION, CAN BE ATTRIBUTED AND HAS BEEN COVERED IN THE LUMP SUM PAYMENT MADE IN THE BEGINNING, WHICH HAS BEEN ALLOW ED U/S 35AB. THE HON'BLE SUPREME COURT, IN THE CASE OF CIT VS S WARAJ ENGINES LTD, 309 ITR 443, HAS CLEARLY HELD THAT SECTION 35AB IS TO BE APPLIED IN RESPECT OF EXPENDITURE ON TECHNICAL KNOW-HOW WHICH IS IN THE CAPITAL FIELD AND THE ENTIRE AMOUNT IS ALLOWABLE IN CASE IT IS IN THE REVENUE FILED. THERE ARE NUMEROUS CASES AVAILABLE ON THIS ISSUE, BUT THERE IS NO NEED TO DISCUSS ALL OF THEM. THE TREATMENT GIVE N BY THE LD. CIT(A) ITA 676 TO 678 & 862/10 :- 8 -: TO 25% OF THE EXPENSES TOWARDS ROYALTY PAYMENT, AS CAPITAL AND THEREAFTER ALLOWING DEPRECIATION THEREON, IS NOT CO RRECT APPROACH IN OUR OPINION. RECENTLY, THE HON'BLE MADRAS HIGH COUR T IN THE CASE OF CIT VS PANASONIC CARBON INDIA COMPANY LTD., VIDE ITS JU DGMENT DATED 12.7.2010 IN TAX CASE APPEAL NOS.552,553, 554 AND 5 56 OF 2010, HAS TAKEN A DECISION IN FAVOUR OF THE ASSESSEE AFTER DI SCUSSING THE JUDGMENT OF HON'BLE SUPREME COURT RENDERED IN THE CASE OF CIT VS IAEC PUMPS LTD (SUPRA). IN THAT CASE, THE TECHNIC AL KNOW-HOW FOR SETTING UP THE FACTORY OF THE ASSESSEE-COMPANY AND COMMENCING ITS PRODUCTION WAS PROVIDED BY MEI [A FOREIGN COMPANY] IN CONSIDERATION OF A LUMP SUM PAYMENT TO MEI WHICH WAS CAPITALIZED IN THE ASSESSEES BOOKS OF ACCOUNT IN RESPECTIVE YEARS OF PAYMENT. T HE ROYALTY WAS PAID BY THE ASSESSEE FROM JUNE 1984 ONWARDS BASED O N THE SALES EFFECTED AT THE RATE OF 2.5% ON DOMESTIC SALES AND AT 5% ON EXPORTS. THE COURT WAS DECIDING WHETHER SUCH ROYALTY PAYMENT WOULD FALL WITHIN THE CATEGORY OF REVENUE EXPENDITURE OR CAPITAL EXPE NDITURE. THE HIGH COURT HAS TAKEN A VIEW IN FAVOUR OF THE ASSESSEE. THE CHENNAI BENCH, RECENTLY IN THE CASE OF NIPPO BATTERIES CO. LTD VS ACIT, [2011] 7 ITR (TRIB) 303 (CHENNAI) HAS DECIDED SIMILAR ISSUE BY H OLDING THAT SUCH TYPE OF ROYALTY PAYMENT CANNOT BE BIFURCATED WITHOU T ANY PROVISION IN THE AGREEMENT AND THE ENTIRE PAYMENT HAS TO BE TREA TED AS REVENUE ITA 676 TO 678 & 862/10 :- 9 -: EXPENDITURE ALLOWABLE AS DEDUCTION. THE BENCH HAS DISCUSSED MORE THAN A DOZEN OF DECISIONS OF VARIOUS HIGH COURTS I NCLUDING THAT OF THE HON'BLE MADRAS, DELHI AND APEX COURT TO ARRIVE AT I TS ABOVE CONCLUSION. 6. THE LD.DR HAS RELIED ON THE DECISION OF HON'BLE SUP REME COURT RENDERED IN THE CASE OF SOUTHERN SWITCHGEAR LTD VS CIT, 232 ITR 359. ABOUT THIS DECISION, WE HAVE ALREADY MENTIONED THAT THE FACTS ARE SLIGHTLY DIFFERENT IN THAT CASE. SIMILARLY, THE FA CTS IN THE CASE OF CIT VS W.S.INSULATORS OF INDIA LTD, 243 ITR 348(MAD), ARE AKIN TO THE CASE OF HON'BLE SUPREME COURT IN SOUTHERN SWITCHGEAR LTD(SU PRA), IN WHICH PRODUCTS MANUFACTURED BY THE ASSESSEE WERE TO BE TE STED BY THE LICENSOR AND THE DRAWINGS AND DOCUMENTS WERE NOT TO BE USED BY THE LICENSEE FOR THE PURPOSE OTHER THAN THE PURPOSE OF THE AGREEMENT WHICH WAS ACQUIRING KNOW-HOW AND LICENCE FOR MANUFA CTURE OF PRODUCTS BASED ON DRAWINGS PROVIDED BY THE FOREIGN COMPANY. IN THAT CASE, IT WAS HELD THAT PAYMENT FOR OBTAINING KNOW-H OW, DRAWINGS AND INFORMATION IS PRIMARILY A CAPITAL EXPENDITURE, BUT STILL THE ASSESSING OFFICER HAD ALLOWED 20% OF SUCH EXPENDITURE AS REVE NUE WHICH WAS TREATED AS ATTRIBUTABLE TO TECHNICAL ADVICE REGARDI NG DAY-TO-DAY OPERATIONS, LAYOUT, ETC. IN OUR OPINION, THIS DECI SION IS NOT DIRECTLY APPLICABLE TO THE FACTS OF THE GIVEN CASE. ANOTHER DECISION RELIED ON BY THE LD.DR IS OF HON'BLE SUPREME COURT RENDERED IN T HE CASE OF JONAS ITA 676 TO 678 & 862/10 :- 10 - : WOODHEAD & SONS LTD VS CIT, 224 ITR 342 IN WHICH IT HAS BEEN HELD THAT WHEN ASSESSEE SETS UP A NEW BUSINESS AND THE F OREIGN FIRM IN ADDITION TO SUPPLYING TECHNICAL KNOW-HOW RENDERS VA LUABLE SERVICES IN SETTING UP THE FACTORY ITSELF AND ASSESSEE IS ALLOW ED TO MANUFACTURE THE PRODUCT IN QUESTION EVEN AFTER THE EXPIRY OF THE AG REEMENT IT IS JUSTIFIED IN HOLDING THAT 25% OF THE ROYALTY, THOUG H PAID ON PERCENTAGE OF GROSS TURNOVER, WAS CAPITAL EXPENDITURE. OSTENS IBLY, THE FACTS OF THIS CASE ARE ENTIRELY DISTINGUISHABLE FROM THE CAS E IN HAND. THEREFORE, AFTER CONSIDERING THE ENTIRE FACTS, CIRC UMSTANCES AND LEGAL POSITION, WE HOLD THAT THE EXPENSES DEBITED TOWARDS ROYALTY PAYMENTS IN ALL THESE ASSESSMENT YEARS HAVE TO BE TREATED AS REVENUE PAYMENT IN TOTO. OUR ABOVE FINDING RESULTS IN ALLOWING THE APPEALS OF THE ASSESSEE AND DISMISSING THE APPEAL OF THE REVENUE. 7. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE ALLOWED WHEREAS THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10.6.2011. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 10 TH JUNE, 2011 RD COPY TO:APPELLANT/RESPONDENT/CIT(A)/CIT/DR