ZODIAC CLOTHING CO. LTD, MUMBAI V. DCIT 7(3), MUMBAI

ITA 7238/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84031 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 16-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 05-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P K BEERLA
• Keywords: Capital asset; Business income; Condonation of delay; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G , MUMBAI . . , , , BEFORE SHRI B.R.BASKARAN , A M AND SHRI AMIT SHUKLA , J M ITA NO.7238 /MUM/201 2 : ASST.YEAR 2008 - 2009 M/S.ZODIAC CLOTHING COMPANY LTD. 10/76 OFF.HAINES ROAD, WORLI MUMBAI 400 018. PAN : AAACZ0151A. / VS. THE DY.COMMISSIONER OF INCOME - TAX CIRCLE 7(3) MUMBAI. ( / APPELLANT) ( / RESPONDENT) /APPELLANT BY : SMT.VASANTI PATEL /RESPONDENT BY : SHRI P.K.BEERLA / DATE OF HEARING : 16.10.2014 / DATE OF PRONOUNCEMENT : 22.10.2014. / O R D E R PER AMIT SHUKLA ( J M) : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT ORDER PASSED IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL - II, MUMBAI (DRP) FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) READ WITH SECTION 144C(5) FOR T HE ASSESSMENT YEAR 2008 - 2009. THE APPEAL OF THE ASSESSEE IS BARRED BY LIMITATION BY 4 DAYS. IN VIEW OF THE REASONS GIVEN IN THE PETITION OF CONDONATION OF DELAY AND AVERMENTS MADE IN AFFIDAVIT, WE CONDONE THE DELAY. 2. THE SOLE DISPUTE RAISED IN THE GROUNDS OF APPEAL IS THE TREATMENT OF TRADEMARK FEES OF RS.1,34,91,284 , PAID AT THE RATE OF 1% OF THE SALES BY THE ASSESSEE FOR THE USE OF TRADEMARK , AS A CAPITAL EXPENDITURE. 3. THE BRIEF FACTS OF THE ISSUE INVOLVED ARE THAT , THE ASSESSEE IS ENGAGED IN T HE BUSINESS OF MANUFACTURING AND SELLING OF SHI R TS, NECKTIES, TROUSERS ETC. IT IS ONE OF THE ITA NO. 7238 /MUM/201 2 . M/S.ZODIAC CLOTHING CO.LTD. 2 LEADING MENS FASHION HOUSES IN INDIA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT, THE ASSESSING OFFICER OBSERVED T HAT AN AMOUNT OF RS.1,34,95,284 HAVE BEEN DEBITED AS `TRADEMARK FEES . IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY THE SAID PAYMENT MAY NOT BE HELD AS CAPITAL EXPENSES, THE ASSESSEE SUBMITTED THAT THE TRADEMARK FEES HAS BEEN PAID FOR THE USE OF REGISTER ED TRADEMARK ZODIAC AND Z OD BELONGING TO METROPOLITAN TRADING COMPANY (MTC). THE SAID TRADEMARK WAS ALLOWED TO BE USED AS A NON - EXCLUSIVE USE OF THE BRAND WHILE SE LL ING THE PRODUCTS , AS PER THE AGREEMENT BETWEEN THE PARTIES. IT WAS CLARIFIED THAT THE A SSESSEE HAD NO RIGHT, TITLE OR INTEREST IN THE SAID TRADEMARK, WHICH ABSOLUTELY BELONGED TO MTC. FOR THE USAGE OF SUCH TRADEMARK, THE ASSESSEE WAS LIABLE TO PAY ROYALTY TO MTC AT THE RATE OF 1% OF THE TOTAL SALES OF DOMESTIC DIVISION AND ON THE BRANDED SAL ES OF EXPORT DIVISION. THE AGREEMENT WAS FOR SEVEN YEARS SUBJECT TO FURTHER EXTENSION. THUS, SUCH A PAYMENT OF LICENSE TO USE THE TRADEMARK IS REVENUE EXPENDITURE. IN SUPPORT OF THIS CONTENTION SEVERAL DECISIONS WERE ALSO RELIED UPON. 4. THE LEARNED ASSES SING OFFICER REJECTED THE ASSESSEE S CONTENTION , MAINLY ON THE GROUND THAT THE ASSESSEE HAS BEEN USING THE TRADEMARK IN TERMS OF THE AGREEMENT EXTENDED FROM TIME TO TIME SINCE LAST 15 YEARS. THE MTC AND THE ASSESSEE - COMPANY HAD CLOSE CONNECTION AS THE DIRE CTORS OF THE ASSESSEE - COMPANY AND THE PARTNERS OF MTC WERE COMMON AND WERE HOLDING CONTROLLING INTEREST. IT WAS SOME KIND OF COLLUSIVE TRANSACTION. THE USE OF TRADEMARK IS OF ENDURING NATURE, AND AS SUCH, IT IS A CAPITAL ASSET, AND THEREFORE, ANY PAYMENT M ADE FOR SUCH USAGE IS A CAPITAL EXPENDITURE. ACCORDINGLY, HE TREATED THE SAID EXPENSES AS CAPITAL EXPENSES. THE DRP HAS CONFIRMED THE FINDING OF THE A.O. , MAINLY ON THE GROUND THAT THE ISSUE HAD ARISEN IN THE EARLIER YEARS , WHERE SIMILAR DISALLOWANCE HAD B EEN MADE. THE DEPARTMENT HAS REPORTED TO BE IN APPEAL BEFORE THE ITAT ON THIS ISSUE AND SINCE THE ISSUE IS BEING SUBJUDICE, NO INTERFERENCE IS CALLED FOR I N THE ORDER OF THE A.O . 5. BEFORE US, THE LEARNED COUNSEL MRS.VASANTI PATEL, SUBMITTED THAT RIGHT FROM ASSESSMENT YEAR S 2005 - 2006 TO 2007 - 2008, THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF ITA NO. 7238 /MUM/201 2 . M/S.ZODIAC CLOTHING CO.LTD. 3 THE ASSESSEE BY THE LEARNED CIT(A) , AGAINST WHICH NO APPEAL HAS BEEN FILED BY THE DEPARTMENT. ATLEAST THE ASSESSEE IS NOT HAVING ANY INFORMATION ABOUT THE FILING OF ANY APPEAL IN THE EARLIER YEARS. BESIDES THIS, SHE SUBMITTED THAT ON MERITS ALSO, THIS ISSUE IS SQUARELY COVERED BY SERIES OF DECISIONS , WHEREIN IT HAS BEEN HELD THAT IF THE ASSESSEE IS PAYING ROYALTY ON YEAR TO YEAR BASIS W ITHOUT BECOMING THE EXCLUSIVE OWNER OF THE KNOW - HOW AND TRADEMARK, THEN SUCH AN EXPENDITURE IS TO BE TREATED AS REVENUE EXPENDITURE. SHE RELIED UPON FOLLOWING DECISIONS : - ( I ) DCIT V. DCM BENETTON INDIA LTD. 178 TAXMAN 52 ( II ) RAIPUR MANUFACTURING CO. V. CIT 135 C TR (GUJ.) 248 ( III ) RAIPUR MANUFACTURING CO. V. CIT 132 CTR (GUJ.) 63 ( IV ) CIT V. CIBA OF INDIA LTD. 69 ITR 692 (SC) ( V ) ITO V. SHIVANI LOCKS LTD. 22 SOT 122 (DEL.) ( VI ) CIT VB. G4S SECURITIES SYSTEMS (I) PVT. LTD. 338 ITR 46 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL RE PRESENTATIVE STRONGLY RELIED UPON THE ORDER OF THE A.O. AND SUBMITTED THAT THE USE OF TRADEMARK IS FOR LONG PERIOD AND ALSO THE A.O. HAS POINTED OUT THAT IT WAS A COLLUSIVE TRANSACTION AMONG THE GROUP ENTITIES. THEREFORE, THE DISALLOWANCE MADE BY THE A.O. AS CAPITAL EXPENDITURE IS JUSTIFIED. REGARDING FILING OF DEPARTMENTAL APPEAL, HE WAS UNABLE TO CONTROVERT THE ASSERTION OF THE ASSESSEE THAT IN THE EARLIER YEARS NO APPEAL HAS BEEN FILED AGAINST THE ORDERS OF THE LEARNED CIT(A). 7. WE HAVE HEARD THE RIVA L SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. THE ASSESSEE HAS BEEN USING TRADEMARK OF ZODIAC AND ZOD , BELONGING TO MTC, WHICH IS A GROUP CONCERN OF THE ASSESSEE - COMPANY, AS THE PARTNERS AND DIRECTORS ARE COMMON. FOR THE USAGE OF SUCH TRADEMARK, THE ASSESSEE HAS BEEN PAYING ROYALTY TO MTC AT THE RATE OF 1% OF THE TOTAL SALES. SUCH AN AGREEMENT FOR USE OF TRADEMARK WAS FOR SEVEN YEARS, SUBJECT TO FURTHER EXTENSION. SIMILAR NATURE OF PAYMENT HAS BEEN MADE IN THE EARLIER YEARS ALSO , WHICH HAS BEEN DISALLOWED BY THE A.O. AS CAPITAL EXPENDITURE . HOWEVER , FROM THE STAGE OF FIRST APPELLATE AUTHORITY , SAME HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT IT IS A REVENUE EXPENDITURE , AS THE ITA NO. 7238 /MUM/201 2 . M/S.ZODIAC CLOTHING CO.LTD. 4 ASSESSEE HAS NOT BEEN GIVEN THE KNOW - H OW AND , IS NOT THE OWNER OF THE TRADEMARK. SUCH AN ORDERS OF THE LEARNED CIT(A) FOR THE ASSESSMENT YEARS 2005 - 2006 TO 2007 - 2008 HAVE ATTAINED FINALITY , AS THE DEPARTMENT HAS NOT FILED SECOND APPEAL. THE D.R. WAS ALSO UNABLE TO CONTROVERT THE ASSERTION OF THE ASSESSEE THAT NO APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINST THE SAID ORDERS. IN ANY CASE, IF THE OWNERSHIP RIGHT OF THE TRADEMARK VESTED WITH MTC AND THE ASSESSEE HAD NOT ACQUIRED THE OWNERSHIP RIGHT OF SUCH BRAND AND ALSO THERE IS NO TRANSFER OF USAGE OF THE BRAND, THEN THERE IS NO ADVANTAGE OF ENDURING NATURE TO THE ASSESSEE. IN SUCH A SITUATION, THE ROYALTY PAYMENT MADE ON YEARLY BASIS ON THE NET SALES OF THE ASSESSEE , IS NOTHING BUT REVENUE EXPENDITURE , BECAUSE IT HAS NO CO - RELATION WITH THE CA PITAL VALUE OF THE ASSET, WHICH ADMITTEDLY DOES NOT BELONG TO THE ASSESSEE. UNDER THESE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO THE FACT THAT IN THE EARLIER YEARS THIS ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE , WE HOLD THAT NO DISALLOWANCE ON ACC OUNT OF TRADEMARK FEES CAN BE MADE IN THE CASE OF THE ASSESSEE ON ACCOUNT OF BEING CAPITAL EXPENDITURE AS THE SAME IS REVENUE EXPENDITURE. THE GROUND S THUS RAISED BY THE ASSESSEE ARE ALLOWED. 8. LASTLY, VIDE GROUND NO.8, THE ASSESSEE HAS CHALLENGED THE C HARGING OF INTEREST U/S.234C. THIS GROUND HAS NOT BEEN ARGUED BEFORE US AT THE TIME OF HEARING , T HEREFORE, WE ARE NOT ADJUDICATING THE SAME. ACCORDINGLY SAME IS TREATED AS DISMISSED. 9 . IN THE RESULT, ASSESSEE S APPEAL IS PARTLY ALLOWED . ORDER PRONOUNCED ON THIS 22 ND DAY OF OCTOBER, 2014 . SD/ - SD/ - ( B.R.BASKARAN ) ( AMIT SHUKLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 22 ND OCTOBER, 2014 . DEVDAS* ITA NO. 7238 /MUM/201 2 . M/S.ZODIAC CLOTHING CO.LTD. 5 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE DRP , MUMBAI. 4. / DRP - II , MUMBAI 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI