DCIT, CHENNAI V. Indian Additives Limited, CHENNAI

ITA 835/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9138 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 01-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN IRS
• Assessee Lawyers: M VISWANATHAN
• Keywords: Depreciation; Transfer pricing; Revenue expenditure; Capital expenditure
• Section: 143(3); 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . ! ' , #'$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO.835/MDS/2016. # % &% / ASSESSMENT YEAR : 2010-2011. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2(2) CHENNAI 600 034 VS. M/S. INDIAN ADDITIVES LIMITED, EXPRESS HIGHWAY, MANALI, CHENNAI 600 068. [PAN AAACI 1445G] ( / APPELLANT) ( /RESPONDENT) '( ) * / APPELLANT BY : SHRI. P. RADHAKRISHNAN, IRS, JCIT. +,'( ) * /RESPONDENT BY : SHRI. M. VISWANATHAN, C.A. ! ) - / DATE OF HEARING : 08-06-2016 ./& ) - / DATE OF PRONOUNCEMENT : 14-06-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-6, CHEN NAI IN ITA NO.155/CIT(A)-6/2014-15, DT 27.01.2016 FOR THE ASSE SSMENT YEAR ITA NO. 835/MDS/2016. :- 2 -: 2010-2011 PASSED U/S.143(3) R.W.S. 144C(3) AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE AC T). 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 2.1. THE CIT(A) ERRED IN HOLDING THAT ROYALTY P AYMENTS MADE BY THE ASSESSEE TO MLS CHEVRON ORONITE COMPANY LLC USA ARE REVENUE IN NATURE. 2.2. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT IN T HE RELIED UPON DECISION, ITAT HAD GIVEN THE DECISION M AINLY BASED UPON THE MODE OF PAYMENT OF ROYALTY OF THE ASSESSEE. 2.3. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE MODE OF PAYMENT OR QUANTIFICATION OF THE SAME IN RELATIO N TO THE TURNOVER CANNOT ALTER THE BASIC PURPOSE I.E. INFUSI ON OF NEW TECHNOLOGY FOR WHICH THE PAYMENT WAS MADE. 2.4. THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT IN THE RELIED UPON DECISION OF THE ITAT, IN THE ITAT'S OWN OBSERVATION THE SO CALLED RUNNING ROYALTY WAS FOR THE PURPOSE OF USE OF LICENCE, TRADE MARK ON TECHNI CAL INFORMATION. WITH THE AMENDMENT IN THE ACT MADE BEF ORE A DECADE ALLOWING DEPRECIATION ON THE INTANGIBLE AS SETS LIKE LICENCE, TRADE MARK ETC, THE PAYMENT CAN ONLY BE CONSIDERED AS CAPITAL IN NATURE AND NOT REVENUE IN CHARACTER. 2.5 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT SINCE ROYALTY FALLS UNDER INTANGIBLE ASSETS AS PER PROVIS IONS OF SEC 32(1) (II), THE EXPENDITURE IS TO BE TREATED ON LY AS CAPITAL EXPENDITURE. 2.6 THE RELIED UPON DECISION OF THE HONBLE ITAT IN ITA NO.2138/MDS/2008 AND 700/MDS/2009, DATED 13.11.2009 FOR ASSESSMENT YEARS 99-2000, 2000-01 TO 2002-03 ON THE SIMILAR ISSUE, HAS NOT BECOME FINAL AND APPAL BEFOR E THE HONBLE HIGH COURT IS PENDING. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY IS ENGAGED IN MANUFACTURING AND SALE OF LUBRICATING OI L, ADDITIVES AND ITA NO. 835/MDS/2016. :- 3 -: FILED RETURN OF INCOME ON 23.09.2010 WITH TOTAL IN COME OF A66,31,49,630/- AND WAS PROCESSED U/S.143(1) OF THE ACT AND THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND NOTIC E U/S.143(2) OF THE ACT WAS ISSUED. IN COMPLIANCE TO NOTICE, THE LD. A UTHORISED REPRESENTATIVE OF ASSESSEE APPEARED AND FILED DETAI LS. THE ASSESSEE DURING THE FINANCIAL YEAR 2009-2010 ENTERED INTO IN TERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISE (AE) SITUAT ED OUTSIDE INDIA WERE THE VALUE EXCEED A15 CRORES. THE LD. ASSESSIN G OFFICER MADE A REFERENCE TO TRANSFER PRICING OFFICER (TPO), CHENNA I TO DETERMINE ARMS LENGTH PRICE (ARMS LENGTH PRICE) IN RESPECT O F THE TRANSACTIONS. THE LD. TPO VIDE ORDER DATED 07.01.2014 IN C.R. NO. 1-210/TPO-II/A.Y. 2010-2011 OBSERVED AND CONCLUDED ON DETERMINATION OF DOWNWARD ADJUSTMENT OF COST AT A19,28,47,000/- ON INTERNATIO NAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES, FURTHER IMMEDIATELY, UN DER RECTIFICATION PROCEEDINGS, THE LD.TPO REVISED THE ORDER U/S.92 CA (3) OF THE ACT DATED 07.01.2014 DETERMINING THE DOWNWARD ADJUSTME NT OF COST TO A3,83,93,740/- AND THE LD. ASSESSING OFFICER MADE AN TPO ADDITION TO THE RETURNED INCOME ALONGWITH OTHER ADDITIONS. THE LD. ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS MADE PAYMENTS OF ROYALTY TO M/S. CHEVRON ORONITE COMPANY LLC, USA (COCL, USA) A6,85, 80,000/- AND CLAIMED AS REVENUE EXPENDITURE. THE LD. AUTHORISED REPRESENTATIVE FILED COPY OF AGREEMENT ENTERED WITH COCL, USA IN T HE ASSESSMENT ITA NO. 835/MDS/2016. :- 4 -: PROCEEDINGS AND THE LD. ASSESSING OFFICER ON PERUS AL FOUND THAT THE ASSESSEE COMPANY HAS EXCLUSIVE RIGHT TO MANUFACTURE AND SELL THE PRODUCTS IN INDIA USING THE LICENSED TECHNOLOGY AND THE PAYMENT OF ROYALTY IN RESPECT OF MANUFACTURING PRODUCT AND LIC ENCE GRANTED TO THE ASSESSEE FALLS WITHIN EXCLUSIVE BENEFIT AND ADVANT AGE OF ENDURING NATURE AND HAS TO BE TREATED AS CAPITAL EXPENDITURE . THE LD. ASSESSING OFFICER ALLEGED THAT THE TRANSACTIONS ENTERED BETWE EN ASSESSEE COMPANY AS PER TERMS & AGREEMENT WERE ROYALTY PAYME NT IN RELATION TO THE TURNOVER AND THE AMOUNT IS FIXED AS LUMPSUM PAYABLE FOR INFUSION OF NEW TECHNOLOGY AND OTHER BENEFITS AND T REATED THE SAID PAYMENT AS INTANGIBLE ASSET BEING ELIGIBLE FOR DEP RECIATION . THE LD. ASSESSING OFFICER RELIED ON THE APEX COURT DECISION CONSIDERING THE STIPULATIONS IN THE AGREEMENT AND PROVISIONS OF S EC. 32 OF THE ACT AND THE EXPLANATIONS ON TREATMENT AS INTANGIBLE ASSETS . THE LD. AUTHORISED REPRESENTATIVE BROUGHT TO THE KNOWLEDGE OF THE LD. ASSESSING OFFICER, THAT SIMILAR ISSUE WAS DECIDED I N FAVOUR OF THE ASSESSEE IN EARLIER ASSESSMENT YEARS. THEREFORE, THE EXPENDITURE HAS TO BE ALLOWED IN THE FINANCIAL STATEMENTS. BUT THE LD. ASSESSING OFFICER FOUND THAT AGAINST THE TRIBUNAL ORDER, DEPARTMENT H AS PREFERRED AN APPEAL BEFORE HONBLE HIGH COURT OF MADRAS AND SAME IS PENDING. THEREFORE, LD. ASSESSING OFFICER DISTINGUISHED DEC ISION AND DISALLOWED THE PAYMENT OF ROYALTY AND ALLOWED DEPRECIATION @2 5% AND EXCESS ITA NO. 835/MDS/2016. :- 5 -: CLAIM OF A5,14,35,000/- WAS BROUGHT TO TAX. SUBSEQ UENTLY LD. ASSESSING OFFICER UNDER PROVISIONS OF SEC.144C(1) O F THE ACT MADE ABOVE TWO ADDITIONS IN DRAFT ASSESSMENT ORDER DATED 07.03.2014 AND SERVED ON THE ASSESSEE UNDER PROVISIONS OF SEC. 14 4C(2) OF THE ACT. THE ASSESSEE COMPANY HAS OPTION TO FILE OBJECTIONS BEFORE DISPUTE RESOLUTION PANEL (DRP) WITHIN THIRTY DAYS FROM THE DATE OF RECEIPT OF ASSESSMENT ORDER U/S.144C(1) OF THE ACT. THE LD. A UTHORISED REPRESENTATIVE FILED LETTER WITH LD. ASSESSING OFFI CER AFTER RECEIPT OF DRAFT ASSESSMENT ORDER ON 08.04.2014 MENTIONING THA T AS AGAINST THE DRAFT ASSESSMENT ORDER, THE ASSESSEE COMPANY INTEND S TO FILE AN APPEAL AND REQUESTED TO ISSUE FINAL ASSESSMENT OR DER TO ENABLE TO FILE AN APPEAL BEFORE COMMISSIONER OF INCOME TAX ( APPEALS). ACCORDINGLY, THE LD. ASSESSING OFFICER CONSIDERED T HE SUBMISSIONS ON DRAFT ASSESSMENT ORDER AND COMPLETED ASSESSMENT ORD ER AS PER PROVISIONS OF SEC. 143(3) R.W.S. 144C(3) OF THE AC T ASSESSING TOTAL INCOME AT A75,29,78,370/- AND RAISED DEMAND. AGGR IEVED BY THE ORDER PASSED U/S.143(3) R.W.S. 144C(3) OF THE ACT D ATED 29.04.2014, THE ASSESSEE FILED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 4. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE OF ASSESSEE ARGUED THE GROUNDS AND REITERATED THE SUBMISSIONS MADE BEFORE ASSESSING OFFICER AND TRANS FER PRICING ITA NO. 835/MDS/2016. :- 6 -: PROCEEDINGS. THE LD. COMMISSIONER OF INCOME TAX (A PPEALS) CONSIDERING THE SUBMISSIONS DISMISSED THE GROUND OF THE ASSESSEE ON THE DISPUTED ISSUE OF TPO DOWNWARD ADJUSTMENT A3,83 ,93,740/- AND ON LAST GROUND, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE AUTHORISED REPRESENTATIVE SUBMISSION S, FINDINGS OF THE ASSESSING AUTHORITIES AND THE NATURE OF EXPENDITURE DEALT IN ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS 1 999-2000 TO 2002- 03 IN ITA NO.2138/MDS/2008 AND ITA NOS.700 TO 702/M DS/2009, DATED 13.11.2009 WHEREIN ROYALTY DISALLOWANCE WAS DELETED AND THE REVENUE HAS FILED AN APPEAL BEFORE HONBLE HIGH COURT AND I S PENDING. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE TRIBUNAL DECISION IN ASSESSEES OWN CASE AND HELD THAT THE R OYALTY PAID TO M/S. CHEVRON ORONITE LLC IS A REVENUE EXPENDITURE AND PA RTLY ALLOWED THE APPEAL. AGGRIEVED BY THE COMMISSIONER OF INCOME TA X (APPEALS) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TR IBUNAL. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE REI TERATED THAT COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONSIDERING ROYALTY PAYMENTS MADE TO M/S. CHEVRON ORONITE COMPA NY LLC, USA IN THE NATURE OF REVENUE EXPENDITURE AND DELETED RELYI NG ON THE DECISIONS OF TRIBUNAL IN ASSESSEES OWN CASE AND OVERLOOKED T HE FINDINGS OF THE LD. ASSESSING OFFICER ON THE PAYMENT OF QUANTIFIED AMOUNT BASED ON ITA NO. 835/MDS/2016. :- 7 -: THE TURNOVER AND TECHNOLOGY TRANSFER WHICH TAKES TH E CHARACTERISTIC OF INTANGIBLE ASSETS I.E. LICENCE, TRADE MARK WHICH FA LLS WITHIN THE PROVISIONS OF SEC. 32(1)(II) OF THE ACT AND ELIGIB LE FOR DEPRECIATION. THE DECISION RELIED BY THE COMMISSIONER OF INCOME T AX (APPEALS) OF TRIBUNAL HAS BEEN CHALLENGED BEFORE JURISDICTIONAL HONBLE HIGH COURT AND THEREFORE PRAYED FOR SET ASIDE THE ORDER OF COM MISSIONER OF INCOME TAX (APPEALS) AND ALLOW THE APPEAL. 6. CONTRA, THE LD. AUTHORISED REPRESENTATIVE OF ASSESS EE SUBMITTED ON THE TRANSACTIONS ENTERED WITH M/S. CHE VRON ORONITE COMPANY LLC, USA AND RELIED ON THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS IN ITA NO.2138/MDS/2008 AN D ITA NOS.700 TO 702/MDS/2009 AND THE ORDER OF COMMISSIONER OF INCOM E TAX (APPEALS) AND OPPOSED TO THE GROUNDS OF THE DEPARTM ENT. 7. WE HEARD THE RIVAL SUBMISSIONS , PERUSED THE MATERI AL ON RECORD AND JUDICIAL DECISIONS RELIED. THE SOLE CRUX OF THE ISSUE BEING PAYMENT OF ROYALTY TO M/S. CHEVRON ORONITE COMPANY LLC, USA IS A REVENUE EXPENDITURE OR CAPITAL EXPENDITURE ELIGIBLE FOR DEPRECIATION @25%. WE PERUSED THE ASSESSMENT ORDER AND FOUND TH AT LD. ASSESSING OFFICER HAS ELABORATELY DISCUSSED ON THE AGREEMENT AND TREATED THE SAID PAYMENT IN THE NATURE OF INTANGIB LE ASSETS AND ALLOWED DEPRECIATION. THE LD. COMMISSIONER OF INCO ME TAX (APPEALS) ITA NO. 835/MDS/2016. :- 8 -: RELIED ON THE ORDER OF THE CO-ORDINATE BENCH OF TH IS TRIBUNAL IN ASSESSEES OWN CASE AND ALLOWED THE APPEAL. THE ON LY CONTENTION OF THE DEPARTMENT BEFORE THE TRIBUNAL THAT THE REVENU E HAS NOT ACCEPTED THE ORDER OF THE TRIBUNAL AND AN APPEAL H AS ALREADY BEEN FILED IN HONBLE HIGH COURT OF MADRAS AND THE SAME IS PENDING. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT MERE PEN DENCY OF APPEAL BEFORE HONBLE HIGH COURT CANNOT BE A REASON TO TAK E A DIFFERENT VIEW. SO, CONSIDERING THE DECISION OF CO-ORDINATE BENCH O F THE TRIBUNAL IN ASSESSEE OWN CASE IN ITA NO.1437, 1438 & 1439/MDS/2 012, ASSESSMENT YEARS 2003-04, 2005-06 & 2006-07 OBSERVE D AT PARA 4 AT PAGE 2 OF HIS ORDER AS UNDER:- 4. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. WE FIND THAT A SIMILAR ISSUE HAD COME UP BEFORE THIS TRIBUNAL IN REVENUES APPEAL FOR ASSESSMENT YE ARS 1999- 2000 TO 2002-03 AS ALSO IN ASSESSMENT YEAR 2004-05. IN ITS ORDER DATED 17 TH JUNE, 2011FOR ASSESSMENT YEAR 2004-05 IN I.T.A. NO. 951/MDS/2009, IT WAS HELD BY CO-ORDINATE BENCH OF THIS TRIBUNAL AS UNDER:- 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. WE FIND THAT THE SAME ISSUE REGARDING ROYALTY PAYMENT MADE TO M/S COCL WAS CONSIDERED BY THIS TRI BUNAL IN THE ORDERS REFERRED SUPRA. IT WAS HELD BY THIS TRIB UNAL AT PARA 2.17 OF ITS ORDER DATED 13TH NOVEMBER, 2009, AS UND ER:- 2.17 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, W HEN THE ROYALTY PAYMENTS SHALL BE COMPUTED AT A PARTICU LAR PERCENTAGE OF SALES PRICED, AND IF THERE WAS NO SAL ES, NO ROYALTY WOULD BE PAYABLE. MERELY BECAUSE GOODS WERE PRODUCED IN INDIA BY THE ASSESSEE ACQUIRING THE TEC HNICAL PROCESS FROM THE FOREIGN COLLABORATOR, IT CANNOT BE SAID THAT THE ROYALTY PAYMENT IS REFERABLE TO THE PRODUC TION ITA NO. 835/MDS/2016. :- 9 -: HOUSE / MANUFACTURING OF THE PRODUCTS. THE TECHNICA L KNOW-HOW FOR THE MANUFACTURING PROCESS WAS ACQUIRED BY THE ASSESSEE AGAINST A LUMP SUM PAYMENT OF ROYALTY AND SUBSEQUENT TO THAT, IF THERE IS NO SALE OF THE PROD UCT MANUFACTURED BY THE ASSESSEE, THEN THERE WOULD BE N O ROYALTY PAYABLE. THUS, THE RUNNING ROYALTY PAYABLE HAS NO NEXUS OR DIRECT CONNECTION WITH THE MANUFACTURE OF THE PRODUCT. THE LIABILITY TO PAY THE ROYALTY ARISES ON LY WHEN THERE IS A SALE. THEREFORE, WE ARE OF THE VIEW THA T THE RUNNING ROYALTY CANNOT BE SAID TO BE A CAPITAL EXPENDITURE. WE DO NOT FIND ANY RATIONALE IN BIFURC ATION OF THE RUNNING ROYALTY AND TREATING ONE PART AS CAPITA L AND THE OTHER PART AS REVENUE BY THE LEARNED COMMISSION ER OF INCOME TAX (APPEALS) WITHOUT ANY BASIS. THE DECISIO N RELIED UPON BY THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) IS ON THE FACTS THAT THE ASSESSEE COULD C ONTINUE TO USE THE TECHNOLOGY EVEN AFTER THE EXPIRY OF THE PERIOD OF PAYMENT OF ROYALTY. THEREFORE, WHEN THE LUMP SUM ROYALTY WAS SEPARATELY AGREED AND PAID, THEN THE RU NNING ROYALTY, IN THE FACTS AND CIRCUMSTANCES, WOULD ONLY BE A REVENUE EXPENDITURE PAID FOR THE USE OF THE LICENCE , TRADE MARK AND TECHNICAL INFORMATION FOR A PARTICULAR PER IOD. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 8. RESPECTFULLY FOLLOWING THE ORDER OF THIS TRIBUNA L FOR THE EARLIER ASSESSMENT YEARS, CLAIM OF THE ASSESSEE HAS TO BE ALLOWED FOR THE IMPUGNED ASSESSMENT YEAR AS WELL. H ENCE, APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2004-05 STANDS ALLOWED, WHEREAS, THE RELATED GROUND OF THE REVENUE STANDS DISMISSED. 5. THUS, THIS TRIBUNAL HAD FOLLOWED ITS OWN ORDER F OR EARLIER ASSESSMENT YEARS ON THE SAME ISSUE. WE ARE, THEREFO RE, OF THE OPINION THAT CIT(APPEALS) WAS WELL JUSTIFIED IN TRE ATING THE ROYALTY PAYMENTS MADE TO M/S CHEVRON ORONITE COMPANY LLC US A AS NOTHING BUT REVENUE EXPENDITURE, NOT RESULTING IN A NY ACQUISITION OF INTANGIBLE ASSETS. ITA NO. 835/MDS/2016. :- 10 -: WE, RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DE CISION, UPHELD THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) AND D ISMISS THE GROUND OF THE REVENUE. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.835/MDS/2016 IS DISMISSED. ORDER PRONOUNCED ON TUESDAY, THE 14TH DAY OF JU NE, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' ) (G. PAVAN KUMAR) / JUDICIAL MEMBER / CHENNAI 1 / DATED:14.06.2016 KV 2 ) +#-34 54&- / COPY TO: 1 . '( / APPELLANT 3. ! 6- () / CIT(A) 5. 4 9: +#-# / DR 2. +,'( / RESPONDENT 4. ! 6- / CIT 6. :;% < / GF