KORTEK ELECTRONICS (INDIA) LIMITED,GAUTAM BUDH NAGAR V. ACIT CIRCLE-5(1), NEW DELHI

ITA 8038/DEL/2019

AI Insights

KORTEK ELECTRONICS (INDIA) LIMITED appealed against the order of the CIT(Appeal) which sustained various disallowances made by the Assessing Officer (AO) during the scrutiny of their income tax return for the assessment year 2011-12. The main issues revolved around disallowances related to repairs and maintenance, business promotion expenses, and the treatment of royalty payments. The Tribunal examined the nature of these expenses and the legal precedents cited, particularly focusing on whether the royalty payments should be treated as capital or revenue expenditure. The Tribunal found that the facts of the case differed from those in the cited precedent, Southern Switchgear Ltd., and thus ruled in favor of treating the royalty payments as revenue expenditure.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 112085 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Other Referred Cases: Southern Switchgear Ltd. 232 ITR 359
• Laws Referred To: Income Tax Act, I.T. Rules
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: OM PARKASH
• Assessee Lawyers: SALIL KAPOOR; ANIL
• Keywords: Capital asset; Revenue expenditure; Depreciation; Rule of consistency; Capital expenditure; Principle of natural justice; Rule 8D; Royalty expenses
• Section: 143(3); 13; 37; 14A; 20

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “C”, NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER, AND SHRI SUDHIR PAREEK, JUDICIAL MEMBER ITA NO. 8038/Del/2019 A.YR. : 2011-12 KORTEK ELECTRONICS (INDIA) LIMITED, 35-B, UDYOG VIHAR, INDUSTRIAL AREA, GREATER NOIDA, GAUTAM BUDH NAGAR, UTTAR PRADESH-201306 (PAN: AABCK5593N) VS. ACIT, CIRCLE 5(1), NEW DELHI ROOM NO. 317-B, C.R. BUILDING, I.P. ESTATE, NEW DELHI – 2 (APPELLANT) (RESPONDENT) Appellant by : Shri Salil Kapoor, Adv., Shri Anil Chachra, Adv., Ms. Ananya Kapoor, Adv. & Sh. Tarun Chanana, Adv. Respondent by : Shri Om Parkash, Sr. DR Date of hearing : 26.03.2025 Date of pronouncement : 16.04.2025 ORDER PER SHAMIM YAHYA, AM : The Assessee has filed the instant Appeal against the Order of the Ld. CIT(Appeal)—5, New Delhi dated 29.07.2019, relating to assessment year 2011-12. 2. Brief facts of the case are that the assessee is engaged in the business of manufacturing of electronic goods and components. The assessee filed its return of income declaring total income of Rs. 8,44,47,290/- and subsequently taken 2 | P a g e up for manually selected scrutiny. Thereafter, the AO assessed the income of the assessee at Rs. 9,28,93,010/- by making addition of Rs. 9,93,783/- on account of disallowance out of repairs and maintenance @20%, addition of Rs. 12,92,069/- on account of disallowance u/s. 14A of the Act r.w. Rule 8D of I.T. Rules, addition of Rs. 4,02,152/- on account of business promotion expenses @ 20% and addition of Rs. 57,57,715/- on account of 25% disallowance of royalty, treated as capital in nature and depreciation allowed on the capitalized value @25%. In appeal, Ld. CIT(A) partly allowed the appeal of the assessee. Aggrieved with the action of the Ld. CIT(A), assessee is in appeal before us on the following grounds of appeal:- 1. That the assessment order passed u/s. 143(3) of the Act dated 24.3.2014 by AO and also additions / disallowance made therein are illegal, bad in law, without jurisdiction and void ab initio. The Ld. CIT(A) has grossly erred in sustaining the disallowances / additions made. 2. That, on the facts and circumstances of the case, the CIT(A) has erred in law and on facts in sustaining adhoc disallowance made by the AO on account of expenditure incurred for repairs and maintenances of plant and machinery. The disallowance amounting to Rs. 4,96,891/- has been sustained without appreciating that the same was incurred by the assessee wholly for its business. 3. That, on the facts and circumstances of the case, the CIT(A) has erred in law and on facts in sustaining the adhoc disallowance made by the AO on account of expenditure incurred for business promotion. The disallowance amounting to Rs. 4,02,152/- has been sustained without appreciating that the same was incurred by the assessee wholly for its business. 4. That, on the facts and circumstances of the case, the CIT(A) has erred in law and on facts in upholding the disallowance made by the AO by 3 | P a g e treating 25% of the royalty payment as capital expenditure. The said disallowance is illegal, bad in law and contrary to the settled position of law. 5. That, on the facts and circumstances of the case, the CIT(A) as well as the AO have failed to appreciate that the total royalty payment is in the nature of revenue expenditure and the same has been allowed in all the earlier years and there is no change in facts during the year under consideration. 6. That, on the facts and circumstances of the case, the CIT(A) as well as the AO have erred in law and on facts in not appreciating that the decision in Southern Switchgear Ltd. 232 ITR 359 was rendered on distinguishable facts and therefore, the ratio of the same is not applicable in the facts of the present case. 7. That, on the facts and circumstances of the case, the assessment order as well as the CIT(A) order have been passed without affording proper opportunity of hearing to the assessee and therefore the assessment order and CIT(A) order so passed are in violation of the principles of natural justice. 8. That, without prejudice, the AO was prevented by sufficient cause for not furnishing all the documents before the lower authorities. 9. That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do no justify the addition made. 3. As regards addition of Rs. 4,96,891/- on account of repairs and maintenance is concerned. Ld. AR for the assessee submitted that Ld. CIT(A) has erred in sustaining adhoc disallowance made by the AO on account of expenditure incurred for repairs and maintenances of plant and machinery. He further submitted that the disallowance amounting to Rs. 4,96,891/- has been sustained without appreciating that the same was incurred by the assessee 4 | P a g e wholly for its business. Per contra, Ld. DR has relied upon the order of the Ld. CIT(A). 4. We have heard both the parties and perused the records. We find that this addition has been made by the AO, disallowing 20% out of repairs and maintenance on plant and machinery due to the reason that the assessee failed to produce the copy of high value bills and other details as desired. However, it was contended before the Ld. CIT(A) that the expenditure on repairs and maintenance has been incurred for the purpose of business and ledger account etc. has been provided to substantiate the same. The ld. CIT(A) noted that in the remand report, it has been mentioned by the AO that certain payments relates to miscellaneous expenses and for the purchase of camera, lens, LCD etc and some of the payments have been incurred in cash and also various expenses have not been incurred wholly for the current repairs within the meaning of section 31 of the Act. Ld. CIT(A), on going through the details provided by the assessee, observed that there are various expenditure, incurred in cash or paid on self made vouchers and it cannot be justified that these expenses have been wholly incurred for the purpose of repair and maintenance, because, the vouchers for these expenses are not available with the assessee and therefore, assessee could not establish the allowability of full expenditure as claimed. In view of the aforesaid factual matrix, the Ld. CIT(A) held that it cannot be established that the whole expenditure has been incurred towards repair and maintenance, however looking to the various details provided and as verified by AO, he deem it fit and proper to restrict the disallowance @10% of the total claim made. Accordingly, Ld. CIT(A) restricted the disallowance to Rs. 4,96,891/- and the balance amount was allowed and directed to be deleted. In our considered view, on the facts and circumstances of the case, the Ld. CIT(A) has rightly restricted the addition @10%, which does not need any interference, on our part, hence, we uphold the decision of the Ld. CIT(A) on this issue and reject the ground no. 2 raised by the assessee. 5 | P a g e 5. As regards addition of Rs. 4,02,152/- on account of business promotion is concerned. Ld. AR for the assessee submitted that CIT(A) has erred in law and on facts in sustaining the adhoc disallowance made by the AO on account of expenditure incurred for business promotion. It was further submitted that the disallowance amounting to Rs. 4,02,152/- has been sustained without appreciating that the same was incurred by the assessee wholly for its business. Per contra, Ld. DR relied upon the order of the Ld. CIT(A). 6. Upon careful consideration, we find that this addition has been made by the AO, disallowing 20% out of business promotion expenses due to the reason that the assessee failed to produce the copy of bills and other details as desired, most of the expenses are enduring in nature and personal element cannot be ruled out. Before the ld. CIT(A), it was contended by the assessee that the expenditure on business promotion expenses has been incurred for the purpose of business and ledger account etc has been provided to substantiate the same. The AO in the remand report has mentioned that various payments have been made in cash and relates to conveyance, food and other things and could not be establish towards promotion of business and during the year the increase in sales turnover was around 18.75% whereas expenses towards business promotion has shot upward by 67.23% and not justified fully. Ld. CIT(A) on going through the details provided by the assessee observed that there are various expenditures, incurred in cash or paid on self made vouchers and it cannot be justified that these expenses have been wholly incurred for the purpose of business promotion or how the business has been increased or gained. Vouchers for these expenses are not available with the assessee and therefore assessee could not establish the allowability of full expenditure as claimed. Further, reason for this disproportionate increase has also not been explained with cogent reasoning. Therefore, Ld. CIT(A) noted that no vouchers are produced by the assessee, hence, it cannot be established that the whole expenditure has been incurred towards business promotion and no personal 6 | P a g e element can also be ruled and restricted the disallowance @10% amounting to Rs. 2,01,076/- and the balance amount was allowed and directed to be deleted. In our considered view, on the facts and circumstances of the case, Ld. CIT(A) has rightly restricted the addition @10%, which does not need any interference, on our part, hence, we uphold the decision of the Ld. CIT(A) on this issue and reject the ground no. 3 raised by the assessee. 7. As regards ground no. 4 to 6 are concerned, which are relating to disallowance of Rs. 57,57,175/-, out of royalty expenses, treating 25% of the same as capital expenditure and depreciation has been allowed on the same, is concerned, Ld. CIT(A) noted that during the year under consideration the assessee has claimed royalty expenses of Rs.3,07,07,813/- as revenue expenditure, paid to three parties towards contract for providing Karaoke Song Royalty. Before him, it was contended by the assessee that during assessment proceedings this royalty payment was revenue expenditure looking to the contract and the services and the same is to be allowed in full. However the AO relying upon the decision of Southern Switch Gear Ltd. 232 ITR 359 (SC) treated 25% of this royalty as capital in nature, having long term benefits which works out to Rs. 76,76,953/-. The depreciation on such capitalized value has been allowed being intangible assets @25% and therefore depreciation of Rs. 19,19,238/- was allowed and the total disallowance has been made for Rs. 57,57,715/-. Further, it was contended before the Ld. CIT(A) earlier this royalty payment has been made to the following persons:- 1. Koninklijke Philips Electronics N.V. - Rs. 1,72,47,376/- 2. Super Cassettes Industries Ltd. - Rs. 94,74,997/- 3. Saregama India Ltd. -Rs. 22,08,960/- 4. Service tax on the above -Rs. 17,76,480/- TOTAL =Rs. 3,07,07,813/- 7 | P a g e 7.1 It was submitted that the royalty paid to KPE is based on the number or units of DVD Players sold. KPE owns certain patents relating to parts of DVD system. Assessee purchases these patented parts from various vendors and uses them in manufacture of DVD players. The royalty paid is for the use of these patented parts of DVD players and does not provide any know how or any information. The royalty is paid on the basis of units sold and no asset has been acquired. The assessee only uses the patented part in the manufacturing of DVD players. Similarly, the royalty as paid to Super Cassettes Industries Ltd. and Saregama India Ltd. for the songs which they license to the assessee. The license is non exclusive non transferable and of limited scope. The songs form a part of the Karaoke Microphone Device which is sold by the assessee. The assessee can use the songs only till such time as the contract exists. The assessee also stated that the judgment relied upon by AO i.e. Southern Switch Gear Ltd. is not applicable and distinguishable. Ld. CIT(A) was not convinced with contention of the assessee and he upheld the order of the AO on this issue by holding that assessee has got intangible assets in the form of such rights, hence, the AO has treated 25% of such royalty payment as intangible rights, in the nature of capital assets. Before us, Ld. AR has filed the following written submissions in support of his contention on account of disallowance for royalty expenses – treating it as capital expenses. “The assessee company is engaged in the business of manufacturing of electronics goods and components. The assessee company paid royalty of Rs. 3,07,07,813/- to the following persons in A.Y.2011-12. S.No. Party Name Amount (Rs) 1. Koninklijke Philips Electronics N.V. 1,72,47,376 2. Super Cassettes Industries Ltd. 94,74.997 3. Saregama India Ltd. 22,08,960 4. Service Tax on the above 17,76,480 Total 3,07,07,813 8 | P a g e 2. The AO relying on the Hon'ble Supreme Court ruling in the case of Southern Switch Gear Ltd. 232 ITR 359 disallowed @ 25% as capital in nature. As per the AO the nature of royalty for the song to be used in Karaoke cannot be only for a year. The assessee is deriving an enduring benefit for this expense by using the song for manufacturing of karaoke mike year after year. The assessee company was one of the pioneers of this concept of karaoke with Indian song in the domestic market. Thus, it is evident that the assessee had a monopoly and brand name through the usage of this karaoke mike set up. Hence, 25% of the Royalty paid is capitalized by AO. Outcome from CIT(A) 3. All agreements have been produced before the CIT(A) and is mentioned in the page no 21 of PB provided to the Bench. CIT(A) has upheld the order of AO 4. Facts of Southern Switchgear Ltd relied by AO [1984] 148 ITR 272 [Mad] upheld by SC - Attached in the page no 60-64 of Case law compilation Para 6 \" On the perusal of the above clauses indicates that the technical knowledge the assessee-company obtained through this agreement from the foreign company secured to the assessee an enduring advantage and benefit in that, the same was available to the assessee for its manufacturing and industries processes even after the termination of the agreement. Though the duration of the agreement is five years, the assessee even after the expiry of the period, could use the methods of production, procedure, experiments, improvements which had been made available to them in pursuance of the agreement. Thus, the assessee had acquired a knowledge of enduring nature. 5. Main Agreement Terms on termination with the parties 1. Koninklike Philips Electronics N.V- Para 6.6 of the Agreement [Page 134 of PB] states that \"Upon the termination of this agreement by Philips for any reason pursuant to clause 6.2 through 6.5, Licensee shall immediately cease the manufacture, sale or other disposal of DVD-Video Players incorporating the DTS technology in which any one or more of the Licensed Patents 9 | P a g e are used. Further, upon such termination, any and all amounts outstanding hereunder shall become immediately due and payable 2. Saregama India Ltd-Para 12 [Page no 95 of PB]- Forthwith cease to re-record the compositions further and/or to manufacture, distribute and/or sell any of the products hereunder and shall return the Licensor any material of the Licensor that may be in the possession of the Licensee and immediately destroy the Master re- recording and any copy/ derivative thereof of the compositions given by the Licensor under the License. 3. Super cassettes Industries Ltd. Para 10.2.2 [Page 107 of PB]- the licensee shall immediately discontinue distribution of the Licensee Devices containing Licensor contents. It is hereby clarified that the termination of this agreement shall not affect those licensee devices that have already been distributed by the Licensee or for which the Licensee has reserved and confirmed orders prior to the date of termination. 6. The facts of the matter are different than Southern Switchgear Ltd, wherein even after the termination of agreement the benefit in the form of manufacturing was available to the assessee. However, in the assessee case after the termination of agreement there is no benefit is available for recording. 7. Hence, the royalty paid is revenue in nature and allowable u/s 37 of the Income Tax Act. 8. Further the facts of the assessee are different than Southern Switchgear Ltd are given at page no 85-87 of PB Assessessment proceedings for earlier and subsequent years 9. It is submitted that the acceptance of the royalty payments as Revenue Expenditure in earlier and subsequent years [A.Y.2010-11 and AY 2012-13] [The Copy of the assessment orders provided to the Bench] indicates that the Revenue has accepted u/s 143(3) of the Act the nature of the royalty payments as revenue in nature. 10. Although the res-judicata does not apply to the income tax proceedings until there is change in facts and circumstances, stand cannot be taken to disallow the expenditure as allowed in earlier proceedings as held in Radhasoami Satsang v CIT [1992] 193 ITR 321 [SCI 10 | P a g e \"We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. \"Emphasis Supplied Further reliance is placed on the Delhi High Court ruling in the case of CIT v Neo Poly Pack (P) Ltd. 245 ITR 492 [Delhi wherein it was held that: Having heard Mrs. Prem Lata Bansal, the learned counsel for the revenue and Mr. Salil Aggarwal, the learned counsel for the respondent, we are of the view that no fault can be found with the order of the Tribunal declining to make reference on the proposed question. It is true that each assessment vear being independent of each other, the doctrine of res judicata does not strictly apply to the income- tax proceedings, but where an issue has been considered and decided consistently in a number of earlier assessment vears in a particular manner, for the sake of consistency, the same view Should continue to prevail in the subsequent vears unless there is some material change in facts. In the present case, the learned counsel for the revenue has not been able to point out even a single distinguishing feature in respect of the assessment year in question which could have prompted the Assessing Officer to take a view different from the earlier assessment years in which the same income was brought to tax as income from business. [Emphasis Supplied] As per the above judicial prouncements it is stated that the facts are remain same in the earlier assessment proceedings and on that basis following the rule of consistency the royalty is to be allowed as revenue in nature. 11. Reliance on the Case Law Compilation | provided to the bench] 1. CIT v Hero Honda Motors Ltd | 2015] 372 ITR 481 (Delhi)- [Page 1-10 of CLCI-Para 12- This was inspite of the fact that the 11 | P a g e original license was for indefinite period and the supplementary agreement did not indicate a terminus quo. It was however, observed that the agreement could be terminated and upon such expiration or termination, the Indian assessee would have no right to exploit or use the know-how. There was no vesting of know-how or goodwill in the Indian assessee. 2. Further reliance is placed on Delhi High Court in the case of CIT v EKL Appliances Ltd. 2012|20 taxmann.com 509 (Delhi) [Page no 18-20 of CLCI- Para 8 Relying on the CIT v Lumax Industries Ltd. [2008] 173 Taxmann 290 (Delhi) it was held that the payment of license fee on year-to-year basis for acquisition of technical knowledge would not amount to capital expenditure it is revenue expenditure. [Emphasis Supplied] Further reliance is placed on the ruling of Delhi High Court in the case of CIT v Modi Revlon (P) Ltd.[20121 26 Taxmann.com 133 (Delhi) wherein, it was held that Para 21 [Relevant Extract] -Moreover, the arrangement can be terminated. Clause 12.1 of the agreement stipulates that upon expiration or termination of this agreement, the licensee shall have no right to exploit or in any way to use the know-how and shall forthwith discontinue all use of the know-how and shall not thereafter use the know-how. Furthermore, there is nothing in the agreement suggestive of any vesting of the know-how, or part of it, or the goodwill in the brand, in the licensee/ assessee. In these circumstances, this court is of the opinion that the revenue's arguments about the royalty amount being really in the nature of capital expenditure, is meritless. The Tribunal's findings on this point are therefore, upheld. [Emphasis Supplied] 12. Based on the above facts and judicial pronouncements, it is stated that the matter of royalty payments is different to the Southern Switchgear case and is allowable u/s 37of the Act. 13. Hence, the above disallowances need to be deleted.” 8. Upon careful consideration, we find that AO by relying upon the decision of the Hon'ble Supreme Court in the case of Southern Switch Gear Ltd. 232 ITR 359 disallowed @ 25% as capital in nature. As per the AO the nature of royalty 12 | P a g e for the song to be used in Karaoke cannot be only for a year. The assessee is deriving an enduring benefit for this expense by using the song for manufacturing of karaoke mike year after year. The assessee company was one of the pioneers of this concept of karaoke with Indian song in the domestic market. Thus, it is evident that the assessee had a monopoly and brand name through the usage of this karaoke mike set up. Hence, 25% of the Royalty paid was capitalized by AO. In appeal ld. CIT(A) has upheld the order of AO. We find that facts of the instant matter are different than Southern Switchgear Ltd., wherein even after the termination of agreement the benefit in the form of manufacturing was available to the assessee. However, in the assessee’s case after termination of agreement there is no benefit is available for recording. Hence, the royalty paid cannot be said to be capital in nature and same deserve to be treated as revenue in nature and allowable u/s. 37 of the Act. It is also noted that the acceptance of the royalty payments as revenue expenditure in earlier subsequent years i.e. AY 2010-11 and AY 2012-13 indicates that the Revenue has accepted u/s. 143(3) of the Act the nature of royalty payments as revenue in nature and it is well settled law that res-judicata does not apply to the income tax proceedings until there is change in the facts and circumstances and therefore, stand cannot be taken to disallow the expenditure as allowed in earlier proceedings. To fortify our aforesaid view, we draw support from the decision of the Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances ltd. (2012) 20 taxmann.com 509 (Delhi) wherein, the Hon’ble Court by relying on the decision in the case of CIT vs. Lumax Industries Ltd. [2008] 173 Taxman 290 (Delhi) held that the payment of licenses fee on year to year basis for acquisition of technical knowledge would not amount to capital expenditure it is revenue expenditure. 8.1 In the background of the aforesaid discussions and respectfully following the precedents, we hold the royalty payment in the instant case deserves to be held as revenue in nature and therefore, the royalty payment in dispute is 13 | P a g e allowable u/s. 37 of the Act and addition made on this account deserve to be deleted. We hold and direct accordingly. Resultantly, we allow the ground nos. 4 to 6 raised by the assesee. 9. In the result, the Assessee’s appeal is partly allowed. Order pronounced on 16/04/2025. Sd/- (SUDHIR PAREEK) Sd/- (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER SRBHATNAGAR Copy forwarded to:- 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT Assistant Registrar "