COMMISSIONER OF INCOME TAX VISHAKAPATNAM V. M/S ARTOS BREWERIES LTD RAMACHANDRAPURAM

RC/31/2000

AI Insights

The case revolves around the classification of royalty payments made by M/s. Artos Breweries Ltd. to M/s. Mohan Meakins Breweries under a Technical Assistance Agreement. Initially, for the assessment years 1980-81 to 1982-83, the Assessing Officer classified these payments as revenue expenditure, a view accepted by the Revenue and not revised by the Commissioner of Income Tax. However, for subsequent years, the Assessing Officer classified the payments as capital expenditure, leading to an appeal by the assessee. The Commissioner (Appeals) and the Tribunal reversed this classification, aligning with the precedent set in PRAGA TOOLS LTD. v COMMISSIONER OF INCOME TAX. The Revenue's appeal to the High Court was dismissed, affirming the Tribunal's decision.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 719183 (HC-VISAKHAPATNAM)
• Appeal Type: Others
• Pronouncement Date: 03-01-2012
• Assessment Year: misc
• Other Referred Cases: PRAGA TOOLS LTD. v COMMISSIONER OF INCOME TAX, ASSAM BENGAL CEMENT CO. LTD v. CIT, BENARSIDAS JAGANNATH, In re, EMPIRE JUTE MILLS v. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Capital expenditure; Revenue expenditure; Royalty Payment; Technical Assistance Agreement
• Section: 263; 37; 256(2)

Judgement Text

"HONOURABLE THE CHIEF JUSTICE SHRI MADAN B.LOKUR AND HONOURABLE SHRI JUSTICE SANJAY KUMAR INCOME TAX TRIBUNAL APPEAL Nos. 38 OF 1999, 46 OF 2000 & R.C.NO.31 OF 2000 Dt: 03-01-2012. ITTA No.38 of 1999 Between: The Commissioner of Income-Tax, Visakhapatnam .. APPELLANT AND M/s. Artos Breweries Ltd., Ramachandrapuram, East Godavari District. .. RESPONDENT HONOURABLE THE CHIEF JUSTICE SHRI MADAN B.LOKUR AND HONOURABLE SHRI JUSTICE SANJAY KUMAR INCOME TAX TRIBUNAL APPEAL Nos.38 OF 1999, 46 OF 2000 & R.C.NO.31 OF 2000 COMMON JUDGMENT : (PER HON’BLE THE CHIEF JUSTICE SHRI Madan B. Lokur) In these two appeals as well as referred case the following substantial question of law has arisen for consideration: “Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the royalty paid by the assessee-company to M/s.Mohan Meakins Breweries was in the nature of revenue expenditure?” 2. The assessee was in the business of manufacture and sale of beer. The assessee used to manufacture beer under the name and style of “Golden Eagle”, which is the popular brand name of M/s. Mohan Meakins Breweries Limited., Solan, U.P. (for short ‘MMB’). 3. The assessee entered into a Technical Assistance Agreement dated 7.2.1979 with MMB. Some of the clauses of the Agreement are as follows: “i) MMB (Mohan Meakins Breweries) grants, for the term of the agreement, an exclusive licence to Artos to use the know-how supplied by MMB for the manufacture of the products at the plant and for this grant of licence Artos shall pay MMB a royalty calculated at the rate Rs.1/- (rupee one only) per case on all products produced at the plant. Case shall constitute 12 bottles of 650 ml each. ii) MMB grants licence to Artos to sell in India under MMB trade mark the products manufactured at the plant in accordance with the know-how provided. For this, Artos shall pay MMB royalty calculated at Rs.2/- per case of product sold by Artos under MMB trade mark. iii) In respect of any product9s) sold by Artos, MMB shall be entitled in addition to any trade or other discount permissible, to a discount equivalent to the amount of royalty which would have otherwise been payable as stated above. iv) Under this agreement royalty is payable on all articles manufactured by it. v) Artos shall note use or permit use of the know-how for any purposes other than for the manufacture of the products at the plant. vi) Artos shall treat as strictly confidential all know-how and information received directly or indirectly from MMB and shall not disclose the same or permit disclosure thereof except to Artos personnel on the condition that each such personnel shall be previously bound in writing to secrecy on condition no law stringent than those assumed by Artos hereunder. vii) Artos shall manufacture the products at the plant strictly according to know-how and instructions of MMB and the sample approved by them. viii) Artos shall bottle products only under labels and bottle design and qualities approved by MMB. Artos shall sell the products only at price(s) in this behalf fixed in consultation with MMB.” For use of the brand name of MMB and for the technical assistance rendered by MMB to the assessee for manufacturing beer, the assessee paid royalty to MMB. 4. For the assessment years 1980-81, 1981-82 and 1982-83 the Assessing Officer held that the royalty payments made by the assessee to MMB were in the nature of revenue expenditure and the amount was spent wholly and exclusively for business purposes so as to be eligible for a deduction under section 37 of the Income Tax Act, 1961 (for short ‘the Act’). 5. The view of the Assessing Officer was accepted by the Revenue and was not sought to be revised by the Commissioner of Income Tax under section 263 of the Act. 6. For the subsequent assessment years, viz., 1983-84 to 1988-89 the Assessing Officer came to the conclusion that the payments made by the assessee to MMB were in the nature of capital expenditure and therefore the assessee was not entitled to the benefit of Section 37 of the Act. 7. Feeling aggrieved, the assessee preferred an appeal before the Commissioner (Appeals) who was of the view that the Assessing Officer had erred in the view that he had taken. Relying on a Full Bench decision of this Court in PRAGA TOOLS LTD. v COMMISSIONER OF INCOME TAX[1] the Commissioner (Appeals) came to the conclusion that the expenditure incurred by the assessee on payment of royalty to MMB was in the nature of revenue expenditure. 8. The Revenue then preferred an appeal before the Income Tax Appellate Tribunal (for short ‘the Tribunal’) and that appeal was rejected by the Tribunal. 9. Under these circumstances, the Revenue has come up in an appeal before us in respect of two assessment years and a reference has been made under section 256(2) of the Act and in respect of another assessment year. 10. While disposing of the appeals in favour of the assessee, the Tribunal held [affirming the view of the Commissioner (Appeals)] that the case of the assessee is fully covered in its favour by the judgment of the Full Bench of this Court in PRAGA TOOLS LTD. 11. Having heard learned counsel for the parties, we are of the opinion that the Tribunal did not commit any error in arriving at the conclusion that it did. 12. In PRAGA TOOLS LTD. the question was more or less similar to the question raised in these cases and it also related to payment of royalty by the assessee, though to its foreign collaborator. This court referred to ASSAM BENGAL CEMENT CO. LTD v. CIT[2], wherein the principles laid down by the Full Bench of the Lahore High Court in BENARSIDAS JAGANNATH, In re[3] were affirmed. The following passage from the decision of Lahore High Court was approved by the Supreme Court: “If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence.” 13. This court held that the decision of the Supreme Court in ASSAM BENGAL CEMENT CO. LTD. is an authority for the proposition that expenditure would be properly attributable to capital if it is incurred for bringing into existence an asset or advantage for the enduring benefit of the business. However, if the expenditure is made for running the business or working it with a view to produce profits, it would be a revenue expenditure. 14. Somewhat more recently, the Supreme Court in EMPIRE JUTE MILLS v. CIT[4] held as follows: “There may be cases where expenditure, even if incurred for obtaining advantage, of enduring benefit, may, none-the-less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably white leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.” 15. In view of the law laid down on the subject by the Supreme Court, we have now to consider whether the payment of royalty made by the assessee to MMB is in the nature of an expenditure incurred for an enduring benefit or not. We find that in terms of the Technical Assistance Agreement, the assessee was entitled to use the know- how supplied by MMB for the manufacture of the products. The know-how and information received by the assessee directly or indirectly from MMB was to be kept strictly confidential. The assessee was entitled to use the trade mark “Golden Eagle” of MMB. The payment of royalty was, therefore, in the nature of expenditure incurred for carrying on business with available know-how rather than for accretion to the capital base or gain an advantage in the capital field of the assessee. 16. In view of the above, there can hardly be any doubt that the expenditure incurred is revenue in nature and not capital in nature. 17. We may also recall that for the assessment years 1980-81 to 1982-83 the Assessing Officer had himself come to the conclusion that the payment of royalty made by the assessee was in the nature of revenue expenditure and this view was not revised or sought to be revised by the Commissioner under section 263 of the Act. 18. Under the circumstances, the question of law is answered in the affirmative, in favour of the assessee and against the Revenue. 19. The appeals and reference stand disposed of accordingly. (MADAN B.LOKUR, CJ) Dt: 03-01-2012. (SANJAY KUMAR, J) LR COPY TO BE MARKED TNB [1] (1980) 123 ITR 773 [2] (1955) 27 ITR 34 [3] (1947) 15 ITR 185 [4] (1980) 124 ITR 1 "