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Before: Shri V. Durga Rao & Shri Manjunatha, G.
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi, dated 11.01.2023 relevant to the assessment year 2013-14.
The appeal filed by the Revenue is delayed by 34 days in filing the appeal, for which, the Revenue has filed an affidavit for condonation of the delay, to which; the ld. Counsel for the assessee has not raised any serious objection. Consequently, since the Revenue was prevented by sufficient cause, the delay in filing of the appeal stands condoned and the appeal is admitted for adjudication.
Brief facts of the case are that the assessee filed its return of income for the assessment year 2013-14 on 29.11.2013 admitting an income of ₹.35,83,71,010/- and subsequently filed its revised return of income on 04.08.2014 admitting an income of ₹.27,75,71,595/-. The return was taken up for scrutiny under CASS and notice under section 143(2) of the Income Tax Act, 1961 [“Act” in short] was issued on 02.09.2014 and was served on the assessee on 15.09.2014. After considering the details furnished by the assessee, the Assessing Officer has completed the assessment under section 143(3) of the Act dated 29.03.2016 assessing total income of the assessee at ₹.33,96,53,623/- after making various additions/disallowances. On appeal, while deleting the additions made towards disallowance of royalty payments, the disallowance of depreciation claimed on the vehicles and disallowance made under section 14A r.w. Rule 8D, the ld. CIT(A) confirmed the addition made towards disallowance of non-deposit of employees contribution towards ESI.
Aggrieved, the Revenue is in appeal against deletion of addition made towards disallowance of royalty payments. The ld. DR has submitted that the royalty payments made by the assessee was capital in nature and hence not allowable as revenue expenditure.
On the other hand, the ld. Counsel for the assessee has submitted that the issue is squarely covered in favour of the assessee by the decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2012-13 and prayed that the same may be followed and supported the order passed by the ld. CIT(A).
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case law relied on by the ld. Counsel for the assessee. We have perused the assessment order as well as appellate order. In the assessment order, the Assessing Officer has observed that the expenditure towards payment of royalty is capital in nature and hence not allowable as revenue expenditure. However, by following various decision of the Tribunal in assessee’s own case for earlier assessment years, the ld. CIT(A) directed the Assessing Officer to delete the addition made on account of royalty payment. We have perused the case law relied on by the ld. Counsel for the assessee in for the assessment year 2012-13 vide order dated 04.04.2022 in assessee’s own case, wherein, the Tribunal has observed and held as under: 4.2 We find that similar issue stood covered in assessee’s favor by the decision of this Tribunal in assessee’s own case for AYs 2011-12 & 2014-15 in revenue’s appeal & ITA No.3536/Chny/2018 order dated 21-02-2022 wherein it was held as under: - During appellate proceedings, the assessee submitted that as per the agreement, ISS A/S Denmark agreed to grant the right to the assessee to use ‘ISS’ name and ISS proprietary trademark etc. The payment of royalty was based on percentage of net annual sales turnover and it was payable annually. However, the licensor shall continue to have the ownership of the trademark, trade-names, patents etc. The assessee had only a limited right to use the same in India. Upon termination of the royalty agreement, all rights & benefits granted under the license shall lapse and assessee was to return all manuals, reports etc. without making any copies. Similarly, as per the management service agreement, ISS A/S Denmark provided various support services in the field of operation management, human resource management, support towards corporate finance, legal affairs etc. which were to be remunerated on Annual basis as fixed percentage of net sales turnover. Upon termination of the managerial service agreement, all rights& benefits shall lapse. Therefore, the payments were merely for right to use and not towards acquisition of any property, rights or otherwise. The royalty was not a lump sum payment to purchase or acquire any IPR, technical know-how, license etc. Therefore, the expenditure could not be regarded as capital expenditure by any stretch of imagination. The Ld. CIT(A), upon perusal of factual matrix, concurred with assessee’s submissions and observed that the payment was as license fees only and not price for acquisition of any capital assets. The ratio of decision of Hon’ble Apex Court in Alembic Chemicals Works Co. Ltd. (177 ITR 377) was noted wherein similar expenditure were held to be allowable deduction. Similar was the decision of Hon’ble Delhi High Court in Jubilant Foodwork Pvt. Ltd. (52 Taxmann.com 215) wherein it was held that the franchise fees paid annually at fixed percentage of sales turnover for using trademark would be revenue expenditure. Similar was the decision in Hero Honda Motors Ltd. (372 ITR 481) wherein it was held that ownership and intellectual property rights in the know-how or technical information were never transferred or became an asset of the assessee. Therefore, the payment would be revenue in nature. This case law has distinguished the case law of Southern Switchgear V/s CIT (supra) as relied upon by Ld. AO. The Ld. CIT(A) also relied on the decision of Hon’ble High Court of Madras in the case of CIT V/s Hitech Arai Ltd. (368 ITR 577) wherein similar expenditure was held to be revenue expenditure. Similar was the ratio of decision in CIT V/s Panasonic Carbon India Co. Ltd. (TCA Nos.552 of 2010 &ors. Dated 12.07.2010). On the basis of all these decisions, it was held by Ld. CIT(A) that there was no transfer of any rights or assets. The assessee merely uses the benefits / licenses / services of ISS A/S Denmark. The termination clause provides for return of such benefits or licenses or services. The royalty as well as management service fees was paid in proportion to sales turnover. Therefore, the disallowance as made by Ld. AO was to be deleted. Aggrieved, the revenue is in further appeal before us.
After due consideration of factual matrix as enumerated in preceding paragraphs, the undisputed position that emerges is that the assessee is using the trade name as well as management services under contractual terms. The payment was to be made on annual basis and the same was based on fixed percentage of net sales turnover. Upon termination of the agreement, the benefits / licenses / services were to lapse and the assessee was to return the manuals, reports etc. No new asset was acquired by the assessee. The assessee merely acted as user. Therefore, it could not be said that the rights acquired by the assessee were enduring in nature. The Ld. CIT(A), in our considered opinion, has clinched the issue in the correct perspective and therefore, the same would not require any interference on our part. The grounds raised by the revenue, in this regard, stand dismissed. Facts being pari-materia the same in this year, we would hold that the royalty payment was to be treated as revenue expenditure. The grounds thus raised stands allowed. 6.1 Since facts are identical and the ld. CIT(A) has rightly followed the decision of the Tribunal in assessee’s own case, we find no infirmity in the order passed by the ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue is dismissed.
In the result, the appeal filed by the Revenue is dismissed. . Order pronounced on 31st October, 2023 at Chennai.