Principal Commissioner of In vs. M/s. ISS SDB Security Servic

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TCA/232/2022HC Madras12 September 2022Bench: Hon`ble Mr Justice S. VAIDYANATHAN6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that there was no merit in the appeal filed by the revenue. Upon perusing the agreement produced by the revenue, specifically clauses 5.5 and 7.5, the Court found that upon termination of the agreement, all rights, benefits, grants, and licenses would lapse. The company was obligated to return all materials and refrain from using intellectual property, including trademarks. The Court concluded that no asset was created, nor was an enduring right established in favor of the respondent under the agreement. Therefore, the royalty payments were correctly treated as revenue expenditure. The appeal was dismissed. No issue was expressly left undecided.

What were the facts?

The assessee is M/s. ISS SDB Security Services Pvt Ltd., and the revenue is the Principal Commissioner of Income Tax, Corporate Circle-2(2), Chennai. The appeal concerns Assessment Year 2014-15. The assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT) challenging an order passed by the Commissioner of Income Tax (Appeals). The ITAT's order dated 21.02.2022, passed in I.T.A.No.3536/CHNY/2018, is the subject of the present Tax Case Appeal filed by the revenue under Section 260-A of the Income Tax Act, 1961. The High Court directed the appellant (revenue) to produce the agreement between the respondent company and its principal, which was subsequently produced.

What were the issues?

The Tribunal had to decide whether royalty payments made by the assessee should be treated as revenue expenditure or capital expenditure. The revenue raised four substantial questions of law: 1. Whether the ITAT erred in treating royalty payments as revenue expenditure, ignoring that the open-ended royalty and management services agreements conferred an enduring benefit and permanent advantage on the assessee. 2. Whether the ITAT was justified in not applying the Supreme Court decision in Southern Switch Gear Ltd. vs. CIT. 3. Whether the ITAT erred in not applying the Bangalore Tribunal's decision in Bosch Ltd. vs. ACIT, which held that amounts paid for acquiring the right to use a trademark are covered by Section 32(1)(ii) and cannot be allowed as revenue expenditure. 4. Whether the ITAT erred in not applying the Supreme Court's rationale in Jonas Woodhead & Sons Ltd. vs. CIT, where royalty paid for technical know-how, resulting in enduring benefit, was disallowed as capital expenditure. The revenue contended that the agreements conferred enduring benefits, making the payments capital in nature, and cited the aforementioned cases. The judgment does not record specific arguments from the assessee.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 32(1)(ii)

AI-generated summary — verify with the full judgment below

Tax Case Appeal No. 232 of 2009 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 12.09.2022 CORAM : THE HON'BLE MR. JUSTICE S.VAIDYANATHAN AND THE HON'BLE MR. JUSTICE C.SARAVANAN T.C.A.No.232 of 2022 Principal Commissioner of Income Tax, Corporate Circle- 2(2) Chennai

.. Appellant Versus

M/s.ISS SDB Security Services Pvt Ltd., Bascon Futura, 5th Floor, No.10/1, Venkatanarayana Road, T.Nagar, Chennai- 600 017. PAN:AAACT-3628-C. .. Respondent

Tax Case Appeal filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, 'B' Bench, Chennai dated 21.02.2022 passed in I.T.A.No.3536/CHNY/2018. For Appellant : Mr. R.Karthik Page 1/6 https://www.mhc.tn.gov.in/judis Tax Case Appeal No. 232 of 2009 JUDGMENT S.VAIDYANATHAN,J and C.SARAVANAN, J This Tax Case Appeal has been filed by the Assessee, calling in question the order dated 21.02.2022 passed by the Income Tax Appellate Tribunal, Madras 'B' Bench, in I.T.A.No.3536/CHNY/2018 relating to the Assessment Year 2014-15, 2. In this Appeal, the Appellant has raised the following substantial questions of law: "1.Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was erred in holding that the royalty payment was to be treated as revenue expenditure ignoring the aspect that the open ended Royalty agreement and the Management Services agreement had conferred an enduring benefit and a right of permanent advantage to the assessee company? 2. Whether on the facts and circumstances of the case, the Hon'ble Income Tax Tribunal was justified in law in not applying the decision of the Apex Court in the case of Southern Switch Gear Ltd Vs. Commissioner of Income Tax [1998] 232 ITR 359 (SC) confirming the Madras High Court decision in Commissioner of Income Tax Vs. Southern Switch Gear Ltd. [1984] 16 Taxman 79 (Mad.) which was squarely applicable to this case? 3.Whether on the facts and circumstances of the Page 2/6 https://www.mhc.tn.gov.in/judis Tax Case Appeal No. 232 of 2009 case, the Hon'ble Income Tax Appellate Tribunal was erred in not applying the decision of the Bangalore Tribunal in the case of Bosch Ltd Vs.ACIT [2016] 74 taxmann.com 161, wherein it was held that the amount paid by the assessee for acquisition of right to use trademark was covered by Section 32 (1)(ii) and thus the same could not be allowed as revenue expenditure, which is squarely applicable to the instant case? 4. Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was erred in not applying the rationale of the Apex Court in the case of Jonas Woodhead & Sons Ltd. Vs. CIT (1997) 91 Taxmann 1 (SC), wherein it was held that, in terms of agreement under which assessee obtained technical know-how from foreign company and royalty was paid based on turnover of product which resulted in providing enduring benefit to the assessee and accordingly the royalty paid was disallowed as capital expenditure, which is squarely applicable to the instant case?" 3. On the previous hearing, i.e. on 05.09.2022, we directed the learned counsel appearing for the Appellant to produce a copy of the agreement entered into between the Respondent Company and its Principal. In pursuance of the said direction, the learned counsel appearing for the Appellant produced the copy of the agreement, in which, in Clause 5.5 and 7.5 of the agreement, it is stated as follows: "5.5. Upon the termination of this Agreement all rights, benefits, grants and licenses under the Agreement shall lapse in particular the Company agrees to return ISS any and all manuals, reports, studies and programmes furnished by ISS to the Company hereunder without making copies. Page 3/6 https://www.mhc.tn.gov.in/judis Tax Case Appeal No. 232 of 2009 ....... 7.5. Upon the termination of this Agreement all rights, benefits, grants and licenses under this Agreement shall lapse in particular the Company agrees to refrain from the use of any Intellectual Property Rights of ISS, including but not limited to ISS proprietary trademarks or other marks, and to conduct such necessary corporate actions as are necessary to eliminate the ISS name and logo in the | Corporate name of the Company and any of its subsidiaries, including removal of any ISS mark or logo from any of its buildings, cars, employee uniforms etc. Further the Company agrees to return to ISS any and all manuals, reports, studies and programmes furnished by ISS to the company hereunder without making copies."

5.

A reading of the aforesaid clause from the agreement makes it very clear that no asset is created or creation of enduring right in favour of the Respondent under the agreement. We, therefore of the view that there is no merit in the Appeal filed by the Appellant. 6. In such view of the matter, this Tax Case Appeal stands dismissed. No costs. [S.V.N., J.] [C.S.N., J.] 12.09.2022 Internet : Yes

Index : Yes / No arr To Page 4/6 https://www.mhc.tn.gov.in/judis Tax Case Appeal No. 232 of 2009 1.The Income Tax Appellate Tribunal Chennai 'B' Bench. 2.ISS SDB Security Services Pvt Ltd., Bascon Futura, 5th Floor, No.10/1, Venkatanarayana Road, T.Nagar, Chennai- 600 017. PAN:AAACT-3628-C. 3. The Commissioner of Income Tax (Appeals) 6 (i/c), Chennai. Page 5/6 https://www.mhc.tn.gov.in/judis Tax Case Appeal No. 232 of 2009 S.VAIDYANATHAN, J. and C.SARAVANAN, J. arr T.C.A.No.232 of 2022

Dated : 12.09.2022 Page 6/6 https://www.mhc.tn.gov.in/judis

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