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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
आदेश / ORDER
PER SUSHMA CHOWLA, JM
The present appeal filed by assessee is against order of CIT(A)-VI, New Delhi dated 19.10.2010 relating to assessment year 2006-07 against the order passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
The only issue raised in the present appeal is against the disallowance of royalty expenses of Rs.31,11,900/-.
Briefly in the facts of the case the assessee was engaged in the business of manufacturing of engineering goods. For the year under consideration, the assessee had furnished the return of income declaring total income of Rs.5,50,15,923/-. The assessee had paid royalty of Rs.31,11,900/- to Waeschle Maschinenfabrik GmBH. The case of the assessee was taken up for scrutiny and show cause notice was issued to the assessee to explain as to why the said expenditure should not be treated as capital expenditure. In reply, the assessee explained that it paid royalty to its principal for obtaining assistance in the manufacturing of the products on the basis of the sale made by use of the technical know how and the assistance provided by them in this regard. The assessee also pointed that it had neither paid the royalty for grant of technical aid fees for setting up the factory nor the technical aid fees was paid which was of a permanent nature and which would always be availed of by the assessee company for its own business and industrial requirements. The assessee claimed that since the product manufactures by it, was not general item hence, it required technical information and assistance for manufacturing the contract product. The assessee also explained that the licensor had provided license to the assessee for a specific period of seven years, which was further extended for further period. Reference was also made to the various clauses of the License Agreement by the assessee to establish its case that royalty paid by the assessee was only towards getting assistance in the manufacturing contract product for a limited period. The Assessing Officer relying on different case laws was of the view that the said payment of Rs.31,11,900/- was to be disallowed as it was capital in nature. 2
Before the CIT(A), similar arguments were made with regard to aforesaid payment of royalty. The CIT(A) further noted that the technical collaboration agreement which was filed during the appellate proceedings, was different from the copy of the agreement filed before the Assessing Officer, particularly clause 13.8 of the agreement. The assessee was thus asked to explain the different version of the clauses of the Technical Collaboration Agreement and was also asked to produce the original documents. The first difference which was noted by the CIT(A) was the difference in the rates of the commission. Another thing which was noted by him was that the agreement dated 01.04.2005 was signed by only one party i.e. the assessee and subsequent agreement, which was signed by both the parties; then, the terms of the agreement were evaluated by CIT(A) and on page 6 of the appellate order, it was concluded by holding that the assessee by entering into the said agreement had acquired benefit of enduring nature hence, the payment made could not be treated as revenue expenditure. Reliance was placed on the decision in Southern Switch Gear Ltd. vs Commissioner Of Income Tax 16 taxmann.com 79, which was affirmed by the Hon’ble Supreme Court, reported in 232 ITR 359 (SC) to hold that the assessee in the present case had acquired knowledge of enduring nature hence, the same was capital expenditure.
The assessee is in appeal against the order of the CIT(A).
The Ld.AR for the assessee after taking us through the orders of the authorities below pointed out that it had entered into contract with the foreign party w.e.f. 01.04.1997 under which the royalty was being paid and the same was allowed as revenue expenditure in all the previous years. The said agreement ended on 31.03.2004 and for intervening period, an agreement dated 09.08.2004 was executed between the parties, wherein the terms of earlier agreement continued. However, fresh agreement was entered on 01.04.2005 between the parties which had differing terms and conditions. The Ld.AR pointed out that before the Assessing Officer, by mistake the earlier agreement dated 01.04.1997 was filed. However, before the CIT(A), relevant agreement was filed under the belief that this agreement itself was filed before the Assessing Officer and hence, no application was made for admission of additional evidence. The Ld.AR in order to support his contentions has filed an affidavit of the assessee which is placed in additional Paper Book. Our attention was drawn to various paras of the earlier agreement and the terms of the later agreement wherein even the rate of royalty rate paid was changed. The Ld.AR for the assessee during the course of hearing then produced the original agreement and subsequent agreement dated 01.04.2005 and drew our attention to clauses 13.8 and 13.9 and pointed out that there was variation in the terms of the agreement. It was also stressed by the Ld.AR that the payment of royalty under the same agreement was allowed in the hands of the assessee by CIT(A) from Assessment Year 2007-08 onwards.
It was also further brought to our notice that out of total sales of Rs.28 crores, royalty was paid only on Rs.17 crores i.e. only on the sales where the technical aid of the licensor was taken. Another point which was brought to our notice was that under the earlier agreement, the payment of royalty was in Deutsche Mark but w.e.f. 01.01.1999, Euro $ was 4 introduced and consequent amendment in the agreement. He stressed principal of Consistency need to be followed as in all the earlier years and even in later years, no addition/ disallowance on account of royalty payment was made in the hands of the assessee. It was also brought to our notice that in Assessment Year 2012-13, the Assessing Officer himself allowed the said payment of royalty at approximately Rs.4 crores as revenue expenditure and even the Transfer Pricing Officer (in short “TPO”) in the TP proceedings, to whom reference was made, made no adjustment.
He placed reliance on the following decisions:-
(a) CIT vs Neo Poly Pack (P.) Ltd. (245 ITR 492) (Delhi High Court) (b) CIT vs Ciba of India Ltd. (69 ITR 692) (Supreme Court) (c) CIT vs G4S Securities System India (P) Ltd., (338 ITR 46) (Delhi High Court)
The Ld. DR for the Revenue on the other hand stressed that the agreement filed by the assessee was not genuine. It was pointed out that during the appellate proceedings, the assessee did not have the copy of the agreement which was signed by the other party and did not even bear the signatures of the witnesses. Then, reference was made to the contents of agreement and heavy reliance was placed on orders of authorities below.
The Ld. DR for the Revenue also pointed out that the Reserve Bank of India had liberlised the rules with regard to royalty payment, to point out that in all the cases of payment of royalty under the automatic route, prior registration with RBI was necessary.
We have heard the rival contentions and perused the record. The issue which is arising in the present appeal is with regard to payment of royalty of Rs.31,11,900/-. The assessee had entered into an agreement with M/s. Coperion Waecshle Gmbh & Co.K.G.Germany as early as on 01.04.1997 in order to avail technical information for manufacturing certain items. The said expense was claimed as revenue expenditure and the same has been allowed as revenue expenditure till Assessment Year 2005-06. The earlier agreement was for a period of 5 years and ended on 31.03.2005; for intervening period, an agreement was executed on 09.08.2004 under which the rate of royalty underwent changes. The said agreement was for the period upto 31.03.2005. Thereafter, fresh agreement was executed on 01.04.2005. In the said technical collaboration, there were certain amendments to certain clauses. The assessee has tabulated the said relevant clauses which were changed vide agreement dated 01.04.2005 as compared to the earlier agreement and placed the same at pages 21 to 26 of the Paper Book. As per clause 8.1, the rate of royalty is prescribed and the assessee has pointed out before us that the terms have been redrafted but the transaction remains to be same. Under clause 8.5, it is provided that the royalty have to be remitted to the licensor, the payment has to be made in Euro $ as against earlier currency of Deutsche Mark. Our attention was then drawn to clause 13.8 of the earlier agreement wherein it was agreed upon with that after the termination of the agreement, the licensee may continue to use the technical information/improvements etc. free of charge. However, in the amended agreement, it is provided that after the termination of agreement, the licensee shall not be entitled to continue to use the agreement. The Ld.AR for the assessee then referred to the earlier 6 agreement, clause 13.9 wherein it was provided that after the termination of the agreement, except for completion of work in progress, the rights acquired by the licensee shall expire with the termination of the agreement. Since there was contradiction in the earlier clauses 13.8 & 13.9 hence, clarification vide para 13.8 in the fresh agreement dated 01.04.2005.
Now, coming to the second aspect of the issue raised by the CIT(A).
It transpires that before the Assessing Officer, in support of its expenditure, the assessee by mistake had filed earlier agreement dated 01.04.1997; but before the CIT(A), the assessee had filed a later agreement dated 01.04.2005. The CIT(A) during the appellate proceedings compared the terms of the agreement and found them to be at variance. The assessee explained its case but the same was not accepted by the CIT(A).
The assessee before us has filed an affidavit in support of its contentions in this regard and we find merit in the plea of the assessee that by mistake/confusion, the agreement was not correctly filed before the Assessing Officer but the same was available before the CIT(A). Another linked aspect is the explanation of the assessee that it had filed the agreement which was signed by the assessee company before the CIT(A) and the signature of the other party admittedly were not there on the same, but before the CIT(A), the said error was pointed and the assessee called for other copy from the licensor and furnished the same before the CIT(A). Before us, same has also been produced during the course of hearing. The Ld.AR for the assessee also produced the original agreement before us for perusal. We find merit in the plea of the assesse that under which one document which was available with the assessee was signed by the assessee but the original copy of agreement, which was available with the licensor bore the signatures of both the parties and was even dated 01.04.2005. In such facts and circumstances, the said agreement needs to be considered for deciding the issue arising in the present appeal. The assessee had used the technical information by way of technical assistance rendered by the licensor to the assessee in India and consequently, the payment of royalty was for the purpose of carrying on the business of the assessee. Thus, claim of the assessee on sales of Rs.17 crores as against the total sales of the year of Rs.28 crores. The assessee had entered into the said agreement after the liberlisation by the RBI w.e.f. 24.06.2003 under the automatic route and accordingly, we hold that the said royalty has to be allowed as revenue expenditure in the hands of the assessee.
Before parting, we may also point out that it is only in Assessment Year 2005-06, the said payment of royalty has not been allowed in the hands of the assessee. In all the later years, starting from Assessment Year 2007-08, the royalty has been allowed as revenue expenditure in the hands of the assessee by the CIT(A) upto Assessment Year 2011-12. In Assessment Year 2012-13, the Assessing Officer vide order passed u/s 143(3) r.w.s 144C of the Act dated 09.03.2016 has allowed the payment of royalty as revenue expenditure. Even the TPO had not made any adverse reference in his order u/s 92CA(3) of the Act. Similar is the case in Assessment Years 2013-14 & 2014-15. All these assessment orders and the appellate orders have been filed before us and following the principal of consistency also, the issue needs to be decided in favour of the assessee. Thus, we direct the Assessing Officer to allow the expenditure of royalty of Rs.31,11,900/-. Thus, grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 06th January 2020.