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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: Shri Pawan Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, AM :
2 ITAs 3894 & 3895/Mum/2018
These two appeals filed by the revenue are directed against separate, but identical orders of the CIT(A)-24, Mumbai dated 19-03-2018 & 28-03-2018 and they pertain to AYs 2011-12 & 2012-13. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order.
The brief facts of the case extracted from ITA3894/Mum/2018 for AY 2011-12 are that the assessee company is engaged in manufacturing and trading of woven and non woven products, filed its return of income for AY 2011-12 on 29-11-2011 declaring total income at Rs.9,37,19,343. The case was selected for scrutiny and during the assessment proceedings, AO noticed that the assessee has debited a sum of rs.89,26,627 under the head, ‘licence fees’ paid; accordingly, called upon the assessee to explain as to why said expenses should not be capitalised as the same has enduring benefit over a period of time and was not restricted to the current year. The AO, after considering submissions of the assessee and also by relying upon the decision of Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd vs CIT (1955) 27 ITR 234 (SC) held that licence fee paid to its AE is in the nature of capital expenditure because such licence fee gives enduring benefit to the assessee, therefore, the same cannot be allowed as revenue expenditure. Similarly, the AO has made addition towards disallowance of employees contribution
3 ITAs 3894 & 3895/Mum/2018 towards ESIC for belated payment of such fund before the due date prescribed under respective Acts.
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has explained the nature of agreement between the assessee and its AE, M/s Freudenberg Vliesstoffe KG and argued that it has paid 1% royalty on total sale of products for using Freudenberg brand for those articles produced and sold from Indian factory and such expenditure is in the nature of royalty and allowable as revenue expenditure.
The Ld.CIT(A), after considering submissions of the assessee and also by taking note of agreement between the parties for payment of royalty @1% on total sales, held that in order to decide whether a particular expenditure is capital or revenue in nature, one of the key aspects to be examined is whether there was a transfer of ownership in the intellectual property rights or in licence.
However, where no such rights have been transferred, but an arrangement facility for grant of licence to use those rights for a limited purpose, the same cannot be considered as capital expenditure which gives enduring benefit to the assessee. Accordingly, he deleted addition made by the AO towards disallowance of licence fee paid. Aggrieved by the order of CIT(A), the revenue is in appeal before us.
4 ITAs 3894 & 3895/Mum/2018
None appeared for the assessee. We have heard the Ld.DR, perused the material available on record and gone through the orders of authorities below.
The Ld.DR vehemently argued the issue in light of facts brought out by the AO during assessment proceedings and submitted that licence fees paid to AE for use of brand name is in the nature of capital expenditure, because such licence fee gives benefit to the assessee during the period of agreement. The Ld.DR further argued that the AO has brought out clear facts in the light of decision of Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd vs CIT (supra), where the Hon’ble Apex Court has clearly held that wherever there is enduring benefit, the expenditure is to be treated as capital expenditure. The Ld.CIT(A), without appreciating these facts, simply deleted addition made by the AO. Having considered the arguments of Ld.DR, we find that the Ld.CIT(A) has brought out clear facts in the light of agreement between the parties that payment of licence fee is for use of brand name of assessee’s AE and such royalty has been paid @1% of total sales effected in India. We further note that payment of licence fee is directly linked to sale made by the assessee and hence there is no error in the finding recorded by the Ld.CIT(A) that it is in the nature of revenue expenditure. No doubt, the Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd vs CIT (supra) clearly stated that wherever enduring benefit is derived, the 5 ITAs 3894 & 3895/Mum/2018 expenditure is to be treated as capital expenditure. But to decide whether a particular expenditure give s enduring benefit to the assessee or not has to be decided in the light of arrangement between parties. In this case, on perusal of agreement between the parties it is clear that the assessee was agreed to pay 1% royalty on total sales which is periodically linked to sales effected by the assessee, but not a lump sum payment for acquiring any right in intellectual property. Therefore, we are of the considered view that the AO was incorrect in holding that licence fee paid to AE is in the nature of capital expenditure which gives enduring benefit. The Ld.CIT(A), after considering relevant facts, has rightly deleted addition made by the AO. Hence, we are inclined to uphold the findings of Ld.CIT(A) and dismiss appeal filed by the revenue.
The first issue that came up for our consideration from this appeal for AY 2012-13 is disallowance of licence fee paid amounting to Rs.77,30,967. The facts are identical to the issue, which we have already considered and decided in , where we have deliberated at length on the issue of licence fee paid to assessee’s AE in the light of agreement between the parties and held that it is a revenue expenditure deductible u/s 37(1) of the I.T.
Act, 1961. The reasons given by us in the preceding paragraphs shall mutatis
6 ITAs 3894 & 3895/Mum/2018 mutandis apply to this appeal also. Therefore, for the detailed reasons given by us in the preceding paragraphs, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the revenue.
The next issue that came up for our consideration is disallowance of employees contribution to PF & ESIC amounting to Rs.85,838 u/s 36(1)(viia) r.w.s. 2(24)(x) of the I.T. Act, 1961. We find that this issue is covered in favour of the assessee by the decision of Hon’ble Bombay High Court in the case of CIT vs Hindustan Organics Chemical Ltd 366 ITR 1 (Bom) where it was held that section 43B is not applicable to payments made beyond the due date specified under respective Acts, if such payments have been made on or before due date of filing return of income. We further noted that the Hon’ble Supreme Court in the case of Alom Extrusions Ltd 319 ITR 306 (SC) had considered an identical issue and held that contribution payable by the employer to the PF or any other fund for the welfare of the employees was allowable, if such contribution is paid on or before the due date of filing return of income. In this case, the Ld.CIT(A) has brought out clear facts to the effect that although the assessee has remitted employees contribution to PF / ESIC after the due date specified under respective Act, but such contribution has been paid on or before due date of furnishing return of income. We do not find any error in the findings of Ld. CIT(A) and hence, reject ground taken by the revenue.
7 ITAs 3894 & 3895/Mum/2018
In the result, appeal filed by the revenue is dismissed.
As a result, both appeals filed by the revenue are dismissed.
Order pronounced in the open court on 10-07-2019.