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Income Tax Appellate Tribunal, “A”
Before: HON’BLE SH. SHAMIM YAHYA, AM & HON’BLE SH. SANDEEP GOSAIN, JM
M/s Asian Paints PPG Pvt. DCIT -14(1)(1), R. No. 481B, 4th floor, Ltd. बिधम/ 6A, Shanti Nagar, Aayakar bhavan, M. K. Vs. Santacruz(east), Road, Mumbai - 400020 Mumbai-400 055 स्थायीलेखासं./जीआइआरसं./ PAN No. AAJCA7128D (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Dharam Veer Singh, DR by प्रत्यथीकीओरसे/Respondentby : Dr. K. Shivaram & Shri Rahul Hakani, ARs सुनवाईकीतारीख/ : 25.02.2019 Date of Hearing घोषणाकीतारीख / : 22.05.2019 Date of Pronouncement आदेश / O R D E R
Per Sandeep Gosain, Judicial Member:
The present Appeal has been filed by the revenue against the order of Commissioner of Income Tax (Appeals)-22, Mumbai, dated 30.08.17 for AY 2012-13 on the grounds mentioned herein below:-
M/s Asian Paints PPG Pvt. Ltd. 1. "Whether in the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of an amount of royalty paid Rs.2,97,40,000/-."
2. "Whether in the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the provision for bad and doubtful debts amounting Rs.72,30,000/-in view of Explanation 1 of section 36(l)(vii) of the Income tax Act, 1961."
The brief facts of the present case are that during the course of assessment proceedings, the AO found that the assessee had paid a sum of Rs. 297.40 lacs as royalty to M/s Asian Paints Ltd. in return for license to use of its Trademarks and Technology. Since royalty paid was for use of Trademark and Technology, the AO held that it was a capital expense and could not be claimed as a revenue expense. The AO while placing reliance on the decision in the case of CIT v. Polyformalin (P.) Ltd. (1986) 161 ITR 36 (Ker), disallowed the claim of the assessee u/s 37(1) of the IT Act, 1961. M/s Asian Paints PPG Pvt. Ltd.
Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties allowed the appeal of the assessee.
Aggrieved by the order of Ld. CIT(A), revenue has filed the present appeal before us on the grounds mentioned herein above.
Ground No. 1 5. This ground raised by the revenue relates to challenging the order of Ld. CIT(A) in deleting the disallowance of an amount of royalty paid by the assessee.
We have heard the counsels for both the parties at length and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has M/s Asian Paints PPG Pvt. Ltd. dealt with the above grounds raised by the revenue in para no. 4.3 to 4.4 of its order and the same is reproduced below:-
4.3 I have considered the facts of the case and the appellant's submissions. Perusal of the Trademark & Technology Licencing Agreement entered into between the appellant and M/s Asian Paints Ltd. shows that the Effective date of agreement was 1st June,2011 and the agreement period was for one year starting from the Effective date. As per the terms of the agreement , the Licence granted to the appellant to use the Licensor's Trademarks and Technology was non-exclusive, non- transferable and revocable without the right to sub- licence. In consideration of the Licence granted, the appellant was to pay a royalty fee of 2% on the net sales value during the term of the agreement. The agreement may be terminated by either party by giving a 24 hours notice in writing to the other party. Upon termination of the agreement for any reason whatsoever, the rights and licence granted to the Licencee shall be revoked and the Licencee shall cease to use the Licensor's Trademarks and technology.
4.4 It is clear from the terms of the agreement that the Licencee, i.e., the appellant, had merely obtained access to technical knowledge with regard to the technique of production and the right to use the M/s Asian Paints PPG Pvt. Ltd. Trademarks of the Licensor during the period of agreement which was for one year only. There was no absolute transfer of know how. The Licence granted was neither exclusive nor transferable. The appellant also did not have the right to sub-licence. The appellant did not become entitled exclusively, even for the period of the agreement, to the Trademarks and Technology of the Licensor. The transaction did not result in acquisition of any capital asset or a benefit of enduring nature. The royalty fees to be paid was also recurrent dependent upon the sales and only for the period of the agreement. Considering all these facts, I am of the considered view that the royalty fees paid by the appellant to M/s Asian Paints Ltd. is revenue expenditure in nature and is allowable u/s 37(1) of the Act. The disallowance made by the AO by treating it as capital expenditure is deleted. This ground of appeal is allowed.
After having gone through the facts of the present case and hearing the parties at length, we find that the assessee while raising his claim had relied upon the the Trademark & Technology Licencing Agreement entered into between the assessee and M/s Asian Paints Ltd. It was submitted by Ld. AR M/s Asian Paints PPG Pvt. Ltd. that vide the said agreement, Asian Paints Ltd. (APL) had granted the assessee a royalty-bearing, non-exclusive, non- transferable and revocable licence for the recipes, processes, method and procedure for the manufacture of its liquid industrial paints and power coatings technology and technical support for the manufacture of its liquid industrial paints and power coatings. As per the said agreement, the effective date of agreement was 1.06.11, which was for a period of 1 year. According to the term of the said agreement, the assessee was to pay a royalty fee of 2% on the net sales value during the term of the agreement. A perusal of the terms of the agreement also shows that the agreement may be terminated by either party by giving a 24 hours notice in writing to the other party and thereafter ipon termination of the agreement for any reason whatsoever, the rights and licence granted to the Licencee/assessee shall be revoked and the Licencee shall cease to use the Licensor's Trademarks and technology.
Thus, in this way, it is clear from the terms of the agreement that the Licencee, i.e., the assessee, had merely obtained access to technical knowledge with regard to the 7 M/s Asian Paints PPG Pvt. Ltd. technique of production and the right to use the Trademarks of the Licensor during the period of agreement which was for one year only. There was no absolute transfer of know how and the Licence granted was neither exclusive nor transferable. Apart from this, the assessee also did not have the right to sub-licence. After considering the terms of the agreement, we are also of the view that the assessee did not become entitled exclusively, even for the period of the agreement, to the Trademarks and Technology of the Licensor. The transaction did not result in acquisition of any capital asset or a benefit of enduring nature. The royalty fees to be paid was also recurrent dependent upon the sales and only for the period of the agreement. The term ‘Capital Expenditure’ has not been defined under the I.T. Act, however, in terms of royalty payment for use of technical know how and trademarks, the only general principle that can be derived is that under the terms of an agreement, if the assessee acquires a benefit of enduring nature that will constitute ‘acquisition of an asset’ any amount paid for the same shall constitute capital expenditure. Whereas on the other hand, if the assessee has acquired merely technical knowledge or knowledge for the 8 I.T.A. No. 6548/Mum/2017 M/s Asian Paints PPG Pvt. Ltd. manufacture of any particular item for a specified duration, then the expenditure is of revenue nature.
In this case, the payment is made by the assessee only for obtaining access to the information, which does not become the property of the assessee as there is no purchase of technical know how. The title and ownership is with APL only and the same has not been transferred to the assessee. Thus, in this way, the transaction did not result in acquisition of any capital asset or a benefit of enduring nature. The decision relied upon by Ld. AR in the case of CIT Vrs. Ciba of India Ltd. (1968) 69 ITR 692 (SC) is squarely applicable to the facts of the present case as under the agreement, the assessee did not become entitle exclusively, even for the period of agreement, to the patents and trademarks of the licensor, it had merely assessed to the technical knowledge and experience, which the licensor commanded and was a mere licence for a limited period of the technical knowledge with the right to use the patent and trademarks.
Considering all these facts, we are of the view that the royalty fees paid by the assessee to M/s Asian Paints Ltd. is M/s Asian Paints PPG Pvt. Ltd. revenue expenditure in nature and is allowable u/s 37(1) of the Act.
Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed.
Ground No. 2 12. This ground raised by the revenue relates to challenging the order of Ld. CIT(A) in allowing the provision for bad and doubtful debts amounting to Rs.72,30,000/- in view of Explanation 1 of section 36(l)(vii) of the I.T. Act, 1961.
13. We have heard the counsels for both the parties at length and we have also perused the material placed on record, M/s Asian Paints PPG Pvt. Ltd. judgment cited by the parties as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in para no. 5.3 of its order and the same is reproduced below:-
5.3 I have considered the facts of the case and the appellant's submissions. It is seen from the appellant's balance sheet that corresponding amount of the provision for doubtful debts debited by the appellant to the.RroJit and Loss account also stands reduced from the Trade Receivables /Debtors account on the asset side of the Balance-sheet. The Hon'ble Supreme Court in the case of Vijaya Bank Vrs. CIT (2010) 323 ITR 166 (SC) held that in such a situation the assessee was entitled to the benefit of deduction under section 36(1)(vii) of the Act as there was an actual write off by the assessee in its books. The Hon'ble Supreme Court also reiterated that section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The AO was, therefore, not correct in holding that the decision of the Hon'ble Supreme Court in the case of Vijaya Bank which was rendered in the context of deduction under section 36(1)(vii) of the Act applied M/s Asian Paints PPG Pvt. Ltd. only to rural branches of commercial banks. The AO's other contention that the provision for bad debts was an appropriation from profits and hence, should be disallowed is vague and has no relevance to the issue at hand. In view of the decision of the Hon'ble Supreme Court in the case of Vijaya Bank Vs CIT (2010) 323 ITR 166 (SC), the disallowance of provision for bad debts of Rs.72.30 lacs is deleted. This ground of appeal is allowed.
14. After having gone through the facts of the present case and hearing the parties at length, we notice that from the assessee’s balance sheet, the corresponding amount of the provision for doubtful debts debited by the assessee to the Profit and Loss account also stands reduced from the Trade Receivables /Debtors account on the asset side of the Balance-sheet. Thus, Ld. CIT(A) had rightly relied upon the decision of Hon'ble Supreme Court in the case of Vijaya Bank Vrs. CIT (2010) 323 ITR 166 (SC) wherein it was held that in such a situation the assessee was entitled to the benefit of deduction under section 36(1)(vii) of the Act as there was an actual write off by the assessee in its books. The Hon'ble Supreme Court also reiterated that section 36(1)(vii)
M/s Asian Paints PPG Pvt. Ltd. of 1961 Act applies both to Banking and Non-Banking businesses. Thus in this way, Ld. CIT(A) had rightly concluded that AO was, therefore, not correct in holding that the decision of the Hon'ble Supreme Court in the case of Vijaya Bank which was rendered in the context of deduction under section 36(1)(vii) of the Act applied only to rural branches of commercial banks as in the present case, the debtors have actually reduced and provisions are actually written off, therefore, the claim of the assessee was allowable. Therefore, Ld. CIT(A) rightly deleted the disallowance of provision for bad debts by relying upon the decision of Hon'ble Supreme Court in the case of Vijaya Bank Vs CIT (2010) 323 ITR 166 (SC).
Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are M/s Asian Paints PPG Pvt. Ltd. judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed.
In the net result, the appeal filed by the revenue stands dismissed with no order as to cost.
Order pronounced in the open court on 22nd May, 2019. (Shamim Yahya) (Sandeep Gosain) लेखासदस्य / Accountant Member न्याययकसदस्य / Judicial Member मुंबई Mumbai;यदनांकDated : 22.05.2019 Sr.PS. Dhananjay