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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-29, Mumbai [in short CIT(A)], in appeal No. CIT(A)-29/IT-134/ACIT-18(1)/14-15 dated 01.01.2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle-18(3), Mumbai (in short ‘ACIT’) for the A.Y. 2012-13 vide order dated 27-02-2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance made by AO of expenses claimed on account of design charges for non-deduction of TDS under section 195 of the Act, thereby invoking the provisions of section 40(a)(i) of the Act. For this, Revenue has raised the following three grounds: - “1. a) On the facts and in the circumstances of the case, the CIT(A) has erred in law as well as on fact in not considering that amount of Rs.1,22,33,590/- being expenditure claimed on account of design charges is not a deductible expenditure uls.40(a(i) of the Act. b) On the facts and in the circumstances of the case the ClT(A) has erred in law as well as on fact in not considering that as the design charges are payments made to persons outside India. it is covered u/s.9(I)(vi)(c) of the Act, hence assessee was liable to deduct TDS on the payment of Rs. 1,22,33,590/-.
On the facts and in the circumstances of the case, the CIT(A) while deleting the disallowance of Rs. 1,22,33,590/-, which is not deductible u/s.40(a)(i) of the Act, has erred in law as well as on fact in ignoring the report of the tax auditor that design charges amounting to Rs. 1,22,33,590/- claimed by the assessee is covered by the provisions u/s.40(a)(ia) of tile Act.
On the facts and in the circumstances of the case and in law and without prejudice to the above grounds of appeal, the Ld. CIT(A) has failed to appreciate that assessee itself. vide submission dated 16.02.201 5 before the A.O. and also in its submissions before the CIT(A) reproduced in pam 4.2 of the appellate order, has accepted that purchase of design and art work is capital in nature and not revenue in nature and hence, he ought to be upheld the addition."
3. Briefly stated facts are that the assessee is manufacture, exporter and traders in textile goods i.e. manufacturing upholstery and furnishing of fabrics. The AO during the course of assessment proceedings noticed that the assessee has claimed design charges in the profit and loss account at ₹ 1,22,32,590/-. The AO also noted that the auditor in the tax audit report in form No. 3CB in Annexure B to clause 17 F has clarified that these expenses are inadmissible as the assessee has not deducted TDS. According to AO, these are disallowable under section 40(a)(i) of the Act. Further, the AO noted that the assessee in its submission also admitted that the purchase of design and Art work is capital in nature and therefore not allowable. The AO also noted that these payments falls under the definition of royalty in view of explanation 2 to section 9(1)(vi)(c) of the Act. Accordingly, he invokes the provisions of section 40(a)(i) of the Act for non-deduction of TDS under section 195 of the Act, and disallowed the claim of expenditure towards purchase of design amounting to ₹ 1,22,32,590/-. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) considered the submissions vide Para 4.3 as under: - “4.3. The facts of the present case are that the assessee is in the business of manufacturing upholstery and furnishing fabrics. The appellant is one of me largest exporter of textile upholstery.
There is a requirement to innovate designs which are unique. They have been purchasing designs from many countries in Europe. It can be seen from the invoices raised by the purchaser that the copy right is awarded to the appellant on full payment of the invoice value. On making the full payment, the appellant becomes the exclusive owner of the designs. This is a case of outright purchase and not payment of royalty. Royalty is usually paid for the right to use the designs where the designer continues to be the owner. However, in this case, the appellant is purchasing the designs like it purchases any other commodity for business and has debited the cost of the said designs to the P/L account. The appellant In its submissions has furnished copies of the relevant para of the DTAA between India and the Italy, Austria, China, France, UK, Switzerland from where the purchased the designs. The same are reproduced as under:- ………”
And finally in Para 4.3.2 deleted the addition by observing as under: - “4.3.2. The ratio followed in the above cases has to be applied to the present case as the facts are identical. The appellant is making outright purchase of designs for use in his business. The seller forfeits all kinds of rights over the design once it receives the full consideration for the same. The appellant i.e. the purchaser becomes the exclusive owner of the property i.e. the designs. Therefore, the payments made to buy/purchase these designs are not covered under royalty and no tax needs to be deducted. This view has been taken by various courts mentioned supra. This ground of appeal is therefore allowed."
Aggrieved, now Revenue is in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee has claimed design charges of ₹ 1,22,32,590/- towards purchase of design. It is a fact that such design purchases result in transfer of proprietary rights of design by making full payment of consideration on the said design purchases. The design purchases do not result in mere use of design but reflect complete ownership on the said design. The assessee is engaged in the business of export of Textile Upholstery. It was claimed before us that there is a constant requirement to innovate on designs as well as to ensure that the designs are unique and not copied or imitated once utilized by firm. It was further claimed that mere use of designs would not satisfy the business needs of the assessee and accordingly purchase of unique designs which are not repeated by the competitors is warranted. The assessee explained that the said design purchases have been imported from different countries in Europe. The aforesaid facts were reiterated and confirmed in the terms and conditions of the purchase of design invoices. Sample copy of invoice design invoices is enclosed at Page No 62-70 of Assessee Paper book wherein the copyright and ownership of designs have been awarded to the assessee completely. These designs are purchased for further utilization for the production and distribution of goods and not for sale of designs in the ordinary course of business. On account of their short shelf life, such design charges have been amortized completely under manufacturing cost as the life of such design is less than a year due to limited shelf life owing to technology obsolesce as well as outdating of fashion. Before us it was argued further that TDS on royalty for design charges is not applicable if transfer is by way of an outright sale by a non-resident party to the assessee. It cannot be termed as royalty and only the consideration received for the use and/or the right to use of any patent, trademark, designs or models, plan, secret formula, etc., would be termed as royalty. Outright purchase of Design is out of purview of Royalty', as such transfer of design transfers proprietary control as well as right of exploitation of design from the hands of the maker of design to the purchase of design.
Before us assessee relied on the case law of coordinate bench of this tribunal in the case of Deputy Director of Income-tax vs. Tata Chemicals Ltd. [2008] 20 SOT 210 (Mum), wherein it is held as under:-
“6. We have considered the rival submissions, perused the materials on record and have gone through the orders of authorities below and judgments cited by both sides. We find that there is no dispute that in the present case, impugned payment is made by the assessee on account of purchase of designs from German party. In the light of this fact, we have to examine as to whether this payment can be treated as royalty as done by the Assessing Officer. In this regard, learned DR of the revenue has placed reliance on the judgment of Hon'ble Calcutta High Court rendered in the case of N.V. Philips Gloeilampenfabrieke N. Eindhoven (supra). We find that this Judgment is not applicable in the present case because facts are different. In that case, there was no purchase of designs; but foreign party agreed to furnish to the Indian company technical information relating to manufacture, use, etc. of a product and such information could be used solely by Indian company and could not be disclosed to third party. The foreign party was to receive 5 per cent of the net selling price of product in consideration thereof. Facts in the present case are different because in the present case, the designs are purchased outright at a fixed price and there is no restriction that this design has to be used by the assessee only. We, therefore, are of the considered opinion that this judgment is not applicable in the present case. When, we examine the facts in the case of Topack Industries (India) Ltd. (supra), we find that the facts are similar with the facts of the present case. In that case also, payment was made by the Indian company to a foreign party, i.e., the party of Italy on account of purchase price of drawings. In that case also, the Assessing Officer was of the view that the payment was on account of royalty and hence, liable to be disallowed under section 40(a)( i) of the Income-tax Act because no tax was deducted at source. Under these facts, it was held by the Tribunal that the payment on account of purchase of drawings was not royalty. Relevant para of this Tribunal judgment, i.e., para No. 6 reads as under :—
"The assessee did make the payment for acquiring the right of ownership in the property. The payment was not towards the user of the property. In view of the definition of the term 'Royalties' as appears in the DTAA, it cannot be said that the assessee did make the payment of royalty. As such, the case of the assessee falls beyond the ken of section 40(a)( i) of the Act as because the assessee was not obliged to deduct any tax."
7. In the present case, learned CIT(A) has also decided the issue on similar basis. It is observed by learned CIT(A) that as per second para of the order passed by the Assessing Officer, the agreement between the German company and the assessee- company indicates that the amount was paid for the sale/purchase of technical documents; and, therefore, it is not a royalty as per Article 12 of the DTAA between India and Germany and section 9 of the Income-tax Act, 1961. Alternative issue was decided by the learned CIT(A) on the basis that there is no PE of the German company in India and hence, impugned payment by the assessee to the German company is not taxable in the hands of the German company as business income or as capital gains. A recent amendment in section 9 made by the Finance Act, 2007 read with effect from 1-4- 1976 reads as under :—
Explanation - For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii ) of sub-section (1), such income shall be included in the total income of the non- resident, whether or not the non-resident has a residence or place of business or business connection in India.
From the above, it can be seen that this Explanation is applicable only to those incomes, which are covered by clauses (v), (vi) and (vii ) of sub-section (1) of section 9. Clause (v) of section 9(1) is regarding payment of interest; clause (vi) of section 9(1) is regarding payment on account of royalty and clause (vii) of section 9(1) is regarding payment on account of fees for technical services. Since, in the present case, the impugned payment is not covered by any of these clauses, this amendment does not make any change in the present case and in spite of this amendment, learned CIT(A) is correct in holding that since, German company is not having PE in India, the impugned payment is not taxable in the hands of the German company as business income or as capital gains. In view of the above discussion, we find no reason to interfere in the order of learned CIT(A); and hence, we uphold the same.”
In view of the above decision of the co-ordinate Bench in the case of Tata Chemicals Ltd (Supra), in the present case when the payment made by the assessee for purchase of designs on outright basis, the payment cannot be treated as royalty in term of section 9(1) explanation- 2, because the payment is made to parties, which are not assessed to tax in India and having no PE (permanent establishment). Further, the admission of assessee in the audit report that the same is capital expenditure, it cannot preclude the assessee from claiming the expense as Revenue because the nature of expenditure is revenue in itself for the reason that such design charges have to be amortized completely under manufacturing cost as the life of such design is less than a year due to limited self life owing to technology obsolence as well as outdating of fashion. Accordingly, we are of the view that the CIT(A) has rightly allow
the claim of the assessee and we confirm the same. This issue of Revenue’s appeal is dismissed. 8. In the result, the appeal of Revenue is dismissed. Order pronounced in the open court on 13-06-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 13-.06.2018 kao kI ga[- .