DCITCORPORATE CIRCLE 2(2) , CHENNAI vs. INDIAN ADDITIVES LTD. , CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

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The AO held that the royalty paid was for acquiring an enduring and exclusive advantage to the assessee's business and hence it was a capital expenditure. The AO further held that though the royalty payment was in relation to the turnover, since the total payment was fixed lump sum and was payable for transfer of technology, the same should be treated as an intangibleasset and hence it was eligible for depreciation as per the decision of the Hon'ble Supreme Court in the case of Southern Switch Gear vs CIT reported in 232 ITR 359. The assessee submitted that the Hon'ble ITAT in the assessee's own case for the ays 1999-00 to 2002-03 has held that the impugned expenditure is revenue in nature. The AO stated in the assessment order that the department has filed an appeal before the Hon'ble High Court against the order of the ITAT. So as to keep the issue alive, the AO treated the royalty expenditure as capital in nature, allowed depreciation @ 25% and brought the balance expenditure of Rs.3,22,42,500/- to tax . Aggrieved , the assesse filed an appeal before the CIT (A) and he held that this is a recurring issue and covered by the decision of ITAT, Chennai in appellant's own case for the assessment years 1999-2000 to 2002-03 vide and ITA Nos.700, 701 and 702/Mds/2009 dated 13.11.2009, wherein the Hon'ble ITAT, Chennai has held that when the royalty is not a definite amount and it is based on the volume of sale, such royalty is to be :-3-: ITA No. 1609/Mds/2017 treated as running royalty which is also not a part of cost of acquisition or technical knowhow.This decision was followed in appellant's own case by the ITAT, Chennai A Bench in 1438 & 1439/Mds/2012 vide order dated 06.09.2012 for the AYs 2003-04, 2005-06 and 2006-07by dismissing the revenue’s appeals. While passing the said orders, the ITAT has taken into consideration the decision made in the AYs 1999-2000 to AY 2002-03.

Subsequently, the ITAT Chennai Bench C vide order (Mds) 2013 for the Assessment Year 2008-09 dated 6th January 2014 in the appellant's own case has allowed the Royalty as Revenue Expenditure. Thus, following the jurisdictional ITAT decisions in appellant's own case, the CIT(A) allowed the appeal. Aggrieved, the Revenue filed this appeal with following grounds :

“1. The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case.

2. The CIT(A) erred in holding that the running royalty paid by the assessee to the foreign company is allowable as revenue expenditure.

3. The CIT(A) ought to have appreciated that the mode of yearly payment on the basis of sales turnover will not alter the nature and the purpose for which the royalty payment made, being infusion of new technology.

4. The CIT(A) ought to have appreciated that running royalty was paid to M/s. CheveronOronite company USA under exclusive right to use the licensed technology and the technical assistance for manufacturing and selling the products in India.

5. The CIT(A) ought to have appreciated that 'running royalty' is to be treated as a capital expenditure since the assessee had acquired an enduring/exclusive advantage and the same had to be treated as capital expenditure.

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AY.2008-09 in TC(A) SR No.44604 of 2014 are pending before the Hon'ble High Court. 7. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (Appeals) be set aside and that of the Assessing Officer be restored” .

“ 7. We heard the rival submissions I perused the material on record and judicial decisions relied. The sole crux of the issue being payment of royalty to M/s. Chevron Oronile Company LIC, USA is a Revenue expenditure or capital expenditure eligible for depreciation @25%. We perused the assessment order and found that ld. Assessing Officer has elaborately discussed on agreement and treated the said payment in the nature of intangible assets and allowed depreciation. The Id. Commissioner of Income Tax (Appeals) relied on the order of the Co-ordinate Bench of this Tribunal in assessee's own case and allowed the appeal. The only contention of the Department before the Tribunal that the Revenue has not accepted the order of the Tribunal and an appeal has already been filed in Hon'ble High Court of Madras and the same is pending. This Tribunal is of the considered opinion that mere pendency of appeal before Hon'ble High Court cannot be a reason to take a different view. So, considering the decision of Co-ordinate Bench of the Tribunal in assessee own case in ITA No,1437, 1438 & 1439/Mds/2012, assessment years 2003-04, 2005-06 & 2006- 07 observed at para 4 at page 2 of his order as under:- 4. We have perused the orders and heard the rival submissions. We find that a similar issue had come up before this Tribunal in Revenue's appeal for assessment years 1999- 2000 to 2002-03 as also in assessment year 2004-05. In its order dated 17th June, 2011 for assessment year 2004-05 in it was held by co-ordinate Bench of this Tribunal as under:- "7. We have perused the orders and heard the rival contentions. We find that the same' issue regarding royalty payment made to M/s. COCL was considered by this Tribunal in the :-5-: ITA No. 1609/Mds/2017 orders referred supra. It was held by this Tribunal at para 2.17 of its order dated 13th November, 2009, as under:- “2.17 In the facts and circumstances of the case, when the royalty payments shall be computed at a particular percentage of sales priced, and if there was no sales, no royally would be payable. Merely because goods were produced in India by the assessee acquiring the technical process from the foreign collaborator, it cannot be said that the royalty payment is referable to the production house / manufacturing of the products. The technical know-how for the manufacturing process was acquired by the assessee against a lump sum payment of royalty and subsequent to that, if there is no sale of the product manufactured by the assessee, then there would be no royalty payable. Thus, the running royalty payable has no nexus or direct connection with the manufacture of the product. The liability to pay the royalty arises only when there is a sale. Therefore, we are of the view that the running royalty cannot be said to be a capital expenditure. We do not find any rationale in bifurcation of the running royalty and treating one part as capital and the other part as revenue by the learned Commissioner of Income Tax (Appeals) without any basis. The decision relied upon by the learned Commissioner of Income Tax (Appeals) is on the facts that the assessee could continue to use the technology even after the expiry of the period of payment of royalty. Therefore, when the lump sum royalty was separately agreed and paid, then the running royalty, in the facts and circumstances, would only be a revenue expenditure paid for the use of the licence, trade mark and technical information for a particular period. Accordingly, this issue is decided in favour of the assessee and against the Revenue."

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Since, there is no change in the fact and on law, respectfully following the above co-ordinate bench decision, we uphold the order of the CIT(A) and dismiss the grounds of the Revenue.

Order pronounced on Monday, the 27th day of November, 2017 at Chennai.