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Before: Shri Chandra Poojari & Shri Duvvuru RL Reddy
आयकर अपील�य अ�धकरण, ‘‘सी’’ �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी चं� पूजार�, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri Chandra Poojari, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member I.T.A. Nos.2583 and 2584/Mds/2016 Assessment Years: 2011-12 & 2010-11 The Deputy Commissioner of M/s. I.P. Rings Ltd., Income Tax, Corporate Circle 2(2), Vs. No. 24, Arjay Apex Centre, Room No. 512, 5th Floor, Wanaparthy College Road, Chennai 600 006. Block, 121, M.G. Road, Chennai 600 034. [PAN: AAACI0908C] (अपीलाथ� /Appellant) (��यथ�/Respondent) I.T.A. Nos.2667 and 2668/Mds/2016 Assessment Years:2010-11 & 2011-12 M/s. I.P. Rings Ltd., The Deputy Commissioner of Vs. No. 24, Arjay Apex Centre, Income Tax, Corporate Circle 2(2), College Road, Chennai 600 006. Chennai 600 006. (अपीलाथ� /Appellant) (��यथ�/Respondent) Department by : Shri N. Madhavan, JCIT Assessee by Shri R. Vijayaraghavan, Advocate : सुनवाई क� तार�ख/ Date of hearing : 24.05.2017 घोषणा क� तार�ख /Date of Pronouncement : 28.07.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER:
These cross appeals filed by the assessee and the Revenue are directed against the common order of the ld. Commissioner of Income Tax
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(Appeals) - 6, Chennai, dated 30.06.2016 relevant to the assessment years 2010-11 and 2011-12. The Revenue has raised two common grounds in both the appeals viz., (i) the ld. CIT(A) has erred in allowing 25% of royalty payment as capital expenditure and the balance 75% as revenue expenditure and (ii) the ld. CIT(A) has erred in deleting the disallowance of additional depreciation. On the other hand, the assessee has raised two effective grounds in both the appeals viz., (i) the ld. CIT(A) has erred in allowing 25% of royalty payment as capital expenditure and the balance 75% as revenue expenditure and (ii) the ld. CIT(A) has erred in confirming the disallowance of marketing service fees paid to India Piston Ltd.
The crux of the facts leading the issue of payment of royalty are that the assessee has made lumpsum payments to M/s. Nippon Piston Rings Ltd. for the acquisition of technical know-how license and has been continuing to pay royalty based on the actual usage of the license. The company capitalized the lumpsum payments towards the acquisition of technical know-how during the year in which they were acquired. The continuing royalty/running royalty is being paid based on the actual usage of license, calculated at a fixed percentage on net sales. The Assessing Officer disallowed the claim of the assessee and treated it as a capital expenditure, allowing depreciation at the rate of 25 percent.
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2.1 The assessee carried the matter in appeal before the ld. CIT(A) for both the assessment years. By following the decision of the Tribunal in assessee’s own case for earlier assessment years, the ld. CIT(A) has directed the Assessing Officer to treat 25% of royalty payment as capital expenditure and the balance 75% as revenue expenditure.
2.2 On being aggrieved, both the Revenue as well as assessee are in appeal before the Tribunal. The main contention advanced by the ld. DR is that similar decision of the Tribunal in assessee’s own case is pending before the Hon’ble Madras High Court in TCA No. 964 of 2015 and therefore, he pleaded that the order of the ld. CIT(A) should be reversed.
2.3 On the other hand, the ld. Counsel for the assessee has submitted that the assessee has not acquired any ownership right in the technology and license but only right to use. Therefore, he has pleaded that the payment for mere right to use should be only revenue in nature and prayed that the entire royalty expenditure claimed by the assessee should be allowed as revenue expenditure.
2.4 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. On careful consideration of facts and materials available on record, we find that on similar facts in an identical issue in assessee’s own case for the assessment years 1999-2000,
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2003-04 to 2005-06 in I.T.A. Nos. 1716 to 1719/Mds/2010 vide order dated 25.02.2011, the Tribunal has observed and held as under: “ 7. We have heard both the sides, considered the material on record as well as case law discussed by the ld. CIT(A) in his order and cited by the rival sides in the light of relevant clauses of agreement and find that the ld. CIT(A), while relying upon the decision of the Hon’ble Supreme Court’s decision in the case of Southern Switchgear Ltd. (supra) (order dated 11.12.1997), has directed the Assessing Officer to treat 25% of the royalty payment as capital expenditure and the balance 75% as revenue expenditure and the Assessing Officer has further been directed to allow appropriate depreciation on the 25% capital expenditure in accordance with law and while doing so, the ld. CIT(A) has preferred to follow the above decision, which was pronounced later to that of CIT v. IAEC (Pumps) Ltd. 232 ITR 316 (SC) ( order dated 03.04.1997), which according to him would prevail. 7.1 We have considered the arguments of rival sides and materials on record in the light of precedent relied upon. We have also considered the basis and reasoning as given by the ld. CIT(A) in giving part relief to the assessee. So far as the facts of the case in hand and point at issue decided by the Hon’ble Madras High Court in the case of Southern Switchgears Ltd. (supra) is concerned, it is almost identical and such decision of the Hon’ble Madras High Court has further been affirmed by the Hon’ble Supreme Court in the said case of Southern Switchgears Ltd. (supra) and the ld. CIT(A) has followed such decision to give part relief to the assessee and no distinguishing feature has been pointed by the ld. DR in this regard. Therefore, while concurring with the finding and the conclusion of the ld. CIT(A) in this regard, we uphold his action and dismiss this ground in all the appeals of the Revenue as well as of assessee.” 2.5 Both the Department as well as the assessee could not controvert the above findings of the Tribunal by filing any higher Court’s decision having modified or reverted. Hence, respectfully following the above decision of the Tribunal in assessee’s own case (supra), we confirm the order of the ld.
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CIT(A) on this issue and dismiss the ground raised in both the appeals by the Revenue as well as assessee.
The next ground raised in the appeals of the Revenue is with regard to allowance of additional depreciation.
3.1 The brief facts of the case are that the assessee has claimed additional depreciation of ₹.11,45,893/- for the assessment year 2010-11 and ₹.69,36,223/- for the assessment year 2011-12. It was the submission of the assessee before the Assessing Officer that the grant of additional depreciation at the rate of 20% under clause (iia) of section 32(1) of the Act on new plant and machinery acquired, it has vested as an incentive for investments in new plant and machinery. The second proviso to clause (ii) of section 32(1) of the Act restricts the depreciation for that year in case of assets put to use for a period of less than 180 days in the previous year, it does not prohibit the claim of balance additional depreciation in the next financial year where the usage is in full. Accordingly, the assessee has claimed 10% of additional depreciation in the subsequent year. However, the Assessing Officer disallowed the claim of additional depreciation on the ground that the machinery purchased is mentioned as “392/2007-08 – Used OCF T200 Press with accs”.
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3.2 On appeal, by following the decision of the Tribunal in assessee’s own case for the assessment year 2005-06, the ld. CIT(A) deleted the disallowance of additional depreciation made in the assessment years 2010- 11 and 2011-12.
3.3 On being aggrieved, the Revenue is in appeal before the Tribunal for both the assessment years. The ld. DR vehemently argued that similar issue on identical facts in the case of MM Forgings Ltd. 349 ITR 673, the Hon’ble Madras High Court has decided the issue against the assessee. Therefore, the ld. CIT(A) was incorrect to follow a decision of the Tribunal in which other High Court’s decision has been followed to decide the issue in favaour of the assessee. Hence, the ld. DR has pleaded that the decision of the Hon’ble Jurisdictional High Court is binding on the jurisdictional Tribunal, which should be followed to decide the present appeals.
3.4 On the other hand, the ld. Counsel for the assessee strongly supported the order of the ld. CIT(A) and prayed that the latest decision of the Tribunal, which was followed in the appellate order should be followed to decide the present appeals.
3.5 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. In this case, with regard to the claim of balance additional depreciation, by relying on the decision in the
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case of Lakshmi Technology and Engineering Industries Ltd. v. DCIT in I.T.A. No. 492/Mds/2015 dated 26.04.2016, the ld. CIT(A) has deleted the disallowance made on this count. In the case of Lakshmi Technology and Engineering Industries Ltd. v. DCIT (supra), the Coordinate Benches of the Tribunal followed its own decision in the case of Automotive Coaches & Components Ltd. v. DCIT in I.T.A. No. 1789/Mds/2014 for the assessment year 2008-09 vide order dated 12.02.2016, wherein, the decisions of the Cochin Benches of the Tribunal in the case of Apollo Tyres Ltd. v. ACIT (supra) or the decision of the Hon’ble Karnataka High Court in the case of CIT v. Rittal India Pvt. Ltd. (supra) were followed by the Chennai Benches of the Tribunal to arrive at a conclusion that the assessee is entitled to claim 50% of additional depreciation in the succeeding year when the plant and machinery was put in use for less than 180 days in the preceding previous year.
3.6 With regard to the reliance placed by the ld. DR in the case of MM Forgings Ltd. (supra), by considering section 32(1) as well as 32(1)(iia) of the Act, the Hon’ble Jurisdictional High Court has held as under: “3. The Assessing Authority by applying the second proviso to section 32(1) of the Act, restricted the allowability of the depreciation to 50 per cent of the amount permissible under section 32(1)(iia) of the Act. According to the appellant, when it satisfied all the conditions stipulated under the provisos to section 32(1)(iia) of the Act, the Assessing Authority ought not to have restricted the depreciation permissible under the said section by resorting to the second proviso to section 32(1) of the Act. The learned counsel however fairly pointed out
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before us that in the second proviso to section 32(1) of the Act, that very clause (iia) itself was inserted by Finance Act, 2002 with effect from 01.04.2003. Therefore, it was imperative that on and after 01.04.2003, the claim of the assessee made under section 32(1)(iia) of the Act, had to be necessarily assessed by applying the second proviso to section 32(1) of the Act. Therefore, when there was statutory stipulation providing for restriction to 50 per cent of the amount allowable under section 32(1)(iia) of the Act, no fault can be found with the conclusion of the Assessing Authority as well as that of the Appellate Authority and the Tribunal in having affirmed the action of the Assessing Authority. We, therefore, do not find any scope to entertain the said question of law.” 3.7 By considering the provisions of sections 32(1) and 32(1)(iia) of the Act, the Hon’ble Jurisdictional High Court has held that when there was statutory stipulation providing for restriction to 50% of the amount allowable under section 32(1)(iia) of the Act, where the plant and machineries were put to use less than 180 days in that particular year and did not speak anything about the allowance of balance 50% of the additional depreciation.
3.8 In the case of CIT v. Rittal India Pvt. Ltd. (supra), the Hon’ble Karnataka High Court, after extracting the provisions of Section 32(1)(iia) of the Act, found that beneficial legislation has to be interpreted liberally so as to benefit the assessee. The Hon’ble Karnataka High Court has also found that the intention of the legislation is to allow additional benefit. The Karnataka High Court opined that the proviso would not restrain the assessee from claiming the balance of the benefit of additional depreciation in the subsequent assessment year. In view of the above ratio laid down by the Hon’ble Karnataka High Court, the decision of the Hon’ble Jurisdictional
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High Court in the case of M.M. Forgings Ltd. (supra), relied on by the ld. DR cannot be applied because, by respectfully agreeing with the decision of the Hon’ble Karnataka High Court in the case of CIT v. Rittal India (P.) Ltd., in a recent judgment of the Hon’ble Jurisdictional High Court in the case of Brakes India Ltd. v. DCIT in T.C.A. No. 551 of 2013 dated 14.03.2017 decided similar issue in favour of the assessee by holding that the Division Bench of Hon’ble Madras High Court in the case of M.M. Forgings Ltd. v. Addl. CIT (supra) was not concerned with the issue. Thus, we are of the considered opinion that the ld. CIT(A) has rightly followed the decision of the Tribunal in the case of Lakshmi Technology and Engineering Industries Ltd. v. DCIT (supra) and directed the Assessing Officer to allow the additional depreciation as claimed by the assessee. Hence, the ground raised by the Revenue for both the assessment years is dismissed. I.T.A. Nos. 2667 & 2668/Mds/2016 4. The first common ground raised in both the appeals of the assessee is that the ld. CIT(A) has erred in confirming 25% of the royalty expenditure as capital expenditure and the remaining 75% as revenue expenditure by contending that the assessee has not acquired any ownership right in the technology and license but only right to use and pleaded that the entire royalty expenditure claimed by the assessee should be allowed as revenue expenditure. In Revenue’s appeals, we have sustained the findings of the ld. CIT(A), who has rightly adjudicated the issue by following the decision of the
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Tribunal in assessee’s own case for earlier assessment years. Thus, the ground raised by the assessee is dismissed in both the assessment years.
The next common ground raised in both the appeals of the assessee is that the ld. CIT(A) has erred in confirming disallowance of the marketing service fees paid to India Piston Limited. The ld. CIT(A) has confirmed the said disallowance by following the decision of the Tribunal in assessee’s own case for earlier assessment years. We also gone through the orders of Tribunal and find that on similar facts in an identical issue in assessee’s own case for the assessment years 1999-2000, 2003-04 to 2005-06 in I.T.A. Nos. 1716 to 1719/Mds/2010 vide order dated 25.02.2011, the Tribunal has observed and held as under: “8.4 We have heard both the sides, considered the material on record as well as relevant portion of the orders of authorities below. It is not in dispute that the assessee has claimed a sum of ₹ .56,58,538/- as sales promotion expenses in addition to the technical consultancy fee payable at 5% of the turnover to the IPL. It is also not in dispute as per agreement with IPL that there is no stipulation in the agreement between the assessee and IPL about payment of such amount and it is also not in dispute that such type of claim was ever made in the immediate previous year when such a huge payment is stated to have been made on the basis of so called oral commitment without placing any material or evidence to prove the expediency of such expenditure with the business of the assessee or any nexus of the expenditure with business in this regard. The plea of the assessee is that it is a tie-up with M/s. IPL for using their sales depot and sales network throughout the country and IPL by virtue of there presence in the market for more than 60 years guide the assessee in introducing the new product and acquiring order for the assessee etc. Whereas, the IP Rings Ltd. does not have any market set up in its own and when specifically pointed out that there is already clause in the agreement for payment technical consultancy fee payable at 5%, the assessee’s counsel asserted further
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that there was a dire need for such expenditure and it has been used for launching of the new product without which the assessee could not appropriately market the new product. But, when asked to supply certain data in details about judgment and other details, the assessee was unable to do so. Considering the entirety of facts, circumstances, material on record, we are inclined to concur with the conclusion as drawn by the ld. CIT(A), who is found to have considered each and every aspect of the issue before arriving at the conclusion drawn by him when no contrary material has been provided by the assessee in this regard and dismiss this ground of appeal of 1999-2000.” 6. Since the ld. CIT(A) has followed the above decision of the Coordinate Benches of the Tribunal while deciding the issue raised by the assessee, we find no infirmity in the order passed by him and accordingly, the ground raised by the assessee is dismissed for both the assessment years.
In the result, the appeals filed by the Revenue in I.T.A. Nos.2583 & 2584/Mds/2016 as well as the appeals filed by the assessee in I.T.A. Nos. 2667 & 2668/Mds/2016 are dismissed. Order pronounced on the 28th July, 2017 at Chennai.
Sd/- Sd/- (CHANDRA POOJARI) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 28.07.2017 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.