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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
These cross appeals are filed by the assessee and the Revenue against the Order dated 11.02.2014 of Commissioner of Income Tax (Appeals)-II, Chennai, in for the AY 2009-10. Since the common issues are involved both the appeals are heard together and a common Order is passed for the sake of convenience.
ITA No.1670/Mds/2014 Assessee’s appeal:
The assessee has raised the following grounds in it’s appeal:
The order of The Commissioner of Income Tax (Appeals) is contrary to Law, facts and circumstances of the case.
The Commissioner of Income tax (Appeals) erred in confirming 25% of the royalty expenditure as capital expenditure and the remaining 75% as Revenue expenditure. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the payment of royalty was towards only use of technical information provided by the foreign company and has not resulted in acquisition of any assets of enduring and exclusive advantage to the appellant’s business. 2.2 The Commissioner of income tax (Appeals) ougt to have appreciated that the appellant has not acquired any ownership right in the technology and license but only right to use. The payment for mere right to use is only Revenue in nature. Hence, the entire royalty expenditure claimed by the appellant should be allowed as Revenue expenditure. 3. The Commissioner of income tax (Appeals) erred in confirming the disallowance of the marketing service fees of Rs.1,22,54,729/- paid to India Piston Limited (IPL). 3.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the above service fee was paid to the IPL, the promoter of the appellant company towards promoting and marketing of appellant’s products. IPL guide the appellant in promoting and securing order on behalf of the appellant. The above amount paid is wholly and exclusively for the purpose of its business hence, should be allowed as a deduction. 4. The Appellant craves Leave to file additional grounds at the time of hearing.
2.0 Ground No.1 and 4 are general in nature which do not require specific adjudication: & 2022/Mds/2014 :- 3 -:
3.0 Disallowance of royalty payment of Rs.53,47,801/-: This issue is common ground of appeal for both the assessee and the Revenue.
Ground Nos.2.0 to 2.2 of the assessee’s appeal is related to the issue of Royalty payment. The Revenue’s appeal in is related to the same issue of Royalty.
4.0 The Assessing Officer made the disallowance of Rs.53,47,801/- representing the royalty payment made by the assessee to M/s.Nippon Piston Ring Co. Ltd. During the assessment proceedings, the Assessing Officer (in short ‘AO’) found that the assessee debited a sum of Rs.71,30,401/- towards the payment of royalty to M/s.Nippon Piston Ring Co. Ltd. The AO called for details and the agreements for the payment of Royalty and after verification of the agreements it was observed by the AO that the royalty payments are in lieu of exclusive license from foreign company to manufacture the products in India and a non-exclusive license to sell the products and treated the Royalty payment as capital expenditure and accordingly disallowed the entire expenditure and allowed the depreciation @25% on the total payment. For the sake of convenience we extract the relevant paragraph No.3.2 of the Assessment Order as under:
“On going through the agreements, it is noticed that the royalty payments are in lieu of exclusive licence from foreign company to manufacture the products in India and a non- exclusive licence to sell the products. The Royalty has been paid as per the agreement, by virtue of which, the assessee enjoys exclusive right to manufacture and sell the products in India using the licensed technology provided and such Royalty is paid on a fixed percentage of sales. In other words, an exclusive right has been conferred on the assessee for manufacturing and selling the products in India and the assessee is enjoying an enduring benefit out of it. Therefore, the payment of Royalty, towards technical information provided by the foreign company in respect of manufacturing methods of the products and the & 2022/Mds/2014 :- 4 -: license granted to the assessee company, is a capital expenditure. The decision of the Hon’ble Supreme Court, in the case of Southern Switch Gear vs. CIT, reported in 232 ITR 359, is squarely applicable in this case. The depreciation schedule provides for 25% depreciation on intangible assets like know-how, patents, copyrights, trademark, licences, franchises or any other business or commercial rights of similar nature. In view of the above, the claim of expense of Rs.71,30,401/- under the head ‘Royalty’ is disallowed and depreciation on the same is allowed @25% which comes to Rs.17,82,600/-. Thus the disallowance under this head comes to Rs.53,47,801/- (Rs.71,30,401/- minus Rs.17,82,600/-).”
4.1 Aggrieved by the order of the AO, the assessee went on appeal before the Learned Commissioner of Income Tax(Appeals) (in short ‘Ld.CIT(A)’). The Ld.CIT(A) following the decision of this Tribunal in the assessee’s own case in to 1719/Mds/2003 dated 25.02.2011 for the AYs 1999-2000 to 2005-06 held 75% of the royalty payments as Revenue expenditure and the balance amount of 25% was held to be capital expenditure and entitled for depreciation.
4.2 Aggrieved by the order of the Ld.CIT(A), the assessee and the Revenue have filed the appeal before this Tribunal. The assessee in it’s appeal agitating the direction of the Ld.CIT(A) to treat 75% of expenditure as Revenue instead of 100%. The Revenue in it’s appeal objecting the direction of Ld.CIT(A) to treat 25% of the expenditure as capital expenditure instead of 100%.
4.3 We heard the rival submissions and perused the material placed before us.
In the assessee’s own case on identical facts in the order cited supra and in for the AY 2008-09, this Tribunal directed the AO to treat 3/4th of Royalty payment as Revenue expenditure and the remaining 1/4th of expenditure as capital expenditure and allowed the & 2022/Mds/2014 :- 5 -: depreciation on the capital expenditure. For ready reference, we reproduce the relevant paragraphs of this Tribunal order dated 25.02.2011
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.
4.4 Since the facts are identical following the order of this tribunal cited (supra) we find no reason to interfere with the order of the Ld.CIT(A) and accordingly we uphold the same. The appeal of the assessee on this ground and Revenue appeal in are dismissed.
5.0 Ground Nos.3 to 3.1 are related to the disallowance of marketing service fee of Rs.1,22,54,729/- paid to M/s.India Piston Rings Ltd., (in short ‘M/s.IPL’). During the assessment proceedings, the AO found that the assessee company paid a sum of Rs.1,22,54,729/- towards service fee to M/s.IPL and claimed to be towards promoting assessee’s products. The assessee claimed that M/s.IPL guide the assessee in marketing, promoting and securing the orders on behalf of the assessee and the consideration of & 2022/Mds/2014 :- 6 -: the service fee of 3% of the net turnover is paid to M/s.IPL as per the agreement. The assessing officer being not convinced with the explanation examined the agreements and disallowed the expenditure holding that the same is not a genuine expenditure. For the sake of convenience we extract the relevant paragraph of the AO’s order in 5.1 and 5.2 as under:
“5.1 Copy of the agreement between assessee and IPL is filed and gone through. As per the agreement of IPL offers the following services- - marketing the products - Canvass business - handle publicity and advertisement - assist in design, drawings etc., - assist in R & D activities - identify diversification and expansion etc 5.2 The assessee — M/s. I P Rings was established 20 years back by IPL — its promoter in collaboration with Nippon Piston Ring Company Ltd, Japan. It is stated that it has a model manufacturing unit, with the state of the art technologies and a sophisticated unit. Its customers include TATA Motors, Ashok Leyland, Maruthi, Hyundai Motors, Hindustan Motors, Simpsons, Eicher Motors, Mahindra, TVS Motors, TAFE and India Pistons. Some of the customers are its own promoter group. The assessee itself claims that the company is the most preferred supplier. The assessee has not given any evidence of its dependability for the services mentioned in the agreement with its promoter nor it was conclusively proved that marketing service for payment is wholly and exclusively for the purpose of its business and by making such payment the assessee increased its sales. The assessee by merely creating an agreement to pay 3% of its sales to its promotion a service for which in my opinion is not allowable. Hence, marketing service fee paid of Rs.1,22,54,729/- is disallowed and added to the total income of the assessee”.
5.1 Aggrieved by the Order of the AO, the assessee went on appeal before the Ld.CIT(A). The Ld.CIT(A) confirmed the addition observing that the services mentioned in the agreement are general in nature and the exact nature of services rendered by M/s.IPL are not furnished by the assessee. The Ld.CIT(A) further observed that though the assessee claimed that the payments were wholly and exclusively for the purpose of business of the assessee, the assessee has not furnished the evidences regarding the nature of services actually rendered to the assessee. The CIT(A) was of the view that mere payment and the receipt are not & 2022/Mds/2014 :- 7 -: conclusive proof of evidence for rendering the services and for the purpose of allowing the expenses and accordingly dismissed the appeal of the assessee.
5.2 Aggrieved by the Ld.CIT(A)’s Order, the assessee filed appeal before us.
Appearing for the assessee, the Ld.AR argued that M/s.IPL is a promoter of the assessee company rendering services related to canvassing, handling, publicity and advertisement, assisting in designing and drawings, assisting in R&D activities and identifying diversification and expansion etc. The payment is made as per the terms and conditions of the agreement entered into with M/s.IPL @3% and the same is evidenced by banking transaction. In the earlier years also, the assessee claimed such expenditure and the AO has allowed the expenditure. On the same set of facts, the AO cannot turn around take different stand. On the other hand, the Ld.DR argued that the assessee has not produced any evidence to show that M/s.IPL was rendering any service to the assessee company.
As stated by the AO, in the Assessment Order, the company is 20 years old company having its own Divisions for marketing, publicity, canvassing, etc., and there is no need to make any payment to M/s.IPL.
5.3 We heard the rival submissions and perused the material placed before us. & 2022/Mds/2014 :- 8 -:
The contention of the assessee was that M/s.IPL is rendering marketing, canvassing, publicity, R&D, designing and drawings, etc. services, for which the service fee @3% on total turnover was paid by the assessee. Both the companies are admitting the income and expenditure and the same are assessed to tax in the respective hands. Therefore, there is no reason to doubt the genuineness of the expenditure. However, the assessee has not produced any evidence to prove that the M/s.IPL is rendering services as discussed above. The company is in need of the services of M/s.IPL but neither before the AO nor before the Ld.CIT(A) the assessee has produced any evidence to prove the genuineness of expenditure. In Income Tax proceedings, each year is independent year and the assessee has to prove that the expenditure was genuinely incurred for the purpose of business. Before this Tribunal the assessee has furnished a Paper Book and in Page Nos.37 to 160 the assessee has submitted various services of technical nature, purported to be rendered by M/s.IPL. These evidences were not placed before the AO and the Ld.CIT(A). At the time of hearing, the Ld.AR argued that the additional evidence may be sent back to the file of the AO for verification. We considered the additional evidences and submissions made by the assessee before us regarding various technical help extended by M/s.IPL to the assessee. The genuineness and correctness of the evidences and the actual services rendered by M/s.IPL require further verification.
Therefore, we are of the considered opinion that the case should be remitted back to the file of the AO to verify the evidences furnished by the & 2022/Mds/2014 :- 9 -: assessee in support of its claim for services taken from M/s.IPL and decide the issue a fresh on merits. Accordingly, we remit the matter back to the file of the AO with directions to verify the services rendered by M/s.IPL and decide the allowability of the expenditure afresh after on merits. This ground of appeal of the assessee is allowed for statistical purpose.
6.0 In the result, the appeal of the assessee is partly allowed and the Revenue’s appeal is dismissed.
Order pronounced in the Open Court on 31st March, 2017, at Chennai.