CIT vs. HONDA SIEL POWER PRODUCTS LTD

It p t #3 o/o 2O,O5.2011 Present: Mr. Sanjeev Sabharwal, Sr. Standing Counsel for the Revenue. Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advs. for the respondent/assessee. +lTA No.748l2o1t {< The respondent/assessee herein has claimed royalty and technical guidance fee as deduction on current expenses and revenue expenditure. The Assessing Officer (AO), however, capitalized 25o/o of such royalty expenses as well as technical guidance fee and allowed balance fee as revenue expenditure while passing the assessment order under Section L43(3) of the Income Tax Act (for brevity 'the Act'). Thereafter, the Commissioner of Income Tax in exercise of its power under Section 263 of the Act, set aside the order of the AO observing that the same was erroneous and prejudicial to the interest of Revenue inasmuch as the AO had not examined the issue or examined the same properly and in fact, the entire expenditure on account of royalty as well as guidance fee should have been capitalized, as it was capital expenditure and not the Revenue expenditure. The order of the CIT has been set aside by the lncome Tax Appellate Tribunal (in short 'the Tribunal') vide impugned order dated 22.L0.20L0. iF Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified

i on going through the said order, one can'find that the main reason for setting aside the order of the CIT was that the AO had specifically gone into the various terms and conditions of Royalty and Technical Guidance Agreement entered into by the assessee with the Japanese company to whom the said payments were made' The Tribunal also found that both the aspects, viz', payments of royalty as well as payments of guidance fee were discussed in detail by the AO in the light of the Agreement and on that basis, after relying upon the judgment of the Supreme Court in the case of Southern Switch Gear Ltd. Vs. Commissioner of Income Tax 232 ITR 359 (SC), 25o/o ot payments was capitalized. The Tribunal in respect of royalty found that the issue was considered by the AO in the following manner: "Therefore, it is clear from the above that the terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the assessee are provided by Honda. Further, the assessee has paid the royalty for the acquisition of an indivisible, non transferable and exclusive license in favor of the assessee to manufacture and assemble the products and the parts in the Territory, and to sell and distribute in the Territory the products and the parts so manufactured or assembled or procured. Moreover, the assessee can grant indivisible and non-transferable sublicense to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products' Moreoier, in the event of the expiration of the Contract, the assessee may continue to use know-how and the Industrial property Rights for the purpose of manufacture, assemble, procurernenl, sale, delivery and service of the products and ihe parts. Clearly the above rights have benefit of enduring nature and therefore, the acquisition of such rights, as discussed above, may be treated partly towards such rights, as discussed above, may be treated partly towards cjpital and partly towards the revenue. The Hon'ble Supreme Court in the Southern Switch Gear Ltd' Vs. CIT reported in 232 ITR 359 (SC) and Hon'ble Madras High court in the same case reported in 148 ITR 272 held that 25o/o of such royalty expenses constituting a capital asset. ir-

i </ Following the same judgment, 25o/o of total royalty expensel of Rs.30419881/- which comes to Rs.760q9701- is treated as being spent towards acquisition of capital asset and thus, is dlsailowed. Since the assessee has filed incorrect particulars of its income, penalty procee-dings under section zl(l\(c) have been initiated separately." Likewise, the issue oi puy11"nt of technical guidance was discussed in the following terms: "Technical Guidance Fees perusal of the above clauses clearly indicated that technical fees admitted have been paid on account of technical services provided by the technicians of Honda. The study of the clauses of the agreement clearly indicates that the technical knowledge the assessee-company obtained through this agreement from the foreign company secured to the assessee an enduring advantage and benefits in that the same was available to the assessee for its manufacturing and industrial processes. The technical assistance contemplated in the agreement covers the establishment of the factory and the operation thereof for the manufacture of various products. Thus, Rs.250349/- being 25o/o of the technical fees paid of Rs.10013963/- is treated as capital expehditure and is disallowed as per the judgment of the supreme court as disallowed above. since the-assessee has filed incorrect particulars of its income, penalty proceedings under section 271(1)(c) have been i nitiated sePa ratelY. " On this basis, having regard to the aforesaid fact that the issue was examined in detail and there was no reason for CIT to exercise its jurisdiction under Section 263 ofthe Act, the Tribunal while setting aside the said order, made the following observations: "ln this case, the Assessing Officer has considered the agreement while finalizing the assessment' This is very evident from paras 10.1 to 10.11 of the Assessing Officer's order, which we have reproduced in our order at para 3. The bare reading of this clearly shows that Assessing Officer had finalized the order after due consideration of the agreement. Section 263 does not visualize a case of substitution of the judgment of the Commissioner for that of the Assessing Officer who has finalized the order. As we have already noted that, the Assessing Officer has made t_

I the inquiries and had applied his mind. After doing so, he had determined the income, which is very evident from the assessment order itself. Terms of agreement have been elaborately discussed in para nos. 10.1 to 10.11 ClT',s finding that Assessing officer had not made efforts to examlne the agreement is contrary to the facts. Assessing officer examined the agreement and its terms and conditions also. Thus, this is not a case where there is 'lack of inquiry'. There is nothing on the record which could estabiish that even there was 'inadequate inquiry'. Assessing Officer had arrived at a decision after inquiries. He had cbnsidered even case laws and applied the ratio of the same. He considered 25o/o of royalty expenses towards capital expenditure. All this shows that he had examined the agreement and arrived at a decision. The CIT's order can be well said that it is an order for substituting of judgment." We do not find any infirmity in the aforesaid order of the Tribunal. No question of law arises. This appeal is accordingly dismissed. /''- M.L. 1 MAY 20,?OLL pmc