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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL
Before: SHRI G.D. AGRAWALG.D. AGRAWAL & AND BEFORE SHRI G.D. AGRAWALG.D. AGRAWAL & AND SHRI SUDHANSHU SRIVASTAVA SHRI SUDHANSHU SRIVASTAVASHRI SUDHANSHU SRIVASTAVA SHRI SUDHANSHU SRIVASTAVA
PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP :- PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP These appeals by the Revenue for the assessment years 2008-09 and 2009-10 are directed against the order of learned CIT(A)-2, Faridabad dated 27.12.2013 and 29.08.2014.
2. In both these years, the Revenue has raised common grounds of appeal except the difference in the amount of disallowance. The grounds raised in assessment year 2008-09 read as under :-
“1. Whether on the facts and in the circumstances of the case, the ld.CIT(A) was right in law in allowing royalty of Rs.1,50,50,557/- paid by assessee to its associated enterprises (Mitsubishi Electric Corporation, Japan) as revenue in nature whereas the assessee company has the exclusive right to sell and manufacture product in India, which resulted in securing benefit of enduring nature.
2 ITA-1267 & 5884/D/2014
Whether on the facts and in the circumstances of the case, the ld.CIT(A) was right in law in holding that the facts of the case are different from ratio of judgment of Hon'ble Supreme Court in the case of Southern Switchgear Ltd. Vs. CIT (1998) 232 ITR 359 whereas the facts of the case are almost similar to that of the judgment of Apex Court.”
The facts of the case are that the assessee company is an assembly unit assembling auto components and supplying the same to OEMs like Maruti Udyog Ltd., Honda C. Cars Ltd., Hindustan Motors Ltd. etc. The assessee has entered into a technology transfer agreement and patent license agreement dated 20th July, 2000 with Mitsubishi. This agreement was subsequently amended vide agreement dated 13th April, 2008. The agreement confers a non-exclusive, non-transferable rights to the assessee to manufacture, use or sell all licensed products under licensed know-how in licensed territory. From a perusal of the agreement, it is evident that by the agreement, the assessee acquired license and right to make, use, distribute and sell the products for the limited period as provided in the agreement and after the termination of this agreement, all rights of the assessee shall return to Mitsubishi. During the year under consideration, the assessee made the payment of royalty amounting to `1,50,50,557/-. The same was disallowed by the Assessing Officer treating it to be capital in nature. On appeal, learned CIT(A) allowed the same. Hence, this appeal by the Revenue.
We have heard the arguments of both the sides and have perused the material placed before us. At the time of hearing before us, it was pointed out by the learned counsel that for first five years i.e. assessment year 2001-02 to 2005-06, the Revenue has accepted the royalty payment as revenue expenditure. In assessment year 2006- 07, in the original assessment, the same was accepted. However, the notice for reassessment was issued u/s 148 which was quashed by Hon'ble Jurisdictional High Court. The said decision is reported in 231 Taxman 343. In assessment year 2007-08, again, the same was 3 ITA-1267 & 5884/D/2014 accepted by the Assessing Officer as revenue expenditure. In assessment year 2008-09, 2009-10 & 2010-11, it was disallowed for which appeal is pending before the ITAT. In assessment year 2011-12, the disallowance was proposed by the Assessing Officer in the draft assessment order but which was directed to be deleted by the DRP. The order of the DRP has been accepted by the Assessing Officer and in the final assessment order dated 25th January, 2016, no addition is made. Similarly, in assessment year 2012-13, in the order passed u/s 143(3), the Assessing Officer accepted the royalty payment as revenue expenditure. It is stated by the learned counsel that the payment is on year to year basis at a percentage of the sales of the licensed product made by the assessee. Thus, it is recurring revenue expenditure and no asset is transferred to the assessee. He also relied upon the following decisions :-
(i) CIT Vs. Ciba of India Ltd. – [1968] 69 ITR 692 (SC). (ii) CIT Vs. Hero Honda Motors Ltd. – [2015] 372 ITR 481 (Delhi). (iii) Hero MotoCorp Limited Vs. Addl.CIT – Order dated 23.11.2012 of ITAT in ITA No.5130/Del/2010. (iv) CIT Vs. Sharda Motor Industrial Ltd. – [2009] 319 ITR 109 (Delhi). (v) Climate Systems India Ltd. Vs. CIT – [2009] 319 ITR 113 (Delhi). (vi) CIT Vs. G4S Securities System (India) P.Ltd. – [2011] 338 ITR 46 (Delhi). (vii) Shriram Refrigeration Industries Ltd. Vs. CIT, Delhi-I – 127 ITR 746. (viii) Shriram Pistons & Rings Ltd. Vs. CIT – [2008] 171 Taxman 81 (Delhi). (ix) Praga Tools Ltd. Vs. CIT – [1980] 123 ITR 773 (AP). (x) CIT Vs. Avery India Ltd. – [1994] 207 ITR 813 (Calcutta). (xi) Maruti Suzuki India Ltd. Vs. Addl.CIT – [2015] 60 taxmann.com 411 (Delhi-Trib).
4 ITA-1267 & 5884/D/2014 (xii) LG Electronics India Pvt.Ltd. Vs. ACIT – Order dated 08.12.2014 of ITAT in ITA No.5140/Del/2011.
Learned DR, on the other hand, has relied upon the order of the Assessing Officer.
We have carefully considered the submissions of both the sides and have perused the material placed before us. We find that the Revenue has accepted the royalty as revenue expenditure in the preceding as well as subsequent years. Thus, there would be no justification for treating the same to be capital expenditure in some of the intervening years. Hon’ble Apex Court in the case of Radhasoami Satsang Vs. CIT – [1992] 193 ITR 321 held as under:-
“Held, reversing the decision of the High Court, on the facts, (i) that property given to the Satguru was intended for the common purpose of furthering the purpose of the institution. The central council had authority to manage the properties of the institution and, on revocation of the trust, the property was not to go back to the Satguru, and, at the most, in the place of the trust, the central council would exercise authority. The Tribunal was justified in holding that the properties were subject to a legal liability of being used for the religious or charitable purposes of the Satsang.
(ii) That, in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, the question of the exemption of the assessee appellant should not have been reopened.
Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”
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The ratio of the above decision would be squarely applicable to the facts of the assessee’s case. Moreover, Hon'ble Delhi High Court in the case of CIT Vs. G4S Securities System (India) P. Ltd. (supra), held as under :-
“Held, dismissing the appeals, that the ownership rights of the trade mark and know-how throughout vested with the foreign company and on the expiration or termination of the agreement the assessee was to return all the know- how obtained by it under the agreement. The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time was the assessee entitled to become the exclusive owner of the know-how and the trade mark. Hence, the expenditure incurred by the assessee as royalty was revenue expenditure and was deductible under section 37(1) of the Income-tax Act, 1961.”
The ratio of the above decision would be squarely applicable to the facts of the assessee’s case because the payment of royalty in the case of the assessee is also on year to year basis on the net sales of the assessee and at no point of time, the assessee is entitled to become the exclusive owner of know-how and the trademark. We also find that in assessment year 2011-12, the DRP, after considering the agreement and legal position in detail, held as under:-
“Perusal of the extracts from the agreement does not reveal to us that any secret or process of manufacture is sold so as to be construed to be capital in nature. Limited non-exclusive, non transferable rights to manufacture, use, or sell all licensed products under licensed patents and licensed know-how in licensed territory are obtained by taxpayer in lieu of payment of royalty for the term of the agreement which is 7 years. There is a prohibition on parting with confidential information and creation of further rights in favour of third parties. What is accorded is purely access to technical knowledge which is for the tenure of the agreement. DRP has also noted a recent decision of the Advanta India Ltd. (TS 590-HC-2015 (TEL&AP) wherein the Hon’ble High Court has distinguished Alembic Chemical Works and held in favor of capitalization
6 ITA-1267 & 5884/D/2014 of ¼ of payment for know-how only as capital in nature, on facts where the taxpayer acquired a living organism “germplasm” used to produce revenue generating products. But, even here the royalty paid was confirmed as a revenue expense.
Having examined the Agreement governing Royalty, and the terms of its payment in light of the principles laid down by the Supreme Court and High Court and in due deference to decisions in the case of Alembic Chemical Works Co Ltd v CIT, 177 ITR 377 (SC) supra and Delhi High Court in the case of CIT v JK Synthetics Ltd 309 ITR 371, Shri Refrigeration Industries Ltd v CIT 127 ITR 746, Triveni Engr Works Ltd v CIT 136 ITR 340 Ciba of India 69 ITR 692 Hon'ble Supreme Court and other DRP concludes that royalty paid is revenue in nature. AO is directed to allow it accordingly.”
The above decision of DRP has been accepted by the Revenue and has become final. In view of the above, we do not find any infirmity in the order of learned CIT(A). The same is upheld and the appeals filed by the Revenue are dismissed.
In the result, the appeals of the Revenue are dismissed. Decision pronounced in the open Court on 19.10.2016.