DCIT, CHENNAI vs. INDIAN ADDITIVES LIMITED, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No. 835/Mds/2016. :- 2 -:

2010-2011 passed u/s.143(3) r.w.s. 144C(3) and 250 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’).

The Revenue has raised the following grounds:- 2.

‘’2.1. The CIT(A) erred in holding that royalty payments made by the assessee to Mls Chevron Oronite Company LLC USA are revenue in nature.

2.2. The CIT(A) ought to have appreciated that in the relied upon decision, ITAT had given the decision mainly based upon the mode of payment of royalty of the assessee.

2.3. The CIT(A) ought to have appreciated that the mode of payment or quantification of the same in relation to the turnover cannot alter the basic purpose i.e. infusion of new technology for which the payment was made.

2.4. The CIT(A) ought to have appreciated the fact that in the relied upon decision of the ITAT, in the ITAT's own observation the so called running royalty was for the purpose of use of licence, trade mark on technical information. With the amendment in the Act made before a decade allowing depreciation on the intangible assets like licence, trade mark etc, the payment can only be considered as capital in nature and not revenue in character.

2.5 The CIT(A) ought to have appreciated that since royalty falls under intangible assets as per provisions of sec 32(1) (ii), the expenditure is to be treated only as capital expenditure.

2.6 The relied upon decision of the Hon’ble ITAT in and 700/Mds/2009, dated 13.11.2009 for assessment years 99-2000, 2000-01 to 2002-03 on the similar issue, has not become final and appal before the Hon’ble High Court is pending’’.

The Brief facts of the case are that the assessee company is 3. engaged in manufacturing and sale of lubricating oil, additives and ITA No. 835/Mds/2016. :- 3 -: filed return of income on 23.09.2010 with total income of �66,31,49,630/- and was processed u/s.143(1) of the Act and the case was selected for scrutiny under CASS and notice u/s.143(2) of the Act was issued. In compliance to notice, the ld. Authorised Representative of assessee appeared and filed details. The assessee during the financial year 2009-2010 entered into International transactions with Associate Enterprise (AE) situated outside India were the value exceed �15 crores. The ld. Assessing Officer made a reference to Transfer Pricing Officer (TPO), Chennai to determine Arm’s Length Price (Arms Length Price) in respect of the transactions.

The ld. TPO vide order dated 07.01.2014 in C.R. No.1-210/TPO-II/A.Y.

2010-2011 observed and concluded on determination of downward adjustment of cost at �19,28,47,000/- on international transactions with Associate Enterprises, further immediately, under rectification proceedings, the ld.TPO revised the order u/s.92 CA(3) of the Act dated 07.01.2014 determining the downward adjustment of cost to �3,83,93,740/- and the ld. Assessing Officer made an TPO addition to the returned income alongwith other additions. The ld. Assessing Officer found that the assessee has made payments of Royalty to M/s.

Chevron Oronite Company LLC, USA (COCL, USA) �6,85,80,000/- and claimed as revenue expenditure. The ld. Authorised Representative filed copy of agreement entered with COCL, USA in the assessment

ITA No. 835/Mds/2016. :- 4 -: proceedings and the ld. Assessing Officer on perusal found that the assessee company has exclusive right to manufacture and sell the products in India using the licensed technology and the payment of royalty in respect of manufacturing product and licence granted to the assessee falls within exclusive benefit and advantage of enduring nature and has to be treated as capital expenditure. The ld. Assessing Officer alleged that the transactions entered between assessee company as per terms & agreement were royalty payment in relation to the turnover and the amount is fixed as lumpsum payable for infusion of new technology and other benefits and treated the said payment as intangible asset being eligible for depreciation . The ld. Assessing Officer relied on the Apex Court decision considering the stipulations in the agreement and provisions of Sec. 32 of the Act and the explanations on treatment as intangible assets. The ld. Authorised Representative brought to the knowledge of the ld. Assessing Officer, that similar issue was decided in favour of the assessee in earlier assessment years. Therefore, the expenditure has to be allowed in the financial statements. But the ld. Assessing Officer found that against the Tribunal order, Department has preferred an appeal before Hon’ble High Court of Madras and same is pending.

Therefore, ld. Assessing Officer distinguished decision and disallowed the payment of royalty and allowed depreciation @25% and excess

ITA No. 835/Mds/2016. :- 5 -: claim of �5,14,35,000/- was brought to tax. Subsequently ld. Assessing Officer under provisions of Sec.144C(1) of the Act made above two additions in Draft assessment order dated 07.03.2014 and served on the assessee under provisions of Sec. 144C(2) of the Act.

The assessee company has option to file objections before Dispute Resolution Panel (DRP) within thirty days from the date of receipt of assessment order u/s.144C(1) of the Act. The ld. Authorised Representative filed letter with ld. Assessing Officer after receipt of draft assessment order on 08.04.2014 mentioning that as against the Draft Assessment order, the assessee company intends to file an appeal and requested to issue final assessment order to enable to file an appeal before Commissioner of Income Tax (Appeals).

Accordingly, the ld. Assessing Officer considered the submissions on Draft assessment order and completed assessment order as per provisions of Sec. 143(3) r.w.s. 144C(3) of the Act assessing total income AT �75,29,78,370/- and raised demand. Aggrieved by the order passed u/s.143(3) r.w.s. 144C(3) of the Act dated 29.04.2014, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

4. In the appellate proceedings, the ld. Authorised Representative of assessee argued the grounds and reiterated the submissions made before Assessing Officer and Transfer Pricing

ITA No. 835/Mds/2016. :- 6 -: proceedings. The ld. Commissioner of Income Tax (Appeals) considering the submissions dismissed the ground of the assessee on the disputed issue of TPO downward adjustment �3,83,93,740/- and on last ground, the ld. Commissioner of Income Tax (Appeals) considered the Authorised Representative submissions, findings of the Assessing Authorities and the nature of expenditure dealt in assessee’s own case for earlier assessment years 1999-2000 to 2002- 03 in and ITA Nos.700 to 702/Mds/2009, dated 13.11.2009 wherein royalty disallowance was deleted and the Revenue has filed an appeal before Hon’ble High Court and is pending. The ld. Commissioner of Income Tax (Appeals) considered the Tribunal decision in assessee’s own case and held that the royalty paid to M/s.

Chevron Oronite LLC is a revenue expenditure and partly allowed the appeal. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.

Before us, the ld. Departmental Representative reiterated 5. that Commissioner of Income Tax (Appeals) has erred in considering royalty payments made to M/s. Chevron Oronite Company LLC, USA in the nature of revenue expenditure and deleted relying on the decisions of Tribunal in assessee’s own case and overlooked the findings of the ld. Assessing Officer on the payment of quantified amount based on ITA No. 835/Mds/2016. :- 7 -: the turnover and technology transfer which takes the characteristic of intangible assets i.e. licence, trade mark which falls within the provisions of Sec. 32(1)(ii) of the Act and eligible for depreciation.

The decision relied by the Commissioner of Income Tax (Appeals) of Tribunal has been challenged before Jurisdictional Hon’ble High Court and therefore prayed for set aside the order of Commissioner of Income Tax (Appeals) and allow the appeal.

Contra, the ld. Authorised Representative of assessee 6. submitted on the transactions entered with M/s. Chevron Oronite Company LLC, USA and relied on the assessee’s own case for the earlier assessment years in and ITA Nos.700 to 702/Mds/2009 and the order of Commissioner of Income Tax (Appeals) and opposed to the grounds of the Department.

We heard the rival submissions , perused the material on 7. record and judicial decisions relied. The sole crux of the issue being payment of royalty to M/s. Chevron Oronite Company LLC, 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 the agreement and treated the said payment in the nature of intangible assets and allowed depreciation. The ld. Commissioner of Income Tax (Appeals)

ITA No. 835/Mds/2016. :- 8 -: 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 1438 & 1439/Mds/2012, assessment years 2003-04, 2005-06 & 2006-07 observed at para 4 at page 2 of his order 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 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 royalty 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

ITA No. 835/Mds/2016. :- 9 -: 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.”

ITA No. 835/Mds/2016. :- 10 -:

We, respectfully following the Co-ordinate Bench decision, upheld the order of Commissioner of Income Tax (Appeals) and dismiss the ground of the Revenue.

In the result, the appeal of the Revenue in ITA 8. No.835/Mds/2016 is dismissed.

Order pronounced on Tuesday, the 14th day of June, 2016, at Chennai.