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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
Before: SHRI N. K. SAINI & SHRI KULDIP SINGH
ORDER PER KULDIP SINGH, JM: Both the aforesaid appeals are being disposed of by way of consolidated order as common question is raised before the Tribunal for adjudication.
The appellant, DCIT, Circle 11(1), New Delhi (hereinafter referred to as ‘the Revenue’), by filing the present appeals, sought to set aside the impugned orders dated 24.02.2012 and 26.03.2012 passed by Ld. CIT(A) XIII, New Delhi qua the Assessment Years 2006-07 and 2007-08 on the grounds inter alia that:
2 I.T.A.Nos.2101 & 2649/Del/2012 A. I.T.A.No. 2101/Dl/2012 (Assessment Year 2007-08):
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,77,878/- made on account of disallowance of royalty expenses. 2. On the facts and circumstances of the case and in law, th Ld. CIT(A) has erred in deleting the addition of Rs.3,48,000/- made on account of disallowance of retainer ship fee paid to Sh. O.P. Sharma.” B. I.T.A.No. 2649/Del/2012 (Assessment Year 2008-09):
“1. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 36,90,062/- made on account of disallowance of expenses of royalty being treated as capital in nature. .
2. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 12,07,103/- made on account disallowance of software expenses.
3. On the facts and circumstance of-the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 4,24,461/- made on account of disallowance of exhibition expenses.
4. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 57,19,835/- made on account of disallowance of professional expenses.
5. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 2,66,667/- made on account of disallowance of payment of stamp duty.
6. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 2,20,77,354/- made on account of difference in receipts shown in P&L A/c and shown in the submission of assessee.”
Briefly stated, the facts of these cases are inter alia that the assessee company is into the business of manufacturing, marketing and selling the 3 I.T.A.Nos.2101 & 2649/Del/2012 fiber optic transmission system and access products. The assessee company claimed expenditure of Rs.49,20,082/- and Rs.2,36,15,837/- on account of royalty payment on percentage basis during the Assessment Years 2007-08 and 2008-09 respectively. The Assessing Officer found that the payments made by the assessee on account of royalty payment in the nature of enduring advantage and finding the explanation rendered by the assessee not sustainable, disallowed 75% of royalty payment subject to depreciation @ 25% amount involved.
During the Assessment Year 2007-08, assessee claimed deduction of retainership expenses to the tune of Rs.3,48,000/- paid to Shri O.P. Sharma as retainership fee on monthly basis which has been disallowed by the Assessing Officer on the ground that no detail has been submitted showing deduction of any TDS on the said payment.
During the Assessment Year 2007-08, the assessee claimed an amount of Rs.13,73,063/- relating to software purchases and repair and maintenance, which is found to be of enduring benefit to the assessee by the Assessing Officer. The Assessing Officer considering the expenditure being capital in nature, allowed depreciation to the tune of 25% to the assessee and made addition of the remaining expenditure to the tune of RS.12,07,103/-. Similarly assessee claimed the deduction of expense of Rs.4,24,461/- on account of exhibition expenses which has been disallowed by the Assessing Officer on the ground that the assessee has specifically failed to justify the provisions so made for such expense. Assessee also claimed deduction of expenditure of Rs.57,19,835/- disallowed on account of professional expenditure having been paid as consultancy fee to a firm namely Renoir GRP. Assessing Officer finding
4 I.T.A.Nos.2101 & 2649/Del/2012 the explanation made by the assessee to justify the claim as revenue expenditure and all the expenditure incurred wholly and exclusively for the business not tenable, made addition of Rs.57,19,835/- to the income of the assessee.
During Assessment Year 2007-08 assessee has also claimed deduction of Rs.2,66,667/- on account of payment of stamp duty which has been disallowed by the Assessing Officer on the ground that the payment of stamp duty has been paid as onetime payment for the renewal of lease deed which is for the period of three years liable to be renewed after every three years. Similarly, Assessing Officer made addition of Rs.2,20,77,354/- on account of difference in receipt shown in P & L account and claimed in the submissions of the assessee as no explanation to reconcile the accounts has been filed by the assessee.
The assessee carried the matter before Ld. CIT(A) who has allowed both the aforesaid appeals. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
Ground No.1 of I.T.A.No.2649/Del/2012 (Assessment Year 2007-08) and ground No.1 of I.T.A.No.2101/Del/2012 (Assessment Year 2008-09): Ld. D.R. challenging the impugned order disallowing the royalty paid by the assessee to the tune of 75% relied upon the order passed by Assessing Officer. However, on the other hand, Ld. A.R. to repel the arguments addressed by the Ld. D.R. relied upon the agreement dated 10.03.2006 for transfer of know-how, technical documentation and licensing rights under which payment of royalty has been made and also relied upon the order passed by ITAT Delhi Bench vide its order I.T.A.
5 I.T.A.Nos.2101 & 2649/Del/2012 No. 471/Del/2010 dated 26.08.2011 in assessee’s own case for Assessment Year 2005-06.
8.1 Undisputedly, the assessee made royalty payment to the tune of Rs.49,20,082/- for Assessment Year 2007-08 and Rs.2,36,15,837/- for Assessment Year 2008-09 respectively in terms of agreement dated 09.08.2002 subsequently replaced by another agreement dated 10.03.2006 lying at page 90 of the Paper Book entered into with Tellabs Denmark A/s for transfer of knowhow, technical documentation New Delhi licensing rights on payment of royalty @ 5% for domestic sale and @ 8% on export product sold by the assessee company.
8.2 Royalty payment has been made by the assessee as per categoric clause 9.6.1 in the agreement dated 10.03.2006 @ 5% for domestic sale and @ 8% on export product sold by the company for transfer of knowhow, technical documentation and licensing rights by Tellabs.
8.3 Identical issue has come up before ITAT Delhi Bench ‘B’ New Delhi in appeal No.4172 and 4894/Del/2010 in assessee’s own case qua the Assessment Years 2004-05 and 2005-06 which has been decided in favour of the assessee. The Coordinate Bench affirmed the findings returned by Ld. CIT(A) as held in para 6 of the order:
“6. We have heard both the sides. The royalty expenses incurred by the assessee were as per the terms of agreement dated 09.08.2002. As per this agreement, onetime payment for acquiring know-how has been separately paid which has been capitalized and it has not been charged to revenue account. In terms of clause 9.1 of the said agreement a separate fee has been prescribed in consideration of the transfer of technical kow-how, technical documentation licensing rights granted under this agreement and 6 I.T.A.Nos.2101 & 2649/Del/2012 for the same, a non-refundable amount has been paid by the assessee. As per clause 9.6.1 of the agreement, the assessee has to pay royalty @ 5% for domestic sales and 8% for the export sales. Since, there was no export during the year, the assessee had paid royalty @ 5% of the domestic sales and the calculation bas been made as per the agreement, which is not in dispute. The payment had been made during the running of' the business. These expenses were recurring and based on the percentage of sales. The non- refundable one time was separately made and the same was capitalized. By incurring this expense, the assessee bad not acquired any asset of enduring benefit. In the case of Southern Switchgear Limited, the expenditure was composite of recurring and non-recurring expenditure. In the absence of segregation, 25% was treated as capital but in assessee's case, such segregation was already made. Keeping all these facts in view, we find no fault in the order of CIT(Appeals) and we sustain the same on this issue. Accordingly, ground no. 20fthe revenue's appeal is dismissed.”
8.4 Now adverting to the case at hand when this identical issue firstly come up before the Assessing Officer he has relied upon the judgment passed by Hon'ble Supreme Court in case cited as Southern Switchgear Ltd. Vs CIT 232 ITR 359 and held that the royalty payment as capital expenditure simply on the ground that the payment of royalty is in the nature of enduring advantage to the assessee. For ready reference, relevant portion of the judgement cited as Southern Switchgear Ltd. (supra) is reproduced below:
“CAPITAL OR REVENUE EXPENDITURE-COLLABORATION AGSREEMENT-GRANT OF TECHNICAL AID FOR SETTING UP FACTORY AND RIGHT TO SELL PRODUCTS-FOREIGN COMPANY AGREEING NOT TO MANUFACTURE SIMILAR PRODUCTS IN INDIA OR GIVE RIGHTS FOR MANUFACTURE TO OTHES EXCLUSIVE AND ENDURING ADVANTAGE- PORTION OF TEHCNICAL AID FEE AND ROYALTY DISALLOWED – DISALLWOANCE JUSSTIFIED”
7 I.T.A.Nos.2101 & 2649/Del/2012 8.5 On the other hand, Ld. CIT(A) has thrashed the matter threadbare and allowed the royalty payment as revenue expenditure by relying upon the judgement by ITAT Delhi Bench ‘B’ New Delhi in appeal No.4172 and 4894/Del/2010 (supra) in assessee’s own case for the Assessment Years 2004-05 and 2005-06. Moreover, when royalty payment has been made by the assessee company on recurring basis during the normal course of business in terms of percentage, it has not acquired any asset of enduring benefit, whereas in Southern Switchgears Ltd. (supra), the expenditure was capital and non recurring in nature and distinguishable from this case and the said case has been wrongly relied upon by the Assessing Officer. So, we find no ground to interfere in the findings returned by Ld. CIT(A). Hence, ground No.1 of appeal for Assessment Year 2006-07 and ground No.2 of appeal for Assessment Year 2008-09 are determined against the Revenue.
Ground No.2 of (Assessment Year 2008-09): Ld. D.R. challenging the impugned order contended inter alia that Ld. CIT(A) has erred in deleting the addition of Rs.3,48,000/- made by the Assessing Officer for disallowance made on account of retainer ship fee paid to Shri O.P. Sharma on the ground of non deduction of TDS without calling for any document nor any remand report has been sought from the Assessing Officer; that Ld. CIT(A) has merely deleted the addition on the basis of Form 16A furnished by the assessee.
9.1 Perusal of the findings returned by Ld. CIT(A), go to prove that the Form 16A furnished by the assessee, has been taken at its face value without making any verification and without calling any remand report
8 I.T.A.Nos.2101 & 2649/Del/2012 from the Assessing Officer. Ld. CIT(A) has not returned the findings if the TDS said to have been deducted by the assessee company, has been paid to the Revenue authorities or not. We are of the considered view that the matter is required to be restored to the Assessing Officer to verify the deduction and payment of TDS as alleged by the assessee and to decide de novo. So, ground No.2 is determined in favour of Revenue for statistical purposes.
I.T.A.No. 2649/Del/2012 (Assessment Year 2007-08):
Ground No.2
Ld. D.R. challenging the impugned order contended that Ld. CIT(A) has erred in deleting the addition on the basis of documents taken on record during appellate proceedings without giving any opportunity of being heard to the Assessing Officer.
10.1 Undisputedly, the Assessing Officer has made the addition regarding expenditure of Rs.7,08,000/- on the ground that no details has been filed for such expenditure. However, Ld. CIT(A), during appellate proceedings, by taking the contention of the Assessing Officer at face value that they have produced the bills of software expenses before the Assessing Officer who has disallowed the same without verifying the bills, entertained the copies of bills during appellate proceedings without getting the same verified by the Assessing Officer, we are of the considered view that the matter is required to be restored to the Ld. CIT(A) to decide afresh after providing an opportunity of being heard to the Assessing Officer. So, ground No.2 is determined in favour of Revenue for statistical purposes.
9 I.T.A.Nos.2101 & 2649/Del/2012
Ground No.3:
Challenging the impugned order qua this ground, Ld. D.R. relied upon the order passed by the Assessing Officer and vehemently contended that Ld. CIT(A) after entertaining the evidence on his own, deleted the addition without giving any opportunity of being heard to the Assessing Officer. A bare perusal of the order passed by Ld. CIT(A), goes to prove that on the basis of documents produced before Ld. CIT(A) by the assessee during appellate proceedings, Ld. CIT(A) came to the conclusion that assessee took part in convergence 2007 exhibition by setting up an exhibition for its products and incurred Rs.9,63,481/-. No doubt, details of such expense were filed before the Assessing Officer along with bill dated 04.04.2007 for Rs.4,71,912/- which has been considered by the Assessing Officer for the Assessment Year 2008-09. Ld. CIT(A) has taken the aforesaid bill into evidence merely on the ground that assessee had not received the said bill till 3.103.2007 and as such, the same was debited as outstanding expenditure on the basis of mercantile system of accounting being followed by the assessee. Ld. CIT(A) also taken on record Form 16A for deduction of TDS regarding the payment made to M/s. Exhibition India Pvt. Ltd. and M/s. Lipi Associates who have deposited in the Government account on 04.04.2007 and 30.05.2007 and thereby deleted the addition. From the findings returned by Ld. CIT(A), when it has apparently become clear that Ld. CIT(A) entertained the evidence brought on record by the assessee during appellate proceeding without providing opportunity of being heard to the Assessing Officer and without calling any remand report, without getting the additional evidence taken on record, verified by the Assessing Officer, the Ld. CIT(A) was not 10 I.T.A.Nos.2101 & 2649/Del/2012 justified in deleting the addition. Hence, we are of the considered view that the matter is required to be restored to the Ld. CIT(A) to decide afresh after providing an opportunity of being heard to the Assessing Officer.
Ground No.4: 12.
Ld. D.R. again contended that Ld. CIT(A) again erred in deleting the amount of Rs.57,19,835/- disallowed by the Assessing Officer as professional expenses on the basis of evidence taken on record at the back of Assessing Officer. Assessing Officer disallowed the expenses on the ground that the copy of agreement was not filed and only one bill was brought on record and thus failed to explain the nature of services rendered. However, Ld. CIT(A) on the basis of TDS certificate brought on record during appellate proceedings decided without affording opportunity of being heard to the Assessing Officer by holding that the payment to Renoir Consultancy India Pvt. Ltd. has been made by the assessee for consultancy services carried during the year under consideration. When the Ld. CIT(A) has decided this issue by taking the documents on record during appellate proceedings without affording an opportunity of being heard to the Assessing Officer, is required to be restored to Ld. CIT(A) to decide afresh after providing opportunity of being heard to the Assessing Officer.
Ground No.5:
To challenge this ground, Ld. D.R. again relied upon the order passed by the Assessing Officer. However, on the other hand, the assessee claimed to have paid Rs.4,00,000/- as per ledger account copy of 11 I.T.A.Nos.2101 & 2649/Del/2012 which is lying at page 173 of the Paper Book regarding the lease of property situated at 77A, Sector 18, Gurgaon. The Assessing Officer disallowed 2/3rd of the said expenditure on the ground that the said expenditure should be amortized for a period of three years since the said payment was a onetime payment for renewal of lease deed which was for a period of three years. However, Ld. CIT(A) deleted this addition by treating the same as business expenditure. 13.1 We are of the considered view that when the Assessing Officer has not disputed the payment admittedly made by the assessee on account of renewal of registration of lease deed and has also not drawn any conclusion that by making such expenditure, he has acquired some capital asset of enduring nature, the same are required to be allowed. Moreover, there is no material on record to show that such expenses could have been deferred by the assessee for the subsequent year. So, we find no ground to interfere into the findings returned by Ld. CIT(A) and hence, this ground is determined against the revenue however subject to the condition that the Assessing Officer has to verify the actual payment of lease amount to the lessor.
Ground No.6: The Assessing Officer, on the basis of scrutiny of P & L account and return of income for the relevant Assessment Year, noticed difference of Rs.2,20,77,354/- because the assessee vide his written submissions shown total receipt including sales, service income and other income at Rs.61,01,27,974/- but in the return of income for the relevant Assessment Year such receipt has been shown at Rs.58,80,50,620/-, on failure of 12 I.T.A.Nos.2101 & 2649/Del/2012 assessee to justify and reconcile the difference, made an addition of Rs.2,20,77,354/-. 14.1 Perusal of the findings returned by Ld. CIT(A) go to prove that Ld. CIT(A) has accepted the evidence relied upon by the assessee to prove the excise duty component of Rs.3,28,70,843/-, which was shown as part of the total sale. But at the same time, it is apparently clear from the order of Ld. CIT(A) that no reconciliation statement has been filed by the assessee before Ld. CIT(A) rather his contention has been taken on the face value, that too at the back of the Assessing Officer. So, we are of the considered view that to reconcile the difference of Rs.2,20,77,354/- between the income shown by the assessee in the P & L account and return of income and entire record relied upon by the assessee and accepted by Ld. CIT(A) the same is required to be verified by the Assessing Officer. So, in the given circumstances, Ld. CIT(A) has erred in accepting the material relied upon by the assessee at the back of Assessing Officer. So, the matter is required to be restored to Ld. CIT(A) to decide afresh after providing opportunity of being heard to the parties.
In view, what has been discussed above, both the appeals of the Revenue are partly allowed for statistical purposes. Order pronounced in the open court on 20th Jan., 2016. 16.