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Income Tax Appellate Tribunal, DELHI BENCH ‘C ’, NEW DELHI
Before: SMT. DIVA SINGH & SHRI INTURI RAMA RAO
The Revenue has filed the present appeal against the order of Ld. CIT(A)-XV, New Delhi dated 29.11.2012 for the Assessment Year 2009-10, inter alia on the following ground: “Whether Ld. CIT(A) was correct on facts and circumstance of the case and in law in treating the royalty payment of Rs.79,61,325/- as revenue expenditure instead of capital expenditure.”
2. Briefly stated the facts of the case are that during scrutiny, return filed by the assessee declaring income of Rs.15,94,02,495/- for the Assessment Year 2009-10, it was found that the payment of Rs.1,06,15,100/- is shown to have been made by the assessee during financial year 2008-09 to its licensor namely G4S Regional Consultancy Services NAMESA WELL, Manama, Bahrain against royalty for the use of trade mark and trade name. The assessee was required to explain why royalty should not be capitalized as it gives enduring benefit to the assessee. The assessee filed reply dated 26.08.2011, which reads as under: “This issue has already been decided by Honorable Delhi High Court in the case of our group company M/s G4S Securities System (India) Pvt. Ltd. for the assessment year 2002-03, 2003-04 and 2005-06. In this case the Delhi High Court has delivered his judgment as on 11.07.2011 as the ownership rights of trade mark and knowhow throughout vested with the "Licensor" and on the expiration or termination of the agreement the assessee has to return all right which is 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 the assessee was entitled to become the exclusive owner of the technical know haw and the trade mark. Hence 'the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under section 37(1) of the Act."
3. Keeping in view the circumstances of agreement, nature of terms, its essence and nature and usage of rights granted under the agreement, the royalty payment of Rs.1,06,15,100/- is held to be towards acquisition of commercial rights being intangible in nature and accordingly, Rs.1,06,15,100/- is held to be capital expenditure entitled to prescribed rate of depreciation @ 25% i.e. Rs.26,53,775/-. Consequently, disallowance of Rs.79,61,325/- was made.
4. The assessee has challenged the assessment order before Ld. CIT(A) who has accepted the appeal vided impugned order dated 29.11.2012. Feeling aggrieved, the Revenue has come up before the Tribunal by filing the present appeal.
5. Ld. D.R. by relying upon the order passed by the A.O., contended that when transaction in question is examined in the light of agreement, the amount of Rs.79,61,325/- is required to be treated as capital expenditure and not revenue expenditure as held by Ld. CIT(A) vide impugned order and relied upon the order passed by Ld. CIT(A).
6. However, on the other hand, Ld. A.R. relied upon the order passed by Tribunal in dated 12.03.2014 and I.T.A. No. 3160/Del/2013 dated 14.08.2014 in the case of ACIT Vs G4S Security Services (India) Pvt. Ltd., wherein the matter in issue in the present appeal has been squarely covered qua the previous assessment years. 7. We have heard both the parties, gone through the assessment order and the order passed by Ld. CIT(A) and documents annexed therewith. The sole question arises for determination in this appeal is “as to whether Ld. CIT(A) has erred on facts and circumstances of the case and in law in treating the royalty payment of Rs.79,61,325/- as revenue expenditure instead of capital expenditure?” 8. Ld. CIT(A) vide impugned order has set aside the assessment order vide following observations: “5.1 I have carefully considered the facts of the case, order of the A.O. and the detailed submission made by the learned AR in the light of several Judicial pronouncements in this regard. Perusal of the facts on records shows that my predecessor on the similar issue in case of the appellant for the AY 2008-09 had treated the Royalty payment as revenue expenditure. Similarly in the case of another group company, M/s G4S Security services for the Assessment Year 2008-09 vide order dated 20.04.2011 in Appeal No. 229/10-11, the Ld. CIT(AL for the detailed reasons cited therein, has treated the royalty payment as revenue expenditure and also held that since royalty has been paid for a right to use trade mark and knowhow for a limited period under the term of agreement, therefore no assets of enduring nature has been acquired in consideration of royalty payment. The Hon'ble High Court in the case of another group company, i.e. M/s G-4S Securities Services, on identical facts, has already dismissed the departmental appeal in earlier years and allowed the royalty expenses as revenue expenses after considering the facts and legal position.
The facts of that case are similar to the following facts of appellant, which as per the term of the present agreement, provide that: (i) The appellant company was engaged in the service industry instead of engaged in the manufacturing activities. (ii) Since in the service industry, technology changes at rapid pace than manufacturing activity therefore it is immaterial to emphasize that appellant company would be able to use the technical knowhow even after the termination of the agreement.
(iii) In the present case, appellant company was giving the royalty more for enjoying trade name and trade mark whose value NIL after termination of the contract.
(iv) Appellant company have non-exclusive right to use the trademarks within the territory of India.
(v) The royalty is determined on the basis of percentage of turnover and it is not paid as lump sum, therefore the same can increase or decrease on the basis of turnover.
5.2 In view of the above discussion, I agree with the appellant that various decisions relied on by the AD for disallowance of royalty have been rendered on distinguishable sets of fact and are not applicable to the issue in question. I agree that the appellant has not acquired any benefit of enduring nature and it will not constitute acquisition of any assets. Hence, respectfully following the ratio of various decisions cited by the appellant and particularly and following the decisions of the Hon'ble Delhi High Court in the case of MIs G4S Security Services, on identical facts, I also concur with the stand taken by my predecessor in group companies, hold that the payment of royalty in the present case is not a capital expenditure. Therefore the ground No.1 of the appellant is allowed.”
A bare perusal of the terms and conditions of Royalty Agreement entered into between the assessee and NMESA WLL reproduced above in the order of Ld. CIT(A) goes to prove that the Royalty in the case in question was exclusively for the purpose of use of trademark, trading norms and know how without any acquisition of any capital research in the year under consideration, thus not of any enduring benefit for the assessee so as to consider any part of royalty expenditure as capital expenditure.
10. In the assessee’s own case for the Assessment Year 2005-06, decided on 11.07.2011 by Hon’ble Jurisdictional High Court in the case of CIT Vs G4S Securities System (India) Pvt. Ltd (supra) in para 9 and 10 has categorically held that the payment of royalty is revenue expenditure. Operative part of the judgement (supra) reads as under: “9. From the terms of the agreement it is noticed that this arrangement was for a period of 5 years, which may be extended by another period of 5 years unless either party gives 6 months notice to the other party prior to the end of such 5 years period. The payment of commission @ 1% was based on the net sales and not lump sum. On the termination of expiration of the sub license agreement, the assessee was to return all G4F knowhow obtained pursuant to the said agreement. Not only that, the assessee was not even entitled to make use of the trade mark name or G4F knowhow and was forthwith to change its' corporate a no/or trade names. All rights and knowhow, therefore, continued to vest in G4F and it was only the right to use the knowhow that was made available to the assessee and that too based on its net sales. That means all the royalty paid in the shape of 1 % of net sales for the use of trade mark and right to use knowhow could not be considered to be of enduring nature and thus capital expenditure. The expenditure was to be of revenue nature. In the case of Jonas Wood Head and Sons Vs. CIT, 117 ITR 55, it was held that the question regarding capital or revenue expenditure depends on the terms of agreement in each case. In the case of CIT Vs. Gujarat Carbon Ltd., 254 ITR 294, it was held that the payment of revenue under the agreement was directly relatable to services which were in the revenue field and were allowable as revenue expenditure. In the case of Goodyear (I) Ltd. Vs. ITO 73 ITD 1 89(Delhi) , the assessee had not acquired ownership right of technical knowhow but transfer of use of licenses. There was no advantage of enduring nature and hence it was held to be a case of revenue expenditure. In the case of Travancore Sugar and Chemicals Ltd. 62 ITR 566 (SC) it was held that whenever a payment is based on a Percentage of turnover or profits, it necessarily has no relation to the capital value of the asset, because it cannot be known at the time of the agreement what the turnover or profits will be over a period of years. In another case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124 Taxman 188, the Tribunal held, revenue payment is allowable as revenue expenditure, since it is related to sales and that it is paid for better conduct, efficiency and improvement of the existing business or product manufactured by the assessee. In the case of err Vs. Lumax Industries Ltd. (2008) 173 Taxman 290 (Delhi), this Court has also held that the payment of license fee on year to year basis for acquisition of technical know edge would not amount to capital expenditure, but the revenue expenditure.
From the ratio of the above said cases, we are of the considered view that under the terms of the agreement as noted above, the ownership rights of the trade mark and knowhow throughout vested with G4F and on the expiration or termination of the agreement the assessee was to return all G4F knowhow 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 the assessee was entitled to become the exclusive owner of the technical knowhow and the trade mark. Hence, the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under Section 37(1) of the Act. We thus, answer the question In favour of the Assessee and against the Revenue and consequently dismiss all the three appeals.”
Since the issue in this case is squarely covered by the judgement of Hon’ble Jurisdictional High Court (supra) no ground for interference in the impugned order is made out and consequently, the appeal under consideration is hereby dismissed. Order pronounced in the open court on 30th Oct., 2015. 13.