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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Per B R Baskaran, AM:
The appeal filed by the revenue is directed against the order dated 04-08-2012 passed by Ld CIT(A)-13, Mumbai and it relates to the assessment year 1999-2000. The revenue is challenging the decision of Ld CIT(A) in cancelling the penalty levied by the AO u/s 271(1)(c) of the Act.
We heard the parties and perused the record. The assessee company is engaged in the business of manufacture and sale of pharmaceutical products and agro chemical products such as insecticides, pesticides etc. The assessment of the year under consideration was reopened by the assessee u/s 148 of the Act and completed the same by making various additions. The appeals filed before Ld CIT(A)/ITAT was 2 partly allowed and some of the issues were restored to the file of the AO. The Tribunal confirmed the disallowance of payment of technical know how fee (patent) claimed by the assessee as revenue expenditure, but treated by the AO as Capital expenditure. The amount so disallowed was Rs.2,52,09,490/- and the AO allowed depreciation of Rs.63,02,702/- thereon. Accordingly, the net addition made by the AO was Rs.1,89,07,118/- and the AO levied penalty of Rs.66,20,000/- u/s 271(1)(c) of the Act on the above said disallowance. In the appeal filed by the Assessee, the Ld CIT(A) deleted the penalty by following the decision rendered by Hon’ble Supreme Court in the case of Reliance Petroproducts Pvt Ltd (322 ITR 158). The revenue is aggrieved by the decision of Ld CIT(A).
The back ground of the claim made by the assessee is stated in brief. M/s G.D. Searle & Co (GDS) is a multinational pharmaceutical company of USA and it held 40% share in the assessee company. M/s GDS entered into an agreement dated 16-12-1983 with the assessee and allowed it to use the name “SEARLE” as part of its corporate name. Accordingly, the assessee was initially named “SEARLE (INDIA) LTD”. By another agreement dated 16.12.1983, GDS granted license and right to manufacture, use and sell products listed in the agreement and also agreed to provide technical data and assistance to enable the Appellant to produce and market pharmaceutical products as specified in the agreement. By another agreement dated 05-07-1984, the assessee was given non-exclusive right to use Trademarks of M/s GDS in India, Nepal and Bhutan. In connection with the use of name “SEARLE” and for use of trademarks, the assessee agreed to pay a royalty of 5% of the domestic sales and 8% of export sales on annual basis.
3
In the year 1993, M/s GDS sold its share holding in the assessee company to CEAT Group. As per the revised agreement entered by M/s GDS with the new group, the assessee was allowed to use the name and trade marks for a period of five years ending on 31.05.1998 against payment of royalty on annual basis. After expiry of the five years, another agreement was entered on 21-12-1998 (amendment agreement), as per which the assessee was permitted to use the name “SEARLE” as part of its corporate name for a further period of 5 years. Upon expiry of second 5 year period, the assessee changed its name to “RPG Life Sciences Ltd” and the assessee was allowed to use the registered trademarks of GDS and produce the goods for additional period of 50 years upto 31-05-2048 on payment of consolidated payment of US $ 500000. As per the amendment agreement, no annual royalty is payable.
The assessee claimed the above said lump sum payment as revenue expenditure, but the assessing officer treated the same as Capital expenditure and allowed depreciation thereon. The view taken by the AO was upheld by the Tribunal. Subsequently, the AO levied penalty on the amount of disallowance confirmed by the Tribunal, but it was deleted by Ld CIT(A).
The ld D.R placed strong reliance on the penalty order and submitted the benefit of payment made by the assessee is available to the assessee for a period of 50 years and hence, in view of the enduring benefit of expenditure, the AO rightly treated the same as capital expenditure and the same was also confirmed by the Tribunal. The Ld D.R submitted that the assessee was aware that the impugned payment is capital in nature, but chose to claim the same as revenue expenditure.
Accordingly he submitted that the assessing officer was justified in levying penalty.
4
The Ld A.R, on the contrary, submitted that the assessee treated the lumpsum payment as deferred revenue expenditure in the books of account, but claimed the same as revenue expenditure. He further submitted that the license to use trade mark and produce the goods was not obtained for the first time during the year under consideration, but it was obtained long time back and the assessee has been using the license to produce the goods under the trade mark of M/s GDS. He further submitted that the assessee has not purchased the trade mark, but got the license to use the trade mark and also license to use the technical know.
Hence the payment is in the nature of revenue expenditure only. He further submitted that the assessee has paid a lump sum amount for using the license for a period of 50 years instead of paying on annual basis.
Hence the assessee claimed the same as revenue expenditure and the view taken by the assessee is now supported by the decision rendered by the Hon’ble juri ictional Bombay High Court in the case of CIT Vs. Essel Propack Limited (2010)(325 ITR 185). He also placed reliance on host of other case laws. Accordingly he submitted that the assessee has made a legitimate claim, but the same was not acceptable to the AO and the said disallowance shall not give rise to concealment of particulars of income or furnishing of inaccurate particulars of income. Accordingly he submitted that the Ld CIT(A) was justified in deleting the penalty by following the decision rendered by Hon’ble Supreme Court in the case of Reliance Petroproducts Pvt Ltd (supra).
Having heard rival submissions, we are of the view that there is merit in the contentions of Ld A.R. There is no dispute that the assessee has furnished all the particulars relating to the payment made to M/s GDS. There is also no dispute with regard to the fact that the assessee has already been using the trade mark and technical knowhow for the past several years by payment of annual royalty. By way of an amendment
5 agreement, the assessee has agreed to make a lumpsum payment instead of annual payment. Accordingly, the assessee has entertained the view that the same is allowable as revenue expenditure. However, the AO has taken the view that the same is capital in nature, since the benefit of expenditure has spread for a period of about 50 years. The Ld A.R submitted that the view taken by the assessee finds support from the subsequent decision rendered by the Hon’ble Bombay High Court in the case of Essel Propack Ltd (supra). Before us, the assessee also placed reliance on the decisions rendered by Hon’ble Supreme Court in the case of Alembic Chemical works Co. Ltd (177 ITR 377); Assam Bengal Cement Vs. CIT (27 ITR 34 @ 46), M.K. Bros Vs. CIT (86 ITR 38). Thus, we notice that the assessee has made a claim on the basis of certain judicial pronouncements and the same was not acceptable to the AO. Thus, the impugned issue becomes debatable issue. Accordingly, we are of the view that, merely because the claim of the assessee was not acceptable to the tax authorities, the disallowance made on that basis will not give rise to concealment of particulars of income or furnishing of inaccurate particulars of income. Accordingly, we uphold the view taken by Ld CIT(A).
In the result, the appeal filed by the revenue is dismissed.
Pronounced accordingly on 24th Nov, 2015. घोषणध खुरे न्मधमधरम भें ददनधंकः 24th Nov, 2015 को की गई । (AMARJIT SINGH) ( B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER भुंफई Mumbai: 24th Nov, 2015. व.नन.स./ SRL , Sr. PS
6 आदेश की प्रतिलऱपप अग्रेपिि/Copy of the Order forwarded to : अऩीरधथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- concerned 3. आमकय आमुक्त / CIT concerned 4. ववबधगीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई /
DR, ITAT, Mumbai concerned गधर्ा पधईर / Guard file. 6. आदेशधनुसधय/ BY ORDER,सहधमक ऩंजीकधय (Asstt.