1990 (2) TMI 13 - HC - Income Tax

Royalty, technical fees held revenue expenses; sales commissions outside section 37(3A) advertisement cap and fully deductible

HC held that royalty and technical fees paid by the assessee to foreign concerns constituted revenue expenditure, allowable under income-tax law. The ... Disallowance of payment of royalty and technical fees paid, to the foreign concerns - Commission and brokerage paid to agents - HELD THAT:- The secret formula, the technical know-how and other things may become the property of the assessee-company after 12 years but, by that time, the said secret formula or technical information may become obsolete and of no value in view of advancement of technology. The royalty has been paid since 1971-72. Payments have been allowed for all these years up to the assessment year 1975-76 as revenue expenditure without any dispute. It is for the first time in the course of the assessment year 1976-77 that the Income-tax Officer took the stand that these expenditures are not allowable. It was contended on behalf of the Department that there was no res judicata in income-tax matters. It is true that there is no res judicata but there must be some substantial ground for one Income-tax Officer to differ from the view taken by another income-tax Officer in an earlier assessment year. In that view of the matter, question must be answered in the affirmative and in favour of the assessee. Commission and brokerage paid to agents - The case of the assessee is that, on the basis of actual sales effected by agents and brokers, the commission and brokerage were paid in the usual course of sale of the products of the assessee. These expenditures cannot be treated as sales promotion expenses. These expenditures will have to be incurred for the purpose of selling the goods. But every type of expenditure incurred in connection with sale of goods will not come within the phrase 'advertisement, publicity and sales promotion'. Selling costs may include many types of expenditure. Only those expenditures which are of the nature of 'sales promotion' will come within the mischief of section 37(3A). The circular is also indicative of the types of expenditure which will be treated as for the purpose of sales promotion. Fashion shows, beauty contests, consumer contests, consumer gift offers and free samples have an element of publicity and are devices for sales promotion. These are not expenditures incurred for selling of goods simpliciter. If a company allows a commission to the retail outlets for the purpose of selling their goods that will not be expenditure for sales promotion. Therefore, in our view, brokerage and commission paid for selling the goods will not come within the mischief of the phrase 'advertisement, publicity and sales promotion.' Issues Involved:1. Nature of royalty and commission payments to foreign companies.2. Nature of commission and brokerage paid to agents.3. Disallowance u/s 40A(5) of the Income-tax Act, 1961.4. Classification of commission and brokerage as sales promotion expenses u/s 37(3A) of the Income-tax Act, 1961.Summary:Issue 1: Nature of Royalty and Commission Payments to Foreign CompaniesThe Tribunal examined whether royalty and commission payments to various foreign companies were revenue expenses and thus allowable as business expenditure. The Income-tax Officer (ITO) had disallowed these payments, considering them capital in nature, as they provided the assessee with enduring benefits. However, the Tribunal, following the precedent set by the Calcutta High Court in Agarwal Hardware Works (P.) Ltd. [1980] 121 ITR 510, affirmed that these payments were revenue expenses. The agreements did not indicate an outright sale of assets but rather a temporary transfer of technical know-how, which would revert to the foreign companies upon termination. The Supreme Court's decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 was also cited, reinforcing that such payments are revenue in nature. Consequently, the question was answered in the affirmative and in favor of the assessee.Issue 2: Nature of Commission and Brokerage Paid to AgentsThe Tribunal addressed whether commission and brokerage paid to agents were sales promotion expenses and thus disallowable u/s 37(3A). The ITO had classified these payments as sales promotion expenses. However, the Tribunal upheld the Commissioner of Income-tax (Appeals)'s view that these payments were made on actual sales and did not constitute sales promotion expenses. The court noted that 'sales promotion' must be construed ejusdem generis with 'advertisement and publicity,' and mere selling costs do not fall under this category. The relevant circular from the Central Board of Direct Taxes (Circular No. 240, dated May 17, 1978) was also considered, which clarified that expenditures like commission and brokerage for selling goods do not qualify as sales promotion expenses. Thus, the question was answered in the affirmative and in favor of the assessee.Issue 3: Disallowance u/s 40A(5)For the assessment years 1977-78 and 1978-79, the Tribunal examined the disallowance made by the ITO u/s 40A(5). The Commissioner of Income-tax (Appeals) had deleted these disallowances, and the Tribunal affirmed this decision. The court referenced its earlier decision in Hindustan Motors Ltd. v. CIT [1985] 156 ITR 223, which supported the assessee's position. Therefore, the question was answered in the affirmative and in favor of the assessee.Issue 4: Classification of Commission and Brokerage as Sales Promotion Expenses u/s 37(3A)The Tribunal considered whether commission and brokerage paid to agents could be classified as sales promotion expenses u/s 37(3A). The ITO had disallowed these expenses, but the Commissioner of Income-tax (Appeals) and the Tribunal found that these payments were made on actual sales and did not qualify as sales promotion expenses. The court emphasized that 'sales promotion' must be construed narrowly and does not include all selling costs. The relevant circular from the Central Board of Direct Taxes further clarified this distinction. Consequently, the question was answered in the affirmative and in favor of the assessee.Conclusion:All questions referred in R. A. No. 683/(Cal) of 1984, R. A. No. 684/(Cal) of 1984, R. A. No. 685/(Cal) of 1984, and R. A. No. 686/(Cal) of 1984 were answered in the affirmative and in favor of the assessee. There was no order as to costs.