TaxTMI 
TaxTMI 
2012 (11) TMI 384
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..../s 263 is beyond the powers granted to the CIT u/s 263 of the Income Tax Act, and therefore be cancelled. 2.0 That the CIT Delhi Central II has grossly erred in law and on fact & in the circumstances of the appellant's case in directing to disallow the claim of running Royalty Rs.194.03 lacs as Capital expenditure. The decision of the Apex Court in the case of M/s Southern Switchgear Ltd. 232 ITR 359 (SC) is not applicable on the fats of the appellants case. 2.1 That the CIT Delhi Central-II ought to have appreciated that no asset of enduring nature has been acquired by payment of royalty on sales and the same is on revenue account. 3.0 That each ground is independent and without prejudice to the other grounds raised herein." 2. The assessment for the present year was framed vide order dated 27th December, 2006 u/s 143(3) of the Act at an income of Rs. 4,62,11,350/- against returned income of Rs. 4,15,87,798/-. Vide letter dated 28th.May, 2008, the Assessing Officer informed the CIT that the assessee company has debited Rs. 194.03 lacs in Profit & Loss Account towards royalty paid to a foreign company. According to ld. CIT, as per decision of Hon'ble Supreme Court in th....
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....fore, acceptance of the issue in earlier year does not debar the revenue from raising this issue in this year. As per copy of the agreement dated 17th August, 1994, M/s Goetze Technologies- Vertriebs and Service GMB II was to provide with all specifications, technical data, instructions, standards, working instructions u/s 2 (disclosure of know-how of the agreement) and similar other modification in designs, etc. were also to be promptly disclosed. The assessee was also free to grant sub-lease to other Indian companies and similar were the terms with respect to other agreement and the royalty was not merely for the sales, but for many other services to be received by the assessee. The agreement did not put any restriction on the use of technology after the end of the agreement period. The copies of the agreements were placed before the Assessing Officer and before him. Therefore, the Assessing Officer did not examine the nature of benefit arising to the assessee and the nature of expenditure whether the same is capital or revenue. Vide letter dated 25th July, 2003, Ministry of Commerce and Industries had granted permission for collaboration with M/s Faderal Mogul Burscheid GabH and....
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....lowed:- "2. The assessee company is engaged in the business of manufacturing and Trading of Automobile parts etc. 3. The assessee was asked to file its objections if any, for not to add back 25 % of Rs. 194.3 Lakhs deducted towards Royalty payments to a foreign company treating as capital expenditure as held by the Hon'ble Supreme Court in its decision in the case of M/s Southern Switch Gear Ltd. Vs. CIT & Another 232 ITR 259 (1998) (SC) 4. In response to above the assessee company vide its letter dt. 18-12-2009 submitted that the royalty of Rs.194.03 Lakhs is being paid on account of technical assistance provided by the foreign company during the period of licence agreement. The royalties being paid at fixed a percentage on sales made by the assessee under the technical assistance agreement and there is no absolute transfer or outright sales of any technical know-how. In this regard the assessee company relied on decision of Hon'b1e High Court, Delhi in the case of CIT Vs. M/s Sharda Motor Industries (2009) 319 ITR 109 (Del) 5. I have gone through the technical assistance agreement dated 23-09*2004 between the assessee company and Federal Mogul Nuremberg Gmbh, situa....
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....ocation 25% of payment towards capital has also been applied by the Hon'ble Madras High Court in the case of CIT vs. Southern Switchgear Ltd. 148 ITR 272, which has been affirmed by the Hon'ble Supreme Court as reported in 232 ITR 359. 9. Accordingly by relying on Hon'ble Apex Court decision the 25% of the payment paid in the year under consideration shall be allocated towards capital expenditure and the balance 75% of the payment is to be allowed as revenue expenditure. Needless to say that the assessee shall be entitled to depreciation on the amount allocated towards capital field. The assessment was finalized accordingly." 5. Referring to the aforementioned observations of the Assessing Officer, he submitted that from the agreements it has been held by the Assessing Officer that royalty payment to the collaborators are made @ 1% to 3% on the turnover of the company. He submitted that for subsequent year i.e., for Assessment Year 2006-07 the similar addition was made by the Assessing Officer which was upheld by CIT (A) and, in this manner, the disallowance of Rs. 45,12,22,000/- was made. The assessee challenged the order of the CIT (A) before the Tribunal and the Tribunal v....
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.... v. CIT 307 ITR 363 (Del.) On the other hand, Id. Sr. D.R. referring to the agreement filed by assessee in paper book submitted that copy of agreement was not filed before Assessing Officer and ld. CIT(A). The copy of agreement filed in the paper book was for a period of 10 years and the period of 10 years had expired in August, 2004 and, therefore, .the payment of royalty cannot be decided on the basis of this agreement. The copy of agreement effective from August, 2004 was neither filed before Assessing Officer nor before ld. CIT(A). Therefore, it is not clear whether the payment of royalty has been made in lump sum, or is based on production basis. These facts are to be ascertained from the agreement. 5. In rejoinder ld. A.R. of the assessee submitted that assessee is in business for last 50 years and agreements have been renewed continuously. However, at the time of hearing he was not having copy of renewal of the agreement. He fairly conceded that this issue can be examined by Assessing Officer and if the payment relates to lump sum payment of royalty, the decision of Hon'ble Supreme Court could be applied but if the payment is made based on sales it has to be allowed as....
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....nts it has been held by the Tribunal that if the royalty is paid on turnover basis, the same is revenue expenditure. He submitted that the Assessing Officer has not disputed this fact that royalty paid by the assessee is based on turnover. Therefore, he submitted that keeping in view the law explained by the Tribunal in the aforementioned order, the order passed by the Assessing Officer cannot be said to be erroneous as well as prejudicial to the interest of the revenue. Hence, the same should be quashed. 7. On the other hand, relying upon the observations of the CIT in the order which have already been pointed out in earlier part of this order, it is the case of the learned DR that it has rightly been held that the order passed by the Assessing Officer was erroneous as well as prejudicial to the interest of the revenue. He submitted that the Assessing Officer failed to make proper inquiries and failed to disallow the said amount. Therefore, he pleaded that the order of the CIT should be upheld and the appeal filed by the assessee should be dismissed. 8. We have carefully considered the rival submissions in the light of the material placed before us. The order of the Tribu....