TaxTMI 
TaxTMI 
2011 (2) TMI 1417
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.... on account of sale promotion expenses at 100% for the assessment year 1999-2000, 50% for the assessment years 04-05 and 05-06, whereas the Department in all its four appeals, through identical common grounds has challenged the direction of ld. CIT(A) to treat 25% of royalty payment as capital expenditure and balance 75% as revenue expenditure. 4. We shall first deal with common ground of both the sides with regard to restricting part disallowance of royalty payment of 25% as capital expenditure and balance 75% as revenue expenditure as agitated by the assessee in relation to upholding part disallowance and Department about giving relief by deleting part disallowance in this regard. 4.1 Since almost identical facts with difference in amount of royalty payment disallowance is there in all the years, therefore, we shall discuss the facts in relation to the assessment year 1999-2000, which indicate that the assessee is engaged in the business of manufacturing and sale of pistons and rings. It filed return of income on 30.12.1999 declaring total income of Rs. 95,42,800/-. Notice under section 148 was issued on 14.03.2006 and the assessment was completed under section 143(3) r.w.s....
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....-." 4.2 During the course of hearing before the first appellate authority, the Id. AR had made elaborate written submission and has filed copies of the agreement. He argued before the ld. CIT(A) that the payment was for the use of the know-how and not for acquiring any know-how. Since the royalty is calculated as a percentage of sales and since sales are taken as revenue receipts, the expenditure in earning the sales including the royalty should be allowed as expenditure. The assessee has made further submission and the ld. CIT(A) incorporated such submission in para 3.2, which reads as under: "The assessee company entered into a collaboration agreement with M/s Nippon Piston Rings Limited under the terms of which the foreign company agreed to provide the assessee company technical aid and information in the manufacture of Steel Rings, GN Rings, Chrome Plated Rings, Nifflex-S Rings. The Iumpsum amount paid towards the technical know-how were capitalized during the years in which they were acquired and deduction u/s.35AB was claimed. The continuing royalty, which is paid based on the actual usage of the license is calculated at a fixed percentage on Net sales. T....
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....se any Confidential information except to those of its agents, sub contractors, officers, directors or employees who have a need to know: (c) to ensure to the extent permitted by law of India that any person falling within any of the categories in the preceding sub para graphs shall abide by the obligation of confidentiality imposed by this Article: and not to use any Technical information it will acquire from NPR under this Agreement other than for the purposes allowed herein. 10.2 IPR's obligations under this Article shall survive the expiration or termination of this Agreement for any reason......... Article 13 duration and termination 13.1 Unless terminated earlier as hereinafter provided, the term of this Agreement shall expire six (6) years from the effective date of this Agreement i.e. the terms of this Agreement shall expire when the last royalty accrues as provided for in Article 7.1 hereof. It is submitted that Royalty is nothing but payments made for the use of the technical know how and is paid on year to year basis. No enduring benefit is obtained by the payment of royalty. In fact the royalty is paid only on the actual use ....
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....is only a licence and what was paid by assessee is only a licence fee and not the price for acquisition of any capital asset. Recently the Hon'ble Income tax Appellate Tribunal, Chennai Bench in the case of M/s.Panasonic Carbon Ltd in ITA Nos.1958 to 1973/2008 for the Asst years 1999-00 to 2004-05 dt.10-07-2009( copy enclosed) has upheld the claim of the assessee that the payment of royalty is revenue in nature. 1. CIT v. MRF Ltd 149 ITR 405 (Mad) 2. CIT v. MRFLtd 212 (Mad) 3. CIT v. Chemicals and Plastics (I) Ltd. 179 1TR269 (Mad) 4. CIT y. Aquapump Industries Ltd 218 ITR 67 (Mad) 5. CIT v. Southern pressing (P) Ltd 242 ITR 67 (Mad) 6. Kirloskar Pneumatic Co. Ltd. 151 ITR 484 (Bom) 7. CIT v. Swaraj Engines Ltd. 203 CTR 310 (P&H) 4.3 The ld. CIT(A) while considering and accepting the plea of the assessee, concluded to give part relief to the assessee with respect to this ground as per para 3.3 of his order, which is reproduced as under: "3.3 I have considered the facts of the case and the submissions of the Id. AR. I have also gone through the various clauses in the agreement and the decision relied....
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.... in the agreement indicated that the assessee paid the royalty for the acquisition of an exclusive privilege of manufacturing and selling the products and the acquisition of an exclusive privilege of manufacturing and selling the products and the acquisition of such a right was rightly treated by the affirmed the disallowance of royalty estimated at 25% by the Tribunal. On appeal to the Supreme Court: The Supreme Court affirmed the judgment of the High Court." The facts of the present case are quite similar to that of the appellant. Further, since decision of Southern Switchgear Ltd (supra) was rendered later to that of the IAEC Pumps Ltd (supra), the decision in the case of Southern Switchgear would prevail. As the assessee company has a joint venture agreement with a foreign company, it cannot be ruled out that there was no technical aid for setting up the factory. Therefore, considering the totality of the facts in the case of the appellant and respectfully following the decision of the Hon'ble Supreme Court in Southern Switchgear (supra), I direct the AO to treat 25% of royalty payment as capital expenditure and the balance 75% as revenue expenditure. The AO is also di....
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....tended that the assessee has got benefit of enduring nature and it is also been worked out in relation to sales and the assessee has miserably failed to establish that it is business expenditure, whereas it is a clear cut expenditure having incurred for acquiring or manufacturing right, which is of enduring nature. Therefore, the Assessing Officer has made proper disallowance but allowing the admissible depreciation on such expenditure and the ld. CIT(A) is not legally correct to give even part relief as allowed by the ld. CIT(A). Therefore, it was urged for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer in this regard. 6. The ld. Counsel for the assessee, in order to counter the submissions of the ld. DR, has submitted that the agreement between the assessee and the other parties, who provided technical know-how to the assessee for a particular period of time as contained in the agreement and on termination of the contract, it is specifically mentioned that all drawings and other materials has to be returned back to the principle/proprietor. The said know-how should not be passed on to any other person and could only be used for manufactur....
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....und in all the appeals of the Revenue as well as of assessee. 8. As regards, the issue in relation to sales promotion expenditure for the assessment year 1999-2000 is concerned, the assessee has claimed a sum of Rs. 56,58,538/- as sales promotion expenses in addition to the technical consultancy fee payable at 5% of the total turnover. It was paid to the Indian Piston Ltd. (IPL). The Assessing Officer has disallowed it on the ground that as per the agreement with IPL, no such amount is payable by the assessee and no such claim was made in the immediate previous year. After perusing the relevant portion of the agreement between the assessee and the IPL, the Assessing Officer has concluded as under: "As could be seen from the above the terms of agreement provided for entire marketing of the products of IP Rings also, for which the technical assistant fee agreed is 5%. In the profit and loss account, it is seen that an amount of Rs. 94,38,512/- has already been debited as technical consultancy fee. Therefore, as per the agreement with IP Ltd, no such amount is payable by the assessee. Further, it is also seen that the assessee had not claimed such expenditure in the immedi....
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....ar under consideration, new rings were introduced in the market by the IPL and since it was new product in the market, this item was thrown in the market on free of cost. No doubt, 5% of the turnover for technical consultancy fee was already there and in addition to that sales promotion expenses have been claimed against which IPL raised debit notes and since it was first time payment and neither before nor after it has been made because introduction of the new product was done in this year. Therefore, there was no written agreement and this expenditure has been claimed on the basis of the oral commitment and since it takes care of future product, therefore, it is an allowable expenditure, which has wrongly been disallowed by the Assessing Officer and the ld. CIT(A) is also not justified in confirming such disallowance, it was pleaded for allowing the claim of the assessee. 8.3 The ld. DR relied upon the orders of authorities below and pleaded for confirmation of the impugned order as huge expenditure has been claimed without there being any agreement with the IPL when technical consultancy fee was payable at 5% of the turnover to the IPL. As such, the Assessing Officer is justi....