TaxTMI 
TaxTMI 
2019 (2) TMI 1619
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....The Assessee is a company engaged in the business of manufacturing, trading and selling of printing ink, industrial adhesives and other allied products. While computing income from business, the assessee claimed deduction of a sum of Rs. 1,45,55,609/- on account of bad debts. It is not in dispute that bad debts were written off in the books of accounts of the assessee and that the Assessee was entitled to claim deduction in respect of bad debts written off u/s 36(1) (vii) of the Act. The dispute raised by the AO was that the bad debts written off comprised of component of sales tax of Rs. 3,34,330/-. The AO was of the view that the sales tax component of the bad debts written off cannot be allowed as deduction as bad debts written off because it was not a debt arising from the trading transaction between the Assessee and its customer. Rather it was a liability of the customer to pay sales tax to the Government. According to the AO the sales tax component should not be allowed as deduction because the sales tax component was not credited as part of the sales when sale was recorded by the assessee in his books of accounts. The AO also was of the view that sales tax could be allowed a....
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....be allowed. 7. Ground no. 3 and 4 raised by the assessee reads as follows :- "3.For that on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in law and on facts in upholding the disallowance of 75% of the royalty payments made by the AO treating it to be capital in nature. 4. For that on the facts and in the circumstances of the case and in law, the royalty was paid by the appellant in the course and for the purposes of business and was therefore revenue in nature and in that view of the matter both the Hon'ble DRP as well as the Id. AO erred in making disallowance to the extent of Rs. 6,88,18,277/- out of total royalty paid during the year. " 8. The assessee paid a sum of Rs. 2,14,29,108/- to the holding company DIC Asia Pacific PTE Ltd., Singapore and Royalty of Rs. 7,03,28,595/- to another holding company DIC Corporation, Japan. The total royalty paid by the assessee was therefore Rs. 9,17,57,703/-. According to the AO by paying the aforesaid royalty the assessee acquired intangible assets technical knowhow for upgrading manufacturing technology and also got right to use the trading names, brand names and marks for a period of se....
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.... flush varnish, adhesives including packaging adhesives on a continuous basis. The assessee had approached DIC Japan to make available to it the said technical knowhow for the purpose of upgrading its manufacturing technology for the existing as well as future products relating printing inks and allied products on a continuous basis in its plants located at Calcutta, Mumbai, Noida, Ahmedabad , New Delhi , Madras or any other future place as may be determined by assessee from time to time. It is further stated that the DIC Japan would.make available to assessee the technical knowhow as aforesaid and the right to use the trade names and brand names. In this regard, the following clauses in the said agreement would.be relevant:- 1.3. "Products" will also include the right of COATES to use the Trade Names, Brand Names relevant to the Products, whether the same be registered or otherwise (hereinafter referred to as "Trademarks"), provided, however, it shall be the responsibility of COATES to ensure compliance with local laws relating to use of such names and marks. 1.4. Licensed Information means such technical information in possession of, and at free disposal of , DIC, on the Ef....
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....s Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) percent of the shares of COATES. 9.2. One (1) year prior to the expiration of this Agreement, the parties shall meet and shall decide jointly either to renew this Agreement for the further period fo five (5) years at the expiration of this Agreement or whether it shall not be renewed after the normal date of expiration. 10. Termination 10.1. Either party may terminate this Agreement forthwith: (1) if the other party is in breach of any of the provisions of this Agreement and fails or is unable to remedy the same within 30 days after receiving notice in writing thereof from the other party. (2) if the other party becomes insolvent, bankrupt or is placed liquidation. 10.2. If under the provisions of this Agreement COATES ceases to be entitled to use the Licensed Information COATES shall deliver up to DIC all such Licensed Information in tangible form which may then be in its possession and will keep no copies thereof. 9.1. We find from pages 27 to 29 of the Paper Book, a copy of the approval, from Government of India, Ministry....
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....rsuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan had upgraded its P&M and also changed the setting up of P&M to make its finished products viable for the market. This assumption is factually incorrect and does not emanate out of the jurisdictional facts on record. The ld. CIT had not brought any material evidence on record to justify this incorrect assumption thereby leading to incorrect conclusion. We find that the assessee had all along been in the business of manufacture of printing inks and it had not ventured into any new business as could.be evident from its financial statements. We find that the knowhow was provided for upgrading the existing business. This payment of royalty has been allowed as a revenue expenditure in the past by the ld. AO u/s 143(3) of the Act. The ld. CIT merely made a bald statement by stating that the assessee by using the licensed information had entered into new dimensions of business from time to time and hence the payment of royalty could.not be equated with the nature of royalty paid in earlier years, which statement is abs....
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....ertainly represent one way of looking at the things. Sight cannot however be lost of the fact that the payment made by the assessee is on account of license fee. By making such payment, the assessee has got a permission la use the technology, The money paid is irrecoverable. In case the business of the assessee for some reason or the other is stopped, no benefit from such payment is likely to accrue to the assessee. The license is not transferable. Therefore. it cannot he said with any amount of certainty that there has been an accretion to the capital asset of the assessee. In case, the assessee continues to do business and continues la exploit the technology for the agreed period of time, the assessee will be entitled to take the benefit thereof. But in case it does not do so, the payment made is irrecoverable. It is in this sense that the matter was looked into by the High Court of Madras and was endorsed by the apex Court in the case of IAEC (Pumps) Ltd. (supra). The point as a matter of fact is covered by the aforesaid judgment. Nothing really is left for us to do in the matter. 11. We are, therefore. of the opinion that the question has to be answered in the affirmative an....
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....ppreciated. He further submitted that a new advantage and acquisition of capital asset by the assessee existed in the present case. The assessee had enduring benefit and has functionally gained advantage and these facts ought to have prompted the tribunal to come to a conclusion that expenditure in question was capital in nature. 15. We have considered the rival submissions and we are of the view that the arguments put forth by the ld. DR have already been considered by the tribunal in the order cited in the earlier paragraphs. We are of the view that the facts and circumstances remain identical. There is no reason for taking a contrary view. We therefore do not accept the arguments put forth by the ld. DR. For the reasons given above we hold that the assessee is entitled to claim the entire royalty paid to DIC Asia Pacific PTE Ltd., Singapore and DIC Corporation, Japan. The addition made by the AO is directed to be deleted. 16. Ground No.5 and 6 raised by the assessee reads as follows :- "5..For that on the facts and in the circumstances of the case and in law, the Id. AO acted in complete violation of the binding directions of the Hon'ble DRP by not allowing the claim ....
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....at was actually paid during the relevant previous year in computing income of the assessee from business. The admitted factual position was that the assessee did not claim the aforesaid sum as deduction in the return of income. The AO therefore refused to entertain the claim of the assessee for deduction as above. 22. On objection by the Assessee before the DRP, the DRP confirmed the order of the AO with the following observations: "Findings - Ground no. 11 pertaining to omission to report to the tax auditor u/s 44AB, the fact of payment towards leave encashment and retirement benefits to its employees was carefully considered by us. The A' presented his claim before the AO who obviously relying M/s. Goetze (SC) denied the deduction to the A.' The arguments of the A' against the above were considered by us. The discovery of' the omission to claim the above amount was post audit. Since the tax audit did not cover this aspect, it is difficult for us to grant any benefit of this claim to the A' as the same would tantamount to accepting entries out of the pale of audit and thereby granting benefit to the A' on the basis of certain facts which were not place....