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2009 (12) TMI 721 - AT - Income TaxNature of Royalty Payment - Revenue or Capital - assessee had entered into a technical know-how agreement with Revlon Mauritius Ltd. for the supply of technical knowhow to manufacture the goods. As per the said agreement in consideration for the supply of know-how the assessee shall pay every year royalty (net of taxes) at the rate of 5 per cent. on domestic sales and 8 per cent. on export sales. During the year the assessee paid royalty to RML in pursuance of the grant of right to use the technical know-how. AO treated part of royalty payment as capital in nature therefore disallowed 25 per cent of royalty payment - basic objection of the Assessing Officer while capitalising 25 per cent. of the royalty paid was on account of his observation that know-how agreement is open ended in terms of duration and that the assessee has exclusive rights to use the know-how and patents and the new products developed by the licensor. CIT (A) treated 5 per cent of the royalty as capital in nature. HELD THAT - In terms of the agreement there is no dispute to the fact that the assessee had been given only right to use know-how and the patents and at no point of time any property of enduring benefit has been transferred in favour of the assessee. In view of the decision of the in the case of CIT v. Ciba of India Ltd. 1967 (12) TMI 3 - SUPREME COURT it can safely be concluded that where the assessee cannot assign or sub-license any part of the right obtained from the know-how the payment made therefor cannot be termed as capital in nature. In the instant case RML has not provided any assets to the assessee for establishing any factory by giving right to use technical know-how no asset of enduring nature was acquired and upon termination the assessee was not entitled to use the industrial properties and know-how of RML. Enduring benefit can be said only if right to manufacture is given even after termination of the agreement. In the result the ground taken by the assessee with regard to revenue nature of royalty payment is allowed whereas the ground of the Revenue is dismissed in both the years under consideration. Disallowance u/s 40A - Consultancy charges - AO has alleged that consultancy charges paid by the assessee were nothing but an arrangement to siphon off part of the profits of the assessee-company to its sister concern and joint ventures and has allowed part as director s remuneration and disallowed u/s 40A(2) by alleging the same as unreasonable and excessive - CIT (A) deleted the same - HELD THAT - Sufficient evidence was produced before the AO to indicate that MMPL was actively involved in the day-to-day activities of the assessee-company. MMPL has duly incorporated the consultancy charges in its income and paid due taxes thereon it cannot be said that agreement was entered for siphoning off of income to the sister concern. The categorical finding recorded by the CIT (A) with regard to reasonableness of the consultancy charges paid has not been controverted by the learned Departmental representative We therefore do not find any reason to interfere with the order of the CIT (A) for deleting disallowance made by the AO by invoking the provisions of section 40A(2). Disallowance of proportionate advertisement and publicity expenses - objection of AO that advertising expenses were incurred by the assessee to promote the brand Revlon therefore it cannot be said that advertising expenses were incurred wholly and exclusively for the purpose of the business of the assessee - HELD THAT - Since the assessee was the brand owner it has vested interests and incurring of expenditure for promotion of brand was in the interest of the business of the assessee company only. We also found that similar expenditure was allowed consistently in the past and no disallowance has been made towards these expenses. Even under the scrutiny assessment for the AY 2000-01 and 2001-02 similar expenditure was allowed. There is no change in the facts and circumstances during the year even on the principle of consistency such expenditure cannot be disallowed. On the similar reasoning the disallowance made by the lower authorities during the AY 2006-07 also stands deleted. Accordingly we do not find any merit in the disallowance made by the lower authorities on account of expenditure incurred for advertising and publicity. In the result the appeals of the assessee are allowed whereas the appeals of the Revenue are dismissed.
Issues Involved:
1. Nature of royalty payment: capital or revenue expenditure. 2. Disallowance of proportionate advertisement and publicity expenses. 3. Reasonableness of consultancy charges paid to MMPL. Issue-wise Detailed Analysis: 1. Nature of Royalty Payment: The primary issue was whether the royalty payment made by the assessee to Revlon Mauritius Ltd. (RML) should be treated as capital or revenue expenditure. The Assessing Officer disallowed 25% of the royalty payment, treating it as capital expenditure, citing that the know-how agreement was open-ended and provided exclusive rights to the assessee. The Commissioner of Income-tax (Appeals) reduced this disallowance to 5%, referencing the Supreme Court judgment in Southern Switch Gear Ltd., due to the exclusive right to manufacture. The Tribunal found that the royalty payments were for the continued use of the brand name and patents, with no fresh input of know-how/technology, and no enduring benefit was derived by the assessee. The Tribunal referenced the Supreme Court's decision in CIT v. Ciba of India Ltd., concluding that since the assessee could not assign or sub-license the know-how, the payment was revenue in nature. Consequently, the Tribunal allowed the assessee's appeal, treating the entire royalty payment as revenue expenditure, and dismissed the Revenue's appeal. 2. Disallowance of Proportionate Advertisement and Publicity Expenses: The assessee contested the disallowance of Rs. 14.87 lakhs out of Rs. 30.51 lakhs incurred on advertising and publicity. The Assessing Officer argued that these expenses promoted the "Revlon" brand and were not wholly and exclusively for the assessee's business. The Tribunal noted that the assessee had an agreement with WMPL for bearing advertising costs related to the consumer sector, but the promotion of the "Revlon" brand benefited the assessee's business. The Tribunal emphasized that similar expenditures had been allowed in previous years, including under scrutiny assessments, and there was no change in circumstances. Thus, the Tribunal deleted the disallowance, allowing the assessee's appeal. 3. Reasonableness of Consultancy Charges Paid to MMPL: The Assessing Officer disallowed Rs. 58.98 lakhs out of Rs. 88.98 lakhs paid as consultancy charges to MMPL, alleging it was an arrangement to siphon off profits. The Commissioner of Income-tax (Appeals) deleted the disallowance, confirming that MMPL rendered services to the assessee. The Tribunal found that MMPL provided various advisory services and Mr. U. K. Modi, representing MMPL, played a significant role in the joint venture. The Tribunal referenced the Supreme Court's decision in CIT v. Dhanrajgirji Raja Narasingirji, stating it was the assessee's prerogative to decide business expenses. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s order, finding no reason to interfere with the deletion of the disallowance. Conclusion: The Tribunal allowed the appeals of the assessee, treating the royalty payment as revenue expenditure, deleting the disallowance of advertisement and publicity expenses, and upholding the reasonableness of consultancy charges paid to MMPL. The appeals of the Revenue were dismissed. The decision was pronounced in the open court on December 18, 2009.
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