9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2011 (8) TMI 485 - HC - Income TaxRoyalty payment - Capital expenditure or not - Expenditure incurred by the assessee was neither for acquisition of any patents or copyrights - This is not even the case of the revenue - The revenue has latched on to royalty paid for use of trademarks and brands of SWCL - It was argued by revenue that the expenses incurred for use of trademark ought to be treated as capital expenditure - A perusal of the provisions of the agreement would show all that the assessee acquired was the use of the brand names and the trade marks of SWCL which find a mention in Appendix-C annexed to the said agreement - The assessee acquired no right to any secret process or formulae or even any right title and interest in the trade marks and brands under which the IMFL products were sold. As a matter of fact assessee s rights were co-terminus with the subsistence of the said agreement. Therefore we have no hesitation in rejecting the contention of the revenue in this regard. Applicability of provisions of section 40A(2) - Assessing Officer in the assessment year 1997-98 after recording that the shares of the assessee were held by six (6) entities goes on to observe that the assessee became a subsidiary of Shaw Wallace Group of Companies - There is no finding recorded by the Assessing Officer that SWCL had acquired substantial interest i.e. 20 per cent or more of the share capital with attending voting rights whether directly or beneficially - If that is so then the provisions of section 40A(2)(a) could not have got triggered - Further CIT(A) records that six (6) individuals held ten (10) shares each in the assessee while one gentleman by the name of Mr. Suraj P. Gupta held 8, 61, 610 shares who was neither an employee of the assessee and nor was any payment made to Mr. Suraj P. Gupta or his relative or to a company of which he was a Director - Held that -payments had not been made to persons specified under section 40A(2)(b) and therefore the provisions of section 40A(2) were not applicable.
Issues Involved:
1. Nature of expenditure: Whether the royalty paid by the assessee to Shaw Wallace & Co. Ltd. (SWCL) was capital or revenue expenditure. 2. Applicability of Section 35A: Whether the expenditure incurred falls under the purview of Section 35A of the Income-tax Act, 1961. 3. Applicability of Section 40A(2): Whether the payments made to SWCL were excessive or unreasonable and thus hit by the provisions of Section 40A(2) of the Income-tax Act, 1961. 4. Transfer Pricing: Whether the arrangement between the assessee and SWCL resulted in a transfer of profits. Detailed Analysis: 1. Nature of Expenditure: The Tribunal concluded that the royalty paid by the assessee to SWCL for using trademarks, brands, and other services was for day-to-day business activities, enhancing the assessee's products and business efficiency. The Tribunal found that the payment was for the use of technical know-how and experience of SWCL, which did not result in the acquisition of any asset of enduring nature. Therefore, the payment could not be termed as capital expenditure. The Tribunal emphasized that the expenditure incurred was in the nature of revenue expenditure. 2. Applicability of Section 35A: The Tribunal held that Section 35A of the Income-tax Act was not applicable as the expenditure was neither for the acquisition of any patents nor copyrights. The Tribunal noted that the assessee had only acquired the use of trademarks and brand names of SWCL, which did not constitute capital expenditure. The Tribunal referred to the judgment in CIT v. J.K. Synthetics Ltd., emphasizing that mere use of a trademark or brand name does not give the expenditure the character of capital expenditure. 3. Applicability of Section 40A(2): The Tribunal found that the Assessing Officer failed to provide evidence that SWCL held a substantial interest in the assessee, i.e., 20% or more of the shares or voting rights. The Tribunal noted that the CIT(A) in the assessment year 1998-99 had found that none of the entities holding shares in the assessee was SWCL, and even the employees of SWCL did not have a controlling shareholding interest. Therefore, the provisions of Section 40A(2) were not triggered. The Tribunal upheld the CIT(A)'s reasoning that the payments made to SWCL were not excessive or unreasonable. 4. Transfer Pricing: The Tribunal accepted the explanation provided by the assessee regarding the difference in bottling charges paid to Balbir Distilleries Ltd. and the assessee. The Tribunal noted that SWCL had paid higher bottling charges to Balbir Distilleries Ltd. due to its lower capacity and the need to establish its presence in North India. The Tribunal found that the variable cost per unit for the assessee was lower due to its higher production capacity, justifying the lower bottling charges. The Tribunal concluded that the royalty paid to SWCL was neither excessive nor unreasonable, and the invocation of Section 40A(2)(a) by the Assessing Officer was unjustified. Conclusion: The Tribunal upheld the order of the CIT(A) for the assessment year 1998-99 and directed the Assessing Officer to apply the same reasoning for the assessment years 1997-98 and 1999-2000. The Tribunal found no substantial questions of law requiring consideration and dismissed the appeals filed by the revenue. The Tribunal's findings were based on the detailed analysis of the terms of the agreement, the nature of the expenditure, and the applicability of the relevant provisions of the Income-tax Act.
|
