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TMI Blog2011 (10) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... at:- 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. - Decided in favour of Assessee. - ITA No. 3738(Del)/2011 - - - Dated:- 21-10-2011 - Rajpal Yadav, K.G. Bansal, JJ. Raj Tandon, CIT, DR, for the Appellant Salil Kapoor and Ankit Gupta, Advs., for the Respondent ORDER K.G. Bansal: Ground nos. 2 and 2.1 taken up by the revenue are against deleting of the disallowance of Rs. 4,54,85,325/- made by the AO out of royalty expenses. Reliance has been placed on the decision of Hon'ble Supreme Court in the case of Southern Switch Gears Ltd., (1984) 232 ITR 359. 2. At the outset, the ld. counsel for the assessee submitted that the issue stands covered by the decision of "D" Bench of Delhi Tribunal in the case of the assessee for assessment years 2005-06 and 2006-07 in ITA Nos. 5 and 2063(Del)/2009, a copy of which has been placed before us. The relevant portion of the decision is reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y property in the sale to the assessee. Obligations of the contract manufacturer were clearly defined in the agreement between the assessee company and the contract manufacturer, according to which obligation relating to royalty payment has not been passed on to the contract manufacturer. The entire benefit of the know-how was meant for manufacturing of the products to be supplied to the company and there was no obligation of contracting manufacturer to pay royalty to the licensor. Since the assessee company was enjoying the complete benefit of the know-how to run its business, the expenditure incurred every year on payment of royalty was revenue in nature and is very much a business expenditure. These expenditure cannot be classified as capital expenditure. From the record, we found that arrangement entered into by the assessee with KCPL and WMPL was for bona-fide commercial needs which cannot be tested against touchstone of tax avoidance. The royalty payment was made by the assessee in the normal course of its business which is revenue in nature, allowable u/s 37(1) of the Act. The know-how license was granted way back in 1994 in terms of an earlier agreement dated 22.7.1994 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the agreement. 9. 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." 2.1 The ld. CIT, DR fairly submitted that the matter stands covered by the aforesaid decision, however, the decision has not been accepted by the revenue. There are strong reasons to have a re-look at the decision and, therefore, even if the present bench of the Tribunal chooses to follow the earlier decision, his submissions may be incorporated in the order. 2.2 The ld. CIT, DR briefly furnished the findings of the AO that -(i) the computation of royalty is not correct as per agreement, (ii) the expenditure on royalty has not been incurred wholly and exclusively for the purpose of business as the assessee neither manufactures the goods nor sells them on its own, and (iii) a part of the expenditure is capital in nature in view of the decision of apex court mentioned in the ground of the revenue. Briefly, the facts are that the assessee has been paying royalty to Revlon Mauritius Ltd. computed @ 5% of net domestic sales and 8% of export sales. The amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the date of agreement till such time as both the parties mutually decide to terminate the same. The agreement is open ended and, therefore, various benefits derived by the assessee from the agreement are of enduring nature. 2.4 Reliance has been placed on the decision of Hon'ble Delhi High Court in the case of My Fair Lady Ltd. vs. ITO, (1988) 41 Taxman 22 (Mag.). In this case, the assessee was granted license by one ML to use its brand name MF in respect of cosmetics manufactured by the assessee on the condition that the assessee will pay royalty @ 2% of the sales on all such items in respect of which the brand name MF was used. Further, the ML was to provide technical know-how to the assessee for manufacture of hair removing creams and waxes on consideration of payment of royalty computed on the basis of 5% of the sale proceeds in the first year and 3% in the second year. Thereafter, the assessee would have exclusive right over the said item. The question was-whether, payment of 5% royalty was for acquisition of capital asset and hence a capital expenditure? After considering various decisions, it has been held that payment of 5% royalty was for acquisition of a capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal agreement. In fact, this agreement mentions that it will become the part of the original agreement except for minor modifications made in it. Various issues regarding the nature of expenditure and its computation have already been considered by the Tribunal. It has also taken into account the fact that the assessee does not manufacture the goods on its own and also does not sell or market the products on its own. The Tribunal has also considered the matter of computation of royalty. We are of the view that although it is an open ended agreement, it is only for the use of know-how and patents including improvements to the know-how. No proprietary right has been passed on to the assessee in the know-how or the patent. Therefore, the view taken by the Tribunal in the decision for assessment years 2005-06 and 2006-07 is followed. The result is that these grounds are dismissed. 3. Ground nos. 3 and 3.1 are against the deletion of the addition of Rs. 87,60,601/- made by the AO by invoking the provision contained in section 40A(2) of the Act. The facts are that the assessee claimed deduction of consultancy charges of Rs. 1,17,60,601/-. The AO had taken the position in earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of income of the sister concern. In view of the decision of Dhanrajgiriji Raja Narsinghji - 91 ITR 544, it is upon the assessee to decide what expenses are to be incurred or what is required for business purposes and it is not open to the Revenue to prescribe as to what expenses are to be incurred by the assessee. The categorical finding recorded by the CIT(A) with regard to reasonability of the consultancy charges paid has not been controverted by learned DR, we therefore do not find any reason to interfere in the order of CIT(A) for deleting disallowance made by the AO by invoking provisions of Section 40A(2)." 4. Ground no. 4 is against deletion of the disallowance of Rs. 10,31,886/- made by the AO from advertisement and sale promotion expenses. The disallowance has been made by the AO on the grounds that the expenditure of Rs. 2,36,934/- in respect of advertisement in print media is in respect of brand promotion. Further, the advertisement expenditure pertains not only to the assessee but also confer benefits to other associate concerns and, therefore, the assessee is entitled to the deduction of proportionate expenditure only. The allocation is made on the basis of tur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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