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TMI Blog2012 (11) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... the order passed by the CIT, Delhi (Central)-II, New Delhi dated 20th March, 2009 for Assessment Year 2004-05. The grounds of appeal read as under:- 1.0 The learned CIT Delhi Central-II has grossly erred in law, on facts and in the circumstances of the case in passing the order revising order of assessment passed by the Assessing Officer i.e., ACIT Central Circle-3 dated 27.12.2006 for Assessment Year 2004-05, order u/s 263 of the Income Tax Act, on wholly illegal, erroneous and untenable grounds. 1.1 That the order passed by the CIT Delhi Central-II dated 20.3.2009 is bad in law and be cancelled. 1.2 That the order passed by the CIT Delhi Central II dated 20.03.2009 u/s 263 is beyond the powers granted to the CIT u/s 263 of the Income Tax Act, and therefore be cancelled. 2.0 That the CIT Delhi Central II has grossly erred in law and on fact in the circumstances of the appellant s case in directing to disallow the claim of running Royalty Rs.194.03 lacs as Capital expenditure. The decision of the Apex Court in the case of M/s Southern Switchgear Ltd. 232 ITR 359 (SC) is not applicable on the fats of the appellants case. 2.1 That the CIT Delhi Central-II ought to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee needed changes and the assessee had obtained only technical assistance and did not purchase any know-how or patents so as to justify capitalization. Reliance was placed on the following decisions:- a) CIT vs. J.K. Synthetic Ltd. b) Shriram Pistons and Rings Ltd. vs. CIT 307 ITR 363 (Del) c) CIT vs. Lumax Industries Ltd. d) CIT vs. Eicher Motors ltd. 214 CTR 629 (MP). 3. It was submitted that agreement with the foreign parties do not guarantee any minimum payment of royalty and royalty is linked with the production/sales. Considering these submissions, learned CIT has held that principle of res judicata does not apply to income-tax proceedings, therefore, acceptance of the issue in earlier year does not debar the revenue from raising this issue in this year. As per copy of the agreement dated 17th August, 1994, M/s Goetze Technologies- Vertriebs and Service GMB II was to provide with all specifications, technical data, instructions, standards, working instructions u/s 2 (disclosure of know-how of the agreement) and similar other modification in designs, etc. were also to be promptly disclosed. The assessee was also free to grant sub-lease to other Indian companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce given and to be given were based on the percentage of domestic sales, export sales, extra charge for CKS sales and chrome plating (non-CKS appliances). Thus, it was pleaded by him that all these royalty payments are based on turnover basis and he submitted that this fact has also been recognized by the Assessing Officer in the order framed in pursuance of aforementioned order passed by CIT which is an order dated 30th December, 2009. He has placed copy of the said order on our record. He drew our attention towards the following observations of the Assessing Officer vided which he has treated 25% of the royalty paid on account of capital field and 75% has been allowed:- 2. The assessee company is engaged in the business of manufacturing and Trading of Automobile parts etc. 3. The assessee was asked to file its objections if any, for not to add back 25 % of Rs. 194.3 Lakhs deducted towards Royalty payments to a foreign company treating as capital expenditure as held by the Hon'ble Supreme Court in its decision in the case of M/s Southern Switch Gear Ltd. Vs. CIT Another 232 ITR 259 (1998) (SC) 4. In response to above the assessee company vide its letter dt. 18-12-2009 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n absence of any contrary circumstances be in the nature of capital expenditure. As against this any expenditure, which enables the profit making structure to work more efficiently leaving the source or the profit making structure untouched would be in the nature of revenue expenditure. By the above observation it is felt that the expenditure in question was within the ambit of Hon'ble Apex Court decision in the case of M/s Southern Switch Gear Ltd. V s. CIT Another 232 ITR 259 (1998) (SC). 8. Further the Hon'ble Supreme Court in the case of Jonas Woodhead Sons (Supra) has treated 25% of the total payment of capital side. The said criterion of allocation 25% of payment towards capital has also been applied by the Hon'ble Madras High Court in the case of CIT vs. Southern Switchgear Ltd. 148 ITR 272, which has been affirmed by the Hon'ble Supreme Court as reported in 232 ITR 359. 9. Accordingly by relying on Hon'ble Apex Court decision the 25% of the payment paid in the year under consideration shall be allocated towards capital expenditure and the balance 75% of the payment is to be allowed as revenue expenditure. Needless to say that the assessee shall be entitled to deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een allowed. However, in the relevant assessment year Assessing Officer had treated 1/4th of the royalty as capital in nature relying on the decision of Hon'ble Supreme Court in the case of Southern Switch Gear Ltd. (supra). Ld. AR of the assessee further submitted that no new asset has been created or new right is being created in favour of the assessee and only the existing business is admitted to run more profitably and efficiently. Therefore, the expenses of such nature are allowable. The assessee placed reliance on the following decisions: 1) CIT v. Sharda Motor Industrial Ltd. 319 ITR 109 (Del.) 2) Shri Ram Pistons and Rings Ltd. v. CIT 307 ITR 363 (Del.) On the other hand, Id. Sr. D.R. referring to the agreement filed by assessee in paper book submitted that copy of agreement was not filed before Assessing Officer and ld. CIT(A). The copy of agreement filed in the paper book was for a period of 10 years and the period of 10 years had expired in August, 2004 and, therefore, .the payment of royalty cannot be decided on the basis of this agreement. The copy of agreement effective from August, 2004 was neither filed before Assessing Officer nor before ld. CIT(A). Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra); Sharda Motor Industrial Ltd.; and Shriram Pistons and Rings Ltd. (supra). If royalty has been paid on turnover basis, the same will be treated as revenue expenditure. However, if assessee had paid the royalty in lump sum for acquiring enduring benefit, the same will be in the capital field. We, therefore, set aside the matter to the file of Assessing Officer to examine the case of assessee and decide the issue in terms of above directions. 7. In the result, appeal filed by the assessee is allowed for statistical purposes. 6. It is the case of the learned AR that after considering all the available judicial pronouncements it has been held by the Tribunal that if the royalty is paid on turnover basis, the same is revenue expenditure. He submitted that the Assessing Officer has not disputed this fact that royalty paid by the assessee is based on turnover. Therefore, he submitted that keeping in view the law explained by the Tribunal in the aforementioned order, the order passed by the Assessing Officer cannot be said to be erroneous as well as prejudicial to the interest of the revenue. Hence, the same should be quashed. 7. On the other hand, relying upon the obser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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