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TMI Blog2014 (11) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... holly and exclusively for the purpose of business of the assessee - The assessee has deducted TDS and deposited the same with the Government - The genuineness of the payment is also not in doubt - the CIT (A) was not justified in sustaining/enhancing the addition and the AO was not justified in treating the amount as capital in nature Decided in favour of assessee. - ITA Nos. 637 & 638/Del./2013, ITA No. 4373/Del./2013 - - - Dated:- 14-10-2014 - Shri Rajpal Yadav And Shri B. C. Meena,JJ. For the Petitioner : Shri Ved Jain Smt. Rano Jain, CAs For the Respondent : Shri Satpal Singh, Senior DR ORDER Per B. C. Meena, Accountant Member : ITA No.637/Del/2013 emanates from the order of CIT (Appeals)-X, New Delhi dated 07.12.2012 for the Assessment Year 2005- 06. Although there are various grounds in the appeal, however, at the time of hearing, ld. AR submitted that he is not contesting any other ground except ground nos.2(i), 2(ii) and 3(i) in which the issue is with regard to the payment of royalty. 2. ITA No.638/Del/2013 emanates from the order of CIT (Appeals)- X, New Delhi dated 10.12.2012 for the Assessment Year 2006-07. In this appeal also, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad approached M/s Macnaught Pvt. Ltd. for production of their products in India with their technology and M/s Macnaught Pvt. Ltd. had provided their specification including drawings of various dyes and details of quality control procedure and equipment and had also allowed the assessee to put the trademark Macnaught on these products in consideration of the royalty. The assessee further argued that the royalty was linked to the volume of the sales. Thus, the assessee argued the royalty expenses should be allowed to the assessee. The reply of the assessee has been duly considered and found to be unacceptable. From the reply of the assessee is very clear that the assessee is basically using the drawings of various dyes, quality control procedure and most importantly the trademark Macnaught of M/s Macnaught Pvt. Ltd. for which the royalty is being paid. The use of these drawings, procedure and trademark is only going to bring an advantage of an enduring nature to the assessee and so the expenditure on the same is clearly an expenditure for acquiring an intangible asset which would bring long term benefit. In view of the above, the royalty paid by the assessee is hereby capitali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the conditions of payments in detail. Regarding the other judicial decisions are clear cut clauses in those agreements whereby details of such payments are always laid down specifically. In this case, the reliance placed by the A.R. on those judicial pronouncements of Coal Shipment P. Ltd 82 ITR, Jacobs P. Ltd. 120 ITR etc. are not relevant. (c) The A.R. of the appellant has not been able to justify the complete background of royalty payments and cryptic agreement. The claim made for these payments shows the casual approach of the appellant. The only claim regarding the payments being based on the output is also not fully supported by any clauses in the agreement where it is nowhere mentioned that no payment shall be made in case of no production being done by the appellant. (d) During the course of appellate proceedings, the appellant was provided opportunity to explain the basis of royalty payment during the year and a letter dated 08-11-2012 was issued seeking an explanation as to why the addition on account of royalty payment for A.Y. 2006-07 should not be enhanced to ₹ 49,01,101/-. In response to this letter, the A.R. of the appellant has made a submission on 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and there was no justification of these payments as business expense. Accordingly, the disallowance is enhanced from ₹ 37,65,091/- to ₹ 50,20,122/-. 7. While pleading on behalf of the assessee, ld. AR submitted that the CIT (A) enhanced/sustained the addition on the ground that assessee has failed to justify the business purpose of the expenses claimed on account of royalty. He submitted that CIT (A) has given the following reasoning for sustaining the addition :- i) the agreement on the basis of which royalty has been paid are very general agreement and do not have any legal sanctity in view of the fact that they have not been documented on any stamp paper; ii) the basis on which the royalty has been paid has not been justified clearly in these agreements; iii) the only issue mentioned in the agreement is that royalty would be paid per unit as agreed; iv) no terms and conditions regarding payment of the royalty have been outlined in these agreements; w) there are no clauses in the agreement which show that no payment shall be made in case of no production being done by the appellant. vi) The CIT(A) also held that appellant is using trademark ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively. Proof/existence of a written agreement between the assessee and the commission agent is not a requirement for allowing the expenditure of the commission payment made by the assessee. He also relied on the decision of ITAT, Mumbai in the case of Harrison Garment Division vs. JCIT 18(2), Mumbai in ITA No.3022/Mum/2012 ITA No.6480/Mum/2012 order dated 30.04.2014 for the proposition that when there was no formal written agreement between the assessee and the agent, but commission has been paid on regular basis to the agent in earlier as well as subsequent assessment years; mere existence of an agreement cannot decide the allowability of commission payment, it is the presence of surrounding circumstances and the basic facts that decide the issue in conclusive manner; non-existence of written agreement cannot be sole base for disallowance of commission payment, if other evidences prove the fact of incurring of such expenditure wholly and exclusively for the business purposes. He also placed reliance on the decision of Smt. Godavari Devi Sehgal vs. ITO reported in (1992) 40 ITD 71 (Delhi) wherein the matter was referred to the third Member and it was the view of all three Members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the MACNAUGHT except to use their trademark to undertake production of MACNAUGHT product. Since the assessee has not acquired any right from MACNAUGHT it cannot transfer any right to others. The fundamental difference between using a technology and acquiring is that knowhow remain exclusive property of the licensee and the payment for the same is capital in nature. However, in assessee s case, the consideration is paid only for the use of technology and no right accrued to the assessee i.e. Licensee, therefore, such expenditure was revenue in nature. He also placed reliance on the case of Climate Systems India Ltd. vs. CIT reported in (2009) 319 ITR 113 (Del) for the proposition that royalty paid by assessee to the foreign collaborator at specified percentage of its domestic and export sales for using the technology and availing of technical services provided by the latter under the technical collaboration agreement is allowable as revenue expenditure. He also placed reliance on the decision of Hon'ble Delhi Hon'ble High Court in the case of CIT vs. Sharda Motor Industrial Ltd. reported in (2009) 319 ITR 109 (Del) and Hon'ble M.P. High Court in the case of CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,30,823/- 2006-07 Rs.2,55,30,823/- ₹ 63,82,706/- ₹ 1,91,48,118/- 2007-08 Rs.1,91,48,118/- ₹ 47,87,030/- ₹ 1,43,61,089/- 2008-09 Rs.1,43,61,089/- ₹ 35,90,272/- ₹ 1,07,70,816/- 2009-10 Rs.1,07,70,816/- ₹ 26,92,704/- ₹ 80,78,112/- 2010-11 Rs.80,78,112/- ₹ 20,19,528/- ₹ 60,58,584/- 2011-12 Rs.60,58,584/- ₹ 15,14,646/- ₹ 45,43,938/- He finally pleaded that there is hardly any revenue implication in this ground as the assessee is entitled for exemption u/s 10B of the Act on majority of sales. 8. On the other hand, ld. DR relied on the orders of the authorities below and pleaded to sustain the addition. 9. We have heard both the sides. The assessee company is a manufacturing company and engaged in the engineering tools. It is a 100% export oriented unit located in Gurgaon, Haryana. This unit is eligible for exemption u/s 10B of the Act on the profit earned. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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