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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 ..... el/2013 emanates from the order of CIT (Appeals)- VIII, New Delhi dated 31.03.2013 for the Assessment Year 2007-08. In this appeal also, the assessee has taken many grounds, however, the ld. AR submitted that he is only pursuing ground nos.2 to 4 in which the issue of payment of royalty is involved. 4. Since ld. AR is only pursuing the issue involved regarding payment of royalty and no other ground was pleaded before us, therefore, all other grounds raised in the appeal memo are dismissed as not pressed. The only issue regarding payment of royalty is being disposed of by this common order in all the three Assessment Years, for the sake of brevity, as the facts and circumstances are same in all the three years. 5. In the Assessment Year 2005-06, the assessee has paid royalty of Rs. 50,20,122/- and the Assessing Officer disallowed a sum of Rs. 37,65,091/- treating the expenditure as capital in nature after allowing depreciation @ 25%. Thus, the net addition to the income was of Rs. 37,65,091/-. Similarly, in the Assessment Year 2006-07, the royalty expenditure claimed of Rs. 49,01,101/- and the same was disallowed treating as capital expenditure in nature after allowing depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee has furnished inaccurate particulars of its income, penalty proceedings under section 271(1)(c) are being initiated separately." The disallowance in the Assessment Years 2006-07 and 2007-08 is also on the similar grounds and the language of the order is almost same. 6. The CIT (A) has sustained/enhanced the addition and the relevant portion of the order from the Assessment Year 2005-06 is reproduced as under :- "2.3. I have gone through the observations and findings of the assessing officer, submissions of the A. R. of the appellant, copies of relevant royalty agreements, this ground of the appellant is being finalized after making the following observations : (a) On going through the copy of the agreement dated 19.11.2002 and 01.06.2005, it is observed that these agreements are very casual in nature and also not on any stamp paper which has proper legal sanctity. It is also surprising to note that even when such large corporate entities are entering into agreement, even the basic legal documentation is not properly followed up. Accordingly, the sanctity of these royalty agreements are prima facie doubtful. Further, on reading the one page agreement, the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the drawings and proof of payment was being provided which was sufficient to explain the royalty payments made to Macnaught Pvt. Ltd. It was argued by the A.R. that without paying the royalty, the assessee would not be in a position to produce / sell Macnaught products. Therefore, these expenses were exclusively for business purposes and should be allowed as revenue expense during the year. (e) These submissions of the A.R. of the appellant are very general in nature and no specific submissions or arguments have been provided by the A.R. of the appellant to justify these payments to Macnaught Pvt. Ltd. on the basis of cryptic and casual agreement which was produced. 2.4. On going through the assessment order also it is observed that the assessing officer had not appreciated the casual nature of the agreement and had not examined the issue whether this payment was justified as a business expense at all. Since there is no legal backing to the agreement and there is nothing mention in the agreement regarding the justification for these payments, the issue of the payments being capital or revenue is secondary and the primary issue remains, whether such payments are at all justifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned company based in Turrella, Sydney, Australia which designs and manufactures a wide range of high quality equipment for the lubrication and fluid transfer industries including grease pumps and guns, fuel pumps, hose reels and flow meters. These products are sold in the agricultural, industrial, automotive, mining, aviation and marine industries throughout the world. The assessee is manufacturing products and selling the same in the name of MACNAUGHT and have been paying royalty as specified in the arrangement entered into with MACNAUGHT. Therefore, the CIT (A)'s reasoning for disallowing the royalty expenditure is untenable in law. The arrangement between the assessee and the Australian company has been duly signed by both the parties. The rate per piece has also been specified therein. The royalty has been paid in actual. MACNAUGHT is not a related concern of the assessee. There is no allegation that the payments were bogus and it was an arranged affair. This is an actual payment after deduction of TDS and remitted through proper banking channel in foreign exchange. Therefore, the observation of the CIT (A) is not based on any specific finding. The rate, the products on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the absence of a specific agreement to make the payment of commission, any payment made cannot be allowed, the Hon'ble High Court has held that we are not able to agree with the reasoning of the Appellate Tribunal. He also relied on the decision of Hon'ble jurisdictional High Court in the case of CIT vs. Agra Beverages Corporation (P.) Ltd in ITA Nos. 966 of 2009 and 836 of 2010 dated 25.01.2011 wherein the Hon'ble High Court has held that the Tribunal rightly allowed this claim as business expenditure which could not be denied merely on the ground that there was no written agreement between Pepsi and the assessee for payment of the aforesaid amount; the amount is represented as hire charges for the coolers which were installed in the premises of the assessee and it would be clearly business expenditure. Reliance was also placed on the decision of CIT vs. Gautam Creations (P) Ltd. reported in (2007) 213 CTR 543 (Del) wherein the Assessing Officer disallowed deduction of commission holding that the assessee was unable to satisfactorily explain the payments and the work done by the agents to whom the commission was paid and the Hon'ble Delhi High Court held that Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that was variable and was unknown at the time the agreement was entered into. At that point of time, it was not possible to predict the volume of sale as also the price at which the cassette was to be sold, and as a result, the amount that would become due and payable to the assignor in future was not known. The sum paid subsequently which sums were variable and not ascertained at the time of assignment would lie in the field of revenue and not capital. 7.2 Ld. AR also made alternate submission in which he submitted that even if the royalty payment is capital in nature, the amount of the payment made since 2002 till date and if it is considered that assessee has incurred expenditure for acquiring technology then the obvious implication shall be that the payment made in each of the year shall be in respect of technology acquired by the assessee initially. If that is the case then entire expenditure needs to be considered as capital expenditure in the first year itself and depreciation has to be allowed since beginning. In the alternate plea, ld. AR submitted a working of the depreciation and pleaded that it gives much more than the claim of the assessee. The details submitted are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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