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TMI Blog2011 (2) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... s at 100% for the assessment year 1999-2000, 50% for the assessment years 04-05 and 05-06, whereas the Department in all its four appeals, through identical common grounds has challenged the direction of ld. CIT(A) to treat 25% of royalty payment as capital expenditure and balance 75% as revenue expenditure. 4. We shall first deal with common ground of both the sides with regard to restricting part disallowance of royalty payment of 25% as capital expenditure and balance 75% as revenue expenditure as agitated by the assessee in relation to upholding part disallowance and Department about giving relief by deleting part disallowance in this regard. 4.1 Since almost identical facts with difference in amount of royalty payment disallowance is there in all the years, therefore, we shall discuss the facts in relation to the assessment year 1999-2000, which indicate that the assessee is engaged in the business of manufacturing and sale of pistons and rings. It filed return of income on 30.12.1999 declaring total income of ₹ 95,42,800/-. Notice under section 148 was issued on 14.03.2006 and the assessment was completed under section 143(3) r.w.s. 147 on 18.10.2006 determining total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late authority, the Id. AR had made elaborate written submission and has filed copies of the agreement. He argued before the ld. CIT(A) that the payment was for the use of the know-how and not for acquiring any know-how. Since the royalty is calculated as a percentage of sales and since sales are taken as revenue receipts, the expenditure in earning the sales including the royalty should be allowed as expenditure. The assessee has made further submission and the ld. CIT(A) incorporated such submission in para 3.2, which reads as under: "The assessee company entered into a collaboration agreement with M/s Nippon Piston Rings Limited under the terms of which the foreign company agreed to provide the assessee company technical aid and information in the manufacture of Steel Rings, GN Rings, Chrome Plated Rings, Nifflex-S Rings. The Iumpsum amount paid towards the technical know-how were capitalized during the years in which they were acquired and deduction u/s.35AB was claimed. The continuing royalty, which is paid based on the actual usage of the license is calculated at a fixed percentage on Net sales. This continuing royalty is directly related to revenue generated during the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs shall abide by the obligation of confidentiality imposed by this Article: and not to use any Technical information it will acquire from NPR under this Agreement other than for the purposes allowed herein. 10.2 IPR's obligations under this Article shall survive the expiration or termination of this Agreement for any reason……… Article 13 duration and termination 13.1 Unless terminated earlier as hereinafter provided, the term of this Agreement shall expire six (6) years from the effective date of this Agreement i.e. the terms of this Agreement shall expire when the last royalty accrues as provided for in Article 7.1 hereof. It is submitted that Royalty is nothing but payments made for the use of the technical know how and is paid on year to year basis. No enduring benefit is obtained by the payment of royalty. In fact the royalty is paid only on the actual use of the technical know how and therefore there is no future right acquired by payment of royalty. The right to use has been obtained as a part of the lump sum payment which includes transfer of technical know how and right to use. Further, once the agreement period is over the royalty payment is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... py enclosed) has upheld the claim of the assessee that the payment of royalty is revenue in nature. 1. CIT v. MRF Ltd 149 ITR 405 (Mad) 2. CIT v. MRFLtd 212 (Mad) 3. CIT v. Chemicals and Plastics (I) Ltd. 179 1TR269 (Mad) 4. CIT y. Aquapump Industries Ltd 218 ITR 67 (Mad) 5. CIT v. Southern pressing (P) Ltd 242 ITR 67 (Mad) 6. Kirloskar Pneumatic Co. Ltd. 151 ITR 484 (Bom) 7. CIT v. Swaraj Engines Ltd. 203 CTR 310 (P&H) 4.3 The ld. CIT(A) while considering and accepting the plea of the assessee, concluded to give part relief to the assessee with respect to this ground as per para 3.3 of his order, which is reproduced as under: "3.3 I have considered the facts of the case and the submissions of the Id. AR. I have also gone through the various clauses in the agreement and the decision relied on by the AO and the AR. The Hon'ble Apex Court in the case of Southern Switchgear (supra) has affirmed the order of the Madras High Court (148 ITR 272(Mad). Hence, reference to the decision of the Hon'ble Madras High Court at 232 ITR 359 may be made hereunder for clarity. "The assessee company entered into a collaboration agreement with a foreign company under the terms of whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court: The Supreme Court affirmed the judgment of the High Court." The facts of the present case are quite similar to that of the appellant. Further, since decision of Southern Switchgear Ltd (supra) was rendered later to that of the IAEC Pumps Ltd (supra), the decision in the case of Southern Switchgear would prevail. As the assessee company has a joint venture agreement with a foreign company, it cannot be ruled out that there was no technical aid for setting up the factory. Therefore, considering the totality of the facts in the case of the appellant and respectfully following the decision of the Hon'ble Supreme Court in Southern Switchgear (supra), I direct the AO to treat 25% of royalty payment as capital expenditure and the balance 75% as revenue expenditure. The AO is also directed to allow appropriate depreciation on the 25% capital expenditure in accordance with law. The ground is partly allowed." 4.4 Aggrieved by this order with regard to sustaining part disallowance with respect to royalty expenditure, the assessee is in appeal and with respect to relief given by the ld. CIT(A) in this regard, the Department has come up in appeal. Similar action has been taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible depreciation on such expenditure and the ld. CIT(A) is not legally correct to give even part relief as allowed by the ld. CIT(A). Therefore, it was urged for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer in this regard. 6. The ld. Counsel for the assessee, in order to counter the submissions of the ld. DR, has submitted that the agreement between the assessee and the other parties, who provided technical know-how to the assessee for a particular period of time as contained in the agreement and on termination of the contract, it is specifically mentioned that all drawings and other materials has to be returned back to the principle/proprietor. The said know-how should not be passed on to any other person and could only be used for manufacturing purpose of the assessee and not for anybody else and there is also a decision of the Hon'ble Supreme Court in the case of Southern Switchgear Ltd. and in that case joint venture agreement was with the foreign company, whereas in the case of the assessee, this is an agreement to provide technical aid for setting up of factory by the NPR and in no case it can be taken as capital expenditure. As suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er has disallowed it on the ground that as per the agreement with IPL, no such amount is payable by the assessee and no such claim was made in the immediate previous year. After perusing the relevant portion of the agreement between the assessee and the IPL, the Assessing Officer has concluded as under: "As could be seen from the above the terms of agreement provided for entire marketing of the products of IP Rings also, for which the technical assistant fee agreed is 5%. In the profit and loss account, it is seen that an amount of ₹ 94,38,512/- has already been debited as technical consultancy fee. Therefore, as per the agreement with IP Ltd, no such amount is payable by the assessee. Further, it is also seen that the assessee had not claimed such expenditure in the immediate previous year. Thus, the sales promotion expenses claimed by the assessee is not proved. Accordingly, the amount is added back". 8.1 The assessee took up the matter in appeal and during the course of hearing before the ld. CIT(A), the ld. AR of the assessee has submitted as under: "The assessee has a tie up with M/s. India Pistons Ltd. for using their Sales Depot and Sales Network throughout the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de because introduction of the new product was done in this year. Therefore, there was no written agreement and this expenditure has been claimed on the basis of the oral commitment and since it takes care of future product, therefore, it is an allowable expenditure, which has wrongly been disallowed by the Assessing Officer and the ld. CIT(A) is also not justified in confirming such disallowance, it was pleaded for allowing the claim of the assessee. 8.3 The ld. DR relied upon the orders of authorities below and pleaded for confirmation of the impugned order as huge expenditure has been claimed without there being any agreement with the IPL when technical consultancy fee was payable at 5% of the turnover to the IPL. As such, the Assessing Officer is justified in rejecting the claim and the ld. CIT(A) is legally correct to confirm such disallowance. It was urged for confirmation of the impugned order in this regard. 8.4 We have heard both the sides, considered the material on record as well as relevant portion of the orders of authorities below. It is not in dispute that the assessee has claimed a sum of ₹ 56,58,538/- as sales promotion expenses in addition to the technical ..... X X X X Extracts X X X X X X X X Extracts X X X X
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