The Commissioner Of Income Tax-Iv ... vs G4S Securities System (India) ...
2011 Latest Caselaw 3246 Del

*               IN THE HIGH COURT OF DELHI AT NEW DELHI

+                ITA No.1943/2010, 763/2011 & 765/2011

                        ITA No. 1943/2010 Reserved On: APRIL 21, 2011
%
             ITA Nos. 763/2011 & 765/2011 Reserved On: MAY 25, 2011

                                          Judgment Delivered On: 11.07.2011

THE COMMISSIONER OF INCOME                                   .... APPELLANTS
TAX-IV NEW DELHI

                     Through: Mr. Sanjeev Sabharwal, Advocate for the
                              appellant.

                                         Versus

G4S SECURITIES SYSTEM (INDIA) PVT.                         .... RESPONDENTS
LTD.
              Through: Ms.   Kavita                Jha,   Advocate    for      the
                       respondents.

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.    Whether reporters of Local papers be                      Yes
      allowed to see the judgment?
2.    To be referred to the reporter or not?                    Yes

3.    Whether the judgment                should   be           Yes
      reported in the Digest?


M.L. MEHTA, J.

*

1. The question of law which arises for consideration in these

appeals is common. These appeals concern with the same

Assessee, though these pertain to different Assessment Years.

2. ITA 1943/2010 and ITA 765/2011 are directed against the

impugned common order dated 10.07.2009 of the ITAT (for short

'the Tribunal'). These pertain to assessment years 2003-04 and

2002-03 respectively. ITA 763/2011 is against the impugned

order dated 03.07.2009 of the Tribunal and it pertains to

assessment year 2005-06.

3. It so happened that ITA 1943/2010 pertaining to assessment

year 2003-04 came to be heard by us prior in time than the other

two appeals. This appeal was admitted only on one substantial

question of law which is as under:

"Whether learned ITAT/CIT(A) erred in deleting the addition of Rs.40,30,509/- on account of Royalty, ignoring that payment made as royalty has element of Capital Expenditure?"

4. In the other two appeals viz ITA 763/2011 and 765/2011 also

identical question came up for consideration for admission. The

counsel of both the parties in these cases also being the same,

they adopted the arguments as made in ITA 1943/2010. The

substantial question of law in all the three appeals being

identical and there being only difference of amounts involved, we

would like to make a brief narration of facts stating the

background under which this question has arisen for our

consideration. For the sake of convenience, we record the facts

from ITA 1943/2010, which would cover other two cases as well.

Brief facts entailing the present appeals are as under:

5. The Assessee is a private limited company and engaged in a

business of providing guard services, development of computer

software, staff training etc. The assessee filed its return of

assessment year 2003-04 on 28.11.2003 declaring income of

`10,73,40,025/-. However, the Assessment Order was also

framed under Section 143(3) of the Income Tax Act ('the Act' for

short) wherein it was observed by the Assessing Officer that

assessee had paid royalty in lieu of technical knowhow

assistance from M/s Group 4 Falck A/S, Denmark for exclusive

use for five years, which was extendable by every five years in

terms of agreement dated 20.06.2002. The assessee had debited

certain amount to Profit & Loss Account by way of royalty for

technical knowhow and use of trade mark to a foreign company

namely M/s. Group 4 Falck A/S, Denmark for the right to use

logo, trade mark and technical knowhow in pursuance of

agreement dated 20.06.2002 through Group 4 Holding Pvt. Ltd.

on the basis of 1% of net sales. The payment of the royalty was

approved by the Government of India.The Assessing Officer held

the payment of royalty in lieu of technical knowhow in the nature

of enduring advantage for exclusive use and therefore, on ad-hoc

basis he held that 25% of the royalty to be construed as

payments of the capital nature. It is noted that identical order

was passed by the Assessing Officer in the assessment year

2002-03 and also in the assessment year 2005-06. The assessee

preferred appeal against the order of the Assessing Officer

before CIT(A). The order of the Assessing Officer passed in the

assessment year 2002-03 and 2003-04 was challenged before

CIT(A) who decided the appeals in favour of the assessee vide

order dated 28.01.2008. The appeal for the assessment year

2005-06 was allowed by the CIT(A) vide its order dated

17.02.2008 following the order of CIT(A) dated 28.01.2008.

Revenue preferred appeals before the Tribunal. The Tribunal

dismissed the appeals of the Revenue for the assessment year

2005-06 vide impugned order dated 03.07.2009 which is in

challenge before us in ITA 763/2011. Following the order of

03.07.2009, the Tribunal also dismissed the appeals of the

Revenue for the assessment year 2002-03 and 2003-04 which is

challenged before us vide ITA 765/2011 and 1943/2010

respectively.

6. We have heard the learned counsel for the parties and perused

the record.

7. At the outset it may be noted that it was following agreement

dated 20.06.2002 between Group 4 Falck A/S, Denmark and

Group 4 Holding Pvt. Ltd., that a further sub license agreement

was entered into by Group 4 Holding Pvt. Ltd. and the Assessee.

This sub license agreement is also dated 20.06.2002.

8. Similar definition of trade mark, G4F knowhow, as existing in the

agreement between G4F and Group4 Holding Private Limited are

also incorporated in the sub license agreement. Clause 4.1 of the

sub license agreement provides for the operational period of the

agreement for a term of 5 year from the effective date, and

continuance' thereafter for further successive 5 years period

unless either party give 6 months written notice to other party

prior to the end of any such 5 year period that the agreement

should not be renewed. Clause 17 of the sub license agreement

acknowledges that G4F has the right to enforce, or to enjoy the

benefit of any term of this agreement which is expressly or

impliedly in favour of G4F. In clause 4.6 of the sub license

agreement, it has been provided that on termination or

expiration of the sub license agreement, the assessee shall

return all G4F knowhow obtained in pursuant to the Agreement.

At Clause 4.7 it has been provided that on termination or

expiration of the agreement, the appellant/assessee shall not

thereafter make any use of the trade mark, trade name or G4F

knowhow and shall forthwith change its corporate and/or trade

names.

9. From the terms of the agreement it is noticed that this

arrangement was for a period of 5 years, which may be extended

by another period of 5 years unless either party gives 6 months

notice to the other party prior to the end of such 5 years period.

The payment of commission @ 1% was based on the net sales

and not lumpsum. On the termination of expiration of the sub

license agreement, the assessee was to return all G4F knowhow

obtained pursuant to the said agreement. Not only that, the

assessee was not even entitled to make use of the trade mark

name or G4F knowhow and was forthwith to change its'

corporate and/or trade names. All rights and knowhow,

therefore, continued to vest in G4F and it was only the right to

use the knowhow that was made available to the assessee and

that too based on its net sales. That means all the royalty paid

in the shape of 1 % of net sales for the use of trade mark and

right to use knowhow could not be considered to be of enduring

nature and thus capital expenditure. The expenditure was to be

of revenue nature. In the case of Jonas Wood Head and Sons

Vs. CIT, 117 ITR 55, it was held that the question regarding

capital or revenue expenditure depends on the terms of

agreement in each case. In the case of CIT Vs. Gujarat Carbon

Ltd., 254 ITR 294, it was held that the payment of revenue

under the agreement was directly relatable to services which

were in the revenue field and were allowable as revenue

expenditure. In the case of Goodyear (I) Ltd. Vs. ITO 73 ITD

189(Delhi), the assessee had not acquired ownership right of

technical knowhow but transfer of use of licenses. There was no

advantage of enduring nature and hence it was held to be a case

of revenue expenditure. In the case of Travancore Sugar and

Chemicals Ltd. 62 ITR 566 (SC) it was held that whenever a

payment is based on a percentage of turnover or profits, it

necessarily has no relation to the capital value of the asset,

because it cannot be known at the time of the agreement what

the turnover or profits will be over a period of years. In another

case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124

Taxman 188, the Tribunal held, revenue payment is allowable

as revenue expenditure, since it is related to sales and that it is

paid for better conduct, efficiency and improvement of the

existing business or product manufactured by the assessee. In

the case of CIT Vs. Lumax Industries Ltd. (2008) 173

Taxman 290 (Delhi), this Court has also held that the payment

of license fee on year to year basis for acquisition of technical

knowledge would not amount to capital expenditure, but the

revenue expenditure.

10. From the ratio of the above said cases, we are of the considered

view that under the terms of the agreement as noted above, the

ownership rights of the trade mark and knowhow throughout

vested with G4F and on the expiration or termination of the

agreement the assessee was to return all G4F knowhow obtained

by it under the agreement. The payment of royalty was also to

be on year to year basis on the net sales of the assessee and at

no point of time the assessee was entitled to become the

exclusive owner of the technical knowhow and the trade mark.

Hence, the expenditure incurred by the assessee as royalty is

revenue expenditure and is therefore, relatable under Section

37(1) of the Act. We thus, answer the question in favour of the

Assessee and against the Revenue and consequently dismiss all

the three appeals.

                                                  M.L.MEHTA
                                                   (JUDGE)



                                                   A.K. SIKRI
JULY 11, 2011                                       (JUDGE)
'awanish'