Delhi High Court
Cit vs Ekl Appliances Ltd. on 22 February, 2012
Author: Sanjiv Khanna
$~5.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 1069/2011
CIT ..... Appellant
Through Mr. Kamal Sawhney, Sr.
Standing Counsel & Mr. Amit
Shrivastava, Advocate.
versus
EKL APPLIANCES LTD. ..... Respondent
Through Mr. V.P. Gupta, Mr. Bassant
Kumar & Mr. Anuj Bansal, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V.EASWAR
ORDER
% 22.02.2012
This appeal by the Revenue under Section 260A of the
Income Tax Act, 1961 (Act, for short) relates to assessment year
2002-03 and arises out of the order of the Income Tax Appellate
Tribunal (tribunal, for short) dated 11th February, 2011 in ITA No.
3895/Del/2010.
2. Pursuant to the order passed by the Commissioner of
Income Tax (Appeals) under Section 263 of the Act, the
Assessing Officer passed an order dated 30th July, 2007 holding
that the royalty payment of Rs.108.64 lacs was capital
expenditure, inter alia, for acquisition of a capital asset.
3. The CIT(Appeals) deleted the said addition. The said
order has been affirmed by the tribunal.
4. We reproduce the reasoning given by the Assessing
Officer to make the said addition:
"3. The assessee vide his letter dated
23.07.2007 has submitted that royalty of
Rs.108.64 cannot be considered as capital
as it is not for acquisition of any capital asset
(trade mark). It is only for „user‟ thereof and
is payable every year, based on the sales in
the year.
The arguments of the assessee cannot
be accepted as the expenditure is in the
nature of capital and give enduring benefit to
the assessee. In view of the Supreme court
deicision in the case of Southern Switch
Gear Ltd. 232 ITR 359, it cannot be allowed
and is therefore disallowed and added to the
income of the assessee."
5. The order passed by the Assessing Officer is cryptic and
non-reasoned. It does not explain and state why and on what
ground the payment of royalty in the present case was to be
treated as a capital expenditure and was not a revenue
expense. The payment of royalty as per the assessment order
was for use of trade mark and was payable for user and
quantum dependent upon the sales in the year.
6. The CIT(Appeals) examined the agreement in question
and found that it was for use of technology and technical
information. The CIT(Appeals) referred to the terms of the
agreement and has recorded that the assessee had not secured
any exclusive privilege to either manufacture or sell the
products. The right to use technology and technical information
was for prescribed period and not perpetual. No benefit or right
accrued in perpetuity.
7. The tribunal in the impugned order has accepted the
reasoning given by the CIT(Appeals).
8. The aforesaid conclusion of the tribunal is in accord with
the decision of the Supreme Court in CIT versus Ciba of India
Limited, (1968) 69 ITR 692 (SC) and their subsequent decision
in the Commissioner of Income Tax versus I.A.E.C. (Pumps)
Limited, (1998) 232 ITR 316 (SC). Referring to these decisions,
a Division Bench of this Court in Commissioner of Income Tax
versus G4S. Securities System (India) (P) Limited, (2011)
338 ITR 46, has held as under:-
"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."
9. In light of the aforesaid legal position, we do not find any
substantial question of law arises on this aspect.
10. The second issue raised by the Revenue is in respect of
addition of Rs.66,86,974/- made by the Assessing Officer
disallowing the entry made by the assessee in books towards
doubtful debts/advances. The Assessing Officer disallowed the
said claim holding as under:-
" The claim of the assessee cannot be
allowed as no details regarding these
expenses have been filed, whether these
were actually trade debts incurred in the
course of business, what steps were taken
to recover the amount and why these have
been written off. Hence the amount of
Rs.66,86,974/- is disallowed and added to
the income of the assessee."
11. The aforesaid findings given by the Assessing Officer are
cryptic and devoid of any reasoning. The CIT(Appeals) had
asked for a remand report in view of the facts stated by the
assessee that they had given advance of Rs.66,68,000/- to
Doshi Plastic Industries for supply of packaging material and
there were other small amounts/petty balances payable by other
third parties. Application filed under Rule 46A by the assessee
was allowed. The CIT (Appeals) after examining the facts and
material brought on record deleted the addition of
Rs.66,68,000/-. He, however, confirmed the balance addition of
Rs.18,974/- for lack of evidence.
12. The tribunal has dismissed the appeal of the Revenue
against the said deletion. We may notice that the tribunal has
referred to Section 36(1)(vii) of the Act, which is not applicable in
the factual background. However, we are not inclined to admit
any substantial of law on the said aspect, in view of the findings
of fact, which have been recorded by the CIT(Appeals) and
affirmed by the tribunal regarding the said claim. The said claim
was admissible under Section 37 read with Section 28 of the
Act.
In view of the aforesaid reasoning, no substantial question
of law arises in the present appeal and the same is dismissed.
SANJIV KHANNA, J.
R.V. EASWAR, J.
FEBRUARY 22, 2012
VKR
