TMI Blog2010 (12) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... roved. Accordingly it has been urged that the expenditure should be allowed as revenue expenditure - It is a settled legal position that in case an expenditure is incurred for better working of the existing profit earning apparatus, it will be revenue in nature but in case the expenditure relates to any change in the profit earning apparatus the expenditure would be capital in nature - the termination of managing agencies did not relate to the profit earning apparatus of the assessee and by termination the assessee could only gain advantage in the revenue field by way of saving of unnecessary expenditure. The case of the assessee is different as in this case payment was for termination of JVA which had impact on the profit earning apparatus - Held that expenditure is capital in nature Regarding nature of payment of Rs.21 crores made by the assessee to GSL under "safeguard confidentiality agreement - The payment had been made in terms of the confidentiality agreement dated 30.7.96 - GSL had acquired any confidential information for which the assessee had to make payment for protecting the information. As the purpose of payment is not established the expenditure cannot be allowed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. We find that the issue is covered by the decision of the tribunal in assessee's own case in assessment years 1994-95, 1995-96 and 1996-97 in ITA Nos.5153/M/98 and 5687-5688/M/99. In the said years tribunal observed that though the assessee had not itself manufactured the goods, it had got the goods manufactured from others for which technical know how had been used. The tribunal also observed that there was no requirement in section 35AB that the assessee should itself manufacture the goods. The said section provided for deduction in respect of expenditure on acquisition of know how obtained for use in the business of the assessee. As this aspect had not been examined by the AO, the tribunal restored the issue to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. Respectfully following the decision of the tribunal in earlier years (supra), we restore this issue to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. 2.2 The second dispute is regarding disallowance of Rs.49,91,847/- being the expenditure incurred on payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry examination and after allowing opportunity of hearing to the assessee. Identical facts are involved in this year also. We therefore set aside the order of CIT(A) and restore the issue to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. 2.3 The third dispute is regarding disallowance of claim of deduction of Rs.3,66,65,058/- consisting of expenditure of Rs.3,59,24,136/- on advertisement film and Rs.7,40,922/- on production of radio programmes, being the expenditure incurred for the purpose of advertisement of the assessee's products. The AO observed that TV films, commercials and radio programmes were used to create brand awareness in the minds of the targets audience which endured for long time and therefore these could not be considered as revenue expenditure. The AO also observed that though advertisement expenditure could be allowed as revenue expenditure, the production of TV film did not amount to advertisement. The AO therefore treated the expenditure as capital expenditure and disallowed the same. In appeal CIT(A) observed that in assessment years 1995-96 and 1996-97, he had considered simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on production of advertisement film was therefore held to be allowable as revenue expenditure. The said decision had been followed by the tribunal in case of Procter and Gamble Distribution Co. Ltd., another group company of the assessee in ITA No.2173/M/2001. The facts in the case of the assessee are identical as the expenditure claimed is on account of production of advertisement film and radio programme. We therefore respectfully following the decision of the tribunal in case of Metro Shoes Pvt. Ltd (supra) set aside the order of CIT(A) and allow the claim of the assessee. 2.4 The fourth dispute is regarding disallowance of expenditure of Rs.1,40,62,500/- on account of non compete fees. The facts of the case are that after the joint venture agreement dated 16.12.92 between PGFE and Godrej family, PGI had bought all the laundry and detergent products from GSL by the names of Trilo, Key, Biz, Ezee and Godrej liquid cleaner. The manufacturing of these products was to be done by GSL and marketing and selling, rights were sold to PGI. In lieu of GSL agreeing not to compete in the laundry and detergent business, PGI had to pay a sum of Rs.9 croes to GSL as non compete fees. PGI h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efits in case of Assam Bengal Cement Co. Ltd. (27 ITR 34). In that case, the assessee who was a manufacturer of Cement had paid protection fees to the lessor of quarries for lime stone, on annual payment of Rs.5000/- for the whole period of lease and another sum of Rs.35000/- p.a. as a further protection fees for five years for similar undertaking in respect of the whole district. The issue was whether the payment could be allowed as revenue expenditure. Hon'ble Supreme Court observed that the fact that the payment was recurring was immaterial. It was the nature of asset acquired which was material. The asset required was the right to carry on the business unfettered by any competition which was not a part of working of the business but went on to appreciate the whole of the capital asset and make it more profit yielding. The expenditure was thus hold as capital in nature by the Hon'ble Supreme Court. The Learned AR has not brought on record any distinguishing feature from the facts of Tecumseh (I) (P) Ltd. (supra). Therefore respectfully following the decision of Special Bench in case of Tecumseh (I) (P) Ltd. (supra), we uphold the order of CIT(A) confirming the disallowance as ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the frame work of existing business and profit making apparatus of the PandG group and therefore was capital in nature. The AO placed reliance on the judgment of Hon'ble High Court of Mumbai in case of Godrej Philips India Ltd. vs CIT (206 ITR 23) and judgment of Hon'ble Supreme Court in case of Chari and Chari Ltd. (57 ITR 400) and several other judgments. The AO therefore disallowed the claim as capital expenditure and not incurred for the purpose of business of the assessee. 2.5.1 The assessee disputed the decision of AO and submitted before CIT(A) that subsequent to the joint venture agreement dated 16.12.92, PGI had entered into agreement with GSL dated 22.1.93 for manufacturing of detergent bars under the name TRILO and subsequently PGI had transferred the business to the assessee. The agreement was valued till 31.3.97 but was prematurely terminated on 30.7.96 necessitating payment of Rs.7 crores to GSL to compensate for loss. The termination had not been created any new company or extinguished the existence of the assessee company. It was pointed out that the judgments relied upon by the AO were distinguishable and the claim was allowable as revenue expenditure. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had emanated from the main joint venture agreement dated 16.12.92 under the provisions of clause 9.3 of the joint venture agreement. Further clause 14.6 of the JV agreement (JVA) clearly provided that in case JVA was terminated the manufacturing agreements and other agreements would automatically be terminated. Therefore the payment made by the assessee was not for termination of the manufacturing agreement but for the termination of the JV agreement. The JV agreement was the mother agreement from which various manufacturing agreements and other agreements had emanated and payments had been made to GSL for termination of the JV agreement from the accounts of various P and G affiliates. It was also submitted that since the JV was a long term agreement which created an income earning framework and the payment thus related to reorganization and restructuring of the main business framework and therefore was capital in nature. It was also argued that payment was not for loss of any revenue by GSL. He referred in this regard to clause 19 of the JVA which provided that in case of termination of JV, no liability would be cast on any party to the agreement towards any other party for loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, sales and profit both had improved. Accordingly it has been urged that the expenditure should be allowed as revenue expenditure. 2.5.5 In our view for deciding the nature of expenditure, it is first necessarily to ascertain the real purpose of payment. It is clear from the reading of the clause 14.6 of JVA that in case of termination of the JVA, all other agreements entered into under the provisions of JVA would automatically cease to exist. There is no dispute that the manufacturing agreement had been entered into under the provisions of the clause 9.3 of the JVA. There is also no dispute that the JVA had been terminated by both the parties on 23.7.96 and therefore on the said date the manufacturing agreement had ceased to exist. There was thus no need to enter into a separate termination agreement. The termination agreement dated 30.7.96 was only a formality. There is also no material produced to show that there were any difficulties between the two parties regarding the working of the manufacturing agreement. Merely because the GP rate in the subsequent period had improved, it cannot be the basis to conclude that the manufacturing agreement had been terminated because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist. The termination of JVA was thus obviously a part of restructuring and reorganization of the profit earning apparatus of the PandG group. Therefore the termination had impact on the profit earning apparatus of the group and the payment was therefore in relation to change in profit earning apparatus of the PandG group and not for termination of manufacturing agreement which had already ceased to exist. 2.5.7 We have now to consider the nature of the said expenditure. It is a settled legal position that in case an expenditure is incurred for better working of the existing profit earning apparatus, it will be revenue in nature but in case the expenditure relates to any change in the profit earning apparatus the expenditure would be capital in nature. The said view is supported by the judgment of Hon'ble Supreme Court in case of Empire Jute Co. (124 ITR 1). We have already held that the payment in this case was in relation to restructuring and reorganization of business frame work and profit earning apparatus of the P and G group. The payment was not wholly and exclusively for termination of manufacturing agreement between the assessee and the GSL. Therefore in our view the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving of unnecessary expenditure. The case of the assessee is different as in this case payment was for termination of JVA which had impact on the profit earning apparatus. 2.5.9 In case of Western India Oil Distributing Co. India vs CIT (77 ITR 140) the assessee had an agreement for 10 years for obtaining aggregate loan of Rs.10 lacs. The assessee had agreed to pay interest @ 6% per annum on Rs.10 lacs whether or not the finance was taken. The assessee was also required to pay commission on import of goods, whether finance was taken or not, even after expiry of agreement. Subsequently the assessee revoked the agreement in a consent decree on payment of Rs.3 lacs in five equal installments. The issue was the nature of expenditure incurred. Obviously, the agreement was only in connections with obtaining finance required for the purpose of business and any payment in connection with the finance, for the working of business is a revenue expenditure. The termination of agreement did not have any impact on the profit earning apparatus. The Hon'ble High Court held that payment had been made only to remove difficulty in the smooth running of business. The case is obviously distinguisha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atories (India) Pvt. Ltd. (114 ITR 110), the assessee had an agreement for the purpose of distribution of products. The agreement could be terminated by either party at one month's notice. The agreement obviously did not have anything to do with the profit earning apparatus as it only related to the sale and distribution of the products and it could be terminated any time after one month's notice. The expenditure for termination was held to be allowable as revenue expenditure. The case is obviously distinguishable from the present case in our view of the discussion made earlier. 2.5.13 In view of the foregoing discussion and for the reasons given earlier we see no infirmity in the orders of the authorities below holding the expenditure as capital expenditure. The order of CIT (A) is accordingly upheld. 2.6 The sixth dispute is regarding disallowance of the sum of Rs.3 crores being the amortized portion of the sum of Rs.21 crores paid by the assessee to GSL under the 'Safeguard' Confidentiality Agreement. The assessee had paid a sum of Rs.21 crores to GSL in terms of the "Safeguard Confidentiality Agreement". The assessee explained that during the tenure of JV agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not using the confidential information to anyone. The payment was therefore basically to ward off competition from M/s. GSL and to prevent disclosure of confidential information in relation thereto to any other party. The payment was thus to ward off competition and such expenditure was therefore capital in nature. Reliance was placed on the judgment of Hon'ble Supreme Court in case of Assam Bengal Cement Ltd. vs CIT (27 ITR 34) and on the judgment of Hon'ble Supreme Court in case of CIT vs Coal Shipment Pvt. Ltd. (82 ITR 902) and several other judgments. Moreover the AO also observed that GSL in its return of income for A.Y.1997-98 had declared the said payment as capital receipt which also supported the case for the expenditure in case of the assessee to be treated as capital in nature. The AO distinguished the judgment of Hon'ble Supreme Court in case of Malayalam Plantation Pvt. Ltd (supra) relied upon by the assessee on the ground that the same related to the payment made during the carrying on the business whereas in the present case the intended business of launching of anti bacterial germicidal soap never materialized even after the lapse of four years from the end of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluding that the payment related to the framework of business and profit earning apparatus of the group. It was pointed out that the product concerned was one of the several products being dealt with the assessee and therefore the same did not have any impact on the profit earning apparatus. The Learned AR also argued that merely because GSL had declared the payment as capital receipt could not be the ground to conclude that the payment in case of the assessee has to be treated as capital expenditure. Reliance for this proposition was placed on the judgment of Hon'ble High Court of Madras in case of C.Lakshmi Rajyam vs CIT (40 ITR 340). It was further submitted that the payment could also be considered as an expenditure in connection with the launch of the product which did not materialize. In such cases the expenditure has to be held as allowable as revenue expenditure. Reliance was placed on the following judgments. (i) 221 ITR 440 (Kol) CIT vs Graphite India Ltd. (ii) 263 ITR 357 (Guw) in case of DCIT vs Assam Asbestos Ltd. (iii) 185 Taxman 44 in case of CIT vs Priya Village Roadshares Ltd. 2.6.4 The Learned DR on the other hand strongly supported the orders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd under the manufacturing agreement dated 22.1.93 and technical assistance agreement dated 22.1.93 GSL had become privies to certain confidential information relating to the anti bacterial germicidal soap such as information relating to packaging material design, formulation of anti bacterial and germicidal soap, advertising material, marketing data etc. The assessee had made the payment for the undertaking by GSL to keep the information confidential. It has been argued that such an information was an asset and the expenditure was incurred for protection of asset to preserve the business and therefore the expenditure was allowable as revenue expenditure. Reliance has been placed on the judgment of Hon'ble Supreme Court in case of CIT vs Malayalam Plantation Ltd. (53 ITR 140) It has also been argued that the payment could also be considered as an expenditure in connection with launching of product which did not materialize and the expenditure has therefore to be allowed as revenue expenditure. Reliance has been placed on several judgments as mentioned in pars 2.6.3 earlier. The case of department is that the real reason for making the payment was the termination of the JVA and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd) and for not disclosing the confidential information to anyone. The purpose of not allowing GSL to manufacture the product is only to ward off competition. Similarly the purpose for not disclosing the information to any one else by GSL is also to ward off competition by not allowing others to use the information for manufacture of product. Therefore the real purpose of payment in such scenario assuming that GSL did have in its possession some confidential information would be to ward off competition. The expenditure incurred to ward off competition is not the same as expenditure on development of product or the expenditure to protect the products. The expenditure to ward off competition is capital in nature as held by Hon'ble Supreme Court in case of Assam Bengal Cement Co. Ltd. vs CIT (supra) and in case of CIT vs Coal Shipment Pvt. Ltd. (supra) and as discussed in detail in para 2.4.2 earlier. The expenditure therefore cannot be allowed. The assessee has placed reliance on the judgment of Hon'ble Supreme Court in case of Malayalam Plantation (53 ITR 140) which is distinguishable as the issue of nature of expenditure incurred to ward off competition was not before the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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