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TMI Blog2012 (10) TMI 886X X X X Extracts X X X X X X X X Extracts X X X X ..... yarn and engaged in installation of material handling equipments. The assessee filed its return of income on 30.10.2005 admitting total income of Rs. 2,72,07,140/-. The return was processed under section 143(1) on 21.08.2006 and the assessment was completed under section 143(3) on 19.12.2008 computing total income at Rs. 6,37,89,240/- after making certain disallowances and additions. While completing the assessment, the Assessing officer treated lump sum royalty of Rs. 4,77,90,000/- paid by the assessee to Fenner, U.K. for the use of trade mark as capital expenditure and allowed depreciation at the rate of 25% on such royalty treating it as intangible asset. 4. The assessee filed an appeal before the CIT(A) against the said disallowance made by the Assessing Officer and the CIT(A) held that 25% of the royalty of Rs. 4,77,90,000/- is to be considered only as expenditure in the nature capital and the remaining 75% of such royalty is allowed as revenue expenditure. Both the assessee and the Revenue are in appeal before us. 5. The ld. Counsel for the assessee submitted that the assessee entered into Trade Mark & Name Licence Agreement with Fenner, U.K. on 17.08.2004. The object for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of royalty as an intangible asset and allowed depreciation. He further submitted that as per the provisions of section 32(1)(ii) of the Act, depreciation is allowable on knowhow, patents, copy rights, trade marks, licenses, franchise or any other business or commercial rights of similar nature being intangible asset acquired on or after 01.04.1998. He submitted that since the assessee has acquired an intangible asset by paying royalty for use of trade mark and used for the purpose of its business, the Assessing Officer is correct in allowing depreciation on such intangible asset. 7. We have heard both the sides, perused the materials filed before us and gone through the orders of lower authorities and the case laws relied on. The Assessing Officer disallowed the lump sum royalty paid by the assessee to Fenner, U.K. for use of trade mark on the ground that patents, copy rights, trade mark, know-how, etc., are intangible assets allowable for depreciation under sub-section (1)(ii) of section 32. The Assessing Officer was of the view that the lump sum royalty payment made to Fenner, U.K. is for acquiring intangible asset of enduring benefit and therefore is capital expenditure. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he licensor in clause 3.3 of the Agreement has also undertaken not by itself or through any member of the Fenner Group, it use or authorise the use of any of the trademarks within the territory of India during the subsistence of this Agreement. 13. The jurisdictional Madras High Court in the case of CIT v. Southern Switchgear Limited [148 ITR. 272], which was subsequently affirmed by the Supreme Court in the decision reported as Southern Switchgear Limited v. CIT [232 ITR 359], accepted the proposition that a portion of the royalty payments, in the facts of a particular case, could be treated as towards acquisition of a capital asset by the assessee company, and the balance towards revenue expenditure allowable under the Act. The Supreme Court, while affirming the decision of the Madras High Court, held [as extracted from the head notes] as under:- ''Since the foreign company had agreed not to manufacture in India,. any of the products in question or grant or make available to any other person any information relating to manufacture, licence, or rights, for any of the products in question in India, thereby conferring on the assessee exclusive right of manufacture and sale of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly a licence to use the brand name and trademarks of the foreign collaborator. A mere lience to use the other party's patent and knowledge have been considered as permissible revenue expenditure by the Apex Court in the I.A.E.C (Pumps) case [232 ITR 316]. However, at the same time, a portion of such expenses would also be in the nature of a capital expenditure to the extent that such expenses were to protect the advantage of using the foreign collaborator's brand name and trademarks. On these facts, in my opinion, 25% of the lump sum royalty payment could be attributed as a payment for acquisition of a capital asset in the form of a commercially valuable right to continue to use the Fenner brand name and trade marks, while the balance 75% would be permissible as a deduction, being a revenue expenditure for the mere use of the brand name and the trade marks. Reliance for such estimated bifurcation of the lump sum royalty payment is placed on the jurisdictional Madras High Court decision in the case of Southern Switchgear Limited [148 ITR 272], which was subsequently affirmed by the Apex Court in the decision reported in 232 ITR 359. Appeal filed by the assessee company on this grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer. 12. We have heard both the sides and perused the materials available on record. This issue is decided by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81(Bom.) wherein their Lordships held as under: "Held, that the provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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