TMI Blog2014 (12) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... d probably in the range of 5% to 10% of the music/songs launched every year - These facts and factors have not been adverted to and elucidated in the assessment orders, as the AO with foreordained commitment disallowed the entire expenditure, unmindful that possibly, it would difficult to sustain the entire addition - the capital amount or asset so created would be of a minuscule value and there would be a minimal tax effect - accounts should not be re-written because of the smallness and minimum tax effect. Nature of expenses incurred on Royalty - Whether the royalty paid is a revenue expenditure and thereby should be allowed as a deduction - Held that:- It is to be held as revenue expenditure, when it is clear that the main business of the assessees was manufacture of blank cassettes and pre-recorded cassettes - The purchase of music rights and reproducing is the purpose of its business - The royalty payment for the cassettes sold is an expenditure in relation to the business activity of the assessee and on this ground and reason, should be regarded as revenue expenditure - It was an expenditure incurred in the normal course of business and was related to the revenue generated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adv. with Ms Kavita Jha and Mr. Vaibhav Kulkarni ORDER V. Kameswar Rao, J. 1. This batch of appeals involves an identical substantial question of law, whether the royalty paid is a revenue expenditure and thereby should be allowed as a deduction. Insofar as the appeal being ITA No. 69/2004 is concerned, two additional questions have been framed and the same would be referred and dealt with separately after answering the question with regard to the nature of expenditure. 2. The appeals pertain to various Assessment Years, the details and the deletion of additions as upheld by the Tribunal are given below: Appeal Number Amount Assessment Year ITA 50/2000 Rs.1,50,500/- 1989-90 ITA 69/2004 Rs.85,91,760/- 1989-90 ITA 457/2004 Rs.95,66,219/- 1993-94 ITA 460/2004 Rs.1,17,93,547/- 1991-92 ITA 524/2004 Rs.54,31,061/- 1992-93 ITA 576/2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Appellate Tribunal ( Tribunal‟ in short) referred to its earlier judgment in the case of Super Cassettes Industries Pvt. Ltd., [1992] 41 ITD 530 to upheld the order of the CIT(A). ITA No. 457/2004 8. For the Assessment Year 1993-94, the following substantial question of law was framed by this Court: Whether the ITAT was correct in law in deleting the addition of ₹ 95,66,219/- made by the Assessing Officer on account of royalty expenses paid by the assessee? Suffice to state that the said expenses on account of royalty were disallowed by the Assessing Officer, being a capital account. 9. On appeal filed by the assessee, the CIT(A), relying upon its own order for the Assessment Year 1990-91, 1991-92 and 1992-93 deleted the addition so made by the Assessing Officer. 10. The appeal of the revenue before the Tribunal was dismissed. ITA No. 460/2004 11. In this appeal, which pertains to the Assessment Year 1991-92, the following substantial question of law was framed by this Court on 22.02.2005: Whether the ITAT was correct in law in deleting the addition of ₹ 1,17,93,547/- made by the Assessing Officer on account of royalty expenses pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduction of audio sound and music from the master plate provided by the film producers and distributors. This master plate contained the original sound track of the film with whose help, the assessee prepared audio cassettes for sale. It was claimed that after the marketing of the cassettes, the master plate became useless and as such, its life was very short. On this ground, the master plate was linked to a licence granted for a specific period for manufacture. The respondentassessee relied upon the ruling of the Supreme Court in Gotan Lime Syndicate Vs. CIT, [1966] 59 ITR 718. It was also stressed that the payment of royalty was related to annual profits and therefore was revenue in nature. The Assessing Officer for the following reasoning concluded that the payment of royalty was a capital expense: a) The assessee acquires a source of its stock in trade by acquiring rights of films and audio cassettes for use in its home produced blank audio video cassettes. b) The master plates or U-matics do not become useless since following that analogy all over the world classical films and records of the last century should have vanished. The master tape is utilized to create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22. The Tribunal, relying upon its own judgment in the assessee‟s own case reported in [1992] 41 ITD 530, which has already been referred to above, has upheld the order of the CIT(A) in deleting the disallowance. ITA No. 69/2004 23. The following substantial questions of law were framed by this Court in this appeal: i) Whether ITAT order was correct in law in deleting the addition of ₹ 85,91,760/- made by the Assessing Officer on account of royalty expenses paid by the assessee? ii) Whether the ITAT was correct in law by deleting an addition of ₹ 2,32,900/- on account of purchase of carpets by treating it as revenue expenditure? iii) Whether ITAT was correct in law in deleting an addition of ₹ 2,13,801/- claimed to have been spent by Bombay Video Division despite the fact that the business activities of this unit had not started till the end of the assessment year in question? 24. The return of income for the Assessment Year 1989-90, was filed on 27.03.1991 declaring Nil‟ income. The assessment order was passed on 27.03.1992. During the course of assessment proceedings, the Assessing Officer noticed that assessee had claimed S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the assessees, the judgment has not been accepted and has been challenged in this Court. He would rely upon the judgment of the ITAT reported as [2002] 82 ITD 641 (Mum), TIPS Cassettes and Record Company Vs. Assistant Commissioner of Income Tax, more specifically para 27. 28. On the other hand, Mr.Ajay Vohra, learned counsel appearing for the respondents-assessees would state that the assessees were engaged in reproduction of audio sound and music from the master plate provided by the film producers and distributors. This master plate was said to contain the original sound track of the film with whose help the assessee prepares audio cassettes for sale. It was claimed that after the marketing of the cassettes, the master plate became useless and as such, its life was very short. According to him, the master plate was like a licence granted from a specific period for manufacture. It was stressed that the payment of royalty was related to annual profit and therefore, revenue in nature. He would also state that for every new music recording, a totally different plate was required. He states that the plate was embedded with the music and as a raw material, was a revenue expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties to these appeals have filed copy of agreement executed between the respondent-assessees and the producers/owners of the original copy right. Revenue being the appellant, if they wanted to rely upon the document should have filed the same. We accordingly proceed to answer the questions, as per the facts recorded by the Tribunal. Having already referred to the issue(s) which falls for our consideration in these appeals, we proceed to note the position of law. 31. In Empire Jute Co. case (supra), the Supreme Court while dealing with the facts wherein the assessee was engaged in the business of manufacture of jute, and was a member of the Jute Mills Association, which was formed on the object of inter alia protecting trade of its members by regulating production in the mills. In pursuance thereto, the members had entered into a working time agreement whereby the number of working hours per week for which the mills were entitled to work their looms to their full capacity was capped, as there was overcapacity but lower demand. This restriction had the effect of limiting the production and consequently the profits, which the assessee could earn. Under the same agreement, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though, the advantage may endure for an indefinite period. (iv) The test of enduring benefit is not conclusive and cannot be applied blindly and mechanically without regard to particular facts and circumstances of a given case. (v) The idea of once for all‟ payment and enduring benefit‟ are not to be treated as something akin to statutory conditions, nor are the notions of the capital or revenue, a judicial fetish. What is capital expenditure and what is revenue expenditure are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of the business. The expression asset or advantage of an enduring nature‟ was evolved to emphasize the element of a sufficient degree of durability, appropriate to the context. 32. In Travancore Sugars and Chemicals Ltd. Vs. CIT, [1966] 62 ITR 566 (SC), the assessee company acquired certain government concerns and was made liable to pay to the government a part of profit share every year. It was held that since the annual payment was for an indefinite p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Engineer who fixed the royalty at ₹ 96,000/- per year as the royalty fixed by the rules was far less than that figure. For each assessment years between 1954 to 1957, the assessee paid an amount of ₹ 96,000/- to the government and claimed it to be revenue deduction. In the absence of material to show that any part of royalty had to be treated as premium and referable to the acquisition of mining lease, the royalty payment included the dead rent had relation only to the lime deposits to be got and were therefore treated as revenue expenditure. Although, the assessee did derive an advantage; assuming that advantage was to last at least for a period of five years, there was no payment once for all. The royalty was not a direct payment for securing an enduring advantage; it had relation to the raw material to be obtained. The reason why royalty was allowed as revenue expenditure was the relation it had to the amount of raw material to be excavated or extracted. You take more, the more royalty you pay. 33. A Division Bench of this Court in the judgment reported as Commissioner of Income Tax Vs. J.K. Synthetics Limited, [2009] 309 ITR 371 (Delhi) after referring to vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the Licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', (e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said software. In case the appellant had imported the said software and sold the same, it would be stock in trade and deductible. However, when the master copies were used for duplication and the software replicated and transferred on the media as a result of the said activities was then sold, the master copy itself might not be stock in trade as such in strict sense, but it did not have a long life and its value and life span was small since it perished and diminished when the upgraded version or a better software in form of the next master copy was imported, for the purpose of duplication. When we accept the said position, the requirement of enduring benefit fails and it cannot be said that any capital asset was acquired or purchased. In these circumstances, we need not apply and go into the other test or caveats. The flaw and the error committed by the tribunal is that they applied other tests or caveats without first ascertaining and determining whether enduring benefit test is satisfied or not. The enduring test may not be the sole, exclusive or universal test but is considered to be the primary test . 34. We note that with regard to one of the assessees in this batch of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all. The recurring payment is similar in nature to the royalty or dead rent paid for the extraction of limestone from the quarries, as has been held by the Supreme Court in Gotan Lime Syndicate‟s case. We are therefore of the opinion that, the royalty paid including the cost of the plate is on revenue account and hence fully allowable as deduction in computing the income from business . 35. Insofar as the case in hand is concerned, we note, the issue pertains to two types of payment. The first one is a fixed amount or a lump sum payment for the master plate and copyright in the music and the second, being royalty which is recurring in nature, depending upon the quantum of sale i.e. volume of sales generated by a particular record/cassettes of an album/song. First, dealing with the fixed amount expenditure, the question would arise whether the same has an enduring benefit. If the enduring benefit test is fulfilled, the conclusion possible could be that the payment was for acquiring a capital asset and expenditure related to it is capital expenditure. But the enduring test could break down for good valid reasons. For good reasons, this test need not be applied as a test to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucers on the sales effected, it must be held that the same is a revenue expenditure, moreso, when it is clear that the main business of the assessees was manufacture of blank cassettes and pre-recorded cassettes. The purchase of music rights and reproducing is the purpose of its business. The royalty payment for the cassettes sold is an expenditure in relation to the business activity of the assessee and on this ground and reason, should be regarded as revenue expenditure. It was an expenditure incurred in the normal course of business and was related to the revenue generated and payable accordingly. It did not secure and add to value or create any new capital asset. 37. The substantial question of law at serial no. 1 is thus decided in favour of the respondent-assessees and against the appellant-revenue. 38. Since two more substantial questions of law arise for consideration in ITA No. 69/2004, we proceed to decide the said questions, which read:- ii) Whether the ITAT was correct in law by deleting an addition of ₹ 2,32,900/- on account of purchase of carpets by treating it as revenue expenditure? iii) Whether ITAT was correct in law in deleting an addition of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as capital expenditure and having recorded a finding of fact that the life of the carpets is very short and have to be replaced at frequent intervals, we are of the view that the conclusion of the Tribunal is not perverse and the same is justified. The question of law is, therefore, decided in favour of the respondent assessee and against the appellant revenue. 41. Insofar as the issue whether the Tribunal was right in deleting an addition of ₹ 2,13,801/- claimed to have been spent by the Bombay video division despite the fact that the business activities of this unit had not commenced/set up till the end of the assessment year in question, is concerned, the factual findings of the Assessing Officer were not accepted in the appellate orders. The Assessing Officer, while making disallowance of the said amount had observed that the expenditure was not admissible as deduction since it pertained to the video division in Bombay as the assessee has not started activities in this division in Bombay and the expenses are in the nature of pre-operative expenses. The CIT(Appeals) reversed the factual finding of the Assessing Officer on the ground that the assessee was eng ..... X X X X Extracts X X X X X X X X Extracts X X X X
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