TMI Blog2011 (2) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... 1999-2000, 50% for the assessment years 04-05 and 05-06, whereas the Department in all its four appeals, through identical common grounds has challenged the direction of ld. CIT(A) to treat 25% of royalty payment as capital expenditure and balance 75% as revenue expenditure. 4. We shall first deal with common ground of both the sides with regard to restricting part disallowance of royalty payment of 25% as capital expenditure and balance 75% as revenue expenditure as agitated by the assessee in relation to upholding part disallowance and Department about giving relief by deleting part disallowance in this regard. 4.1 Since almost identical facts with difference in amount of royalty payment disallowance is there in all the years, therefore, we shall discuss the facts in relation to the assessment year 1999-2000, which indicate that the assessee is engaged in the business of manufacturing and sale of pistons and rings. It filed return of income on 30.12.1999 declaring total income of ₹ 95,42,800/-. Notice under section 148 was issued on 14.03.2006 and the assessment was completed under section 143(3) r.w.s. 147 on 18.10.2006 determining total income at ₹ 1,81,64,69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Id. AR had made elaborate written submission and has filed copies of the agreement. He argued before the ld. CIT(A) that the payment was for the use of the know-how and not for acquiring any know-how. Since the royalty is calculated as a percentage of sales and since sales are taken as revenue receipts, the expenditure in earning the sales including the royalty should be allowed as expenditure. The assessee has made further submission and the ld. CIT(A) incorporated such submission in para 3.2, which reads as under: The assessee company entered into a collaboration agreement with M/s Nippon Piston Rings Limited under the terms of which the foreign company agreed to provide the assessee company technical aid and information in the manufacture of Steel Rings, GN Rings, Chrome Plated Rings, Nifflex-S Rings. The Iumpsum amount paid towards the technical know-how were capitalized during the years in which they were acquired and deduction u/s.35AB was claimed. The continuing royalty, which is paid based on the actual usage of the license is calculated at a fixed percentage on Net sales. This continuing royalty is directly related to revenue generated during the period and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt will be remitted to NPR. IPR shall provide NPR with official receipts evidencing payment of such taxes as soon as possible after payment thereof. Article 10 confidentiality 10.1 IPR agrees and shall cause any of its permitted sublicencees to agree in writing to NPR: (a) to treat as confidential all Technical information, know-how, trade customs and any other information(the Confidential information ) that it has acquired from NPR whether orally or in written form: (b) not to disclose any Confidential information except to those of its agents, sub contractors, officers, directors or employees who have a need to know: (c) to ensure to the extent permitted by law of India that any person falling within any of the categories in the preceding sub para graphs shall abide by the obligation of confidentiality imposed by this Article: and not to use any Technical information it will acquire from NPR under this Agreement other than for the purposes allowed herein. 10.2 IPR s obligations under this Article shall survive the expiration or termination of this Agreement for any reason Article 13 duration and termination 13.1 Unless terminated earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital in nature. In any event, the assessing officer erred in treating the entire royalty payment as capital in nature. It was held in the case of CIT(vs) IAEC (Pumps) L Td reported in 232 ITR 316 (SC) that the agreement is for a duration of 10 years with the option to extend the agreement or renew the same subject to the approval of the Government of India and not to disclose the same to third parties would establish that what was obtained by the assessee is only a licence and what was paid by assessee is only a licence fee and not the price for acquisition of any capital asset. Recently the Hon ble Income tax Appellate Tribunal, Chennai Bench in the case of M/s.Panasonic Carbon Ltd in ITA Nos.1958 to 1973/2008 for the Asst years 1999-00 to 2004-05 dt.10-07-2009( copy enclosed) has upheld the claim of the assessee that the payment of royalty is revenue in nature. 1. CIT v. MRF Ltd 149 ITR 405 (Mad) 2. CIT v. MRFLtd 212 (Mad) 3. CIT v. Chemicals and Plastics (I) Ltd. 179 1TR269 (Mad) 4. CIT y. Aquapump Industries Ltd 218 ITR 67 (Mad) 5. CIT v. Southern pressing (P) Ltd 242 ITR 67 (Mad) 6. Kirloskar Pneumatic Co. Ltd. 151 ITR 484 (Bom) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be taken as being capital in nature. Since the foreign company has also 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 the sale of the products, the High Court held that the clause in the agreement indicated that the assessee paid the royalty for the acquisition of an exclusive privilege of manufacturing and selling the products and the acquisition of an exclusive privilege of manufacturing and selling the products and the acquisition of such a right was rightly treated by the affirmed the disallowance of royalty estimated at 25% by the Tribunal. On appeal to the Supreme Court: The Supreme Court affirmed the judgment of the High Court. The facts of the present case are quite similar to that of the appellant. Further, since decision of Southern Switchgear Ltd (supra) was rendered later to that of the IAEC Pumps Ltd (supra), the decision in the case of Southern Switchgear would prevail. As the assessee company has a joint venture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 109, Hon ble M.P. High Court decision in the case of CIT vs. Eicher Motors Ltd., 293 ITR 464, Hon ble Delhi High Court s decision in the case of Shriram Pistons and Rings Ltd. 307 ITR 363. Therefore, the order of the ld. CIT(A) requires to be modified to the extent to allow the entire claim of the assessee for all the years under consideration. 5. The ld. DR strongly opposed to the pleas of the assessee as raised and contended that the assessee has got benefit of enduring nature and it is also been worked out in relation to sales and the assessee has miserably failed to establish that it is business expenditure, whereas it is a clear cut expenditure having incurred for acquiring or manufacturing right, which is of enduring nature. Therefore, the Assessing Officer has made proper disallowance but allowing the admissible depreciation on such expenditure and the ld. CIT(A) is not legally correct to give even part relief as allowed by the ld. CIT(A). Therefore, it was urged for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer in this regard. 6. The ld. Counsel for the assessee, in order to counter the submissions of the ld. DR, has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Madras High Court has further been affirmed by the Hon ble Supreme Court in the said case of Southern Switchgears Ltd. (supra) and the ld. CIT(A) has followed such decision to give part relief to the assessee and no distinguishing feature has been pointed by the ld. DR in this regard. Therefore, while concurring with the finding and the conclusion of the ld. CIT(A) in this regard, we uphold his action and dismiss this ground in all the appeals of the Revenue as well as of assessee. 8. As regards, the issue in relation to sales promotion expenditure for the assessment year 1999-2000 is concerned, the assessee has claimed a sum of ₹ 56,58,538/- as sales promotion expenses in addition to the technical consultancy fee payable at 5% of the total turnover. It was paid to the Indian Piston Ltd. (IPL). The Assessing Officer has disallowed it on the ground that as per the agreement with IPL, no such amount is payable by the assessee and no such claim was made in the immediate previous year. After perusing the relevant portion of the agreement between the assessee and the IPL, the Assessing Officer has concluded as under: As could be seen from the above the terms of agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering and not accepting the plea of the assessee has concluded to confirm the impugned disallowance of ₹ 56,58,538/- made by the Assessing Officer while dismissing this ground of appeal of the assessee. 8.3 Still aggrieved, the assessee took up the matter in further appeal and while reiterating the submissions as made before the lower authorities, the ld. Counsel for the assessee has contended that during the year under consideration, new rings were introduced in the market by the IPL and since it was new product in the market, this item was thrown in the market on free of cost. No doubt, 5% of the turnover for technical consultancy fee was already there and in addition to that sales promotion expenses have been claimed against which IPL raised debit notes and since it was first time payment and neither before nor after it has been made because introduction of the new product was done in this year. Therefore, there was no written agreement and this expenditure has been claimed on the basis of the oral commitment and since it takes care of future product, therefore, it is an allowable expenditure, which has wrongly been disallowed by the Assessing Officer and the ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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