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2015 (6) TMI 999 - ITAT CHENNAI

2015 (6) TMI 999 - ITAT CHENNAI - TMI - Disallowance of royalty - revenue v/s capital expenditure - Held that:- From this agreement, the following facts emerge:-

(i) The royalty is paid @ 5% on domestic sales and 8% on export sales.

(ii) Thus, the royalty payment is directly linked to revenue.

(iii) The royalty payment is for a period of seven years extendable upto 10 years.

Thus, from the above it is apparent that the royalty payment is for definite p .....

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, D.R ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-II, Chennai dated 17.06.2014 in ITA No.919/2013-14 passed under Sec.143(3) read with section Sec. 250 of the Act. 2. The Assessee has raised four elaborate grounds in its appeal; however the crux of the issue is that the Assessee is aggrieved by the order of the Ld. CIT (A), who had upheld the order of the Ld. Assessing Officer in disal .....

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essment was completed u/s.143 (3) on 11.12.2008 wherein the ld. A.O disallowed the royalty payments to M/s.Hyundai Industries Co. Ltd., Korea for the following reasons:- i) On perusal of the agreement, it is evident that the technical knowledge gained by the assessee company gives enduring benefit to the assessee for manufacturing and industrial process initially for a period of seven years which can be further extended indefinitely on mutual agreement. (ii) The technical assistance contemplated .....

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royalty @ 5% on the net ex-factory sales price of the products manufactured and sold within India and @ 8% on net ex-factory sale price of the products manufactured and exported outside India. Thus, the running royalty is determined at a fix percentage on sale made by the assessee company. The Ld. Assessing Officer finally concluded by stating that the assessee had made royalty payments for the acquisition of exclusive privilege of manufacturing and selling the products and therefore was of the .....

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was provided amounting to ₹ 1,90,114/-, the balance amount of ₹ 5,70,344/- (7,60,458-1,90,114) was disallowed as capital expenditure. 4. On appeal, Ld. CIT (A) confirmed the order of the Assessing Officer accepting the view of the Ld.A.O. The relevant portion of the Ld.CIT(A) s order is reproduced as under:- 4.2. I have considered the assessee s submissions carefully. There could be two types of Royalty payments. The first category is a one time up-front payment of royalty at the be .....

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percentage of the assessee s manufacture and sale fo the items. The assessee claimed this as revenue xpn. However, the A.O treated 25% of this payment as a capital xpn by relying on the decision of the Hon ble Supreme Court in the case of M/s.Southern Switch Gear Ltd Vs. CIT (232 ITR 359) (SC) where the Supreme Court has held that the ratio of the royalty expenses to be considered as revenue xps and capital xps was @ 3:1 ratio. 4.4. The facts of the assessee s case are identical to those involv .....

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) of the income-tax act, 1961 - Capital or revenue expenditure - Assessee company entered into collaboration agreement for 5 years with a foreign company for manufacture of switchgear etc -exclusive right granted to assessee to manufacture and sell scheduled products in Indiaeven after termination of agreement, method of production, etc. could be used by assessee -assessee paid lump sum technical collaboration fees and royalty based on net invoiced price-whether part of such payments could be di .....

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d to train the necessary personnel at its U.K. factory. Under the terms of the agreement, the assessee company agreed to pay to the foreign company as consideration for the services rendered by it a lump sum payable in five equal installments, the payment to be spread over a period of time. For the assessment year 1966-67, the assessee's claim for deduction of the payment made to the foreign company as a revenue expenditure was disallowed by the ITO on the ground that the consideration paid .....

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ture and restricted the disallowance to 1/4th of the technical aid fees paid. He also confirmed the disallowance of the 1/4th royalty. The Tribunal confirmed the view of the AAC. On reference: High Court Held - Even without acquisition of an asset, a right of a permanent advantage could be acquired and the cost of acquisition of such a right could be taken to be capital expenditure. In the instant case, though the duration of the agreement was five years, the assessee even after the expiry of th .....

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justified. 4.5. The decisions of the CIT(A)-I Coimbatore and the ITAT were in 2013, where the decision of the Supreme Court in the case of M/s.Southern Switch Gear Ltd Vs. CIT supra, was not available/considered. Hence in view of the Supreme Court decision on the issue, the decisions of the CIT(A)-I,Coimbatore and the ITAT in the assessee s earlier year were not considered. 4.6. The facts involved in the present case are exactly identical to the above decision of jurisdictional High Court, as co .....

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e orders of the Revenue. 6. We have heard both the parties and carefully perused the materials available on record. The Revenue has relied on the order of the Hon ble Jurisdictional High Court in the case CIT v/s Southern Switchgear Ltd reported in 148 ITR 272 for treating 25% of the royalty payments as capital expenditure. The gist of the decision is reproduced herein below for reference:- The assessee-company entered into a collaboration agreement with a foreign company under the terms of whic .....

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he services rendered by it a lump sum payable in five equal installments, the payment to be spread over a period of time. For the assessment year 1966-67, the assessee's claim for deduction of the payment made to the foreign company as a revenue expenditure was disallowed by the ITO on the ground that the consideration paid was in the form of a royalty and had an enduring benefit to the assessee-company and 1/4th of the payment could be treated as being capital in nature. The ITO, accordingl .....

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the AAC. On a reference: Held, that a perusal of the various clauses of the agreement clearly indicated that the technical knowledge that the assessee obtained through the agreement with the foreign company secured to the assessee an enduring advantage and benefit in that the same was available to the assessee for its manufacturing and industrial process even after the termination of the agreement . The foreign company had also agreed not to manufacture in India any of the products in question o .....

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evenue expenditure. The Tribunal was, therefore, right in its view that 25% of the technical aid fees would have to be taken as being capital in nature. With regard to the disallowance of 25% of the royalty paid, 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 such a right was rightly treated by the Department and the Tribunal partly towards capital and partly t .....

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in the field. (iii) For the services/assistance provided by the foreign company the assessee company was to pay the foreign company a lump consideration in five equal installments. Thus, in the above case the facts are that the assessee company was to make lump sum payment to foreign company in five installments for providing technical aid, however the facts of the relevant case before is little different. The gist of the agreement is reproduced herein below for reference:- Article 5 Payment 1. .....

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x-factory Sales Price of the Products manufactured and exported outside India by IHD, subject to deduction of tax at source, if any, at the rates prevailing in force under the existing provisions of the Indian Income Tax Act. (b) Net ex-factory sales price shall be the gross invoice value of the Licensed Products sold or otherwise disposed of by IHD in normal, bonafide, commercial transaction without any deduction other than the following items of expenses, if any, to the extent to which they ar .....

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ayment to Hyundam within 30 days after receipt of relevant invoice from Hyundam. IHD shall provide Hyundam with Royalty calculation sheet within 30 days after receipt of relevant invoice from Hyundam. IHD shall provide Hyundam with Royalty calculation sheet within 30 days after the last date of September and March of each year and Hyndam shall provide with mentioned invoice within 15 days after the receipt of the Royalty calculation sheet from IHD. (d) The royalty shall be payable for a period o .....

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