TMI Blog1990 (2) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the Income-tax Appellate Tribunal was justified in holding that royalty and commission payments to various foreign companies were in the nature of revenue expenses and that they should be allowed as business expenditure ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the disallowance made by the Income-tax Officer under section 40A(5) of the Income-tax Act, 1961 ?" R. A. No. 685 (Cal) of 1984: " 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that royalty and commission payments to various foreign companies were in the nature of revenue expenses and that they should be allowed as business expenditure ? 2.. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the disallowance made by the Income-tax Officer under section 40A(5) of the Income-tax Act, 1961 ?" R. A. No. 686 (Cal) of 1984: " 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that royalty and commission payments to var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay licence fee at 6 1/2 per cent. of the net sale price to the foreign company. The Income-tax Officer pointed out that the agreement covered a fairly long period of 12 years, after which the assessee would have the property in the information, specification and technique provided by the foreign company and it can exploit the same indefinitely without payment of further consideration. The Income-tax Officer found that the assessee had set up a huge plant near Madras several years ago with a capital outlay exceeding Rs. 2 crores for the manufacture of Euclid products and that the assessee was not required to pay a lump sum for all the rights and advantages in this respect and the payments were to be made on a periodical basis depending on production and sale of the articles. According to the Income-tax Officer, the assessee had obtained a not easily available or readily acquirable information and know-how without any initial payment in an area in which the assessee had no knowledge or skill or ability and obtained the right to use the same even after expiry of the agreement. He, therefore, inferred that, by incurring the above expenditure on licence fee, the assessee had acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how was obtained have been manufactured by the assessee for long time and that the assessee had already been engaged in the business of manufacture of such goods and no new item was manufactured with reference to the said agreement. It was also contended that the assessee was given a licence for user only for the period of the agreement and all the drawings, etc., would have to be returned on termination of the agreement. The Commissioner of Income-tax (Appeals) found that it was clear that the payments of royalty and technical know-how fees were based on sales and that for the assessment year 1976-77, royalty payment was of Rs. 32,69,762 to General Motors Ltd., Scotland, whereas, the royalty for the assessment year 1979-80 came to Rs. 79,54,452. He allowed the claim of the assessee following the ratio of the decision in the case of Agarwal Hardware [1980] 121 ITR 510 (Cal). On further appeal, the Tribunal affirmed the order of the Commissioner of Income-tax (Appeals). On behalf of the Revenue, Mr. Mitra has contended that the expenditure was clearly of capital nature. He laid great emphasis on the fact that the technical and other information supplied by the foreign com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for compensation and payment under two sub-clauses (i) and (ii), which are as follows: 7. Compensation and payment: "(i) Hindusthan shall pay MARION a technical service fee in accordance with the schedule appended hereto designated as Schedule-A and hereby made part of this agreement. All other payments shall be due at the end of each quarter and shall be made in U. S. dollars, converted from Indian rupees at the official rate of exchange existing at the time the payment falls due. The payment shall be accompanied with a written report signed by the managing agents or other designated officer of Hindusthan showing all the transactions upon which such payment is based. (ii) Remittance shall be made to an account Of MARION at a bank outside the territory to be designated by MARION. " Paragraph 10 of the agreement related to termination of the agreement under various circumstances. From all these paragraphs and clauses of the agreement, it does not appear that there was any out and out sale of the designs, drawings, technical information or technical know-how by the foreign companies to Hindusthan Motors Ltd. Mr. Bajoria, appearing on behalf of the assessee, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was recurrent dependent upon the sales, and only for the period of the agreement. We agree with the High Court that the first question was rightly answered in favour of the assessee." The agreement in the instant case contains all these features pointed out by the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692. It should also be noted in this connection that the agreements were all entered into long before the relevant accounting periods. The royalty has been paid since 1971-72. Payments have been allowed for all these years up to the assessment year 1975-76 as revenue expenditure without any dispute. It is for the first time in the course of the assessment year 1976-77 that the Income-tax Officer took the stand that these expenditures are not allowable. It was contended on behalf of the Department that there was no res judicata in income-tax matters. It is true that there is no res judicata but there must be some substantial ground for one Income-tax Officer to differ from the view taken by another income-tax Officer in an earlier assessment year. In that view of the matter, question No. 1 must be answered in the affirmative and in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 37(3A) speaks of "advertisement, publicity and sales promotion". "Sales promotion" is a phrase of wide amplitude. In fact, "advertisement and publicity" may well come within the ambit of the phrase "sales promotion". By using the phrase "advertisement, publicity and sales promotion" in section 37(3A), the Legislature clearly indicated that a certain type of expenditure will not be allowed as deduction beyond the limit specified in that section. "Sales promotion" must be construed ejusdem generis with the earlier two expressions "advertisement and publicity". The meaning of the word "promote" has been given in Webster's New World Dictionary, 2nd edition, as under : " 1. To raise or advance to a higher position or rank (promoted to foremanship). 2. To help bring about or further the growth or establishment of (to promote the general welfare). 3. To further the popularity, sales, etc., by publishing and advertising (to promote a product). 4. (slang) to clear (something) by devious or cunning means. 5. To move forward grade in school." It appears from the dictionary meaning that costs incurred to sell goods simpliciter will not come within the meaning of the word "promotion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or produce such articles and the two previous years immediately following that year ... 12. 3. The provisions of new sub-section (3A) will not apply in relation to any expenditure incurred by the taxpayer on the following, namely : (i) advertisement in any small newspaper; (ii) advertisement in any newspaper for recruitment of personnel; (iii) the publication in any newspaper of any notice required to be published by or under any law ; (iv) the maintenance of any office for the purpose of advertisement, publicity or sales promotion ; (v) the payment of salary (as defined in clause (1) of section 17) to any employee engaged in advertisement, publicity or sales promotion; (vi) the holding of, or the participation in, any press conference, sales conference, trade convention, trade fair or exhibition ; (vii) publication and distribution of journals, catalogues or price lists ; (viii) such other items as may be prescribed by rules framed by the Central Board of Direct Taxes .... 12. 4. As the terms 'publicity' and 'sales promotion' have a wide amplitude, expenditure incurred by taxpayers on fashion shows ; beauty contests, consumer contests, consumer gift offers and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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