DCIT, New Delhi v. M/s Federal Mogul TPR (I) Ltd., New Delhi

ITA 1361/DEL/2011 | 2007-2008
Pronouncement Date: 30-09-2011 | Result: Dismissed

Appeal Details

RSA Number 136120114 RSA 2011
Assessee PAN AABCG0749E
Bench Delhi
Appeal Number ITA 1361/DEL/2011
Duration Of Justice 6 month(s) 14 day(s)
Appellant DCIT, New Delhi
Respondent M/s Federal Mogul TPR (I) Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 30-09-2011
Date Of Final Hearing 22-09-2011
Next Hearing Date 22-09-2011
Assessment Year 2007-2008
Appeal Filed On 16-03-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI A. D. JAIN JM AND SHRI K. D. RANJAN AM I. T. A. NOS. 1360 & 1361 (DEL) OF 2011 ASSESSMENT YEARS : 2006-07 & 2007-08. DY. COMMISSIONER OF INCOME-TAX M/S. FEDERAL MOGUL T P R (I) LTD. [FORMERLY KNOWN AS GOETZE TP (INDIA) LTD . ] C I R C L E : 35 (1) VS. A26/3 MO HAN CO-OP. INDUSTRIAL ESTATE M A T H U R A R O A D N E W D E L H I. N E W D E L H I. P A N / G I R NO. AAB CG 0749 E. ( APPELLANT ) ( RE SPONDENT ) ASSESSEE BY : SHRI PRADEEP DINODIA C. A .; & SHRI R. K. KAPOOR C. A.; DEPARTMENT BY : SHRI ROHIT GARG SR. D . R.; O R D E R. PER K. D. RANJAN AM : THESE APPEALS BY THE REVENUE FOR ASSESSMENT YEARS 2006-07 AND 2007-08 ARISE OUT OF SEPARATE ORDERS OF THE LD. CIT (APPEALS)-XIII NEW DELHI. 2. THE COMMON GROUNDS OF APPEAL [EXCEPT FOR THE AMO UNTS] RAISED BY THE REVENUE ARE AS FOLLOWS :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW THE CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS. 80 08 667/- / RS.65 43 517/- ON ACCOUNT OF ROYALTY PAYMENT. 2 I. T. A. NOS. 1360 & 1361 (DEL) OF 2011 3. THE ONLY ISSUE FOR CONSIDERATION WHICH IS COMMON IN BOTH THE APPEALS RELATES TO DELETING THE ADDITION OF RS.80 08 667/- IN ASSESSMENT YEAR 2 006-07 AND RS.65 43 517/- ON ACCOUNT OF ROYALTY PAID. THE FACTS OF THE CASE STATED IN BRIE F ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF PISTON RINGS USED IN AUTOMOBILES. THE ASSESSEE CLAIMED ROYALTY EXPENSES OF RS.1 06 78 222/- IN ASS ESSMENT YEAR 2006-07 AND RS.87 24 684/- IN ASSESSMENT YEAR 2007-08. THE SAID ROYALTY WAS PAID TO TELKOKU PISTON RING COMPANY LTD. TOKYO JAPAN FOR RECEIVING TECHNICAL ASSISTANCE. A S THE ASSESSEE WAS RECEIVING TECHNICAL KNOW- HOW TECHNICAL ASSISTANCE AND TRAINING THE ASSESSI NG OFFICER WAS OF THE VIEW THAT THE PAYMENT OF ROYALTY WAS OF ENDURING IN NATURE. THE ASSESSING O FFICER WAS ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PAYMENT OF ROYALTY SHOULD NOT BE CAPITALIZE D. IN RESPONSE THERETO IT WAS SUBMITTED BY THE ASSESSEE THAT ROYALTY WAS PAID AT A SPECIFIC RA TE PER PIECE OF PRODUCTION AND THE SAME WAS PURELY A REVENUE EXPENDITURE AND IT SHOULD BE ALLOW ED IN FULL. HOWEVER THE ASSESSING OFFICER RELYING ON ASSESSMENT ORDER FOR ASSESSMENT YEAR 200 5-06 DISALLOWED 25 PER CENT OF THE ROYALTY PAID TREATING THE SAME AS CAPITAL IN NATURE. THIS RESULTED IN AN ADDITION OF RS.80 08 667/- IN ASSESSMENT YEAR 2006-07 AND RS.65 43 517/- IN ASSES SMENT YEAR 2007-08. 4. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED TH AT THE PAYMENT OF ROYALTY TO TELKOKU PISTON RING CO. LTD. JAPAN FOR TECHNICAL KNOW-HOW AND TECHNICAL ASSISTANCE AND TRAINING WAS BASED ON RIGHT TO USE OF TECHNICAL INFORMATION TEC HNICAL ASSISTANCE AND TECHNICAL TRAINING UNDER A LICENCE AGREEMENT DATED 29/05/1997 WHICH WAS RENEWE D BY SUPPLEMENTARY AGREEMENT DATED 10/1/2006. THE ROYALTY WAS PAID AS RUNNING ROYALTY AS A PERCENTAGE OF SALES MADE BY THE ASSESSEE UNDER THE TECHNICAL ASSISTANCE GIVEN. THE RE WAS NO ABSOLUTE TRANSFER OR OUTRIGHT SALE OF ANY TECHNICAL KNOW HOW. COPIES OF RELEVANT LICENSE AGREEMENTS WERE PLACED ON RECORD. AS REGARDS ASSESSING OFFICERS RELIANCE ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEARS LTD. 232 ITR 359 (SC) FOR DISA LLOWANCE OF 25 PER CENT OF ROYALTY AS A CAPITAL EXPENDITURE IT WAS SUBMITTED THE RELIANCE PLACED BY ASSESSING OFFICER WAS WHOLLY MISPLACED ON THE GROUND THAT THE ASSESSEE WAS PAYIN G ROYALTY @ 3 PER CENT OF NET EX-FACTORY SALE PRICE OF LICENSED PRODUCTS EXCLUSIVE OF EXCISE DUTY AS PER TERMS OF PAYMENT PROVIDED IN CLAUSE 5 OF THE SAID AGREEMENT. THERE WAS NO TRANSFER OF OW NERSHIP OF TECHNICAL KNOW-HOW AND TECHNOLOGY. TECHNICAL KNOW-HOW AND TECHNOLOGY REMA INED THE PROPERTY OF TELKOKU PISTON RINGS CO. LTD. JAPAN (SUPRA). THEREFORE DECISION OF HONBLE SUPREME COURT IN THE CASE OF 3 I. T. A. NOS. 1360 & 1361 (DEL) OF 2011 SOUTHERN SWITCHGEAR LTD. (SUPRA) FOR DISALLOWANCE O F 25 PER CENT OF THE ROYALTY AS CAPITAL EXPENDITURE WAS NOT APPLICABLE. THE ASSESSEE PLACE D RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SHARDA MOTOR INDU STRIES LTD. 319 ITR 109 (DEL.) WHEREIN IT HAS BEEN HELD THAT RUNNING ROYALTY AT A SPECIFIC RA TE PER PIECE PRODUCTION WAS PURELY A REVENUE EXPENDITURE. RELIANCE WAS ALSO PLACED ON THE DECIS ION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. J. K. SYNTHETICS LTD. 309 ITR 371 (DEL.) WHEREIN IT HAS BEEN HELD THAT THE EXPENDITURE INCURRED FOR GRANT OF LICENSE WHICH ACCORDS ACCESS TO TECHNICAL KNOWLEDGE AS AGAINST ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE WOULD BE ALLOWABLE AS REVENUE EXPENDITURE. THE LD. CIT (APPEALS) AFTER CONSIDERING THE FACTS OF THE CASE O BSERVED THAT AS PER CLAUSE 5 OF THE LICENSE AGREEMENT THE TERMS OF PAYMENTS AND PAYMENT PROCEDU RE HAVE BEEN LAID DOWN THEREBY THAT THERE WAS NO LUMP SUM PAYMENT MADE BY THE ASSESSEE UNDER THE TERMS OF AGREEMENT. THE ROYALTY WAS TO BE PAID DIRECTLY LINKED WITH THE TURNOVER / SALE S AFTER MAKING CERTAIN ADJUSTMENTS. THE LD. CIT (A) FURTHER OBSERVED THAT IN TERMS OF AGREEMENT THE TECHNOLOGY WAS BEING CONTINUOUSLY PROVIDED AND UPGRADED TO THE ASSESSEE FOR RUNNING THE BUSINE SS MORE PROFITABLY AND EFFICIENTLY; AND ALSO KEEPING IN VIEW THE TECHNOLOGY WAS A FAST CHANGING ONE IN THE ASSESSEES LINE OF BUSINESS; AND THAT THERE WAS NO OUT-RIGHT SALE OR INFORMATION AND THAT IT WAS A CASE OF PAYMENT OF ROYALTY BASED ON FIGURES OF SALES THE LD. CIT (A) TREATED THE PA YMENT OF ROYALTY IN THE NATURE OF REVENUE EXPENDITURE. HE THEREFORE HELD THAT THE EXPENDIT URE WAS ALLOWABLE AS BUSINESS EXPENDITURE. 5. BEFORE US THE LD. SR. DR SUPPORTED THE ORDER OF THE ASSESSING OFFICER RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SO UTHERN SWITCHGEAR LTD. (SUPRA). ON THE OTHER HAND THE LD. AR OF THE ASSESSEE SUBMITTED TH AT THE ROYALTY WAS BASED ON TURNOVER BASIS. HE PLACED RELIANCE ON THE DECISION OF HONBLE DELHI HI GH COURT IN THE CASE OF CIT VS. SHARDA MOTOR INDUSTRIES LTD. (SUPRA). 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. AS PER CLAUSE 5 OF AGREEMENT BETWEEN THE ASSESSEE AND TELK OKU PISTON RING COMPANY LTD. JAPAN (SUPRA) THE ROYALTY IS TO BE PAID AT THE RATE OF 3 PER CENT OF THE SALE PRICE OF THE LICENSED PRODUCT S SUBJECT TO CERTAIN ADJUSTMENTS. THE LD. CIT (A) H AS EXAMINED THE AGREEMENTS AND HAD OBSERVED THAT THE LICENSE GRANTED BY TELKOKU PISTON RINGS LT D. WAS NON TRANSFERABLE AND NON-ASSIGNABLE. UNDER CLAUSE 6.1 THE ASSESSEE HAD AGREED THAT DURIN G THE TERMS OF AGREEMENT FOR 3 YEARS AFTER TERMINATION THEREOF ALL THE INFORMATION DISCLOSED B Y TELKOKU PISTON RINGS LTD. SHALL BE 4 I. T. A. NOS. 1360 & 1361 (DEL) OF 2011 MAINTAINED BY THE ASSESSEE IN CONFIDENCE AND WILL N OT BE DISCLOSED TO ITS EMPLOYEES OR SUPPLIERS ONLY TO THE EXTENT NECESSARY TO PERMIT THE ASSESSEE TO DESIGN AND MANUFACTURE ITS PRODUCTS AND THE ASSESSEE WILL TAKE EVERY PRECAUTION TO ENSURE THAT NO INFORMATION IS OTHERWISE DISCLOSED BY ITS EMPLOYEES AND SUPPLIERS TO OTHER PARTIES. FROM THE TERMS OF THE AGREEMENT THE LD. CIT (A) CAME TO THE CONCLUSION THAT TECHNICAL INFORMATION AND PA TENTS PROVIDED BY FOREIGN COLLABORATOR TO THE ASSESSEE WERE IN THE NATURE OF LICENSE WHICH PROVID ED ACCESS TO TECHNICAL KNOWLEDGE AND IT WAS NOT AN ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION IN FAVOUR OF THE ASSESSEE. FURTHER THE TERMS ALSO CONTAINED PROHIBITION IN PAR TING WITH THE CONFIDENTIAL INFORMATION RECEIVED BY THE ASSESSEE UNDER LICENSE TO THIRD PARTIES. TH EREFORE THE TECHNICAL INFORMATION AND PATENTS PROVIDED BY THE FOREIGN COLLABORATOR COULD NOT BE T REATED TO HAVE BEEN TRANSFERRED TO THE ASSESSEE. THE ASSESSEE RECEIVED RIGHT TO USE THE SAME FOR THE PURPOSE OF BUSINESS. HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SHARDA MOTOR INDUSTRIE S LTD. (SUPRA) HAS HELD THAT THE PAYMENT OF ROYALTY AT THE RATE CALCULATED PER PIECE OF PRODUCT ION WAS REVENUE EXPENDITURE. SIMILARLY HONBLE DELHI HIGH COURT IN THE CASE OF J. K. SYNTH ETICS (SUPRA) HAS HELD THAT AMOUNTS PAID FOR PROCESS AND TECHNICAL KNOW-HOW SUPPLY OF TECHNICIA NS AND TRAINING OF PERSONNEL WAS IN THE NATURE OF REVENUE EXPENDITURE. SINCE IN THE INSTAN T CASE ASSESSEE HAD RIGHT TO ACCESS THE TECHNICAL KNOWLEDGE AS AGAINST ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION AND THE PAYMENT FOR WHICH HAS BEEN MADE ON TURNOVER BASIS THE EXPE NDITURE HAS TO BE TREATED REVENUE IN NATURE. THEREFORE IN OUR CONSIDERED OPINION THE LD. CIT ( A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE AS REVENUE EXPENDITURE IN BOTH THE YEARS. 8. IN THE RESULT BOTH THE APPEALS FILED BY THE REV ENUE ARE DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 30 TH SEPTEMBER 2011. SD/- SD/- [ A. D. JAIN ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : _30 TH SEPTEMBER 2011 . *MEHTA * 5 I. T. A. NOS. 1360 & 1361 (DEL) OF 2011 COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT 4. CIT (APPEALS) 5. DR ITAT NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR ITAT.