The Commissioner [Of ]Income Tax-Iv New Delhi v. G S Securities [System ][(Lndla) ][Pvt

e A '-i * IN THE HIGH COURT OF + ITA No'L943/2OLO' 763/2O11 [& ][765/2O11] Lg43t2OI0 Reserved On: APRI L2!,2OiI "^ [* ] o/^ -/o -/o o/^ -/o -/o ITA Nos. 7O3\20II "^ &.76512011 [Reserved On: ] [25,20IL] Judgment [Delivered ][On: ][11.07.2011] THE COMMISSIONER INCOME TAX-IV NEW DELHI .... APPELLANTS Through: Mr, Sanjeev [Sabharwal, Advocate ][for ][the]aPPellant. Versus G S SECURITIES [(lNDlA) ][PVT. ] .... RESPONDENTS LTD. Ms. Kavita Throu'gh: Jha, [Advocate ][for ][the]respondents. CORAM:F!oN'BLE MR. JUSTICE A.K. HON'BLE MR. JUSTICE [M.L. ] 1. Whether reporters of [Local papers ][be ]\ allowed to see the see the the [[judgment? ]] allowed to see the see the the [[judgment? ]]\ f [+4]2. To be referred to [the ][reporter ][or ][not? ]'\ \3. Whether the [judgment ][should ][be ]\reported in the [Digest?] M.L. MEHTA, I.* * The question of law [which ][arises ][for ][consideration ][in ][these]appeals is common. [These appeals concern ][with ][the ][same]Assessee, though [these pertain ][to ][difterent ][Assessment ][Years.] 1. ITAs No. 7943/2070, [763/201 ][7 ] [765/20 ][7 ][7] Signature Not Verified Page 7 of 8 , 2. 3. 4. ITA l943l2ol0 and ITA 765120L1' are directed against [the]impugned common order dated [10.07.2009 of ][the ] [(for short]'the Tribunal'). These pertain to assessment [years ]2003-04 [and]2002-03 respectively. ITA 763120IL is [against ][the ][impugned]order dated 03.07.2009 of the Tribunal [and ]it [pertains ][to]assessment [year ]2005-06. lt so happened that ITA L943|20IO [pertaining ][to ][assessment] year 2003-04 came to be heard by us [prior ]in time than [the ][other]two appeals. This appeal was admitted [only on one ][substantial]question of law which is as under: "Whether learned ITAT'|Cff(A) erred in deleting the additionof Rs.40,30,50g/- on account of [Royalty, ][ignoring ][that]payment made as royalty has element of [Capital]Expenditure?" In the other two appeals viz [7631201-I ][and ][76512011 ][also]identical [question ]came up for [consideration ][for ][admission. ][The]counsel of both the [parties in these ][cases ][also ][being ][the ][same,]they adopted the arguments [as ][made ][in ] [L943120I0. ][The]substantial [question ]of [law ][in ][all ][the ][three ][appeals ][being]identical and there being only difference [of amounts involved, ][we]would like to make a [brief ][narration ][of ][facts ][staiing ][the]background under which [this ][question ][has ][arisen ][for ][our]consideration. [For ][the ][sake ][of ][convenience, ][vrte ][record ][the ][facts] c J -d Lj In the other two appeals viz [7631201-I ][and ][76512011 ][also]identical [question ]came up for [consideration ][for ][admission. ][The]counsel of both the [parties in these ][cases ][also ][being ][the ][same,]they adopted the arguments [as ][made ][in ] [L943120I0. ][The]substantial [question ]of [law ][in ][all ][the ][three ][appeals ][being]identical and there being only difference [of amounts involved, ][we]would like to make a [brief ][narration ][of ][facts ][staiing ][the]background under which [this ][question ][has ][arisen ][for ][our]consideration. [For ][the ][sake ][of ][convenience, ][vrte ][record ][the ][facts] c J -d Lj from ITA 1943l2OlO, [which would cover ][other ][two ][cases as well.]Brief facts entailing the [present ]appeals [are ][as under:]5. The Assessee is a [private ][limited ][company ][and ][engaged ][in ][a]business of prorriding [guard ]services, [development ][of ][computer]software, staff training etc. [The ][assessee ][filed ][its ][return ][of]assessment year 2003-04 [on ][28.11.2003 ][declaring ][income ][of]T10,73,40,0251-. However, the [Assessment ][Order ][was ][also]framed under Section [143(3) of ][the ][Income ][Tax ][.Act ][('the Act' for]short) wh.erein it was cbserved [by ][the ][Assessing ][Officer that]assessee had [paicl ]royalty in [lieu ][of ][technical ][knowhow]assistance from M/s [Group ][4 ][Falck ][A/S, ][Denmark ][for ][exclusive]use for five [years, ]which [was extendable ][by ][every ][five ][years ][in]terms of agreement [datecl 20.06.2002. The assessee had debited]certain amount to Profit [& ][Loss ][Account ][by way ][of ][royalty ][for]technical knowhow [and ][use ][of ][trade ][mark ][to ][a ][foreign ][company]namely M/s. Group 4 [Falck ][A/S, Denmark ][for the ][right ][to ][use]logo, trade mark [and ][technical ][knowhow ][in ][pursuance ][of]agreement dated 20.06.2002 [through ][Group ][4 ][Holding ][Pvt' ][Ltd']on the basis of [L% ][of net ][sales. ][The payment of ][the ][rcyalty ][was]the [Government ][of ][lndia.The ][Assessing ][Officer ][held]approved by the payment [of royalty ][in lieu ][of ][technical ][knowhow ][in ][the ][rtature]of enduring advantage [for ][exclusive ][use and ][therefore, ][on ad-hoc]basis he held that [25% ][of the ][royaity ][to ][be ][construed ][as] Page 3 of I .tTAs No. 7943/20 [70, ][763/20 I ][7 ][& ][765/20 ] [1] q C t ) Page 3 of I .tTAs No. 7943/20 [70, ][763/20 I ][7 ][& ][765/20 ] [1] q C t ) payments of the capital nature. lt is noted that identical orderwas passed by the Assessing Officer in the assessment year2OO2:03 and also in the assessment year 2005-06. The assesseepreferred appeal against the order of the Assessing Officerbefore CIT(A). The order of the Assessing Officer passed in theassessment year 2OO2-O3 and 2003-04 was challenged beforeCIT(A) who decided the appeals in favour of the assessee videorder dated 28.01.2008. The appeal for the assessment [year]2005-06 was allowed by the CIT(A) vide its order dated17.02.2008 following the order of CIT(A) dated 28.01.2008.Revenue preferred appeals before the Tribunal. The Tribunaldismissed the appeals oT the Revenue for the assessment [year]2005-06 vide impugned order dated 03.07.2009 which is inchallenge before us in ITA 763/2OLL. Following the order of03.07.2009, the Tribunal also dismissed the appeals of theRevenue for the assessment [year ]2002-03 and 2003-04 which [is]challenged before us vide ITA 7651201-L and I943120L0respectively.was passed by the Assessing Officer in the assessment year2OO2:03 and also in the assessment year 2005-06. The assesseepreferred appeal against the order of the Assessing Officerbefore CIT(A). The order of the Assessing Officer passed in theassessment year 2OO2-O3 and 2003-04 was challenged beforeCIT(A) who decided the appeals in favour of the assessee videorder dated 28.01.2008. The appeal for the assessment [year]2005-06 was allowed by the CIT(A) vide its order dated17.02.2008 following the order of CIT(A) dated 28.01.2008.Revenue preferred appeals before the Tribunal. The Tribunaldismissed the appeals oT the Revenue for the assessment [year]2005-06 vide impugned order dated 03.07.2009 which is inchallenge before us in ITA 763/2OLL. Following the order of03.07.2009, the Tribunal also dismissed the appeals of theRevenue for the assessment [year ]2002-03 and 2003-04 which [is]challenged before us vide ITA 7651201-L and I943120L0respectively. We have heard the learned counsel for the [parties ]and [perused]the record. At the outset it may be noted that it [was following ][agreement]dated 20.06.2002 between Group 4 [Falck ][A/S, ][Denmark ][and]Group 4 Holding Pvt. Ltd., that [a ]further [sub ][license agreement] 7. Page 4 of 8 ITAs No.7943/2070' 763/2017 [& ][765/2077] T a .ll J was entered into by Group 4 Holding Pvt. Ltd. and the Assessee.This sub license agreement is also dated 20.06.2002. Similar definition of trade mark, G4F knowhow, as existing in theagreement between G4F and Group4 Holding Private Limited arealso incorporated in the sub license agreement. Clause 4.1 of thesub license agreement [provides ]for the operational [period ]of theagreement for a term of 5 year from the effective date, andcontinuance' tlrereafter for further successive 5 [years ][period]unless either party give 6 months written notice to other [party]prior to the end oF any such 5 year period that the agreementshould not be renewed. Clause 17 of the sub license agreementacknowledges that G4F has the right to enforce, or to enjoy thebenefit of any term of this agreement which is expressly orimpliedly in favour of G4F. ln clause 4.6 of the sub licenseagreement, it has been provided that on termination orexpiration of the sub license agreement, the assessee [shall]return all G4F knowhow obtained in [pursuant ]to the Agreement.At Clause 4.7 it has been [provided ]that on termination [or]expiration of the agreement, the appellant/assessee shail [not]thereafter make any use of the trade mark, trade [name ][or ] knowhow and shail forthwith change its [corporate and/or ][trade]names. Page 5 of I ITAs No.7943/2070' 763/2011 & [765/2411] { \-:I 9. Page 5 of I ITAs No.7943/2070' 763/2011 & [765/2411] { \-:I 9. From the terms of the agreement it is noticed that thisarrangement was for a period of 5 years, which may be extendedby another period of 5 years unless either party gives 6 monthsnotice to the other party prior to the end of such 5 years period.The payment of commission @ Lo/o was based on the net salesand not lumpsum. On the termination of expiration of the sublicense agreement, the assessee was to return all G4F knowhowobtained pursuant to the said agreement. Not only that, theassessee was not even entitled to make use of the trade markname or G4F kndwhow and was forthwith to change its'corporate and/or trade names. All rights and knowhow,therefore,' continued to vest in G4F and it was only the right touse the knowhow th-at was made available to the asse.ssee andthat too based on its net sales. That means all the royalty paidin the shape of L [o/o ]of net sales for the use of trade mark andright to use knowhow could not be considered to be of enduringnature and tlrus capital expencliture. The expenditLrre was to beof revenue nature. In the case of lonas Wood Head and SonsVs, CIT, 117 ITR 55, it was held that the question regardingcapital or revenue expenditure depends on the terms ofagreement in each case, ln the case of CIT Vs, Gujarat CarbonLtd,, 254 ITR 2g4, it was helci that the [payment ][of ][revenLie]under the agreement was directly relatable to services [which] ITAs I{o.7943/2070, 763/2077 & [765/207'l] !- were in the revenue field and were allowable as revenueexpenditure. In the case of Goodyear [(l) ]Ltd. Vs. tTO 73 ITD189(Delhl), the assessee had not acquired ownership right oftechnical knowhow but transfer of use of licenses. There was noadvantage of enduring nature and hence it was held to be a caseof revenue expenditure. In the case of Travancore Suga.r andChemicals Ltd. 62 tTR 566 [(SC) ]it was held that whenever [a]payment is based on a percentage of turnover or profits, itnecessarily has no relation to the capital value of the asset,because it cannot be known at the time of the agreement whatthe turnover or profits will be over a [period ]of years. In anothercase reported as DCIT Vs. Swaraj Engines ['Ltd. ][(2OO2) ]f24Taxman 1,88, the Tribunal held, revenue [payment ]is allowableas revenue expenditure, since it is related to sales and that it [is]paid for better conduct, efficiency and improvement of theexisting business or product manufactured by the assessee. [In]the case of CIT Vs, Lumax Industries Ltd. [(2OOB) ]773Taxman 29O [(Delhi), ]this Court has also held that the [payment]of license fee on [year ]to year basis for acquisition of [technical]knowledge would not amount to capital expenditure, [but ][the]revenue expenditure. 10. From the ratio of the above said cases, [we ][are of ][the ][considered] view that under the terms of the agreement as [noted ][above, ][the] ITAs No. 7943/20 70, 763/201 7 & [765/20 ][7 ][7] {'vI --1, ownership rights of the trade mark and knowhow throughoutvested with G4F and on the expiration or termination of theagreement the assessee was to return all G4F knowhow obtainedby it under the agreement. The payment of royalty was also tobe on year to year basis on the net sales of tiie assessee and atno point of time the assessee was entitled to become theexclusive owner of the technical knowhow and the trade mark.Hence, the expenditure incurred by the assessee as royalty isrevenue expenditure and is therefore, relatable under Section37(1) of the Act. We thus, answer the [question ]in favour of theAssessee and against the Revenue and consequently dismiss allthe three appeals. 6^<t4,M.L.MEFITA(JUDGE)(JUDGE) JULY [ll ], [ZOrr]'awanish' ITAs No.7943/2070, 763/2077 & [765/2071]