The Commissioner [Of ][Income ]Tax.iv New [Delhi v. G4S Securites [Sysrem ][(Lndla) ][Pvt' ]Ltd' [[Kavita

. a. n' IN THE HIGH * + ITA No. tg43l2}1O [Reserved ][On: ] -' 20L1] V" ITA Nos. ll3l2}t' [glOStZOll ][Reserved On: ] [25,20LL] Judgment [Delivered ][Onl ][lt ][-l ][' )a'Ll] "'' THE COMMISSIONER TAX.IV NEW Through: [Mr. ][Sanjeev Sabhatwal' Advocate ][for ][the]aPPellant. Versus G4S SECURIT|ES [sYsrEM ][(lNDlA) ][PVT' ]LTD' [[Kavita ]] "" Through: Ms. [[Kavita ]]Jha, [Advocate ][for ][the]resPondents' CORAM:HON'BLE MR. JUSTICE [A.K. ][SIKR'I]HON',BLE [MR. ]JUSTICE [M'l-. ] 1. Whether [reporters ][of ][Local papers ][be ]\ Whether allowed to [see ][the ][judgment? ]allowed to [see ][the ][judgment? ] \ \t allowed to 2. io be [referred ][to ][the ][reporter ][or ][not? ]I I 3. Whether [the ][judgment ][should ][be \]rePorted in [the ][Digest?]rePorted in [the ][Digest?] ' M.L. MEHTA, L ,< 1. The question [of ][law ][which ][arises ][for ][consiceration ][in ][these]appea|sis.common.TheseappealsconcernwiththeSameAssessee, [though these pertain ][to ][different ][Assessrnent ][Years'] Page 7 oJ I -1 ITA Ig43l2OIO [and ] [765I2OIL ][are ][directed ][against ][the] 2. impugned common [order dated 10.07.2009 ][of ][the ] [(for ][short],the Tribunal'). These pertain to assessment years 2003-04 and2002-03 respectively. [7631201j- ][is ][against ][the ][impugned]order dated 03.07.2009 [of ][the ][Tribunal ][and ][it ][pertains ][to]assessment Year [2005-06.] It so happened [that ] [Ig43l2O1'O ][pertaining ][to ][assessment]year 2OO3-04 came to [be ][heard by ][us ][prior ][in ][time ][than ][the ][other]This [appeal was ][admitted only on one ][substantial]two appeals. question of law which is [as ][under:] 3. "Whether learned ITAT/CIT(A) [erred ][in deleting ][the addition]oi Rs.40,30,509/- [on ][account ][of ][Royalty, ignoring ][that]paymentmadeasroyattyhaselementofCapitalExpenditure?" ln the other two [appeals ][viz ] [763120lI ][and ][765/2011 ][also] 4. identical [question came ][up ][for ][consideration ][for ][admission. ][The]counsel of both [the ][parties in these ][cases ][also ][being ][the ][same,]the [arguments ][as ][made ][in ] [194312010' ][l'he]they adopted substantial [question ][of ][law ][in ][all the ][three ][appeals ][being]iderrtical and there [being ][only difference of amounts involved, ][lve]would like to make a [brief ][narration ][of ][facts ][stating ][the]background under [which ][this ][question ][has ][arisen ][for ][our]consideration. [For ][the ][sake ][of ][convenience, ][we ][record ][the ][facts] ITAs No,7943/2070, [763/2077 ][6b ][765/2017] from ITA 1943 l2O7O, [which would ][cover other ][two ][cases as ][well']Brief facts [entailing ][the ][present ][appeals ][are ][as under:] 4. identical [question came ][up ][for ][consideration ][for ][admission. ][The]counsel of both [the ][parties in these ][cases ][also ][being ][the ][same,]the [arguments ][as ][made ][in ] [194312010' ][l'he]they adopted substantial [question ][of ][law ][in ][all the ][three ][appeals ][being]iderrtical and there [being ][only difference of amounts involved, ][lve]would like to make a [brief ][narration ][of ][facts ][stating ][the]background under [which ][this ][question ][has ][arisen ][for ][our]consideration. [For ][the ][sake ][of ][convenience, ][we ][record ][the ][facts] ITAs No,7943/2070, [763/2077 ][6b ][765/2017] from ITA 1943 l2O7O, [which would ][cover other ][two ][cases as ][well']Brief facts [entailing ][the ][present ][appeals ][are ][as under:] The Assessee [is ][a ][private ][limited ][company ][and ][engaged ][in ][a]business of [providing guard ][services, ][development ][of ][computer]staff [training ][etc. ][The ][assessee ][filed ][its ][return ][of]software, assessment [year ][2003-04 ][on ][28.].:-2003 declaring income ][of]{10,73,40,0251-. [However, ][the ][Assessment ][Order ][was ][also]framed under [Section 143(3) of ][the ][lncome Tax ][Act ('the Act' for]wherein [it ][was ][observed ][by ][the ][Assessing ][officer ][that]short) assessee had [paid ][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 [dated ][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]M/s. [Group ][4 ][Falck ][A/S, Denmark ][for the ][right ][to ][use]namely trade [mark ][and ][technical ][knowhow ][in ][pursuance ][of]logo, agreement [dated ][20.06.2002 ][through ][Group ][4 ][Holding ][Pvt' ][Ltd']on the basis of [!o/o ][of net ][sales. ][The ][payment ][of ][the ][royalty ][was]approved by [the ][Government ][of ][lndia.The ][Assessing ][Officer ][held]the [payment of royalty ][in lieu ][of ][technical ][knowhow ][in ][the ][nature]of enduring [advantage ][for ][exclusive ][use ][and ][therefore, ][on ad-hoc]basis he held [that ][25o/o ][of ][the ][royalty ][to ][be ][construed ][as] ITAs No. 7949/2OlA, [763/20 ][7 ][7 ][e ][765/207 ][7] -5 payments of the capital [nature. ][lt ][is ][noted ][that ][identical ][order]was passed by [the ][Assessing ][officer ][in the ][assessment year]2002-03 and also [in ][the ][assessment ][year ][2005-06' ][The ][assessee]preferred appeal against [the ][order ][of ][the ][Assessing ][officer]before clT(A). [The order of ][the ][Assessing ][officer ][passed ][in ][the]assessment [year ][2OO2-03 ][and ][2003-04 ][was ][challenged ][before]CIT(A) who decided [the ][appeals ][in ][favour of ][the ][assessee vide]order dated 28.01.2008. [The ][appeal ][for ][the ][assessment year]2005-06 was allowed [by ][the ][CIT(A) ][vide ][its ][order ][dated]17.02.2008 following [the ][order ][of ][CIT(A) ][dated ][28'01'2008']Revenue [preferred ][appeals ][before ][the ][Tribunal. ][The ][Tribunal]dismissed the appeals [of ][the ][Revenue ][for ][the ][assessment year]2005-06 vide impugned [order dated ][03.07.2009 ][which ][is ][in]challenge before us in [763|2OIL. ][Following ][the ][order ][of]03.07 .2OOg, the [Tribunal ][also ][dismissed ][the ][appeals ][of ][the]Revenue for the [assessment ][year ][2002-03 ][and ][2003-04 which ][is]challenged before [us ][vide ] [765120]-L ][and ][]-943l2O]-O]respectively. 6. We hariC heard the [learned counsel ][for ][the ][parties and ][perused]the record. 6. We hariC heard the [learned counsel ][for ][the ][parties and ][perused]the record. 7. At the outset it [may ][be ][noted ][that ][it ][was ][following ][agreement]dateci 20.06 .2002 [between ][Group ][4 ][Falck ][A/S, ][Denmark ][and]Group 4 Holding [Pvt. ][Ltd., ][that ][a ][further ][sub ][license agreement]dateci 20.06 .2002 [between ][Group ][4 ][Falck ][A/S, ][Denmark ][and]Group 4 Holding [Pvt. ][Ltd., ][that ][a ][further ][sub ][license agreement] -1 8. 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 ][the]agreement between G4F and Group4 [Holding Private Limited ][are]also incorporated in the sub license [agreement. ][Clause ][4.1 ][of ][the]sub license agreement [provides ]for the [operational ][period of the]agreement for a term of 5 [year ]from [the ][effective date, ][und]continuance' thereafter 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 t7 of the sub [license agreement]acknowledges that G4F has the right to [enforce, ][or ][to ][enjoy the]benefit of any term of this agreement which is [expressly ][or]impliedly in favour of G4F. In clause 4.6 [of ][the ][sub ][license]agreement, it has been [provided ]that on [termination ][or]expiration 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 ][shall ][not]thereafter make any use of the trade [mark, ][trade ][name ][or ] knowhow and shall forthwith change its [corporate and/or ][trade]names. 9. From the terms of the agreement it is [noticed ][that ][this]arrangement was for a [period ]of [5 ][years, which may ][be extended]by another [period ]of 5 [years unless ][either ][party ][gives ][6 ][months]notice to the other [party ][prior ]to the [end ][of. ][such 5 years ][period.]The payment of commission @ 1% [was ][based ][on ][the ][net ][sales]and not lumpsum. On the termination [of ][expiration ][of ][the ][sub]license agreement, the aSSeSSee [WaS ][to ][return ][all ] [knowhow]obtained pursuant to the said agreement. [Not only ][that, ][the]aSSeSSee was not even entitled to make [use ][of ][the ][trade ][mark]name or G4F knowhow 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 ][to]use the knowhow that was made [available ][to ][the ][assessee ][and]that too based on its net sales. That [means ][all ][the ][royalty ][paid]in the shape of L [o/o ]of net sales for the [use ][of trade ][mark ][and]right to use knowhow could not be considered [to ][be ][of ][enduring]nature and thus capital expenditure. [The expenditure ][\i^Jas ][to ][be]of revenue nature. In the case [of ]tonas [Wood Head ][and ][Sons]Vs. CtT, LL7 ITR 55, it was held that [the ][question ][regarding]capital or revenue expenditure depends on [the ][terms ][of]agreement in each case. In the case [of ] [Vs, ][Guiarat ][Carhon]Ltd., 254 ITR 294, it was held that [the ][paynrent ][of ][revenue]under the agreement was directly [relatable ][to ][services ][which] ITAs No.7943/2070' 763/2071 & [765/2011] -a ITAs No.7943/2070' 763/2071 & [765/2011] -a were in. the revenue field [and were ][allowable ][as ][revenue]expenditure. In the [case ][of ][Goodyear ][(l) ][Ltd' ][Vs. ITO 73 ] [89(DelhrJ, the assessee [had ][not ][acquired ownership ][right ][of]technical knowhow but [transfer ][of ][use ][of ][licenses. ][There was ][no]advantage of enduring [nature and hence ][it ][was ][held ][to ][be a ][case]of revenue expenditure. [In ][the ][case ][of ][Travancore Sugar ][and]Chemicals Ltd. 62 ITR 566 [(SC) ][it ][was held ][that ][whenever ][a]payment is based on a [percentage ]of turnover [or ][profits, ][it]necessarily has no relation to [the ][capital ][value ][of the ][asset,]because it cannot be known at [the ][time ][of ][the ][agreement what]the turnover or [profits ]will [be ][over a ][period ][of ][years. ][ln ][another]case reported as DCIT Vs. [Swarai ][Engines ][Ltd. ]eAO2) [724] Taxman 1,88, the Tribunal [held, revenue payment ][is ][allowable]as revenue expenditure, [since ][it ][is ][related ][to ][sales and ][that ][it ][is]paid for better conduct, efficiency and improvement [of ][the]existing business or [product manufactured ][by ][the ][assessee' ][In]the case of CIT Vs. Lumax [Industries ][Ltd' ][(2OOB) 773]Taxman 29A @elhi), 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. 7943/2070, [763/20 ][t ] [& ][765/20l ][7] 'j ownership rights of the trade mark and [knowhow ][throughout]vested with G4F and on [the ][expiration ][or ][termination ][of ][the]agreement the assessee was to [return ][all ] [knowhow obtained]by it under the agreement. [The payment ][of ][royalty ][was ][also ][to]be on year to [year ]basis [on ][the ][net ][sales of ][the ][assessee ][and at]no point' of time the assessee was [entitled ][to ][become ][the]exclusive owner of the [technical ][knowhow ][and ][the trade ][mark.]Hence, the expenditure incurred by [the ][assessee ][as ][royalty ][is]revenue expenditure and is therefore, relatable [under ][Section]37(1) of the Act. We thus, answer [the ][question in favour of ][the]Assessee and against the Revenue [and ][consequently dismiss ][all]the three appeals. ?^<r-\.M.L.MEHTA(JUDGE)tuv('A]K. SIKR,I(JUDGE) JULY\1,2011'awanish' ITAs No.1943/2070' 763/2071 & [765/2011]