Income Tax Appellate Tribunal - Delhi
Dcm Benetton India Pvt. Ltd., New Delhi vs Department Of Income Tax on 3 March, 2011
BEFORE THE INCOME TAX APPELLATE TRIBUNAL,
"DELHI BENCH - B", NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA NOS. 2811 & 2810/DEL.2011
(ASSESSMENT YEARS : 2004-05 & 2005-06)
DCIT, Circle 2 (1), vs. M/s. Benetton India Pvt. Ltd.,
New Delhi. (formerly known as DCM
Benetton India Pvt. Ltd.),
B - 25, Infocity, Sector 34,
Gurgaon (Haryana)
(PAN NO.AAACD1013F)
(APELLANT) (RESPONDENT)
ASSESSEE BY : Shri Sandeep Chaufla, CA
DEPARTMENT BY : Smt. Shyama S. Bansia, Senior DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
Both these appeals filed by the Revenue for the assessment years 2004-05 and 2005-06 arise out of the order of the CIT (Appeals)-XIII, New Delhi both dated 03.03.2011. The grounds of appeal in ITA No.2811/Del/2011 taken by the Revenue are as under :-
"1. The Ld.CIT(A) has erred on facts and in law in deleting addition of Rs.1,58,69,739/- on account of royalty ignoring that as per the royalty agreement the assessee company is allowed to manfucature and sell products by using technology and patents of the Italian company which is of enduring and capital in nature.
2. The Ld. CIT (A) has erred on facts and in law in deleting addition of Rs.86,27,740/- on account of
2 ITA NOS.2811 & 2810/DEL/2011 expenditure on payment of export related services ignoring that :
a) The assessee had not been able to provide any documentary evidence to show that the services provided by M/s. Shriram Global Enterprises Ltd. a related party had been incurred wholly and exclusively for the purpose of business.
b) Hon'ble Supreme Court in the Case of Dwarkadas Kesardeo Morarka vs. CIT 441 Income Tax Rules, 1962 529 and in Joint Family of Udayan Chinubhai vs. CIT 63 Income Tax Rules, 1962 416 has decided that each year's assessment is separate from that of earlier years, therefore, the taxing authorities are not bound to follow the decsion taken in earlier years.
3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal."
The grounds of appeal in ITA No.2810/Del/2011 taken by the Revenue are as under :-
"1. The Ld.CIT(A) has erred on facts and in law in deleting addition of Rs.1,49,15,502/- on account of royalty ignoring that as per the royalty agreement the assessee company is allowed to manufacture and sell products by using technology and patents of the Italian company which is of enduring and capital in nature.
2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal."
2. The assessee company is engaged in the manufacturing and trading of garments of the brand of United Colours of Benetton. The total sales during the assessment year 2004-05 were Rs.42,10,47,845/-. The issue 3 ITA NOS.2811 & 2810/DEL/2011 involved in the ground no.1 of both the appeals is regarding deletion of addition on account of payment of royalty. The Assessing Officer disallowed the payment of royalty and made an addition on the basis that the royalty claimed by the assessee was not allowed in the assessment years 2002-03 and 2003-04 and it was also noted by the Assessing Officer that the appeal is pending before the ITAT for adjudication for these years. The Assessing Officer held that the payment of royalty is capital in nature and made the disallowances. The CIT (A) deleted the addition by relying on the decsion of Hon'ble Delhi High Court in the case of CIT vs. J.K. Synthetics Ltd., 309 ITR 371 and the other cases relied upon by the assessee in his pleadings which include the cases of CIT vs. Cuba of India Limited, 69 ITR 692 (SC) and CIT vs. India Oxygen Ltd. 218 ITR 337 (SC), CIT vs. Wavin (India) Ltd. 236 ITR 314 (SC) and Alembic Chemical Works Co. Ltd., 177 ITR 377 (SC). The CIT (A) also held that the royalty payment made to the Benetton Group SPA is not capital in nature but it is made during the normal course of business and held it as an allowable revenue expenditure.
3. At the outset of the hearing, the learned AR for the assessee submitted that the issue of payment of royalty had been decided in favour of the assessee in its own case in ITA No.392/Del.2006 for assessment year 2002-03 and 3973/Del/2006 for assessment year 2003-04, the ITAT, Delhi Bench 'C'. Since this issue already stands decided in favour of the 4 ITA NOS.2811 & 2810/DEL/2011 assessee the order of the CIT (A) should be upheld and the ground no.1 in both the appeals of the revenue be dismissed.
4. Ld.DR was also not having any contrary view in this regard.
5. We have heard both the sides. The facts remain the same. The licence agreement by which royalty paid also remains the same. The issue is decided by the co-ordinate Bench of the ITAT as under :-
"7. We have considered the rival submissions. To understand the controversy it is necessary to reproduce the relevant clauses of the license agreement which are as under:-
A. The LICENSOR is the holder of a license of the trade marks registered and the trade mark applications pending or in the process of being filed in India, the Maldives, Nepal and Sri Lanka for products of International Class no.25 which are owned by BENETOON GROUP SpA, of Via villa Minelli 1, 31050 Ponzano Veneto (Treviso), Italy ("the PROPRIETOR'') and are listed in the Third Schedule.
B. The LICENSOR holds under the terms of the license referred to under Recital A. the right to grant third parties in India and the other countries therein referred to sub- licenses inter alia of the said trade marks, trade mark applications and any registration issuing from any such application.
C. The LICENSOR has furthermore developed and/or has acquired or acquired the right to use certain otherwise unavailable innovative technology, confidential know- how and proprietary information of value concerning the. Planning, design, erection and operation of state-of-the- art dyeing facilities for tile textile sector.
D. The LICENSEE is a whose stock is owned 50% by the LICENSOR and 50% by DCM and/or its nominees or associated companies and has requested that the LICENSOR grants the LICENSEE an exclusive sub- licence to operate in India a dyeing, processing and manufacturing facility for the textile sector of the kind referred to under Recital C, and furthermore to manufacture in India, and market, distribute and sell in India, the Maldives, Nepal and Sri Lanka the Licensed 5 ITA NOS.2811 & 2810/DEL/2011 Product (as hereinafter defined) under the trade marks and trade mark applications referred to under Recital B (and any registration issuing from any such application), and the LICENSOR is prepared to grant such request on the terms hereinafter set forth.
E. The LICENSEE and DCM hereby unconditionally acknowledges that the PROPRIETOR is the sole owner inter alia of all the said trade marks and trade mark applications (and any registration issuing from any such application) and (as the case may be, together with the LICENSOR) of the goodwill appertaining thereto, the Product Know-How and the Dyeing Processing and Manufacturing Facility Know-How (both as hereinafter defined)."
"(5) "Product Know-How" means such of the following matters and things (other hand the Dyeing Processing and Manufacturing Facility Know-,How) as arc or may hereafter be developed by or be available to the LICENSOR with respect to Licensed Products, are determined by the LICENSOR in its sole discretion to be appropriate for utilization in the Territory and are delivered, divulged, disclosed, imparted or otherwise communicated hereunder by or on behalf-of the LICENSOR to , the LICENSEE: (a) designs, patterns and specifications~ (b) manufacturing instructions; (c) quality specifications and standards; (d) advertising and sale promotion materials; (e) samples; (f) marketing information systems and procedures; (g) retail techniques; (h) premises furnishing, decoration and presentation; (i) staff training and organization.
"3. Scope of License (1) Subject to the terms hereinafter set forth, the LICENSOR hereby grants the LICENSEE the non-transferable, non-assignable license, right and privilege
(a) to utilize in India the Dyeing Processing and Manufacturing Facility Know-How for the planning, design, erection and operation of a dyeing facility for the dyeing thereat of both Licensed Products for the LICENSEE's own account, and products of the same kind as that of the Licensed Products for the account of third parties.
6 ITA NOS.2811 & 2810/DEL/2011 (2) with reference to the Licensed Mark "012 BENETTON"
and to the relevant Licensed Products starting from the Winder 1992 Season, and thus from 20th October 1992:
- with reference to the Licensed Marks "UNITED COLOURS OF BENETTON", "ZEROTONDO" AND "SISLEY" and to the relevant Licensed Products starting from the Fall/Winter 1993-94 Season and thus from September 1993;
(a) to manufacture or cause to be manufactured for its account solely by Agreed Sub-Contractors (as hereinafter defined) Licensed Product in India.
(b) to market, distribute and sell in the Territory under the Licensed Marks Licensed Products manufactured by or for the account of the LICENSEE through the Permissible Outlets solely
(c) to utilize in the Territory and cause to be utilized by an Agreed Sub-Contractor in India the Product Know-How in connection with and for the purpose of the exercise on its part of the licenses, rights and privileges which are specified under Clause 3(2)( a) and (b)
(d) to use the expression "BENETTON" (a BENETOON MARK) as its company name or part of its company name, in India, if and to the extent that the LICENSOR has previously consented thereto, in writing.
(3) The license specified under Clause 3(1)(a) shall be non-exclusive, the licenses specified under Clause 3(2)(a) through (d) shall be exclusive (except that the PROPRIETOR, the LICENSOR and any company of the Benetton Group shall retain the right to itself use the expression "BENETTON" as its company name, or part of its company name, anywhere in the Territory)."
"13. Consideration, Royalties, Payments, Interest (1) The LICENSEE shall, in consideration of the License (but subject always to the provisions of Clause 14).
(a) pay a sum equal to Indian Rupees 10,000,000 (ten million) as fee for the technical Know-How and
(b) pay the LICENSOR royalties ("the Royalties") calculated at a rate of five-per-cent (5%) of the
7 ITA NOS.2811 & 2810/DEL/2011 Amount of Net Sales (as hereinafter defined) of all Licensed Products marketed, distributed, sold or manufactured by or for the account of the LICENSEE at any time.
( c) Invest in the advertising of the Licensed Products and the promotion of the Licensed Marks in the Territory an amount not lower than five-per-cent (5%) of the Amount of Net Sales of all Licensed Products marketed, distributed, sold or manufactured by or for the account of the LICENSEE at any time."
"16. Coming into effect, Expiry, Termination
(l) xx xx xx (2) Either Party may terminate this Agreement at any time upon thirty (30) days' notice in writing given to the other Party if such other Party commits a material breach of this Agreement which is not effectively remedied within sixty (60) days of the first Party's notice in writing to that effect."
"17. Effects of expiry or termination (I) Upon this Agreement expiring or being terminated the LICENSEE shall
(a) cease to use the. Licensed Marks, the Dyeing Facility Know-how and the Product Know-How and furt11ennore cease to use and where applicable surrender to the LICENSOR all documents and materials containing data and information divulged, disclosed, imparted or otherwise communicated by the LICENSOR hereunder: provided, however, without prejudice as provided for under Clause 17 (3)
(b) thereafter refrain from manufacturing under the Product Know-How, marketing, distributing or selling goods under any name or mark similar to, or capable of being confused with, any of the Licensed Marks, or in any way causing, encouraging or permitting any person to do so."
"18. Prohibition to grant sub-licenses he LICENSEE may not without the previous consent of the LICENSOR in writing, sub-license this Agreement and the License in
8 ITA NOS.2811 & 2810/DEL/2011 whole or in part to or in favour of any person (or in any way attempt to do so)."
From the above it is clear that the assessee was only granted non- assignable licence, right and privilege with reference to the licensed marks to manufacture on the mark and distribute the licensed product in India and to use the expression "Benetton". The assessee did not become the owner of the licensed marks or the holder of the trade-marks. Such license marks at all times remain the property of the licensor. The license was initially granted for a period from October 1992 till fall/winter season of 1999- 2000. However, to continue to use the license mark for manufacturing of the licensed products, the assessee was to pay royalty @ 5% of the amount of net sales. By paying the royalty the assessee did not acquire any' right in the licensed trade marks. Only the products manufactured by the assessee i.e. garments will bear the licensed marks for which the license has been granted. Accordingly it can be said that the assessee has not acquired any capital asset but has merely paid to the licensor for use of such trade marks. Therefore, expenses are t be treated as revenue expenditure and not capital expenditure. In the case of CIT vs. Ciba India Ltd., 69 ITR 692 (SC), the assessee, an Indian subsidiary of a foreign company agreed to pay percentages of its turnover by way of technical consultancy @ 5%, cost of raw material @ 3% and royalties on trade marks @ 2% of turnover in consideration of the foreign company delivering to the assessee for a period of 5 years all processes, formulae, scientific data, patents and trade marks. The same was held to be revenue expenditure and hence deductible while computing total income. In the case of CIT vs. Indian Oxygen Ltd., 112 ITR 1025, the Hon'ble Calcutta High Court held that where under an agreement the assessee, an Indian company had a subsidiary of an English company was to pay to the English company 2.5% of the total expenditure incurred by the parent company in running a scientific establishment and in return the Indian company became entitled to utilize certain processes, information, inventions and rights of the parent company, the payments so made were held to be revenue expenditure and deductible. This view of the Hon'ble Calcutta High Court has been affirmed by the Hon'ble Supreme Court in the case of CIT VS. Indian Oxygen Ltd. 218 ITR 337. In the case of Shriram Refrigeration Industries Ltd. vs. CIT, 127 ITR 746, the Hon'ble Delhi High Court held that where an assessee entered into a collaboration agreement with a USA manufacturer for obtaining patent, etc., rights initially for a period of 10 years which could be extended for succeeding periods of 5 years each at a time and the collaborator had, during subsistence of the agreement agreed to provide technical and manufacturing information in relation to manufacture of certain types of electrical and other apparatus, the assessee had to pay to the collaborator a sum or $50,000, one-third initially, one-third within 12 months and the remaining one third within the next 12 months. The entire amount so paid was held to be of revenue nature and deductible. The decisions on this subject are endless but broadly the ratio laid down by the Hon'ble Supreme Court in the case of Ciba India Ltd. (supra) has been 9 ITA NOS.2811 & 2810/DEL/2011 considered to arrive at a finding as to the deductibility of the expenditure.
8. In the present case also it is seen that the assessee was required to pay royalty every year. But for payment of royalty every year the assessee could not continue receiving the license to use the licensed marks on the products manufactured by it. Thus making payment every year, it cannot be said that the assessee received advantage of enduring nature primarily to bring it as capital expenditure. Royalty payment is not a one time but rather recurring expenditure merely to use licensed marks.
9. As regards decisions relied upon by the learned DR, it is seen that the facts are quite distinguishable. In the case of Eimco K.C.P. Ltd.(supra) the assessee was promoted jointly by Eimco, an American company and K.C.P. Ltd., an Indian company. Both were to subscribe shares worth Rs.4,70,000/- each. For its share, Eimco contributed technical know-how and for which shares were allotted. The Hon'ble Supreme Court held that what in effect was done by the assessee in allotting equity shares to Eimco was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the assessee. It was not a case where after the incorporation, the assessee in the course of carrying on its business, spent the amount for acquiring any asset. However, in the present case the facts are quite distinct as noted above and hence said decision cannot be applied. In the case of Saraf Chemicals Ltd. (supra) before the Mumbai Bench of the Tribunal the assessee acquired the proprietary concerns transferred the respective business rights, assets and liabilities which included trade marks etc. in addition to the value of assets. The assessee also paid for eliminating competition in the same line of business for a period of 15 years. The use of trade mark was an inseparable part of the entire agreement. Thus it was a case of acquiring trade marks and payment for non-compete fee which was held to be capital expenditure. However, the facts in the present case are quite distinguishable as noted above and do not help the case of the revenue. As rightly contended by the learned counsel for the assessee that granting of exclusive license to the assessee alone in India does not alter the character of payment from revenue to capital. Whether the expenses are revenue or capital, will depend upon the fact whether the assessee acquired assets itself or whether it was merely granted the license to use the trade marks on the products being manufactured by it.
10. In the case of Avery India Ltd. (supra} the Hon'ble Calcutta High Court held that even if the assessee was granted exclusive license, it will not convert the revenue expenditure into capital expenditure. Similar view has been held by Full Bench of the Hon'ble Andhra Pradesh High Court in the case of Praga Tools Ltd. vs. CIT, 123 ITR 773. We accordingly hold that the expenditure in nature and even do not bring 10 ITA NOS.2811 & 2810/DEL/2011 into existence any capital asset or the assessee receives any advantage of enduring nature so as to treat it as capital expenditure."
In view of these facts, we dismiss ground no.1 in both the revenue's appeals.
6. In ITA No.2811/Del/2011, the ground no.2 raised by revenue is regarding the deletion of addition of Rs.86,27,740/- on account of expenditure on payment of export related services.
7. The learned DR submitted that the assessee has not been able to provide any documentary evidence to show that the services provided by M/s. Shriram Global Enterprises Limited (hereinafter referred to as SGEL) which is a related party had been incurred wholly and exclusively for the purposes of assessee's business. It was also pleaded that the CIT (A) is not justified in deleting the addition that such payments made to SGEL were allowed in earlier years. Ld. DR pleaded that every assessment year is separate assessment year. The principle of res judicata is not strictly applicable to the income-tax proceedings. During the year under consideration, the total exports were only Rs.1.74 crores while the export sales in the immediately preceding year were Rs.6.21 crores. The assessee has failed to bring anything on record or any documentary evidence which could justify such a huge amount of Rs.86,27,740/- paid for the services to SGEL except stating that the assessee received the services under the agreement for the export related services. Assessee 11 ITA NOS.2811 & 2810/DEL/2011 failed to justify that the whole amount was spent wholly and exclusively for the purposes of assessee's business. Ld. DR pleaded to set aside the order of the CIT (A) on this issue and to restore the order of the Assessing Officer.
8. On the other hand, the learned AR submitted that this payment was made under the agreement to SGEL. This agreement was related to the export related services provided by SGEL to the assessee during the relevant period. This payment was being made during the earlier years also under the agreement. SGEL have identified six parties for export of readymade garments with whom meetings have been arranged and negotiations were going on. He also pleaded that the amount paid to SGEL was included in its income and has been offered for taxation and SGEL is also assessed to tax. Ld. AR relied on the order of CIT (A).
9. We have heard both the sides on the issue and from the documents submitted in the paper book as well as the other documents available on record shows that assessee has failed to justify the payment to the tune of Rs.86,27,740/- to SGEL although the payment was made as per the agreement. Admittedly SGEL is associate concern of the assessee. Copy of the agreement and the renewal of the agreement shows that SGEL was also operating from the same premises from where the assessee was operating. The address of the assessee as well as SGEL is Kanchanjunga Building, 18, Barakhamba Road, New Delhi. The exports made during 12 ITA NOS.2811 & 2810/DEL/2011 the year were only of Rs.1.74 crores. The exports in immediate preceding year were of Rs.6.21 crores. The certificate submitted from SGEL only shows that six parties have been identified. No supporting evidence was filed that whether the assessee had made any business with these persons in future and what was the magnitude of the business. In absence of all these facts, prima facie it appears that whole of the payment made to SGEL was not wholly and exclusively for the purposes of assessee's business. The huge payments made to the associate concern are definitely not justified. The issue requires a close verification in respect of the magnitude of the services provided by SGEL to the assessee. In our considered view, the issue needs a re-examination therefore, we restore it to the file of Assessing Officer.
10. Ground No.3 of ITA No.2811/Del/2011 and Ground No.2 of ITA No.2810/Del/2011 are general in nature and does not require any adjudication, hence dismissed.
11. In the result, the appeal in ITA No.2811/Del/2011 is partly allowed for statistical purposes and the appeal in ITA No.2810/Del/2011 is dismissed.
Order pronounced in open court on the 19th day of August, 2011.
Sd/- sd/-
(C.L. SETHI) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : the 19th day of August, 2011/TS
13 ITA NOS.2811 & 2810/DEL/2011
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)-XIII, New Delhi.
5.CIT(ITAT), New Delhi.
AR/ITAT