Income Tax Appellate Tribunal - Delhi
Honda Siel Cars India Ltd, Noida vs Department Of Income Tax on 16 May, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "C" DELHI
BEFORE SHRI D.R. SINGH AND SHRI K.G. BANSAL
ITA No. 4701(Del)/2009
Assessment year: 2004-05
Deputy Commissioner of Honda Siel Cars India Ltd.,
Income-tax, Circle Noida. Vs. A-1, Sector 40/41,
Surajpur Kasna Road, NOIDA,UP.
(Appellant) (Respondent)
Appellant by : Shri D.N. Kar, CIT, DR
Respondent by: Shri Rupesh Jain, Advocate
ORDER
PER K.G. BANSAL : AM This appeal of the revenue emanates from the order of the CIT(Appeals), Ghaziabad, passed on 17.9.2009 in Appeal No. 122/2006- 07 and it pertains to assessment year 2004-05. The following grounds have been taken in the appeal:-
(i) "That the ld. CIT(A) has erred in law and on facts by allowing relief of Rs. 27,78,86,000/- by treating lump sum fee for technical guidance as revenue expenditure as against capital expenditure held by the AO by placing reliance on order of ITAT in assessee's case for A.Y. 2003-04 against which department has already filed an appeal before Hon'ble Allahabad High Court.2 ITA No. 4701(Del)/2009
(ii) That the ld. CIT(A) has erred in law and on facts by allowing relief of Rs. 26,03,25,000/- by treating royalty as revenue expenditure as against capital expenditure held by the AO by placing reliance on order of Hon'ble ITAT in assessee's case for A.Y. 2003-04 against which department has already filed an appeal before Hon'ble Allahabad High Court.
(iii) That the ld. CIT(A) has erred in law and on facts by allowing relief of Rs. 74,10,913/- by treating research and development as revenue expenditure as against capital expenditure held by the AO by placing reliance on order of Hon'ble ITAT in assessee's case for A.Ys. 2003-04, 2001-02 and 2002-03 against which department has already filed an appeal before Hon'ble Allahabad High Court.
(iv) That the ld. CIT(A) has erred in law and on facts by allowing relief of Rs. 3,66,76,803/- by holding that the provision for warranty is ascertained by placing reliance on order of Hon'ble ITAT in assessee's case for A.Ys 2002-03 and 2003-04 against which department has already filed an appeal before Hon'ble Allahabad High Court.
(v) That the ld. CIT(A) has erred in law and on facts by allowing relief of Rs. 11,24,636/- by deleting the addition made on account of export commission by placing reliance on order of Hon'ble assessee's case for A.Ys. 2001-02, 2002-03 and 2003-04, against which department has already filed an appeal before Hon'ble Allahabad High Court."
1.1 From the narration in the grounds, it will be clear that all these matters have been decided by the Tribunal against the revenue in earlier years. Therefore, the ld. counsel for the assessee submitted at the outset that the appeal may be dismissed by following the earlier order. However, in regard to ground no. 1, the ld. DR wanted to re-state the 3 ITA No. 4701(Del)/2009 case of the revenue in the light of the decision of Hon'ble Delhi High Court in the case of CIT Vs. J.K. Synthetics Ltd., (2009) 309 ITR 371, which statedly laid down certain principles in deciding as to whether payment of fees by way of technical know-how was capital or revenue expenditure. Further, his case was that this position was not considered by the Tribunal in earlier order. In order to upport his case that this Bench of the Tribunal could differ from the earlier decision, if such a need arises, he relied on the decision of Hon'ble Supreme Court in the case of Union of India & Another Vs. Raghubir Singh (1989) 178 ITR 548.
2. The ld. DR referred to the background facts that the assessee is a joint venture company and a technical collaboration agreement was entered into with the parent company on 21.5.1996 under which it agreed to pay lump-sum know-how fees amounting to about 31.50 million US$ in five equal installments starting from the year of commercial production, which was assessment year 2001-02. In assessment years 2001-02 and 2002-03, two questions came up before the ld. CIT(Appeals), namely, whether- (i) the payment to the parent company amounted to diversion of income as it held 99.9% shares in the assessee company; 4 ITA No. 4701(Del)/2009 and (ii) the expenditure was capital in nature? The CIT(Appeals) decided the first issue in favour of the revenue because of which it was not necessary for him to decide the second question. However, the Tribunal did not uphold the findings of the ld. CIT(A) in respect of diversion of income and restored the matter to the file of the ld. CIT(A) for deciding whether the expenditure was capital or revenue in nature. This matter also traveled up to the Tribunal, which was decided in ITA No.3173(Del)/20076 dated 16.5.2008, a copy of which was placed before us. In paragraph 28 of the aforesaid order, it was held that the expenditure was revenue in nature. For the sake of ready reference, this paragraph is reproduced below:-
"28. The learned counsel for the assessee as well as the learned CIT DR has submitted paper-books containing the case-law on which they placed reliance in the course of the arguments. Predictably, whereas the learned counsel for the assessee sought to distinguish the cases cited by the learned CIT DR, the latter's attempt was to distinguish the cases cited by the former. We have gone through the cases cited. In our humble opinion, the question has to be decided on the basis of the facts of the particular case with which we are dealing. One noteworthy feature in all the cases was that there is no divergence of judicial opinion so far as the principles to be applied are concerned; cases were decided on the application of such principles to the facts of a particular case. We have already referred to the common basic principle which runs through all the cases cited by both the sides and there is no need to repeat it. If that principle is applied to the facts of the 5 ITA No. 4701(Del)/2009 present case and to the terms and conditions of technical collaboration agreement, it would be seen that the assessee obtained only the right to use, during the currency of the agreement, the technical know-how and information and the intellectual property rights relating to the manufacture of Honda cars and did not secure any ownership rights over them. We, therefore, hold that the payment of the lump-sum fees for technical know-how and the royalty is allowable as revenue expenditure. We may add that we have avoided the temptation to burden this order with any detailed discussion of the entire case-law cited before us because, as we have already noticed, the decision in such cases should be based on facts and the basic principles applicable are well-settled and need no elaborate reference. However, a few important judgments both of the jurisdictional High Court and the Supreme Court cited by the learned CIT DR require to be noticed."
Similar decisions were taken in respect of assessment years 2001-02, 2002-03 and 2005-06.
2.1 The case of the ld. DR was that the decision of Hon'ble Delhi High Court in the case of J.K. Synthetics Ltd. (supra) was not considered in the earlier orders and this decision has a material bearing on this issue. This decision had laid down certain principles, on reviewing various judgments of Supreme Court and High Courts, in the matter on pages 412 and 413. The propositions at serial nos. (i), (iv) and (v) were in favour of the revenue, which may now be taken into consideration for 6 ITA No. 4701(Del)/2009 deciding the case. For the sake of ready reference, the discussion at placitum 55 of the aforesaid decision are reproduced below:-
"An overall view of the judgments of the Supreme Court, as well as of the High Courts would show that the following broad principles have been forged over the years which require to be applied to the facts of each case:
(i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bring into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it with a view to produce profits it would be in the nature of revenue expenditure;
(ii) it is the aim and object of expenditure, which would determine its character and not the source and manner of its payment;
(iii) the test of "once and for all" payment, i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in "lump sum" or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business as against an expense undertaken for the benefit of the business as a whole;7 ITA No. 4701(Del)/2009
(iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit-
making structure to work more efficiently leaving the source or the profit making structure untouched would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down;
(v) expenditure incurred for grant of licence which accords "access" to technical knowledge, as against, "absolute" transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as :
(a) the tenure of the licence.
(b) The right, if any, in the licensee to create further rights in favour of third parties,
(c) The prohibition, if any, in parting with a confidential information received under the licence to third parties without the consent of the licensor,
(d) Whether the licence transfers the "fruits of research" of the licensor, "once for all",
(e) Whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which 'access' to knowledge was obtained during the subsistence of the licence, 8 ITA No. 4701(Del)/2009
(f) Whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature;
(vi) the fact that the assessee could use the technical knowledge obtained during the tenure of the licence for the purposes of its business after the agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The courts have held that this by itself cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete;
(vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue."
2.2 For the purpose that the Tribunal had power to take independent decision in subsequent year, the ld. DR placed reliance on the decision of Hon'ble Supreme Court in the case of Raghubir Singh (supra). In this connection, reliance was placed on the head note, where it is mentioned that "The Supreme Court of India should not differ from its earlier decision merely because a contrary view appeared preferable. But, if the previous decision is plainly erroneous, there is a duty of the court to say so and not perpetuate the mistake. A revision of its 9 ITA No. 4701(Del)/2009 earlier decision would be justified, if there were compelling and substantial reasons to do so. The earlier decision may be reviewed, for instance, (i) where an earlier relevant statutory provision had not been brought to the notice of the court, or (ii) if a vital point was not considered. Whether the court should review depends on several relevant considerations, such as:
(a) What was the nature of the infirmity or error on the earlier occasion, (i) did some patent aspects of the question involved remain unnoticed, or (ii) was the attention of the court not drawn to any relevant and material statutory provision, or (iii) was any previous decision of the court bearing on the point not noticed?
(b) Is the court hearing the plea for review unanimous that there is such an error in the earlier view?
(c) Has the earlier decision been followed on subsequent occasions, either by the Supreme Court or by the High Court?10 ITA No. 4701(Del)/2009
(d) What would be the impact of the error on the general administration of law or on the public good?
(e) Would the reversal of the earlier decision lead to public inconvenience, hardship or mischief?"
2.3 It was also submitted that in case the expenditure is held to be revenue in nature, then, the direction given by the Tribunal in paragraph 32 of the order for assessment year 2003-04 may also be reiterated and the matter may be allowed to be referred to the TPO for determining arm length price of the transaction.
3. In reply, the ld. counsel for the assessee submitted that the agreement on the basis of which payment was made in this year was the same as in assessment year 2003-04 and other years, where the matter has been decided in favour of the assessee. It was further submitted that Hon'ble Delhi High Court has not laid down any new proposition of law for deciding the issue as to whether the expenditure was revenue or capital in nature. The Hon'ble Court merely summarized the ratios of various cases and termed them as broad principles which should be 11 ITA No. 4701(Del)/2009 taken into account for this purpose. The decision is not of the jurisdictional High Court as the assessee falls within the jurisdiction of Allahabad High Court. Coming to the issue of determining arm's length price, it was submitted that the revenue has not taken any such ground in its appeal. In any case, the arm's length price was determined by the TPO in order dated 30.9.2009 for assessment year 2003-04, a copy of which was placed before us, in which it was held that after going through the submissions of the assessee, the documentation placed on record and the economic analysis contained therein, no adverse inference is drawn in respect of international taxation (i.e., royalty payment and lump-sum fee for technical know-how ) undertaken by the assessee with its Associated Enterprises.
4. We have considered the facts of the case and the submissions made before us. We find that the Hon'ble Supreme Court in the case of Raghubir Singh (supra) laid greater emphasis on the principle of consistency that it should not differ from its earlier decision merely because a contrary view appears to be preferable. However, if the previous decision is plainly erroneous there will be a duty on the court to say so and not to perpetuate the mistake. The Hon'ble Court also 12 ITA No. 4701(Del)/2009 furnished two illustrations- (i) where relevant statutory provision was not brought to its notice, (ii) if a vital point was not considered. Even if this decision is applied mutates mutandis to the orders of the Tribunal, the revenue will have to show that either the relevant statutory provision was not brought to the notice or a vital point was not considered. No such case has been made out by the revenue. The Tribunal had considered the same agreement, the lump-sum payment under which was to be paid in five years. Hon'ble Delhi High Court has not brought any new consideration for deciding the issue of capital versus revenue. It merely culled out ratios of various cases already in existence. Therefore, we are of the view that the decision in the case of Raghubir Singh (supra) is not applicable to the facts of this case. The ld. DR had also relied on the decision of Mumbai Bench of the Tribunal in the case of Thomas Cook India Vs. Dy. CIT (2007) 293 ITR (AT) 283, in which it was held that if the decision of the coordinate bench is in conflict with the decision of Supreme Court, then the decision of coordinate bench is not applicable. We find that no case has been made out by the ld. DR that the decision of the Tribunal in earlier year is in conflict with the decision of Hon'ble Delhi High Court in the case of J.K. Synthetics Ltd. (supra). Apart from that, the Delhi High Court is not 13 ITA No. 4701(Del)/2009 the jurisdictional High Court in this case and, therefore, its decision cannot be taken at par with the decision of Supreme Court in this case to come to a conclusion that the decision of the coordinate bench is not binding.
4.1 Coming to the reference of the international transaction to the TPO, the decision of the Tribunal was against the revenue and not in its favour. Paragraph 32 of the order for assessment year 2003-04 reads as under:-
"32. Before proceeding to the next ground, we may also dispose of the preliminary argument taken by the learned CIT DR. It was submitted that the Tribunal should not give any finding as to whether the payment under the technical collaboration agreement should be treated as capital or revenue without obtaining the arm's length price from the TPO. In support of his submission, reference has been made to sections 92 to 92C of the Act as also to the order of the Special Bench of the Tribunal in the case of Aztec Software and Technology Services Limited vs. ACTI (2007) 294 ITR (AT) 32 (Bangalore) (SB). This plea was opposed by Mr. Vohra, the learned counsel for the assessee. He submitted that the only function of the TPO under the provisions of sections 92 to 92C of the Act is to see if the price paid is an arm's length price and that he is not concerned with the question whether the payment was capital or revenue, nor was he competent in law to decide the question. He further submitted that the order of the Special Bench cited above does not touch upon the controversy sought to be raised by the department. He contended that the nature of the payment - whether it is capital or revenue - has to be 14 ITA No. 4701(Del)/2009 decided first, and the question of determining the quantum of the allowance would logically come in for consideration only later. Mr. Vohra however had no objection to the arm's length price being referred to TPO for determination after the Tribunal's order determining the nature of the payment. On a consideration of the matter, it seems to us that the submissions of Mr. Vohra should prevail, as they are logical and supported by the provisions of the Income-tax Act noticed above. The TPO is not concerned, nor is he competent to decide as to whether the payment under the collaboration agreement is capital or revenue. It is first necessary to determine the nature of the payment and decide whether it is capital or revenue. If it is held to be capital, it is not allowable as deduction and the question of determining the arm's length price may not be necessary to be decided by the TPO. However, as we have held the payment to be revenue in nature and hence allowable, accepting the submission of Mr. Vohra, we direct that while giving effect to our order the Assessing Officer may, if so advised, refer the question of arm's length price to TPO for determination in accordance with law. The decision of the Tribunal regarding the nature of the payment cannot be deferred, as requested by the learned CIT DR, to a stage after the TPO determines the arm's length price. Such a course is not contemplated by law. We, therefore, reject the preliminary objection raised by the learned CIT DR."
Apart from that, the TPO has not found any fault with the value placed by the assessee on the international transaction. Therefore, there is no need for giving any direction in this matter.
4.2 In the result, we do not find any reason to differ with the coordinate bench in this matter.
15 ITA No. 4701(Del)/20094.3 As mentioned earlier, on plain reading of all the grounds, it is clear that all issues were decided against the assessee in earlier years. Respectfully following those orders, we do not find any merit in the grounds taken by the revenue.
5. In the result, the appeal is dismissed.
The order was pronounced in the open court on 18 February, 2010.
Sd/- sd/- (D.R. Singh) (K.G.Bansal) Judicial Member Accountant Member Date of order: 18th February, 2010. SP Satia Copy of the order forwarded to:-
1. Honda Siel Cars India Ltd., Gautam Budh Nagar (U.P).
2. Dy. CIT, Circle Noida.
3. CIT(A)
4. CIT,
5. DR, ITAT, New Delhi. Assistant Registrar.