Income Tax Appellate Tribunal - Delhi
Daikin Airconditioning India Pvt. ... vs Department Of Income Tax on 25 January, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'B' : NEW DELHI)
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.1346/Del./2010
(ASSESSMENT YEAR : 2002-03)
M/. Daikin Airconditioning India Pvt. Ltd., vs. DCIT, Circle 10(1),
(formerly known as Daikin Shriram New Delhi.
Airconditioning Pvt. Ltd.),
12th Floor, Tower A, DLF Cyber City,
DLF Phase III, Gurgaon (Haryana).
(PAN : AABCD0971F)
ITA No.1404/Del./2010
(ASSESSMENT YEAR : 2002-03)
DCIT, Circle 10(1), vs. M/s. Daikin Airconditioning India Pvt. Ltd.,
New Delhi. (formerly known as Daikin Shriram
Airconditioning Pvt. Ltd.),
th
12 Floor, Tower A, DLF Cyber City,
DLF Phase III, Gurgaon (Haryana).
(PAN : AABCD0971F)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri S.K. Aggarwal & Binod Verma, CAs
REVENUE by : Shri S.N. Krishna, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
Both the cross appeals arise out of the order of CIT (Appeals)-XIII, New Delhi dated 25.01.2010. The grounds of revenue's appeal read as under:-
2 ITA No.1346 & 1404/Del./2010
"1. On the facts and circumstances of the case and in law, the order of the CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred deleting the addition of Rs.37,50,000/- made by the AO claimed as 'Goodwill' by the assessee on account of depreciation on WDV paid to Usha International Ltd. for acquiring business and commercial rights.
3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting disallowances on account of depreciation of Rs.2,04,93,750/- on patents, trademarks and intellectual property rights acquired by it from Seil Aircon Ltd.
4. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in allowing 1/3rd amount out of advertisement and publicity expenditure for launching a new product inspite of the fact that the AO has held the same as a capital expenditure.
5. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.
The grounds of assessee's appeal read as under :-
"1. That the Ld. CIT (Appeals) has erred on facts and in law in not allowing deduction for expenses of Rs.1,050,654 treating as prior period expenses. He has failed to appreciate that the liability for the above expenditure crystallized during the year and hence, the deduction should have been allowed in computing the income.
2. That the Ld. CIT (Appeals) has erred on facts and in law in not allowing deduction in respect of entire expenditure of Rs.39,398,597 incurred on account of advertisement and publicity expenses and restricting the deduction to one third (1/3) of the expenses incurred by spreading the deduction over a period of 3 years. He has failed to appreciate that expenses is allowable in full in the year in which such expenses incurred for the purpose of business.
3. That the Ld. CIT (Appeals) has erred on facts and in law in not deleting the addition of Rs.13,198,642 on account of opening balance of advertisement and publicity expenses deferred in the books of accounts which was not claimed in the return of income.
4. The above grounds are independent and without prejudice to one another.3 ITA No.1346 & 1404/Del./2010
5. The Appellant craves leave to add to or alter by deletion, substitution or otherwise the above grounds of appeal at any time before or during the hearing of the appeal."
2. The assessee company was incorporated on 4th April, 2000 under the Companies Act, 1956. The company is a subsidiary of Daikin Industries Ltd., Japan. During the year, the assessee company was engaged in the business of manufacturing and marketing of air-conditioners, water coolers, etc. The return of income was filed declaring loss of Rs.5,95,60,099/- on 31.10.2002. It was revised on 31.03.2004 by increasing loss to Rs.6,65,72,388/-. The return was processed under section 143(1). Thereafter the assessment order was made u/s 143(3) on 31.03.2005 by assessing loss at Rs.1,13,19,255/-.
3. Ground Nos.1 to 5 in revenue's appeal are general in nature and also not prosecuted, therefore, do not require any adjudication. The same are dismissed.
4. In the ground no.2 of revenue's appeal, the issue involved is deleting the addition of Rs.37,50,000/- made by the Assessing Officer claimed as 'Goodwill' by the assessee on account of depreciation on WDV paid to Usha International Ltd. for acquiring business and commercial rights.
5. Ld. DR relied on the order of the Assessing Officer. On the other hand, the learned AR submitted that the assessee company has purchased marketing rights along with employees and premises and also trade names etc. from Usha International Ltd under the business agreement dated 1st May, 2000. As 4 ITA No.1346 & 1404/Del./2010 per the agreement, the Usha International Ltd. was not to compete with the assessee company for 20 years in the marketing of airconditioners and water coolers of M/s. SIEL Aircon Ltd. The learned AR submitted that this agreement was for business rights, therefore, eligible for depreciation under section 32 of the Income-tax Act as intangible assets. He further pleaded that the exclusive business rights as defined in the agreement were represented as carrying on the business as successor to Usha International Ltd. which include all records of business including records of suppliers and customers; the benefit of the current orders; the benefit of all bids and proposals that have been made by Usha International Ltd. and all rights to Usha International Ltd. distribution network for the business excluding Usha International Ltd.'s company shop. The consideration for exclusive business rights was payable of Rs.1,73,00,000/-. For other business and commercial rights Rs.27,00,000/- was paid. These amounts were capitalized as goodwill in books of accounts. These amounts were paid to Usha International Ltd. during the period relevant to assessment year 2001-02. These amounts were capitalized as Goodwill in the books of account. For computing the taxable income, depreciation was claimed @ 25% as prescribed in schedule of depreciation rates in respect of the intangible assets. The depreciation in the year 2001-02 was claimed at Rs.50,00,000/- and in assessment year 2002-03 at Rs.37,50,000/-. For the assessment year 2001-02, the CIT (A) granted the 5 ITA No.1346 & 1404/Del./2010 relief. The revenue went in appeal before the ITAT wherein the ITAT had dismissed the revenue's appeal by upholding the order of the CIT (A). The ITAT has held as under :-
"A perusal of the business purchase agreement also clearly shows that UIL as agreed to sell to the assessee and the assessee agreed to purchase the business and the goodwill and the other assets thereof. A perusal of the consideration also clearly shows that the agreement is for selling 3 items, first one being the business, second goodwill and third other assets. The purchase consideration also shows the computation of such 3 items being the exclusive business rights for a consideration of Rs.1,73,00,000/-, 27,00,000/- without any specifications and (c) the transferable deposits which would have to be considered as other assets. This being as the amount of Rs.27,00,000/- as shown in the purchase price has not been shown to be in relation to either exclusive business rights or for transferable deposits. The same would have to be treated as being towards "goodwill".
This being so, we are of the view that the amount of Rs.27,00,000/- as paid by the assessee would have to be treated as goodwill. In regard to the balance of 1.73 Crores, it is for the exclusive business rights."
The ITAT vide Para 7 of their order held as under:
"In these circumstances, we are of the view that the ld. CIT(A) was right in holding that the assessee was entitled to the depreciation in regard to the purchase of the exclusive business rights to the extent of Rs.1,73,00,000 and directing the AO to grant depreciation on the same. In regard to the amount of Rs.27,00,000 as paid by the assessee, as it has not been shown that this amount had been paid for any specific rights, the same would have to be treated as goodwill and the depreciation on the same cannot be granted.
In the circumstances, the findings of the Ld. CIT(A) on this issue is modified to the extent that the AO is directed to grant the depreciation on the consideration of Rs.173,00,000/- paid to UIL for the purchase of the exclusive business rights which are to be treated as intangible assets. The action of the AO in disallowing the depreciation on the goodwill to the extent of Rs.27,00,000 is confirmed."
Ld. AR pleaded that the facts are same and there is no change in the circumstances, therefore, the order of the CIT (A) may be upheld.
6. We have heard both sides and perused the material on record. Since the assessee has got the relief from ITAT in the preceding year, on the same 6 ITA No.1346 & 1404/Del./2010 facts. The issue remains the same, therefore, respectfully following the decision of ITAT, we dismiss this ground of revenue's appeal.
7. Ground No.3 in revenue's appeal is regarding deleting the disallowances on account of depreciation of Rs.2,04,93,750/- on patents, trademarks and intellectual property rights acquired by its from SIEL Aircon Ltd.
8. The assessee company has purchased manufacturing business of M/s. SIEL Aircon Ltd. as a going concern vide agreement dated 08.08.2000. As a part of this agreement, the assessee company also acquired intellectual property rights which include patents, trademarks, etc. etc. and paid Rs.10,93,00,000/-. The amount was capitalized in books as patent and trademark and the same is treated as intangible assets. These intellectual property rights have not been registered in the name of assessee company. The assessee company claimed depreciation as per section 32 of Income-tax Act read with Schedule for depreciation @ 25%. The Assessing Officer disallowed the same by following the order of earlier year. The CIT (A) has granted the relief to the assessee by following the decision of ITAT in assessee's own case for assessment year 2001-02 where the ITAT has held as under :-
"A perusal of the purchase price consideration as per the business purchase agreement entered into between the assessee and SAL shows that the consideration has been paid for the intellectual property rights. Intellectual property rights are immovable asset. It is also an intangible asset as per the provisions of section 32 (1) (ii) of the Act. It is also undisputed that the 7 ITA No.1346 & 1404/Del./2010 assessee has used the intellectual property rights in its business and there has been no claim against the assessee for the use of the said trademarks. In fact as per the agreement in clause 8.1 (a)(i) it has been specifically agreed that on completion duly executed instruments of transfer, assignment etc. as the assessee may reasonably be required to complete the transfer, assignment and conveyance of the asset in accordance with the provisions of this agreement shall be delivered to the assessee at a place nominated by the assessee. This clearly shows that once the completion of the agreement is done by payment of the consideration as on the completion date specified in the agreement the assessee would be in possession of the duly executed instruments of transfer, assignment and Conveyances of the assets as specified in the agreement which are basically the intellectual property rights and the fixed assets. This being so, as also the principles as laid down by the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. referred to supra and reaffirmed the decision of Dalmia cements" it would have to be held that the assessee was the owner of the property and the assessee having used the same in its business was entitled to depreciation on the same. In the circumstances the finding of the Ld. CIT(A) on this issue stands confirmed."
Since the revenue has failed to brought on record any distinction of facts from the earlier year, i.e., 2001-02, therefore, respectfully following the decision of ITAT, we dismiss this ground of revenue's appeal also.
9. Ground No.4 in revenue's appeal is against allowing 1/3rd amount out of advertisement and publicity expenditure for launching a new product inspite of the fact that the Assessing Officer has held the same as a capital expenditure. Ground No.2 of assessee's appeal is also related to this issue wherein the assessee has claimed that whole of the expenditure of Rs.3,93,98,597/- incurred on account of advertisement and publicity expenses should have been allowed and the CIT (A) is not justified in restricting the deduction to 1/3rd only. Ground No.3 in assessee's appeal also deals with the confirming the addition of Rs.1,31,98,642/- on account of opening balance of 8 ITA No.1346 & 1404/Del./2010 advertisement and publicity expenses deferred in the books of account which was not claimed in the return of income.
10. During the year, the assessee has claimed Rs.3,93,98,597/- on account of advertisement and publicity. In the books, the assessee has claimed as deferred revenue expenditure, the details of which were provided before the authorities below are as under :-
Opening Balance Rs.1,31,98,642
Add : Incurred during the year Rs.3,93,98,597
Less : Written off during the year Rs. 65,22,822
Closing Balance Rs.4,60,74,417
A note was provided in the financial statement wherein it is stated that the marketing cost incurred during the product campaign are deferred and amortized over a period of 4 years and it was claimed that although the expenses incurred on advertisement and publicity are deferred as per books, in the computation of income, the assessee company has added back this expenditure debited in profit and loss account and claimed actual expenses in advertisement and publicity incurred during the year as an allowable expenditure u/s 37(1) of the Income-tax Act. It was also claimed that in the past year also, similar accounting and tax treatment was given and the tax authorities have accepted the same. Reliance was placed on the following decisions :-
(i) Amar Raja Batteries Ltd. vs. ACIT - 272 ITR 17 (AT)(Hyd.-ITAT)
(ii) Hindustan Commercial Bank Ltd. vs. Re. - 21 ITR 353 (All.)
(iii) National Industrial Corporation Ltd. - 124 Taxman 413 (Delhi)
(iv) CIT vs. Berger Paints (India) Ltd. - 254 ITR 503 (Cal.) 9 ITA No.1346 & 1404/Del./2010
(v) Campa Beverages (P) Ltd. vs. IAC 34 ITD 241 (Delhi Tribunal) The Assessing Officer held that during the year, marketing cost incurred on the new product launch/campaign and new business. The Assessing Officer also held that these were the expenditure of benefit of enduring nature. The Assessing Officer held that in view of the decision of Hon'ble Supreme Court in the case of CIT vs. Madras Auto Service (P) Ltd., 233 ITR 468, these expenditure are capital in nature and cannot be allowed as revenue expenditure and the expenditure incurred during the year is added to the income of the assessee.
11. The CIT (A) has allowed only 1/3rd advertisement expenses by holding as under :-
"6.13 I have considered the submissions of the appellant and perused the records of the case. After going through the details of expenses and keeping in view the fact that appellant company was trying to launch a new brand and new product line in India, the huge expenses were incurred for such a launch. There is no denying the fact that such a huge initial expenses will give an edge to the company's product and brand a recall value in terms of target audience for at least advantage of 3 years. Therefore, only 1/3 of the advertisement expenses will be allowable in this year. The appeal is partly allowed."
12. Ld. AR relied on the latest decision of Hon'ble jurisdictional High Court in the case of CIT vs. Citi Financial Consumer Finance India Ltd. wherein the Hon'ble High Court has decided the issue as under :- 10 ITA No.1346 & 1404/Del./2010
"10. We are unable to persuade ourselves by the aforesaid submission of the learned counsel for the Revenue. Identical argument was taken by the Revenue in IFCI (supra). Explaining the ratio of Supreme Court in Madras Industrial Investment Corpn. Ltd. (supra), the argument of the Revenue was rejected in the following manner:-
"The judgments on which reliance is placed by the learned Counsel for the Revenue would be of no avail in the instant case. The learned Counsel for the Revenue had strongly argued that matching concept is to be applied, as per which part of the expenditure had to be deferred and claimed in the subsequent years and, therefore, approach of the AO was correct. However, this argument overlooks that even in Madras Industrial Investment Corporation (supra), on which the reliance was placed by Ms. Bansal, the general principle stated was that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business can be allowed in the year in which it is incurred. Some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time as was justifying such spread. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilize the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned Counsel for the Revenue herself:11 ITA No.1346 & 1404/Del./2010
"The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirely in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. Commissioner of Income-Tax, Calcutta-I (1983) 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.
Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."
Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread 12 ITA No.1346 & 1404/Del./2010 over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period."
11. This Court, thus, explained in no uncertain terms that the normal rule accepted by the Supreme Court in the said judgment was that the expenditure is to be allowed in the year in which it was incurred. Only at the instance of the assessee who wanted to spread over, the court had agreed to allow the assessee the benefit after finding that there was a continuing benefit to the company over the entire period. The ratio of this judgment was thus summarized in the following manner:-
"What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the Income Tax department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of matching concept is satisfied, which upto now has been restricted to the cases of debentures.
12. At this stage, it would be of advantage to discuss the judgment of Supreme Court in Empire Jute (supra) which repelled the theory of expenditure of enduring nature, in a great measure. In that case, the Supreme Court noted that by decided cases, the courts evolved various tests for distinguishing between the capital and revenue expenditure but no test is paramount or conclusive. Every case has to be decided on its facts keeping in mind the broad picture of whole operation in respect of which the expenditure has been incurred. At the same time, few tests formulated by the Courts were taken note of. One such test which was specifically spelled-out and may be relevant for our purpose was "when an expenditure is made not only once 13 ITA No.1346 & 1404/Del./2010 and for all, but with a view to bringing into existence of an advantage for which enduring benefit of a trade, the expenditure can be treated as capital in nature and not attributable to revenue". However, cautioned the Court, it would be misleading to suppose that in all cases securing a benefit for business expenditure would be capital expenditure. The Court added the caution in the following words:-
"There may be cases where expenditure, even if incurred for obtaining advantage, of enduring benefit, may, none-the-less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assesses that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably white leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case."
13. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee's trading operations. No fixed capital was created by this expenditure. We may also add here that in the Income-Tax laws, there is no concept of deferred revenue expenditure. Once the assessee claims the deduction for whole amount of such 14 ITA No.1346 & 1404/Del./2010 expenditure, even in the year in which it is incurred, and the expenditure fulfills the test laid down under Section 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Corporation (supra), the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so."
13. Ld. DR submitted that the Assessing Officer has held that the expenditure is capital, therefore, there is no justification for allowing 1/3rd claim during the year by CIT (A).
14. After considering the pleadings of both sides and case laws relied upon, we are of the view that the revenue has failed to bring out a case to establish that any capital assets had come into existence. Further, as held by the Hon'ble High Court, there is no concept of deferred revenue expenditure in Income-tax laws. The genuineness of the expenditure has not been doubted by the revenue authorities. Keeping all these facts in view and following the decision of Hon'ble jurisdictional High Court, we allow the grounds of assessee's appeal and dismiss the revenue's ground no.4.
15. The issue involved in the ground no.1 of assessee's appeal is for not allowing the prior period expenses. The assessee claimed that these liabilities were crystallized during the year, hence deduction should be allowed in computing the income of the assessee. The Assessing Officer disallowed the claim by holding that assessee has failed to substantiate its claim that the liability had crystallized during the year under consideration. The same is not allowable as the assessee is following mercantile system of accounting. The 15 ITA No.1346 & 1404/Del./2010 CIT (A) also confirmed the addition by holding that the assessee has failed to show that the liability has accrued during the year under consideration and the same is not allowable as per mercantile system of account.
16. Before us also, the assessee has failed to establish that this liability accrued during the year under consideration. The assessee is following the mercantile system of accounting, therefore, the same is not allowable during the year under consideration. We sustain the order of the CIT (A) and dismiss assessee's ground no.1.
17. Ground Nos.4 & 5 in assessee's appeal are general in nature and does not require any adjudication.
18. In the result, the appeal of the revenue is dismissed whereas the appeal of the assessee is partly allowed.
Order pronounced in open court on this 23RD day of December, 2011.
SD/- SD/-
(RAJPAL YADAV) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 23RD day of December, 2011/TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XIII, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.