Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Amway India Enterprises Pvt. Ltd., ... on 31 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.6148/Del/2014
Assessment Year : 2005-06
DCIT, Circle- 1(1), Amway India Enterprises Pvt. Ltd.,
New Delhi. First Floor, Elegance Tower, Plot
No.8, Non-Hierarchial Commercial
Vs.
Centre, Jasola,
New Delhi.
PAN : AAACA5603Q
(Appellant) (Respondent)
Department by : Smt. Aprva Karan, CIT-DR
Assessee by : Shri Tarandeep, CA
Date of hearing : 31-08-2017
Date of pronouncement : 31-08-2017
ORDER
PER R. K. PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 21.08.2014 passed by the CIT(A)-IV, New Delhi relating to assessment year 2005-06.
2. The grounds raised by the Revenue are read as under :-
"1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that the assessment order cannot be rectified u/s 154 for disallowing 'Royalty Expenses'.
2. The appellant craves leave for reserving the right to amend, modify, alter, and or forego any ground(s) of appeal at any time before or during the hearing of this appeal."2
ITA No.6148/Del/2014
3. Facts of the case, in brief, are that the assessee is a company and is engaged in the business of direct selling of consumer products through multilevel marketing. It filed its return of income on 29.10.2005 declaring total income of Rs.1,13,55,33,357/-. The Assessing Officer completed the assessment u/s 143(3) on 30.12.2008 determining the total income of Rs.1,13,88,88,457/-. Subsequently, the Assessing Officer issued notice u/s 154 of the I.T. Act dated 14.03.2013 asking the assessee to show-cause as to why the following additions should not be made :-
a. Provision for Annual Commission - Rs.2,60,45,677/-
b. Bonus Unpaid - Rs.1,52,37,120/-
c. Royalty - Rs.15,01,44,000/-
4. The assessee submitted that the Provision for Annual Commission has already been added back by the assessee in its computation of income. So far as Unpaid Bonus is concerned, it was replied that the amount of bonus was paid before the due date of filing of return u/s 139(1). So far as Royalty of Rs.15,01,44,000/- is concerned, it was stated that the issue whether royalty expenditure is revenue expenditure or a capital expenditure is an issue which can be established by a long drawn process of reasoning of points on which there can be two opinions. Relying on various decisions, it was argued that the same cannot be rectified u/s 154 of the I.T. Act.3
ITA No.6148/Del/2014
5. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. While he accepted the plea of the assessee on account of the first two issues, however, so far as the issue relating to Royalty is concerned, the Assessing Officer relying on various decisions held that the Royalty expenditure of Rs.15,01,44,000/- claimed by the assessee as revenue expenditure cannot be allowed. According to him the same is capital in nature and therefore a mistake has crept in the order which requires rectification u/s 154 of the I.T. Act. Relying on various decisions the Assessing Officer added the amount of Rs.15,01,44,000/- to the total income of the assessee.
6. Before ld. CIT(A), the assessee, relying on various decisions, submitted that a decision on a debatable point of law is not a mistake apparent from record and cannot be rectified u/s 154 of the I.T. Act. It was submitted that the assessee entered into a Technology Transfer Agreement on 13th January, 2004, as amended by an agreement dated 30.03.2005 with M/s Assess Business Group International LLC of USA (ABGIL). As per the terms of the Agreement, a non-
assignable, non-transferable, non-exclusive right was given by the said company to use ABGIL's Intellectual Property for the manufacturing of certain products in India. In consideration thereto, the assessee was required to pay 5% of the net sales price of the products incorporating or manufactured in India using ABGIL's Intellectual property. It was submitted that the Technology Transfer Agreement specifically clarifies that the assessee shall not have any ownership interest in ABGIL's Intellectual Property and therefore, the royalty payment 4 ITA No.6148/Del/2014 was allowable expenditure u/s 37(1) of the Act. It was submitted that Hon'ble Supreme Court in the case of CIT vs. Swaraj Engines Ltd. 309 ITR 443 has held that the question of payment of royalty as revenue or capital expenditure is a substantial question of law. Relying on various other decisions including the decision of Hon'ble Delhi High Court in the case of CIT vs. J. K. Synthetics Ltd. reported in 309 ITR 371, it was submitted that the rectification u/s 154 of the Act is not possible if the question is debatable.
7. Based on the arguments advanced by the assessee, the ld. CIT(A) deleted the addition by observing as under :-
"4.3 I have carefully considered the submissions of the ld. AR for the appellant and perused the order passed by the AO. I find that the issue involved is whether the royalty expenditure of Rs.15,01,44,000/- was of the capital nature or of revenue nature. In the original assessment order passed u/s 143(3) of the Act on 30.12.2008, no disallowance on account of royalty was made. However, the AO issued notice u/s 154 of the Act on 14.03.2013 to which the appellant objected. Notice u/s 154 of the Act was issued on account of three additions proposed viz. provision for annual commission, bonus paid and royalty. The AO accepted the objection of the assessee in respect of provision for annual commission and bonus unpaid. However, in respect of royalty payment, the AO did not accept the objection of the assessee and treated it as capital nature. I find that the Hon'ble Delhi High Court in the case of J.K. Synthetics Ltd. (supra) has laid down detailed test in order to determine whether a particular payment was of revenue nature or of capital nature. I find that the issue as to whether the royalty payment was of capital nature or of revenue nature is of debatable nature. Therefore, the same cannot be disallowed u/s 154 of the Act as it is not a mistake apparent from the case record. In view of the above, I agree with the submissions of the appellant that the issue being of debatable nature, the same cannot be rectified u/s 154 of the Act. Therefore, Ground Nos.1 and 2 of appeal are allowed. However, the AO is at liberty to take appropriate action as per law under the other provisions of the Act as he may deem fit."
8. Aggrieved with such order of the CIT(A), the Revenue is in appeal before us.
5ITA No.6148/Del/2014
9. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and Paper Book filed on behalf of the assessee. We find the Assessing Officer in the order passed u/s 154 made addition of Rs.15,01,44,000/- treating the royalty paid by the assessee as capital in nature as against revenue expenditure claimed by the assessee. We find the ld. CIT(A) deleted such addition on the ground that whether royalty payment is a capital expenditure or revenue expenditure is a highly debatable issue and, therefore, the same cannot be disallowed u/s 154 of the I.T. Act. We do not find any infirmity in the order of the CIT(A) on this issue. In view of the various decisions relied on by the assessee before the CIT(A), the question as to whether payment of royalty is revenue or capital expenditure is a highly debatable issue. It has been held in various decisions that rectification u/s 154 of the I.T. Act cannot be made on issues which are highly debatable in nature. We further find the Assessing Officer had disallowed royalty payment treating the same as capital in nature in assessment year 2010-11 and the CIT(A) following various decisions deleted such addition treating the same as revenue in nature vide order dated 23.12.2015. Similarly, the ld. CIT(A) in his order dated 13.04.2015 for assessment year 2010-11, relying on various decisions including the decision of the Hon'ble Delhi High in the case of CIT vs. J. K. Synthetics Ltd. reported in 309 ITR 371, had allowed the claim of the assessee treating the royalty payment as revenue expenditure as against capital expenditure held by the Assessing Officer. Since proceedings u/s 154 of the 6 ITA No.6148/Del/2014 I.T. Act was initiated on an issue which is highly debatable in nature and since it is held in various decisions that rectification proceedings cannot be made on debatable issues, therefore, in view of the detailed reasoning given by the CIT(A) and in absence of any contrary material brought to our notice by the ld. DR, we find no infirmity in the same. Accordingly, the order of the CIT(A) is upheld and the ground raised by the Revenue is dismissed.
10. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court at the time of hearing itself i.e. on 31st day of August, 2017.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 31-08-2017.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The CIT
4) The CIT(A)
5) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi