Income Tax Appellate Tribunal - Delhi
Grand Windsor Resorts Ltd., New Delhi vs Department Of Income Tax
1 ITA No.3529/Del/2012
Asstt.Year: 2006-07
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C' NEW DELHI
BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
I.T.A.No.3529/Del/2012
Assessment Year : 2006-07
Asstt.Commissioner of Income Tax, vs Grand Windsor Resorts Ltd.
Circle 12(1), D-63, South City I,
New Delhi. Gurgaon 122002
(PAN: AAACG4627Q)
(Appellant) (Respondent)
Appellant by: Shri Satpal Singh, Sr. DR
Respondent by : Shri S.K. Vatta
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the Revenue against the order of the Commissioner of Income Tax(A)-VIII, New Delhi for AY 2006-07 dated 23.4.2012 for AY 2006-07 passed u/s 250(6) of the Income Tax Act, 1961(hereinafter referred to as the Act).
2. The grounds of appeal read as under:-
"1. Whether ld. Commissioner of Income Tax(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.23,46,743/- made by the Assessing Officer on account of GP ratio.
2. Whether ld. Commissioner of Income Tax(A) was correct on facts and circumstances of the case and in law 2 ITA No.3529/Del/2012 Asstt.Year: 2006-07 in deleting the disallowance of Rs.3,64,607/- made by the Assessing Officer on account of royalty payments."
3. Briefly stated, the facts of the case giving rise to this appeal are that the assessee filed a return of income declaring a total loss of Rs.19,50,292 and the same was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and a notice u/s 143(2) of the Act on 12.10.2007 and again a notice u/s 143(2) along with questionnaire u/s 142(1) of the Act was sent and served on the assessee. The Assessing Officer noted that during the year under consideration, GP rate was declared at 45.74% as against 50.87% as declared in the immediately preceding assessment year. The assessee submitted that the fall in GP was due to increase in cost of food, provisions and stores consumption and also due to substantial increase in the cost of inputs and dairy products etc. The Assessing Officer held that the fall in GP in such line of business was not desirable inasmuch as the assessee company had tried to inflate the expenses under various heads and the Assessing Officer finally adopted the GP rate of 50% and the difference calculated to Rs.23,46,743 was added back to the income of the assessee. The Assessing Officer also noted that the claim of expenses of Rs.14,58,428 on account of royalty, marketing, reservation to Radisson, USA is an expenditure capital in nature. Therefore, relying on the judgment of 3 ITA No.3529/Del/2012 Asstt.Year: 2006-07 Hon'ble Supreme Court in the case of Southern Switch Gear Ltd. vs Commissioner of Income Tax 232 ITR 359 and Jonas Woodhead and Sons (India) Ltd. vs Commissioner of Income Tax 224 ITR 342 (SC), the Assessing Officer held that looking into the nature of the business of the assessee, 25% of amount of royalty was to be held as capital expenditure amounting to Rs.3,64,607 and disallowed and added to the total income of the assessee.
4. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax(A)-VIII, New Delhi which was allowed passing an order u/s 250(6) of the Act. The operative paras of the order are being reproduced as under:-
"In CIT vs. Gujarat Carbon Ltd. 254 ITR 294 (Guj.), in addition to a lump sum payment, the assessee had to pay the collaborator a royalty based on the figures of sales for a period of 5 years in return for various after installation services by technically qualified persons for spot technical assistance to be rendered by the collaborator. There was no provision in that agreement requiring the assessee to return the designs etc. after the expiry of the period of 5 years. Under the second agreement, the assessee was required to pay a royalty of 3% of the net ex factory sales price for the supply of information on day to day developments in the range of products manufactured by the assessee and pertaining to the research carried out by the collaborator. The Tribunal held that royalty under the first agreement pertained to services in respect of the stage after installation of the plant and that the supply of information under the second agreement was only for the 4 ITA No.3529/Del/2012 Asstt.Year: 2006-07 purpose of obtaining information as to the range of products manufactured by the assessee and, therefore, payment of royalty under both agreements were directly relatable to the services which were in the revenue field and were allowed as revenue expenditure. The Gujarat High Court affirmed the decision of the Tribunal. In the case of Good Year India Ltd. vs. ITO 73 ITD 189 (Del), the assessee manufacturing tyres entered into an agreement with the foreign company for technical know how for manufacture of radial tyres. The assessee obtained right to use license for fixed period of 8 years. Under the agreement the assessee agreed to pay lump sum payment beside royalty of 2% on net ex factory sale price of product for a period of 5 years from the date of commercial production. Under the agreement, technical data, designs, plans etc. remained the property of the foreign company. The Tribunal held in that case that the assessee had not acquired ownership rights of technical know how but transfer of use of licenses. Thus, there was no advantage of an enduring nature, and hence it was held as a case of revenue expenditure. Similar views have been rendered in CIT vs. Ashok Leyland Ltd. 130 ITR 900 (Mad.), CIT vs. Eicher Motors Ltd. 163 Taxman 556 (MP), CIT vs. Prem Heavy Engg. Works Ltd. 149 Taxman 301 (Allh.), CIT vs. Kanpur Cigarettes Pvt. Ltd. 147 Taxman 428 (Allh.), CIT vs. South India Exports Co. Ltd. 127 Taxman 478 (Mad.), CIT vs. Southern Pressings Pvt. Ltd. 125 Taxman 714 (Mad.), CIT vs. Jyoti Electric Motors Ltd. 121 Taxman 519 (Guj.), CIT vs. Power Build Ltd. 113 Taxman 327 (Guj.).
In the case of the appellant, it is seen that it had paid royalty for the right to use the trade mark and know how. The terms of the agreement make it clear that the ownership rights over trade mark and know how vest with Radisson Hotels International INC. On termination or expiration of the agreement, the appellant shall return all know how obtained under the agreement. What has been paid under the agreement is royalty on the basis of net sales. In Travancore Sugar& Chemicals Ltd. 62 ITR 5 ITA No.3529/Del/2012 Asstt.Year: 2006-07 566 (SC) it has been held that whenever a payment is based on a percentage of turnover or profits, is necessarily has no relation to 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. In similar interpretation of facts and law in the case of DCIT vs. Swaraj Engines Ltd. (2002) 124 Taxman 118 (Chd.) the Tribunal held that royalty 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 of product already manufactured by the assessee.
The case of Southern Switch Gears Ltd. relied upon by the ld. AO is distinguishable on facts, because in the case of Southern Switch Gears both royalty on sales and lump sum for technical aid was payable in 5 equal installments, whereas, in the instant case the assessee neither paid lump sum amount and the payment is entirely linked to the net sale.
In the instant case the appellant has not acquired any benefit of enduring nature and it will not constitute acquisition of any assets. Further by payment of royalty, the ownership right over trade mark and know how doesn't transfer to the appellant. The Appellant Company has a non-exclusive right to use the trademarks within the territory of India and the royalty is determined on the basis of percentage of turnover and is not paid as lump sum, therefore, the same can increase or decrease on the basis of turnover. It is also pertinent to note that the above expenditure has not been disallowed by the department either in the preceding AYs or in the succeeding AYs.
The decisions relied on by the AO for enforcing ¼ of disallowance out of payment of royalty have been rendered on distinguishable sets of fact and are not applicable to the issue in question. On the contrary, and as per discussion supra, since royalty has been paid for a 6 ITA No.3529/Del/2012 Asstt.Year: 2006-07 right to use trade mark and know how for a limited period under the terms of an agreement, I hold that no asset of enduring nature has been acquired in consideration of payment of royalty, marketing and reservation fee. The disallowance of ¼ th of the expense is without merits. The ground is allowed."
Hence this appeal before us by the Revenue.
5. Ground No.1 relates to disallowance made on account of low GP rate by the Assessing Officer. The ld. DR submitted that the Assessing Officer rightly noted that during the year under consideration, GP rate was declared at 45.75% as against 50.87% as declared in the immediately preceding assessment year. He further submitted that the Assessing Officer rightly adopted GP rate of 50% and disallowed the difference in GP to the tune of 2.46% amounting to Rs.23,46,743. The DR supported the assessment order and finally submitted that the ld. Commissioner of Income Tax(A) deleted this addition without any reasonable and sound basis.
6. The assessee's representative supporting the impugned order in this regard submitted that when the Assessing Officer has accepted books of accounts and final accounts of the assessee and he has not proceeded to make an assessment in the manner provided in Section 144 and the provision of Section 145(3) of the Act, then it is not permissible to the Assessing 7 ITA No.3529/Del/2012 Asstt.Year: 2006-07 Officer to add difference on the basis of low GP rate compared with earlier Asstt. Years.
7. On careful consideration of the submissions and the facts and circumstances of the case, we observe that in the impugned order, the Commissioner of Income Tax(A) held that the action of the Assessing Officer in making addition on account of low GP was passed without pointing out any defect in the books of accounts and without bringing any incriminating material or evidence on record. At this state, we find it appropriate to follow the judgment of Hon'ble Delhi High Court in the case of Commissioner of Income Tax vs M/s Jackson House 210 TIOL 296 HC-Delhi wherein it was held as under:-
"in any case, the question whether the accounts maintained by the assessee were defective and/or incomplete, or not, was a question of fact. Neither the Commissioner of Income Tax(A) nor the ITAT found the accounts to be defective or incomplete. Both, Commissioner of Income Tax(A) as well as the Tribunal were satisfied with the Stock Register maintained by the assessee and appreciated the fact that the raw material, i.e., the fabric purchased by the assessee was to be measured in metres, whereas the finished products were to be counted in numbers. No reasonable ground has been made out for this Court to go in to this question and revisit the finding returned by the Commissioner of Income Tax(A) and the ITAT.
The question as to whether the assessee had duly explained the drop in the gross profit ratio or not was a question of fact. It is not as if the assessee did not give 8 ITA No.3529/Del/2012 Asstt.Year: 2006-07 any plausible explanation for the fall in gross profit during year in question. He gave a number of reasons in this regard and the explanation given by the assessee having been accepted by the Commissioner of Income Tax(A) as well as by the Tribunal, it is not for this Court to go into such a question of fact."
8. In view of above discussion and following the judgment of Hon'ble Delhi High Court in the case of M/s Jackson (supra), we are inclined to hold that the ld. Commissioner of Income Tax(A) rightly deleted the addition made by the Assessing Officer on account of low GP rate comparing to the immediately preceding year. We also hold that the action of the Assessing Officer making the addition on account of low GP rate is not sustainable because the Assessing Officer did not reject the books of accounts of the assessee and he did not bring any incriminating material or evidence against the assessee in this regard. Accordingly, the ld. Commissioner of Income Tax(A) rightly relied on the judgment of Hon'ble Jurisdictional High Court in the case of M/s Jackson House (supra) and we are unable to see any reason to interfere with these findings pertaining to ground no. 1. As per discussions made hereinabove, ground no. 1 is dismissed. 9 ITA No.3529/Del/2012 Asstt.Year: 2006-07
9. Ground no.2 relates to the deletion of disallowance made by the Assessing Officer on account of royalty payments.
10. We have heard rival arguments of both the parties in the light of material on record before us. Ld. DR submitted that the Assessing Officer relied on the judgment of apex court in the case of Southern Switchgear (supra) and M/s Jonas Woodhead and Sons (India) Ltd. vs CIT (supra), disallowing 25% of royalty payment being capital expenditure in nature and rightly added the same to the total income of the assessee. He further submitted that in this regard, the Commissioner of Income Tax(A) deleted the addition without appreciating the facts and circumstances of the case and the order of the Assessing Officer may be restored setting aside the impugned order in this regard.
11. The assessee's representative vehemently contended and submitted that the facts and circumstances of the present case are different from the facts and circumstances of the case in Southern Switchgear Ltd. because in this case the royalty on sales and lump sum payment for technical aid was payable in five equal installments whereas in the present case, the assessee never paid any lump sum amount and the payment was entirely linked to the net sales of the assessee. The assessee's representative supported the impugned order and finally submitted that the action of the Assessing 10 ITA No.3529/Del/2012 Asstt.Year: 2006-07 Officer was not just and proper as per provisions of the Act and judgment of Hon'ble Apex Court.
12. After careful consideration of the arguments of both the parties and orders of the authorities below, with regard to the issue of disallowance on account of royalty expenses, we observe that this fact has not been disputed by the Revenue that the payment of royalty, marketing and reservation fees paid to the Radisson USA, RHW and Rismo had a direct nexus and calculated on the basis of revenue generated from room rent collection, marketing and reservation fees which in no way could be construed as capital in nature. On careful perusal of the judgment of Hon'ble Apex Court in the case of Southern Switchgear Ltd. (supra), we observe that the benefit of the ratio of the judgment in the present case is not available to the revenue because there was a lump sum payment by the assessee for royalty on sales and technical aid which was payable in five equal installments whereas in the instant case, there is no lump sum payment by the assessee and the royalty payment is purely linked to the net sales of the assessee. Therefore, we are inclined to hold that the addition made by the Assessing Officer was unreasonable based on misinterpretation of the facts and circumstances of the case and on the contrary, the ld. Commissioner of Income Tax(A) rightly considered the citations submitted before him and properly appreciated the 11 ITA No.3529/Del/2012 Asstt.Year: 2006-07 facts and circumstances of the case in hand as well as the facts of the cases cited before him. In view of above, we have no reason to interfere in the impugned order in regard to deletion of disallowance on account of royalty expenses by the ld. Commissioner of Income Tax(A) and ground no. 2 is also disallowed.
13. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 21.9.2012.
Sd/- Sd/-
(G.D. AGRAWAL) (CHANDRA MOHAN GARG)
VICE PRESIDENT JUDICIAL MEMBER
DT. 21st SEPTEMBER, 2012
'GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. CIT(A)
4. CIT 5. DR By order
Asstt. Registrar