Income Tax Appellate Tribunal - Delhi
Climate System Pvt. Ltd , New Delhi vs Department Of Income Tax on 9 October, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B' : NEW DELHI
BEFORE SHRI C.L.SETHI AND SHRI K.D.RANJAN
ITA No. 1698/Del/2009
Assessment Year : 2003-04
Climate Systems India Ltd. Vs. ACIT, Cir.-3(1),
Plot No.1, Nelson Mandela New Delhi.
Road, Vasant Kunj,
New Delhi110070
PAN AAACC1074D
(Appellant) (Respondent)
ITA No. 1684/Del/2009
Assessment Year : 2004-05
ACIT, Cir.-3(1), Vs. Climate Systems India Ltd.
New Delhi. Plot No.1, Nelson Mandela Road,
Vasant Kunj,
New Delhi110070
PAN AAACC1074D
(Appellant) (Respondent)
ITA No. 2161/Del/2009
Assessment Year : 2004-05
Climate Systems India Ltd. Vs. ACIT, Cir.-3(1),
Plot No.1, Nelson Mandela New Delhi.
Road, Vasant Kunj,
New Delhi110070
PAN AAACC1074D
(Appellant) (Respondent)
Assessee by : Shri Kanchan Kaushal, C.A.
Department by : Shri Manish Gupta, D.R.
2
ORDER
PER RANJAN, AM:
The appeal by the assessee for Assessment Year 2003-04 and cross appeals by the Revenue and the assessee for Assessment Year 2004-05 arise out of separate orders of ld. CIT(A)-VI, New Delhi. These appeals were heard together and for the sake of convenience are disposed of by this common order.
2. The first issue for consideration which is common in assessee's appeals in both the years relates to upholding the disallowance of royalty expenses by treating the same as capital expenditure. Facts of the case, stated in brief, are that the assessee in Assessment Year 2003-04 debited Rs.15,68,666/- as royalty in profit and loss account. In Assessment Year 2004-05, the net amount debited on account of royalty is at Rs.20,73,720/-. The Assessing Officer was of the view that the royalty paid was towards acquiring technology which was in the nature of technical know-how fee. He, therefore, treated the expenditure of Rs.15,68,666/- in Assessment Year 2003-04 and Rs.20,73,720/- in y 2004-05. However, he allowed depreciation @25% in both the years.
3. On appeal, the ld. CIT(A) upheld the disallowance on the ground that I.T.A.T. in Assessment Year 2002-03 had upheld the stand taken by the Assessing Officer.
4. At the outset, it has been brought to the notice of the Bench that against the order of I.T.A.T. assessee preferred appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court on appreciation of facts has held that the expenditure incurred was in the nature of royalty and, 3 therefore, the issue is now covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court. On the other hand, ld. Sr.D.R. supported the order of ld. CIT(A). He submitted that it was to be seen whether the Hon'ble Delhi High Court has appreciated the facts noted and relied upon by the Tribunal.
5. We have heard both the parties. We have gone through the decision of Hon'ble Delhi High Court in ITA No.464 of 2009 dated 9/10/2009. The Hon'ble Delhi High Court while deciding the issue in favour of the assessee has held as under:
"6. We have given our due consideration to the aforesaid submissions made by the learned counsel for both the parties. Since the answer to the question formulated above depends on the construction of Technical Collaboration Agreement dated 25.05.1999 entered into between the assessee and the foreign collaborators, viz., Ford Motors Company, we have scanned the said Agreement as well, minutely. As per Article 2 of the Agreement, the licensor has granted to the assessee non-exclusive rights and licenses during the term of the Agreement in the contract territory to manufacture, sale retail and service license products, using technical information furnished by the licensor and under Idustrial Property Rights. Article 3 provids that the licensor shall supply the assessee with technical information promptly to assist the assessee to introduce manufacture of licensed products. During the term of the Agreement, the licensor also agreed to supply technical improvement and infusion in use in mass production by the assessee relating to the licensed products without additional charge. Article 4 deals with payments to be made by the assessee as a consideration for the aforesaid transfer of technology, etc. It is in two parts. Clause 1(a) of Article 4 stipulates making payments of lump sum fee and reads as under:
"a) For transfer of CAB technology by Licensor to Licenseee, Licensee shall pay the Licensor a lump sum of USS One Million (1,000,000) in three equal instalments."4
Clause 1(b) of Article 4 deals with royalty payment (with which we are concerned) reads as under:
b) In consideration of the obligations of providing Technology Services, License shall pay a royalty of 3% on domestic and 5% on export sales, subject to tax, calculated on the basis of the net ex-factory sale price as stated in the Licensee's invoice of all Licensed product produced by or for Licensee, exclusive of Excise duties minus the cost of standard brought out components and the landed cost of imported components, irrespective of the source or procurement including ocean freight, insurance, custom duties etc. Royalty shall be paid for a period of seven years from the date of the commencement of commercial production."
7. Thus, for transfer of technology, the assessee agreed to pay lump sum amount of US $ 1 billion. This payment is admittedly treated as capital expenditure by the assessee and has been shown as such. However, insofar as payment of royalty is concerned which is an issue before us, that depends on the domestic as well as export sales. Quantum of the said sales would determine the extent of royalty to be paid and it will decrease or increase every year depending upon the decrease or increase in the sales. Significantly, this payment is not because of "transfer" of technology, but for providing "technical services". In such circumstances, we are of the opinion that this payment of royalty, which is a continuous process, should have been treated as revenue expenditure. In a recent judgment given by this court in the case of Commissioner of Income Tax Vs. Sharda Motor Industrial Ltd. in ITA No.837/20096 decided on 03.09.2009, identical issue arose. In the aforesaid case also, lump sum payment was made for providing technical know-how, which was considered as capital expenditure. In addition, royalty was also paid by the assessee at a particular percentage of the sales. Holding that, the said payment would be in the nature of revenue expenditure. This court dealt with the issue in the following manner:
"3. Insofar as lump sum payment against transfer of technical know-how provided by the Korean company is 5 concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The CIT(A) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler.
4. We are of the opinion that this finding of the CIT(A), as approved by the ITAT, is a finding of fact which is rightly arrived at as expenditure in purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year.
5. In CIT v. J.K.Syntheticx Ltd., 309 ITR 371, after elaborately discussing the entire case law on the subject, the Court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure.
One of the principle enumerated therein reads as under:-
"(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 licence,
6
b) the right, if any, in the licensee
to create further rights in favour
of third parties.
c) The prohibitio, 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 transfer the
"fruits of research" of the
licensor, "once for all",
e) Whether on expiry of 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. In these circumstances, we answer the question in favour of the assessee and against the Revenue. As a result, order of the Authorities below is set aside. No costs."
Since facts of the case are identical to the facts of the case for Assessment Year 2002-03, the issue is covered in favour of the assessee by the decision of Hon'ble Delhi High Court. Respectfully, following the decision of Hon'ble Delhi High Court, it is held that payments made by assessee are in the nature of revenue expenditure. The Assessing Officer is directed to allow the relief to the assessee in both the years.
6. The next issue for consideration relates to upholding the action of Assessing Officer in respect of disallowance of ISO certification charges of 7 Rs.95,254/- in Assessment Year 2003-04. Facts of the case, stated in brief, are that the assessee debited an amount of Rs.95,254/- on account of ISO 14001 charges. The Assessing Officer was of the view that certificate of ISO 14001 was of enduring benefit and, therefore, he disallowed the amount as capital expenditure.
7. Before ld. CIT(A), it was submitted that ISO certification charges were incurred as an Environment Management System (EMS) standard which provides a highly effective globally accepted framework for establishing an continually improving the effectiveness of environmental management. Implementation of ISO 14001 may bring both reduction in environmental risk and environmental costs. The expenditure was incurred with the object of rationalizing its administration and improving the effectiveness of environmental management. Therefore, the expenditure was revenue in nature. However, the ld. CIT(A) was of the view that since the assessee had not provided complete details, the claim of the assessee could not be substantiated. She accordingly upheld the order of Assessing Officer.
8. Before us, ld. A.R. of the assessee submitted that ISO certification charges are annual expenses paid by the assessee and are in the nature of revenue expenses. He placed reliance on the decision of I.T.A.T. Jodhpur Bench in the case of ACIT v. Tirupati Mircrotech (P) Ltd. 111 TTJ 149 (JB) for the proposition that ISO certificate was basically issued and renewed from time to time to bring forth the fact, the system and procedure of operation implemented in the organization in accordance with the standard laid down and, therefore, the same were revenue in nature. On the other hand, the ld. Sr. D.R. supported the order of ld. CIT(A).
89. We have heard both the parties and gone through the material available on record. The ISO certification charges are annual payment as pleaded by the assessee. In the case of Tirupati Microtech (P) Ltd. (supra), it has been held that by making payments for obtaining ISO 9002 certification, the fixed capital of the assessee had not enhanced in any manner. Rather it created a positive image of the product of the assessee for the smooth conduct of the business, therefore, the expenditure incurred by the assessee was in the nature of revenue expenditure. The Bench while arriving at this conclusion placed reliance on the decision of Hon'ble Supreme Court in the case of Empire Jute Manufacturing Co. Ltd. v. CIT 124 ITR 1 wherein the test for determination of the nature of expenditure incurred has been prescribed. It has been held that 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 while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. Since the issue is covered by the decision of I.T.A.T. Jodhpur Bench in the case of Tirupati Microtech. (P) Ltd. (supra), we hold that the amount of Rs.95,254/- is allowable as revenue expenditure. Accordingly, we set aside the order of ld.CIT(A) and direct the Assessing Officer to allow the claim of the assessee on account of ISO certification charges.
10. The next issue for consideration relates to confirming the addition on account of development charges. We have heard both the parties. We have also gone through the details of development charges. From the receipts issued by Bhiwadi Industrial Development Authority; the Rajasthan State Industrial Development; and Investment Corporation Ltd. it is seen that the 9 assessee has made payment on account of SC, ground rent, FSC, DC and ER. From the receipts and details given, it is not clear whether the expenditure was incurred in the revenue field or in the capital field. We, therefore, set aside this issue to the file of Assessing Officer with the direction to examine the nature and character of the payments of development charges and decide the issue as per provisions of law after affording the assessee a reasonable opportunity of being heard.
11. In the result, appeal filed by the assessee for Assessment Year 2003- 04 is partly allowed for statistical purposes.
12. The next issue for consideration in assessee's appeal for Assessment Year 2004-05 relates to disallowance of Rs.25,430/- in respect of QS 9000 and FTPM certification charges. The Assessing Officer disallowed the expenditure treating the same as capital expenditure.
13. On appeal, the ld. CIT(A) upheld the disallowance by observing that ld. A.R. of the assessee had not filed complete details and documents with regard to certification charges. Since nobody attended the proceedings on the date of hearing, the ld. CIT(A) confirmed the addition as true nature of expenses could not be determined.
14. We have heard both the parties and gone through the material available on record. From the order of ld. CIT(A) we find that the assessee has not given complete details in respect of claim on account of ISO certification charges in both the years. We, therefore, feel it necessary to set aside the issue to the file of Assessing Officer with the direction to examine the nature and character of the expenditure and decide the same accordingly.
10The assessee is also directed to provide the entire information relating to his claim for certification charges.
15. In the result, appeal filed by the assessee for Assessment Year 2004- 05 is allowed for statistical purposes.
16. Now, coming to the cross appeal filed by the Revenue, the only issue for consideration relates to directing the Assessing Officer to allow depreciation @60% on computer peripherals and accessories amounting to Rs.8,90,529/-. During the year under consideration, the assessee purchased computer accessories i.e. UPS, scanner, printers, camera, memory card etc. of Rs. 16,54,600/-. The Assessing Officer after examining the details found that amount of Rs. 1,11,250/- was incurred on computers and balance amount of Rs.50,350/- was incurred on computer accessories/peripherals. The Assessing Officer was of the view that 60% depreciation is allowable on computer hardware and, therefore, the same cannot be extended to computer accessories and peripherals like UPS, scanner, printers, camera, memory card etc. He, therefore, disallowed 60% of depreciation claimed on these items.
17. On appeal before CIT(A), it was submitted that computer peripherals were connected to the computer and have no independent usage and as such they were integral part of computer only. Therefore, the computer peripherals were entitled for depreciation @60% as is applicable to computers. Ld. CIT(A) relying on decision of I.T.A.T. in the case of ITO v. Simran Majumdar 98 ITD 199 and decision of I.T.A.T. Delhi Bench in the case of Expeditors International (India) P. Ltd. held that computer 11 accessories and peripherals being integral part of computer was eligible for deduction of depreciation allowance @60%.
18. Before us, ld. Sr.D.R. submitted that all the computer peripherals are not eligible for depreciation as UPS can be used independently for any other purpose. Likewise camera can also be used for some other purposes, therefore, depreciation will not be allowable on all the items @60%. It was also submitted that the Assessing Officer had not examined the matter in the light of decisions of I.T.A.T. On the other hand, ld. A.R. of the assessee supported the order of ld.CIT(A).
19. We have heard both the parties and gone through the material available on record. From the order passed by the Assessing Officer, it is clear that he has not examined the nature and character of computer peripherals whether they could be used independently. We, therefore, set aside the matter to the file of the Assessing Officer with the direction to examine the nature of each and every item. If they are independent of functioning, the depreciation will be allowable as in the case of any other plant and machinery. However, if they are integral part of the computer, the depreciation will be allowable @60%. The Assessing Officer will keep in mind the decision of the I.T.A.T. in the case of Simaran Majumdar (supra) and Expeditors International (supra). Needless to say that the Assessing Officer will provide the assessee of being heard before deciding the issue.
20. In the result, the appeal filed by the Revenue is allowed for statistical purposes.
1221. To sum up, the appeal filed by the assessee for Assessment Years 2003-04 and 2004-05 and by Revenue are allowed for statistical purposes.
Decision pronounced in the open Court on 17th December, 2009.
Sd/- sd/-
(C.L.SETHI) (K.D.RANJAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 17.12.2009.
PSP
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar