I.T.A. No. 126 /Kol/2017. Case: DIC India Ltd. Vs DCIT, Cir-10(1). ITAT (Income Tax Appellate Tribunal)

Case NumberI.T.A. No. 126 /Kol/2017
CounselFor Appellant: D.S. Damle, FCA and For Respondents: G. Mallikarjuna, CIT, DR
JudgesN.V. Vasudevan, Member (J) and M. Balaganesh, Member (A)
IssueIncome Tax Act, 1961 - Sections 137, 143(3), 144C, 260A, 263, 68, 69(C), 92CA, 92CA(1), 92CA(3), 92E
Judgement DateApril 05, 2017
CourtITAT (Income Tax Appellate Tribunal)


M. Balaganesh, Member (A), (ITAT Kolkata 'C' Bench)

  1. This is an appeal preferred by the assessee against the order passed by the Pr. Commissioner of Income Tax, Kolkata - 4 (hereinafter referred to as the "ld. CIT") u/s. 263 of the Income Tax Act. 1961 (hereinafter referred to as the "Act") relating to Assessment Year 2010-11.

  2. The only issue to be decided in this appeal is as to whether the ld. CIT was justified in invoking revisionary jurisdiction u/s. 263 of the Act in the facts and circumstances of the case.

  3. The brief facts of this issue is that the assessee filed the return of income for the Asst Year 2010-11 declaring total income of Rs. 26,57,00,956/- on 22.9.2010. Later this return was revised on 14.4.2011 declaring total income of Rs. 26,62,38,618/-. The assessment was completed u/s. 143(3) read with section 144C of the Act on 30.4.2014 determining total income at Rs. 32,31,67,610/- pursuant to the letter dated 7.4.2014 filed by the assessee stating that they are not preferring to file objections before the Hon'ble Dispute Resolution Panel (DRP) against the proposed additions/disallowances and that they would only prefer regular appeal before the Ld. CITA. In the said assessment, a sum of Rs. 4,87,70,886/- was added as per the order of the ld. TPO suggesting an upward adjustment to Arm's Length Price (ALP) which admittedly included an addition towards adjustment to ALP for payment of Royalty in the sum of Rs. 82,88,935/-. During the pendency of appeal before the ld. CITA, the ld. Administrative Commissioner of Income Tax (CIT) sought to revise the assessment framed by the ld. AO on 30.4.2014 by holding the same as erroneous and prejudicial to the interests of the revenue in terms of section 263 of the Act.

  4. The ld. CIT issued a show cause notice u/s. 263 of the Act to the assessee on the ground that the Royalty Payment of Rs. 6,42,47,978/- to its Associated Enterprise (AE) (DIC Asia Pacific PTE Ltd. of Singapore and DIC Corporation of Japan) as revenue expenditure for using technical knowhow and upgrading manufacturing technology and right to use the trade names and brand names and reported in Form 3CEB as required u/s. 92E of the Act. He observed that as per detail submitted in Form 3CEB, Column No. 9 and agreement dated 1.7.2008 between DIC India Ltd. and DIC Asia Pacific India Ltd. of Singapore (Holding Company having 71.27% shares) and DIC Corporation of Japan (Ultimate Holding Company) established that the payment of royalty was in composite manner and the charges of all (i) Technical Know-how (ii) Licences (iii) Trademarks (iv) Brand name, was paid to acquire the business/commercial rights of intellectual property in the form of intangible assets for the period of seven years. He stated that assessee has acquired the aforesaid intangible rights on technical knowhow for upgrading manufacturing technology.

    4.1 The ld. CIT further observed on scrutiny of copy of the agreement relating to "Royalty payment" dated 1.7.2008, that there was no embargo on the assessee to continue to manufacture the product in question even after expiry of the agreement. It was also observed that the assessee has been upgrading their existing plant and machineries to make their finished products more viable for the market from time to time. For example he noticed that assessee has annexed various accessories in the name of instrumentation where no additional depreciation is allowed, being the additional accessories of existing plant & machineries. This kind of modification of P & M is the effect of technical know-how for upgrading the manufacturing technology. The said royalty payment involves also setting up of P & M due to regular change in set up of machineries. In this way the technical knowhow for upgrading the manufacturing technology is helping the assessee to enter into the new dimension of the business from time to time. It is fact that these aspects were not brought on record in earlier occasions and the Royalty payment has been allowed as revenue expenditure. Hence the doctrine of res-judicata can't be applied here in the case of assessee and should not be treated as settled for ever. The ld. CIT placed reliance on the decision of Hon'ble Supreme Court in the case of Alembi Chemical Works Co. Ltd. vs CIT reported in (1989) 177 ITR 377 (SC) held that the royalty payment made by the assessee needs to be construed as capital in nature. Therefore, he issued show cause notice as to why the same should not be treated as capital expenditure and depreciation at 25% be granted to the assessee by treating the same as intangible asset of enduring nature and since this was not done by the ld. AO in his order, it makes the order of ld. AO erroneous in so far as it is prejudicial to the interest of the revenue.

  5. The assessee submitted that During the year under consideration the assessee paid royalty of Rs. 6,33,74,362/- and Rs. 8,73,616/- to DIC Asia Pacific Pte Ltd. Singapore & DIC Corporation, Japan respectively. The assessee stated that the payments were made in the course and for the purposes of carrying on ordinary business of manufacture and sale of printing inks. It stated that it did not purchase and/or acquire any technology or knowhow pursuant to the royalty payments. No intangible asset was purchase by the company nor was these payments expected to give benefit of any enduring nature. The royalties were payable on a monthly/quarterly basis aligned to the sales effected and were in the nature of periodical payments. The quantum of royalty payment was commensurate with sales achieved in given quarters meaning thereby that the royalty paid was directly correlated with the assessee's regular trade i.e. the sales and therefore the benefit derived from the same could not be said to be of enduring nature. It is also not a case one-time lump sum payment made by assessee for transfer of technology or knowhow which may raise a question as to the nature of expense.

    In terms of the agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. the assessee was allowed the use of technology & trademarks in the manufacture & sale of printing inks only in the Indian Territory. In consideration the assessee was required to pay royalty @ 2% of the net sale printing inks subject to certain conditions. For the relevant AY 2010-11, pursuant to the aforesaid agreement dated 01.07.2008, the assessee had paid royalty of Rs. 6,33,74,362/- to DIC Asia Pacific Pvt Ltd.

    Similarly the assessee had also entered into a technical collaboration agreement dated 01.04.2007 with DIC Corporation, Japan; in terms of which the assessee was permitted to use the technology for manufacture & sale of poly-resins only in Indian territory. In consideration for use of technology, the assessee was required to pay royalty @ 3 of the net sales of poly-resins to DIC Corporation, Japan.

    The assessee submitted that it did not purchase the ownership rights in the technology form DIC Asia Pacific Pte. Ltd. or DIC Corporation, Japan but it was granted only a non-transferable license to unitize the technological knowhow. Under the license agreement, the assessee was not given the right to sub-license, sell, transfer or allocate the technology to third parties. The assessee never owned the technology and could not have registered the same in its own name. As stated in the foregoing the assessee was granted only a non-transferable license which is returnable to the licensor at the end of the license period. The royalty paid is directly commensurate with the products sold by the company.

    5.1 The assessee replied that in the impugned notice it is alleged that the assessee had acquired the licensed information in form of business/commercial rights and therefore it constituted intangible asset of the assessee. it is submitted that the aforesaid observation is totally incorrect and in contradiction to the material facts of the case and the extant terms of the License Agreements. On perusal of the terms & conditions of the license Agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. it would be noted that the license was a non-transferable nonexclusive license granted to the assessee for limited use within the territory of India and that too for licensed period. It referred to the Clause 2.1 of the agreement wherein it is provided that the licensor has granted DIC India Limited a non-exclusive license to use the licensed information within the territory including improvements throughout the tenure of the agreement of 7 years. Clause 10.2 of the agreement also provides that on termination of the Agreement, the assessee shall cease to use the License Information and shall deliver the Licensed Information, if any, in tangible form back to DIC Asia Pacific Pte. Ltd. along with any copies thereof. The aforesaid terms of the Agreement therefore make it evidently clear that the licensed information was not acquired or purchased by the assessee outrightly. Instead the case is exactly opposite. The License Agreement provided only for the use of technical knowhow & information by the assessee which at all material times during the period of license & even thereafter is to be owned by DIC Asia Pacific Pte Ltd. The royalty paid by the assessee is only a "license fee" for use of technical knowhow and not the price for acquisition of a "capital assets". The royalty paid, without an iota of doubt was therefore revenue in character and hence fully deductible from the profits of the business. On appreciation of these material facts therefore the AO rightly allowed the deduction of these material facts therefore the AO rightly allowed the deduction for royalty paid as revenue expenditure. The assessee also stated that it may also be relevant to invite attention to Clause 2.2 of the agreement which states that DIC India Limited is granted a non-exclusive right to sell the products in any countries except the countries where parent company has its plant, its...

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