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IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "B" DELHI)
BEFORE SHRI A.D. JAIN AND SHRI K.D. RANJAN
ITA NO. 1552(Del)2010
Assessment year: 2005-06
Dy.Commissioner of Income Tax, M/s. Climate Systems Pvt. Ltd.,
Circle 3(1), New Delhi. V. Jeevan Prakash Bldg. KG Marg,
New Delhi.
(Appellant) (Respondent)
Appellant by: Ms. Y. Kakkar, Sr. DR
Respondent by: Shri Neeraj Jain/Ms.Pinky Kapur,CA
ORDER
PER A.D. JAIN, J.M.
This is Department's appeal for the assessment year 2005-06, taking the following grounds:-
"1. In the facts and circumstances of the case, the ld. CIT(A) has erred in law and on facts by allowing the depreciation @ 60% on computer peripherals and accessories amounting to ` 1,52,896/- though the I.T. Rules allows 60% depreciation only on computer and computer software and not on computer peripherals and accessories.
2. In the facts and circumstances of the case, the ld. CIT(A) has erred in law and on facts in deleting addition of ` 41,27,464/- made by the AO on account of disallowance of royalty expenses which was capitalized b the AO, ignoring the fact that the same was paid by the assessee under Technical Know-how Agreement for right to use technical know-how which undoubtedly is of capital nature.
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3. In the facts and circumstances of the case, the ld. CIT(A) has erred in law and on facts by deleting addition of ` 6,41,250/- made by the AO on account of capitalization of 'Repair & Maintenance Expenses' which included expenditure incurred on erection of 'Secure Land Fill Systems (SLFS), ignoring the fact that the expenditure allowed enduring benefit over a period of years to the assessee."
2. Apropos ground No.1, during the year, the assessee claimed depreciation @ 60% on computer accessories and peripherals, namely, UPS, Scanner. Printers, etc. The AO held that only computer and software are eligible for depreciation @ 60% and that computer accessories and printers are not eligible for depreciation at this rate. The AO thus restricted the claim of the assessee for depreciation on computer peripherals @ 25% and made a disallowance of ` 1,52,896/-.
3. The learned CIT(A), by virtue of the impugned order, directed the AO to allow depreciation @ 60% on computer accessories and peripherals. It was observed that in the assessee's case for assessment years 2003-04 and 2004-05, such claim of the assessee had been allowed, following Delhi Bench of the Tribunal in the case of M/s. Expeditors International India Pvt. Ltd. v. ACIT, 118 TTJ 652(Cal) and Calcutta ITAT decision in the case of "ITO v. Samiran Majumdar" 98 ITD 119.
4. The Tribunal, vide order dated 17.12.2009, passed in the case of the assessee for assessment years 2003-04 and 2004-05, in ITA Nos. 1698, 1684 & 2161(Del)09 (copy placed at pages 144 to 145 of the APB), remitted the 3 ITA 1552(Del)2010 matter to the file of the AO for examining the nature and character of the computer peripherals, whether they could be used independently on the computer. The relevant para 19 of the said order is reproduced, for ready reference, as under:-
"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 AO 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 AO will keep in mind the decision of the ITAT in the case of 'Simaran Majumdar'(supra) and 'Expeditors International'(supra). Needless to say that the AO will provide the assessee of being heard before deciding the issue."
5. Before us, the ld. DR has contended that the ld. CIT(A) has erred in allowing depreciation on computer peripherals and accessories @ 60%, though the I.T. Rules allowing 60% depreciation only on computer and computer software and not on computer peripherals and accessories.
6. As opposed to this, the learned counsel for the assessee has contended that all equipments/parts run with the help of the computer system have to be treated as computers eligible for depreciation at the higher rate of 60%. Reliance has been placed on the following case laws:-
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1. CIT v. BSES Rajdhani Powers Ltd. ITA 1266/2010(Del);
2. DCIT v. Datacraft India Ltd. [2010] 6 Taxman.com 85(Mum);
3. Inspecting Assistant Commissioner v. Commission and General Agency reported in [17 ITD 6] (Bangalore).
4. Escorts Tractors Ltd. v. Asstt. CIT [101 Taxmann 171(Delhi)]
5. ITO v. Samiran Majumdar [280 ITR 74, 2001, ITAT (Calcutta)] ;
6. CIT v. Karnataka Power Corporation reported in 247 ITR 268;
7. ITO v. Samiran Majumdar, 98 ITD 119 (Kolkata);
8. DCIT v. Surface Finishing Equipment (2004) 2 SOT 233(Jodh);
9. Expeditors International (India)(P)Ltd. v. Addl.CIT: 118 TTJ 652.
7. The facts remaining the same herein also, in keeping with the aforesaid Tribunal order in the assessee's case for assessment years 2003-04 and 2004-05, this issue for the present year is also similarly remitted to the file of the AO, to examine as to whether the computer peripherals could be used independently or not and to decide the issue of depreciation, keeping in mind the directions issued by the Tribunal, as aforesaid.
8. Coming to ground No.2, the assessee company had debited ` 55,03,285/- as royalty in its profit and loss account. Observing that it was in the nature of technology transfer, the AO queried the assessee as to why this royalty paid be not treated as capital in nature.
9. The assessee contended that it had entered into a Technical Collaboration Agreement (TCA) dated 25.5.98 with Visteon Global Technology Inc. (VGTI), USA; that as per the Agreement VGTI would grant the assessee a non-extensive right and licenses to manufacture, sell, repair and service, licensed product using the technical information and 5 ITA 1552(Del)2010 intellectual property rights furnished by VGTI. The assessee was to manufacture them control atmosphere brazed (CAB) Aluminium Heat Exchangers, viz. Radiators for Automobiles. The assessee thereto had a running royalty @ 3% on domestic sales and 5% on export sales of VGTI.
10. The AO disallowed 75% of the royalty expenditure amounting to ` 41,27,464/-, out of the royalty expenses of ` 55,03,385/-, holding it as capital expenditure. That being so, the AO relied on the assessment orders of the earlier years.
11. The ld. CIT(A) directed the AO to allow the claim of the assessee, following the decision of the Hon'ble High Court in the assessee's own case for assessment year 2002-03, in "Climate Systems India Limited v. CIT" 319 ITR 113(Del), copy placed at pages 237 to 238 of the APB, wherein it was held that the said payment of royalty which was a continuous process, should have been treated as revenue expenditure.
12. In this regard, the ld. DR has argued that the ld. CIT(A) has erred in deleting the addition of ` 41,27,464/-, made by the AO on account of disallowance in the royalty expenses which amount was rightly capitalized by the AO; that the ld. CIT(A) erred in ignoring that the entry was under Technical Know-how Agreement for right to use Technical Know-how which, undoubtedly, is of capital nature. The ld. DR has placed reliance on 6 ITA 1552(Del)2010 'Jonas Woodhead And Sons (India) Ltd. v. CIT' 224 ITR 342(SC) and 'CIT v. Shriram Bearings Ltd.' 251 ITR 155(Cal).
13. The learned counsel for the assessee, on the other hand, has contended that under the TC Agreement, the assessee only acquired right to use the technology and other technical information for the purpose of production of Radiators, using the CAB technology in India; that the TC Agreement was valid for 7 years and was terminable at will by either parties; that on termination of the agreement, the assessee was required to stop using the technical know-how and was to return the technical information to VGTI; that as per the agreement, the assessee was required to maintain secrecy of the technical information, etc., and was not permitted to sub-licence the rights under the agreement; that the agreement did not confer any proprietory rights on the assessee concern with regard to technology to VGTI; and that since under the agreement, the assessee merely acquired the limited right to use the technical know-how/information and no title thereto, the payment of technical know-how fee is allowable as a deduction. In this regard, the learned counsel has placed reliance on the following case laws:-
1. CIT v. Ciba India Ltd., 69 ITR 692(SC);
2. Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377(SC);
3. CIT v. Indian Oxygen Ltd., 218 ITR 337(SC);
4. CIT v. Wavin (India) Ltd., 236 ITR 314(SC);
5. Shriram Refrigeration Industries Ltd. v. CIT, 127 ITR 746(Del);
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6. Triveni Engineering Works Ltd. v. CIT, 136 ITR 340(Del);
7. Addl. CIT v. Shama Engine Valves Ltd., 138 ITR 216(Del);
8. CIT v. Bhai Sunder Dass & Sons P. Ltd., 158 ITR 195(Del);
9. CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. 123 ITR 538(Bom);
10.CIT v. Avery India Ltd., 207 ITR 813(Cal);
11.Bajaj Tempo Ltd. v. CIT, 207 ITR 1017(Bom);
12.CIT v. Madras Rubber Factory Ltd., 212 ITR 443(Mad);
13.Eicher Motors Ltd., 293 ITR 464(MP);
14.CIT v. Lumax Industries Ltd., 173 Taxman 390(Del);
15.Shriram Pistons & Rings Ltd. v. CIT: 171 Taxman 81(Del);
16.CIT v. Shri Ram Pistons & Rings Ltd., 220 CTR 404(Del);
17. CIT v. Sharda Motor Industries Ltd., 319 ITR 109(Del-HC);
18.CIT v. Essel Propack, 325 ITR 185 (Bom-HC);
19.CIT v. Munjal Showa Ltd. (ITA No. 85/2009)(Del);
20.Goodyear India Ltd. v. ITO, 73 ITD 189(Del) TM
21.ITO v. Shivani Locks, 118 TTJ 467(Del);
22.Hero Honda Motors Ltd. v. DCIT (ITA Nos. 716, 717 & 718(Del)2008.
It has been submitted that the issue has also been decided in favour of the assessee by the Delhi Bench of the Tribunal in the assessee's own case for assessment year 2002-03, vide order dated 21.11.08, in ITA No. 1547(Del)07 (copy at APB 56 to 67) and in the assessee's case for assessment years 2003-04 and 2004-05 (supra). It has been contended that further, the said Tribunal order for assessment year 2002-03 has also been upheld by the Hon'ble Delhi High Court, in the assessee's case, reported at 319 ITR 113(Del)(supra).
14. Apropos this issue, at the outset, it is seen that the Hon'ble jurisdictional High Court has decided this issue in favour of the assessee, 8 ITA 1552(Del)2010 holding that under the Agreement, payments were to be made by the assessee in two parts, i.e., a lumpsum fee for transfer of technology, which the assessee had admitted as being of capital nature and royalty payment in consideration of providing technology services; that the payment of royalty depended on the quantum of domestic as well as export sales which would decrease or increase every year, depending on the decrease or increase in the sales; that this payment was not because of 'transfer' of technology, but for providing 'technical services'; and that so, the payment of royalty, which was a continuous process, should have been treated as a revenue expenditure.
15. The Department has not been able to bring anything on record opposed to the above observations of the Hon'ble Delhi High Court in the case of the assessee.
16. Apropos 'Jonas Woodhead And Sons (India) Ltd. v. CIT' (supra), the facts therein were entirely different from those of the assessee's case. Therein, there was a composite payment for supply of technical know-how and services for setting up plant and manufacturing of products. These are not the facts herein. Therefore, 'Jonas Woodhead And Sons (India) Ltd. v. CIT' (supra), is not applicable.
9 ITA 1552(Del)2010
17. Regarding 'CIT v. Shriram Bearings Ltd.' 251 ITR 155(Cal), firstly, in view of the Delhi High Court decision (supra) in the case of the assessee itself, 'Shriram Bearings Ltd.' is of no help to the Department. Secondly, therein also, the facts were different. There was a Collaboration Agreement between the assessee and a foreign company . Payment was made for supply of technical know-how. The assessee was allowed to use technical know-how even after the period of agreement. It was in these facts that it was held by the Hon'ble Calcutta High Court that there arose a benefit of enduring nature to the assessee. Evidently, these are not the facts before us.
18. In view of the above, respectfully following the decision of the Hon'ble Delhi High Court in the case of the assessee (supra), ground No.2 raised by the Department is rejected.
19. So far as regards ground No.3, the assessee debited an amount of ` 36,79,722/- in its profit and loss account, on account of repairs and maintenance (building). This included 'Secure Land Fill Systems (SLFS), supplied by M/s. Techno Economic Services and erected by M/s. Sunrise Erectors. The fencing had been provided by Ram Fabricators. Ploughing, filling and levelling of the land was done by M/s. National Associates. SLFS was constructed for storage of hazardous waste, which was effluent of 10 ITA 1552(Del)2010 the assessee in its manufacturing process, for 10 years. The expenses were as under:-
Date Party Nature Amount-`
14.06.2004 Techno Economic Secure Land Fill 6,10,500/-
Services System Including
CST
13.07.2004 Sunrise Erectors Labour charges for 40,000/-
erection of SLFS
12.06.2004 Ram Fabricator Fencing 32,500/-
31.08.2004 National Associates Ploughing, filling & 30,000/-
levelling
Total: 7,12,500/-
20. The AO was of the opinion that the above expenditure of ` 7,12,500/ was capital in nature. He, therefore, disallowed the same after allowing depreciation @ 10%. The net addition worked out was of ` 6,41,250/-.
21. The ld. CIT(A) deleted the addition, holding the expenditure to be an allowable business expenditure. The ld. CIT(A) followed 'CIT v. Sakhi Textiles Ltd.' 250 ITR 449(Mad) and 'CIT v. Steel Complex Ltd.' 238 ITR 1054(Ker).
22. The ld. DR has contended that the expenditure provided an enduring benefit over a period of years to the assessee which fact has wrongly been over-looked by the ld. CIT(A) while wrongly deleting the addition correctly made.
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23. The learned counsel for the assessee, on the other hand, has supported the action of the ld. CIT(A). It has been contended that the expenditure on SLFS was incurred for storage of hazardous waste and to prevent pollution of air, water and ground; that SLFS was a statutory requirement under the Water (Prevention and Control of Pollution) Act, 1974 and under the Air (Prevention and Control of Pollution) Act, 1981, so as to make necessary provision for disposal of hazardous waste (Management and Handling)Rules, 1989; that therefore, the expenditure was an incumbent incurrence by the assessee to abide by the said laws; and that similar expenditure incurred on Water Treatment Plant and Fume Extraction Plant to ward off health hazardous, in compliance of statutory requirement, has been held to be an allowable revenue expenditure. Reliance in this regard has been placed on 'CIT v. Sakhi Textiles Ltd.' 250 ITR 449(Mad), 'CIT v. Steel Complex Limited', 238 ITR 1054(Kerala), 'Hindustan Electro Graphites Ltd. v. CIT' 218 ITR 688(MP-HC) and 'Zenith Steel Pipes Limited v. CIT' 185 ITR 126 (Bom-HC).
24. The factum of the expenditure having been incurred by the assessee in compliance of Water (Prevention and Control of Pollution) Act, 1974, the Air (Prevention and Control of Pollution) Act, 1981 and the Hazardous Waste (Management and Handling ) Rules, 1989, has nowhere been 12 ITA 1552(Del)2010 disputed by the Department. Once the Hazardous Waste was an effluent/bye product of the management process of the assessee, provision therefor was of necessity to be made by the assessee . Else, it would have been well nigh impossible for the assessee to carry on its business.
25. In 'Sakhi Textiles Ltd.'(supra), relied on by the ld. CIT(A), it has been held that protection of health of the workmen was the basis for installation of carding machines, the expenditure incurred on installation of the carding machine was to be treated as revenue expenditure for promoting the health and welfare of the workmen.
26. In 'Steel Complex Limited' (supra), relied on the CIT(A), it was held that expenditure incurred for Water Treatment Plant and Fume Extraction Plant was a revenue expenditure.
27. In 'Hindustan Electro Graphites Ltd.' (supra), it was held that the expenditure incurred in raising a plantation in factory premises, is an expenditure intended to make the atmosphere pollution free and it is a revenue expenditure.
28. Though it has been contended that the expenditure brought an enduring benefit to the assessee, this contention remains unsubstantiated.
29. As such, in view of the nature of the expenditure, which remains, undisputedly, a statutory requirement enabling the assessee to carry on its 13 ITA 1552(Del)2010 business, keeping in view the case laws discussed, we find no error in the order of the ld. CIT(A) in this regard also and the same is confirmed. Ground No.3 stands rejected.
30. In the result, the appeal filed by the Department is partly allowed, as indicated.
Order pronounced in the open court on 8.12.2010.
Sd/- sd/-
(K.D. Ranjan) (A.D. Jain)
Accountant Member Judicial Member
Dated: 8.12.2010
*RM
copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
True copy
By order
Deputy Registrar