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IN THE HIGH COURT OF DELHI
A.K. Sikri and M.L. Mehta, JJ.
Appellants: The Commissioner Of Income Tax
Vs.
Respondent: G4S Securities System (India) Pvt. Ltd.
ITA Nos. 1943/2010, 763 and 765/2011
Decided On: 11.07.2011
Royalty - Taxation - Income Tax Act - Section 143(3), Section 37(1), Section 254 - The court discussed the interpretation of the terms of the agreement, ownership rights, and the nature of royalty payments in relation to technical knowhow and trade mark. Key legal provisions such as Section 37(1) were applied to determine the nature of the expenditure. The court's decision was influenced by precedents such as Jonas Wood Head and Sons v. CIT, CIT v. Gujarat Carbon Ltd., and others, which established the principles for distinguishing between capital and revenue expenditure.
Fact of the Case:
The appeals concerned the assessment of royalty payments made by the Assessee for technical knowhow and use of trade mark. The court considered the nature of the payments and their treatment as capital or revenue expenditure.
Finding of the Court:
The court found that the royalty payments were revenue expenditure and thus, relatable under Section 37(1) of the Income Tax Act.
Issues: The main issue was whether the payments made as royalty had an element of capital expenditure or were to be treated as revenue expenditure.
Ratio Decidendi: The court held that the ownership rights of the trade mark and knowhow vested with the licensor, and the payments were based on net sales, indicating a revenue nature. Precedents and legal principles were applied to support this finding.
Final Decision: The court answered the question in favor of the Assessee and against the Revenue, dismissing all three appeals.
M.L. Mehta, J.
1. The question of law which arises for consideration in these appeals is common. These appeals concern with the same Assessee, though these pertain to different Assessment Years.
2. ITA 1943/2010 and ITA 765/2011 are directed against the impugned common order dated 10.07.2009 of the ITAT (for short 'the Tribunal'). These pertain to assessment years 2003-04 and 2002-03 respectively. ITA 763/2011 is against the impugned order dated 03.07.2009 of the Tribunal and it pertains to assessment year 2005-06.
3. It so happened that ITA 1943/2010 pertaining to assessment year 2003-04 came to be heard by us prior in time than the other two appeals. This appeal was admitted only on one substantial question of law which is as under:
Whether learned ITAT/CIT (A) erred in deleting the addition of Rs. 40,30,509/- on account of Royalty, ignoring that payment made as royalty has element of Capital Expenditure?
4. In the other two appeals viz ITA 763/2011 and 765/2011 also identical question came up for consideration for admission. The counsel of both the parties in these cases also being the same, they adopted the arguments as made in ITA 1943/2010. The substantial question of law in all the three appeals being identical and there being only difference of amounts involved, we would like to make a brief narration of facts stating the background under which this question has arisen for our consideration. For the sake of convenience, we record the facts from ITA 1943/2010, which would cover other two cases as well. Brief facts entailing the present appeals are as under:
5. The Assessee is a private limited company and engaged in a business of providing guard services, development of computer software, staff training etc. The Assessee filed its return of assessment year 2003-04 on 28.11.2003 declaring income of `10,73,40,025/-. However, the Assessment Order was also framed under Section 143 (3) of the Income Tax Act ('the Act' for short) wherein it was observed by the Assessing Officer that Assessee had paid royalty in lieu of technical knowhow assistance from M/s Group 4 Falck A/S, Denmark for exclusive use for five years, which was extendable by every five years in terms of agreement dated 20.06.2002. The Assessee had debited certain amount to Profit & Loss Account by way of royalty for technical knowhow and use of trade mark to a foreign company namely M/s. Group 4 Falck A/S, Denmark for the right to use logo, trade mark and technical knowhow in pursuance of agreement dated 20.06.2002 through Group 4 Holding Pvt. Ltd. on the basis of 1% of net sales. The payment of the royalty was approved by the Government of India. The Assessing Officer held the payment of royalty in lieu of technical knowhow in the nature of enduring advantage for exclusive use and therefore, on ad-hoc basis he held that 25% of the royalty to be construed as payments of the capital nature. It is noted that identical order was passed by the Assessing Officer in the assessment year 2002-03 and also in the assessment year 2005-06. The Assessee preferred appeal against the order of the Assessing Officer before CIT (A). The order of the Assessing Officer passed in the assessment year 2002-03 and 2003-04 was challenged before CIT (A) who decided the appeals in favour of the Assessee vide order dated 28.01.2008. The appeal for the assessment year 2005-06 was allowed by the CIT (A) vide its order dated 17.02.2008 following the order of CIT (A) dated 28.01.2008. Revenue preferred appeals before the Tribunal. The Tribunal dismissed the appeals of the Revenue for the assessment year 2005-06 vide impugned order dated 03.07.2009 which is in challenge before us in ITA 763/2011. Following the order of 03.07.2009, the Tribunal also dismissed the appeals of the Revenue for the assessment year 2002-03 and 2003-04 which is challenged before us vide ITA 765/2011 and 1943/2010 respectively.
6. We have heard the learned Counsel for the parties and perused the record.
7. At the outse
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