Invocation of powers u/s 263 is legitimate on the ground of lack of compliance with the principle of consistency in allowing certain expenses as revenue expenditure

M/s Frick India Ltd Vs DCIT (ITAT Delhi)– There was a composite agreement titled as “intellectual property license and non compete agreement” vide which several valuable rights including the right to use the trademark, technical know-how including right to export to 30 countries have been granted over a long period of ten years to the assessee, which gave rise to a benefit of enduring nature. However, the AO has allowed the same as revenue expenditure without application of mind and without keeping in view the stand taken in earlier years by the AO which was also confirmed by the CIT(A) on the very same facts.

 IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘B’ : NEW DELHI

ITA No. 831/Del/2010
Assessment Year : 2005- 06

 Date of Judgment: 30th September, 2010.

O R D E R

PER R.C.SHARMA, AM :

This is an appeal filed by the assessee against the order of CIT passed u/s 263 dated 31.12.2009.

2. The grievance of the CIT is that while framing the assessment, the AO has not considered the claim of deduction in respect of technical know-how fees of Rs. 82.73 lakhs paid to M/s Vilter Mfg.Corporation, USA which was capital in nature and also taxability of interest receivable on inter-corporate deposits. As per learned AR, there was no infirmity in the order of the AO insofar as the deduction for payment of know how fees as well as accrual of interest income on deposits, the AO has applied his mind and thereafter allowed the same, thus the order of AO was neither erroneous nor prejudicial to the interest of the Revenue and the CIT was not justified in setting aside the same u/s 263 on these two issues for reconsideration afresh.

3. On the other hand, it was contended by the learned CIT-DR Shri D.N. Kar that the assessee company entered into an “Intellectual Property License & Non compete Agreement” with Vilter Manufacturing Corporation, U.S.A. on 13.12.2002 for manufacture of reciprocating compressors and parts thereof, use of ‘Vilter’ trade mark, right to use technical know how and Intellectual Property Rights connected with the same, rights to sell in USA and export to designated territories (about 30 countries mentioned in Annexure ‘C’ – page 84 of paper book). The relevant portion of the agreement is reproduced here under (see page 45-46 of Paper Book).

C. VILTER is in possession of Technical Know-How (as defined herein below) and Intellectual Property Rights (as defined herein below) in respect of the Products and Parts (as defined herein below) embodying the Technology and is legally entitled to impart and license , the Technical-know- How and the Intellectual Property Rights to Frick India.

D. Frick India is desirous of acquiring the right to use the Technical Know-How and Intellectual Property Rights which it considers essential for its business and has requested VILTER to License the Technical Know-How and Intellectual Property Rights to it ( or the purpose of manufacturing the Products and Parts subject to the terms and conditions of this agreement

E. VILTER has agreed to grant a License to Frick India to use VILTER’s Technical Know-How and Intellectual Property Rights for the purposes of assembling, manufacturing marketing and distributing the Products ( as defined herein below) and Parts (as defined herein below ) in the Territory (as defined herein below )on the terms and conditions contained in this Agreement.

G. VILTER at the request of the Frick India and in consideration of Frick India giving such covenants as are hereinafter contained, has agreed by grant to Frick India the License and right to use the Trade Mark “VILTER” on the Products and Parts in the Territory upon and subject to the terms, conditions and stipulations hereinafter appearing.

H. As an inducement to VILTER to enter this agreement and for other covenants undertaken by Frick India in connection herewith, Frick India has agreed that it will not compete with VILTER as provided herein.

I. VILTER desires to purchased from Frick India, and Frick India is willing to sell to VILTER for export into the United States, various components and parts manufactured by Frick India for use by VILTER in the manufacturer of products in the Unites States.

4. Learned DR further submitted that the total considerations for obtaining the license or right granted by VILTER, USA to Frick India to manufacture, assemble, market and sells the products and proprietary parts in USA. India and other designated territories together with right to use the trademark “VILTER” and other non-compete rights etc. was fixed at U.S.$ 4,60,000/-. The same was to be paid in various installments beginning with A.Y. 2004- 05 on wards. In addition to the above lump sum payment, the assessee was also to pay running royalties on the products manufactured and sold during the year after the commencement of production. The A.O in the first year of such claim treated such expenses as having been incurred for the purpose of acquiring “Intellectual Property Rights” or “intangible assets” such as know-how, patents, copy rights, trademark, licenses, franchises or other commercial rights of similar nature within the meaning of section 32(1)(ii) of the Act which was introduced w.e.f. A.Y. 1998- 99 and allowed depreciation at the applicable rate (25%). However, while completing the assessment for A.Y. 2005-06, the impugned assessment year, the successor A.O. did not follow the “Principle of consistency” and also did not consider the relevant provisions contained in section 32(1)(ii) of the I.T. Act read with Explanation 3(b) & Explanation 4 to section 32 of the same Act. Accordingly, it was contended that order passed by AO was erroneous and prejudicial to the interest of the Revenue.

5. Contention of learned AR was that during the course of assessment proceedings, the AO has raised queries and issued questionnaire regarding alleged payments and the assessee has replied the same, therefore it cannot be said that AO has not applied his mind. However, on going through the record, we found that while allowing the claim of the revenue expenditure in respect of license fees so paid, the AO has not considered the treatment of the very same payment given in the earlier year. In the earlier year, the AO himself has treated such expenses as having been incurred for the purpose of acquiring intellectual property rights of intangible assets such as know- how, patents, copyrights, license or other commercial rights of similar nature within the meaning of Section 32(ii) of the Act and allowed claim of depreciation at the applicable rate. However, during the year under consideration, the AO allowed the same as revenue expenditure. In reply to the learned AR’s submission that AO has raised relevant query on the allowability of technical know-how fees as well as questions relating to doubtful ICDs, the learned DR replied that AO did not apply the correct law under the statutory provisions of the Act and also principle of consistency and judicial discipline was not followed. As per learned DR, failure of the AO to apply correct provisions of law with regard to allowability of claim u/s 32(ii) read with Explanation 3(b) and Explanation-4 of Section 32, has made his order erroneous in the eyes of law insofar as prejudicial to the interest of the Revenue. As per learned DR, there was no discussion at all on the allowability or otherwise of the deduction claimed by the assessee in the body of the assessment order and mere issue of questionnaire will not serve the purpose of making enquiries when the same has not been done.

6. The learned AR heavily relied on the order of the Hon’ble Delhi High Court in the case of Sunbeam Auto Limited – 2009 TIOL 552 wherein it was held that merely because CIT was of different opinion in the matter, the powers u/s 263 cannot be invoked. In reply to the same, learned DR submitted that decision in the case of Sunbeam Auto Limited (supra) was on peculiar facts, wherein expenditure on tools and dyes was claimed as revenue expenditure, which according to the CIT, should have been treated as capital expenditure. But the High Court found that CIT himself had given a finding in his order that the life of the dyes was approximately one year or so. It was also found that such expenditure has been allowed as revenue expenditure both in earlier years and subsequent years as well. In the light of these specific facts, the Hon’ble High Court confirmed the Tribunal’s view that there existed no reason for revising the order of the AO by the CIT. In the case in hand, the inquiry conducted by the AO did not go to the whole issue and the stand taken by the department itself in earlier year, which was the first year when the expenditure on intellectual property rights was incurred. Thus, while allowing the claim, the AO has not considered the correct provisions of law contained u/s 32(ii). Merely making query from the assessee will not serve the purpose unless due diligent inquiry is made by the AO in this regard in the light of statutory provisions and the facts gathered during such inquiry.

7. It was also contention of learned DR that AO did not carry the inquiry to its logical conclusion, and in view of such AO’s failure, the order has become erroneous insofar as prejudicial to the interest of the Revenue.

8. We have considered the rival contentions and carefully gone through the orders of the authorities below and also deliberated on the case laws cited at bar by learned AR and learned DR in the context of factual matrix of the case. From the record, we found that assessee company has entered into technical know-how, intellectual property right agreement with the US company. The license fee of 4,60,500 US$ was payable. In the computation of income, the assessee has claimed deduction of Rs.67.00 lakhs and added back an amount of Rs. 32.32 lakhs. In view of CIT, the alleged payment was capital in nature which has been wrongly allowed by AO as revenue expenditure. From the record, CIT also found that assessee had also given an intercorporate deposit on which interest income was brought to tax in the immediately preceding AY 2004-05 and CIT(A) has also confirmed the addition, by dismissing assessee’s appeal. Since during the year under consideration the assessee has not accounted for such interest income and the AO has not made any addition on account of accrual of such interest income, the CIT was of the view that order of the AO was erroneous insofar as prejudicial to the interest of the Revenue. The CIT observed that both these issues were never taken into consideration by the AO while framing the assessment u/s 143(3). It was also found that from the AY 1998-99, the acquisition of technical know-how has been included in the intangible assets and depreciation was allowed thereon, whereas in the instant assessment year under consideration, the technical know how fees has not been capitalized. The CIT therefore reached to the conclusion that there is no discussion of these issues in the assessment order to show that AO has considered the matter and has decided to allow the claim of the assessee under departure to the view taken by the department in the earlier years. Similarly, for AY 2004- 05, addition made on account of interest receivable on inter corporate deposit, was also not brought to tax during the year even though amount remained outstanding. Hon’ble Supreme Court in the case of Malabar Industrial Company– 243 ITR 82 has held that an incorrect assumption of facts and an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders without application of mind. In the instant case before us, there was a composite agreement titled as “intellectual property license and non compete agreement” vide which several valuable rights including the right to use the trademark, technical know-how including right to export to 30 countries have been granted over a long period of ten years to the assessee, which gave rise to a benefit of enduring nature. However, the AO has allowed the same as revenue expenditure without application of mind and without keeping in view the stand taken in earlier years by the AO which was also confirmed by the CIT(A) on the very same facts.

9. Similarly, addition was made in earlier year on account of accrued interest on inter corporate deposit given by the assessee. However, during the year under consideration, the AO has not narrated nor discussed these facts and circumstances during the year under consideration as compared to the earlier year wherein both the issues were decided in favor of the Revenue. However, while framing assessment u/s 143(3), if the AO wants to deviate from the conclusions already arrived at in the earlier year on the very same facts, at least he should have given the reason for the same and the changed circumstances because of which he was going to change the stand. By not considering all these things, the order of the AO was not only erroneous but also prejudicial to the interest of the Revenue. Accordingly, we are inclined to agree with the learned DR, that no interference is called for in the order of CIT passed u/s 263, wherein he has set aside both these issues to the file of the AO for deciding afresh.

10. In the result, appeal of the assessee is dismissed.

Decision pronounced in the open Court on 30th September, 2010.