ITAT Remands Dixon Technologies prior-period Royalty & Interest Dispute to AO

Dixon Technologies Vs Add. CIT (ITAT Delhi)

In a recent ruling, the Income Tax Appellate Tribunal (ITAT) Delhi has sent back a significant tax dispute involving Dixon Technologies (India) Ltd concerning the disallowance of royalty and interest payments amounting to over ₹14.48 crore. The tribunal directed the Assessing Officer (AO) to re-examine the matter after considering additional evidence presented by the company. The case, centering on whether the payments constituted prior period expenditure, highlights complexities in accounting for liabilities arising from retrospective settlements.

The appeal, ITA No. 7261/Del/2019 for Assessment Year (AY) 2016-17, challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which had upheld the AO’s disallowance.

Dixon Technologies, engaged in manufacturing consumer durables and electronic equipment, had filed its return for AY 2016-17 declaring income under normal provisions and book profit under Section 115JB. The tax liability under Minimum Alternate Tax (MAT) provisions was higher, leading to tax payment on book profit. During the scrutiny assessment, the AO made additions, including the disallowance of the royalty and interest payments totaling ₹14,48,93,346 under normal provisions, classifying it as prior period expenditure. The CIT(A) subsequently confirmed this specific disallowance, while granting partial relief on another matter.

The core of the dispute lay in a patent license agreement dated October 10, 2005, between Dixon Technologies and Koninklijke Philips N.V. (Philips) of the Netherlands. This agreement covered the manufacture and sale of Philips DVD players, VCD players, and other electronic items in India, with royalty payments stipulated based on the units sold. A disagreement emerged during Financial Year 2012-13 regarding the calculation of royalty payable for preceding years.

Philips issued a notice of default on December 16, 2013, raising a total demand of USD 13,572,890.30. This demand comprised various components, including alleged failure to report and pay royalties for units sold prior to March 31, 2010, an increment between standard and compliant royalty rates for units reported up to September 30, 2013, and accrued interest on these amounts.

Following this notice, Dixon Technologies and Philips entered into negotiations, culminating in a settlement agreement on April 23, 2015. Under this settlement, Dixon Technologies agreed to pay USD 2,200,000 as full and final settlement of the claims. The Indian Rupee equivalent of this amount, ₹14,48,93,346, was debited to the Profit and Loss account as an “Exceptional Item” in the financial statements for the year relevant to AY 2016-17.

During the assessment proceedings, the AO questioned the debit, considering it a prior period expense. The AO’s grounds for disallowance included the absence of a provision for such expenses in prior years’ books, the lack of information on the year of accrual, the settlement agreement not being on stamp paper, the liability not being disclosed as a contingent liability in the Financial Year 2014-15 balance sheet, and the application of the matching concept.

Dixon Technologies argued before the AO and subsequently the CIT(A) that the liability crystallized only upon the settlement being reached during the relevant assessment year (AY 2016-17). They contended that the payment was a discharge of contractual obligations settled in that year and that tax had been duly deducted at source (TDS) on the payment, which, according to the proviso to Section 40(a)(ia) of the Income-tax Act, 1961, should allow the deduction. The company also highlighted that their statutory auditor had classified the payment as an exceptional item, not a prior period item, and that royalty was not applicable to certain DVD player models, which is why no provision was made earlier.

A key point raised by the assessee was the disregard by the CIT(A) of the jurisdictional Delhi High Court decision in the case of CIT vs. SMCC Construction India (ITA No. 12/2010). The assessee argued that this binding decision supported their stance that the creation of a provision in the books in the year to which the expense pertains is not a prerequisite for claiming deduction on a payment basis under the proviso to Section 40(a)(ia).

Before the ITAT, Dixon Technologies reiterated its arguments and submitted additional evidence under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963. This evidence included copies of the patent license agreements from 2005, related side letters, and communications concerning the default notice and subsequent discussions with Philips.

The ITAT, after considering the submissions and the additional evidence, deemed the new documents crucial for a fair adjudication of the dispute. The tribunal observed that the settlement with Philips in April 2015, relevant to AY 2016-17, indicated that the additional royalty and interest liability had crystallized in that year. They also noted that TDS had been deducted on the payment.

Recognizing the significance of the additional evidence and the need for a thorough examination, the ITAT admitted the documents and decided to restore the entire issue of the disallowance of royalty and interest payments back to the file of the AO. The tribunal directed the AO to undertake a ‘de novo’ adjudication, meaning a fresh examination, in accordance with the law, taking into account the ITAT’s observations and the newly submitted evidence after due verification of all agreements on record.

In addition to the royalty dispute, the assessee had also raised grounds challenging the non-granting of full MAT credit under Section 115JAA and the charging of interest under sections 234B and 234C. The ITAT directed the AO to grant MAT credit according to the law after verifying the computation. Regarding the interest under Section 234C, the tribunal noted the settled legal position that it should be charged only on the returned income, not the assessed income.

The ITAT’s order effectively provides Dixon Technologies another opportunity to present its case and evidence before the tax authorities. The outcome of the re-adjudication by the AO, considering the settlement context and the legal arguments presented, will be crucial in determining the final tax liability for the assessment year in question.

FULL TEXT OF THE ORDER OF ITAT DELHI

1.The appeal in ITA No.7261/Del/2019 for AY 2016-17, arises out of the order of the ld. Commissioner of Income Tax (Appeals)-34, New Delhi [hereinafter referred to as ^„ CIT(A)’, in short] in Appeal No. 178/18-19 dated 14.06.2019 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ^„the Act’) dated 20.12.2018 by the Assessing Officer, Addl. CIT, Special Range-3, New Delhi (hereinafter referred to as ^„ld. AO’).

2. The assessee has raised the following grounds of appeal:-

“1. That the Commissioner of Income Tax (Appeals) [^„CIT(A)’] erred on the facts and in law in confirming action of the assessing officer in disallowing royalty and interest payments aggregating to Rs.14,48,93,346 made by the appellant during the relevant assessment year, alleging the same to be prior period expenditure.

1.1. That the CIT(A)/ assessing officer erred on facts and in law in not appreciating that since liability in respect of aforesaid expense crystallized during the relevant assessment year under consideration, the same could not be regarded as prior period expense.

1.2. That the CIT(A) erred on facts and in law in levelling various false and baseless allegations with regard to non-furnishing of information by the appellant, disregarding the documents/ explanations filed before the CIT(A).

1.3. That the CIT(A)/ assessing officer erred on facts and in law in not appreciating that royalty and interest accrued thereon could not have been, even otherwise, disallowed since the appellant had duly deducted and deposited the tax at source on the above payment in the year under consideration, having regard to proviso to section 40(a)(ia) of the Act.

1.4. That the CIT(A) erred on facts and in law in disregarding the binding decision of the jurisdictional Delhi High Court in the case of CIT vs. SMCC Construction India: ITA No. 12/2010 and holding that the creation of provision for royalty expense in books of account in the year to which royalty pertains is a pre-requisite for claiming deduction on payment basis as per proviso to section 40(a)(i) of the Act.

2. That the assessing officer erred on facts and in law in not allowing ful l MAT credit available to the appellant.

3. That the assessing officer erred on facts and in law in charging interest under section 234B of the Act.

4. That the assessing officer erred on facts and in law in charging excess interest under section 234C of the Act. ”

3. The assessee is a company engaged in the business of manufacturing consumer durables, electronic equipment, sub assembling thereof as well as other electronic items. The assessee filed its return of income on 30.11.2016 declaring income of Rs.17,15,75,120/- under the normal provisions of the Act and book profit of Rs. 27,47,61,092/- u/s 115JB of the Act. Since tax liability under MAT provisions was higher than normal provisions, tax was paid on book profit. The scrutiny assessment u/s 143(3) of the Act was completed vide order dated 20.12.2018 determining the total income at Rs.32,09,48,830/- under the normal provisions of the Act and Rs.27,92,41,459/- under MAT provisions, after making the following additions/ disallowances:-

Disallowance u/s 14A of the Act both under

4. On first appeal, the ld CITA granted partial relief to the assessee by deleting the disallowance u/s 14A of the Act and confirming the disallowance of royalty and interest payments amounting to Rs. 14,48,93,346/-. The disallowance confirmed by ld CIT(A) in respect of royalty and interest payments has been challenged before us.

5. We have heard the rival submissions and perused the materials available on record. The assessee had entered into a patent license agreement dated 10.10.2005 with M/s Koninklijke Philips N.V. (hereinafter referred to as ‘Philips’] based in Netherlands, for manufacture and sale of Philips DVD players, VCD Players, other products in India. Pursuant to the said agreement, the assessee was required to pay royalty to Philips basis the units of DVD players sold by it, at agreed rates. During the financial year 2012-13, a dispute arose between the assessee and Philips in respect of the calculation of Royalty payable on sale of DVD players in preceding years. In this regard, notice of default dated 16.12.2013, issued by Philips wherein total demand of USD 13572890.30 was raised on the assessee in the following manner:-

6. Pursuant to the aforesaid notice, the parties amicably negotiated and settled the dispute vide letter dated 23.04.2015 issued by Philips specifying the terms of settlement which was countersigned by the assessee. It is respectfully submitted that pursuant to the settlement, the assessee had agreed to pay USD 2,200,000 to Philips as full and final settlement of claims, demands and requisitions mentioned in the notice of default. Thus, an equivalent amount of Rs. 14,48,93,346/- was debited to the Profit and Loss account [net of exceptional income of Rs. 13.29 crores ] in the audited financial statements as an “Exceptional Item”.

7. During the assessment proceedings, notice dated 13.12.2018 was issued by the ld AO requiring the assessee to show cause as to why the aforesaid amount should not be disallowed considering the same to be prior period expenses. In response thereto, the assessee, vide letter dated 17.12.2018, furnished detailed reply in support of allowability of the aforesaid expenditure. The ld AO, however, without appreciating the factual and legal position in this regard, disallowed the aforesaid sum holding it to be prior period expenses, levelling the following allegations:-

a) The assessee did not create provision of such expenses in the preceding years to which it pertains;

b) The assessee did submit the information such as year of accrual of such expenses;

c) Agreement is not executed on stamp paper;

d) The said liability towards Royalty payment is not appearing in the balance sheet of financial year 2014-15 as contingent liability;

e) Prior period expenditure is not allowable in view of matching concept.

7.1. The assessee before the ld CIT(A) made extensive submissions along with documents in support of its contentions and rebutted the allegations of the ld AO. However, the ld CIT(A) vide order dated 10.06.2019, confirmed the disallowance of royalty and interest payments on the following grounds:-

a) Settlement agreement entered into between the assessee and Philips is not on stamp paper;

b) The assessee failed to explain why it did not pay/ made provision in books in respect of the Royalty to Philips which it is paying now;

c) The assessee did not explain how the Royalty and interest has been computed.

8. The assessee pleaded that it has been carrying on sale of DVD players every year and which has been consistently allowed as revenue expenditure in the earlier years. It was submitted that genuineness of the payment/ transaction has never been doubted by the revenue. It was also pointed out that the statutory auditor had classified the said payment only as an exceptional item and not as a prior period item ; that royalty is not payable on sale of specified models of DVD video players and hence did not make provision for the same ; that it is only by subsequent discussion and settlement arrived between the parties that the claim for payment of royalty and interest aggregating to a sum of Rs. 14,48,93,346/- was agreed upon. The assessee pleaded that the said discussion and settlement was arrived during the year under consideration and consequentially eligible for deduction. In either case, the assessee had merely discharged its contractual obligations which got settled during the year. We find that the contentions of the assessee to be correct as in view of the letter dated 23.04.2015 relevant to AY 2016­17 wherein, additional royalty and interest had been crystallized in the hands of the assessee and settlement agreed with Philips. The said settlement happened during the year, the expenditure had to be construed as having crystallized during the year. We find that the said expenditure is duly subjected to deduction to tax at source. The evidence for settlement arrived with Philips by the assessee vide letter dated 24.03.2015 is enclosed in pages 78 to 81 of the Factual Paper Book. The ld AR before us sought to meet each and every observation by the ld AO and ld CIT(A) which are enclosed in his written submissions. The assessee had also filed a Petition under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 containing certain additional evidences as under:-

9. These additional evidences, in our considered opinion, goes to the root of the matter and are very much crucial for adjudication of the issue in dispute before us. Hence, we deem it fit and appropriate to admit those additional evidences and restore the entire issue in dispute to the file of the ld AO for de novo adjudication in accordance with law in the light of the aforesaid observations, in the light of additional evidence submitted and after due verification of all the agreements on record. Accordingly, Ground Nos. 1 to 1.4 raised by the assessee are allowed for statistical purposes.

10. Ground no. 2 raised by the assessee is challenging the action of the lower authorities in not granting full MAT credit u/s 115JAA of the Act. This matter requires factual verification with ld AO and hence the ld AO is hereby directed to grant MAT credit in accordance with law after due verification of the computation thereon. Accordingly, Ground No. 2 raised by the assessee is allowed for statistical purposes.

11. Ground No. 3 raised by the assessee is challenging the levy of interest u/s 234B of the Act which is consequential in nature.

12. Ground No. 4 is challenging the levy of interest u/s 234C of the Act. The law is well settled law that the interest u/s 234C of the Act could be charged only on the returned income and not on the assessed income.

13. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 07/05/2025.