IN THE INCOME TAX APPELLATE TRIBUNAL DELHI `C' BENCH
BEFORE SHRI A.N. PAHUJA, AM & SHRI C.M. GARG, JM
ITA No.980/Del/2012
Assessment year: 2007-08
A.C.I.T.,Circle-12(1), V/s . Gamma Pizzakraft Pvt. Ltd.,
New Delhi 303, Mansarover Building, 90,
Nehru Place,
New Delhi
[PAN : AACCG3988 Q]
(Appellant) (Respondent)
Assessee by Shri Suresh Malik,AR
Revenue by Shri Satpal Singh,DR
Date of hearing 13-09-2012
Date of pronouncement 21 -09-2012
ORDER
A.N.Pahuja:- This appeal filed on 27.02.2012 by the Revenue against an order
dated 05.12.2011 of the ld. CIT(A)-VII, New Delhi, raises the following grounds:-
1 "Whether ld. CIT(A) was correct on facts and
circumstances of the case and in law in deleting the
disallowance of ``13,85,238/- made by the AO on
account of royalty expenses.
2 Whether ld. CIT(A) was correct on facts and
circumstances of the case and in law in deleting the
disallowance of ``5,99,464/- made by the AO on
account of additional depreciation.
3 The appellant craves leave, to add, alter or amend
any ground of appeal raised above at the time of
hearing."
2. Adverting first to ground no.1 in the appeal, facts, in brief, as per
relevant orders are that return declaring loss of ``16,24,943/- filed on 31.10.2007
2 ITA no.980/Del./2012
by the assessee, was taken up for scrutiny with the service of a notice u/s 143(2)
of the Income-tax Act, 1961 (hereinafter referred to as the `Act') issued on
24.09.2008. Subsequently, return was revised on 23.03.3009, declaring total
loss of ``16,09,576/-. During the course of assessment proceedings, the
Assessing Officer[AO in short] noticed that the assessee claimed deduction for
an amount of ``13,85,238/- on account of royalty. The AO was of the opinion
that the expenditure was capital in nature. To a query by the AO, the assessee
replied that the expenditure being recurring did not bring any enduring benefit
and, therefore, was revenue in nature. However, the AO did not accept the
submissions of the assessee while relying upon decision of the Hon'ble Apex
Court in Southern Gear Pvt. Ltd. Vs. CIT, 232 ITR 359(SC) and Jonas
Woodhead and Sons (India) Ltd. Vs. CIT, 224 ITR 342(SC) and accordingly,
concluded that 25% of the aforesaid expenditure was capital in nature. However,
in the computation of income, the AO disallowed the entire amount,
3. On appeal, the ld. CIT(A) allowed the claim of the assessee in the
following terms:-
"4. Grounds of appeal No.2 and 3 relate to the
disallowance of ``13,85,238/- on account of continuing fee/royalty
expenses by treating it as a capital expenditure. It was submitted
on behalf of the appellant inter alia that identical addition as made
on similar grounds in assessment year 2006-07 by the Assessing
Officer in appellant's own case. The appellant preferred an appeal
before learned CIT(A)-XV, New Delhi who has deleted the
disallowance made on this ground vide order dated 01.09.2011 for
assessment year 2006-07 in Appeal No.63/2008-09. I have
perused the order of the learned CIT(A)-XV, New Delhi for
assessment year 2006-07 referred to above. As the facts and
circumstances of the case are pari materia with the case of the
appellant in assessment year 2006-07, for the reasons as
discussed in the aforesaid order of CIT(A)-XV, New Delhi, ground
of appeal No.2 is allowed."
4. The Revenue is now in appeal before us against the aforesaid findings of
the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR on
behalf of the assessee supported the findings of the ld. CIT(A) and contended
3 ITA no.980/Del./2012
that in the preceding assessment year similar claim had been allowed by the ld.
CIT(A).While referring to various clauses in para 3.4, 9, 14.1, 14.2 of the
agreement placed at page 26 to 46 of the paper book, the ld. AR added that a
similar claim disallowed in preceding assessment year, had been allowed by ld.
CIT(A) and the Revenue have not preferred any appeal against the said order.
5. We have heard both the parties and gone through the facts of the
case. The issue before us is as to whether royalty paid in terms of the agreement
dated 10.12.2005 is revenue in nature. Before proceeding further, we may have
a look at the relevant terms and conditions of the agreement., whereunder the
licensor is stated to be having a comprehensive restaurant system for retailing a
limited menu of uniform and quality food products, emphasizing prompt and
courteous service in a clean and wholesome atmosphere for families. The said
system is adherence by licensees to standards and policies ,not limited to
serving designated food & beverages ,use of only prescribed equipment and
building lay out & designs, but strict adherence to designated food and beverage
specifications and to prescribed standards of quality, service & cleanliness in
restaurants besides compliance of standards & policies in conjunction with trade
marks, service marks, trade names etc. In terms of clause 1 of the agreement,
licensor granted the right to use system, system's property and marks to the
assessee licensee solely in connection with the conduct of business of the
outlet, initially for a period of 10 years. In terms of clause 1.3, licensee shall not
without the prior written approval of the licensor conduct all or any part of the
business at any other location or sublicense the right to use the system, system's
property and marks. The licensee has not been granted any exclusive territory,
protection or any other rights and licensor reserved the right to use or grant to
other parties the right to use system, system's property and marks, in terms of
clause 1.4 of the agreement. In terms of clause 2 read with schedule B to the
agreement, licensee is required to pay 6.3% of the continuing fee besides initial
fee. In terms of clause 3.4, licensor shall lend only one copy of Manuals to
licensee and the latter is not authorised to reproduce or part with possession of
4 ITA no.980/Del./2012
the said manual. Clause 9 stipulates confidentiality clause while in terms of
clause 14 ,licensee shall not charge, pledge or otherwise create any
encumbrance or security ,interest or lien in respect of any interest or right under
the agreement nor can transfer or gift the business or the agreement. In the
event of termination of the agreement, licensee agreed to discontinue use of
marks and system property and dispose of all materials bearing the marks or
proprietary supplies. On perusal of various clauses of the agreement , it is
apparent that the assessee was merely given a non-exclusive and non-
transferable right of user of the system, system's property and marks for the
stipulated period. Expenditure in these facts cannot be said to be for acquisition
of any asset at all. In fact, all the rights in the system, system's property and
marks continued to vest in Yum Restaurants (India) Pvt. Ltd. and it was only the
right to use the system, system's property and marks that was made available to
the assessee and that too based on its Revenues for a limited period . That
means all the royalty paid in the shape of 6.3 % of the Revenues for the use of
the system, system's property and marks could not be considered to be of
enduring nature and thus, capital expenditure. The expenditure, in our opinion, is
revenue nature. In the case of Jonas Wood Hear and Sons Vs. CIT, 117 ITR 55,
it was held that the question regarding capital or revenue expenditure depends
on the terms of agreement in each case. In the case of CIT Vs. Gujarat Carbon
Ltd., 254 ITR 294, it was held that the payment of revenue under the agreement
was directly relatable to services which were in the revenue field and were
allowable as revenue expenditure. In the case of Goodyear (I) Ltd. Vs. ITO,73
ITD 189 (Delhi), the assessee had not acquired ownership right of technical
knowhow but transfer of use of licenses. There was no advantage of enduring
nature and hence it was held to be a case of revenue expenditure. In the case of
Travancore Sugar and Chemicals Ltd. 62 ITR 566 (SC) it was held that whenever
a payment is based on a percentage of turnover profits, it necessarily has no
relation to the capital value of the asset, because it cannot be known at the time
of the agreement what the turnover or profits will be over a period of years. In
another case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124 Taxman 188,
5 ITA no.980/Del./2012
the Tribunal held that the royalty payment is allowable as revenue expenditure,
since it is related to sales and that it is paid for better conduct, efficiency and
improvement of the existing business or product manufactured by the assessee.
In the case of CIT Vs. Lumax Industries Ltd. (2008) 173Taxman 290 (Delhi),
Hon'ble High Court held that the payment of license fee on year to year basis
for acquisition of technical knowledge would not amount to capital expenditure,
but the revenue expenditure. In view of the foregoing, especially when the
ownership rights in the system, system's property and marks throughout vested
with the licensor and on the expiration or termination of the agreement the
assessee was required to discontinue use of the system, system's property and
marks while the payment of royalty is on year to year basis on the Revenues
earned by the assessee and at no point of time the assessee was entitled to
become the exclusive owner of the system, system's property and marks, we
are of the opinion that the expenditure incurred by the assessee as royalty is
revenue expenditure and is, therefore, allowable under section 37(1) of the Act.
Consequently, in the absence of any basis ,we do not find any infirmity in the
conclusion of the ld. CIT(A).Therefore, ground no.1 in the appeal is dismissed.
6. Coming now to ground no.2 relating to disallowance of ``5,99,464/- on
account of additional depreciation, during the course of assessment proceedings,
the AO noticed that the assessee claimed additional depreciation amounting to
``5,99,464/-. To a query by the AO seeking to disallow additional depreciation,
the assessee submitted that claim has been made in accordance with provisions
of section 32 (1)(iia) of the Act. However, the AO did not accept the submissions
of the assessee and relying upon decision in Indian Hotel Company Ltd. Vs.
Income-tax Officer, (2000) 112 Taxman 48 (SC) concluded that cooking food in a
hotel does not qualify for additional depreciation. Accordingly, the AO rejected
the claim of the assessee.
7. On appeal, the ld. CIT(A) allowed the claim in the following terms:-
6 ITA no.980/Del./2012
"6. Ground of appeal No.4 relates to the grievance
of appeal against the action of the Assessing Officer in
disallowing depreciation to the extent of ``5,99,464/-. It was
submitted on behalf of the appellant inter alia that identical
addition was made on similar grounds in assessment year
2006-07 by the Assessing Officer in appellant's own case.
The appellant preferred an appeal before learned CIT(A)-
XV, New Delhi who has deleted the disallowance made on
this ground vide order dated 1.9.2001 for assessment year
2006-07 in Appeal No.63/2008-09. I have perused the order
of the learned CIT(A)-XV, New Delhi for assessment year
2006-07 referred to above. As the facts and circumstances
of the case are pari materia with the case of the appellant in
assessment year 2006-07, for the reasons as discussed in
the aforesaid order of CIT(A)-XV, New Delhi, ground of
appeal No.4 is allowed."
8. The Revenue is now in appeal before us against the aforesaid
findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld.
AR on behalf of the assessee relied upon the findings of the ld. CIT(A). Inter alia,
the ld. AR relied upon decisions in Idandas Vs. Anant Ramchandra Phadke:
1982 AIR 127 (SC); CIT Vs. M.R. Gopal: (1965) 58 ITR 598 (Madras); CIT Vs.
East India Hotels Ltd.: (1994) 209 ITR 854 (Calcutta); India Cine Agencies Vs.
CIT : 220 CTR 223 (SC) and YFC Projects (P) Ltd. Vs. DCIT: 134 TTJ 167 (ITAT,
Delhi) relating to manufacture of an article or thing. The ld. AR added that a
similar claim disallowed in preceding assessment year, had been allowed by
learned CIT(A) and the Revenue have not preferred any appeal against the said
order..
9. We have heard both the parties and gone through the facts of the
case. Indisputably a similar claim of additional depreciation disallowed in the
preceding assessment year had been allowed by the ld. CIT(A) and the Revenue
have not preferred any appeal against the said decision nor the ld. DR stated the
reasons for non-filing of the appeal in the preceding assessment year. At the
outset, we may have a look at the relevant provisions of sec. 32(1)(iia) of the Act,
which read as under:
7 ITA no.980/Del./2012
"(iia) in the case of any new machinery or plant (other
than ships and aircraft), which has been acquired and
installed after the 31st day of March, 2005, by an assessee
engaged in the business of manufacture or production of
any article or thing, a further sum equal to twenty per
cent, of the actual cost of such machinery or plant shall be
allowed as deduction under clause (ii):
Provided that no deduction shall be allowed in
respect of -
A. any machinery or plant which, before its
installation by the assessee, was used either
within or outside India by any other person ;
or
B. any machinery or plant installed in any
office premises or any residential
accommodation, including accommodation in
the nature of a guest-house ; or
C. any office appliances or road transport
vehicles ; or
D. any machinery or plant, the whole of the
actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise)
in computing the income chargeable under the
head "Profits and gains of business or
profession" of any one previous year; "
9.1 The ld. AR on behalf of the assessee while referring to decision in Osnar
Chemical Pvt. Ltd. (2012) 276 E.L.T. 162 (SC) contended that manufacture takes
place only when there is transformation of raw materials into new and different
article, having different identity, characteristic and use. The conclusion arrived at
in this decision or in the decisions placed in the paper book relied upon by the ld.
AR ,are not disputed. The various decisions were rendered on peculiar facts and
circumstances of their own. However, in the instant case before us, neither the
8 ITA no.980/Del./2012
ld. AR nor the ld. DR explained before us as to which specific products are
manufactured by the assessee or what are the ingredients used therein or what
is the manufacturing process involved. There is nothing in the impugned order or
order of the ld. CIT(A) in the preceding year as to the products manufactured or
produced or even the manufacturing process. As regards decision relied upon
by the AO in the case of Indian Hotel Company Ltd. Vs. Income-tax Officer
(2000) 112 Taxman 48 (SC) holding that catering food is not a manufacturing
activity, we find that the ld. CIT(A) in the preceding assessment year while
referring to a circular no. 281 dated 22.9.1980 issued in the context of extant
provisions of clause (iia) in sec. 32(1) by the Finance(No.2) Act, 1980,allowed the
claim of the assessee ,without recording any findings as to whether or not the
said decision is applicable. Since the provisions of section 32(1)(iia) inserted by
Finance(No.2) Act, 1980 were quite different from the provisions applicable in
the year under consideration, we are of the opinion that the ld. CIT(A) without
recording his specific findings as to how the conditions stipulated in the
aforesaid provisions of sec. 32(1)(iia)of the Act are fulfilled and without even
analyzing the manufacturing process involved in various products prepared by
the assessee, was not justified in accepting the claim of the assessee for
additional depreciation, merely on the basis of aforesaid circular dated
22.9.1980. A mere glance at the impugned order reveals that the order
passed by the ld. CIT(A) is cryptic and grossly violative of one of
the facets of the rules of natural justice, namely, that every
judicial/quasi-judicial body/authority must pass a reasoned order,
which should reflect application of mind by the concerned authority
to the issues/points raised before it. The application of mind to the
material facts and the arguments should manifest itself in the order.
Section 250(6) of the Act mandates that the order of the CIT(A)
while disposing of the appeal shall be in writing and shall state the
points for determination, the decision thereon and the reasons for
the decision. The requirement of recording of reasons and
communication thereof by the quasi-judicial authorities has been
9 ITA no.980/Del./2012
read as an integral part of the concept of fair procedure and is an
important safeguard to ensure observance of the rule of law. It
introduces clarity, checks the introduction of extraneous or
irrelevant considerations and minimizes arbitrariness in the
decision-making process. Hon'ble jurisdictional High Court in their decision
in Vodafone Essar Ltd. Vs. DRP,196 Taxman423(Delhi) held that when a quasi
judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and
germane reasons as the same is the heart and soul of the matter and further, the
same also facilitates appreciation when the order is called in question before the
superior forum. W e may point out that a `decision' does not merely
mean the `conclusion'. It embraces within its fold the reasons
forming basis for the conclusion.[Mukhtiar Singh Vs. State of
Punjab,(1995)1SCC 760(SC)]. As already observed, the impugned
order suffers from lack of reasoning and is not a speaking order on
the issue of additional depreciation, disallowed by the AO. In view of
the foregoing, especially when the ld. CIT(A) have not passed a
speaking order on the issue, we consider it fair and appropriate to
set aside the order of the ld. CIT(A) and restore the matter to his file
for deciding the aforesaid issue, af resh in accordance with law,
after allowing sufficient opportunity to both the parties. Needless to
say that while redeciding the appeal, the ld. CIT(A) shall pass a
speaking order, keeping in mind, inter alia, the mandate of
provisions of sec. 250(6) of the Act, bringing out clearly as to how
the assessee fulfills the conditions stipulated under sec. 32(1)(iia)
of the Act.. W ith these observations, ground no. 2 in the appeal is
disposed of.
10. No additional ground having been raised in terms of residuary
ground no.3 in the appeal, accordingly, this ground is dismissed.
11. No other plea or argument was made before us.
10 ITA no.980/Del./2012
12. In result, appeal is partly allowed but for statistical purposes.
Order pronounced in open Court
Sd/- Sd/-
(C.M. GARG) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Assessee
2. A.C.I.T.,Circle-12(1),New Delhi
3. CIT concerned
4. CIT(A)-VII, New Delhi
5. DR, ITAT,'C' Bench, New Delhi
6. Guard File.
By Order,
Deputy/Asstt.Registrar
ITAT, Delhi
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