DCIT Circle-12 (1) , ITO Ward-12 (4) New Delhi Vs Hitz FM Radio India Ltd.
I.T.A. No. 3685/Del/2013, I.T.A. No. 2129/DEL/13, I.T.A No. 3689/DEL/2013
Order Dated.- September 8, 2015
Ratio/ brief analysis
Where liability remained unpaid since many years, it does not imply that it has seized to exist in view of the Limitation Act 1963. The Hon’ble Supreme Court in case of Mahabir Cold Storage Vs. CIT  188 ITR 91 (SC) held that the entries in the books of account of the assessee would amount to an acknowledgment of the liability within the meaning of section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt. Thus, the CIT(A) has rightly deleted the addition u/s 41(1)
SHRI N. K. SAINI AND SMT SUCHITRA KAMBLE
For the Appellant: Sh.T. Vasanthan, SR. DR
For the Respondent: Sh.Sanjeev Sapra, FCA
SUCHITRA KAMBLE, JM
This appeal is filed by the Revenue against the order of CIT(A) XV, New Delhi dated 20/3/2013 for Assessment Year 2007-08. The ground of appeal raised herein, is as follows:-
“1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.37,25,225/- made by the AO on capitalization of license fee and royalty expenditure.”
2. The assessee company is engaged in business of FM Radio Broadcasting. Assessee filed return of income declaring loss of Rs. 1,12,82,860/-. The records before the Assessing Officer shows that the assessee company had paid amount of Rs. 48,58,967/- (Rs.3,000/- License Fee, Rs. 6,08,765/- RCS Fee, Rs. 27,19,446/- Prasar Bharati Fee and Rs. 15,27,756/- Broadcast Fee) to the Govt. of India, Department of Telecommunication (Prasar Bharati etc.) and a royalty of Rs.1,08,000/- in consideration for grant of licence to operate and provide the services. The assessee claims it to be revenue expenses.
3. The Assessing Officer held that the expenditure on account of licence fee and Royalty is held to be capital expenditure incurred for acquisition of intangible asset in form of licence which is for the tenure of 10 to 20 yrs. And gives enduring benefit to the assessee. After allowing 25% of the depreciation whch comes to Rs. 12,41,742/- (25% of Rs. 49,66,967/-) the remaining amount of Rs. 37,25,225/- was added to the income of the assessee by the Assessing Officer.
4. The CIT(A) held that the RCS license fee is in the nature of a nonexclusive and a non-transferable right to use scheduling and broadcast software. Through this agreement, the assessee could get only the limited right to use the software of RCS for the purpose of scheduling the assessee company’s content on its FM Station. Thus, the nature of such license was no difference than the license any user gets for use of any other computer software, such as the license for the use of MS-Windows, which is available to all users simultaneously without any exclusivity involved and there is no permanent transfer of right that allows the user to transfer the right further.
5. The CIT(A) further held that in respect of the fee paid to the Prasar Bharati, the invoices raised by the Prasar Bharati show that the payment to Prasar Bharati was to be made in terms of the direction of the Govt. of India to private FM Broadcasters to mandatorily share the common infrastructure facility provided by the Prasar Bharati at their UTV tower complex. The payment was in respect of use of the common infrastructures facility, which is no different than the annual rental for use of such facilities. Regarding the broadcast license fee, the assessee was required to pay an annual license fee to the Government of India for operating the license issued by Government of India in this regard. The assessee had already paid one-time entry fee for obtaining the license to move from Phase-I to Phase-II FM Broadcasting Regime, which was capitalized by assessee in its books of account. After obtaining that license, the assessee is required to share the revenue in the ratio prescribed by Government on annual which is related to gross revenue earning of assessee. The AO did not look into the true nature of the rights and the liabilities of the assessee company in respect of the agreement to use rights emanating from various agreements/authorization. In not a single items of expenditure, the assessee received the entire bundle of rights on permanent basis nor does it get the right to further transfer such rights, no enduring benefits were received by it and the payment in respect of such agreements/athorisation was on a year to year basis, which is linked to the gross revenue receipts of the assessee. Thus the CIT (A) granted the relief of Rs. 37,25,225/- to the assessee.
6. The Ld. DR submitted that the law has been amended as relate to Section 32(1) (ii) of the Income Tax Act, 1961 and the case laws will not be applicable in the present case but the DR could not distinguish the said case law.
7. The AR submitted that the jurisdictional Delhi High Court in the case of CIT Vs. G4S Securities India Pvt. Ltd. (2011) 338 ITR 46 has held that “…..The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time the assessee was entitled to become the exclusive owner of technical knowhow and the trademark. Hence, the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under Section 37 (1) of the Act…..” The AR further submitted that the CIT(A) has taken correct view and the appeal of the Revenue be dismissed.
8. We have gone through all the records and perused the arguments of both the counsels. The ratio laid down in case of G4S Securities India Pvt. Ltd. is clearly applicable in the present case. In the case of Empire Jute Co. Ltd. v. CIT, (1980) 124 ITR 1, the Supreme Court observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the cost of enduring benefit may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The license fee and the royalty fee to the Government of India is on a year to year basis and this fact was never disputed by the Revenue at any point of time and thus the same has to be held as revenue in nature keeping in mind the decisions of the Supreme Court as well as the Delhi High Court.
9. Thus, the appeal of the Revenue is dismissed.
10. This appeal is filed by the Revenue against the order of CIT(A) XV, New Delhi dated 31/01/2013 for Assessment Year 2008-09. The grounds of appeal raise herein, is as follows:-
“1. On the facts and circumstances of the case and in law the order of the Ld. CIT(A) is wrong and against the provisions of law which is liable to be set aside.
2. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the disallowance of Rs.81,29,043/- on account of fees held as capital.
3. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the disallowance of Rs.1,08,000/- u/s 40(a)(ia) of the IT Act.
4. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.1,23,94,225/- made u/s 41 (1) of the IT Act.
11. Ground No. 1 in this year is general in nature and Ground No. 2 is already decided against the Revenue in earlier Assessment Year 2007- 2008 hereinabove. Thus Ground No. 2 is dismissed.
12. As regards Ground No. 3 of the appeal, the assessee has claimed an amount of 1,08,000/- as royalty paid to the Government of India. The Assessing Officer has held that from perusal of details it has been gathered that the assessee has not deducted any TDS on this payment and disallowed as per provisions of Section 40(a)(ia) of the Income Tax Act, 1961. The CIT(A) held that payment was made to the Government of India and therefore, the assessee was not required to deduct TDS and action of Assessing Officer of invoking the Section 40(a)(ia) of the Income Tax Act, 1961 is unjustified.
13. The DR relied solely on the Assessment Order and the AR submitted that annual amount payable to DOT, Govt. of India towards royalty for wireless operation for frequency allocation and FM broadcasting and as per Section 196 of the Act, TDS was not required to be made on interest or dividend or other sums payable to Government of India.
14. After going through the records and arguments of both the counsels, first we have to look into the aspect of Section 40(a)(ia) of the Act:
“Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘profits and gains of business or profession” – (a) In the case of any assessee (i) ----------------- (ia) any interest, commission or brokerage, rent, royalty fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid, on or before the due date specified in sub-section (1) of section 139: Provided ........................................................... Provided further ............................................. Explanation: ...................................................”
In this particular case Section 40(a)(ia) of the Act will not be applicable as the royalty was payable to the Government of India. Thus TDS was not deducted by the assessee. As per Section 196 which is as follows:
“196. Interest or dividend or other sums payable to Government, Reserve Bank or certain corporations.- Notwithstanding anything contained in the foregoing provisions of this Chapter, no deduction of tax shall be made by any person from any sums payable to— (i) the Government, or (ii) the Reserve Bank of India, or (iii) a corporation established by or under a Central Act which is, under any law for the time being in force, exempt from income-tax on its income, or (iv) a Mutual Fund specified under clause (23D) of section 10, where such sum is payable to it by way of interest or dividend in respect of any securities or shares owned by it or in which it has full beneficial interest, or any other income accruing or arising to it.”
As per Section 196 of the Act, no deduction of tax shall be made by any person from any sums payable to government. In this regard the AO has overlooked the provisions of Section 196 of the Act and CIT(A) has rightly allowed the deduction to the assessee in this regard.
The ground No. 3 of the Revenue’s appeal is dismissed.
15. Now coming to Ground No. 4 of the appeal. As per the assessing officer, the assessee is in constant agreement with M/s Airtime Marketing & Sales India Pvt. Ltd. (AMSIPL). As per the said agreement it has been observed that M/s AMSIPL is responsible for generation of revenue for the assessee. The assessee has thus agreed to pay to this consultant 15% of net revenue or $2,50,000/- plus 74% of the net profit arisen to the assessee. As per clause 6 and Schedule to the agreement, all the business operation has to be conducted by M/s AMSIPL and even the account has to be maintained by M/s AMSIPL. In addition to this M/s AMSIPL is providing various services, equipments, assets to the assessee company for which it is charging from the assessee. These expenses includes 1)Transmitter site maintenance –Rs. 6,00,000/-; Lease finance charges-Rs.9,07,488/-; Retainer ship Fee- Rs.6,40,000/-; Consultancy Fee: Rs.68,45,155/- Studio maintenance & Studio Permission Charges Rs. 8,92,811/- (Totaling 98,85,454/-). In addition to this the assessee has to pay the actual cost incurred by M/s AMSIPL ., for conducting the operation on behalf of assessee. This agreement with M/s AMSIPL has resulted into Sundry Creditor of Rs. 5,41,27,375/- (Payable to M/s AMSIPL). The unique feature of the agreement was that M/s AMSIPL is sole responsible for generating the revenue like bringing the advertisement to the assessee, convincing customers etc. on behalf of assessee and for that M/s AMSIPL is charging from the assessee. Since M/s AMSIPL is not able to generate the revenue for the assessee, he is not claiming/forcing the assessee to pay the outstanding debt. In the light of these facts the assessee was asked to submit the year wise break up of outstanding liability. The details submitted by the assessee shows that the liability before 1/4/2004 payable to M/s AMSIPL was Rs.1,23,94,225/- and the same increased to Rs.5,41,27,375/-. As per the Assessing Officer, the assessee has not paid these liabilities in line to the agreement with M/s AMSIPL, under which M/s AMSIPL is to bring revenue to the assessee on a profit sharing basis and the assessee has to pay the expenses incurred by M/s AMSIPL in case positive revenue generation. Since the second condition was not fulfilled, the first condition will not be satisfied, meaning thereby that the assessee has not to pay the liability to M/s AMSIPL if he has failed to generate the revenue for the assessee. Further the outstanding liabilities are clearly bared by limitation, since more than three years has been lapsed and the creditor in not claiming its debt which clearly point out the fact that the liability to the assessee has ceases to exit as per provision of SESction 41(1) of the I. T Act.
16. The CIT(A) held that the Assessing Officer disregarded the confirmation made by the party which was furnished before him on the ground that the said party shall not be able to legally enforce the liability in terms of law of limitation. The CIT(A) further held that the agreement does not prescribed any time limit beyond which the assessee will be free from discharging the liability to the said party and therefore, it is not correct to assume that such liability has ceased to exist. The liability exists in the books of account of both the debtor and creditor which implies that it exists in view of Limitation Act, 1963 as parties have confirmed the same.
17. The DR solely relied upon the Assessing Officers order in this particular case.
18. The AR submitted that the copy of consultancy agreement dated 21/7/2006 with M/s Airtime Marketing and Sales India Pvt. Ltd. Stated that the assessee was contractually liable to pay consultancy fee AMSIPL for various services as received by it from AMSIPL the amount was contractually and legally payable in full to AMSIPL by the assessee and hence Section 41 (1) could not be invoked. The assessee filed details of amount payable against services to AMSIPL shows that it is a moving balance and as on 1/4/2004 total amount of Rs.1,23,94,225/- was payable while as on 31st March 2008 Rs.5,41,27,375/- was payable to them by the assessee against various services as taken.
19. We have gone through the records and perused the arguments of both the counsels. The assessee has given the details for last 3 years and it can be seen that the treatment of credit balance in respect of AMSIPL amounting to Rs.1,23,94,225/- held as seized liability that was made chargeable to tax u/s 41(1) was outstanding in the assessee’s books in respect of liabilities incurred before 1/4/2004. The AO passed his assessment order on the detail furnished by the assessee including the agreement with AMSIPL and was of the view that the assessee shall not be able to discharge the said liability until and unless such party in terms of the agreement brings revenue for the assessee in such manner that profit arises from the operation when such party could be paid its dues. It was informed by the AR that since profits were not generated the company could not pay to the creditor and creditor could also not enforce the payment of date till profits and generated. However, the agreement does not prescribe any time limit beyond which the appellant will be free from discharge the liability to the said party and, therefore, it is not correct to assume that such liability has seized to exist. Such liability remained unpaid does not amply that it has seized to exist in view of Limitation Act 1963. The aforesaid liability exist in the books of accounts of both the debtor and the creditor. The Hon’ble Supreme Court in case of Mahabir Cold Storage Vs. CIT  188 ITR 91 (SC) held that the entries in the books of account of the assessee would amount to an acknowledgment of the liability within the meaning of section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt. Thus, the CIT(A) has rightly deleted this addition.
20. In result, the Ground No. 4 of the Revenue’s appeal is dismissed.
I.T.A NO. 3689/DEL/2013
(ASSESSMENT YEAR 2009-10)
21. This appeal is filed by the Revenue against the order of CIT(A) XV, New Delhi dated 28/03/2013 for Assessment Year 2009-10.. The grounds of appeal raise herein, is as follows:-
“1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.38,15,742/- made by the AO on capitalization of license fee and royalty expenditure?
2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.5,54,170/- made by the AO on capitalization of brand development expenditure?
22. Ground No. 1 is already decided against the Revenue in earlier Assessment Year 2007-2008 hereinabove. Thus Ground No. 1 is dismissed.
23. In respect of Ground No. 2, the assessing Officer stated that since the assessee has himself identified the amount of Brand Development and its corresponding figures i.e. Rs.7,38,893/- which gives the assessee and entry benefit of a long lasting nature the same needs to be capitalize. The same being intangible assets depreciation of Rs.25% is being allowed and the balance amount of Rs.5,54,170/- is disallowance and added back to the total income of the assessee but for this there was no reason given by the Assessing Officer by deciding this issue. The CIT(A) held that relating to disallowance its advertisement expenses of Rs. 5,54,170/-. The expenses classified as Brand Development Expenses and the same are capital in nature. The CIT(A) has taken into account the decision of the Hon’ble Gujrat High Court in the case of DCIT Vs. CORE HEALTHCARE LTD.  308 ITR 263
24. The DR relied upon the Assessment Order and the AR relied upon the CIT(A)’s order.
25. We have perused the records and submissions made by both the counsels and come to the conclusion that even that the assessee made for classified part of advertisement as Brand Development Expenses the real nature is no more than a normal advertisement expenses as it includes expenses on hoardings, pamphlets, advertisement behind buses expenses relating to promotional events etc. The Hon’ble Delhi High Court in the case of CIT Vs. Casio India Ltd  335 ITR 196 (Del) and CIT Vs. CITI FINANCIAL CONSUMER FIN. LTD.  335 ITR 29 (Del) hold that the expenditure on publicity and advertisement is to be treated as Revenue in nature allowable fully in the year in which it was incurred. The assessee’s case is squarely covered by these judgments as well as the judgment of Gujrat High Court in case of DEPUTY COMMISSIONER OF INCOME-TAX v. CORE HEALTHCARE LTD.  308 ITR 263 (Guj) which held as under:
“14. In relation to the first item, namely, advertisement expenses, it is not in dispute that the expenditure of Rs. 70 lakhs and odd was incurred on a special advertisement campaign. However, that by itself would not be sufficient to determine as to whether the expenditure in question is on revenue account or capital account. The approach of the Commissioner (Appeals) that the expenditure in question was treated as deferred revenue expenditure and hence was capital in nature, cannot be termed to be a correct approach because in so far as the Income-tax Act is concerned, there is no such category of deferred revenue expenditure. Similarly, making of an entry or absence of an entry does not determine the allowability or otherwise of the item of expenditure and the same cannot be considered to be a factor adverse, if the expenditure is otherwise of allowable nature. Every expenditure incurred by a business concern, if incurred for the purposes of business, is bound to result in some benefit, direct or indirect, immediate or after some time, but the benefit to the business cannot be termed capital or revenue only on the basis of the period for which the benefit is derived by the business. Any benefit resulting to a business need not be confined to the year of expenditure and this is an ordinary incident of a running business. In the case before the Allahabad High Court in Hindustan Commercial Bank Ltd., In re  21 ITR 353, the expenditure on advertisement had been incurred at the point of time when new branches of the bank had to be opened and inaugurated. It has been held by the Allahabad High Court that there is no proposition that the amount spent in a special campaign of advertisement must necessarily be capital expenditure. 15. The apex court decisions on which reliance has been placed by the Tribunal, namely, Empire Jute Co. Ltd.  124 ITR 1 (SC) and Alembic Chemical Works Co. Ltd.  177 ITR 377 (SC) specifically lay down that the nature of advantage has to be considered in a commercial sense and the test of enduring benefit is not a certain or conclusive test and cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The expression " asset or advantage of an enduring nature" has been evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The idea of once for all payment and enduring benefit are not to be treated as something akin to statutory conditions. 16. Applying the aforesaid settled legal position to the facts of the case, it is not possible to agree with the appellant-Revenue that the advertisement expenses incurred by the respondent-assessee at the time of installation of additional machinery in the existing line of business resulted in any enduring benefit, so as to be treated as capital in nature. 17. Question No. 1 is, therefore, answered in the affirmative, namely, advertisement expenses incurred by the assessee to create brand image is allowable as revenue expenditure.”
26. In view of the above Ground No. 2 of the Revenue is dismissed
27. In the result, all the three appeals of the Revenue are dismissed.
The order is pronounced in the open court on 08th of September 2015.