2014 (7) TMI 1227 - HC - Income Tax

Model Know How Fee - disallowance by AO as capital expenditure and covered under Section 35AB - Held that - This issue has been decided against the revenue and in favour of the respondent- assessee in the earlier years by the Delhi High Court. Special Leave Petition filed before the Supreme Court was dismissed. The aforesaid factual position stated by the Tribunal in the impugned order on the aforesaid question is accepted as correct by the Standing Counsel for the Revenue. Provision of warranty - why and for what reason the claim for warrantee can be categorized as exaggerated or untenable in terms of the observations in Rotork Controls India Limited (2009 (5) TMI 16 - SUPREME COURT OF INDIA) - Held that - The only reason given by the learned Standing Counsel is that in the present case the data relied upon by the assessee pertains to two years; whereas in Rotork Controls India Limited (supra) only one year data was considered. The argument fail to notice in that in this case the warrantee was for two years. Even otherwise this reason does not appeal to us. Data and figures should truly and correctly reflect and support the claim for provision for warranty. It should not be excessive. The aforesaid decision of the Supreme Court provides for and stipulates adjustment in case an excessive or higher claim is made by an assessee. It is not the case of the Revenue that in fact it was found that any excessive or wrong claim was made. Figures for warranty claims actually made would be available with the Revenue but were not pointed out to the Tribunal or before us. Expenditure incurred on purchasing software - should been treated as capital expense or revenue expenditure - Held that - The aforesaid expenditure was for purchase of application software and not on customerized or operating software. Tribunal in the impugned judgment has followed decision of the Delhi High Court in CIT Vs. Asahi India Safety Glass (2011 (11) TMI 2 - DELHI HIGH COURT ). It is not shown to us that the software in question had enduring benefit and why and for what reason the software purchased should be treated as a capital asset. The third issue therefore does not require consideration of this Court as a substantial question of law.

Summary

Issues:
1. Classification of "Model Know How Fee" as revenue or capital expenditure.
2. Treatment of provision for warranty as revenue expenditure.
3. Classification of software purchase expenditure as capital or revenue expense.

Analysis:
1. The first issue pertains to the classification of the "Model Know How Fee" as either revenue or capital expenditure. The appellant claimed it as revenue expenditure, but it was disallowed by the Assessing Officer under Section 35AB of the Income Tax Act. The Tribunal accepted the respondent's position based on previous decisions by the Delhi High Court and the Supreme Court. The Standing Counsel for the Revenue acknowledged the correctness of the Tribunal's factual position on this matter.

2. The second issue revolves around the provision for warranty and its treatment as revenue expenditure. The Tribunal referred to a previous decision by the Delhi High Court and analyzed the factual aspect of the warranty provision by the respondent. The Tribunal highlighted that the warranty was provided for two years and followed the mercantile system of accounting. The Court questioned the Revenue's argument regarding the warranty claim being exaggerated, emphasizing the need for accurate data to support such claims. The Court dismissed the appeal as the Revenue failed to demonstrate any excessive or incorrect claims made by the assessee.

3. The third issue concerns the expenditure of purchasing software and whether it should be treated as a capital or revenue expense. The Tribunal followed a decision by the Delhi High Court and concluded that the software purchase expenditure was revenue expenditure. The Court noted that the software purchased was application software, not customized or operating software. It was emphasized that the software did not provide enduring benefits, leading to the conclusion that it should be treated as a revenue expense. The Court found no substantial question of law in this issue and dismissed the appeal based on the discussions and analysis presented.

In conclusion, the High Court dismissed the appeal after thorough analysis and discussion of the three main issues raised by the Revenue regarding the classification of expenses as revenue or capital expenditures. The judgment was based on the Tribunal's findings, previous legal decisions, and the lack of substantial legal questions in the presented issues.