2014 (10) TMI 949 - AT - Income Tax

Payment for royalty - nature of expenditure - revenue or capital - Held that - Considering the fact that identical issue in 2005-06, 2006-07 & 2008-09 assessment years have been followed and the years under consideration are intervening years and noting that there is no change in facts, circumstances or position of law as held the royalty payment is determined annually on the basis of quantity and value of production, the expenditure so incurred by the assessee is essentially recurring and revenue in nature. However, the AO has treated 25% of such payment as capital in nature. The expenditure so claimed is charged on the products manufactured by the assessee company and the same is not incurred for acquiring a process or design or technology which can be utilized by the assessee for years to come so as to categorize such expenditure, as capital in nature. Nothing was brought on record by the learned DR to controvert the findings of the CIT(A). We therefore do not find any reason to interfere in the order of CIT(A) for allowing the entire payment of royalty as revenue expenditure. Appeals of the Revenue are dismissed.

Summary

Issues:
1. Addition of payment for royalty as revenue expenditure.
2. Applicability of previous Tribunal orders on the current case.
3. Disallowance of 25% royalty payment as capital expenditure.
4. Review petition filed by the Revenue against previous decisions.

Issue 1: Addition of Payment for Royalty as Revenue Expenditure

The case involved two appeals by the Revenue against separate orders for different assessment years. The dispute centered around the addition of a specific amount made by the Assessing Officer for payment of royalty. The CIT(A) had deleted the addition, treating it as revenue expenditure. The Revenue contended that the CIT(A) erred in law by relying on previous decisions without considering the pending review petition filed by the Revenue. The Tribunal analyzed the terms of the agreement between the assessee and a Japanese company for technical assistance and royalty payment. The Tribunal upheld the CIT(A)'s decision, stating that the royalty payment was recurring and revenue in nature, not capital expenditure, as it was based on production quantity and value. The Tribunal dismissed the Revenue's appeal, affirming the royalty payment as a revenue expenditure.

Issue 2: Applicability of Previous Tribunal Orders

Both parties agreed that the issue in the current appeal was covered by previous orders of the Co-ordinate Bench in the assessee's own case. The relevant facts indicated that the assessee had entered into an agreement for technical assistance, including royalty payment terms. The CIT(A) had allowed the appeal based on Tribunal orders from earlier years, which the Revenue challenged before the Tribunal. The Tribunal reviewed the findings of the Co-ordinate Bench and concluded that the expenditure on royalty was revenue in nature, following the same reasoning as in previous years. As there were no changes in facts or law, the Tribunal dismissed the departmental appeals, relying on consistency in previous decisions.

Issue 3: Disallowance of 25% Royalty Payment as Capital Expenditure

The Assessing Officer had disallowed 25% of the royalty payment, considering it as capital expenditure. However, the CIT(A) and the Tribunal disagreed, emphasizing that the royalty payment was a recurring expense based on production quantity and value. The Tribunal reiterated that the expenditure was revenue in nature, as it was not for acquiring a long-term process or technology. The Tribunal's decision aligned with the CIT(A)'s ruling, emphasizing the recurring and revenue-based nature of the royalty payment.

Issue 4: Review Petition Filed by the Revenue

The Revenue had filed a review petition against previous decisions relied upon by the CIT(A) and the Tribunal. However, the Tribunal found no reason to interfere with the CIT(A)'s order, as the royalty payment was considered a revenue expenditure based on production metrics. The Tribunal dismissed the Revenue's appeals, emphasizing the lack of merit in challenging the royalty payment treatment. The decision was pronounced in the open court on October 10, 2014, upholding the dismissal of the Revenue's appeals based on the recurring and revenue-based nature of the royalty payment.