2010 (12) TMI 612 - AT - Income Tax

Depreciation - computer peripherals - Royalty - Addition - in the case of the assessee for assessment years 2003-04 and 2004-05 in ITA Nos. 1698 1684 and 2161(Del)09 (copy placed at pages 144 to 145 of the APB) remitted the matter to the file of the AO for examining the nature and character of the computer peripherals whether they could be used independently on the computer - Accordingly the matter is remitted back to AO Regarding royalty - since under the agreement the assessee merely acquired the limited right to use the technical know-how/information and no title thereto the payment of technical know-how fee is allowable as a deduction - being of capital nature and royalty payment in consideration of providing technology services; that the payment of royalty depended on the quantum of domestic as well as export sales which would decrease or increase every year depending on the decrease or increase in the sales; that this payment was not because of transfer of technology but for providing technical services ; and that so the payment of royalty which was a continuous process should have been treated as a revenue expenditure - Decided in favour of the assessee Regarding addition on account of repairs and maintenance (building) - It has been contended that the expenditure on SLFS was incurred for storage of hazardous waste and to prevent pollution of air water and ground; that SLFS was a statutory requirement under the Water (Prevention and Control of Pollution) Act 1974 and under the Air (Prevention and Control of Pollution) Act 1981 so as to make necessary provision for disposal of hazardous waste - As such in view of the nature of the expenditure which remains undisputedly a statutory requirement enabling the assessee to carry on its business - Appeal is rejected

Summary

Issues Involved:
1. Depreciation on computer peripherals and accessories.
2. Disallowance of royalty expenses.
3. Capitalization of repair and maintenance expenses.

Issue-wise Detailed Analysis:

1. Depreciation on Computer Peripherals and Accessories:
The assessee claimed depreciation at 60% on computer peripherals and accessories such as UPS, scanners, and printers. The Assessing Officer (AO) restricted the depreciation to 25%, disallowing Rs. 1,52,896/-, arguing that the higher rate of 60% applies only to computers and software, not peripherals and accessories. The CIT(A) directed the AO to allow 60% depreciation, referencing previous Tribunal decisions in similar cases. The Tribunal remitted the matter back to the AO to examine whether the peripherals could function independently of the computer. If they could, they would be treated as plant and machinery; if not, they would be eligible for 60% depreciation as integral parts of the computer. The Tribunal upheld this approach for the current year as well, directing the AO to re-examine the nature of the peripherals.

2. Disallowance of Royalty Expenses:
The assessee debited Rs. 55,03,285/- as royalty expenses in its profit and loss account. The AO treated 75% of this amount as capital expenditure, disallowing Rs. 41,27,464/-, based on the nature of the Technical Collaboration Agreement (TCA) with Visteon Global Technology Inc. (VGTI), USA. The CIT(A) allowed the claim, following the Delhi High Court's decision in the assessee's case for the assessment year 2002-03, which held that the royalty payments, being a continuous process and linked to sales, should be treated as revenue expenditure. The Tribunal noted that the Department failed to provide contrary evidence and upheld the CIT(A)'s decision, distinguishing the facts from other cited cases where the payments were for acquiring technical know-how with enduring benefits.

3. Capitalization of Repair and Maintenance Expenses:
The assessee debited Rs. 36,79,722/- for repairs and maintenance, including Rs. 7,12,500/- for constructing a Secure Land Fill System (SLFS) for hazardous waste storage. The AO capitalized this expenditure, allowing 10% depreciation and adding back Rs. 6,41,250/-. The CIT(A) treated the expenditure as revenue, citing case laws that support treating statutory compliance expenditures as revenue. The Tribunal agreed, noting the statutory requirement for SLFS under environmental laws and the necessity for the assessee to carry on its business. The Tribunal found no evidence that the expenditure provided an enduring benefit and upheld the CIT(A)'s decision.

Conclusion:
The Tribunal partly allowed the Department's appeal, remitting the issue of depreciation on computer peripherals back to the AO for re-examination, while upholding the CIT(A)'s decisions on royalty expenses and repair and maintenance capitalization.