2011 (10) TMI 18 - AT - Income Tax

Allowability of Royalty Expense. - Disallowance in consultancy Charges u/s 40A(2) on the basis of reasonability of payment. - Disallowance of advertisement and sale promotion expenses on the grounds that advertisement expenditure in print media is in respect of brand promotion. advertisement expenditure pertains not only to assessee but also confer benefits to other associate concerns therefore assessee is entitled to deduction of proportionate expenditure only. Regarding of Roylaty Expense. - Held that - it is an open ended agreement, it is only for the use of know-how and patents including improvements to the know-how. No proprietary right has been passed on to the assessee in the know-how or the patent. decided in favour of Assessee. Regarding disallowance u/s 40A(2). - Held that -it is upon the assessee to decide what expenses are to be incurred or what is required for business purposes and it is not open to the Revenue to prescribe as to what expenses are to be incurred by the assessee. - Decided in favour of Assesseee. Regarding disallowance of Advertisement and sale promotion. - Held that - the assessee was the brand owner, it has vested interests and incurring of expenditure for promotion of brand was in the interest of the business of the assessee company only. We also found that similar expenditure was allowed consistently in the past and no disallowance has been made towards these expenses. - Decided in favour of Assessee.

Issues Involved:
1. Deletion of the disallowance of Rs. 4,54,85,325/- made by the AO out of royalty expenses.
2. Deletion of the addition of Rs. 87,60,601/- made by the AO by invoking section 40A(2) of the Act.
3. Deletion of the disallowance of Rs. 10,31,886/- made by the AO from advertisement and sale promotion expenses.
4. Restriction of the disallowance to Rs. 8,87,557/- against Rs. 73,26,507/- made by the AO.

Detailed Analysis:

1. Deletion of the disallowance of Rs. 4,54,85,325/- made by the AO out of royalty expenses:
The revenue challenged the deletion of the disallowance of Rs. 4,54,85,325/- made by the AO out of royalty expenses. The assessee's counsel argued that the issue was covered by the decision of the Delhi Tribunal for assessment years 2005-06 and 2006-07. The Tribunal found that the know-how agreement between RML and the assessee had been extended and the royalty payments were for the continued use of the brand name and patents, not for any fresh input of know-how. The Tribunal concluded that the royalty payments were revenue in nature and allowable under section 37(1) of the Act. The CIT(A) had accepted the assessee's method of computing royalty and deleted the addition. The Tribunal followed its earlier decision and dismissed the revenue's grounds, stating that no proprietary right had been passed to the assessee, and the expenditure was revenue in nature.

2. Deletion of the addition of Rs. 87,60,601/- made by the AO by invoking section 40A(2) of the Act:
The AO had disallowed Rs. 87,60,601/- out of consultancy charges of Rs. 1,17,60,601/- claimed by the assessee, alleging that the agreement was an arrangement to siphon off profits. The CIT(A) deleted the addition, following the Tribunal's decision in earlier years. The Tribunal noted that the disallowance was not made on the ground that no service was availed by the assessee but on the presumption of siphoning off profits without any proof. The Tribunal, following its earlier decision, dismissed the revenue's grounds, stating that the consultancy charges were reasonable and incurred for business purposes.

3. Deletion of the disallowance of Rs. 10,31,886/- made by the AO from advertisement and sale promotion expenses:
The AO disallowed Rs. 10,31,886/- from advertisement and sale promotion expenses, stating that the expenditure was for brand promotion and conferred benefits to associate concerns. The CIT(A) deleted the addition, following the Tribunal's decision in earlier years. The Tribunal found that the expenditure was incurred for the promotion of the brand "Revlon," which accrued only to the assessee and was a commercial decision. The Tribunal noted that similar expenditure was allowed in the past and there was no change in facts. Following the principle of consistency, the Tribunal dismissed the revenue's grounds.

4. Restriction of the disallowance to Rs. 8,87,557/- against Rs. 73,26,507/- made by the AO:
This ground was not argued by the CIT, DR, and no such disallowance was made by the AO as seen from the computation of income. The issue did not emanate from the order of the CIT(A). Therefore, the ground was dismissed as infructuous.

Conclusion:
The Tribunal dismissed the appeal, upholding the decisions of the CIT(A) regarding the deletion of disallowances and additions made by the AO, and following the principle of consistency based on earlier decisions.

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