2012 (8) TMI 796 - AT - Income Tax

Capital expenditure vs Revenue expenditure - development fee paid to manufacturer (foreign company) based on an agreement which required manufacturer to supply the required quantities of the items(developed as per its specification) to the assessee for a period of five years - development fee developing Liquid Crystal Display Units assessee contending the same to be revenue in nature - Held that - It is undisputed that payments were made for customized products. Also if the components so developed were sold to any other persons by M/s.Fujitsu then royalty was payable to assessee. Hence it led to the creation of a type of asset which could give rise to royalty income to the assessee in future. Therefore payments resulted in creation of a commercial right to the assessee over such developed components. Further benefit was of an enduring nature. Same has been rightly held as intangible asset eligible for depreciation. Moreover assessee himself has treated it as a capital out go and claim of it being revenue in nature was never made by filing a revised return. In the original return assessee had itself claimed only depreciation Decided against assessee

Summary

Issues involved:
1. Allowance of depreciation on development fee/charges.
2. Classification of development fee as revenue expenditure or capital expenditure.

Analysis:
1. Allowance of depreciation on development fee/charges:
The Assessing Officer disallowed the depreciation claimed on development fee paid by the assessee for the development of components. The Assessing Officer considered the purpose for which the design was created by the developer as a capital expenditure, leading to the disallowance of depreciation. However, the Commissioner of Income Tax(Appeals) overturned this decision, stating that the payment made by the assessee resulted in the creation of an intangible asset, akin to intellectual property rights, and directed the Assessing Officer to grant depreciation. The Tribunal upheld the decision of the Commissioner, emphasizing that the payment led to the creation of a commercial right for the assessee, eligible for depreciation under Section 32(1)(ii) of the Act.

2. Classification of development fee as revenue expenditure or capital expenditure:
The dispute also revolved around whether the development fee paid should be treated as revenue expenditure or capital expenditure. The Departmental Representative argued that the payments were merely technical fees and did not result in the creation of any capital asset. On the other hand, the Authorized Representative of the assessee contended that if the payments did not result in acquiring a capital asset, they should be considered as revenue expenditure. The Tribunal noted that the payments resulted in the creation of an intangible asset, as evidenced by the control and potential royalty income to the assessee. The Tribunal agreed with the Commissioner of Income Tax(Appeals) that the payments were akin to a commercial right and, therefore, upheld the decision to allow depreciation on the amount paid as development fee.

In conclusion, the Tribunal dismissed the appeal of the Revenue and the cross objection of the assessee, affirming the decision of the Commissioner of Income Tax(Appeals) to allow depreciation on the development fee paid by the assessee, considering it as the creation of an intangible asset eligible for depreciation under the Income Tax Act.