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2013 (10) TMI 515 - AT - Income TaxCapital or Revenue expenditure - Disallowance of royalty expenses - CIT held that payment of royalty was partly towards capital and partly towards the revenue - Held that - know-how was granted by the foreign company solely for the purpose of manufacture, assembly and sale of products during the term of the contract and the licensee was to pay royalty to the licensor. The drawings and designs which were supplied by the licensor only enabled the assessee to manufacture the goods, namely, the shock absorbers. The assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required. For the aforesaid purpose, the training of the personnel of the assessee was imperative. If the agreement is read in entirety in a purposeful manner, there can be no trace of doubt that the know-how acquired relates to the process of manufacturing and for a tenure and the documents, designs and specifications which have been supplied by the licensor are only for facilitating the said purpose of manufacturing - Following decision of CIT v. T.E.I. Technologies P. Ltd. 2008 (2) TMI 275 - DELHI HIGH COURT - Decided in favour of assessee.
Issues Involved:
1. Disallowance of 25% of royalty expenses. 2. Disallowance of 25% of technical fees. 3. Disallowance of 25% of design and drawing fees. 4. Deduction of power and fuel expenditure. Detailed Analysis: 1. Disallowance of 25% of Royalty Expenses: The primary issue was whether the royalty expenses paid by the assessee should be treated as capital or revenue expenditure. The CIT (A) upheld the Assessing Officer's decision to treat 25% of the royalty expenses as capital expenditure. However, the assessee argued that these expenses were revenue in nature. The assessee referenced a technical collaboration contract from 1995 with M/s. Showa Corporation, Japan. Previous decisions by the ITAT and the Hon'ble Delhi High Court in the assessee's own cases for earlier assessment years (2000-01 and 2001-02) had held that such expenses were revenue in nature. The tribunal noted that the terms of the agreement remained unchanged and thus ruled in favor of the assessee, allowing the royalty expenses as revenue expenditure. 2. Disallowance of 25% of Technical Fees: Similar to the royalty expenses, 25% of the technical fees paid by the assessee were treated as capital expenditure by the Assessing Officer and upheld by the CIT (A). The assessee contended that these fees were for training personnel and acquiring designs and drawings necessary for manufacturing but not for acquiring the technology itself. The tribunal, referencing previous rulings and the unchanged terms of the agreement, concluded that these expenses were revenue in nature and allowed the appeal. 3. Disallowance of 25% of Design and Drawing Fees: The Assessing Officer and the CIT (A) treated 25% of the design and drawing fees as capital expenditure. The assessee argued that these fees were necessary for the manufacturing process and did not result in the acquisition of any enduring benefit or technology. The tribunal, considering previous decisions and the unchanged terms of the agreement, ruled that these expenses were revenue in nature and allowed the appeal. 4. Deduction of Power and Fuel Expenditure: The assessee claimed power and fuel expenses of Rs.1,01,83,270/- for the assessment year 2004-05, which were disallowed by the Assessing Officer on the grounds that they pertained to the assessment year 2003-04. The CIT (A) directed these expenses to be allowed in the assessment year 2003-04. The tribunal, after hearing both sides, upheld the CIT (A)'s decision, noting that the expenses were indeed related to the assessment year 2003-04. Consequently, the ground taken by the assessee for the assessment year 2004-05 was dismissed. Conclusion: The tribunal allowed the appeals related to the disallowance of 25% of royalty, technical fees, and design and drawing fees, treating them as revenue expenditure. The tribunal also upheld the CIT (A)'s decision to allow power and fuel expenses in the assessment year 2003-04, dismissing the assessee's ground for the assessment year 2004-05. The final order pronounced that ITA No.4674/Del/2005 for Assessment Year 2002-03 is allowed, ITA No.1705/Del/2007 for Assessment Year 2003-04 and ITA No.2619/Del/2007 for Assessment Year 2004-05 are partly allowed.
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