2014 (12) TMI 1107 - AT - Income Tax

Disallowance on trade mark fee deleted Revenue expenses or not - Right to use the trade mark acquired by the assessee was an intangible asset as defined u/s 32 or not - Held that - CIT(A) rightly deleted the disallowance of ₹ 55,70,045/- on account of trade mark fee by holding that it was a revenue expenditure and without considering that right to use the trade mark acquired by the assessee was an intangible asset as defined u/s. 32 - following the decision in THE COMMISSIONER OF INCOME TAX-IV NEW DELHI Versus G4S SECURITIES SYSTEM (INDIA) PVT. LTD. 2011 (7) TMI 65 - DELHI HIGH COURT - under the terms of the agreement, the ownership rights of the trade mark and knowhow throughout vested with G4F and on the expiration or termination of the agreement the assessee was to return all G4F knowhow obtained by it under the agreement - The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time the assessee was entitled to become the exclusive owner of the technical knowhow and the trade mark - hence, the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable u/s 37(1) Decided against revenue. Disallowance of license fee deleted Revenue expenses or not - assessee had acquired proportionate rights to use the software, which was an intangible asset as defined u/s. 32 or not Held that - CIT(A) rightly deleted the disallowance of license fee by holding it as revenue expenditure and without considering that the assessee had acquired proportionate rights to use the software, which was an intangible asset as defined u/s. 32 Following the decision in COMMISSIONER OF INCOME TAX Versus M/s ASAHI INDIA SAFETY GLASS LTD. 2011 (11) TMI 2 - DELHI HIGH COURT - it cannot be said that the expenses brought about in an enduring benefit to the assessee - the mere fact that the assessing officer records that the expenditure, in financial year 1997-98 (assessment year 1998-99), was incurred towards what he terms as an on-going project would not ipso facto give it a colour of capital expenditure - after noticing the submission of the assessee that the expenditure incurred in the AY was for removing deficiencies which were found in the software installed in the earlier assessment year, and that, out of a sum of ₹ 1.71 crores a sum of ₹ 49 lacs was incurred to modify, customize and upgrade the software installed, while the balance expenditure was used for development and implementation it returned a finding that the expenses were incurred to upgrade and run the system thus, the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Disallowance of Rs. 55,70,045/- on account of trade mark fee.
2. Disallowance of license fee of Rs. 3,44,550/- for software usage.

Detailed Analysis:

Issue 1: Disallowance of Rs. 55,70,045/- on Account of Trade Mark Fee

The Revenue challenged the decision of the CIT(A) to delete the disallowance of Rs. 55,70,045/- on account of trade mark fee, arguing it was a capital expenditure as the "right to use the trade mark" was an intangible asset under Section 32 of the I.T. Act. The assessee, engaged in manufacturing gears and components, had an agreement with its parent company to use the "Oerlikon" brand name, paying a fee based on turnover, which the AO treated as capital expenditure, allowing depreciation at 25%.

The CIT(A) ruled in favor of the assessee, treating the fee as revenue expenditure. The Tribunal referenced the Hon'ble Jurisdictional High Court's decision in CIT vs. G4S Securities System (India) Pvt. Ltd., which held that payments based on turnover for using a trade mark and knowhow, without acquiring ownership rights, are revenue expenditures. The Tribunal concluded that the assessee's situation was similar, with the trade mark fee being a recurring expense linked to turnover, not creating an enduring benefit or ownership rights. Thus, the Tribunal upheld the CIT(A)'s decision, treating the trade mark fee as revenue expenditure.

Issue 2: Disallowance of License Fee of Rs. 3,44,550/- for Software Usage

The Revenue also contested the CIT(A)'s deletion of the disallowance of Rs. 3,44,550/- for software license fees, asserting it was a capital expenditure as the software was an intangible asset under Section 32 of the I.T. Act. The AO had capitalized the software license fee, treating it as a capital expense.

The Tribunal referred to the Hon'ble Jurisdictional High Court's ruling in CIT vs. Asahi India Safety Glass Ltd., which clarified that expenses for software licenses and related services, aimed at improving business efficiency without creating new assets or income sources, are revenue expenditures. The Tribunal noted that the software license fee was for operational efficiency, training, and maintenance, not for acquiring a new asset or income source. Therefore, the Tribunal upheld the CIT(A)'s decision, treating the software license fee as revenue expenditure.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues, treating the trade mark fee and software license fee as revenue expenditures. The judgments in favor of the assessee were based on established legal precedents, emphasizing the recurring nature of the expenses and their role in business operations rather than asset creation. The order was pronounced in open court on 19/12/2014.