2015 (1) TMI 824 - HC - Income Tax

Royalty paid to parent Company - Capital v/s Revenue - Held that - It is not disputed that no new fact or development took place or was taken into account by the A.O. Considering that consistently for 12 years identical payments were treated as revenue expenditure and in fact are entitled to be treated as such this Court is of the opinion that the question of law has to be answered against the revenue - Decided in favour of the assessee. Payments made to M/s Denso Haryana for use of the intranet disallowed - Held that - The facility was a communication network known as NICE NET . The network was availed on cost sharing basis for reporting and communication, and changed to the Denso Group Companies world over. Since it was an actual payment in respect of the service availed by the assessee, the first Appellate authority was of the opinion that there could be no dispute in this regard. The CIT (Appeals), therefore, set aside the observations of the A.O., based upon his surmise that no service was in fact rendered and agreement was itself sham. This Court is of the opinion that findings of the ITAT affirming the conclusions of the CIT (Appeals) are reasonable.- Decided in favour of the assessee. Know-how fees - benefit of Section 35AB - Held that - Since the depreciation under Section 32(1) is available, in respect of an amount, claimed by the assessee, that it sought benefit under Section 35AB earlier could not have been the only reason to deny it. The revenue can succeed only if it establishes that such depreciation is impermissible in law. The ITAT s findings are to the contrary. There is no substantial question of law on this aspect.- Decided in favour of the assessee.

Summary

Issues:
1. Treatment of royalty payment as capital or revenue expenditure.
2. Disallowance of payment made for intranet services.
3. Treatment of expenditure paid to Denso Corporation for technical services.
4. Disallowance of claim made under Section 35AB.

Issue 1 - Royalty Payment:
The revenue appealed against the ITAT's decision to delete the addition made by the Assessing Officer on account of royalty paid by the assessee to its parent company, arguing that it should be treated as capital expenditure. The CIT (Appeals) and ITAT disagreed, holding that the royalty payments were revenue expenditure, consistent with previous years. The court sided with the assessee, citing past decisions and lack of new developments to support the revenue's claim, ultimately ruling in favor of the assessee.

Issue 2 - Intranet Services Payment:
The dispute centered on the disallowance of payments made by the assessee to Denso Haryana for using the intranet service. The A.O. questioned the nature of the service, but the CIT (Appeals) and ITAT found the payments to be legitimate revenue expenditure, as they were for actual services provided. The court upheld the ITAT's decision, stating that the A.O. lacked evidence to prove otherwise, leading to a ruling in favor of the assessee.

Issue 3 - Expenditure on Technical Services:
Regarding the expenditure paid to Denso Corporation for technical services, the court referred to a previous judgment for A.Y. 2001-02, where it was established that such expenses were allowable as business expenditure under Section 37(1) of the Income Tax Act. As this issue was already settled in favor of the assessee, the court ruled against the revenue's claim, affirming the treatment of the expenditure as revenue expenditure.

Issue 4 - Claim under Section 35AB:
The matter concerned the claim made by the assessee under Section 35AB, which was disallowed by the A.O. The ITAT observed the assessee's transition from Section 35AB to Section 32(1) for depreciation on know-how fees paid to Denso Japan. The court found that since depreciation under Section 32(1) was available, the revenue's argument to deny it based on the previous claim under Section 35AB was unsubstantiated. Consequently, the court dismissed the revenue's appeals, emphasizing that the depreciation claim was valid under the law, leading to the failure of the appeals.