2018 (7) TMI 2094 - AT - Income Tax

Payment made for technical knowhow - capital in nature or revenue - HELD THAT - CIT(A) has relied on Supreme Court Decision in the case of Southern Switchgear Ltd. vs. CIT 1997 (12) TMI 105 - SC ORDER is not applicable in the present case because in that case agreement was made for a period of five years and it was expressly stipulated that after expiry of agreement, the method, production, procedure etc. would remain with the Indian assessee, whereas no such stipulation is made in the agreements made in the case before us so as to observe any benefit of enduring nature with the assessee. In the present case, the assessee has acquired only right to use of technical knowledge of the foreign company. Royalty paid by the assessee in the peculiar facts and circumstances of the present case, was in the nature of revenue expenditure incurred by the assessee. Therefore, we set aside the orders of the authorities below on this issue and decide it in favour of the assessee.

Summary

Issues Involved:
1. Disallowance of reimbursement under Section 40(a)(i) of the Income Tax Act, 1961.
2. Liability to deduct tax under Section 195 of the Income Tax Act, 1961.
3. Disallowance of expenditure on account of royalty.
4. Classification of royalty expenditure as capital or revenue in nature.

Detailed Analysis:

1. Disallowance of Reimbursement under Section 40(a)(i):
The assessee contested the disallowance of ?8,92,572/- as reimbursement under Section 40(a)(i) of the Income Tax Act, 1961. The CIT(A) confirmed this disallowance, stating that the assessee failed to demonstrate the nature of reimbursements both in the assessment and appellate proceedings. The assessee argued that similar claims were allowed in the previous assessment year 2010-11.

2. Liability to Deduct Tax under Section 195:
The assessee argued that it was not liable to deduct tax under Section 195 from payments made to Bellsonica Corporation Japan towards reimbursement of expenses, claiming these were not chargeable to tax in India. The CIT(A) dismissed this contention, leading to the assessee's appeal.

3. Disallowance of Expenditure on Account of Royalty:
The assessee also contested the disallowance of royalty expenditure. The CIT(A) treated 25% of the royalty expenditure as capital in nature and the remaining 75% as revenue expenditure. The Revenue, on the other hand, argued that the entire royalty payment should be classified as capital expenditure.

4. Classification of Royalty Expenditure:
The Assessing Officer classified the royalty payment of ?2,36,63,834/- to Bellsonica Corporation Japan as a fee for technical know-how, treating it as an intangible capital asset under Rule 5. Consequently, 25% depreciation was allowed, and the remaining amount was capitalized. The CIT(A) partially agreed, treating 25% as capital and 75% as revenue expenditure.

Judgment:

Reimbursement Disallowance:
The Tribunal noted that the exact nature of the payments was not demonstrated by the assessee before the Assessing Officer or the CIT(A). The matter was remitted back to the Assessing Officer to re-examine the applicability of TDS provisions concerning the nature of payments made to Bellsonica Corporation Japan. The assessee was directed to produce cogent evidence to support its claim, and the Assessing Officer was instructed to provide a reasonable opportunity to the assessee.

Royalty Expenditure:
The Tribunal examined the terms of the agreement dated 01.10.2006, noting that the ownership of technical know-how remained with the foreign company and was not transferred to the assessee. The Tribunal referenced decisions in similar cases, including CIT vs. Hero Honda Motors Ltd. and Moser Baer, where royalty payments under similar agreements were treated as revenue expenditure. The Tribunal concluded that the royalty payment did not confer any enduring benefit to the assessee and was, therefore, revenue in nature. Consequently, the Tribunal set aside the orders of the lower authorities on this issue, deciding in favor of the assessee.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the Revenue was dismissed. The Tribunal's order was pronounced in the open court on 27th July 2018.