2014 (1) TMI 1921 - AT - Income Tax

Depreciation relating to Intangible Assets - depreciation on trademarks and licences - HELD THAT - The issue involved in this appeal is whether the depreciation claimed by the assessee is eligible or not. The very same issue in assessee s own case for the assessment year 2008-09 2013 (2) TMI 716 - ITAT CHENNAI came before the Tribunal and the Tribunal has decided the issue in favour of the assessee. Service charges paid to UBL and IIL were revenue in nature and capitalization of service charges - service charges paid to UBL and IIL is eligible or not? - HELD THAT - The Tribunal in assessee s own case has considered this issue and decided in favour of the assessee as concluded that verification of a transaction with the group company is at arm s length and is not a statutory requirement u/s 40A(2) of the Act. It was argued that as per the provisions of section 40A(2) what is required of the Assessing Officer is to form an opinion that an expenditure is not excessive or unreasonable. The discretion to decide this issue is vested with the Assessing Officer and he has exercised the same in favour of the assessee. Thus, it cannot be said that an error has crept into the assessment order causing prejudice to the Revenue. Disallowance of payment towards fees and technical advisory and management fees - Whether technical advisory and management fees paid to UBL is for the purpose of business or not ? - HELD THAT - Respectfully following the decision of the Coordinate Bench in assessee s own case for the assessment year 2008-09 2013 (2) TMI 716 - ITAT CHENNAI held it be allowable, since expenditure incurred was for making the business which continued after closure of an unit, viable. In our opinion, this case will only support the case of the assessee hereand in the Revenue could not file any higher Court s decision to take a different view, we find no reason to interfere with the order passed by the ld. CIT(Appeals) and the grounds raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Disallowance of depreciation on trademarks and licenses.
2. Capitalization of service charges.
3. Disallowance of payment towards technical advisory and management fees.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Trademarks and Licenses:
The assessee, engaged in the manufacture and sale of liquor, claimed depreciation on trademarks and licenses valued at Rs. 12,45,41,161/-. The Assessing Officer (AO) disallowed the depreciation amounting to Rs. 3,11,35,290/- on the grounds that the trademarks and licenses were appreciating assets and not eligible for depreciation. The assessee argued that the assets were acquired from Empee Distilleries Ltd. for Rs. 22 crores and were intangible assets eligible for depreciation under Section 32 of the Income Tax Act. The CIT(Appeals) and the ITAT upheld the assessee's claim, noting that the transaction was at arm's length and the depreciation was allowable as per the provisions of the Act. The Tribunal relied on its earlier decision in the assessee's case for AY 2008-09, confirming that the depreciation on intangible assets like trademarks and licenses is permissible.

2. Capitalization of Service Charges:
The AO capitalized service charges amounting to Rs. 11,94,34,603/- paid to UBL and IIL, considering them as payments for acquiring technical know-how, thus disallowing them as revenue expenditure. The assessee contended that the payments were for royalty and brand usage, recurring in nature, and based on production volume. The CIT(Appeals) and the ITAT, following the decision in the assessee's case for AY 2004-05, ruled in favor of the assessee, treating the service charges as revenue expenditure. The Tribunal noted that the payments were essential for the business operations and not for acquiring any capital asset.

3. Disallowance of Payment Towards Technical Advisory and Management Fees:
For AY 2009-10, the AO disallowed Rs. 10 crores paid to UBL for technical advisory and management fees, questioning the commercial expediency and lack of specific service details. The assessee argued that the payments were justified by the savings and managerial expertise provided by UBL. The CIT(Appeals) and the ITAT, referencing the decision for AY 2008-09, upheld the assessee's claim, emphasizing that the payments were made for business purposes and were revenue-neutral. The Tribunal highlighted that the genuineness of the payments was not in doubt and they were essential for the business strategy and operations.

Conclusion:
The ITAT Chennai dismissed the Revenue's appeals for AYs 2005-06, 2006-07, and 2009-10, confirming the CIT(Appeals)'s decisions to allow depreciation on trademarks and licenses, treat service charges as revenue expenditure, and accept the payment towards technical advisory and management fees as business expenses. The Tribunal consistently followed its previous rulings in the assessee's favor, ensuring compliance with the provisions of the Income Tax Act and recognizing the commercial rationale behind the expenditures.