2016 (10) TMI 1389 - AT - Income Tax

Nature of expenditure - Payment of royalty - Revenue or capital expenditure - HELD THAT - Whether the payment of royalty by assessee to Carraro SpA, Italy is revenue or capital in nature, has been laid to rest by the Tribunal while deciding the appeal of the Department 2013 (2) TMI 877 - ITAT PUNE for assessment years 2003-04 and 2004-05 decided the issue in favour of the assessee by holding royalty payment as revenue expenditure. Royalty paid in respect of goods sold in domestic market and the amount of royalty pertains to and is necessarily an expense incurred to earn sales revenue during the year, hence same is revenue expenditure. Amortization of loose tools - principle of consistency - uniformity in treatment and consistency when the facts and circumstances in different years are identical - HELD THAT - We would like to observe that loose tools refer to patterns/dies further required to manufacture components according to design and technology specifications of the assessee. These components are used in the products manufactured by the assessee. Undisputedly, the dies and designs are provided by the assessee to the suppliers of the components. Merely for the reason that the loose tools are in possession of the suppliers of the components, it does not mean that the loose tools ceases to be the assets of the assessee. The assessee has provided the loose tools to the suppliers of the components for its own convenience. It is not the case of the revenue that the assessee has charged for the dies/patterns (loose tools) from the suppliers. Hon'ble Supreme Court of India in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT and Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT has emphasized on the principle of consistency. There should be uniformity in treatment and consistency when the facts and circumstances in different years are identical, particularly in the case of same assessee. Revenue appeal dismissed.

Summary

Issues Involved:
1. Nature of royalty payment: Whether it is capital or revenue expenditure.
2. Amortization of loose tools: Whether it is permissible under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Nature of Royalty Payment:
The primary issue raised by the Revenue pertains to the classification of the royalty payment of ?2,28,84,778/- made by the assessee to Carraro SpA, Italy. The Revenue contended that the Commissioner of Income Tax (Appeals) erred in treating the payment as revenue expenditure rather than capital expenditure. The Assessing Officer (AO) argued that the payment provided the assessee with a perpetual and royalty-free license to use the technology, thus conferring an enduring advantage and should be treated as capital expenditure.

The Tribunal, however, upheld the Commissioner of Income Tax (Appeals)’s decision by referencing earlier decisions in the assessee’s favor. It was noted that the Tribunal had previously ruled in the assessee's own case for the assessment years 2003-04, 2004-05, and 2007-08 that such royalty payments were revenue in nature. The Tribunal reiterated that the royalty payments were linked to the net sales turnover and not a lump-sum payment, indicating that the payments were for the use of technology and technical services, thus qualifying as revenue expenditure. The Tribunal found no change in the facts and circumstances for the assessment year under appeal and dismissed the Revenue's grounds on this issue.

2. Amortization of Loose Tools:
The second issue relates to the amortization of loose tools. The Revenue argued that the loose tools, which were not installed in the business premises of the assessee but were with vendors, should not be amortized and that such amortization was not permissible under sections 36 or 37(1) of the Income Tax Act. The AO contended that the loose tools were capital assets and their amortization constituted writing off a capital asset not used in the assessee's business.

The Tribunal, however, upheld the Commissioner of Income Tax (Appeals)’s decision, noting that the assessee had consistently followed the accounting practice of amortizing loose tools since the assessment year 2002-03 without any objection from the Revenue. The Tribunal emphasized the principle of consistency, citing the Supreme Court’s decision in Radhasoami Satsang Vs. CIT and the Bombay High Court’s decision in CIT Vs. Gopal Purohit, which stress uniformity in treatment when facts and circumstances are identical across different years, particularly for the same assessee.

The Tribunal observed that the loose tools, although in the possession of suppliers, were used exclusively for manufacturing components as per the assessee’s specifications and remained the property of the assessee. The Tribunal found no merit in the Revenue’s objection, as the tools were used for the assessee’s business, and dismissed the grounds raised by the Revenue on this issue.

Conclusion:
The Tribunal dismissed the Revenue’s appeal, upholding the Commissioner of Income Tax (Appeals)’s decisions on both issues. The royalty payment was confirmed as revenue expenditure, and the amortization of loose tools was deemed permissible, emphasizing the principle of consistency in the treatment of such expenditures.