2016 (7) TMI 1694 - AT - Income Tax

Nature of expenses - Royalty payment - capital or revenue expenditure - AO treated it as a capital expenditure - A.R. submitted that the assessee has been incurring royalty expenditure every year, by virtue of license agreement entered into between the assessee and company in Germany - HELD THAT - On perusal of the order passed by this Tribunal for Assessment Year 2004-05 we observe that the co-ordinate bench of this Tribunal has analyzed the agreement and the nature of the amount paid by the assessee pursuant to the agreement. It has also been observed therein that the royalty payment is a running expenditure incurred by the assessee every year. D.R. / Ld. A.O. has not been able to bring out contrary facts, we are in agreement with the submissions of the learned counsel for relating to disallowance of royalty amount is covered in favour of the assessee by the order of the Coordinate Bench of the Tribunal rendered in assessee's own case as followed the decision of Sarda Motor Industrial Ltd 2009 (9) TMI 159 - DELHI HIGH COURT held assessee has not obtained any benefit of enduring nature. The royalty is payable on the basis of volume of sales year to year. In the event of termination of agreement has to discontinue uses of material provided return everything in this respect. Hence it cannot be said that any benefit of enduring nature accrued to the assessee - DR only contended that the agreement also provided training to the assessee's employees, which cannot be returned in any case. We do not find any cogency in this aspect of this agreement as training expense of employee cannot be treated as capital expenditure. - Decided against revenue.

Summary

Issues:
1. Disallowance of Royalty payment as capital expenditure.

Analysis:
The appeal was filed by the Revenue against the order passed by CIT(A) for the Assessment Year 2009-10, challenging the deletion of the addition of Rs.77,00,367 made by the Assessing Officer on account of disallowance of Royalty payment. The assessee company, engaged in manufacturing adhesives and related products, had claimed royalty expenditure of Rs.1,02,67,156. The Assessing Officer treated it as a capital expenditure, citing judicial precedents. However, the CIT(A) allowed the claim, emphasizing that the royalty payment should be treated as revenue expenditure based on previous ITAT decisions and the consistency in treatment of the issue for the appellant. The CIT(A) also considered the claim under section 35AC for donation to SNS Foundation, partially allowing it. The Revenue, aggrieved by the CIT(A) order, appealed before the ITAT.

The ITAT analyzed the license agreement between the assessee and a German company, observing that the royalty payment was a running expenditure incurred annually. Referring to previous ITAT decisions in the assessee's own cases for different assessment years, the ITAT found that the disallowance of royalty amount was settled in favor of the assessee. The ITAT highlighted that the royalty payment did not confer any enduring benefit and was based on sales volume, thus qualifying as revenue expenditure. The ITAT upheld the CIT(A) order, dismissing the Revenue's appeal. The decision was based on consistent precedents and the nature of the royalty payment as a recurring expense.

In conclusion, the ITAT upheld the CIT(A) order, dismissing the Revenue's appeal against the disallowance of royalty payment as capital expenditure. The decision was supported by previous ITAT rulings in the assessee's favor, emphasizing the recurrent nature of the royalty payment and its classification as revenue expenditure. The ITAT's decision was based on the analysis of the license agreement and the absence of enduring benefits from the royalty payment, in line with established legal principles and precedents.