2017 (10) TMI 689 - HC - Income Tax

Addition on account of payment of royalty - seminar expenditure - Assessing Officer had held that the expenditure was a capital expenditure - nature of expenditure - Tribunal allowed it as revenue expenditure - Held that - No question of law arising. When it is found that the expenditures were for the purpose of augmenting the business of the assessee and did not result into any enduring benefit such expenditures were correctly allowed as revenue expenditures. We are not unmindful of the decision of the Supreme Court in case of Honda Siel Cars (I) Ltd. vs. Commissioner of Income Tax reported in 2017 (6) TMI 524 - SUPREME COURT OF INDIA in which on facts it was held that the royalty payment for obtaining technical knowhow for the entire period of agreement was a capital expenditure. The Supreme Court confirmed the view of the High Court that such acquisition resulted into an enduring benefit to the assessee. Disallow the expenditure same was in the nature of penalty - Held that - CIT(Appeals) and the Tribunal both noted that the amount had to be paid since the assessee failed to achieve the pre-set targets. This was just a contractual liability and not strictly speaking of, penal liability. No question of law therefore arises.

Summary

Issues:
1. Whether the Appellate Tribunal erred in deleting the addition made by the Assessing Officer on account of royalty payment.
2. Whether the Appellate Tribunal erred in deleting the addition made by the Assessing Officer on account of seminar expenses treated as capital expenditure.
3. Whether the Appellate Tribunal erred in deleting the addition made by the Assessing Officer on account of non-achievement of targets.

Analysis:

1. The first issue revolves around a royalty payment of ?71.75 lakhs. The Assessing Officer treated this expenditure as capital expenditure. However, the CIT(Appeals) disagreed, stating that the payment of royalty for trademark use facilitated easier product marketing, constituting a profit-earning apparatus without any enduring benefit. The Tribunal upheld this view, emphasizing that the expense was correctly treated as revenue expenditure.

2. Addressing the second issue concerning seminar expenses of ?5.92 lakhs, the CIT(Appeals) recognized the expenditure was for training purposes related to marketing services for pharmaceutical companies. The Tribunal affirmed this decision, concluding that the expenses aimed at enhancing the business and did not result in any lasting benefit, thus qualifying as revenue expenditures.

3. Regarding the last issue of non-achievement of targets leading to an expense of ?93.45 lakhs, the Assessing Officer sought to disallow this amount as a penalty. However, both the CIT(Appeals) and the Tribunal determined that the payment was contractual due to failure in meeting pre-set targets, not constituting a penal liability. Consequently, it was deemed a contractual obligation, and no legal question arose.

In summary, the High Court dismissed the tax appeal, finding no legal grounds for interference as the expenses in question were justified as revenue expenditures, aligning with the purpose of enhancing the assessee's business without resulting in enduring benefits. The court referenced relevant precedents and clarified the distinction between capital and revenue expenditures, ultimately upholding the decisions of the lower authorities.