2018 (7) TMI 1822 - HC - Income Tax

Disallowance of the royalty payment made to G4S NAMESA - whether the same was not incurred wholly and exclusively for the purpose of business under Section 37? - Held that - We find that, CIT (A) and the Tribunal have both rendered finding of fact that the respondent-assessee has not led any evidence before it to establish the manner in which the technical knowhow as acquired from G4S NAMESA has been used in the business of the respondent. The authorities have also held that the Incident Report Format produced on account of ERP obtained from an Associated Enterprise to whom the payment was made, was infact being carried out by the appellant even prior to entering into an agreement dated 27th December, 2007 with G4S. The concurrent finding recorded is that the assessee had offered no explanation as to the manner in which the agreement had helped the assessee to carry out its business. These are findings of facts. Thus, mere entering into an agreement with it being actually put to use cannot lead to the conclusion that the payment made under the Agreement was for knowledge to be used in its business. - Decided against assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding disallowance of royalty payment as business expenditure under Section 37 of the Income Tax Act, 1961 for Assessment Year 2008-09 and 2009-10.

Analysis:
1. The respondent, engaged in providing security services globally, claimed payment to its Associate Company as revenue expenditure for expert advisory services. The Assessing Officer disallowed the claim, treating it as capital expenditure for trademark usage and allowed depreciation.
2. The Commissioner of Income-Tax (Appeals) held the expenditure neither revenue nor capital, noting the lack of trademark usage and dismissed the appeals due to failure to explain the acquired knowledge's use in business.
3. The Tribunal upheld the disallowance, finding the respondent failed to demonstrate how the acquired technical know-how was utilized in business operations, leading to the conclusion that the expenses were not incurred wholly and exclusively for business purposes.
4. The appellant argued the use of ERP modules as evidence of technical know-how application, citing a Delhi High Court judgment supporting similar expenditure as revenue. However, both the CIT (A) and Tribunal found no evidence of the technical know-how's utilization in business operations.
5. The High Court upheld the Tribunal's decision, stating that the mere existence of an agreement without evidence of its actual use in business does not justify the expenditure as business-related. The Delhi High Court judgment cited by the appellant was deemed inapplicable due to the lack of evidence of technical know-how utilization in the present case.
6. The Court concluded that the proposed question of law did not raise any substantial issue, as the Tribunal's decision aligned with the findings of the CIT (A) and was not shown to be unreasonable. Consequently, both appeals were dismissed, with no order as to costs.