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2019 (9) TMI 186 - AT - Income TaxNature of expenditure - licence fee paid to AE - capital expenditure OR revenue expenditure - HELD THAT - CIT(A) has brought out clear facts in the light of agreement between the parties that payment of licence fee is for use of brand name of assessee s AE and such royalty has been paid @1% of total sales effected in India. Payment of licence fee is directly linked to sale made by the assessee and hence there is no error in the finding recorded by the CIT(A) that it is in the nature of revenue expenditure. No doubt, in the case of Assam Bengal Cement Co. Ltd vs CIT 1954 (11) TMI 2 - SUPREME COURT clearly stated that wherever enduring benefit is derived, the expenditure is to be treated as capital expenditure. But to decide whether a particular expenditure give s enduring benefit to the assessee or not has to be decided in the light of arrangement between parties. In this case, on perusal of agreement between the parties it is clear that the assessee was agreed to pay 1% royalty on total sales which is periodically linked to sales effected by the assessee, but not a lump sum payment for acquiring any right in intellectual property. AO was incorrect in holding that licence fee paid to AE is in the nature of capital expenditure which gives enduring benefit. CIT(A), after considering relevant facts, has rightly deleted addition made by the AO Disallowance of employees contribution to PF ESIC u/s 36(1)(viia) r.w.s. 2(24)(x) - HELD THAT - We find that this issue is covered in favour of the assessee by the decision in the case of CIT vs Hindustan Organics Chemical Ltd 2014 (7) TMI 477 - BOMBAY HIGH COURT where it was held that section 43B is not applicable to payments made beyond the due date specified under respective Acts, if such payments have been made on or before due date of filing return of income. In the case of Alom Extrusions Ltd 2009 (11) TMI 27 - SUPREME COURT had considered an identical issue and held that contribution payable by the employer to the PF or any other fund for the welfare of the employees was allowable, if such contribution is paid on or before the due date of filing return of income. In this case, CIT(A) has brought out clear facts to the effect that although the assessee has remitted employees contribution to PF / ESIC after the due date specified under respective Act, but such contribution has been paid on or before due date of furnishing return of income.
Issues:
1. Disallowance of licence fee paid 2. Disallowance of employees' contribution to PF & ESIC Analysis: Issue 1: Disallowance of licence fee paid The case involved an appeal against the disallowance of licence fee paid by the assessee. The Assessing Officer (AO) contended that the licence fee paid to the assessee's associated enterprise (AE) for using the brand name was capital expenditure, as it provided enduring benefit. However, the Commissioner of Income Tax (Appeals) held that the payment of royalty at 1% on total sales did not transfer ownership of intellectual property rights and was, therefore, revenue expenditure. The Income Tax Appellate Tribunal (ITAT) agreed with the CIT(A) and dismissed the revenue's appeal. The ITAT emphasized that the payment was directly linked to sales and did not confer enduring benefit, as it was a periodic royalty based on sales volume, not a lump sum for acquiring intellectual property rights. Issue 2: Disallowance of employees' contribution to PF & ESIC Another issue pertained to the disallowance of employees' contribution to Provident Fund (PF) and Employee State Insurance Corporation (ESIC) under sections 36(1)(viia) and 2(24)(x) of the Income Tax Act, 1961. The ITAT relied on precedents, including a decision by the Bombay High Court and the Supreme Court, to rule in favor of the assessee. The ITAT held that contributions paid after the due date specified under the Acts but before the due date of filing the return of income were allowable deductions. As the assessee had made the contributions before the due date of filing the return, the disallowance was overturned, and the revenue's appeal was dismissed. In conclusion, the ITAT upheld the CIT(A)'s decisions on both issues, dismissing the revenue's appeals in both cases.
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