2021 (10) TMI 399 - AT - Income Tax

Nature of expenditure - expenditure incurred under the head 'technology services and research development fee' paid - Revenue or capital expenditure - HELD THAT - In this case, expenditure incurred by the assessee towards payment made to group companies for technology and research development fees is supported by an agreement between the parties, which clearly lays down nature of services and technology availed by the assessee. The assessee had also made payment by cheque after deducting applicable TDS as per law - there is no doubt about genuineness of payment and rendering of services by service provider - expenditure incurred by the assessee towards payment made to M/s. IFMR Rural Financial Services Pvt. Ltd. for availing services and using their trademark, including software 'PERDIX' etc. is in the nature of revenue expenditure, which was incurred wholly and exclusively for the purpose of business of the assessee. Thus expenditure is not capital in nature, because the assessee has not acquired any technical know-how or asset, but what was received from service provider was technology support services and professional services for managing day-to-day business affairs of the assessee. Therefore, said expenditure cannot be considered as capital in nature - Decided against revenue

Summary

Issues Involved:
1. Whether the payment of ?4,50,00,000 towards 'Technology and Research & Development Fee' to M/s. IFMR Rural Financial Services Pvt. Ltd. (IRFS) is an eligible business expenditure.
2. Whether the expenditure should be capitalized or treated as revenue expenditure.
3. Whether the assessee provided sufficient evidence to substantiate the expenditure.

Issue-wise Detailed Analysis:

1. Eligibility of Business Expenditure:
The primary issue revolves around the eligibility of the payment of ?4,50,00,000 towards 'Technology and Research & Development Fee' as a business expenditure. The assessee, M/s. IFMR Rural Channels & Services Pvt. Ltd., entered into a framework agreement with IRFS to avail various services, including the KGFS Model framework and the software 'PERDIX'. The Assessing Officer (AO) disallowed the expenditure, questioning the genuineness and relevance of the technology received and suggesting that the expenditure was a colorable device to shift profits. However, the CIT(A) found that the payment was for genuine services received, which were necessary for the business operations of the assessee’s subsidiary, DKGFS. The Tribunal upheld the CIT(A)’s decision, stating that the payment was indeed for business purposes and thus an allowable expenditure.

2. Capitalization vs. Revenue Expenditure:
The AO contended that the expenditure should be capitalized as it was for acquiring a trademark or technology. However, the CIT(A) clarified that the payment was made on a monthly basis for using the KGFS Model framework and software 'PERDIX', not for acquiring any capital asset. The Tribunal agreed with the CIT(A), noting that the expenditure was for technology support services and professional services necessary for day-to-day business operations, thus qualifying as revenue expenditure.

3. Sufficiency of Evidence:
The AO argued that the assessee failed to provide sufficient evidence to substantiate the expenditure. The CIT(A) and the Tribunal, however, found that the assessee had provided detailed submissions, agreements, and payment evidence, including TDS deductions. The Tribunal emphasized that the AO cannot question the necessity of the expenditure if it is genuine and incurred wholly and exclusively for business purposes. The Tribunal concluded that the assessee had adequately demonstrated the genuineness and necessity of the payment, supported by agreements and actual services rendered by IRFS.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)’s decision to allow the ?4,50,00,000 expenditure as a deductible business expense. The Tribunal highlighted that the expenditure was genuine, necessary for business operations, and correctly treated as revenue expenditure. The order was pronounced in open court on 29th September 2021.