2023 (8) TMI 718 - AT - Income Tax

Nature of expenses - Capitalization of Engineering Research and Development cost incurred by the assessee during the year claimed as revenue expenditure - HELD THAT - As manifest from the key points of the Agreement as culled out above that the assessee did not have any dominion and control over the intellectual property rights of the technology developed by Lear and Tachi-S, which was simply licensed to it on non-exclusive basis. Thus, the payment by the assessee did not result in acquiring and owning the Engineering and Development Technology so as to be characterized as an intangible asset capable of capitalization. Rather, it is a case of payment in the nature of royalty for the use of such Technology, being an item of revenue nature. As such, the view point of the authorities below in this regard does not merit our concurrence. We, therefore, overturn the impugned order on this score and direct to delete the disallowance made by the AO and affirmed in the first appeal.

Summary

Issues involved: The only issue pressed in the appeal is against the capitalization of Engineering Research and Development cost incurred by the assessee during the year, which was claimed as revenue expenditure.

Judgment Summary:

1. Issue: Capitalization of Engineering Research and Development cost
The assessee, a Joint Venture engaged in manufacturing and selling seats for passenger cars, claimed deduction for Engineering and Development costs. The AO treated the amount as capital expenditure, disallowing it and allowing depreciation. The Tribunal examined the Engineering Recovery Agreement with Lear Corporation and Tachi-S Company, which stated the payment was for non-exclusive use of technology based on production volume. The agreement clearly indicated that the assessee did not have control over intellectual property rights, making the payment a royalty for technology use, not an intangible asset. The Tribunal overturned the lower authorities' decision, directing the disallowance to be deleted.

2. Conclusion
The Tribunal allowed the appeal partly, dismissing the other grounds not pressed by the assessee's representative.

3. Separate Judgment:
No separate judgment was delivered by the judges.

4. Date of Order:
The order was pronounced in the Open Court on 01st June, 2023.