2011 (4) TMI 1556 - AT - Income Tax

Summary

Issues Involved:

1. Treatment of Rs. 18 Crore received as one-time settlement.
2. Non-disallowance of royalty paid to BDF in excess of 1% of net sales.
3. Non-disallowance of 25% of royalty paid as capital expenditure.
4. Addition on account of raw material consumption discrepancies.

Issue-wise Detailed Analysis:

1. Treatment of Rs. 18 Crore Received as One-Time Settlement:

The primary issue was whether the Rs. 18 Crore received from M/S Beierdorf AG., Germany (BDF) should be considered as income under Section 28 or Section 56 of the Income Tax Act. The Commissioner of Income Tax (C.I.T.) argued that this receipt, which was transferred directly to the Capital Reserve Account, should have been taxed as income. The C.I.T. noted that the payment was not only for the termination of agreements but also for future business relationships, including the use of the assessee's plant for manufacturing by BDF India. The assessee contended that the receipt was a voluntary payment and thus not taxable. However, the C.I.T. found this argument untenable, as the payment was linked to the termination and future business arrangements. The Tribunal concluded that the Assessing Officer (A.O.) had made sufficient inquiries and the view taken was one of the possible views, and thus, the C.I.T.'s invocation of Section 263 was not justified.

2. Non-disallowance of Royalty Paid to BDF in Excess of 1% of Net Sales:

The C.I.T. argued that the royalty payment allowed exceeded the 1% of net sales as per guidelines, resulting in an additional Rs. 46,61,828 being debited. The assessee claimed that the 1% limit was not applicable due to the technology transfer involved. The C.I.T. disagreed, stating that technology transfer was distinct from the allowance of know-how usage. The Tribunal found that the A.O. had considered the agreements and the royalty payments were accepted as revenue expenditure, and thus, the C.I.T.'s action under Section 263 was unwarranted.

3. Non-disallowance of 25% of Royalty Paid as Capital Expenditure:

The C.I.T. contended that 25% of the royalty payment should be disallowed as capital expenditure, citing judicial precedents. The assessee argued that the royalty was for temporary use of trademarks and know-how, with no enduring benefit. The Tribunal observed that the A.O. had accepted the royalty payments as revenue expenditure after due consideration, and the C.I.T.'s disagreement with the A.O.'s conclusion did not justify revision under Section 263.

4. Addition on Account of Raw Material Consumption Discrepancies:

The C.I.T. pointed out discrepancies in the raw material consumption figures, suggesting an additional amount was wrongly debited. The assessee explained the differences were due to disclosure requirements under the Companies Act, not discrepancies in accounts. The Tribunal noted that the A.O. had examined the accounts and explanations provided by the assessee, and the C.I.T.'s action was based on a mere difference in opinion, which did not render the A.O.'s order erroneous or prejudicial to the revenue.

Conclusion:

The Tribunal held that the A.O. had conducted sufficient inquiries and exercised judicial discretion in accepting the assessee's claims. The C.I.T.'s invocation of Section 263 was deemed unjustified as the A.O.'s order was not erroneous or prejudicial to the interests of the revenue. The Tribunal quashed the C.I.T.'s order and restored the original assessment order. The appeal of the assessee was allowed.