1997 (9) TMI 157 - AT - Income Tax

Summary

Issues:
1. Disallowance of royalty payment to an associate company.
2. Treatment of capital subsidy received in relation to depreciation and investment allowance.

Issue 1: Disallowance of Royalty Payment
The appeal was filed by the Revenue against the order of the CIT(A) regarding the disallowance of royalty payment of Rs. 3,92,685 to an associate company for the assessment year 1989-90. The dispute arose as the AO contended that the assessee-company was fully controlled by the associate company, leading to the disallowance of the entire royalty payment under s. 40A(2)(b) of the Act. However, the CIT(A) held that both companies were separate legal entities and that the payment of royalties was made at the market rate. The Revenue argued that the payment of royalty at a higher rate between sister concerns was unjustifiable and amounted to transfer of profits. The assessee countered that the payment was made at market rate and that both companies were independent entities, citing the absence of legal restrictions on obtaining technical know-how from a sister concern. The tribunal found that the companies were sister concerns with substantial common directorship, leading to the conclusion that the assessee-company was fully controlled by the associate company. It was held that the royalty payment should be at the rate settled between the associate company and the foreign company, directing the AO to determine the appropriate rate.

Issue 2: Treatment of Capital Subsidy
The second issue concerned the direction to the AO not to deduct the amount of capital subsidy received from the cost of assets while allowing depreciation and investment allowance under the IT Act. The tribunal noted that this issue was covered by the apex Court's judgment in the case of CIT vs. P.J. Chemicals, where it was decided in favor of the assessee. As the matter was squarely covered by the apex Court's decision, the tribunal ruled in favor of the assessee on this issue. Consequently, the appeal was partly allowed based on the decisions reached on both issues.

In conclusion, the tribunal's judgment addressed the disallowance of royalty payment to an associate company and the treatment of capital subsidy in relation to depreciation and investment allowance, providing detailed analysis and legal reasoning for each issue, ultimately deciding in favor of the assessee on both counts.