2013 (1) TMI 488 - HC - Income Tax

Disallowance of non-compete fees - CIT(A) deleted the addition and confirmed by ITAT - Held that - At paragraph 12 of the impugned order the Tribunal while dealing with marketing knowhow expenses has also observed that non-compete fee was also dictated by business and commercial expediency and was not an expenses incurred for acquisition of capital assets but only enhanced its profitability. However, there is no discussion on the issue before coming to the above conclusion. Therefore, the issue with this regard has to be remanded to the Tribunal to enable it to pass an order with reasons while determining whether non-compete fees was revenue or capital expenditure - in favour of revenue for statistical purposes. Disallowance of marketing know how - CIT(A) deleted the addition and confirmed by ITAT - Held that - On an examination of marketing knowhow agreement it is very clear that this agreement would lead to an improvement in its existing business resulting in higher sales and consequently higher profitability. This is so as the amounts spent on marketing knowhow would result in improving the profits of the business on the acquired brands as this knowledge would assist in improving the marketing strategy. The expenses incurred for acquiring this marketing knowhow if incurred by the respondent would be revenue and merely because it is outsourced it does not cease to be revenue expenditure. The expenditure incurred on marketing knowhow, according to the Tribunal would result in higher sales as well as lead to higher profit. Consequently,will be revenue expenditure as correctly held by the Tribunal - against revenue. Disallowance of depreciation on Royalty payments - CIT(A) deleted the addition and confirmed by ITAT - Held that - Tribunal has reached a finding of fact that the royalty payment was a part of the cost of the acquisition of the brand and therefore, would form a part of the cost of the assets namely the brand, thus entitled to depreciation u/s 32 - no fault can be found with the order of the Tribunal - against the revenue. Interest charged u/s 234B and 234C while computing income u/s 115JB - Held that - Decided in favour of revenue relying on case of Rolta India Ltd v. CIT 2011 (1) TMI 5 - SUPREME COURT OF INDIA wherein held that interest under Sections 234B and 234C shall be payable on failure to pay advance tax in respect of tax payable under Section 115JA/115JB - against assessee.

Summary

Issues:
1. Disallowance of expenditure under Section 14A of the Income Tax Act.
2. Treatment of non-compete fees, marketing knowhow fees, and royalty payments as revenue or capital expenditure.
3. Charging of interest under Section 234B and 234C while computing income under Section 115JB.

Issue 1: Disallowance of expenditure under Section 14A of the Income Tax Act:
The appeal by the Revenue challenges the Tribunal's order relating to the Assessment Year 2001-2002. The Tribunal deleted the expenses disallowed by the Assessing Officer under Section 14A of the Act, stating that no expenditure was incurred for earning exempt income as the investments were made from the assessee's own funds. The Tribunal's finding of fact was upheld, dismissing the question raised by the Revenue under Section 260A.

Issue 2: Treatment of non-compete fees, marketing knowhow fees, and royalty payments:
a) Non-compete fees: The CIT(A) classified non-compete fees as revenue expenditure, emphasizing commercial expediency for enhancing profitability. The Tribunal upheld this classification, but the issue was remanded back to the Tribunal for a reasoned order on whether non-compete fees were revenue or capital expenditure.
b) Marketing knowhow fees: The Tribunal considered marketing knowhow expenses as revenue expenditure, linking it to improving profitability and higher sales. The Tribunal's decision was in favor of the respondent-assessee, as the expenses were deemed to result in revenue generation.
c) Royalty payments: Both the CIT(A) and the Tribunal concluded that royalty payments were part of the cost of acquiring the brand, entitling the assessee to depreciation under Section 32. The Tribunal's decision was upheld, favoring the respondent-assessee.

Issue 3: Charging of interest under Section 234B and 234C:
Regarding the charging of interest under Section 234B and 234C while computing income under Section 115JB, the Tribunal overturned the decision of the CIT(A) and held that no interest could be charged. However, the Supreme Court decision in Rolta India Ltd v. CIT favored the Revenue, resulting in the question being answered in favor of the Revenue and against the assessee.

In conclusion, the High Court addressed the various issues raised by the Revenue in the appeal, providing detailed analysis and explanations for each question. The Tribunal's findings were upheld in some instances, remanded in others, and overturned in light of relevant legal precedents. The judgment provided clarity on the treatment of different expenses and the application of relevant sections of the Income Tax Act, ultimately disposing of the appeal with specific outcomes for each issue.