2020 (3) TMI 709 - AT - Income Tax

Disallowance of royalty expenses - allowable revenue expenses - HELD THAT - We find merit in the plea of the assessee that under which one document which was available with the assessee was signed by the assessee but the original copy of agreement, which was available with the licensor bore the signatures of both the parties and was even dated 01.04.2005 - the said agreement needs to be considered for deciding the issue arising in the present appeal. The assessee had used the technical information by way of technical assistance rendered by the licensor to the assessee in India and consequently, the payment of royalty was for the purpose of carrying on the business of the assessee - claim of the assessee on sales of ₹ 17 crores as against the total sales of the year of ₹ 28 crores. The assessee had entered into the said agreement after the liberlisation by the RBI w.e.f. 24.06.2003 under the automatic route and accordingly, we hold that the said royalty has to be allowed as revenue expenditure in the hands of the assessee. It is only in Assessment Year 2005-06, the said payment of royalty has not been allowed in the hands of the assessee. In all the later years, starting from Assessment Year 2007-08, the royalty has been allowed as revenue expenditure in the hands of the assessee by the CIT(A) upto Assessment Year 2011-12. In Assessment Year 2012-13, the Assessing Officer vide order passed u/s 143(3) r.w.s 144C of the Act dated 09.03.2016 has allowed the payment of royalty as revenue expenditure. Even the TPO had not made any adverse reference in his order u/s 92CA(3) - appellate orders have been filed before us and following the principal of consistency also, the issue needs to be decided in favour of the assessee.

Summary

Issues Involved:
Disallowance of royalty expenses of ?31,11,900 as capital expenditure.

Analysis:
1. The appeal was against the disallowance of royalty expenses of ?31,11,900. The assessee explained that the payment was for technical assistance in manufacturing products. The Assessing Officer considered it capital expenditure based on various case laws.
2. Before the CIT(A), discrepancies in the technical collaboration agreement were noted. The CIT(A) concluded that the payment was capital expenditure as it provided enduring benefits. Reference was made to legal precedents to support the decision.
3. The assessee argued that the royalty payment had been treated as revenue expenditure in previous years. Discrepancies in the agreements were highlighted, showing changes in terms and conditions. The assessee emphasized the consistency in treatment of royalty payments in earlier and subsequent years.
4. The Revenue contended that the agreement submitted was not genuine. It was highlighted that prior registration with RBI was required for royalty payments under the automatic route.
5. The Tribunal examined the agreements and discrepancies in clauses. It was observed that the assessee mistakenly submitted the wrong agreement before the Assessing Officer. The correct agreement showed changes in terms, but the transaction remained the same.
6. The Tribunal considered the explanation provided by the assessee and the original agreement presented during the hearing. It was noted that the royalty payment was for technical assistance in business operations. The Tribunal held that the royalty should be allowed as revenue expenditure.
7. The Tribunal emphasized the consistency in treatment of royalty payments in subsequent years, where they were allowed as revenue expenditure. Therefore, the Tribunal directed the Assessing Officer to allow the royalty expenditure of ?31,11,900. The appeal of the assessee was allowed.