2022 (4) TMI 804 - AT - Income Tax

Royalty payments treated as capital expenditure - HELD THAT - Facts being pari-materia the same in this year as per earlier AY year. 2022 (4) TMI 702 - ITAT CHENNAI we would hold that the royalty payment was to be treated as revenue expenditure. The grounds thus raised stands allowed. Disallowance of excess depreciation - Assessee was engaged in the business of security services for the purpose of secured transportation for ATM services and for the same it was using motor lorries customized as armored/ security vans and vehicles deployed were customized motor Lorries which were used in the business of running them on hire for transportation of valuables - HELD THAT - It could be seen that majority of the depreciation as claimed by the assessee is on opening written down value (WDV) of the block. The vehicles under consideration form part of 30% Block of Assets - the depreciation on vehicles have been allowed at higher rates in earlier years. AR submitted that similar disallowance as made in earlier years was deleted by learned first appellate authority for which revenue did not prefer any further appeal and thus, the issue has attained finality in earlier years. Keeping in view these facts, we direct Ld. AO to allow depreciation at higher rates as claimed by the assessee. The grounds thus raised stands allowed. Disallowance of Miscellaneous expenditure - HELD THAT - M/s SDB CIDCO Pvt. Ltd. has expressed desire to obtain and utilize the professional, technical and other specialized skills of Shri Alexander John George for the business integration, operation, due diligence and managing business. The SDB CIDCO Pvt. Ltd. was to be charged for the costs incurred including reimbursement of out-of-pocket third-party costs and expenses. Accordingly, IIFS has raised periodic debit note on the assessee, the copies of which are on record. The copy of the employment contract between IIFS and Shri Alexander John George is also on record. Thus, it could be seen that this employee was in employment of IIFS but it was seconded to the assessee under a contract. The assessee reimbursed IIFS as per the contract and the deduction of the expenditure has been claimed by the assessee. Since the person is an employee of IIFS, Form No.16 would be issued by ISS only. On the basis of all these facts and documentary evidences, there is no reason to deny the deduction of the expenditure to the assessee. Disallowance u/s. 43B - service tax liability was outstanding as on 31.03.2012 - HELD THAT - Provisions of Sec.43B could not be applied to this expenditure as held by Hon ble Delhi High Court in Noble Hewitt (I) (P) Ltd 2007 (9) TMI 238 - DELHI HIGH COURT . We concur with the decisions provided it could be shown that the liability to pay Service Tax as per relevant Service Tax Rules did not arise before due date of filing return of income. Therefore, we direct Ld. AO to verify this fact and delete the disallowance if the liability to pay Service Tax did not arise as per relevant Service Tax Rules before due date of filing of return of income. The assessee to provide requisite information and substantiate its stand. This ground stand allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of payment of royalty and management fees by treating it as capital expenditure.
2. Disallowance of excess claim of depreciation on motor vehicles.
3. Disallowance of miscellaneous expenses.
4. Disallowance under section 43B of the Act towards service-tax payable.

Comprehensive, Issue-wise Detailed Analysis:

1. Disallowance of Payment of Royalty and Management Fees:
The primary issue is whether the payment of royalty and management fees amounting to INR 5,55,04,454 should be treated as capital or revenue expenditure. The assessee argued that these payments were for the use of brand name and proprietary trademarks, and for availing managerial and consultancy services provided by an overseas group company. The Ld. AO and CIT(A) treated these payments as capital expenditure, asserting that they were in lieu of the right to use management services, thus providing enduring benefits. However, the Tribunal found that similar issues were previously adjudicated in favor of the assessee for AYs 2011-12 and 2014-15, where it was held that the payments were merely for the right to use and not for acquiring any property or rights. Consequently, the Tribunal held that the royalty payment should be treated as revenue expenditure, allowing the appeal in favor of the assessee.

2. Disallowance of Excess Claim of Depreciation on Motor Vehicles:
The assessee claimed depreciation at 30% on specially designed and equipped motor vehicles used for carrying valuables and cash. The Ld. AO restricted the depreciation to 15%, contending that the vehicles did not fit the category for higher depreciation. The CIT(A) upheld this view. However, the Tribunal noted that similar disallowances in earlier years were deleted by the appellate authority, and no further appeal was preferred by the revenue, thus attaining finality. The Tribunal directed the Ld. AO to allow depreciation at the higher rate of 30% as claimed by the assessee, allowing this ground of appeal.

3. Disallowance of Miscellaneous Expenses:
The assessee claimed INR 1,22,27,000 as miscellaneous expenses, which included salary and flight expenses for Mr. Alexander John George, an employee seconded from another group company. The Ld. AO disallowed the claim, noting that Form 16 was issued by the other group company, not the assessee. The CIT(A) upheld this disallowance. The Tribunal found that the expenses were reimbursed as per an inter-company agreement, and the employee was seconded to the assessee for business integration and management. Since the expenses were legitimate business expenses, the Tribunal directed the Ld. AO to delete the disallowance, allowing this ground of appeal.

4. Disallowance under Section 43B of the Act towards Service-Tax Payable:
The issue involved the disallowance of unpaid service tax liability of INR 92,49,420. The Ld. AO added this amount to the income under Section 43B, as it was outstanding as of 31.03.2012. The assessee contended that the service tax was not routed through the Profit & Loss account and was not claimed as a deduction, thus Section 43B should not apply. The CIT(A) confirmed the disallowance. The Tribunal agreed with the assessee's contention, citing the decision of the Hon’ble Delhi High Court in Noble & Hewitt (I) (P) Ltd. The Tribunal directed the Ld. AO to verify if the liability to pay service tax did not arise before the due date of filing the return of income and to delete the disallowance if this condition was met, allowing this ground for statistical purposes.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee on all grounds, directing the Ld. AO to treat the royalty payments as revenue expenditure, allow higher depreciation on motor vehicles, delete the disallowance of miscellaneous expenses, and verify the applicability of Section 43B to the unpaid service tax liability. The order was pronounced on 04th April, 2022.