2022 (11) TMI 1113 - AT - Income Tax

Addition in respect of royalty payment - assessee company has made royalty payme on the basis of agreement which permits the assessee exclusive right to manufacture and sale of products in India using a licensed technology - AO disallowed 25% of royalty payment on the ground that said royalty has been paid towards technical information provided by the foreign company in respect of manufacturing methods of products and license granted to the assessee to manufacture and sell the products is in nature of capital expenditure, which gives enduring benefit to the assessee - HELD THAT - We are of the considered view that there is no error in reasons given by the ld. CIT(A) to delete addition made towards disallowance of royalty payment and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the Revenue for both assessment years. Excess depreciation claimed on UPS - @ 60% OR 15% - AO has disallowed excess depreciation claimed on UPS @ 60% on the ground that the UPS and printers are in the nature of office equipment which are eligible for depreciation @ 15% and cannot be treated as computer and computer software to claim higher depreciation of 60% - HELD THAT - We find that the issue of depreciation on UPS and printer as part of computer and computer software is decided in the case of M/s. Brakes India Limited vs DCIT 2017 (4) TMI 511 - MADRAS HIGH COURT where it has been held that UPS and printer are integral part of computer and computer software and are eligible for higher depreciation of 60%, but not normal depreciation of 15% as applicable to office equipment. CIT(A) by following the decision of Hon ble Madras High Court in the above case has rightly deleted additions made towards excess depreciation claimed on UPS and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject ground taken by the Revenue for the assessment year 2011-12. Disallowance of expenditure in relation to exempt income u/s. 14A r.w.r. 8D - HELD THAT - Hon ble Jurisdictional High Court of Madras in the case of M/s. Redington India Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT has considered an identical issue and held that when there is no exempt income in relevant assessment year, there cannot be a disallowance of expenditure u/s. 14A in relation to any assumed income. In this case, the counsel for the assessee stated that for both the assessment years, the assessee has not earned any exempt income and the same has been accepted by the ld. DR present for the Revenue.There is no error in the reasons given by the Ld. CIT(A) to delete additions made towards disallowance of expenditure u/s. 14A r.w.r. 8D because in both assessment years the assessee did not earned any dividend income which was exempt income u/s. 10(34) of the Act and thus, we are inclined to uphold the findings of the CIT(A) and reject the ground taken by the Revenue for both the assessment years. Appeals filed by the Revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition made in respect of royalty payment.
2. Excess depreciation claimed on UPS.
3. Disallowance of expenditure in relation to exempt income under Section 14A read with Rule 8D of the Income-tax Rules, 1962.

Detailed Analysis:

1. Deletion of Addition Made in Respect of Royalty Payment:
The first issue pertains to the deletion of the addition made concerning royalty payment. The assessee company paid royalty to Koito Manufacturing Company Ltd. based on an agreement from 1995, granting exclusive rights to manufacture and sell products in India using licensed technology. The Assessing Officer (AO) disallowed 25% of the royalty payment, treating it as capital expenditure providing enduring benefits. The assessee argued that this issue had already been decided in its favor in previous years by the ITAT, Chennai, which classified the royalty payment as revenue expenditure. The Tribunal reiterated that the royalty payment for using technology provided by the foreign company is revenue in nature and cannot be treated as capital expenditure. The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO, following consistent judicial precedents.

2. Excess Depreciation Claimed on UPS:
The second issue concerns the excess depreciation claimed on UPS at 60%. The AO disallowed the higher depreciation rate, categorizing UPS and printers as office equipment eligible for only 15% depreciation. However, the CIT(A) followed the decision of the Hon'ble Madras High Court in the case of M/s. Brakes India Limited, which held that UPS and printers are integral parts of computers and thus eligible for higher depreciation at 60%. The Tribunal upheld the CIT(A)'s decision, confirming that UPS and printers qualify for higher depreciation as part of computer systems.

3. Disallowance of Expenditure in Relation to Exempt Income under Section 14A read with Rule 8D:
The third issue involves the disallowance of expenses related to exempt income under Section 14A read with Rule 8D. The AO disallowed expenses by applying Rule 8D, despite the assessee not earning any exempt income during the relevant years. The CIT(A) deleted these additions, reasoning that without exempt income, there could be no disallowance of related expenses. The Tribunal supported this view, citing the Hon'ble Madras High Court's decision in M/s. Redington India Ltd. vs. ACIT, which held that in the absence of exempt income, no disallowance under Section 14A is warranted. The Tribunal upheld the CIT(A)'s decision for both assessment years, confirming that no expenses related to assumed exempt income should be disallowed when no such income was earned.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue on all grounds, affirming the CIT(A)'s decisions. The Tribunal's judgment was pronounced on 23rd November 2022 at Chennai.