Delhi High Court: Royalty & ISO Fees as Revenue Expenditures

The Hon'ble Delhi High Court ruled that royalty payments were revenue expenditures, not capital, directing the AO to allow relief to the assessee for both years. ISO certification charges were considered annual payments and treated as revenue expenditure. The issue of development charges was remanded to the AO for further examination. Disallowance of QS 9000 and FTPM certification charges was set aside for the AO to reevaluate. Depreciation on computer peripherals was subject to examination by the AO to determine eligibility for 60% depreciation. Appeals for AY 2003-04 and 2004-05 were allowed for statistical purposes.

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Issues Involved:
1. Disallowance of royalty expenses by treating them as capital expenditure.
2. Disallowance of ISO certification charges.
3. Addition on account of development charges.
4. Disallowance of QS 9000 and FTPM certification charges.
5. Depreciation on computer peripherals and accessories.

Summary:

1. Disallowance of Royalty Expenses:
The first issue pertains to the disallowance of royalty expenses by treating them as capital expenditure. The assessee had debited Rs.15,68,666/- in AY 2003-04 and Rs.20,73,720/- in AY 2004-05 as royalty expenses. The Assessing Officer (AO) treated these as capital expenditure and allowed depreciation at 25%. The CIT(A) upheld this disallowance based on the ITAT's decision for AY 2002-03. However, the Hon'ble Delhi High Court later ruled that the royalty payments were revenue expenditures, not capital. Consequently, the ITAT directed the AO to allow the relief to the assessee for both years, treating the royalty payments as revenue expenditure.

2. Disallowance of ISO Certification Charges:
The second issue involves the disallowance of ISO certification charges of Rs.95,254/- in AY 2003-04. The AO disallowed the amount as capital expenditure, considering the ISO 14001 certification as an enduring benefit. The CIT(A) upheld this view due to incomplete details provided by the assessee. However, the ITAT, referencing the case of Tirupati Microtech (P) Ltd., held that ISO certification charges are annual payments and should be treated as revenue expenditure. The ITAT directed the AO to allow the claim of the assessee for ISO certification charges.

3. Addition on Account of Development Charges:
The third issue concerns the addition on account of development charges. The ITAT noted that the nature and character of the payments made to various authorities were unclear. Therefore, the ITAT set aside this issue to the AO to examine the nature of the payments and decide as per the law after providing the assessee a reasonable opportunity of being heard.

4. Disallowance of QS 9000 and FTPM Certification Charges:
The fourth issue relates to the disallowance of Rs.25,430/- for QS 9000 and FTPM certification charges in AY 2004-05. The AO treated these as capital expenditure, and the CIT(A) upheld the disallowance due to incomplete details. The ITAT set aside this issue to the AO to examine the nature and character of the expenditure and decide accordingly, directing the assessee to provide complete information.

5. Depreciation on Computer Peripherals and Accessories:
The fifth issue involves the depreciation on computer peripherals and accessories amounting to Rs.8,90,529/-. The AO allowed 60% depreciation on computer hardware but not on peripherals like UPS, scanner, printers, etc. The CIT(A) allowed 60% depreciation on these items, treating them as integral parts of the computer. The ITAT set aside this issue to the AO to examine whether these peripherals could function independently. If they are integral parts of the computer, 60% depreciation is allowable; otherwise, standard depreciation rates apply.

Conclusion:
The appeals filed by the assessee for AY 2003-04 and 2004-05 and by the Revenue are allowed for statistical purposes. The ITAT directed the AO to re-examine the issues as per the guidelines provided and after giving the assessee a reasonable opportunity of being heard. Decision pronounced in the open Court on 17th December, 2009.

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