2012 (8) TMI 663 - AT - Income Tax

Tribunal decision: Royalty payment nature, expense estimation, PF deduction under sections 14A, 43B.

The Tribunal upheld the CIT(A)'s decision regarding the nature of royalty payment, determining 25% as capital expenditure and 75% as revenue expenditure. ... Royalty - nature - assessee acquired only a licence to use the brand name and trade marks of the foreign collaborator – Held that:- 25% of the lump sum royalty payment could be attributed to acquiring capital asset in the form of commercially valuable right to continuously use the Fenner brand name and trade mark and the balance 75% could be permissible as deduction as revenue expenditure for mere use of brand name and the trade mark. - following the decision in Southern Switchgear Limited [1997 (12) TMI 106 - SUPREME COURT] confirming the order of HC in [1983 (3) TMI 18 - MADRAS HIGH COURT] decided in favor of revenue. Applicability of provisions of section 32(1) – Held that:- Assessee has not either owned wholly or partly any know-how, patents, copy rights, trade mark, etc. so as to apply the provisions of section 32(1) - assessee is only permitted to use trade mark and brand name of the foreign collaborator with certain conditions - provisions of section 32(1) are not applicable to the facts of the assessee’s case. Issues Involved:1. Nature of royalty payment (capital vs. revenue expenditure).2. Disallowance under section 14A read with Rule 8D.3. Deduction under section 43B for employees' contribution to Provident Fund.Detailed Analysis:1. Nature of Royalty Payment:The primary issue is whether the royalty payment made by the assessee to Fenner, U.K. should be treated as capital or revenue expenditure. The assessee argued that the royalty payment was for the use of the trade mark for a limited period and did not result in the acquisition of any asset, thus it should be treated as revenue expenditure. The Department contended that the payment was for acquiring an asset of enduring nature, thus it should be treated as capital expenditure.The CIT(A) concluded that 25% of the royalty payment is capital expenditure and 75% is revenue expenditure. This decision was based on the agreement between the assessee and Fenner, U.K., and supported by precedents such as CIT v. Southern Switchgears Ltd. and CIT v. IAEC (Pumps) Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee acquired a license to use the trade mark, which did not confer any permanent right, thus a portion of the payment was rightly considered as revenue expenditure.2. Disallowance under Section 14A read with Rule 8D:The second issue pertains to the disallowance of expenses under section 14A read with Rule 8D. The CIT(A) directed the Assessing Officer to recompute the disallowance. The Tribunal referred to the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT, which held that Rule 8D is applicable from the assessment year 2008-09. Therefore, for the assessment year 2005-06, the Assessing Officer should adopt a reasonable basis for determining the expenditure related to exempt income. The Tribunal set aside the lower authorities' orders and directed the Assessing Officer to estimate the expenses reasonably.3. Deduction under Section 43B for Employees' Contribution to Provident Fund:The third issue concerns the deduction under section 43B for employees' contribution to the Provident Fund. The CIT(A) allowed the deduction, and the Department appealed against this decision. The Tribunal referred to the Supreme Court's judgment in CIT vs. Alom Extrusions Ltd., which held that the omission of the second proviso to section 43B operated retrospectively from 01.04.1988. The Tribunal directed the Assessing Officer to verify if the contributions were paid before the due date for filing the return. If so, the contributions should be allowed as a deduction.Conclusion:The Tribunal upheld the CIT(A)'s decision on the nature of royalty payment, directing that 25% be treated as capital expenditure and 75% as revenue expenditure. It set aside the lower authorities' orders regarding disallowance under section 14A and directed a reasonable estimation of expenses. For the deduction under section 43B, the Tribunal directed verification of payment dates and allowed the deduction if payments were made before the due date for filing the return. Both the assessee's and the Department's appeals were partly allowed.