2014 (1) TMI 487 - AT - Income Tax

Tax Tribunal Upholds CIT(A) Ruling on Revenue Expenditures

ACIT (LTU) Versus M/s Honda Siel Cars India Ltd.

The Ld. CIT(A) deleted various additions made by the AO, including those related to Royalty, Provision for warranty, Airfare of Technicians, Entry tax, ... Royalty & lump sum fee – Held that:- Following assessee’s own case for A.Y. 2003-04 - The assessee obtained only the right to use, during the currency of the agreement, the technical knowhow and information and the intellectual property right relating to the manufacture of Honda cars and did not secure any ownership right over them - The payment of lump sum fees for the technical know-how and the royalty is allowable as revenue expenditure – Decided against Revenue. Disallowance of provision of warranty and sales services – Held that:- Following assessee’s own case for earlier years and Jay Bee Industries v. DCIT [1997 (12) TMI 136 - ITAT AMRITSAR] - The liability to carry out repairs/replacements accrues on the date when the sale agreement is executed with warranty clause and such in-built liability cannot be ignored - Such liabilities are to be treated as trading expense and must be allowed - The expenses were allowed for the reason it was not a contingent liability and such liability arose as soon as assessee made the sale – Decided against Revenue. Disallowance of airfare of technicians, entry tax u/s 43B, software Expenses – Held that:- Following assessee’s own case for earlier years – Decided against Revenue. Issues:1. Deletion of addition of Royalty and lump sum fee2. Deletion of addition of Provision for warranty and sales service3. Deletion of addition of Expenditure on Airfare of Technicians4. Deletion of addition of Entry tax claimed as a deduction5. Deletion of addition of Expenditure on software expenses treated as capital expenditureDeletion of addition of Royalty and lump sum fee:The AO added Rs.1,90,88,77,843 on account of Royalty and lump sum fee, considering it as capital expenditure. However, the Ld. CIT(A) referred to the Tribunal's earlier order in the assessee's case and held that the payment was for the right to use technical know-how, not ownership. Citing the common basis principle, it was ruled that the payment was allowable as revenue expenditure. The Ld. CIT(A) deleted the addition based on the Tribunal's previous decision, stating that the payment was for the right to use, not ownership.Deletion of addition of Provision for warranty and sales service:The AO added Rs.1,32,74,684 for provision of warranty claims, treating it as a deferment of tax. However, the Ld. CIT(A) noted the Tribunal's past rulings in the assessee's favor, emphasizing that the liability was ascertained and accrued, not contingent. Citing various judgments, including the Supreme Court's decision, it was held that the provision was allowable as a trading expense. The Ld. CIT(A) deleted the addition based on the Tribunal's previous decisions, stating that the provision was an ascertained and accrued liability.Deletion of addition of Expenditure on Airfare of Technicians:The AO added Rs.3,77,63,814 for airfare of technicians, claiming it as an enduring benefit. However, the Ld. CIT(A) referred to the ITAT's favorable decision in the assessee's earlier years and ruled that the expenditure was revenue in nature. Based on the ITAT's previous orders, the Ld. CIT(A) deleted the addition, stating that the expenditure was revenue in nature.Deletion of addition of Entry tax claimed as a deduction:The AO disallowed the entry tax under section 43B, stating it was not an ascertained tax liability. The Ld. CIT(A) observed that similar disallowance was overturned by the ITAT in the assessee's case for AY 2004-05. Relying on the ITAT's and Delhi High Court's decisions, the Ld. CIT(A) allowed the deduction, stating that the amount was deductible in computing total income.Deletion of addition of Expenditure on software expenses:Regarding the addition of software expenses, the Ld. AR argued that the expenditure was for website tracking and online statistic tools, not to acquire an asset. Citing relevant judgments, the Ld. CIT(A) held that the expenditure was revenue in nature and allowed it. Based on the ITAT's previous decisions, the Ld. CIT(A) deleted the addition, stating that the expenditure was revenue in nature.In conclusion, the Tribunal dismissed the revenue's appeal as the issues raised were already covered by the ITAT's earlier decisions in the assessee's favor. The Ld. CIT(A) had correctly applied the Tribunal's previous rulings, and hence, the appeal was dismissed.