2015 (9) TMI 22 - HC - Income Tax

High Court affirms ITAT's reasonable engineering services payment, royalty not capital expenditure, 50% dividend income disallowance reduced.

The High Court upheld the ITAT's findings that the payment for engineering services was not excessive, as it was based on a calculated estimation of ... Disallowance @ 50% u/s 40A(2)(a) read with Section 37(1) - AO held that the payment made to the MM Mumbai @ ₹ 500 per hour was excessive and unreasonable - ITAT concluded that the payment to MM Mumbai at the said rate could not be said to be excessive and unreasonable and also found that none of the three situations contemplated by Section 40A (2) (a) of the Act was attracted - Held that:- ITAT has in fact returned a finding of fact after analyzing the material and sufficient details available on record. The Revenue has not been able to persuade the Court to hold that the said finding is perverse. Accordingly, the Court declines to frame a question of law as regards the said issue. - Decided against revenue. Addition of expenditure incurred towards payment of royalty to Metso Minerals (Australia) - AO held this to be of enduring benefit and treated it as capital expenditure nature while allowing depreciation @25% thereon denied by ITAT - Held that:- ITAT analyzed that there is no assignment of the intellectual property rights in terms of the agreements in favour of the Assessee. The licenses were granted on non-exclusive basis and for a limited period. The Assessee was not authorized to use or permit others to use such technology except as specifically permitted by the licensor. In these circumstances, the decision of the ITAT that the said expenditure could not be considered as a capital expenditure does not suffer from any illegality or perversity and is consistent with the settled legal position explained in CIT Vs. Ciba India Ltd. (1967 (12) TMI 3 - SUPREME Court ) - Decided against revenue. Dividend income - CIT (Appeals) reduced the disallowance by 50% and this has been concurred with by the ITAT - Held that:- In view of the concurrent findings of both the CIT (A) and the ITAT, the Court is satisfied that in the facts and circumstances of the case, no substantial question of law arises as regards this issue. - Decided against revenue. Issues:1. Excessive payment for engineering services2. Treatment of royalty payment as capital expenditure3. Disallowance of dividend incomeAnalysis:Issue 1: Excessive payment for engineering servicesThe Assessing Officer (AO) disallowed 50% of the payment made by the Assessee to its subsidiary for engineering services, considering it excessive and unreasonable under Section 40A(2)(a) of the Income Tax Act. The AO found the rate of payment to be high without comparable cases to support it. However, the ITAT observed that the payment was based on a calculated estimation of expenses and reasonable profit margin, and the rate charged was consistent with what the subsidiary charged other group companies. The ITAT concluded that the payment was not excessive or unreasonable, and none of the situations under Section 40A(2)(a) applied. The High Court upheld the ITAT's findings, stating that the Revenue failed to prove otherwise, leading to the dismissal of the appeal.Issue 2: Treatment of royalty payment as capital expenditureThe AO treated the expenditure incurred by the Assessee for royalty payment as capital expenditure, allowing depreciation at 25%. However, the ITAT analyzed the agreements and found that there was no assignment of intellectual property rights to the Assessee. The licenses were non-exclusive and limited, restricting the Assessee's use of the technology. Citing legal precedents, the ITAT concluded that the expenditure could not be considered capital in nature. The High Court agreed with this interpretation, finding no illegality or perversity in the ITAT's decision, and declined to frame a question of law on this issue.Issue 3: Disallowance of dividend incomeThe CIT (Appeals) and the ITAT reduced the disallowance of dividend income by 50%, a decision that the High Court found to be supported by concurrent findings. As no substantial question of law arose from this issue in the given circumstances, the Court upheld the decisions of the lower authorities. Consequently, the appeal was dismissed based on the thorough analysis and reasoning provided by the ITAT and the lower appellate authorities.