2013 (2) TMI 877 - AT - Income Tax

Court dismisses revenue appeals on royalty, depreciation, and exchange loss. Ld. CIT(A) orders upheld.

The court dismissed all three appeals of the revenue. The first issue regarding the deletion of disallowance on account of royalty payment was decided in ... - Issues Involved:1. Deletion of disallowance on account of Royalty payment.2. Allowing the claim of depreciation on computer peripherals and accessories.3. Allowing deduction of Exchange fluctuation loss.Summary:Issue 1: Deletion of disallowance on account of Royalty payment3.1 The first issue is in respect of the royalty payment of Rs. 1,38,23,945/- paid by the assessee to Carraro Spa, Italy which was treated by the A.O. as a capital expenditure and disallowed the same. The A.O. observed that the royalty payment was for acquiring technical knowledge, thus capital in nature, and allowed depreciation at 25%. The Ld. CIT(A) accepted the assessee's plea that the royalty payment was linked to annual sales and was a non-transferable license, making it revenue in nature.5.1 The Ld. CIT(DR) argued that the agreement granted the assessee exclusive rights to manufacture and sell licensed products, suggesting the royalty payment was capital in nature. However, the Ld. Counsel for the assessee emphasized the limited rights and obligations under the agreement, arguing the royalty was revenue expenditure.6. We reviewed the agreement terms and found that the assessee did not have absolute rights to the technology, and the royalty payment was linked to sales turnover, making it revenue expenditure. The Ld. CIT(A) rightly allowed the expenditure as revenue in nature.9. In the result, the ground taken by the revenue is dismissed.Issue 2: Allowing the claim of depreciation on computer peripherals and accessories10. The next issue is the percentage at which the depreciation is to be allowed in the peripheral of the computer. The A.O. allowed only 25% depreciation, but the Ld. CIT(A) allowed 60% depreciation, considering peripherals as part of the computer. This issue is covered by the decision of the Hon'ble High Court of Delhi in CIT Vs. BSES Rajdhani Power Ltd. and the ITAT special bench Mumbai in DCIT Vs. Datacraft India Ltd.13. We confirmed the order of the Ld. CIT(A) and dismissed the ground.Issue 3: Allowing deduction of Exchange fluctuation loss14. The A.O. disallowed Rs. 1,40,915/- on account of exchange fluctuation loss, considering it a provision. The Ld. CIT(A) allowed the claim, and the Ld. Counsel cited the decision in CIT Vs. Woodward Governor India P. Ltd., which supports the assessee's claim. The loss pertains to foreign exchange liability as of the financial year-end, making the provision permissible.We find no reason to interfere with the order of the Ld. CIT(A) and ground no.3 is dismissed.For A.Y. 2004-05 and 2005-06:12. The royalty payment issues for Rs. 2,48,63,403/- and Rs. 3,08,01,101/- respectively were treated similarly to A.Y. 2003-04, confirming the order of the Ld. CIT(A) and dismissing the grounds.13. The depreciation on computer peripherals and accessories issue was also treated similarly to A.Y. 2003-04, confirming the order of the Ld. CIT(A) and dismissing the grounds.14. The exchange fluctuation loss issue for A.Y. 2004-05 was resolved similarly to A.Y. 2003-04, confirming the order of the Ld. CIT(A) and dismissing the grounds.18. In the result, all three appeals of the revenue are dismissed.Pronounced in the open Court on 18.02.2013.